by Calculated Risk on 7/28/2005 06:09:00 PM

UPDATE: Also see Asha Bangalore's (pdf) Signs of Distress in the Effervescent Housing Market?

Fitch Ratings released a newsletter "RMBS Mortgage Principles and Interest" this week. (RMBS: Residential Mortgage Backed Securities)

There were several interesting trends.
Click on graph for larger image.

The percentage of prime loans using ARMs and IOs has been increasing (IOs have dipped slightly so far in '05). The same pattern can be seen for subprime loans (not graphed).

At the same time, the percentage of loans requiring full documentation has dropped significantly.

UPDATE: tanta points out that these are old pools with "junk that can't prepay". Ignore this section on subprime delinquencies ... nothing of value here! Also of interest is the percent of subprime loans (the fastest growing segment) that are in delinquency. Although delinquency rates were around 30% (over 60 days late) for a number of years, recently the rate has fallen to almost zero.

Lower delinquencies would usually be good, but I am concerned if the housing market slows that delinquency rates will return to the 30% range on subprimes. Also, I believe the extensive use of ARMs and IOs indicates excessive leverage, even in the prime market.

by Calculated Risk on 7/27/2005 10:51:00 PM

Dr. Dean Baker of Center for Economic Policy Research (CEPR) has put out "The Housing Bubble Fact Sheet". (thanks to Ficus for the tip).

1. The unprecedented rise in house prices has dangerous implications for the economy.

2. The housing bubble has created more than $5 trillion in bubble wealth, the equivalent of $70,000 per average family of four.

3. The increase in house prices is not being driven by fundamental factors in the housing market, such as income and population growth.

4. The housing bubble regions are large enough to have a major impact on the national economy.

5. The collapse of the housing bubble will throw the economy into a recession, and quite likely a severe recession.

6. The collapse of the housing bubble is likely to put major strains on the financial system and require a federal bailout of the mortgage market.

7. The sooner house prices drop, the less economic damage there will be.

8. The housing bubble could pop from higher interest rates, but it could also deflate even if interest rates stay low.

Read Dr. Baker's fact sheet for the details. I agree with most of his points, but Baker is more pessimistic than me.

by Calculated Risk on 7/27/2005 06:02:00 PM

Dr. Thoma excerpts from Bernanke's commentary in the WSJ. Clearly Bernanke has been drinking the Bush Administration Kool-Aid.

How can anyone claim the Bush Administration has been pursuing "good economic policies" with respect to the budget deficit? That is outlandish.

And on jobs, I've cut the Bush Administration slack. But there is a difference between "cutting them slack" and giving them credit - The Bush Administration deserves no credit on jobs! Since Bush has taken office there have been a total of 161 thousand non-farm private sector jobs created. That is the worst net job creation performance in over 70 years.

The entire commentary is bunkum. But instead of correcting each of Bernanke's false assertions, I've found the template for his talking points:

No Congress of the United States ever assembled, on surveying the state of the Union, has met with a more pleasing prospect than that which appears at the present time. In the domestic field there is tranquillity and contentment, harmonious relations between management and wage earner, freedom from industrial strife, and the highest record of years of prosperity.

Calvin Coolidge, State of the Union Address, December 4, 1928

Bernanke is now channeling Coolidge's monument to economic shortsightedness.

by Calculated Risk on 7/27/2005 01:12:00 PM

Here are three more stories that back up my prediction for July.

New Hampshire: Real Estate Listings In Area Skyrocketing

Along a 2-mile stretch of Route 302 - from Bethlehem Junction to the Memory Lane Apartments - the landscape is dotted with "for sale" signs.
...
As a result, the number of real estate listings in the greater Littleton area - including Bethlehem - have doubled since this time last year.
...
"Right near me every place is for sale,"

Florida: More Strand homes for sale

Home listings in the second quarter jumped 9 percent, from 2,916 to 3,165. Condo listings increased 36 percent from 2,636 to 3,584, according to the Multiple Listing Service for Horry and Georgetown counties.

California: Higher inventory takes some zing out of sellers' edge that dominated '04

Meanwhile, the latest level of unsold inventory [in Palm Springs], at about 3,296 homes - more than 80 percent higher than a year ago and more than twice the level of April 2004 - suggests that the market is reaching an equilibrium between the needs of buyers and sellers.

"This is not a buyer's market yet," said Greg Berkemer, executive vice president of the California Desert Association of Realtors. "It's just less of a seller's market than it was a year ago."

by Calculated Risk on 7/27/2005 11:00:00 AM

According to a Census Bureau report, New Home Sales in June were at a seasonally adjusted annual rate of 1.374 million vs. market expectations of 1.3 million. May sales were revised up to 1.321 million from 1.271 million.


Click on Graph for larger image.

NOTE: The graph starts at 700 thousand units per month to better show monthly variation.

Sales of new one-family houses in June 2005 were at a seasonally adjusted annual rate of 1,374,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development.



The Not Seasonally Adjusted monthly rate was 122,000 New Homes sold, down from a revised 123,000 in May.

The median sales price of new houses sold in June 2005 was $214,800; the average sales price was $267,400.



The average sales price is down and the median price is the lowest since September of 2004.

The seasonally adjusted estimate of new houses for sale at the end of June was 454,000. This represents a supply of 4.0 months at the current sales rate.

The seasonally adjusted supply of New Homes was 4.0 months, about normal for the last few years.

by Calculated Risk on 7/26/2005 02:22:00 AM

Existing home inventories rose to 2.653 million in June. Because sales were so strong (7.33 million annual rate), this represented a supply of 4.3 months.

I expect a further increase in inventories based on recent articles like this one: D.C. Area Housing Market Cools Off.

Home sales tend to slow in the summer, but the number of houses for sale in the Washington area has climbed by 50 percent in recent months. The available inventory has risen to about 35,300 homes, up from an average of about 23,000 in the past three years....

Therefore I expect a further increase in July inventories to 2.9+ million (from 2.653 million in June). I also expect to see a small drop in July sales to maybe around 6.8 million (still very strong) annual rate.

If both of these predictions hold, this computes to a 5.1 month supply - the highest level in a number of years.

by Calculated Risk on 7/25/2005 10:52:00 PM

DiMartino disagrees with Greenspan on the housing bubble:

There's a good chance the housing bubble carries severe macroeconomic implications, a point Alan Greenspan disputed in his congressional testimony last week.

If prices fall, he said, "they likely would be accompanied by some economic stress, though the macroeconomic implications need not be substantial."

Let's start with some factoids from Merrill Lynch:

•Real estate accounts for 70 percent of the rise in household net worth since 2001.

•Forty percent of private-sector jobs created since then are housing-related.

•Consumer spending and residential construction have accounted for 90 percent of U.S. economic growth.

I tried to quantify the impact of the housing bust on the economy on Angry Bear. DiMartino does a better job:

The inevitable pullback in construction speaks directly to housing's risks. A similar 40 percent decline in construction to that of the 1981-82 recession implies a decline of 2 percentage points in GDP.

And then there's the wealth effect. The housing bubble has added $5 trillion to household net worth, equating to about $70,000 for a family of four.

"The large wealth effect associated with the housing bubble, which has spurred a consumption boom in the last few years, will go into reverse as housing prices plummet," Mr. Baker predicted.

This dent in consumption would whack an additional 1.6 to 2.5 percentage points off GDP growth. Totaled out, that GDP retreat about equals current GDP growth.

Maybe I'm being obtuse, but a recession is about as macro as you can get, economically speaking.

Maybe the best thing to do is respectfully agree to disagree with Mr. Greenspan and let time render its own decision.

by Calculated Risk on 7/25/2005 05:49:00 PM

Back in April, on Angry Bear, I suggested that a sustained oil contract price above $50 per barrel might lead to a recession.

UPDATE: By "contract" I mean actual price paid for oil, not Futures contract. The DOE provides the average price paid per contract on a weekly basis. When measuring the impact on the economy, I want to look at the actual dollars paid. Sorry for any confusion.


Click on graph for larger image.

The average contract price for a barrel of oil has been above $50 for four consecutive weeks.

The DOE expects this trend to continue and they are projecting spot prices to "average $59 per barrel for the third quarter of 2005" and "above $55 per barrel for the rest of 2005 and 2006".

NOTE: Actual contract prices are usually $5 to $10 per barrel below spot prices.

Based on my earlier calculations, I believe the price of oil is now in the danger zone for the economy. The good news is the price is being driven by growing demand as opposed to a supply shock like in '73 and '79. We will probably see some slackening of demand in the near future and that should lead to somewhat lower prices.

EDIT: Greenspan believes the current price of oil will not hurt the economy:

Should the prices of crude oil and natural gas flatten out after their recent run-up--the forecast currently embedded in futures markets--the prospects for aggregate demand appear favorable.

However he cautioned:

Energy prices represent a second major uncertainty in the economic outlook. A further rise could cut materially into private spending and thus damp the rate of economic expansion.

by Calculated Risk on 7/24/2005 10:13:00 PM

On Angry Bear I discuss a tale of two governors and the danger of premature fiscal celebrating. We should also consider the recent premature celebration by the Bush Administration.


Click on graph for larger image.

This graph shows the Year to Date (July 21st) and full fiscal year increase in the National Debt for 2001 through 2005.

The graph shows that for YTD fiscal 2005 (Oct 1, 2004 - July 21, 2005), the National Debt has increased $489.6 Billion. This is almost the same as for the equivalent period for the previous two years. Last year for the same period was $494.5 Billion.

Not exactly cause for celebration.

I will stick to my earlier prediction that the National Debt will increase more in Fiscal 2005 than in Fiscal 2004. It will probably be close, but this is far from the claims of the Bush Administration. Of course the Bush Administration isn't talking about reductions in the increase in the debt, they are discussing improvements in "forecasts" for the Enron style "Unified Budget".

by Calculated Risk on 7/24/2005 04:06:00 PM

Rising inventories is the story in many housing bubble areas. The Sacramento Bee reports:

While the latest sales statistics for June show more of the same - a strong market with rising prices - many agents and brokers say the lagging data don't reflect recent market trends. The number of homes for sale has risen to levels not seen since the late 1990s, they say, and buyer psychology is changing fast.

"We are in a shifting situation right now," said broker Pam Petterle, the manager for Prudential California Realty's Sacramento-Tahoe region. "The biggest change is that we have a much greater inventory ... and that's a major change because it shifts the balance from sellers driving this market to a more balanced market. There are not as many multiple offers, and listings are staying on the market longer."

At the end of June, the inventory of resale homes on the market in Sacramento, Placer, El Dorado and Yolo counties rose to 6,246. It was the highest for any June since 1999 and the most for any month since September 2001, according to TrendGraphix, a local data firm affiliated with Lyon Real Estate.

I think the surge in inventories will show up in June's Existing Home Sales numbers (released this coming week), but we may have to wait until the July numbers are released.