Media Lying To Control The Public

Before you put much hope in forecasts for a 2008 rebound in the battered housing market, consider this: A year ago at this time many top economists were looking for that recovery to begin in 2007.Instead, the year saw historic declines in nearly every measure of housing strength and home building, and left a trail of predictions from some of the nation’s top economists that look – at best – foolish.

Former Federal Reserve Chairman Alan Greenspan and his successor Ben Bernanke, after reviewing home sales and mortgage rates in fall 2006, were hopeful that the market had bottomed out.

“It may be too soon to say that it’s over. It may not be too soon to say that the worst is over,” said Greenspan in an October 2006 speech in Richmond, according to press reports.

In a November 2006 speech, Bernanke said he saw some “encouraging” signs in recent housing reports.

“Although residential construction continues to sag, some indications suggest that the rate of home purchase may be stabilizing, perhaps in response to modest declines in mortgage interest rates over the past few months and lower prices in some markets,” Bernanke said.

But those signs of life were short-lived.

By Feb. 7, HSBC (HBC) was warning that rising losses on mortgage-backed securities would cause it to take a $10.5 billion charge. The phrase “subprime mortgage” was on its way to becoming the key global business term of 2007. And few would use the word “encouraging” in relation to housing again.

Subprime fiascos of 2007

Rising mortgage delinquencies and defaults led to a meltdown in the mortgage market, cutting off credit to many homeowners and potential buyers and sparking record levels of foreclosures. That only added to a record glut of both new and existing homes on the market. Historic declines in both the pace and price of home sales soon followed.

Lisa Panasiti, a spokeswoman for Greenspan, said the former chairman was referring in his 2006 remarks to real estate’s drag on gross domestic product, and that housing’s hit on GDP has since eased.

Many other economists freely admit their year-ago forecasts missed the mark. And while many of those economists are again hoping the year ahead will bring a modest recovery, they are far from certain.

“A lot can go wrong here,” said David Wyss, chief economist at Standard & Poor’s.

“I thought we’d have problems, but I thought it’d be a smoother adjustment,” Wyss said about the problems that developed in mortgage-backed securities. “The financial side was much worse than I thought it was going to be.”

A year ago Wyss was forecasting a 7 percent drop in home prices from peak levels. Instead prices fell nearly 10 percent from the July 2006 record.

“Everyone thought I was nuts. Now it turns out I was an optimist,” he said.

Wyss’ current forecast is that prices will fall another percent or two, but he added that there’s a risk of a worse fall-off. His hopes for the start of a turnaround in housing in late 2008 depend on the broader economy not slipping into a recession and foreign investment in mortgage-backed securities continuing to flow. Both of those are risky assumptions, he concedes.

“As foreigners get scared and stop sending money to us, that could send bond yields and mortgage rates up. That’s the biggest worry,” said Wyss.

The National Association of Realtors made a forecast a year ago that was far more optimistic than those by Wyss and many other economists. The Realtors expected only a 1 percent drop in the pace of existing home sales, and a 1 percent gain in median prices. Instead, 2007 will likely end with a 12.5 percent plunge in the pace of sales, and nearly a 2 percent drop in prices, the first such decline on record.

The group’s current forecast for 2008 calls for a 0.5 percent increase in the pace of sales, and a 0.3 percent rebound in prices. But Lawrence Yun, chief economist for the trade group, said that making forecasts is even tougher this year than it was a year ago.

Yun forecasts essentially flat prices in 2008. Yet, he also believes there’s at least a one in four chance that prices will fall more than they did this year, and about the same chance that prices could rebound by 3 percent or more.

“I would not be surprised if home sales improves in 2008,” he said. “At the same time I can also foresee a circumstance where buyers continue to pull back, the inventory sitting on the market continues to build and it causes prices to go down further.”

Home prices post record drop

Yun hopes that housing may get a lift if proposals are enacted to allow government-sponsored mortgage finance firms Fannie Mae (FNM) and Freddie Mac (FRE, Fortune 500) to back mortgages of more than $417,000 in high-priced markets. He also puts stock in proposed reform of the Federal Housing Administration that would help borrowers get loans.

Yun’s biggest fear is that Fannie and Freddie’s financial problems will worsen substantially in 2008. While he said he doesn’t believe that will happen, a financial crisis at one or both firms could shake the housing market enough to cause a recession.

“As long as global providers of capital feel comfortable with Fannie and Freddie, I don’t foresee a major crisis,” he said. “But if Fannie or Freddie were to be wobbly, that could send mortgage rates to 7 to 8 percent and really choke off demand.”

Robert Shiller, a Yale economist who had argued for years that a bubble was forming in real estate prices, points out that one group was on target about where prices would go – investors in a real estate futures market that he helped set up on the Chicago Mercantile Exchange.

Starting in May 2006, the CME set up futures contracts for 10 metropolitan real estate markets, allowing investors to bet whether prices would go up or down and by how much.

By the end of 2006 those futures were pointing to real estate price declines between 5 percent and 7 percent in those markets, Shiller said. That ended up in line with the 6.7 percent annual decline in the October reading of S&P/Case-Shiller home price index, which was the largest drop recorded in that 20-year-old price measure.

“I’m not normally an advocate of market efficiency, but there’s something to be said when you’re putting money on the line with your prediction, rather than just talking,” he said.

Those futures today are far more bearish about future housing prices than most current economists – foreseeing an additional 4 percent to 14 percent drop in prices over the next year.

“I don’t have any reason to doubt those forecasts,” said Shiller, who does not make forecasts of his own because of his work on his price index and with the markets.

Other economists who had warned of a housing bubble still saw their late 2006 forecasts underestimate the problems that lay ahead.

“A year ago I thought a drop in prices was inevitable, but I didn’t know if it would be a bubble bursting or the air leaking out of the balloon,” said Dean Baker, co-director of the Center for Economic and Policy Research. “At this point we’re seeing a quick meltdown.”

Baker’s forecast for the drop in existing home sales to 5.6 million homes was essentially spot on. But he underestimated the drop in new housing starts: He forecast 1.7 million and they are on pace to come in at between 1.3 million to 1.4 million.

The problems in subprime mortgages were foreseeable, Baker said. He added that those problems are likely to spread to prime mortgages given to people with strong credit histories. And that could mean that Freddie Mac and Fannie Mae, which have relatively little exposure to subprime mortgages, could need a bailout despite stock sales that executives say have raised the capital they need to weather the storm.

“People still haven’t caught up with the fact that this is a larger issue for the mortgage market as a whole rather than just subprime,” said Baker.  

AMT Will cause Refund Delays

More than 3 million people will have to wait until February to get their tax refunds because of Congress’ late fix to the alternative minimum tax, the IRS said Thursday.Congress put a one-year freeze on growth of the alternative minimum tax last week, shielding many middle- and upper-middle income taxpayers from first exposure to the tax. But Congress’ late action means the Internal Revenue Service won’t be able to start processing five AMT-related forms until February, delaying potential refunds for those people until that month.

Between 3 million and 4 million people filed in January of last year using those forms, with many of those people expecting a refund, the IRS said.

“We regret the inconvenience the delay will mean for million of early tax filers, especially those expecting a refund,” acting IRS Commissioner Linda Stiff said.

As many as 13.5 million people will have to wait until February 11 to start filing with the five AMT-related forms, but the IRS said filing patterns show only between 3 million to 4 million of those people file during the early tax season anyhow.

The IRS was able to reprogram its computers to begin accepting the seven other AMT-related forms when the tax season opens in early January.

But the tax packages that will start arriving in the mail beginning after New Year’s Day were printed in November, before the AMT fixes were approved by Congress. The IRS has created a special section on its Web site, irs.gov, with updated copies of AMT forms.

The alternative minimum tax was passed in 1969 and was aimed at about 155 very wealthy families who used deductions to avoid paying any federal income tax. The AMT disallows certain deductions and credits. It was not adjusted for inflation; as a result, over the years it has hit a growing number of middle-income taxpayers.

More than 4 million were subject to it in the 2006 tax year. Without the congressional fix, more than 20 million families would have been faced with an extra $2,000 tax hit on average.

The five forms affected by the delay are:

• Form 8863, Education Credits.
• Form 5695, Residential Energy Credits.
• Form 1040A’s Schedule 2, Child and Dependent Care Expenses for Form 1040A Filers.
• Form 8396, Mortgage Interest Credit and
• Form 8859, District of Columbia First-Time Homebuyer Credit.

Any taxpayer using those forms will have to wait until February to file their taxes, the agency said. The IRS will begin processing those forms on Feb. 11, and the first refunds for those people will start going out 10 to 14 days later.

More than 100 million people got refunds during the last tax season.

The Associated Press reported on Dec. 1 that the IRS Oversight Board was warning that taxpayers could expect refund delays because Congress hadn’t acted on an AMT fix.

Congress passes legislation every year to keep the tax from expanding. The fix this year was delayed by an argument between Republicans and Democrats over whether some taxes should rise to offset the cost of correcting the AMT.

The House’s Democratic majority demanded that the $50 billion cost of the tax relief be paid for, mainly by closing a loophole on offshore tax havens. But Republicans’ argument that the AMT shouldn’t be fixed with increased taxes prevailed, with the backing of a White House veto threat.

The Dec. 19 passage of the AMT fix threw the IRS’s schedule off because it takes seven weeks to reprogram the agency’s computers to adjust for congressional action, the agency said.

IRS officials suggest that people file electronically to get faster refunds. People who file electronically and get direct deposits into their accounts can expect refunds in 10-14 days, while those who file with paper forms can expect a wait of as long as six weeks.

The IRS is also working with tax professionals and the makers of tax preparation software to make sure their information is as up-to-date as possible.

“The IRS is going to continue to do everything it can to make this a fully successful filing season for the nation’s taxpayers,” Stiff said. 

Worse Than The Great Depression

The United States is deep in its worst housing slump since the Great Depression, and according to a new report, it’s not going to get better any time soon.In a new survey, Moody’s Economy.com says many metro areas will record losses of 20 percent or more during the downturn, with the national median price for single-family homes dropping 13 percent through early 2009. Factoring in discount offers from sellers, the actual price decline would be well over 15 percent.

80 of the 381 metro areas covered by the report will record double-digit losses, according to the report. Most of the worst-hit markets are in once high-flying areas such as California and Florida.

The steep losses were bound to arrive sometime. Throughout the housing slump, which began in the summer of 2006, experts kept expecting prices to tumble, but it wasn’t until recently that they dropped substantially, according to Mark Zandi, chief economist for Moody’s Economy.com.

“There has been a sea change in seller psychology since the subprime shock this summer,” he said. “Sellers now realize they have to drop their prices to make a sale and prices are coming down very rapidly in some markets.”

One such place is Punta Gorda, Fla. In Moody’s outlook, prices there will undergo the steepest correction of any U.S. market. From their peak during the first three months of 2006, to their bottom, forecast for the second quarter of 2009, prices will decline 35.3 percent. That’s in nominal dollars; adjusted for inflation, the loss will be even greater.

Other metro areas expected to go through crushing price drops include: Stockton, Calif., where prices are forecast to drop 31.6 percent, Modesto, Calif., (-31.3 percent), Fort Walton Beach, Fla, (-30.4 percent) and Naples, Fla. (-29.6 percent).

The worst hit market outside the Sun Belt is expected to be Ocean City, N.J. where prices will fall 24.9 percent, according to Moody’s. Prices in St. George, Utah (-21.8 percent), Grand Junction, Colo. (-18.9 percent) and Atlantic City, N.J. (-18.6 percent) will also suffer. In the Washington, D.C. metro area, Moody’s forecasts a decline of 18.4 percent.

Home prices are being pulled down by an even more severe decline in home sales, which Moody’s expects to bottom out in early 2008, when unit sales will be down more than 40 percent from their peak.

Home builders continued to add to inventory even as the slump got well underway, contributing to what it now an 11-month back-log of homes for sale, according to the National Association of Realtors.

Many of these homes are sitting completely empty: The Census Bureau reported a total of 2.1 million vacant homes for sale. Vacant homes add pressure on prices because owners of these houses are usually more willing to slash prices to move the properties. They cost out-of-pocket cash each month while providing neither income nor shelter.

Even though home construction has now contracted severely – the Census Bureau reported Tuesday that new housing starts were down to an annualized rate of 1.187 million units in November, the lowest in 16 years – it will take time to work through the excess inventory.

The housing slump will have a substantial impact on the overall economy, according to Moody’s, which says it will depress real gross domestic product by more than a percentage point this year and by 1.5 percentage points in 2008.

Speculative investment in the mid-2000s helped fuel the current slump. Zandi pointed out that 16 percent of mortgage originations during 2005 were for non-owner occupied housing, twice the number of a few years earlier.

“And that’s a very conservative estimate of investor demand,” he said. “Many home buyers lied on their mortgage applications.” That’s because interest rates are lower for owner/occupied dwellings.

Buying for investment was especially prevalent in many resort areas, such as Ocean City, N.J. Many buyers were betting they could hold onto the property for a short time and sell it for a quick profit, a difficult feat to finesse, considering the high transactional costs. Many speculators came late to the party and got caught in the slump. Now their properties are adding to mountainous inventories.

Another factor was excessive new home construction, especially in once hot markets. As prices skyrocketed, builders rushed to take advantage of the increases, contributing to the now high inventories.

Also adding homes to markets was the increase in foreclosure filings. When lenders take back properties, they put them back on the markets. Foreclosures have just about doubled this year.

For the slump to end, much of the excess inventory will have to be worked through. Zandi doesn’t envision that happening much before 2010, which he forecasts to be a very modest recovery year with low, single-digit growth. 

FHA Secure a Bust So Far

A program unveiled by U.S. President George W. Bush in August that is trying to save tens of thousands of homeowners from foreclosure has aided just 266 borrowers so far, according to government data released on Monday.The initiative, which helps high-risk or low-income borrowers win better loan terms by insuring mortgage payments, targets recent homeowners whose loans have a built-in interest-rate spike that made them miss a payment.

More than 1.8 million borrowers could face mortgage rate spikes by the end of next year, according to the Federal Reserve Board, with the mortgage costs rising $350 a month.

Until Bush relaxed the rules, borrowers who missed a payment would not have been eligible to refinance under the Federal Housing Administration — a program from the Depression era designed to make home ownership more affordable.

Officials behind the new initiative, called FHA Secure, said it is on track to move 60,000 delinquent borrowers into stable, fixed-rate home loans.

But between September and mid-December, only 266 such borrowers have cleared all FHA hurdles, according to data compiled by the Department of Housing and Urban Development that was provided to Reuters.

Wall Street Guru’s Deluded.

Maybe Wall Street analysts are more honest and less compromised than they were pre-SarbOx, but recent events show that they’re still awful at their most important job: predicting bad news. They haven’t lost their habit of falling in love with the companies they cover and refusing to face unpleasant realities until everyone else has already done so. Now, eight years after they were inflating the bubble, we again have to question whether analysts do retail investors any good.The latest evidence: Analysts have only just discovered that corporate profits in the fourth quarter aren’t going to be nearly as strong as they had supposed a month or two ago. The consensus view going into the quarter was that S&P 500 profits would go up 12 percent to 15 percent, a large jump coming on top of the 20 percent rise in last year’s fourth quarter. In light of the credit crunch, the housing collapse, and the towering price of oil, that forecast seemed highly – one might say insanely – optimistic. This it proved to be, but only after the quarter began did the consensus view finally lurch into the real world. Their growth forecast is now about 1.5 percent and still falling.

It has been obvious for many months that profit growth would have to slow way down simply because it couldn’t continue at recent rates. Profits have been rising sharply the past few years, which makes sense after the hole they fell into in 2001 and 2002. But by early this year they had grown to 12 percent of GDP, way above their historical average of 9 percent. Analysts knew all this, and in case they didn’t, various commentators (including Fortune’s Shawn Tully) were insistently pointing it out. But the analysts, ever hopeful, chose to believe that U.S. companies would perform magic.

They still believe it. To see the stubbornness of Wall Street’s Pollyannas, look at new data from Merrill Lynch. The firm’s chief North American economist, David Rosenberg, regularly and realistically forecasts S&P 500 profit growth. He cut his 2008 forecast sharply (to zero growth) in June, even before the credit crunch. He has since cut it twice more, and it’s now -3 percent.

But Merrill’s analysts hold a far different view. Add up their 2008 profit growth forecasts for individual S&P companies, and you get 14 percent. In analyst-land, 2008 is going to be another knockout year, with profits yet again growing several times faster than the economy. What’s more, Merrill’s analysts have actually been increasing their 2008 growth forecasts in recent months. In their bizarre world the logic goes like this: Since we must now admit that 2007 profits will be much lower than we expected, and since we’re still certain that 2008 will nonetheless be totally fabulous, then the percentage increases will be even bigger than we thought.

How these nonsensical situations arise is no mystery. Each analyst can accept that the future may be tough overall while still believing that the companies he or she covers are special and will beat the trend. The analysts individually think they’re being reasonable, but in the aggregate, they’re crazy.

It’s similar to what happened in subprime mortgages in recent years or stocks in the late 1990s: Many players realized the situation wasn’t sustainable but figured they were especially perceptive and would get out ahead of the pack.

In the days of the market bubble, when many analysts failed to cut their earnings estimates until the collapse was underway, we blamed their motivation. They were afraid their firm’s investment-banking arm would lose business. That problem has at least been reduced by SarbOx and by fear of public scrutiny. But if analysts are still predicting fantasy earnings, who cares why? Individual investors are no better off than they were.

Not every analyst gets it wrong. It’s always possible in retrospect to find some who hit bull’s-eyes. The trouble is, you never know who they’ll be. Of course, you may be tempted to believe that while analysts in general are poor, the ones you’re relying on are special and will … no, wait. We know how that turns out

Fed Lends out 20 Billion to Banks

The Federal Reserve announced Wednesday that it was lending $20 billion to banks in the first of four special auctions designed to help alleviate the credit crunch on Wall Street.The Fed said that it received requests for $61.6 billion in loans from 93 bidders – illustrating strong demand by banks that need short-term funds. The winning bidders will receive their loans, which will mature in 28 days, on Thursday.

Initially, stocks moved modestly higher Wednesday following the release of the auction results but headed lower in early afternoon trading. The price of bonds fell at first but wound up rallying later in the morning, pushing the yield on the benchmark 10-year U.S. Treasury note down to 4.09 percent. Bond yields and prices move in opposite directions.

One market expert said the auctions will do little to ease the pain in the financial markets.

“This is a crisis of confidence, not of liquidity or rates. The problem is that people made bad loans this year. There’s nothing the Fed can do to fix this. All they can do is try and reduce anxiety,” said Barry Ritholtz, director of equity research for Fusion IQ, an asset management firm based in New York.

The Fed last week announced the auction plan in conjunction with central banks in Canada and Europe. A senior Fed official said at the time that the central bank was hoping banks that needed funding would be less hesitant to ask for money through the new anonymous auction process than they were to borrow directly from the Fed.

Mortgage Rates on the Rise.

The 30 yr mortgage rate is on the rise. Sources indicate that fears of inflation are to blame . The latest poll from Fannie Mae and Freddie Mac indicate the going rate for a 30 yr fixed to be roughly 6.12%.

Bonds No Longer On Steroids

Treasury prices have fallen in the last few days, ending  an unstoppable run that drove Bond prices sky high, leaving benchmark 10 year note to yield 3.83 . The bull market for bonds was created as Investors feared economic hardship due to energy and mortgage markets.    

However, word on the street has the Fed lowering prime interest rate at least 1/4 when they meet tomorrow. Lowering the prime interest rate traditionally provides more liquidity in the system, boosting the economy.  

Prime interest rate currently sits at 4.5% , down 3/4 of a point since the Fed halted its historic run of 17 consecutive rate increases. Many experts suggest Bernanke was too hawkish on rates and inflation, while ignoring blatent indicators driving the economy, noticably the coming housing crisis. He is expected widely to continue focusing on the enomony much of 2008.

Wall st is infamous for not even waiting until Bernanke makes his announcement.  The dow has gained several hundred points in the last few days, in spite of some weak economic indicators. This has led to downward pressure on Treasuries, leaving the 10 yr note yielding 4.15% at Mondays close.

Upside Down And Nowhere To Go

Seems like the goverment and various groups are trying hard to stem the tide of foreclosures in the US housing market.  They have introduced FHA secure . Community projects such as NACA, backed by Countrywide, Bank of America and more recently Chase. We now even have Hillary, Henry Paulson and even the Prez himself trying to grab the headlines. Its called the ARM Freeze.

However, none of this addresses the real problems facing the entire real estate industry nationwide. The real problem of course is the most fundamental concept of all. Supply and Demand.

There is an 8month inventory of houses on the market in the United States. The highest it has been in who knows how long. Builders overbuild, buyers overbought, investors overinvested, Lenders overextended themselvs, and Realtors oversold.

But when the inventory reached a certain point, houses were not selling anymore. The demand went down because there was no longer huge appreciations. Naturally this caused the appreciation to stop altogether. Then people started scrambling for cover. Everyone and their dog put their house up for sale, hoping to still sell while prices were high. Same with builders, and investors.

With any ‘boom’ or ‘gold rush’ , the speed of the boom will invariably equal the speed of the CRASH. Lenders could not lend out money to anyone for any reason.  Borrowers could not refinance or sell to get out of foreclosure. Lenders  couldnt count on flipping the property to recoup monies on foreclosure either. Losses started to pile up. Lenders began retracting their dubious products to protect themselves. Without the dubious products, a chunk of the housing market dissapeared immediatly.

But it was too late. All of 2005 and 2006, ‘experts’ were predicting a ’soft landing’ . When we look at the statistics, and history itself, these media release must surely have been a bald faced line in retrospect. 

The biggest thing about any boom is the alarming number of people in the market simply to ‘flip’ the thing for a profit, much like the stock market. If they cant sell the house, then they have to continue to pay the mortgage, and sooner or later simply walk away from it.

All the powers that be stood around and did nothing about this for quite a long time. Until it became painfully obvious the market was crashing deeper and harder than anyone was willing to admit. I bet they knew all along , but was hoping against hope it wouldnt come true.

Now these 1/2 baked programs have come into effect to ’save’ people. Except they fail to mention none of them actually fix the real problem.

There are millions of people whom bought at the height of the housing boom. This means they bought at boom prices. Whether they have a 30 yrs fixed, or ARM payment or whatnot, it still little comfort that their house could very well be worth 50% of what they bought it for .

None of the programs address all these exasperated homeowners who are now ’upside down’ in their house. Regardless of fantastic credit and good income. How long will it be before they realize their home will never be worth the boom price for at least 5 years, and walk away from the thing to save tens of thousands of dollars in property tax, home isnurance, PMI, homeowner association dues, and mortgage payments.

They can simply rent for cheaper, and their credit will be right back up to where it is now after 5years. Nobody predicts another real estate boom within 5 years. So why waste all this money to stay in the house? Homeowners will save a huge chunk of money by handing back the keys and renting until houses stabilize, then purchase the same damn house for 1/2 the price.

Therefore, none of these programs will stop the huge avalanche of foreclosures that are coming, and thus the home prices will continue to fall. Until they help the homeowner underneath their houses, nothing will change in the slightest.  

Bitter Over Bailout

There are a growing number of people whom are opposed to a mortgage industry bailout. Programs such as NACA, FHA Secure, and the new ARM Freeze introduced by Henry Paulson.

While these program are designed to help ditressed homeowners, critics of the programs are not as happy about it. The beef with these new programs is that they reward people whom should have never been a homeowner or lender in the first place. People all across america who paid a down payment and recieved a 30 year fixed loan. They feel that doing the right thing has now become the wrong thing.

Opponents of these plans also site the fact that none of these programs will address the real underlying problem for people who owe more than their house is worth. They cite that those people, whether they are excellent credit risks or less than perfect, will still have no choice but to walk away from their home as there is no real benefit for years.

Many experts predict that the current housing crisis is the worst the country has seen since the great depression, and therefore housing prices will not rebound anytime soon. This may convince many borrowers to walk away whether they can afford it or not. They can rent for much cheaper until the housing market picks up again, perhaps 5 years or more from now.