by Calculated Risk on 8/27/2008 12:50:00 PM

"People are saying the reason prices are falling are because of all of the foreclosures, but the foreclosures are happening because the prices are falling. They've got it backwards. The prices are falling because they're too freakin' high."
Chris Thornberg, Beacon Economics, Aug 27, 2008

The above quote is from a Voice of San Diego article by Kelly Bennett: Local Prices Down 30 Percent from Peak

The article notes that there has been an increase in sales recently, but this is probably a "false dawn":

The 10.5 percent [sales] increase in July compared to July 2007 was the first year-over-year increase in more than four years, according to DataQuick Information Systems.
...
Usually, an increase in sales means a market is recovering, and the bump up in sales has been touted as a potential turnaround for the local market.
...
But foreclosure sales counted for a large portion of that increase, leaving analysts expecting continued price declines.
...
"When you see sales begin to increase, that's often an indicator of a market turning," said Chris Thornberg, founding partner at Beacon Economics and former economics professor at the University of California, Los Angeles. "But this is a bit of a false dawn."

And prices are now falling for luxury homes too:

[E]ven luxury homes are now showing weakness. ... That "prestige homes" index found that in the second quarter this year, values on many such houses in San Diego dropped 2 percent from the first quarter and 7.8 percent from second quarter 2007. The average price among those homes has fallen to $2.02 million, from a peak of $2.19 million in the second quarter 2007.

No area is immune. The housing bust is now moving up the price chain.

by Calculated Risk on 8/27/2008 12:18:00 PM

From Bloomberg: Thrifts Posted $5.4 Billion Loss in Second Quarter

U.S. savings and loans posted a $5.4 billion loss in the second quarter as lenders set aside record reserves for loan losses amid the slump in the housing market, the [Treasury's Office of Thrift Supervision] said.

Provisions for bad loans reached $14 billion ...

The OTS list of ``problem thrifts'' increased to 17 from 12 at the end of the first quarter and accounted for 2.1 percent of all the OTS-supervised thrifts ...

The S&Ls have problems too.

by Calculated Risk on 8/27/2008 09:40:00 AM

From Reuters: FDIC says IndyMac failure costlier than expected

The Federal Deposit Insurance Corp said on Tuesday it now expects IndyMac's failure in July to cost its insurance fund $8.9 billion, compared with the previous expected range of $4 billion to $8 billion.
...
Diane Ellis, the FDIC's associate director of financial-risk management, said IndyMac's expected hit to the fund blossomed because analysts have had more time to value IndyMac's assets and have assigned some higher loss rates.

Also, some deposits that the FDIC originally thought were uninsured are actually insured, Ellis said.

This is quite an increase in the expected loss.

by Anonymous on 8/27/2008 08:29:00 AM

Dean Baker is highly annoyed by this line from Sheila Bair, as paraphrased by the New York Times:

The swelling tide of toxic home loans is proving to be even more worrisome than initially feared, Ms. Bair said.

I think I've become more or less impervious to the hoocoodanode line, given too much exposure to it. I'm actually rather more blown away by the following quote:

She is struggling to clean up the mess and forestall home foreclosures with a plan to ease loan terms for hard-pressed homeowners.

“It is going to be slog to work though this, but there is no easy way to do it,” Ms. Bair said about her plan during an interview in her office here. “We haven’t seen the trough of the credit cycle yet.”

People ask me all the time something like this: "So, well, you think you're so smart, what's your solution for this problem?" And I tell people all the time, "There is no 'solution' to this problem. That's why it sucks so bad. That's why you don't let problems like this develop in the first place."

I might even be willing to grant Bair an occasional indulgence in hoocoodanode if she'd just quit trying to pretend that she--or anyone else--can "work through this" in any meaningful way, "this" being the deflation of the housing bubble. I mean, one does what one can. I don't object to anyone making lemonade where the opportunity presents itself, nor do I fault anyone for taking whatever limited measures are possible to ease the pain for individual homeowners. But anyone who continues to pretend that "preventing foreclosure" is a "solution" to the problem here is lying to the public. Trying to "prevent" the results of a home-mortgage credit bubble isn't "solving" anything, it's keeping your finger in the dike and waiting for a miracle.

Besides the fact that Sheila Bair is still, as far as I know, the head of the FDIC, not the National Homeowners Association. Her concern for homeowners is nice and everything, but she's supposed to be regulating banks and thrifts. The FDIC needs to be worrying about "foreclosing" on some troubled banks, not pretending that troubled banks can avoid the consequences of a bubble by refusing to let mortgage loans fail.

by Anonymous on 8/27/2008 07:21:00 AM

It used to be, whenever I had no inspiration for a blog post at all, I could just go slumming over at one of the broker boards and find something for edification of my readers or just comic relief. These days, it seems, I just have to check my email.

Yesterday I was being asked to help write a hardship letter, which was certainly an understandable request since I have offered advice on that subject in the past and so, you might say, I asked for it. Today I am being asked to do somebody else's homework. I publish the following in its entirety with the exception of the name:

hi

i saw in your blog that you are a risk expert.

for university purpose i am supposed to calculate a value at risk of an option.

the optoin is a call option on 1000 shares for one year with strike price at 10$. the delta of this option is 1.5, meaning that if the share price goes up by 1bp the option by 1.5bp

daily volatilty is 12cents, the value at risk for 95% is supposed to be 419. how do i get this? oh it is delta normal

thank you

A____

Since I have examined my conscience and discovered that I have no scruples about subjecting people who ask me to do their story problems for them to a high degree of risk, I hereby invite the Calculated Risk commenting community to assist. Please explain to "A" here how to derive a VaR of 419. You may of course assume as many can openers--or as much convexity--as you need to. Remember that your answer could be going into A's frat house files, so please approach this with the appropriate degree of seriousness.

by Calculated Risk on 8/26/2008 08:27:00 PM

Another casual dining chain feels the pinch ...

From the WSJ: Olive Garden's Parent Warns on Profit

A surprise warning on earnings by Darden Restaurants Inc. suggests that sit-down restaurants will continue struggling through the fall after a dismal summer.
...
"The environment was weaker this quarter than it's been for a while," Darden Chief Executive Clarence Otis said in an interview. Asked how the overall industry will perform during the next few months, he said "We're not counting on it getting a whole lot better."

In coming months, restaurants are expected to close more locations, build fewer new ones, offer more low-priced promotions and tighten worker scheduling to contain labor costs ...
emphasis added

Just more evidence that the 2nd half recovery has been cancelled.

by Calculated Risk on 8/26/2008 06:10:00 PM

UPDATE: I remain very bearish on housing, especially on prices and existing home sales.

***bumped*** have fun!

There is wide disagreement in the comments on how much further New Home Sales will decline. Last year we had a contest on existing home sales (winners here). Note: although I didn't enter the contest, I predicted, at the end of 2006, existing home sales of 5.6 to 5.8 million for 2007.

So, for fun, here is a little contest to predict New Home sales for 2008 and 2009.

First, a little help ...

Click on graph for larger image in new window.

This graph shows annual New Home sales vs. New Home sales through July for each year.

Through July this year, there have been 327K New Homes sold (subject to revision). For the last 45 years, the median number of new homes sold through July is 61%, so 2008 is currently on pace for 534K homes sold.

The rate of sales (SAAR) has been declining all year, just like the previous two years, so I think sales will be below the normal ratio of July to Annual sales, and I'm going to pick 515K for 2008.

For 2009, I think sales will be about the same as 2008 or pick up slightly. My guess is a slight pick-up in sales or about 540K in 2009 (although I will not change my contest pick, I might change my view).

If you'd like to enter, please just post a comment in a format like this:

CR's picks:
2008: 515K
2009: 540K

Best of luck to all (winners each year will be announced in February of the following year - before all revisions).

by Calculated Risk on 8/26/2008 05:31:00 PM

From Bloomberg: Carteret Mortgage Will Close, Chief Executive Says (hat tip Dave)

Carteret Mortgage Corp., a closely held mortgage broker that originated more than $4 billion in loans in 2006, plans to close in several weeks, said Chief Executive Officer Eric Weinstein.

``We ran out of money,'' Weinstein, 49, said in an interview today. ``We're not technically out of business yet, but we're winding it down and trying to do the best we can for everybody.''

Weinstein said the ... company has about 800 employees ...

Just a reminder that Mortgage brokers are still going out of business. Carteret had more than 4,500 employees at one time, and operated in 45 states.

by Calculated Risk on 8/26/2008 03:42:00 PM

UPDATE: FDIC Press Release: Insured Bank and Thrift Earnings Fell to $5.0 Billion in the Second Quarter

From Bloomberg: FDIC Says Banks on `Problem List' Rose 30% in Second Quarter

The U.S. Federal Deposit Insurance Corp. said its ``problem list'' of banks increased [to] 117 ``problem'' banks as of June 30, up from 90 in the first quarter and the highest since mid 2003 ... FDIC-insured lenders reported net income of $4.96 billion, down from $36.8 billion in the same quarter a year ago.

``Quite frankly, the results were pretty dismal, and we don't see a return to the high earnings levels of previous years any time soon,'' FDIC Chairman Sheila Bair said at a news conference.
...
Lenders on the FDIC's ``problem list'' had assets of $78 billion at the end of the second quarter, an increase from the $26.3 billion at the end of the first quarter, the agency said.

Also CNBC reported that the FDIC insurance fund ratio fell to 1.01%, below the 1.15% required by law. So the FDIC will probably have to raise rates for insurance.

by Calculated Risk on 8/26/2008 11:40:00 AM

The first graph compares real and nominal Case-Shiller Home Prices through Q2 2008 (real is current index adjusted using CPI less Shelter).

Click on graph for larger image in new window.

In real terms, the Case-Shiller National Home price index is off 25% from the peak. Real prices are now back to the Q4 2002 level (nominal prices are back to mid-2004).

With existing home inventory at record levels, and tighter lending standards, prices will probably continue to decline over the next few years - perhaps another 15% to 25% in real terms on a national basis.

The second graph compares the year-over-year (YoY) change in real Case-Shiller house prices with the YoY change in Personal Consumption Expenditure (PCE) from the BEA GDP report.

There is some correlation, but there are other factors that impact PCE such as changes in income, consumer borrowing and other assets prices (like the stock market). I still think YoY PCE growth will turn negative in the coming quarters, but so far PCE has held up pretty well given the sharp decline in real house prices.