bank run blog

In the accompanying video from Yahoo Finance, Aaron Task talks to analyst Nariman Behravesh about the newest US residential construction activity numbers and the prospects for a bottom :

“Hopes for a bottom in the housing market took a serious knock Thursday as the government reported housing starts fell 10.8% in March while building permits fell 9% to a record low.

The starts number is volatile because it’s weather dependent – February, for example, saw a surprising spike – but ‘the permits are a little more reliable,’ says Nariman Behravesh, chief economist at IHS Global Insights. ‘The fact they’re down is a little worrisome.’

As rates and home prices have fallen, mortgage applications have risen sharply and affordability has improved dramatically, says Behravesh. But ‘we’re not out of the woods yet,’ he says, forecasting another 5% to 10% decline in average home prices nationwide.”

Yahoo Finance Tech Ticker : Housing Dilemma: Govt. Needs Banks to Play Ball as Public Outrage Grows

Los Angeles Times : Housing starts plunge in March

originally published November 12, 2006

As a variety of local and regional statistics continue to confirm that a significant adjustment in real estate values is occurring across the country, industry observers are pointing to the impending collapse of the home equity loan market as a further sign of the deterioration of the housing market. A downturn in equity extraction is expected to have a severe impact on consumer spending, which accounts for almost 70 percent of US economic activity, in 2007 and 2008.

Although mortgage equity extraction hit record levels in the first half of 2006, experts predict a dramatic slowdown, attributing most of the recent activity to mortgage holders rushing to get out of interest-only loans that are due to reset to higher rates. From 2000 through June of this year, total home equity actually declined by 4 percent, despite an increase in total home values of 78 percent.

Just as many homeowners who purchased short-term adjustable rate mortgages are facing sharp increases in their payments without realizing commensurate gains in value, holders of home equity loans may find themselves making payments based on an ultimately unrealizable value. In both cases the consumers risk paying back loans that greatly exceed the value of the assets. Sharp reductions in real estate value make effective refinancing of such debt impossible for most individual homeowners.

Some economists have criticized the Federal Reserve for failing to act decisively to prevent, or at least curb, the housing bubble. Last January, in an article surveying the career of outgoing Fed Chairman Alan Greenspan, the Economist noted, “From a risk-management perspective, the case for acting against the housing bubble is even greater than for the stock market bubble. A housing bubble has bigger wealth effects on consumer spending, so a collapse in housing prices would cause more economic harm than one in share prices.” But Greenspan was reluctant to quell spending, which is increasingly the only agent for growth in the US economy.

It remains unclear how the US economy will replace equity withdrawal activity. In the third quarter of this year, even with more than $250 billion in equity extraction, US GDP was up only 1.6 percent. If that activity is significantly curtailed, analysts agree that negative GDP is a likely result.

cross posted at

redstateupdate.net

The Wall Street Journal is reporting Developers Ask U.S. for Bailout as Massive Debt Looms :

“With a record amount of commercial real-estate debt coming due, some of the country’s biggest property developers have become the latest to go hat-in-hand to the government for assistance.

They’re warning policymakers that thousands of office complexes, hotels, shopping centers and other commercial buildings are headed into defaults, foreclosures and bankruptcies. The reason: according to research firm Foresight Analytics LCC, $530 billion of commercial mortgages will be coming due for refinancing in the next three years — with about $160 billion maturing in the next year. Credit, meanwhile, is practically nonexistent and cash flows from commercial property are siphoning off.”

full story

According to the Atlanta Business Chronicle, the imminent collapse of the commercial real estate market in the early part of 2009 has prompted developers to ask for this bailout now :

“In a letter to Paulson, commercial real estate leaders warn that thousands of properties are in danger of foreclosure because current financing is coming due and new financing is hard to come by.

The industry envisions a credit facility that would offer financing to investors interested in purchasing highly-rated securities backed by newly-underwritten and appraised commercial properties.

‘Banks do not want to originate loans unless they have some way to transfer those loans to new investors,’ said Jeffrey DeBoer, president and CEO of The Real Estate Roundtable. ‘There needs to be market support for investors who want to buy highly-rated securities. Once they have a market, other securities will be able to price off of that.’”

full story

Henry Paulson’s plan to manipulate mortgage rates for new home purchases is nothing more than another bailout of an influential interest group, in this case the nation’s large homebuilders. The industry is facing an insolvency crisis and has been lobbying hard behind the scenes in Washington. This morning Aaron Task of Yahoo Finance Tech Ticker interviewed Nouriel Roubini :

“A new Treasury plan to lower mortgage rates won’t solve the housing crisis and is a “essentially a direct bailout of the homebuilders,” says Nouriel Roubini, economics professor at NYU Stern School and chairman of RGE Monitor.

Homebuilding stocks like Toll and Lennar surged early Thursday, a sign Roubini is not alone in sharing this view.”

Roubini notes that the giveaway won’t halt foreclosures, which will further increase supply even if the big homebuilders clear some of their inventories. He also warns that in attempting to stimulate the residential real estate market before it has reached a price equilibrium, the government is in danger of prolonging the fiscal crisis :

“Furthermore, there’s not enough Americans who are credit worthy and confident enough in the economy and/or their job security to absorb the record levels of unsold homes on the market, says the notoriously bearish economist. ‘For new programs you have to qualify. Very few people qualify,’ Roubini said. ‘If you are loosening the criteria then you are creating a credit risk for the government because you’re creating mortgages people cannot afford and some of them are going to default. You create another fiscal problem down the line.’”

Yahoo Finance Tech Ticker : Mortgage Rates to 4.5 Percent? Homebuilders Win, Crisis Continues

The Commerce Department is reporting that in October home construction starts and applications for construction permits have fallen to their lowest levels since the US began keeping records in 1959. CNN Money writes;

“Housing starts reached an annual rate of 791,000 last month, the lowest level since the department began tracking starts in 1959. The rate tumbled 4.5% from the revised reading of 828,000 in September.

Building permits fell 12% to an annual rate of 708,000 in October, breaking the previous low of 709,000 in March 1975. The annual rate for September was revised to 805,000.”

The number of construction starts and home building permits is seen as a key economic indicator, foretelling growth, or in the case of today’s numbers, continued decline.

see stories-
CNN Money : Key indicators plummet in October, spelling more bad news for the economy.
Reuters : October housing starts at record low