by Calculated Risk on 8/30/2007 08:45:00 PM

From Reuters: Moody's president sees unprecedented illiquidity (hat tip Viv)

The credit market is experiencing an unprecedented loss of confidence due to the lack of transparency over where exposures lie rather than underlying credit quality problems, Moody's Investors Service President Brian Clarkson said on Thursday.

"I've been in the marketplace for 20 years ... what we're experiencing is an extreme lack of confidence and lack of liquidity. I have never seen this before," Clarkson told Reuters in an interview. "A lot of it has to do with transparency: it's not clear who owns what."

As an aside, watch for layoffs on Wall Street next week:

"Everyone in New York is expecting to hear about more job cuts in September. There'll be a wave of them."

by Calculated Risk on 8/30/2007 05:30:00 PM

UPDATE: Changed 2nd graph to make the price change clearer (hopefully). Original 2nd graph is at the bottom. Nominal prices in San Diego fell a cumulative 18% in terms in the early '90s.

In an earlier post, I presented some graphs based on the new Goldman Sachs housing forecast. One of the graphs, reproduced below, showed a possible bottom for residential investment (RI) in Q4 2008.

Click on graph for larger image.

To this graph, I added a caveat:

NOTE: Please don't confuse a bottom in RI, with a bottom in housing prices. During previous housing busts, existing home prices continued to fall long after residential investment bottomed.

To clarify this statement, here is a graph showing prices vs. residential investment for the early '90s housing bust. The prices are based on the S&P/Case-Shiller price indices for the U.S. and San Diego. These are nominal prices; for real prices the time lag between the bottom for RI and existing prices would be even longer.

In the '90s housing bust, residential investment (as a percent of GDP) bottomed in Q1 1991.

The bottom for nominal U.S. house prices was in February 1994, about 3 years after the bottom for RI. In real terms (not shown) the bottom was in 1996.

The bottom for nominal San Diego prices was in March 1996, five years after the bottom in RI.

Note: Original graph.

This is the typical pattern for housing busts, and it is because prices tend to be sticky and don't adjust immediately to the market clearing price. It's important to remember that a bottom in RI will probably precede a bottom in existing home prices by a few years.

by Anonymous on 8/30/2007 03:50:00 PM

This is the slide presentation from Freddie's Q02 conference call this morning; there's some interesting data on the credit quality of the loan portfolio. I have not yet seen a link to a transcript of the call. If you want to listen to a recording, it's available here.

by Calculated Risk on 8/30/2007 01:28:00 PM

From Rex Nutting at MarketWatch: Commercial paper market still shrinking

Outstanding commercial paper in the U.S. financial system dropped sharply for a third straight week, indicating that a severe credit crunch has not eased in the market that supplies most large companies with operating funds.

Outstanding paper fell by $62.8 billion, or 3.1%, in the week ending Wednesday to $1.98 trillion, bringing the total decline in the past three weeks to $244 billion, or 11%, the Federal Reserve reported Wednesday.

Commercial paper consists of short-term promissory notes issued by corporations to raise cash for their operational needs. Most of the paper has maturities between 30 days and 270 days; anything longer than that requires a registration statement with the Securities and Exchange Commission.

An estimated $1 trillion in commercial paper will mature in the next few months. ...
...
The declines in outstanding paper have been felt strongest in the asset-backed portion of the market, which represents about half of all commercial paper. These securities are backed by assets such as credit-card receivables or mortgages. In the latest week, asset-backed paper fell by $59.4 billion, or 5.6%. In the past three weeks, this kind of paper has fallen by $184.9 billion, or 15.6%.

by Calculated Risk on 8/30/2007 12:12:00 PM

Last night, I posted the current Goldman Sachs housing forecast.

A frequently asked question is why starts are forecast to be higher than new home sales. New Home sales come from a subset of housing starts. Housing starts also include owner built units, rental apartments, and other units that would still not be included, if sold, in the New Home sales report.

The new home sales estimate reported by the Census Bureau includes only new single-family residential structures that include both the structure and the land. The Census Bureau defines single-family homes as either fully detached structures or certain attached homes with an unbroken ground-to-roof separating wall. This definition includes some condominiums (side by side units), but does not include condominium units with another unit above or below. Starts for large multi-story condominium projects are included in the housing starts report, but sales and inventory are not included in the New Home sales report.

Just remember that new home sales come from a subset of housing starts. Working through the numbers, the Goldman Sachs forecast for starts to fall to 1.1 million units SAAR, and new home sales to fall to 0.650 million units SAAR is logically consistent, and consistent with historical data.

The following two graphs show the Goldman Sachs forecast for residential investment (RI) and new home sales.

Click on graph for larger image.

The GS forecast is given as a percent change in RI. This graph converts that forecast into RI as a percent of GDP (with some added assumptions about GDP).

The GS forecast is for another significant downturn in residential investment, and their forecast takes RI as a percent of GDP close to or below 4%, similar to previous housing downturns. GS is currently forecasting RI to bottom in Q4 '08. This is similar to my current view.

NOTE: Please don't confuse a bottom in RI, with a bottom in housing prices. During previous housing busts, existing home prices continued to fall long after residential investment bottomed.

The second graph shows Goldman Sachs' new home sales forecast through 2008. GS shows sales bottoming at 650K in Q1 and Q2 2008, with a very modest increase towards the end of '08.

No wonder the home builders will be meeting with Bernanke next week. See: Hovnanian CEO says risk of recession heightened. If these forecasts are accurate, these two graphs spell doom for some home builders.

To see the Goldman Sachs forecasts for prices and existing home sales, see table at bottom of Goldman Sachs Housing Forecast.