Mortgage Failures Could Create Nightmare

Saturday November 24, 12:02 am ET
By Joe Bel Bruno, AP Business Writer

New Wave of Mortgage Failures Could Create a Nightmare Economic Scenario

NEW YORK (AP) -- When Domenico Colombo saw that his monthly mortgage payment was about to balloon by 30 percent, he had a clear picture of how bad it could get.
His payment was scheduled to surge by an extra $1,500 in December. With his daughter headed to college next fall and tuition to be paid, he feared ending up like so many neighbors in Ft. Lauderdale, Fla., who defaulted on their mortgages and whose homes are now in foreclosure and sporting "For Sale" signs.

Colombo did manage to renegotiate a new fixed interest rate loan with his bank, and now believes he'll be OK -- but the future is less certain for the rest of us.

In the months ahead, millions of other adjustable-rate mortgages like Colombo's will reset, giving them a higher interest rate as required by the loan agreements and leaving many homeowners unable to make their payments. Soaring mortgage default rates this year already have shaken major financial institutions and the fallout from more of them, some experts say, could spread from those already battered banks into the general economy.

The worst-case scenario is anyone's guess, but some believe it could become very bad.

"We haven't faced a downturn like this since the Depression," said Bill Gross, chief investment officer of PIMCO, the world's biggest bond fund. He's not suggesting anything like those terrible times -- but, as an expert on the global credit crisis, he speaks with authority.

"Its effect on consumption, its effect on future lending attitudes, could bring us close to the zero line in terms of economic growth," he said. "It does keep me up at night."

Some 2 million homeowners hold $600 billion of subprime adjustable-rate mortgage loans, known as ARMs, that are due to reset at higher amounts during the next eight months. Subprime loans are those made to people with poor credit. Not all these mortgages are in trouble, but homeowners who default or fall behind on payments could cause an economic shock of a type never seen before.

Some of the nation's leading economic minds lay out a scenario that is frightening. Not only would the next wave of the mortgage crisis force people out of their homes, it might also spiral throughout the economy.

The already severe housing slump would be exacerbated by even more empty homes on the market, causing prices to plunge by up to 40 percent in once-hot real estate spots such as California, Nevada and Florida. Builders like Chicago's Neumann Homes, which filed for bankruptcy protection this month, could go under. The top 10 global banks, which repackage loans into exotic securities such as collateralized debt obligations, or CDOs, could suffer far greater write-offs than the $75 billion already taken this year.

Massive job losses would curtail consumer spending that makes up two-thirds of the economy. The Labor Department estimates almost 100,000 financial services jobs related to credit and lending in the U.S. have already been lost, from local bank loan officers to traders dealing in mortgage-backed securities. Thousands of Americans who work in the housing industry could find themselves on the dole. And there's no telling how that would affect car dealers, retailers and others dependent on consumer paychecks.

Based on historical models, zero growth in the U.S. gross domestic product would take the current unemployment rate to 6.4 percent. That would wipe out about 3 million jobs from the economy, according to the Washington-based Economic Policy Institute.

By comparison, in the last big downturn between 2001-03 some 2 million jobs were lost, according to the Labor Department. The dot-com bust early this decade decimated the technology sector, while the Sept. 11, 2001, terror attacks hurt the transportation and allied industries. Economists said the country was officially in recession from March to November of 2001, but the aftermath stretched to 2003.

There is increasing evidence that another downturn has begun.

Borrowers who took out loans in the first six months of this year are already falling behind on their payments faster than those who took out loans in 2006, according to a report from Arlington, Va.-based investment bank Friedman, Billings Ramsey. That's making it even harder for would-be buyers to get new mortgages -- a frightening prospect for home builders with projects going begging on the market, and for homeowners desperate to unload property to avoid defaulting on their loans.

Meanwhile, the number of U.S. homes in foreclosure is expected to keep soaring after more than doubling during the third quarter from a year earlier, to 446,726 homes nationwide, according to Irvine, Calif.-based RealtyTrac Inc. That's one foreclosure filing for every 196 households in the nation, a 34 percent jump from just three months earlier.

Such data suggests more Americans could lose their homes than ever before, and those in peril are people who never thought they'd welsh on a mortgage payment. They come from a broad swath -- teachers, pharmacists, and civil servants who were lured by enticing mortgage terms.

Some homebuyers gambled on interest-only loans. The mortgages, which allowed buyers to pay just interest at a low rate for two years, were too good to pass up. But with that initial term now expiring, many homeowners find they can't make the payments. The hopes that went along with those mortgages -- that they'd be able to refinance because the equity in their homes would appreciate -- have been dashed as home prices skidded across the country.

"It's been said a lot of people have been using their homes as ATM machines," said Thomas Lawler, a former official at mortgage lender Fannie Mae who is now a private housing and finance consultant. "The risk has a lot of tentacles."

This example illustrates the distress many homeowners are in or will find themselves in: A subprime adjustable-rate mortgage on a $400,000 home could have payments of about $2,200 a month, with borrowers paying 6.5 percent, interest only. When the teaser period expires, that payment becomes $4,000, with the homeowner paying 12 percent and now having to come up with principal as well as interest.

Minneapolis resident Chad Raskovich found himself in a such a situation. He hoped -- it turned out, in vain -- to gain more equity in his home and that a strong record of payments would enable him to secure a better loan later on.

"It's not just me, it's a lot of people I know. The housing market in the Twin Cities has dramatically changed for the worse in the years since I purchased my home. Now we're just looking for a solution," he said.

Colombo, who lives in the planned community of Weston just outside Ft. Lauderdale, said the reset on his home would have "destroyed' his financial situation. He went to Mortgage Repair Center, one of hundreds of debt counselors trying to bail out desperate homeowners, to work with his lender.

"But many people in my neighborhood didn't get help, and some have literally just walked away from their homes," said Colombo. "There are over 133,000 homes on the market in Broward-Miami-Dade counties, and some of them were actually abandoned. People in this situation don't like to talk about it, and end up getting hurt because they don't."

Many Americans are unaware that a borrower defaulting on a loan can have an impact on everyone else's well-being and that of the nation. After all, the amount of mortgages due to reset is just a fraction of the United States' $14 trillion economy.

But the series of plunges that Wall Street has suffered in past months prove that no one is immune when mortgages turn sour.

Today's financial system is interconnected: Mortgages are sold to investment firms, which then slice them up and package them as securities based on risk. Then hedge and pension funds buy up such investments.

When home prices kept rising, these were lucrative assets to own. But the ongoing collapse in housing prices has set off a chain reaction: Lenders are tightening their standards, borrowers are having a harder time refinancing loans and the securities that underpin them are in jeopardy.

This has resulted in more than $500 billion of potentially worthless paper on the balance sheets of the biggest global banks -- losses that could spill into the huge pension and mutual funds that also invest in these securities and that the average worker or investor expects to depend on.

There's more pain left for Wall Street: "We're nowhere close to the end of the collapse," said Mark Patterson, chairman and co-founder of MatlinPatterson Global Advisors, a hedge fund that specializes in distressed funds.

"I just assumed banks could stomach these kind of losses," said Wendy Talbot, an advertising executive when asked about the subprime crisis outside of a Charles Schwab branch in New York. "I guess you don't really pay attention to things until your forced to. ... You put out of your mind the worst things that can happen."

The subprime wreckage could dwarf the nation's last big banking crisis -- the failure of more than 1,000 savings and loans in the 1980s. The biggest difference is that problems with S&Ls were largely contained, and the government was able to rescue them through a $125 billion bailout.

But this situation is far more widespread, which some experts say makes it more difficult to rein in.

"What really makes this a doomsday scenario is where would you even start with a bailout?" housing consultant Lawler asked.

Sen. Charles Schumer, D-N.Y., a key member of Senate finance and banking committees, said borrowers are the ones who need relief. The playbook to bail out the economy would not be applied to the banks and mortgage originators, but money could be funneled through non-profit organizations to homeowners that need help, he said in an interview with The Associated Press.

"There is a worst-case scenario because housing is the linchpin of our economy, and more foreclosures make prices go down, that creates more foreclosures, and creates a vicious cycle," Schumer said. "You add that to the other weakness in the economy -- on one end is the home sector and the other is the financial sector -- and it could create a real problem."

He also believes Federal Reserve Chairman Ben Bernanke should do more to help the economy. Bernanke said in recent comments he has no direct plans to bail out the mortgage industry, but to instead offer relief through cheap interest rates and further liquidity injections into the banking system.

There's also been talk of letting government-backed lenders like Fannie Mae and Freddie Mac buy mortgages of as much as $1 million from lenders, pay the government a fee for guaranteeing them and then turn them into securities to be sold to investors. This would extend the government's support, and its exposure, to the mortgage market to help alleviate stress.

Either way, the impact of a fresh round of subprime losses remains of paramount concern to economists -- especially since there's little certainty about how it would ripple through the U.S. economy.

"We all know that more hits from these subprime loans are coming, but are having a devil of a time figuring out how it will happen or how to stop it," said Lawler, who was once chief economist for Fannie Mae.

"We've never been in this situation before."

When the levee breaks

CHUCK JAFFE
By Chuck Jaffe, MarketWatch
Last Update: 4:21 PM ET Nov 22,

Even average homeowners feel rising mortgage floodwaters

BOSTON (MarketWatch) -- While the headlines have been full of stories on the credit crunch, subprime mortgage mess and the real estate bubble, a lot of ordinary homeowners have figured they were immune from the problems.

Ensconced in a home with a prime mortgage, they have watched the news and figured they're safe. And all the while, the water has been rising.

With property values dropping in many areas of the country, a growing number of homeowners -- particularly those who bought their house in the last five years -- are looking at the prospect of being "underwater" on the mortgage. That's when the value of the home is less than the amount remaining on the loan used to buy it.

So while the nation has been focused on a record-high rate of foreclosures, the tide has been rising on a lot of people who simply had bad timing. Zillow.com, an online real estate community, reported Tuesday that home values nationally are down more than 5.5% compared with a year ago, with many markets being hit much harder.

As a result, according to Zillow, more than 15% of homeowners nationwide who bought their home in the last year are now underwater. The number is slightly worse for consumers who bought their home two years ago. By comparison, the study showed that just under 2% of people who purchased a home five years ago have seen their equity go negative.

"We are so used to the fantasy that real estate is a great investment and that it always goes up in value that we're surprised when it doesn't," says Marc Eisenson of Good Advice Press, author of the 1980s classic "The Banker's Secret," the book which first taught Americans the value of prepaying mortgages and auto loans.

"This is a scary place to be, and a lot of people who never expected to get here are watching the waters rising -- particularly if they have adjustable-rate mortgages -- and their home values sinking."

Being underwater on a loan -- and it's increasingly common on auto loans in this country too -- is not really a function of interest rates and payments. The problem that adjustable-rate mortgages pose in this market is more psychological, in that the borrower's payments are likely to rise while the asset they are paying for is depreciating. The amount owed is the same before or after the adjustment, but the higher payments simply make the situation feel more helpless.

Riding it out

Thankfully, most experts suggest that negative home equity is not something that should cause a panic, assuming the homeowner can afford the current mortgage payment and has no reason to move.

"It could take five years or longer before this thing swings around, but as long as cash flow is positive -- so that you're making the payments and living life without worrying where the equity stands in your home -- you can ride this out," says Paul Richard, director of education at the Institute for Consumer Financial Education. "The question is whether you will want to hold on to your investment if you have lost 10% or 15% or more and don't see it turning around. ... You wouldn't want to do that with most mutual funds, but you will have to decide if you will do it with your house."

For most homeowners, selling the home doesn't necessarily solve the problem. After all, if they are underwater on the mortgage, they will need to bring cash to the closing. And while they may be able to buy the next home for a lot less -- due to the drop in home prices -- there is no guarantee they will get a good mortgage rate to make the deal happen.

Renting and waiting out the decline and the real estate cycle is an option, but more for the prospective home buyer rather than the person who is up to their neck on the mortgage.

"If you can afford the payments and bought in a market that you believe will go up, then the way out of this is to drive through it, keep making the payments and plan to hold on long enough so that it pays off," says Greg McBride, senior financial analyst for BankRate.com. "It's only a real problem if you're going to have to sell the house in these conditions, or if you can't make the payment."

Watch your dollars

That said, most experts also believe that when the waters are coming closer to your personal shore, you might want to change a few behaviors, even if you plan to stay in the house and ride it out.

For starters, put off significant investments in the home. While real estate agents frequently say that certain home improvements "pay for themselves" when the home is sold, that's not the case in a market where home prices are shrinking and mortgages are underwater. Instead, you're simply adding more water.

Says Eisenson: "If you want a new bathroom while your house is underwater, you need to be really confident that you can ride things out. ... Right now, you're making the situation worse by putting more into the home at a time when you possibly won't make it back."

Next, bolster the emergency fund, just in case. It's not just financial problems making headlines, but economic ones; if the economy hits home in the form of job loss, at a time when the home is underwater, the choices you're facing are ugly. A bigger cash cushion will keep options open.

Experts disagree on whether you should pay off the mortgage faster when it's underwater; paying additional principal drops the water level, but that money is not coming back if you have to move and sell the house before the market rebounds.

Paying down other debts, or putting excess cash into investments that will be positive while real estate is in the doldrums may do more to improve a homeowner's overall financial position.

Says Eisenson: "This situation is going to get worse before it gets better, so think about what you would do now. You'll probably decide to try to push through it, but if you're unprepared and you wake up one day to find out you're underwater, you're going to be scared."

Chuck Jaffe is a senior MarketWatch columnist. His work appears in dozens of U.S. newspapers.

17 reasons America needs a recession

Think positive, this 'slow motion train wreck' is good for the U.S.

By Paul B. Farrell, MarketWatch
Last Update: 6:53 PM ET Nov 19, 2007

ARROYO GRANDE, Calif. (MarketWatch) -- Yes, America needs a recession. Bernanke and Paulson won't admit it. And investors hate them. We're all trapped in outdated 1990s wishful thinking about a "new economy" and "perpetual growth."

But the truth is, not only is a recession coming, America needs a recession. So think positive: Let's focus on 17 benefits from this recession.

To begin with, recession may be an understatement. Jeremy Grantham's GMO firm manages $150 billion. In his midyear report before the credit crisis hit he predicted: "In 5 years I expect that at least one major 'bank' (broadly defined) will have failed and that up to half the hedge funds and a substantial percentage of the private-equity firms in existence today will have simply ceased to exist."

He was "watching a very slow motion train wreck." By October, it was accelerating: "Train hits end of track at full speed."

Also back in August, The Economist took a hard look at the then emerging subprime/credit crisis: "The policy dilemma facing the Fed may not be a choice of recession or no recession. It may be between a mild recession now, and a nastier one later."

However, the publication did admit that "even if a recession were in America's long-term economic interest, it would be political suicide" for Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson to suggest it.

Then The Economist posed the big question: Yes, "central banks must stop recessions from turning into deep depressions. But it may be wrong to prevent them altogether."

Wrong to prevent a recession? Why? Because recessions are a natural and necessary part of the business cycle. Remember legendary economist Joseph Schumpeter, champion of innovation and entrepreneurship?

Economists love Schumpeter's "creative destruction:" Obsolete firms get destroyed and capital released, making way for new technologies, new businesses, like Google. And yet, nobody's willing to apply Schumpeter's theory to the entire economy ... and admit recessions are a natural part of the business cycle.

Instead, everyone persists in the childlike fairy tale that "all growth is good" and "all recessions are bad," a bad hangover of the '90s "new economy" ideology. So for the folks at the Fed, Treasury and Wall Street, "eternal growth" is still America's mantra.

Unfortunately, the American investors' brain has also developed this blind obsession with "growth-at-all-costs," coupled with a deadly fear of all recessions, as if recessions are a lethal super-bug more powerful than Iran with a bomb.

Our values are distorted: It's OK to be greedy and overshoot the market on the upside -- grab too many assets, take on too much debt, make consumer spending a religion, live beyond our means, ignite hyperinflation along the way. Growth is good, even in excess.

And yet, recessions are a no-no that drives politicians, economists and investors ballistic.

Well, folks, you can block all this from your mind, you can argue that recessions are not a part of Schumpeter's thinking, that they are inconsistent with your political ideology. But the fact is, we let the housing/credit boom become a massive bubble, it popped and a recession is coming. So think positive, consider some of the benefits of a recession:

1. Purge the excesses of the housing boom

No, it's not heartless. Not like wartime calculations of "acceptable collateral damage." Yes, The Economist admits "the economic and social costs of recession are painful: unemployment, lower wages and profits, and bankruptcy." But we can't reverse Greenspan's excessive rate cuts that created the housing/credit crisis.

It'll be painful for everyone, especially millions of unlucky, mislead homeowners who must bear the brunt of Wall Street's greed and Washington's policy failures.

2. U.S. dollar wake-up call

Reverse the dollar's free fall and revive our global credibility. Warnings from China, France, Iran, Venezuela and supermodel Gisele haven't fazed Washington. Recession will.

3. Write-offs

Expose Wall Street's shadow-banking system. They're playing with $300 trillion in derivatives and still hiding over $100 billion of toxic off-balance sheet asset-backed securities, plus another $300 billion hidden worldwide. A lack of transparency is killing our international credibility. Write it all off, now!

4. Budgeting

Force fiscal restraint back into government. America has been living way beyond its means for years: A recession will cut back revenues at all levels of government and cutbacks will encourage balanced budgeting.

5. Overconfidence

A recession will wake up short-term investors playing the market. In bull markets traders ride the rising tide, gaining false confidence that they're financial geniuses. Downturns bruise egos but encourage rational long-term strategies.

6. Ratings

Rating agencies have massive conflicts of interest; they aren't doing their job. They're supposed to represent the investors, but favor Corporate America, which pays for the reports. Shake them up.

7. China

Trigger an internal recession in China. Make it realize America's not going into debt forever to finance China's domestic growth and military war machine. A recession will also slow recycling their reserves through sovereign funds to our equities.

8. Oil

Force the energy and auto industries to get serious about emission standards and reducing oil dependency.

9. Inflation

Expose the "core inflation" farce Washington uses to sugarcoat reality.

10. Moral hazard

Slow the Fed from cutting interest rates to bail out speculators.

11. War costs

Force Washington to get honest about how it's going to pay for our wars, other than supplemental bills that are worse than Enron-style debt financing.

12. CEO pay

Further expose CEO compensation that's now about five hundred times the salaries of workers, compared with about 40 times a generation ago.

13. Privatization

Stop the privatization of our federal government to no-bid contractors and high-priced mercenary armies fighting our wars.

14. Entitlements

Force Congress to get serious about the coming Social Security/Medicare disaster.

With boomers now retiring, this problem can only get worse: A recession now could avoid a depression later.

15. Consumers

Yes, we're all living way beyond our means, piling up excessive credit-card debt, encouraged by government leaders who tell us "deficits don't matter." Recessions will pressure individuals to reduce spending and increase savings.

16. Regulation

Lobbyists have replaced regulation. Extreme theories of unrestrained free trade plus zero regulation just don't work; proven by our credit crisis, hedge funds' nondisclosures, private-equity taxation, rating agencies failures, junk home mortgages, and more. Get real, folks.

17. Sacrifice

"We have not seen a nationwide decline in housing like this since the Great Depression, says Wells Fargo CEO John Stumpf. As individuals and as a nation Americans have always performed best in crises, like the Depression or WWII, times when we're all asked to make sacrifices. Pampering us with interest-rate cuts and tax cuts during the Iraq and Afghan wars may have stimulated the economy temporarily, but they delayed the real damage of the '90s stock bubble while setting the stage for this new subprime/credit crisis.

Wake up, the train wrecked. Time to think positive, find solutions, demand sacrifices.

Goldman paints bleak picture for housing, financials

Tue Nov 20, 2007 7:19am EST

NEW YORK (Reuters) - Goldman Sachs issued a gloomy report on the U.S. financial services sector, saying housing prices are likely to fall a lot further, write-downs will mount and some mortgage insurers and guarantors will be forced to raise capital just to survive.

Falling house prices and a worsening economy will drive down securities based on residential mortgages, especially those given to borrowers with the riskiest credit, Goldman Sachs financial analysts Lori Appelbaum, Thomas Cholnoky, James Fotheringham and William Tanona, wrote in a lengthy report released on Monday.

Meanwhile, the value of collateralized debt obligations -- bonds based on pools mortgages -- related to those subprime mortgages, could fall another $150 billion across the industry, the bank said.

That's on top of the $18 billion financial firms globally wrote down in the third quarter and the $22 billion that some companies have indicated they expect in the fourth quarter.

Share markets across the globe sank after an earlier report from the Goldman analysts downgrading Citigroup (C.N: Quote, Profile, Research) reignited fears that losses from the global credit crisis may widen.

Stock benchmarks in the United States fell to their lowest levels in three months on Monday. In Asia MSCI's measure of other Asia Pacific stocks (.MIAPJ0000PUS: Quote, Profile, Research) hit its lowest level since late September. Financial stocks were among the worst affected.

Inevitability, certain financial guarantors and mortgage insurers will need to raise capital to shore up their balance sheets. The Goldman analysts said these companies will fall into two groups, the desperate -- those which will face the risk of going out of business if they don't raise capital -- and the needy -- those that could employ other means to do so, such as cutting dividends.

Goldman lists financial guarantors MBIA Inc (MBI.N: Quote, Profile, Research), Ambac Financial Group Inc, Security Capital Assurance Ltd (SCA.N: Quote, Profile, Research) and Assured Guaranty Ltd (AGO.N: Quote, Profile, Research) as the desperate. It lists Citigroup Inc, Washington Mutual Inc (WM.N: Quote, Profile, Research), First Horizon National Corp (FHN.N: Quote, Profile, Research) and National City Corp (NCC.N: Quote, Profile, Research) in the "needy" column.

Without the riskier loans such as subprime or no-or-low documentation mortgages, returns in the mortgage business will be significantly lower.

"Investor appetite for high-yielding subprime mortgage securities fuelled the home pricing bubble and this investor market is not coming back," the analysts wrote.

Brokers will rethink their business models focused on these exotic loans, the analysts said.

CONSUMER CREDIT FEAR

With home prices, consumer credit deterioration is not far off. The downturn in housing is spilling over into employment in some states and is leading to high consumer losses, the analysts said.

Falling home prices have put one-third of the United States, by Gross Domestic Product, in or near recession, the analysts wrote. California is the biggest concern as it represents 13 percent of the U.S. GDP. Card and auto losses will rise.

Although financial companies across the board have seen their stock prices walloped, despite attractive valuations, Goldman says a broad wave of industry consolidation is still another 12 to 18 months away.

"Credit risk, balance sheet deterioration, and business model risk continues to outweigh low valuations," the analysts wrote.

"We believe acquisitions are unlikely to occur until balance sheets stabilize and a market bottom is in sight," the analysts said.

Once U.S. housing shows signs of bottoming out, there will be some solid but tarnished companies investors will view as likely acquisitions targets.

Suitors are likely to come from all parts of the globe, even from emerging economies such as China or India, as the dollar remains weak.

"We would not be surprised to see the first acquisition of a major U.S. broker or commercial bank by an emerging market institution," the analysts wrote.

Earlier on Monday, the analysts downgraded Citigroup (C.N: Quote, Profile, Research) to a sell because of its exposure to CDO revaluations and Discover Financial Services (DFS.N: Quote, Profile, Research) because of its vulnerability to consumer credit deterioration. In the report, the analysts suggested pairing trades with these companies.

* Go long on American Express Co (AXP.N: Quote, Profile, Research) shares and short Discover

* Go long on Lehman Brothers Holding's (LEH.N: Quote, Profile, Research) shares and short Citigroup

Additionally, the firm believes that three financial "babies" have been "thrown out with the bathwater" and recommend buying American International Group Inc (AIG.N: Quote, Profile, Research), US Bancorp (USB.N: Quote, Profile, Research) and aircraft lessors, such as AerCap Holdings NV (AER.N: Quote, Profile, Research), Aircastle (AYR.N: Quote, Profile, Research), and Genesis Lease Ltd (GLS.N: Quote, Profile, Research).

Additionally it recommends another pair trade; go long on U.S. Bancorp's shares and short First Horizon.

(Reporting by Ilaina Jonas; editing by Louise Heavens)

Freddie Mac loses $2B, seeks new capital

By MARCY GORDON, AP Business Writer

WASHINGTON - Freddie Mac, the nation's No. 2 buyer and guarantor of home loans, lost $2 billion in the third quarter and said Tuesday it must raise fresh capital to meet regulatory requirements. Its shares fell more than 26 percent.

The quarterly loss was the largest ever for Freddie Mac which, like its larger government-sponsored competitor Fannie Mae and a number of large investment banks, has been slammed in recent months by rising defaults on home mortgages.

The mortgage financier said it is "seriously considering" cutting in half its dividend in the fourth quarter and has hired Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. as financial advisers to help it examine possible new ways of raising capital in the near future.

Freddie Mac said it set aside $1.2 billion in the turbulent July-September period to account for bad home loans, reflecting "the significant deterioration of mortgage credit."

Executives said Tuesday there was little to be optimistic about in the fourth quarter and told investors to brace for more of the same, sending shares on the greatest one-day plunge since public trading began for Freddie nearly two decades ago.

Losses widened from $715 million during the same period last year. The report sent shares tumbling $9.89 to $26.37 Tuesday.

The company posted negative revenue of $678 million, as it sustained losses under generally accepted accounting principles of $3.6 billion in the quarter. The revenue compared with positive revenue of $91 million a year earlier.

The $2 billion third-quarter loss for McLean, Va.-based Freddie Mac worked out to $3.29 a share, compared with $1.17 a share in the third quarter of 2006.

Losses far exceeded Wall Street analysts expectations of a 22 cent per-share loss, according to a poll by Thomson Financial.

The results for Freddie Mac, together with a recent report by Fannie Mae, heighten investor anxiety over the government-sponsored companies, which had been considered less vulnerable in the housing crisis because they have had less exposure to high-risk, subprime mortgages.

Freddie Mac's regulatory core capital was estimated to be just $600 million in excess of the 30 percent mandatory target capital surplus directed by the Office of Federal Housing Enterprise Oversight.

If dividend cuts and other actions aren't sufficient to help the company reach its government-mandated level of capital held in reserve as a cushion against risk, Freddie Mac said it may consider other measures such as limiting its growth, reducing the size of its mortgage investment holdings or issuing new stock.

That could put additional strain on a housing market suffering the worst slump in more than 15 years.

Freddie Mac has traditionally funded the mortgage market when other banks pull back because of risk.

An inability by Freddie Mac to fill that role could hinder a return to equilibrium in the mortgage market and possibly intensify the housing downturn.

"Without doubt, 2007 has been an extremely difficult year for the country's housing and credit markets and, as our third-quarter financial results reflect, we have been impacted by the deterioration in these markets," company Chairman and CEO Richard Syron said in a statement. "We recognized the challenges facing the mortgage markets, however, and have taken further steps to address them."

So far this year, Freddie Mac has recognized $4.6 billion in pretax credit related items.

Buddy Piszel, chief financial officer, said Freddie Mac is moving to stem losses.

"We have begun raising prices, tightened our credit standards and enhanced our risk management practices," Piszel said. "We also continue to improve our internal controls."

"We were getting thin" in terms of excess capital, and Freddie Mac decided it needed to bolster its capital "to manage through this credit cycle," Piszel said in a telephone interview. That cycle isn't expected to improve until 2009, he said, with home prices projected to register a 5 percent to 6 percent decline nationwide.

__

On the Net:

Freddie Mac: http://www.freddiemac.com

Fannie Mae: http://www.fanniemae.com

Commentary: U.S. economy is freezing up

IRWIN KELLNER
Rough patch or briar patch
By Dr. Irwin Kellner, MarketWatch
Last Update: 11:29 AM ET Nov 20, 2007Print E-mail Subscribe to RSS Disable Live

PORT WASHINGTON, N.Y. (MarketWatch) -- Whether the Federal Reserve realizes it or not, the United States economy is reeling from a one-two punch of plunging real estate values and a full-blown credit crunch that might not be alleviated with additional rate cuts.

While the Fed might have had a role in creating what has come to be known as the subprime mess, because of the way it has evolved, the Fed's ability to deal with it is rather limited. There are a number of reasons for this.

First and foremost is the fact that, on the real estate side, the damage has already been done.

Because short-term interest rates today are well above the 45-year lows plumbed from the middle of 2003 through mid-2004, those mortgages with adjustable rates have -- or will -- reset to much higher rates even if the Fed decides to lower rates by a quarter of a point or even more.

As a consequence, there will likely be more delinquencies and foreclosures, which, besides causing pain for those homeowners, will result in more homes on the market, thereby depressing their prices.

In turn, this will affect other homeowners -- even those with fixed rate mortgages and who and are current with their payments. They will likely be unable to use their homes as ATMs, tapping the equity to supplement their incomes.

They can't turn to savings, either, since, collectively, the nation's homeowners have been spending more than they have been earning for the past two years. The last time this happened was at the bottom of the Great Depression.

This alone is why consumers are reducing their outlays on all kinds of goods and services -- luxuries and necessities alike. Indeed, you know there's a problem out there when Starbucks (SBUX:Starbucks Corp SBUX 22.91, +0.04, +0.2%) reports a decline in traffic in response to -- among other reasons -- a 9 cent hike in the price of a cup of coffee.

Another reason why the Fed alone will not be able to ameliorate this crisis is that its main jurisdiction is over the banks -- and the problem is now centered in the financial markets. This is because the banks no longer have these loans on their books, having turned them into securities and sold them to others.

In turn, these mortgage-backed securities were used as collateral for the issuance of debt, whose value, as you know, is far lower than originally thought.

This has caused massive write downs by holders of these securities, cutting into their profits -- but, more important, depleting confidence in the financial system.

And this reduction in confidence is spreading beyond the financial markets and residential real estate to commercial real estate as well.

To the extent the banks are involved (by holding on to some of these securities), their capital is being reduced and thus their ability to make new loans.

I need not remind you that the ability to borrow money is the lifeblood of not just business --but consumers, too.

Not surprisingly, the combination of lower real estate values and reduced availability of funding is beginning to reduce business spending on new plants and equipment. This is overwhelming the positive effect that the lower-valued dollar is having on our exports.

So while the Fed is preoccupied with communications and forecasting, the financial markets remain frozen while the economy is melting down.

Talk about fiddling while Rome burns.

Irwin Kellner is chief economist for MarketWatch and for North Fork Bank.

Kass: They're Still Not Getting It on Housing

We need more of these reality checks (see article below). Too many folks are trying to broad brush the housing decline as a short-term, economically contained event. I don't buy it. This will be a steep and long decline, and there is and will be spillover impact into the broader economy. I always appreciate candor from smart investment types, and i don't think it gets better than this: (Vito Boscaino)


By Doug Kass
RealMoney Silver Contributor
10/25/2007 3:14 PM EDT
URL: http://www.thestreet.com/newsanalysis/newsonthego/10386473.html

This blog post originally appeared on RealMoney Silver on Oct. 25 at 7:26 a.m. EST

Last night I appeared on CNBC's "Kudlow & Company" with my favorite host, Larry Kudlow, and I went face to face with Dr. Wayne Angell, Jim Lacamp, Dennis Kneale and Dr. Robert Shiller.

I want to give you a rundown of the show because it offers pretty clear evidence that many of the same misconceptions that surrounded the inflating of the housing bubble are still around -- and as such are still dangerous to your financial well being.

So read on.

Most of last night's discussion involved the subject of housing and the meaning of yesterday's turnabout in equities.

Angell encouraged the Fed to move aggressively in order to revive the housing markets. Later on, I questioned him on this, asking why another rate cut would help when the September cut didn't -- indeed industry statistics have worsened. He just said I was wrong, but I didn't really get an explanation.

Shiller put the magnitude of the housing situation in perspective. The two-year housing drop has continued, and the future outlook is not optimistic for the sector as the correction will continue for some time.

The optimism from the panelists was summarized by my pal Dennis, who started by denying that there was a housing problem, and stating that the housing bogeyman is not that important, that most homeowners have benefited from the rise in home prices during this decade -- and even if they sold, they would end up well. He went on to say that the recovery in stocks yesterday was testimony to the bull market.

What?

I accused Dennis as being too linear in his comments, especially on the market. By that, I meant that diagnosing the recovery in equities (in any one day) and making a grand statement about its import was a one-dimensional (or linear) way of looking at things.

The investment mosaic is multidimensional and incorporates a lot more than just recent market behavior. From my perch, his view of the meaning of the market recovery on Wednesday could prove as wrong as when many made the incorrect observation when homebuilder stocks rallied impressively in May 2007 that this was an indication of a likely recovery in the housing markets.

I asked, what would he have said after Friday's schmeissing? "Buy," he said. Point made: Buy when they drop; buy when they pop.

On housing, I expressed the view to the panelists that leaning on the Fed with shock and awe (again) next week would have little positive effect on the housing markets, just as the last 50 basis point had no impact (as housing statistics continue to move lower). The affordability issue remains unresolved, and the inventory of unsold homes remains at record levels -- and, according to traffic readings, looks to worsen in the months ahead.

As to Dennis' remarks that most consumers are well off after the long rise in home prices, I expressed the view that the problem was the mortgage loans that were made at the margin over the last three years; they are coming back to bite the homeowner in mortgage rate resets in lower home prices and in a difficulty getting a loan as the originating business evaporates.

Jim Lacamp expressed the bullish view that the housing market will be "ring-fenced" and will not spill over into the economy or capital markets and that the fact that the markets are where they are is proof positive of the market's strength. He used the metaphor of "rope a dope" as an expression of the market's continued vigor. That reminds me of something that Jeremy Grantham recently wrote in this month's GMO Quarterly Letter:

Of course, I am fed up. We had Risk on the ropes. His followers were panicking. They were calling for the ref to stop the fight: "He has absolutely no idea how badly our boy is hurting ... He has no idea!" And what does the ref do? Ends the round early, extends the break, and allows a dangerous injection of adrenaline. Risk then leaps out of his corner, apparently rejuvenated, and wins the next couple of rounds. And here we are, wondering whether Risk has taken enough punishment to make him vulnerable to a knockout blow in a later round. Or has he completely recovered?
-- Jeremy Grantham, GMO Quarterly Letter, October 2007

From my perch, the bulls continue to ignore the ramifications of the housing market's depression not only on the economy but the spillover and contagion in the credit markets.

For example, ignored in last night's conversation was how the subprime fiasco has devastated the credit markets, as evidenced by the continued structured investment vehicle problems and the huge writeoffs of permanent capital at the leading money-center banks and investment bankers.

It is astonishing to me that the subprime-/housing-induced inflection point in credit, from credit expansion to credit contraction, continues to be ignored by market and economic bulls.

The ironic thing of course was that after several of the guests denied the very existence of the housing problem (what...? again), the next two segments were dedicated to Countrywide Financial's (CFC) deal to renegotiate some of its adjustable-rate mortgages and the implications of Chapter 13 bankruptcy filings on homeowners whose mortgage problems have accumulated.

I have mentioned in the past that a 20% drop in home prices, as currently predicted in the Case Shiller Futures Index by 2011, means that about $4 trillion of consumer wealth will be wiped out. Another $500 billion to $1 trillion of losses looks to be taken by the financial institutions and hedge funds from the collateralized debt obligation mess.

That's close to the amount lost after the tech bubble -- and very large in the context of a $13 trillion U.S economy (the number Larry used last night). Moreover, the financial industry's reluctance to provide credit to homeowners provides another important economic headwind.

The housing problem ring-fenced? Not likely.

Housing Slump May Reduce Payrolls, Growth: U.S. Economy Preview

By Joe Richter

Oct. 28 (Bloomberg) -- Smaller employment gains and slower growth signal the two-year U.S. housing slump is reverberating through the economy, economists said before reports this week.

Employers added 80,000 workers to payrolls this month following an increase of 110,000 in September, based on the median forecast in a Bloomberg News survey of economists before a Nov. 2 government report. Figures two days earlier may show the economy expanded at a slower pace in the third quarter.

Manufacturers fired workers for a 16th consecutive month in October, while declines in subprime-mortgage lending and homebuilding led to job losses at construction companies and financial institutions. Federal Reserve policy makers will lower the target interest rate again this week to sustain the expansion through the real-estate crash, economists said.

``Evidence on the labor market is that things are on the soft side,'' said Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts. ``The Fed is likely to cut rates as insurance.''

The Labor Department's employment report may also show the unemployment rate held at 4.7 percent for a second month, based on the survey median.

Factory payrolls probably shrank by 15,000 workers this month, the survey showed, capping an almost 200,000 decline in employment at manufacturers since the same month last year. Economists at Lehman Brothers Holdings Inc. in New York are among those also forecasting declines at homebuilders and financial firms.

Mortgage Firings

Countrywide Financial Corp., the biggest U.S. mortgage lender, is in the process of cutting 10,000 to 12,000 jobs because of the drop in loans. The Calabasas, California-based company last week reported its first quarterly loss in 25 years and said profit would rebound in coming quarters.

Lennar Corp. Chief Executive Officer Stuart Miller said in a Sept. 25 statement that the company has cut 35 percent of its workforce and will continue to eliminate jobs to ``bring us back to profitability.'' Miami-based Lennar is the largest U.S. homebuilder.

Gains in wages and hours worked at service industries, such as health care and education, are giving the majority of employed Americans the means to keep spending, helping to prevent the economy from succumbing to the housing slump, economists said.

Earnings per hour rose 0.3 percent on average in October after a 0.4 percent gain the month before, the survey showed.

A Commerce Department report on Oct. 31 may show the economy cooled in the third quarter as a result of the decline in residential construction, while consumer spending quickened.

GDP Cools

Gross domestic product rose at an annual rate of 3.1 percent from July through September, compared with a 3.8 percent growth rate the prior quarter, according to economists surveyed. Consumer spending, which accounts for more than two-thirds of the economy, expanded at a 3.2 percent pace, more than double the second quarter's growth rate.

A Commerce Department report Nov. 1 may show consumer spending grew in September. Purchases increased 0.4 percent after a 0.6 percent gain the prior month, based on the median forecast. Incomes rose 0.4 percent after a 0.3 percent August increase, the survey showed.

Still, the meltdown in subprime lending and turmoil in credit markets raises the risk the real-estate slump will worsen and spread to consumer spending. After meeting for two days, Fed policy makers will probably lower the benchmark interest rate on Oct. 31 to 4.50 percent from 4.75, the second cut in as many months, economists said.

Bigger Slowdown

Growth is expected to slow to a 1.8 percent pace this quarter as spending cools, based on a Bloomberg survey of economists this month.

There are signs the housing slump is starting to spill over to other industries.

A report from the Institute for Supply Management on Nov. 1 may show manufacturing grew in October at the slowest pace in seven months. The ISM's factory index probably fell to 51.5 this month from 52 in September. A reading greater than 50 signals expansion in manufacturing, which accounts for about 12 percent of gross domestic product.

Midland, Michigan-based Dow Chemical Co., the largest U.S. chemical maker, said third-quarter earnings dropped as the decline in housing reduced demand for latex and pipe-making materials. Slumps in the U.S. automotive and housing markets are hurting sales of wire, coatings and solvents, Dow Chief Executive Andrew Liveris said Oct. 25.

The economic slowdown will gradually push unemployment higher as businesses trim costs, economists said. The jobless rate will probably rise to 5 percent by the second half on next year, based on the Bloomberg survey earlier this month.

``The economy will still be creating jobs, but not enough to keep the unemployment from rising,'' Global Insight's Gault said.



Bloomberg Survey

Date Time Period Indicator BN Survey Prior
10/30 10:00 Oct. Confidence-Conf. Board 99.0 99.8
10/31 8:30 3Q Employment Cost Index 0.9% 0.9%
10/31 8:30 3Q A GDP Price Index 2.0% 2.6%
10/31 8:30 3Q A Gross Domestic Product 3.1% 3.8%
10/31 10:00 Oct. Chicago Purchasers 53.0 54.2
10/31 10:00 Sept. Construction Spending -0.5% 0.2%
11/01 8:30 10/13 Continuing Claims 2532.5K 2530K
11/01 8:30 10/20 Initial Jobless Claims 330K 331K
11/01 8:30 Sept. Personal Income 0.4% 0.3%
11/01 8:30 Sept. Personal Spending 0.4% 0.6%
11/01 10:00 Oct. ISM Manufacturing 51.5 52.0
11/01 10:00 Oct. ISM Prices 63.0 59.0
11/02 8:30 Oct. Avg. Hourly Earnings 0.3% 0.4%
11/02 8:30 Oct. Change Nonfarm Jobs 80K 110K
11/02 8:30 Oct. Unemployment Rate 4.7% 4.7%
11/02 10:00 Sept. Factory Orders -0.5% -3.3%
To contact the reporter on this story: Joe Richter in Washington Jrichter1@bloomberg.net .

U.S. Homeownership Falls in Longest Slide Since 1981 (Update1)

By Bob Willis

Oct. 26 (Bloomberg) -- Homeownership in the U.S. dropped for a fourth consecutive quarter, the longest string of declines since at least 1981, a sign that the key means of building assets for millions of Americans is weakening.

The homeownership rate, the percentage of households that own their residences, fell to 68.1 percent in the July-September period from 68.3 percent in the prior three months, according to a report today from the Census Bureau in Washington. The rate has been declining from a peak in 2004, which culminated a decade of gains fueled by easier lending standards and rising ownership for immigrants and younger households.

``Owning a home in this country has been a principal source of wealth creation for low- and moderate-income people,'' said Nicolas Retsinas, director of Harvard University's Joint Center for Housing Studies in Cambridge, Massachusetts. ``In the absence of home equity, families will inevitably spend less.''

Homeowners accumulate wealth faster than renters, with median net wealth for owners at $184,400 in 2004, compared with only $4,000 for renters, according to Federal Reserve figures.

Homeownership reached a record 69.3 percent of households in 2004, up from 64 percent a decade earlier. With home prices soaring, net household wealth nearly doubled to $51.8 trillion at the end of 2005 from $27.6 trillion in 1995, with real-estate accounting for 47 percent of the change, according to Federal Reserve data.

New Mortgage Products

A September study by the Fed Bank of Atlanta found that as much as 70 percent of the increase in the aggregate homeownership rate over the decade was due to the introduction of new mortgage products, including second mortgages. Demographics, including the rapidly growing immigrant population, accounted for up to 31 percent of the increase, said the study.

Now, declining ownership rates mean fewer Americans will be able to tap housing equity to fund education, vacations and other spending. The trend also signals potential further declines in new-home sales that may extend the drag on growth from falling construction, said Jan Hatzius, chief economist at Goldman Sachs Group Inc. in New York.

Vacant Homes at Record

The Census Bureau report also found that a record 17.9 million U.S. homes stood empty in the third quarter as lenders took possession of a growing number of properties in foreclosure.

The figure is a 7.8 percent gain from a year ago, when 16.6 million properties were vacant, the Census Bureau said. About 2.07 million empty homes were for sale, compared with 1.94 million a year earlier, the report said.

Slowing residential construction has detracted from growth in gross domestic product for the last six quarters through June, shaving as much as 1.3 percentage point off growth in the third quarter of 2006, when the overall economy grew at just a 1.1 percent pace. Most economists forecast an extended construction drag on growth after credit tightened further in August amid subprime-market turmoil.

``If homeownership declines significantly, the implications for new-home sales could be dramatic,'' said Hatzius. With further weakness in sales, ``the drag from new-home building on GDP growth will last longer than most people have in their forecasts, perhaps, if things go badly, into 2009.''

Housing Starts

Housing starts, which track work begun on new homes, fell 48 percent to a 1.19 million annual pace in September from a three-decade peak of 2.29 million in January 2006. Sales of new homes declined 45 percent to an annual pace of 770,000 units in September from a peak of 1.389 million in July 2005.

With inventories of unsold homes piling up near record levels, housing prices will have to fall further, economists say.

Twenty-eight percent of all homeowners surveyed this month felt their property had lost value, surpassing the peak of 24 percent reached during the last real-estate slump in 1992, according to a Reuters/University of Michigan report today.

Home prices in 20 U.S. metropolitan areas dropped 3.9 percent in July from a year earlier, the biggest such decline since record-keeping began in 2001, according to the S&P/Case- Shiller home-price index.

Goldman Sachs is forecasting a 15 percent decline in home prices from the peak to trough, Hatzius said.

Less Wealthy

Hatzius and other economists argue that declining home prices leave Americans feeling less wealthy and less likely to spend on big-ticket items. Economists surveyed by Bloomberg forecast consumer spending growth to slow to a 2.3 percent pace in 2008 from this year's projected 2.9 percent pace.

``In periods of easy credit, it was easy to take a second mortgage out and use the money to finance discretionary spending,'' said Michelle Meyer, an economist at Lehman Brothers Holdings Inc. in New York.

Second mortgages, along with interest-only, payment-option and other unconventional mortgage products, have largely dried up this year as subprime defaults mounted and lenders such as American Home Mortgage Investment Corp. closed their doors. That makes it harder for people to refinance adjustable-rate loans before they reset at higher rates.

``So many mortgages with ARMS are resetting and most people can't make their payments,'' said Steve Hawkins, a real-estate agent at Re/Max Inc. in Alexandria, Virginia. ``And with the new criteria, they can't get loans'' to refinance their mortgages, he said.

The volume of mortgages issued this year will fall to the lowest since 2000, the Mortgage Bankers Association forecast on Oct. 17. Foreclosures doubled in September from a year earlier, RealtyTrac Inc. said Oct. 11.

Out of 297 townhouses in Springfield, Virginia, for sale last week, almost 80 were in the process of foreclosure or offered at a price lower than the mortgage balance, so-called short sales, said Hawkins.

Two years ago there would have been about 50 such units offered in the same Washington suburb, with none in foreclosure, he said.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

REITs See Biggest Drop Since 1998 as U.S. Rout Grows (Update1)

By Dan Levy and Hui-yong Yu

Oct. 25 (Bloomberg) -- U.S. real estate investment trusts are poised for their biggest decline in almost a decade as higher borrowing costs curb takeovers and reduce property values.

After outperforming the Standard & Poor's 500 Index every year from 2000 to 2006, REIT stocks may drop as much as 20 percent in the next 12 months, according to University of California economist Kenneth Rosen.

``REITs are overvalued by 25 to 40 percent relative to stocks and bonds,'' and cash flow yields are too low, said Rosen, who also runs a $480 million hedge fund from Berkeley, California, that invests in real estate securities.

Property trusts that own office buildings, apartment complexes, hotels and shopping centers are losing value as banks and investors shun bonds and loans backed by subprime and commercial mortgages. That's going to drive down REIT prices, said American Century Investments fund manager Jeffrey Tyler. Morgan Stanley analysts said last month that REIT returns could decline 10 percent.

The Chicago-based National Association of Realtors said yesterday that sales of previously owned U.S. homes fell more than economists forecast in September as higher mortgage rates made it more difficult for potential buyers to get financing. Sales were down 19 percent from September 2006 and the median home price dropped.

Index Slumps

The 128-member Bloomberg REIT Index returned 78 percent with dividends in the two years prior to its Feb. 8 peak, the day before New York-based Blackstone Group LP bought Equity Office Properties Trust for $23 billion, or $39 billion including debt, the real estate industry's biggest leveraged buyout.

Since then, the index has fallen 16.5 percent after dividends as commercial mortgage rates climbed as much as 2 percentage points above the 10-year Treasury note. The last time the REIT index declined more than 10 percent in total return was in 1998 when investors were diverting funds to high-flying Internet stocks.

International Returns

REITs outside the U.S. also declined. The 40-company Tokyo Stock Exchange REIT Index, led by Nippon Building Fund Inc. and Japan Real Estate Investment Corp., is down 28 percent from its high last May. The 14-member Bloomberg Europe Real Estate Index, led by Unibail-Rodamco SA, is down 33 percent from its February peak.

Warehouse and industrial REITs are the only group in the Bloomberg U.S. index that hasn't lost value this year, gaining 11.5 percent as U.S. imports of raw materials and consumer products increased. Public storage REITs dropped the most, down 19 percent. Apartment REITs decreased 13 percent and office stocks declined 12 percent. All returns include dividends.

American Century, the Kansas City, Missouri-based money management firm with about $100 billion of assets, sold about 40 percent of its REIT holdings in May 2006 because prices, driven up by hedge funds and takeovers, ``exceeded the underlying fundamentals,'' Tyler said. Now, with rents flattening and vacancies rising, ``the picture isn't getting better,'' he said.

The U.S. office vacancy rate increased to 9.8 percent at the end of September from 9.7 percent in the second quarter, and rents in Manhattan and San Francisco climbed at the slowest pace in more than a year in the third quarter, according to real estate brokers Cushman & Wakefield Inc. and Studley Inc. in New York and Chicago-based Grubb & Ellis Co.

`More Shakeout'

``There is plenty more shakeout to go in the REIT market,'' Tyler said. ``Property values are going to be under pressure, and by extension that will move to REITs.''

Sam Lieber, who oversees $5.5 billion in real estate stocks as president of Alpine Mutual Funds in Purchase, New York, sold ``lesser-quality'' REITs as prices climbed starting in the fourth quarter of 2006. ``They got very expensive,'' Lieber said, declining to identify specific companies. He expects higher growth from REITs outside the U.S.

``International has greater growth and there have been significant currency benefits as well'' as the dollar weakened against the euro and other currencies this year, Lieber said.

The Alpine Global Premier Properties Fund, with a market value of about $1.6 billion, has about 28 percent of its assets in the U.S., compared with about 40 percent to 45 percent for the majority of similar funds that invest in real estate worldwide, Lieber said.

`Volatile' Prices

Lieber bought shares of Unibail-Rodamco, Europe's largest REIT, after it fell as low as 161.22 euros on Aug. 1, two months after the company was created in June through the merger of France's Unibail Holding SA with Dutch shopping-center owner Rodamco Europe NV. He had previously sold shares of Unibail for a four-fold gain in the run-up prior to the takeover.

``There are still some opportunities here in the U.S. so I wouldn't discount it,'' Lieber said. ``The trick for us is to manage through this difficult period of volatile share prices.'' He recently bought shares of Los Angeles-based Kilroy Realty Corp., an office and industrial REIT, after it fell more than 30 percent from its February high.

Drag on Growth?

Morgan Stanley, the second-biggest U.S. securities firm by market value, told clients on Oct. 18 that weak credit markets and a shutdown of the commercial mortgage-backed bond market may mean ``downside stock price risks'' for REITs and lower property prices.

The New York-based company said in a Sept. 21 report that returns could fall 10 percent in a ``mild recession'' and by as much as 32 percent in ``a low-probability stagflation scenario.''

Economists and Federal Reserve officials are predicting the real estate slump will curb economic growth. Fed Chairman Ben S. Bernanke said last week that housing ``is likely to be a significant drag on growth in the current quarter and through early next year.'' It's ``too early'' to assess whether the drop will slow consumer spending and business investment, Bernanke said.

Wachovia Corp. analysts reduced 2008 earnings estimates for apartment, hotel, retail, office, diversified and specialty REITs in an Oct. 17 report.

``REIT valuations are not factoring in a more significant slowdown of the economy,'' said Christopher Haley, an analyst at Charlotte, North Carolina-based Wachovia, which has an overall investment rating for the industry of ``underweight.''

Decline in Takeovers

Takeovers fell 72 percent in the third quarter from the prior quarter, data compiled by Bloomberg show. While the pace of deals slowed, the value of U.S. REIT acquisitions totaled $59 billion in 2007, up from $7 billion in 2005, according to New York-based industry research firm Real Capital Analytics Inc.

This year's transactions include the buyout of Chicago- based Equity Office; the $22.2 billion purchase of apartment REIT Archstone-Smith Trust of Englewood, Colorado, by Tishman Speyer Properties LP and Lehman Brothers Holdings Inc.; and Morgan Stanley's $6.5 billion takeover of Crescent Real Estate Equities Co., the Fort Worth, Texas-based office, residential and resort REIT.

The REIT market got its start in 1960 when the U.S. Congress created property trusts. That led to a wave of initial public offerings beginning in 1991 with Kimco Realty Corp. of New Hyde Park, New York. Kimco is now the largest U.S. owner of community shopping centers, with a market value of $10.5 billion.

REIT IPOs

More than 200 REITs went public since 1991. Today, their combined market value is about $357 billion, according to the National Association of Real Estate Investment Trusts in Washington.

REITs have attracted investors because they are required to pay out at least 90 percent of their income as dividends, avoiding corporate taxes, and their dividend yields have historically exceeded those of Treasury securities. Assets in real estate mutual funds rose to $82 billion as of Sept. 30 from $12.5 billion a decade ago, accounting for almost 1 percent of mutual fund assets tracked by Chicago-based Morningstar Inc.

Yields Narrow

Almost half of the 128 stocks in the Bloomberg REIT Index yield less than the 10-year Treasury note's 4.34 percent, making them expensive relative to government bonds, according to Bloomberg data. Nine of the 10 largest U.S. REITs by market value have dividend yields of less than 4 percent.

Confidence in REITs will return once banks resume making loans to finance acquisitions, said James Corl, chief investment officer at New York-based Cohen & Steers Inc., which manages more than $25 billion of real estate stocks. That will show investors that properties have retained their values, he said.

``Six months from now, a lot of this stuff will have been flushed out,'' Corl said.

Publicly traded real estate companies that own office assets in markets such as Tokyo, Hong Kong and London offer potentially higher returns than U.S. stocks, said Ted Bigman, a managing director at Morgan Stanley who invests $25 billion in real estate stocks on behalf of pension funds and endowments.

U.S. REITs are trading at a discount to net asset value as investors anticipate declines in property values; historically, these stocks traded at a premium to the value of the underlying real estate, Bigman said.

``Over time, asset values will settle out and the shares are likely to trade at a premium again,'' said Bigman. ``The process of property prices settling out is not likely to happen before the end of 2007.''

When will housing hit bottom?

Analysis: Fundamentals are bad, and there's the credit squeeze on top of that
By Rex Nutting, MarketWatch

WASHINGTON (MarketWatch) -- The housing market is just getting worse. Home resales tumbled 8% in September to the lowest levels in this decade, prompting the obvious question: When will it all end?

The honest answer is no one knows. Optimists have been saying for more than a year that the worst is behind us, while the pessimists have been saying recovery is still a year, or years, away.

So far, the pessimists have been right about the weakness in the housing market, but their forecast that the collapse in housing would lead to a general economic malaise has, at least so far, failed to pan out. The economy has slowed, but has not fallen into recession, as consumers and investors adjust to a world in which home prices don't automatically rise 5% or 10% a year.

The only thing that's clear now is that the housing market has gotten worse since the spring. The market was in a free fall in September. Sales of existing home fell 8%, while inventories of unsold homes rose to a 10.5-month supply. It could take 320 days for a home to sell. See full story.

Sales of existing single-family homes are down 20% in the past year, the fastest decline in 16 years.

Median prices have dropped 4% in the past year, in part because fewer expensive homes are being sold, but also because the typical home is worth less than it was a year ago.

Homes are only worth what someone is willing to pay for them, and right now, most homes on the market have no buyer in sight. Prices may have to fall much more to bring supply and demand back into balance, economists say.

Builders have almost no confidence. The home builders' index fell to a record low in October (the index dates back to 1985). New construction on single-family homes has plunged 31% in the past year, but still the inventory of new homes on the market, after adjusting for cancellations, is at the highest level since the early 1990s.

As if the fundamental sickness in the housing market weren't enough, a secondary infection has developed. The credit crisis in the mortgage market that erupted in the summer has left huge numbers of potential buyers without any access to mortgages.

The subprime sector has essentially died, with the newly reinvigorated Federal Housing Administration able to replace only a tiny segment of what was once a huge market of home buyers.

The top end of the market was also frozen out, as jumbo loans (those with mortgages above the conforming level of $417,000) became more expensive or completely unavailable.

The jumbo freeze-out devastated sales in pricey areas such as the San Francisco Bay area, where jumbo loans had accounted for about 52% of purchases in August, but just 39% in September.

There's some evidence that the jumbo market is slowly returning, but it's not functioning normally yet.

So where does the market stand now?

"We are seeing the first buds of spring" in the recovery of the jumbo market, said Stephen Stanley, chief economist for RBS Greenwich Capital. "It's a slow, glacial recovery."

Stanley believes home sales will be "really bad" for two or three more months, before the credit markets begin to function more normally. "It won't return to where we were six or 12 months ago."

At that point, the secondary infection would be gone, but the underlying illness would still be there. The market will really begin to recover only after sellers capitulate on prices.

And then home sales might level out, Stanley said, acknowledging that he's one of the more optimistic analysts.

Historically, housing corrections take a long time. After the market softened in the late 1980s, sales fell for five years, then took three more years to return to the peak level. Prices took just as long to recover.

Some analysts say the fundamentals will worsen in coming months. The main problem is that so many adjustable-rate mortgages will reset to a higher interest rate. The typical family with an ARM will see mortgage payments rise by $10,000 a year, according to Andrew Jakabovics of the Center for American Progress, a progressive Washington think tank.

Millions of these home owners will be unable to refinance their current loan and will either have to scrounge to make the payments, or lose their home through a fire sale or foreclosure. That would throw even more supply onto a saturated market.

"The mortgage crisis is neither wholly contained nor likely to abate in the near future," said Jakabovics. "Default and foreclosure loom ever more menacingly as borrowers are unable to find a reasonable payment option and unable to sell their homes."

Rex Nutting is Washington bureau chief of MarketWatch.

Home Sales Plunge by 8 Percent

Oct 24, 10:24 AM (ET)

By MARTIN CRUTSINGER

WASHINGTON (AP) - Sales of existing homes plunged by a record amount in September as turmoil in mortgage markets added more problems to a housing industry in its worst slump in 16 years.

The National Association of Realtors reported Wednesday that sales of existing homes fell 8 percent in September, the largest decline to show up in records dating to 1999. The seasonally adjusted annual sales rate of 5.04 million existing homes was also the slowest pace on record.

The weakness in sales translated into further pressure on prices. The median price - the point at which half the homes sold for more and half for less - fell to $211,700 in September, down by 4.2 percent from the sales price a year ago. It marked the 13th time out of the past 14 months that the year-over-year sales price has decreased.

The 8 percent decline in sales was bigger than the 4.5 percent decline that had been expected.

Analysts blamed the bigger-than-expected slump on the turmoil that hit credit markets and mortgage markets in August as worries increased over rising mortgage foreclosures.

Those worries resulted in a drying up of the availability of so-called jumbo mortgages, loans over $417,000, which are particularly important in high-cost areas such as California.

"Mortgage problems were peaking back in August when many of the September closings were being negotiated and that slowed sales notably in higher priced areas that rely more on jumbo loans," said Lawrence Yun, senior economist for the Realtors.

By region of the country sales were down 10 percent in the Northeast, 9.9 percent in the West, 7 percent in the Midwest and 6 percent in the South.

The slowdown in sales meant that the inventory of unsold homes rose to 4.4 million units in September. At the September sales pace, it would 10.5 months to eliminate the overhang of unsold homes, a record length of time.

Economists are worried that the huge levels of unsold existing and new homes will put further downward pressure on prices.

Yun said that the price declines should be put into perspective in that they are occurring after a five-year housing boom which pushed prices up to record levels.

He forecast that prices will decline by about 1.5 percent this year. That would be the first annual price decline on Realtors' records going back four decades.

The troubles in housing have been a drag on overall economic growth, increasing worries that the housing slump and related credit market troubles could become so severe that they will push the country into a recession.

However, many private economists believe that the Federal Reserve, which cut a key interest rate for the first time in four years last month, will continue cutting rates in a campaign to make sure that the weakening economy does not tumble into a full-blown recession.

Commercial Real Estate Market Remains Strong

Reprinted from MoneyNews.com, courtesy of Associated Press
Tuesday, Oct. 23, 2007 10:00 a.m. EDT

WASHINGTON -- The excesses that led to a bust in the housing boom haven't spread to the commercial real estate market, where the outlook is cautious but decidedly upbeat.

Led by strong growth in the office and retail segments, commercial property sales hit $401 billion through Oct. 18, outpacing last year's $359 billion total, according to Real Capital Analytics, a New York based real-estate research firm.

Construction spending on office buildings, shopping centers and other private, nonresidential projects jumped 15.2 percent in August, the Commerce Department said last month.

There are some signs of slowing growth, analysts say, but nothing compared to the residential real estate market, where foreclosures and mortgage defaults are still rising rapidly, mainly from subprime mortgages extended to risky borrowers. Most economists forecast further declines in home sales and prices, making it "the most significant current risk to our economy," Treasury Secretary Henry Paulson said last week.

The commercial market has not been dragged down by the residential mortgage mess because for the most part, buyers and sellers are more sophisticated, and they have more financial flexibility and resources to ride out credit-market turmoil, experts said.

"It's a different animal than the nonresidential construction business with the direct relationship between banks and business leaders, not banks and homeowners," said Bernard Baumohl, managing director of The Economic Outlook Group in Princeton, N.J.

That doesn't mean the market would be unaffected if economic growth stalls.

"As home prices continue to fall, people feel poor and spend less," and that puts pressure on the profits that fuel corporate spending, said William Wheaton, research director at the Massachusetts Institute of Technology's Center for Real Estate. He puts 50-50 odds on a mild recession in the U.S. within the next six months.

Economic data due out soon is likely to show that September was one of the slowest months in several years for all areas of commercial real estate — from apartment buildings to retail properties, according to Real Capital Analytics.

If the broader economy stumbles, the commercial real estate market would be vulnerable to "credit-risk contagion," Wheaton said. Already, the credit crunch that started in mortgages has spread to other markets, including the commercial market, with some sellers asking for more capital upfront when mortgage-backed assets are financing a transaction.

Projects in Midwestern cities dominated by individual investors have seen prices plateau and capitalization rates rise compared with developments in New York, Washington and San Francisco, where institutional and foreign investments remain stable, said Dan Fasulo, managing director of Real Capital Analytics.

Risk premiums also are up, which means commercial real estate investors can't get sellers to finance as much debt as before. And there has been an "above-normal flow" of lodging project cancellations and postponements, even though the increase is "not excessive or alarming," said Patrick Ford, president of Lodging Econometrics, a Portsmouth, N.H.-based real estate consulting firm. Speculative deals or developments with marginal profits are "dead," Wheaton said.

Yet only a handful of deals have been cut, analysts said, generally because the buyer or developer had terms that "pushed the envelope's edge" in a tight credit market. As an example, Wheaton cited recent media reports of struggles at Macklowe Properties, which in February financed the roughly $7 billion purchase of eight Manhattan office buildings with little equity and heavy short-term debt.

Representatives from New York-based Macklowe Properties did not return calls for comment. But Fasulo said "anyone expecting defaults on those loans will be disappointed," especially since Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. this week said they will pool money to buy distressed short-term debt in markets that were roiled this summer by a collapse in securities backed by subprime mortgages.

Homeowners who foreclosed or would-be home buyers who can no longer get financing are seeking to rent, a positive development for the apartment sector in the commercial property market.

Fundamentals in the commercial market remain strong with rising rents and occupancy levels expected to continue, especially in metropolitan areas. And while overbuilding in residential housing is worsening the magnitude of the downturn, commercial markets are not in oversupply mode.

"There's plenty of excess capital that wants into real estate, especially in metro areas," Fasulo said, adding that apartment building operator Archstone-Smith Trust's $22.2 billion acquisition by a partnership led by Tishman Speyer earlier this month provided a "real shot of adrenaline to the marketplace."

Tishman Speyer, which owns New York's Rockefeller Center and Chrysler building, led the takeover with capital organized by Lehman Brothers Holdings Inc., Banc of America Strategic Ventures Inc. and Barclays Capital.

As the housing market struggles to regain its footing, the outlook for commercial real estate is mostly positive, and investors are reaping the benefits.

A recent example: Host Hotels & Resorts Inc., the nation's largest lodging real estate investment trust, this month reported third-quarter results that beat Wall Street estimates on improved occupancy and lodging rates.


© 2007 Associated Press.

US loan default problems widen

Courtesy of The Financial Times
By Ben White in New York

Published: October 21 2007 19:21 | Last updated: October 21 2007 19:21

Poor quarterly results from banks across the US over the past two weeks suggest credit problems once confined to high-risk mortgage borrowers are spreading across the consumer landscape, posing new risks to the economy and weighing heavily on the markets.

US banks have raised reserves for loan losses by at least $6bn over the second quarter and by even larger amounts from last year, indicating financial executives believe consumers will be increasingly unable to make payments on a variety of loans.

Banks are adding to reserves not just for defaults on mortgages, but also on home equity loans, car loans and credit cards.

“What started out merely as a subprime problem has expanded more broadly in the mortgage space and problems are getting worse at a faster pace than many had expected,” said Michael Mayo, Deutsche Bank analyst.

“On top of this, there is an uptick in auto loan problems, which may or may not be seasonal, and there is more body language from the banks that the state of the consumer was somewhat less strong [than thought].”

Dick Bove, analyst at Punk Ziegel, said bank earnings indicated “there are problems with consumer debt that extend beyond the well-known issues in the real estate markets. Auto loans are clearly a new area of concern”. At Wachovia, the fourth largest US bank by assets, credit loss provisions more than doubled from the second quarter to $408m.

Troubled loans that could turn into losses also more than doubled. Ken Thompson, chief executive, said the housing market could remain weak through next year. Wachovia’s poor earnings fuelled a stock market rout on Friday.

Problems can be seen at banks across the US. At KeyCorp, in Cleveland, non-performing assets rose $241m from last year and loan-loss provisions doubled. In Dallas, Comerica’s loan loss provisions tripled from last year to $45m. Net credit losses jumped from $663m last year to $892 at Wells Fargo, in San Francisco, due to home equity and car loan losses. Loans more than 90 days past due and still accruing increased to $5.53bn from $3.66bn last year.

“There has been a fast sea-change in thinking,” said Rick Klingman, interest rate trader at BNP Paribas. “Stocks are showing some real concern about bank earnings and there are worries about credit in general.”

Additional reporting by Michael Mackenzie in New York

Copyright The Financial Times Limited 2007

DOJ launches real estate competition Web site

Real Estate Articles from Inman News

Site features commission charts, maps, agency reports
Wednesday, October 10, 2007

Inman News

The U.S. Justice Department's Antitrust Division today unveiled a Web site focusing on competition in the real estate industry that features a chart detailing commission trends and maps of states that have adopted policies that can restrict consumer rebates and some forms of brokerage services.

The site is intended "to educate consumers and policymakers about the potential benefits that competition can bring to consumers of real estate brokerage services and the barriers that inhibit that competition," according to a Department of Justice announcement today.

Another federal antitrust enforcement agency, the U.S. Federal Trade Commission, last year launched a Web site focusing on competition in the real estate industry.

The Justice Department is no stranger to research about real estate competition -- two years ago the agency filed a lawsuit against the National Association of Realtors trade group, charging that association-adopted policies for the online display and sharing of property information were overly restrictive. That litigation is ongoing.

Lucien Salvant, a National Association of Realtors spokesman, said today in response to the DOJ Web site, "The real estate market is competitive. Real estate is probably the most competitive industry in the world." He pointed out that the real estate industry is unique in that industry participants share vital information with their competitors.

Many of the comments at the Justice Department's Web site appear to be focused on state-level issues, he said.

Both the DOJ and FTC have engaged in actions targeting Realtor-backed state measures that restrict rebates or mandate minimum levels of service for real estate licensees, for example, and the FTC last year took action against a group of MLSs that placed restrictions on the online dissemination of property information based on the type of listing contract chosen by the sellers.

The estimated median commission paid by home sellers in 2006 was $11,672, and that amount has risen every year since it was $9,110 in 2001, according to the DOJ site.

"Unless broker costs were also rising sharply during this period of time, competition among brokers should also have held commissions in check even as home prices were rising," according to the Web site. Real estate commission rates are typically a percentage of the home's selling price.

"Over the past decade the average commission rate has remained relatively steady between 5 and 5.5 percent," the Web site states. "As a result, the actual median commission paid by consumers rose sharply along with the run-up in home prices."

In 2007, the median commission paid by consumers dropped to $11,302 from the 2006 level, while the median sales price of homes dropped from $230,059 in 2005 to $225,334 in 2006 and dropped to $218,184 in the first half of 2007.

According to the preliminary results of an annual profile of home buyers and sellers prepared by the National Association of Realtors, 70 percent of sellers say they negotiated their real estate commissions, Salvant said, adding that in 39 percent of cases the agent brought up the negotiability of commissions while in 31 percent of the cases the seller brought it up.

A map at the DOJ site lists 13 states that forbid buyers' brokers from rebating a portion of the sales commission to consumers, and a separate map displays eight states that require consumers "to buy more services form sellers' brokers than they may want, with no option to waive the extra items," according to text at the site.

The list of states with anti-rebate measures includes: Alaska, Oregon, Montana, North Dakota, Kansas, Oklahoma, Iowa, Missouri, Louisiana, Tennessee, Mississippi, Alabama and New Jersey. The list of states with so-called minimum-service measures includes: Idaho, Utah, Texas, Iowa, Missouri, Illinois, Indiana and Alabama -- Iowa, Missouri and Alabama appear on both lists.

A chart at the site compares the cost of full-service real estate companies that charge about a 5 percent commission to alternative business models that offer a buyer's broker rebate and/or offer a fee-for-service model.

"Consumers who live in states permitting them the option to choose innovative brokerage options, such as rebates or fee-for-service MLS-only packages, can potentially save thousands of dollars on commission payments," the Web site states.

The Web site notes that closing costs related to real estate transactions "are another area where robust competition is needed to protect consumers," and the DOJ's Antitrust Division "advises states to reject laws that prohibit nonlawyers from providing real estate closing services" to preserve competition between lawyers and nonlawyers.

Additional resources at the Web site include links to reports and hearings on the topic of real estate competition in the brokerage industry, as well as a list of DOJ enforcement actions.

***

NAR: Existing-home sales to fall 10.8% in 2007

Real Estate Articles from Inman News

Hefty declines expected for single-family housing starts
Wednesday, October 10, 2007

Inman News

The National Association of Realtors expects sales of previously owned homes to fall 10.8 percent this year compared to last year, and for prices to fall 1.3 percent, according to the group's latest annual forecast.

The Realtor group's forecast, prepared by Lawrence Yun, its senior economist, also anticipates a 27.1 percent drop in housing starts for single-family units, a 24 percent overall drop in housing starts, a 23.5 percent decline in new single-family home sales, and a 2.1 percent drop in new-home prices this year compared to 2006.

Yun's forecast calls for sales of 5.78 million previously owned homes this year, compared with 6.78 million sales in 2006. Existing-home sales are expected to grow 5.8 percent, to 6.12 million, in 2008 compared to 2007.

In its previous annual forecast, the Realtor group predicted that existing-home sales would drop 8.6 percent this year compared to 2006 and then rise to 6.27 million in 2008. That report also predicted a 1.7 percent drop this year in the median price of previously owned homes.

The latest forecast calls for housing starts to drop to 1.37 million this year compared with 1.8 million last year, and to drop 9.2 percent in 2008 compared to 2007, to 1.24 million. Single-family housing starts are expected to drop to 1.07 million this year compared with 1.47 million last year, and to sink another 13.7 percent next year to 922,000.

Sales of new single-family homes are expected to fall to 804,000 this year compared with 1.05 million last year, and to drop 6.4 percent next year to 752,000.

The median price of previously owned homes is expected to rebound in 2008, rising 1.3 percent compared to 2007, with the new-home median price rising 1 percent.

Yun said that despite the slowdown compared to 2006, this year is still on pace to be the fifth-highest year on record for existing-home sales, and "a lot of people are, in fact, buying homes," he stated. "One out of 16 American households is buying a home this year.

"The speculative excesses have been removed from the market and home sales are returning to fundamentally healthy levels, while prices remain near record highs," he stated. The cutback in home construction "will help lower inventory and firm up home prices," he added.

The 30-year fixed-rate mortgage is expected to average 6.4 percent for the next two quarters and then rise to the 6.6 percent range in the second half of 2008. Additional cuts are expected in the Fed funds rate, according to the Realtor group's forecast.

Growth in the U.S. gross domestic product is expected to be 2 percent this year, below the 2.9 percent growth rate in 2006, and GDP is expected to grow 2.7 percent in 2008.

The forecast calls for the unemployment rate to average 4.6 percent this year, or level with the 2006 rate. Inflation, as measured by the Consumer Price Index, is expected to be 2.8 percent in 2007, compared with 3.2 percent last year. Inflation-adjusted disposable personal income is expected to rise 3.6 percent in 2007, up from 3.1 percent last year, according to the forecast.

Overnight real estate rates mostly flat

Real Estate Articles from Inman News

30-year fixed rate at 6.09%; 10-year Treasury yield at 4.65%
Wednesday, October 10, 2007

Inman News

Long-term mortgage interest rates barely moved Tuesday, and the benchmark 10-year Treasury bond yield rose to 4.65 percent.

The 30-year fixed-rate average held at 6.09 percent, and the 15-year fixed rate dipped to 5.71 percent. The 1-year adjustable dropped to 5.73 percent.

The 30-year Treasury bond yield was down at 4.86 percent.

Rates and bonds are current as of 7:15 p.m. Eastern Standard Time.

Mortgage rate figures are according to Bankrate.com, which publishes nightly averages based on its survey of 4,000 banks in 50 states. Points on these mortgages range from zero to 3.5.

In other economic news, the Dow Jones Industrial Average jumped 120.8 points, or 0.86 percent, finishing at 14,164.53. The Nasdaq was up 16.54 points, or 0.59 percent, closing at 2,803.91.

Stock figures are current as of 7:30 p.m. Eastern Standard Time.

Home prices slide in Sacramento, San Diego, D.C.

Real Estate Articles from Inman News

New monthly index reveals changes in price per square foot
Friday, October 05, 2007

Home prices fell in two thirds of the metro areas reported in a monthly home-price index released this week by real estate research firm Radar Logic.

Sixteen of 24 metro areas in Radar Logic's newly launched monthly housing market report experienced price declines during July compared to July 2006, with the most severe price drops in Sacramento, Calif., San Diego, Calif., and Washington, D.C.

The index is based on a 28-day aggregated value of a daily index, known as the Residential Property Index, or RPX, that is based on actual prices paid per square foot for U.S. residential real estate.

The price per square foot fell 12.7 percent in the Sacramento metro area during the 28-day period ended July 31, 2007, compared to the same period last year.

The price per square foot of homes fell 10.8 percent in San Diego; 10.2 percent in Washington, D.C.; 7.3 percent in Tampa and Detroit; 5.9 percent in Las Vegas, 5 percent in Miami, 3 percent in Minneapolis, 2.4 percent in Boston, 2.2 percent in Jacksonville and 1.9 percent in Phoenix during the reporting period in July compared to the same period last year.

"Of the top five metro areas that led the way during the housing boom of 2002 through 2005, four are showing declines," Radar Logic reported.

The price per square foot rose 9.2 percent in Seattle, 5.4 percent in Charlotte, 4.5 percent in New York City, 4.3 percent in Milwaukee, 2.7 percent in Atlanta, 0.4 percent in Chicago and 0.2 percent in Philadelphia during the 28-day period in July compared to the same period last year.

The monthly report also ranks metro areas based on changes in price per square over two-year and five-year periods ended in July.

The Seattle market had the highest appreciation in price per square foot over the past two years, followed by Charlotte at 11.3 percent, Philadelphia at 11 percent, Jacksonville at 9.8 percent and New York City at 9.7 percent. Sacramento had the biggest drop in price per square foot during that period, at 15.1 percent, followed by San Diego at 11.8 percent, Detroit at 10.4 percent, Washington, D.C., at 5.3 percent, and Boston at 3.8 percent.

During the five-year period ended July 31, 2007, Miami had the largest gain in price per square foot, at 92.7 percent, followed by Los Angeles at 91.3 percent, Las Vegas at 80.1 percent, Phoenix at 73.6 percent and Seattle at 72.5 percent.

Detroit had the slightest gain in price per square foot during that same five-year period, up 2.2 percent, followed by Columbus, Ohio, at 5.3 percent, Cleveland at 7.1 percent, Denver at 7.5 percent and Atlanta at 15.5 percent.

San Jose had the highest price per square foot among the 24 markets tracked in July 2007, at $465.40, Radar Logic reported, followed by San Francisco at $449.01 and Los Angeles at $389.70. Detroit had the lowest price per square foot among the reported metro areas, at $96.91, followed by Columbus at $99.45 and Charlotte at $100.86.

The report states that the development of condominium units has "impacted the overall pricing characteristics of each metropolitan area," as condo sales represented about 16.4 percent of all units analyzed in the July report and were an average of 24.1 percent more expensive than single-family homes on a per-square-foot basis.

"Three of the five leading condo markets were also the top three overall markets, including Charlotte, New York and Seattle," the report states. "Speculative metro areas comprised four of the five trailing condo markets, led by Sacramento, followed by Las Vegas, Jacksonville and San Diego."

Radar Logic's price index is an alternative to the Standard & Poor's/Case-Shiller home-price indices, which measure changes in home prices based on multiple sales of the same homes.

Below is a chart that compares the Radar Logic monthly price report for July with the July S&P/Case-Shiller report.

Metro areas
Radar Logic index % change July '06-July '07
S&P Case-Shiller index July '06-July '07

Seattle
9.2%
6.9%

Charlotte, N.C.
5.4%
6.0%

New York
4.5%
-3.8%

Milwaukee
4.3%
N/A

Atlanta
2.7%
1.2%

San Francisco
0.9%
-4.1%

Chicago
0.4%
-0.9%

Philadelphia
0.2%
N/A

Cleveland
-0.2%
-3.6%

San Jose
-0.7%
N/A

Columbus, Ohio
-1.1%
N/A

Los Angeles
-1.4%
-4.8%

Denver
-1.9%
-0.7%

Phoenix
-1.9%
-7.3%

Jacksonville
-2.2%
N/A

Boston
-2.4%
-3.4%

Minneapolis
-3.0%
-3.4%

Miami
-5.0%
-6.4%

Las Vegas
-5.9%
-6.1%

Detroit
-7.3%
-9.7%

Tampa
-7.3%
-8.8%

Washington, D.C.
-10.2%
-7.2%

San Diego
-10.8%
-7.8%

Sacramento
-12.7%
N/A


Sources: Radar Logic, S&P/Case-Shiller

***