by Calculated Risk on 6/11/2008 05:37:00 PM

From the WSJ: Foreclosures Make Up Majority of Sales in Sacramento

The Sacramento Association of Realtors says that a whopping 65.5% of 1,654 homes sold by Realtors in May were bank-owned, foreclosed, homes.
...
In Las Vegas, for example, about half of recent sales have been lender sales.

Is it any wonder pending home sales clicked up a little?

by Calculated Risk on 6/11/2008 04:21:00 PM

You know it's bad when ... (hat tip Brian)

From WaMu: WaMu Statement Regarding Rumors of Regulatory Action

While it is the policy of Washington Mutual not to comment on speculation and market rumors, the company released the following statement to address recurring speculation about regulatory activity:

"Neither our primary federal regulator, the OTS, nor any other bank regulatory agency has taken any enforcement action against WaMu that we have not previously disclosed. Further, the company is not currently in such discussions with any regulatory agency."

We are in denial season.

by Calculated Risk on 6/11/2008 03:07:00 PM

A few headlines via Dow Jones with comments from Merrill CEO Thain (hat tip Brian):

Click on image for larger headlines in new window.

Hmmm ... 'hasn't decided to raise more capital'? I think we've heard that one before.

The last headline is funny: "Merrill could be coming down with Mono exposure".

by Calculated Risk on 6/11/2008 02:44:00 PM

From AP: Economic stimulus payments push May budget deficit to an all-time high of $165.9 billion.

The economic slowdown is definitely impacting receipts.

A key question is how much those stimulus checks are boosting consumer spending in May and June. According to the Fed's beige book, consumer spending was weak in May.

And yet the WSJ reported last week: Some Chains Posts Strong Sales Despite Gas Prices, Low Confidence

Retailers posted stronger-than-expected same-store sales for May [despite a] surge in gasoline prices and tumbling consumer confidence.

With the conflicting reports on consumer spending, the Census Bureau's retail sales for May might be interesting (to be released tomorrow).

It definitely appears the budget deficit will set a record this year - and this is the unified deficit - the General Fund deficit will be significantly worse (excludes the Social Security surplus).

by Calculated Risk on 6/11/2008 01:58:00 PM

From the Fed's Beige Book.

Reports from the Federal Reserve Districts suggest that economic activity remained generally weak in late April and May. ... Consumer spending slowed further since the last report.

The last report was fairly negative on consumer spending, so to say "spending slowed further" is significant.

On Real Estate and Construction:

Residential real estate markets were generally weak across most of the nation. ... Inventory levels of new and existing homes remained high or were rising in New York, Philadelphia, Cleveland, Richmond, and San Francisco. Home sales prices decreased somewhat in Boston, Atlanta, Kansas City, and San Francisco, but remained relatively stable in Richmond and Chicago. The New York and Chicago Districts noted that some potential buyers had difficulty in obtaining financing. ... Richmond and San Francisco noted an increase in home foreclosures.

Commercial real estate conditions varied in April and May, with some Districts reporting that activity had softened. Leasing activity eased in Boston, New York, Philadelphia, Richmond, and San Francisco. Minneapolis, however, reported that market activity was up modestly, while activity was mixed across the St. Louis District. Vacancy rates edged higher in Boston, Kansas City, and San Francisco, as well as in pockets of the Richmond and St. Louis Districts. Absorption was negative in Boston and in Minneapolis for both office and manufacturing space. Overall rents were on the rise in New York, but were stable or beginning to slip in Boston, Philadelphia, Richmond, and Kansas City. Sales trended downward according to the New York, Philadelphia, and Kansas City Districts.

Commercial Real Estate (CRE) is just starting to slump, and the residential bust is continuing.

On rising prices:

Business contacts in most Districts reported increases in input prices since the last report, especially prices for energy, petroleum derivatives, metals, plastics, chemicals, and food. Manufacturing contacts in several Districts reported some ability to pass along the higher costs to customers and contacts in the Cleveland District noted that they are considering additional price increases in the near future if input costs continue to rise.

Overall this is a pretty negative Beige Book with a weakening economy and rising prices.

by Calculated Risk on 6/11/2008 11:55:00 AM

Important note: Reuters has corrected the story. It now reads:

Home prices may fall 25 percent to 30 percent from their peak in 2006 and not hit bottom until 2010 ...

This is much more in line with my thinking. Note that nominal prices are off 16.1% according to Case-Shiller, so we are about half way to JPM's forecast.

Here was the orginal post:

From Reuters: US home prices may dip 30 pct, junk bonds weaken-JPM

[Peter Acciavatti, credit analyst and managing director at JP Morgan Securities Inc, said] Home prices may fall another 25 percent to 30 percent over the next four years, with greater drops still in subprime mortgage debt markets, he said.

In a separate interview, the analyst said junk bond spreads will push past 800 basis points and may top 900 basis points as the crisis drags out.

I think we will see price declines for several more years, but this seems a little too bearish to me. An additional 25% to 30% decline in nominal prices over four years would be close to an additional 40% decline in real prices - and that would put real prices at the lowest level since the Case-Shiller Index started in 1987. Note that real prices are already off 21% according to the Case-Shiller national index.

Wow. And I thought I was bearish on housing!

Note: My comments were based on the original article forecasting an additional 30% decline in prices.

by Calculated Risk on 6/11/2008 10:18:00 AM

It appears the MBA Purchase Index might be useful again. Note: the index wasn't useful when lenders were going out of business because of the method used to calculated the index.


The MBA reports that the Purchase Index increased 12.8 percent to 376.2 from 333.6 one week earlier. The four week moving average (removes the weekly noise) declined, and is at the lowest level since early 2003. Because of the changes to the index, we can't compare directly to 2003, but clearly the index is weak.

Click on graph for larger image in new window.

This graph shows the MBA Purchase Index, and four week and twelve week moving averages.

Although we can't compare directly to earlier periods because of the changes in the index, this does suggest that sales of homes are continuing to decline.

by Calculated Risk on 6/11/2008 09:52:00 AM

From Professor Duy: Fed Watch: Between a Rock and a Hard Place

Fedspeak turned decidedly hawkish this week, and market participants responded accordingly, moving up expectations for a rate hike to as early as this August. But is Federal Reserve Chairman Ben Bernanke really ready to follow through? The answer could make or break the Dollar in the coming weeks.

Tim covers the current situation, the recent Fedspeak, the arguments for and against raising rates and keep rates steady - and the politic issues. Duy concludes:

Bottom Line: The Fed has no one to blame for their predicament but themselves. Bernanke & Co. cut rates too deeply, fighting a battle against deflation that never was. Now they are backed into a corner; either raise rates and risk upsetting a very fragile economy, or stay the path and risk the inflationary consequences. If the Fed is truly concerned about the Dollar and commodity prices – and their open talk about currency values implies real and serious concerns – Bernanke will have to follow through with his newfound hawkish side. The bluntness of Fedspeak looks to signal a dramatic shift in thinking on Constitution Ave., and that argues for a rate hike by September, earlier than I had previously expected, and I cannot rule out an August move. Such a move is not without considerable risk for the economy.

The Fed is still data dependent, and unless the economic numbers improve, it seems unlikely the Fed will raise rates. But, as Tim notes, the Fedspeak has turned decidedly hawkish.

by Calculated Risk on 6/10/2008 11:04:00 PM

From the WSJ: Some Buy a New Home to Bail on the Old

Next month, Michelle Augustine plans to walk away from her four-bedroom house in a Sacramento, Calif., subdivision and let the property fall into foreclosure. But before doing so, she hopes to lock in the purchase of another home nearby.

"I can find the same exact house as what I live in right now for half the price," says Ms. Augustine ...

In markets hit hardest by falling home prices and rising foreclosures, lenders and brokers are discovering a new phenomenon: the "buy and bail," in which borrowers with good credit buy a new home -- often at a much lower price -- then bail out of the "upside down" mortgage on their first home.
...
The mortgage industry is starting to wise up to the practice and is scrambling to fight back. Buy-and-bail is "certainly fraudulent and unfortunately on an uptick," says Gwen Muse-Evans, vice president for credit policy and controls at Fannie Mae.
...
Under revised Fannie Mae guidelines, which could take effect next week, loan applicants who claim they will rent out their first home will have to produce supporting evidence, including an executed lease agreement. Borrowers also will have to prove that they can pay the mortgage, property taxes and insurance for both residences.

So far there are only a few anecdotal reports of "buy and bail", so this might be much ado about nothing. This is certainly fraud (if they sign a false loan document). But just like fraud for housing (when people lie about their income to buy a home), this type of fraud is almost never prosecuted - and extremely difficult to prove, unless someone tells a reporter what they're going to do.

by Calculated Risk on 6/10/2008 06:09:00 PM

The buzz on the street is that the Fed might raise the Fed Funds rate 25 bps at the August meeting.

Click on graph for larger image in new window.

Here are the probabilities from the Cleveland Fed. As of yesterday, the market was still expecting no move in June - with the odds of a 25 bps rate hike increasing only slightly.

But all the tough talk about inflation and supporting the dollar is getting some attention.

The 2nd graph shows the August meeting probabilities as of yesterday.

As of yesterday, the implied probability of a 25 bps rate hike in August was below 40%.

However, according to a private calculation (using the August Fed Funds future contract), the odds of a 25 bps rate hike increased to over 70% today!

Raising rates with unemployment rising, and the economic risks to the downside, seems very unusual - but that is what the market expects.