Monday, March 10, 2008

Fed Official: Housing Could Tank Badly

Breaking from

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 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, 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, 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 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 ;

Last Updated: February 29, 2008 10:33 EST