CATEGORY ARCHIVE: Real Estate Economics
May 9, 2008
Preaching To The Choir: Fundamentals, Cash-Flow, Longer Horizon
They’re preaching to the SocketSite choir: fundamentals, cash-flow positive and a long-term horizon. The current challenge: finding those opportunities a bit closer to home (assuming you're not reading from Vallejo). Our solution: continue to plug in.
∙ Timing may be right for real estate investors [SFGate]
Posted by socketadmin at 7:00 AM | Permalink | Comments (4) | (email story)
May 8, 2008
JustQuotes: Fewer Transfers Yields Fewer Dollars And Offsets Savings
“On Tuesday, the City Controller’s Office released a report that put [San Francisco's projected budget] shortfall for next fiscal year at approximately $305 million, $33 million less than what was projected a few weeks ago.
The savings came from the departmental cost-cutting, as well as well-performing hotel, sales, property and business taxes, according to the Controller’s Office.
The “good news” however, is tempered by less-than-expected property transfer tax revenue. The City budgeted to receive $123.5 million from the sales of real estate in San Francisco [down from $144 million the year before], but have now adjusted that figure and expect to bring in $91.6 million.”
∙ Sales of soaring skyscrapers sag [Examiner]
Posted by socketadmin at 6:50 AM | Permalink | Comments (10) | (email story)
May 7, 2008
When Bulls Become Bears (AKA No Longer Working For The Realtors)
During his tenure as Chief Economist for the National Association of Realtors (NAR), David Lereah published the infamously titled "Why the Real Estate Boom Will Not Bust.” Since parting way with NAR and Move Inc., however, Mr. Lereah has had an epiphany: not only has the boom busted, but it's going to get worse.
∙ It’s Going to Get Worse [Newsweek]
Posted by socketadmin at 8:55 AM | Permalink | Comments (32) | (email story)
April 29, 2008
Yes, The Greater California Housing Market Does Matter To You
“Gov. Arnold Schwarzenegger said Monday that California faces a budget gap that could approach $20 billion through June 2009, a dizzying projection that adds further confusion to the depth of California's financial crisis.”
“The estimated gap for the fiscal year that begins July 1 already has prompted talk in Sacramento of tax increases and spending cuts that could hit classrooms, law enforcement and health care.
The new figure essentially doubles the Republican governor's deficit projection from just days ago. California's economy has been hammered by the slumping housing market, while soaring gas prices have cut into consumer spending.”
∙ Schwarzenegger says Calif. faces $20 billion budget deficit [SFGate]
Posted by socketadmin at 6:00 AM | Permalink | Comments (23) | (email story)
April 24, 2008
U.S. New-Home Sales Slide Plunge To Near Seventeen Year Low
“Purchases of new homes in the U.S. plunged more than forecast in March to the lowest level in almost 17 years as stricter loan rules and falling prices caused buyers to hold off. Sales dropped 8.5 percent to an annual pace of 526,000, the fewest since October 1991, from a 575,000 rate the prior month....”
∙ New-Home Sales in the U.S. Plunge More Than Forecast [Bloomberg]
∙ U.S. Existing-Home Sales Slide (This Time Despite The Seasonality) [SocketSite]
Posted by socketadmin at 10:00 AM | Permalink | Comments (44) | (email story)
April 21, 2008
If This Has Been The Calm, What Happens To Sales During The Storm?
“The Bay Area's largest public companies experienced the calm before the storm in 2007. Amid signs of an impending recession, local companies continued to expand at a moderate pace, one that most other U.S. regions would envy.
The Chronicle 200, [an] annual report on the 200 largest public companies in the Bay Area, demonstrates the economic diversity and health of this region. Despite a national housing slump and credit crunch, most companies still delivered solid financial performances in 2007 - although there are clearly clouds on the horizon for 2008.”
“Some of that resilience can be traced to local companies' strong presence on the world stage. Most of the corporate leaders, especially Silicon Valley companies, have major international sales. The dollar's weakness has fueled the rest of the world's appetite for U.S. products.
The flip side is that many of those companies also have hefty employment rolls overseas, so while their robust global sales boost the bottom line back home, they don't necessarily translate into job growth here.”
∙ Chron 200: Bay Area enjoys calm before the storm [SFGate]
∙ San Francisco Recorded Sales Activity In March: Down 20.6% YOY [SocketSite]
Posted by socketadmin at 7:30 AM | Permalink | Comments (10) | (email story)
April 16, 2008
Beige Book Results For The Twelfth District (San Francisco): Flat
According to the latest Federal Reserve regional business survey (a.k.a. The Beige Book), economic growth has slowed in nine of its twelve districts. And the Twelfth District of San Francisco is one of the nine, not one of the three.
Economic activity in the Twelfth District appears to have been largely flat on net during the survey period of March through the beginning of April. Upward pressures on labor costs continued to moderate in some sectors, while upward price pressures were subdued for most products but remained strong for food and energy-intensive items. Retail sales weakened further and demand growth for services continued to slow. Manufacturing activity was mixed across sectors but appeared to hold steady on net, while agricultural producers saw solid growth in sales. Demand for residential real estate remained exceptionally weak, and demand for commercial real estate softened a bit in some areas. Banking contacts reported that loan demand was largely unchanged or fell slightly on net and credit standards tightened further.
What does economic acitivity have to do with real estate activity? We'll just pretend that you didn't ask that question (if for some strange reason you did).
∙ Federal Reserve Bank: Beige Book Summary (April 16, 2008) [federalreserve.gov]
Posted by socketadmin at 12:06 PM | Permalink | Comments (3) | (email story)
April 10, 2008
It's A Good Thing San Francisco's Fortunes Aren't Tied To The Valley
"Housing prices in Silicon Valley remain defiantly high. New BMWs and Saabs cruise Highway 101. But for the first time there are signs that the current economic downturn is taking its toll on the country’s cradle of technology and innovation.
Job growth has slowed, start-up companies are hiring and spending more cautiously, and early-stage investors who nurture the start-ups with money and expertise are growing more frugal."
∙ Economy Has Become a Drag on Silicon Valley [New York Times]
∙ And What Happened Seven And One Half Years Ago In San Francisco? [SocketSite]
Posted by socketadmin at 11:13 AM | Permalink | Comments (41) | (email story)
April 8, 2008
JustQuotes: U.S. Pending Home Resale Index Hits Seven Year Low
“The number of Americans signing contracts to buy previously owned homes declined more than forecast in February, indicating no sign of a bottom in the U.S. real-estate recession that is entering its third year.
The National Association of Realtors' index of signed purchase agreements decreased 1.9 percent to 84.6, the lowest reading since records began in 2001, the group said today. The drop follows a revised 0.3 percent increase in January.”
“Pending resales dropped in three of four regions, led by a 9.8 percent decline in the West. Purchases fell 5.5 percent in the South and 3.7 percent in the Midwest. Pending sales increased 3.2 percent in the Northeast.”
∙ U.S. Economy: Pending Home Resales Fell More Than Forecast [Bloomberg]
Posted by socketadmin at 8:06 AM | Permalink | Comments (48) | (email story)
March 27, 2008
Are We Detached From More Than Simply The Fundamentals?
An interesting chart of California MSA home price appreciation as measured by the OFHEO*, put together by the Public Policy Institute of California (pdf), and by way of a plugged-in tipster. And an important observation which shouldn’t catch any plugged-in readers by surprise:
While California’s previous housing crisis (southern California in the early and mid‐1990s) was part of a broader economic slowdown, the relationship between housing and economic conditions today is less clear‐cut. In 2007, employment in Merced and Stockton grew more than 2%, despite crashing housing prices, whereas employment grew only 0.6% in California overall and even fell in Los Angeles, Orange County, Ventura County, and Riverside-San Bernardino – where home prices are holding up better than in the Central Valley.
*Note: For those who are unfamiliar, the OFHEO Home Price Index (HPI) is based on data from repeat single-family home sales, or refinancings, that involve conforming mortgages. Data from transactions involving either condominiums or non-conforming loans (two major components of the San Francisco market) are excluded from the Index.
∙ The California Economy: Crisis In The Housing Market (pdf) [ppic.org]
∙ OFHEO: U.S. House Prices Don't Fall (But Do In CA And The SF MSA) [SocketSite]
Posted by socketadmin at 9:38 AM | Permalink | Comments (55) | (email story)
JustQuotes: At Least It’s Getting Cheaper For Those Foreign Buyers…
"The difference between the 10-year government bond yield and the average U.S. fixed mortgage rate was 2.7 percentage points last month, the widest spread since 1986, data compiled by Bloomberg show. Banks are defying Bernanke and hoarding cash after writing down the value of more than $200 billion of mortgage-related securities since July."
"Fed policy makers have made seven rate cuts since September, shaving 3 percentage points off borrowing costs, and the effort has failed to spur a recovery. The average rate for a 30-year fixed mortgage dropped half a percentage point during that period."
Banks Fail to Lower Mortgage Rates as Bernanke Cuts Money Costs [Bloomberg]
Posted by socketadmin at 7:03 AM | Permalink | Comments (4) | (email story)
March 26, 2008
No Real Signs Of Recovery (Much Less Of Simply Stopping Its Slide)
While U.S. existing home sales were “up” in January (but once again, down 23.8% on a year-over-year basis and with prices down 8.2% nationally and 13.4% in the West), the pace of U.S. new-home sales continued its slide in February, down 1.8% to its lowest level since February 1995 and with a median sales price that's down 2.7% (year-over-year).
In short, the national housing market has yet to show any real signs of recovery much less of simply stopping its slide (see the light blue line).
∙ The Good And The Bad (But Not Necessarily The Ugly) [SocketSite]
∙ New-Home Sales in U.S. Fall to Lowest in 13 Years [Bloomberg]
∙ January S&P/Case-Shiller: San Francisco MSA Continues Decline [SocketSite]
Posted by socketadmin at 7:39 AM | Permalink | Comments (7) | (email story)
March 19, 2008
We'll Just Go With The Graphic (And Note That 6% Is Low Not "High")
∙ Fed tries to shake stubborn rates with cut [SFGate]
Posted by socketadmin at 8:06 AM | Permalink | Comments (24) | (email story)
March 18, 2008
JustQuotes: The Fed Cuts By 0.75% Amid “Weakened” Outlook
"The Federal Reserve cut its main lending rate by three-quarters of a percentage point to 2.25 percent as officials try to prop up the faltering economy and restore faith in the U.S. financial system. Chairman Ben S. Bernanke is struggling to cushion consumers and companies from the worst of the credit freeze that's made some of the world's biggest banks reluctant to lend to each other. Officials also showed renewed concern about inflation, making a smaller reduction than traders anticipated."
"The moves helped relieve some stress in credit markets. Yield differences on a Bloomberg index for Fannie Mae's current- coupon, 30-year fixed-rate mortgage bonds and 10-year U.S. government notes narrowed about 22 basis points to 176 basis points, or 61 basis points less than the 22-year high reached two weeks ago. Still, mortgage lending will tumble to an eight-year low this year and house prices will continue to decline, according to the Mortgage Bankers Association."
∙ Fed Cuts Main Rate to 2.25%, Says Outlook `Weakened' [Bloomberg]
Posted by socketadmin at 3:14 PM | Permalink | Comments (13) | (email story)
March 11, 2008
Two Economic Hands: Which Is The Left, And Which Will Be Right?
On the one hand are the economists at UCLA: "…the housing collapse won't cause a California recession because the sector is too small to cause the state's overall economy to contract."
On the other are many others: "…the housing woes are prompting consumers to cut back and making credit harder to get, putting the brakes on broader economic activity…a recession is already at hand."
And in this case, we happen to be more with the "many others" than not.
∙ UCLA forecast sees no California recession [SFGate]
Posted by socketadmin at 10:32 AM | Permalink | Comments (15) | (email story)
A Liquidity Boost (And A Chance To Launder Some “AAA” Securities?)
"The Federal Reserve, struggling to contain a crisis of confidence in credit markets, plans to lend up to $200 billion in exchange for mortgage-backed securities.
The Fed coordinated the effort with central banks in Europe and Canada, which plan to inject up to $45 billion into their banking systems. The Fed said in a statement it will hold auctions of Treasuries in exchange for debt including AAA rated mortgage securities sold by Fannie Mae, Freddie Mac and by banks.
Today's steps indicate the Fed is increasingly concerned about the investor exodus from mortgage debt, which threatens to deepen the housing contraction and the economic slowdown. While they fall short of the calls by some analysts for the Fed to make outright purchases of mortgage debt, the central bank left the door open to expanding the effort."
∙ Fed to Lend $200 Billion, Take on Mortgage Securities [Bloomberg]
Posted by socketadmin at 7:54 AM | Permalink | Comments (13) | (email story)
March 10, 2008
And What Happened Seven And One Half Years Ago In San Francisco?
As we’ve often pointed out, sales volumes and home price appreciation have been falling in San Francisco over the past couple of years despite the fact that that by most accounts our local economy remains strong, employment and wages are up, and the cost of borrowing remains near historic lows. And this has been in marked contrast to our last real estate decline (2001-2002) which directly coincided with a local economic meltdown (a.k.a. The Internet Bubble).
And now, both the national economy and Bay Area Business Confidence Index are faltering and Federal rate cuts are failing to spark sales (but are doing a great job of weakening the dollar). In fact, The Bay Area Business Confidence Index “tumbled to its lowest level in its 7 1/2-year history, based on results of a survey conducted in late January and early February.”
Let’s see, 7 1/2-years ago would be right around...
∙ Record low Bay Area business confidence [SFGate]
∙ U.S. Economy: Payrolls Unexpectedly Decline for Second Month [Bloomberg]
∙ Bay Area “Notices Of Default” Heading North? (So To Speak) [SocketSite]
∙ February S&P/Case-Shiller Index Decline Continues For SF MSA [SocketSite 4/07]
Posted by socketadmin at 9:55 AM | Permalink | Comments (14) | (email story)
March 6, 2008
New Conforming Limits Expected Today, Access Within A Month?
Increased FHA loan limits for high-cost areas were announced and effected yesterday (apparently Wells Fargo will begin writing in about two weeks). Today, the new conforming loan limits are expected to be announced. And if Kathleen Pender is correct, “Fannie and Freddie are expected to begin buying the bigger loans in about a month."
Still no word on any new conforming guidlines (down payment, credit score, loan-to-value and debt-to-income ratios). Any tipsters within (or with "intimate knowledge" within...) the agencies?
And an FHA aside: "The FHA program has been sporting double-digit delinquency rates for years...We are potentially shifting risk from the private market onto the federal government. It puts the taxpayers on the hook. No doubt about it."
∙ FHA boosts home mortgage limits [SFGate]
∙ Loan Limits Have Been Raised For FHA-Backed Loans In California [SocketSite]
Posted by socketadmin at 7:31 AM | Permalink | Comments (2) | (email story)
March 5, 2008
JQ: While The Fed Giveth (Cuts), The Street Taketh Away (Spreads)
"The extra yield that investors demand to own so-called agency mortgage-backed securities over 10-year U.S. Treasuries rose to the highest since 1986, boosting the cost of loans for homebuyers considered the least likely to default.
The difference in yields on the Bloomberg index for Fannie Mae's current-coupon, 30-year fixed-rate mortgage bonds and 10- year government notes widened about 1 basis point, to 204 basis points, or 70 basis points higher than Jan. 15. The spread helps determine the interest rate homeowners pay on new prime mortgages of $417,000 or less. A basis point is 0.01 percentage point."
"Spreads tightened last week when the regulator for Fannie Mae and Freddie Mac, two of the largest buyers of the securities they guarantee, announced that temporary caps on their $1.5 trillion portfolio would be lifted. Investors have realized that the step was unimportant because the companies remain "capital-constrained," [a] New York-based UBS analysts wrote."
∙ Agency Mortgage-Backed Bond Spreads Reach Highest Since 1986 [Bloomberg]
∙ JustQuotes: What The OFHEO Are They Thinking? [SocketSite]
Posted by socketadmin at 9:04 AM | Permalink | Comments (8) | (email story)
March 4, 2008
Did Your Portfolio Help Bailout An Overleveraged Homeowner Today?
Federal Reserve Chairman Ben Bernanke, urged lenders “to forgive portions of mortgages held by homeowners at risk of defaulting” this morning in Orlando.
"Lenders tell us that they are reluctant to write down principal," Bernanke said. "They say that if they were to write down the principal and house prices were to fall further, they could feel pressured to write down principal again."
The Fed chairman countered that by reducing the amount of the loan, this "may increase the expected payoff by reducing the risk of default and foreclosure."
Bernanke also urged investors in mortgage bonds to accept "short payoffs" of loans by allowing borrowers to refinance at a lower principal.
For investors, a reduction in principal that's "sufficient to make borrowers eligible for a new loan would remove the downside risk" of further writedowns or defaults, Bernanke said. Investors may be able to share in future gains in home prices under some plans, he said, citing a proposal by the Office of Thrift Supervision.
Wall Street reacted accordingly this morning in New York. There’s nothing like talk of a federally orchestrated, yet privately funded, bailout in the morning.
∙ Bernanke Urges Banks to Forgive Portion of Mortgages [Bloomberg]
∙ U.S. Stocks Fall on Bernanke Plan; Citigroup, Oil Shares Drop [Bloomberg]
Posted by socketadmin at 9:46 AM | Permalink | Comments (17) | (email story)
February 28, 2008
JustQuotes: Freddie Follows Fannie (As Is Human Nature)
"Freddie Mac, the second-largest mortgage-finance company, posted a record $2.45 billion loss for the fourth quarter as rising defaults sent credit costs soaring....Government-chartered Freddie Mac and Fannie Mae, which account for 45 percent of the $11.5 trillion home loan market, are posting their biggest-ever losses as foreclosures and tumbling home prices increase costs. Freddie Mac Chief Executive Officer Richard Syron said today the company remains 'extremely cautious' for 2008."
∙ Freddie Mac Posts Record Loss, Remains `Cautious' [Bloomberg]
Posted by socketadmin at 6:56 AM | Permalink | Comments (7) | (email story)
February 27, 2008
JustQuotes: What The OFHEO Are They Thinking?
"U.S. regulators removed limits on the combined $1.5 trillion mortgage portfolios of Fannie Mae and Freddie Mac, enabling the companies to increase financing for the slumping housing market.
The asset caps, imposed in 2006 after the two largest mortgage finance companies revealed $11.3 billion of accounting errors, will end on March 1, the Office of Federal Housing Enterprise Oversight said in a statement today. The agency will still require the companies to set aside reserve capital that is 30 percent more than the usual minimum.
Unconstrained by portfolio limits, the government-chartered companies may buy more loans and bonds, replacing buyers who fled the market amid the collapse in subprime mortgages."
"Ofheo lifted the constraints after Fannie Mae and Freddie Mac met a demand that they resume timely reporting by the end of the month. Fannie Mae today posted a fourth-quarter net loss of $3.55 billion, as record home foreclosures increased credit losses."
∙ Fannie Mae, Freddie Mac Portfolio Caps Will Be Lifted [Bloomberg]
Posted by socketadmin at 1:40 PM | Permalink | Comments (7) | (email story)
February 25, 2008
JustQuotes: Damn Those "Broader Effects"
"Sales of existing homes in the U.S. fell in January to the lowest level since records began nine years ago and prices slid for the sixth time in seven months, posing a threat to consumer spending, the largest part of the economy.
Resales declined 0.4 percent, less than forecast, to an annual rate of 4.89 million from a revised 4.91 million in December that was higher than previously reported, the National Association of Realtors said today in Washington.
The figures indicate declines in home prices so far aren't sufficient to entice more buyers. Former Federal Reserve Chairman Alan Greenspan said today that the deepening rout in housing is having a 'broader effect' on spending, and that a recession this year may be deeper than previous downturns."
∙ Existing Home Sales Decline to Nine-Year Low [Bloomberg]
Posted by socketadmin at 5:55 AM | Permalink | Comments (10) | (email story)
February 19, 2008
Savings From Increased Conforming Loan Limits Get Shaved
Remember that little comment we made a few weeks ago regarding increased prepayment risk associated with increasing conforming loan limits? From the Securities Industry and Financial Markets Association (SIFMA) on Friday:
Higher balance loans which are now temporarily eligible for Federal Housing Authority (FHA) and GSE guarantee programs under H.R. 5140, the Stimulus Package, will not be eligible for inclusion in TBA-eligible pools. They are instead expected to be securitized under unique pool codes for trading on a “specified pool” basis or inclusion in Real Estate Mortgage Investment Conduit (REMIC) transactions.
Thank increased prepayment risk for the unique pooling. And why does the pooling matter?
Jumbo mortgages now eligible for purchase by the nation's largest home loan finance companies [under the Stimulus Package] will be locked out of the market where trading helps lower rates to consumers...
Including jumbo loans in TBA pools would have had the unintended effect of raising rates on traditional conforming loans since investors assume they will receive the larger loans when they take delivery of the bonds, according to Freddie Mac. In TBA, the loans must be deemed fungible, so investors buy without knowing attributes.
In other words, hello "super conforming tier" and goodbye "conforming" mortgage rates for loans between $417,000 and $729,750 in San Francisco.
∙ Conforming Loan Limits: A Placeholder For Discussion And Analysis [SocketSite]
∙ SIFMA to Update MBS TBA Good Delivery Guidelines [SIFMA]
∙ Jumbo loans to be isolated from mortgage TBA: SIFMA [Reuters]
∙ If Lowering Rates Isn’t Working, Perhaps Increasing Limits Will [SocketSite]
Posted by socketadmin at 1:22 PM | Permalink | Comments (24) | (email story)
February 14, 2008
The California Budget Project Reports: It’s Expensive In San Francisco
The conclusion from the California Budget Project’s ominously titled “Locked Out 2008: The Housing Boom and Beyond” report:
California’s home sales and prices boomed in recent years, driven in part by loosened mortgage underwriting standards and the promotion of loans with risky features – such as ARMs with short-term teaser rates – that allowed many Californians to buy a piece of the “American Dream.” As teaser rates have expired, mortgage payments have jumped to unaffordable levels for many homeowners, helping to trigger a rising wave of foreclosures that could exacerbate the state’s current economic slowdown. Although the housing downturn has been dramatic, other characteristics of California’s housing market – such as lack of affordability and high rates of overcrowding – have remained relatively constant.
And setting the stage for the upcoming DataQuick sales report for Nothern California:
Analysts point to two key reasons that the median home price continued to increase during 2006 and early 2007 as sales declined. First, home prices “tend to be ‘sticky’ on the downside” of a housing-market cycle, because some sellers take their homes off the market if they cannot sell for their preferred price, which initially keeps home prices from falling. Second, the composition of home sales had changed. The downturn in sales was most apparent in neighborhoods with lower-priced homes, in part due to rising foreclosures, tightened underwriting standards, and the decline of investment funds for subprime loans. Meanwhile, sales of higher-priced homes remained steadier as Californians with higher incomes continued to purchase homes. As a result, higher-priced homes made up a larger share of sales, thereby boosting the statewide median home price even as overall sales declined.
Or as we often write in far fewer words, “think mix.”
∙ Locked Out 2008: The Housing Boom and Beyond (pdf) [California Budget Project]
∙ Locked Out 2008: Profile of California Counties (pdf) [California Budget Project]
Posted by socketadmin at 5:00 AM | Permalink | Comments (53) | (email story)
February 13, 2008
If Lowering Rates Isn’t Working, Perhaps Increasing Limits Will
President Bush is expected to sign the economic stimulus bill this afternoon which will likely raise the conforming loan limit in San Francisco to $729,750 (at least “temporarily”). Don’t expect the new limits to take effect for at least 30 days or for the first closings to occur until a few weeks after that.
And in terms of the actual impact on mortgage rates, Julian Hebron of Residential Pacific Mortgage offers one perspective:
There has always been tiered pricing in the Jumbo market. Rates on Jumbo loans from $417k to $650k can be lower than rates on loans from $650k to $1m, and so forth as loan amounts rise into the ‘Super Jumbo’ realm above $1m. Early lender chatter is that when conforming limits rise, we may see higher rates on the ‘Super Conforming’ tier from $417k to $729k.
We also may see rates on all conforming loans rise as a result of the new loan limits. Right now, conforming 30yr fixed rates are about 1% lower than jumbo rates. Conforming 5yr, 7yr and 10yr ARMs are about .5% lower than jumbo rates. If we had a so-called Super Conforming pricing tier, or if conforming loan limits rose in general, expect the benefit of a new Super Conforming versus a jumbo to be cut in half or worse. This might not happen, but such adjustments are a normal part of open market pricing, so just be aware of it.
As always, only time (and the traders) will tell.
UPDATE: Bush has signed the bill.
UPDATE: In response to a reader's question about timing, keep in mind that the Secretary of Housing and Urban Development now has 30 days to establish official median home prices for the high cost areas (the first step in calculating the new conforming loan limits) and updated underwriting guidelines still need to be debated, drafted and distributed.
∙ Conforming Loan Limits: A Placeholder For Discussion And Analysis [SocketSite]
∙ Bush Signs $168 Billion Measure Designed to Stimulate Economy [Bloomberg]
Posted by socketadmin at 9:46 AM | Permalink | Comments (24) | (email story)
JustQuotes: It’s Not About The Rates But Rather The Spreads
"The Federal Reserve's interest-rate cuts last month have failed to lower borrowing costs for many companies and households, increasing the chance of further reductions from the central bank.
Companies are paying more to borrow now than before the Fed reduced its benchmark rate by 1.25 percentage point over nine days in January, based on data compiled by Merrill Lynch & Co. Rates on so-called jumbo mortgages, those above $417,000, have increased in the past month, making it tougher to sell properties and risking further price declines."
∙ Fed Interest-Rate Cuts Fail to Lower Borrowing Costs [Bloomberg]
Posted by socketadmin at 8:19 AM | Permalink | Comments (3) | (email story)
January 31, 2008
Senate Advances Stimulus Plan Without Any Loan Limit Adjustments
As a plugged-in reader notes, while the House has approved a “Stimulus Plan” which includes the much ballyhooed increase in conforming loan limits for California, the Senate is advancing a package which does not. Game(smanship) on.
And yes, we still owe you our thoughts on the whole shebang.
UPDATE: And as another reader notes below, "Republicans are filibustering it and 60 votes are needed for it to pass. According to the NY Times, Sen. Schumer says they will pass the house version if they can't get 60 votes for the Senate version."
∙ House Approves Economic Stimulus Plan [New York Times]
∙ Conforming Loan Limits: A Placeholder For Discussion And Analysis [SocketSite]
∙ Senate Democrats Short of Votes for Stimulus Bill [New York Times]
Posted by socketadmin at 9:20 AM | Permalink | Comments (26) | (email story)
January 30, 2008
JustQuotes: The Federal Reserve Cuts Rates Yet Again (0.5%)
"The Federal Reserve lowered its benchmark interest rate by half a point to 3 percent, the second cut in nine days, and indicated its willingness to do so again to prevent a U.S. recession.
'Downside risks to growth remain,' the Federal Open Market Committee said in a statement after meeting today in Washington. In a reference to the volatility of the past five months, the Fed added that 'financial markets remain under considerable stress and credit has tightened further for some businesses and households.'
The dollar tumbled and two-year Treasury notes rose after the decision as traders anticipated another reduction at the Fed's March meeting, if not before. The cumulative reduction in rates since Jan. 22 is the fastest easing of monetary policy since 1990. The Standard & Poor's 500 Index closed 0.5 percent lower and is down 7.7 percent this year."
∙ Fed Cuts Interest Rate to 3% as U.S. Growth Falters [Bloomberg]
Posted by socketadmin at 3:22 PM | Permalink | Comments (14) | (email story)
January 28, 2008
JustQuotes: U.S. New Home Sales Follow In The Footsteps Of Old
“Purchases of new homes in the U.S. fell to a 12-year low in December [and fell 26% on a year-over-year basis], capping the biggest annual decline on record.
Sales decreased 4.7 percent to an annual pace of 604,000, the fewest since February 1995, from a 634,000 rate the prior month, the Commerce Department said today in Washington. The median price last month dropped 10 percent from December 2006, the biggest 12-month decline in 37 years.
The report may reinforce concern that falling home values and stricter lending rules will lead to more foreclosures and hurt consumer spending. Federal Reserve policy makers, meeting later this week, will probably cut interest rates again to try to ward off recession, economists said.”
∙ Sales of New Houses in U.S. Fall More Than Forecast [Bloomberg]
∙ U.S. Existing Home Sales Decline More Than Forecast In December [SocketSite]
Posted by socketadmin at 7:47 AM | Permalink | Comments (2) | (email story)
January 24, 2008
U.S. Existing Home Sales Decline More Than Forecast In December
"Sales of existing homes in the U.S. fell more than forecast in December, capping the biggest yearly slump in more than a generation.
Purchases fell 2.2 percent to an annual rate of 4.89 million, the National Association of Realtors said today in Washington. For all of last year, sales of single-family homes declined 13 percent, the most since 1982, and prices dropped for the first time in at least four decades [and likely since the Great Depression].
Falling property values and tougher borrowing rules may lead to more foreclosures and depress housing for most of this year. The worsening real-estate recession is at the core of the economic slowdown and will probably prompt the Federal Reserve to lower interest rates next week and in future meetings, economists said."
∙ U.S. Existing Home Sales Fell More Than Forecast [Bloomberg]
Posted by socketadmin at 8:12 AM | Permalink | Comments (2) | (email story)
January 22, 2008
The Federal Reserve Cuts Benchmark/Discount Rates By 0.75%
Twelve weeks ago the Federal Reserve cut the benchmark interest rate by 25 basis points (0.25%) and signaled that further cuts were unlikely. Six weeks ago they cut again by 25 basis points as house prices continued to drop, spending continued to slow, and banks continued to tighten their lending standards.
And in an unscheduled session this morning, the Feds have further cut the benchmark interest rate by 75 basis points (0.75%):
The Federal Reserve lowered its benchmark interest rate in an emergency move for the first time since 2001 after stock markets tumbled from Hong Kong to London and the U.S. economy showed increasing signs that it's headed into a recession.
The central bank cut the target overnight lending rate to 3.5 percent from 4.25 percent, the Federal Open Market Committee said in a statement in Washington. Policy makers weren't scheduled to gather until next week. It's the biggest single reduction since the Fed began using the rate as the principal tool of monetary policy around 1990.
And once again we ask, will the cuts help revive our national housing market? And of course, what impact (if any) will the cuts have on mortgage rates closer to home?
∙ The Federal Reserve Cuts Benchmark/Discount Rates By 0.25% [SocketSite]
∙ It’s Déjà Vu All Over Again: Fed Cuts Benchmark/Discount Rates .25% [SocketSite]
∙ Fed Cuts Rate 0.75 Percentage Point in Emergency Move [Bloomberg]
Posted by socketadmin at 7:08 AM | Permalink | Comments (33) | (email story)
January 14, 2008
The 2008 Housing Market Through The Eyes Of The (Not An) MBA
Expectations for the national housing market in 2008 according to the Mortgage Bankers Association (MBA):
- A 2 percent decline in nominal median sales price (versus 2007)
- A 13 percent decline in existing home sales (versus 2007)
- A 15 percent decline in new home sales (versus 2007)
- An 18 percent decline in purchase mortgage originations (versus 2007)
The MBA is also forecasting that the 30-year fixed-rate mortgage yield will trend up slightly to 6.2 percent by the end of the year (yes, “still quite low by historical standards”), and that the market will start its recovery in 2009.
∙ 2008 MBA Forecast: Slow Economic Growth/Lower Levels of Mortgage Originations [MBA]
Posted by socketadmin at 12:20 PM | Permalink | Comments (2) | (email story)
January 8, 2008
JustQuotes: Just Don’t Bet On (Or Call It) A Potential ARM Bailout
""There is no evidence it is bottoming,"' [Treasury Secretary Henry Paulson] said of the housing decline on CNBC television during a trip to New York. "The evidence would be that it has further to run."
The Treasury chief indicated the outlook may prompt an expansion of the plan Bush administration officials brokered with mortgage lenders last month. The initiative is aimed at helping as many as 1.2 million Americans keep their homes by making it easier to negotiate affordable loans and freezing some adjustable-rate mortgages at current rates.
"We have this wave of resets coming," Paulson said, referring to the almost 2 million of adjustable-rate loans forecast to jump to higher rates in the coming two years. "One thing we will consider is maybe expanding this beyond subprime borrowers to other borrowers.""
∙ Paulson Sees `No Evidence' Housing Decline Is Ending [Bloomberg]
∙ Pending Sales of Existing U.S. Homes Fell in November [Bloomberg]
Posted by socketadmin at 8:00 AM | Permalink | Comments (15) | (email story)
December 28, 2007
JustQuotes: National New Home Sales Drop To 12-Year Low
"Sales of new homes in the U.S. fell to a 12-year low in November, pointing to bigger declines in construction that will hobble economic growth throughout 2008."
"Purchases fell in three of four regions, led by a 28 percent plunge in the Midwest. Sales dropped 19 percent in the Northeast and 6.4 percent in the South. They rose 4 percent in the West."
∙ Sales of New Homes in U.S. Dropped 9% to 12-Year Low [Bloomberg]
Posted by socketadmin at 7:45 AM | Permalink | Comments (2) | (email story)
December 20, 2007
Their Mascot Might Be A Bull, But Merrill Lynch Is Anything But
The title of yesterday’s Economic Commentary from Merrill Lynch: “Housing deflation could be a multi-year process.” And the executive summary:
Both the near-term and longer-run outlooks for the housing market remain clouded in what is a severe downturn in starts, sales and prices that has become national in scope. As we saw in the November housing starts data, the builders are now frantically cutting production.
But with the sales backdrop still softening, they may have to slice their construction plans by another 30% before we hit bottom on a cyclical basis. And, that bottom could be as long as a year away. Beyond that, weak demographic fundamentals point to years of sluggish real estate activity, particularly in terms of the “price”. The looming dominance of the “move down” buyer suggests that home values will continue to soften long after the building industry mops up the current excess supply. In fact, real estate pricing in general can be expected to be in the doldrums through 2012.
The need to save for retirement will have to increasingly come “organically” in the form of setting aside an extra nickel or dime from every dollar earned in after-tax wages and salaries as opposed to what we as a society have been doing for the better part of the past decade, in essence, blurring the distinction between real estate as a “consumption good” (place to live) and real estate as part of the “portfolio” (investment) that was going to experience sustained double-digit appreciation and emerge as a fountain of cash-flow in the future.
Expectations are already in the process of being deflated and we are at the early stages of a savings revival in the traditional sense of the word, and this will (i) be deflationary for the aggregate demand curve; (ii) be bullish for Treasury bonds; (iii) act as an underpinning for the dollar insofar as this process continues to foster an improvement in the current account deficit (which, excluding energy, is down to a six-year low).
See the chart [above] – at the height of the bubble, almost one in four households who were contemplating a move into real estate based their decisions on future price appreciation. This “investor class” that dominated the housing market for so long has now seen its share dwindle to a record low of 4%. This is a very big deal as it illustrates just how far the speculation has been expunged, and it also heralds a major (and healthy) shift in how the public now perceives real estate.
And while the report is national by nature, there are obviously themes that might resonate right here at home. And of course, there’s the punch line:
Here is what we really “do not get”. There are still economists out there talking about how the housing recession is still local and not regionally broad based. We have no idea who their data vendors are. In our view, this clearly goes down as the most national real estate downturn since the 1930s.
Posted by socketadmin at 2:00 AM | Permalink | Comments (13) | (email story)
December 19, 2007
Promoted From Comment To Post: Satchel Does Deflation
We’re not sure whether to call it a guest editorial or a soapbox, but in either case we’re handing plugged-in reader Satchel the mike.
Thanks for the questions regarding how I can be predicting deflation when everyone else seems to be saying inflation (and some price measures are pointing that way). It does seem contradictory, but it's really pretty straightforward when you take it step by step. Apologies to anyone who finds this pedantic or useless. And of course for some of you this will be very obvious. But maybe some of you would find this interesting? As usual, it is long…
First, real wealth is not the same as monetary value (prices). Real wealth (sometimes called real assets) consists of things like real estate, useful goods (like, say, a nice handmade guitar or maybe a store of grain) and control of the factors of production (people typically think equities, but it's really much broader - intellectual capital, the ability of a mother to teach her young children in their earliest years, small unlisted businesses, etc.). Most real assets are assigned a monetary value or price, especially if they are to be exchanged. This is obvious with real estate or equity prices. But think out of the box. Think about how people sometimes say, "I need to monetize my idea" or "monetize my time". Wealth is a pretty broad concept.
Real wealth grows slowly, and is correlated with productivity growth, which is a small number, and, although the tech guys will not like to hear this, is actually today lower than pre-WWII. Lots of debate, and no real reason to go into it here, but suffice it to say, we're talking gains of roughly 1-2% per year per capita. So, real wealth grows slowly, and if too much government gets in the way, it can turn negative (think USSR post- about 1980). (Please guys, don’t tell me about the recent uptrend in trend productivity. I’ve seen the NY Fed data – they’re wrong as far as I can tell, because they’re derived from a deflator that is understated; I guess this is arcane, but for those of you who understand this, you’ll also understand why the government has a systematic bias in favor of understating price inflation measures for obvious reasons.)
In a fiat system, money is debt. Simple as that. Money is literally borrowed into existence. Think about when you buy a house in SF in 1999. Its monetary value then was $1MM. In 2005, say, its monetary value is $2MM. The real value (or wealth) inherent in the house has not increased (technically, there is a slight increase or decrease, but people are already complaining about the bandwith I use, so forgive me if I skip that wrinkle) because it is the SAME house. Same utility. Same wealth. Same real value.
Now, if you borrow $500,000K against it, you get money. Where did that money come from? It was borrowed into existence. That's how it works. In the old days, before Dr. Greedscam, the amount of borrowing available was limited by reserve requirements, so that the Fed could control the rate of growth, at least somewhat (not that they really did). Following 1991, these limits gradually disappeared, as securitization took hold. In its most extreme and current iteration, one could literally create money out of nothing. All you needed was a willing investor (hello silly Asian savers and Eurosclerotics) in a SIV (or conduit, or ABS tranche, or CDO, or CLO, get the picture?), and you could always find a willing American Debt-Serf. By now the fed had basically relinquished all control over borrowing, especially as it was unwilling to disappoint the masses who were increasingly tricked into thinking debt was wealth (and this confusion was a very happy happenstance for the banks and corporations BTW). Nominal debt (and derivatives) EXPLODED – literally into the hundreds of trillions of dollars, although some of these net against each other. Wall Street siphoned off a little bit every time they created one of these things, then took a little more every time they traded, and for good measure even bought them and traded against the infinitely less sophisticated public officials, pension funds, money market funds and, yes, even homebuyers (through excessive fees siphoned off by brokers, re agents, etc). It was literally a slaughter.
Following the example, after you create the $500K of money, you are no more wealthy. This is important. You have exchanged your future earnings (with interest of course) for the newly-created money. In other words, you have exchanged part of your FUTURE wealth (your earnings power and productive capacity or your ability to consume in the future) for current wealth. (You might sometimes hear people throw around the term “Riccardian equivalence” which is basically this idea.) There is an illusion of increased wealth, because of all the money flying around, but wealth is the same on a net basis (across time), increasing slowly as it does. Actually, you take a hit to your wealth – LOL! That’s why all the hedge fund guys are buying yachts and mansions!! – but you won’t realize that until later, if ever. Where do you think Wall Street got all the hundreds of billions in bonuses in the last 6 years while equity markets returned approximately 0% (excluding the fraudulently small dividends received)? Now that return was for the broad S&P. If you happened to be invested in tech stocks generally…..well, you know it was a(nother) slaughter. Hmmm, BTW, where did all that money go?? I’ll let you figure that out, but I’ll give you a hint – drive around Atherton or, even better, Greenwich, Connecticut for some clues…..
Back to your questions now. I think your confusion about inflation is that you are only thinking about it as prices. Think of it as money (credit) supply. As the credit supply is expanded (through borrowing) it is inflated. As it contracts, it deflates. Inflation/deflation. That’s it. But think about the effect on monetary values (prices) of things when credit inflates. The extra money created “chases” some asset prices and goods/services up. Generally, these items are what amateur trader/economists call “houses and haircuts” – that is, fixed assets and services that cannot be arbitraged. You can’t get a haircut from China. You can’t get a house from China. And you can’t eat out at a restaurant in China on a Staurday night and still be home for bedtime. So that created money tends to flow here, raising prices for houses, haircuts and restaurant meals. For things that you can get from China, well, you know the story. Price deflation, which is what you would expect because as productivity rises things become cheaper to make (in real terms).
There’s no real reason prices should go up in the aggregate, absent credit creation. In fact, before we had a fiat money system (basically prior to 1913), you might be surprised to learn that a house in 1780 cost basically the same as it did in 1900! Imagine that. Real estate didn’t go up over a 120 year period!! Well, of course that makes sense, because the REAL VALUE doesn’t really change too much. It never does, not even today. (This is of course super oversimplified, but you get the idea.) Incidentally, over this period, living standards and real income increased dramatically, as many prices fell (through increased productivity), freeing people up to enjoy the fruits of their increased productivity.
Sometimes when credit is expanded recklessly, and under apparent mass psychology conditions that no one can really figure out, the public’s attention is turned to a particular asset or asset class. It could be tulips in Holland, could be land in Florida 1925-26, equities in the 1920s, railroad stocks in the 1840s, a crazy company that no one really could figure out what it was supposed to do (except somehow exchange stock for newly created government debt) in the 1720s England, the twin Japanese real estate and stock bubbles of the late 1980s, the NASDAQ in the late 1990s, or, most unfortunately for some of us, what looks to be the biggest bubble of them all, the (almost) global housing bubble. Although no one wants to admit that SF suffers from it, it would be strange for it to sit out the party, don’t you think, since it is usually on the cutting edge and all??
We’re getting to the good part. What happens when there is deflation? That is, when money/credit is destroyed? And what effects will this process likely have on asset prices, and can certain consumer prices (like food or oil, for instance) still rise in an environment like this, or its variant, what is often thought of as stagflation?
I’ll post more tomorrow. If anyone appreciates this at all, or wants me to absolutely stop, either way, put up a comment, and I’ll try to be a “people pleaser” – as I’m sure you can tell, something that does NOT come naturally to me!
Editor's Note: We're not all that interested in lowest common denominator thoughts, so please don't worry about trying to be a "people pleaser" on this post. And as always, thank you for plugging in (and provoking thought).
Posted by socketadmin at 9:46 AM | Permalink | Comments (39) | (email story)
December 11, 2007
It’s Déjà Vu All Over Again: Fed Cuts Benchmark/Discount Rates .25%
Six weeks ago the Federal Reserve cut both the benchmark interest rate and the discount rate by 25 basis points (a quarter percent) while signaling that further cuts were unlikely. Our questions at the time: “Will the cuts help revive our national housing market? And of course, what impact (if any) will the cuts have on mortgage rates closer to home?”
Today the the Federal Reserve cut both the benchmark interest rate and the discount rate by another 25 basis points. And it looks like we have an answer (at least to question number one):
The economy is faltering after a third-quarter surge as house prices drop, consumer spending slows and banks tighten lending standards for even their best customers. Chairman Ben S. Bernanke has struggled to insulate the economy from financial- market instability since the central bank began reducing borrowing costs in August.
"Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending," the FOMC said. "The committee will continue to assess the effects of financial and other developments in economic prospects and will act as needed to foster price stability and sustainable economic growth.''
And related to our question number two (regarding local rates):
Because banks are protecting capital, lending has been cut and concerns about counter-party risk are higher. About 40 percent of lenders have increased their standards for the most creditworthy borrowers to qualify for a so-called prime loan, according to a Fed study in October.
Interest rates for jumbo 30-year fixed-rate mortgages are about 6.68 percent, a spread of 92 basis points over non-jumbo loans of $417,000 or less. A year earlier, the spread was 36 basis points, and last month it was 57. A basis point is 0.01 percentage point.
∙ Fed Lowers Benchmark Rate by a Quarter Point to 4.25 Percent [Bloomberg]
∙ The Federal Reserve Cuts Benchmark/Discount Rates By 0.25% [SocketSite]
Posted by socketadmin at 11:28 AM | Permalink | Comments (17) | (email story)
December 10, 2007
NAR Adds 0.18% And Aims To End The Year On A Positive Note
For the first time in nine months, the National Association of Realtors has revised their forecasts for national existing home sales in 2007 and 2008 upwards.
In both cases, however, NAR's revised forecasts have added 10,000 home sales to last month's estimates of 5.66 and 5.69 million (2007 and 2008 respectively). And in both cases it represents an increase of 0.18% over last month's forecasts (which seems to be more spin than substance) and a drop of 12.5% as compared to 2006 (which would represent the lowest level of market activity since 2002).
The trade group also said its index that forecasts near-term home sales inched upward in October. The trade group's seasonally adjusted index of pending sales for existing homes rose 0.6 percent to 87.2 from an upwardly revised September index of 86.7, but was down 18.4 percent from a year ago — the third-largest year-over year decline on record.
The Realtors group also said the median price for U.S. existing homes — the point at which half sold for more and half for less — will sink by 1.9 percent to $217,600 this year and rise 0.3 percent next year to $218,300.
∙ Realtors' Forecast Bucks Common Wisdom [Associate Press]
Posted by socketadmin at 9:17 AM | Permalink | Comments (8) | (email story)
December 6, 2007
JustQuotes: A Preview Of The Federal Subprime Freeze To Come
“President George W. Bush today will announce a [five year] freeze on some subprime mortgage rates in an effort to stop a wave of foreclosures undoing the six-year expansion.”
“The agreement addresses homeowners unable to afford higher interest rates once starter rates increase, and offers help in one of three ways, a White House official said. The options are freezing rates or refinancing into either a new private mortgage or a Federal Housing Administration-backed loan, he said on condition of anonymity.”
“The freeze will apply to mortgages issued between January 2005 and July 2007 that are scheduled to reset between January 2008 and July 2010, said the people familiar with the plan. To be eligible, borrowers must not be more than 60 days behind in their payments, have less than 3 percent equity in their property [and have a FICO score below 660].”
∙ Bush Aims to Prolong Expansion With Subprime Freeze [Bloomberg]
Posted by socketadmin at 8:00 AM | Permalink | Comments (36) | (email story)
December 3, 2007
An Apples To Apples Sale In The Marina (1751 Beach): The Investment
A little over two years ago (on 9/30/2005 to be exact) 1751 Beach Street was purchased for $1,400,000. The purchase appears to have been financed with a down payment of $170,000, a first (variable rate) mortgage in the amount of $980,000, and a second (variable rate) mortgage of $250,000. And HOA dues for the condo are a reasonable (especially considering they include earthquake insurance) $275 per month.
Assuming a blended mortgage rate of 6% in 2005 (which is likely understated based on the combination of a super Jumbo first and a second), interest payments over the past two years would have been running at least $6,100 per month. And property taxes (based on the sale price in 2005) around $16,000 a year.
Based on these numbers, our back of the envelope calculations put the after-tax cost of holding this property at around $4,400 per month (at a minimum); the opportunity cost on the down payment at around $700 per month (assuming a 5% annual return); and the total effective cost at $5,100 per month over the past two years. At the same time, this property did appreciate in value by about $800 per month (based on its recent sale for $1,420,000).
In other (overly simplified) words, if the person who purchased 1751 Beach Street last month for $1,420,000 had passed on the purchase in 2005 (for $1,400,000) and instead rented a similar condo for anything under $4,300 per month (in 2005), they would have likely come out ahead (at least financially).
Looking forward? Well, that's a topic for tomorrow.
∙ An Apples To Apples Sale In The Marina (1751 Beach): The Market [SocketSite]
Posted by socketadmin at 12:11 PM | Permalink | Comments (64) | (email story)
November 30, 2007
No Direct Support! But Any Bets On Tax Credits For Security Holders?
“U.S. Treasury Secretary Henry Paulson is negotiating an agreement with banks to stem a surge in foreclosures by fixing interest rates on loans to subprime borrowers, according to people familiar with a meeting he led yesterday.”
“While the government can't force the industry to modify loans, Mr. Paulson and other administration officials have been using moral suasion to push for workouts, telling the companies it is in their interest to avoid foreclosure since most parties can lose money when that happens. A similar plan to freeze interest rates temporarily was recently announced by California Gov. Arnold Schwarzenegger and four major loan servicers, including Countrywide.
Among the holdouts have been investors, who typically hold securities backed by mortgages. If interest rates are frozen, they would lose the potential benefit of higher payments. But investors have cautiously moved toward cooperation, likely on the grounds that it's better to get some interest than none at all.”
“Officials in Washington have been cautious about steps that would be seen as rescuing borrowers, lenders and investors from the consequences of their own bad decisions. That is why few are suggesting direct support for borrowers who can't afford their loans. Mr. Paulson has decided his best option is to prod the markets to sort matters out themselves, as long as companies bear in mind the public interest in keeping people in their homes.”
∙ Paulson, Banks in Talks to Stem Surge in Foreclosures [Bloomberg]
∙ U.S., Banks Near A Plan to Freeze Subprime Rates [WSJ]
∙ JustQuotes: What’s The Cause And What’s The Effect? [SocketSite]
Posted by socketadmin at 9:10 AM | Permalink | Comments (10) | (email story)
November 28, 2007
We’ll Say It Once Again: It’s All About Managing Expectations
“The [U.S.] housing sector has continued to decline and to erode at a very, very rapid rate,'' [Federal Reserve Vice Chairman Donald Kohn] said in response to a question. “It would be nice to see some early signs that it was beginning to stabilize, and we haven't seen that yet.”
Merrill Lynch & Co., Citigroup Inc. and other banks that underwrote so-called collateralized debt obligations linked to mortgages and other credits have already warned of losses of at least $47.2 billion on CDOs and other holdings. The securities slid as investors shunned assets linked to subprime U.S. mortgages following a surge in loan defaults.
“There's further to go” in revealing losses, Kohn said today. He added that the more information that is made public about potential losses “the better,” as it will help ease uncertainty."
UPADTE: A publishing error resulted in this excerpt being published twice. And an editor’s error (damn monkeys) resulted in the deletion of the version with (rather than without) our reader’s comments (which we didn’t even have a chance to read). Sorry about that folks, no slight intended, and please feel free to comment again. And as always, thank you for plugging in.
∙ Kohn Sees Risk of Reduced Credit From Market Upheaval [Bloomberg]
Posted by socketadmin at 9:59 AM | Permalink | Comments (0) | (email story)
November 20, 2007
We’re Looking For A Messenger (And Promise Not To Shoot)
The agenda (and no, not that kind of agenda) for yesterday’s real estate and economics symposium hosted by the UC Berkeley Fisher Center for Real Estate and Urban Economics.
The Chronicle’s summary: “A real estate symposium on Monday…predicted more gloom in the Bay Area housing market over the next year or so.”
And a reader’s inquiry (which we’ll simply have to parrot): “Would love to hear to some insider scoop on the symposium.”
UPDATE: And will_h comes through with a plugged-in reader's synopsis of the symposium.
∙ 30th Annual Real Estate & Economics Symposium: Agenda [berkeley.edu]
∙ Bay Area real estate symposium forecasts more gloom [SFGate]
Posted by socketadmin at 8:29 AM | Permalink | Comments (11) | (email story)
November 14, 2007
JustQuotes: The Foreclosure Spillover, Symptom Or Subterfuge?
"The losses (from foreclosures) are extending to neighbors and to entire communities," said Martin Eakes, chief executive of the Durham, N.C., Center for Responsible Lending, which released the survey on Tuesday. "The spillover effect is disturbing because we've only just begun to see the foreclosures."
"Foreclosures aren't causing prices to fall - it's a symptom of the whole thing unraveling," [Christopher ] Thornberg said. "If you had no foreclosures at all, prices were still going to fall. (Foreclosures) may accelerate the process, but it's a process that has to happen one way or another because when you look at (home) prices relative to income, it's completely insane."
∙ Ripple effect of foreclosures touch entire communities [SFGate]
Posted by socketadmin at 8:30 AM | Permalink | Comments (24) | (email story)
November 5, 2007
The Fortune Forecast For Where Home Prices (And Rents) Are Headed
As a plugged-in reader notes, Fortune Magazine looks at historic Price to Rent ratios (pages 76-88) across 54 major metropolitan areas in an attempt to forecast where home prices are headed.
In most markets people won’t lay out much more in monthly costs to own a house or condo than they would to rent a similar property unless they expect a huge profit when they sell. Indeed, speculators chasing quick profits did a lot to inflate the recent bubble. But once the fervor fades, prices must fall to restore their normal, long-term relationship with rents. Rents exercise a kind of inevitable gravitational pull on prices. The ratio of prices to rents “behave much like price/earning rations for stocks,” says Yale economist Robert Shiller. “Like P/Es, price-to-rent ratios are mean-reverting.” In other words, while prices soar from time to time, sending the ration to exceptional heights, sooner or later the relationship is bound to return to its historical average.
Of course, rather than prices falling rents can rise. And while Fortune forecasts a 28.3% correction in the Price to Rent ratio over the next five years for the San Francisco MSA, they’re forecasting it's derived from a 10% drop in prices along with an 18% increase in rents. Over in the East Bay, however, the Fortune forecast is a bit more grim as they're calling for a 38.1% correction driven mainly by price declines of >30%.
And of course, the concept of a housing P/E (and rising rents) shouldn't catch any plugged-in readers by surprise.
∙ Real Estate: Buy, Sell, or Hold? (Pages 76-88) [Fortune Magazine]
∙ Not The “P” But The “E” [SocketSite]
Posted by socketadmin at 3:48 PM | Permalink | Comments (179) | (email story)
October 31, 2007
The Federal Reserve Cuts Benchmark/Discount Rates By 0.25%
The known: the Federal Reserve has cut both its benchmark interest rate and discount rate by 25 basis points (a quarter percent) while signaling that further cuts are unlikely.
"Today's action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets," the Federal Open Market Committee said in a statement after meeting today in Washington. "After this action, the upside risks to inflation roughly balance the downside risks to growth."
The big unknown(s): will the cuts help revive our national housing market? And of course, what impact (if any) will the cuts have on mortgage rates closer to home?
∙ Fed Lowers Rate by a Quarter Point to 4.5 Percent [Bloomberg]
∙ U.S. Federal Open Market Committee Statement: Text [Bloomberg]
Posted by socketadmin at 11:53 AM | Permalink | Comments (32) | (email story)
October 25, 2007
JustQuotes: Pick Your U.S. New Homes Sales Headline And Spin
U.S. New-Home Sales Rose in September After Revisions [Bloomberg]
“Sales of new U.S. homes unexpectedly rose in September after figures for previous months were revised down, maintaining concern the housing slump will restrain economic growth. Purchases increased 4.8 percent to an annual rate of 770,000 that matched the median forecast of economists surveyed by Bloomberg News. August purchases were revised down to an 11-year low of 735,000, the Commerce Department said today in Washington.”
New home sales hammered again [CNN]
“The pace of new home sales was weaker than expected in September, although it was a slight pick-up from an even weaker revised figure for the previous month, according to a government report. The pace of new home sales came in at an annual pace of 770,000 in the month, up from the revised 735,000 rate in August. Economists surveyed by Briefing.com had forecast sales would slow to a pace of 775,000 in the month.
But the report showed more weakness than the narrow miss of the forecast would indicate. Both the pace in July and the pace in August were revised lower. The previous reading of a 835,000 sales pace in July was cut to 798,000, while the original August reading to 795,000 was cut 8 percent to an 11-year low."
Posted by socketadmin at 7:45 AM | Permalink | Comments (18) | (email story)
October 24, 2007
U.S. Existing Home Sales Fall 8% (And Yes, It Might Matters To You)
Sales of previously owned U.S. homes fell 8% in September (19% year-over-year) and the median price paid fell 4.2% compared to September 2006. And while some might point to a national slump as a macro trend that’s irrelevant to us in the micro San Francisco (no slight intended), any drag on the macro economy (think a potential slowdown in consumer spending) will most definitely have an impact on the Bay Area.
Stricter lending standards and higher borrowing costs are making it more difficult to qualify for loans, causing an increase in the number of unsold properties and pulling prices down. Some economists say falling home values, by making owners feel less wealthy, may reduce consumer spending.
"The credit freeze in August definitely impacted sales in September," said Lawrence Yun, a senior economist at the [National Association of Realtors]. The negative influence was greater on jumbo loans, or loans larger than $417,000, affecting high- priced areas such as California, Yun said.
The good news? Another rate cut by the Fed is looking even more likely (think mortgage rates). The bad news? Another rate cut by the Fed is looking even more likely (think our weakening dollar).
And while some might take solace in Goldman Sachs’ chief U.S. economist’s quote that “[e]xisting home sales are still not particularly low by historic standards,” don’t forget the punch line: “Housing still has a lot of weakness ahead of it.”
∙ U.S. Existing Home Sales Fall More Than Forecast [Bloomberg]
∙ Dollar Falls Against Yen on Home Sales Decline, Merrill Loss [Bloomberg]
Posted by socketadmin at 9:17 AM | Permalink | Comments (84) | (email story)
October 22, 2007
JustQuotes: Delving Into The Drivers Of Demand (Part I)
“Many analysts have fingered easy lending as a contributor to the housing boom, but the Atlanta Fed paper may be the first to quantify its effect in a rigorous way. Using math-heavy econometric analysis, the authors conclude that the availability of new kinds of mortgages, mainly ones with low down payments, accounted for 56% to 70% of the decade-long increase in the U.S. homeownership rate, while demographic changes accounted for only 16% to 31% of the effect.” (A Troubled 'Ownership Society')
Posted by socketadmin at 10:36 AM | Permalink | Comments (26) | (email story)
October 10, 2007
NAR's Monthly Moving Target (October Edition)
For the eight month in a row, the National Association of Realtors has lowered their annual sales forecast for existing homes across the nation. And the latest forecast now calls for an 11 percent drop in sales (down from 8.6% last month). At the same time, however, the median existing home price is now forecast to drop only 1.3 percent (versus last month’s forecast of a 1.7 percent decline).
“The forecasts signal the housing decline is deepening and the market isn't recovering. Mortgage lenders such as Countrywide Financial Corp., the largest, and Wells Fargo & Co., the second-biggest, have raised standards in reaction to a surge of foreclosures, Donald Kohn, Federal Reserve vice chairman, said in an Oct. 5 speech in Philadelphia.”
∙ U.S. Existing Home Sales May Drop to Five-Year Low [Bloomberg]
∙ JustQuotes: NAR's Monthly Moving Target (September Edition) [SocketSite]
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October 2, 2007
The National Association of Realtors Pending Home Sales Index Falls
Citing mortgage woes, the National Association of Realtors reports that their forward-looking national Pending Home Sales Index (based on signed contracts) fell 6.5 percent from July to August and is down 21.5 percent year-over-year. In the West, the Index fell 2.7 percent and is down 27.1 percent as compared to August 2006.
“The impact was greater in high-cost markets that are more dependent on jumbo mortgages. In some areas, as much as 30 percent of signed contracts were falling through in August when the credit crunch problem peaked,” [NAR senior economist] Yun said. “The problem has since become less severe, though jumbo loan rates are still higher than they would be under normal conditions. Therefore, sales activity in late fall will better reflect market fundamentals.”
We're not exactly sure what "normal conditions" may be (and if anything would argue that the past few years have been anything but), but we do understand fundamentals (a return to which might not be such a great thing for the market).
And citing mortgage woes of thier own, today Morgan Stanley announced a 25% reduction in “residential mortgage origination and servicing jobs.” Which isn't a great thing for 600.
∙ Mortgage Problems Continue to Hamper Pending Home Sales [realtor.org]
∙ Morgan Stanley Cuts 600 Jobs in Home Loan Business [Bloomberg]
Posted by socketadmin at 8:39 AM | Permalink | Comments (4) | (email story)
September 28, 2007
JustQuotes: Don’t Shoot (But Feel Free To Debate) The Messenger(s)
“A recession within the next 12 months is likely and its impact on the Bay Area will be "sharp but short" due to the area's strong economic underpinnings, according to a new forecast.”
“A recession will be brought on by slowing consumer spending prompted by a cooling housing market, said economist Jon Haveman. "People who have seen their house values rise 10 to 15 percent annually have been spending accordingly," he said. The Bay Area housing market is overpriced and Haveman expects prices to drop by as much as 20 percent by 2009 before stabilizing.”
“While the forecast, presented to business executives this month, predicts a relatively short recessionary period, there are risks to the local economy. Among them is the commercial real estate market, Haveman said.
Low interest rates allowed unprecedented speculation on office space. If lease rates dip, that could trigger an unraveling of mortgage-backed securities in the commercial market, the forecast said. "The same excesses in the mortgage markets have also been seen in commercial markets," Haveman said.” (Bay Area may be in for short, sharp shock)
Posted by socketadmin at 2:30 AM | Permalink | Comments (14) | (email story)
September 27, 2007
JustQuotes: The Bigger Picture Is Looking A Bit Bleak
“Fannie Mae Chief Executive Officer Daniel Mudd said the [national] housing slump will last beyond next year, dragging down home prices and increasing credit losses at the largest provider of financing for U.S. mortgages. ‘We don't think we hit a bottom until the end of '08 and then we have some period of time to work our way back up again,’ Mudd said today in an interview in Washington.”
“Sales of new homes in the U.S. dropped more than forecast in August and prices plunged by the most since 1970, underscoring the Federal Reserve's concern about the broader economy. Purchases declined 8.3 percent to an annual pace of 795,000, the lowest level in more than seven years, the Commerce Department said today in Washington. The median price dropped 7.5 percent from a year ago.”
“Sales fell in two of four regions. The decline was led by a 21 percent slump in the West and a 15 percent drop in the South. Purchases increased 42 percent in the Northeast and 21 percent in the Midwest.”
∙ Housing Slump to Last Beyond 2008, Fannie's Mudd Says [Bloomberg]
∙ U.S. Economy: New-Home Sales Decline 8.3 Percent [Bloomberg]
Posted by socketadmin at 9:30 AM | Permalink | Comments (5) | (email story)
September 25, 2007
July S&P/Case-Shiller Index: San Francisco MSA Continues Decline
And speaking of the S&P/Case-Shiller index (and no, that wasn't a coincidence), according to the July 2007 index (pdf), single-family home prices in the San Francisco MSA slipped 4.1% year-over-year and fell 0.4% from June '07 to July '07. For the broader 10-City composite (CSXR), year-over-year price growth is down 4.5% (down 0.5% from May).
The standard SocketSite footnote: The S&P/Case-Shiller index only tracks single-family homes (not condominiums which represent half the transactions in San Francisco), is imperfect in factoring out changes in property values due to improvements versus actual market appreciation (although they try their best), and includes San Francisco, San Mateo, Marin, Contra Costa, and Alameda in the “San Francisco” index (i.e., the greater MSA).
∙ They're Betting Against San Francisco On The CME [SocketSite]