by Calculated Risk on 12/29/2009 11:04:00 PM

There has been much more on the Dec 24th press release from Treasury.

From the WSJ: Questions Surround Fannie, Freddie

From Tim Duy: Why Christmas Eve?

I think Linda Lowell at HousingWire has a good explanation: Treasury Updates Its GSE Support; And the Mainstream Misleads

First on the timing:

It’s in the law: the Treasury’s authorization in [Housing and Economic Recovery Act (HERA) of 2008] to alter the terms, conditions and amounts under any agreements (such as the PSPAs) to purchase Fannie or Freddie obligations expires December 31, 2009. After that date, new authorization would be required from Congress.

That explains the timing. My guess is some people at Treasury aren't working this week, so last Thursday was the deadline.

As far as why uncap Fannie and Freddie even though the current caps looked sufficient:

Too much is at stake, for taxpaying homeowners, to leave outstanding even a small “tail risk” that one of the enterprises would penetrate the cap. We’ve all seen how politics - even the agendas of a small minority - can stall lawmaking by the majority. Read the law (HERA): if a deficiency goes unfunded, the deficient enterprise goes into receivership.

And receivership (as opposed to the current conservatorship) means the enterprise would be wound down. So Ms. Lowell suggests this was probably to avoid a low probability event that could have triggered a huge political battle - and put the housing market at further risk since the housing market is currently "overwhelmingly supported by FHA/Ginnie Mae, Fannie and Freddie".

Also, on my earlier speculation about whether this was related to HAMP, Nick Timiraos at the WSJ writes:

A Treasury representative said the bailout caps were suspended "specifically to ensure continued confidence in Fannie Mae and Freddie Mac, but were not based on any considerations" related to an expansion of the administration's loan-modification program.

I guess this qualifies as a huge nothingburger.

by Calculated Risk on 12/29/2009 08:06:00 PM

From the Detroit News: Treasury plans to inject around $3.5 billion into GMAC (ht jb)

The Treasury Department plans to announce as early Wednesday afternoon that it will give GMAC Inc. around $3.5 billion in additional capital, sources told The Detroit News.

... The Treasury Department said earlier this year it would invest up to $5.6 billion more in GMAC -- on top of $13.4 billion GMAC has received over the last year.
...
GMAC is the primary lender to most GM and Chrysler dealers and customers ...

Most of the losses have come from ResCap, GMAC's mortgage unit.

Just a few billion more. Nothing compared to AIG, Freddie and Fannie.

by Calculated Risk on 12/29/2009 06:09:00 PM

First, from Brett Arends in the WSJ on May 6, 2008: Is Housing Slump at a Bottom?

Wellesley College Prof. Karl E. Case, one of the leading experts on the housing market in the country ... suggests we may be at, or near, the bottom of the housing crash.
...
"It is really remarkable how much where we are today looks like the bottom we've had in the last three cycles," Mr. Case says. "Every time we've gone below a million starts, the market has cleared at that moment."
...
"It's bottom-fishing time, I think," says Mr. Case. "There's got to be bargains in Florida, Arizona and Nevada."

Total starts were at 574 thousand in November after falling to a low of 479 thousand earlier this year - half the number of starts from when Prof. Case called the bottom in 2008.

And on "bottom-fishing" in Florida, Arizona and Nevada: prices have fallen 23.5%, 31,3% and 36.4% in Miami, Phoenix and Las Vegas respectively since Prof. Case's suggestion in May 2008 using his own Case-Shiller index.

Why bring this up now? Because Brett Arends wrote in the WSJ today: Latest Home Price Data Is Good News for Buyers

Homes are now cheap.

Mr. Arends does write that homes are not cheap everywhere, but his main argument is:

If you buy an average home today, and take out a 30-year mortgage at 5%, the annual bill for interest and repayment of principal will come to about 19 times typical weekly earnings ...

He then provides a chart that shows this is the lowest level since the early '70s for this metric. Mr. Arends does add many cautions and caveats.

Well, allow me to retort.

House prices are not cheap nationally. This is apparent in the price-to-income, price-to-rent, and also using real prices. Sure, most of the price correction is behind us and it is getting safer to be a bottom caller! But "cheap" means below normal, and I believe that is incorrect.

The following graph shows the price-to-income ratio using the Case-Shiller national index as of Q3 2009, and the Census Bureau's median income tables (assuming no increase for 2009).

Click on graph for larger image in new window.

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.

The second graph shows the price to rent ratio (January 2000 = 1.0) for the Case-Shiller composite indices through October. For rents, the national Owners' Equivalent Rent from the BLS is used.

Although most of the adjustment in the price-to-rent ratio is behind us, it appears this ratio is still a little high.

As Mr. Arends also noted, this is national data, so beware of the local variations.

So why does Mr. Arends think "homes are now cheap"? Because he is using a measure of affordability based on mortgage interest rates. This is a mistake without further anlaysis.

Imagine this simplified example with a buyer willing to pay $1000 per month. With a 5% mortgage rate, the buyer could afford a $186,282 30 year fixed rate mortgage (principal and interest). But the buyer expects to sell the home in seven years, and he expects mortgage rates to be 7% then. That means the new buyer - who will also be willing to pay $1000 per month - can only afford a mortgage of $150,308.

So how does the affordability index account for this expected $36,000 loss? It doesn't.

It ends up in this simplified example, the current buyer would be willing to pay about $161,000 today because of the lower interest rate if he was planning on selling in seven years at $150,000 - excluding all expenses, transaction costs, tax savings, discount rates, etc. The actual calculation would be extremely complicated.

Sometimes it is smart to buy when "affordability" is low like in the early '80s when mortgage rates were very high - but smart buyers were expecting rates to fall. And sometimes it is smart not to buy when "affordability" appears high - like say last year when Mr. Arends wrote in May 2008:

[I]nterest rates are low right now. ... you can get a 30-year fixed-rate mortgage under 6%. If the economy recovers that won't last. If you are shopping for a home, it is probably worth seeing if you can lock in one of these rates cheaply.

But the real key is to focus on supply and demand, and on the general fundamentals of price-to-income and price-to-rent (not perfect measures). House prices are not currently "cheap". They just aren't outrageously expensive nationally anymore.

by Calculated Risk on 12/29/2009 04:40:00 PM

From the American Trucking Association: ATA Truck Tonnage Index Jumped 2.7 Percent In November

Click on graph for slightly larger image in new window.

The American Trucking Associations’ advance seasonally adjusted (SA) For-Hire Truck Tonnage Index increased 2.7 percent in November, following a 0.2 percent contraction in October. The latest gain boosted the SA index from 103.6 (2000=100) in October to 106.4, its highest level in a year. The not seasonally adjusted index, which represents the change in tonnage actually hauled by the fleets before any seasonal adjustment, equaled 100.8 in November, down 8.0 percent from October.

Compared with November 2008, SA tonnage fell 3.5 percent, which was the best year-over-year showing in twelve months. In October, the index was down 5.2 percent from a year earlier.

ATA Chief Economist Bob Costello said that tonnage is moving in the right direction. “Slowly, but surely, truck freight has started the recovery process and November’s solid increase is a very positive sign,” Costello noted. He said that November’s tonnage levels were pushed higher by improved economic activity, as well as by an inventory correction that is near completion. “Truck freight had been hurt by both slow economic output and bloated inventories; however, we now have evidence that the inventories are in much better shape, which will not be such a drag on truck freight volumes.” Costello continued to be cautious about the future though. “While the economy and trucking is improving, the industry should not get overly excited about the sizeable increase in November. I continue to believe that both the economy and truck tonnage will exhibit starts and stops in the months ahead, but the general trend should be for moderate growth.”
...
Trucking serves as a barometer of the U.S. economy, representing nearly 69 percent of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods.

The economy fell off a cliff in September 2008, so the year-over-year comparisons are getting easier. As ATA Chief Economist Bob Costello noted, trucking benefited from the inventory correct, and he believes that is nearing completion - and trucking will likely "exhibit starts and stops" until there is a pickup in domestic end demand.

Note: I think this is the highest level since January, unless January was revised down.

by Calculated Risk on 12/29/2009 02:38:00 PM

Kathleen Pender at the San Francisco Chronicle reminds everyone of the changes to the FDIC's Transaction Account Guarantee Program: $250,000 in bank? Check deposit insurance

There is no change for those with less than $250,000 in the bank:

Deposits at all banks will still be insured up to $250,000 through 2013 under the FDIC's general deposit insurance rules, so the vast majority of consumers don't need to worry. But starting Friday, checking account balances that exceed $250,000 will no longer be covered under the FDIC's Transaction Account Guarantee Program at some banks.
...
Although few individuals keep more than $250,000 in a checking account, many businesses and nonprofits do to handle payroll, accounts receivable and other cash-flow needs. Even a small business might occasionally have a balance exceeding $250,000 when a large payment comes in or a big bill is coming due.

The FDIC's Transaction Account Guarantee Program will continue (insuring non-interest-bearing transactional accounts above $250,000), but the FDIC raised the fees and many banks have opted-out.

The program was supposed to expire at the end of this year, but in August the FDIC announced it would continue through June 30. However, starting Friday the fee will jump to 15, 20 or 25 cents per $100 in insured deposits, depending on the bank's risk category.

Banks had until Nov. 2 to tell the FDIC if they would opt out of the program at the end of this year. The FDIC could not say how many banks did, but many large ones - including Citibank, Bank of America, Chase and Wells Fargo - have disclosed they are dropping out.

What matters for most people is that deposits are still insured up to $250,000. For more, here is the FDIC site: Your Insured Deposits

by Calculated Risk on 12/29/2009 11:46:00 AM

This following graph compares the Case-Shiller Composite 10 SA index with the Stress Test scenarios from the Treasury (stress test data is estimated from quarterly forecasts).

Click on graph for larger image in new window.

The Stress Test scenarios use the Composite 10 index and start in December. Here are the numbers:

Case-Shiller Composite 10 Index (SA), October: 157.56

Stress Test Baseline Scenario, October: 142.3

Stress Test More Adverse Scenario, October: 130.6

House prices are 10.7% higher than the baseline scenario, and 20.6% higher than the more adverse scenario.

There were three key economic stress test parameters: house prices, GDP and unemployment. Both house prices and GDP are performing better than the baseline scenario, and unemployment is performing worse than both stress test scenarios.

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 October 2009 using the Case-Shiller Composite Indices (SA):

This graph shows the price to rent ratio (January 2000 = 1.0) for the Case-Shiller composite indices. For rents, the national Owners' Equivalent Rent from the BLS is used.

At the peak of the housing bubble it was obvious that prices were out of line with fundamentals such as price-to-rent, price-to-income and real prices. Now most of the adjustment in the price-to-rent ratio is behind us.

It appears the ratio is still a little high, and the recent increase was a combination of falling rents and rising house prices (probably due to the massive government intervention). I expect some further decline in prices, although it isn't as obvious as in 2005.

Comparison to LoanPerformance

And finally, here is a graph of the LoanPerformance index (with and without foreclosures) and the Case-Shiller Composite 20 index. Earlier LoanPerformance announced that house prices fell 0.7% in October.

This graph shows the three indices with January 2000 = 100.

The indices mostly move together over time. Notice how the total LoanPerformance index fell further than the index excluding foreclosures - and also rebounded more.

The seasonally adjusted Case-Shiller index increased slightly in October and the LoanPerformance index showed a decline. However Case-Shiller is an average of three months, so there might be a decline next month.

by Calculated Risk on 12/29/2009 09:30:00 AM

S&P/Case-Shiller released their monthly Home Price Indices for October this morning.

This monthly data includes prices for 20 individual cities, and two composite indices (10 cities and 20 cities). This is the Seasonally Adjusted data - some sites report the NSA data.

Click on graph for larger image in new window.

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

The Composite 10 index is off 30.5% from the peak, and up about 0.4% in October.

The Composite 20 index is off 29.5% from the peak, and up 0.4% in October.

NOTE: S&P reported this as "flat", but they were using the NSA data.

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

The Composite 10 is off 6.4% from October 2008.

The Composite 20 is off 7.3% from October 2008.

This is still a significant YoY decline in prices.

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

Prices decreased (SA) in 9 of the 20 Case-Shiller cities in October.

In Las Vegas, house prices have declined 56.3% from the peak. At the other end of the spectrum, prices in Dallas are only off about 5.4% from the peak - and up slightly in 2009. Prices have declined by double digits from the peak in 18 of the 20 Case-Shiller cities.

The impact of the massive government effort to support house prices led to small increases in prices over the Summer, and the question is what happens to prices as these programs end over the next 6 months. I expect further price declines in many cities. I'll have more ...

by Calculated Risk on 12/29/2009 09:05:00 AM

Still waiting for the data ...

From S&P:

“The turn-around in home prices seen in the Spring and Summer has faded with only seven of the 20 cities seeing month-to-month gains, although all 20 continue to show improvements on a year-over-year basis. All in all, this report should be described as flat.” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s.
...
As of October 2009, average home prices across the United States are at similar levels to where they were in the autumn of 2003. From the peak in the second quarter of 2006 through the trough in April 2009, the 10-City Composite is down 33.5% and the 20-City Composite is down 32.6%. With the relative improvement of the past few months, the peak-to-date figures through October 2009 are -29.8% and -29.0%, respectively.

Prices declined in 12 of the 20 Case-Shiller cities, and were flat in New York.

by Calculated Risk on 12/28/2009 11:54:00 PM

From Eric Pryne at the Seattle Times: Commercial real-estate market suffered in 2009; more of the same forecast for 2010

In 2007, developers excavated a deep hole in downtown Seattle at Second Avenue and Pine Street for the foundation of a 23-story luxury hotel and condo tower.

They filled the hole in 2009.

That pretty much captures the kind of year it's been for commercial real estate in the Seattle area.

Lots of good information in the article about commercial real estate in the Seattle area. After discussing rising vacancy rates and falling rents, the article finishes with this great quote:

"About a year and a half ago, we thought we were different," [Jim DeLisle, a University of Washington professor of real-estate studies] told one recent forum. "Nobody is really different."

How times did we hear "it is different here" during the housing bust?

by Calculated Risk on 12/28/2009 08:01:00 PM

Here is the monthly Fannie Mae hockey stick graph ...

Click on graph for larger image in new window.

Fannie Mae reported today that the rate of serious delinquencies - at least 90 days behind - for conventional loans in its single-family guarantee business increased to 4.98% in October, up from 4.72% in September - and up from 1.89% in October 2008.

"Includes seriously delinquent conventional single-family loans as a percent of the total number of conventional single-family loans. These rates are based on conventional single-family mortgage loans and exclude reverse mortgages and non-Fannie Mae mortgage securities held in our portfolio.
...
A measure of credit performance and indicator of future defaults for the single-family ... credit books. We include single-family loans that are three months or more past due or in the foreclosure process ... We include conventional single-family loans that we own and that back Fannie Mae MBS in our single-family delinquency rate, including those with substantial credit enhancement."

Just more evidence of the growing delinquency problem, although it is important to note these stats do include Home Affordable Modification Program (HAMP) loans in trial modifications (and the trial modification periods have been extended again).