by Calculated Risk on 12/14/2007 03:15:00 PM

Via Dow Jones (no link, hat tip Brian): CNBC's Charlie Gasparino, citing unnamed sources inside Merrill's fixed-income department, reported that Merrill's writedowns could be $4 billion to $6 billion more than is currently expected.

by Calculated Risk on 12/14/2007 02:11:00 PM

From Bloomberg: Housing Crash Deepens in 2008 as U.S. Realtors See Record Drop

Analysts at New York-based CreditSights Inc. predict housing won't rebound until ``2009, at best.'' Moody's Economy.com Inc., the economic forecasting unit of Moody's Corp. in New York, says home sales will hit bottom next year, declining 40 percent from their peak.

The peak for existing home sales was 7.076 million in 2005. So 40% off the peak would be 4.246 million units next year.

And from AP: Fannie CEO: housing trouble until 2009

Fannie Mae's CEO [Daniel Mudd] told shareholders Friday he does not expect a housing market recovery until late 2009, "at the earliest" ...

OK, not a specific 2008 forecast, but still interesting.

Here are a few other forecasts:

NAR, Dec 2007:

Existing-home sales are likely to total 5.67 million this year, the fifth highest on record, rising to 5.70 million in 2008, in contrast with 6.48 million in 2006.

From AP:

Patrick Newport, an economist at Global Insight, forecasts that home sales will drop from 5.66 million this year to 4.7 million in 2008

Back in August, Goldman Sachs forecast existing home sales would fall to 4.9 million in 2008. However, since then, Goldman has becoming even more bearish on housing.

To put these numbers in perspective:

Click on graph for larger image.

This graph shows sales as a percent of total owner occupied units. This is a measure of turnover of existing homes.

It appears sales in 2007 will come in at about 7.5% of owner occupied units, well above the long term median of 6%. If sales fall back to the median level, sales will be around 4.5 million in 2008. Note also that usually sales fall below the median level during a housing slowdown.

Here is a table of a few existing home sales forecasts:

Forecaster	Units	Percent of Owner Occupied Units
National Association of Realtors	5.7 million	7.5%
Goldman Sachs (August)	4.9 million	6.5%
Global Insights	4.7 million	6.2%
Moody's Economy.com	4.25 million	5.6%

I'll try to forecast 2008 sales at the end of the year.

by Calculated Risk on 12/14/2007 11:49:00 AM

Update: Also see Krugman's blog: Why negative equity matters

[T]he problem with the markets isn’t just a lack of liquidity — there’s also a fundamental problem of solvency.
Paul Krugman, NY Times, Dec 14, 2007

Paul Krugman writes in the NY Times: After the Money's Gone

First, we had an enormous housing bubble in the middle of this decade. To restore a historically normal ratio of housing prices to rents or incomes, average home prices would have to fall about 30 percent from their current levels.

The WSJ recently had a series of graphs titled: Genesis of a Crisis. Here is the chart of the Price to Rent ratio.

Click on graph for larger image.

This graph is based on a ratio of the OFHEO house price index to personal consumptions on rent. Note: Later today I'll post a graph based on the Case-Shiller index.

As Krugman notes, house prices would have to fall about 30% to bring the Price to Rent ratio back to a more normal ratio.

Krugman:

Second, there was a tremendous amount of borrowing into the bubble, as new home buyers purchased houses with little or no money down, and as people who already owned houses refinanced their mortgages as a way of converting rising home prices into cash.

The Fed recently released the Q3 Flow of Funds report. The report showed that household percent equity was at an all time low of 50.4%.

This graph shows homeowner percent equity since 1954. Even though prices have risen dramatically in recent years, the percent homeowner equity has fallen significantly (because of mortgage equity withdrawal 'MEW'). With prices now falling - and expected to continue to fall - the percent homeowner equity will probably decline rapidly in the coming quarters.

Also note that this percent equity includes all homeowners. Based on the methodology in this post, aggregate percent equity for households with a mortgage has fallen to 33% from 36% at the end of 2006.

Krugman:

As home prices come back down to earth, many of these borrowers will find themselves with negative equity — owing more than their houses are worth. Negative equity, in turn, often leads to foreclosures and big losses for lenders.

And the numbers are huge. The financial blog Calculated Risk, using data from First American CoreLogic, estimates that if home prices fall 20 percent there will be 13.7 million homeowners with negative equity. If prices fall 30 percent, that number would rise to more than 20 million.

That translates into a lot of losses, and explains why liquidity has dried up. What’s going on in the markets isn’t an irrational panic. It’s a wholly rational panic ...

From the post Professor Krugman mentions: Homeowners With Negative Equity

The following graph shows the number of homeowners with no or negative equity, using the most recent First American data, with several different price declines.

At the end of 2006, there were approximately 3.5 million U.S. homeowners with no or negative equity. (approximately 7% of the 51 million household with mortgages).

By the end of 2007, the number will have risen to about 5.6 million.

If prices decline an additional 10% in 2008, the number of homeowners with no equity will rise to 10.7 million.

The last two categories are based on a 20%, and 30%, peak to trough declines. The 20% decline was suggested by MarketWatch chief economist Irwin Kellner (See How low must housing prices go?) and 30% was suggested by Paul Krugman (see What it takes).

As Krugman notes: The current crisis is not a liquidity problem, it is a solvency problem.

by Anonymous on 12/14/2007 10:50:00 AM

BusinessWeek sums it up: "Dog Days at Cerberus."

Here's one for the Things You Have To Read A Couple of Times At Least To Assure Yourself That It's Not Just You File:

Now, say sources close to Cerberus, the $26 billion firm has slowed its pace of dealmaking with the credit crunch in full force. It's also focusing more rigorously on the troubled holdings in its portfolio—some of which may have blindsided the firm. The situation has prompted concern that Cerberus' returns may suffer. This comes at a time when all players are under pressure. "Industry returns have been extraordinary, 20% to 30% a year," says Katharina Lichtner, managing director of the private equity advisory firm Capital Dynamics. "Returns will come down, revert to a more normal 16%."

And what kind of socially redeeming value will Cerberus be adding to the mortgage biz for that perfectly normal 16%?

It's unclear just how much work it will take to fix GMAC, the financing arm of General Motors (GM). A Cerberus-led group paid $14 billion for a 51% stake in September, 2006. Cerberus wasn't exactly an industry newcomer. It had a front row seat at the subprime show with Aegis Mortgage, a lender it took control of in 1996. Yet Cerberus jumped into GMAC at exactly the wrong moment. Price defends the move: "There was one time to buy GMAC. We wanted it and took action."

The short story? Aegis filed for bankruptcy in August, and GMAC's mortgage group ResCap has been bleeding red ink. Cerberus watched GMAC continue to make subprime loans in the first quarter but has since reined it in. It wasn't fast enough to prevent the pain. ResCap has lost $3.4 billion so far this year, forcing GMAC to pump $2 billion into the business to help it survive the mortgage mess. And Lehman Brothers analyst Brian Johnson forecasts an additional $1.3 billion hit this quarter and $600 million in 2008. "I don't think anyone is panicked," says one Cerberus insider. But "we sure as hell didn't expect GMAC to be what it turned out to be."

Those problems may put a kink in the firm's strategy. Cerberus, which also owns 80.1% of struggling automaker Chrysler, wants to merge the lending operations of both companies. By doing so, it could reap massive savings on back office and loan processing operations, boosting returns at both GMAC and Chrysler.

Cut back office at a mortgage servicer. Put people who can service car loans in charge of mortgage loans. That's exactly what we need right now. Dog days at Cerberus, or just doghouse for the rest of us?

Let me just observe that GMAC's mortgage servicing unit was already pretty "stripped down" in its heyday. That was its business model: cheap servicing. I can't wait to see what happens when you make it cheaper.

by Anonymous on 12/14/2007 09:50:00 AM

In case you were paying attention to big news yesterday (yeah, we're lookin' at you, Citi) and missed the RepoBus, don't miss the RepoBus. Tragedy as farce. It always gets there in the end.

I forgot who sent me the link to that article yesterday. So I'll just hat tip everybody, the innocent as well as the guilty. It ought to be a fun day.