by Calculated Risk on 2/24/2009 04:05:00 PM

The opposite of cliff diving today ...

Dow up 3.3%

S&P 500 up 3.9%

NASDAQ up 4%

Krugman writes: Mysterious plans

I’m trying to be sympathetic to the various plans, or rumors of plans, for bank aid; but I keep not being able to understand either what the plans are, or why they’re supposed to work. And I don’t think it’s me.

So the latest is that we’re going to convert preferred stock held by the government to common stock, maybe. James Kwak has a good explanation of what that’s all about. And it’s not at all clear what is accomplished thereby.
...
[See Krugman's post]
...
I just don’t get it. And my sinking feeling that the administration plan is to rearrange the deck chairs and hope the iceberg melts just keeps getting stronger.

by Calculated Risk on 2/24/2009 02:06:00 PM

From Bloomberg: U.S. Will Take Bank ‘Ownership’ Stakes Only as Losses Climb (ht Anthony)

Federal Reserve Chairman Ben S. Bernanke said the ... Treasury will buy convertible preferred stock as needed in the 19 largest U.S. banks after stress tests to determine how much capital is needed to address losses in a “worse” case scenario, Bernanke told lawmakers at a Senate Banking Committee hearing today. The shares will be converted to common only as the extraordinary losses happen, he said.

“It doesn’t have an ownership implication until such time as those losses which are forecast in the bad scenario actually occur,” the Fed chief said. Bernanke also said that the so- called stress tests that regulators will run on the 19 banks will look at potential losses over a two-year horizon if the economy worsens.

If the banks are seriously insolvent, this sounds like the zombie bank approach and rewards existing shareholders at the expense of taxpayers. If the banks are not seriously insolvent, this is a reasonable approach. But how does Bernanke know the solution before the data is available from the stress tests?

by Calculated Risk on 2/24/2009 01:55:00 PM

One more house price post! This one looks at a few selected cities ...

For more, please see:
Case-Shiller: House Prices Decline Sharply in December

House Prices: Real Prices, Price-to-Rent, and Price-to-Income (national data)

Click on graph for larger image in new window.

This graph shows the Case-Shiller house price indices for five cities. These are nominal graphs (not adjusted for inflation).

This shows the incredible bubbles in Los Angeles and Miami (other cities like Las Vegas, Phoenix, San Diego had similar price bubbles). Now the prices in these cities are falling quickly.

I included Denver and Cleveland as examples of cities with smaller price bubbles - and prices are falling in those cities too. New York was a special case. Prices held up longer, but are now starting to fall rapidly.

The second graph shows the price-to-rent ratio for Miami, Los Angeles and New York. This is similar to the national price-to-rent ratio, but uses local prices and local Owners' equivalent rent.

This ratio is getting close to normal for LA and Miami (although rents are now falling!), but still has further to go in NY.

by Calculated Risk on 2/24/2009 12:15:00 PM

UPDATE: Also check out the charge-off rates. The charge-off rate almost doubled for commercial real estate (CRE) from 1.16% in Q3 to 2.04% in Q4. The commercial banks are starting to recognize their CRE losses!

The Federal Reserve reports that delinquency rates rose sharply in Q4 in all categories.

Click on graph for larger image in new window.

This graph shows the delinquency rates at the commercial banks for residential real estate, commercial real estate and consumer credit cards.

Commercial real estate delinquencies are rising rapidly, and are at the highest rate since Q2 '94 (as delinquency rates declined following the S&L crisis).

Residential real estate delinquencies are at the highest level since the Fed started tracking the data (since Q1 '91).

Credit card delinquency rates are now above the previous high in 1991 (the Fed started tracking data in '91).

Although there is credit deterioration everywhere, the rise in these three categories is especially significant. Residential delinquency rates jumped by over 1% from 5.22% to 6.29% - in just Q4! Credit card delinquencies rose from 4.83% to 5.56%, the fastest increase since the Fed started keeping records.

And commercial real estate delinquencies rose from 4.74% to 5.36%. The Fed defines commercial as "construction and land development loans, loans secured by multifamily residences, and loans secured by nonfarm, nonresidential real estate", and many of the problems are probably in the C&D loans. These are the loans that will probably lead to the closure of many regional banks.

Just more evidence of severe credit problems at the commercial banks.

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.