by Calculated Risk on 2/23/2006 01:37:00 AM

Good luck Sasha! Have Fun!

For the Ladies' Free Skate, Sasha will be wearing a new red velvet dress and perform to Nina Rota’s soundtrack of "Romeo and Juliet". Enjoy.


Photo by Dave Black for Newsweek

Sasha in blue leads after the short program.

Photo from Newsweek's Can Sasha Cohen Save the Olympics?

NOTE: I will not post a spoiler. Enjoy the competition: the three top skaters in the world over the last two years are essentially tied. Irina is the 2005 World Champion. Shizuka is the 2004 World Champion. And Sasha is the 2004 and 2005 World Silver medalist and reigning US Champion.

by Calculated Risk on 2/22/2006 11:20:00 AM

From the Federal Reserve:

Roger W. Ferguson, Jr., submitted his resignation Wednesday as Vice Chairman and as a member of the Board of Governors of the Federal Reserve System, effective April 28, 2006.

Ferguson, who has been a member of the Board since November 5, 1997, submitted his letter of resignation to President Bush. He will not attend the March 27-28 meeting of the Federal Open Market Committee.

"Roger has made invaluable contributions to the Federal Reserve and to the country," said Federal Reserve Board Chairman Ben S. Bernanke. "He led the Fed's first response to the 9/11 terrorist attacks, was a strong advocate for increased transparency of monetary policy, and ably represented the Federal Reserve in important international fora. I value his friendship and counsel greatly and wish him all the best in his new endeavors."

Ferguson, 54, was first appointed to the Board by President Clinton to fill an unexpired term ending January 31, 2000. He was then appointed by President Bush to a full term that expires on January 31, 2014.

Resignation letter.

I am surprised.

by Calculated Risk on 2/22/2006 10:33:00 AM

The Mortgage Bankers Association (MBA) reports that mortgage applications increased slightly for the week ending Feb 17th.

Click on graph for larger image.

The Market Composite Index — a measure of mortgage loan application volume – was 578.5, an increase of 0.8 percent on a seasonally adjusted basis from 574.1 one week earlier. On an unadjusted basis, the Index increased 3.4 percent compared with the previous week but was down 20 percent compared with the same week one year earlier.
The seasonally-adjusted Purchase Index increased by 4.3 percent to 408.7 from 391.7 the previous week whereas the Refinance Index decreased by 4.0 percent to 1571.4 from 1636.7 one week earlier.

Mortgage rates were steady:

The average contract interest rate for 30-year fixed-rate mortgages decreased to 6.22 percent from 6.25 percent ...

The average contract interest rate for one-year ARMs increased to 5.60 percent from 5.52 percent...

Activity is still fairly high though off from the peaks of 2005. The unadjusted Purchase Index is 436.5, off slightly from 448.0 for the same week last year.

by Calculated Risk on 2/21/2006 03:06:00 PM

From PIMCO: Chris Dialynas Discusses Causes and Implications of Low Interest Rates and the Yield Curve Conundrum

Here are his views on housing:

Q: If the global economy is awash in liquidity, wouldn’t that normally lead to inflation?

Dialynas: The inflation has occurred. The inflation is in the housing market. The inverse of the current account deficit has been debt creation, and debt has accumulated in the consumer side and federal component of the economy. So the inflation that we have realized in the U.S., the U.K., Australia and other current-account deficit countries, but also in some surplus countries like China with low-priced labor and undervalued exchange rates, has been huge price inflation in the real estate markets. Housing price inflation is, in essence, the externality of this global liquidity and fixed exchange rate regimes.

Housing price inflation has some very important longer-term implications. A housing bubble leads to more investment in housing, which contributes to current GDP growth. However, if that investment were in plant and equipment of equal magnitude then we would have a productive resource with which production could be utilized to repay the current account deficit. In the case of a housing bubble and construction boom, no such product is available. The economic prospects for the national economy will rise and fall with the housing market. A pop in the housing bubble may invoke a ruinous downward multiplier reduction in the U.S. economy while the debts remain. Ultimately, the houses themselves may need to be liquidated to settle debts with foreigners.

Ouch.

by Calculated Risk on 2/20/2006 06:52:00 PM

Forbes reports: Trichet says market expectations for ECB rate hike are 'reasonable'

European Central Bank president Jean-Claude Trichet reiterated that market expectations for an ECB interest rate hike are 'reasonable'.

The ECB is widely expected to raise its main refinancing rate to 2.50 pct from 2.25 pct at its next meeting on March 2.
...
He also said that house price rises in some euro zone countries are 'not normal'.
...
In its February monthly bulletin, the European Central Bank said it sees tentative signs that the euro zone housing market is becoming overvalued following recent sharp price rises in some countries.

Some recent house price rises in some euro zone regions may be unsustainable, it said.

Trichet told the committee that the real estate sector is important for the ECB and one of the parameters that it considers when taking interest rate decisions.

And he said it is important to 'avoid further inflation of the bubble' in some euro zone housing markets.

Its interesting that Trichet commented on real estate being important with regards to interest rate decisions. I'm not sure if he is talking about targeting asset prices, or just that the real estate sector is an important part of the economy.

by Calculated Risk on 2/17/2006 08:59:00 PM

The Financial Times' Jim Pickard has lunch with Dr. Robert Shiller: The man and the bubble. A few excerpts:

What I really want to know, not least as a homeowner, is when and how the property market will crash. So I ask him.

For a man whose written predictions seem so definite - and dire - he appears loath to be nailed as an inveterate doomster. "I really don’t know what prices will do," he says hesitantly, playing with his cutlery.

But hasn’t he predicted a huge drop in US house prices? Only in some specific cities and states, he clarifies.

The professor is no doubt aware that the history of economic forecasting is littered with the names of those who made the right forecasts at the wrong time.

And more:

What, exactly, can Ben Bernanke, Greenspan’s successor, do to rescue the US economy if the property market crashes? Has the Fed already used up its one silver bullet - that of interest rate cuts?

"Bernanke thinks there is no housing bubble," says Shiller. "According to the White House website, he said recently that the fundamentals explained house price movements except in some speculative markets." The new chairman of the Fed is a "brilliant man", Shiller continues, but he has not shown any interest in behavioural economics.

And this is where he has underestimated the danger posed by real estate speculation. "He is not attuned to one of the great innovations of our time, that is, bringing psychology back into economics."

Here we come to the crux of Shiller’s theories about asset bubbles, whether tulips, shares or property: people get excited as they see the price of an asset rising, so they buy more, which pushes the prices up further until they are unsustainable. "The bubble is made by a ‘story’, by excitement and glamour," he says. And then, once a market loses that momentum, it will experience negative feedback, where people rush to sell before things worsen further.

I'm disappointed that Shiller didn't offer a suggestion as to what Bernanke could do.

Last year I provided some supply-demand diagrams to model the market dynamics of speculation that might be of interest to some readers: Speculation is the Key

by Calculated Risk on 2/16/2006 08:58:00 PM

From Barron's Online: Is It Crunch Time for Housing? (hat tip: Gary Evans for the link)

Bear markets, be they in stocks, housing or commodities, go through certain identifiable phases, like Elizabeth Kubler-Ross's famed five stages of dealing with dying -- denial, anger, bargaining, depression and finally acceptance.

"It's a three- to five-year cycle on the downside," says Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at UC Berkeley.

Rosen calls himself a real-estate bear who endorses the doom-and-gloom scenario of Yale University professor Robert Shiller (see Barron's, "The Bubble's New Home," June 20, 2005)."

We've already passed stage one, characterized by "a falloff in new sales and orders," says Rosen, and are just entering stage two, in which unsold inventories build up.

That may be where the crunch begins.

Prospective sellers, of course, can just take their homes off the market and live in them until they think they can get a better price.

But speculators don't have that luxury: At some point they can no longer carry a money-losing investment, so they may throw in the towel and unload their once-promising albatross.

That's stage three, says Rosen, and it usually finishes about three years from the beginning of the downturn.

The final phase is when we see massive defaults or delinquencies on mortgage loans. That's several years away, he says, and this time the damage could be worse because of the large number of exotic loans giddy lenders extended to desperate home buyers (see Barron's, "Coming Home to Roost," Feb. 13)."

There is more in the article. I think the sequence is more like:

1) A surge in inventories as sellers try to get out at today's high prices.

2) followed by a drop in orders as buyers become leery of buying at the top. Historically house prices tend to be sticky as sellers want prices close to those of recent sales in their neighborhood. And buyers want a discount from recent sales. The result is a drop in orders.

3) Then prices start falling as some sellers (speculators and homeowners in distress) need to get out.

There are other economic impacts:

1) as prices stagnate or fall, homeowners will withdraw less equity from their homes and that will impact retail sales.

2) as transactions decline, housing related employment will fall.

3) and finally, as mentioned in Barron's, there will be defaults or delinquencies on mortgage loans.

Already inventories are rising rapidly. And I believe sales are just starting to decline. The next few months will be interesting.

by Calculated Risk on 2/16/2006 07:26:00 PM

Click on image for full cartoon.

David Horsey is a cartoonist for the Seattle Post-Intelligencer.

And for more on the National Debt, please see pgl's post on Snow's actions today: Snow Withholds Checks to the Retirement Accounts of Federal Workers

As of February 15, 2006, the National Debt is $8.238 Trillion.

by Calculated Risk on 2/16/2006 05:15:00 PM

The Financial Times reports: Bernanke upbeat about housing effect

... Ben Bernanke suggested that the discussion around the Federal Reserve’s boardroom table in coming months may focus on ... house prices.

The outlook ... Bernanke presented ... were based on the assumption that the US housing market is slowing after the sizzling growth ... in recent years.

Mr Bernanke’s remarks ... suggested that the Fed expects the housing market to cool but not to undergo a dramatic slowdown ...

"Low mortgage rates, together with expanding payrolls and incomes and the need to rebuild after the hurricanes, should continue to support the housing market. Thus, at this point, a levelling out or a modest softening of housing activity seems more likely than a sharp contraction," Mr Bernanke said.
...
Since rising household wealth and home equity withdrawal have supported consumer spending, there may be an impact on spending. But it is not expected to be dramatic. The Fed expects households to raise their savings rate from near zero, but only gradually. Residential investment is expected to slow, but business investment is expected to take up the slack.

... It is quite likely that policymakers may not know how much further they need to raise rates. Policy will be data-driven – and one of the key questions will be the course of, and the spillover effects from, the housing market.
...
But the housing market presents both upside as well as downside risks for growth and the federal funds rate. If low long-term rates mean the housing market continues to soar, then the FOMC may have to raise rates by more than what is currently expected, to prevent the economy from overheating.

"On the one hand, some observers believe that home values have moved above levels that can be supported by fundamentals and that ... a realignment - if abrupt – could materially sap household wealth and confidence and, in turn, depress consumer spending," the monetary report to Congress said.

"On the other hand, if home values continue to register outsized increases, the accompanying increment to household wealth would stimulate aggregate demand and raise resource utilisation further ... adding to inflation pressures."

At least Bernanke is being open about the problem, even if he is more optimistic than I am.

by Calculated Risk on 2/15/2006 08:27:00 PM

MarketWatch reports: Washington Mutual to cut 2,500 jobs

Washington Mutual announced 2,500 job cuts at its home-loan business late Wednesday, another sign of a cooling real-estate market.

The bank, one of the largest mortgage lenders in the U.S., said its network of processing offices that provide administrative support to its home-loan businesses will be reduced to 16 from 26.

The job cuts represent more than 4% of Washington Mutual's total workforce of about 60,000.

...the bank also said in a statement on Wednesday that it's cutting costs at its home-loan business to "better match current and anticipated mortgage-market conditions."

Signs that the once-hot housing market is beginning to cool have accumulated this year.

U.S. banks reported weaker demand for mortgages in the past three months, a Federal Reserve survey of senior loan officers found in January.