Wednesday, August 29, 2007
Tuesday, August 28, 2007
Main Problem With Subprime Debt Is That It’s Hidden
Courtesy of John Browne, Financial Intelligence
There is growing evidence of subprime contagion, from within our domestic banking system and from banks as far away as Europe, Japan and Australia.
Meanwhile, legions of “cheerleaders” keep repeating that the subprime problem is small.
One recent CNBC item showed the subprime problem likened to just a small cupboard in a large house. Well, in size that may be correct.
The problem is that history is littered with examples of size being no indication of results. Two notable ones that come to mind are Lenin and his Bolsheviks who were very few in number, and Castro and his 17 henchmen in Cuba.
The problem with the subprime is that its tentacles are largely hidden, for three reasons.
Editor’s Note: Special Report: 5 Highest Yielding, Safest Investments
for 2007.
Firstly, derivatives such as Collateralized Debt Obligations (CDO’s) are sliced and diced so that the “toxic” subprime credits were mixed up, or bundled, together with triple-A credits.
This “bundling” confused not just the rating agencies but also many of the investors, who are still uncertain as to how much toxic waste they have and even who ultimately holds it.
This causes the assets of many highly leveraged financial institutions to become suspect and cause for great concern by potential lenders.
It is like the discovery of toxic waste in a giant batch of food. No one wants to eat any of the batch, no matter how impassioned the appeals and assurances of the producer that, “all is under control!”
Secondly, much of the investment in subprime mortgages and CDO’s was done by hedge funds and in the accounts of institutions, where valuations were done at cost or “informed estimate”, rather than at market, as no public market existed for such “privately” placed instruments.
The adjustment to a true “market price” of many of the assets of certain major financial institutions is a second cause of deep concern, out of proportion to the probable degree of subprime infection.
No one likes to come into physical contact with anyone close to someone who has succumbed to an infectious disease. The fear may eventually prove to be false, but for a time at least, it is all too real. Social contact, like financial markets, tends to seize up.
Finally, despite adopting genuinely independent investment strategies, many investors, including hedge funds, end up investing with a “common approach”. Today’s New York Times (NYT) contains a most interesting article on this very subject entitled, “Just How Contagious Is That Hedge Fund.”
The NYT article goes on to quote Lawrence G, Tint, an investment consultant and retired vice chairman of Barclays Global Investors as saying that he suspects that, “some hedge fund investors will be surprised that their funds lost money and because of problems in the subprime mortgage arena. That’s because those investors have been falsely assuming that just because their funds focused on completely different strategies—commodities, for example—they have no exposure to the subprime mortgage market.
So there you have it. The subprime market may be relatively small, but it is intertwined with the vastly greater credit and derivative markets.
Just as in CNBC’s “house” analogy, the room may be relatively very small, but if it is linked to the rest of a vast, tinder dry wooden house, a small fire in that room could soon affect the whole house.
We therefore urge our readers to ignore the siren voices of the cheerleaders, especially those representing interests that are either “long” the market or credit institutions.
We repeat our forecast made throughout the last year and more, that the housing bust will prove not just contagious but disconcertingly so.
10 Tips for a Sleek Home Office
Decorate for an Efficient Work Space
© Victoria Foley
Feb 9, 2007
Using a little creative thinking can turn your home office into a modern and attractive work space that will be sleek enough to blend in with your decor and inspire you!
When setting up a home office, there are some things you know you need: pens, a printer, a telephone, a computer and a desk to put it all on. But how all of the necessities come together is what makes a work space your own. Organization and decoration are key tools in your home-office toolbox, so use them wisely.
No matter your budget, you can design a work space that will be as beautiful as it is functional. Many items you already own can be reassigned to desk duty if buying new doodads isn't on the agenda. Remember to follow your own taste before any trend - the idea is for your home office to be an extension of your home. Here are some tips for creating the right office for you.
LAYOUT First, look at the layout of the room. Think about where your desk should fit - will a window view distract you, or do you crave sunlight? Place furniture accordingly.
DESKTOP REAL ESTATE Your desk should be sized appropriately to the kind of work you do - if you mostly use the computer, a smaller table may suffice. If you like to spread out projects and use the desktop for writing, look into larger desks or tables.
COLOR SCHEME If your office is in a room of its own, think about a color scheme that will inspire you. Bright but tasteful colors such as french blue or spring green can creative a happy atmosphere without overwhelming your senses.
ACCENT COLORS If the walls are a more subdued hue and you can't paint, think accents. A piece of patterned or textured paper from an art store can dress up a bulletin board or tabletop. A colorful bedspread or slipcover can camouflage the guest bed or sofa and brighten the room.
BLENDING IN For home offices that need to blend into a larger room, consider the theme of the space. An upholstered armchair may work for a living room, while a simple wooden stool might be just right for the kitchen. Choose a desk or tabletop that complements the other pieces in the room without fading into the background.
STORAGE To streamline the look of your work space, look for storage options that hide your excess paper and files. A small plastic box in the closet can hold less-used supplies like tape and note cards.
ACCESSORIES Look for desktop accessories that can be repurposed from things you already have. Pretty glasses can double as pencil cups, serving dishes can hold paper clips and pushpins, and deeper pottery bowls can hold cords for electronics. Keep the items you use most in easy reach so you don't waste time searching for them.
BOOKS Decorative bookends can dress up your reference book collection. You can make almost any pair of heavy objects into a corral for your dictionary and thesaurus. Statuettes or trophies can substitute for more ordinary bookends if you like the look.
ART Wall art can add an extra dose of personality to your home office. Choose images that inspire you. Frame degrees and special photographs. Add a bulletin board where you can pin up motivational quotes or funny cards.
KEEP IT SLEEK However you choose to decorate, remember to keep clutter under control. Piles of disorganized papers make an otherwise stylish office seem unkempt and out of control. Likewise, try not to overload your desktop with photos and knickknacks. Keep it simple and clean to make the most of your home work space!
Home Prices: Steepest Drop in 20 Years
Courtesy of AP
Tuesday August 28, 9:58 am ET
By Vinnee Tong, AP Business Writer
S&P Says Housing Prices Fell in 2Q by Steepest Rate Since Its Index Was Started in 1987
NEW YORK (AP) -- U.S. home prices fell 3.2 percent in the second quarter, the steepest rate of decline since Standard & Poor's began its nationwide housing index in 1987, the research group said Tuesday.
The decline in home prices around the nation shows no evidence of a market recovery anytime soon, one of the architects of the index said.
MacroMarkets LLC Chief Economist Robert Shiller said the declining residential real estate market "shows no signs of slowing down."
The report came a day after the National Association of Realtors said sales of existing homes dropped for a fifth straight month in July while the number of unsold homes shot up to a record level.
The S&P/Case-Schiller quarterly index tracks price trends among existing single-family homes across the nation compared with a year earlier .
A separate index that covers 20 U.S. cities fell 3.5 percent in June from a year earlier. A 10-city index fell 4.1 percent from a year earlier.
Housing is among the economic indicators closely watched by Federal Reserve policymakers.
After five years of rapidly rising home prices, the market stalled last year, with prices holding steady or falling as sales slowed. Since then, lenders have made it more difficult for some people to get mortgages by tightening standards just as foreclosures rise and some who borrowed at adjustable rates facing higher payments they can't meet.
Problems have spread from those with poor credit repayment histories to more creditworthy borrowers.
The Fed has taken a number of steps aimed at stabilizing the situation, and market watchers look further for a possible cut in the federal funds rate, which is the rate commercial banks charge each other for short-term loans. That rate has been kept steady at 5.25 percent for more than a year.
The Fed has its next regularly scheduled meeting on Sept. 18.
Fifteen of the cities surveyed for S&P's 20-city index showed a year-over-year decline in prices in June.
Prices in Boston dropped in June at a slower rate than they did in May, continuing a trend that started at the beginning of the year. In April 2006, Boston was the first metropolitan area to show a year-over-year decline, so any turnaround there could be an early sign of recovery.
S&P said it needed more data to determine whether Boston would be the first area to improve.
Detroit led the cities with the biggest price declines, with an 11 percent drop from June of last year. Other cities with falling prices included Tampa, Fla., San Diego and Washington, D.C., which all recorded drops of at least 7 percent.
Seattle and Charlotte, N.C., were on the small list of cities that saw prices rise in the same period. Seattle prices rose 8 percent in June while Charlotte saw a 6.8 percent increase.
In Monday's report, the National Association of Realtors said sales of existing homes dipped by 0.2 percent in July from June to a seasonally adjusted annual rate of 5.75 million units.
The median price of a home sold last month slid to $230,200, down by 0.6 percent from the median price a year ago. It marked the 12th consecutive month that home prices have declined, a record stretch.
Monday, August 27, 2007
Home re-sales fall as inventories soar
Courtesy of Reuters
By Joanne Morrison
WASHINGTON (Reuters) - The pace of sales of pre-owned U.S homes fell slightly in July but the inventory of unsold properties soared to the highest level in over 15 years as troubles in the subprime mortgage market continued to wreak havoc on the housing sector.
Home sales slid 0.2 percent in July to a seasonally adjusted 5.75 million unit annual rate, according to the National Association of Realtors.
That brought the supply of unsold homes at the current sales pace to 9.6 months' worth, the highest level on record since 1999, when the association began tracking all types of properties, such as condominiums, together with single-family homes.
The supply of single-family homes, the bulk of the inventory included in the association's data, rose to 9.2 months' worth, which was the biggest supply on hand for sale since October 1991.
"This shows that the housing downturn continues to intensify. It shows no sign of abating. Given the turmoil in the financial market from lending problems, the housing problem will continue in the months ahead," said Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania.
Worries over the housing market coupled with high energy costs have eroded investor confidence, with the UBS/Gallup Index of investor confidence falling for the third straight month, bringing it down to the lowest reading in a year.
This sentiment also held true for a panel of key business economists who in a survey released on Monday concluded that the risk of massive defaults on subprime mortgages and heavy debts is a bigger threat to U.S. economic prosperity than terrorism.
"The combined threat of subprime loan defaults and excessive indebtedness has supplanted terrorism and the Middle East as the biggest short-term threat to the U.S. economy," the National Association for Business Economics said.
That panel's conclusion was based on a survey of 258 NABE members conducted between July 24 and August 14. In that survey, only 20 percent of members said terrorism was now their top concern, compared with 35 percent surveyed in March.
U.S. Treasury debt prices rose on Monday following the housing data but trading volume in Treasury securities was particularly thin due to a market holiday in London and with many U.S. players out on summer vacation.
U.S. stocks were down amid concerns housing market troubles would impact the economy and corporate profits. At midday, the benchmark Dow Jones Industrial Average was down more than 40 points (.DJI), or 0.3 percent.
HOUSING IMPACT ON ECONOMY
Even with a somewhat dismal picture continuing on the housing front, National Association of Realtors economist Lawrence Yun maintained that this key segment of the U.S. economy is still holding on.
"In the aggregate, we don't see the subprime market damaging the economy," Yun said.
Bob Moulton, president of the Americana Mortgage Group, a mortgage brokerage firm in Manhasset, New York, said there is still a steady stream of mortgage business.
"We are still writing our fair share of business. We are still seeing transactions. We still see homeowners buying houses," Moulton said, noting that declining home prices will ultimately boost home sales.
According to the latest home sales data from the Realtors association, median home prices fell 0.6 percent from a year ago to $228,900.
"Volatility creates transactions and with median home prices falling, it's great for first-time home buyers," Moulton said.
Last month's decline in existing home sales was smaller than expected. Economists polled ahead of the report forecast home resales to drop to a 5.70 million-unit pace.
(Additional reporting by Glenn Somerville in Washington and Richard Leong in New York)
Home sales hit slowest pace in 5 years
Courtesy of AP
By MARTIN CRUTSINGER, AP Economics Writer
WASHINGTON - Sales of existing homes dropped for a fifth straight month in July, falling to the slowest pace in nearly five years, while home prices fell for a record 12th consecutive month.
The National Association of Realtors reported that sales of existing homes dipped by 0.2 percent last month to a seasonally adjusted annual rate of 5.75 million units.
The median price of a home sold last month slid to $230,200, down by 0.6 percent from the median price a year ago. It marked the 12th consecutive month that home prices have declined, a record stretch.
The deep slump in housing, combined with recent severe turmoil in financial markets, has raised worries about a possible recession. But many economists believe the Federal Reserve will ward off a full-blown downturn by reducing a key short-term interest rate should financial market conditions fail to stabilize.
The steep slump in housing has trimmed overall growth for the past year and recently the economy has been shaken by spillover effects in financial markets. Rising defaults in subprime mortgages have triggered a serious credit crunch as investors have worried that hedge funds and other big investors in securities backed by subprime loans could suffer serious losses.
The 0.2 percent drop in July sales, compared with activity in June, marked the fifth straight monthly decline and left sales 9 percent below the level of a year ago. The sales pace was the slowest since November 2002.
By region of the country, sales fell by 2.2 percent in the Midwest and were unchanged in the South. Sales rose by 1.8 percent in the West and 1 percent in the Northeast.
The increase in the Northeast, which also saw the median home price increase, was seen as possibly hopeful sign that the worst of the housing downturn may be ending.
"The rise in sales and prices in the Northeast region on a fairly consistent basis in recent months is promising because this was the first region that underwent sales and price weakness after the boom," said Lawrence Yun, senior economist for the Realtors. "Now, it appears that it will be the first region to climb back, indicating that other regions could follow a similar path."
However, many analysts believe it could be months before housing stabilizes because of the threat that rising delinquencies could dump further homes onto an already glutted market.
The inventory of unsold homes rose by 5.1 percent at the end of July to a record of 4.59 million units.
Saturday, August 11, 2007
Friday, August 10, 2007
Declining home prices - Four ways to cope with a sluggish market
Friday, August 10, 2007
By Bernice Ross
Inman News
The subprime fiasco, tougher underwriting standards, and increasing foreclosure rates and interest rates are all exerting additional pressure on the slowing market many places in the country. Are you prepared to survive a declining market?
A buyers' market, where the prices are declining, is the worst possible market in which to be a commissioned sales person. Price deflation is bad for everyone. Buyers are reluctant to purchase because they fear that prices will decrease further. Sellers are unable to sell, which results in more foreclosures. Lenders end up taking back more property, and brokers end up doing fewer transactions.
If your market is declining, here are four steps that you can take to avoid being caught in the downward price spiral.
1. Price properties below the comparable sales
Declining prices make obtaining an accurate CMA difficult. Assume that a seller's property is currently worth $400,000. If property is declining at an annual rate of 5 percent per year ($20,000), then the seller's property 180 days from now is worth only $390,000. Given that few sellers price their property exactly at market value, their list price of $410,000 is now $20,000 higher than the property's value. Thus, even with a $10,000 price reduction, the list price would still be $10,000 over the new market value. This is exactly where the seller started at the beginning of the listing period. If a price that was $10,000 over market value did not result in a successful sale, it is even less likely to produce a sale as the market continues to decline.
To avoid this trap, list the property below the comparable sales. The reason for this is simple -- today's comparable sales represent what the prices were 60 to 90 days ago. If the market is declining, then the property is actually worth less than the comparable sales suggest.
2. Avoid letting the sellers "test the market"
Persuading your sellers to be realistic is challenging in any market. This is especially true when the market has been very good and is now transitioning into a buyer's market. As a result, sellers often want to "test the market." This is a huge mistake. Many sellers mistakenly believe that the initial activity on their property will continue throughout the listing period. Nothing could be further from the truth. When they first list their property, there is pent-up demand among the current buyers who haven't found a property. Once this initial surge ceases, showings will be limited to new buyers coming into the marketplace. Missing this initial "honeymoon period," which normally lasts the first 21 days a property is listed, usually results in longer market time and a substantially lower price. Do everything within your power to keep sellers from making this costly mistake.
3. When it comes to price reductions, you need a chain saw, not a pair of nail clippers
When property values are declining, reducing the price to the current market value is not sufficient. Instead, you must be slightly below market value to sell the property. To persuade the sellers about the wisdom of this approach, show them how much they lose each month they hold their property. To illustrate this point, assume that a seller is paying $3,000 per month in principal, interest, taxes and insurance (PITI) and that the prices are decreasing by $1,000 per month. The actual cost to the seller of not being accurately priced is $4,000 per month ($3,000 in PITI + $1,000 in depreciation.)
4. Tap into the seller's motivation to sell
In a declining market, many people are selling because they must. It may be a divorce, financial difficulties, a job transfer, or some other event where the seller has no choice. An important part of providing the seller with excellent service is to understand his or her motivation. While a seller's market is difficult for buyers because prices are constantly climbing, a buyer's market is tough on sellers because prices are declining. If the sellers have to sell and are reluctant to accept a reasonable offer, you can ask, "Which is more important, getting on with your life or waiting for the real estate market to improve?"
If the sellers are purchasing a more expensive home, remind them that they will be making additional money on the deal. For example, the owner of a home worth $300,000 who experiences a 5 percent price decline will see a $15,000 reduction in value. If that same individual is purchasing a $600,000 home, that home will experience a $30,000 reduction in value. Thus, the seller comes out $15,000 ahead. In fact, the higher price ranges usually experience greater drops than entry-level homes.
Helping your clients understand the psychology of a changing market will make the job of selling their home easier. More importantly, it can save your clients plenty of money as well.
Bernice Ross, national speaker and CEO of Realestatecoach.com, is the author of "Waging War on Real Estate's Discounters" and "Who's the Best Person to Sell My House?" Both are available online. She can be reached at bernice@realestatecoach.com or visit her blog at www.LuxuryClues.com.
***
Friday, July 27, 2007
Franco Is Still Dead, and Housing Is Still Bust: Caroline Baum
Courtesy of Bloomberg.com
By Caroline Baum
Foreclosure resolutions ad displayed in front of a home July 27 (Bloomberg) -- The latest round of housing statistics -- sales, starts, homebuilders' outlook surveys and earnings reports -- offered little hope that residential real estate would be back on its feet anytime soon.
``Housing is bust, and wishful thinking cannot unbust it anytime soon,'' says Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.
Just to recap what we learned this week: New home sales plunged 6.6 percent in June to 834,000, just above the seven- year low set in March. Sales are down 22 percent from a year earlier, even with builders throwing in the kitchen sink to sweeten incentives and lighten the load (inventories).
Home resales fell 3.9 percent last month to 5.75 million, a five-year low. They're down 11 percent in the last 12 months.
The only surprise is that prices haven't fallen more. The median price of an existing home was unchanged from a year earlier while new home prices fell 2.2 percent, removing the refinancing/cash-out option for strapped homeowners but not much of a real loss given soaring home prices from about 2001 through 2005.
Shepherdson warns against taking any comfort in the stabilization in home prices for two reasons: one, the deterioration in the supply picture; and two, the lack of adjustment in median prices for either seasonal variations or the mix of properties sold from one month to the next.
Because most of the problems have been in the subprime and Alt-A sectors, and because non-prime borrowers probably buy lower-priced homes, ``their absence from the market will limit the speed of the decline in the median home price,'' he says.
`Challenging'
Moving along to the builder side, things are equally glum. (The outlook is ``challenging,'' in homebuilder speak.) Six U.S. homebuilders, including D.R. Horton Inc. and Pulte Homes Inc., reported losses in the second calendar quarter this week. The chief executives of these companies were not optimistic about the rest of this year. Many weren't optimistic about next year either. Homebuilders' stock prices, which early this year saw a housing renaissance, plunged, with the Standard & Poor's Supercomposite Homebuilding Index dropping to a three-year low.
Yet the real blow this week seemed to come from someone outside the homebuilding industry. Countrywide Financial Corp., the biggest U.S. mortgage lender, did to the stock market this week what HSBC Holdings Plc did to the subprime loan market back in February. Countrywide's road-side bomb, delivered with its second-quarter earnings report, was news that the stress in the home-loan market was spreading from deadbeats to folks with good credit histories.
Rising delinquencies on mortgage payments on prime loans contributed to the company's third consecutive quarterly loss and a one-day 10 percent loss in its stock price.
Technology Redux
On top of rising late payments, Chief Executive Officer Angelo Mozilo said on a conference call that the U.S. was experiencing ``home price depreciation almost like never before, with the exception of the Great Depression.''
The Dow Jones Industrial Average fell 226 points, or 1.6 percent, following the news, and another 312 points yesterday.
``We've been looking at the same data on housing for months, and it took the CEO of a lender to make everyone say, ouch,'' says Joe Carson, director of global economic research at AllianceBernstein in New York.
Carson says Mozilo's comments were not unlike those of Cisco Systems Inc. CEO John Chambers when technology companies woke up in late 2000/early 2001 to find their order books had evaporated (at least that's when companies owned up to it).
Chambers rattled the stock market in early 2001 when he admitted that the previous quarter had been ``a little bit more challenging than expected.''
Visibility, Hindsight
One year earlier, when capital spending and the economy were plowing headfirst into a brick wall, Chambers said he had ``never been more optimistic about the market opportunities for our industry as a whole and for Cisco within that market.''
Just call it visibility in hindsight.
While everyone from the Federal Reserve chairman to the Treasury secretary has been talking housing containment, the damage has started to seep out from under the foundation and spill over to other parts of the economy. Home improvement retailers such as Home Depot and Lowe's Cos. are feeling the pinch. Consumer spending slowed markedly in the second quarter. Wall Street is having trouble finding buyers for loans to finance leveraged buyouts. Investors are starting to reprice risk.
The yield curve has inverted again as the yield on the 10- year Treasury plummeted 50 basis points in the last six weeks.
Rerun Time
Haven't we seen this movie before? Every bubble has a credit kicker when the price of whatever asset folks were chasing stops rising. Banks find religion when it comes to making new loans. Regulators step in to make sure there will be no repeat of the last bubble. Consumers save more; businesses invest less.
Housing has been the economy's weakest link for some time, subtracting about 1 percentage point from growth in every quarter from the second quarter of 2006 through the first quarter of 2007.
Residential investment, as it's referred to in the gross domestic product accounts, may not be the real threat to the U.S. economy. The danger lies in the fact that ``there's a lot more household debt associated with housing'' than there was with the stock-market bubble, Carson says.
Maybe you can take housing out of the economy for analytical purposes (see ``GDP ex-housing''). But when it comes to the real world, the two are inextricably linked.
(Caroline Baum, author of ``Just What I Said,'' is a columnist for Bloomberg News. The opinions expressed are her own.)
To contact the writer of this column: Caroline Baum in New York at cabaum@bloomberg.net
Last Updated: July 27, 2007 00:03 EDT
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