by Calculated Risk on 7/21/2005 02:04:00 PM

Federal Reserve minutes for June. Here are some excerpts on housing:

At this meeting the Committee reviewed and discussed staff presentations on the topic of housing valuations and monetary policy. Prices of houses in the United States had risen sharply in recent years, especially in certain areas of the country, to very high levels relative to incomes or rents. In addition to local market factors, a wide range of influences appeared to be supporting home prices, including solid gains in disposable income, low mortgage rates, and financial innovation in the residential mortgage market. Prices might be somewhat above the levels consistent with these underlying factors, but measuring the extent of any overvaluation either nationally or in regional markets posed considerable conceptual and statistical difficulties. Meeting participants noted that the rise in house prices had been accompanied by a modest shift toward potentially riskier types of mortgages, including adjustable-rate and interest-only loans, which could pose challenges to both lenders and borrowers. Nonetheless, financial institutions generally remained in a comfortable capital position, such loans had performed well thus far, much of the associated risk had been transferred to other investors through securitization, and valuations had risen more rapidly than mortgage debt on average--so that loan-to-value ratios had fallen.

Activity in the housing sector remained robust. Single-family starts averaged more than 1.65 million units at an annual rate in April and May, not much below the very strong first-quarter pace. Sales of both new and existing homes remained at a high level in May. While prices of existing homes continued to increase rapidly, new home prices showed signs of decelerating. Available indicators suggested that, with the ongoing support of low mortgage rates, the housing sector remained strong in June.

With regard to any role for monetary policy in responding to possible imbalances in housing or bond markets, meeting participants stressed the importance of the pursuit of their core objectives of price stability and maximum sustainable economic growth. To the extent that an asset price movement threatened the achievement of those objectives, it would of course be taken into consideration in setting policy. However, given the unavoidable uncertainties associated with judgments regarding the appropriate level of and likely future movements in asset prices, a strategy of responding more directly to possible mispricing was seen as very unlikely to contribute, on balance, to the achievement of the Committee's objectives over time.

My interpretation: "There is a problem. There is nothing we can do." This is eerily reminiscent of minutes from the FED in late '99 concerning the NASDAQ.

by Calculated Risk on 7/20/2005 12:23:00 PM

Testimony of Chairman Alan Greenspan July 20, 2005. A short housing excerpt:

... they suggest that risk takers have been encouraged by a perceived increase in economic stability to reach out to more distant time horizons. These actions have been accompanied by significant declines in measures of expected volatility in equity and credit markets inferred from prices of stock and bond options and narrow credit risk premiums. History cautions that long periods of relative stability often engender unrealistic expectations of its permanence and, at times, may lead to financial excess and economic stress.

Such perceptions, many observers believe, are contributing to the boom in home prices and creating some associated risks. And, certainly, the exceptionally low interest rates on ten-year Treasury notes, and hence on home mortgages, have been a major factor in the recent surge of homebuilding, home turnover, and particularly in the steep climb in home prices. Whether home prices on average for the nation as a whole are overvalued relative to underlying determinants is difficult to ascertain, but there do appear to be, at a minimum, signs of froth in some local markets where home prices seem to have risen to unsustainable levels. Among other indicators, the significant rise in purchases of homes for investment since 2001 seems to have charged some regional markets with speculative fervor.

The apparent froth in housing markets appears to have interacted with evolving practices in mortgage markets. The increase in the prevalence of interest-only loans and the introduction of more-exotic forms of adjustable-rate mortgages are developments of particular concern. To be sure, these financing vehicles have their appropriate uses. But some households may be employing these instruments to purchase homes that would otherwise be unaffordable, and consequently their use could be adding to pressures in the housing market. Moreover, these contracts may leave some mortgagors vulnerable to adverse events. It is important that lenders fully appreciate the risk that some households may have trouble meeting monthly payments as interest rates and the macroeconomic climate change.

The U.S. economy has weathered such episodes before without experiencing significant declines in the national average level of home prices. Nevertheless, we certainly cannot rule out declines in home prices, especially in some local markets. If declines were to occur, they likely would be accompanied by some economic stress, though the macroeconomic implications need not be substantial. Nationwide banking and widespread securitization of mortgages make financial intermediation less likely to be impaired than it was in some previous episodes of regional house-price correction. Moreover, a decline in the national housing price level would need to be substantial to trigger a significant rise in foreclosures, because the vast majority of homeowners have built up substantial equity in their homes despite large mortgage-market-financed withdrawals of home equity in recent years.

Historically, it has been rising real long-term interest rates that have restrained the pace of residential building and have suppressed existing home sales, high levels of which have been the major contributor to the home equity extraction that arguably has financed a noticeable share of personal consumption expenditures and home modernization outlays.

by Calculated Risk on 7/19/2005 08:35:00 PM

The Port of Los Angeles released their June statistics today. Inbound (loaded containers) was 335 thousand compared to 313 thousand in May - an increase of 7%.

Outbound volume was 97 thousand loaded containers vs. 105 thousand for May. This is an 8% decline from May.

Port of Long Beach statistics correlate better with imports from China, but I can't overlook the strong import performance / weak export performance for the Port of Los Angeles.

This may indicate a stronger than expected June trade deficit and possibly a larger deficit with Japan.

by Calculated Risk on 7/19/2005 07:10:00 PM

An American Express economist is predicting that the US housing bubble [is] expected to spread according to the Financial Times.

"...the current bubble, which was already larger than the last one, is likely to grow - and spread even further - said John Calverley, chief economist at American Express, the financial services group.

The boom in US house prices has started later than in other countries such as the UK, Australia, the Netherlands and Spain. However, figures suggest that it is catching up fast."

See Dr. Setser's comments on the Netherlands.

"...Mr Calverley warned that the boom had definitely become a bubble. The giveaway signs included excitement in the media and new lending policies from banks.

People were borrowing as much as they could because they expected prices would only go up. Meanwhile, new entrepreneurs were springing up offering property advice or “condo flipping”, when flats are bought off-plan and sold as quickly as possible.

A swift end to the phenomenon was unlikely unless interest rates rose significantly. Instead, the US could expect an expansion of the bubble and an even harder landing, predicted Mr Calverley ..."

by Calculated Risk on 7/18/2005 07:51:00 PM

UPDATE: Bay Area: Near Record Sales, New Price Peak

DataQuick reports: Southland Real Estate Market Hits New Highs

Both sales counts and prices reached new highs in Southern California last month. While appreciation continued to ease back, a new price peak was reached in each of the Southland counties.

All Homes Sold	June-04	June-05	Pct.Chg
Los Angeles	11,673	12,001	2.8%
Orange County	4,749	4,898	3.1%
San Diego	6,208	5,663	-8.8%
Riverside	6,343	6,485	2.2%
San Bernardino	4,292	4,700	9.5%
Ventura	1,466	1,707	16.4%
TOTAL SoCal	34,731	35,454	2.1%

Median Home Price	June-04	June-05	Pct.Chg
Los Angeles	$414K	$475K	14.7%
Orange County	$540K	$603K	11.7%
San Diego	$464K	$493K	6.3%
Riverside	$319K	$393K	23.2%
San Bernardino	$246K	$322K	30.9%
Ventura	$500K	$584K	16.8%
TOTAL SoCal	$406K	$465K	14.5%