Matrix Blog

Posts Tagged ‘Ben Bernanke’

Pumping Laissez-Fare Into The Banking System Didn’t Work

August 17, 2007 | 12:27 pm | |

For the past few weeks, investors have been subject to calming statements on the subprime fallout by Fed Chair Bernanke, Treasury Secretary Paulson and others suggested that this problem will pass although there will be rough times ahead. In other words, let the markets handle it.

In fact, just last week, there was a growing concern over inflation risk to the economy even though the housing market was still a concern.

But the credit crunch continues to get worse and Countrywide, the nation’s number 1 originator, is having problems selling their paper to the point were they had to borrow $11.5B.

The action by the Fed was only 10 days since it stated that the “predominant policy concern remains the risk that inflation will fail to moderate as expected” in a prior release which says a lot about how quickly the mortgage market has deteriorated. I guess the 5%+ drop in the Nikkei Index, got the Fed thinking they had better take action immediately over coffee this morning.

Here’s a recap of the week.

August 7th: the Fed voted to keep the federal funds rate unchanged at 5.25% and said the following:

Although the downside risks to growth have increased somewhat, the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the outlook for both inflation and economic growth, as implied by incoming information.

August 10th: the Fed pumped $62B into the banking system to calm fears of investors.

However, this action didn’t calm investors.

In current circumstances, depository institutions may experience unusual funding needs because of dislocations in money and credit markets.

August 17th: the Fed dropped the primary credit rate (not the federal funds rate) by 1/2% to help banks have access to funds

To promote the restoration of orderly conditions in financial markets, the Federal Reserve Board approved temporary changes to its primary credit discount window facility. The Board approved a 50 basis point reduction in the primary credit rate to 5-3/4 percent, to narrow the spread between the primary credit rate and the Federal Open Market Committee’s target federal funds rate to 50 basis points.

The FOMC released a statement today indicating the downside risk to the economy is greater than previously thought and they are prepared to take further action.

It looks like the Fed Funds Rate Predictions were sort of right, assuming action by the Fed would be 1/2%, just not via the federal funds rate.

So what does this mean to housing?
In many ways, I think the credit upheaval has more of an impact on non-conventional mortgages than conventional, but all are affected. Lenders can’t lend if they can’t sell their paper (mortgages already issued) if investors don’t want to buy. Investors don’t want to buy because they don’t believe that the collateral and associated risks of the mortgage loan pools are fully understood. Its like buying a a 2-story single family house, but not sure if you also get the second floor with the purchase price. So what would you do?

Fewer mortgage products and tighter underwriting standards (actually, its the way they should have been interpreted all along), reducing affordabiliy, reducing the number of sales, and potentially, reducing prices are the result of all this. Its got investors spooked about whats in the mix of what they are buying.

From an appraiser’s perspective.
For years I have ranted, more than is probably healthy, about the appraisal industry and how it has been treated by the mortgage industry is a proxy for the credit problem. In the need to “do deals” appraisers who can crank out reports in lightening speed and always “make the number” are rewarded with huge volume. Its no wonder firms like us can’t get work from high volume mortgage brokers and large lending institutions who use appraisal management companies (but I digress). Complaints about slow turn times are really an attempt at misdirection. In the mortgage industry, the quality control people want appraisal firms that represent quality while the sales people want firms who represent speed and “service”. Because the sales function has had more politcal power than the quality function for the past decade, speed rules. We’ll see if that changes in the near future.

Here’s a few myths associated with jittery markets.

Some other interesting reading: The Quants Explain Disaster [Norris-NYT]

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Fed Remains Biased About Inflation Bias

August 8, 2007 | 12:01 am | |

The Federal Open Market Committee met yesterday. Many expected the Fed to hold the federal funds rate firm. They did not dissappoint disappoint.

Here’s the WSJ’s helpful interpretation of Bernankespeak called Parsing The Fed.

The recent credit crunch development is the likely to accelerate the erosion of the housing market in markets that are already weak. Its inevitable that housing is going to provide a drag on the economy. Before this past month’s credit-related festivities, I had been looking to the Fed to drop rates in order to influence mortgage rates to drop and keep the housing market from slipping further.

Now I am not so sure.

The Fed remains biased towards inflation prevention and I suspect that mortgage rates won’t be impacted so it seems like this FOMC was a non-event as it relates to housing. The flight to quality has pressed investors into treasuries, driving down yields, but lenders are tightening underwriting or pulling out of the mortgage market, so the scarcity of lenders could prevent mortgage rates from falling or even them drive up, no matter what the Fed does.

There is political pressure being applied towards expanding the amount Fannie Mae can puchase in order to loosen credit.

Someone I know closed on a no-doc home equity loan last friday. The program is being discontinued this friday. We are hearing feedback from lenders that other programs are being discontinued, although I was surprise programs like this still exist given how loose the standards are, so its no surprise.


Givin’ Speeches About Mortgages And Housing: No Answers, Only Solutions

July 21, 2007 | 6:13 pm | |

On the same day last week, Wednesday to be precise, presentations touching on the housing market were given by two influential financial leaders: Fed Chairman Ben Bernanke and James B. Lockhart III, Director of OFHEO, which oversees Fannie Mae and Freddie Mac (GSE’s). Both are accomplished individuals whose jobs influence the housing market to a certain degree. I am not sure which one I would have liked to have heard in person so could only hope for a double header.

Fed Chairman Ben Bernanke (Its been a year and a half, so I feel like I can refer to the Fed Chair as Ben) spoke in front of Congress, before the Committee on Financial Services, U.S. House of Representatives. He is required by law to do this twice per year and I kind of feel sorry for him. I listened to his live testimony on CNBC and was struck by how smart he is and how weak most of the questions posed to him were. After 2 minutes of thank-you’s from each member of the committee, they asked him to explain things like core inflation and how he was going to protect subprime borrowers in the future. The media coverage of the testimony was extensive and rather than spending much of the time talking about the economy, the bulk of the questions from Congress was spent on protection of borrowers, the problems with hedge funds, lax underwriting and why didn’t the Fed see this coming. Bernanke’s macro perspective seemed a little out of sync with the questions posed. I was struck by his references to the housing market, which suggest more weakness to come:

The pace of home sales seems likely to remain sluggish for a time, partly as a result of some tightening in lending standards and the recent increase in mortgage interest rates. Sales should ultimately be supported by growth in income and employment as well as by mortgage rates that–despite the recent increase–remain fairly low relative to historical norms. However, even if demand stabilizes as we expect, the pace of construction will probably fall somewhat further as builders work down stocks of unsold new homes. Thus, declines in residential construction will likely continue to weigh on economic growth over coming quarters, although the magnitude of the drag on growth shoul

…and subprime, which was more dire:

For the most part, financial markets have remained supportive of economic growth. However, conditions in the subprime mortgage sector have deteriorated significantly, reflecting mounting delinquency rates on adjustable-rate loans. In recent weeks, we have also seen increased concerns among investors about credit risk on some other types of financial instruments.

James B. Lockhart III, Director of OFHEO (Its been a year since he took over OFHEO and my rule of thumb for someone with roman numerals after their name is to avoid nicknames so I’ll refer to him as James) gave a year in review speech in Washington DC. He referred to unexpected challenges: housing and subprime. In other words, it was a surprise that the housing market is currently experiencing problems. How could an agency that deals with two large mortgage bemoths be in the dark about the housing market? However, he makes the observation that the GSE’s should be “fulfilling their mission of stabilizing the housing markets.” He refers to the “triple-witching” of the subprime market because of the tripling of subprime originations, the shift to non fully amortizing mortgages and the drop in lending standards. His emphasis was on subprime lending and how the GSE’s can help:

Despite the many problems in the subprime mortgage market it has made a positive contribution toward getting low-income individuals into their first homes. (#12)
Hopefully, the changes I have been talking about today will be continued to help place people into affordable housing without putting them and their neighborhoods into high- risk situations.

It is my belief that Fannie Mae and Freddie Mac can do even more to help in what is one of their key mission areas – affordable housing. It is also my belief that to do so they must be fully remediated with strong systems to address the credit issues in this sector and that they need a strong regulator to help ensure that they are healthy, well-managed companies.

To recap both speeches

We have both banking and mortgage oversight institutions caught unaware of the growing problems with subprime, we have a government agency responsible with the oversight of government sponsored enterprises (GSE’s) saying that it should be dissolved and a new oversight agency formed that would be more effective and we had lending standards drop sharply without reaction from regulators.

So I think I am impressed with everyone’s intentions of fixing things, but don’t we need to understand what went wrong? How can we fix it if we didn’t see it coming? I think Congress was really asking questions of Ben that it could have been answered by James. The whole thing is backwards.

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Badge of Irony: HALTing Appraisal Pressure Despite Ghost In The Machine

May 19, 2007 | 4:54 pm | |

New York State joins the post-housing boom mortgage clean-up effort and tries to learn more about the ghost in the machine. The machine being the lending industry and yet the government seems to know so little about it. This is ironic because fraud appears to have been blatantly prevalent (It ain’t just subprime) for many years. And although mortgage fraud is a significant problem, the cumulative effect of “little white lies” that are engrained into the system will be the most difficult to undo, detect or prove. You know, the things that are commonly done so much that eventually no one realizes that they are illegal or unethical?

New York state Governor Eliot Spitzer announced creation of a new interagency task force with the neat acronym (an important element of government culture): HALT (Halt Abusive Lending Transactions) that:

is designed to help the public handle questionable lending practices in the subprime market, and to make it easier for low-income families to buy new homes.

A Political Fine Line
Any government agency walks a fine political line when trying to reign in subprime lending because on one hand, the government can shut low-income families from access to funds to purchase new homes by being too tough, and on the other hand, low-income families will continue to get hurt if government does nothing and the abusive tactics continue. This week, Fed Chair Bernanke addressed the subprime issue and seemed to take a laissez-fare position on fixing the subprime mess.

There was a “Debtor Nation: The Mortgage Mess” special on CNN/Paula Zahn Now show last night that included real estate editor Gerri Willis. One of the facts mentioned was the statistic reported by that 34% of loan applicants don’t know what type of mortgage product they have on their house. Amazing. No wonder the scope of the mortgage problem is so widespread. I am not downplaying the mortgage problem in any way, but at some point, people need to take some responsibility for their actions (assuming they are not misled).

The first overt action taken from this task force was announced yesterday:

Attorney General Andrew Cuomo issued a subpoena to Manhattan appraiser Mitchell, Maxwell & Jackson Inc., the company said. Manhattan Mortgage Co., a [mortgage] broker, also received a subpoena, Chief Executive Officer Melissa Cohn said.

I have known Jeff Jackson and Steve Knobel of Mitchell, Maxwell & Jackson (MMJ) professionally since they founded their firm in 1991 (my firm started in 1986). MMJ is my primary competitor. In addition, our firm has done work for mortgage broker Melissa Cohn, founder of Manhattan Mortgage on and off, but very little in recent years.

Here’s another irony:

I am pretty confident that Mitchell, Maxwell and Jackson (MMJ) as well as Manhattan Mortgage do very little, if any subprime work. Manhattan and the surrounding region have a relatively low concentration of subprime lending activity and these firms aren’t known for this type of work.

I am sure the AG’s office know these two firms are not orientated towards subprime, so this effort must be largely directed at the issue of appraisal pressure and not subprime lending.

Here’s how the MMJ responded to the media:

Y. David Scharf, an attorney at New York law firm Morrison Cohen LLP, who is representing Mitchell, Maxwell & Jackson, said his client has been told it’s not a target of the investigation.

The information that is being requested is whether or not pressure has been brought to bear on appraisers to change their appraisals,” Scharf said. The firm is “continuing to gather information” in response to the subpoena, he said.

We did not change appraisals in any circumstances,” he said.

I thought the closing quote by Jeff Jackson in the Crain’s article was particularly interesting.

Because we are a large company were not as easily pressured as a small company might be.

This phrasing seems to infer that the smaller an appraisal firm is, the more unethical it has the potential to become. I believe that size is not a proxy for insulation from pressure. Sure, a small firm can be pressured by small clients, whereas a larger firm is less likely to react to that type of pressure. I think that’s what Jeff was referring to and I agree with that example.

However, a large mortgage broker can inflict significant pressure on a large appraisal firm. Get the appraiser addicted to high volume and the potential to be influenced is just as significant. Small and large appraisal firms, like firms in any other industry, are always concerned about covering their overhead.

Every appraisal firm who does mortgage work, no matter what their size, is vulnerable to significant appraisal pressure.

The issue of appraisal pressure is why I got into blogging in the first place and started the appraiser blog Soapbox before I got the idea for Matrix. I can work up a good rant about the appraisal pressure issue with very little effort at a moment’s notice. One of my personal goals in life is to speak about appraisal pressure before Congress to explain what the problem is and how to solve it. Many of these ideas have been fleshed out in both of my blogs already. Of course, at the rate this is going, I may get my chance. I’ll keep my fingers crossed.

but I digress…

An edited down version of the Bloomberg wire story also ran in the New York Times today.

I was contacted by Bloomberg for the story to ask whether we too were issued a subpoena.

Other appraisers — Miller Samuel Inc. and the Vanderbilt Appraisal Company, competitors of Mitchell, Maxwell & Jackson — said they had not received subpoenas.

A quote of mine was left out of the New York Times version of the Bloomberg story – sort of an overview of the state of affairs in the appraisal industry:

Appraisers frequently face pressure to revise their findings, said Jonathan Miller, president of Miller Samuel.

“I would seriously doubt that there is one appraiser in the United States that has not been on more than one occasion pressured to make a number,” Miller said.

In a study conducted last year by Richfield, Ohio-based October Research Corp., 90 percent of appraisers said they felt influenced to write bogus appraisals. Four years ago, that number was 55 percent. Seventy-one percent said mortgage brokers asked them to do it.

I’d say the October Research report results were on the conservative side because I think the idea of appraisal pressure is so commonplace, its become invisible. Here’s a typical example:

Mortgage Broker XYZ hires my firm to appraise a property for a cash-out refinance. I estimate the market value but its not high enough to make the deal work. The value is reasonable but the property owner needs more. The deal dies and the mortgage broker simply never uses my firm again. This incident is a one-time situation but it exists in perpetuity because that mortgage broker learned from the experience and only selects appraisers who “play ball.”

Another irony in these situations, is that we have had owners or top producers at mortgage firms that don’t use us regularly, recommend or use us when it impacts them personally such as for a divorce, an estate, a complex deal, a lender who requires them to use us, a friend thinking about buying a property, etc. In other words, when incentivized to obtain a reasonable estimate market value, we get the call.

A Badge of Honor
I have spent a large portion of my professional appraisal career steering clear or getting rid of clients that pressure us. Don’t get me wrong. There are clients that don’t pressure us at all. Those clients are the keepers. I have worn this effort as a badge of honor. However, that badge of honor is bad for business and has cost myself and my family in significant economic terms during my career. I could triple the size of my firm tomorrow if removed that badge.

But that’s for another rant…

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Molasses Primer: The Subtext on Subprime

May 18, 2007 | 9:16 am | |

Change can be slow as molasses…

Fed Chairman Ben Bernanke spoke yesterday at the Federal Reserve Bank of Chicago‘s 43rd Annual Conference on Bank Structure and Competition in Chicago yesterday. There is a certain irony (well, to me, anyway) in that this was given a speech given at a conference on banking industry structure when the mortgage problem is based on a fundamental structure problem with the banking system. Structure is the key word here. Take a look at our other blog Soapbox for articles that contain the use of the word structure as it relates to the appraisal and lending industries.

Basically Bernanke does not want to regulate subprime, or be very selective on what is being regulated.

Bernanke concludes (excerpted from his speach):

Credit market innovations have expanded opportunities for many households. Markets can overshoot, but, ultimately, market forces also work to rein in excesses. For some, the self-correcting pullback may seem too late and too severe. But I believe that, in the long run, markets are better than regulators at allocating credit.

We at the Federal Reserve will do all that we can to prevent fraud and abusive lending and to ensure that lenders employ sound underwriting practices and make effective disclosures to consumers. At the same time, we must be careful not to inadvertently suppress responsible lending or eliminate refinancing opportunities for subprime borrowers. Together with other regulators and the Congress, our success in balancing these objectives will have significant implications for the financial well-being, access to credit, and opportunities for homeownership of many of our fellow citizens.

There seems to be a disconnect here. Bernanke is saying markets take care of themselves and we shouldn’t do too much, only in specific instances, because it might hurt those people it is intended to help. And I can’t seem to find the logic as to why he thinks the subprime mortgage problem won’t spill into the prime mortgage market.

From the Washington Post:

we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system,” according to the text of his remarks. While some subprime lenders have closed or entered bankruptcy proceedings, the problems in that market are not hurting banks or thrift institutions, he said.

Holden Lewis of Bankrate, who writes a must-read blog gets analytical and even goes all rhetorical on us to make his point.

He didn’t explain why he doesn’t expect the subprime debacle to spill over into prime mortgages or the overall economy, although he did acknowledge that the slowdown in home sales can be traced partly to the tightening of subprime credit. He contradicts himself there.

…So it would be better for our society if the homeownership rate were lower. Is that an unreasonable conclusion?…isn’t it safe to say that those neighborhoods would have been more stable had the houses been owned by landlords who had an incentive to maintain the dwellings to make them rentable?

Les Christie at CNN/Money writes:

But, according to Bernanke, the kinds of innovations in credit markets represented by exotic subprime loan products have had a positive effect, opening up home-buying opportunities for millions of Americans.

Bernanke wants regulators to be careful not to overreact and address specifics only. Aren’t these the same regulators who were there when underwriting quality deteriorated and subprime exploded?

Subprime lending has its place so its clear that its in no one’s interest to choke it off. However, I believe that the problems in subprime lending are not unique to subprime lending and are prevalent throughout the mortgage lending industry as it relates to collateral. These include:

  • Massive documentation that borrowers are unable to understand.
  • Appraisal pressure so prevalent and part of the lending culture that no one sees it as a problem.
  • “Don’t ask, don’t tell” position taken by lenders to their wholesale mortgage broker partners.
  • Commission-based lending system – high production with no real accountability from sales person.
  • Inflated appraisals understate risk to investors.

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Inflated Housing Expectation’s Sticky Downside: Recession

April 30, 2007 | 11:13 am | |

Waiting for the other shoe to drop and its getting sticky.

Since the housing boom ended in mid-2005, the Fed has continued to play the roll of inflation hawk, worried that an over heated economy will force them to raise the federal funds rate even higher. I get the impression that they have been saying this for so long (2004) that they seem to be missing the economic slowdown (of course, I am exaggerating).

This topic is covered in the Bloomberg piece Bernanke Is Wrong on Inflation, Goldman, Merrill Say.

“House prices could decline as much as 10 percent,” said Maury Harris, chief economist at UBS in New York, in an interview. UBS, based in Zurich, is the world’s biggest money manager for the wealthy. Fed research doesn’t agree. The central bank reported “signs of stabilization in housing demand in most regions of the country,” according to the April 11 report. “Home-buying attitudes improved and continuing job growth could be expected to support home sales.”

I wonder if they are speaking to New York market participants only, because the market here is one of the few in the country that is doing well. The economy is showing weakness and a recession is a growing concern but not on many people’s radar these days.

GDP grew 1.3% in the first quarter, averaging 2.2% for the past year and well below the Fed’s 3% expectation level.

Two hands…
On one hand, the Fed is concerned about inflation and higher mortgage rates further crippling an already weak housing market. On the the other hand, the other side views the economy as not yet bearing the full brunt of the housing slowdown. I have been on the latter side, contending that the lag time for housing to fully impact the economy is probably more like 1-2 years from the point the housing market began to slow.

Since that point was about mid-2005, that means right about now. Yet the odds of a rate cut seem to be slipping. Muddy economic discussions lumber along, with an occasional insertion of the word “inflation” to nudge us awake periodically.

Housing prices tend to be sticky on the downside, falling at a far slower than they rose since many sellers simply opt not to sell. Hence the delayed housing market reaction, only accelerated (or primed – ok, sorry) by subprime. Nationally, foreclosures are rising, the number of sales are falling and prices are slipping.

I am guessing that if the Fed is very much wedded to holding firm for a while, which will keep mortgage rates stable and at low levels, but if it doesn’t cut rates by the end of the year, its going to get sticky and we may be using the “R” word a whole lot more. Or perhaps the “S” word (stagflation).

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The Fed: Nuances And Transparency

March 27, 2007 | 12:36 pm | |

I think many of us are confused about where the national economy is going at the moment and with that, where housing is going.

The Fed seems to be having trouble delivering a clear message. On one hand, we have been given the impression that inflation is a concern and that housing is not too bad. That makes us worry about rising mortgage rates. Yet on the other hand we are seeing national economic stats slip, suggesting the economy is weakening. Add to that, the troubles with subprime mortgages and tightening credit (and increased awareness of risk by investors).

The FOMC recently changed their bias of action against inflation to neutral in their latest meeting suggesting growing weakness in the economy and raising the odds of a rate reduction in the second half of this year.

Greg Ip, who covers the Federal Reserve for the Wall Street Journal, touched on this market confusion in today’s article Fed Has Trouble Getting Across Nuanced Message

Since then, economic developments have added to the impetus for change. Fed officials had expected that as the housing market slumped, stronger business investment would pick up much of the slack. But business investment has been surprisingly weak; capital-goods shipments excluding aircraft and defense products have fallen in four of the five months through January. February data will be released tomorrow.

While officials still believe demand for housing has stabilized, they acknowledge the recent turmoil in the subprime-mortgage market adds an unpredictable element to the outlook for the housing sector.

These factors, however, haven’t led the Fed to significantly lower its growth forecast. In late February Mr. Bernanke told Congress, “There is really no material change in our expectations.”

Yesterday, Federal Reserve Bank of Chicago President Michael Moskow told an audience in Beijing that “we are expecting the recent softness [in capital spending] to be temporary,” though “we are monitoring developments in investment closely.”

I am not sure how the deterioration in the subprime market situation, which wasn’t as apparent a little over a month ago, won’t change economic expectations. It will likely cause credit to tighten on Alt-A and prime mortgages, tempering demand, when the market is already vulnerable. The national housing market simply hasn’t had a chance to influence the national economy at full force because the underlying factors such as employment seem to be pretty good.

What does this mean to housing? [Translated] Well, things are pretty good, in not such a bad way yet we must be concerned and need to deal with it carefully and look at the indicators to make sure we are moving along in the right direction in case something thats not so pleasant actually happens that we haven’t prepared for in a careful thoughtful manner. Got it?

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[Getting Graphic] Speeches, Stocks And Safety

February 28, 2007 | 9:44 am | |

Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related chart(s).

Click here for full sized graphic.

Greenspan gives a speech in Hong Kong [NYT] and mentions the r-word (recession) as being a possibility in the US and the following day, after just reaching a record, the Shanghai Composite Index corrected sharply (but its up today) [WSJ].

Notice how Greenspan still carries more weight than Bernanke in terms of an immediate market reaction after a speech?

Combine this phenomenon with the coincidence that Freddie Mac announces more restrictive parameters for subprime lending (sorry, 3rd consecutive day of talking about subprime), durable goods orders shows weakness and all of a sudden, the Dow Jones Industrial Average is falling 400 points, aided by a glitch in computerized trading.

Thats quite a sequence of events for anyone to process. However for perspective, thats a 3.29% drop in the DJIA index, only 4.4% from its record high and yet it still remains above 12,000. I don’t want to sugar coat the drop because it is still a large drop, but on Black Monday, September 19, 1987, the index dropped even more. It fell 508 points but it fell from 2,500 and nearly 23% of value was erased in a single day. Quite a different senario than 3.29%. I remember being in Kansas City visiting friends on that day in 1987 thinking I was out of business. Real estate was over. (Of course I had that same feeling on September 11, 2001).

Warning – statistical aside: Every day, the rise and fall in the DJIA is chronicled in thousands of nightly newscasts. The other day the quote went something like this (I am embelishing here just a little bit):

Stocks slid 5 points as investors grew skittish about the price of rice in China and the growing political clout of left handed orthodontists…

Thats 5 points of a total index of about 12,600 points at that time or a .0004% drop. This is more akin to a rounding error and not an indicator of anything, anymore than an increase of 5 points would be. I think the consumer sees these points as percentage and reads more into subtle changes than they should simply because no perspective is provided. Its like looking at existing home sale trends as a benchmark for a local real estate market. The DJIA is merely a list of major companies that may or may not reflect the overall stock market (sound familiar?).

ok, I am back from the aside.

I was listening to a group of real estate panelists at a luncheon yesterday as the stock market was falling. At the end of the panel, a question came from an audience member that went something like this:

Now that the stock market has fallen moret han 400 points today, what will be the impact on New York City real estate?

The answer given was essentially no affect but the question seems a little dramatic at this point. My mindset is usually oriented to the trend is your friend.

However, it does raise the point that perhaps the conventional wisdom of a continued improvement in the US economy is more tenuous than has been cheered for as of late. In the fall, I was drifting toward the belief that the economy was headed for a recession. My worries have lifted somewhat but I don’t carry the same optomism that the stock markets seem too.

Housing should ultimately provide more of a drag on the economy. I don’t think the impact of the slowdown has had adequate time to fully flow throw the economy. Honestly, its been a challenge to me personally to keep euphoria in check, when commenting on national trends given the better real estate conditions enjoyed in New York as compared to other parts of the country.

What does this stock market drop mean for the real estate economy?

I am not entirely sure. However, if the underlying economy doesn’t change significantly and more people become more risk averse, we may see more movement to saftey like we did yesterday as people move from stocks to treasuries. Treasury prices would go up, and as a result, yields would go down. As yields go, so do mortgage rates, helping temper growing damage caused by foreclosures and limiting the future effects of tightening underwriting guidelines.

All this from a Greenspan speech in Hong Kong. Just imagine if the speech was given at halftime during the Superbowl?

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National Housing Prices Slip, Leaving Throats Parched

February 16, 2007 | 10:53 am | |

With all the talk about national housing rebounds lately, reality had to settle in with actual numbers. What’s interesting to me is how the takeaway from the results seem unclear.

NAR is spinning it that prices have hit bottom. I don’t agree but I would guess we are within 2-3 quarters from that point.

Is the glass half empty or is it half full? For much of the coverage on the NAR figures, the glass is not half empty, its simply empty.

Well, I’d say its half empty. With 40 states posting losses in the 4th quarter as compared to the same period last year, it sure looks like the market is continuing to weaken nationwide. That’s logical since inventory levels, while showing signs of stability, are still way too high. Until levels are fully absorbed, I would think the NAR will keep reporting declining numbers for the next 2-3 quarters. Oversupply = more competition = weaker position by sellers to hold to their price.

On the other hand, its not all gloom and doom in every market, and I think this is the sort of impression that one walks away with when reading about this topic today.

CNN/Money presented a link to 149 major metro markets and guess what? The range of price changes ranged from -18% (Sarasota-Bradenton-Venice, FL) to 25.9% (Atlantic City, NJ). The big news angle here is that 71 markets went up and 73 went down, which is more than half of all metro markets. Didn’t everyone see this coming? Is this a new idea?

The drop in median home prices is -2.7% for the country is somewhere in the middle of the 149 metro market price change range. The cities on the positive side seems to show solid local economies with limited speculative markets. Those cities on the negative side are from markets with weak local economies and/or speculative markets. Logical.

In New York, the NAR stats for New York-Northern New Jersey-Long Island show a 2.3% increase and NY: Nassau-Suffolk showed 0.3% in median sales price over the same period (4q 2006 versus 4q 2005).

The Manhattan Market Overview [pdf] we prepared in 4Q 2006 showed a 5.1% increase in median sales price and our Long Island/Queens Market Overview [pdf] showed a -1% drop in median sales price over the same period (4Q 2006 versus 4Q 2005). In other words, real estate is local.

I am fairly confident the national numbers will continue to show similar weakness for the next several quarters and we are not at “housing bottom” nationally. That’s why I think the Fed Chair Bernanke’s comments about the economy actually suggest potential rate cuts and housing is one of the main reasons.

he forecast calls for slightly slower growth in 2007 than the Fed predicted last summer, but still in line with officials’ estimates about the economy’s long-run potential growth rate. The lower growth estimate reflected the sharp downturn in the housing market last year, and an expectation that housing would continue to drag down overall growth in 2007.

With national housing and the auto industry weak, and a lot of speculation that the latest GDP figures are inflated, there is a growing argument that we could see the fed cut interest rates in the second half of 2007. This could help prime the housing pump to get the excess inventory off the books.

In fact, there a rising level discussion that interest rates will remain low for the next several years. Housing is one of the reasons. There’s a great article in last week’s issue of Businessweek.

UPDATE: Chart just added to the NY Times article:

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Fed Speak: The Diplomacy Of Contradicting Messages, Housing The Fall Guy?

December 13, 2006 | 8:39 am | |

The Fed held firm for the fourth consecutive meeting, keeping the federal funds rate at 5.25%. Short-term rates are therefore more likely to hold steady for a while. They gave us the “hi” sign that rate cuts may be coming next year [].

They do seem to be raising more warnings about the housing market [WaPo] at each of the 4 meetings where they have kept rates unchanged, inferring that housing is keeping inflation in check.

This makes me wonder…if inflation is really not that much of an immediate threat because they are inferring future rate cuts, then perhaps the Fed is overstating the economic weight of the housing market’s problems to serve as an offset? Housing seems to be their out for not raising rates right now.

During the heady days of the Greenspan reign, the WSJ journal developed a really cool graphic [ESJ] that parsed the language of the FOMC after each meeting. Likely because of greater transparency under the Bernanke era, there wasn’t a need because the language is less cryptic.

Here’s the Federal Open Market Committee’s statement on the federal funds rate [Federal Reserve]

Note the concept that Bernanke introduced by warning everyone about inflation to make investors jittery, which then causes the same effect as having a rate increase, but still gives clues that a future rate cut is coming [LA Times].

In the statement explaining its decision, the central bank’s Open Market Committee signaled new concern about risks that the economy could sputter, noting that “recent indicators have been mixed.”

With such slight changes in language, the Fed reinforced the consensus view that the nation’s monetary policymakers could begin to lower rates next year. Still, the Fed warned, “some inflation risks remain” that might necessitate credit tightening.

The Fed is walking a fine line here: []

The Federal Open Market Committee completed 2006 by telling investors to follow the data just as they would follow the bouncing ball when singing along to a Christmas carol on television. That’s what the Fed is doing. To wit, the central bank toed a careful line Tuesday by acknowledging slower growth, but maintained a tightening bias.

Definition of a diplomat: someone who informs you that you are in trouble, but you are happy they told you.

The power of words…fascinating.

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Salad Days At The Campfire: Bernanke’s View On Rate Cuts

November 29, 2006 | 8:26 am | |

Bernanke spoke at a luncheon yesterday and its been a while since he spoke about the outlook for the economy. The regional Fed presidents have been doing all talking lately. His transparent communication approach to Fed policy seems to be working (although, in order to remain true to transparency, we should be told his lunch selection so we can factor that into his commentary). Arguably, by talking up or down the economy, the Fed has been able to stop tweaking rates every month. Now the Fed is working hard to assure investors that the economy is doing well enough to avoid rate cuts in the near future, by raising concerns about inflation. Weaker housing market conditions [WaPo] are not enough on their own to push the economy into a recession.

This contradicts the commonly held assumption that the inflation has been held in check and the economy weakening, forcing the Fed to have to cut rates by the middle of 2007. The probability of a mid year rate cut is rising [Clev Fed] as investors look further out through 2007.

Here’s a recap of Bernanke’s speech coverage in several major publications:

Bernanke Warns Inflation Remains A Significant Risk [Page 1 WSJ/Dow Jones]
_Fed Chief’s View Contrasts With That of Wall Street; Could Interest Rates Go Up?_

In a contrast with the widely held view on Wall Street that slower economic growth will lead to interest-rate cuts, Federal Reserve Chairman Ben Bernanke offered an upbeat assessment of the nation’s economy, warning that tight labor markets could put more pressure on wages and prices. Many investors point to declining housing construction, mixed news on holiday sales and a tame reading on inflation as indications that the economy is weakening, inflation risks are fading and that the next move by the Fed will be to cut interest rates, perhaps as soon as next spring.

Modest growth, lower inflation ahead: Bernanke says [MW/Dow Jones]

The Federal Reserve called a halt to its long string of rate hikes in August because it believed the economy would slow and the inflation picture would improve and three months later this forecast still seems about right, Fed chief Ben Bernanke said Tuesday. In a rich speech examining most of the hot topics captivating Wall Street economists, Bernanke said the economy is still on track to expand at a moderate pace over the next year without slowing too much.He said the inflation is already “better behaved of late” and should continue to slow gradually. Much of his speech was used to gently dampen two of the major fears about the outlook – that the housing market would push the economy into a full-fledged recession, or that inflation pressures were like a smoldering campfire, seemingly controlled but ready to burst up in the next strong wind.

Fed Chief Underlines His Essential Focus on Inflation [NYT]

Signaling that the Federal Reserve was not inclined to lower interest rates any time soon, its chairman, Ben S. Bernanke, said yesterday that while economic growth should rebound next year, inflation remained “uncomfortably high.” In a speech that offered a wide range of prospects for the direction of the economy — from an unexpected surge in growth to no growth at all — Mr. Bernanke painted a generally sanguine picture. So far, he said, the economy had slowed in line with Fed’s forecasts, and inflation had “been somewhat better behaved.”

Fed Chief Optimistic of Soft Landing [WaPo]
With Eye on Inflation and Jobs, Bernanke Remains Upbeat

The nation’s central bank is growing more confident that the U.S. economy will slow gradually in a way that should cause inflation to decline without tipping the nation into a recession, Federal Reserve Chairman Ben S. Bernanke said yesterday. “Over the next year or so, the economy appears likely to expand at a moderate rate, close to or modestly below the economy’s long-run sustainable pace,” Bernanke told the National Italian American Foundation in New York, in his most extensive remarks on the economy since July. Inflation “is expected to slow gradually from its recent level.”

Fed chief’s comments hint no rate cuts loom [Boston Globe/Bloomberg]

Federal Reserve chairman Ben S. Bernanke said the US economy will pick up in the coming year and emphasized that inflation remains his greatest concern.

I find it annoying, however, that whenver Bernanke is making some sort of significant statement that impacts housing, Greenspan is quoted about the housing market [BW] at the same time. (Do they share their calendars?) He is about to publish an analysis of the “serious dispute” over the true effect of mortgage wealth on consumer spending.

So Bernanke’s take is basically this. Housing and the economy are not expected to drop like a stone next year and if there is a rate cut, its likely to be later in 2007.

Which raises a more important question: Did he have a salad for lunch?

Update: The Fed Cries Wolf; Mr. Market Isn’t Listening [Caroline Baum/Bloomberg]

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Point (Ben):Counterpoint (Alan)

October 9, 2006 | 12:07 am | |

Remember the Point:Counterpoint routine on Saturday Night Live? It can be summed up by the quote: Jane, you ignorant slut!

I can’t help but think how out of sync Fed Chairman Ben Bernanke is with former Fed Chairman Alan Greenspan. Or is the former chairman out of sync with the current chairman? I am not really who is ignorant recognizing that both men are extremely smart. The photo of each precisely measures how important the housing market is as it relates to the economy.

October 7, 2006: Greenspan says…

Former Federal Reserve Chairman Alan Greenspan said that last week’s rise in weekly mortgage applications could signal that the “worst may well be over” for the U.S. housing industry, according to a report of a speech Greenspan gave in Canada on Friday.

Sounds like the the worst is over…

October 5, 2006: Bernanke says…

There is currently a substantial correction going on in the housing market,” Mr. Bernanke said. The decline in residential housing construction is one of the “major drags that is causing the economy to slow.

Or more pain is yet to come…

It would seem to me that the Greenspan era was a legacy of rapid asset appreciation (stocks and real estate) followed by asset corrections so I am not so sure why there remains so much concern placed on what Greenspan thinks. To his credit, Greenspan has been careful not to steal Bernanke’s thunder.

I think it comes down to public relations. Greenspan never stumbled in his public relations (not policy) during his tenure to my recollection. However, Bernanke has not been consistent as he relates his economic message on housing to the public.

The recent Bernanke speech felt more harsh than what he previously relayed so I am not sure whether to rely on the message. I hope Bernanke figures out a clear message soon. Greenspan is still sounding pretty good to the hopeful.

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