Richard Suttmeier: Home Prices Could Fall Another 50%

Home Short Sales Bring Real Estate Prices Down

The housing market continues to deteriorate.

Thursday’s report on May pending home sales was down 30% from the prior month and nearly 16% vs. a year ago.

The market weakness spans the country. Sales in the Northeast, Midwest and South fell more than 30%, the bright spot, the West, only fell 21%.The news comes after last week’s record low new home sales in May, which plummeted nearly 33%. Experts say the expiration of the new homebuyer tax credit is to blame for the sudden market softness.

Unfortunately, the market could get worse and prices could fall further, says Richard Suttmeier of ValuEngine.com. High unemployment and struggling community banks are two main causes. Saddled with bad housing and construction loans, local banks will continue to restrict lending.Plus, the failure of the Obama administration’s mortgage modification program means a steady flow of short sales. “People are going to be surprised when they see there have been short sales,” which negatively impact appraisals in the local community, says Suttmeier.How low can prices go?Using the S&P/Case-Shiller index as his guide, Suttmeier suggests homes across the country could lose half their value. “If it gets back, like stocks, back to the 1999-2000 levels, that’s another 50% down in home prices,” he says.

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Nouriel Roubini Says You Should Preserve Capital

CNN Money

CNN Money

8 really, really scary predictions

Dow 4,000. Food shortages. A bubble in Treasury notes. Fortune spoke to eight of the market’s sharpest thinkers and what they had to say about the future is frightening.

Known as Dr. Doom, the NYU economics professor saw the mortgage-related meltdown coming.

We are in the middle of a very severe recession that’s going to continue through all of 2009 – the worst U.S. recession in the past 50 years. It’s the bursting of a huge leveraged-up credit bubble. There’s no going back, and there is no bottom to it. It was excessive in everything from subprime to prime, from credit cards to student loans, from corporate bonds to muni bonds. You name it. And it’s all reversing right now in a very, very massive way. At this point it’s not just a U.S. recession. All of the advanced economies are at the beginning of a hard landing. And emerging markets, beginning with China, are in a severe slowdown. So we’re having a global recession and it’s becoming worse.

Things are going to be awful for everyday people. U.S. GDP growth is going to be negative through the end of 2009. And the recovery in 2010 and 2011, if there is one, is going to be so weak – with a growth rate of 1% to 1.5% – that it’s going to feel like a recession. I see the unemployment rate peaking at around 9% by 2010. The value of homes has already fallen 25%. In my view, home prices are going to fall by another 15% before bottoming out in 2010.

For the next 12 months I would stay away from risky assets. I would stay away from the stock market. I would stay away from commodities. I would stay away from credit, both high-yield and high-grade. I would stay in cash or cashlike instruments such as short-term or longer-term government bonds. It’s better to stay in things with low returns rather than to lose 50% of your wealth. You should preserve capital. It’ll be hard and challenging enough. I wish I could be more cheerful, but I was right a year ago, and I think I’ll be right this year too.

Dollar Hits Two-Year High Against The Euro

“This is just another stage of the credit crisis,” said Birinyi Associates analyst Cleveland Rueckert.

“Now we’re seeing the effects in world economies of the trickle down effect of the last year and a half.”

The sell-off in commodities has hit gold, oil, base metals, sugar and grains and is tied to the soaring dollar. The dollar hit a two-year high against the euro on Wednesday as investors move away from investing in foreign markets and look to the dollar as a safe haven. Whereas earlier in the year many investors hid in commodities pushing prices higher than demand warranted, now there’s a big move to cash, Rueckert said. This hurts dollar-priced commodities, which appear cheaper as the dollar gets stronger.

The euro fell to $1.2886 against the dollar from $1.30, while the pound fell to $1.6208 from $1.6698.

Other currencies are also depreciating as central banks try to inject capital into their financial systems. The United States has been doing the same, but the dollar is still benefiting as a safe-haven play.

Fed To Buy Frozen Money Market Assets

Show Me The Money

Show Me The Money

New Money Market Investor Funding Facility (MMIFF)

Fed To Buy Frozen Assets To Meet Redemptions from Money Market Accounts

Federal Reserve will help finance purchases of up to $600 billion in assets from money market mutual funds which have suffered redemptions from investors seeking the safety of government debt. The program start date should be announced by the end of this week. Holy Hell, what’s next?

Financial Crisis is Becoming Severe

RGE Monitor

RGE Monitor

On Nouriel Roubini’s Global EconoMonitor, Nouriel explains why the Treasury rescue plan is very poorly conceived and does not contain many of the key elements of a sound, efficient and fair rescue plan – like a HOLC-style program and the need to recapitalize the financial institutions that are badly undercapitalized. Check out: RGE Conference Call on the Economic and Financial Outlook and why the Treasury TARP bailout is flawed.

The claim by the Fed and Treasury that spending $700 billion of public money is the best way to recapitalize banks has absolutely no factual basis or justification. This way of recapitalizing financial institutions is a total rip-off that will mostly benefit – at the huge expense of the U.S. taxpayer – the common and preferred shareholders and even unsecured creditors of the banks. Check out Nouriel’s Is Purchasing $700 billion of Toxic Assets the Best Way to Recapitalize the Financial System‌ No! It is Rather a Disgrace and Rip-Off Benefitting only the Shareholders and Unsecured Creditors of Banks.

In The US and global financial crisis is becoming much more severe in spite of the Treasury rescue plan. The risk of a total systemic meltdown is now as high as ever, Nouriel explains why the risk of a total systemic meltdown is now as high as ever as the severe strains in financial markets (money markets, credit markets, stock markets, CDS and derivative markets) are becoming more severe rather than less severe in spite of the nuclear option of a $700 billion package.

The next step of this panic could become the mother of all bank runs: a run on the 1 trillion dollar plus of the cross border short-term interbank liabilities of the U.S. banking and financial system as foreign banks start to worry about the safety of their liquid exposures to U.S. financial institutions. Such a silent cross border bank run has already started as foreign banks are worried about the solvency of U.S. banks and are starting to reduce their exposure. Check out: Roubini Sees ‘Silent’ Run on Banks, Urges `Triage’: Bloomberg Radio Interview and BBC Hardtalk Interview with Roubini: “US Bail-Out Special”.

Foreclosures Hit All-Time High

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Foreclosures hit all-time high

Over 900,000 borrowers are losing their homes, up 71% from a year ago, and a record number of home owners are behind on payments.

CNN Money
By Les Christie, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) — More home owners than ever are losing the battle to make their monthly mortgage payments.

Over 900,000 households are in the foreclosure process, up 71% from a year ago, according to a survey by the Mortgage Bankers Association. That figure represents 2.04% of all mortgages, the highest rate in the report’s quarterly, 36-year history.

Another 381,000 households, or 0.83% of borrowers, saw the foreclosure process started during the quarter, which was also a record.

Additionally, the number of mortgage borrowers who were over 30 days late on a payment in the last three months of 2007 is at its highest rate since 1985.

“Boy, that was ugly,” said Jared Bernstein, an Economic Policy Institute economist of the data.

“It’s another reminder that anyone who thought we had hit bottom was wrong. This was a huge bubble, and when a bubble of this magnitude breaks, it creates a huge mess,” he said.” It could take a lot longer for the correction to work through the system.”

One reason it may take so long is that there seems to be no end in sight for falling home prices.

“Declining prices are clearly the driving factor behind foreclosures, but the reasons and magnitude of the declines differ from state to state,” said Doug Duncan, MBA’s Chief Economist said in a prepared statement.

The foreclosure rates for prime and subprime adjustable rate mortgages both more than doubled compared with a year ago, from 0.41% for prime ARMs to 1.06% and from 2.70% for subprime ARMs to 5.29%.

But it was subprime ARMs that contributed most heavily to the nation’s soaring foreclosure rates. Many of these loans come with low introductory rates that reset higher, often to unaffordable levels, in two or three years. Although they represent only 7% of all outstanding mortgage loans, they accounted for 42% of foreclosure starts during the quarter.

Delinquencies stood at 5.82% of outstanding mortgages, up from 5.59% during the three months ended September 30, 2007, according to the MBA. In the last quarter of 2006, the rate was 4.95%.

“In states like Ohio and Michigan, declines in the demand for homes due to job losses and out-migration have left those looking to sell their homes with fewer potential buyers, particularly with the much tighter credit restrictions borrowers now face,” said Duncan.

“In states like California, Florida, Nevada and Arizona, overbuilding of new homes created a surplus that will take some time to work through.”

California and Florida are the states hardest hit by foreclosures. They accounted for 30% of all foreclosure starts in the United States last quarter, despite representing only 21% of the mortgage market.

Florida’s foreclosure start rate more than tripled during the last three months of the year compared with a year ago, and they more than doubled in California.

Both states still have a sizable over-supply of inventory, according to Duncan, due to over-building during the speculative boom that lasted through mid-2006. That will continue to depress home prices and add to mortgage delinquencies in those states.

“We expect to see home price declines to last there through the end of 2008,” he said, “after the rest of the country is in recovery.”

As prices plummet — already some California and Florida areas have seen price drops of 25% or more, according to Duncan — defaults will soar.

And falling prices and growing foreclosures create a vicious cycle; the more prices fall the less likely it is that borrowers can use home equity to refinance into more affordable loans, which leads to more defaults. And as foreclosures rise housing inventory increases, further depressing prices.

At the same time, these trends have lead to a contraction the construction industry, hurting overall U.S. economic activity and increasing the chances that the economy will fall into recession.

CNN Money

Treasuries Rise on Speculation Credit-Market Losses to Deepen

Bloomberg News

March 6 (Bloomberg) — Treasuries rose and three-month bill rates fell to the lowest level since 2004 on concern that the Federal Reserve may be unable to prevent credit-market losses from deepening.

Investors sought the safety of government debt as Citigroup Inc. planned to pare its U.S. residential unit’s mortgage and home-equity holdings by about $45 billion over the next year. Bonds briefly pared gains as speculation increased that the government would have to guarantee mortgage agency securities before a Treasury spokesperson said the conjecture was untrue.

“Every day is like the 1987 stock market crash,” said Thomas Tucci, head of U.S. government bond trading at RBC Capital Markets in New York, the investment-banking arm of Canada’s biggest lender. “There isn’t a day when you’re not at the edge of your seat. The system is at daily risk.”

The yield on the two-year note fell 13 basis points, or 0.13 percentage point, to 1.50 percent at 4:32 p.m. in New York. The price of the 2 percent security due in February 2010 rose 1/4, or $2.50 per $1,000 face amount, to 100 31/32. The 10-year note’s yield decreased 10 basis points to 3.58 percent.

The three-month bill’s rate dropped 13 basis points to 1.36 percent after touching 1.31 percent, the lowest level since July 2004. The drop pushed the so-called TED spread, the difference between what banks and the government pay for three-month loans, to 1.64 percentage points, the widest amount since Dec. 27.

`Driven by Fear’

“The short end is really being driven by fear,” said Donald Ellenberger, who oversees about $6 billion as co-head of government and mortgage-backed securities at Federated Investors in Pittsburgh.

The cost of exchanging fixed for floating interest-rate payments for two years climbed to a record high as investors sought to lock in rates. The spread between the rate on a two- year interest-rate swap, used to hedge against and speculate on interest-rate swings, and the Treasury two-year note yield, reached 110.06 basis points, the largest since at least November 1988, when Bloomberg began compiling data.

“This is the most illiquid market we’ve ever had, bar none, 9/11, any time in the history of the bond market,” said Thomas Roth, head of U.S. government bond trading at Dresdner Kleinwort in New York. “And it’s not getting better any time soon. We’re going to be living with this for a while.”

Merrill Lynch & Co.’s MOVE index, a measure of expectations for Treasury volatility, increased to 164.9 yesterday, the highest level since Jan. 28, two days before the central bank reduced its lending target by a half-percentage point.

`Screen Prices’

“There’s liquidity but not at the screen prices,” said Brant Carter, managing director of fixed-income retail trading for government and agency bonds in Memphis, Tennessee, at Morgan Keegan Inc. “By the time you make a quote and get an execution, the prices are, depending on the size of the transaction, a tick or a plus away to even more. That hasn’t happened in a long time.”

Ten-year securities yielded 2.07 percentage points more than two-year notes, the most in almost four years, on speculation further interest-rate cuts by the Fed will stoke inflation as commodity prices soar. Oil traded at a record of $105.97 a barrel in New York.

The difference in yield between 10-year notes and similar- maturity Treasury Inflation Protected Securities, or TIPS, climbed to 2.57 percentage points today, the most since August 2006. The difference reflects the rate of inflation traders expect for the next decade.

Negative Real Yield

The yield on two-year notes is almost 1 percentage point below the 2.5 percent annual rate of inflation excluding food and energy through January as reported by the Labor Department. The real yield for two-year Treasuries, or the difference between their interest rate and the pace of inflation, is negative 0.99 percentage point.

“This is not a value play in Treasuries,” said Richard Volpe, head of U.S. government bond trading in New York at Bear Stearns Cos., on Bloomberg Television. “This is about preservation of capital.”

Fed funds futures on the Chicago Board of Trade show a 72 percent chance the Fed will lower the 3 percent target rate for overnight lending between banks by three-quarters of a percentage point, compared with 54 percent odds yesterday. The balance of bets is for a cut of a half-percentage point.

Geithner on Stress

New York Fed President Timothy Geithner said the central bank may need to keep interest rates low for “some time” if financial markets remain under stress. The New York Fed president is a permanent voter on the rate-setting Federal Open Market Committee.

The cost of protecting corporate bonds from default rose, with credit-default swaps on the benchmark CDX North America Investment-Grade Index increasing 4 basis points to 170 basis points, according to broker Phoenix Partners Group.

Citigroup’s CitiMortgage division will decrease its total holdings mainly by making fewer loans that can’t be sold, CitiMortgage President Bill Beckmann said. Moody’s Investors Service downgraded bond insurer CIFG Guaranty four levels to A1, citing its “significant exposure to the mortgage sector.”

Bloomberg News By Daniel Kruger and Deborah Finestone