by Calculated Risk on 6/13/2005 12:04:00 AM

In today's post on Angry Bear, I looked at the impact of the strong Euro on the US trade deficit with the European Union: "The Euro and the Trade Deficit".

Also, Greg Ip has an excellent article on housing in the WSJ today: "What Happens If Real Estate Goes Bust". A couple of excerpts:

If housing prices do fall, what would it mean for the economy? "A housing bust would be worse [than the stock bust]," says Kenneth Rogoff, an economics professor at Harvard University and former chief economist at the International Monetary Fund.

And these interesting statistics:

Homes are collateral for about $7.7 trillion in mortgage and home-equity debt, whereas total margin debt in investors' stock brokerage accounts is only $194 billion. For the same reason, a decline in housing prices would put more bank loans at risk; mortgages make up 40% of the assets of U.S. commercial banks, mortgage-backed securities another 16% and stocks less than 1%.

UPDATE: Oops, I forgot the "more" in the title. That can wait for another post!

Best to all!

by Calculated Risk on 6/12/2005 01:20:00 AM

Just a headsup. Dr. Leamer will present his quarterly forecast on June 21st. It sounds like the housing bubble will be the main topic. The UCLA Anderson forecast is typically one of the most accurate.

I'm confident there will be substantial news coverage.



JUNE 2005 ECONOMIC OUTLOOK
What Goes Up Might Come Down
How Long Can This Hot Housing Market Last?
UCLA - Ackerman Grand Ballroom
Tuesday, June 21, 2005
7:00am - 11:30am

Overview
The current level of hype about real estate bears a worrisome resemblance to the dot.com bubble of the late nineties. Financial companies tout no-money-down interest-only loans as a way of extending speculators' purchasing power, and developers pitch new developments to buyers the way Wall Street analysts used to pitch new IPOs. According to the National Association of Realtors, over a third of total sales in 2004 were to families buying a second home--most for 'investment' purposes.

While housing activity levels are still high from a historical perspective, there are signs that the market is starting to slow. Appreciation rates and sales rates have peaked, and some markets have seen a rapid increase in inventory levels. The recent Fed warning regarding inflation has sent mortgage rates up.

How long can this market last? Are we in for a soft landing or a crash? Who is likely to be left holding the bag when the smoke clears? These are the questions --among many others--about the California and National housing markets that we will attempt to answer at the Conference.

by Calculated Risk on 6/11/2005 12:06:00 PM

From the Sacramento Bee: "More houses 'for sale' a sign of market chill?" A few excerpts:

The number of capital region homes on the market has risen to its highest level since November 2001, suggesting the market might be seeing the first signs of cooling.

So inventories are climbing.

"Inventory is up because of the psychological effect of the media reporting on the 'bubble,' " said Jeff Culbertson, who heads Coldwell Banker's capital region operations, of the barrage of news on a possible price bubble in housing. "Some of those people (investors) bought those properties two years ago and have seen a 50 percent increase in value. A lot of them are saying, 'I rode this up, and maybe I'll relocate my equity someplace else now.' "

And from Analyst Pat Veling, president of Real Data Strategies Inc. on inventories:

"I'm surprised it's happening in the (prime) home buying and selling season, but we need to cool the market's jets a bit because it's going far too far, and far too fast, and we don't want the market to collapse under its own weight like it did in the early 1990s."

But this could just be a one month anomaly.

Last fall the number of homes for sale in some Southern California markets shot up as sales dropped, causing some to conclude a downturn had begun. Since then, sales have picked up and inventory remains relatively low amid rising prices.

So it is too early to tell. But this quote is funny:

"It's too early to panic, for sure," said housing analyst Greg Paquin, president of the Folsom-based Gregory Group.

I hope Mr. Paquin lets us know when it is time to "panic"!

by Calculated Risk on 6/11/2005 01:11:00 AM

This month I started to build a simple model to project the trade deficit. I didn't make as much progress as I had hoped, but the first two components (oil imports and China) were somewhat close.

First, I projected oil imports. And then I projected the trade deficit with China.

My model projected $19.3 B Not Seasonally Adjusted (NSA) in energy related petroleum product imports. The actual number was $18.94 B (see Exhibit 17). This is an error of just under 2%.

For the trade balance with China, my model projected a deficit of $15.1B. The actual number (see Exhibit 14) was $14.7B or an error of 2.7%.

Here are each of the components and how the model performed:

ITEM	Projection	Actual	Error
US Exports to China	$3.4B	$3.4B	0
US Imports from China	$18.5B	$18.12B	2.1%
US Trade Deficit: China	$15.1B	$14.7B	2.7%
Oil: Contract Price BBL	$45.70	$44.76	2.1%
Oil: BBLs Crude	328.6M	313.8M	4.7%
Oil: Price Other BBL	$52.56	$50.77	3.5%
Oil: BBLs Other	82M	96.5M	15%
ERPP Total NSA	$19.3B	$18.94B	1.9%

UPDATE: I found an error in the oil model. I used 31 days for April to estimate the quantity of Crude. The actual Q(crude) should have been 318 million BBL, or an error of 1.3% (instead of 4.7%). The overall oil imports projection should have been $18.83B vs. actual of $18.94B. That is a dumb error!

I didn't have a good method for estimating "Other" energy related petroleum products. As I wrote: "The good news is that the larger percentage errors for "Other" are not very important for the overall ERPP."

There is much more to do!

by Calculated Risk on 6/10/2005 02:09:00 PM

MSNBC provides a table from LoanPerformance of interest only mortgages as a share of total mortgages for the 50 largest metro areas in 2004. Apparently many of these loans are both Interest Only (IO) and Adjustable Rate Mortgages (ARMs). As MSNBC cautioned:

"... borrowers may be able to buy a more expensive house than they might otherwise afford.

Trouble is, when borrowers do have to start making principal payments -- after anywhere from 2 years to 10 years -- the monthly payment could jump by up to 50%, or even more if the index for the adjustable rate rises as well."

MSNBC also quoted some recent data from BusinessWeek:

BusinessWeek Online has also obtained new data from Fannie Mae and Freddie Mac that lend credence to the LoanPerformance numbers. They show that, in April, going by dollar volume, interest-only loans accounted for 35% of the adjustable-rate mortgages in securities sold by Fannie Mae and 39% of the adjustable-rate loans in securities sold by Freddie Mac. That represents a sharp increase for both giants, which buy mortgages from lenders and then repackage them as securities for sale to investors.

As recently as January, 2004, only 10% of adjustable-rate mortgages in securities sold by Fannie classified as interest-only.

Yesterday Kash looked at the percentage of ARMs and suggested that it appears

"... people have decided to pay more for their house than they can afford with a fixed-rate mortgage."

And he concluded that

"we shouldn't find it surprising if millions of recent home buyers soon find themselves unable to afford to live in their own houses."

It is no surprise that a bubble state metro area like San Diego is at the top of the list. But, as a recent story noted, Georgia leads the nation in IOs. That seems unusual.

Interest-Only Loans Across the U.S. Metro Area Interest-Only Mortgages As Share of Total, 2004

San Diego 47.6%

Atlanta 45.5%

San Francisco 45.3%

Denver 43.4%

Oakland 43.1%

See table for next 45 metro areas: MSNBC article.