by Calculated Risk on 12/31/2009 12:06:00 AM

From the NY Times: New York State Has First Deficit in General Fund

... For the first time in history, [New York]’s main bank account is poised to end the year in the red.

... New York had a negative balance of $174 million in its general fund on Wednesday, with nearly $1 billion in bills owed by day’s end. ... To fill the gap, New York will be forced to rely on ... raiding its short-term investment pool ... But that account itself is dangerously low, with only about $800 million on hand, compared with a balance in more flush years of as much as $16 billion.

And the lower the short-term balance falls, the harder it is for the state to cover its day-to-day bills and the closer New York moves toward a previously unimaginable eventuality: A government check that bounces.

No problem - just write IOUs.

by Calculated Risk on 12/30/2009 08:03:00 PM

This is a pretty bold squatter. According to Jim, the squatter moved in right after the tenant left ... and when the landlord (in foreclosure) showed up, the squatter called the cops and accused him of trying to break in - and apparently was able to obtain a restraining order against the owner ... it is now Jim's problem!

by Calculated Risk on 12/30/2009 04:55:00 PM

From the Treasury: Treasury Annouces [SIC] Resturcturing of Commitment To GMAC

Treasury will commit $3.8 billion of new capital to GMAC ... Prior to today's actions, Treasury had invested $12.5 billion in preferred stock of GMAC. Treasury owns $13.1 billion in preferred stock in GMAC, through purchases and the exercise of warrants, and 35 percent of the common equity in GMAC.

From the WaPo: U.S. taking majority ownership of GMAC

The Treasury Department said it will increase its stake in GMAC to 56 percent from 35 percent. It also will hold about $14 billion in what amount to loans that GMAC may eventually be required to repay.

by Calculated Risk on 12/30/2009 03:12:00 PM

I've added two polls on the right sidebar.

Predict the 2010 GDP growth and the Dec 2010 unemployment rate.

I'll post the poll results here tomorrow and post my own thoughts over the weekend.

Please feel free to post your predictions in the comments too - and I'll link to this post next year.

Best to all

by Calculated Risk on 12/30/2009 12:35:00 PM

Here is a comparison of real house prices and the unemployment rate using the LoanPerformance national house price data (starts in 1976) and Case-Shiller Composite 10 index (starts in 1987). Both indexes are adjusted by CPI less shelter. This is an update to a post earlier this year.

Click on image for larger graph in new window.

The two previous national declines in real house prices are evident on the graph (early '80s and early '90s). The dashed green lines are drawn at the peak of the unemployment rate following the peak in house prices.

In the early '80s, real house prices declined until the unemployment rate peaked, and then increased sluggishly for a few years. Following the late 1980s housing bubble, real house prices declined for several years after the unemployment rate peaked.

Although there are periods when there is no relationship between the unemployment rate and house prices, this graph suggests that house prices will not bottom (in real terms) until the unemployment rate peaks (or later, especially since the current bubble dwarfs those previous housing bubbles). This also suggests that real house prices are probably 10% or more too high on a national basis.

by Calculated Risk on 12/30/2009 09:51:00 AM

From MarketWatch: Chicago purchasing index reaches 16-month high

More businesses in the Chicago region were expanding in December than at any time in the past 16 months, based on the latest data from the Chicago purchasing managers index. The business activity index rose to 60.0% from 56.1% in November...

Readings above 50% indicate expansion, and below 50% indicate contraction, so this suggests business activity is increasing.

This index is for both manufacturing and service activity in the Chicago region. In general the Chicago area is considered representative of the mix of manufacturing and non-manufacturing business activity in the nation.

The national ISM manufacturing index will be released Monday, and the ISM non-manufacturing index next Wednesday.

by Calculated Risk on 12/30/2009 07:56:00 AM

From The Times: Japan pledges to end economic spiral (ht Jonathan)

Japan’s four-month-old Government ... today vowed to enlarge the economy by 150 trillion yen (£1 trillion) ...

The Democratic Party of Japan said that the scheme would deliver annual real GDP growth of at least 2 per cent between now and 2020 and ... is thought to be an attempt by the Government to quash rising domestic fears over the country’s gargantuan mound of public debt. The debt equates to about 180 per cent of GDP and will probably hit 200 per cent in the wake of the record budget announced last week.

Halfway through the Government’s ten-year plan, Japan's debt relative to GDP may rise to 246 per cent, according to analysts from the International Monetary Fund.
...
Since its property bubble burst 20 years ago, Japan has borrowed heavily to stimulate the economy and recent years have seen the level of debt spiral wildly.

Talk about a high level of debt to GDP.

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.