by Calculated Risk on 7/11/2006 04:16:00 PM

Dr. Stiglitz proposes in the Economists’ Voice: A New Agenda for Global Warming. Dr. Stiglitz proposes a global environmental tax:

There is a second problem with Kyoto: how to bring the developing countries within the fold. The Kyoto protocol is based on national emission reductions relative to each nation’s level in 1990. The developing countries ask, why should the developed countries be allowed to pollute more now simply because they polluted more in the past? In fact, because the developed countries have already contributed so much, they should be forced to reduce more. The world seems at an impasse: the United States refuses to go along unless developing countries are brought into the fold; and the developing countries see no reason why they should not be allowed to pollute as much per capita as the United States or Europe. Indeed, given their poverty and the costs associated with reducing emissions, one might give them even more leeway. But, given their low levels of income, that would imply that no restraints would be imposed on them for decades.

There is a way out, and that is through a common (global) environmental tax on emissions. There is a social cost to emissions, and the common environmental tax would simply make everyone pay the social cost. This is in accord with the most basic of economic principles, that individuals and firms should pay their full (marginal) costs. The world would, of course, have to agree on assessing the magnitude of the social cost of emissions; the tax could, for instance, be set so that the level of (global) reductions is the same as that set by the Kyoto targets.

As technologies evolve, and the nature of the threat of global warming becomes clearer, the tax rate could adjust, perhaps up, perhaps down. ... each country could keep its own revenues and use them to replace taxes on capital and labor: it makes much more sense to tax "bads" (pollution,like greenhouse gas emissions) than to tax "goods," like work and saving. (Economists refer to these taxes as corrective taxes.) Hence, overall economic efficiency would be increased by this proposal. The big advantage of taxation over the Kyoto approach is that it avoids most of the distributional debate. Under Kyoto, getting the right to pollute more is, in effect, receiving an enormous gift. (Now that pollution rights are tradeable, we can even put a market value on them.) The United States might claim that because it is a larger country, it “needs” more pollution rights. Norway might claim that because it uses hydroelectric power, the scope for reducing emissions is lower. France might claim that because it has already made the effort to go into nuclear energy, it should not be forced to reduce more. Under the common tax approach, these debates are sidestepped. All that is asked is that everyone pay the social cost of their emissions, and that the tax be set high enough that the reductions in emissions is large enough to meet the required targets. The economic cost to each country is small—in some cases, actually negative.

Now that the scientific debate concerning Global Warming is over (it is over except for the industry shills), it is now time to consider policies to reduce pollutants. This proposal seems like an excellent alternative to Kyoto.

by Calculated Risk on 7/10/2006 07:43:00 PM

Please see my post on Angry Bear: Record Household Debt Service

by Calculated Risk on 7/10/2006 12:38:00 PM

From the LA Times: Default rate of 'piggyback' loans spurs Wall Street to action

Wall Street is sounding the alarm on one of the most popular ways to buy a house in many high-cost areas around the country — so-called "piggyback" programs that mesh first mortgages with second-lien credit lines or mortgages.

As of July 1, the most influential ratings agency in the mortgage arena, Standard & Poor's Corp., has upped the ante for lenders who fund piggyback deals. The move is likely to raise interest rates and fees for some home purchasers this summer, say mortgage experts, and could reduce the volume and availability of piggyback programs overall.

The reason for the change, according to Standard & Poor's credit analyst Kyle Beauchamp, is that an exhaustive study of piggyback loans found them anywhere from 43% to 50% more likely to go into default than comparable stand-alone first-lien purchase transactions.

And a mention of the new nontraditional mortgage guidance:

More ominous still for the piggyback market: Federal financial regulators are expected to issue guidelines for lenders within the next few months that will force them to throttle back on piggybacks, payment-option loans and interest-only loans to borrowers with marginal credit scores and incomes.

The regulatory agencies will eventually close the barn door; too bad the cow is long gone. I'm surprisd it has taken so long for the rating agencies (like S&P) to catch on.

by Calculated Risk on 7/07/2006 07:13:00 PM

The AP reports: Dominion Homes 2nd-Quarter Sales Slip 46 Percent on Cooling Real Estate Climate

Dominion Homes Inc., which sells homes and offers mortgage financing services, said revenue from home sales dropped 46.2 percent in the second quarter, compared with the same period last year.

This would be no surprise in Florida, Boston, Phoenix or SoCal, but ...

The homebuilder said the decline in sales, deliveries and backlog reflects the cooling residential real estate climate in the company's markets, primarily central Ohio and the Louisville, Ky., area.

I believe the housing slowdown is geographically widespread; not just on the coasts.

by Calculated Risk on 7/07/2006 04:26:00 PM

Reader Steve points out that according to the Monthly Treasury Statement for May (June will be released soon), the YTD General Fund deficit has fallen slightly from fiscal year '05. He takes exception to my comment: "If someone says the deficit is falling - laugh (or cry). Its not true."

Of course I'm tracking the annual increase in the National Debt, and that is not falling. For the National Debt, the YTD annual increase in '06 is greater than in '05. See: June: Near Record Increase in National Debt

Last year on Angry Bear I pointed out the difference between the different methods of tracking the deficit: Another Budget, Another Disaster


Click on graph for larger image.
Note: Graph from last year.

There are at least three methods of presenting the deficit; the first is the “Unified Budget” that includes the annual surplus from Social Security Insurance (and the miniscule Postal Service Fund) in the total. The second is the “General Fund Budget” (the most used) that excludes the SS Insurance surplus, but includes surpluses from Military Retirement, Federal Employee Retirement and many other smaller trust funds. The third approach (my favorite) is to use the annual increase in the National Debt as the annual deficit.

As noted, the Unified Budget is worthless as a measuring tool. I'll stick to my favorite measure, but I'll also include the MTS report on the General Fund deficit.

by Calculated Risk on 7/07/2006 12:11:00 PM

Click on graph for larger image.

This graph shows cumulative employment growth for Bush's second term. So far job growth has been about as expected.

Construction employment showed a slight decline in June. The construction declines were in 'Residential building' and 'Residential specialty trade contractors', finally showing a slight impact from the housing slowdown.

Rex Nutting reported for MarketWatch: Jobs report not as weak as it looks

The U.S. labor market was stronger in June than indicated by the tepid 121,000 growth in nonfarm payrolls.

The data from the Labor Department released Friday paint a muddled picture. While job growth of 121,000 was less than the 175,000 expected by economists and far less than the 390,000 projected by the ADP index, other aspects of the report show a healthier labor market. See full story.

"Everything else in the report showed strength," said David Greenlaw, an economist for Morgan Stanley.

In contrast to the weak payroll survey, the household survey showed robust job growth of 387,000 in June, keeping the unemployment rate at a very low 4.6%. The number of hours worked rose smartly, and average pay increased. The number of people who've been out of work longer than six months dropped by 217,000 to 1.1 million. The labor force participation rate rose by a tenth of a percentage point to 66.2%

by Calculated Risk on 7/06/2006 10:58:00 PM

Some anecdotal info on the San Diego housing market:

I spoke to a top real estate agent in San Diego this evening. She has been selling Real Estate since the mid-'80s. She told me the last couple of months have been the slowest of her career; even slower than the early '90s.

She said Standard Pacific called her and offered a 5% commission on any new home. Usually SPF just offers a small finders fee. She also said the builder offered substantial upgrades to any buyer. Last year these homes would have sold immediately - now they can't find buyers.

Finally she said there is heavy discounting in the existing home market and she is surprised the price declines have not shown up in the official numbers yet.

by Calculated Risk on 7/06/2006 10:55:00 AM

The Mortgage Bankers Association (MBA) reports: Application Volumes Increase

Click on graph for larger image.

The Market Composite Index, a measure of mortgage loan application volume, was 561.0, an increase of 5.9 percent on a seasonally adjusted basis from 529.6 one week earlier. On an unadjusted basis, the Index increased 5.9 percent compared with the previous week but was down 33.3 percent compared with the same week one year earlier.

The seasonally-adjusted Purchase Index increased by 6.5 percent to 414.2 from 389.0 the previous week and the Refinance Index increased by 5.0 percent to 1423.9 from 1356.0 one week earlier.

Mortgage rates were mixed:

The average contract interest rate for 30-year fixed-rate mortgages decreased to 6.80 percent from 6.86 percent ...

The average contract interest rate for one-year ARMs increased to 6.39 percent from 6.36 percent ...

Change in mortgage applications from one year ago (from Dow Jones):

Total	-33.3%
Purchase	-20.1%
Refi	-48.9%
Fixed-Rate	-32.1%
ARM	-35.8%

Purchase activity is off 20.1% compared to the same week last year. Despite the slight increase in activity this week, the MBA Purchase Index is indicating that the housing market is continuing to slow compared to 2005.

by Calculated Risk on 7/05/2006 02:44:00 PM

Kenneth Heebner, manager of the CGM Realty Fund was interviewed in the WSJ today. A few excerpts:

WSJ: How is the housing market?

Mr. Heebner: A significant decline in prices is coming. A huge buildup of inventories is taking place, and then we're going to see a major [retrenchment] in hot markets in California, Arizona, Florida and up the East Coast. These markets could fall 50% from their peaks.

WSJ: What has you so concerned?

Mr. Heebner: I'm worried that more people will default on their mortgages. Risky mortgages such as interest-only and pay-option adjustable-rate mortgages require no principal amortization and in some cases payment of only a fraction of the interest due, have been widely used in the last two years. Some people got 100% financing for their homes. It made the tech bubble look like a picnic. When housing is going up rapidly and you can buy far more than your income can support, some people are eager to make big profits by extending themselves financially.

As housing prices fall more people will be under water, and these people are just going to walk away from their homes. They are going to say, 'I'm outta here.' You're going to see increasing foreclosures over the next several years. As [home] prices come down, it will create a difficult environment for home builders.

WSJ: What data have you most worried?

Mr. Heebner: We're seeing a huge increase in inventories of unsold homes. The role of incentives in selling a home is increasing so the weakness doesn't show up immediately in list prices. Large price declines will follow in inflated markets.
...
WSJ: Given the big size of some of the markets that you see as inflated, won't the regional 'pops' reverberate throughout the economy?

Mr. Heebner: The pops will reduce the growth rate of the economy, but they won't precipitate a downturn. ...

WSJ: Do you agree with economists who have described the individual consumer as a linchpin of the economy during the past few years, using refinancings to fuel the expansion?

Mr. Heebner: Borrowing against home equity has been overrated as a source of economic stimulus. While it has been a factor in the economic expansion, I don't think it's been the most important factor.

Mr. Heebner has an excellent track record. Read the interview for more of his comments.

I think Mr. Heebner is underestimating the role that mortgage equity extraction has played in stimulating the economy over the last few years. I also think the "burst" will be more widespread than Mr. Heebner believes - because homeowners used nontraditional mortgages just about everywhere. Prices might not fall very much in the less frothy areas, but I believe housing activity will slow significantly in almost all areas.

by Calculated Risk on 7/05/2006 02:05:00 AM

The Census Bureau reported:

"that construction spending during May 2006 was estimated at a seasonally adjusted annual rate of $1,206.2 billion, 0.4 percent (±1.4%) below the revised April estimate of $1,210.5 billion. The May figure is 6.0 percent (±2.2%) above the May 2005 estimate of $1,137.5 billion."

The following graph shows private residential construction spending for New Single Family and Improvements, seasonally adjusted and annualized since 2000:


Click on graph for larger image.

It appears construction spending peaked in Q4 2005. I expect the drop in construction spending to start showing up in the BLS employment report soon. As I noted in May, construction employment has already started to decline in California.

From Federal Reserve economist Dr. Krainer's Economic Letter last week:

"For recession-related downturns, the real price of new houses declines about four quarters after the peak, on average. Real new house prices register no detectable declines surrounding the average non-recession-related downturn."

So far the behavior of this housing downturn is similar to recession related downturns. If the similarities continue, prices will start to fall about four quarters after the peak, or late this year.

Note: I'm not arguing for a recession; I'm just saying the market behavior is similar (with Krainer's caveats) to recession related housing slowdowns.