by Calculated Risk on 10/02/2008 09:40:00 AM

It would be more than a full time job - and one I don't want - to comment on all the good and bad housing policies being proposed these days. But this piece in the WSJ by R. Glenn Hubbard and Chris Mayer demands attention: First, Let's Stabilize Home Prices .

Chris Mayer recently published a study showing that -- assuming normally functioning mortgage markets -- the cost of buying a house is now 10% to 15% below the cost of renting across most of the country.

Well, it is true that Dr. Mayer recently published a study, but I believe the conclusions were incorrect. Please note that Dr. Mayer in 2005 (with Charles Himmelberg and Todd Sinai) used a similar approach and concluded there was "little evidence of housing bubbles in almost any of the markets we have studied". I disagreed with Dr. Mayer in 2005 (many people sent me his paper), and I felt that there was no question there was a bubble. I disagree with Dr. Mayer today.

But this is even worse:

We are in a vicious cycle: falling housing values cause losses on securities, which reduce bank capital, thereby tightening lending and causing house prices to fall further.

First, house prices are falling because prices are too high when compared with fundamentals like incomes and rents.

Second - and this is important to understand - the value of the securities is based on projections of future house prices, not on current house prices. If we knew the trajectory of future house prices (and the relationship to defaults), we could accurately price the various mortgage backed securties (MBS).

Since analysts are finally getting realistic on their house price projections, further house price declines (that are in line with those projections) will not impact the value of MBS! So the Hubbard and Mayer vicious cycle analysis is flawed. The apparent "vicious cycle" was caused by incorrect forecasts by analyst and economists of future house prices.

This flawed analysis led the authors to a terrible proposal: to try to stabilize house prices by using artificially low interest rates:

We propose that the Bush administration and Congress allow all residential mortgages on primary residences to be refinanced into 30-year fixed-rate mortgages at 5.25% (matching the lowest mortgage rate in the past 30 years), and place those mortgages with Fannie Mae and Freddie Mac.

First, it is important for a healthy housing market to allow prices to return to more fundamental levels (and that means further price declines and/or increases in household incomes).

Second, this shows a misunderstanding of the role of interest rates with regards to house prices. This gets complicated, but if the interest rate is artificially low today, the buyer can expect rates to rise - and therefore that the home price will not be as high in the future (all else being equal). The buyer should discount this lower house price back to the present, and we discover that interest rate changes only play small role in house prices.

This is just a terrible proposal.

by Calculated Risk on 10/02/2008 09:11:00 AM

The DOL reports on weekly unemployment insurance claims:

In the week ending Sept. 27, the advance figure for seasonally adjusted initial claims was 497,000, an increase of 1,000 from the previous week's revised figure of 496,000. It is estimated that the effects of Hurricane Gustav in Louisiana and the effects of Hurricane Ike in Texas added approximately 45,000 claims to the total. The 4-week moving average was 474,000, an increase of 11,500 from the previous week's unrevised average of 462,500.

Click on graph for larger image in new window.

This graph shows weekly claims. The four week moving average is at 474,000.

Some of the jump in unemployment claims is a result of the hurricanes and should be temporary, but weekly unemployment claims continues to show significant weaknesses in the labor market and real economy.

Also on employment: in a research note last night, Goldman forecast the BLS report tomorrow will show "a loss of 150,000 payroll jobs" and a further increase in the unemployment rate. Also note that the September employment report will include the initial annual benchmark revisions (to be released in February) and this is expected to show a fairly large downward revision in employment.

by Calculated Risk on 10/01/2008 10:54:00 PM

From the SEC: Statement of Securities and Exchange Commission Concerning Short Selling (hat tip Interesting Times)

Temporary prohibition of short selling in financial companies.

This order will be extended beyond its currently scheduled expiration, to allow time for completion of work on the anticipated passage of legislation. It will expire at 11:59 p.m. ET on the third business day after enactment of the legislation, but in any case no later than 11:59 p.m. ET on Oct. 17, 2008.

Oh well ... this is still dumb.

by Calculated Risk on 10/01/2008 10:29:00 PM

The bailout bill has a number of unrelated provisions. This one caught my eye earlier today: SEC. 503. EXEMPTION FROM EXCISE TAX FOR CERTAIN WOODEN ARROWS DESIGNED FOR USE BY CHILDREN.

Bloomberg has the details: Bailout Bull's-Eye for Kids' Arrow-Makers' Tax Break

Senators attached a provision repealing a 39-cent excise tax on wooden arrows designed for children to an historic $700 billion bank rescue that is likely to pass tonight. The provision, originally proposed by Oregon senators Ron Wyden and Gordon Smith, will save manufacturers such as Rose City Archery in Myrtle Point, Oregon, about $200,000 a year.

My understanding is the bailout bill was attached to another bill for procedural reasons, and that that other bill had all the weird provisions (Senators weren't trying to add them to the bailout bill specifically). Oh well ... now you know.

by Calculated Risk on 10/01/2008 08:45:00 PM

Count was 74 yes, 25 no. House will apparently vote on Friday.

Here is the live feed from C-SPAN2.

by Calculated Risk on 10/01/2008 04:54:00 PM

Here is the live feed from C-SPAN2. The vote will probably be early this evening.

Here is the CNBC feed.

Other news:
An incredible (must see) video from KCET.org: Foreclosure Alley

National Debt Exceeds $10 Trillion

From MarketWatch: U.S. Sept. ISM manufacturing index plunges to 43.5%

Non-Residential Construction Spending Declines

From the WSJ: U.S. Auto Sales Dive As Consumers Struggle

Ford, Toyota Motor Corp. and Honda Motor Co. reported declines of 35%, 32% and 24%, respectively, while GM rode its now-expired employee-prices sales promotion to keep its decline to 16%.
...
General Motors Corp. Chief Operating Officer Fritz Henderson said he expects the U.S. auto market weakness to continue into 2009 ...

by Calculated Risk on 10/01/2008 03:11:00 PM

As of Sept 30th, the debt was $10,024,724,896,912.49.

The surge in the National Debt over the last two weeks has been because of the Supplementary Financing Program (SFP) with the Treasury raising cash for the Fed's liquidity initiatives (announced a couple of weeks ago).

Even though this rapid increase in the debt is being driven by the Fed's liquidity initiatives (and should be paid back), crossing $10 trillion is still quite an achievement ...

Hat tip Buzz!

by Calculated Risk on 10/01/2008 02:49:00 PM

For those with infinite patience, here is the live feed from C-SPAN2. The vote will probably be early this evening.

UPDATE: Here is the full text of the bill. The Senate added the bailout to another bill and there are some weird provisions. This is my favorite (I wish each provision had the name of the author!):

SEC. 503. EXEMPTION FROM EXCISE TAX FOR CERTAIN WOODEN ARROWS DESIGNED FOR USE BY CHILDREN.

(a) IN GENERAL.—Paragraph (2) of section 4161(b) is amended by redesignating subparagraph (B) as sub301 paragraph (C) and by inserting after subparagraph (A) the following new subparagraph:

‘‘(B) EXEMPTION FOR CERTAIN WOODEN ARROW SHAFTS.—Subparagraph (A) shall not apply to any shaft consisting of all natural wood with no laminations or artificial means of enhancing the spine of such shaft (whether sold separately or incorporated as part of a finished or unfinished product) of a type used in the manufacture of any arrow which after its assembly—

‘‘(i) measures 5⁄16 of an inch or less in diameter, and
‘‘(ii) is not suitable for use with a bow described in paragraph (1)(A).’’.

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to shafts first sold after the date of enactment of this Act.

by Calculated Risk on 10/01/2008 01:16:00 PM

From kcet.org (hat tip anon)

Foreclosure Alley

For the past few years, the Inland Empire in Riverside County has been one of the fastest growing counties in the state - home to a major housing boom. But now the Inland Empire is pretty much the poster child for the foreclosure crisis. SoCal Connected tracked down some surreal sights associated with the crisis, including a guy who started a business turning abandoned, dead lawns green - with spray-paint.

by Calculated Risk on 10/01/2008 12:22:00 PM

From MarketWatch: Ford U.S. sales fall 34.6% to 120,788 vehicles in September

Ford ... on Wednesday reported a 34.6% drop in September U.S. sales to 120,788 vehicles from 184,612 in September 2007. September marked the lowest sales month so far this year for Ford and the industry, the automaker said.

The focus for the last couple of weeks has been on the credit crisis and the proposed bailout plan, but an even bigger story might be how sharply the economy is slowing. The economic news is grim.