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Posts Tagged ‘Lehman’

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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The Housing Boom Is Over And Economy Feels A Little Too Fine (Thats The Problem)

March 7, 2006 | 12:01 am |

Ok, thats a little dramatic – semi-borrowed from an REM song. Still, the culmination of reports over the past week appears to confirm what most have known for the past six months: The Housing Boom Is Over.

What does that mean, exactly? Lets look at the stats: [WP]

  • New home sales fell 5% (4th decline in 7 months) [Commerce]

  • Backlog of unsold new homes hit a record [NAR].

  • Existing home sales fell 2.8% in January (4th consecutive monthly decline) [NAR].

  • Median sales price of existing homes $210,500 in January down from $219,500 in July 2005 [NAR].

  • Foreclosures are rising [Big Picture]

  • 43% of all new jobs created since 2001 are related to housing.

As a sign of more difficult times ahead, specifically in the real estate economy, analysts are beginning to raise their estimates as to how high the Fed will go until they feel inflation is in check. Consensus has been to either 4.75% or 5%. Lehman Brothers has just increased their federal-funds rate peak to 5.5% in August or September. They have not penciled in a policy reversal at any time in the next year and a half [Barrons]. Their reasons for the change:

  • although the housing market is cooling off, the process is slow and Fed Chairman Bernanke has reiterated the idea that the Fed will respond slowly to the cooling.

  • the economy is showing more underlying strength than we had expected. Therefore, it will probably take longer for the diminishing housing-wealth effect to overcome an even stronger underlying trend in growth.

In other words, no bursting housing bubble is seen by the Fed. They are focusing on the overall economy and not tinkering specifically with housing at this point (much to the disappointment of those who follow the housing market, I might add).


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The Real Storm On The Horizon Is Rita, Not Inflation

September 22, 2005 | 7:30 am | |

As noted in the Investor’s Soapbox submitted by Lehman Brothers yesterday [Barron’s Online], inflation fears may be overblown:

Even though oil prices are still very high, the mere fact that prices have become less volatile and, by extension, less surprising, is contributing to the recent simultaneous increase in oil and S&P 500 prices. There are three other contributing factors are also at work.

First, the current combination of oil prices, monetary policy, and fiscal policy is collectively not tight enough to cause a recession.

Second, in the face of rising energy costs, corporate profitability has been more resilient than initially expected.

Third, despite high energy prices and some pass-through, broad-based measures of core inflation are not apt to accelerate to dangerous levels.

Indeed, the leading indicators of inflation point to low but positive levels of core inflation in the months ahead, just as they did a couple of years ago when many investors were worried about deflation.

One of the pass-throughs besides oil prices include building materials. Builders may get squeezed because they expect to have a limited ability to pass through higher costs to the consumer who they feel are nearing peak levels of affordability [REJ].

Despite the recent actions by the Fed, the bond market rose yesterday [WSJ], concerned that we are headed for an economic slowdown, influenced by Katrina and further damage by Rita. Rising bond prices would hold down long-term (including mortgage) rates.

In other words, the weakened economy does not allow producers to pass through all their increased costs to the consumer. The bond market views the price volatility of fuel and building materials as a drag on the economy, which could dampen the inflation-risk. However, the Fed does not agree.

Redux: 11’s the Charm?: The Fed Raises Rate To 3.75% [Matrix]

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