February 14,
2008
NAR Says 4th
Quarter Home Price Decline Sets New National Record
From CNN: “Home
prices continued their plunge during the last three months of 2007, setting a
real estate trade group's record for the biggest-ever quarterly drop. The national median price drop of 5.8%, to
$206,200 from $219,300, was the steepest ever recorded by the National
Association of Realtors (NAR), which has been compiling the report since 1979… "The
continuing crunch in the jumbo loan market that began in August has
disproportionately reduced the number of transactions in higher price
ranges," said Lawrence Yun, NAR's chief economist, in a statement. Fewer expensive homes were sold, bringing
down median prices. "California,
south Florida, D.C., many of the high-cost markets are reflecting that,"
said Walter Molony, a spokesman for NAR.
Each of the four U.S. regions recorded losses compared with the fourth
quarter of 2006. The West took the worst hit, at 8.7%. Prices dropped 4.8% in
the Northeast, 5.4% in the South and 3.2% in the Midwest. In Lansing, Mich., square in the Midwest Rust
Belt, prices plunged 18.8% to $109,600. In Sacramento, Calif., prices fell
18.5% to $197,600, and in both Jackson, Miss and Riverside, Calif. prices
dropped 16.8%. Seventy-three of the
nation's 151 real estate markets recorded price gains. Cumberland, Md., led the
winners with an increase of 19% to $116,600.
The least expensive single-family-home market in the nation got even
cheaper, as prices in Youngstown, Ohio, dropped 9.3% to $72,600. The most
expensive market, San Jose, Calif., got dearer, with prices up 11.2% to
$845,300.
Condo prices fared better. The fourth-quarter median condo
price of $221,100 was little changed from the $221,200 a year earlier. But some areas, mostly Sun Belt cities, took
significant price hits. Cape Coral,
Fla., condo prices were down 26% compared with the last three months of 2006 to
$202,300, and Tucson, Ariz., prices dropped 19.8% to $128,000. Atlanta prices
fell 12% to $141,100, and Las Vegas was off 10.3% to $178,500.
Bismarck, N.D., condo prices recorded the largest gain at
20.8% to $125,000, with New Orleans second at a 17.8% gain to $173,300. Last year, fourth-quarter home prices were
2.7% lower from the year before. "The
healthiest housing markets today generally are moderately priced and are
experiencing job growth and often population growth, which in turn is
supporting strong price growth," said NAR's Yun. "Most of the weakest
markets have either experienced both job and population losses, or they are
experiencing corrections following a prolonged period of rapid price
growth." Many markets have
also been affected by soaring foreclosure rates. Large numbers of houses for sale, many
repossessed from borrowers, sit empty, depressing prices in cities from coast
to coast - but most notably in economically distressed Midwest industrial towns
and some once-booming Sun Belt cities.
NAR numbers are arrived at by examining the prices of all homes sold
during the period. The median price is the one in which half of all homes sold
for more and half for less. Using median
prices rather than mean - or average - prices reduces the impact of the sale of
very expensive homes, which would raise mean prices disproportionately. The NAR take on price trends, usually an
optimistic one, was that recent steps taken in Washington would lead to
improved conditions later this year.
"Higher limits for FHA loans, which go into effect
March 14, will be a big help to first-time buyers in high-cost markets,"
said NAR President Richard Gaylord.
"Higher limits for conventional loans purchased by Freddie Mac and
Fannie Mae will take a bit longer," he said. "When they become
available, high-income, creditworthy borrowers in high-cost areas will have
access to affordable and safer financing, and that will help unleash pent-up
demand." But other industry
insiders are predicting harder times ahead. A Merrill Lynch report in January
forecast peak-to-trough price declines of 15% in 2008 and another 10% in 2009
before markets begin to recover.”
Freddie Eases
Mortgage Insurer Rating Requirement as Home Prices Fall
From Bloomberg: “Freddie Mac…will purchase loans covered by
mortgage insurers that don't meet the company's standards for the amount of
capital backing their policies.
Freddie Mac's suspension of its requirements applies to mortgage
insurers downgraded below AA- or Aa3 by ratings firms…The insurers will be
required to submit a remediation plan within 90 days of a downgrade. Higher defaults by subprime borrowers
propelled a jump in mortgage insurance claims last year, leading the industry's
three largest firms, MGIC Investment Corp., PMI Group Inc. and Radian Group
Inc., to report their first money-losing quarters as publicly traded companies.
The mortgage insurers and their subsidiaries have been downgraded or told they
face possible cuts by ratings firms.
``We're trying to help the mortgage insurers,'' said Brad German, a
spokesman for Freddie Mac… Mortgage insurance pays lenders when homeowners
default. Falling values make it harder
for borrowers to refinance or for lenders to recoup costs in a foreclosure,
increasing claims.”
Comments on
Bernanke’s Economic Update
From Morgan Stanley: “The prepared text of the testimony that
Bernanke delivered to the Senate Banking Committee was unusually brief and
contained little new information. The language used to describe the economic
outlook was very similar to that delivered in his last public appearance on
January 17 – even though a lot has transpired since that time. Indeed, the
exact same wording was used in a few key parts of the testimony, including that
related to a discussion of “the downside risks to growth” and the inflation
environment. Moreover, the concluding policy message, which noted that the FOMC
will “be carefully evaluating incoming information” and “will act in a timely
manner as needed to support growth” is basically identical to the wording used
in the last couple of official FOMC statements. We detected only a couple of new twists in
today’s testimony.
First, Bernanke referenced the problems facing some bond
insurers. He noted that this situation has “added to strains in the financial
markets” and could lead to “further writedowns” at commercial and investment
banks…Second, the Fed Chief provided a baseline scenario for the economy that
seemed to be broadly consistent with our own outlook. Although the text did not
specifically address the issue of whether we are facing recession, Bernanke
indicated that his own baseline forecast shows a period of sluggish growth over
the near term “followed by a somewhat stronger pace of growth starting later
this year as the effects of monetary and fiscal stimulus begin to be felt.” Our main takeaway is that Fed is not looking
to send any strong policy signals at this point. Clearly, the door remains open
for further action. However, after having moved quite aggressively in recent
weeks, there is a sense that officials now appear to be willing to roll with
the punches for a while.”
From Lehman: “Bernanke offered a benign economic forecast.
Chairman Bernanke began by noting that the "Federal Open Market Committee
(FOMC) has moved aggressively, cutting its target for the federal funds rate by
a total of 225 basis points since September, including 125 basis points during
January alone. As the FOMC noted in its most recent post-meeting statement, the
intent of these actions is to help promote moderate growth over time and to
mitigate the risks to economic activity."
What seems out of synch with the market is the combination of his
discussion of the importance of the medium-term forecast and his own,
relatively benign, baseline outlook. He reminded that "Monetary policy
works with a lag. Therefore, our policy stance must be determined in light of
the medium-term forecast for real activity and inflation, as well as the risks
to that forecast.” He added to that statement by noting that “At present, my
baseline outlook involves a period of sluggish growth, followed by a somewhat
stronger pace of growth starting later this year as the effects of monetary and
fiscal stimulus begin to be felt."
His
follow on comments, which seem to be garnering the most attention, then
reiterate
that
"Although the baseline outlook envisions an improving picture, it is
important to
recognize
that downside risks to growth remain, including the possibilities that the
housing
market or the labor market may deteriorate to an extent beyond that currently
anticipated,
or that credit conditions may tighten substantially further. The FOMC will
be carefully evaluating incoming information
bearing on the economic outlook and
will act in a timely manner as needed to
support growth and to provide adequate
insurance against downside risks." This last sentence clearly implies that the
risk management approach to Fed policy is still in play. However, it comes
after comments that suggest he is presently somewhat comfortable with his own
outlook for growth and inflation. We continue to expect a 50 basis point rate
cut at the March meeting as we see his forecast as a somewhat optimistic
scenario that rightly includes the impact of the tax
rebates.
However, financial market risks continue to mount and, by the March meeting
we
believe these will be enough for the Fed to continue to rely on their risk
management
approach
and cut rates an additional 50 basis points, particularly in the absence of
significant
inflation pressure and in light of the deterioration of the labor market and
credit availability.”
From Deutsche: “Bernanke sticks to the script, highlights
downside risks
Chairman Bernanke's testimony before the Senate Banking
Committee mostly reiterated economic themes from recent policy speeches. The Chairman again emphasized the importance
of pre-emptive monetary policy-reassuring further timely action, if warranted;
meanwhile, he also gave a nod to maintaining price stability, although the
Fed's near-term focus remains clearly tilted toward slowing economic
activity. Similar to his previous
comments, Mr. Bernanke once again highlighted the negative economic
implications of what now appears to be an economy-wide credit crunch. He stated, "More-expensive and less
available credit seems likely to continue to be a source of restraint on
economic growth." His comments
diverged slightly from those made previously in that the Chairman cited not
only the credit-crunch and slumping housing markets as negative economic
factors, but now more broadly included a softer labor market and higher energy
prices. Mr. Bernanke appeared to remain
confident that stimulative fiscal and monetary policy would lead to a more
solid pace of growth later this year; although, he did state the
following: "Although the baseline
outlook envisions an improving picture, it is important to recognize that
downside risks to growth remain, including the possibilities that the housing
market or the labor market may deteriorate to an extent beyond that currently
anticipated, or that credit conditions may tighten substantially further."
However, there was one important subtle shift.
He said, "Our policy stance must be determined in light of the
medium-term forecast for real activity and inflation, as well as risks to that
forecast." This indicates to us
that further rate cuts will be conditioned on new information regarding the economic
and financial outlook. Implicitly, this
also means that when the economy regains its footing, monetary policy will
respond accordingly. Our view is that
growth will likely shrink in Q1, but rebound next quarter. This should compel
the Fed to cut rates by 50 bps next month.”
From UBS: “In Q&A, Mr. Bernanke was asked by
Senator Carper (D-DE) about when will we know whether or not actions already
taken in stimulating the economy are working. In response, Mr. Bernanke said:
“Well, Senator, we’ll be looking over the next few quarters. Obviously, the
general performance of the economy. But as I mentioned in my testimony, I think
there are a few areas of particular sensitivity we need to watch. First is the
housing market, we need to begin to see some stabilization in starts and sales,
it would be very productive in terms of both the economy and the credit
markets. Secondly is the labor market, we don’t expect a rip-roaring labor
market by any means, but it would be nice if the labor market would begin to stabilize
close to current levels. Third, credit markets, Senator Schumer was correct
that there is a lot of concern among participants of the financial markets
about the state of the credit markets. Much of that is connected with
uncertainty about the broader economy. A significant worsening in financial
conditions or credit availability would certainly be a warning bell that we
need to take further action.””
Composition of Recent
Foreign Official Reserve Growth
From Morgan Stanley: “Total world official foreign reserves
reached US$6.4 trillion
around
end-2007, and continue to grow at roughly US$150 billion a month, with Asia
accounting for half of this growth, and oil exporters another third of this
increase…This is an acceleration: the average pace of the world’s foreign
reserve growth was only about US$30 billion a month in 2005…Asian exporters and oil exporters remain the
key reserve accumulators. Of the total stock of reserves, Asia and oil
exporters account for US$3.9 trillion and US$1.2 trillion, respectively.1 In
terms of monthly growth, they
account
for US$75 billion and US$50 billion. With US$1.57 trillion,2 China is the
world’s largest reserve holder, followed by Japan (US$996 billion)3 and Russia
(US$483 billion)… Of the US$150 billion in monthly reserve growth, making some
assumptions, roughly 70% of the total may have come from outright
interventions, while only 12% came from interest earnings on the underlying
assets and 18% from valuation changes (i.e., EUR appreciation)… At the country specific
level, Japan’s rapid reserve growth in 4Q07 was a puzzle. We do not believe
that the MoF conducted stealth interventions, but suspect that it may have
bought EUR/USD, i.e., diversified, and the rise in EUR/USD exposed the higher weighting
on EUR, which we guesstimate to be around 21%, compared to what we had presumed
to be the case (10%).”
New Credit Crunch
Hits Muni Market
From The Financial
Times: “A collapse in confidence in
a $330bn corner of the debt market has left US municipalities and student loan
providers facing spiralling interest rate costs. The implosion of the so-called auction-rate
securities market - amid worries that bond insurers guaranteeing much of this
debt could face rating downgrades - is the latest incarnation of the credit crisis. The market, heavily used by municipal
borrowers and backed by triple-A rated guarantees from bond insurers such as
Ambac and MBIA, was until now used as a safe harbour for investors. The interest rates on such bonds reset either
weekly or monthly and a lack of interest from investors can trigger a sharp
rise to compensate holders. The market's
sudden slump has pushed interest rates as high as 20 per cent for entities from
the Port Authority of New York & New Jersey to a hospital. "The auction securities market is falling
apart," …Municipal borrowers are scrambling to seek letters of credit from
banks and other fresh sources of finance. The auction rate securities market, much like
structured investment vehicle and asset-backed commercial paper markets, had
been growing fast. Banks acting as
dealers have been propping up the sector, but many pulled back this week amid a
realisation that it might not be possible to restore confidence and woo
investors back. "Dealers who would
normally pick up a slump are not doing so as their balance sheets are full”… The
importance of bond insurers to municipal borrowers has prompted regulators to
push banks to provide capital or credit lines so that Ambac, MBIA and others
can retain their triple-A ratings.”
From Citi:
“The monoline saga drags on with auctions of bonds issued by local
governments and student loan providers being the latest casualties. There have
been failed auctions with some local governments being forced to pay as much as
20% to borrow in the short-term debt markets. It remains to be seen if this is
a temporary phenomenon related to the inability of monoline insurers to cover
their portfolios or a more secular decline in the availability of credit. CDS
indices remain at extremely elevated levels on wide ranging concerns on the
overall health of the financial sector and the global real economy. “
From Bank of America: “Failures in the auction rate securities market
accelerated today with an estimated 80% of all auctions failing. What does this
mean for financial markets? Auction rate securities were used as cash
equivalents primarily by individual investors and corporate treasurers. Those
investors will now find their previous liquid cash surrogates replaced by term
debt securities. With a total size of $330bn and roughly half of that held by
individuals, a significant, albeit likely short lived liquidity crunch is again
emanating out of the credit markets.”
From FTN: “UBS has joined a growing list of dealers [Goldman,
Lehman, Citi] that will not buy auction-rate securities if auctions fail to
attract enough bidders, according to Bloomberg. Auctions by cities, hospitals
and student loans have failed in recent days because they were
undersubscribed.”
From Deutsche: “Moody's downgraded FGIC, but noted that MBIA
and Ambac are better positioned from a capitalization and business franchise
perspective…”
Bank of America’s CEO
Sees Mild Recession and Bank Mismanagement of Risk
From AP: “The head of the nation's largest consumer
bank said Wednesday there is an “even chance” the nation's economy is in a mild
recession, comparing last year's credit crunch and ongoing turmoil in the
nation's mortgage market to the Internet bubble of 2001. But Bank of America Corp. chief executive Ken
Lewis said that's not a reason to give up entirely on the complex securities
that led to the crunch, helped precipitated the current economic slowdown and
cost his bank and other financial services companies more than $145 billion in
losses. “The basic idea that banks can
better manage and distribute risk by securitizing financial assets has created
extraordinary growth and stability over the past 20 years, for the financial
sector and for the global economy,” Lewis said. “The forms this activity takes
will be simpler, but it will continue.”… Lewis reiterated the bank's belief
that GDP growth will accelerate in the second half of the year and return to
“trendline growth” in 2009. “We have to
be smarter about managing our risks and we have to get paid for the risks we
take,” Lewis said. “But we do have to keep taking risk. It's the business we're
in and it's what drives economic growth.” Lewis said his bank, and many others, were
unable to properly price the innovative products created by investment bankers
when money to lend to prospective homebuyers was cheap and widely available.
Those products included collateralized debt obligations, a complex security
often backed by subprime mortgage loans – or those given to customers with poor
credit histories. Banks and others fell
into a “follow-the-leader” exercise, Lewis said, in which the prices and risks
of such assets were based on those that had come before. As the housing-market
slump led to delinquencies, defaults and bankruptcies at mortgage lenders
nationwide, the credit market seized up. Trading came to a halt because no one
really knew how much the investments were worth, he said. At Bank of America, the cost of mortgage
related write-downs topped $5 billion in the fourth quarter, nearly wiping out
earnings. Lewis said Wednesday putting
the nation's credit markets back on stable ground will require increased
transparency in both the accounting of such assets and the firms that
investment in them, and “a return to simpler, more traditional structures that
are easier to value.” In the meantime,
Lewis said, the nation's financial service companies can work on their own and
with the federal government to keep homeowners in their homes. On Tuesday, Bank
of America – which Lewis has said does business with nearly one out of every two
American households – joined five other lenders in granting some customers
threatened with foreclosure a 30-day reprieve under an initiative announced by
the Bush administration. But the banks
themselves, he said, need to be “willing to deal with our own challenges.” “Central bankers will step in when possible to
protect the markets from the most severe consequences,” Lewis said. “But
companies on the hook for past decisions need to find solutions in the private
sector, and not look to governments for help.””
MISC
From Lehman: “Chicago
Fed President Evans noted that economic data “readings like this
indicate a greater than 50% probability that the economy is in a recession.””
From RBSGC: “MBS are heading towards a disastrous month
with -53 bp in excess returns so far.”
From RBSGC: “Agency spreads for on the run issues are 15
to 30 bp wider versus Tsy and 16 to 20 bp wider to swaps YTD led by the 5yr
sector. The dramatic cheapening in agencies is due primarily to concerns over
FNMA and FHLMC Q4:07 financials, the lingering possibility of supply and the
GSEs callable replacement needs.”
From Deutsche Bank: “The yield curve has continued to steepen,
with 2/10Y now at 173 bp in swaps. It was only 142 bp at the beginning of the
month. Liquidity issues, as exemplified by the crisis in the auction-rate bond
market, has caused increased buying focus on the short end of the yield curve.”
From The Washington
Post: “The National Association of
Home Builders, one of the top 10 corporate donors to politicians, has stopped
contributing to congressional candidates after it failed to get what it wanted
in recent anti-recession legislation.”
From AP: “Auto loans at least two months delinquent
hit a 10-year high in January, Fitch Ratings said Thursday, signaling the
continued spread of consumer weakness to beyond homes and credit cards. The firm said 0.77 percent of U.S. prime and
subprime auto asset-backed securities were more than 60 days behind on
payments, with the rate jumping 12 percent from December and 44 percent from a
year ago. Subprime delinquencies topped
the 4 percent level for the first time since late 1997, reaching 4.03 percent
last month, up 10 percent from December and 43 percent from a year earlier.”
From USA Today: “Car and truck repossessions this year are
headed for the highest level in at least a decade, thanks to easy credit and a
faltering economy, says an economist for one of the largest wholesale auto
auction services. So many vehicles are being snatched from owners who stop
making payments that some repo operators and auto auctioneers say lots are
overflowing. This year's predicted 10%
rise in vehicle repos to 1.6 million would be a third higher than 10 years ago,
says Thomas Webb, chief economist for a unit of Atlanta-based Manheim, which
sells cars to dealers worldwide. The increase comes atop a 10% rise in repos
last year. Webb blames overly
"generous" auto loans in the past couple of years as a key factor in
driving up defaults that lead to repossessions.”
From The Wall Street Journal: “…utilities say more customer accounts are
falling delinquent. Sierra Pacific
Resources, which owns two utilities that serve Nevada, said it has seen a 50%
increase in accounts that are more than 30 days late compared with a year ago.
Chief Executive Michael Yackira said it shouldn't be surprising, since "we
lead the nation in home foreclosures." The problem is especially
pronounced in Las Vegas, where a housing boom has turned into a bust, with more
than 20,000 homes on the market now… In New York, Consolidated Edison said it
has experienced a 12% increase in delinquencies, with 140,000 households
falling behind during the past three months.
"We think part of it has to do with subprime mortgages," said
ConEd spokesman Michael Clendenin. He added that people with rising mortgage
costs sometimes put off paying utility bills because they know that under the
laws of New York and many Eastern and Midwestern states, their power can't be
shut off for nonpayment during winter months.”
From Deutsche Bank: “Even though initial jobless claims fell for
the second consecutive week, their underlying trend continues to move higher.
Claims declined 9k to 348k for the week ending February 9 but the 4-week moving
average still rose 12 to 347k, the highest reading since October 2005. The
pattern is the same for continuing claims; they fell 9k to 2761k for the week
ending February 2 but the 4-week moving edged up 4k to 2728k. We have cited
350k as a key level on claims that bears watching. To this point, the labor market
has held in reasonably well, but the trend in claims over the last several
weeks is troubling especially since it dovetails with a sharp decline seen in
employee tax withholding receipts; they had been growing consistently between
6-7% until recently. But over last several weeks, tax receipts have seen their
growth rate more than halve.”
From JP Morgan: “…the yen…now sits at its lowest level versus
the dollar in more than a month…”
From Deutsche Bank: “…the ECB's Weber was beating the hawkish
drum, suggesting explicitly that ".current interest rate expectations on
financial markets do not reflect an appropriate assessment of inflation risks,
at least for a stability-orientated central banker". Speaking on
inflation, Weber went on to say that "Risks are clearly to the upside and
this makes it all the more important to head off second-round effects at the
first sign and prevent them from delaying a fall in the current rate of
inflation, which is much too high." At the very least his comments suggest
there is no consensus at the ECB in favour of a near-term cut in rates. Weber
forecast Euroland growth to run at or a little below potential in 2008 (the
latter believed to be 2% yoy).”
End-of-Day Market
Update
From RBSGC: “The market same under pressure early, on the
narrower-than-expected trade deficit and speculation that Bernanke's testimony
would be more balanced -- when the Chairman's comments broke no new ground and
continued the dovish trend of Fedspeak, the market remained under pressure
further out the curve, but impressively steepened out as the front-end firmed.
Equities came under pressure later in the session, with all the major indices
down 1% or more, and in a bit of shift from the recent trend Treasuries took
little direction from this move. We are
taking no grand lessons from the Treasury markets intra-day decoupling from
stocks, and are reminded that with the NASDAQ still down more than 11% YTD, and
the DJIA and S&P off 6% and 7.7%, respectively -- the impact of equity
ownership on any feelings of wealth is not a major upside factor for the
American consumer. Layer on top of that, the impact of falling home prices (and
presumably home equity as well). On the
housing front, we heard from the National Association of Realtors -- which
reported that the median sale price of a U.S. home declined 5.8% in the
fourth-quarter of last year -- bringing the median to 206.2k vs. 219k prior --
an impressive decline to be sure. The industry group also reported that prices
were lower in 77 of 150 metropolitan areas -- the most on record (since 1979)
-- with 16 of the metro areas reporting declines of 10%+. Concerning, yes, but
not necessarily a new story -- it is still noteworthy and supportive of the
hard-landing story.
Volumes were very strong today…”
From Deutsche Bank: “Equity markets faltered after Fed Chairman
Bernanke essentially repeated his recent commentary…”
From UBS: “Equity markets fell on Thursday, with the
S&P500 down 1.3%, and the Nasdaq down 1.7%. The Treasury yield curve
steepened, with the 2-year down 2bps at 1.90% and the 10-year up 8bp to 3.82%.
The dollar weakened versus the Yen (-0.3%) and euro (-0.4%). Crude oil prices
rose 1.8% to $94.92/bbl.”
Three
month T-Bill yield rose 2 bp to 2.28%.
Two
year T-Note yield fell .5 bp to 1.89%
Ten
year T-Note yield rose 9 bp to 3.82%
Dow
fell 175 to 12,377
S&P
500 fell 18 to 1349
Dollar
index fell 26 to 76.14
Yen
at 107.9 per dollar
Euro
at 1.464
Gold
rose $1.5 to $908
Oil rose $2.03 to $95.30
*All prices as of 5:07PM
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