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I’m thinking maybe credit isn’t going to lead us out of the recession. Banks are getting much enjoyment out of the wide spreads for now – gearing up for future carnage in commercial, auto loans, credit cards and industrial loans. This is apparent in the The October 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices that was released on Friday. Its kind of the Beige Book equivalent of anecdotal credit practices.

The report basically showed that fewer banks are tightening mortgage credit policy and mortgage demand is up. Of course this doesn’t mean much yet since bank lending policy can’t really can’t get much tighter.

In the October survey, domestic banks indicated that they continued to tighten standards and terms over the past three months on all major types of loans to businesses and households. However, the net percentages of banks that tightened standards and terms for most loan categories continued to decline from the peaks reached late last year.2 The exceptions were prime residential mortgages and revolving home equity lines of credit, for which there were only small changes in the net fractions of banks that had tightened standards.

About 25 percent of banks, on net, reported in the latest survey that they had tightened standards on prime residential real estate loans over the past three months. This figure is slightly higher than in the July survey but is still significantly below the peak of about 75 percent that was reported in July 2008. For the third consecutive quarter, banks reported that demand for prime residential real estate loans strengthened on net. About 30 percent of banks reported tightening standards on nontraditional mortgage loans, which represents a decline of about 15 percentage points in net tightening from the July survey. Only about 5 percent of domestic respondents, on net, reported weaker demand for nontraditional mortgages, the smallest net fraction reporting so since the survey began to include questions on the demand for nontraditional mortgages in April 2007.

Tags: Beige Book

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In this podcast, I have a conversation with Justin Fox, economics and business columnist for Time Magazine and author of the book The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street.

As publisher Harper Collins says about the book: “Chronicling the rise and fall of the efficient market theory and the century-long making of the modern financial industry, Justin Fox’s The Myth of the Rational Market is as much an intellectual whodunit as a cultural history of the perils and possibilities of risk.”

Here’s his interview on The Daily Show with Jon Stewart.

I first became acquainted with Justin by stumbling on his blog The Curious Capitalist which takes complex economic issues and translates them into everyday speak.

[Click to expand]

[Audio Quality Alert] What began as a 30-minute interview was cut to 18 minutes because of a random recurring podcast issue I have been trying to resolve: audio distortion. About 18 minutes into the interview I had to cut it short. My sincere apologies to Justin. But I got an idea and I set out this past weekend to solve the mystery. I am happy to report: problem solved going forward – I explain how at the end of the podcast – so much for myth of the rational podcast.

Check out the podcast

The Housing Helix Podcast Interview List

You can subscribe on iTunes or simply listen to the podcast on my other blog The Housing Helix.

Tags: Justin Fox

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Council on Foreign Relations has a very interesting chart on who financed the massive amounts of debt that the U.S. government issued in the first half of 2009.– it is divided by “official buyers” who generally are government entities have have motivations other than profit and “economic buyers” who are looking for a return.

The Federal Reserve plans to slow and then stop its purchases by the end of the first quarter of 2010. This raises the question of who will replace this source of demand, and at what price.

This would likely result in higher mortgage costs next year if the Fed stops buying GSE paper because of reduced liquidity (The article has several other charts which serve to emphasis the Fed’s role in stabilizing the banking system and keeping mortgage rates low).

The point of the Fed’s purchases was to lower mortgage rates during the worst of the housing slump and lower funding costs at the GSEs, which were struggling with skittish investors in the private market. That plan has largely worked; rates for a 30-year fixed-rate loan have fallen to 5.11%, according to Bankrate.com, and GSE debt with five-year maturities traded at 30.5 basis points above Treasuries this week.

But most analysts are predicting those rates will rise by at least 50 basis points before the Fed stops buying and could rise even further afterward. That might not hurt as much on the MBS side, as long as investors have an appetite for mortgages, but could pose problems on the debt side if investors are worried about funding an institution that might not be around a few years down the road.

At the same time, there is discussion of dismantling the GSE’s in favor of a new agency or restructure into smaller agencies.

My sense is that we can’t revert to the old Fannie and Freddie because they answered to 2 masters: Taxpayers and Shareholders.

I don’t see how mortgage rates don’t edge up next year. That offsets any hope that housing prices will begin to rise and suggests there are a number of years to go before they do.

Tags: GSE, Bankrate.com

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In the recently released paper “Is the Worst Over? Economic Indexes and the Course of the Recession in New York and New Jersey”, by Jason Bram, James Orr, Robert Rich, Rae Rosen, and Joseph Song the answer seems to be…sort of.

In this paper, key metrics of nonfarm payroll employment, real earnings (wages and salaries), the unemployment rate, and average weekly hours worked in the manufacturing sector were used to create coincident indexes for New York state, New York City and New Jersey. A coincident index is a single summary statistic that tracks the current state of the economy.

The paper points out that regional economic cycles are not the same as national cycles. They conclude that the region may not mirror, and could lag the national economy.

• Wall Street, once it begins to rehire, will be subject to more regulatory oversight, which may limit its economic contribution.
• Government shortfalls
• Private education and health sector employment may not contribute as much of a stabilizing effect on total employment as it has in years past.

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An interesting study from an economist at the Boston Fed that discusses the relationship between a seller and the real estate broker hired to sell in the property. What’s interesting to me is that the conflict of interest is measured by the costs associated with the delay in selling the property. That’s a clever way to quantify.

Real Estate Brokers and Commission: Theory and Calibrations
by Oz Shy (What a cool name!)

The conclusion of the 6% model:

The findings suggest that while the pressure brokers exert on sellers to reduce prices generates faster sales and hence improves social welfare, the usual commission rate of 6 percent exceeds the seller’s value‐maximizing rate if the sale is handled by a single agent. On the other hand, if several agents (such as the buyer’s and seller’s brokers and the agencies that employ these realtors) split the commission, then a 6 percent commission rate may be required to motivate the broker to sell at a high price.

On the plus side…

Two-sided market and network effects: Real estate brokers are connected via computerized networks that expose them to a large variety of houses for sale. Buyers are aware of that and will therefore hire an agent who is also connected to the same network. Sellers know that buyers tend to hire agents who are also on this network, which induces more sellers to enlist. This “snowball” effect can potentially magnify until all sellers and buyers connect via agents to the same network of realtors.

When I went to sell my last house, I toyed with doing it myself, but rationalized that I would receive less exposure and the my net would end up being more than if I sold it myself, before I figured in the hassle/time factor and my fear of screwing up my biggest investment.

On the down side…

Conflicting interests: Agents may provide sellers with certain information on the housing mar- ket in order to lead them to settle on a lower price compared with the price that would maximize sellers’ expected gain. Lower prices would increase the probability of finding a buyer and would also shorten brokers’ expected waiting time until the transaction takes place, allowing them to collect their commission sooner.

There seems to be a lot of weight given to the idea that real estate brokers want the price as low as possible to lift transaction volume.

While I agree there is a structural conflict, I think the premise as presented is overly simplistic. Yes, if the price is lowballed, the property will move quickly.

In my 23 years of interacting with brokers in my appraisal work, in a number of housing markets, I have found that the sellers generally hold sway over the brokers. The idea that the seller simply accepts the broker’s price recommendation is not real world. Of course there are good agents and bad agents just like any profession.

In fact, the sellers are armed with a lot more information than ever before – a lot of it is incorrect or misleading and in my experience, causing sellers to be less reliant on the agent’s initial advice.

There are all sorts of models out there trying to find an alternative to the traditional brokerage model or fit in as an alternative to the traditional model. Some ideas will be successful and some won’t, but to date, there hasn’t been an “ah-ha” model to arrive.

So until the industry will remain conflicted.

Tags: NAR, National Association of Realtors

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I was fortunate to have Jason Bram, Senior Economist with the Federal Reserve Bank of New York join me for the podcast. We covered a lot of ground including regional employment, securities industry employment versus all other employment, the rent versus ownership ratio and confidence versus sentiment.

Jason referenced a few charts during the discussion including the forward looking Index of Coincident Economic Indicators.

Note: The views expressed here are those of the interviewee only and not necessarily those of the Federal Reserve Bank of New York or the Federal Reserve System.

Check out the podcast

The Housing Helix Podcast Interview List

You can subscribe on iTunes or simply listen to the podcast on my other blog The Housing Helix.

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Many consumers seem to be feeling better about the economy (not good, just better than earlier this year). Well so do the central bankers – a la The Fed – at their annual Jackson Hole summer retreat.

Mr. Hoenig tried a few economist-jokes too. Playing off the phrase “too-big-to-fail” – a reference to banks that would topple the financial system if regulators let them collapse – he joked with the audience that he doesn’t want the Jackson Hole meetings to get too big. They could become “too big to feed.”

A number of ironies here but the overwhelming takeaway is that they are feeling better about the economy. While the economy “bites,” perhaps it’s now good enough to eat.

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Since the direction of the housing market is now largely determinate on bank underwriting practices, and this is a fairly abstract thing, unlike mortgage rates, I like to look at this report from the Fed called (released at 2pm today) Senior Loan Officer Opinion Survey on Bank Lending Practices.

The message seems to be that bank underwriting hasn’t gotten any tighter over the past several months, but it is still constrained.

Residential mortgage loan demand (prime) has done better than other types of lending.

In the July survey, domestic banks indicated that they continued to tighten standards and terms over the past three months on all major types of loans to businesses and households, although the net percentages of banks that tightened declined compared with the April survey.2 Demand for loans continued to weaken across all major categories except for prime residential mortgages.

And fewer have tightened underwriting standards further:

The net fraction of domestic banks that reported tightening their lending standards on home equity lines of credit fell to roughly 30 percent, from 50 percent in the April survey

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The Federal Reserve just released the Beige Book which provides anecdotal commentary on the economy nationally and across the regions of its member banks.

Here’s real estate and mortgage excerpts from the overall report. The macro take away is the pace of economic decline has “begun to stabilize” or “moderated.”

Residential real estate markets stayed soft in most Districts, although many noted some signs of improvement.

Real Estate and Construction

Residential real estate markets in most Districts remained weak, but many reported signs of improvement. The Minneapolis and San Francisco Districts cited large increases in home sales compared with 2008 levels, and other Districts reported rising sales in some submarkets. Of the areas that continued to experience year–over–year sales declines, all except St Louis–where sales were down steeply– also reported that the pace of decline was moderating. In general, the low end of the market, especially entry-level homes, continued to perform relatively well; contacts in the New York, Kansas City, and Dallas Districts attributed this relative strength, at least in part, to the first–time homebuyer tax credit. Condo sales were still far below year–before levels according to the Boston and New York reports. In general, home prices continued to decline in most markets, although a number of Districts saw possible signs of stabilization. The Boston, Atlanta, and Chicago Districts mentioned that the increasing number of foreclosure sales was exerting downward pressure on home prices. Residential construction reportedly remains quite slow, with the Chicago, Cleveland, and Kansas City Districts noting that financing is difficult.

Banking and Finance

In most reporting Districts, overall lending activity was stable or weakened further for most loan categories. In contrast, Philadelphia reported a slight increase in business, consumer, and residential real estate lending. As businesses remained pessimistic and reluctant to borrow, demand for commercial and industrial loans continued to fall or stay weak in the New York, Richmond, St. Louis, Kansas City, Dallas, and San Francisco Districts. Consumer loan demand decreased in New York, St. Louis, Kansas City, and San Francisco, stabilized at a low level in Chicago and Dallas, and was steady to up in Cleveland.

Residential real estate lending decreased in New York, Richmond, and St. Louis. Dallas reported steady but low outstanding mortgage volumes, while Kansas City noted that the rise in mortgage loans slowed. Refinancing activity fell dramatically in Richmond, decreased in New York and Cleveland, and maintained its pace in Dallas. Bankers in the New York District indicated no change in delinquency rates in all loan categories except residential mortgages, while Cleveland, Atlanta, and San Francisco reported rising delinquencies on loans linked to real estate.

Banks continued to tighten credit standards in the New York, Philadelphia, Richmond, Chicago, Kansas City, Dallas, and San Francisco Districts; and some have stepped up the requirements for the commercial real estate category, in particular, due to concern over declining loan quality. Meanwhile, Cleveland and Atlanta reported that higher credit standards remained in place, with no change expected in the near term. Credit quality deteriorated in Philadelphia, Cleveland, Kansas City, and San Francisco, while loan quality exceeded expectations in Chicago and remained steady in Richmond.

Tags: Beige Book

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From Caroline Baum’s excellent column: Conan’s Couch, ‘Daily Show’ Ready for Bernanke:

Alan Greenspan prided himself on being opaque. The former Federal Reserve chairman used to joke that if the audience thought he was being clear, they probably misunderstood what he was saying.

Bernanke believes in transparency. With everyone hanging on every word of every report, every pundit, every TV show, every government official release etc., I’m not quite sure this doesn’t create a lot of more volatility. But if we could have the Fed Chairman on the Daily Show?

My life would be complete.

Aside: The IRS is more popular than the Fed.

Tags: Alan Greenspan, Ben Bernanke

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

Click here for full sized graphic.

It’s 2 out of 3: GM joins Chrysler on the bankruptcy production line, so my take on Ford’s advertising slogan seems relevant.

Bank and automakers’ similarities end with GM and Citigroup being removed from the Dow Jones Industrial Average today.

Automakers WANT to sell cars.

Banks DO NOT WANT to make loans.

Here’s a compelling reason for banks’ recent need for self-preservation.

In Floyd Norris’ column this weekend titled Troubled Bank Loans Hit a Record High

OVERALL loan quality at American banks is the worst in at least a quarter century, and the quality of loans is deteriorating at the fastest pace ever, according to statistics released this week by the Federal Deposit Insurance Corporation.

Bank underwriting is notoriously difficult right now and who can blame them? They have to make loans in an economic environment where:

• Housing prices are declining
• Mortgage defaults are rising
• Unemployment is rising

Banks are in survival mode at the moment.

Tags: Getting Graphic

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Empirical evidence says that the myriad of alphabet soup regulatory agencies didn’t work to prevent the systemic breakdown of the financial system on a global scale, stemming from CMBC activity. Of course, I’m not naive to think that they would have prevented it, but I do think the scale of the crisis was significantly larger as a result of the lack of logical oversight.

It’s not about lack of regulation, it’s about limited coordination, lack of responsibility and most importantly, departmental turf wars.

Hopefully this may change in a few weeks as the administration takes the wraps of an emerging plan to reorganize regulatory oversight.

Senior administration officials are considering the creation of a single agency to regulate the banking industry, replacing a patchwork of agencies that failed to prevent banks from falling into the worst financial crisis since the Great Depression, sources said.

Ideas include

• Federal Reserve – becomes a powerful systemic risk regulator
• Create a new agency to protect consumers of consumer products
• Merge the SEC into CFTC to protect investors from fraud
• OCC and OTS would go away and their responsibilities would be distributed to FDIC and the Federal

One of the key issues, which runs parallel to investment banks being able to select the most favorable ratings agency or mortgage brokers to pick their own appraiser, is the fact that banks can pick whichever regulator is most lenient: FDIC, OTS or OCC.

Seriously, a regulator that is competing with other agencies to get more banks to work with them to justify their existence is inherently flawed.

Of course the American Bankers Association is against this:

“As a practical matter, I think the idea is a nonstarter,” said Ed Yingling, president of the American Bankers Association. He said the administration should focus on the two ideas that command the broadest consensus: the creation of a system risk regulator and a resolution authority for collapsing companies. “That’s probably all Congress can handle,” he said. “They can propose a lot of things, but there’s a real risk in doing so that you just overload the system.”

Good grief. Use of the word “Risk” and “Overload” seems kind of quaint at this point, doesn’t it?

The proposal also urges creation of a new government agency to conduct “prudential regulation,” with supervision authority over state and federally chartered banks, bank holding companies and insurance firms, the source said.

Yes the Fed will have new powers, but seriously, why have any of these agencies if they aren’t very effective? In the current format, it all seems like a colossal waste of taxpayer dollars unless the system is streamlined and reorganized. However, the turf wars will move from the regulators to Congress as everyone tries to hold onto their power base.

The new bank regulatory agency could prove controversial because it would consolidate the Office of the Comptroller of the Currency and the Office of Thrift Supervision and strip supervisory powers from the Federal Reserve and the Federal Deposit Insurance Corp.

Ideally, it is in everyone’s benefit to reduce the regulatory clutter and create clean lines of responsibility and authority. My worry is that we don’t jettison enough of what didn’t work after the power struggle/compromise struggle shakes out.

Housing doesn’t stabilize until banking/credit stabilizes. Period.

Tags: Appraisal Management Companies, FDIC, AMC

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