by Calculated Risk on 2/24/2009 10:26:00 AM

Here are three key measures of house prices: Price-to-Rent, Price-to-Income and real prices (including FHFA).

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 Q4 2008 using the Case-Shiller National Home Price Index:

Click on image for larger graph in new window.

This graph shows the price to rent ratio (Q1 1997 = 1.0) for the Case-Shiller national Home Price Index. For rents, the national Owners' Equivalent Rent from the BLS is used.

Looking at the price-to-rent ratio based on the Case-Shiller index, the adjustment in the price-to-rent ratio is probably 75% to 85% complete as of Q4 2008 on a national basis. This ratio will probably continue to decline.

However it now appears rents are falling too (although this is not showing up in the OER measure yet) and this will impact the price-to-rent ratio.

Price-to-Income:

The second graph shows the price-to-income ratio:

This graph is based off the Case-Shiller national index, and the Census Bureau's median income Historical Income Tables - Households (and an estimate of 2% increase in household median income for 2008).

Using national median income and house prices provides a gross overview of price-to-income (it would be better to do this analysis on a local area). However this does shows that the price-to-income is still too high, and that this ratio needs to fall another 10% or so. A further decline in this ratio could be a combination of falling house prices and/or rising nominal incomes.

In Q2 2008 this index was over 1.25. In Q3 it fell to 1.2. Now the index is just over 1.1. At this pace the index will hit 1.0 in mid-2009. However, during a recession, nominal household median incomes are usually stagnate - so it might take a little longer. And the index might overshoot too.

Real Prices

Here is a look at real house prices using both the Case-Shiller national index and the FHFA purchase only index.

FHFA released their Q4 house price index today showing:

U.S. home prices posted record declines in the fourth quarter of 2008 according to the Federal Housing Finance Agency’s House Price Index (HPI). The FHFA seasonally-adjusted purchase-only house price index, based on data from home sales, was 3.4 percent lower on a seasonally-adjusted basis in the fourth quarter than in the third quarter. This decline was greater than the 2.0 percent decline in the third quarter and the largest in the purchase-only index’s 18-year history. Over the past year, seasonally-adjusted prices fell 8.2 percent from the fourth quarter of 2007 to the fourth quarter of 2008.

Note: there are a number of difference between FHFA (previously OFHEO) and Case-Shiller (See House Prices: Comparing OFHEO vs. Case-Shiller), but the main reason for the difference is FHFA doesn't include many of the really bad loans (subprime and Alt-A) that were sold through Wall Street. FHFA is GSE only loans.

This graph shows the real house prices based on both OFHEO Purchase Only index and the Case-Shiller national index. (Q1 1999 = 100)

Important: Nominal prices are adjusted using CPI less Shelter. Even though the FHFA prices declined significantly in Q4, CPI less Shelter declined even more, and real FHFA prices increased slightly (using this measure of inflation).

Both indices show real prices are still significantly above prices in the '90s and perhaps real prices will decline another 20%.

Summary

These measures are useful, but somewhat flawed. These measures give a general idea about house prices, but there are other important factors like inventory levels and credit issues. We are getting closer on prices, but it appears we still have a ways to go. All of this data is on a national basis and it would be better to use local area price-to-rent, price-to-income and real prices. I'll post some local data for price-to-rent ratios.

One thing is pretty certain - as long as inventory levels are elevated, prices will continue to decline. And right now inventory levels of existing homes (especially distressed properties) are still near all time highs.

by Calculated Risk on 2/24/2009 10:20:00 AM

From Fed Chairman Ben Bernanke: Semiannual Monetary Policy Report to the Congress

In their economic projections for the January FOMC meeting, monetary policy makers substantially marked down their forecasts for real GDP this year relative to the forecasts they had prepared in October. The central tendency of their most recent projections for real GDP implies a decline of 1/2 percent to 1-1/4 percent over the four quarters of 2009. These projections reflect an expected significant contraction in the first half of this year combined with an anticipated gradual resumption of growth in the second half. The central tendency for the unemployment rate in the fourth quarter of 2009 was marked up to a range of 8-1/2 percent to 8-3/4 percent. Federal Reserve policymakers continued to expect moderate expansion next year, with a central tendency of 2-1/2 percent to 3-1/4 percent growth in real GDP and a decline in the unemployment rate by the end of 2010 to a central tendency of 8 percent to 8-1/4 percent. FOMC participants marked down their projections for overall inflation in 2009 to a central tendency of 1/4 percent to 1 percent, reflecting expected weakness in commodity prices and the disinflationary effects of significant economic slack. The projections for core inflation also were marked down, to a central tendency bracketing 1 percent. Both overall and core inflation are expected to remain low over the next two years.

This outlook for economic activity is subject to considerable uncertainty, and I believe that, overall, the downside risks probably outweigh those on the upside. One risk arises from the global nature of the slowdown, which could adversely affect U.S. exports and financial conditions to an even greater degree than currently expected. Another risk derives from the destructive power of the so-called adverse feedback loop, in which weakening economic and financial conditions become mutually reinforcing. To break the adverse feedback loop, it is essential that we continue to complement fiscal stimulus with strong government action to stabilize financial institutions and financial markets. If actions taken by the Administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability--and only if that is the case, in my view--there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery.
emphasis added

by Calculated Risk on 2/24/2009 09:00:00 AM

Both the monthly indices (20 cities and 2 composites) and the quarterly national index were released this morning. I'll have more on the national index shortly.

Here is the S&P/Case-Shiller monthly Home Price Indices for December.

Click on graph for larger image in new window.

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

The Composite 10 index is off 28.3% from the peak.

The Composite 20 index is off 27.0% from the peak.

Prices are still falling, and will probably continue to fall for some time.

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

The Composite 10 is off 19.2% over the last year.

The Composite 20 is off 18.5% over the last year.

These are the worst year-over-year price declines for the Composite indices since the housing bubble burst, although only slightly worse (on a year-over-year basis) than November.

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

In Phoenix, house prices have declined more than 45% from the peak. At the other end of the spectrum, prices in Charlotte and Dallas are only off about 9% from the peak.

Prices fell at least 1% in all Case-Shiller cities in December, with Phoenix off 5.1% for the month alone!

I'll have more on prices including the National Index soon.

by Calculated Risk on 2/24/2009 08:45:00 AM

From the WSJ: Home Depot Posts Loss, Expects Earnings Below Views

Home Depot's sales fell by more than 17% in the fourth quarter and by nearly 8% on the year. The company expects them to fall another 9% in its 2009 fiscal year ...

"We expect the home improvement market in 2009 will remain just as challenging as 2008," Chief Executive Frank Blake said in a release.

Hoocoodanode?

by Calculated Risk on 2/24/2009 12:11:00 AM

From the WSJ: AIG Seeks to Ease Its Bailout Terms

American International Group Inc. is seeking an overhaul of its $150 billion government bailout package ... Under the plan, the government loan of up to $60 billion at the heart of the bailout would be repaid with a combination of debt, equity, cash and operating businesses, such as stakes in AIG's lucrative Asian life-insurance arms. AIG and the government have been discussing the changes since December and plan to announce them by Monday when the insurer is expected to report fourth-quarter results, the people said.

The earnings report is expected to underscore AIG's worsening condition with its total loss for the quarter likely to top $60 billion...

It looks another Sunday announcement coming up. No new info on Citi yet.

Here are the Bloomberg Futures. Futures are basically flat so far.

Barchart.com (active contract has a time, not a date)

CBOT mini-sized Dow

And the Asian markets. Not bad so far.

by Calculated Risk on 2/23/2009 10:10:00 PM

Press Release: General Growth Properties, Inc. Releases Fourth Quarter and Full-Year 2008 Operating Results

We are considering all strategic alternatives and are continuing our discussions with our lenders. In addition, we have suspended our cash dividend, halted or slowed nearly all of our development and redevelopment projects, systematically engaged in certain cost reduction or efficiency programs, reduced our workforce by over 20% and sold certain non-mall assets. We currently have approximately $1.179 billion of past due debt and approximately $4.09 billion of debt that could be accelerated. However, our lenders have not yet exercised any of their remedy rights with respect to such debt. In addition, we have an additional $1.44 billion of consolidated mortgage debt and approximately $595 million of unsecured bonds scheduled to mature in the balance of 2009 that remains to be refinanced, repaid or extended. In the event that we are unable to extend or refinance our near and intermediate term loan maturities, we may be required to seek legal protection from our creditors.

No BK yet for the 2nd largest mall owner.

by Calculated Risk on 2/23/2009 08:50:00 PM

Waiting for some news ...

General Growth Properties, the 2nd largest mall owner in the U.S., is scheduled to report earnings this evening. In an SEC filing on Friday, GGP reported that they are currently in default on certain loans.

And today was the light news day of the week! The rest of the week will be busy with Case-Shiller house prices, existing home sales, new home sales, and revised GDP all being released. Plus President Obama will address Congress tomorrow evening, Bernanke testifies to Congress on Tuesday and Wednesday, and Geithner will provide more details on the capital program and stress tests on Wednesday.

May we all live in interesting times.

by Calculated Risk on 2/23/2009 05:55:00 PM

From Rudolph Bell at GreenvilleOnline: Ex-Fed governor feels 'accountable' in economic crisis (ht Scott)

[Former Fed Governor from 2001-2007] Susan Schmidt Bies is having second thoughts about some of the votes she cast as a member of the Federal Reserve Board of Governors in the years leading up to the present crisis.
...
"I never, never would have guessed it was going to be like this, never," she said.

In an interview with The Greenville News, Bies reflected on her time at the Fed -- and expressed regret at not acting to raise interest rates faster or doing more to strengthen mortgage underwriting.
...
Bies said the bigger problem was lenders granting mortgages to people without the means to repay the loans. That concern fell to Bies, since she was the Fed's point person for bank oversight.

"As regulators, we didn't see the whole picture of how poorly the loans were being underwritten, because there's so many regulators in this country. None of us saw the whole picture, and we didn't tighten down enough, fast enough on it," Bies said.
...
"I think everybody just really lost touch with how much the underwriting of loans had deteriorated," Bies said.
...
Before the collapse, she said, "every bank risk model, every securitizer, broker dealer, all the rating agencies, were all basically where I was."

"I just didn't realize it was as bad as it was," she said.

It's tempting to say: Hoocoodanode?

But actually Bies did realize there was a problem, but she just didn't act aggressively to understand the depth of the problem ... here are some excerpts from a speech she gave in June, 2005:

Current Regulatory Issues

[W]e see indications that underwriting standards are beginning to weaken. For example, "affordability products"--such as interest-only loans, negative amortizations, and second mortgages with high loan-to-value ratios--are becoming more popular; subprime lending is growing faster than prime lending; adjustable-rate mortgages, or ARMs, have grown substantially and now account for more than a third of all mortgage originations, the highest level since 1994. Industry experts are increasingly concerned about the quality of collateral valuations relied upon in home equity lending and residential refinancing activities. More homes are being purchased not as primary dwellings, but as vacation homes or pure investments, in which case anticipated price appreciation may be a large factor influencing purchase decisions.

... [T]he agencies have observed some easing of underwriting standards, with lenders competing to attract home equity lending business. Lenders are sometimes offering interest-only loans and are sometimes requiring very small down payments and limited documentation of a borrower's assets and income. They are also relying more on automated-valuation models and entering into more transactions with loan brokers and other third parties. Given this easing of standards, there is concern that portions of banks' home equity loan portfolios may be vulnerable to a rise in interest rates and a decline in home values. In other words, there is concern that not all banks fully recognize the embedded risks in some of their portfolios.

Bank supervisors today have similar concerns about commercial real estate lending, defined as those real estate loans in which the primary source of repayment is derived from the rental income or sale proceeds of commercial property. This has historically been a highly volatile asset class, and it played a central role in the banking problems of the late 1980s and early 1990s.

Yes, Bies was late realizing there was a problem. And she didn't seem to recognize the extent of the underwriting issues - even though this speech outlined many of the key issues and was given almost two years before New Century went down. Think of all those poorly underwritten loans made after Bies gave this speech. Why didn't the Fed move more aggressively to understand the underwriting issues, and why did they drag their feet for the next two years? I think those are key questions that still need to be answered.

by Calculated Risk on 2/23/2009 04:01:00 PM

Well, almost 1996. The S&P 500 low in 1997 was 737.01.

Click on graph for larger image in new window.

DOW off 250 points (3.4%)

S&P 500 off 27 points (3.5%)

NASDAQ off 53 points (about 3.7%)

Another day of Cliff Diving.



This graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears". (if smaller graph isn't updated, click for larger graph - Doug should update soon)

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

by Calculated Risk on 2/23/2009 02:42:00 PM

CNBC Headline: AIG Is In Talks With Government To Secure Additional Funds to Keep Operating, CNBC Has Learned Click on cartoon for larger image in new window. Cartoon from Eric G. Lewis

Update from David Faber: AIG Seeks More US Funds As Record Loss Looms

Sources close to the company said the loss will be near $60 billion due to writedowns on a variety of assets including commercial real estate.

That massive loss is likely to spur downgrades in its insurance and credit ratings that will force AIG to raise collateral that it doesn't have.