by Calculated Risk on 3/10/2010 07:15:00 PM

From CR: There are so many reports of a housing bubble in China, I asked a friend living in China for his thoughts ... this is his view:

From Michael Kleist in Shanghai:

News of soaring housing prices in China, which are now hovering around late 2007 peaks, naturally invites talk of bubbles and excessive speculation. More so, since the 2007 highs led to a humbling drop in prices for homeowners and investors in 2008. Are things heading that way again in 2010?

Not necessarily.

Let’s start with the news in the papers. See the WSJ today: China Property Prices Surge

It’s clear the housing market in China has been hot, topped by February’s 10.7% YoY increase in prices. In fact, housing prices have been rising for 9 straight months YoY in China, which coincides to some degree with the government’s massive stimulus package that took effect first quarter 2009.

Certainly there is some speculation inside these numbers, as there would be in any hot property market. The government has shown enough concern on this point, and overheating in general, to tell banks last month to curtail lending and increase reserve rations.

But the bigger reason for rising home prices in China may simply be due to an imbalance in supply and demand.

In 2008 the housing market tanked, in large part, because the China government, which was worried about overheating in the property sector, slammed on the brakes in 2007. The government added a hefty tax on homes sold within 5 years of purchase, increased fees, told banks to raise interest rates on home loans and increase minimum down payments, and essentially forced banks to stop lending to developers.

The result was a dried up market, a drastic drop in prices, and an almost complete halt in new home starts.

When in early 2009, in response to the economic crisis, the China government launched its stimulus package it also stoked the property market by once again loosening lending regulations and lowering taxes and fees for both developers and home buyers. Builders began building and people began buying homes again. As a result, prices naturally began to go up.

What we are seeing today is that with fewer homes on the market after a nearly 2 year lull in building, the prices have continued to climb.

This imbalance will likely even out as the homes started in 2009 become available for sale. Most likely, this will result in a stabilization of prices but not a bursting bubble because it’s not even clear there is a housing bubble in China.

Certainly there isn’t a mortgage credit-related bubble. The majority of homes in China are purchased with down payments between 30-40%, which is required by the banks, and nearly 25% of homes are purchased with all cash. Only those qualifying for low-cost housing can purchase a home with a minimum down payment as low as 20%. For this reason foreclosures in China are practically nonexistent.

In addition, the majority of home buyers in China are still either first-time buyers or upgrading their home. Only an estimated around 20% of home buyers in China are pure investors. As with any statistics coming out of China, this figure can be questioned, but regardless, if investors are speculating, they are doing it with large cash down payments.

Still, it is clear that prices in tier 1 cities such as Beijing, Shanghai, and Shenzhen in the south have risen to amazing levels for China. Flats in downtown Shanghai can sell for RMB150,000 (US$ 22,000) per square meter with exclusive homes in prime locations commanding even higher prices. To get a new home for under RMB18,000 (US$2,640) per square meter certainly requires a trip to the suburbs and only a hope of being near a subway line.

With prices at these highs, it is fair to wonder at what point the situation in China can be called a bubble and what risk there is of it bursting.

With regard to the bursting side of this question, two things to keep in mind are the tremendous amount of influence the China government has to manipulate the housing market (both up and down) and its strong desire to keep prices stable or rising comfortably without squashing the market like it did at the end of 2007.

The central government in China has multiple tools at its disposal to directly impact the market. This begins with its control over all of the country’s commercial banks. When the Party tells banks to increase or adjust lending there is an immediate response. That’s one reason why the country was able to recover so quickly from the world credit crunch. The government uses this blunt tool when it feels there is a need for a country-wide impact on lending.

More subtly, it can direct banks to adjust mortgage rates or down payment percentages in specific locations that seem to be heating or cooling, it its mind, at an unreasonably pace.

One of the government’s most effective tools against speculation is to raise the down payment ratio and interest rate for buyers with an existing mortgage trying to purchase a second home. Currently, in Shanghai any buyer of a home with an existing mortgage is required to have a minimum down payment of 40% and must pay a higher interest rate on the loan than a first time buyer or buyer without an existing loan. This is a very effective approach that targets speculators without affecting the rest of the market and can be applied locally. In some locations, banks are forbidden to approve any second home loan until the first loan is paid off.

The point here is that as long as China’s government acts by tapping the brakes when and where necessary, a precipitous drop in home prices is unlikely. This assumes the government has learned from its mistakes in late 2007 when it adjusted too hard.

Given the sentiment and concern out of Beijing about keeping a balanced economy as the world recovers, I think the likelihood of any strong movements to dampen the housing market across China are low. More likely, through 2010 it will continue to use the banks and rules on second mortgages to cool specific locations while letting the overall market grow.

Note: Michael lives in Shanghai and has been in China for 8 years. He is a founder of www.tradesparq.com, a trade advertising platform that combines products and categories with social networking web tools to match international buyers and sellers. Michael hopes to address how local Chinese can afford homes in China in a future post.

From CR: This was Michael's view. It is certainly different than what we read in the U.S. I'm looking forward to his next post - US$ 22,000 per square meter (about $2,000 per foot) sounds very expensive to me - but the large downpayments should cushion in spillover if prices do decline.

by Calculated Risk on 3/10/2010 04:03:00 PM

From the WSJ: Financial Crisis Panel to Grill Greenspan

Greenspan is scheduled to testify before the Financial Crisis Inquiry Commission in early April. This might be the one real opportunity to understand why regulators missed the lending problems.

Hopefully the Commission will ask about regulatory oversight (and lack thereof). We already know from various Inspector General reports that Fed and FDIC field examiners were expressing significant concerns in 2003 and 2004. What action did Greenspan take at that time with those reports? Put them in a drawer?

Why wasn't action taken earlier to tighten lending standards? Was Greenspan concerned about the "widespread" innovation in the mortgage industry (automated underwriting, reliance on FICO scores instead of the 3 Cs - creditworthiness, capacity, and collateral, agency issues with the widespread use of independent mortgage brokers, expanded securitization, non-traditional mortgage products, etc.)? When lending booms, methods change, and standards weaken - isn't that when the regulators need to be the most vigilant?

Unfortunately the WSJ article discusses "subprime" and Fannie and Freddie - and misses all the key issues.

by Calculated Risk on 3/10/2010 01:43:00 PM

From the Association of American Railroads: Rail Time Indicators. The AAR reports traffic in February 2010 was down 1.7% compared to February 2009, and off 0.1% compared to January 2010 (seasonally adjusted).

Click on graph for larger image in new window.

This graph shows U.S. average weekly rail carloads. It is important to note that excluding coal, traffic is up 7.2% from February 2009, and traffic increased in 14 of the 19 major commodity categories YoY.

Housing: In addition to the decline in coal, two key building materials were also down YoY from February 2009: Forest products (off 1.7% YoY, and 27.5% compared to Feb 2008) and Nonmetallic minerals & prod. (crushed stone, gravel, sand was off 8.6% YoY, and 25.2% compared to Feb 2008). This fits with the recent data on housing starts, new home sales, and the NAHB home builder index that shows residential investment is flat - at best.

From AAR:

• On a non-seasonally adjusted basis, U.S. freight railroads originated 1,089,977 carloads in February 2010 — an average of 272,494 carloads per week. That’s down 1.5% from February 2009 (276,548 average) and down 15.6% from February 2008’s 323,047 average (see chart)

• On a seasonally adjusted basis, U.S. rail carloads fell 0.1% in February 2010 from January 2010 and were down 1.7% from February 2009.

• The heavy snow negatively affected railroads, both by making rail operations more difficult and by preventing rail customers from originating or receiving loads. ... it’s not possible to precisely quantify the snow’s impact on rail traffic.
emphasis added, excerpts with permission

Blame it on the snow!

Note: The new truck fuel consumption based Ceridian-UCLA Pulse of Commerce Index™ showed a decline in February too: Disappointing February, Potentially Dampened by Record Snowfalls

by Calculated Risk on 3/10/2010 12:10:00 PM

This is a follow up on the previous post on short sales and 2nd liens. (the previous post had excerpts from the NY Times, Short-Sale Program to Pay Homeowners to Sell at a Loss and WSJ Home-Saving Loans Afoot)

Just to be clear on what subordinate lien holders will receive under a HAFA short sales - from Treasury's HAFA program Short Sale Agreement:

Subordinate Liens. We will allow up to three percent (3%) of the unpaid principal balance of each subordinate lien in order of priority, not to exceed a total of $3,000, to be deducted from the gross sale proceeds to pay subordinate lien holders to release their liens. We require each subordinate lien holder to release you from personal liability for the loans in order for the sale to qualify for this program, but we do not take any responsibility for ensuring that the lien holders do not seek to enforce personal liability against you. Therefore, we recommend that you take steps to satisfy yourself that the subordinate lien holders release you from personal liability.

So on a $50,000 2nd lien, the holder of the lien will be offered up to $1,500 to sign off on the deal and release the borrower from personal liability. The HAFA program will reimburse the 1st lien holder one third of that amount, or up to $500.

Investor Reimbursement for Subordinate Lien Releases. The investor will be paid a maximum of $1,000 for allowing a total of up to $3,000 in short-sale proceeds to be distributed to subordinate lien holders, or for allowing payment of up to $3,000 to subordinate lien holders. This reimbursement will be earned on a one-for-three matching basis. For each three dollars an investor pays to secure release of a subordinate lien, the investor will be entitled to one dollar of reimbursement. To receive an incentive, subordinate lien holders must release their liens and waive all future claims against the borrower....

I expect that most 1st lien holders will be willing to pay this amount to the 2nd lien holder. But would a $50,000 2nd lien holder be willing to sign off for only $1,500?

It really depends on the financial situation of the borrower, and probably on the likelihood of personal bankruptcy. In most cases the 2nd lien holder can probably do much better by selling the lien to a collection agency.

Although I think the HAFA program will help with short sales (and deed-in-lieu transactions), this will not solve the 2nd lien problem. Foreclosure may still be the servicers' option of choice for borrowers with subordinate liens.

by Calculated Risk on 3/10/2010 10:00:00 AM

From the BLS: Regional and State Employment and Unemployment Summary

Thirty states and the District of Columbia recorded over-the-month unemployment rate increases, 9 states registered rate decreases, and 11 states had no rate change, the U.S. Bureau of Labor Statistics reported today. Over the year, jobless rates increased in all 50states and the District of Columbia.
...
Michigan again recorded the highest unemployment rate among the states, 14.3 percent in January. The states with the next highest rates were Nevada, 13.0 percent; Rhode Island, 12.7 percent; South Carolina, 12.6 percent; and California, 12.5 percent. North Dakota continued to register the lowest jobless rate, 4.2 percent in January, followed by Nebraska and South Dakota, 4.6 and 4.8 percent, respectively. The rates in California and South Carolina set new series highs, as did the rates in three other states: Florida (11.9 percent), Georgia (10.4 percent), and North Carolina (11.1 percent). The rate in the District of Columbia (12.0 percent) also set a new series high.
emphasis added

Click on graph for larger image in new window.

This graph shows the high and low unemployment rates for each state (and D.C.) since 1976. The red bar is the current unemployment rate (sorted by the current unemployment rate).

Fifteen states and D.C. now have double digit unemployment rates. New Jersey and Indiana are close.

Five states and D.C. set new series record highs: California, South Carolina, Florida, Georgia and North Carolina. Two other states tied series highs: Nevada and Rhode Island.

by Calculated Risk on 3/10/2010 07:25:00 AM

The MBA reports: Purchase Applications Increase in Latest MBA Weekly Survey

The Market Composite Index, a measure of mortgage loan application volume, increased 0.5 percent on a seasonally adjusted basis from one week earlier. ...

The Refinance Index decreased 1.5 percent the previous week and the seasonally adjusted Purchase Index increased 5.7 percent from one week earlier. ...

The refinance share of mortgage activity decreased to 67.2 percent of total applications from 69.1 percent the previous week. The refinance share is at its lowest level since it was 66.1 percent in October 2009. ...

The average contract interest rate for 30-year fixed-rate mortgages increased to 5.01 percent from 4.95 percent, with points decreasing to 0.82 from 0.99 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.

Click on graph for larger image in new window.

This graph shows the MBA Purchase Index and four week moving average since 1990.

Even with the increase in purchase applications this week, the 4 week average is still at the levels of 1997.

Also, with mortgage rates slightly above 5% again, refinance activity decreased last week.

by Calculated Risk on 3/09/2010 10:39:00 PM

From Shahien Nasiripour at the Huffington Post: Obama Foreclosure-Prevention Plan Lagging, New Data Shows

Only about a third of the homeowners who have successfully completed the trial period of the Obama administration's mortgage modification program have been offered permanent relief, according to new federal data obtained by the Huffington Post.

The conversion rate -- about 33 percent -- is woefully short of what the Treasury Department had forecast. ...

The new data was contained in a series of answers by Treasury Secretary Timothy Geithner to questions posed by Neiman and his colleagues on COP, including Harvard Law professor and bailout watchdog Elizabeth Warren.

"As of the end of January there were over 116,000 permanent modifications and over 67,000 permanent modifications pending final approval," Geithner wrote in his letter, which the panel received last week. "This group of approximately 180,000 permanent and pending permanent modifications represents about a third of the population of total modifications who have completed the trial modification and are at a point in the process where they are able to convert to permanent."

No real surprise - there is much more in the article including some interesting comments about a possible principal reduction program.

The HAMP report for February will probably be released late next week, and the numbers will be closely scrutinized.

by Calculated Risk on 3/09/2010 06:49:00 PM

A couple of articles about vacant or near vacant high rise condo towers in Florida ...

From the News-Press: Sole occupant of 32-story Fort Myers condo wants out (ht several)

Victor Vangelakos is the only buyer to take possession of his unit in the 32-story Tower 1 of the Oasis high-rise project in downtown Fort Myers.

Apparently the original plan was to build 5 towers with a total of 1,079 units. That is about 216 units per tower, and all but one unit are vacant in Tower 1. Tower 2 appears to have few lights on too.

And from the WSJ on the 850-unit Everglades project in Miami: BofA Lawyers Rebuked in Cabi Case

Only 109 or about 13% of the Everglades' 850 units have sold, according to CondoVultures.com. However, as of last month, the developer has rented about 260, or about 30%, of the units, in what it calls a "deferred purchase program."

That sounds like another 480 vacant units.

Many of these high rise condo towers are part of the "shadow inventory" because the units do not show up on either the new home sales or existing home sales reports (unless they are listed in the MLS). For some areas - like South Florida and Las Vegas - this is a significant part of the inventory.

by Calculated Risk on 3/09/2010 03:28:00 PM

One of the important points NY Fed VP Brian Sack made in his speech yesterday was the need for clear communication:

[T]his tightening cycle, when it arrives, will be more complicated than past cycles, as there will be more decision points facing policymakers. With more decision points come more opportunities for the markets to be confused by our actions. The recent changes to the discount rate and the Treasury's Supplementary Financing Program balances highlight this concern, as the amount of attention that those actions received was outsized relative to their significance for the economy or for the path of short-term interest rates.

The burden is on the Fed to mitigate this risk by communicating clearly about its policy intentions and the purpose of any operational moves it might take. In this regard, the forward-looking policy language that the FOMC is currently using in its statement is important. I would argue that this language contains much more direct and valuable information about the likely path of the short-term interest rate target than does any decision about draining reserves.

Sack singled out two recent releases that he believes were misunderstood.

The first was the change to the Discount Rate on February 18th. I think that release was very clear and it was released after the market closed. The increase in the discount rate had been expected, but the timing was a little surprising since the FOMC has trained participants that inter-meeting announcements are special.

Brian Sack suggests the FOMC should communicate "clearly about its policy intentions and the purpose of any operational moves it might take". Clearly the Fed could have done better, if, as Sack suggests, they had included a few sentences in the FOMC statement released a few weeks earlier and mentioned the possibility of this move.

Still any "outsized" attention was probably from people who didn't read the release (I'm not sure how to fix that problem).

The other announcement that Sack highlighted was from Treasury on the Supplementary Financing Program:

The U.S. Department of Treasury today issued the following statement on the Supplementary Financing Program (SFP):

"Treasury anticipates that the balance in the Treasury's Supplementary Financing Account will increase from its current level of $5 billion to $200 billion. This will restore the SFP back to the level maintained between February and September 2009.

This action will be completed over the next two months in the form of eight $25 billion, 56-day SFP bills. Starting tomorrow, SFP auctions will be held each Wednesday at 11:30 a.m. EST, unless otherwise noted."

That was it.

Although I got that one right, is it any wonder that some people were confused by this statement? Why not expand and explain why this action was being taken?

It was a considered a positive step when the Treasury started to unwind the SFP, and here they are expanding it again without explanation.

Brian Sack argued the burden is on the Fed to communicate clearly and explain the reasons behind each action. I agree. And I'd suggest the burden is also on Treasury.

by Calculated Risk on 3/09/2010 12:50:00 PM

A few factoids from Michael Fletcher and Dana Hedgpeth at the WaPo: Are unemployment benefits no longer temporary?

About 11.4 million out-of-work people now collect unemployment compensation, at a cost of $10 billion a month. Half of them have been receiving payments for more than six months ...

States determine the amount of the benefits, but they average 36 percent of the average weekly wage, according to the National Employment Law Center.

Nearly two-thirds of the jobless collect unemployment benefits, which go only to those who have earned a certain amount of money in the previous year, and who lost their jobs through no fault of their own.

Note: The suggestion mentioned in the article that the unemployment rate is high because of unemployment benefits is off point: See Krugman's Supply, Demand, and Unemployment

Another important benefit of unemployment insurance is that the benefits have helped keep many households in place. If there were no extended benefits, many of the 5+ million people now receiving extended benefits would be moving out of their homes or apartments, and doubling up with friends and relatives, or living in their cars or worse. Fewer households would increase the number of excess vacant housing units in the U.S. and exacerbate the housing crisis.