by Calculated Risk on 11/04/2005 01:23:00 AM

From the New York Times article: To Fight Rising Prices, Fed Nominee May Need New Weapons

Mr. Bernanke ... has also asserted, like Mr. Greenspan, that he does not intend to use interest rates prematurely to puncture an asset bubble. But he has signaled a readiness to use a different set of tools to fight the new inflation, and in this he departs from Mr. Greenspan.

What lifts asset prices, Mr. Bernanke and others argue, is the willingness of lenders to offer riskier types of loans, which "juice up the housing market and are not very responsive to interest rates," as Mark Zandi, chief economist at the research firm Economy.com, put it.

Lenders can engage in riskier loans because they have developed techniques in recent years that make it far easier for them to shed their vulnerability to risk, doing so mainly by shifting the risk of default to others. The lenders operate in sophisticated markets that allow thousands of individual investors to purchase a slice of the original loan, and a slice of the risk.

In the past, the danger of default as rates rose tended to discourage lenders from making overly risky loans. The lender, often a bank, kept the loan and bore all the risk. Mr. Bernanke, in response to the risk shifting, has raised the possibility of limiting the dangers through the use of regulations - microregulatory policy, he calls it.

"There are two ways to approach bubbles: one is interest rate policy, the other is microregulatory policy," he said in a little noted interview published last year by the Federal Reserve Bank of Minneapolis. "Microregulatory policy is the much better approach, in my view," Mr. Bernanke said.

Pursuing his point, he added: "Research on historical episodes suggests that large asset price increases are sometimes preceded by credit booms. In many cases, this pattern results from the fact that the country in question deregulated its banking system, giving banks extra powers, but did not enhance the supervisory structure adequately at the same time."

I believe tighter lending requirements would have minimized the housing bubble. Of course its too late this time.

by Calculated Risk on 11/03/2005 05:47:00 PM

From TheStreet.com: Zip Realty Warns

"It is important to appreciate that our fourth quarter and preliminary 2006 guidance is being provided in the context of what we believe to be a transitioning market, slowly shifting the advantage from sellers to buyers," said CEO Eric Danziger. "Evidence of this shift is seen in rapidly rising inventory levels in September and slightly declining median selling prices across our markets for the past two months." emphasis added

And from DataQuick:

California Foreclosures Edge Up

Foreclosure activity in California showed a year-over-year increase during the last quarter for the first time in more than three years, the result of lower appreciation rates and riskier loans...

"Current foreclosure levels are extremely low and this increase is a step towards more normal activity. Foreclosures decline when home prices go up. As home appreciation rates come down, we expect the foreclosure numbers to go up. They could double by the end of 2006," said Marshall Prentice, DataQuick president.

Just more evidence of a slowing housing market.

by Calculated Risk on 11/03/2005 12:32:00 PM

The OC Register reports: Mortgage lenders see profits shrink

Rising interest rates are hitting mortgage lenders in the wallet.

The owner of Irvine-based Option One Mortgage Corp. on Wednesday joined a chorus of profit-starved lenders. H&R Block,best known for its tax services, says its profit may be trimmed due to costlier mortgage making.

H&R Block CEO Mark Ernst told analysts Wednesday that profits may be at the low end of analysts' expectations because of increased borrowing expenses for its mortgage unit. He said rising short-term interest rates create "a difficult environment for anybody in this industry."

And this "difficult environment" will probably hit employment soon:

Lenders and related businesses added 15,000 workers - a 42 percent jump - in the past four years. One in four jobs created in [Orange County, CA] since 2001 have been in lending-related fields.

And "lending-related fields" are only a portion of the jobs directly related to the housing boom; other home related employment would include RE agents, construction, home inspectors and escrow officers.

And some interesting tidbits from the article:

But many lenders' profits are now shrinking. For example, Los Angeles-based lender and mortgage investor Aames said Wednesday that its pre-tax net interest margin - the gap between what it lends money at and the costs to acquire those funds - shrank to 2.12 percent in the third quarter from 2.39 percent in the previous three months.
...
Mortgage bankers made $4trillion in mortgages in 2003, a banner year. While business in the past two years has been exceptional - twice the annual average in the 1990s - it is expected to fall off some 18 percent in 2006 from 2005's projected $2.78 trillion, according to the Mortgage Bankers Association.
...
According to the National Association of Realtors, buyers were spending close to 21 cents out of every $1 earned on monthly mortgage payments during the second quarter of 2005. The group's housing affordability index - a measure of consumers' ability to make monthly mortgage payments started in 1970 - was at a low during the second quarter of 2005 not seen since 1991.
...
Roughly three-quarters of Orange County's homebuyers use adjustable-rate mortgages that help borrowers qualify for bigger loans.
...
Prashant Kothari, president of String Information Services, estimates that as much as $300 billion in adjustable-rate mortgages could be refinanced nationwide next year and $1trillion in 2007.

by Calculated Risk on 11/02/2005 10:32:00 AM

The Mortgage Bankers Association (MBA) released its weekly survey today:

The Market Composite Index — a measure of mortgage loan application volume – was 646.7, a decrease of 4.8 percent on a seasonally adjusted basis from 679.1, one week earlier. On an unadjusted basis, the Index decreased 5.2 percent compared with the previous week but was down 15.2 percent compared with the same week one year earlier.
...
"The seasonally adjusted purchase index is down 7.6 percent since last month. This decline is consistent with our expectations of a softening from the record level of new home sales during the first three quarters of 2005," said Doug Duncan, Chief Economist for the Mortgage Bankers Association.

Click on graph for larger image.

This graph show the seasonally adjusted MBA Market and Purchase indices since the beginning of July. The market index has been steadily declining for several months, mostly reflecting a slowing in refinance activity.

The purchase index had stayed steady, reflecting the continued strength in new and existing homes sales. Over the last month, the Purchase index has started to fall, probably indicating slowing home sales (these numbers are seasonally adjusted).

Mortgage interest rates continued to rise:

The average contract interest rate for 30-year fixed-rate mortgages increased to 6.21 percent from 6.06 percent on[e] week earlier...

The average contract interest rate for 15-year fixed-rate mortgages increased to 5.75 percent from 5.57 percent...

The average contract interest rate for one-year ARMs increased to 5.39 percent from 5.37 percent one week earlier...

First we saw rising inventories, now it appears we are seeing more signs of falling activity. Next I would expect to see prices flatten out or even start to decline.

by Calculated Risk on 11/02/2005 12:37:00 AM

The USA Today reports: Overheated housing market is cooling off

...there's nervous chatter about the recent increase in the number of homes for sale, sellers cutting their asking prices and builders wooing buyers with incentives.

The reason: There are signs that the overheated market might finally be cooling. The Commerce Department, for example, said sales of new homes in September fell shy of expectations, median prices declined 5.7%, and the number of new homes for sale shot up to a record 493,000. Freddie Mac also said October mortgage applications seem to be "tapering off."

The USA Today article covers familiar ground and adds these anecdotes:

• Ricardo Cortazar, a Realtor in Tempe, Ariz., says it now takes 35 days, on average, to sell a home. Six months ago, it took a week. Inventory in Arizona has swelled to 15,000 homes, vs. 6,000 in May.

• Vaughn Bryan, a real estate agent in San Bernardino County, has spotted another ominous trend: a rise in the number of 90-day listing contracts that expire without a sale.

• Dan Elsea, a Detroit Realtor, says it's common for sellers in the job-starved Motor City to reduce asking prices two, three or four times before signing a deal.

• Kelly Haslam of Madison, Wis., hasn't been able to sell her bungalow-style home despite putting it up for sale "by owner" seven weeks ago, hosting four open houses and dropping her price once.

• Judi Keenholtz, CEO of Empire Realty, which serves San Francisco's East Bay, says desirable homes in good school districts that used to fetch eight to 10 bids now get three or four.

The housing market does appear to be slowing.

by Calculated Risk on 11/01/2005 02:57:00 PM

Fiscal 2006 is off to a poor start as the increase in the National Debt set a record for the month of October. The National Debt increased $94.4 Billion to $8.027 Trillion as of Oct 31, 2005.


Click on graph for larger image.

The previous record for October was in 2003 (fiscal 2004) when spending for the Iraq war lead to an increase in the National Debt of $89.4 Billion. This October was negatively impacted by spending related to hurricanes Katrina and Rita.

Each month I will plot the YTD increase in the National Debt and compare it to the proceeding years. Even without the hurricane spending, I expect fiscal 2006 to set a new record for National Debt accumulation.

by Calculated Risk on 11/01/2005 12:05:00 PM

The AP reports: Construction spending hit all-time high in September

Construction spending set another record in September as the building industry continued to enjoy boom times.

The Commerce Department said construction activity rose 0.5 percent to an all-time high of $1.12 trillion at a seasonally adjusted annual rate in September...
...
Private construction rose by 0.6 percent to a seasonally adjusted annual rate of $871.5 billion with private residential building up an even stronger 1 percent, to $624.3 billion. Both the overall private construction figure and the residential activity were at all-time highs.

Both office construction and commercial buildings, a category that includes shopping centers, showed big gains in September.

Total government construction was unchanged in September at an annual rate of $248.5 billion after posting a 0.4 percent increase in August. Activity at the state and local level rose by 0.3 percent to a record high of $231.9 billion while federal building projects dipped by 4.5 percent to an annual rate of $16.7 billion.

New Home inventories are already at record levels, sales appear to be slowing, and residential construction activity is at record levels. Hmmm ...

by Calculated Risk on 10/31/2005 08:11:00 PM

Dr. Duy prepares us for another "measured pace" rate hike tomorrow: Fed Watch: Another Meeting, Another 25 Basis Points

"The above title makes the Fed sound just a little too predictable. But the hawkish rhetoric from Fed officials has been quite clear, and last week’s data adds to the case for additional tightening at what we have come to know as the measured pace.
...
...incoming data suggests the economy remains on cruise control despite the series of speed bumps the Fed keeps laying down. Does this mean the Fed just keeps laying down more bumps? For the rest of this year, the answer appears to be yes. I think the Fed is comfortable chasing the 10 year bond. Indeed, the bond market has recently cleared the way for additional hikes, with the 10 year yield rising above 4.5%."

But after the next couple of hikes, Dr. Duy expects the FED to become more data dependent:

"While policymakers might see the need for additional rate hikes, they realize a lot is also in the pipeline as well. With a considerable amount of accommodation removed, the Fed, I suspect, will soon start paying more attention to data that comes in on the weak side.

So what will the Fed be looking for in that respect? The Fed will be watching for additional evidence of a slowing housing market. Again, the point is not housing itself, but the expected negative impact of a housing slowdown on consumer spending. I doubt the early data and anecdotal evidence is enough to convince them that the housing ATM is closed, but if the housing bears are correct, we could see evidence in that direction pile up over the next couple of months.

Another red flag for the Fed would be sputtering investment spending. Greenspan’s speeches and the minutes suggest that policymakers expected investment spending to hold strong, and they were a little disappointed by what they were seeing..."

Hey, hey, hey ... I think those housing bears are correct! Read Dr. Duy's entire post - it is excellent as always.

And a couple of comments on the "data". Dr. Kash is concerned about personal income growth and the negative savings rate: Slowing Growth?

And to add to Kash's concerns, I've noticed that the data on personal savings has been steadily revised downward.

Click on graph for larger image.

The graph shows the monthly personal savings (Billions $ annual rate) from the BEA's monthly Personal Income and Outlays report.

The purple bar is the initial reported value, the red bar the most recent revision.

With the exception of March (minor upwards revision), all of the revisions have been negative. This might indicate a change in trend. I wonder if this concerns the FED?

by Calculated Risk on 10/31/2005 10:15:00 AM

The Census Bureau released the 3rd quarter Housing Vacancies and Homeownership (PDF) report today.

National vacancy rates in the third quarter 2005 were 9.9 percent for rental housing and 1.9 percent for homeowner housing ...

The Home Ownership rates was 68.8%.

The housing survey is subject to large errors and readers must be careful evaluating quarter to quarter changes. But the report does show these trends:

1) Vacancy rates might have peaked for rental housing at the historically high rate of around 10%, and

2) The vacancy rate for homeowner housing is at a record level and might still be increasing.

This level of vacancies indicates significant excess housing capacity.

Here is the Census Bureau site for Housing Vacancies and Homeownership with definitions and historical tables.

by Calculated Risk on 10/31/2005 01:40:00 AM

My Angry Bear post is up: GDP and Housing.

Dr. Thoma excerpts Krugman's Ending the Fraudulence. I would like to echo Dr. Thoma's comments on the media.

Journalists need to ... ask themselves how to do a better job of presenting objective analysis on economic matters rather than the opinions of pundits from both sides. That’s a lot harder than grabbing the usual talking heads who say the usual things, it will require digging in and doing research, seeking out and talking to the real experts in the field, and understanding the issues before reporting on them.

Of course the media tries to be "fair" and report both sides. When one side is spouting nonsense, reporting both sides equally is absurd. Dr. Krugman once joked that if President Bush said that the Earth was flat, the headlines of news articles would read, "Opinions Differ on Shape of the Earth."

And finally, I have suggested that the UK's current economic problems might be an example of what will happen in the US, after the housing market slows, since the BoE started raising rates sooner than the FED. Australia is another country to watch: Home sales stall on slowdown

SALES of new homes and units plummeted 16 per cent in September with no sight of a recovery in the housing market, figures released today show.

The sale of new houses fell by 20 per cent while the sale of multi-units rose 9.4 per cent over the month, the Housing Industry Association (HIA) said.

New home sales are less than half their level two years ago before the property market had started to cool with higher interest rates.

Australia's peak building industry body said there was no sight of recovery in housing demand.

Dilbert (Scott Adams) has started blogging: Enjoy!