by Calculated Risk on 2/26/2009 04:22:00 PM

Yesterday I posted two graphs based on the Capital Assistance Program house price scenarios. The first graph was the change in nominal house prices, and the second was a house price-to-rent ratio (assuming rents are flat for the next two years).

But what if rents decline?

Here is a story from the Guardian in the UK: Steep fall in rents as unsold homes flood the market

A glut of unsold properties hitting the ­lettings market since the beginning of the year has pushed rents down by as much as 25% across Britain.
...
Average rents dropped to £795 a month in February compared to £950 in May last year, a fall of 16.3%, according to property search engine Globrix ...

It estimates that the number of new properties for let has jumped by 88% over the past year, with the biggest increase occurring since the start of 2009.

... FindaProperty said that the number of rental properties advertised on its site almost doubled between September 2008 and February 2009 ... average rental prices fell from £872 a month last year to £830 in February this year, and that landlords are offering lures such as free satellite TV and free weekly cleaner in a desperate attempt to secure new tenants.

Rents are declining in the U.S. too, although this hasn't shown up in the BLS' Owners Equivalent Rent.

Here is a graph that shows the price-to-rent ratio under three rent scenarios (using the "more severe" economic scenario). House prices are based on the Composite 10 index (used by Treasury) and are assumed to decline 22% in 2009 and 7% in 2010 under the "more severe" scenario.

Click on graph for larger image in new window.

This shows three scenarios for rents in the U.S. over the next two years: Flat, a 10% decline in rents, and a 25% decline in rents.

As I noted yesterday, with the "more severe" scenario and flat rents, the price-to-rent ratio will be slightly below the normal range. If rents fall 10%, this metric would be in the normal range, and with a 25% decline in rents house prices would be too high.

With the largest bubble in history, I'd expect house prices to overshoot and the price-to-rent ratio to decline to the bottom of the normal range. This suggests even a 10% decline in rents would make the "more severe" scenario too mild.

by Calculated Risk on 2/26/2009 03:25:00 PM

The FDIC released the Quarterly Banking Profile for Q4 today. Here is an excerpt from the FDIC press release:

Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported a net loss of $26.2 billion in the fourth quarter of 2008, a decline of $27.8 billion from the $575 million that the industry earned in the fourth quarter of 2007 and the first quarterly loss since 1990. Rising loan-loss provisions, losses from trading activities and goodwill write-downs all contributed to the quarterly net loss as banks continue to repair their balance sheets in order to return to profitability in future periods.
...
The FDIC's "Problem List" grew during the quarter from 171 to 252 institutions, the largest number since the middle of 1995. Total assets of problem institutions increased from $115.6 billion to $159 billion.
emphasis added

It is going to be a busy year for the FDIC.

by Calculated Risk on 2/26/2009 02:37:00 PM

From Bloomberg: AIG Rescue May Include Credit-Default Swap Backstop

American International Group Inc. may get a backstop from the U.S. to protect against further losses on credit-default swaps, according to a person familiar with the matter.

The federal guarantees may be included in New York-based AIG’s restructured bailout ...

There you have it.

This will probably be announced Sunday night or Monday morning.

by Calculated Risk on 2/26/2009 12:59:00 PM

From CNBC: Troubled Banks Could Get $250 Billion More in Budget

President Barack Obama penciled into his budget on Thursday the possibility that he may request an additional $250 billion to help fix the troubled U.S. financial system.

The figure, described as a "placeholder" and not a specific funding request, would support asset purchases of $750 billion via government financial stabilization programs, administration officials said.

Any additional request to Congress would come on top of the $700 billion financial bailout program enacted last year ...

"Additional action is likely to be necessary to stabilize the financial system and thereby facilitate economic growth," the White House said in budget documents released on Thursday.

What a surprise ...

by Calculated Risk on 2/26/2009 11:59:00 AM

I'm not talking about Cape Fear Bank, although they just entered into a written agreement with the Fed. Another bank to watch for on Friday afternoons ...

I'm more concerned with the stress tests, and I fear they will be inadequate.

Bloomberg reported today: Moody’s May Downgrade More Subprime-Mortgage Debt

Moody’s Investors Service said it’s reviewing all 2005, 2006 and 2007 subprime-mortgage bonds for credit-rating downgrades, covering debt with $680 billion in original balances.

The review reflects an increase in Moody’s expected losses on the underlying loan pools, the New York-based company said in a statement today. Losses for such mortgages backing 2006 securities will probably reach 28 percent to 32 percent, up from a previous projection of 22 percent, Moody’s said.

The ratings firm said that it boosted expected losses based on “the continued deterioration in home prices, rising loss severities on liquidated loans, persistent elevated default rates, and progressively diminishing prepayment rates.”

This is extremely timely.

I can understand Krugman's Feelings of despair

... Obama and Geithner say things like,

If you underestimate the problem; if you do too little, too late; if you don’t move aggressively enough; if you are not open and honest in trying to assess the true cost of this; then you will face a deeper, long lasting crisis.

But what they’re actually doing is underestimating the problem, doing too little too late, and not being open and honest in trying to assess the true cost.