by Calculated Risk on 9/30/2008 12:34:00 PM

The following graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

Click on graph for larger image in new window.

In Phoenix and Las Vegas, home prices have declined more than 34%. In Charlotte, prices have only declined about 2% from the peak.

This graph illustrates the point Professor Krugman made in August 2005: That Hissing Sound

When it comes to housing ... the United States is really two countries, Flatland and the Zoned Zone.

In Flatland, which occupies the middle of the country, it's easy to build houses. When the demand for houses rises, Flatland metropolitan areas, which don't really have traditional downtowns, just sprawl some more. As a result, housing prices are basically determined by the cost of construction. In Flatland, a housing bubble can't even get started.

But in the Zoned Zone, which lies along the coasts, a combination of high population density and land-use restrictions - hence "zoned" - makes it hard to build new houses. So when people become willing to spend more on houses, say because of a fall in mortgage rates, some houses get built, but the prices of existing houses also go up. And if people think that prices will continue to rise, they become willing to spend even more, driving prices still higher, and so on. In other words, the Zoned Zone is prone to housing bubbles.

There was a bubble in Flatland too caused by the rapid migration from renting to buying - facilitated by loose lending - that pushed up Flatland prices. But those bubbles were small compared to the bubbles in the Zoned Zones.

Now that the bubble has burst, prices in the more bubbly Zoned Zones are falling much more than in Flatland.

Detroit is an exception with prices off 27% from the peak, even though Detroit never had a price bubble. The reason is Detroit has a weak economy and a declining population. Since housing is very durable, there is excess supply in Detroit, and prices for existing homes are below replacement costs.

Another exception is New York. Prices in New York are only off 10.6% even though New York is part of the Zoned Zone. New York had a price bubble, but until recently prices had held up pretty well. That is changing right now.

And here was Krugman's conclusion from August 2005:

Meanwhile, the U.S. economy has become deeply dependent on the housing bubble. The economic recovery since 2001 has been disappointing in many ways, but it wouldn't have happened at all without soaring spending on residential construction, plus a surge in consumer spending largely based on mortgage refinancing. .... Now we're starting to hear a hissing sound, as the air begins to leak out of the bubble. And everyone - not just those who own Zoned Zone real estate - should be worried.

I think most people are worried now.

by Calculated Risk on 9/30/2008 10:29:00 AM

From the WSJ: Irish Government Moves to Safeguard Banking System

The Irish government Tuesday announced a surprise decision to safeguard the Irish banking system for two years, guaranteeing all deposits, covered bonds, senior debt and dated subordinated debt of the four main banks.
...
Finance Minister Brian Lenihan said the guarantee will cover €400 billion ($577.64 billion) of the €500 billion of bank assets involved. That is more than Ireland's gross domestic product of €190 billion and national debt of €45 billion.
...
Davy Research analyst Scott Rankin said: "The Irish government has taken out its bazooka."

by Calculated Risk on 9/30/2008 09:00:00 AM

Housing is the key. And house prices are still falling sharply ...

S&P/Case-Shiller released their monthly Home Price Indices for July this morning. This includes prices for 20 individual cities, and two composite indices (10 cities and 20 cities). Note: This is not the quarterly national house price index.

Click on graph for larger image in new window.

The first graph shows the nominal Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index was off 12.3% annual rate in July (from June), and is off 21.1% from the peak.

The Composite 20 index was off 10.1% annual rate in July (from June), and is off 19.5% from the peak.

Prices are still falling, and will probably continue to fall for some time.

The second graph shows the Year over year change in both indices.

The Composite 10 is off 17.5% over the last year.

The Composite 20 is off 16.3% over the last year.

More on prices later ... including selected cities.

by Calculated Risk on 9/30/2008 08:31:00 AM

"The money markets have completely broken down, with no trading taking place at all. There is no market any more."
Christoph Rieger, Dresdner Kleinwort in Frankfurt, Sept 30, 2008

From Bloomberg: Libor Surges Most on Record After U.S. Congress Rejects Bailout

The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 431 basis points to an all-time high of 6.88 percent today, the British Bankers' Association said. The euro interbank offered rate, or Euribor, for one-month loans climbed to record 5.05 percent, the European Banking Federation said. The Libor-OIS spread, a gauge of the scarcity of cash, advanced to a record.

Also President Bush spoke at 8:45AM ET.

Short excerpt from Bush:

"This is not the end of the legislation process. ... This is an urgent situation. Consequences will grow worse if we don't act. If we continue on this course, the economic damage will be painful and lasting. ... Congress must act. ... We will deliver."

by Calculated Risk on 9/30/2008 02:57:00 AM

From Bloomberg: Senate May Try to Revive Bank-Rescue Bill as Early as Tomorrow

The U.S. Senate will try to salvage a $700 billion financial-rescue package after the measure was defeated in the House of Representatives. ...

``They're not going to totally revamp the bill,'' said Pete Davis, president of Davis Capital Investment Ideas in Washington, who spoke to House and Senate leaders yesterday. ``They'll make some minor changes and pass it. This is all about political cover.''

by Calculated Risk on 9/29/2008 09:20:00 PM

From the Financial Times: Dexia shares fall amid capital concern (hat tip avinunu)

Shares in Dexia lost more than a quarter of their value on Monday on fears that the Belgian-French financial services group needed to raise capital.
...
The board met on Monday night “to assess the international financial situation”, according to a spokesperson ...

This article in lesoir.be suggests that it will take 6 to 7 billion euros to save Dexia: Entre 6 et 7 milliards pour sauver Dexia

by Calculated Risk on 9/29/2008 07:09:00 PM

The following analysis is based on data from the Census Bureau (for 2007) and First American CoreLogic at the end of 2006. Although some of this data is a little old, it provides us with an estimate of the number of Americans household underwater (with negative equity).

According to the Census Bureau's 2007 American Community Survey there were 51,615,003 households with a mortgage in the U.S. at the end of 2007.

Click on chart for larger image in new window.

For prices, using Case-Shiller, by the end of 2006 U.S. home prices had fallen just over 1% from the peak, but a number of homeowners were already underwater because they bought their homes with more than 100% LTV financing.

By the end of 2007, prices had fallen 10% from the peak, and 8.2 million homeowners owed more on their mortgages than their homes were worth.

As of Q2 2008, prices had fallen almost 18% from the peak, and for the graph, I estimated that prices will decline about 22.5% from the peak by the end of 2008. (this seems conservative). This means about 15.4 million households will be underwater or already foreclosed on by the end of 2008.

The last two categories are based on various estimates for the price bottom (peak-to-trough). The 30% decline was suggested by Paul Krugman in December 2007: What it takes). The 35% decline is close to the "severe recession" case presented by JPMorgan last week.

Not every homeowner with negative equity will default, in fact many of these homeowners will only be underwater by a few percent. But if we estimate one half of homeowners with negative equity will eventually default, use a 50% loss severity, and a 35% price decline (23.6 million households with negative equity), and use the median house price from the Census Bureau of $216 thousand, we get $1.3 trillion in mortgage losses for lenders.

I think this is probably high (probably fewer than 50% will default), but this does give a general idea of the potential losses. If we use one third of homeowners, the mortgage losses with a 35% peak-to-trough price decline would be about $840 billion.

by Calculated Risk on 9/29/2008 05:52:00 PM

From Bloomberg: Paulson to Work Quickly With Congress to Revive Plan (hat tip Ministry of Truth)

U.S. Treasury Secretary Henry Paulson said he will work with Congress to salvage a $700 billion rescue plan ...

``We need to work as quickly as possible; we need to get something done,'' Paulson told reporters at the White House after meeting with President George W. Bush. ``We believe that our plan, and the plan that we developed with congressional leaders and worked so hard, is a plan that works. And we need a plan that works.''
...
House Majority Leader Steny Hoyer said the House may take up the measure again as early as this week, possibly after Senate action.

I've heard that there are enough votes in the Senate to pass the bill (probably on Wednesday night), and Paulson is probably hoping that passage in the Senate will put additional pressure on the House.

by Calculated Risk on 9/29/2008 05:27:00 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.

Back in March, with the housing bust starting to hit government revenues, it started looking like the $10 trillion projection had a chance.

Click on graph for larger image in new window.

This graph shows the daily National Debt from TreasuryDirect). Note that the y-axis doesn't start at zero to better show the change.

Here is an update: The National debt is $9.889 trillion as of Sept 26, 2008. That leaves the debt just over $110 billion short of my projection with almost 4 months to go.

Over the last month, from August 26th to Sept 26th, the National Debt has increased $254 billion as the recession has started to significantly impact government revenues. It looks like $10 trillion will be passed very soon.

Also, the National Debt has increased a stunning $895 billion over the last 12 months (from Sept 26, 2007 to Sept 26, 2008). Shocking.

by Calculated Risk on 9/29/2008 03:40:00 PM

Dow off 6%.

S&P 500 off 7%.

NASDAQ off 7%.

With the failure of the bailout in the House, the question is now what?

There is the possibility of some arm twisting and another vote tomorrow. Another possibility is that the bill will be revised in some way to garner a few more votes.

In the short run, the government is back to acting on a case by case basis.