by Calculated Risk on 11/25/2008 11:13:00 AM

From a Newsweek interview: Even Dr. Doom Likes Them

NEWSWEEK: What are your thoughts on the team Obama assembled?

Nouriel Roubini: The choices are excellent. Tim Geithner is going to be a pragmatic, thoughtful and great leader for the Treasury. He has experience at the Treasury and the IMF [International Monetary Fund], then the New York Fed. I have great respect for both Geithner as well as Larry Summers. I think both of them in top roles in economics in the administration were good moves. I think very highly of them both.

Roubini adds on his blog:

First, I told the Newsweek reporter – as full disclosure – that I had worked for Tim Geithner and Larry Summers when they were both at Treasury: I was head of a Treasury Office and the Senior Advisor to Tim Geithner in 1999-2000 who was at that time the Under Secretary for International Affairs while Larry Summers was Treasury Secretary. So some may [believe] that my positive views of the two may be biased/tinted by my working for them; on the other hand I know first hand about them and I have the greatest respect for their skills, intelligence, expertise, commitment to sound public policy and policy wisdom even if I may not always agree with all of their views.

Second, I have also to add that ... while I have the greatest respect for the new Obama economic team, they will inherit a huge economic and financial mess that will be extremely hard to fix even if they were to implement the most sound and consistent economic and financial policy package. This is going to be the worst US recession in decades as the strapped US consumer is now faltering. ... What policy can do – at best – is to minimize the financial and economic losses and limit the extent and severity and length of the economic and financial crisis, not to prevent it. President Elect Obama and his top notch team will inherit two wars and the worst economic and financial crisis in decades.

by Calculated Risk on 11/25/2008 10:37:00 AM

In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

Here is a similar graph through Q3 2008 using the Case-Shiller National Home Price Index:

Click on image for larger graph in new window.

This graph shows the price to rent ratio (Q1 1997 = 1.0) for the Case-Shiller ational Home Price Index. For rents, the national Owners' Equivalent Rent from the BLS is used.

Looking at the price-to-rent ratio based on the Case-Shiller index, the adjustment in the price-to-rent ratio is probably 60% to 70% complete as of Q3 2008 on a national basis. This ratio will probably continue to decline with some combination of falling prices, and perhaps, rising rents. The ratio may overshoot too.

The second graph shows the price-to-rent ratio for three cities: Los Angeles, Miami, and New York. On this monthly graph, January 1997 = 1.0. The OER from the BLS for each individual city is used.

Some combination of falling prices, and perhaps rising rents, will probably push the ratio back towards 1.0. By this measure of housing fundamentals, it appears that Miami has corrected about 80% or more of the way to the eventual bottom, Los Angeles about 65%, and New York just over 40%.

Price-to-rent ratios are useful, but somewhat flawed. They give a general idea about house prices, but there are other important factors (like inventory levels, price to income and credit issues). We are getting closer on prices, but it appears we still have a ways to go.

One thing is pretty certain - as long as inventory levels are elevated, prices will continue to decline. And right now inventory levels of existing homes (especially distressed properties) are near all time highs.

by Calculated Risk on 11/25/2008 08:57:00 AM

S&P/Case-Shiller released both the September monthly home price indices for 20 cities (with two composites), and the national house price index. The national index shows prices are off 16.6% from Q3 2007, and off 21% from the peak. I'll have more on the national index shortly.

This post focuses on Case-Shiller prices for 20 individual cities, and two composite indices (10 cities and 20 cities).

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 is off 23.4% from the peak.

The Composite 20 index is off 21.8% 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 18.6% over the last year.

The Composite 20 is off 17.4% over the last year.

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

In Phoenix and Las Vegas, home prices have declined about 38% from the peak. At the other end of the spectrum, prices in Charlotte and Dallas are only off about 4% from the peak.

I'll have more on prices including price-to-rent and price-to-income ratios soon.

by Calculated Risk on 11/25/2008 08:32:00 AM

Note: the Fed also announced a facility to buy asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans.

From the Fed:

The Federal Reserve announced on Tuesday that it will initiate a program to purchase the direct obligations of housing-related government-sponsored enterprises (GSEs)--Fannie Mae, Freddie Mac, and the Federal Home Loan Banks--and mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae. Spreads of rates on GSE debt and on GSE-guaranteed mortgages have widened appreciably of late. This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.

Purchases of up to $100 billion in GSE direct obligations under the program will be conducted with the Federal Reserve's primary dealers through a series of competitive auctions and will begin next week. Purchases of up to $500 billion in MBS will be conducted by asset managers selected via a competitive process with a goal of beginning these purchases before year-end. Purchases of both direct obligations and MBS are expected to take place over several quarters. Further information regarding the operational details of this program will be provided after consultation with market participants.

by Calculated Risk on 11/25/2008 01:45:00 AM

From Bloomberg: Treasury, Fed Said to Unveil Plan to Bolster Consumer Financing

The U.S. Treasury and Federal Reserve will unveil as soon as today a lending program to shore up the consumer-finance market, using money from the [TARP] ...

Treasury Secretary Henry Paulson ... scheduled a press conference for 10 a.m. New York time [Tuesday]

From the WSJ: New Facility Targets Consumer Lending

The lending facility, which will be operated by the Federal Reserve, is expected to provide loans to investors who want to buy securities backed by credit cards, auto loans and student loans ... Treasury will contribute between $25 billion to $100 billion to the facility from its $700 billion Troubled Asset Relief Program.

Your daily bailout facility ...

by Calculated Risk on 11/24/2008 11:09:00 PM

One of the key elements of the Obama stimulus package is infrastructure investment.

From the WSJ: Construction Industry Is Poised for a Rebound

The construction industry, beset by one of the biggest drops in employment in the current economic downturn, could be poised for a rebound under President-elect Barack Obama's expected stimulus package.

I don't think the plan is to have a rebound in construction employment, but to cushion the blow of the 2nd wave of construction job losses coming in 2009. Most of the construction job losses so far have been in residential construction, but the 2009 construction job losses will be related to the end of the commercial real estate boom.

Click on graph for larger image in new window.

This graph shows construction employment as a percent of the civilian labor force. Even though construction employment has declined as a percent of the workforce, construction employment is still higher than the normal level. This is because the commercial real estate boom has kept many construction workers employed, mostly working on hotels, malls and office buildings.

However non-residential investment is now hitting the wall.

The second graph shows the Architecture Billings Index is at a record low.

There is "an approximate nine to twelve month lag time between architecture billings and construction spending", so we should expect the first decline in architecture billing to impact non-residential structure investment in Q4 2008, and a further downturn in non-residential construction activity next summer.

The Obama stimulus plan is intended to somewhat offset this coming slowdown in non-residential investment.

From the WSJ article:

From highways to schools, state and local governments have been postponing approved construction projects in recent months. Assured funding would jump-start these projects. The American Association of State Highway and Transportation Officials, a group of state and local government officials, has a list of 3,109 "ready-to-go" highway projects that could break ground in 30 days to 90 days worth $18.4 billion.

Two former Clinton administration transit officials, Mortimer Downey and Jane Garvey, are among those spearheading transportation issues for the Obama transition. They have reached out to state and local officials to be ready for a spending package.

Back in May I estimated the decrease in non-residential investment for malls, offices and lodging alone at about $60 billion in 2009. So I don't think $18.4 billion is anywhere near enough to offset the probable decline in 2009 non-residential investment.

by Calculated Risk on 11/24/2008 06:48:00 PM

Wow. Does anyone change their mind more than Paulson?

From Bloomberg: Paulson May Ask for Remaining $350 Billion of TARP

Treasury Secretary Henry Paulson, less than a week after indicating he would let the Obama administration decide how to use the second half of the $700 billion financial fund, is considering asking for the money.

Amazing.

by Calculated Risk on 11/24/2008 05:59:00 PM

This was an important disclosure:

"The Realtors are reporting that foreclosure sales - that is distress sales being foreclosures or short sales - have risen from what they thought was 35% to 40% of all existing home sales, now they are saying it is 45% of all existing home sales. They also are saying they are seeing further softening toward the November numbers."
CNBC's Diana Olick: Existing Home Sales

This is another reminder that the only reason existing home sales appear to have "stabilized" is because of the high number of REO sales. Sales excluding REOs have plummeted.

I've argued before that REO resales are real sales and should be included in the NAR statistics, but I suspect these REO buyers might hold these properties longer than recent turnover would suggest. If these are owner occupied buyers, they have probably been waiting to buy, and they have saved a down payment and qualified under the tighter lending standards. They probably won't sell until they can make a reasonable profit to buy a move up home - and it will probably be a number of years before prices recover.

If they are investors, they are likely buying REOs for cash flow - not appreciation, unlike the speculators in recent years - and these investors will probably hold the properties for a number of years too.

This suggests to me that turnover will slow further.

Click on graph for larger image in new window.

This graph shows existing home turnover as a percent of owner occupied units. Sales for 2008 are estimated at just over 4.9 million units.

I've also included inventory as a percent of owner occupied units (all year-end inventory, except 2008 is for October).

The turnover rate was boosted in recent years by:

Speculative buying (flippers).

Speculative buying by first time home buyers (using excessive leverage).

Move up buying, especially by Baby Boomers.

Although slowing, the turnover rate is still above the median for the last 40 years and substantially above previous troughs. Both types of speculative buying are over for now. And the Baby Boomers have probably bought move up homes, and the next major move will be downsizing in retirement (still a number of years away).

And finally - and probably a very important point - homeowners with negative equity, who manage to avoid foreclosure, will be stuck in their homes for years.

All of the above suggests the turnover rate - and existing home sales - will fall further, perhaps much further.

by Calculated Risk on 11/24/2008 04:46:00 PM

Professor Krugman on CBS "The Early Show":

by Calculated Risk on 11/24/2008 01:22:00 PM

The 3-month treasury is still at zero ... and that is not good. Here is more more data:

The three month LIBOR increased slightly to 2.17% from 2.16%. The three-month LIBOR rate peaked (for this cycle) at 4.81875% on Oct. 10. (unchanged)

The TED spread: 2.16. (slightly worse)

The TED spread is stuck above 2.0, and still too high. The peak was 4.63 on Oct 10th. I'd like to see the spread move back down to 1.0 or lower. A normal spread is around 0.5.

The yield on 3 month treasuries is essentially zero (bad).

The 10-Year Treasury Note yield is up to 3.34% from 3.17%.

The A2P2 spread decreased to 3.61 from a record (for this cycle) 4.83 (Better). For the first time since this wave of the crisis started it looks like the A2P2 spread is declining.

This is the spread between high and low quality 30 day nonfinancial commercial paper. If the credit crisis eases, I'd expect a significant decline in this spread - and the graph makes it clear this indicator is still in crisis.

The two year swap spread from Bloomberg: 110.75, up slightly from 107.5. (slightly worse). This spread peaked at near 165 in early October, so there has been significant progress, but I'd like to see this below 100.

Contacts: Late Friday a friend (in management at a public company) told me his company just obtained a new loan (about $100 million) for expansion and a revolving line of credit. This is a good sign.

Most of these indicators are slightly worse or unchanged, but there was some progress with the A2/P2 spread.