CR4RE

Washington Farewell

2012-01-31T18:53:00.001-08:00

To the efficacy and permanency of your Union, a government for the whole is indispensable. No alliance, however strict, between the parts can be an adequate substitute; they must inevitably experience the infractions and interruptions which all alliances in all times have experienced. Sensible of this momentous truth, you have improved upon your first essay, by the adoption of a constitution of government better calculated than your former for an intimate union, and for the efficacious management of your common concerns. This government, the offspring of our own choice, uninfluenced and unawed, adopted upon full investigation and mature deliberation, completely free in its principles, in the distribution of its powers, uniting security with energy, and containing within itself a provision for its own amendment, has a just claim to your confidence and your support. Respect for its authority, compliance with its laws, acquiescence in its measures, are duties enjoined by the fundamental maxims of true liberty. The basis of our political systems is the right of the people to make and to alter their constitutions of government. But the Constitution which at any time exists, till changed by an explicit and authentic act of the whole people, is sacredly obligatory upon all. The very idea of the power and the right of the people to establish government presupposes the duty of every individual to obey the established government.

All obstructions to the execution of the laws, all combinations and associations, under whatever plausible character, with the real design to direct, control, counteract, or awe the regular deliberation and action of the constituted authorities, are destructive of this fundamental principle, and of fatal tendency. They serve to organize faction, to give it an artificial and extraordinary force; to put, in the place of the delegated will of the nation the will of a party, often a small but artful and enterprising minority of the community; and, according to the alternate triumphs of different parties, to make the public administration the mirror of the ill-concerted and incongruous projects of faction, rather than the organ of consistent and wholesome plans digested by common counsels and modified by mutual interests.

However combinations or associations of the above description may now and then answer popular ends, they are likely, in the course of time and things, to become potent engines, by which cunning, ambitious, and unprincipled men will be enabled to subvert the power of the people and to usurp for themselves the reins of government, destroying afterwards the very engines which have lifted them to unjust dominion.

Towards the preservation of your government, and the permanency of your present happy state, it is requisite, not only that you steadily discountenance irregular oppositions to its acknowledged authority, but also that you resist with care the spirit of innovation upon its principles, however specious the pretexts. One method of assault may be to effect, in the forms of the Constitution, alterations which will impair the energy of the system, and thus to undermine what cannot be directly overthrown. In all the changes to which you may be invited, remember that time and habit are at least as necessary to fix the true character of governments as of other human institutions; that experience is the surest standard by which to test the real tendency of the existing constitution of a country; that facility in changes, upon the credit of mere hypothesis and opinion, exposes to perpetual change, from the endless variety of hypothesis and opinion; and remember, especially, that for the efficient management of your common interests, in a country so extensive as ours, a government of as much vigor as is consistent with the perfect security of liberty is indispensable. Liberty itself will find in such a government, with powers properly distributed and adjusted, its surest guardian. It is, indeed, little else than a name, where the government is too feeble to withstand the enterprises of faction, to confine each member of the society within the limits prescribed by the laws, and to maintain all in the secure and tranquil enjoyment of the rights of person and property.

Employment Graphs

2011-11-20T06:42:00.000-08:00

Title: Percent Job Losses in Post WWII Recessions, October, posted on Nov 4, 2011
Post: October Employment Report: 80,000 Jobs, 9.0% Unemployment Rate

Title: Percent Job Losses during Recessions, Aligned at Bottom, October, posted on Nov 4, 2011
Post: Employment Summary, Part Time Workers, and Unemployed over 26 Weeks

Title: Unemployment Rate, Employment Population Ratio, October, posted on Nov 4, 2011
Post: October Employment Report: 80,000 Jobs, 9.0% Unemployment Rate

Title: Part Time Workers, October, posted on Nov 4, 2011
Post: Employment Summary, Part Time Workers, and Unemployed over 26 Weeks

Title: Unemployed Over 26 Weeks, October, posted on Nov 4, 2011
Post: Employment Summary, Part Time Workers, and Unemployed over 26 Weeks

Title: Duration of Unemployment, October, posted on Nov 4, 2011
Post: Seasonal Retail Hiring, Duration of Unemployment, Unemployment by Education and Diffusion Indexes

Title: Unemployment by Education, October, posted on Nov 4, 2011
Post: Seasonal Retail Hiring, Duration of Unemployment, Unemployment by Education and Diffusion Indexes

Title: Weekly Initial Unemployment Claims since 1971, posted on Nov 10, 2011
Post: Weekly Initial Unemployment Claims decline to 390,000

Title: Weekly Initial Unemployment Claims since 2000, posted on Nov 10, 2011
Post: Weekly Initial Unemployment Claims decline to 390,000

Title: Employment Diffusion Indexes, October, posted on Nov 4, 2011
Post: Seasonal Retail Hiring, Duration of Unemployment, Unemployment by Education and Diffusion Indexes

Title: Job Openings and Labor Turnover Survey, September, posted on Nov 8, 2011
Post: BLS: Job Openings increase in September

Title: Payroll Employment as percent of previous peak, Sept, posted on Oct 30, 2011
Post: Recovery Measures

Title: NFIB Small Business Survey of Hiring Plans over next three months, Oct, posted on Nov 3, 2011
Post: Survey: Small Business Owners report small reduction in employment, hiring plans slightly positive

Title: Seasonal Retail Hiring, Oct, posted on Nov 4, 2011
Post: Seasonal Retail Hiring, Duration of Unemployment, Unemployment by Education and Diffusion Indexes

Image test

2011-11-03T17:27:00.000-07:00

Click on graph for larger image.

Just a test

2011-07-27T14:09:00.001-07:00

Here are the new FOMC projections.

GDP growth was revised down to around 1.7% this year.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in Real GDP¹	2011	2012	2013	2014
Jan 2011 Projections	3.4 to 3.9	3.5 to 4.4	3.7 to 4.6	NA
April 2011 Projections	3.1 to 3.3	3.5 to 4.2	3.5 to 4.3	NA
June 2011 Projections	2.7 to 2.9	3.3 to 3.7	3.5 to 4.2	NA
November 2011 Projections	1.6 to 1.7	2.5 to 2.9	3.0 to 3.5	3.0 to 3.9

¹ Projections of change in real GDP and in inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

The unemployment rate was revised up to 8.6% to 8.9% (this is Q4 unemployment rate). The FOMC thinks the unemployment rate will still be around 8% at the end of 2013 and in the 6.8% to 7.7% in 2014!

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment Rate²	2011	2012	2013	2014
Jan 2011 Projections	8.8 to 9.0	7.6 to 8.1	6.8 to 7.2	NA
April 2011 Projections	8.4 to 8.7	7.6 to 7.9	6.8 to 7.2	NA
June 2011 Projections	8.6 to 8.9	7.8 to 8.2	7.0 to 7.5	NA
November 2011 Projections	9.0 to 9.1	8.5 to 8.7	7.8 to 8.2	6.8 to 7.7

² Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

Inflation was revised up for 2011.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE Inflation¹	2011	2012	2013	2014
Jan 2011 Projections	1.3 to 1.7	1.0 to 1.9	1.2 to 2.0	NA
April 2011 Projections	2.1 to 2.8	1.2 to 2.0	1.4 to 2.0	NA
June 2011 Projections	2.3 to 2.5	1.5 to 2.0	1.5 to 2.0	NA
November 2011 Projections	2.7 to 2.9	1.4 to 2.0	1.5 to 2.0	1.5 to 2.0

But core inflation is seen at levels still below the FOMC target.

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core Inflation¹	2011	2012	2013	2014
Jan 2011 Projections	1.0 to 1.3	1.0 to 1.5	1.2 to 2.0	NA
April 2011 Projections	1.3 to 1.6	1.3 to 1.8	1.4 to 2.0	NA
June 2011 Projections	1.5 to 1.8	1.4 to 2.0	1.4 to 2.0	NA
November 2011 Projections	1.8 to 1.9	1.5 to 2.0	1.4 to 1.9	1.5 to 2.0

test image anchor

2011-07-25T17:06:00.000-07:00

An update: Case-Shiller, CoreLogic and others report nominal house prices. However it is also useful to look at house prices in real terms (adjusted for inflation), as a price-to-rent ratio, and also price-to-income (not shown here).

Below are three graphs showing nominal prices (as reported), real prices and a price-to-rent ratio. Real prices are back to 1999/2000 levels, and the price-to-rent ratio is also back to 2000 levels.

Title: Percent Job Losses in Recessions
Date: for September, posted on Oct 7, 2011
Post: September Employment Report: 103,000 Jobs, 9.1% Unemployment Rate

Nominal House Prices

Click on graph for larger image.

The first graph shows the quarterly Case-Shiller National Index SA (through Q2 2011), and the monthly Case-Shiller Composite 20 SA (through August) and CoreLogic House Price Indexes (through August) in nominal terms (as reported).

In nominal terms, the Case-Shiller National index is back to Q4 2002 levels, the Case-Shiller Composite 20 Index (SA) is back to June 2003 levels, and the CoreLogic index is back to July 2003.

Real House Prices

The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices.

In real terms, the National index is back to Q3 1999 levels, the Composite 20 index is back to July 2000, and the CoreLogic index back to June 2000.

In real terms, all appreciation in the last decade is gone.

Price-to-Rent

In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

Here is a similar graph using the Case-Shiller Composite 20 and CoreLogic House Price Index.

This graph shows the price to rent ratio (January 1998 = 1.0).

On a price-to-rent basis, the Composite 20 index is back to August 2000 levels, and the CoreLogic index is back to July 2000.

In real terms - and as a price-to-rent ratio - prices are mostly back to 2000 levels (nationally) and will probably be back to 1999 levels in the next few months.

Earlier:
• Case Shiller: Home Prices increased Seasonally in August

Iframe

2011-07-01T22:24:00.000-07:00

They might be crazy, but are they insane? Investors don't think so ... yet.

The Asian markets are red tonight with the Nikkei off almost 1%.

From CNBC: Pre-Market Data and Bloomberg futures: the S&P 500 is off about 2.7 points, and Dow futures are off about 30 points.

Oil: WTI futures are down to $90.60 and Brent is down to $104.47.

Of course we will be watching Greece again tomorrow: The Greek 2 year yield is at 28.3% and the ten year yield is at 16.8%.

Yesterday:
• Summary for Week Ending July 22nd
• Schedule for Week of July 24th

bernank

2011-06-22T10:48:00.001-07:00

Comments by European Central Bank President Jean-Claude Trichet earlier this morning:

"We have decided to suspend the application of the minimum credit rating threshold in the collateral ... requirements for the purpose of Eurosystem credit operations.

"In the case of marketable debt instruments issued and guaranteed by the Portuguese government, this suspension will be maintained until further notice.

"And we took that decision taking into account the fact that the Portuguese government has approved an economic and financial adjustment program, which has been negotiated with the European Commission, ... with us and the International Monetary Fund. The Governing Council has assessed the program and considers it appropriate."

Here are the links for bond yields for several countries (source: Bloomberg):

Greece	2 Year	5 Year	10 Year
Portugal	2 Year	5 Year	10 Year
Ireland	2 Year	5 Year	10 Year
Spain	2 Year	5 Year	10 Year
Italy	2 Year	5 Year	10 Year
Belgium	2 Year	5 Year	10 Year
France	2 Year	5 Year	10 Year
Germany	2 Year	5 Year	10 Year

NYT

2011-06-12T07:15:00.000-07:00

Changes in Refinancing

iframe housing

2011-05-30T17:52:00.000-07:00

gas

2011-05-30T08:59:00.001-07:00

	Excess compared to 2000	Excess compared to both	Excess compared to 1990	Excess compared to 2000	Excess compared to both	Excess compared to 1990
United States	2,536,605	1,825,089	1,408,480	2.2%	1.6%	1.2%
Alabama	25,728	41,749	57,770	1.4%	2.2%	3.1%
Alaska	0	0	0	0.0%	0.0%	0.0%
Arizona	89,638	17,736	0	3.8%	0.7%	0.0%
Arkansas	17,352	14,181	11,011	1.5%	1.2%	1.0%
California	267,976	163,032	58,089	2.1%	1.3%	0.5%
Colorado	43,167	0	0	2.2%	0.0%	0.0%
Connecticut	21,780	15,089	8,398	1.6%	1.1%	0.6%
Delaware	5,929	623	0	1.7%	0.2%	0.0%
D.C.	241	0	0	0.1%	0.0%	0.0%
Florida	318,298	211,430	104,562	4.3%	2.8%	1.4%
Georgia	140,994	96,805	52,616	3.9%	2.7%	1.5%
Hawaii	0	2,383	6,454	0.0%	0.5%	1.4%
Idaho	7,885	4,403	921	1.4%	0.8%	0.2%
Illinois	126,105	105,322	84,540	2.6%	2.2%	1.7%
Indiana	68,745	68,824	68,903	2.7%	2.8%	2.8%
Iowa	21,430	19,823	18,217	1.8%	1.6%	1.5%
Kansas	17,140	8,387	0	1.5%	0.8%	0.0%
Kentucky	25,652	29,269	32,886	1.5%	1.7%	1.9%
Louisiana	33,153	6,916	0	1.9%	0.4%	0.0%
Maine	10,613	7,742	4,871	1.9%	1.4%	0.9%
Maryland	27,407	33,730	40,054	1.3%	1.6%	1.9%
Massachusetts	54,898	23,431	0	2.2%	0.9%	0.0%
Michigan	166,850	160,997	155,143	4.3%	4.2%	4.0%
Minnesota	55,415	31,844	8,273	2.7%	1.5%	0.4%
Mississippi	27,319	26,317	25,314	2.4%	2.4%	2.3%
Missouri	55,268	43,487	31,707	2.3%	1.8%	1.3%
Montana	0	0	0	0.0%	0.0%	0.0%
Nebraska	12,638	8,697	4,756	1.8%	1.2%	0.7%
Nevada	50,078	45,750	41,421	5.0%	4.5%	4.1%
New Hampshire	13,884	1,172	0	2.7%	0.2%	0.0%
New Jersey	57,708	27,003	0	1.8%	0.8%	0.0%
New Mexico	0	0	0	0.0%	0.0%	0.0%
New York	92,011	86,198	80,384	1.3%	1.2%	1.1%
North Carolina	75,185	77,585	79,985	2.0%	2.1%	2.1%
North Dakota	0	0	0	0.0%	0.0%	0.0%
Ohio	154,556	165,131	175,707	3.4%	3.6%	3.8%
Oklahoma	15,081	0	0	1.0%	0.0%	0.0%
Oregon	6,415	11,630	16,846	0.4%	0.8%	1.1%
Pennsylvania	42,681	46,875	51,069	0.9%	0.9%	1.0%
Rhode Island	13,299	9,280	5,261	3.2%	2.2%	1.3%
South Carolina	41,590	45,520	49,451	2.3%	2.5%	2.7%
South Dakota	1,877	0	0	0.6%	0.0%	0.0%
Tennessee	62,032	56,546	51,060	2.5%	2.3%	2.0%
Texas	122,837	0	0	1.4%	0.0%	0.0%
Utah	6,075	0	0	0.7%	0.0%	0.0%
Vermont	4,189	1,030	0	1.6%	0.4%	0.0%
Virginia	54,241	31,630	9,018	1.8%	1.0%	0.3%
Washington	35,215	31,540	27,866	1.3%	1.2%	1.1%
West Virginia	1,089	750	410	0.1%	0.1%	0.1%
Wisconsin	44,940	45,229	45,518	2.0%	2.0%	2.0%
Wyoming	0	0	0	0.0%	0.0%	0.0%

Washington Address

2011-05-25T15:42:00.001-07:00

In contemplating the causes which may disturb our Union, it occurs as matter of serious concern that any ground should have been furnished for characterizing parties by geographical discriminations, Northern and Southern, Atlantic and Western; whence designing men may endeavor to excite a belief that there is a real difference of local interests and views. One of the expedients of party to acquire influence within particular districts is to misrepresent the opinions and aims of other districts. You cannot shield yourselves too much against the jealousies and heartburnings which spring from these misrepresentations; they tend to render alien to each other those who ought to be bound together by fraternal affection. The inhabitants of our Western country have lately had a useful lesson on this head; they have seen, in the negotiation by the Executive, and in the unanimous ratification by the Senate, of the treaty with Spain, and in the universal satisfaction at that event, throughout the United States, a decisive proof how unfounded were the suspicions propagated among them of a policy in the General Government and in the Atlantic States unfriendly to their interests in regard to the Mississippi; they have been witnesses to the formation of two treaties, that with Great Britain, and that with Spain, which secure to them everything they could desire, in respect to our foreign relations, towards confirming their prosperity. Will it not be their wisdom to rely for the preservation of these advantages on the Union by which they were procured ? Will they not henceforth be deaf to those advisers, if such there are, who would sever them from their brethren and connect them with aliens?

To the efficacy and permanency of your Union, a government for the whole is indispensable. No alliance, however strict, between the parts can be an adequate substitute; they must inevitably experience the infractions and interruptions which all alliances in all times have experienced. Sensible of this momentous truth, you have improved upon your first essay, by the adoption of a constitution of government better calculated than your former for an intimate union, and for the efficacious management of your common concerns. This government, the offspring of our own choice, uninfluenced and unawed, adopted upon full investigation and mature deliberation, completely free in its principles, in the distribution of its powers, uniting security with energy, and containing within itself a provision for its own amendment, has a just claim to your confidence and your support. Respect for its authority, compliance with its laws, acquiescence in its measures, are duties enjoined by the fundamental maxims of true liberty. The basis of our political systems is the right of the people to make and to alter their constitutions of government. But the Constitution which at any time exists, till changed by an explicit and authentic act of the whole people, is sacredly obligatory upon all. The very idea of the power and the right of the people to establish government presupposes the duty of every individual to obey the established government.

All obstructions to the execution of the laws, all combinations and associations, under whatever plausible character, with the real design to direct, control, counteract, or awe the regular deliberation and action of the constituted authorities, are destructive of this fundamental principle, and of fatal tendency. They serve to organize faction, to give it an artificial and extraordinary force; to put, in the place of the delegated will of the nation the will of a party, often a small but artful and enterprising minority of the community; and, according to the alternate triumphs of different parties, to make the public administration the mirror of the ill-concerted and incongruous projects of faction, rather than the organ of consistent and wholesome plans digested by common counsels and modified by mutual interests.

However combinations or associations of the above description may now and then answer popular ends, they are likely, in the course of time and things, to become potent engines, by which cunning, ambitious, and unprincipled men will be enabled to subvert the power of the people and to usurp for themselves the reins of government, destroying afterwards the very engines which have lifted them to unjust dominion.

Towards the preservation of your government, and the permanency of your present happy state, it is requisite, not only that you steadily discountenance irregular oppositions to its acknowledged authority, but also that you resist with care the spirit of innovation upon its principles, however specious the pretexts. One method of assault may be to effect, in the forms of the Constitution, alterations which will impair the energy of the system, and thus to undermine what cannot be directly overthrown. In all the changes to which you may be invited, remember that time and habit are at least as necessary to fix the true character of governments as of other human institutions; that experience is the surest standard by which to test the real tendency of the existing constitution of a country; that facility in changes, upon the credit of mere hypothesis and opinion, exposes to perpetual change, from the endless variety of hypothesis and opinion; and remember, especially, that for the efficient management of your common interests, in a country so extensive as ours, a government of as much vigor as is consistent with the perfect security of liberty is indispensable. Liberty itself will find in such a government, with powers properly distributed and adjusted, its surest guardian. It is, indeed, little else than a name, where the government is too feeble to withstand the enterprises of faction, to confine each member of the society within the limits prescribed by the laws, and to maintain all in the secure and tranquil enjoyment of the rights of person and property.

I have already intimated to you the danger of parties in the State, with particular reference to the founding of them on geographical discriminations. Let me now take a more comprehensive view, and warn you in the most solemn manner against the baneful effects of the spirit of party generally.

Newest Post

2011-05-25T15:22:00.003-07:00

This speech is on financial education, but the following comments outlined some of the impact of the financial crisis on financial decisions.

From Fed Governor Elizabeth Duke: Research, Policy, and the Future of Financial Education

The financial crisis and the slow recovery from it has obviously had a dramatic impact on the financial decisions made by American families. Many now have fewer financial resources and limited options. The pace and timing of their saving and investing life cycle has also been disrupted.
...
In addition, starting salaries for recent college graduates have also declined, which means that young Americans who are employed will have fewer resources for saving and investing than their predecessors. Young people are living with their parents longer, which helps conserve their limited resources but likely places a strain on their parents' budgets.

Also troubling is research showing that many consumers who should be saving for retirement instead have been forced to take hardship withdrawals from their 401(k) plans. According to an analysis by Vanguard, hardship withdrawals increased by 49 percent between 2005 and 2010. Other types of withdrawals increased by 56 percent.

The increasing use of retirement savings for other purposes is particularly troubling given that the responsibility for saving for retirement has shifted away from employers to individual employees.
...
Individuals who are approaching retirement age, in particular, are being forced to make changes to their plans for retirement. Social Security Administration data indicate that in 2009 and 2010, the proportions of men and women claiming social security benefits at age 62 began to rise again after several years of decline. Workers have either chosen to leave the work force early in the last few years or, more likely, have applied for social security benefits as early as possible because of the weak job market.
...
The recession has clearly disrupted the future expectations and financial plans of millions of Americans, but even in the best of circumstances, effectively managing one's longevity risk requires a level of financial knowledge well beyond that required of any previous generation.

Many in the 401(k) generation are now reaching retirement - with little in savings and using withdrawals from their 401(k) plans just to get by. A grim retirement ...

New Post

2011-05-25T15:22:00.001-07:00

The financial crisis and the slow recovery from it has obviously had a dramatic impact on the financial decisions made by American families. Many now have fewer financial resources and limited options. The pace and timing of their saving and investing life cycle has also been disrupted.
...
In addition, starting salaries for recent college graduates have also declined, which means that young Americans who are employed will have fewer resources for saving and investing than their predecessors. Young people are living with their parents longer, which helps conserve their limited resources but likely places a strain on their parents' budgets.

Also troubling is research showing that many consumers who should be saving for retirement instead have been forced to take hardship withdrawals from their 401(k) plans. According to an analysis by Vanguard, hardship withdrawals increased by 49 percent between 2005 and 2010. Other types of withdrawals increased by 56 percent.

The increasing use of retirement savings for other purposes is particularly troubling given that the responsibility for saving for retirement has shifted away from employers to individual employees.
...
Individuals who are approaching retirement age, in particular, are being forced to make changes to their plans for retirement. Social Security Administration data indicate that in 2009 and 2010, the proportions of men and women claiming social security benefits at age 62 began to rise again after several years of decline. Workers have either chosen to leave the work force early in the last few years or, more likely, have applied for social security benefits as early as possible because of the weak job market.
...
The recession has clearly disrupted the future expectations and financial plans of millions of Americans, but even in the best of circumstances, effectively managing one's longevity risk requires a level of financial knowledge well beyond that required of any previous generation.

Many in the 401(k) generation are now reaching retirement - with little in savings and using withdrawals from their 401(k) plans just to get by. A grim retirement ...

Moody's: Commercial Real Estate Prices declined 4.2% in March, Hit new Post-Bubble Low

2011-05-24T15:44:00.000-07:00

The financial crisis and the slow recovery from it has obviously had a dramatic impact on the financial decisions made by American families. Many now have fewer financial resources and limited options. The pace and timing of their saving and investing life cycle has also been disrupted.
...
In addition, starting salaries for recent college graduates have also declined, which means that young Americans who are employed will have fewer resources for saving and investing than their predecessors. Young people are living with their parents longer, which helps conserve their limited resources but likely places a strain on their parents' budgets.

Also troubling is research showing that many consumers who should be saving for retirement instead have been forced to take hardship withdrawals from their 401(k) plans. According to an analysis by Vanguard, hardship withdrawals increased by 49 percent between 2005 and 2010. Other types of withdrawals increased by 56 percent.

The increasing use of retirement savings for other purposes is particularly troubling given that the responsibility for saving for retirement has shifted away from employers to individual employees.
...
Individuals who are approaching retirement age, in particular, are being forced to make changes to their plans for retirement. Social Security Administration data indicate that in 2009 and 2010, the proportions of men and women claiming social security benefits at age 62 began to rise again after several years of decline. Workers have either chosen to leave the work force early in the last few years or, more likely, have applied for social security benefits as early as possible because of the weak job market.
...
The recession has clearly disrupted the future expectations and financial plans of millions of Americans, but even in the best of circumstances, effectively managing one's longevity risk requires a level of financial knowledge well beyond that required of any previous generation.

Many in the 401(k) generation are now reaching retirement - with little in savings and using withdrawals from their 401(k) plans just to get by. A grim retirement ...

Europe Table

2011-05-23T06:00:00.001-07:00

Greece	2 Year	5 Year	10 Year
Portugal	2 Year	5 Year	10 Year
Ireland	2 Year	5 Year	10 Year
Spain	2 Year	5 Year	10 Year
Italy	2 Year	5 Year	10 Year
Belgium	2 Year	5 Year	10 Year
France	2 Year	5 Year	10 Year
Germany	2 Year	5 Year	10 Year

video

2011-05-07T16:22:00.000-07:00

Orange County Historical Gas Price Charts Provided by GasBuddy.com

video

2011-04-13T08:34:00.001-07:00

JOIN THE LIVE CHAT

VISIT WHITEHOUSE.GOV

Lawler: Census 2010 and Excess Vacant Housing Units

2011-03-26T14:48:00.000-07:00

Census 2010: Households, Housing Stock, and Vacant Housing Units: Understanding Why Demographers Drink

Census has now released the final Census 2010 counts for state and local population and housing units – occupied and vacant. Here are some national totals, as well as a comparison to the “official” Census 2000 counts – which are “known” to be off, but by uncertain amounts.

	Census 2010	Census 2000	Change	% Change
Population	308,745,538	281,421,906	27,323,632	9.7%
Total Housing Units	131,704,730	115,904,641	15,800,089	13.6%
Occupied	116,716,292	105,480,101	11,236,191	10.7%
Vacant	14,988,438	10,424,540	4,563,898	43.8%
Gross Vacancy Rate	11.38%	8.99%	2.39%

For those who follow housing production, one of the “striking” things about the Census 2010 vs. the Census 2000 data is the apparent growth in the housing stock – 15.8 million units.
According to Census data on housing completions and manufactured housing placements for residential use, the there were about 16.735 million housing completions plus MH placements from April 2000 to March 2010. That would come close to implying that the net loss in the housing stock associated with demolitions, conversions, etc. was only around 935,000, or 93.500 a year – a fraction of the “guesstimate” based on admittedly suspect data from the AHS CINCH studies. (I say “come close” because housing stock estimates include RVs, boats, campers, etc. used as places to live). The number seems especially low given estimates of the housing stock loss just to Katrina and other “natural disasters,” and quite frankly they don’t pass a “sniff test” of reasonableness.

As I have noted before, however, subsequent analysis of Census 2000 by analysts suggested that the Census 2000 housing unit counts were “too low,” though the methodology used to estimate net undercounts was deemed imprecise enough to incorporate into “official” Census data¹ . On the population front, subsequent analysis suggested that the Census 2000 population numbers may have been overstated by about 1.3 million, though these new estimates were not incorporated into official Census data².

If one were to compare Census 2010 with the “unofficial” revised Census 2000 estimates, the comparison table would look as follows:

	Census 2010	Census 2000 (unofficial revised)	Change	% Change
Population	308,745,538	280,090,250	28,655,288	10.2%
Total Housing Units	131,704,730	116,586,458	15,118,272	13.0%
Occupied	116,716,292	105,808,904	10,907,388	10.3%
Vacant	14,988,438	10,777,553	4,210,885	39.1%
Gross Vacancy Rate	11.38%	9.24%	2.14%

Even using these “revised” estimates, the “net” loss in the housing stock from demolitions, conversions, etc. would still have been about 1.62 million units, of 162,000 per year – well south of “AHS-derived” estimates. Interestingly, using the “better” 2000 estimates, population growth over the decade ended April 1, 2010 was just a shade under household growth, suggesting little change in the average size of households (I say “suggesting” because the household population excludes people living in “group quarters,” and that data has not yet been released).

But wait (of course!), there’s more! A Census 2000 supplemental survey (C2SS), using the same “methods and instruments” of the ACS and based on a sample of about 700,000 housing units, “found” a higher vacancy rate than did Census 2000. This result was a bit surprising. Some analysts feel that Census 2000 may have “missed” a significant number of vacant housing units, and that the C2SS may be more “representative” of gross vacancy rates. Others, however, note that the C2SS sample, while large, is dwarfed by that of the official Census.

There is also a “challenge” in using the ACS/C2SS data on Census’ website – the housing units shown in the ACS/C2SS data are “controlled” to equal that of the official Census data (known to be understated). As the paper “Effect of Housing Unit Controls on Survey Estimates” (Albright, Census Bureau)³, the ACS/C2SS estimates of households and housing units varies considerably depending on whether one uses Census 2000 housing units controls, or instead one uses other “weighting” schemes (e.g., Principal Person Factor).

E.g., if one were to assume that the C2SS vacancy rate numbers for 2000 were correct, but if one were also to assume that the Census 2000 REVISED household count numbers were correct, then ACS/C2SS estimates of the 2000 housing units might look something like this. (HU control means Housing Unit Control, while HH Control means Household Control).

	Census 2000 Official	Census 2000 Unofficial	ACS/C2SS HU Control	ACS/C2SS HH Control
Total Housing Units	115,904,641	116,586,458	115,904,641	116,999,235
Occupied	105,480,101	105,808,904	104,819,002	105,808,904
Vacant	10,424,540	10,777,553	11,085,639	11,190,331
Gross Vacancy Rate	8.99%	9.24%	9.56%	9.56%

If one were to instead use the ACS/C2SS Household Unit Control (this is NOT derived by anyone at Census, by the way), then one would get the following 2010 vs. 2000 comparison.

	Census 2010	ACS/C2SS HH Control	Change	% Change
Total Housing Units	131,704,730	116,999,235	14,705,495	12.6%
Occupied	116,716,292	105,808,904	10,907,388	10.3%
Vacant	14,988,438	11,190,331	3,798,107	33.9%
Gross Vacancy Rate	11.38%	9.56%	1.82%

If the above numbers were correct, and if the Census numbers on housing production were correct, then the net loss in the housing stock resulting from demolitions, conversions, etc. would be about 2.03 million, or 203,000 per year. Even this number is on the low side of “estimates,” but the Census 2010 data do suggest that previous estimates were too high. (Based on AHS data, Census “guesstimated” that the “scrappage rate” for the housing stock would be about 0.025% a year, which for last decade would have meant an average of just over 300,000 per year).

Of course, all of the above comparisons assume that the Census 2010 figures are “correct,” and in fact subsequent analysis will find “issues.” However, early results presented by Census folks on such metrics as % usable responses, etc. suggest that the Census 2010 “error rates” are likely to be lower than those in previous Censuses.

Confused yet? Ah, then mission accomplished!

Any way you “slice” the data, it seems pretty clear that the number of vacant housing units increased dramatically from 2000 to 2010 relative to total housing units, but by how much is not crystal clear. Moreover, there are no “official” data yet on year round vs. “seasonal” vacant units, vacant units for sale or for rent, etc., making it tricky to assess the “excess” supply of housing as of last April.

IF one were to assume that the housing market were “in balance” in 2000, and IF one were to assume that the increase in the “gross” vacancy rate from 2000 to 2010 was a reasonable proxy for the extent of “overbuilding” (relative to household formations) – both assumptions of which are subject to serious debate – then a “reasonable” range for the “excess” supply of housing as of April 1,2010 would be somewhere between 2.14 million units (using Census 2010 and ACS/C2SS controlled for Census 2000 adjusted households) and 3.15 million units (using Census 2010 and “official” Census 2000 data) – with the high end of that range almost certainly being “too high.”

These assumptions, however, do not take into account the likely faster growth in “seasonal/second” vacant homes that would have occurred without any “housing bubble”/overbuilding. Both household an population in the 45+ year old age groups was materially faster than that of younger folks/household last decade, and these older age groups have a much higher likelihood of owning a seasonal/occasional use/second home than is the case for younger households. Trying to figure out how fast “vacant seasonal” homes would have grown relative to the overall housing stock in the absence of the “bubble/bust,” however, is not a simple task, and is hampered by controversy over the MEASUREMENT of the total number of seasonal/second homes!⁴

Doing a crude adjustment for this “seasonal/second” effect, I estimate that the “range” of possible “excess” supply for April 1, 2010 would shift to the two to three million range, with the latter almost certainly “too high.”

Since April 1st of last year, of course, housing production has been subdued – based on my estimates for housing completions in March and for manufactured housing placements from January to March, I’d estimate that housing completions plus MH placements totaled about 675,000 units. If one conservatively assumed that about 225,000 housing units were “lost”, then the housing stock on April 1, 2011 would be about 450,000 higher than last April 1st. The number of VACANT homes, however, would depend on household growth, and sadly there are no good, reliable, and/or timely data on households – though the HVS data SUGGEST (but just that and no more) that household growth was “decent” in the last three quarters of 2010. If one were to assume that household growth over the 12 months ended in April were about a million, then estimates of the “excess” supply of housing as of (almost) right now would be somewhere in the range of 1.45 to 2.45 million units – with the latter (again) almost certainly too high.

If one were to assume that the current “excess supply” of housing was around 1.75 million, and that the net housing stock lost to demolitions is about 225,000 per year, then here is a “matrix” of how many years it would take to absorb that excess supply for different combinations of housing production and household formations.

Years to Absorb 1.75 million "excess supply" of housing units
	Household Growth (thousands)
Housing Production (thousands)	900	1,000	1,100	1,200	1,300	1,400	1,500	1,600
500	2.80	2.41	2.12	1.89	1.71	1.56	1.43	1.32
600	3.33	2.80	2.41	2.12	1.89	1.71	1.56	1.43
700	4.12	3.33	2.80	2.41	2.12	1.89	1.71	1.56
800	5.38	4.12	3.33	2.80	2.41	2.12	1.89	1.71
900	7.78	5.38	4.12	3.33	2.80	2.41	2.12	1.89
1,000	14.00	7.78	5.38	4.12	3.33	2.80	2.41	2.12
1,100	70.00	14.00	7.78	5.38	4.12	3.33	2.80	2.41
1,200	Never	70.00	14.00	7.78	5.38	4.12	3.33	2.80
1,300	Never	Never	70.00	14.00	7.78	5.38	4.12	3.33
1,400	Never	Never	Never	70.00	14.00	7.78	5.38	4.12
1,500	Never	Never	Never	Never	70.00	14.00	7.78	5.38

E.g., if housing production (completions plus MH placements) ran at around 600,000 per year, and household formations increased to 1.2 million per year, it would take a little over two years to absorb a “reasonable but possibly low” estimate of the current “excess” supply of homes – unless, of course, the number of homes “lost” to demolition, conversion, etc., ran above 225,000 per year.

It is easy to see why many housing economists view the current “low” level of housing production as a plus for the overall health of the housing market, even before allowing for the current high number of residential mortgage loans either seriously delinquent or in some stage of foreclosure. It is also easy to understand why competent housing analysts believe that any government policies designed to encourage additional construction of housing units would be “dumber than dishwater,” and that the only government policies designed to encourage increased “AD&C” activity would NOT be acquisition, development, and construction lending, but instead “acquisition, destruction, and or conversion” of existing vacant housing units.

Of course, the “matrix” above was for the nation as a whole, and estimates of the “excess supply” of housing would vary massively by states. Using the “official” Census gross vacancy rates, there was an increase of over three percentage points from 2000 to 2010 in eight states: (in order) Nevada, Florida, Michigan, Georgia, Rhode Island, South Carolina, Ohio, and Arizona. And, of course, within states with overall “modest” vacancy rate increases there were huge increases in some counties – California being one of many examples.) Some state data are shown in the table at the end of this report. In addition, the matrix doesn’t account for the “types” of homes that are vacant versus the “types” of households that might be formed.

Flipping back to household growth, the Census 2010 data suggest that the number of households grew by about 1.1 million per year in the decade ended April 1, 2010, down from what appears to have been around 1.34 million per year in the previous decade (there are lots of issues with the Census 1990 data!). While the multiple and conflicting government data on inter-censal households are extremely unreliable, all suggest that household growth slowed massively in the last few years of last decade. Household growth appears to have been somewhat slower than what one would have expected given population growth by age cohort combined with 2000 headship rates by age cohort, with apparent “headship rate” declines occurring in the last few years of last decade – suggesting the potential for an above-trend rebound in household formations once the economy and jobs market picks up steam. (Official 2010 census data by age of population and by age of householder are not yet available).

For those who don’t remember, the Joint Center for Housing Studies in 2006 upped its forecast for household growth to what at the time seemed an inanely high 1.456 million per year for the 2005 to 2010 period, partly because it increased its assumption for net immigration growth to 1.2 million a year (which was right around the time net immigration per year began to slow), and partly because of its use of highly suspect “headship rates” from the CPS/ASEC. That forecast, combined with what proved to be excessively high estimates of net housing loss estimates and a few other factors, led to widely-quoted (often by home builders!) “projections” that “demographic” demand in the latter half of last decade would “support” close to 2 million units of housing production per year! Available (though not great) data suggest that household growth began to slow shortly after the JCHS upped its forecast. While many believe that the JCHS’ analysis was criminally bad, to the best of my knowledge no litigation has been filed against it.

¹ See., e.g., CENSUS 2000 HOUSING UNIT COVERAGE STUDY
² See, e.g., Comparison of A.C.E. Revision II Results with Demographic Analysis
³ Available at Effect of Housing Unit Controls on Survey Estimates
⁴ See, e.g., HOW MANY SECOND HOMES ARE THERE?

tst

2011-01-26T17:49:00.001-08:00

story

Iframe test

2011-01-25T16:12:00.001-08:00

Census test

2010-12-21T06:05:00.001-08:00

Summary of significant events since World War II. Source: Hamilton (2011).
Gasoline shortages	Price increase	Price controls	Key factors	Business cycle peak
Gasoline shortages	Price increase	Price controls	Key factors	Business cycle peak
Nov 47-Dec 47	Nov 47-Jan 48 (37%)	no (threatened)	strong demand, supply constraints	Nov 48
May 52	Jun 53 (10%)	yes	strike, controls lifted	Jul 53
Nov 56-Dec 56 (Europe)	Jan 57-Feb 57 (9%)	yes (Europe)	Suez Crisis	Aug 57
none	none	no	---	Apr 60
none	Feb 69 (7%) Nov 70 (8%)	no	strike, strong demand, supply constraints	Dec 69
Jun 73 Dec 73-Mar 74	Apr 73-Sep 73 (16%) Nov 73-Feb 74 (51%)	yes	strong demand, supply constraints, OAPEC embargo	Nov 73



May 79-Jul 79	May 79-Jan 80 (57%)	yes	Iranian revolution	Jan 80
none	Nov 80-Feb 81 (45%)	yes	Iran-Iraq War, controls lifted	Jul 81
none	Aug 90-Oct 90 (93%)	no	Gulf War I	Jul 90
none	Dec 99-Nov 00 (38%)	no	strong demand	Mar 01
			strong demand
none	Nov 02-Mar 03 (28%)	no	Venezuela unrest, Gulf War II	none
none	Feb 07-Jun 08 (145%)	no	strong demand, stagnant supply	Dec 07

test of charts

2010-11-01T19:42:00.000-07:00

Here is the C-Span Link

This is a test of images

2010-10-03T08:13:00.000-07:00

Here is a summary of last week - mostly in graphs.

During the previous week, a number of Fed Presidents spoke about further easing (what is known as QE2: quantitative easing, round two). The majority seemed to favor taking additional action - probably purchasing longer term Treasury securities. Barring an upside surprise in the economic data, most analysts expect QE2 to arrive at 2:15 PM ET on November 3rd (when the next FOMC statement is released).

Another story was the "robo-signer" foreclosure mess that has led to GMAC, JPMorgan and BofA halting or reviewing foreclosure filings - and for some insurance companies to stop offering title insurance on related foreclosures.

There are links to other stories at the bottom of this post.

U.S. Light Vehicle Sales 11.76 million SAAR in September

Based on an estimate from Autodata Corp, light vehicle sales were at a 11.76 million SAAR in Setpember. That is up 25.8% from September 2009 (the dip following cash-for-clunkers), and up 2.8% from the August 2010 sales rate.

Click on graph for larger image in new window.

This graph shows the historical light vehicle sales (seasonally adjusted annual rate) from the BEA (blue) and an estimate for August (red, light vehicle sales of 11.76 million SAAR from Autodata Corp).

This is the high for the year - slightly higher than in March.

The second graph shows light vehicle sales since the BEA started keeping data in 1967.

Note: dashed line is current month sales rate. The current sales rate is about at the bottom of the '90/'91 recession - when there were fewer registered drivers and a smaller population.

This was above most forecasts of around 11.6 million SAAR.

Case-Shiller: "Home Prices Stable in July"

From S&P: Home Prices Remain Stable Around Recent Lows According to the S&P/Case-Shiller Home Price Indices

This graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 29.0% from the peak, and flat in July (SA).

The Composite 20 index is off 28.6% from the peak, and down 0.1% in July (SA).

The next graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

Prices increased (SA) in only 4 of the 20 Case-Shiller cities in July seasonally adjusted.

Prices in Las Vegas are off 57.2% from the peak, and prices in Dallas only off 5.7% from the peak.

Prices probably declined just about everywhere in July, but this will not be evident in the Case-Shiller index until next month since the Case-Shiller index is an average of three months.

August: Real Personal consumption expenditures (PCE) increases 0.2%

From the BEA: Personal Income and Outlays, August 2010

Personal income increased $59.3 billion, or 0.5 percent ... Personal consumption expenditures (PCE) increased $41.3 billion, or 0.4 percent.
...
Real PCE increased 0.2 percent, the same increase as in July.
...
Personal saving as a percentage of disposable personal income was
5.8 percent in August, compared with 5.7 percent in July.

This graph shows monthly real PCE since Q4 2009. the dashed red lines are the quarterly PCE (note: left scale doesn't start at zero to show the change).

The key in this report is that real PCE growth in Q3 will probably be around 2.0% annualized - barring a significant change in September. This suggests sluggish, but positive GDP growth in Q3.

ISM Manufacturing Index declines in September

PMI at 54.4% in September down from 56.3% in August.

From the Institute for Supply Management: September 2010 Manufacturing ISM Report On Business®

Here is a long term graph of the ISM manufacturing index.

In addition to the decrease in the PMI, the ISM's new orders index fell to 51.1 from 53.1 in August, and the production index declined to 56.5 from 59.9.

The employment index declined to 56.5 from 60.4 in August.

And the inventory index was up for the 3rd month in a row to 55.6 from 51.4.

With new order growth slowing, and inventory increasing - further declines in the ISM PMI are very likely. As ISM's Norbert Ore noted, these indexes are "sending strong negative signals of weakening performance in the [manufacturing] sector".

Private Construction Spending declines in August

The Census Bureau reported overall construction spending increased slightly in August.

This graph shows private residential and nonresidential construction spending since 1993. Note: nominal dollars, not inflation adjusted.

Both residential and non-residential private construction spending declined in August. Residential spending is 64.7% below the peak early 2006, and 4.7% above the recent low in 2009.

Non-residential spending is 37.3% from the peak in January 2008.

Residential spending has turned slightly negative after the tax credit expired - and this indicates residential investment (RI) will be a drag on Q3 GDP.

Other Economic Stories ...

From the Chicago Fed: Index shows economic activity weakened in August

From the Dallas Fed: Texas Manufacturing Picks Up and Six-Month Outlook Improves

From the Institute for Supply Management – Chicago: Chicago PMI increases in September

From the Kansas City Fed: Regional Manufacturing Activity reboundedin September

From the American Trucking Association: ATA Truck Tonnage Index Plunged 2.7 Percent in August

Unofficial Problem Bank List increases to 877 institutions

Best wishes to all.

Recession Bards

2010-07-31T16:30:00.001-07:00

Something a little different for a Saturday. This is a common question, using excel, how do you get from this:
to this:I'll walk anyone interested through it (I use Excel 2007; I have 2010, but I haven't loaded it yet).

After the jump is a simple step-by-step example on one way to do it:

Graph 1: Start with three columns in the spreadsheet.

Here is a starter excel file (with the following data and first graph).

Set up a data file. For the example below, the first column is months, from January 2000 to January 2011 (no header), the second column uses Single Family Housing Starts from the Census Bureau, excel data here, with the column header "Single Family Housing Starts", and the third column is title "Recession" and is blank excepts for the months in recession. For the months in recession, I entered 100 (recession dates here from the NBER).

Now create a line graph by highlighting the data and clicking on insert and pick the first line graph. The result will look like this:

Graph 2: Put the recession on the 2nd axis. Do this by 1) right clicking on red recession bars, 2) Click on "Format Data Series", and 3) choose "secondary axis".

Note: It isn't necessary to put the recession on the 2nd axis and sometimes you will want to put other data there. In that case pick different numbers to mark a recession (like 2,000 instead of 100), so that the eventual columns will fill the entire range.

Graph 3: Change Recession from line to bars.

1) Right click on red again, 2) click on "Change Series Chart Type", 3) choose the first choice under column.

The graph now looks like:

Graph 4: Some cleanup steps.

Fill the gaps and change the color.

1) Right click on red, 2) Choose "Format Data Series", 3) Change Gap Width to Zero, 4) Click on "Fill", 5) Pick "Solid fill" and color (light blue in example), 6) Change transparency to 50%.

Make columns full height and remove axis labels.

1) Right click on secondary axis labels, 2) Click on "Format Axis", 3) Change max to 100, 4) Set "axis labels" and "tick marks" to none.

Graph 5: Make it look sharp!

The final look is up to the user, but here is the look I frequently use:

Move legend to top and bold.

1) Right click on legend, 2) choose "Format legend", 3) position on "top", 4) right click on legend again, 5) increase size and bold.

Make bottom axis years. 1) Right click on horizontal axis, 2) choose "Format axis", 3) make major unit fixed at 12 months or 1 year.

Enhance single family housing starts line.

1) Right click on blue line, 2) click on "Format Data Series", 3) Choose "Line color" and red, 4) Choose "Line Style" and increase width, 5) Choose shadow and use presets "outer".

Add annual vertical grid lines.

1) Right click on horizontal axis, 2) click on "add major gridlines"

Add background to plot area.

1) Right click on plot area, 2) select "format plot area", 3) I use "Picture or texture fill" and fill with marble blue at 50% transparency.

Add title and axis labels. And you have a CR looking graph!

At this point I copy and paste the image to Photoshop (or Photoshop Elements) and sometimes make changes - and then save the file as a jpeg to upload to my blog.

SIG 3

2010-07-31T16:29:00.001-07:00

CR Note: This series is from reader "some investor guy".


Part 1: How Large is the Outstanding Value of Sovereign Bonds?


Part 2. How Often Have Sovereign Countries Defaulted in the Past?


Part 2B: More on Historic Sovereign Default Research


Part 3. What are the Market Estimates of the Probabilities of Default?


Part 4. What are Total Estimated Losses on Sovereign Bonds Due to Default?

Part 5A. What Happens If Things Go Really Badly? $15 Trillion of Sovereign Debt in Default

In Part 5A, I showed a Really Bad scenario consistent with some very bad historic default rates for sovereign debt. That produced an estimate of $15.3 trillion of defaulted sovereign debt, with $7.5 to $10.5 trillion of losses.

In today’s post, we look at the effects of sovereign default on credit default swaps, interest rate swaps and options, and currency exchange contracts.

Sovereign risk can make its way into over the counter markets in many ways, including:

     A. For credit default swaps, the sovereigns are often the “reference entity”. In other words, market participants are often buying and selling insurance related to a potential future default of a country on its debt.

     B. Sovereign bonds are a major form of collateral for over the counter trades. The collateral itself is often marked to market. Thus, movements in interest rates often changes the value of highly rated sovereign bonds posted as collateral, and a participant might post more or fewer bonds as collateral as a result. However, sovereign bonds are typically subject to larger haircuts if downgraded, and might not be accepted at all if rated lower than BB-.

     C. Sovereigns ARE the participants in a large number of contracts. Yes, many governments and/or their central banks or sovereign wealth funds are active participants in OTC markets. The author’s impression is that sovereign participation in the CDS market is low, but participation in interest rate and FX markets is considerably higher.

OTC markets are huge. Their notional values are over $600 trillion, and exceed all other forms of investment combined (source: BIS Quarterly Review, June 2010 ). During the 2008 crisis, the market values of CDS, interest rate derivatives, and FX contracts was about the same as all outstanding sovereign debt, or all outstanding equities.

There are also exchange-traded interest and FX futures and options, about $67 trillion in 2009 (source: BIS Quarterly Review, June 2010, page 126).

Unlike stocks and bonds, the total market values for the OTC rise during times of turmoil. That’s partly because when interest rates or FX move from their values when the contracts were entered into, one party to the transaction now has a positive mark to market value for the swap (the other counterparty has a negative mark to market value).

Click on graph for larger image in new window.

From mid 2007 to the end of 2008, the market values of FX and interest rate derivatives tripled, even though their notional values moved by less than 9%. The market value of CDS went up by a factor of seven, on an almost unchanged notional value.

Credit Default Swaps.

The next chart shows the ratios of gross and net notional to current outstanding bonds. Unlike the case for many corporate borrowers, for sovereigns it’s rarely the case that even gross notional CDS values exceed sovereign bonds outstanding. It’s even rarer for net notional to exceed outstanding sovereign bonds.

Good to know that CDS are unlikely to make sovereign default much worse, right? Well, these are recent CDS numbers, but take note. The ratios of CDS to bonds outstanding are higher for those countries believed to be in the most trouble. If sovereign financial conditions got much worse, the volume of CDS could go up considerably. In our Really Bad scenario, I assume the amount of CDS outstanding on sovereigns triples, and about half of it pays off. Currently there are about $2 trillion of sovereign CDS outstanding. Let’s assume it goes to $6 trillion of notional, that half of that pays off due to the insolvency of reference entity (the country the CDS is written on), or $3 trillion. That produces $3 trillion of payments, but there is a lot of netting. Even with some counterparty problems, net losses will probably not go over $1 trillion. Let’s assume $500 billion to $1 trillion of net payment and losses due to counterparty problems. Not too bad next to $7.5 to $10.5 trillion of losses on defaulted bonds.

Interest Rate and FX Derivatives.
Here the situation is much different. The total notional value of OTC interest rate and derivatives is $500 trillion (half a quadrillion). It is many times the size of the sovereign bond market.

Interest rate and FX derivatives typically start out at inception with a zero market value. Over time, as interest rates move, a contract acquires a market value. Sometimes, those market values are very large. In the 2008 distress, market values rose to $32 trillion from $11 trillion just 18 months before (Source: BIS, Table 19). Much of that market value is collateralized. Much of it is not, especially for sovereigns.

During the 2008 market turmoil, all kinds of typical relationships between rates changed. Significantly, there were no sovereign defaults during that period. A sovereign default would have made this period even more volatile.

During late 2008, huge amounts of collateral were sucked into the over the counter markets. With numerous sovereign defaults, this would likely happen again, probably on a bigger scale. There are several major sovereign-related risks:

     1. Sovereigns are frequently counterparties, and many of them typically don’t post any collateral. According to the ISDA Margin Survey 2010, exposures to “sovereign governments and supra-national institutions tend to have the lowest collateralization levels“. Only 25% of what would normally be collateralized is collateralized if the counterparty is a sovereign. Thus, a highly-rated sovereign, its central bank, or another quasi-sovereign entity could accumulate very large risk positions with no collateral. For example, a AAA-rated sovereign might slide to lower ratings and eventually to default, leaving an immense amount of collateral and derivatives payments due.

Does that story sound familiar? It’s what happened to AIG. AIG went from AAA rated in early 2005 to being majority owned by the Federal Reserve in its first bailout in September 2008.

AIG had some poor risk management decisions, aside from selling mostly unhedged credit default swap protection. ISDA asserts that

“Apparently, AIG relied excessively on a credit risk model that did not adequately account for both the sharp decline in the mortgage market and a downgrade of AIG's credit rating. It has been said that AIG would never have needed government assistance if not for its investments in credit default swaps. Perhaps that is true. But it would be more accurate to state that AIG would never have needed government assistance if had not so heavily exposed itself to mortgage backed securities”

(ISDA, AIG and Credit Default Swaps, 2009 ).

Good to know that sovereigns don’t provide unhedged credit guarantees, right? Among many other guarantees, it is common for sovereigns to guarantee bank deposits.

If interest rates or exchange rates moved quickly near the time a sovereign was downgraded or defaulted, a number of in-the-money swaps could be anywhere from worrisome to worthless to the other counterparty. Cash is an acceptable form of collateral, so some sovereigns who control their own currencies might print money, though printing really large amounts of it could have unintended consequences. Countries on the Euro don’t have the choice of printing their own money. Often, the native currency is not the one the OTC contract is written in, so any money printed might have to be converted to dollars, euros, or yen.

     2. Sovereign bonds are a major form of collateral. As downgrades occur, haircuts become larger, meaning that for every $100 million of collateral required, a counterparty might have to post $112 million of bonds with a BB rating. Then, when the bonds go below BB- (typical Basel II collateral requirements), it wouldn’t be acceptable at all.

     3. Sovereign distress and default would likely cause a breakdown between historic relationships and term structures. The relationships between short and long term rates in a particular currency could move to a strong preference toward short term debt, with long term rates going up. The relationships of interest rates in different currencies could move considerably. In Part 5C on banks, we’ll also discuss how LIBOR departed very substantially from its usual relationships in 2008, and in a period of distress this could easily happen again.

     4. Many interest rates for OTC contracts are directly set based on a sovereign interest rate, or are strongly influenced by them. Thus, a contract between two banks might be based on a rate which becomes very volatile, or unglued from its historic relationship.

Having defaulted or distressed sovereigns as counterparties could cause cascading defaults. Downgrades of sovereign debt being used as collateral could cause a massive rush for debt which is still highly rated, and cash. Remember that not only will traders have to replace downgraded debt with other collateral, downgraded debt will lose a big portion of its value and is affect traders’ balance sheets, and the entire system will need much more collateral.

Total Current OTC Collateral, Current Credit Risk
At year end 2009, there was only about $3.2 trillion of collateral posted, on over $600 trillion of notional value contracts, ISDA Margin Survey 2010.

With $22 trillion of gross market value of derivatives at year end 2009, BIS shows “gross credit exposure” of $3.7 trillion (Gross market values after taking into account legally enforceable bilateral netting agreements), BIS Quarterly Review, June 2010 Much of the half trillion of uncollateralized exposure is sovereigns. While I have no reason to doubt the BIS data collection on this item, the $3.7 number is not what it might seem to be.

Stress Cases
If you were to assume that there was only $3.7 trillion of credit exposure in the OTC derivatives market, you would be greatly underestimating.

Why? 1. The BIS number assumes that all expected netting actually occurs. These are bilateral contracts. It is not a given that netting will function properly when there are some big defaulted counterparties and quickly rising collateral requirements. 2. The BIS number would be more appropriately titled “gross credit exposure at current market values”. If market values change wildly due to movements in interest rates and FX, the market values of the OTC contracts will rise considerably. Vastly more collateral and/or credit exposure would now be booked at the new prices.

How much more collateral? Between mid 2007 and late 2008, the market value of OTC derivatives rose by $21 trillion (source: BIS). The “gross credit exposure” rose by $2 trillion.

A couple of analogies may help. If a bank looks at a line of credit for a borrower, it has two different risks. First, the risk that the borrower won’t repay part of all of what they have currently borrowed. Second, the risk that they will borrow considerably more, even max out the credit line, and then not pay that amount. The second one is an extreme stress case.

Another example is even more informative for OTC derivatives. Credit default swaps are similar to insurance in many ways. What many people miss is that interest rate and FX derivatives are also similar to insurance in many ways. They are much like the way that property insurers transfer risk around between various companies. Writing homeowners coverage in an area prone to hurricanes involves taking in risk. It is then sliced, diced, moved around in various ways, and mixed in with risk from other areas and hazards. Of course, regulators do tests for adequacy of capital.

In an analysis which sounds like you could simply substitute “financial crisis” for “hurricane”, Rawle King wrote,

“as development increased in coastal areas, a catastrophic hurricane could result in huge government outlays for disaster assistance and present insurers with significant financial hazards, such as the risk of insolvency, a rapid reduction of earnings and statutory surplus, forced asset liquidation to meet cash needs, and ratings downgrade ... for the very highest layers of catastrophe risk, the government (and consequently the taxpayer) is now, by default, the insurer of last resort.”

“Insurers were caught off-guard by the large losses associated with Hurricane Andrew because of significant errors in actuarial estimates of potential hurricane related losses. Prior to Hurricane Hugo in 1989, the insurance industry never suffered any loss over $1 billion from a single hurricane. Further, most insurance industry experts estimated the probable maximum loss (PML) for a single hurricane in the United States at between $8 and $10 billion, and that such an event would occur only once in a century. Hurricane Andrew took insurers and forecasters by total surprise. In hindsight, because of the lull in hurricane activity during the 1970s and 1980s, insurance policies were underpriced and insurers accepted far more hurricane exposure than could be supported by their capital resources (including reinsurance).”

That was published several months before Hurricane Katrina.

The low hurricane period of the 1970s and 80s has a close analog in finance, with similar results. The Great Moderation lasted from the late 1980s to 2007. In a speech in 2004, Fed Governor Ben Bernanke said

“One of the most striking features of the economic landscape over the past twenty years or so has been a substantial decline in macroeconomic volatility ...

I have argued today that improved monetary policy has likely made an important contribution not only to the reduced volatility of inflation (which is not particularly controversial) but to the reduced volatility of output as well. Moreover, because a change in the monetary policy regime has pervasive effects, I have suggested that some of the effects of improved monetary policies may have been misidentified as exogenous changes in economic structure or in the distribution of economic shocks. This conclusion on my part makes me optimistic for the future, because I am confident that monetary policymakers will not forget the lessons of the 1970s.”

In the Really Bad scenario, we have passed the Great Moderation, and are currently sitting in the relative calm between Hurricane Hugo and the much larger Hurricane Andrew (3x Hugo), or the even larger Hurricane Katrina (6x Hugo).

In our Really Bad scenario, there isn’t enough collateral to cover the gross market values. If collateral was required on all positions of all traders and the market values reached 3x their 2008 values, gross market value would be about $100 trillion dollars. That would exceed all sovereign debt, all corporate debt and all outstanding equities. However, even in a dysfunctional market, there is a lot of netting.

There might not be enough collateral even if netting. In recent years, the ratio of “gross credit exposure” to “gross market value” has been about 14-22% (BIS data). Let’s say that there is a need for a maximum of $20 trillion of collateral given the net positions. While there is probably enough collateral worldwide to cover $20 trillion, it would undoubtedly move market prices for acceptable assets. It would also be difficult to buy or borrow that much in a short time period.

It’s not just collateral. During a crisis, huge amounts of money would be changing hands. Many interest rate and FX contracts would have their scheduled payments.

An estimate of OTC losses.
While this is not a market value estimate like Part 5A, in the Really Bad scenario, defaulted sovereigns, banks, and other counterparties might find themselves unable to make a substantial part of their payments, or provide collateral. The IMF has discussed “the systemic risk associated with cascading counterparty failures” in Making Over-the-Counter Derivatives Safer.

Despite some large efforts by academics, governments, and others to estimate stress case losses, there are a myriad of modeling issues and choices. For the Really Bad scenario, I use a similar assumption to the losses on sovereign bonds. 45% of the counterparties have problems providing collateral or making their derivative payments as due. Losses to their counterparties are 50-69% of what is owed. That results in another $4.5 to $9.0 trillion of losses on interest rates and FX, and $0.5 to 1.0 trillion on CDS. So far, we’re at $12.5 to 20.5 trillion of losses in the Really Bad scenario

Such large losses require that in addition to the sovereigns themselves, a number of large OTC traders would default. The largest traders include banks and other institutions which have already received government rescues or substantial additional capital from governments. The Really Bad scenario assumes that solvent governments do not cover, or cannot cover, many of those traders’ OTC losses. Nouriel Roubini and Michael Pettis have interesting views on this. Due to OTC losses and direct losses on sovereign bonds, in our Really Bad scenario many of those firms would be in bankruptcy, conservatorship, receivership, or liquidation. As a result, massive changes would occur in the OTC market, and financial systems as a whole.

What can be done? Can we just print money? Turn unacceptable collateral into acceptable? Issue IOUs? Can governments change the terms of the OTC contracts? How about austerity, would that help?

Those are in Part 5C. Some Policy Options, Good and Bad. Financial institutions, governments, and central banks can be creative in a crisis. We will look at some previous actions during crises, and some proposals.

Note from Some Investor Guy: I appreciate everyone’s comments on each thread, they help to improve the series as it goes. CR Note: thanks to Some Investor Guy - this series has add over 100,000 visits to CR.

Full Disclosure: Some Investor Guy owns no credit default swaps, interest rate derivatives, or FX contracts. This series is not investment advice nor an offer to buy or sell anything. Unless cited to other sources, opinions are the author’s. Like just about any other analyst, he could be wrong. He might be right, but he is not psychic. He is not a regulator, nor is he running for any elected office. If a regulator or researcher wants to talk about the series, email CR. He will forward it to Some Investor Guy.

CR Note: This is from "Some investor guy".

Part 1: How Large is the Outstanding Value of Sovereign Bonds?

Part 2. How Often Have Sovereign Countries Defaulted in the Past?

Part 2B: More on Historic Sovereign Default Research

Part 3. What are the Market Estimates of the Probabilities of Default?

Part 4. What are Total Estimated Losses on Sovereign Bonds Due to Default?

Part 5A. What Happens If Things Go Really Badly? $15 Trillion of Sovereign Debt in Default

SIG 2

2010-07-31T16:28:00.002-07:00

“Apparently, AIG relied excessively on a credit risk model that did not adequately account for both the sharp decline in the mortgage market and a downgrade of AIG's credit rating. It has been said that AIG would never have needed government assistance if not for its investments in credit default swaps. Perhaps that is true. But it would be more accurate to state that AIG would never have needed government assistance if had not so heavily exposed itself to mortgage backed securities”

“as development increased in coastal areas, a catastrophic hurricane could result in huge government outlays for disaster assistance and present insurers with significant financial hazards, such as the risk of insolvency, a rapid reduction of earnings and statutory surplus, forced asset liquidation to meet cash needs, and ratings downgrade ... for the very highest layers of catastrophe risk, the government (and consequently the taxpayer) is now, by default, the insurer of last resort.”

“Insurers were caught off-guard by the large losses associated with Hurricane Andrew because of significant errors in actuarial estimates of potential hurricane related losses. Prior to Hurricane Hugo in 1989, the insurance industry never suffered any loss over $1 billion from a single hurricane. Further, most insurance industry experts estimated the probable maximum loss (PML) for a single hurricane in the United States at between $8 and $10 billion, and that such an event would occur only once in a century. Hurricane Andrew took insurers and forecasters by total surprise. In hindsight, because of the lull in hurricane activity during the 1970s and 1980s, insurance policies were underpriced and insurers accepted far more hurricane exposure than could be supported by their capital resources (including reinsurance).”

“One of the most striking features of the economic landscape over the past twenty years or so has been a substantial decline in macroeconomic volatility ...

I have argued today that improved monetary policy has likely made an important contribution not only to the reduced volatility of inflation (which is not particularly controversial) but to the reduced volatility of output as well. Moreover, because a change in the monetary policy regime has pervasive effects, I have suggested that some of the effects of improved monetary policies may have been misidentified as exogenous changes in economic structure or in the distribution of economic shocks. This conclusion on my part makes me optimistic for the future, because I am confident that monetary policymakers will not forget the lessons of the 1970s.”

Part 1: How Large is the Outstanding Value of Sovereign Bonds?

Part 2. How Often Have Sovereign Countries Defaulted in the Past?

Part 2B: More on Historic Sovereign Default Research

Part 3. What are the Market Estimates of the Probabilities of Default?

Part 4. What are Total Estimated Losses on Sovereign Bonds Due to Default?

Part 5A. What Happens If Things Go Really Badly? $15 Trillion of Sovereign Debt in Default

SIG 1

2010-07-31T16:28:00.001-07:00

“Apparently, AIG relied excessively on a credit risk model that did not adequately account for both the sharp decline in the mortgage market and a downgrade of AIG's credit rating. It has been said that AIG would never have needed government assistance if not for its investments in credit default swaps. Perhaps that is true. But it would be more accurate to state that AIG would never have needed government assistance if had not so heavily exposed itself to mortgage backed securities”

“as development increased in coastal areas, a catastrophic hurricane could result in huge government outlays for disaster assistance and present insurers with significant financial hazards, such as the risk of insolvency, a rapid reduction of earnings and statutory surplus, forced asset liquidation to meet cash needs, and ratings downgrade ... for the very highest layers of catastrophe risk, the government (and consequently the taxpayer) is now, by default, the insurer of last resort.”

“Insurers were caught off-guard by the large losses associated with Hurricane Andrew because of significant errors in actuarial estimates of potential hurricane related losses. Prior to Hurricane Hugo in 1989, the insurance industry never suffered any loss over $1 billion from a single hurricane. Further, most insurance industry experts estimated the probable maximum loss (PML) for a single hurricane in the United States at between $8 and $10 billion, and that such an event would occur only once in a century. Hurricane Andrew took insurers and forecasters by total surprise. In hindsight, because of the lull in hurricane activity during the 1970s and 1980s, insurance policies were underpriced and insurers accepted far more hurricane exposure than could be supported by their capital resources (including reinsurance).”

“One of the most striking features of the economic landscape over the past twenty years or so has been a substantial decline in macroeconomic volatility ...

I have argued today that improved monetary policy has likely made an important contribution not only to the reduced volatility of inflation (which is not particularly controversial) but to the reduced volatility of output as well. Moreover, because a change in the monetary policy regime has pervasive effects, I have suggested that some of the effects of improved monetary policies may have been misidentified as exogenous changes in economic structure or in the distribution of economic shocks. This conclusion on my part makes me optimistic for the future, because I am confident that monetary policymakers will not forget the lessons of the 1970s.”

Part 1: How Large is the Outstanding Value of Sovereign Bonds?

Part 2. How Often Have Sovereign Countries Defaulted in the Past?

Part 2B: More on Historic Sovereign Default Research

Part 3. What are the Market Estimates of the Probabilities of Default?

Part 4. What are Total Estimated Losses on Sovereign Bonds Due to Default?

Part 5A. What Happens If Things Go Really Badly? $15 Trillion of Sovereign Debt in Default

test

2010-06-07T08:38:00.001-07:00

test

Daily Show: Hoarders

2010-06-03T17:18:00.001-07:00

We all need a laugh ... Here is the link at the Daily Show

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Cenac - The Spilling Fields - Oil Leak Containment Ideas
www.thedailyshow.com

Neg Eq

2010-05-13T10:58:00.001-07:00

See Calculated Risk Post: 11.2 Million U.S. Properties with Negative Equity in Q1

test ad

2010-04-23T13:47:00.001-07:00

Calculated Risk Post: 'Betting Against the American Dream'

Image

2010-04-20T09:10:00.001-07:00

This is an image

2010-04-15T14:53:00.001-07:00

short test

2009-08-31T09:41:00.001-07:00

short

test

2009-08-30T12:05:00.000-07:00

Date	Status
Sep 13, 2006
Feb 21, 2007
Apr 25, 2007
Jun 27, 2007
Oct 5, 2007
Jan 4, 2008
Aug 30, 2009

If you've only been following Econbrowser since 2008, you may have thought that the crabby countenance in the upper-right corner of our main page was a permanent fixture, conveying our general grumpiness about the state of the economy or perhaps life in general. Despite having been stuck in the pessimistic mode for quite some time now, the emoticon was in fact always intended to be a dynamic feature, adjusted from time to time to provide readers with our overall impression of incoming data. The table on the left provides links to each occasion that our Little Econ Watcher's countenance has changed in the past.

Last week's data persuaded me to move the Econbrowser Emoticon back into neutral, signifying that I now judge overall output to be growing slowly rather than declining. Here are details on the evidence that prompted this change in assessment, and what it signifies.

test

2009-08-18T20:35:00.001-07:00

22658
29979
33535
29776
35029
34294
3735
22441
35462
34242
35170
58183
4999
29864
22130
22469
24199
33134
34578
35136
30187
35575
35013
24271
13693
21521
34381
2521
34692
57976
57136
34682
16370
30364
27583
57448
22308
28536
27732
2595
5672
14370
35383
23011
12261
57944
22710
57885
32583
57315
30003
32618
58005
151
29042
34597
22977
4392
10100
57068
31555
25648
26348
35518
29247
35476
18115
1361
57096
35096
57586
34789
57021
28136
26972
33314
58329
19794
35385
9719
19797
20448
34830
57874
58100
33928
57740
28235
31419
18962
38129
27126
131
27506
23266
5048
33211
57110
29341
57697
28114
57120
14587
58072
16480
31027
18321
28312
58294
12513
30329
31623
30890
32167
22868
34824
15448
1149
27197
35224
57424
15083
6423
35461
32328
20843
57113
57169
20292
8205
15354
33989
31813
13272
8265
13832
21161
22353
2205
22754
8537
19869
17594
1252
35431
17792
32347
24935
27808
57736
35101
26619
34659
21801
33823
35372
58352
34430
19657
58158
28353
32267
35450
26185
1695
57563
27465
12303
9422
9619
32284
5702
35291
21132
32148
35036
57036
23306
34503
18272
34119
4803
34551
27559
2691
8833
58257
27015
21649
5732
35561
20026
32360
57132
22536
5716
17614
33198
4516
34396
22327
21478
35246
35038
1900
24957
4709
5338
2226
4174
15484
57181
18564
169
5318
24355
3041
19266
22046
4185
26290
57239
9502
15787
34875
11704
16089
33519
35044
26323
57259
8283
33103
32287
23835
58391
57807
26615
10816
57262
18984
19254
58416
20761
13058
35279
34652
11636
32489
34727
35156
32456
57688
26820
23876
31495
25258
57107
11416
31263
9793
27877
8193
10161
57953
58082
26816
11522
32165
1909
32698
11261
27477
22644
20280
1624
10925
13809
57593
58341
23331
35014
27026
22669
35586
32276
35242
2284
26890
34953
58550
24156
34171
23966
22427
26299
23632
9772
34673
19381
20160
17782
32503
14194
57147
34112
57920
1905
14485
9425
57764
22846
29323
24067
57525
3019
24099
35114
19686
58641
35139
27986
23156
35299
30898
34127
4731
35335
57263
8221
1406
29561
32536
32232
20115
28805
58029
26442
3302
57431
3337
3400
5283
14246
34292
35259
14200
19040
34663
13959
26396
3934
18794
2119
4457
25155
4476
2708
4744
5558
5485
5489
15794
33904
3358
27096
10216
15288
12080
32606
10506
57024
57303
57826
23032
34781
57189
33144
18772
34665
34678
34985
24465
25651
58399
19245
58065
58205
10168
32571
58009

test

2009-08-14T09:19:00.000-07:00

Bank and Thrift Failures
http://calculatedrisk.blogspot.com/
1921 506
1922 366
1923 646
1924 775
1925 617
1926 975
1927 669
1928 498
1929 659
1930 1,350
1931 2,293
1932 1,453
1933 4,000
1934 9
1935 25
1936 69
1937 75
1938 74
1939 60
1940 43
1941 15
1942 20
1943 5
1944 2
1945 1
1946 1
1947 5
1948 3
1949 4
1950 4
1951 2
1952 3
1953 2
1954 2
1955 5
1956 2
1957 1
1958 4
1959 3
1960 1
1961 5
1962 1
1963 2
1964 7
1965 5
1966 7
1967 4
1968 3
1969 9
1970 7
1971 7
1972 2
1973 6
1974 4
1975 13
1976 17
1977 6
1978 7
1979 10
1980 22
1981 40
1982 119
1983 99
1984 106
1985 180
1986 204
1987 262
1988 470
1989 534
1990 382
1991 271
1992 181
1993 50
1994 15
1995 8
1996 6
1997 1
1998 3
1999 8
2000 7
2001 4
2002 11
2003 3
2004 4
2005 0
2006 0
2007 3
2008 25
2009 77

table

2009-08-09T09:54:00.001-07:00

Home Tenure	2005	2020	Change	Percent Change in Supply	Share of Change in Supply	Tenure 2005	Tenure 2020
Owner-Homes (occupied and vacant)	74,164	87,135	12,971	17%	43%	68.90%	63.50%
Renter-Homes (occupied and vacant)	35,903	53,254	17,351	48%	57%	31.10%	36.50%
Total	110,067	140,389	30,322
Source: Arthur C. Nelson, Director, Metropolitan Research Center

Obama

2009-07-22T16:28:00.001-07:00

test

2009-07-18T11:44:00.000-07:00

CNBC

2009-07-15T08:37:00.001-07:00

Colbert

2009-07-14T14:33:00.001-07:00

The Colbert Report

Mon - Thurs 11:30pm / 10:30c

Paul Krugman

www.colbertnation.com

Colbert Report Full Episodes

Political Humor

Jeff Goldblum

tet

2009-07-11T06:07:00.001-07:00

Click image for video.Henry Paulson's Legacy Is Imperiled as SIVs Unravel: Video November 21 (Bloomberg) -- Henry Paulson, the former Goldman Sachs Group Inc. chief executive officer who took office as U.S. Treasury Secretary in July 2006, led an effort to create a superfund to buy up structured investment vehicles, or SIVs, to stem the tide of defaults. Paulson discusses the superfund concept and Nouriel Roubini, chairman of Roubini Global Economics LLC, Robert Steel, the Treasury's undersecretary for domestic finance, and Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co., comment on the likely effectiveness of the SIV fund. (Source: Bloomberg)

GM

2009-07-10T05:26:00.001-07:00

Here is the press conference at 9 AM ET:

CNBC

2009-07-07T15:17:00.000-07:00

This is an interesting review with Bryan Marsal, CEO of Lehman Brothers Holdings, who is unwinding Lehman Brothers ... especially at the 18 minute mark:

One of my partners said yesterday that we are going to call this phase the "extend and pretend" phase in our economy. Which is you extend someone's maturity - because they are going to default - and you pretend that business will come back or that leverage factor is going to come back.

Then we'll enter phase two, which he said is the request to extend or "amend".

Then "send". In other words send the keys.

That is the phases we are in right now. Everyone is trying to buy time, as opposed to dealing with the leverage, they are trying to buy time. Whether they you are a banker or a company, they are all trying to buy time. I don't see the leverage coming back, and I don't see the consumption of good and services coming back.
Bryan Marsal, CEO of Lehman Brothers Holdings, quoting his partner.

test

2009-06-28T11:37:00.001-07:00

ht ShortCourage

And one from May ...

Fed meeting

2009-06-22T21:09:00.001-07:00

A short preview from Bloomberg ...

gold

2009-06-20T21:12:00.001-07:00

test

2009-06-17T17:55:00.001-07:00

Note: Downey Savings & Loan was seized by regulators on Nov 21, 2008, at an estimated cost to the Deposit Insurance Fund (DIF) of $1.4 billion.

E. Scott Reckard at the LA Times Money & Co blog: Report: Lax oversight allowed Downey Savings' loan binge

Federal regulators responded inadequately from 2005 on as billions of dollars in high-risk mortgages piled up at weakly managed Downey Savings and Loan, the U.S. Treasury Department inspector general said in a report on last year’s failure of the Newport Beach thrift.

The Office of Thrift Supervision ... began warning Downey management in 2002 about its heavy issuance of pay-option adjustable-rate mortgages but failed to rein in the practice, the report said.
...
Yet despite the warnings, "OTS examiners did not require Downey to limit concentrations in higher-risk loan products," said the 71-page inspector general report, posted Tuesday on the Treasury Department’s website.

Here is a Downey ad from the loose lending period (not in report):

Click on Ad for larger image in new window.
Not sure of the exact date of this advertisement, but thanks for the memories! (hat tip Elroy).

From the report:

The primary causes of Downey’s failure were the thrift’s high concentrations in single-family residential loans which included concentrations in option adjustable rate mortgage (ARM) loans, reduced documentation loans, subprime loans, and loans with layered risk; inadequate risk-monitoring systems; the thrift’s unresponsiveness to OTS recommendations; and high turnover in the thrift’s management. These conditions were exacerbated by the drop in real estate values in Downey’s markets.

And oversight from the OTS was insufficient:

OTS examiners did not require Downey to limit concentrations in higher-risk loan products. We believe that in light of the OTS’s repeated expressions of concern and management’s unresponsiveness to those concerns, OTS should have been more forceful, at least by 2005, to limit such concentrations. In interviews, OTS examiners commented that this would have been difficult since there was no history of losses in Downey’s option ARM, low documentation, and layered-risk loans from 2002 to 2006. However, both ND Bulletin 02-17 and the successor ND Bulletin 06-14 provide that examiners can direct thrifts to discontinue activities that lead to a specific high-risk concentration when proper oversight and controls are not in place. We believe that if there is one lesson to be learned from Downey’s failure it is that a lack of losses in the short term should not negate the need to address risk exposure such as high concentrations.

This graph from the Inspector General's report (with color added) shows the shift over time to reduced documentation loans. This add risk to already risky products and should have been a huge red flag.

"Reduced documentation" is code word for borrower underwritten, as opposed to lender unwritten loans. Not surprisingly, reduced documentation loans perform worse than full documentation loans.

At the same time Downey was shifting to more and more reduced doc loans, they were also increasing the percentage of Option ARMs.

(See the ad above)

This was a toxic combination of risk layering.

$13.9 Trillion Total Maximum Government Support Announced

2009-06-16T09:07:00.000-07:00

The FDIC released the Summer 2009 Supervisory Insights today. The report includes the following table showing all the government support announced in 2008 and soon thereafter. The maximum capacity is $13.9 trillion.

Government Support for Financial Assets and Liabilities Announced in 2008 and Soon Thereafter ($ in billions)
Important note: Amounts are gross loans, asset and liability guarantees and asset purchases, do not represent net cost to taxpayers, do not reflect contributions of private capital expected to accompany some programs, and are announced maximum program limits so that actual support may fall well short of these levels
	Year-end 2007	Year-end 2008	Subsequent or Announced Capacity If Different
Treasury Programs
TARP investments1	$0	$300	$700
Funding GSE conservatorships2	$0	$200	$400
Guarantee money funds3	$0	$3,200
Federal Reserve Programs
Term Auction Facility (TAF)4	$40	$450	$900
Primary Credit5	$6	$94
Commercial Paper Funding Facility (CPFF)6	$0	$334	$1,800
Primary Dealer Credit Facility (PDCF)5	$0	$37
Single Tranche Repurchase Agreements7	$0	$80
Agency direct obligation purchase program8	$0	$15	$200
Agency MBS program8	$0	$0	$1,250
Asset-backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF)9	$0	$24
Maiden Lane LLC (Bear Stearns)9	$0	$27
AIG (direct credit)10	$0	$39	$60
Maiden Lane II (AIG)5	$0	$20
Maiden Lane III (AIG)5	$0	$27
Reciprocal currency swaps11	$14	$554
Term securities lending facility (TSLF) and TSLF options program(TOP)12	$0	$173	$250
Term Asset-Backed Securities Loan Facility (TALF)13	$0	$0	$1,000
Money Market Investor Funding Facility (MMIFF)14	$0	$0	$600
Treasury Purchase Program (TPP)15	$0	$0	$300
FDIC Programs
Insured non-interest bearing transactions accounts16	$0	$684
Temporary Liquidity Guarantee Program (TLGP)17	$0	$224	$940
Joint Programs
Citi asset guarantee18	$0	$306
Bank of America asset guarantee19	$0	$0	$118
Public-Private Investment Program (PPIP)20	$0	$0	$500
Estimated Reductions to Correct for Double Counting
TARP allocation to Citi and Bank of America asset guarantee21			– $13
TARP allocation to TALF21			– $80
TARP allocation to PPIP21			– $75
Total Gross Support Extended During 2008		$6,788
Maximum capacity of support programs announced through first quarter 200922			$13,903

Table notes:
1 $300 is as of 1-23-2009 as reported in SIGTARP report of February 6 2009; EESA authorized $700.
2 Year-end reflects Treasury announcement of September 7, 2009, capacity reflects Treasury announcement of February 18, 2009; funding authorized under Housing and Economic Recovery Act.
3 Informal estimate of amount guaranteed at year-end 2008, provided by Treasury staff.
4 Year-end balances from Federal Reserve Statistical Release H.R. 1, “Factors Affecting Reserve Balances” (henceforth, H.R. 1); capacity from “Domestic Open Market Operations During 2008” (Report to the Federal Open Market Committee, January 2009), page 24.
5 Year-end balances from H.R. 1.
6 Year-end balances from H.R. 1; capacity from “Report Pursuant to Section 129 of the Emergency Economic Stabilization Act of 2008: Commercial Paper Funding Facility,” accessed May 26, 2009, from http://www.newyorkfed.org/aboutthefed/annual/annual08/CPFFfinstmt2009.pdf.
7 Year-end balances from H.R. 1; see also “Domestic Open Market Operations During 2008” (henceforth “DOMO report”) report to the Federal Open Market Committee, January 2009, page 11, summary of activity in program announced March 7 by the Federal Reserve.
8 Year-end balances from H.R. 1, capacity from Federal Reserve announcements of November 25, 2008 and March 18, 2009.
9 H.R. 1.
10 Year-end balances from H.R. 1; capacity from periodic report pursuant to EESA, “Update on Outstanding Lending Facilities Authorized by the Board Under Section 13(3) of the Federal Reserve Act,” February 25, 2009, page 8, henceforth referred to as “Update;” Federal Reserve AIG support is separate from Treasury support that is included in the TARP line item.
11 Year-end balances reported in DOMO report, page 25.
12 Year-end balances from H.R. 1; capacity from Federal Reserve announcement of March 11, 2008, Federal Reserve Bank of New York press release of August 8, 2008, and discussion at page 22 of DOMO report.
13 From “Update,” page 2.
14 From “Report Pursuant to Section 129 of the Emergency Economic Stabilization Act of 2008: Money Market Investor Funding Facility,” accessed May 26, 2009, from http://www.federalreserve.gov/monetarypolicy/files/129mmiff.pdf; Federal Reserve to fund 90 percent of financing or $540 billion.
15 Program and capacity announced by the Federal Reserve, March 18, 2009.
16 FDIC Quarterly Banking Profile, Fourth Quarter 2008, (henceforth, “QBP”) Table III-C.
17 Year-end outstanding from QBP, Table IV-C; total estimated cap for all entities opting in the program from QBP, Table II-C.
18 Announcement by FDIC, Treasury, and Federal Reserve November 23, 2008.
19 Announcement by FDIC, Treasury, and Federal Reserve of January 16, 2009.
20 To purchase legacy assets, as described in Treasury, FDIC, and Federal Reserve announcement of March 23, 2009. $500 refers to maximum capacity of Legacy Loans Program; funding for the Legacy Securities Program is believed to be subsumed under the TALF.
21 SIGTARP quarterly report of April, 2009, page 38.
22 Year-end 2008 amounts plus the amount by which announced capacity exceeds the year-end 2008 amount, minus the amount of known double counting.

test

2009-06-16T08:41:00.000-07:00

Government Support for Financial Assets and Liabilities Announced in 2008 and Soon Thereafter ($ in billions)
Important note: Amounts are gross loans, asset and liability guarantees and asset purchases, do not represent net cost to taxpayers, do not reflect contributions of private capital expected to accompany some programs, and are announced maximum program limits so that actual support may fall well short of these levels
	Year-end 2007	Year-end 2008	Subsequent or Announced Capacity If Different
Treasury Programs
TARP investments1	$0	$300	$700
Funding GSE conservatorships2	$0	$200	$400
Guarantee money funds3	$0	$3,200
Federal Reserve Programs
Term Auction Facility (TAF)4	$40	$450	$900
Primary Credit5	$6	$94
Commercial Paper Funding Facility (CPFF)6	$0	$334	$1,800
Primary Dealer Credit Facility (PDCF)5	$0	$37
Single Tranche Repurchase Agreements7	$0	$80
Agency direct obligation purchase program8	$0	$15	$200
Agency MBS program8	$0	$0	$1,250
Asset-backed Commercial Paper Money Market Mutual Fund
Liquidity Facility (AMLF)9	$0	$24
Maiden Lane LLC (Bear Stearns)9	$0	$27
AIG (direct credit)10	$0	$39	$60
Maiden Lane II (AIG)5	$0	$20
Maiden Lane III (AIG)5	$0	$27
Reciprocal currency swaps11	$14	$554
Term securities lending facility (TSLF) and TSLF options program(TOP)12	$0	$173	$250
Term Asset-Backed Securities Loan Facility (TALF)13	$0	$0	$1,000
Money Market Investor Funding Facility (MMIFF)14	$0	$0	$600
Treasury Purchase Program (TPP)15	$0	$0	$300
FDIC Programs
Insured non-interest bearing transactions accounts16	$0	$684
Temporary Liquidity Guarantee Program (TLGP)17	$0	$224	$940
Joint Programs
Citi asset guarantee18	$0	$306
Bank of America asset guarantee19	$0	$0	$118
Public-Private Investment Program (PPIP)20	$0	$0	$500
Estimated Reductions to Correct for Double Counting
TARP allocation to Citi and Bank of America asset guarantee21			– $13
TARP allocation to TALF21			– $80
TARP allocation to PPIP21			– $75
Total Gross Support Extended During 2008		$6,788
Maximum capacity of support programs announced through first quarter 200922			$13,903

Pac-Man

2009-06-12T18:06:00.001-07:00

temp

2009-06-11T15:00:00.001-07:00

One of the headlines from the Fed's Flow of Funds report this morning was that household percent equity had fallen to a record low 41.4%.

Click on graph for larger image in new window.

This graph shows homeowner percent equity since 1952.

This is a simple calculation: divide home mortgages ($10,464 billion) by household real estate assets ($17,870 billion) gives us the percent mortgage debt (58.6%). Subtract from one gives us the percent homeowner equity (41.4%).

But what does this tell us?

What we really want to know is the percent equity for homeowners with mortgages. According to the Census Bureau, 31.6% of all U.S. owner occupied homes had no mortgage in 2007 (most recent data). These homeowners tend to be older, or more risk adverse, and few of them will probably borrow from their home equity.

You can't do a direct subtraction because the value of these paid-off homes is, on average, lower than the mortgaged 68.4%. But we can construct a model based on data from the 2007 American Community Survey.

	United States
	Estimate	Margin of Error
Total:	75,515,104	+/-227,236
With a mortgage:	51,615,003	+/-152,731
Less than $50,000	2,037,849	+/-21,748
$50,000 to $99,999	6,443,236	+/-45,023
$100,000 to $149,999	8,023,775	+/-48,465
$150,000 to $199,999	7,318,809	+/-43,489
$200,000 to $299,999	9,538,216	+/-46,625
$300,000 to $499,999	10,196,919	+/-44,000
$500,000 or more	8,056,199	+/-35,865
Not mortgaged:	23,900,101	+/-91,776
Less than $50,000	3,577,700	+/-30,890
$50,000 to $99,999	4,665,031	+/-35,455
$100,000 to $149,999	3,765,972	+/-28,355
$150,000 to $199,999	2,968,680	+/-24,691
$200,000 to $299,999	3,227,661	+/-23,430
$300,000 to $499,999	3,080,889	+/-21,963
$500,000 or more	2,614,168	+/-17,619

Click on graph for larger image in new window.

This graph shows the distribution of U.S. households by the value of their home, with and without a mortgage. This data is for 2007.

By using the mid-points of each range, and solving for the price of the highest range to match the then Fed's estimate of household real estate assets at the end of 2007: $20.5 Trillion, we can estimate the total dollar value of houses with and without mortgages.

Using this method, the total value of U.S. houses, at the end of 2007, with mortgages was $15.1 Trillion or 73.6% of the total. The value of houses without mortgages was $5.4 Trillion or 26.4% of the total U.S. household real estate.

Assuming 73.6% of current total assets is for households with mortgages (so $13.2 trillion of $17.87 trillion total), and since all of the mortgage debt ($10.464 trillion) is from the households with mortgages, these homes have an average of 20.4% equity. It's important to remember this includes some homes with 90% equity, and millions of homes with zero or negative equity.

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2009-06-10T23:19:00.000-07:00

image size

2009-06-10T11:26:00.001-07:00

t

2009-06-08T17:27:00.000-07:00

Temp

2009-06-06T21:44:00.000-07:00

As CR mentions in his essay on housing supply in this issue, plenty of markets are seeing very large segments of for-sale inventory coming in the form of short sale listings. Yet completed short sales remain a small segment of actual “distressed sales” or final dispositions of “worked out” loans. It is difficult to get reliable current data on short sales completed; the MBA reported in its first major analysis of workout data back in Q3 2007 that in that quarter, there were around 384,000 foreclosure starts and about 9,000 short sales completed. Certainly we have a lot of anecdotal evidence in the mainstream news media and from real estate agent reports suggesting that while short sales were never especially easy to accomplish, they are getting less so as time goes on.

Because so many observers of the scene express endless frustration that short sales have not been embraced by lenders as a “solution” to the foreclosure crisis—and no doubt because many potential real estate investors may be thinking that buying in a short sale is a good way to find a bargain—I thought it would be worthwhile to examine some of the reasons why they just don’t happen as often as one might expect. Part of the problem is overwhelmed servicers dealing with securitization documents that give them limited negotiating room, but that isn’t all of it. There is, I think, a certain psychological issue with two of the important participants in a short sale scenario other than the servicer, namely the current owner and the potential buyer, and this issue is causing short sale proposals that just don’t pass muster with servicers.

We should start by reviewing why it is that a servicer might be inclined to accept a short sale: the idea is that the loss incurred is less than the loss that would be incurred in a foreclosure. To start, then, the servicer must have some model it can use to project likely losses in foreclosure. A good deal of the data going into that model involves not just a projection of the likely sales price of the eventual REO, but also the servicer’s estimates of the costs and expenses of foreclosure, which the short sale is supposed to be minimizing or eliminating. This modeling is dynamic: as a local RE market changes (prices fall, inventory mounts, timelines for foreclosure extend), the model has to keep updating its loss projections.

There is no particular “rule of thumb” for what loss severity in a foreclosure is in any market, but one can start with a fairly simple example of where the losses come from by looking at some aggregated national data prepared by two Freddie Mac economists, Amy Crews Cutts and William A. Merrill, in a recent paper entitled “Interventions in Mortgage Default: Policies and Practices to Prevent Home Loss and Lower Costs” (available for download at www. freddiemac.com). The authors estimate the “breakout” of foreclosure losses on Freddie Mac (conforming dollar, prime or near-prime credit quality mortgages) in the period up to the third quarter of 2007 as follows:

• 20% Principal loss (the difference between the unpaid principal balance or UPB of the loan and the REO sales price, or the amount of the borrower’s “negative equity”)

• 37% Pre-Foreclosure Expenses (24% interest expense, 4% legal fees, 8% property costs such as taxes, insurance, assessments and utilities)

• 43% Post-Foreclosure Expenses (21% sales commission/concessions, 2% legal fees, 20% property costs and maintenance/repair

To take a simple example, then, in a market which is currently experiencing a “loss severity” of 40% (of the unpaid principal balance or UPB of the loan), the breakout would look something like this on average (using a smaller than “average” loan balance just to simplify the math):

Loan Amount	100,000
REO Sales Price	92,000
UPB Loss	8,000
Pre-FC Expense	14,800
Post-FC Expense	17,200
Total Loss	40,000
Loss Severity	40%

A short sale, then, would be of interest to the servicer only if it could result in a loss severity less than 40%. Of course, we do not necessarily expect the buyer in a short sale scenario to be offering $92,000 in this example, because that is not, in the buyer’s mind, a “discount” from the price the property would fetch as REO. The idea is that the servicer can be brought to accept a lower price for the property today than it could (potentially) get for the REO, because the short sale saves on the “foreclosure expenses.” Much frustration is being expressed by certain market participants or buyers who are nonplussed by servicers who apparently don’t want to “save” this money by accepting low-ball offers.

Part of the difficulty here is coming to terms with what the components of a servicer’s expenses are, and also what a difference it makes whether the current owner is delinquent (and cash-strapped) or not. It simply isn’t clear to me that everyone who is listing a property as a short sale these days is, actually, delinquent yet. That certainly makes a difference to a servicer’s willingness to negotiate, but it also makes a big difference in terms of what the cost comparisons are.

We also need to consider questions of timing. We looked in last month’s newsletter at some comparative foreclosure timeline numbers, making the point that they are dependent on the state’s laws as much if not more so that the servicer’s capacity or efficiency, although the latter is certainly significant. A short sale, more or less by definition, needs to be a “quick sale.” Delinquent borrowers do not have time to “expose” the property to “typically motivated” buyers for long enough to get the “optimum” price for the property; that’s why they’re facing foreclosure. Non-delinquent borrowers, presumably, can. However, they don’t want to deal with the extraordinarily extended “exposure” time required in a thorough-going RE bust, which moves from a matter of months to, apparently, a matter of years. Short sales offered by non-delinquent sellers fall into this odd sort of time-continuum: not as “quick” as a distressed borrower, but much “quicker” than a borrower seeking at least his loan amount. This no doubt accounts for a lot of the “failure to communicate” between non-delinquent borrower and servicer that we’re hearing about these days.

Let’s look at a theoretical set of alternative transactions based on the average numbers I laid out above. Please note that what I’m trying to capture here is the “mathematics of psychology,” not precisely the mathematics of “reality.” That will, I hope, be clearer after we look at some numbers:

	Foreclosure With 40% Loss Severity	Short Sale with Delinquent Owner		Short Sale with Non-Delinquent Owner
	Foreclosure With 40% Loss Severity	Deal Fails	Deal Passes	"Typical" Exposure	"Quick Sale"
Loan Amount	100,000	100,000	100,000	100,000	100,000
"Gross" Sales Price	92,000	80,000	84,000	80,000	80,000
Sales Expense to Buyer	-	8,400	8,400	-	21,200
"Net" Sales Price	92,000	71,600	75,600	80,000	58,800
UPB Loss	8,000	28,400	24,400	20,000	41,200
Pre-FC Legal & Property	5,200	5,200	5,200	2,000	2,000
Pre-FC Interest Expense	9,600	9,600	9,600	-	-
Post FC Legal & Property	8,800	-	-	-	-
Post-FC Sales Expense	8,400	-	-	-	-
Total Loss:	40,000	43,200	39,200	22,000	43,200
"Discount" From REO Price	-	22%	18%	13%	36%
Post-FC Sales Expense to Owner	-	-	-	8,400	-
Pre-FC Interest Expense to Owner	-	-	-	9,600	-
Pre-FC Property Expense to Owner	-	-	-	3,200	-

In the foreclosure scenario, all costs to maintain the property, as well as cover interest payments on the outstanding loan balance due to the investor, are carried by the servicer and reimbursed from liquidation proceeds. This includes the “post-FC” costs of sales commissions and typical sales concessions (such as paying all or part of a buyer’s closing costs).

In our first example of a short sale with a delinquent owner, the buyer offers $80,000 for the property. However, we are going to assume a cash-strapped seller who is unable to cover the $8,400 in commissions/ concessions that would, in the foreclosure, have been paid by the servicer, and so we will assume that these costs are “passed on” to the buyer of the home, resulting in a net sales price of $71,600, or a 22% “discount” from the assumed REO price of $92,000. I don’t think it’s unreasonable to believe there might be buyers out there telling themselves that surely a servicer would rather lose 22% than 40%.

As we can see, however, it is really only the “post-FC” expenses that the servicer is “saving” in this deal, because the property seller has not, we assume, been making mortgage payments in a time-frame we will, for example purposes, consider to be equivalent to an “average” pre-FC period. You can, of course, and you would reduce the servicer’s expenses if the short sale were very fast, fast enough to make a meaningful difference in the servicer’s property expenses and interest costs. We’re just trying to keep the math constant to show, exactly, that you do have to sell not just “short” but “quick” to “pass” the servicer’s test here.

The second delinquent-owner column shows that the proposed deal doesn’t “pass” the servicer’s less-loss test until the sales price gets up to $84,000. That is still a “discount” from $92,000, if you choose to think of it that way, but not anywhere near a “lowball” offer.

The last two columns show how “psychological math” changes when we have a non-delinquent seller. In the first column, we assume a “rational” seller who understands that he needs to keep paying his mortgage until the sale takes place, meaning that he carries that “interest cost” and “pre-FC property expense” that the servicer would carry in the foreclosure scenario. Also, he will have to pony up at settlement for commission and typical concessions. If he is not particularly pressed for time here—he isn’t, after all, facing imminent foreclosure—then we’ll call his situation something like a “typical” marketing time for the property, which we are for simplicity’s sake making the equivalent of the foreclosure timeline. That scenario results in what should surely be an attractive deal to the servicer: a loss of only $22,000. With the property seller “paying” most of the costs that would otherwise have been the servicer’s. (I assume for example purposes that the legal costs of pre-foreclosure ($2,000) are equivalent to the legal/administrative costs to the servicer of processing a short sale.)

The only problem with that scenario, besides the fundamental question of the servicer’s motivation to accept loss when there is no delinquency to signal probable eventual foreclosure, is that this seller is displaying a set of behaviors I suggest might not be very common: wanting to sell quickly (compared to the years you might have to wait out a bust) but not too quickly (willing to pay out of pocket for sales commissions and market-driven concessions in order to get the best possible price in listing time comparable to the average 6-9 months of a foreclosure timeline). All while considering the monthly mortgage interest, taxes, and insurance as simply an inevitable expense that he needs to carry until he is approved by the servicer and relieved of ownership of the property.

My sense is that what we are actually seeing on the ground with non-delinquent short sale offers is probably closer to the second column: the one in which the seller in essence “decides” to “pass on” the sales costs and interest expense to the new buyer, to “get out without a loss.” (Again, I’m talking a certain kind of psychology here, not what you might call realistic math.) In this case, the seller presents the servicer with a “quick” low-ball price which will, he hopes, get him out before he incurs any more expense—expense here including the mortgage payment. The result of that? A loss to the servicer that is basically identical to the loss in the “failed” delinquent owner short sale.

In reality, of course, these costs that a “buyer” is taking are really costs that the servicer/investor is taking: it’s really the investor who ends up covering the transaction costs in most of these scenarios (because of the reduced sales price). Yet I don’t think enough prospective short-sellers have that in mind. Many, many people weren’t very good negotiators—or rational cost analysts—when they first bought these homes or took out these mortgages. It’s rather bizarre to think they’ll suddenly take a different view of things now, isn’t it? Our examples suggest that the deal most attractive to the servicer—the non-delinquent “typical” exposure or adequately-marketed property—is the one least likely to be offered. The “math of reality” works on these deals, but the “math of psychology” doesn’t.

My view is that, realistically, only the short sales with delinquent owners stand much of a chance of getting “passed” by servicers, and those few are being overtaken by events, namely, such a rapidly falling price environment that it’s hard to get that $84,000 bid and make it stick long enough to close the deal. This part is where servicer inability in so many cases to “just pull the trigger and close the deal” is hampering things, that being mostly a result of securitization rules requiring servicers to get investor/trustee approval, plus the endlessly updating numbers on those “models” that the servicers are using to find the “trigger point” where a short sale makes sense.

There are no doubt some bargains to be had for real estate investors looking into short sales, but for nearly anyone except an expert in certain markets, I think I’d suggest not wasting your time. Unless, that is, the listed “short” price has already been “pre-approved” by the owner’s servicer. That does sometimes happen; the seller will in that case have a letter from the servicer indicating the minimum allowable sales price/maximum concessions. It will also help to be working with a real estate agent who knows more than a little about doing short sales. Otherwise I suspect you’ll end up waiting for Godot. I hate to spoil the plot, if you’ve never seen that play, but in the end he never arrives.

Psychology of a Short Pig

test

2009-06-06T07:12:00.000-07:00

By request ...

Click on graph for larger image in new window.

This graph shows the unemployment rate by four level of education.

And here is a graphic from the BLS based on 2008 data: Education pays ...

Education matters!

test

2009-06-04T15:23:00.001-07:00

Here is a video of Mish, Global Economic Analysis, giving a talk at Google (most Q&A). Yes, I helped him get started ...

video

2009-06-03T19:07:00.001-07:00

Video

2009-06-03T19:03:00.001-07:00

The Daily Show With Jon Stewart

M - Th 11p / 10c

BiG Mess

thedailyshow.com

Daily Show
Full Episodes

Political Humor

Economic Crisis

te

2009-05-31T09:31:00.001-07:00

The NY Times has a graphic of the performance of a theoretical mall: The Fall of the Mall (ht Ann, Pat).

Click on graphic for complete image.

The graphic compares the performance of a number of retailers from Q1 2008 to Q1 2009.

The best performers are a dollar store, a movie theater and a pharmacy.

The worst performers are Saks, Abercrombie & Fitch, Bebe and some others.

This is a theoretical mall where all the retailers are still in business. In reality many stores are vacant, and many malls are dead or dying. See the WSJ: Recession Turns Malls Into Ghost Towns

One industry rule of thumb holds that any large, enclosed mall generating sales per square foot of $250 or less -- the U.S. average is $381 -- is in danger of failure. By that measure, [Eastland Mall in Charlotte] is one of 84 dead malls in a 1,032-mall database compiled by Green Street.

test

2009-05-29T21:49:00.000-07:00

Here is a collection of real estate and economic graphs for data released in May ...

Click on graphs for larger image in new window.
********************
New Home Sales in April (NSA)

The first graph shows monthly new home sales (NSA - Not Seasonally Adjusted).

Note the Red columns for 2009. This is the second lowest sales for April since the Census Bureau started tracking sales in 1963. (NSA, 33 thousand new homes were sold in March 2009; the record low was 32 thousand in April 1982).

From: New Home Sales Flat in April

********************
New Home Sales in April

This graph shows shows New Home Sales vs. recessions for the last 45 years. New Home sales have fallen off a cliff.

"Sales of new one-family houses in April 2009 were at a seasonally adjusted annual rate of 352,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development.

This is 0.3 percent (±14.5%)* above the revised March rate of 351,000, but is 34.0 percent (±11.0%) below the April 2008 estimate of 533,000."

From: New Home Sales Flat in April

********************
New Home Months of Supply in April

There were 10.1 months of supply in April - significantly below the all time record of 12.4 months of supply set in January.

"The seasonally adjusted estimate of new houses for sale at the end of April was 297,000. This represents a supply of 10.1months at the current sales rate.

From: New Home Sales Flat in April

********************
Existing Home Sales in April

This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.

Sales in April 2009 (4.68 million SAAR) were 2.9% higher than last month, and were 3.5% lower than April 2008 (4.85 million SAAR).

It's important to note that close to half of these sales were foreclosure resales or short sales. Although these are real transactions, this means activity (ex-distressed sales) is under 3 million units SAAR.

From: Existing Home Sales in April

********************
Existing Home Inventory April

This graph shows nationwide inventory for existing homes. According to the NAR, inventory increased to 3.97 million in April. The all time record was 4.57 million homes for sale in July 2008. This is not seasonally adjusted.

Typically inventory increases in April, and then really increases over the next few months of the year until peaking in the summer. This increase in inventory was probably seasonal, and the next few months will be key for inventory.

Also, many REOs (bank owned properties) are included in the inventory because they are listed - but not all. Recently there have been stories about a substantial number of unlisted REOs - this is possible.

From: Existing Home Sales in April

********************
Existing Home Inventory April, Year-over-Year Change

This graph shows the year-over-year change in existing home inventory.

If the trend of declining year-over-year inventory levels continues in 2009 that will be a positive for the housing market. Prices will probably continue to fall until the months of supply reaches more normal levels (in the 6 to 8 month range comparted to the current 10.2 months), and that will take some time.

From: More on Existing Home Sales and Inventory

********************
Case Shiller House Prices for March

This graph shows the nominal Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 32.4% from the peak, and off 2.0% in March.

The Composite 20 index is off 31.4% from the peak, and off 2.2% in March.

From: Case-Shiller: Prices Fall Sharply in March

********************
NAHB Builder Confidence Index in May

This graph shows the builder confidence index from the National Association of Home Builders (NAHB).

The housing market index (HMI) increased to 16 in May from 14 in April from. The record low was 8 set in January.

The increase in April and May followed five consecutive months at either 8 or 9.

From: NAHB: Builder Confidence Increases in May

********************
Architecture Billings Index for April

"After an eight-point jump in March, the Architecture Billings Index (ABI) fell less than a full point in April. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the April ABI rating was 42.8, down from the 43.7 mark in March. This was the first time since August and September 2008 that the index was above 40 for consecutive months, but the score still indicates an overall decline in demand for design services (any score above 50 indicates an increase in billings)...."

From: Architecture Billings Index Steady in April

********************
Housing Starts in April

Total housing starts were at 458 thousand (SAAR) in April, the all time record low. The previous record low was 488 thousand in January (the lowest level since the Census Bureau began tracking housing starts in 1959).

Single-family starts were at 368 thousand (SAAR) in April; just above the revised record low in January (357 thousand).

From: Housing Starts at Record Low in April

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Construction Spending in March

This graph shows private residential and nonresidential construction spending since 1993. Note: nominal dollars, not inflation adjusted.

Private residential construction spending is 61.8% below the peak of early 2006.

Private non-residential construction spending is 5.7% below the peak of last September.

From: Private Construction Spending Declines Slightly in March

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April Employment Report

This graph shows the unemployment rate and the year over year change in employment vs. recessions.

Nonfarm payrolls decreased by 539,000 in April. March job losses were revised to
699,000. The economy has lost almost 4 million jobs over the last 6 months, and over 5.7 million jobs during the 16 consecutive months of job losses.

The unemployment rate rose to 8.9 percent; the highest level since 1983.

Year over year employment is strongly negative (there were 5.2 million fewer Americans employed in Apr 2009 than in Apr 2008).

From: Employment Report: 539K Jobs Lost, 8.9% Unemployment Rate

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April Retail Sales

This graph shows the year-over-year change in nominal and real retail sales since 1993.

On a monthly basis, retail sales decreased 0.4% from March to April (seasonally adjusted), and sales are off 11.4% from April 2008 (retail and food services decreased 10.1%).

From: Retail Sales Decline in April

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LA Port Traffic in April

This graph shows the loaded inbound and outbound traffic at the port of Los Angeles in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container). Although containers tell us nothing about value, container traffic does give us an idea of the volume of goods being exported and imported.

Inbound traffic was 21.5% below April 2008.

Outbound traffic was 18.3% below April 2008.

There has been some slight recovery in exports the last two months (the year-over-year comparison was off 30% from December through February). But this is the 2nd worst YoY comparison for imports - only February was worse, and that might have been related to the Chinese New Year. So imports from Asia appear especially weak.

From: LA Area Port Traffic

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U.S. Imports and Exports Through March

This graph shows the monthly U.S. exports and imports in dollars through March 2009.

Both imports and exports declined in March, although it appears the cliff diving in trade might be over.

On a year-over-year basis, exports are off 17.4% and imports are off 27%!

From: U.S. March Trade Deficit: $27.6 billion

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April Capacity Utilization

This graph shows Capacity Utilization. This series is at another record low (the series starts in 1967).

The Federal Reserve reported that "Industrial production decreased 0.5 percent in April after having fallen 1.7 percent in March. Production in manufacturing declined 0.3 percent in April and was 16.0 percent below its recent peak in December 2007. The decreases in manufacturing in April remained broadly based across industries."

From: Industrial Production Declines, now 16% Below Peak

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Vehicle Miles driven in March

The first graph shows the annual change in the rolling 12 month average of U.S. vehicles miles driven. Note: the rolling 12 month average is used to remove noise and seasonality.

By this measure, vehicle miles driven are off 3.3% Year-over-year (YoY); the decline in miles driven was worse than during the early '70s and 1979-1980 oil crisis. However miles driven - compared to the same month of 2008 - has only been off about 1% for the last couple months.

From: D.O.T.: U.S. Vehicle Miles off 1.2% YoY in March

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Unemployment Claims

This graph shows weekly claims and continued claims since 1971.

Continued claims are now at 6.79 million - an all time record. This is 5.1% of covered employment.

Note: continued claims peaked at 5.4% of covered employment in 1982 and 7.0% in 1975. So this isn't a record as a percent of covered employment.

From: Unemployment Claims: Continued Claims at Record 6.79 Million

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Restaurant Performance Index for April

"The outlook for the restaurant industry grew more optimistic in April, as the National Restaurant Association’s comprehensive index of restaurant activity registered its fourth consecutive monthly gain. The Association’s Restaurant Performance Index (RPI) – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 98.6 in April, up 0.8 percent from March, its highest level in 11 months."

From: Restaurant Performance Index Improves in April

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Philly Fed State Conincident Indicators for April

Here is a map of the three month change in the Philly Fed state coincident indicators. All 50 states are showing declining three month activity.

This is the new definition of "Red states" and this is what a widespread recession looks like based on the Philly Fed states indexes.

"Over the past three months, the indexes decreased in all 50 states, for a three-month diffusion index of -100."

From: Philly Fed State Coincident Indexes

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WaPo

2009-05-24T14:39:00.001-07:00

t

2009-05-24T07:48:00.001-07:00

This is another "Deal of the Week" from Zach Fox at the North County Times (San Diego): New construction, same discount.

August 2000: $310,000 (new)

January 2006: $620,000

March 2009: $339,000

Zach describes the house: 'four bedrooms, two-and-a-half baths, 2,231 square feet and a lot some might compare to a postage stamp.'

Median Price Example

2009-05-19T14:57:00.000-07:00

Median Price Example

Item	2002	2005	2006	2009	2010
Low Price	$100	$200	$200	$100	$100
High Price	$300	$500	$500	$400	$300
Low End Units Sold	50	50	40	40	30
High End Units Sold	50	50	50	10	20
Median Price	$200	$350	$367	$160	$180
Change in Low Price	--	100%	none	-50%	none
Change in High Price	--	67%	none	-20%	-25%
Change in Median Price	--	75%	5%	-56%	12%

temp

2009-05-16T10:24:00.000-07:00

RBi

2009-05-15T21:34:00.001-07:00

test

2009-05-14T23:32:00.001-07:00

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Whitney

2009-05-11T13:41:00.000-07:00

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2009-05-10T08:41:00.001-07:00

Central Park West

2009-05-08T12:05:00.001-07:00

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Washington Farewell

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Moody's: Commercial Real Estate Prices declined 4.2% in March, Hit new Post-Bubble Low

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Lawler: Census 2010 and Excess Vacant Housing Units

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$13.9 Trillion Total Maximum Government Support Announced

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