by Calculated Risk on 3/01/2006 01:14:00 AM

The Washington Post reports: Fed Official Warns of Changes

A top Federal Reserve official warned yesterday that the U.S. financial system is evolving faster than the ability of investors, lenders and regulators to evaluate and manage the risks involved.

... he said, "there are aspects of the latest changes in financial innovation that could increase systemic risk" -- the danger that the losses of a few investors could set off a chain reaction of events that disrupts the broader financial system, as did the near-collapse of a heavily leveraged hedge fund in 1998.
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"The complexity of many new instruments and the relative immaturity of the various approaches used to measure the risks in those exposures magnify the uncertainty involved," he said.
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Many analysts have worried that the Fed's success in managing ... financial crisis ... during Alan Greenspan's 18-year tenure as Fed chairman have lulled many investors into underestimating financial risks.
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Geithner said recent financial innovations have helped the economy absorb various financial shocks, "but they have not eliminated risk." He added, "They have not eliminated the possibility of failure of a major financial intermediary. And they cannot fully insulate the broader financial system from the effects of such a failure."

Geithner's speech: Risk Management Challenges in the U.S. Financial System

by Calculated Risk on 2/28/2006 12:39:00 AM

Standard Pacific reported declining year over year New Home Orders Through February 26.

New home orders companywide for the year-to-date period ended February 26, 2006, excluding joint ventures, were down 13% from the level achieved a year ago. The overall decline in orders resulted from the slowing of demand in some of our markets from the unsustainable pace of the past few years, a trend that we began to experience in the fourth quarter of last year. This slowing of sales activity is particularly evident in markets which have experienced significant price increases and investor-driven demand in recent years, such as California and Florida.

New home orders were down 24% year over year in Southern California on a 29% increase in active selling communities. The lower level of sales activity in Southern California was due to: (1) a softening in buyer demand, most notably in San Diego and, to a lesser degree, in Orange County, (2) reduced product availability, particularly in our Los Angeles division, and (3) an increase in the cancellation rate. New orders were up, however, year over year in the Inland Empire, our largest and most affordable division in the region.

In Northern California, new home sales were down 60% on a 12% lower active community count. The year-over-year decrease in new home orders during the period reflected a slowdown in order activity which began in the latter half of 2005 from the robust pace experienced in 2004 and the first half of 2005, combined with a reduction in the number of active selling communities. The decrease in community count is particularly pronounced in our South Bay division where we experienced rapid sellouts in 2004 and 2005, and where a number of our new projects are targeted for 2006. While the Company saw a noticeable slowing of demand in Sacramento in the second half of 2005, orders for the year-to-date period ended February 26, 2006 were up slightly compared to the year earlier period.

New home orders were down 37% in Florida on a 12% decrease in community count. A number of factors contributed to the year-over-year decrease in Florida order activity: (1) reduced product availability in certain divisions, particularly in Orlando and Jacksonville, (2) a softening in buyer demand, most notably in South Florida and Southwest Florida, (3) continued intentional slowing of orders to better align production and sales, particularly in Tampa, and (4) a modest increase in the cancellation rate. The Company has 73% of its 2006 targeted deliveries for the state in its backlog or closed as of February 26, 2006.
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The Company's cancellation rate for the year-to-date period ended February 26, 2006 was 26%, up from the year earlier rate of 18%.

by Calculated Risk on 2/27/2006 10:26:00 AM

UPDATE: For more on housing, please see my Angry Bear post: Slowing, but Not Crashing.

According to the Census Bureau report, New Home Sales in January were at a seasonally adjusted annual rate of 1.233 million. December's sales were revised upwards slightly to 1.298 million.


Click on Graph for larger image.

NOTE: The graph starts at 700 thousand units per month to better show monthly variation.



The Not Seasonally Adjusted monthly rate was 93,000 New Homes sold, slightly higher than the 89,000 in December.

On a year over year basis, January 2006 sales were 1% higher than January 2005.



The median and average sales prices are steady.

The median sales price of new houses sold in January 2006 was $238,100; the average sales price was $291,600.



The seasonally adjusted estimate of new houses for sale at the end of January was 528,000. This represents a supply of 5.2 months at the current sales rate.

The 528,000 units of inventory is another all time record for new houses for sale. On a months of supply basis, inventory is above the level of recent years.

This report is still reasonably strong, except for the record inventory and months of inventory.

by Calculated Risk on 2/26/2006 06:03:00 PM

Merril Lynch economist David Rosenberg discusses (pdf): Reassessing Hard Landing Risks

... I’d just like to go through briefly what I took away from a week-long marketing swing through Europe last week, because everywhere I went, I was greeted with these five macro beliefs, or what I call major macro misperceptions:

(i) that the U.S. economy is booming;

(ii) the consumer is going to remain underpinned by record wealth even as the Fed raises rates and the housing market slows;

(iii) that high-end retailing stocks will be safe because the ‘well off’ homeowner did not play a role in the housing boom;

(iv) interest rates are still far too low to generate any weakness in the economy;

(v) the tight labor market is on the precipice of triggering wage inflation, and therefore the Fed has much more to do.

See the link for Rosenberg's discussion and many interesting graphs. Here are his comments on the US consumer:

Misperception #2 – "don’t worry about the consumer; the level of household net worth is at a record high."

We heard that all the time, household net worth is over $50 trillion, and the level of bank deposits and money market fund holdings, are at record highs and somehow this accumulated savings will keep the consumer afloat even if the Fed tightens further. Well, we went back into the history books and found that U.S. household net worth hit a RECORD level in the quarter before every recession in the post-war era. Not only that, but in every recession outside of the 2001 episode when the equity market melted, household net worth rose throughout the entire period of negative GDP growth. So basically, net worth goes up before, during and after recessions, and it would make sense that with personal income setting new records practically every quarter, that the level of savings would too. In other words, the level of net worth is a pretty useless leading economic indicator, and the notion that households will draw down their level of savings – savings hopefully intended to fund retirement – to satisfy current consumption instead sounds pretty spurious to me.

by Calculated Risk on 2/24/2006 07:26:00 PM

CNN Money reports: Cancelled home orders: Latest bubble prick?

Home builders are growing concerned about an increasing number of cancelled new home orders, which experts say could be a sign of an underlying weakness in the recent run in home prices.

Specifically, the cancelled orders could be the latest warning sign that buyers who were turning to real estate as an investment, rather than for their own housing needs, are shifting out of real estate. And that could mean that in many hot markets, the air is about to come out of over-inflated real home prices overall.

A survey recently conducted by the National Association of Home Builders of its members found one in 5 reporting more cancellations than six months ago, with 4 percent of the overall group saying the increase in cancellations has been significant.

"One in 5" and "4 percent ... saying increase ... has been significant" doesn't seem too ominous. And so far, most cancellations are not job related:

... only 15 percent citing job losses by buyers as a cause for the cancellations. The survey, which allowed the builders to cite more than one cause for cancellations, found 45 percent saying it was due to a buyer's inability to sell their existing home and a third citing the buyers not being able to qualify for financing at a time of rising mortgage rates.

But Seiders and others say a big concern is a factor not cited on the survey, the fear that cancellations are being driven by real estate investors who were ordering new homes with the intention of selling them quickly in a hot real estate market. And Seiders said many of the 72 percent of those surveyed not yet reporting an increase in cancellations are already worried.

If its really speculators that are cancelling orders that is probably healthy for the housing market over the next few years.