by Calculated Risk on 9/29/2009 12:56:00 PM

This following graph compares the Case-Shiller Composite 10 SA index with the Stress Test scenarios from the Treasury (stress test data is estimated from quarterly forecasts).

The Stress Test scenarios use the Composite 10 index and start in December. Here are the numbers:

Case-Shiller Composite 10 Index (SA), July: 154.69

Stress Test Baseline Scenario, July: 147.23

Stress Test More Adverse Scenario, July: 138.14

Unlike with the unemployment rate (worse than both scenarios), house prices are performing better than the the stress test scenarios.

Price-to-Rent

In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

Here is a similar graph through July 2009 using the Case-Shiller Composite Indices (SA):

Click on image for larger graph in new window.

This graph shows the price to rent ratio (January 2000 = 1.0) for the Case-Shiller composite indices. For rents, the national Owners' Equivalent Rent from the BLS is used.

Back in 2004 or 2005, it was obvious that prices were out of line with fundamentals. This was clear in the price-to-income and price-to-rent ratios - and there was also widespread speculation (the definition of a bubble).

Now, looking at the price-to-rent ratio based on the Case-Shiller indices, the adjustment in the price-to-rent ratio is mostly behind us. Although the ratio is still a little high. Note: some would argue the ratio being a little too high is reasonable based on mortgage rates and "affordability".

With rents now falling almost everywhere, a further downward adjustment in house prices seems likely.

by Calculated Risk on 9/29/2009 11:03:00 AM

From the FDIC:

The Board of Directors of the Federal Deposit Insurance Corporation today adopted a Notice of Proposed Rulemaking (NPR) that would require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC estimates that the total prepaid assessments collected would be approximately $45 billion.

MarketWatch has more details: Fund to protect deposits has shrunk to low levels

Absent the prepaid premiums, the FDIC said that the agency's Deposit Insurance Fund ... would face a liquidity crunch early next year, and that it will be operating in the red by the end of this month.

The FDIC said that the prepayments would raise $45 billion for the fund. The board said it estimates that total bank failure losses could reach $100 billion by 2013.
emphasis added

by Calculated Risk on 9/29/2009 10:33:00 AM

Here is a hockey stick graph ...

Click on graph for larger image in new window.

Fannie Mae reported that the serious delinquency rate for conventional loans in its single-family guarantee business increased to 4.17 percent in July, up from 3.94 percent in June - and up from 1.45% in July 2008.

"Includes seriously delinquent conventional single-family loans as a percent of the total number of conventional single-family loans. These rates are based on conventional single-family mortgage loans and exclude reverse mortgages and non-Fannie Mae mortgage securities held in our portfolio."

Just more evidence of some shadow inventory and the next wave of foreclosures.

Update: These stats include Home Affordable Modification Program (HAMP) loans in trial modifications.

by Calculated Risk on 9/29/2009 09:00:00 AM

S&P/Case-Shiller released their monthly Home Price Indices for July this morning.

This monthly data includes prices for 20 individual cities, and two composite indices (10 cities and 20 cities). This is the Seasonally Adjusted data - others report the NSA data.

Click on graph for larger image in new window.

The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 31.6% from the peak, and up about 1.3% in July.

The Composite 20 index is off 30.6% from the peak, and up 1.2% in July.


The second graph shows the Year over year change in both indices.

The Composite 10 is off 12.8% from July 2008.
The Composite 20 is off 11.5% from last year.

This is still a very strong YoY decline.

The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

Prices increased (SA) in 17 of the 20 Case-Shiller cities in July.

In Las Vegas, house prices have declined 55.2% from the peak. At the other end of the spectrum, prices in Dallas are only off about 4.9% from the peak - and up in 2009. Prices have declined by double digits almost everywhere.

The debate continues - is the price increase because of the seasonal mix (distressed sales vs. non-distressed sales), the impact of the first-time home buyer frenzy on prices, and the slowdown in the foreclosure process (with a huge shadow inventory), or have prices actually bottomed? I think we will see further house price declines in many areas.

I'll compare house prices to the stress test scenarios soon.

by Calculated Risk on 9/28/2009 11:14:00 PM

Here are some unintended consequences ...

According to the NAR, the "first-time" homebuyer tax credit will lead to an additional 350 thousand homes sold in 2009. As I've mentioned before, this tax credit is inefficient and poorly targeted, costing taxpayers about $43,000 for each additional home sold.

And where are those 350 thousand buyers coming from? My guess is most were probably renters (a few might have been living in their parent's basements!).

Click on graph for larger image in new window.

And what will be the impact on the rental vacancy rate?

The rental vacancy rate was already at a record 10.6% in Q2 2009. Some quick math suggests the tax credit will push the national vacancy rate above 11% soon.

And that means even more pressure on rents (rents are already falling). This is good news for renters, but this will also lead to more apartment defaults, higher default rates for apartment CMBS, and more losses for small and regional banks.

And falling rents are already pushing down owners' equivalent rent (OER), and my guess is OER will probably turn negative soon. Since OER is the largest component of CPI (and almost 40% of core CPI), this will push down CPI for some time.

Extend the tax credit and we might be looking at the core CPI showing deflation. Welcome to the Fed's nightmare.