by Calculated Risk on 7/18/2008 10:11:00 PM

Stu says thanks!

From Stu:

"I’d like to thank the 885 CR readers who have voted on my form so far. They were a tremendous resource whether complimenting me or challenging me to be better."

Check out the 12 cartoons that made the cut: Stu's Real Estate Cartoons

by Calculated Risk on 7/18/2008 05:56:00 PM

Several years ago I predicted that the National Debt would reach $10 trillion by the time President Bush left office. For a short period (thanks to the housing bubble), it looked like the deficit would be less than I projected.

Now that the housing bust is hitting government revenues, it looks like the $10 trillion projection will be close.

The current National debt is $9.518 trillion (see TreasuryDirect) as of July 17, 2008. That leaves the debt about $482 billion short of my projection with about 6 months to go.

Last year, from July 17, 2007 to Jan 20, 2008, the debt increased $297 billion. That is not a fast enough pace to make $10 Trillion by next January. But the debt is increasing faster this year.

The increase in the debt was about 50% higher over the first half of 2008 compared to the first half of 2007. If that pace continues for the next 6 months, we can estimate the debt will increase another $297 billion * 1.5, or $446 billion, before Bush leaves office.

$10 Trillion Man? It is going to be close!

by Calculated Risk on 7/18/2008 05:06:00 PM

From Bloomberg: Fed's Stern Says Rate Rise Can't Wait for Crisis End

``We can't wait until we clearly observe the financial markets at normal, the economy growing robustly, and so on and so forth, before we reverse course,'' Stern, president of the Federal Reserve Bank of Minneapolis, said in an interview today.
...
``We're pretty well-positioned for the downside risks we might encounter from here,'' said Stern, 63, the Fed's longest- serving policy maker. ``I worry a little bit more about the prospects for inflation.''

Market participants expect no rate change through at least the September meeting. Stern is a voting member of the FOMC.

by Calculated Risk on 7/18/2008 01:47:00 PM

From Bloomberg: Agency Mortgage-Bond Spreads Rise as Freddie Mac Ponders Sales

The difference between yields on Fannie Mae's current- coupon, 30-year fixed-rate mortgage bonds and 10-year government notes widened 5 basis points to 206 basis points [a four-month high], according to data compiled by Bloomberg.

This is still below the spread in March of 238 bps. The increase today is apparently due to comments made in a Freddie SEC filing.

Freddie Mac is considering selling assets carried below their value to maintain acceptable capital ratios, it said today in a filing with the U.S. Securities and Exchange Commission.

Selling of these assets (or less buying) would put pressure on the price. The end result would probably be higher mortgage rates.

by Calculated Risk on 7/18/2008 11:24:00 AM

Haven't we been here before? Ah, yes ...

Click on graph for larger image in new window.

This cartoon was drawn in 1993 by Eric G. Lewis, a freelance cartoonist living in Orange County, CA (used with permission).

The following graph puts the cartoon into context. The graph compares real Case-Shiller house prices for Los Angeles and the Composite 10 and 20 Index (10 and 20 large cities). The indices are adjusted with CPI less Shelter.

Note that the cartoon was drawn in 1993 and real prices fell in the Los Angeles area for about four more years!

The current Composite 20 bubble looks similar (although larger) to the previous Los Angeles bubble. (Note the Composite 20 index started in 2000). And prices will probably fall in real terms for several more years.

Professor Krugman presents a similar graph today using the Case-Shiller Composite 10 index and also looking at how elevated unemployment will probably linger. His conclusion: Housing slumps last.

Yes we've been here before - although this housing bubble was larger and more geographically pervasive than the earlier Los Angeles bubble.

by Calculated Risk on 7/18/2008 09:08:00 AM

From MarketWatch: Citigroup swings to loss on $7.2 billion write-down

Citigroup ... said on Friday that it lost money for the third consecutive quarter after writing down $7.2 billion of investments related to fixed-income weakness and consumer credit woes.
...
The consumer area showed worse performance than some other businesses on a quarter-to-quarter level, as the $3 billion second-quarter figure was down just a fraction from the $3.1 billion first-quarter figure.

"Higher credit costs reflected a weakening of leading credit indicators, including higher delinquencies in first and second mortgages, and unsecured personal and auto loans. Credit costs also reflected trends in the macro-economic environment, including the housing market downturn," Citi said.

by Calculated Risk on 7/18/2008 12:40:00 AM

From the WSJ: Mortgage Giant Freddie Mac Considers Major Stock Sale

Freddie Mac ... is considering raising capital by selling as much as $10 billion in new shares to investors ...

The main buyers for any new-stock issues are likely to be existing shareholders world-wide, according to one person involved in the discussion, adding that a definitive plan hasn't yet been determined.

In the short term, a sale of new shares might eliminate the need for the Treasury's help, but a government bailout might still be required later.

A little stock rally, and, well ... this seems extremely unlikely to me.

by Calculated Risk on 7/17/2008 09:17:00 PM

From Jon Lansner at the O.C. Register: O.C. office construction plummets 91%

Voit Commercial Brokerage reports that construction of O.C. office buildings plunged 90.8% in the second quarter to 325,276 square feet. Last year in the second quarter, 3.5 million square feet was under construction.
...
All the added space pushed the second quarter office vacancy rate to 14.46%. A year [ago], vacancies were at 8.95%. ... “You have two negatives — a lot of new product without tenants and you have got an economic slowdown,” says [Jerry J. Holdner Jr., Voit vice president of market research].

Take a drive at sunset down the 405 and you will see through a number of new buildings. Nice shiny empty glass towers ...

by Calculated Risk on 7/17/2008 07:00:00 PM

Cartoonist Stu Reese has drawn a series of a real estate related cartoons.

Here is his main site: Stu's Views.

Stu has generously offered to allow CR readers to preview, rate and offer suggestions on his new real estate cartoons.

Here is the preview page (removed) with 18 cartoons. This will only be posted for a short period.

You guys know real estate - and you know funny too - I'm sure he'd appreciate any suggestions.

by Calculated Risk on 7/17/2008 06:00:00 PM

Conference Call: (hat tip Brian) all emphasis added

Comments on the economy:

“While these credit metrics reflect modest credit pressure in the second quarter, there was a more pronounced deterioration in economic indicators. We assume this will translate into additional credit pressure in future quarters causing us to increase our [provisions for losses] in the second quarter. You may recall that we began tightening our under writing in the fourth quarter of 2007. You can see the affects of this tightening in our loan growth in quarter. Managed loans declined $800 million as we have been more selective in originating new loans. We have been focused on those business segments with [stronger profitability]”

Outlook for charges in the card business:

“The managed charge off rate increased in the quarter consistent with the low 6% range of expectations we discussed a quarter ago. The increase in charge off rate resulted mostly from the continuing deterioration of the U.S. economic environment. We expect average offs in the third quarter to remain in the low 6% range and rise to about 7% in the fourth quarter. We expect charge offs to increase as a result of three factors. First, expected seasonal patterns would result in higher charge off levels in the fourth quarter, all else equal. Second, [ we see deterioration] in economic indicators. The impact of economic weakening is likely to be evident in our U.S. charge offs in the fourth quarter and finally the initial impacts of the payments [regulations] that I discussed last quarter are expected to begin in the fourth quarter”

More bad news for the consumers looking for car loans:

“Looking beyond the second quarter our auto finance business continues to face challenges from the season of 2006 and 2007 originations and cyclical headwinds. Auto resale values are falling as a result of declining auto sales and the rapid shift in consumer preferences to more fuel efficient cars as gas prices continue to rise. To address these challenges we took aggressive steps to retrench and reposition our auto business last quarter... We are pulling back on originations and shrinking loans outstanding while improving the credit characteristics of the portfolio. We are leveraging pricing opportunities in the face of shrinking supply and we are reducing operating costs. Originations for the second quarter were $1.5 billion, 38% lower than the first quarter and 49% than a year ago. We expect auto loan originations for the full year of 2008 to be at least 40% lower than 2007 originations The total auto loan portfolio shrank by $1.7B to date.”