by Calculated Risk on 3/26/2008 12:45:00 PM

How many people think the new "temporary jumbo conforming loan limits" are really temporary?

Apparently the Office of Federal Housing Enterprise Oversight (OFHEO) does.

From OFHEO: OFHEO Issues Final Guidance on Conforming Loan Limit Calculations

The final Guidance addresses the handling of decreases in the house price data used to set the conforming loan limit as well as procedural matters relating to calculation of the limit that determines the size of mortgages eligible for purchase by Fannie Mae and Freddie Mac.

Based on comments received in two public comment periods, OFHEO is issuing a final Guidance that provides that the conforming loan limit would not decrease from its current level of $417,000 in 2009 and subsequent years. However, the conforming loan limit will not increase until cumulative increases in house prices exceed cumulative decreases since the $417,000 limit was first reached.

This means the conforming loan limit can never decrease, but it will not increase until prices have returned to earlier levels. Under the old guidance, the conforming loan limit was supposed to move with house prices, both up and down.

Of course, "temporary" probably means "permanent", and the limit will vary by MSA (Metropolitan Statistical Area).

by Calculated Risk on 3/26/2008 11:31:00 AM

There is actually some good news in the Census Bureau's New Home sales report this morning. But first a few more ugly graphs (see February New Home sales for earlier graphs).

Click on graph for larger image.

This graph shows New Home Sales vs. recessions for the last 45 years. New Home sales were falling prior to every recession, with the exception of the business investment led recession of 2001.

It appears the U.S. economy is now in recession - possibly starting in December - as shown on graph.

This is what we call Cliff Diving!


The second graph shows monthly new home sales (NSA - Not Seasonally Adjusted).

Notice the Red columns in January and February 2008. This is the lowest sales for February since the recession of '91.

As the graph indicates, the spring selling season has started - and started poorly. Toll Brothers CEO said last month:

“The selling season, which we believe starts in mid-January, has been weak ..."

And one more long term graph - this one for New Home Months of Supply.


"Months of supply" is at the highest level since 1981. Note that this doesn't include cancellations, but that was true for the earlier periods too.

The all time high for Months of Supply was 11.6 months in April 1980.

Once again, the current recession is "probable" and hasn't been declared by NBER.

So what is the good news?

There are actually two pieces of good news in the report. First, inventory levels (even accounting for cancellations) are clearly falling. This is a small first step in correcting the huge overhang in new home inventory.

Note: The inventory (and sales) reported by the Census Bureau doesn't account for cancellations, and the Census Bureau doesn't include many condos (especially high rise condos).

The second piece of good news is revisions. During periods of rapidly declining sales, the Census Bureau routinely overestimates sales in the initial report - and then revises down sales over the next few months. In this report, sales were revised up slightly for November (from 630K to 631K), December (605K to 611K) and January (588K to 601K). This is actually a positive sign that New Home sales might be nearing a bottom. However, a quick rebound in sales is unlikely with the huge overhang of both new and existing homes for sale.

by Calculated Risk on 3/26/2008 11:20:00 AM

From Bloomberg: Citigroup Estimates Cut by Oppenheimer's Whitney

Whitney predicted the bank will lose $1.15 a share in the quarter because of potential markdowns of $13.1 billion on assets including leveraged loans and collateralized debt obligations.

Hopefully there will be no death threats for Ms. Whitney this time.

by Calculated Risk on 3/26/2008 10:00:00 AM

According to the Census Bureau report, New Home Sales in February were at a seasonally adjusted annual rate of 590 thousand. Sales for January were revised up to 601 thousand.

Click on Graph for larger image.

Sales of new one-family houses in February 2008 were at a seasonally adjusted annual rate of 590,000 ... This is 1.8 percent below the revised January rate of 601,000 and is 29.8 percent below the February 2007 estimate of 840,000.



The seasonally adjusted estimate of new houses for sale at the end of February was 471,000.

Inventory numbers from the Census Bureau do not include cancellations - and cancellations are once again at record levels. Actual New Home inventories are probably much higher than reported - my estimate is about 100K higher.

Still, the 471,000 units of inventory is below the levels of the last year, and it appears that even including cancellations, inventory is now falling.


This represents a supply of 9.8 months at the current sales rate.

This is another weak report for New Home sales, and I'll have some analysis later today on New Home Sales.

by Calculated Risk on 3/26/2008 09:45:00 AM

From Rex Nutting at MarketWatch: Demand for durable goods falls 1.7% in Feb.

Demand for machinery and other capital goods sank in February, driving orders for durable goods down 1.7%, the Commerce Department reported Wednesday.

The unexpected decline in orders for big-ticket items marked the second straight monthly drop, an indication that domestic demand is weakening faster than exports can grow.

"This is another report that has a strong recessionary feel about it," wrote John Ryding, chief U.S. economist for Bear Stearns.

Another indicator suggesting recession.

by Calculated Risk on 3/25/2008 11:08:00 PM

From USA Today: FDIC Plans Staff Boost for Bank Failures

The Federal Deposit Insurance Corp. wants to add 140 workers to bring staff levels to 360 workers in the division that handles bank failures, John Bovenzi, the agency's chief operating officer, said Tuesday.

"We want to make sure that we're prepared," Bovenzi said ...

Gerard Cassidy, managing director of bank equity research at RBC Capital Markets, projects 150 bank failures over the next three years, with the highest concentration coming from states such as California and Florida where an overheated real estate market is in a fast freeze.

This is a follow-up to the WSJ story last month of the FDIC bringing back 25 retirees with experience in handling bank failures.

The bank failures are coming.

by Calculated Risk on 3/25/2008 04:13:00 PM

From the WSJ: Clear Channel Communications' Privatization Deal Is Near Collapse

The $19 billion privatization of Clear Channel Communications Inc. was near collapse as the private equity firms behind the deal and the banks financing it failed to resolve their differences over the terms of the credit agreement ...

This is a deal no one wants - except Clear Channel's current owners.

by Calculated Risk on 3/25/2008 02:41:00 PM

From Bloomberg: Wall Street May Face $460 Billion Credit Losses, Goldman Says

Wall Street banks, brokerages and hedge funds may report $460 billion in credit losses from the collapse of the subprime mortgage market ... according to Goldman Sachs Group Inc.

A few excerpts from the report: Leveraged Losses—Still Out There (no link)

Residential mortgage losses will represent about half the damage, with another 15%-20% coming from commercial mortgages. Credit card loans, auto loans, commercial and industrial lending, and nonfinancial corporate bonds make up the remainder.
...
The losses to leveraged US financial institutions make up only a part of total credit losses, which we expect to be $1.2 trillion.
...
Thus far, our banks team has tallied approximately $120 billion in announced writeoffs from US leveraged institutions since the credit crisis began (including foreign institutions, this number rises to about $175 billion).
...
Most of the write-offs to date relate to residential mortgages, so here we may be halfway through the process, perhaps even a bit further. Elsewhere, though, we suspect significant write-offs remain in store, even after the full set of first-quarter results for financial firms becomes available.

It's hard to tell the actual losses to date, because hedge funds will probably not announce losses, and some losses are actually gains for other institutions. But it appears that the process has just started for commercial mortgages, credit card and auto loans, corporate bonds, and other lending.

by Calculated Risk on 3/25/2008 01:45:00 PM

Looking at the Case-Shiller house price indices in real (inflation adjusted) terms give us an idea of how much further house prices might fall.

Click on graph for larger image.

This graph shows the inflation adjusted Case-Shiller indices for San Diego, Chicago and the composite indices for 10 and 20 cities. (I'd add more cities, but the graph is too messy!)

Looking at this graph, I'd guess prices have fallen somewhat less than half way (in real terms) to the eventual bottom. Of course, more inflation means less prices need to fall in nominal terms.

Also look at the length of the housing bust in the early '90s. It took over six years from peak to trough in some cities. If this bust takes the same amount of time, prices will not bottom in some cities until 2012 (or there about).

by Calculated Risk on 3/25/2008 10:14:00 AM

OFHEO is now releasing a monthly House Price Index. Note that this is a National index, but only uses data from Freddie and Fannie.

From OFHEO: New U.S. Monthly House Price Index Estimates 1.1 Percent Price Decline in January

U.S. home prices fell approximately 1.1 percent on a seasonally-adjusted basis between December 2007 and January 2008, according to OFHEO’s new monthly House Price Index. For the 12 months ending in January, U.S. prices fell 3.0 percent. Since its peak in April 2007, the monthly index is down 4.1 percent.

The monthly index is calculated using purchase prices of houses backing mortgages that have been sold to or guaranteed by Fannie Mae or Freddie Mac.

Click on graph for larger image.

This graph from OFHEO shows the monthly change for the Purchase Only index.

When comparing the national Case-Shiller and OFHEO indices, there are a number of differences: OFHEO covers more geographical territory, OFHEO is limited to GSE loans, OFHEO uses both appraisals and sales (Case-Shiller only uses sales), and some technical differences on adjusting for the time span between sales.

OFHEO economist Andrew Leventis’ research suggests that the main reason for the recent price difference between the Case-Shiller and OFHEO indices was that prices for low end non-GSE homes declined significantly faster than homes with GSE loans. This was probably due to the lax underwriting standards on these non-GSE subprime loans. Note that Leventis' research focused on the differences in the indices for the period from Q3 2006 through Q3 2007. I suspect the Case-Shiller index will continue to see larger price declines than OFHEO as lending standards have now been tightened significantly for other non-GSE loans (especially jumbo loans).