Tuesday, September 30, 2008

The Wall Street Bailout (Otherwise known as: The Economic Stabilization Bill)

An open letter to our elected officals:

Reference: The Wall Street Bailout (Otherwise known as: The Economic Stabilization Bill)

I strongly urge you to vote AGAINST any additional measures to bail-out Wall Street, financial and mortgage firms.

As a citizen who pays a lot of attention to politics and votes every time an opportunity presents itself, I also spend a lot of time talking with friends, associates, clients, and anyone who is willing to listen, and I espouse a strong conservative and libertarian point of view. I will make a very determined and pointed effort to share my perspective with anyone that is willing to listen. I will also identify those politicians who exercised good judgment and voted AGAINST any and all measures designed to bailout these firms. I will make a very determined effort to expose those who vote FOR such bailouts.

I am a well educated professional with an MBA in Corporate Finance and Investments, and am also someone who spent many years in the corporate world and am now a small business owner as well as home-owner; I am a strong supporter of the free market system.

I know that my success as a business owner is completely dependent on my ability to keep my business solvent and to generate sales and manage my business in a competent fashion.

I also know that I cannot depend on a government bailout, I cannot pay lobbyists and that I cannot make large campaign contributions in an effort to sway my politicians points-of-view.

Any business that makes poor business decisions MUST be accountable to the free market system. Therefore if liabilities exceed assets, these firms MUST be dissolved, forced into bankruptcy or otherwise shuttered. There cannot be any other response.

The strong will survive and the weak will succumb. This is what our free market system should be all about. These are the options that I face every day.

I am appalled at the thought of government further entwining itself within the free market system. The democrats, as well as many republicans, set the stage for this financial debacle. Everyone who helped Fannie May and Freddie Mac should be held FULLY accountable. What happened to Sarbanes-Oxley? What happened to regulatory checks and balances?

Where are the investigations and hearings into these individuals and issues? Why are Barney Frank, Maxine Waters, Charles Rangel, Chuck Schumer, Franklin Raines, Chris Dodd, Bill Clinton, Nancy Pelosi, Harry Reid and other GUILTY individuals not being put on trial for their criminal actions?

If you have voted AGAINST these bailout measures, I applaud you and further encourage you to stand strong and resist the pressure to succumb to the pressures that will ultimately lead to the elimination of the free market system as we know it.

If you have voted FOR or are considering voting for these measures, I will tell you that the average American citizen is not stupid and naïve as many of you would like to believe, and you will be held fully accountable for your ignorant and dangerous pandering to the lobbyists and financial firms.

We are actively participating in this process; we are closely watching your actions. We will reward those who act with prudence and good judgment. Come election time, we will punish harshly those who exercise bad judgment.

Tuesday, September 09, 2008

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Wednesday, May 07, 2008

A current assessment of the economy

Check out this article on Inman News, I agree completely with the assessment of the author and would recommend that everyone with a vested interest in understanding where we really are in this economic cycle, take a read:

"Recession could run deep, economist cautions
Industry analysts cite declining dollar, oil spikes and foreclosuresBy Glenn Roberts Jr., Wednesday, May 7, 2008.
Inman News"


Vito Boscaino
Managing Partner
Help-U-Sell North High Realty


Tuesday, April 22, 2008

The Mortgage Mess - FHA's Risky Business

Joshua Zumbrun and Maurna Desmond

In the wake of the subprime mortgage debacle, who on Earth would loan to "first-time home buyers whose high rents left them strapped for cash" or borrowers "with strong current incomes but not a lot of savings"? Wells Fargo says it will--with a little help from the federal government.
Touted as a savior in the housing crisis by Congress and the White House, the Federal Housing Administration is being turned into a bank's best friend. Major U.S. lenders are again aggressively enticing risky borrowers, offering FHA-backed mortgages with attractive terms and as little as 3% down. Meanwhile, the agency watches as its liabilities balloon.
As a result, the nation's mortgage market is quietly undergoing a radical and potentially risky transformation that shifts liability for hundreds of billions of dollars on to the government's books.

"FHA delinquencies tend to be quite high," says Alex Pollock, a fellow at the American Enterprise Institute and former president of the Federal Home Loan Bank of Chicago. "They are substantially higher than the prime market--not as high as the subprime market, but nonetheless quite high. You're in a sector of the market that is by definition risky."

Bill Glavin, special assistant to FHA Commissioner Brian Montgomery, says the FHA has been "inundated" with requests by business-strapped banks to become FHA-certified lenders. He expects the FHA to increase loan volume by 168.2% in fiscal year 2008 (ended September 30), insuring 1.14 million loans, up from 425,000 in 2007. The agency expects to guarantee $224 billion worth of loans in 2008.

On Thursday, Ginnie Mae--a government-owned company with more than two-thirds of its securities portfolio comprised of FHA-backed loans--announced a 114% surge in volume. They issued $39.1 billion in the first quarter of 2008, up from $18.3 billion during the same period last year. The company also expects its total portfolio of outstanding securities to grow to more than $600 billion by the end of the year, reflecting a 35.2% increase from the $443.8 held by Ginnie in 2007.

From Wells Fargo (nyse: WFC - news - people ) to Countrywide (nyse: CFC - news - people ), lenders see opportunity, driving the numbers. Bank of America (nyse: BAC - news - people ) Government Lending Executive Allen Jones says his company is "actively promoting" FHA-insured loans through "all of its sales channels." Jones expects the percentage of BofA mortgages insured by the FHA to be 30% to 35% by the end of the year, up from just 2% in 2006.

The FHA's growing role in the mortgage market "will clearly fill the void of subprime financing," says Vicki Wagner, an analyst at Standard & Poor's. Wagner said an FHA loan "by definition, looks and acts like a subprime loan."

The FHA's admirable, longstanding aim, of course, is to help home buyers snag keys to their American Dreams. Throughout the housing boom, more than 80% of FHA-insured loans went to buyers with less than 5% equity in their homes. In the early years of the boom, this was a safe bet. A $200,000 home might be purchased with a $190,000 loan--a 95% loan. In a few years, the home price might rise to $250,000, meaning the borrower has a 25% equity stake in the home. That's about the same portion of a loan that a private mortgage insurer would vouch for, even though FHA backs its loans 100%.

Unlike private mortgage insurers, the FHA requires an up-front premium, providing an extra cushion to cover its costs. Another difference from the worst of the online click-and-borrow hucksters: FHA's government-backed mortgages require income and asset documentation and have real underwriting rules. The FHA Secure program, through which subprime loans can be refinanced into FHA-insured loans, is only open to owner-occupied housing; properties purchased by speculators hoping to flip a home quickly amid rising prices are unable to benefit.

In July, the FHA celebrated these prudish lending practices, which had resulted in half the foreclosure rate of commercial subprime lenders. (See "Mortgage Lending's Benevolent Bureaucracy.")

But as the housing market melted, politicians looking to soften the blow turned to the agency for help. In August, President Bush announced a program expanding the FHA so an additional 240,000 risky borrowers could benefit from its mortgage insurance program this year alone. The program also altered the code to help borrowers refinance their loans with FHA insurance. (See "This Is Not A Bailout.") Then, in February, a congressional stimulus package allowed the FHA to increase its loan maximum to 125% of a market's median value, up to $729,750 from $362,790 for single-family homes.

Now legislators have proposed allowing borrowers unable to pay off the full value of their loans to reduce their debt to fit their home's diminished market value, backed by FHA insurance. If a lender were to foreclose, it could not recover more than this value anyway. With FHA insurance, the argument goes, everyone gets an incentive to refinance. (See "Third Way For FHA.")

Combined with a credit-starved mortgage market, the moves resulted in 87.8% growth in government loan applications from Aug. 3 to April 4. Conventional loans averaged just 12.6% growth during the same time.

The FHA estimates that, ultimately, 500,000 borrowers will avail themselves of the refinancing program announced in August and expanded earlier this month. Thus far, the average refinancing has been $190,000. If this average remains constant, the FHA portfolio would increase by $95 billion. In fact, this estimate may be low: The average loan price is likely to rise, as the ceiling on these loans was raised by the Economic Stimulus Act, making even more expensive loans eligible.

The FHA's default and delinquency rates fall between subprime and prime rates. In the Mortgage Bankers Association's most recent National Delinquency Survey, FHA foreclosure starts stood at 0.91%, much higher than the 0.22% rate for prime fixed-rate loans, but much lower than subprime fixed-rate loans at 1.52% and subprime adjustable-rate mortgages at 5.29%.

In 2007, the FHA's liability for loan guarantees amounted to $7 billion, an increase from $3 billion in 2006. With its portfolio continuing to increase, this liability will rise, but so will income from its initial premiums. In the FHA's report to the Office of Management and Budget, the FHA projected its premiums would continue to cover its liabilities in 2009, but only narrowly.

FHA only provides "guidelines" for who can benefit from an FHA loan. Glavin said the agency allows individual lenders to independently define what a "first-time home buyer" means, and also to decide whether a borrower is creditworthy.

FHA loans have no minimum credit score and no income cap. The only rock solid requirement is a 3% down payment; some politicians are also proposing to lower this to 1.5%, and others advocate zero payment.

Regardless of credit risk or how much equity a homeowner has, FHA borrowers pay a flat initial premium of 1.5%. On a $200,000 loan, the premium works out to $3,000. The borrower then pays an annual premium of 0.5%, in this case, $1,000 a year.

But while 0.5 % is also a fairly standard insurance rate in the private mortgage insurance market, the FHA does not have an average portfolio of borrowers. Once home prices stopped rising, FHA continued insuring homes with less than 95% equity. In 2006 and 2007, the insuring of homes with minimal equity continued--75% and 78% of the loans it insured were in this high-risk group.

The FHA is pressing Congress for permission to adjust insurance premiums to reflect risk. Glavin said that with increased volume, the inability to factor in the likelihood of default could create real solvency problems for the FHA down the road.

Nonetheless, the Department of Housing and Urban Development defends the FHA's practices.

"It's reasonable risk and it's compassionate, given the circumstances that we find ourselves in," says HUD spokesman Brian Sullivan.

Taxpayers had better hope he's right. As FHA's Glavin points out: "Now that subprime financing has dried up, you will see more of those borrowers in FHA loans--because we are virtually the only game in town."

Existing-Home Sales Decline


WASHINGTON -- Existing-home sales fell during March after making a surprising climb in February.

Home resales fell to a 4.93 million annual rate, a 2.0% decrease from February's unrevised 5.03 million annual pace, the National Association of Realtors said Tuesday. Resales fell 19% from March 2007's 6.11 million rate.

The median home price was $200,700 in March, down 7.7% from $217,400 in March 2007. The median price in February this year was $195,600. Falling prices have kept would-be buyers from signing off on property as they wait for still-lower price tags.

NAR economist Lawrence Yun said the market is performing unevenly. "Though mortgage rates are at historically low levels, some borrowers are facing restrictive lending practices in declining markets," Mr. Yun said. "At the same time, many buyers continue to bide their time with a larger number of homes to choose from, while other potential buyers remain on the sidelines."

Lenders have tightened their standards on home loans, contributing to the credit crunch that is restraining the U.S. economy. Those tighter standards have priced marginal buyers out of the market and made purchasing more difficult and costly for prime borrowers.

The March resales level was right in line with Wall Street expectations of 4.93 million sales rate for previously owned homes. The average 30-year mortgage rate was 5.97% in March, up from 5.92% in February, according to Freddie Mac.

Inventories of homes increased 1.0% at the end of March to 4.06 million available for sale, which represented a 9.9-month supply at the current sales pace. There was a 9.6-month supply at the end of February.

Regionally, existing-home sales in March were mixed.

Sales fell 6.5% in the Midwest, rose 2.2% in the Northeast, rose 2.2% in the West, and fell 3.5% in the South.

Write to Maya Jackson Randall at Maya.Jackson-Randall@dowjones.com

What's Analyst Worth? Not Even Penny a Share as Estimates Miss

By Peter Robison

April 22 (Bloomberg) -- This earnings season may expose how much Wall Street analysts rely on guidance in making estimates, as the credit crunch and weakening economy make it harder for companies to meet or beat the numbers.

At least 27 companies have matched or topped Wall Street estimates in every quarter since 2000, including Coach Inc. and Starbucks Corp., according to data compiled by Bloomberg. General Electric Co. ended a 32-period winning streak on April 11. Goldman Sachs Group Inc. called GE and other early misses ``a sign of things to come,'' saying it expects more companies to fall short of first-quarter estimates.

In good times, companies often use the flexibility of accounting rules to choose when they book revenue and costs, creating an impression of predictable earnings, said Thomas Russo, a partner at Gardner Russo & Gardner. The economy's decline and the freeze in credit markets are making that harder.

``Companies are smooth and steady and growing, right up until the point they collapse,'' said Russo, who manages about $3.5 billion. His largest holding is Warren Buffett's Berkshire Hathaway Inc., famous for not providing quarterly forecasts.

The real puzzle is why GE hadn't missed estimates since at least 2000, said Shiva Rajgopal, an accounting professor at the University of Washington in Seattle. If analysts made their own judgments independent of company forecasts, the probability of compiling a record like GE's by sheer chance would be about 1 in 100 billion, based on a standard statistical equation, similar to a coin flip, he said.

`Silly' Game

``The whole game is silly,'' said former U.S. Securities and Exchange Commission Chairman William Donaldson, who led a group that recommended abolishing quarterly forecasts and reducing the amount of executive compensation tied to quarterly earnings per share. ``Earnings themselves are subject to interpretation.''

The so-called earnings game each quarter makes stock prices more volatile, wastes corporate resources and may encourage managers to use aggressive accounting or delay investments, according to a report Donaldson helped produce in June for the Committee for Economic Development, a Washington nonprofit policy group formed in 1942 to promote ``sustained economic growth.''

The earnings game costs anyone who invests in a mutual fund, by obscuring real corporate performance and through commissions from short-term, speculative trades, according to the report. Those extra fees may have cost $70 billion in 2005 alone, it found.

`Buy' Ratings

Most analysts missed the earnings shortfall for Fairfield, Connecticut-based GE, the world's biggest supplier of power- plant turbines, locomotives and medical imaging machines.

Sixteen of nineteen had ``buy'' ratings on the shares before the company said April 11 that profit from continuing operations fell 12 percent to $4.36 billion, or 44 cents a share, 7 cents less than the average Wall Street estimate. Its shares have fallen 12 percent since then to $32.46 yesterday. General Electric, which also sells financial services, said the seize-up in credit markets prevented it from closing some transactions.

``We're doing the best job forecasting that we know how,'' Chief Financial Officer Keith Sherin said the day General Electric reported earnings. ``I guess we could have forecast much lower earnings and just left an open category called unknown volatility, but that's not the way we do business.''

A 2000 SEC rule, the 2002 Sarbanes Oxley Act and a 2003 SEC settlement with securities firms all contained provisions intended to make Wall Street research more independent. By some measures, research has become less accurate.

Moving Target

In the fourth quarter, the almost 1,800 equity analysts overestimated final results by 33.5 percentage points, the biggest miss ever, based on data compiled by Bloomberg. Yet 62 percent of companies in the Standard & Poor's 500 Index beat average estimates -- because analysts lowered their forecasts as the quarter progressed. First-quarter numbers show a similar trend, with 55 percent of the 111 companies reporting so far exceeding the average estimate.

Until the recent quarter, GE and 27 other companies in the S&P 500 always met or exceeded Wall Street's average estimates dating back to 2000, Bloomberg data show.

While those companies' shares outperformed the S&P 500 during that span, seven of them -- including GE, Seattle-based Starbucks, the world's largest coffee retailer, and Atlanta- based Coca-Cola Co., the world's largest soft-drink maker -- lagged behind the benchmark index during the past five years.

GE, for instance, rose 36 percent from April 4, 2003, through April 4, 2008, compared with a 56 percent gain for the index. During the 32 quarters when its earnings met or beat estimates, GE's share price dropped 39 percent, while the S&P 500 was unchanged.

`Wrong Reasons'

``Quarterly earnings per share are at best a finger in the wind,'' said Nicholas Heymann, an analyst at Sterne, Agee & Leach Inc. who started his career as a General Electric auditor in 1977.

``People are obsessed for the wrong reasons.''

Other companies performed well for a time, only to stumble. KB Home exceeded profit estimates for 29 straight quarters, until the real estate market collapsed and the Los Angeles homebuilder lost $1.93 a share in the second quarter of 2007.

After rising fivefold from April 2003 to April 2007, New York-based Coach, the largest U.S. luxury-goods maker, fell 40 percent in the past year, compared with a 9 percent drop for the S&P 500. In one stretch from 2003 to 2005, Coach beat the average estimate by exactly 1 cent for 10 consecutive quarters.

Revenue growth and productivity gains are fueling the earnings streak, said Andrea Resnick, a Coach spokeswoman. The company is scheduled to report today.
Earnings Priority

Rajgopal, the University of Washington professor who has studied the earnings game, said pressure to meet quarterly targets can hurt investors. He helped survey 400 executives about management choices in 2005, and said he was surprised to find that 78 percent would sacrifice long-term investments for smoother earnings.

``Guidance serves a purpose,'' he said. ``It helps managers communicate a summary number that captures all the changes in the business. On the other hand, it can easily be abused.''

A 2006 paper by researchers at the University of Southern California in Los Angeles and New York's Columbia University, ``Earnings Management and Managerial Myopia,'' sought to document the costs of the earnings game.

The paper labeled 989 public U.S. companies as either dedicated guiders or occasional guiders, based on how often they gave quarterly direction. The study found that the value of dedicated guiders' assets declined 2.7 percent from 2000 to 2003, while occasional guiders achieved a 7.8 percent gain.

Less R&D

Frequent guiders spent about 25 percent less on research and development. The authors theorized that some companies scale back on R&D to meet earnings goals.

``Everyone is so focused on one number, forgetting that the much more important thing is the long-term growth of the company,'' said Yuan Zhang, who co-wrote the paper and teaches accounting at Columbia's Graduate School of Business.

Quarterly forecasts are an unintended consequence of the 1995 Private Securities Litigation Reform Act, which exempted companies from legal liability for making forward-looking statements. Investors had pressed for the law as a way to increase the information available.

Instead, it became a way for analysts to avoid doing their own legwork, said former Tupperware Corp. CEO Warren Batts, who said he was irritated by frequent requests for guidance in the 1990s.

`Hero to Bum'

``We went from hero to bum every three months,'' Batts said. ``It's such a ridiculous game.''

The SEC began regulating how companies communicate with analysts in 2000, when it passed Regulation FD, for fair disclosure. The rule barred officers from slipping market-moving news to favored investors before general dissemination.

Accounting scandals at Enron Corp. and WorldCom Inc. led to the 2002 Sarbanes Oxley Act, the most sweeping reform of U.S. financial laws since the 1930s. In addition to stiffening criminal penalties for financial fraud, the law forced analysts to disclose conflicts of interest and barred employers from retaliating against analysts who wrote negative reports.

In 2003, Citigroup Inc., Merrill Lynch & Co. and eight other securities firms paid a $1.4 billion fine to settle allegations of biased research and agreed to stop compensating analysts based on how much investment-banking business they helped generate.

Guidance in Statements

While Regulation FD prevented companies from making selective disclosures, they still can guide analysts to an estimate they know they can beat by forecasting in a public statement. Analysts still have incentives to avoid writing negative reports, because it might hurt their relationship with the company or their employer's goal of encouraging customers to buy shares.

Investors view analysts as ``a necessary evil,'' said Bryan Armstrong, who surveyed 30 portfolio managers in 2005 on how they use estimates. Many said they like to learn what others are saying about a company and compare with their own models, said Armstrong, a partner at Ashton Partners, a corporate advisory firm in Chicago.

Criticisms of analysts are overstated, said Paul Nisbet, an analyst with JSA Research Inc. in Newport, Rhode Island. Analysts stand to lose clients if their reports are inaccurate, he said.

``All of a sudden, the people you're selling the stock to try to find another analyst who didn't get caught,'' Nisbet said.

Analyst Uneasiness

In the months leading up to General Electric's results, analysts hinted at concern that the company was straining to meet its own growth forecasts. Credit Suisse analyst Nicole Parent wrote that she wanted GE to stop setting quarterly targets and focus instead on ``lower, higher-quality'' earnings.

Former GE auditor Heymann rated the stock ``hold'' when he began coverage Nov. 13 for Sterne Agee. He joined the Birmingham, Alabama, firm last year after 25 years as a Wall Street analyst. Now he looks at longer-term measures: research spending, internal growth, sales from emerging markets.

``Most guys, they're still carving wooden figurines: `Hey, this quarter's going to be 37, not 36, and the tax base is going to be low, so buy the stock,''' Heymann said, mimicking an analyst report. ``That stuff is so yesteryear.''

To contact the reporter on this story: Peter Robison in Seattle at Robison@bloomberg.net.

Monday, April 21, 2008

Mortgage Crisis Just Beginning

Courtesy of MoneyNews.com

The subprime mortgage crisis is far from over and may still only be in its early stages, says money fund guru John Hussman, who manages the $3.18 billion Hussman Strategic Growth Fund.

Hussman reckons the U.S. economy is just starting the game of mortgage defaults and has many more innings to go. He points to the number of adjustable mortgages yet to reset to higher rates — so high that many more foreclosures are inevitable.

"We appear to be quite early in the mortgage crisis, with only about a quarter of the cumulative resets having occurred. That places us near the start of the third inning, where we can expect each of the ‘nine innings’ to be about three months in duration.”

The next three quarters, he writes, are when the "the cumulative amount of resets will surge. With that surge, loan losses and foreclosures will also predictably spike higher,” Hussman notes.
Story continues below . . .

Other analysts tell MoneyNews they agree with Hussman’s forecast.

"We’re hearing a cavalcade of talking heads telling us the housing market could right itself later this year,” says Robert Sheridan, a housing developer with Robert Sheridan & Partners.

"Let me be clear. It won’t. Some markets may not recover until 2010, and, in cases like Florida, a turnaround could take as long as three to five years. There is lots of grim news to come.”

Experts reckon that many homeowners with high interest rate subprime loans are staving off foreclosure by taking second, or even third, jobs, to make the money to meet the payments.

Eventually, these folks will have to give up, out of sheer exhaustion.

"These families are not going to be able to make it out of the ‘seventh inning stretch’ if their interest rates don’t stop increasing at a faster rate than their home values are decreasing,” Dr. Gary Lacefield, president of financial risk management consultancy Risk Mitigation Group, tells MoneyNews.

The refusal of many economic elites and of the financial media to recognize these issues is part of the reason policymakers haven’t responded properly to the mortgage crisis, Hussman charges.

"One of the fascinating aspects of Wall Street is the ability of analysts to provide opinions without the faintest backing from evidence,” notes Hussman.

"Among the latest topics of opinion is how far the mortgage crisis has to go. Evidently, the idea is that the recession that these analysts didn't forecast is already over, so it is time to look across the valley on the belief that most of the write-downs are behind us.”

Wednesday, April 16, 2008

U.S. Housing Starts Slide to Lowest Level in 17 years

U.S. Housing Starts Slide to Lowest Level in 17 Years (Update3)
By Bob Willis

April 16 (Bloomberg) -- Housing starts in the U.S. dropped more than twice as much as forecast in March to a 17-year low, signaling that declining construction will keep eroding economic growth this year.

Work began on 947,000 homes at an annual rate, down 11.9 percent from February and the fewest since March 1991, the Commerce Department said today in Washington. Building permits, a gauge of future construction, fell to a 927,000 rate from 984,000 the prior month.

Foreclosures are pushing down property values by adding to the glut of unsold homes, prompting buyers to hold out for better bargains and undermining new construction. The Federal Reserve will probably lower the benchmark rate again at its meeting this month to cushion the economy against the housing- led slowdown.

"Home construction is probably going to continue to fall right through this year,'' Mark Vitner, a senior economist at Wachovia Corp. in Charlotte, North Carolina, said in a Bloomberg Television interview. ``While we see a bottoming in sales in 2008, we really don't see an improvement until later 2009, early 2010.''

A separate report today showed that consumer prices rose 0.3 percent in March from the previous month, matching economists' forecasts. Excluding food and energy costs, prices increased 0.2 percent, the Labor Department said.

Economists' Forecasts

Starts were projected to fall 5.2 percent to a 1.01 million pace from an originally reported 1.065 million rate in February, according to the median forecast in a Bloomberg survey of 72 economists. Estimates ranged from 950,000 to 1.1 million.

Permits were forecast to drop to a 970,000 pace, according to the survey median.
The yield on the benchmark 10-year note dropped to 3.58 percent at 9:47 a.m. in New York following the reports, from 3.60 percent late yesterday. The Standard & Poor's homebuilder index rose 1.5 percent to 397.2.

Work on single-family homes decreased 5.7 percent to a 680,000 pace, Commerce said. Construction of multifamily homes, such as townhouses and apartment buildings, fell 25 percent to an annual rate of 267,000 in March.

Starts dropped in all four regions, led by a 21 percent slump in the Midwest.

Residential building has subtracted from economic growth since the first three months of 2006, culminating in a 25 percent decline last year that was the biggest since 1980.
Annual Forecast

The National Association of Home Builders yesterday forecast housing starts would fall 30 percent this year, compared with a previously estimated 27 percent drop, as the credit crisis persists.

"It's now clear that we have entered what we anticipate will be a mild recession,'' David Seiders, chief economist for the homebuilders' group, said in a statement.

As property values tumble and adjustable-rate mortgages reset, more Americans are walking away from their homes. Foreclosure filings jumped 57 percent and bank repossessions more than doubled in March from a year earlier, Irvine, California-based RealtyTrac Inc., a seller of default data, said April 14 in a statement.

JPMorgan Chase & Co., the third-biggest U.S. bank, said today that profit fell 50 percent in the first quarter after $5.1 billion of writedowns and provisions linked to subprime mortgages, bad home-equity loans and financing for leveraged buyouts. The company set aside $1.1 billion for future home- equity loan defaults, almost three times as much as in the fourth quarter.

Job Losses

The construction slump is causing job losses to mount and sales of building materials and appliances to drop. Falling home prices undermine consumer confidence and spending, which accounts for two-thirds of the economy.

Homebuilders are also pessimistic. The National Association of Homebuilders said yesterday its confidence index held near a record low this month.

KB Home, the fifth-largest U.S. homebuilder, last month reported a wider loss than analysts projected as the housing recession cut sales and led to land writedowns.

``Many potential buyers either cannot or will not make a purchase commitment today,'' Chief Executive Officer Jeffrey Mezger said on a conference call March 28. ``Many are simply unable to qualify for financing given the more restrictive lending environment.''

Economists surveyed by Bloomberg this month forecast the economy will not grow at all in the first half of the year, the weakest performance since the 2001 downturn.

Fed Stance

Fed policy makers are more focused on the threat of recession than inflation, believing that the economic slowdown already under way will help tame prices.

``Many participants thought some contraction in economic activity in the first half of 2008 now appeared likely,'' according to the minutes of Fed's March 18 meeting released last week. While

``uncertainties about the outlook for inflation had risen,'' the minutes said, ``the Committee expected inflation to moderate in coming quarters.''

Investors project the central bank will lower the benchmark rate by at least a quarter point later this month.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net Last Updated: April 16, 2008 09:53 EDT

Tuesday, April 15, 2008

Foreclosures jump 52 percent in last 12 months

By Lynn Adler Tue Apr 15, 5:26 AM ET

NEW YORK (Reuters) - Home foreclosure filings surged 57 percent in the 12 month-period ended in March and bank repossessions soared 129 percent from a year ago, as homeowners struggled to make mortgage payments, real estate data firm RealtyTrac said on Tuesday.

For the month of March, foreclosure filings, default notices, auction sale notices and bank repossessions rose 5 percent, led by Nevada, California and Florida, RealtyTrac said.

The rise in March to filings on a total of 234,685 properties followed a 4 percent decline in February, RealtyTrac reported.

RealtyTrac said the peak has yet to be reached.

"What we're really looking at is ongoing fallout from people overextending themselves to buy homes they couldn't afford and using highly toxic loan products to get into the houses in the first place," Rick Sharga, vice president of marketing at RealtyTrac, based in Irvine, California, said in an interview.

"We're going to see quite possibly a record amount of foreclosure activity in the third or fourth quarter," reflecting sharp payment increases on adjustable-rate subprime mortgages in May and June, Sharga said.

One in every 538 U.S. households living in single-family dwellings received a foreclosure filing in March. The single-family dwellings can include condominiums.

There are three phases of the foreclosure process in most states -- an initial default notice, notice of a scheduled auction, and an "REO" filing if the property is not sold at auction but instead repossessed by the bank, Sharga said.

REO refers to real estate-owned property.

All of the households in the report received at least one of these filings last month.


While default notices and repossessions soared in March, auction notices rose a relatively small 32 percent, James J. Saccacio, chief executive officer of RealtyTrac, said in a statement.

That suggests "more defaulting homeowners are simply walking away and deeding their properties back to the foreclosing lender," he said. "This deed-in-lieu-of-foreclosure process allows the lender to take possession of a property without putting it up for public foreclosure auction."

The states with the highest foreclosure filing rates -- Nevada, California and Florida -- also are among those that had the biggest price appreciation in the five-year boom before the housing meltdown that began in 2006.

These states tend to also be plagued by defaults on unoccupied homes bought by speculative investors. In many cases, home prices have now fallen below the size of the mortgages and some owners are walking away.

In Nevada, one in every 139 households received a foreclosure filing in March, keeping the state at the top of the ranks for the 15th straight month.

The 7,659 Nevada properties receiving foreclosure filings last month represented a 24 percent jump from February and a nearly 62 percent spike from March 2007.

California had the second highest rate of foreclosure filings, one for every 204 households, followed by Florida with one of every 282 households.

Arizona's filings fell about 5 percent, but it retained its standing as with the fourth highest pace of foreclosure activity for the third month straight.

Foreclosure activity in Colorado dropped 8 percent in March from February and 1 percent from a year ago, but it ranked No. 5, with one filing for each 339 households.

Georgia, Ohio, Michigan, Massachusetts and Maryland were the other states with the highest foreclosure rates in March.

The states with highest total number of foreclosure filings were California, Florida and Ohio.

Foreclosure filings were reported on 64,711 California properties in March, the most of any state for the 15th consecutive month, up nearly 21 percent from February and up almost 106 percent from March 2007.

Florida posted the second highest total, with foreclosure filings reported on 30,254 properties in March. While down about 7 percent from February, filings were about 112 percent higher than last March.

Georgia, Texas, Michigan, Arizona, Illinois, Nevada and Colorado were the other states with the highest foreclosure totals in March.

(Editing by Leslie Adler)

Saturday, April 05, 2008

Minding the Gap: Home-Price Downside

By Scott Patterson and Mark Gongloff
From The Wall Street Journal Online

The economic balance hangs in large part on how much further home prices will fall. A look at one important measure -- the relationship between home prices and household income -- suggests we might not even be halfway there.

Over the long run, home prices and income should march along the same path. As households earn more, they can afford to pay for more expensive homes.

But the two can get out of whack. During much of the 1990s, incomes grew faster than home prices. The landscape shifted around 2000. From the start of the decade through the mid-2006 peak, home prices nearly doubled, thanks in part to falling interest rates. Over the same period, income per household rose just 26%, according to Moody's Economy.com.

In certain states, the disparity was extreme. Seven states, including California, Florida and Arizona, saw annualized growth in home prices outpace income growth by 10 percentage points from 2002 through 2006, according to housing expert Thomas Lawler.

The difference between income growth and home prices has started to narrow. Home prices were down 10% through the fourth quarter from their peak in mid-2006, according to the S&P/Case-Shiller national home-price index. But to bring prices in line with incomes, they will need to fall further. If incomes continue to grow in the next year as they have in the past decade -- probably an optimistic assumption -- it would take a 9% to 12% drop in home prices to bring the two measures in line with each other.

In states that saw bigger housing bubbles, the correction will be more severe, says Mr. Lawler.

It is also possible that home prices will overshoot on the downside, just as they did on the upside. Goldman Sachs economists say prices could fall another 15%. Merrill Lynch economists say they could drop another 20% to 30%. Both banks have been more bearish than others on the economy -- and so far look correct to have been so pessimistic.

Retailing Likely Checks In With More Glum Numbers

Consumer spending is one potential casualty of falling home prices. When home values fall, households have less home equity to tap when they want to buy a new flat-screen television.

Today's February retail-sales report from the Commerce Department could provide evidence of that. Sales were up 3.9% in January from a year earlier. That paled in comparison with year-over-year gains of more than 6% that prevailed from 2004 to 2006. It was also less than the 4.3% increase in consumer-price inflation registered in January from a year earlier.

Economists don't expect strong numbers for February. On average, they see an increase of 0.1% from the month before. Auto makers and retailers reported a slow February -- with the exception of Wal-Mart Stores and other discounters, which benefited as shoppers tightened their purse strings. The Federal Reserve's latest "beige book" compilation of economic anecdotes described retail sales as "below plan, downbeat, weak, or having softened" in most of the country since mid-January.

Tax rebates might temporarily boost spending again later this year. But consumers are walking into pretty stiff headwinds.

Email your comments to rjeditor@dowjones.com.

Monday, March 10, 2008

Fed Official: Housing Could Tank Badly

Breaking from MoneyNews.com

WASHINGTON (Reuters) - A decline in U.S. home prices is needed to attract buyers back and end the housing slump, but with no bottom in sight, more trouble lies ahead for an economy that may already be in recession.

This is a growing concern among Wall Street analysts and policy-makers, like Federal Reserve Governor Frederic Mishkin, that potential home buyers may wait on the sidelines for an extended period.

"If house prices fall more than expected, and that condition leads to more adverse expectations for future changes in house prices, then housing demand could fall as a result," Mishkin warned a group of key economists meeting in the Washington area this week in one of the bleakest public speeches by a Fed official during this business cycle.

Typically, falling home prices help stave off a downturn by boosting demand for homes and reducing the backlog of unsold homes. Even though U.S. home prices fell last year for the first time in a generation, sales continue to slow, only adding to the glut of inventories.

At the current sales pace for previously owned homes during January, there was more than 10 months' worth of homes for sale, according to the National Association of Realtors.

That was much more than the 6.5 months' supply available during the peak of the housing boom in 2006. That also comes as sales have slipped for the past six months, according to the real estate group.


But economists fear there is no bottom in sight and that's making everyone jittery: the buyer, the lender and the investor.

"I think it's freezing the market right now," said Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania. "Home buyers are not going to catch that falling knife and that's going to weigh very heavily on the housing market through this year and next."

Home prices have indeed fallen according to the real estate group, which reported a nearly 5 percent drop in median prices for previously owned homes, the bulk of the housing market, in January from prices a year ago.

The group projects that prices for new homes will tumble 6 percent this year and 1.2 percent for previously owned homes.

Analysts warn that until there are signs the housing market has stabilized or bottomed out, buyers and lenders are likely to be very cautious.

"We're not near there yet so people are going to continue to wait on the sidelines," said JPMorgan economist Michael Feroli.

Since September, the Fed has slashed its benchmark interest rate by 2.25 percentage points in an effort to end a growing credit crisis and boost the economy. Economists are expecting the central bank will continue on this path even though there are signs of inflationary pressures.

Even with such price pressures, analysts believe the central bank needs to continue with rate cuts, saying this is key in bringing an end to what has been seen as the worst housing downturn since Great Depression.

"The Fed should forget about everything else now and just do whatever is necessary to bring a bottom for home prices into sight," said John Lonski, chief economist at Moody's in New York.

Timing is crucial because the Fed's latest data shows that the net wealth of U.S. households in the final three months of last year fell for the first time in five years as the value of real estate holdings and stocks weakened.

In that report, the percentage of equity that Americans have in their homes sank to the lowest since 1945.

"Not only have the fundamentals for housing shifted, but the psychology has shifted. Now it's pessimism with expectations of future price declines and this is not going to resolve itself quickly," said Zandi.

© NewsMax 2008.

Thursday, March 06, 2008

NAR: Home sales, prices expected to drop this year

Forecast anticipates 2009 turnaround for housing
By Inman News, Thursday, March 6, 2008.

The National Association of Realtors expects the median price of U.S. resale homes to drop 1.2 percent this year, following a 1.4 percent decline in 2007, with sales of resale homes slipping for the third consecutive year.

The forecast report released today also anticipates a 31.1 percent drop in single-family housing starts, a 6.1 percent decline in new-home prices, a rise in housing affordability and a dip in consumer confidence this year compared to 2007.

The federal funds rate is expected to average 3 percent in 2008, compared with 5 percent in 2007, according to the NAR forecast.

Sales of resale homes are expected to fall to 5.38 million this year, compared with 5.65 million in 2007 and 6.48 million in 2006. The association expects a 4.2 percent rise in resale home sales in 2009 compared to 2008.

The aggregate resale home price is projected to fall to $216,300 this year and then increase 3.5 percent to $223,800 in 2009, with the median new-home price falling to $232,200 this year and rising 5.1 percent to $244,100 in 2009.

Single-family housing starts, which fell 14.6 percent in 2006 and 28.6 percent in 2007, are expected to drop another 31.1 percent to 721,000 units this year, and to fall 5.6 percent to 680,000 units in 2009.

New single-family home sales, which dropped 18.1 percent in 2006 and 26.4 percent in 2007, are expected to fall another 23.7 percent this year compared to 2007. New single-family home sales are expected to turn around in 2009, rising 7.2 percent.

The average mortgage rate for a 30-year fixed-rate loan is expected to be 5.8 percent this year, down from 6.3 percent in 2007, with the average rate for a one-year adjustable-rate loan falling from 5.5 percent in 2007 to 4.8 percent in 2008, according to the NAR forecast.

An index measuring pending sales of previously owned homes, also released today by NAR, was down 19.6 percent in January compared to the same month last year and remained flat compared to December 2007, the National Association of Realtors trade group reported today.

The Pending Home Sales Index is based on contracts signed in January, and a sale is listed as pending when the contract has been signed but the transaction has not yet closed. A sale is typically finalized within one to two months of a contract signing.

In January the index stood at 85.9 -- an index of 100 equals the average level of contract activity in 2001, which was the first year examined for the index and the first of five consecutive record years in sales of resale homes, the association reported. In January 2007 the index was 106.8.

Regionally, the index plunged 28 percent in the Northeast, 23.8 percent in the South, 13.3 percent in the Midwest and 12.7 percent in the West in January 2008 compared to January 2007.

NAR will release resale home-sales data for February on March 24, and the next Pending Home Sales Index and forecast report is scheduled for release on April 8.


Tuesday, March 04, 2008

In Business, Integrity Still Matters

By Christopher Ruddy
Money News Editor's Corner

Word last month that the FBI was opening up a criminal probe into the subprime mortgage mess should come as no surprise. Greed usually sprouts corruption.

One of the reasons America has been the safe haven for the world and has been its economic leader (though we have just 5 percent of the world population, we generate about 25 percent of global GDP) is that world investors have, for a long, long time, trusted America.

The subprime crisis is undermining that worldview. Investors liked the United States not simply because of our free enterprise system, but because of the values reflected in our financial and legal systems: trust, honesty, integrity.

I remember as a child, maybe 8 years old, accompanying my dad to the bank on pay day — always a big deal for me. Every time Dad cashed his check, the teller would quickly count out a bankroll of bills.

Invariably, my dad would step to the side and count every single bill to make sure that the count was accurate. I remember one occasion when the teller miscounted and gave Dad an extra $20 bill. When my father discovered the error, he moved to return the money — which left his son perplexed. No doubt my imagination went wild with what $20 could buy me!

My dad poked me in the chest and said, “Never take anything that isn’t yours. God will take care of you.”

It was an important lesson for a young child, just one of many Mom and Dad taught me.

American values such as these showed that people here agree to behave in certain ways even when the impersonal facts of the case make getting away with something easy (my dad did not know the teller, she did not know him, and the bank would have made up for the $20 error at the end of the day). Still, my dad intuitively saw a much bigger picture of how his actions in a small way might affect the larger world.

Looking back at this childhood incident, I can see how American values have frayed. No, we are not a banana republic, as some pessimists suggest. The rule of law and values still prevail. But they are under attack by a “whatever-it-takes” culture that emphasizes material success over spiritual values.

At the heart of the subprime banking crisis, I think we will see how core American values have been discarded.

So far, financial institutions have written off more than $100 billion in subprime debt. Low interest mortgages (ARMS) only began resetting en masse in January 2007. We have three more years for massive ARM resets. We could easily see $500 billion to $1 trillion in losses when the dust settles.

There is increasing evidence that mortgage lenders systematically encouraged applicants to lie on their applications about income and credit worthiness. Even low interest mortgages were supposed to be approved on the basis that the borrower could still repay the loan when it reset at a higher monthly payment.

Apparently, many borrowers got loans they should never have. Why would banks and lenders encourage loan applicants to lie?

To understand this, one has to understand how the banking business has fundamentally changed. Decades ago, your local bank wanted to underwrite your mortgage as the basis of its relationship with you as a customer. You paid your mortgage to Main Street Bank and also kept your checking and other accounts with them.

But in recent years, banks got away from holding mortgages long term. As soon as they sold you a mortgage, they would bundle it with others, “securitize” it in a bond-like instrument called a CDO (collateralized debt obligations ) and then sell these CDOs to global investors who wanted the income the underlying mortgages seemingly provided.

But as many mortgage holders have stopped paying their mortgages and foreclosed on their homes, the CDO holders have realized they were sold junk. Big and small CDO investors, including many foreigners, are left holding the bag.

Now creditors are exacting revenge. They are demanding a huge premium from borrowers across the board. Even credit card holders are feeling it as rates are skyrocketing to 30 percent.

This credit squeeze is spilling over and affecting consumers and businesses, helping to push the economy into a recession.

All of this because someone lied on their mortgage application thinking they could beat the “teller.” My dad could have told them otherwise.

© 2008 Newsmax. All rights reserved.

Saturday, March 01, 2008

Auto, Home Buys `Won't Happen' as Rates Don't Budge (Update1)

By Matthew Benjamin

Feb. 29 (Bloomberg) -- Consumers like Valerie Jacobsen aren't getting much of a break on borrowing costs even after five months of interest rate cuts by the Federal Reserve.

Jacobsen, 30, wants to refinance her 7.25 percent first and 8.5 percent second mortgages into one loan at a lower cost. To cut the payments enough to recoup her $3,000 in closing costs, she needs a rate well below 6 percent. She wasn't ready when costs dipped in January and now they're back at levels that make her plan too expensive, the Austin, Minnesota, resident says.

``Rates I'm seeing aren't really mimicking what the Federal Reserve is doing,'' said Jacobsen. ``I'm wondering why that is.''

Trying to spur lending and avert a recession, the Fed has chopped 2.25 percentage points off its benchmark rate since September. Wariness among lenders and fears of inflation are keeping mortgage and auto loan rates close to or above levels before the central bank began easing, while credit-card issuers are tightening their standards.

The slippage between the Fed's rate cuts and consumers' ability to borrow or reduce loan costs is weakening the central bank's ability to stimulate the biggest part of the economy, consumer spending. It accounts for more than two-thirds of goods and services output and stalled for the second consecutive month in January after adjusting for inflation, the Commerce Department said today.

`Missing Activity'

With many households unable to borrow, ``those transactions won't happen, and that missing activity is the missing economic growth,'' said Neal Soss, chief economist at Credit Suisse Group in New York. ``So the Fed will have to do more than otherwise to compensate.''

Fed Chairman Ben Bernanke told the House Financial Services Committee Feb. 27 that ``the slump in subprime mortgage originations, together with a more general tightening of credit conditions, has served to increase the severity of the downturn.''

The Fed lowered the cost of overnight loans between banks by 125 basis points, or 1.25 percentage points, over nine days in January, the fastest easing since 1990. The rate, now at 3 percent, sets the benchmark for other credit.

Consumer costs for mortgages barely budged. The average interest rate on a conventional 30-year fixed-rate mortgage stands at 5.88 percent, according to Bankrate.com, 2 basis points below the September level. For jumbo loans, those exceeding $417,000, borrowers are paying an average of 6.82 percent, just 20 basis points lower than when the Fed began easing. Lenders say they are requiring a bigger down payment for that rate than before, as much as 20 percent.

For buyers of new cars, a five-year loan costs 6.95 percent, 4 basis points more than in September. In some states, the rate is closer to 7.5 percent.

Disconnected Rates

Loan costs for individuals and businesses declined 45 basis points since September, or a fifth as much as the Fed's benchmark, according to Merrill Lynch & Co., based in New York. While consumer interest rates have never moved in lockstep with the central bank, now they are even more disconnected, according to David Rosenberg, Merrill Lynch's chief North America economist.

``For every 5 basis points cut by the Fed, only 1 basis point is reaching Main Street,'' said Rosenberg. ``The Fed is cutting rates, which is wonderful for the government yield curve, but most interest rates are not following suit.''

Credit-card rates, which tend to reflect Fed changes quickly, are down an average of 1.32 percentage points since the easing began, according to Cardweb.com, a Fort Myers, Florida, research organization.

At the same time, ``card issuers have tightened lending standards, so fewer people qualify for those lower rates,'' says Cardweb.com President Robert McKinley.

Reduced Credit

Credit-card lenders including New York-based Citigroup Inc. have reduced lines of credit for borrowers they consider likely to default.

No matter how low rates go, certain consumers may be out of luck. Banks tightened standards and terms for a broad range of loan types over the past three months, according to the Fed's quarterly survey of senior loan officers.

GMAC LLC, the lender controlled by New York-based Cerberus Capital Management LP, tightened underwriting standards three times last year to the least credit-worthy borrowers, according to spokeswoman Gina Proia.

Passing On Risk

``Mortgage and consumer credit are, and will almost certainly become, even harder to come by,'' said Credit Suisse's Soss. He blames growing risk aversion among lenders and widespread fears that inflation will limit the Fed's ability to lower rates further.

In addition, lenders can't pass on the risk as easily as they could before the subprime crisis began, as secondary markets for many loans have dried up.

``There's less availability of securitization financing, so lenders have to price it such that they're comfortable living with the credit risk on their own balance sheet,'' said Eric Wasserstrom, a New York-based UBS AG analyst.

For homebuyers, conditions will get worse, industry analysts say. Loan purchasers like Freddie Mac, the second- largest provider of home-loan money, have added new charges that will ultimately be paid by consumers, says Dean Hackemer, president of Access National Mortgage in Reston, Virginia.

``If you're a consumer with great credit, you're paying a quarter of a percentage point to three-eighths of a percentage point more than you were in September,'' Hackemer said. ``If you've got marginal credit, God help you.''

To contact the reporter on this story: Matthew Benjamin in Washington at mbenjamin2@bloomberg.net ;

Last Updated: February 29, 2008 10:33 EST

Tuesday, February 26, 2008

U.S. Home Foreclosures Jump 90% as Mortgages Reset (Update2)

By Sharon L. Lynch

Feb. 26 (Bloomberg) -- Bank seizures of U.S. homes almost doubled in January as property owners failed to make higher payments on adjustable-rate mortgages.

Repossessions rose 90 percent to 45,327 last month from the same period a year ago, RealtyTrac Inc. said today in a statement. Total foreclosure filings, which include default and auction notices as well as bank seizures, increased 57 percent.

``The most troubling thing is that we are seeing more and more of these properties actually going all the way through the process and going back to the banks,'' Rick Sharga, executive vice president of Irvine, California-based RealtyTrac, said in an interview.

Defaults among subprime borrowers and those unable to meet rising payments on adjustable-rate loans drove foreclosure filings to the highest since August and the second-highest since RealtyTrac started keeping records. About $460 billion of adjustable mortgages are scheduled to reset this year, raising minimum payments for borrowers, according to New York-based analysts at Citigroup Inc.

More than 233,000 properties were in some stage of default last month. Total filings increased 8 percent in January from December, said RealtyTrac, a seller of foreclosure statistics that has a database of more than 1 million properties.

Nevada, California and Florida recorded the highest foreclosure rates among the 50 states, RealtyTrac said.

Nevada Leads

The rate of foreclosure filings in Nevada continued to lead the nation, with 6,087 properties in default or having been repossessed. That's 95 percent more than in January 2007 and 45 percent less than in December.

California had the highest total number of default and foreclosures with 57,158 properties facing possible seizure last month. That was more than double the year-earlier figure and was up 7 percent from December.

Florida had the second-highest number of homes in default or foreclosure with 30,178 in January, more than double the figure for the prior year and 3 percent less than in December.

Arizona, Colorado, Massachusetts, Georgia, Connecticut, Ohio and Michigan rounded out the top 10 states worst off in terms of missed payments and property seizures, RealtyTrac said.

Cape Coral-Fort Myers, Florida, had the highest January foreclosure rate among 229 metropolitan areas. Stockton, California, had the second highest, followed by the Riverside- San Bernardino area.

Prices Sink

New Jersey ranked 18th in terms of the proportion of households at some stage of default or seizure, with 1.5 percent. New York was 30th with 0.6 percent of households facing possible foreclosure.

Banks may be forced to resell as many as 1 million foreclosed properties this year, adding to a glut of inventory and forcing prices down even further, Sharga said.

January was the sixth straight month with more than 200,000 foreclosure filings, RealtyTrac said. The fourth-quarter total of 642,150 filings was the most since the company began records in January 2005. More than 1 percent of U.S. households were in some stage of foreclosure during 2007.

U.S. home prices fell last year for the first time since the Great Depression. That made it more difficult for homeowners to sell or refinance properties encumbered by mortgages that may be higher than the value of the houses themselves. Sales of existing homes fell last month to the lowest in at least nine years, the National Association of Realtors said yesterday.

Bush Plan

The median price of an existing home fell 4.6 percent to $201,100 from January 2007. The median for a single-family home dropped 5.1 percent to $198,700, and condominium and co-op prices fell 1 percent to $220,400.

President George W. Bush's proposal to help 1 million subprime borrowers avoid foreclosure with tax-exempt bonds is doing little to slow the increase in defaults.

State housing agencies are turning away many applicants because their homes have lost too much value or they've accumulated too much debt, according to estimates from Geoffrey Cooper, emerging markets director at a unit of MGIC Investment Co., the country's biggest mortgage insurer.

Mortgage companies including Fannie Mae and HSBC Finance have joined a U.S. Treasury Department-led effort to offer 30- day foreclosure freezes to give delinquent borrowers more time to arrange payment plans.

Citigroup Inc., JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co., Washington Mutual Inc. and Countrywide Financial Corp. have initially agreed to participate in the effort.

To contact the reporter on this story: Sharon L. Lynch in New York at sllynch@bloomberg.net .

Sunday, February 24, 2008

Bargain hunters may toss a lifeline to housing

Sun Feb 24, 2008 8:16pm EST

NEW YORK (Reuters) - The distressed U.S. housing market should get a lift this spring as bargain prices lure prospective buyers out of hibernation, but tighter lending means no one should expect the boom days to return any time soon.

Spring is a pivotal season in the housing market. Potential buyers typically emerge from a winter hiatus and shop in earnest for a new home or an investment. The strength of the market in March, April and May usually sets the tone for the entire year.

This year, spring has assumed even greater importance as it coincides with a sharp U.S. economic slowdown, triggered largely by a dysfunctional real-estate market. After sales of existing homes sank almost 13 percent last year, a housing revival could put the economy back on solid ground.

When the housing sector is thriving, so does the economy as buyers spend heavily on new appliances and furniture while owners pump cash into remodeling or additions.

Even in Arizona and Florida, which are among the states most hard-hit by the collapse of the housing market, a few rays of light are starting to shine through.

"If I would have described this whole process as a hurricane coming through Phoenix, I would tell everybody that for the last month I've been taking the shutters off the windows because I think the eye of the storm and most of it is behind us," said Floyd Scott, president of Century 21 Arizona Foothills, which has 10 offices and 460 agents in Phoenix. "Now we're in the process of picking up the debris."

In many areas, the choice of homes on the market has increased considerably, with unsold inventory double the typical supply as foreclosures mount and sellers hold out for higher bids.

Indeed, possible buyers are already coming out the woodwork seeking deep discounts.

Signed contracts that have yet to close were higher in January than any month in the prior six, though down 30 percent from January 2007, said Scott. "We've seen quite a bit of increase in traffic. A lot of people are shopping for deals right now," he said.


But the roadblock to closing the contracts is ominous.

Many lenders are shutting down the money pipeline to all but the most credit-worthy borrowers, looking to avoid repeating mistakes that led to the current wave of bad mortgages.

"One of the difficulties that we are having obviously in the home market is that lending conditions have really tightened up dramatically," Scott said.

While a flurry of sales this spring may highlight the pent-up demand in the market, it probably would not signal a sustainable housing upturn this year, most economists agree.

"We have this continuing battle with tightening lending standards and it's going to be tough for prospective buyers, even though they want the homes -- that's going to be an obstacle," said Young Kim, an economist at Stone & McCarthy Research Associates in Princeton, New Jersey.

Still, demand is stirring as sellers grow desperate to off-load properties. Fixed mortgage rates are low, and some home prices are looking too attractive to pass up.

Bidders are emerging for foreclosed homes and for so-called "short sales" at sharply reduced prices, real-estate agents said. In a short sale, the lender agrees to take a loss and avoid foreclosure costs if the borrower is unable to command a sale price that will pay the remaining mortgage balance.

Gary Kent, a real estate agent with Gary Kent Team-RE/MAX Associates in La Jolla, California, said he had his best sales month ever in January, selling foreclosure homes for banks.

Meanwhile, the average 30-year mortgage rate is around 6 percent. That's up a half percentage point from four-year lows set last month, but it's roughly a quarter point less than a year ago, based on data from Freddie Mac, the second-largest U.S. home funding company.

The median price for an existing single-family home dropped in 2007 for the first year since the National Association of Realtors began tracking them in 1968, sliding 1.8 percent to


By contrast, prices on average have risen 6.6 percent annually over the past 40 years, NAR said. Annual double-digit gains were the norm in some areas earlier this decade.

A new government stimulus package will likely also open the doors for more buyers in high-cost areas. It temporarily raises the size of mortgages that can be purchased by Freddie Mac and Fannie Mae, the No. 1 federally chartered home funding company, making some lenders more inclined to approve home loans.

"I think this is the best buyer's market that has existed in a decade, maybe longer," said Russell Shaw, in his 30th year with John Hall & Associates real estate in Phoenix. "There are tons of inventory, great interest rates and the prices are back in line to where houses are decently priced again."

"If people have a good track record of paying their bills, the loans are there," Shaw said.

Arizona is one of several states slammed by overbuilding and buying by investors looking to sell quickly for a big profit. This "flipping" strategy worked well when prices soared, but when prices tanked, many owners could not sell and just walked away.


South Florida is another area overrun with speculators, leading to overbuilding, particularly in the condominium market.

"People who are desperate are selling at any price," said Susan Weitz, an agent with Buy the Beach Realty in the South Beach district of Miami Beach. "Buyers that have been waiting for really, really good buys are in the market now. I am putting in a lot of offers on short sales."

Still, Weitz thinks the market won't stabilize for another two years, "I am talking people out of selling if they don't have to sell. I am convincing them this is not the time to sell," she said.

In Boston, a sense of urgency is also returning to the market, according to John D. Murray, a broker/Realtor with Realty Executives Prestige Properties.

A buyer he represents was the winning bidder at the asker's selling price for a condo in the city's upscale Back Bay neighborhood. At least three competing bids surfaced.

Until recently, the vast majority of would-be sellers have had to slice their asking prices to lure buyers.

Still, "even if you talk to people who refinanced recently, a lot of them are finding that the banks are asking a lot more personal and critical questions. It's more daunting and troublesome" to get a loan, said Murray.

(Additional reporting by Jim Loney in Miami, Marty Graham in San Diego, David Schwartz in Phoenix; Editing by Frank McGurty)

Tuesday, February 19, 2008

Tracking Housing Prices, Why The Numbers Conflict

Courtesy of WSJ.com

(See Corrections & Amplifications item below.)

By David Wessel
From The Wall Street Journal Online

Predicting how much worse the U.S. housing market will get is tough. The future is never certain. But when it comes to home prices, getting a clear picture of the recent past turns out to be surprisingly hard as well.

That's confusing to homeowners, who fret about the value of what for many is their single largest asset. There is a huge psychological difference between a slower climb in the value of one's house and an outright decline -- and, as a result, a difference in the political reaction.

Tracking home prices is harder than tracking the price of stocks, which are traded constantly in public view on exchanges. And it's harder than tracking the price of toothpaste. That just involves sampling posted prices on grocery-store shelves and Web sites.

The two best -- though far from perfect -- measures of housing prices are the Office of Federal Housing Enterprise Oversight's index and the gloomier Standard & Poor's Case/Shiller index. Both are based on a concept, developed in the 1980s by Karl Case of Wellesley College and Robert Shiller of Yale University, that looks at repeat sales of the same houses.

Ofheo's index says home prices rose nationally by 1.8% between the third quarters of 2006 and 2007. But the S&P/Case-Shiller national index of home prices was down 4.5% in the same period. The Ofheo index showed a 2.16% increase in house prices in Chicago; the Case-Shiller index showed a decline of 2.48%.

Those discrepancies persist even though both barometers avoid distortions that occur in other widely cited measures -- such as the National Association of Realtors' median home price -- that reflect the mix of homes actually sold in a given month as well as the change in prices. Such measures rise in months when a lot of high-end houses are sold and fall at times when a lot of low-end houses are sold.

The Realtors' measure fell 6% in 2007. The group says the index was pulled down by a drop in the number of high-end home sales, which have been hurt by disruptions in the market for mortgages exceeding $417,000, the maximum mortgage giants Fannie Mae and Freddie Mac are allowed to guarantee.

The big picture here is clear: House prices rose rapidly in the early years of this decade. They have stopped rising in many places. And, in many markets, they are now falling. (Even Ofheo's index showed a quarterly decline at the end of 2007.) And prices don't appear to have touched bottom yet. But Charles Calomiris, a Columbia University economist, says, "Too much weight is being attached to the Case-Shiller index. ... Housing prices may not be falling as much as some economists say they are."

With house prices so central to the economy right now, there is intense public (as well as scholarly) interest in why these two carefully constructed measures differ.

Ofheo gets a steady stream of inquiries from ordinary homeowners trying to figure out what's happening to the price of their houses, and offers an online calculator to make estimates. Ofheo's quarterly numbers -- to be released monthly beginning in March -- go into the Federal Reserve's estimates of household wealth. Case/Shiller is increasingly prominent and is the basis for future contracts that allow investors to bet on the price of houses.

There are a couple of very big differences. The Ofheo index relies on data collected by Fannie Mae and Freddie Mac, which Ofheo regulates, so it excludes loans too big for Fannie and Freddie to guarantee (those exceeding $417,000) or too shaky (the riskiest of the subprime). Case/Shiller includes those, but its data are limited to 20 major markets because it relies on the costly process of going to local property records for data. One of Mr. Calomiris's complaints is that house prices in these markets may be doing worse than those in other places.

A recent dissection of the two indexes in 10 metropolitan areas by Ofheo economist Andrew Leventis, posted on the agency's Web site, sheds some light on other differences. Part of the discrepancy is technical, such as different approaches to adjusting data when there's a long interval between repeat sales of a house.

But puzzles remain. It turns out, for instance, that prices of low- and moderate-priced homes with mortgages that aren't guaranteed by Fannie and Freddie are falling particularly sharply, buoying the Ofheo index -- even though that index includes plenty of other of low- and moderately priced homes in the same neighborhoods.

Of course, by the time the experts get the measures perfected, we'll be onto a bubble in some other asset market.

Email your comments to rjeditor@dowjones.com.

-- February 15, 2008
Corrections & Amplifications:

In addition to its widely followed 20-city survey of home prices, S&P/Case-Shiller publishes a national home price index based on data from more than 100 metropolitan areas.

The 100-Page Start-Up Plan -- Don't Bother

Courtesy of WSJ.com

If you've considered starting a business, or actually have done it, you've probably been instructed to write a business plan. Perhaps you even bought a business-planning guide walking you through elaborate details of market analysis, sales projections and operational plans.

But while there's a lucrative industry of software, how-to books and business coaches preaching the merits of lengthy planning -- and selling their business-planning expertise -- a growing body of research suggests that some entrepreneurs spend way too long polishing 50- or 100-page business plans when they should be out in the marketplace selling their product or service.

"It doesn't take a year of planning to figure out whether someone is going to buy your product," says William Bygrave, a Babson College entrepreneurship professor. "All you have to do is start selling it."

Important Questions

Some entrepreneurs get so caught up in polishing their written plan, they lose sight of make-or-break issues, such as whether they have actual people clamoring to buy their product and who will sell it. Sometimes, the product can't be manufactured and sold at a price that will make a profit.

But it shouldn't take a year of long-winded planning to figure that out.

Mr. Bygrave and a few of his colleagues were so curious about the value of written business plans that they analyzed 116 businesses started by Babson alumni who graduated between 1985 and 2003.

Comparing measures such as annual revenue, employee numbers and net income, they found no statistical difference in success between those businesses started with formal written plans and those without.

The study concludes: "Unless you need to raise external start-up capital from institutional sources or business angels, you do not need to write a formal business plan."

Other research has come to similar conclusions. Columbia University professor Amar Bhide analyzed Inc. magazine's 1989 list of the 500 fastest-growing private businesses and found that 41% of them didn't have any business plan, and 26% had rudimentary plans.

He found that many opportunities need to be pursued quickly -- and to take advantage of them you can't wait for the planning process to be completed.

Dumping the Plan

Many business plans get tossed out the window the day after launch, because the plan wasn't grounded in reality.

Traditionally, when a business plan has been essential is when a start-up is pitched to potential investors. But even that's changing. Many venture capitalists and angel investors now say an effective 10-minute slide presentation or executive summary can be more effective than a full-blown written plan.

Investors often base their decision to invest on their trust in the people running the business as much as the idea itself.

"Most venture capitalists base the decision on a five-minute conversation or 10 PowerPoint slides," says Guy Kawasaki, a Silicon Valley venture capitalist and creator of AllTop.com.

Too often, he says, entrepreneurs try to pitch venture capitalists with projected sales forecasts that show a large upward trajectory, when "we know it has no relation to the truth."

Forget About Planning?

So ditch the planning altogether? Not so fast. While the formal written plan itself may not be worth much, the planning process can be very helpful in honing strategy and dodging potential calamities. Just don't spend too long on it.

Mr. Kawasaki says entrepreneurs should spend no more than a few months planning and writing a plan of less than 20 pages. He recommends addressing three key questions: Who's going to make it? How are we going to sell it? How are we going to service it?

"The most important thing they should do is create a prototype" of their product, Mr. Kawasaki says. "Spend your time creating prototypes, not plans."

The value of the planning is it forces you to go through the various scenarios and troubleshoot hypothetical problems or roadblocks. You can address, for instance, what sales channel will be most lucrative and the most opportune sales price -- decisions that have to be made before you hit the market.

Flexibility Is Crucial

But for certain, much of the real planning happens once you start selling and hit realities you may not have anticipated.

And it's important to recognize when there's a flaw in the plan and be willing to change directions or ditch plans altogether when they're clearly not working, says Tom Kinnear, executive director of the entrepreneurial studies institute at the University of Michigan.

A business plan should just be a compass, he says, pointing entrepreneurs in the right direction before starting their business. Too many entrepreneurs get wrapped up in perfecting their written plans, which he says shouldn't take more than a few weeks to write.

"No business plan has ever survived contact with the marketplace," he adds.

Write to Kelly K. Spors at kelly.spors@wsj.com

Tuesday, February 12, 2008

Homes in Bubble Regions Remain Wildly Overvalued

February 12, 2008

If you own a home in a former bubble region like California or southern Florida, there's bad news… and really bad news.

And they suggest that it is still way too early to go bargain hunting in these markets, although -- of course -- there is always the occasional deal around.

The bad news is fresh market data published Monday night by real-estate Web site Zillow.com. They show prices, as expected, kept slumping through the end of last year.

A new report from Zillow.com shows home values dropped nationwide by 3%. Chief Financial Officer Spencer Rascoff discusses which cities saw the largest declines.
But the really bad news is that, even after a year of misery and falling prices, homes in many of these regions still aren't cheap. They remain wildly overvalued compared to average personal incomes.

There is a strong long-term correlation between the two figures. And in many regions, house prices would still have to fall a very long way to get back into line.

How far?

Try around a third in Florida and Arizona -- and closer to 40% in California.

Yes, from here. The long-term chart for California is shown below.

Even if house prices stabilized, it would take a decade or more for rising incomes to catch up.

The data on median house prices and per capita personal income in these states have been tracked by Karl Case, economics professor at Wellesley College. (He is one half of the duo behind the closely-watched Case-Schiller real estate index).

Professor Case's numbers ran through the end of the third quarter. I decided to see how they might look today, using Zillow's data for the fourth quarter.

The company hasn't posted statewide data, but the price falls across the many cities it tracks give a pretty strong picture. From these I assumed, for the sake of calculations, that California prices fell 8% last quarter from the third quarter, a huge number by historic measures but not out of line with Zillow's data. For Florida and Arizona I assumed declines of 5% and 5.5%. You could use other, more modest estimates for the recent declines: They won't change the outcomes much. I also assumed personal incomes in these states rose in line with recent and historic averages."

The results? In all three markets, the prices are well off their peaks when compared to incomes. But they remain far above historic averages.

Median prices in California peaked in 2006 at 13.3 times per capita incomes. Hard to believe, but true. They may be down now to about 11.1 times.

But that's still way above the ground. Throughout most of the 80s and 90s they ranged between six and seven times incomes.

Just to get down to seven times incomes, prices would have to fall 37% tomorrow.

Those who bought at the peak of the cycle may be pinning their hopes instead on "incomes catching up" instead. But they had better be patient. Even if house prices stayed exactly where they are, it would take around 10 years for rising incomes to bring the ratios back into any sort of alignment.

And it would take even longer before prices started to look very cheap again.

That's based on average personal income growth of 4.6% a year in California and Florida and 4.2% in Arizona.

Yes, these are projections and estimates. Time and chance will play their usual roles. And there will doubtless be different pictures within regions of the same state.

Nonetheless the overall picture is pretty clear. And, if you are a homeowner in any of these regions, none too appealing.

Write to Brett Arends at brett.arends@wsj.com