by Calculated Risk on 10/02/2008 11:08:00 PM

From the WSJ: Developer Sells Land Dirt Cheap To Reap Tax Benefits

Horton two weeks ago sold about 2,000 house lots in Desert Hot Springs ... for $7.8 million, according to county records. William Shopoff, a land investor ... estimates Horton paid about $110 million for the land before [spending on improvements].

Horton also recently sold a four-acre parcel in Escondido, near San Diego, for $4.4 million, about 25% of what it paid for the property in 2005, according to the county assessor.

The reason Horton is selling now - for pennies on the dollar - is to obtain a tax refund by applying the losses to prior profits. Earlier this year I reported on a deal at 15 cents on the dollar for the same reason.

This is the common patten in a housing bust - typically land prices decline much more than house prices (on a percentage basis) - because houses can be rented, whereas land has to be held for years before realizing a return.

by Calculated Risk on 10/02/2008 08:07:00 PM

From Charlie Rose: A discussion about the economy with Mort Zuckerman & Andrew Ross Sorkin

by Calculated Risk on 10/02/2008 04:37:00 PM

Update: from Dow Jones: US Fed Discount Window Borrowing Continues To Hit New Highs

The Fed on Thursday said total borrowing at the discount window, including both depository institutions and primary dealers, rose more than 50% to $409.52 billion Wednesday from $262.34 billion in the prior week.
...
Separately, the Fed said a loan to troubled insurer American International Group Inc. (AIG) on Wednesday totaled $61.28 billion...

The Fed is peddling as fast as they can.

by Calculated Risk on 10/02/2008 02:03:00 PM

"The credit window is closed."
Jim Press, president of Chrysler LLC

The TED spread is at a record 3.62.

And from Bloomberg: Libor Soars, Commercial Paper Slumps as Credit Freeze Deepens

The Libor- OIS spread, the difference between the three-month dollar rate and the overnight indexed swap rate, widened to a record 260 basis points today. It was 197 basis points a week ago and 79 basis points a month ago.
...
The market for commercial paper plummeted $94.9 billion to $1.6 trillion for the week ended Oct. 1 as banks and insurers were unable to find buyers for the short-term debt ...

The NY Times quoted Chairman Bernanke as saying on Friday, Sept 19th:

"If we don’t do this, we may not have an economy on Monday."

Well, we still have an economy, but it is clearly in tatters ...

by Calculated Risk on 10/02/2008 12:15:00 PM

From Bloomberg: Fed May Lose Out on Bear Assets, Bank of America Says

The Fed will announce its quarterly estimate of the fair value of Maiden Lane LLC's $30 billion of holdings that JPMorgan Chase & Co. considered too risky when it acquired Bear Stearns in March, Bank of America analysts Jeffrey Rosenberg and Hans Mikkelsen wrote in a client note. The central bank valued the assets at $29 billion as of June 30, according to the report.

``With the worsening in mortgage markets since last quarter, we estimate a range of $2 billion to $6 billion of unrealized losses,'' the New York-based analysts wrote.

Just sell them to Paulson ... problem solved.

by Calculated Risk on 10/02/2008 11:37:00 AM

Professor Hamilton at Econbrowser always does a great job summarizing auto sales, see: Auto sales deteriorate further

All the graphs show a sharp decline in September - as Jim Hamilton writes:

"U.S. auto sales have been dismal for most of this year. And they just took a turn for the worse."

Perhaps the most telling is this graph on import car sales. Import car sales have been the one bright spot all year because importers offered more fuel efficient models. But look at September 2008:


From Econbrowser: Data source: Wardsauto.com

Hamilton concludes:

"All of which is consistent with the view that the U.S. economy has been in recession and took a sharp turn for the worse last month."

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.