by Calculated Risk on 2/25/2009 03:59:00 PM

Here are a couple of graphs to illustrate the Capital Assistance Program house price scenarios. (see previous post) Note: the FDIC called it Capital Assessment Program (so the graph titles are incorrect!)

Click on graph for larger image in new window.

For whatever reason the Treasury is using the Case-Shiller Composite 10 index (I'd prefer the National Index). This graph shows nominal house prices under the two scenarios: baseline, and more severe.

Under the baseline scenario, nominal prices in the Composite 10 cities would return to mid-2002 prices. Under the more severe scenario, prices would return to early 2001 prices.

The second graph shows what this would mean for the price-to-rent ratio.

Note: this is price-to-rent for the Composite 10 index and Jan 2000 is set to 1.0.

This assumes rents stay flat for the next two years (recent reports suggest rents are falling - and that would mean prices would have to fall further).

This metric suggests that the severe price declines would bring the price-to-rent ratio below the normal range. Note: this requires the above assumption on rents.

NOTE: This is based on the Composite 10 index, and that index will most likely decline more than the national index. Even in these 10 cities, some areas will probably see larger price declines (as an example areas with significant Option ARM loans) and other areas less.

Repeating this table of the scenarios:

by Calculated Risk on 2/25/2009 02:42:00 PM

According to the Supervisory Capital Assessment Program FAQs, the Stress Tests will be completed "as soon as possible" but no later than the end of April.

Here are the economic scenarios for the stress tests:

Click on table for larger image in new window.

The more severe case is a 22% decline in house prices in 2009 and a 7% decline in 2010 (using the Case-Shiller Composite 10). I'll put up a graph with these projections soon.

by Calculated Risk on 2/25/2009 02:18:00 PM

From the U.S. Treasury: Terms of Capital Assistance Program

To view the White Paper, Term Sheet and FAQ, visit www.FinancialStability.gov.

Terms

Capital provided under the CAP will be in the form of a preferred security that is convertible into common equity at a 10 percent discount to the price prevailing prior to February 9th.

CAP securities will carry a 9 percent dividend yield and would be convertible at the issuer's option (subject to the approval of their regulator).

After 7 years, the security would automatically convert into common equity if not redeemed or converted before that date.

The instrument is designed to give banks the incentive to replace USG-provided capital with private capital or to redeem the USG capital when conditions permit.

With supervisory approval, banks will be able to request capital under the CAP in addition to their existing CPP preferred stock.

With supervisory approval, banks will also be allowed to apply to exchange the existing CPP preferred stock for the new CAP instrument.

Conditions

Recipients of capital under the CAP will be subject to the executive compensation requirements in line with the Emergency Economic Stabilization Act of 2008, as recently amended. The Treasury will shortly be releasing rules to implement these amendments.

As part of the application process, banks must submit a plan for how they intend to use this capital to preserve and strengthen their lending capacity – specifically, to increase lending above levels relative to what would have been possible without government support. The Treasury Department will make these plans public when the bank receives the capital under the CAP.

Taxpayers will be able to monitor the performance of banks receiving capital under the CAP. Banks receiving capital will be required to submit to Treasury monthly reports on their lending broken out by category. These will be posted on www.FinancialStability.gov.

Recipients will also be subject to restrictions on paying quarterly common stock dividends, repurchasing shares, and pursuing cash acquisitions.

Update: From the Treasury White Paper on Capital Assistance Program (see previous post):

These shares can convert at the firm’s discretion (with the approval of their regulator) into common equity if needed to preserve lending in worse-than-expected economic environment at a conversion price set at a 10% discount from the prevailing level of the institution’s stock price as of February 9, 2009.

Guess the date Citi's stock price peaked in February (closed at $3.95 on Feb 9th)

by Calculated Risk on 2/25/2009 01:10:00 PM

Real Time Economics at the WSJ excerpts some analyst comments about the existing home sales report: Economists React: ‘So Much for Signs of Stability’ in Housing. A few comments from analysts:

"So much for signs of stability."

"The drop back in the number of existing U.S. home sales in January dashes hopes that housing activity had found a floor."

"Overall, the longer housing activity remains in the doldrums, the less likely it is that the economy will see a decent recovery in 2010 as Fed Chairman Ben Bernanke hopes."

"The rate of decline in existing home sales over the last three months suggests that the market has not yet entered a bottoming phase and housing remains under considerable pressure."

I wouldn't look at existing home sales for signs of stability.

A large percentage of existing home sales (45% according to the NAR) are distressed sales: REO sales (foreclosure resales) or short sales. This has created a gap between new and existing sales as shown in the following graph that I've jokingly labeled the "Distressing" gap.

Click on graph for larger image in new window.

This graph shows existing home sales (left axis through January) and new home sales (right axis through December).

Update (Feb 26, 2009): The graph is updated through January now (and right axis label corrected).

For a number of years the ratio between new and existing home sales was pretty steady. After activity in the housing market peaked in 2005, the ratio changed. This change was caused by distressed sales - in many areas home builders cannot compete with REO sales, and this has pushed down new home sales while keeping existing home sales activity elevated.

If we are looking for the first "signs of stability" in the housing market, I think we should look for declining inventory, a bottom in new home sales, and the gap between new and existing home sales closing.

Note: Existing home inventory might be declining, see the 5th graph here. However this might be misleading (see caveats in post).

by Calculated Risk on 2/25/2009 12:23:00 PM

As Bernanke said today, some progress has been made ...

The yield on 3 month treasuries has risen to 0.30%. Better than zero!

The three month LIBOR has increased to 1.25%. The three-month LIBOR rate peaked (for this cycle) at 4.81875% on Oct. 10. Although this has increased recently, this is still very positive for all those adjusted rate mortgage loans tied to the LIBOR (or treasuries).

The TED spread is at 0.96. Although a normal spread is around 0.5, this is still a significant improvement.

The A2P2 spread as at 1.02.

This is a significant improvement from the high of 5.86 after Thanksgiving. The A2P2 spread is at the lowest level since the latest wave of the crisis started in Sept 2008. However this is still fairly high - look at those previous small peaks - those were considered serious at the time.

Note: This is the spread between high and low quality 30 day nonfinancial commercial paper.

Federal Reserve Assets

The Federal Reserve released the Factors Affecting Reserve Balances last Thursday. Total assets increased $72.2 billion to $1.92 trillion. The increase was mostly due to the Federal Reserve buying $57.9 billion in mortgage-backed securities (MBS) guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae.

After spiking last year to $2.31 trillion the week of Dec 18th, the Federal Reserve assets have declined somewhat. Now it looks like the Federal Reserve is starting to expand their balance sheet again.

Note: the graph shows Total Factors Supplying Federal Reserve Funds and is an available series that is close to assets.

These indicators do indicate some progress ...

by Calculated Risk on 2/25/2009 11:48:00 AM

Fed Chairman Ben Bernanke is testifying before the House Financial Services Committee today.

UPDATE: Here is the CNBC feed (opens in new window).

From Gregg Robb at MarketWatch: Bernanke tells Congress Fed knows what it is doing

"We're not making it up," Bernanke told the House Financial Services panel.

"We're working along a program that has been applied in various contexts," he said. "We're not completely in the dark."

I'm not making this up.

by Calculated Risk on 2/25/2009 10:30:00 AM

The NAR press release is in the previous post. Here are some graphs of existing home sales ...

Click on graph for larger image in new window.

The first graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.

Sales in January 2009 (4.49 million SAAR) were 5.4% lower than last month, and were 8.6% lower than January 2008 (4.91 million SAAR).

It's important to note that about 45% of these sales were foreclosure resales or short sales. Although these are real transactions, this means activity (ex-distressed sales) is under 3 million units SAAR. (edit: fixed typo)

The second graph shows nationwide inventory for existing homes. According to the NAR, inventory decreased to 3.6 million in January, from an all time record of 4.57 million homes for sale in July 2008.

Usually inventory peaks in mid-Summer, and then declines slowly through November - and then declines sharply in December as families take their homes of the market for the holidays. Typically inventory starts to increase again slightly in January, however this month there was a slight decrease.

Usually most REOs (bank owned properties) are included in the inventory because they are listed - but not all. Recently I've heard a number of stories about lenders holding REOs off the market, but I can't confirm this.

The third graph shows the 'months of supply' metric for the last six years.

Months of supply decreased to 9.6 months.

Even though the inventory level declined, sales fell even more, leading to a higher "months of supply".

Here is another way to look at existing homes sales - monthly, Not Seasonally Adjusted (NSA):

This graph shows NSA monthly existing home sales for 2005 through 2009. Sales (NSA) were slightly lower in January 2009 than in January 2008. This is the fourth straight year of declining sales.

Again - a significant percentage of recent sales were foreclosure resales, and although these are real sales, I think existing home sales could fall even further when foreclosure resales start to decline sometime in the future.

The last graph shows inventory by month starting in 2004.

Inventory levels were flat during the bubble, but started increasing at the end of 2005.

Inventory levels increased sharply in 2006 and 2007, but have been below the year ago level for the last six months. This might indicate that inventory levels are close to the peak for this cycle. Note: there is probably a substantial shadow inventory – homeowners wanting to sell, but waiting for a better market - so existing home inventory levels will probably stay elevated for some time. There is also the possibility of some ghost inventory (REOs being held off the market).

It is important to watch inventory levels very carefully. If you look at the 2005 inventory data, instead of staying flat for most of the year (like the previous bubble years), inventory continued to increase all year. That was one of the key signs that led me to call the top in the housing market!

If the trend of declining year-over-year inventory levels continues in 2009 that will be a positive for the housing market. Prices will probably continue to fall until the months of supply reaches more normal levels (in the 6 to 8 month range), and that might take some time.

by Calculated Risk on 2/25/2009 10:04:00 AM

The NAR site is having problems again (I'll have graphs soon). Here is a story from MarketWatch: Existing-home sales drop 5.3% in January

Sales of pre-owned homes dropped 5.3% to a seasonally adjusted annual rate of 4.49 million in January, the lowest sales pace in 12 years ...

Here is the NAR Press Release: January Existing-Home Sales Fall, Inventory Down

Existing-home sales – including single-family, townhomes, condominiums and co-ops – fell 5.3 percent to a seasonally adjusted annual rate of 4.49 million units in January from a level of 4.74 million units in December, and are 8.6 percent lower the 4.91 million-unit pace in January 2008.
...
Total housing inventory at the end of January fell 2.7 percent to 3.60 million existing homes available for sale, which represents a 9.6-month supply at the current sales pace. Because sales were down, the January supply is up from a 9.4-month supply in December.
...
“Distressed sales activity appears to be leveling off, although there are wide differences locally. For example, close to 80 percent of all sales are either foreclosed properties or short sales in Santa Ana, Calif., but less than 20 percent in the Chicago region,” Yun said. About a quarter of all inventory is listed as being distressed, but NAR estimates that distressed sales – foreclosed or those requiring a lender-mediated short sale – comprised about 45 percent of all sales in January.

by Calculated Risk on 2/25/2009 12:59:00 AM

Most of the following article is on the stress test, but it does mention that the Citi deal could be announced Wednesday.

From Eric Dash at the NY Times: Stress Test for Banks Exposes Rift on Wall St.

Citigroup, which maintains that it is well capitalized by its regulators’ standards, was nonetheless locked in negotiations with the government on Tuesday over a third rescue. Under the plan, the government is expected to raise its stake in Citigroup to 30 to 40 percent, from about 8 percent now. The deal, which was moving toward completion and could be announced as early as Wednesday, would bolster the level of common stock that investors are focused on.

by Calculated Risk on 2/24/2009 10:00:00 PM

For the late readers, earlier today I graphed the price-to-rent, price-to-income and real prices based on the National Case-Shiller Home Price index.

Here is the monthly Case-Shiller data: Case-Shiller: House Prices Decline Sharply in December

And the Fed released the Q4 delinquency report: Fed: Delinquency Rates Increased Sharply in Q4

And the joke of the day comes from Senator Dodd: "The stress test has introduced stress."

From CNBC: Handicapping the Bank 'Stress Test'

“The outcome of the stress test is not going to be fail or pass [for banks],” Benrnake told legislators, but to “get a clear estimate of their capital needs.”

Thus far, the Treasury has only said that: a) the tests would be applied to banks with assets over a $100 billion, which is essentially the top 20; b) banks found lacking would be told they needed to raise private capital; c) if they were unable to do so, they could apply for government funds under the newly created Capital Access Program, CAP, ... d) funding would come from the second tranche of TARP.

Here is more from Bloomberg: U.S. to Get Bank Ownership Stakes Only as Losses Rise

“I don’t see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalize a bank when it just isn’t necessary,” Bernanke said at the Senate Banking Committee hearing.
...
Bernanke also said the so-called stress tests that regulators will run on the 19 banks will look at potential losses over a two-year horizon if the economy worsens.

The stress tests “will look at the balance sheets and the capital needs of each of our 19 largest $100-billion-dollar-plus banks over the next two-year horizon,” ...

The assessment will use “both a consensus forecast -- where we think the economy is likely to be based on private sector forecasts -- and an alternative which is worse,” Bernanke said.

We will know more tomorrow when Treasury Secretary Geithner speaks tomorrow (Wednesday), but this is definitely different than my original understanding of the purpose of the stress tests.