by Calculated Risk on 2/16/2006 08:58:00 PM

From Barron's Online: Is It Crunch Time for Housing? (hat tip: Gary Evans for the link)

Bear markets, be they in stocks, housing or commodities, go through certain identifiable phases, like Elizabeth Kubler-Ross's famed five stages of dealing with dying -- denial, anger, bargaining, depression and finally acceptance.

"It's a three- to five-year cycle on the downside," says Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at UC Berkeley.

Rosen calls himself a real-estate bear who endorses the doom-and-gloom scenario of Yale University professor Robert Shiller (see Barron's, "The Bubble's New Home," June 20, 2005)."

We've already passed stage one, characterized by "a falloff in new sales and orders," says Rosen, and are just entering stage two, in which unsold inventories build up.

That may be where the crunch begins.

Prospective sellers, of course, can just take their homes off the market and live in them until they think they can get a better price.

But speculators don't have that luxury: At some point they can no longer carry a money-losing investment, so they may throw in the towel and unload their once-promising albatross.

That's stage three, says Rosen, and it usually finishes about three years from the beginning of the downturn.

The final phase is when we see massive defaults or delinquencies on mortgage loans. That's several years away, he says, and this time the damage could be worse because of the large number of exotic loans giddy lenders extended to desperate home buyers (see Barron's, "Coming Home to Roost," Feb. 13)."

There is more in the article. I think the sequence is more like:

1) A surge in inventories as sellers try to get out at today's high prices.

2) followed by a drop in orders as buyers become leery of buying at the top. Historically house prices tend to be sticky as sellers want prices close to those of recent sales in their neighborhood. And buyers want a discount from recent sales. The result is a drop in orders.

3) Then prices start falling as some sellers (speculators and homeowners in distress) need to get out.

There are other economic impacts:

1) as prices stagnate or fall, homeowners will withdraw less equity from their homes and that will impact retail sales.

2) as transactions decline, housing related employment will fall.

3) and finally, as mentioned in Barron's, there will be defaults or delinquencies on mortgage loans.

Already inventories are rising rapidly. And I believe sales are just starting to decline. The next few months will be interesting.

by Calculated Risk on 2/16/2006 07:26:00 PM

Click on image for full cartoon.

David Horsey is a cartoonist for the Seattle Post-Intelligencer.

And for more on the National Debt, please see pgl's post on Snow's actions today: Snow Withholds Checks to the Retirement Accounts of Federal Workers

As of February 15, 2006, the National Debt is $8.238 Trillion.

by Calculated Risk on 2/16/2006 05:15:00 PM

The Financial Times reports: Bernanke upbeat about housing effect

... Ben Bernanke suggested that the discussion around the Federal Reserve’s boardroom table in coming months may focus on ... house prices.

The outlook ... Bernanke presented ... were based on the assumption that the US housing market is slowing after the sizzling growth ... in recent years.

Mr Bernanke’s remarks ... suggested that the Fed expects the housing market to cool but not to undergo a dramatic slowdown ...

"Low mortgage rates, together with expanding payrolls and incomes and the need to rebuild after the hurricanes, should continue to support the housing market. Thus, at this point, a levelling out or a modest softening of housing activity seems more likely than a sharp contraction," Mr Bernanke said.
...
Since rising household wealth and home equity withdrawal have supported consumer spending, there may be an impact on spending. But it is not expected to be dramatic. The Fed expects households to raise their savings rate from near zero, but only gradually. Residential investment is expected to slow, but business investment is expected to take up the slack.

... It is quite likely that policymakers may not know how much further they need to raise rates. Policy will be data-driven – and one of the key questions will be the course of, and the spillover effects from, the housing market.
...
But the housing market presents both upside as well as downside risks for growth and the federal funds rate. If low long-term rates mean the housing market continues to soar, then the FOMC may have to raise rates by more than what is currently expected, to prevent the economy from overheating.

"On the one hand, some observers believe that home values have moved above levels that can be supported by fundamentals and that ... a realignment - if abrupt – could materially sap household wealth and confidence and, in turn, depress consumer spending," the monetary report to Congress said.

"On the other hand, if home values continue to register outsized increases, the accompanying increment to household wealth would stimulate aggregate demand and raise resource utilisation further ... adding to inflation pressures."

At least Bernanke is being open about the problem, even if he is more optimistic than I am.

by Calculated Risk on 2/15/2006 08:27:00 PM

MarketWatch reports: Washington Mutual to cut 2,500 jobs

Washington Mutual announced 2,500 job cuts at its home-loan business late Wednesday, another sign of a cooling real-estate market.

The bank, one of the largest mortgage lenders in the U.S., said its network of processing offices that provide administrative support to its home-loan businesses will be reduced to 16 from 26.

The job cuts represent more than 4% of Washington Mutual's total workforce of about 60,000.

...the bank also said in a statement on Wednesday that it's cutting costs at its home-loan business to "better match current and anticipated mortgage-market conditions."

Signs that the once-hot housing market is beginning to cool have accumulated this year.

U.S. banks reported weaker demand for mortgages in the past three months, a Federal Reserve survey of senior loan officers found in January.

by Calculated Risk on 2/15/2006 03:12:00 PM

Last March, I excerpted a quote from an OC Register article: Loan rates on the rise by Orange County "real-estate broker and economist" Gary Watts:

"There's too much emphasis on interest rates in the marketplace," Watts said. "Who wouldn't trade $1,200 for $70,000?"

Last March the median home price in OC was $555,000. Today the median home price is $582,000, an increase of $27K or just under 5%. Mr. Watts has two months for the median prices to hit his prediction.

And now Mr. Watts is being quoted in Fortune's A tale of two markets

"Fifteen percent is pretty much in the bag for Orange County in 2006," [Gary Watts] says. "It's impossible for prices to go down this year."

I'm going to have to disagree with Mr. Watts again!

by Calculated Risk on 2/15/2006 03:04:00 PM

DataQuick reports: Five-year low for Southland home sales

The number of Southern California homes sold in January edged down to the lowest level in five years ...

A total of 20,085 new and resale homes were sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month. That was ... down 7.4 percent from 21,680 for January last year, according to DataQuick Information Systems.

Prices were down too (a typical seasonal pattern), but still up 13% from last January.

In Orange County, the Register reports: Housing prices slip 6% in January

DataQuick reported today that the median sale price for all residences sold in January was $582,000 – down more than 6 percent from December's record $621,000 but still up 9 percent from January 2005. Sales volume was weak, too, as 2,594 homes sold – down 11 percent in a year. This was the slowest January since 1997.

by Calculated Risk on 2/15/2006 10:47:00 AM

The Mortgage Bankers Association (MBA) reports that mortgage applications declined for the week ending Feb 10th.

Click on graph for larger image.

The Market Composite Index — a measure of mortgage loan application volume was 574.1 – a decrease of 7.3 percent on a seasonally adjusted basis from 619.3 one week earlier. On an unadjusted basis, the Index decreased 4.4 percent compared with the previous week and was down 21.7 percent compared with the same week one year earlier.

The seasonally-adjusted Purchase Index decreased by 7.9 percent to 391.7 from 425.1 the previous week, whereas the Refinance Index decreased by 6.5 percent to 1636.7 from 1751.0 one week earlier.

Mortgage rates were steady:

The average contract interest rate for 30-year fixed-rate mortgages remained at 6.25 percent ...

The average contract interest rate for one-year ARMs increased to 5.52 percent from 5.48 percent...

Activity continues to fall and mortgage rates are expected to rise again this week. The unadjusted Purchase Index is 401.9, off from 437.2 for the same week last year.

by Calculated Risk on 2/14/2006 01:20:00 PM

Bloomberg reports: Retail Sales May Spur Faster Expansion

Retailers rang up their biggest sales gains since May 2004 last month, more than doubling forecasts and helping the U.S. economy snap back from its worst quarter in three years.

The 2.3 percent rise came as the warmest January in more than a century encouraged Americans to buy more cars and redeem holiday gift cards. The gain followed a 0.4 percent increase in December, the Commerce Department said today in Washington. Excluding autos, sales rose 2.2 percent, the most in six years.

The fifth straight increase in sales reflects the higher wages U.S. workers are enjoying as the economy adds more jobs and unemployment declines. Treasury notes fell on speculation the economic rebound will give Federal Reserve Chairman Ben Bernanke more reason to raise interest rates next month.

"We're definitely going to see a very strong first quarter," said Brian Bethune, an economist at Global Insight Inc., a forecasting firm in Lexington, Massachusetts. "It looked like consumers were hibernating in December, and all they needed was an excuse to go on a spending spree. The weather provided that."

Economists expected sales to rise 0.9 percent, after an originally reported 0.7 percent gain in December, according to the median of 71 forecasts in a Bloomberg News survey. The rise exceeded the highest estimate of 1.5 percent.

"There's no question it's exaggerated by the record mild temperatures in January," said Jim O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. "We expect some payback" for February, he said.

I'm not really surprised. The weather has been nice and mortgage activity is still robust. With the recent increases in the Ten Year yield, I expect mortgage rates to increase this week. It will be interesting to see if higher rates slow mortgage activity (the MBA report is due tomorrow).

And it looks like rates are even going higher. Based on the FED funds futures, the market is now expecting at least two more rate hikes (See Macroblog: Betting On Ben, Market Version)

For more on retail, see Kash's Consumption: Full Steam Ahead

by Calculated Risk on 2/13/2006 08:40:00 PM

Sasha practices in Torino. / Photo by Kevork Djansezian

Schedule:

Tuesday, Feb. 21, Ladies short program, 7 p.m. (Italy time), (2 p.m. ET)

Thursday, February 23, Ladies free skate, 7 p.m. (Italy time) (2 p.m. ET)



Photo from the current People Magazine: Ready to Ice the Competition

Credit: Patrik Giardino

Please pardon this off topic post (see Nationals). Hopefully this will be the first of a few off topic posts during the Olympics as I cheer for Sasha.

Good luck Sasha! Have fun!

by Calculated Risk on 2/13/2006 02:18:00 PM

In last Friday's 10-K filing with the SEC, KB Home (KBH) summarized their outlook:

There are signs ... that consumer demand in the United States for residential housing at current prices is softening. For example, the U.S. Census Bureau reported that single-family housing starts in December 2005 were approximately 12% lower than in November 2005 and approximately 8% lower than in December 2004. The Bureau also reported that the median sales price for new homes fell approximately 3% in December 2005 relative to the median sales price in December 2004.

Our results to date in fiscal year 2006 reflect these broader market trends. In the first two months of the year, we have experienced an increase in home order cancellations and a decline in net orders for new homes when compared to the same period last year.

It is too early in our prime selling season (February through June) to forecast whether our experience in the first two months of the year will continue. Historically, demand for new homes in the United States has been strong during periods of economic expansion and growth in employment, and we continue to believe that the state of the U.S. economy is the single most important long-term indicator of our future financial performance.

If the current trends do not improve, we may be required to moderate our revenue guidance for fiscal year 2006. At the same time, we do not anticipate changing our diluted earnings per share guidance for fiscal year 2006.

Emphasis added.