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Monday, August 25, 2008

Housing/Subprime/Credit Roundup — August 25, 2008

Items of Interest:

U.S. Existing Home Sales Rose 3.1 Percent in July -- Sales of previously owned homes in the U.S. rose in July from a 10-year low, while the gain wasn't enough to reduce the supply of properties on the market.

Resales rose 3.1 percent, more than forecast, to an annual rate of 5 million from 4.85 million in June, the National Association of Realtors said today in Washington. The median price dropped 7.1 percent from July 2007, and the number of homes for sale jumped to a record.

Record foreclosures have pushed property values down even more, luring some bargain hunters into the market. Still, stricter lending rules, rising unemployment and a glut of unsold houses signal the outlook for residential real estate remains grim.

``It'll be a while before we get a real recovery in housing,'' Stephen Gallagher, chief U.S. economist at Societe Generale in New York, said before the report. ``These things take time to work through. Prices have come off, so that's helping home sales a little.'' . . .

Barry Ritholtz /The Big Picture:
Existing-home sales drop 13.2% as prices fall 7.1% -- Prices also fell. The national median existing-home price for all housing types was $212,400 in July, down 7.1% from a year ago prices of $228,600. The NAR notes that "The only valid comparisons for median prices are with the same period a year earlier due to the seasonality in buying patterns. Month-to-month comparisons do not compensate for seasonal changes, especially for the timing of family buying patterns. Changes in the geographic composition of sales can distort median price data."

We have mentioned this seasonality before, but that is not the only factor involved in the monthly sales increase. About 40% of the existing home sales are now distressed nationwide. Hence, the downward pressure on prices, which are attracting value buyers...

Kevin Depew / Minyanville:
Fear Mixed With Incredulity -- These days, hammering a For Sale sign in the front yard of a home must feel a bit like driving a stake into the rotting corpse of a vampire; fear mixed with incredulity and the foggy notion that this unnatural gesture may not, in fact, work. And so we get headlines like those streaming across the wires this morning: "Existing US Home Sales Up 3.1 Percent in July." That's good, but only until nightfall. Then the bad craziness begins all over again...

Fil Zucchi / Minyanville:
Here come the condos!! -- This morning housing data showed a jump in condos for sale from 595k units last month, to 769k units this month. That is a huge increase and puts the months-supply of condos on the market at an eye-popping 15.1 months.

A couple of thoughts: First this probably reflects the coming onslaught of condos being delivered and being put back on the market immediately. I say the "coming onslaught" as opposed to "the onslaught" because it won't be until whole new projects deliver and construction financing expires, that we will see the real hit of entire developments being foreclosed on by lenders.

Second, areas like the District of Columbia proper (not the suburbs where the bloodbath is in full swing), which so far have not seen meaningful price declines are about to take it on the chin. Privately owned units in a tell-tell development I have been watching for years are on the market for $50k (15%) less than what new units are being marketed for.

What this all adds up to is that we may be about to start the last leg down of the greatest financial bubble in history. That's not necessarily good news since these kind of "last plunges" - in any market - tend to be the most violent and painful, and once they are over the market is likely to flatline for years...
John Mauldin / Minyanville:
Financials in Trouble, Part 1 -- Bank failures could total $850 billion.

The US Banking System Is in Trouble

A few weeks ago when I was in Maine, I met Chris Whalen. Chris is the managing director of a service called Institutional Risk Analytics, whose primary business is analyzing the health of banks and financial institutions.

If you’re one of their clients, you can go to their website and drill quite deep into all aspects of every bank in America. And they’ve come up with various metrics to compare how well-capitalized a bank is, how much risk it's taking and what kind of losses (or profits) it can expect. It’s a one-of-a-kind firm, and the data gives Chris a very special perspective on the US banking system.

And what he sees isn’t pretty. There’s a crisis brewing. He expects 100 banks to fail between now and July of 2009. Most of them will be small, but there will be a few large banks. He estimates their total assets at $850 billion (not a typo!). Those are the assets the FDIC is going to have to cover when they take over the banks...
Bennet Sedacca / Minyanville:
Dead Banks Walking?

Libor Signals Tighter Credit as Banks Balk at Lending -- In a replay of the last four months of 2007, interest-rate derivatives imply that banks are becoming more hesitant to lend on speculation credit losses will increase as the global economic slowdown deepens. Binit Patel, an economist in London at Goldman Sachs Group Inc., said in an Aug. 21 report that nations accounting for half of the world's economy face a recession.

The premium banks charge for lending short-term cash may approach the record levels set last year, based on trading in the forward markets, where financial instruments are sold for future delivery. Back then, concern about the health of the banking system led investors to shun all but the safest government debt, sparking the biggest end-of-year rally for Treasuries since 2000...

Losses and writedowns on securities related to home loans to people with poor credit now exceed $504 billion at financial institutions...
John Mauldin / Minyanville:
Financials in Trouble, Part 2 -- It's almost a foregone conclusion that the US Treasury will have to step in and essentially nationalize the 2 government-sponsored enterprises. The estimated losses in these 2 firms are far beyond what they could raise in a traditional market. And the longer the government waits, the worse the situation is likely to get.

Moody’s downgraded the preferred stock in these firms to almost junk levels because of the increased likelihood of “direct support” from the US Treasury. Depending on the nature of the support, this could wipe out holders of both common and preferred...

The basic problem is this: Without Freddie and Fannie, the mortgage market would go from crippled to moribund, if not dead. We've created a system that couldn't function without them, and the cost of allowing them to collapse would be another 1930s-style Depression - the era in which these firms were first created.

They were never designed to take on the huge leverage they did, nor to use hundreds of millions in lobbyists' money and campaign contributions to create a massive payment scheme for management and shareholders. Congressional estimates are that this could cost US taxpayers $25 billion, a significant multiple of their current market caps...
Andrew Jeffery / Minyanville:
Mortgaging the Future -- Mark Zandi, chief economist at Moody’s Economy.com, estimated earlier this year that as many as 10% of all U.S. homeowners, or 8 million borrowers, are upside-down. With the median home price hovering around $200,000, this means the true value of housing stock (around $1.6 trillion) cannot be determined.

Thus far, home prices on a nationwide basis have fallen around 15% (depending on whose data you believe), which means roughly $240 billion in home equity is yet to be wiped out - despite the fact that it no longer exists...
Wall Street Journal:
Home-Price Watchers Hope Drop Slows -- This week's housing-market data won't erase the souring situation surrounding Fannie Mae and Freddie Mac, but there still might be a way to make lemonade.

Start with the S&P/Case-Shiller home-price-index report due out Tuesday. It will likely show continued price declines across the country as the housing slump drags on. Those are the lemons. To sweeten that up, look to the rate of price declines in hard-hit markets such as those in California and Florida. If the rate of declines slows, as some experts expect, there is your sugar...

In Merced, Calif., of the central valley, frames of houses in the Riverstone development have bleached in the sun for more than a year.Merced, California: abandoned Riverstone housing development

NY Times:
In the Central Valley, the Ruins of the Housing Bust -- As Merced goes, so might go much of the nation. With as many as 2.5 million homes in the United States entering foreclosure this year and, at best, sales of only five million existing houses, the foreclosure price is becoming the rule in many areas. In Los Angeles County, whose 10 million people make it the most populous county in the United States, a third of the sales are foreclosures.

Local markets will not truly begin to recover until their foreclosures are absorbed, but just as few in Merced saw reasons for caution at the height of the boom, hardly anyone is optimistic now. Bank repossessions are accelerating as overleveraged owners see the value of their properties sink. Merced County had a record 523 foreclosures in July, quadruple the rate of a year earlier, according to DataQuick.

The repossessions are accelerating as overleveraged owners see the value of their properties sink and can find no way out...
These homes for sale stink -- Never before have there been so many squalid, dilapidated homes on the market - and they're helping to exaggerate already-plummeting home prices.

Mold, maggots and piles of festering trash - no wonder home prices are in freefall.

It's not just the subprime mortgage crisis that's to blame for plummeting home prices. A flood of squalid properties on the market is helping to exaggerate the post-bubble price declines.

"Part of the reason home prices are declining is a fundamental deterioration in the housing stock," said Glenn Kelman, CEO of the online, discount broker Redfin. "During the boom, nine out of 10 houses for sale in many markets were in prime condition. Now, for every 10 houses, at least three are dogs."

Most of these mutts are foreclosed properties that have been permitted to fall into disrepair by lenders overwhelmed with thousands of vacant homes. If these houses sell at all, they're going for bargain basement prices that are hurting home values throughout the neighborhood...
The Anglo American:
MERRILL LYNCH: US Sub-Prime Gambling Debts Paid for by British Tax Payer for the next 60 years. -- Merrill Lynch has run up a $29bn loss from its collateralized debt obligations, which are backed, though not completely, by subprime mortgages. This debt has now been channeled through its UK subsidiary, Merrill Lynch International.

UK law allows such losses to be carried forward indefinitely, setting them against future profits. The Financial Times estimates that Merrill Lynch will be able to lower its UK tax bill by as much as $8bn...
Gretchen Morgenson / NY Times:
What Will Mac ’n’ Mae Cost You and Me? -- THE inevitability of a taxpayer-funded bailout of Freddie Mac and Fannie Mae, the hobbled mortgage behemoths, shook investors last week, and shares in both companies plummeted on fears that existing stockholders would be wiped out...

There is no certainty about what form a Mac ’n’ Mae rescue would take. Naturally, this is giving investors the jitters. Up and down Fannie’s and Freddie’s capital structure, debt and equity holders want to know how a bailout would affect them...
NY Times:
Finding the Mess Behind the Mess -- A BURSTING real estate bubble set off the Japanese recession of the 1990s, which deepened as ailing banks languished. It took Japan’s economy more than a decade to resume steady, noticeable growth.

Will this happen to the United States? Probably not, but we may face a protracted process of recovery, stretching longer than the two or so years usually required to climb out of recession.

Behind every financial crisis there is usually a crisis in the real economy, based in some underlying structural deficiency. Even if the financial crisis is bottoming out, sooner or later the real crisis must be faced.

The fundamental problem in the American economy is that, for years, people treated rising asset prices as a substitute for personal savings. The thinking went something like this: As long as your home’s value rose every year, you didn’t have to set aside so much from your paycheck.

Of course, asset prices haven’t been rising much lately, so many people will need more savings for their retirement or for possible emergencies...
Seeking Alpha:
Real Estate Bubble Is Only in 4 States: CA, FL, NV, AZ -- For four states (Arizona, California, Florida and Nevada) there has definitely been a real estate bubble with a definite crash in prices in in recent quarters (see top chart above of Nevada). For six other states (Hawaii, Maryland, Massachusetts, Michigan, Rhode Island and Virginia), there's some correction in prices going on, but not enough of a price drop to make it a crash (subjective opinion, see middle chart above). For the other forty states, it seems clear that there hasn't been a crash at all, and real estate prices have continued to increase in most of those forty states...
NY Times:
A Mission Goes Off Course -- Whenever the mortgage finance giants, Fannie Mae and Freddie Mac, find themselves in a tough spot — and boy, are they in a tough spot now! — they always seem to find a way to blame their problems on “the mission.” “We exist to expand affordable housing,” says Fannie Mae on its Web site, and although it also lists its other mission — providing liquidity for the American housing market — it is the former that has long been the companies’ trump card.

That mission of creating affordable housing is the reason that Alan Greenspan, the former Federal Reserve chairman, could testify, year after year, that Fannie and Freddie had become so large, and took so much risk, that they could one day damage the nation’s financial system — only to be utterly ignored by the same members of Congress who otherwise hung on his every word.

The mission is why Representative Barney Frank, the powerful, and usually clear-eyed, chairman of the House Financial Services Committee, will defend Fannie and Freddie even now, when their misdeeds are so clear...

Doctor Housing Bubbe:
10 Reasons why there will be no Second Half Recovery in 2008: Federal Reserve, Housing, and Jobs -- Reason #6 - Lenders are Stuck -- Lenders are sticking their fingers in their ears and trying to ignore the bombastic sound of the piper coming down the street. They don’t want to listen to the utter reality that we have $500 billion in shameless toxic pay option mortgages that are set to reset starting NOW. These loans will prove to be more troublesome than the subprime loans for a variety of reasons. First, the housing market has no buffer room anymore. That is, the entire housing market is in shambles and people will now be selling at the worst time possible...
Mish's Global Economic Trend Analysis:
Repossessed Toys Are A Booming Business -- The San Diego Union-Tribune is reporting The Economy is forcing many to let go of luxury toys...

From Yachts To Luxury Autos, Loans Go Unpaid As The Economy Struggles. It's a Boom Time For Repo Man...

InsideBayArea is reporting Gas, economy drown Delta boating...

Frugality is the new reality. For many it is a forced event.

Calculated Risk

MishTalk - Mike Shedlock

Paul Krugman - NY Times

The Big Picture - Barry Ritholtz

naked capitalism - Yves Smith

Pragmatic Capitalism

Washington's Blog

Safe Haven

Paper Economy

The Daily Reckoning - Australia