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Posts Tagged ‘Alan Greenspan’

[Getting Credit For Credit] Getting Sentimental About The Past But Not Many Ideas About The Future

April 13, 2008 | 5:21 pm | |

As the housing market economy continues to show problems (although some argue it isn’t that bad) as evidenced by the sharp drop in confidence, voices from the past are popping up.

I have been struck by the notion that virtually nothing has been done to fix the credit markets, the core of the current economic problems that will prevent a rebound of housing markets across the country until credit is fixed.

In part, that is because there is a scarcity of ideas. Paul Volcker, the former Federal Reserve chairman whose legacy has not crumbled since he left office, was right this week when he said the financial engineers had created “a demonstrably fragile financial system that has produced unimaginable wealth for some, while repeatedly risking a cascading breakdown of the system as a whole.”

With Paul Volker, the Fed Chair pre-Greenspan who rightly suggests that we can’t return to a financial market that existed before electronic trading and securitization and Greenspan working hard to fix his legacy of creating a credit bubble and current chair Bernanke who is stuck with the problem, it’s getting crowded on the lecturn, podium and talk shows.

Volker is starting to look like the new zen-god of the financial system simply because Greenspan’s reputation has quickly unraveled (why did I buy his book?).

In an interesting juxtaposition of events in recent days, the two former Fed chairmen collided in the headlines. Greenspan, who left the Fed two years ago, took to print and television media to defend his battered reputation. Volcker, in two rare, back-to-back speeches, gave a critical assessment of the current economy and the Fed’s role in creating and managing the crisis. Their styles have always contrasted, now and when they were at the Fed. Economists say Greenspan is as much a politician as he is a policymaker – always looking for opportunities to claim the spotlight – a tactic that may be hindering rather helping his reputation now. It’s just the opposite for Volcker.


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[Dog House] When Investment Houses Are On Fire, Propose Long Term Repair Plan

April 6, 2008 | 12:16 am | |

As a possible diversion tactic, the administration, lead by treasure Secretary Hank Paulson, has announced sweeping plans to revamp the financial services sector. It will take years to implement and has been in development for the past year.

Paulson’s plan would also give the Federal Reserve more power to oversee investment houses. On some level, this is only fair, since the Fed is now allowing them to borrow at a discounted rate as commercial banks do. Yet Congress should worry about overloading the nation’s central bank with responsibility; under not-so-infallible-after-all Alan Greenspan, the Fed fueled a housing mania that set the stage for the current mess.

And on another note, take a look at this series of charts Le monde dans les yeux d’un rédac che, that supposedly reflect the world views of various publication. I had to brush up on my French (I know how to ask if I can sharpen my pencil, but that’s about it.)


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Housing Political Aspirations Has No Ceiling (Or Dome)

March 26, 2008 | 12:55 pm | | Public |

I have always had what I considered a jaded view of the electorate. Overall I think citizens tend to vote with their wallets.

So I continue to be amazed at the delayed response and awareness over the last year on a federal level to the housing market problem as it related to the economy. The Federal Reserve began to react in late summer, but it was at minimum, a year late. Here we are well into the presidential campaign, and only now, does housing begin to take a bigger role in policy declarations by the candidates.

A few weeks ago, the WSJ published an article and a series of charts that seemed to suggest the current administration, through laissez-faire, had enabled the current housing market downturn.

John McCain has only provided very general recommendations for housing but lacks specific solutions nor does he intend to provide them:

“I will not play election-year politics with the housing crisis,” he said, adding he would evaluate all proposals. ”I will not allow dogma to override commonsense.”

Of course that doesn’t address election-politics to applied to all other issues being discussed. Again, a disconnect on the federal level continues to apply to housing.

”I will consider any and all proposals based on their cost and benefits,” the certain GOP presidential nominee, who has acknowledged the economy is not his strong suit, told local business leaders south of Los Angeles.

Hillary Clinton addressed her approach to the problems only this week.

On Monday, Democratic presidential candidate Sen. Hillary Rodham Clinton proposed several remedies to the home mortgage problems, including aggressive federal intervention to ease the strain on homeowners.

Among her ideas is to create an Emergency Working Group on Foreclosures to deal with the growing foreclosure crisis. These would include Paul Volcker (former Fed Chair), Robert Rubin (former Treasury Secretary) and Alan Greenspan (former Fed Chair). All are distinguished individuals and sharp financial minds. I can’t help but note the irony of having Greenspan on the panel since he was at the helm during the housing market build up and argued that housing was not a problem.

Barack Obama has also proposed more involvement at the federal level with creation of a foreclosure prevention fund, although it is smaller than Clinton’s proposal.

Senator Obama’s proposed $10 billion foreclosure fund is a mere one-third the size of Senator Clinton’s, yet another failure on his part to acknowledge the size and scope of this crisis. When Senator Obama says that Senator Clinton’s plan will “reward people who are wealthy and don’t need it” he shows himself to be out of touch with average Americans. Senator Clinton’s plan only helps subprime borrowers, a population that is disproportionately low-income.”

The problem is, the credit markets won’t likely recover before the fall election and with the economy continuing to erode, housing will likely continue to erode.

So where are we?

In banking jargon, the analogy that housing would be “too big to fail” but I think in political jargon, it’s more appropriate to say the housing/credit market problems are “too big to see.

In other words, let’s not be pigs


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[Shelter Propaganda] The Legacy Risk Of Housing History

March 18, 2008 | 12:16 am | Radio |

Following the collapse of one of the largest asset bubbles in the history, the credit and housing markets, everyone is trying to figure out what went wrong. One of the biggest figures in the asset price run up was former Fed Chair Alan Greenspan, whom radio host Don Imus used to refer to as the Zen-God or Crazy Al when talking to Greenspan’s wife Andrea Mitchell, NBC News Chief Foreign Affairs Correspondent.

A lot as changed since Greenspan moved on to the other things. He has written a book and has spent a lot of energy distancing himself from the problems that were put into play under his watch at the Fed.

On Sunday he wrote a piece for the Financial Times called We will never have a perfect model of risk.

In other words, there is no such thing as a sure thing. He says:

The American housing bubble peaked in early 2006, followed by an abrupt and rapid retreat over the past two years. Since summer 2006, hundreds of thousands of homeowners, many forced by foreclosure, have moved out of single-family homes into rental housing, creating an excess of approximately 600,000 vacant, largely investor-owned single-family units for sale. Homebuilders caught by the market’s rapid contraction have involuntarily added an additional 200,000 newly built homes to the “empty-house-for-sale” market.

Home prices have been receding rapidly under the weight of this inventory overhang. Single-family housing starts have declined by 60 per cent since early 2006, but have only recently fallen below single-family home demand. Indeed, this sharply lower level of pending housing additions, together with the expected 1m increase in the number of US households this year as well as underlying demand for second homes and replacement homes, together imply a decline in the stock of vacant single-family homes for sale of approximately 400,000 over the course of 2008.

Apparently the reason that this credit market bubble was missed was because the EXACT same thing had never happened before. Therefore the sophisticated models could not possibly work?

The most credible explanation of why risk management based on state-of-the-art statistical models can perform so poorly is that the underlying data used to estimate a model’s structure are drawn generally from both periods of euphoria and periods of fear, that is, from regimes with importantly different dynamics.

How about an application of common sense? Mortgage origination ran amok from 2004-2006 with virtually no oversight – isn’t this the banking system? There were no checks and balances in the underwriting decision process. Salesman ruled the planet and risk was something to deal with later on.

We will never be able to anticipate all discontinuities in financial markets. Discontinuities are, of necessity, a surprise. Anticipated events are arbitraged away. But if, as I strongly suspect, periods of euphoria are very difficult to suppress as they build, they will not collapse until the speculative fever breaks on its own. Paradoxically, to the extent risk management succeeds in identifying such episodes, it can prolong and enlarge the period of euphoria. But risk management can never reach perfection. It will eventually fail and a disturbing reality will be laid bare, prompting an unexpected and sharp discontinuous response.

A series of predictably irrational commentsGood grief.

Speaking of irrational behavior, check out the most daring magazine cover EVER.


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[List-o-links] 1-27-08 Subprime Cuts: Pets At Risk, Concedes Failures, Presidential, Greenspan

January 28, 2008 | 12:01 am | |

After consuming a 7 ounce steak during at a celebratory dinner with my wife on our 24th wedding anniversary, I was inspired to bring back this Subprime post series (I know, I lead a pretty pathetic life). Subprime, as a topic, has come back strong in recent weeks. Once rationalized just to be the smoking gun, its now clearly more than that.

And that steak was great…


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Outstanding On Our Soapbox: Taking License With Appraisals

December 29, 2007 | 11:04 pm | |

There has been a lot of great content presented by my guest columnists (and, ahem..me) on my other blog Soapbox as of late. Its a pleasure to have their contributions. Admittedly its appraiser-centric content, but isn’t that a big part of the credit crunch? Lack of understanding of mortgage risk and one way its measured is via value of the collateral.


Sounding Bored – My recent post outlines the problems with licensing the appraisal profession (hint: because it doesn’t go far enough) in Deja Vu: How Licensing Killed The Appraisal Industry As We Know It.

The Hall Monitor – Todd uses a tongue in cheek analysis of current appraisal practice and comes up with new rules for us to live by in Let’s Get The PAP Out Of USPAP!.


Fee Simplistic – Marty dissects the credit crunch for us via Tin Pan Alley music in The Paper Moon in the Cardboard Sky; Bewitched, Bothered & Bewildered; Don’t Know Why There’s No Sun Up in the Sky-Stormy Weather: How Tin Pan Alley Can Better Explain the Credit Crunch Than Alan Greenspan

Palumbo on USPAP – Joe speaks to the labyrinth of appraisal guidelines that exist and the problems with loosening the reigns in USPAP 2008: Be Careful What You Wish For.

There will be a quiz on Tuesday…


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Drinking The Mortgage Kool-aid And It Tastes Like Sour Grapes

December 26, 2007 | 1:11 am | |

After a busy day, the house is again quiet, so I had aspirations of figuring out how to set up my new coffee machine and to decide whether to ever wear the gift of green boxer shorts that say “blogworthy” on them.

For some reason, and perhaps it was the excess food of the past days, but it occurred to me just how unbelievably widespread the flaws in the lending universe of the past few years were. I mean, really, really unbelievable.

I have been outspoken on the topic of appraisal pressure for a number of years, from my front line experience as an appraiser. Though not solely for altruistic reasons. Good (=ethical, not financial) appraisers did not thrive during the housing boom. I focused on what turned out to be more lucrative appraisal work outside of the mortgage business and kept the good clients who understood it was actually important to understand what the collateral was worth. It wasn’t sour grapes on my part, but my wide-eyed amazement at the enormity of the problem.

No one seemed to understand the widespread issue of ethics lapses and building instability of the lending industry while it was happening. It seems that everyone drank the kool-aid, with the thought that “everyone wins.”

Now the damage created by the ethical lapse in judgement is pretty clear and its a 4-6 year mess many of us will have to deal with.

Sour grapes summary

  • affordability waned in 2004, causing lenders to loosen the reigns to keep the pipeline flowing.
  • orientation moved from down payment (which I recalled, was a real bear to save for) to monthly payment (falsely characterized as a demographic shift in consumer habits)
  • the bulk of mortgage origination came from mortgage brokers, who were incentivized to generate loan volume from lenders who took a “don’t ask, don’t tell” view on mortgage quality.
  • appraisers became order takers (well, 80% of appraisers are) and had to either sell our soul or get out of the mortgage appraisal business.
  • the sales function gained political clout over the underwriting function of the typical retail bank (revenue vs. cost).
  • consumers and media readily accepted national housing statistics and drank NAR kool-aid every month.
  • real estate surpassed stock market conversations at the backyard bbq.
  • carpenters and nurses were quitting their jobs in droves to flip real estate.
  • developers were opening sales offices in new projects to serve the flippers and mortgage money was as easy to get as a morning newspaper.
  • no doc, “liar loans” were deemed necessary.
  • lenders had no idea that it was illegal and unethical to pressure appraisers to make the number.
  • banks were built on mortgage loan volume.
  • secondary mortgage market investors accepted loan pools purchase with very little understanding of the collateral.
  • NAR and local reports were used to guess loan pool values which were then used to judge portfolio purchase spreads (disconnect between risk and value).
  • foreign investors were one step removed from secondary market investors and had even less understanding of the content of the mortgage pools they were purchasing.
  • mortgages were sliced into varying slivers of risk.
  • no Federal Reserve or any meaningful banking oversight as the disconnect from risk was occurring.
  • mortgage tranches were so complicated that no one really understood what was in them.
  • credit crises became falsely synonymous with subprime.
  • the breadth and scope are termed “temporary” and projected to be behind us within a few months.
  • low mortgage rates are deemed the savior of housing problems but don’t solve the credit crises.
  • GSE’s (Fannie & Freddie) are shaken financially and may have a bunch of subprime under their belts.
  • Greenspan acknowledges that there may have been an overheated asset bubble (housing) but it was really all about shakey financing practices that made housing roar.

Sour grapes are enough to give anyone indigestion.


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Legacy Turbulence: Irrational Book Advances

September 25, 2007 | 10:01 am | |

Hey I admit it, I bought the former Fed Chair Greenspan’s new book The Age of Turbulence on Monday, the first day it was available. Of course I bought as a birthday present for me, not to be opened for a few weeks when my maturity age of 17 clashes in screaming technicolor with my actual age, even louder than a rate cut. We have strict rules around my house. If I buy something under the pretense of it being a birthday present, its not to be opened until then.

Well its been a week and I have had some time to reflect on the events associated with the new book, before I have even read it.

What thought first comes to mind? Incredible timing. Who says you can’t time a market?

Announce a book the day before one of the most anticipated FOMC meetings in recent memory, support your successor, admit some flaws but no regrets, criticize the administration as well as both the Democrats and Republicans in Congress, acknowledge a housing market problem but keep your reputation in tact. Hey, the $8M advance needs to be earned.

All this gets you a number one ranking on Amazon.com, ahead of Water for Elephants, Playing for Pizza and Math Doesn’t Suck: How to Survive Middle-School Math Without Losing Your Mind or Breaking a Nail.

Since I admired Greenspan during his tenure, I can’t tell if the insight being provided during the media blitz is helpful in understanding how we got here, or merely spin.

Caroline Baum, one of my favorite columnists on Bloomberg sums it up nicely:

Greenspan, who reportedly received an advance of more than $8 million for this memoir, seems eager to stave off criticism for keeping short-term rates too low for too long in 2003 and 2004, stoking a housing bubble in the process. He was aware of reduced credit standards on subprime mortgage loans, he says, “but I believed then, as now, that the benefits of broadened home ownership are worth the risk.'”

That view is being challenged as the housing bubble deflates, delinquencies and foreclosures rise and financial losses mount. The reader is left wondering if a more introspective Greenspan, and one less interested in shaping his legacy, wouldn’t have found a regret or two along the way.

With a possible recession looming and housing on the downslide (a word?), I am experiencing my own personal turbulence and have officially added it to my economic vocabulary in addition to “contained”, “frothy” and “irrational exuberance”.


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Staking Revisionist Mortgage Market History Yields Different Tomatoes

August 21, 2007 | 7:49 am | |

My son planted about 30 tomato plants in our garden this year so needless to say, I am now full of tomatoes.

One of the things that have come out of all the upheaval in the mortgage markets has been the frequency and clarity of explanations as to what happened and how the markets got into this predicament. Hindsight is 20/20 so they say. It was not long ago that people were scratching their heads about how prices can rise at an expotentially higher rate than income for a seemingly indefinite period of time.

It was all about the Benjamins mortgages and how easily the payments could be managed. Downpayment became monthly payment in the dialog between buyers and lenders. Lenders reduced underwriting requirements to bare bones, appraisers were encouraged to become form fillers. The lending community came up with mortgage products to stimulate transactions and Wall Street responded, creating a labrynth of tranches designed to move risk around to the right places…except investors ulitmately figured out that few on Wall Street really understood the risk. And then the world changed.

As Jim Grant wrote in Time Magazine (special thanks to “the man who wears shirts that look like graph paper.”):

That is the way great ideas end, not with a bang, not with a whimper, but through reductio ad absurdum. You know investment bankers are not satisfied until every good idea is driven into the ground like a tomato stake.

Here’s a few recent summaries of what happened over this period of mortgage excess that I found particularly interesting.

How Missed Signs Contributed to a Mortgage Meltdown [New York Times] with a very cool chart. Things were moving so quickly but we should have seen it coming.

As far back as 2001, advocates for low-income homeowners had argued that mortgage providers were making loans to borrowers without regard to their ability to repay. Many could not even scrape together the money for a down payment and were being approved with little or no documentation of their income or assets.

In December, the first subprime lenders started failing as more borrowers began falling behind on payments, often shortly after they received the loans.

Reaping What You Sow: Hedge Fund and Housing Bubble Edition [Huffington Post]. This article suggests that a Fed rate cut represents help for the wealthy and not the masses.

Last week we got to watch as the markets went wild with the realization they were over leveraged on bad debt, until Bernanke rode in with a huge bailout, answering a question (and settling some bets) on whether he was an inflation fighter, or an inflationist (he’s an inflationist, and he has now proved it.)

Bloody and Bloodier – The subprime-lending crisis is worse than you think, and could crush financial and real-estate markets for years. [New York Magazine]. Besides sharing dentists, I can empathize with Jim Cramer’s pain as of late. Barron’s Magazine dedicated its cover story to analyzing how wrong his advice has been in his CNBC show Mad Money in the article: Shorting Cramer.

You’re losing money right now. This very minute. You’re losing money if you own an apartment. You’re losing money if you own a country home. You’re losing money if you own a stock or bond mutual fund. You’re losing money if you have a pension plan. You’re probably losing money here or there, you’re probably losing money everywhere (except maybe from your savings account and wallet). But this is no Dr. Seuss story. It’s more of a John Steinbeck tale, and we are the victims, a new generation of Tom Joads, and it’s the damn bankermen who broke us. No, there won’t be a police officer to investigate, and the government, at least this federal government, won’t save us.

Panic on Wall Street [Salon]. It starts with an obligatory blame Greenspan bent but goes deeper.

There is a standard explanation included as a paragraph in almost every story attempting to explain the current turmoil. It goes like this: Anxious to goose the U.S. economy out of its dot-com-bust doldrums, Alan Greenspan and the Federal Reserve Bank lowered interest rates to rock bottom in 2001. The resulting flood of cheap money encouraged an orgy of borrowing at every level of the U.S. and world economies. Whether you wanted to buy a house or a multibillion-dollar conglomerate, lenders were your best friends, falling over themselves to offer you whatever amount of capital you desired — and charging low, low rates of interest. Cheap money led to a growing complacency about risk. If you ran into trouble, you could just refinance your house, or borrow a few billion more dollars today to pay off the billions you might owe tomorrow.

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Broad Side The Barn, Waiting For The Shovel

June 19, 2007 | 12:05 pm | |

As a kid, I remember the popular dress-down phrase: “You couldn’t hit the broad side of a barn.” Fast forward to today and the phrase becomes: “You don’t even know what your mortgage amount and terms are.” (note: this is a clue to how boring I was as a kid, especially on the baseball field.)

One of the things that occurred in the housing boom of the past decade was the detachment of risk from the borrowing equation. It didn’t matter how you got there, you simply wanted the property or the loan.

The LA Times reports (via Seeking Alpha) that a Federal Trade Commission study shows that despite (or because of) a myriad of closing documents, borrowers only had a 50/50 chance of finding the loan amount on their loan documents.

View the study.

Peter Coy of Businessweek concurs and lays blame on lenders, not borrowers in his Hot Properties post:

  • Half the 819 borrowers surveyed could not correctly identify their loan amount.
  • Two-thirds did not recognize that they faced a two-year prepayment penalty.
  • Three-quarters did not recognize that they were paying extra for optional credit insurance.
  • Nearly 90% couldn’t identify the total amount of upfront charges in the loan.

It’s easy to blame the borrowers…But when so many people can’t understand the loan documents, I put most of the blame on the lenders.

Ok, so now we have loan applicants not understanding what they are actually borrowing.

Now the Federal Reserve, who is responsible for overseeing the banking industry, has less influence on the economy, and perhaps by extension, less influence on credit quality.

But a new study by the Federal Reserve shows it has much less control over economic growth than assumed by many. The study, completed by Fed economists, found little evidence that tighter monetary policy has much impact on bank lending via deposits.

Greg Ip, the WSJ reporter who covers the Fed, writes about this in the WSJ Real Time Economics Blog:

banks with more deposits than loans, and banks with far less deposits than loans (because they relied more on wholesale markets), didn’t change lending much when deposits shrank. Only banks whose deposits were about equal to loans significantly reduced lending. These banks only represent 6% of of U.S. bank assets. Thus, the “bank lending channel seems limited in scope and importance” in the U.S., the authors conclude.

6% is pretty low.

But lending standards are getting tighter. Where is this coming from?

The Federal Reserve seemed to back away from the potential subprime problem back when Greenspan was there. This laissez-fare policy would likely have applied to all types of bank lending.

So bank underwriting is getting tougher on its own initiative, probably only after seeing the damage occurring to the housing market as of late.

Lets summarize:

  • Borrowers don’t know how much they borrow.
  • Bank regulators say themselves, that they have no significant influence on the economy and, it follows by past action, no significant desire to reign in the banks they regulate (admittedly a stretch, but let me have it).
  • Banks have now become tougher on borrowers which will further damage the collateral on their outstanding home loans as restrictions to credit will constrain demand.

Everyone seems to be counting on someone else to take care of things – thats a disfunctional financial community.

As former presidential candidate Ross Perot once uttered: “Its time to pick up the shovel and clean out the barn.”


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Housing Gloom Recap Leads To March Madness

March 13, 2007 | 10:33 am | |

Lets recap the potential path for housing and the economy based on news reported in March:

  1. Economy so-so
  2. Investors get risk averse
  3. Subprime defaults increase
  4. Mortgage underwriting guidelines tighten
  5. Weak housing market gets weaker as a result
  6. Housing related jobs decrease
  7. Economy weakens further, skirts with recession
  8. A few years of weak housing conditions remain

To expand on each point…

1. Economy so-so [FDIC – pdf]

Pronounced weakness in the housing sector is being largely offset by continued strength in the corporate sector, commercial construction activity, and exports…Still, some negative trends have emerged for banks. They include a narrowing of net interest margins, particularly among larger institutions; increasing concentrations of traditionally riskier commercial real estate loans; and emerging signs of credit distress in subprime mortgage portfolios. Ultimately, it is local economic conditions that are the most important determinants of credit quality and earnings strength at the majority of banks and thrifts. In this issue of the FDIC Outlook, our regional analysts identify trends that are expected to affect banking in their areas during the remainder of 2007.

2. Investors get risk averse [Bloomberg]
The concern over subprime lending and rising defaults is increasing the flight to safety. That is, investors are buying treasuries. Price goes up, yield goes down. Lower yields on a ten year have limited effect on most mortgage rates because the term is too short but still, it would probably help maintain a low rate environment.

“The biggest risk we can identify is from the spate of foreclosures in the subprime market increasing the inventory of unsold homes and weighing on home prices,” said Amitabh Arora, head of U.S. interest-rate strategy in New York at Lehman Brothers Inc. “We are much more cognizant of that than we used to be.”

3. Subprime defaults rise [MSNBC]

“Just as the case often was back in college, when you have too much liquidity sloshing around for too long, people tend to do some foolish things,” Wachovia senior economist Mark Vitner wrote in a recent research note. “Apparently that includes loaning money to folks with spotty credit histories to purchase homes not only to live in but also to speculate on.”

4. Mortgage underwriting guidelines tighten [WSJ]

Early February, the Federal Reserve reported a sharp increase in the number of banks tightening mortgage-lending standards. On Tuesday, Freddie Mac — whose main business is repackaging mortgages into mortgage-backed securities — said it was tightening standards on purchases of risky, subprime mortgages. On Friday, banking regulators proposed stricter mortgage guidance.

5. Weak housing market gets weaker as a result [LA Times]

That could hurt the housing market by shrinking the pool of eligible buyers. In addition, many homeowners with high-risk loans whose rates will adjust upward in the next year or two won’t be able to refinance into loans with better terms. That could put some into foreclosure.

6. Housing related jobs decrease [MSNBC]

Housing-related job losses once again put a dent in February job growth, which saw an overall gain of 97,000 — down from a gain of 111,000 in January. Employment in housing-related industries fell by 11,000 in February, bringing to 176,000 the total number of jobs lost in the sector since at sector since April 2006, according to figures compiled by Moodys.com.

7. Economy weakens further, skirts with recession [Bloomberg]

Alan Greenspan, who jolted investors by predicting a one-in-three chance of a recession this year, isn’t as bearish as the bond market, where the risk of a downturn is even money. The probability the U.S. economy will shrink for two quarters has risen to 50 percent, according to a model created when Greenspan ran the Board of Governors of the Federal Reserve System. The formula is based on differences in yields on Treasuries.

8. A few years of weak housing conditions remain [CNN/Money]

Celia Chen, director of housing economics for Moody’s Economy.com, says she thinks it will take until 2009 for prices nationally to reach the peaks hit in 2005. Take inflation into account, she said, and a full recovery could take more than 7 years.

I’d have to agree that its not simply a matter of time before the national housing market returns to 2004/2005 conditions. The housing boom was a period where all the stars were aligned and the universe was in sync. The combination of unusually low mortgage rates prompted by 9/11, loose or perhaps non-existent underwriting guidelines for mortgages, expansion of subprime lending, exotic mortgages, a solid non-inflationary economy, rising productivity, risk oblivious investors who had moved out of the stock market after the 2000-2001 period of volatility, shifting demographics that saw more immigration and a get rich quick mindset created the housing boom.

The news isn’t all bad, however. Modest growth in the housing sector would go a long way in keeping housing more affordable. I think Fannie Mae’s record of 69% home ownership reached last year, which has since slipped, is not going to be passed anytime soon.

On the bright side, March Madness is nearly here and my son’s basketball team won our town’s 3rd grade basketball championship.


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Economic Momentum In The Wrong Direction

March 7, 2007 | 11:52 pm | |

Last night my eight year old’s basketball team was losing their semifinal game by as much as 9 points in the first three periods. In the final period however, things changed. As momentum shifted towards my son’s team, my son looked over at my wife and I and smiled. He could feel it getting better. They tied up the game at the buzzer and then eeked out a victory in overtime in the final seconds. All the kids on his team contributed and luckily, none of the parents watching needed medical attention when the final buzzer sounded. (Championship game on Saturday.)

What does this have to do with falling mortgage rates later this year? (Well, give me a second and I will figure out something. My son’s facial expressions are still vivid in my mind.)

I think the near term stabilization of inventory and level mortgage rates has got everyone seeing…hoping for a housing rebound on a national level. Many are hanging on to each price stat releases from NAR, the Census Bureau and others wondering if the next announcement will show a hint of optomism. The beginning of some sort of momentum towards a win (see, thats the link to the basketball story).

We have been seeing very optomistic news on the economic front with robust 4Q 06 GDP at a 3.5% pace (just revised to a feeble 2.2%) and the phrase housing rebound has been more popular than soft landing or housing bubble as of late.

In Bill Gross’ Investment Outlook column this month Ten Little Assets he addresses the fact that housing hasn’t been factored enough into the economic picture. As the founder of one of the world’s largest bond managers, PIMCO, his words resonate in the bond market like Greenspan’s still do in the stock market.

What I’ve been saying over and over again on the investment side is that the Fed will cut rates later this year and that their two key criteria will be employment and asset prices. With construction laborers about to hit the unemployment lines and the U rate in jeopardy of rising more than the Fed feels comfortable with, an ease as soon as mid-year may be in the cards. I have a strong sense as well, that mortgage credit availability is in the midst of a cyclical squeeze due to subprime defaults and “better late than never” moral suasion/congressional supervision of mortgage bankers. This should not only continue to floor the housing sector but dampen consumption, as the combined effect of layoffs and Mortgage Equity Withdrawal, “withdrawal” produce a 2% or less real and a 4% or less nominal economy. Those numbers when extended for three or four quarters (which they now have been) are the stuff leading to output gaps, rising unemployment, declining inflation, and an easing in overnight Fed Funds rates.

There has been a considerable change in the federal funds futures index. Until recently, the index was predicting a flat federal funds rate for the remainder of the year. I have been a little more gloomy in this outlook for the past 6 months, based solely on the idea that weakness in the national housing hasn’t made much of an impact yet on the economy. At present, the index shows a 50% probability that the rate will hold at 5.25% and only a 5% chance rates will rise to 5.25%. The balance of probabilities are divided among a 5%, 4.75% and 4.5% rate in June.

I think one of the primary reasons for this is the anticipated (actually, its already happening) credit tightening spillover from the subprime fiasco. Underwriting changes won’t occur overnight but a gradual realization that lending risks are unacceptably high are beginning to influence lending decisions.

Economically, things are pretty subpar, according to the Fannie Mae economist David Berson in his weekly commentary (March 5, 2007).

real economic growth in four of the past five quarters was below 3.0 percent (a pace of growth that most analysts think represents long-term trend growth).  Because of a 5.6 percent surge in growth in the first quarter of last year, however, the growth rate of the economy from the fourth quarter of 2005 to the fourth quarter of 2006 edged up to 3.1 percent.  If the consensus forecast of 2.5 percent annualized real growth in the first quarter of 2007 is correct, then the four-quarter growth rate for real GDP will drop to 2.3 percent — a pace consistent with the trend in the annualized growth path.

Nevertheless, I’m still hoping my son’s team is able to squeak out a win on Saturday.

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