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

By Sharon L. Lynch

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

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

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

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

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

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

Nevada Leads

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

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

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

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

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

Prices Sink

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

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

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

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

Bush Plan

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

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

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

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

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

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

Bargain hunters may toss a lifeline to housing

Sun Feb 24, 2008 8:16pm EST

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

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

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

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

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

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

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

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

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

HIGH HURDLES

But the roadblock to closing the contracts is ominous.

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

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

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

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

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

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

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

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

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

$217,800.

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

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

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

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

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

SENSE OF URGENCY RETURNS

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

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

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

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

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

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

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

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

Tracking Housing Prices, Why The Numbers Conflict

Courtesy of WSJ.com

(See Corrections & Amplifications item below.)

By David Wessel
From The Wall Street Journal Online

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Email your comments to rjeditor@dowjones.com.

-- February 15, 2008
Corrections & Amplifications:

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

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

Courtesy of WSJ.com
By KELLY SPORS

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

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

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

Important Questions

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

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

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

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

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

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

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

Dumping the Plan

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

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

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

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

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

Forget About Planning?

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

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

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

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

Flexibility Is Crucial

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

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

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

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

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

Homes in Bubble Regions Remain Wildly Overvalued

R.O.I.
By BRETT ARENDS
February 12, 2008

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

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

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

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

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

How far?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

US home loan demand rises to highest since '04-MBA

Reuter
Wed Feb 6, 2008 11:23am EST

By Julie Haviv

NEW YORK, Feb 6 (Reuters) - U.S. mortgage applications rose last week to the highest level in nearly four years, fueled by demand for home purchase loans as interest rates hovered near recent lows, an industry group said on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended Feb. 1 rose 3 percent to 1,086.6, its highest since the week ended March 26, 2004.

The sharp rise in home purchase applications last week may offer a glimmer of hope for the hard-hit U.S. housing market.

Bob Walters, chief economist at Quicken Loans, an online mortgage lender in Livonia, Michigan, said those seeking to purchase a home have had plenty to cheer about in recent weeks as long term interest rates plummeted to near historic lows.

"Right now they have the best of both worlds," he said. "Home prices have become more affordable due to a sizable inventory of unsold homes, and they can finance their purchase at decade-low interest rates."

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 5.61 percent, up 0.1 percentage point from the previous week and 0.12 percentage point above where it stood two weeks prior when it reached its lowest since late June 2005.

Interest rates were below year-ago levels at 6.23 percent.

Mortgage rates have fallen along with U.S. Treasury yields in recent weeks. The benchmark 10-year U.S. Treasury note yield fell further on Tuesday after data showed the vast U.S service sector contracted sharply last month, sending recession-wary investors into safe-harbor government bonds. Yields move inversely to price.

Many analysts, however, say the MBA's data has been skewed in recent months as prospective borrowers have been filing multiple applications to obtain a single loan due to widespread tightening of lending standards.

The MBA's data also counts all applications, including borrowers who are ultimately denied.

Furthermore, the MBA's data only includes retail lenders, which have most probably witnessed an increase in applications as wholesale lenders pull back from the market, according to Michelle Meyer, an economist at Lehman Brothers in New York.

"The home purchase data is incredibly volatile on a weekly basis and last week's jump does not suggest a turnaround in home sales," she said. "It is quite unreliable and a poor indicator of future home sales because purchase applications have been little changed over the past year and a half while home sales have fallen sharply."

The MBA's seasonally adjusted purchase index jumped 12.0 percent to 405.3. The index came in above its year-earlier level of 404.7, a rise of 0.1 percent.

Overall mortgage applications last week were 72.4 percent above their year-ago level. The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was up 10.4 percent to 1,007.4.

REFINANCING BOOM LOSES MOMENTUM

The rise in applications last week was largely due to increased demand for home purchase loans. Demand for home refinancing loans, however, dropped last week after surging the previous three weeks.

The group's seasonally adjusted index of refinancing applications decreased 1.0 percent last week to 5,054.0.

However, the index, which is closely tied to mortgage rates, was up 160.1 percent from its year-ago level of 1,943.4.

Fixed 15-year mortgage rates averaged 5.09 percent, up from 5.04 percent the previous week. Rates on one-year adjustable-rate mortgages decreased to 5.62 percent from 5.70 percent.

The refinance share of applications decreased to 69.2 percent from 73.0 percent the previous week. The ARM share of activity increased to 8.8 percent, up from 8.6 percent the previous week. (Reporting by Julie Haviv; Editing by Tom Hals)

Tips for Buying A Foreclosed Home

RealEstateJournal.com
By June Fletcher
From The Wall Street Journal Online

Question: I have been considering relocating to Charlotte, N.C., where I can purchase more home for the money. With the recent housing slump and increase in foreclosures, I figure it's an opportune time to purchase an affordable property. My questions: Is this a good time to buy, and if so, where can I find bargains? Also, where can I locate foreclosed properties without having to join an online site that charges a membership fee?

-- Johnna Richard, New York. N.Y.

Johnna: In good markets and bad, real-estate agents are constantly announcing that "now" is the best time to buy. With housing prices weakening, inventories rising and sales slumping, this attitude has drawn a lot of ridicule in the press.

But you know what? Now may actually be a very good time to buy, or at least start looking seriously.

Though no one can really tell when the downward-trending housing market will reach its nadir -- most economists predict it will bottom out sometime in 2008 or 2009 -- there's no doubt that sellers have let go of bubblelicious notions of what their homes are worth. According to S&P/Case-Shiller, existing home prices dropped 4.5% nationally in the third quarter over the year before; price appreciation was even slowing in Charlotte, one of the few cities that the research group covers that showed price appreciation year-over-year. It rose at a tepid rate of 4.7%.

The media makes this out as a tragedy, but it's really not. For buyers, a market that's nearing its bottom is only a concern for flippers, who need a rising market to make money. For buyers making a long-term investment, it's a reason to rejoice.

Yes, loans are hard to find, but they are still being made, especially if you have good credit. While the qualifications for getting a loan are becoming stricter -- but no more strict than they were in the mid-1990s -- mortgage money is still cheap by historical standards and will likely remain so in the near future. The Mortgage Bankers Association projects that 30-year fixed rates will hover around 6% throughout 2008 and the first two quarters of 2009.

Meanwhile, as you have noted, bargains abound, particularly in foreclosure properties. While many Web sites sell foreclosure information (sometimes after letting you sample the Web site for a week-long free trial), you don't have to pay an online membership fee to find them. Title companies, real-estate agents and lenders -- including credit unions -- all have information on homes in various stages of foreclosure.

Homes that are being auctioned are listed in the legal notices section of the main local newspaper and can usually be found on the newspaper's Web site.

But generally, you will get a better deal if you buy a house before it goes to auction, or after -- if it doesn't sell on the courthouse steps. Bidders at an auction sometimes get caught in the heat of the moment and push up prices.

For a simple and up-to-date explanation of the foreclosure process, you may want to read "Finding Foreclosures" by real-estate investor Danielle Babb and mortgage broker Bill Nazur (Entrepreneur Press; 2007). But keep in mind that the book was prepared with RealtyTrac, an online database of foreclosure and pre-foreclosure properties, and promotes that Web site heavily.


-- June Fletcher is a staff reporter at The Wall Street Journal and the author of "House Poor" (Harper Collins, 2005).

Risk of property defaults growing

The Financial Times
By Daniel Pimlott in New York and Gillian Tett in London

Published: February 5 2008 18:47 | Last updated: February 5 2008 18:47

There is a growing risk of defaults on loans on commercial property this year, in a trend that could spill over into tumbling values and create more jitters in the credit world, analysts and bankers warn.

US property companies that took out big short-term loans to finance acquisitions in the past couple of years at low-interest rates are now struggling to refinance this debt, as banks curb lending and commercial property prices fall.

EDITOR’S CHOICE
Squeeze halts sales in office property - Jan-25Insight: An international approach to commercial real estate - Jan-16Banks gloomy on commercial property debt - Jan-14Punitive barriers ‘threatening progress’ - Jan-11Singapore’s GIC builds stake in British Land - Jan-10Savills defies gloom with upbeat outlook - Jan-09In recent days, Harry Macklowe, the New York developer, has failed to refinance $5.8bn in short-term loans he used to buy seven Manhattan office towers from Equity Office Properties last February. Deutsche Bank, which provided the loan, has taken control of the buildings and will put them up for sale, a person familiar with the matter said.

Analysts warn of a pattern that could spread. US commercial property prices have fallen 10 per cent in some markets since August, after rising more than 90 per cent since 2001, according to Real Capital Analytics.

“For [recent] loans coming to maturity this year . . . it will be very difficult to acquire refinancing,” said Sam Chandan, chief economist at Reis, a property re-search company.

Signs of growing stress also exist in the UK commercial property sector. Tomorrow, UK group British Land is expected to announce a sharp writedown in the value of its commercial property. The Bank of England highlighted its unease in its recent quarterly bulletin, noting that “commercial property prices fell sharply” in recent months, and “returns on commercial property slowed significantly”.

Most analysts think the scale of problems building in the commercial property sector are far smaller than in the subprime loans market. However, if the sector produces tangible losses this year, this will be deeply unwelcome for banks and investors in commercial mortgage-backed securities

One area of concern revolves around property companies that have taken out floating rate loans in the past couple of years.

This year $22bn out of a total $38bn in outstanding floating rate CMBS is coming due, according to Wachovia Capital Markets data, of which $2bn faces the greatest risk of default because it has a final maturity this year with no option to extend.

Worried Sellers Splurge on Home Renovations

By June Fletcher
From The Wall Street Journal Online

Christina Lee just spent $150,000 to remodel her house -- for a stranger.

Ms. Lee has lived in her 19th century New York City brownstone for nearly three decades and in that time did just one major upgrade -- a $25,000 makeover of a kitchen 13 years ago. Now, the attorney wants to relocate her law practice to Seattle and sell her place -- which she bought in the Hamilton Heights neighborhood of northern Manhattan back in 1979 for $70,000. So for the past few months, the 4,400-square-foot house has been a frenzy of contractors, who have refinished floors and woodwork, overhauled her second kitchen, changed two bedrooms into sunrooms and redone a bath, complete with vessel sink, new shower and recessed lighting.

The modernistic redo doesn't quite match her own taste. But it did mimic the décor in newspaper real-estate sections. Ms. Lee says she hopes it will cement a quick sale when she puts her house on the market at "something north" of $2 million. "If I didn't do this, I wouldn't get my best price," she says.

Add another hassle to the headache of home selling: the last-minute renovation. With the housing market continuing to weaken, many sellers are going beyond the usual cleaning, painting and "staging" with flowers and pillows, by taking on big-ticket projects.

Payback Time

Selected remodeling projects with average estimated percentage of costs recovered when home is sold.

Some experts warn that sellers are unlikely to get their money back from extensive renovations. But owners often feel they have no choice if they want to sell, especially when builders of newly constructed homes are throwing in hardwood floors, finished basements and other free upgrades.

"There's so much competition, you need to stand out," says Brian Goe, a waterproofing-company owner. He spent $28,000 to upgrade a Bedminster, N.J., house that he bought in 1987 for $187,000. Before it hit the market a couple of weeks ago, Mr. Goe had contractors add pickled oak flooring to the dining room and new carpeting. They installed skylights in the living room, new stainless-steel kitchen appliances and separate sinks in the master bath. He had the interior walls painted in faux finishes.

Such are the decisions homeowners make in a market where the news, for sellers, goes from bad to worse. According to the National Association of Realtors, the pace of sales of existing homes fell 22% in December compared with a year earlier. The median price fell 6% to $208,400.

The depressed market is hurting remodeling overall. Homeowner spending is expected to fall at an annual rate of 2.6% through the third quarter this year, according to Harvard University's Joint Center for Housing Studies. The center doesn't break out separate home-improvement spending by owners preparing to sell. But Kermit Baker, director of the center's Remodeling Futures Program, says, "I suspect that there is a fair amount of this happening, given the softness in the housing market."

An online poll of 445 contractors conducted last week for The Wall Street Journal by ServiceMagic, a national contractor-referral service in Golden, Colo., indicates last-minute renovating is propping up a sizable chunk of the remodeling industry. According to the poll, 26% of contractors said they had been contacted in the past year by prospective home sellers looking to do substantial work. Of those contractors, 48% said such work had boosted their business by 20% or more.

Extensive presale remodeling is often fraught with conflicted decisions, because homeowners are making aesthetic choices they hope will please people they don't know. Tracey Born Fitzgerald, a marketing consultant, recently spent weeks visiting 20 open houses, buttonholing real-estate agents and watching makeover shows on TV to figure out what to do to the 1930s Los Angeles house that she and her two sisters inherited from their mother. She discovered that it wasn't important to install top-of-the line appliances. Instead, she put in good-quality, matching appliances and new countertops -- she had them tiled in seafoam green -- and replaced cabinet fronts, carpeting, doors, faucets, fixtures and lighting in a traditional style that didn't clash with the English Tudor home. All these upgrades cost her $55,000.

Ms. Fitzgerald says it was essential to let go of her personal preferences for the house, which she is planning to list "in the upper $3 million range." "I had to think, if I were a buyer, what would I want?" she says.

No matter what the upgrade, homeowners aren't likely to recoup all the money spent when they sell. According to Remodeling magazine's annual Cost Versus Value Survey, the overall return for remodeling projects is on the decline, falling to an average of 70% in 2007 from 86.7% at the market peak in 2005.

For a project using midrange products, the best returns come from putting on a new deck, replacing the siding and sprucing up the kitchen; the lowest returns come from remodeling a home office, adding a sunroom or putting in a backup power generator.

Tricia Sinn, a Ladue, Mo., remodeler who recently oversaw a seller's $24,000 last-minute redo, says rather than splurge on major upgrades, it is often better to remove aging window treatments and other dated features and to selectively replace worn and "icky" items, such as countertops, shower doors and hardware. "A comprehensive, clean look is better than one newly renovated area," she says. The house she worked on sold at the first open house for $645,000 -- $4,900 less than the asking price.

Some sellers aren't worried about recouping what they've spent. Carl Frederick, a landscape-lighting company executive, spent $23,000 preparing to sell his four-bedroom Boston Heights, Ohio, home. It was only nine years old, but Mr. Frederick replaced laminated countertops with granite, installed new sinks with brushed-nickel faucets, replaced light fixtures -- and put the house on the market in April for $879,000.

Several contracts fell through before it finally sold for $775,000. Mr. Frederick paid $700,000 for the house five years ago -- leaving him with little profit after the agent's fees and closing costs. But he has no regrets. "At the end of the day, I sold the house," he says.

You May Not Want to Wait to Refinance That Mortgage

TheStreet.com Market Features
02/03/08 - 12:17 PM EST
Terry Savage

With all the headlines about Federal Reserve rate cuts, it's easy to jump to the wrong conclusion: that you can afford to wait to refinance your home. But that's a dangerous position to take. It's one thing to speculate with interest-rate futures.

It's quite another to gamble with the roof over your head.

Last week, mortgage rates ticked slightly higher across the board, from fixed-rate 30-year loans to adjustable-rate mortgages. The bond market, and the mortgage market, may be looking across the temporary decline in rates to the inflation that is likely to follow this current round of Fed easing.

Dangers of Playing the Refi Game

There are two important reasons not to "game" the mortgage rate if you know you need to refinance, or are one of the very few still buying a new home.

First: The Fed does not "control" long term rates! The Fed can pump liquidity into the system, and can set short-term rates. But it can't control the longer-term bond market, where trillions of dollars of debt are freely traded each day. In that bond market, the very sophisticated participants are considering the impact of all that liquidity -- and its potential to create inflation down the road.

Typically, the 30-year fixed-rate mortgage tracks the yield of the 10-year Treasury note (because very few mortgages are actually held for 30 years). It is not the same rate as 10-year treasuries, of course, because individual mortgages have a higher degree of risk -- as we've all seen lately!

Inflation Fears Push Rates Up, Bond Prices Down

If bond buyers are worried about inflation, they're going to demand higher rates to compensate. In reality, if they sniff inflation coming, they start to sell the bonds they own, pushing prices down and yields up.

Remember, in bonds, the yield moves inversely to the price. A bond may have a fixed rate promise to pay off the principal in ten years, and a promise to pay a certain interest rate every year until then. But though the face value of the bond may be $1,000 -- which you'll get back at maturity -- the trading price of the bond may be much lower.

When you purchase a bond at a lower price than face value, your "yield to maturity" is higher than the interest rate on the face of the bond. That's how existing bonds trade to compensate for fears of future inflation. So even "old" 10-year Treasurys may be trading to give a higher yield as sellers push bond prices down.

Here's the simple rule to keep in mind: When interest rates rise, bond prices fall.

That's something beyond the Fed's power to control over the long run. The market is bigger than the Fed when it comes to long-term interest rates.

Which brings us back to your mortgage.

What Could Happen to Mortgage Rates

Mortgage rates might fall a bit farther if there is a deep recession, lowering the business demand for money. Or, there could be an economic recovery because of all this liquidity, with renewed growth causing rates to rise.

But the worst case is that the liquidity the Fed is pushing into the economy now doesn't create growth, but does create fears of future inflation. That creates the possibility of stagflation -- higher rates, but still a slow economy.

That's the first and main reason why you want to refinance as soon as possible into a fixed rate loan. Don't try to beat out the bond traders, because the upside risk on rates definitely exists, and could be devastating if you still have an adjustable-rate mortgage.

The Other Risk: Home Prices Fall Farther

I mentioned that there are two reasons to lock in rates now. The second reason is that if we do have a continued economic slowdown, the appraised value of your home could fall still farther. In fact, if you don't have enough equity in your home, you simply can't refinance -- as millions of homeowners have already learned. They're stuck in adjustable rate loans, worrying about the possibility of higher monthly payments.

Take advantage of this possibly temporary dip in mortgage rates to start the refi process now. And as you start the process, get a written rate guarantee from your lender.

If rates drop again, and your house retains its value, you can always refi another time. But if rates rise, you may not get this chance again. And that's The Savage Truth!

Terry Savage is an expert on personal finance and also appears as a commentator on national television on issues related to investing and the financial markets. Savage's personal finance column in the Chicago Sun-Times is nationally syndicated, and she released her fourth book, The Savage Number: How Much Money Do You Need? in June 2005. Savage was the first woman trader on the Chicago Board Options Exchange and is a registered investment adviser for stocks and futures. A Phi Beta Kappa graduate of the University of Michigan, Savage currently serves as a director of the Chicago Mercantile Exchange Corp. She also has served on the boards of McDonald's and Pennzoil.

Home Prices Decline at Record Rates

Courtesy of WSJOnline.com
By KATHY SHWIFF and KEVIN KINGSBURY
January 29, 2008 12:37 p.m.

A closely watched gauge of U.S. home prices shows they are falling sharply at record rates as a deepening slump in the housing market threatens to damp consumer spending.

Home prices in 10 major metropolitan areas in November were down 8.4% from a year earlier, according to the S&P/Case-Shiller home-price indexes, released Tuesday by credit-rating firm Standard & Poor's. In October, they fell 6.7%, exceeding the previous record year-to-year decline of 6.3% in April 1991, when the economy was emerging from a recession.

November was the 11th consecutive month of negative annual returns and the 24th straight month of decelerating returns.

Robert Shiller, chief economist at MacroMarkets LLC and co-developer of the index, said, "We reached another grim milestone" in November, as 13 of the 20 metro areas in the 20-city index, all of which have data dating to 1991, hit record price drops as well.

The indexes include some places most affected by the fast-growing home-price bubble during the past few years. Miami home prices were down 15% in November from a year earlier, while prices fell 13% in San Diego, Las Vegas and Detroit.

The expanded 20-city index, which dates back to 2001, fell 7.7% from a year earlier and 2.1% from October. Portland and Seattle are the only two metro areas with year-over-year increases - 1.3% and 1.8%, respectively.

The Case-Shiller Index is now one of the most closely watched measures of home prices. But some economists argue that it paints an overly bleak picture.

Columbia University economist Charles Calomiris has noted that the Case-Shiller Index does not cover the entire U.S. market, "and the omitted parts of the U.S. market seem to be doing better than the included parts."

Mr. Calomiris said an alternative measure -- compiled by the federal Office of Federal Housing Enterprise Oversight -- doesn't show as deep a decline and that may be representative of all markets in the U.S. The Ofheo index, however, only tracks houses with mortgages under $417,000, the ceiling on loans that can be purchased or guaranteed by government-sponsored mortgage giants Fannie Mae or Freddie Mac.

Ofheo said at the end of November that, for the first time in nearly 13 years, U.S. home prices fell. A seasonally adjusted index that tracks value of homes purchased and refinanced was 0.4% lower in the third quarter than in the previous quarter, though it was 1.8% above year-ago levels.

Rising home prices plus refinancing options and home-equity loans previously allowed homeowners to squeeze money out of their homes to finance their spending - an important trend because consumer spending fuels about 70% of economic growth. Economists now worry that falling home prices will prompt consumers to pull back on spending enough to slow growth or even tip the economy into recession.

Nevertheless, people who bought their homes several years ago typically are sitting on sizable gains in most of the country. Home sales began to slow in mid-2005. Prices leveled off then started declining in 2006. During the past year, mortgage defaults have soared, leading to rapid growth in foreclosures.

Write to Kathy Shwiff at kathy.shwiff@dowjones.com and Kevin Kingsbury at kevin.kingsbury@dowjones.com

Home Resales Probably Fell in December: U.S. Economy Preview

By Courtney Schlisserman

Jan. 20 (Bloomberg) -- Sales of existing homes in the U.S. probably fell in December, capping the biggest yearly slump in almost a generation, economists said before a report this week.

Purchases fell 1 percent last month to a 4.95 million rate, the fewest since comparable records began in 1999, according to the median forecast in a Bloomberg News survey ahead of the National Association of Realtors' report due Jan. 24.

Falling property values and tougher borrowing rules will lead to more foreclosures and keep the real-estate market in recession for most of this year, economists said. A housing- related slump in consumer spending poses the biggest risk to the economic expansion in coming months.

``We're still on the way down in housing,'' said Ellen Zentner, an economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. ``The first half of the year is going to be crucial to determining whether we have a recession.''

Sales of existing homes probably dropped 13 percent last year, the most since 1989, according to a forecast by the real- estate agents group.

The same day as the sales report, the Labor Department is scheduled to release its weekly figures on first-time jobless claims. Filings for unemployment benefits probably increased to 320,000 from 301,000 the prior week, according to the survey median.

An unexpected decline in the number of claims in recent weeks caused many economists to question whether the government has accurately monitored the situation. It's often difficult for the Labor Department to adjust the data during holidays, adding to volatility in the readings, economist said.

Claims May Rise

Economists are expecting to see a pickup in claims to confirm the labor market has weakened. The jobless rate jumped up to 5 percent in December.

``We've been a little puzzled by the continued strength of the overall labor market, particularly claims,'' Peter Hooper, chairman of the American Bankers Association's Economic Advisory Committee, said at a press conference on Jan. 18. ``Our sense is the labor market is likely softening.''

Hooper is chief economist at Deutsche Bank Securities Inc.

The deepening housing slump is one of the reasons the job market has deteriorated. Lehman Brothers Holdings Inc., the largest U.S. underwriter of mortgage-backed bonds, said last week it will eliminate 1,300 jobs in the firm's fourth round of cuts resulting from the collapse of the mortgage market.

Lehman, the fourth-largest U.S. securities firm, cut 2,450 jobs last year by shutting its subprime-mortgage unit.

Construction Drops

Builders broke ground in December on fewer houses than forecast, making last year's decline in homebuilding the worst in almost three decades, a report from the Commerce Department last week showed. For all of 2007, starts were down 25 percent, the biggest decline since 1980.

Spending on residential construction projects will drop 21 percent this year after declining 17 percent in 2007, according to a forecast by Lehman economists.

Federal Reserve Chairman Ben S. Bernanke said earlier this month that the central bank would take ``substantive'' action in response to the increasing risk of slower growth. Central bankers will cut interest rates by at least half a percentage point when they meet this month, according to futures trading.

President George W. Bush last week proposed a growth package of as much as $150 billion to counter escalating risks to the economic expansion.

``The biggest issue we have in our economy is housing,'' Treasury Secretary Henry Paulson told reporters on Jan. 18. The stimulus proposals will help the economy ``better withstand and weather effects that are coming about largely as a result of this decline in home prices and the housing slump.''



Bloomberg Survey

================================================================
Release Period Prior Median
Indicator Date Value Forecast
================================================================
Initial Claims ,000's 1/24 Jan. 20 301 320
Cont. Claims ,000's 1/24 Jan. 13 2751 2728
Exist Homes Mlns 1/24 Dec. 5.00 4.95
Exist Homes MOM% 1/24 Dec. 0.4% -1.0%
================================================================
To contact the reporter on this story: Courtney Schlisserman in Washington at cschlisserma@bloomberg.net

Last Updated: January 20, 2008 08:52 EST

Subprime Nation

By Patrick J. Buchanan

Since it began to give credit ratings to nations in 1917, Moody's has rated the United States triple-A. U.S. Treasury bonds have been seen as the most secure investment on earth. When crises erupt, nervous money seeks out the world's great safe harbor, the United States. That reputation is now in peril.

Last week, Moody's warned that if the United States fails to rein in the soaring cost of Social Security, Medicare and Medicaid, the nation's credit rating will be down-graded within a decade.

Our political parties seem oblivious. Republicans, save Ron Paul, are all promising to expand the U.S. military and maintain all of our worldwide commitments to defend and subsidize scores of nations.

Democrats, with entitlement costs drowning the federal budget in red ink, are proposing a new entitlement – universal health coverage for the near 50 million who do not have it – another magnet for illegal aliens. Moody's is telling America it needs a time of austerity, while the U.S. government is behaving like the governments we used to bail out.

California has already hit the wall. With an economy as large as a G-8 nation, the Golden State is looking at a $14 billion deficit in 2009 and a $3 billion shortfall in 2008. Gov. Schwarzenegger has called for slashing prison staff by 6,000, including 2,000 guards, early release of 22,000 inmates, closing four dozen state parks and a 10 percent across-the-board cut in all state agencies. The Democratic legislature is demanding tax hikes, which would drive more taxpayers back over the mountains whence their fathers came.

Meanwhile, Washington drifts mindlessly toward the maelstrom. With the dollar sinking, oil surging to $100 a barrel, the Dow having its worst January in memory, foreclosures mounting, credit card debt going rotten, and consumers and businesses unable or unwilling to borrow, we appear headed into recession.

If so, tax revenue will fall and spending on unemployment will surge. The price of the stimulus packages both parties are preparing will further add to the deficit and further imperil the U.S. credit rating. This all comes in the year that the first of the baby boomers, born in 1946, reach early retirement and eligibility for Social Security.

To stave off recession, the Fed appears anxious to slash interest rates another half-point, if not more. That will further weaken the dollar and raise the costs of the imports to which we have become addicted. While all this is bad news for the Republicans, it is worse news for the republic. As we save nothing, we must borrow both to pay for the imported oil and foreign manufactures upon which we have become dependent.

We are thus in the position of having to borrow from Europe to defend Europe, of having to borrow from China and Japan to defend Chinese and Japanese access to Gulf oil, and of having to borrow from Arab emirs, sultans and monarchs to make Iraq safe for democracy.

We borrow from the nations we defend so that we may continue to defend them. To question this is an unpardonable heresy called "isolationism."

And the chickens of globalism are coming home to roost.

We let Europe to get away with imposing value-added taxes averaging 15 percent on our exports to them, while they rebate that value-added tax on their exports to us. Thus, the euro has almost doubled in value against the dollar in the Bush years, as NATO Europe begins to bail out on Iraq and Afghanistan.

We sat still as Japan protected her markets and dumped high quality goods into ours and China undervalued its currency to suck jobs, technology and factories out of the United States. Now, China and Japan have $2 trillion in cash reserves. The Arabs have an equal amount of petrodollars. Both are headed here to spend their depreciating dollars snapping up U.S. assets – banks, ports, highways, defense contractors.

America, to pay her bills, has begun to sell herself to the world.

Its balance sheet gutted by the subprime mortgage crisis, Citicorp got a $7.5 billion injection from Abu Dhabi and is now fishing for $1 billion from Kuwait and $9 billion from China. Beijing has put $5 billion into Morgan Stanley and bought heavily into Barclays Bank.

Merrill-Lynch, ravaged by subprime mortgage losses, sold part of itself to Singapore for $7.5 billion and is seeking another $3 billion to $4 billion from the Arabs. Swiss-based UBS, taking a near $15 billion write-down in subprime mortgages, has gotten an infusion of $10 billion from Singapore.

Bain Capital is partnering with China's Huawei Technologies in a buyout of 3Com, the U.S. company that provides the technology that protects Pentagon computers from Chinese hackers.

This self-indulgent generation has borrowed itself into unpayable debt. Now the folks from whom we borrowed to buy all that oil and all those cars, electronics and clothes are coming to buy the country we inherited. We are prodigal sons, and the day of reckoning approaches.

Mortgage-Meltdown Upside: Lower Rates

By BRETT ARENDS
Brett Arends writes R.O.I., or Return On Investment, daily for the Online Journal, dissecting where personal finance meets current affairs, and how the latest news can make you money."

A lot of the time, that comes from going against the herd.

Brett has spent his life rifling through department store bargain bins in London, Boston and New York, and that's pretty much the same way he views markets. A good stock-market panic yields the cheapest deals. And there's only one thing better: a scandal. That's when you get a firesale. R.O.I. will be looking for bargains anywhere, and for opportunities on the spending side as well.

It isn't really true that $1,000 saved is just $1,000 earned. If you're in the top income-tax bracket, it's $1,500 earned. And salted away for 30 years in a tax-deferred account, $1,000 saved is nearly $9,000 towards your retirement. That's some return.



Mortgage-Meltdown Upside: Lower Rates
January 10, 2008 7:23 p.m.

The doom and misery enveloping Wall Street brings with it a cheerier by-product: Cheaper mortgages.

The rate on standard 30-year, fixed-rate loans has "fallen about half a percentage point in the last two weeks owing to the dour economic outlook," says Greg McBride, senior analyst at Bankrate.com.

If you are borrowing less than $417,000, the limit backed by Federal housing agencies, and you are making a down payment of 20% or more, you can get a 30-year loan mortgage for well under 6%.


Bankrate.com, which surveys lenders, says the average rate is now 5.88%. As our chart shows, that's well below levels of nearly 7% seen as recently as last summer.

And you can find better if you shop around. Some loans are as low as around 5.5%, including fees.

Of course, everybody's mortgage decision is going to involve a lot of independent variables, including the size of the loan and the down payment, and whether to get a fixed or variable rate. Interest rates are higher on "jumbo" loans of more than $417,000, and where the down payment is less than 20% of the home's value. There's no such thing as one-size-fits-all advice.

The reason mortgage rates have fallen so far isn't hard to find: Deepening fears over the economy.

Nervous investors have shifted their money from riskier assets into U.S. government bonds, bidding up the price of the bonds and thereby lowering the yield. And that brings down the cost of long-term capital for other loans, including mortgages.

Ten-year Treasurys now pay a measly 3.79%, compared to 5.3% earlier last year. The yield on the 30-year has fallen from 5.4% to 4.32%.

Given these declines in Treasury yields, mortgage rates should probably be even lower. But the lending industry's obvious crisis has gummed up the works.

Are mortgages rates going to fall further? Should you wait to refinance?

Maybe. But rates right now are very cheap by historic standards. The law of mean reversion would suggest they are more likely to rise from this point than to fall further.

Anything from a boost in economic sentiment to fears about inflation would be likely to raise long-term interest rates.

You can usually have it both ways -- sort of. You can generally pay a fee to lock in a good interest rate for a period. If rates fall still further, you surrender the fee, but you can then take advantage of the lower rate.

Overall, cutting your cost of capital is probably the easiest way to boost your net worth. On a $400,000 loan, cutting your interest rate from 6.8% to 5.5% will save you about $4,000 a year before tax -- or about $120,000 over 30 years.

Of course, to make sure switching mortgages is worthwhile you need to factor in fees, points and other costs as well as the interest rate.

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

Lennar's New Homes Fetch 60% Less as U.S. Market Slump Deepens

By Bob Ivry

Jan. 10 (Bloomberg) -- Lennar Corp.'s November sale of 11,000 properties in eight states set a price that may mark the bottom for the U.S. housing market: 40 cents on the dollar.

That's how much Morgan Stanley Real Estate paid for an 80 percent stake in the 32 communities, 60 percent less than the price at which the properties were valued just two months earlier. That's also what some investors say they would pay for distressed land, condominiums, homes and whole developments, whether it's now or later this year.

``If you're an opportunistic buyer with enough cash and credit, it will be one of the best opportunities for acquiring property in our lifetime,'' said Jack McCabe, whose McCabe Research & Consulting LLC in Deerfield Beach, Florida, advises hedge funds and other investors on real estate sales.

As the U.S. housing slump drags into its third year, sellers will start cutting prices as much as it takes to find buyers, said Marcel Arsenault, a self-described ``vulture investor.'' Properties will be available to buyers with the financial strength to ride out the slide. Now that a price has been set, all that's left is the waiting.

Arsenault, based in Broomfield, Colorado, bought real estate during the savings-and-loan collapse of the early 1990s. He said he has put together a $200 million fund he expects to expand to $800 million this year to buy distressed condos.

`Eroding by the Minute'

``We're watching Denver, Phoenix, Austin and Tucson, but South Florida is our principal focus,'' said Arsenault, 60. ``If you're a vulture, Florida has more carrion. This stuff is lying on the ground. It's lost life. Some of the stuff in Phoenix is still breathing. Perhaps not for long.''

Arsenault said he and his three partners may buy a block of about 50 new, unsold condominiums in Orlando, Florida. They have a price in mind and they're willing to wait until they get it: 40 cents on the dollar.

``There's a risk to buying too early in the downturn, but buying too expensive is our biggest pitfall,'' he said.

Companies such as Miami-based Lennar, the biggest U.S. homebuilder by revenue, need to generate cash to make up for slowing home sales, especially this time of year, said Vicki Bryan, a Friendswood, Texas-based senior high-yield debt analyst for Gimme Credit LLC.

``They sold land at 40 cents on the dollar and they're happy to get it,'' Bryan said. ``The value of land is eroding by the minute.''

$10,000 an Acre

New-home sales fell to a 12-year low in November as rising foreclosures, increased credit restrictions and a swelling inventory of unsold houses have persuaded potential buyers to wait.

More than half of all U.S. home sales occur in April, May and June, according to Frank Nothaft, chief economist at McLean, Virginia-based Freddie Mac, the No. 2 U.S. mortgage buyer.

About 150 so-called real estate opportunity funds have been formed to buy distressed properties and other assets, a 21 percent increase over the number this time last year and an all- time high, according to Real Estate Alert, a trade publication based in Hoboken, New Jersey.

Fort Worth, Texas-based D.R. Horton Inc., the biggest U.S. homebuilder by market value, sold 20,000 lots on 6,884 acres outside Phoenix to Wolff Co., a closely held real estate investment and development company based in Scottsdale, Arizona, and Langley Properties of Gilbert, Arizona, in November.

The price, $70 million, or about $10,000 an acre, was lower than the sale price for the same land that Horton had in escrow six months ago, said Wolff Co-President Tim Wolff.

Land Inventory

``We are going to wait for as long as it takes the market to recover and figure it out from there,'' Wolff said.

The sale reduced the amount of time D.R. Horton calculates it would take to sell off all its land by about six months, to five years, Chief Executive Officer Donald Tomnitz said in a November conference call with analysts.

``We're going to be looking to sell land opportunistically,'' Stacey Dwyer, the company's executive vice president and treasurer, said in the call.

Standard Pacific Corp., the worst-performing of the 15 companies in the Standard & Poor's Supercomposite Index of Homebuilders last year, sold more than 2,500 home lots, some ready for building and some raw, in the San Antonio area earlier this week.

``Standard Pacific is reviewing a number of ways to adjust our business to changing market conditions,'' the company said in an e-mailed statement. ``As a part of our plan, we sold most of our excess land in San Antonio and will continue to explore ways to optimize our business, while continuing to provide our customers with high quality homes at an excellent value.''

`Aggressive Right Now'

The buyers were Cleveland-based Forest City Enterprises Inc. and closely held Covington Capital Corp. The price wasn't disclosed.

``We're very aggressive right now because the homebuilders are in survival mode,'' said Ken Sheer, chief executive officer of Santa Monica, California-based Covington. ``Like any other business group that has some softness, everybody is scrambling to survive. The guys left standing are the guys who are going to be kings of the hill.''

Lawrence Gottesdiener, chairman of Northland Investment Corp. in Newton, Massachusetts, pounced last week when New York- based Tarragon Corp. offered five apartment complexes in Florida and another in South Carolina for $156 million.

``I could say I bought for 50 cents on the dollar of last year's price, because I did, but I think that's a little bit of hyperbole because last year's price was last year,'' Gottesdiener said.

`Portfolio Optimization'

Orleans Homebuilders Inc. of Bensalem, Pennsylvania, sold 1,400 lots to nine different buyers in December for $32 million. The book value of the properties was $86 million, the company said in a statement. Orleans also anticipates receiving about $20 million to $25 million in federal income tax refunds as a result of the sales, the statement said.

Most of the lots, which represented about 18 percent of the land the company owned, were in weaker performing communities in Florida, Illinois and Arizona, said Garry Herdler, the company's executive vice president and chief financial officer. Orleans is keeping properties in the Northeast and the Carolinas, areas where prices have held up well on a relative basis, he said.

``We call this strategy portfolio optimization,'' Herdler said in an interview. ``These sales provided cash to repay bank debt, reduced operational costs and allowed us anticipated significant federal tax refunds.''

John Levy, a real estate investment banker in Richmond, Virginia, said he's passed up opportunities in the past to join forces with homebuilding companies. Now he said he's planning a joint venture with a national builder to buy communities abandoned by bankrupt developers in the middle of construction.

``That's where you can buy at the biggest discount,'' Levy said.

To contact the reporter on this story: Bob Ivry in New York at bivry@bloomberg.net .

Last Updated: January 10, 2008 00:24 EST

U.S. Economy: Pending Sales of Existing Homes Fell in November

By Joe Richter

Jan. 8 (Bloomberg) -- The number of Americans signing contracts to buy previously owned homes fell more than forecast in November, signaling further deterioration in housing.

The National Association of Realtors' index of pending home sales decreased 2.6 percent to 87.6, following a 3.7 percent gain in October that was larger than previously estimated, the group said today in Washington.

The figures underscore Treasury Secretary Henry Paulson's forecast that the housing recession will continue, posing the biggest risk to economic expansion. Economists said more stringent lending practices following the collapse in subprime mortgages and prospects that home prices will keep falling are deterring buyers.

``There is no evidence it is bottoming,'' Paulson said today about the housing market. He added that a plan designed to stem a wave of foreclosures may need to be expanded beyond subprime homeowners.

Economists predicted the index of signed contracts for existing homes would fall 0.7 percent following a previously reported 0.6 percent October increase, according to the median of 33 projections in a Bloomberg News survey. Estimates ranged from a drop of 3 percent to a 0.3 percent increase.

Compared with a year earlier, the index was down 19 percent.

`Further to Fall'

``We'll probably see more weakness in existing home sales given that inventories are so high,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. ``Prices may keep dropping for a while.''

The housing slump is likely to last well into 2008, hurting economic growth and prompting Federal Reserve policy makers to lower interest rates, analysts said.

Stocks extended gains following the report and later dropped, led by a slump in financial shares. Treasury securities were little changed. The benchmark 10-year note yielded 3.85 percent at 11:54 a.m. in New York, compared with 3.83 percent late yesterday.

Today's figures showed pending resales fell in three of four regions. Purchases decreased 13 percent in the Northeast, 4.1 percent in the Midwest and 2.1 percent in the West. Sales rose 2.3 percent in the South.

KB Home Loss

KB Home, the fifth-largest U.S. homebuilder, today reported a fourth-quarter loss as tumbling demand for new homes forced the company to write down land values. Los Angeles-based KB Home operates in 13 states, including California, Florida, Nevada and Arizona.

The bigger gain in October than previously estimated suggested the market may be stabilizing, according to Lawrence Yun, the NAR's chief economist.

``Although there could be some minor slippage in the first quarter, existing home sales should hold in a narrow range before trending up,'' Yun said in a statement. ``The exact timing and the strength of a home-sales recovery is a bit uncertain.''

Paulson, speaking on CNBC television during a visit to New York, said evidence shows the housing decline ``has further to run.''

The Treasury chief indicated the outlook may prompt an expansion of the plan Bush administration officials brokered with mortgage lenders last month. The initiative was designed to make it easier to negotiate affordable loans and freeze some adjustable-rate mortgages at current rates.

``One thing we will consider is maybe expanding this beyond subprime borrowers to other borrowers,'' Paulson said.

Unsold Homes

There was a 10.3 months' supply of previously owned homes on the market in November at the current sales pace, compared with an average 6.5 months in 2006 and 4.5 months a year earlier.

That excess is one reason property values are dropping. Home prices in 20 U.S. metropolitan areas fell in October by the most in at least six years, based on the S&P/Case-Shiller home- price index. The decrease, reported last month, was the biggest since the group started keeping year-over-year records in 2001.

The Realtors association estimates 5.7 million homes will be sold in 2008, little changed from an estimated 5.65 million last year. Purchases of new homes will fall to 669,000 from 773,000.

While traders anticipate the Fed will lower its benchmark rate by at least a quarter point this month, Philadelphia Fed Bank President Charles Plosser said he hasn't made up his mind yet.

Fed's Plosser

``A substantially weaker outlook than expected, particularly if that weakness is projected to be more prolonged than anticipated, may require further adjustments to policy,'' Plosser said in a speech in Gladwyne, Pennsylvania.

Boston Fed chief Eric Rosengren, who last month dissented from the majority in voting for a larger rate cut, said in a speech today that ``The continued decline in residential investment has heightened the risk of a more significant downturn in the overall economy.''

The real-estate agents' group began reporting pending home resales in March 2005 and has supplied historical data back to February 2001. The gauge is considered a leading indicator because it tracks contract signings. The group's existing-home purchases report tracks closings, which typically occur a month or two later.

To contact the reporter on this story: Joe Richter in Washington at Jrichter1@bloomberg.net

Last Updated: January 8, 2008 11:58 EST

Owning vs. Renting: Still Not Close

By Greg Ip
From The Wall Street Journal Online

U.S. house prices "likely would have to fall considerably" to return to a normal relationship with rents, says a study by one former and two current Federal Reserve economists.

The study, which doesn't necessarily reflect the views of Fed policy makers, suggests prices would have to fall 15% over five years, assuming rents rose 4% a year. House prices would have to fall further if the adjustment took place more quickly.

The study tracks rents and home prices back to 1960 and found annual rents fluctuated at around 5% to 5.25% of home prices until 1995. At the end of that year, the average monthly rent was about $553 (or about $6,600 a year) and the average home price was about $134,000.

Related Links

Econ Blog: Houses, Rents and Bubbles

Manhattan Prices Still Surging -- but Will It Last?

But starting in 1996, home prices started to grow much more rapidly than rents. By the end of 2006, they had more than doubled to an average of $282,000, while the average rent had risen 48% to $818. That drove the annual rent/price ratio down to 3.48%.

That means the rent/price ratio is about a third below its long-term average. To return to normal would require some combination of falling prices and rising rents. The paper suggests house prices would need to fall about 3% a year, if rents grew in line with their 4% average annual growth this decade.

Of course, the link between house prices and rents can remain out of whack for years.

The U.S. study is by Morris Davis, an economist at the University of Wisconsin-Madison and until 2006 a staff economist at the Fed; and Andreas Lehnert and Robert F. Martin, staff economists at the Fed.

The authors' methodology was based in part on previously published work by Fed economist Joshua Gallin. The same approach is used by many other analysts, including the Congressional Budget Office, which arrived at similar conclusions.

In an interview, Mr. Davis said lower long-term interest rates can explain only a small part of the drop in the ratio. "To justify current price levels, you need rapid growth in rents." But it's hard to imagine the scenario that would justify such rapid growth in rents, he added. Indeed, it's possible rents will grow more slowly than 4%, reflecting the overhang of unsold homes that might be rented out.

Mr. Davis said the authors postulated a five-year horizon for the rent/price ratio to return to normal by looking at previous downturns. "When a downturn begins, it will last for a while."


Email your comments to rjeditor@dowjones.com.

Happy 2008! Buckle-up, this is going to be one scary ride down.....

I read this article over at the Wall Street Journal Online and made a few comments, along with many others who commented as well. Everyone is trying to figure out how and when housing is going to land. I am concerned by those same issues, but I consider housing to be but one of the major economic issues we need to think about. Housing is the fuse, the question in my mind is when will the bomb blow-up and what other components of the economy will be destroyed along with the housing bubble?

http://blogs.wsj.com/economics/2007/12/31/will-home-prices-hit-bottom-by-june/

My post from the WSJ Online:

"Some macro-trends that very few seem to be considering as it relates housing demand and valuations:

1. Retiring baby-boomers and their changing requirements for housing. In my opinion, likely to only further aggravate and put downward pressure on single family residences.

2. Recession? Stagflation? One or both are underway. A lot of consumer spending activity will dry up from the combination of evaporating equity in real estate in conjunction with higher costs for everything from gasoline to simple commodities and food products. Also need to factor in the prospect of severly declining employment levels as corporate earnings fall short and companies start adjusting workforce levels in an effort to prop up earnings and better align capacity with falling demand. I’m sorry, but I don’t believe that increasing exports will materially offset declining domestic demand.

For what its worth, my personal projection (primarily based on midwest perspective) is that a bottom won’t be seen until deep into 2009 at best, and that assumes no recession/stagflation/inflation impacts. If any or a combination of those occur, we could easily be looking at a scenario where real estate markets don’t begin to significantly recover until well after 2010."

I may be somewhat more of a pessimist on this than many others, but I do believe the mainstream Wall Street media has a lot invested in fooling the innocents into thinking that things are not as bad as they really are. I am simply trying to read between the lines to obtain a more balanced perspective of just how much potential trouble we are facing. I personally do not expect politicans and Wall Street professionals to be sincere and honest in their perspectives.

Let me know your thoughts.

Vito Boscaino

Recession or not, Middle America will continue to feel the pinch in 2008

From The Times
December 31, 2007

Recession or not, Middle America will continue to feel the pinch in 2008
The decline in the housing market that led to the squeeze on lending is widely expected to carry over into the new year – and it is not the only pressure on the US economy

A small 1950s bungalow in Stockton, California, is up for sale for $169,950. Sitting off a quiet road dotted with American flags, the Funston Avenue home has two bedrooms, one bathroom and a covered porch.

It was built as part of President Truman’s Fair Deal, a federal promise to guarantee economic opportunity and housing for America’s servicemen returning from the war.

Sixty years on, however, the American Dream has turned into a nightmare. The bungalow’s value has fallen by $110,000 in two years and the family who live in it have fallen so far behind with their rising mortgage repayments that they have been foreclosed by the bank.

This family’s story is a common one in the neighbourhood, which houses the bank workers and civil servants who zoom up Highway 205 to commute for two hours each day to and from the pricier city of San Francisco.

According to David Sousa, the real estate broker who is selling the house, the number of properties up for sale in the area has risen from around 1,800 two years ago to about 8,000 now. Most of those properties are in the process of being repossessed by mortgage lenders. Moreover, there is no sign that the residents of Stockton are past the worst. Their lot seems a far cry from the town’s sunny motto: “Stockton’s Great, Take a Look!”

Stockton is one of America’s foreclosure capitals – according to RealtyTrac, in November one in 99 households had entered the foreclosure process, six times the national average. “One of the biggest challenges we face is that the number of foreclosures have left the market saturated with unsold property,” Mr Sousa said. He estimated that prices were falling at “between half and 1 per cent a month” and said that that local mortgage lenders had been so overwhelmed by the number of repossessed homes on their books that they are trying to sell, that real estate brokers – estate agents to you and me – cannot get a decision from them for at least 30 days over whether they will accept an offer price.

So how bad can America’s housing market get? Robert Shiller, of Yale University, one of the world’s leading economists, thinks that the property market could continue to deteriorate “for years”, with the estimated $1 trillion-worth of losses in the market, ballooning to “three times” more. Professor Shiller, who famously predicted the top of the dot-com boom, told The Times at the weekend that the likelihood of Americans having to endure a Japan-style recession with property values declining for years is a “realistic scenario”.

“At the same time as this slowdown, the stock market is highly priced and we have high oil prices. There are a lot of negatives. We are facing a substantial possibility of a big recession,” he said.

This month, the S&P Case/Shiller house price index showed that property values had fallen in October at their fastest rate for six years, with all 20 of the cities monitored showing a decline. In some states, such as Florida, California and Arizona, property prices have fallen by 40 per cent in the past two years.

A world away from the Ivy League office of Professor Shiller, Max Spann, a property auctioneer in New Jersey, told the same story. The bulk of assets that went under Mr Spann’s hammer three years ago used to be agricultural land or government buildings in New York State, New Jersey and Pennsylvania. Now, most of his business is from builders trying to get rid of unsold new homes and banks desperate to remove repossessed homes from their books.

“The situation has really got worse,” Mr Spann said. “We are getting calls from the banks. The last thing lenders want to do is take back real estate. All the time that property is on its books, it is accumulating tax demands and is potentially a declining asset. They are using auctions to get out of that position.” Mr Spann’s business has doubled each year in revenues for the past three years, and he is expecting sales to triple in 2008.

“I think the real estate market will continue to slide at this rate in 2008 and 2009. And that’s all provided that there isn’t a recession. If that happens, all bets are off,” he said.

Yet the housing slowdown is not the only risk to America’s economy. One of the biggest threats is neatly expressed in marketing material welcoming visitors to Stockton, “California’s Sunrise Seaport – twinned with Foshan, Guangdong”. The closeness between the American town and one of China’s fastest-growing cities underlines America’s growing dependence on an economy that is expected to apply the brakes in 2008.

Carl Weinberg, chief economist at High Frequency Economics, believes that China poses one of the greatest threats to the health of the US economy and could force America to slow next year. “The American and Chinese economies are now inextricably linked,” he said. “The US imports a quarter of a trillion dollars-worth of goods a year from China. There is now a new leader on China’s state council and we are expecting them to impose harsh measures next year to slow their economy. They could well introduce fiscal measures with real teeth, like blocking exports of mobile phones, for example. A slowdown in China would have big repercussions for us. The risks could be awful.”

Mr Weinberg is still sanguine about America’s prospects next year and insists that its economy is far from facing a catastrophe. “The odds of a recession are still slim,” he said, explaining that while growth looks to have slowed sharply since the third quarter of 2007, from 4.9 per cent to about 1 per cent in the fourth quarter, the US Federal Reserve is likely to stave off a sharper slowdown by cutting rates by another 1 per cent to about 3.25 per cent next autumn. He forecasts that even though unemployment will rise next year, he is expecting the percentage of the workforce unable to find a job to rise from 5.1 per cent to about 5.3 per cent in 2008.

While the forecasts of some of Wall Street’s top number-crunchers suggest that America may avoid a nasty recession, it is unlikely to feel that way for many families across the United States. Americans, who for the past two years have spent more than they took home for the first time since 1933, are arguably at their most financially vulnerable for generations. The risk that Americans may be forced to tighten their belts, dampening consumer demand, is a real one, now that they are confronted with a decreasing value of their homes, rising fuel prices and uncomfortably high food costs.

The milk price has doubled this year, to keep pace with the soaring cost of maintaining a dairy herd. Corn prices used to feed dairy cattle have doubled because of the rising demand for corn to ferment to make ethanol, the biofuel.

Amy Green, the proprietor of the Ivanna Cone Ice-cream Emporium in Lincoln, Nebraska, has raised her ice cream prices by 37 per cent in the past 18 months. “Everything has gone up. All the raw materials that I need to run my business have risen – the butterfat, the milk, the sugar and the fuel. I had to pass on the rising costs,” she said.

Ms Green, who at the height of summer makes 600 gallons of ice cream a week, said that the fuel price was so prohibitive that her suppliers would not deliver her goods for an order of less than $500: “We’re a small firm. I have to be really creative at finding ways to get my orders up to $500. I’m only ordering small items like spoons and ice cream cones.”

One of her neighbours, Mike Biggs, a third-generation cattle farmer just west of Lincoln, told The Times that business had been very difficult this year. Mr Biggs, who feeds up his 10,000 cows from about 500lb to as much as 1,400lb, explained that the volatility in corn prices and the rising fuel price meant that it had become very challenging to manage the farm’s costs. “The increase in the corn price was not anticipated. The rises meant that a lot of us got caught in the middle,” he said.

Rising food and fuel costs, increasing health insurance and declining property values have made economists jumpy about whether America’s consumers will continue to drive the economy.

The plight of the swath of struggling Americans has not gone unnoticed.

According to research compiled over the past three years by Harvard University, Middle America is experiencing the most severe financial hardship for more than five decades, and Edward Wolff, Professor of Economics at New York University, predicts that the squeeze on the middle classes would get tighter as banks are expected to tighten their lending criteria in the wake of this summer’s credit crisis.

Professor Wolff said: “These families are just not going to be able to take out additional debt. Credit-card companies and auto-loan groups are just going to start saying no.” He said that Americans had not been profligate in their spending – “they’re not expanding consumption, they are just trying to tread water”. He said that median household income has nose-dived by 7 per cent between 2000 and 2004, increasing only 6 per cent between 1983 and 2004.

Americans are being delivered a grim New Year warning, Professor Shiller said: “People aren’t scared yet – but once all this unwinds, they will be.”

Perils for US

Key risks to America's economy in 2008

— Rising energy prices

— Middle East unrest

— Rising food prices

— Worsening financial markets

— Slowdown in China

Source: Carl Weinberg, High Frequency Economics

Wall Street braces itself for more sub-prime misery

From The Times December 31, 2007
Tom Bawden in New York

New year celebrations may not always usher in a better year. As Wall Street reflects on the misery of the past six months – the credit crisis, sub-prime losses, executive sackings and share-price slides – many say that the worst is yet to come.

As Goldman Sachs pointed out last week, Citigroup still has an estimated $25 billion (£12.5 billion) of collateralised debt obligations (CDOs) on its books, the bundled packages of sub-prime loans that are now perceived as so risky they are effectively worthless.

Merrill Lynch, which is expected to admit to writedowns of almost $12 billion in the fourth quarter alone, has about $8 billion of CDOs in its portfolio. According to Goldman estimates, JPMorgan is exposed to around $5 billion of the securities.

Even though American banks have collectively written off at least $60 billion in combined sub-prime-related securities, James Owers, Professor of Finance at Georgia State University, says that “the worst credit crunch in modern history still has some way to go yet . . . The repercussions will eventually be more widespread than the savings and loan crisis.” (This occurred in the 1980s and led to the closure of 1,000 American building societies, with the loss of $150 billion).

The bank also thinks that its rivals are unlikely to be able to hope that they can offset the misery of their sub-prime investments with revenues from investment banking and M&A, both of which it expects to stagnate in 2008.

Yet while few Americans are likely to feel sympathy with Wall Street bankers, they may worry that banks’ reluctance to take on more risk and extend credit lines to American businesses could push the country into recession. Moody’s Investors Service pointed out to clients last week: “The continued uncertainty of what land-mines remain on bank balance sheets has the potential to spill over into restricted lending to industrial firms.”

The fallout from the sub-prime mortgage meltdown has hit all lending. Private equity firms have been hit particularly hard because, typically, they finance about two thirds of each leveraged buyout with debt in high-risk deals that, in this climate, are causing the banks to balk.

The impact on private equity deals has been enormous. Some deals that were agreed before the credit crunch took hold, such as the takeover of Home Depot’s building supplies unit by a consortium including Carlyle, saw their prices cut dramatically – in that case, by $2 billion. Other deals collapsed as the private equity firms were unable to secure financing or were not prepared to complete the transaction. In October, Kohlberg Kravis Roberts and Goldman Sachs walked away from their $8 billion takeover of Harman International, the audio speaker maker. JC Flowers’s bid to buy Sallie Mae, the student lender, for $26 billion, fell through.

Risk on Wall Street

— Citigroup Tipped to cut dividend by 40 per cent and to write off $18.7bn in Q4. Expected to raise up to $10bn of new capital. Sitting in $25bn of CDO investments

— Merrill Lynch Expected to write off $11.5bn in Q4; still exposed to $8bn in CDOs

— JPMorgan Expected to write off $3.4bn in Q4; still exposed to $5bn of CDOs

Source: Goldman Sachs Note December 26 2007