by Calculated Risk on 6/24/2008 09:36:00 AM

From MarketWatch: Four years of home gains have been wiped out

Home prices in 20 major U.S. cities have dropped a record 15.3% in the past year and are now back to where they were in 2004, according to the Case-Shiller home price index released Tuesday by Standard & Poor's.

Prices in the 20 cities are now down 17.8% from the peak two years ago. The biggest declines were seen in Las Vegas, Miami and Phoenix, with prices falling by 25% or more in the past year. Prices in 10 cities have fallen by more than 10%.

Prices were lower in April than they were a year earlier in all 20 cities tracked by the Case-Shiller index.

Note that the Composite 20 is not the national index, but this show prices are still falling in many areas of the country - and still falling quickly (the Composite 20 fell 1.4% in April alone).

More later on individual cities ...

by Calculated Risk on 6/23/2008 09:30:00 PM

When I first heard of Down-payment Assistance Programs (DAPs), I knew we would see higher default rates on FHA loans. Heck, the IRS has called DAPs a "scam". The FHA has vowed to eliminate DAPs ... and yet, amazingly, the percent of FHA loans using DAPs is still increasing.

DAPs simply will not die.

To understand DAPs in nerdy detail, see Tanta's DAP for UberNerds.

From the WSJ: Government Mortgage Program Fuels Risks

The offers -- including "100% financing" -- are made possible due to down-payment assistance programs run by nonprofit organizations. These programs are funded largely by home builders and also by private homeowners desperate to sell. The seller-funded groups provide enough down-payment money to buyers that they can qualify for a mortgage backed by the Federal Housing Administration, which requires at least a 3% down payment.

These are not real down-payments from disinterested third parties. These programs are designed to have the seller (including home builders) funnel money to the buyer through a "nonprofit" to get around the FHA down-payment requirements. The buyer still has no skin in the game.

The FHA estimates that down payments provided by nonprofit groups account for 34% of all 200,000 loans backed by the FHA so far this year, up from 18% in all of 2003 and less than 2% in 2000. And the agency says that borrowers are two to three times as likely to default on their payments when they receive a down payment from a nonprofit.

D.R. Horton Inc., the nation's largest home builder by volume, is touting "100% financing" for its two- and three-bedroom condominiums near the beach in Maui, Hawaii, which start at $498,000. In the Seattle area, local builder Quadrant Corp. is advertising townhouses that can be purchased with as little as $500 down. "Use your coffee budget to move into a new home," says an online promotion.

Here are some previous posts by Tanta and I about DAPs:

FHA Going After DAP Again? Tanta, June 10, 2008

DAP for UberNerds, Tanta, Oct 19, 2007 **** READ this one for nerdy details! ****

FHA to Ban DAPs, CR, Sept 29, 2007

Housing: IRS Raps DAPs, June 2, 2006

More on Housing, CR, Feb 24, 2005

by Calculated Risk on 6/23/2008 05:17:00 PM

From Bloomberg: UPS Reduces Outlook on Fuel Costs, Slowing Economy

United Parcel Service ... lowered its second- quarter profit forecast because of rising fuel costs and a slowing U.S. economy.
...
UPS said the ``anemic'' U.S. economy was causing customers to cut back on air shipments, its most profitable offering, and that international packages coming into the U.S. were also declining.

Meanwhile from the WSJ: GM Extends Plant Shutdowns, Offers More Sales Incentives

Expanding its efforts to address a steep decline in sales of pickup trucks and sport-utility vehicles, General Motors Corp. plans to extend the summer shutdowns at six plants and to offer more sales incentives to clear its bloated inventory of large vehicles.

by Calculated Risk on 6/23/2008 03:48:00 PM

The Harvard Joint Center for Housing Studies report: "The State of the Nation's Housing 2008" is now online. Unfortunately the table I was really hoping they would update is the House Price to Income ratio by metropolitan statistical areas (MSA).

Here is the excel file from the 2007 report: Metropolitan Area House Price-Income Ratio, 1980-2006

Here is some price-to-income data from the 2007 report (data through 2006). I picked a few random cities and plotted the national average (dashed). Check out the excel file for your MSA.

Click on graph for larger image in new window.

Different areas have different price to income ratios. There are several reasons for this (land restrictions, demographics), but on a national basis, the median price to median income ratio rose from around 3.0 to 4.6 by the end of 2006 (and has probably declined sharply since then). This would suggest that a combination of falling prices and rising incomes would need to adjust this ratio by about 1/3 from peak to trough.

For Los Angeles, it is reasonable to expect the price to income ratio to fall to between 4 and 5 (the historical average). This suggests price at the peak were about twice as high as normal.

Imagine buying a home at 10 times income. With 10% down, and a 6.0% 30 year mortgage, the P&I payments alone (pre-tax) would be about 54% of the homebuyers gross income. Add in taxes, insurance, maintenance and this homeowner is "house poor" from the get go.

And that brings us to table A-7 in the current report. This table shows that 8.8 million owner occupied households dedicate more than 50% of their income to housing in 2006. Another 13.3 million owner occupied households dedicate 30% to 50% of their income to housing.

Of those 8.8 million owner occupied households with housing a severe burden, approximately 3.3 million are in the middle 50% of household incomes - and this is the fastest growing segment - the middle class with housing a severe burden.

by Calculated Risk on 6/23/2008 12:57:00 PM

In his daily Market Memo, economist David Rosenberg at Merrill Lynch writes: The bad news on the banks is definitely 'out there' (hat tip Bernie)

The WSJ may have well devoted a whole section to the sector's travails - "Investors Hide as Banks Come Knocking"; "Citi to Slash Investment Banking Jobs World-Wide"; "More Bank Bailouts Ahead?" and "Regional Bank Bargains". links added

We could add New Crisis Threatens Healthy Banks from the WaPo:

Increasing struggles by consumers and businesses to make payments on a variety of loans, not just mortgages, are setting off a new wave of trouble in the financial sector that is battering even institutions that had steered clear of the subprime-home-loan debacle.

Late payments on home-equity loans are at a record high, according to fresh data from the Federal Deposit Insurance Corp. The delinquency rates on loans for cars, small businesses and construction are spiking to levels not seen in a decade or more.

Rosenberg makes a similar point as the WaPo noting that "concerns are spreading" from mortgages to other consumer and commercial debt. Rosenberg adds:

... regional banks which may find it difficult to find suitors since accounting rules require that a takeover target's portfolio is marked to market at the time of acquisition ...

And that might just leave FDIC receivership as the only option for many banks. From the WSJ:

There is often only one option left for a capital-starved U.S. bank that can't attract a suitor -- receivership under the auspices of the Federal Deposit Insurance Corp. While hardly ideal, that works fine as long as only a few banks stumble. But if the pressures of the credit crunch cause too many to fail, the FDIC could be overwhelmed. ... No wonder FDIC Chairwoman Sheila Bair has said bank problems are giving her heartburn.

by Calculated Risk on 6/23/2008 11:21:00 AM

"When the bankers are selecting color schemes, you know a project isn't going well"
reader Brian, June 23, 2008

This article from Bloomberg is a good summary of the banks exposure to commercial real estate (CRE): Deutsche Bank Lost in Vegas as Defaults Make Lenders Decorators

Workers building the $3.5 billion Cosmopolitan Resort & Casino on the Las Vegas strip are getting used to their financiers from Deutsche Bank AG. Lately, the weekly visitors from 60 Wall Street have been critiquing plans that called for a black-and-white decor.

``They are considering changing the color palettes and finishes,'' said Travis Burton, a vice president for lead contractor Perini Corp., who outfits the bankers with safety vests and hard hats before touring the site.
...
Deutsche Bank ... is one of a dozen investment banks that rode a five-year boom in commercial real estate by financing developers and landlords while profiting by packaging loans into securities. Then credit markets seized up in 2007, sticking banks and brokerage firms with commercial mortgages and bonds. The amount for large U.S. banks alone: $169 billion ... The resolution may take more than providing advice on drapes as the economy falters and mall vacancies increase.

by Calculated Risk on 6/23/2008 09:02:00 AM

Note: Dean Baker comments on the Joint Center for Housing Studies at Harvard University. As I noted below, the JCHS outlook sections always seem too optimistic, but the report does provide some excellent data.

Hat tip Ben Zipperer in Baker's comments:

When America's housing boom finally ends, don't expect a loud pop.

"It's not going to be a big dramatic event," says William Apgar, senior scholar at Harvard University's Joint Center for Housing Studies.
From the WSJ in August 2005: How Will Home Boom End?

"But comparing the [sudden price declines in the] stock market and the housing market is misleading at best. Because people live as well as invest in their homes, many owners stay put when prices first show signs of softening. This reduces the number of houses on the market and helps bring supply and demand back into balance, forestalling faster and sharper price declines."
-- from a 2005 Joint Center report

"With the slowdown in the entire residential construction sector, the home improvement market has downshifted to a more sustainable rate of growth... The dip in spending should, however, be both mild and short-lived. The fundamentals of remodeling demand remain positive, and the backlog of under-improved homes ensures a ready market for upgrades in the near term. And with home equity still at record levels, owners have the means as well as the motivation to continue to invest in their properties over the coming years."
-- from a 2007 Joint Center report

From the San Diego Union: Harvard report: Housing outlook remains bleak

In a grim report on the weakened state of the housing industry, Harvard University says the United States is caught in a real estate market downturn “that is shaping up to be the worst in a generation.”

The decline in housing construction and home sales “already rivals the worst downturns in the post World War II era,” said the report out today from Harvard's Joint Center for Housing Studies. Price drops and mortgage failures “are the worst on records that date back to the 1960s and 1970s.”

Hopefully the report will be available online soon (check here). The annual Harvard report is a great source of data, however for the last few years I've noted that the report seemed too optimistic.

Despite the “State of the Nation's Housing” report's somber tone, some analysts said it might be understating the problem.

“We have never had anything like this happen,” said Christopher Thornberg, an economist with the Beacon Economics research firm in Los Angeles. “It's a bloodbath. Prices are falling because they are too high. You would have to have prices in California fall 40 percent in order to get back to an historical level of affordability relative to incomes.”
...
“I think it is going to take another year nationwide for us to work through all of our problems in the housing market, at least to make a significant dent,” [Mark Zandi, chief economist for Moody's Economy.com] said. “In some parts of the country, the market will remain depressed well into the next decade. It is going to be a slog.”

by Calculated Risk on 6/23/2008 01:23:00 AM

From the NY Times: Home Not-So-Sweet Home

Listening to politicians, you’d think that every family should own its home — in fact, that you’re not a real American unless you’re a homeowner. ... Even Democrats seem to share the sense that Americans who don’t own houses are second-class citizens.
...
And the belief that you’re nothing if you don’t own a home is reflected in U.S. policy. Because the I.R.S. lets you deduct mortgage interest from your taxable income but doesn’t let you deduct rent, the federal tax system provides an enormous subsidy to owner-occupied housing.
...
In effect, U.S. policy is based on the premise that everyone should be a homeowner. But here’s the thing: There are some real disadvantages to homeownership.

Krugman lists three disadvantages to owning that we've discussed:

Financial risk: "At this point there are probably around 10 million households with negative home equity — that is, with mortgages that exceed the value of their houses."

Less labor mobility.

The cost of commuting.

Krugman concludes:

All I’m suggesting is that we drop the obsession with ownership, and try to level the playing field that, at the moment, is hugely tilted against renting.

And while we’re at it, let’s try to open our minds to the possibility that those who choose to rent rather than buy can still share in the American dream — and still have a stake in the nation’s future.

Hear, hear!

by Calculated Risk on 6/22/2008 07:14:00 PM

The WSJ is reporting: Citi to Slash Investment Banking Jobs World-Wide

Citigroup ... will dismiss thousands of investment-banking employees world-wide as part of a plan to cut the roughly 65,000-employee group by 10% ...

According to the WSJ the cuts will probably happen tomorrow, with entire trading desks eliminated in New York and other cities.

Update: from the Financial Times: Job fears mount as Goldman sheds staff (hat tip crispy&cole)

... it emerged that Goldman Sachs ... cut staff at its investment banking division last week.

The Wall Street bank is now expected to cut up to 10 per cent of staff in the division that handles mergers and acquisition advice and corporate fundraisings over the course of 2008 ...

The FT article ends with:

“Any bank that says it’s not cutting is lying,” said one industry insider on Sunday. “It’s getting to halfway through the year and everyone can see that business hasn’t picked up.”

It is becoming more clear that the '2nd half recovery' was a mirage - not only for the financial industry, but for the economy in general.

by Calculated Risk on 6/22/2008 05:13:00 PM

From the LA Times: Tax cushion for falling property values

Assessors in the five-county Los Angeles area are now in the process of cutting property taxes on more than half a million homes because of plunging home values. ...

Although savings will vary widely, the average annual property tax reduction in Los Angeles County is expected to be about $750. In Riverside County, it'll be around $1,200.

In California, the assessed value is set to the sales price (in most cases), and then the assessed value is limited to a maximum increase of 2% per year. Property taxes are 1% of the assessed value.

Homeowners who bought years ago will still see their property taxes increase 2% per year (since the assessed value is still below the market value). However for recent home buyers, with falling prices, the market value will likely be below the purchase price. These homeowners can appeal the assessment value - or as in this case, the assessors office may reduce the assessed value automatically.

A decline of $1,200 per year in Riverside suggests assessed values have fallen $120,000 on average.

Those tax breaks will go only to selected homeowners who bought their homes around the market's peak in 2005 and 2006. The Los Angeles County Assessor's office, for example, reviewed only properties purchased since July 1, 2004, and will be lowering taxes on 128,000 out of the 318,000 examined.

Assessors in Orange, Riverside, San Bernardino and Ventura counties reviewed sales since Jan. 1, 2004, and say they expect to reduce taxes on about two-thirds of those homes.

This is both good news and bad news for homeowners. Imagine opening a letter from the assessors office saying your property taxes have decreased $1,200 per year - but that the value of your home has declined $120,000. Ouch!

My guess is the assessors office will have to review sales back to 2003 or even 2002 next year.