by Calculated Risk on 2/07/2007 04:50:00 PM

"Real home-price gains, adjusted for inflation, will be negative this year, next year and possibly the year after that."
David Berson, Fannie Mae Chief Economist, Feb 7, 2007

From MarketWatch: Housing still on down slope

"I don't think we've seen the bottom," said David Berson, chief economist for Fannie Mae. "We're going to see a much bigger drop in investor demand this year. But by the second half of the year the market will stabilize, if investors pull out quickly."

Berson said he expects the home-price index calculated by the Office of Federal Housing Enterprise Oversight will show a nationwide decline in values for 2007, the first time that will have happened since the data began being collected in 1975. Unlike other measures, the OFHEO data measure the price changes on the same homes over time, meaning the index is less likely to be skewed by the types and locations of sales.

"It won't be a big decline, maybe 1%. And the declines will be far more centered in areas that have had the most investor activity," he said. "Real home-price gains, adjusted for inflation, will be negative this year, next year and possibly the year after that."

My forecast that "prices will fall nominally by 1% to 3% nationwide" is similar to Berson's.

Here are a few more recent forecasts:

Home prices will fall 10% on average in 2007
UBS analyst Margaret Whelan, Nov 6, 2006

"We believe nationwide home prices -- as measured by the federal OFHEO repeat sales index -- will be roughly unchanged in 2007. ... The risk to our price forecast is to the downside."
Saumil Parikh, PIMCO Portfolio Manager, Dec 27, 20062007

"Whether prices go down or stay the way they are, you can pretty much guarantee that whatever the value of your house now, that's going to be the value of your house in 2011."
Dr. Christopher Thornberg, October 19, 2006

"I expect at least a 20% decline in median single-family house prices nationwide, and that number may be way understated."
A. Gary Shilling, August 29, 2006, for the entire bust, not 2007.

[Orange County] house prices this year will increase 7 percent
Broker Gary Watts, Feb 7, 2007

by Calculated Risk on 2/07/2007 03:56:00 PM

From Northern Trust: The Fed Probably Thinks It Is On Hold for All of 2007

We don’t. We continue to believe that the Federal Reserve’s next move is to cut the federal funds rate. However, the first interest rate cut now appears likely later in the year, perhaps on August 7, than we had been forecasting in recent months. The trigger for the Fed to decrease the federal funds rate will be the combination of lower inflation and persistent below-potential economic growth.

On housing:

We believe that the bottom of the current housing recession lies quarters ahead. An average post-WWII era housing recession entails about a 25% peak-to-trough decline in real residential investment expenditures. As of the fourth quarter of 2006, these expenditures were down about 13% from their Q3:2005 peak. So, unless this is a milder-than-average housing recession, the trough lies ahead.

And on tighter lending standards:

Click on graph for larger image.

... effective housing affordability is likely to fall as federal and state financial regulators clamp down on “exotic” mortgage products as well as the mortgage market itself. In the past couple of months a number of exotic mortgage lenders and brokers have closed their doors as intermediate buyers/securitizers of this product have pulled back. The Fed’s latest survey of bank lending standards shows a sharp rise in the number of banks tightening their lending standards for residential mortgages (see Chart 2). In other words, credit conditions in the mortgage market are tightening.

by Calculated Risk on 2/07/2007 11:32:00 AM

"... many families found it cost effective to cash-out equity through a new first mortgage even though it raised their rate."
Amy Crews Cutts, Freddie Mac deputy chief economist, Feb 6, 2007

Freddie Mac reports: Refinance Activity Remains High; Cash-out Share Falls in Fourth Quarter

In the fourth quarter of 2006, 84 percent of Freddie Mac-owned loans that were refinanced resulted in new mortgages with loan amounts that were at least five percent higher than the original mortgage balances, according to Freddie Mac’s quarterly refinance review. This percentage is down from the third quarter of 2006, when the share of refinanced loans that took cash out was a revised 87 percent.

"... many families found it cost effective to cash-out equity through a new first mortgage even though it raised their rate." said Amy Crews Cutts, Freddie Mac deputy chief economist. "This quarter we saw $70.7 billion cashed out, down from a revised $80.2 billion cashed out in the third quarter of 2006. Cash out refinance volume is expected to decline over 2007, due to lower expected refinance shares overall and lower mortgage origination activity than in 2006."

"... there are roughly $500 billion in outstanding first-lien adjustable-rate mortgages that will see a monthly payment increase due to an interest-rate reset, the start of amortization, or both, in 2007, and a large number of homeowners with second liens that adjust each month depending on changes in the prime rate. We expect that many borrowers facing payment increases this year will refinance prior to their payment adjustment."

by Calculated Risk on 2/07/2007 10:57:00 AM

The Mortgage Bankers Association (MBA) reports: Market and Purchase Applications Decrease in This Week’s Survey

Click on graph for larger image.

The Market Composite Index, a measure of mortgage loan application volume, was 630.1, a decrease of 0.2 percent on a seasonally adjusted basis from 631.1 one week earlier. On an unadjusted basis, the Index increased 3 percent compared with the previous week and was up 1.4 percent compared with the same week one year earlier.

The Refinance Index increased 0.2 percent to 1943.4 from 1940.2 the previous week and the seasonally adjusted Purchase Index decreased 0.8 percent to 404.7 from 408 one week earlier.

Mortgage rates decreased slightly:

The average contract interest rate for 30-year fixed-rate mortgages decreased to 6.23 percent from 6.29 percent ...

The average contract interest rate for one-year ARMs decreased to 5.84 from 5.86 percent ...

The second graph shows the Purchase Index and the 4 and 12 week moving averages since January 2002. The four week moving average is down 4 percent to 413.78 from 430.8 for the Purchase Index.

The refinance share of mortgage activity decreased to 46.1 percent of total applications from 47.4 percent the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 22.3 from 21.37 percent of total applications from the previous week.

by Calculated Risk on 2/07/2007 12:53:00 AM

From the AP: California short $1 billion in tax revenue, controller says

"Tax payments are down about $1 billion, and we don't yet have the source of that decrease," said Controller John Chiang, holding a news conference at the state's tax-collection center, where 2006 tax returns have begun to trickle in.

Chiang speculated that the state's slumping housing market might be a cause of the revenue decline.

by Calculated Risk on 2/06/2007 03:56:00 PM

Rex Nutting at MarketWatch writes: Many layoffs coming in housing, economists say

The home-building industry collapsed in 2006, but surprisingly few workers lost their jobs, revised government data show. That could change this year, economists said.

Between December 2005 and December 2006, the number of building permits for new homes plunged 23.5%, while spending on residential construction projects fell by 12.4%. But over that time, employment in residential construction fell by just 1.4% from 3.38 million to 3.34 million. ...

Click on graph for larger image.

This graph shows residential construction employment vs. completions and starts (Starts are shifted 6 months into the future). Part of my Housing 2007 forecast concerned the loss of 400K to 600K residential construction jobs over the first 6 months of 2007.

"What it means is that we have a steeper cliff to fall off from," wrote David Rosenberg, chief North American economist for Merrill Lynch ...

"We are doubtful, however, the gross job losses tied to the housing cycle are any more than one-third complete," [Steven Wieting, an economist for Citigroup] wrote. He's looking for losses to "easily exceed a half million."

Rosenberg estimates that employment in residential construction will fall about 20% in 2007, or about 600,000 jobs. In essence, the number of jobs in home-building will return to 2002 levels as the pace of home building does.

In addition, of some 3 million manufacturing jobs tied directly to housing, about 10% will disappear, Rosenberg estimated.

All told, that's about 900,000 jobs likely to be lost this year, and it doesn't include a large number of threatened jobs in real estate, mortgage banking and other housing-related fields.

by Calculated Risk on 2/06/2007 12:47:00 AM

Our net sales orders for the month ended January 31, 2007 decreased as compared to the same period in 2006 at a greater rate than the 23% decrease we experienced in our most recent quarter. Our cancellation rate for the month ended January 31, 2007 was similar to our cancellation rate during our most recent quarter.
D.R. Horton, 10-Q filing with SEC, Feb 5, 2007

by Calculated Risk on 2/05/2007 03:06:00 PM

The Hartford Courant reports: Mortgage Lenders Network Files For Bankruptcy

Middletown-based Mortgage Lenders Network, which once promoted itself as a model for building financial services employment in Connecticut, filed for bankruptcy protection today.

by Calculated Risk on 2/05/2007 12:53:00 PM

From the MBA: The Residential Mortgage Market and Its Economic Context in 2007

Some interesting data and comments. The MBA is fairly optimistic:

Click on graph for larger image.

The housing market is nearly back to normal. The housing market will regain its footing by mid-to-late 2007, depending on what measure is used. Home sales and starts will likely begin to increase in mid-2007, but, given the large inventory overhang, prices are unlikely to show any significant increase until late 2007 or early 2008.

On the trade deficit:

The primary reason for the relatively low level of long-term interest rates is the massive inflows of global capital into U.S. fixed income markets. These capital inflows are the flip side of the historically large U.S. trade deficit.

On mortgages:

Interest only (IO) loans, with both adjustable- and fixed-rates, and payment option loans that allow negative amortization, have become a very important part of the market. In the second half of 2005 and the first half of 2006, IOs accounted for about 25 percent of the dollar volume of originations. In addition to their use as affordability products, these products offer homeowners an innovative and flexible means to more actively manage their home equity.
...
Much of the stock of outstanding loans has been originated in the past three years. This has implications for mortgage delinquencies and foreclosures, as loans tend to hit their peak delinquency rates three to five years after origination. We estimate that more than 80 percent of outstanding loans have been originated since 2002.

by Calculated Risk on 2/05/2007 11:13:00 AM

"We are concerned that there could be downward pressure on [housing] prices for awhile."
J.P. Morgan economist Haseeb Ahmed, Feb 5, 2007

From the WSJ: Vacant Homes For Sale Cloud Economic Hopes

... the overhang of vacant housing stock could erode existing home values as sellers slash prices to move their vacant properties. Economists fear that many vacant homes are owned by speculators who are stuck with investment properties that they can't sell and may be under increasing pressure to drop their prices. "We are concerned that there could be downward pressure on prices for awhile," Mr. Ahmed says.

Such worries could cloud hopes for a swift housing rebound. ...

The homeowner vacancy-rate increase "does temper your outlook" for new construction, says David Seiders, chief economist at the National Association of Home Builders in Washington. Mr. Seiders is forecasting largely flat housing sales this year followed by a strong rebound in housing starts in 2008. "There clearly are uncertainties about how this is going to work its way out," says Mr. Seiders. "I keep preaching to builders it's not time to ramp up production."
...
The recent vacancy data may be a useful measure of speculative activity and its fallout.

"I think a persuasive case can be made that the reason we are seeing such extraordinarily excessive vacancy is because of the heavy investor demand over the past few years," said Richard DeKaser, chief economist at National City Corp.

What's troubling is that speculators may not act like typical home sellers. When they sell their vacant home in a down market, they don't necessarily purchase another home. By contrast, people selling the homes they live in will most often buy another house -- thus fueling a healthy market of buying and selling.
...
"This whole thing has been new," says Mr. Seiders, the National Association of Home Builders' economist. "We've never seen this kind of investor activity and we've never seen this kind of [vacancy] resale. It's an extra complication moving forward."