Economic Condition Review

Here at the end of the 3Q2011 all eyes are focused on the European Union (EU), the European Central Bank (ECB), the International Monetary Fund (IMF), the Federal Reserve Bank (FRB), and now laser like focus on the 17 European Monetary Union (EMU) parliaments who are individually considering their agreement to further assistance for Greece. The process is complicated by the complexity of the euro currency experiment. It is also complicated by the number of politicians in positions of influence. I hope cynicism is reaching high tide. The danger is extreme if there is not a plan developed to corral the ripple effects from what is expected to be substantial losses to major banks who are Greece's sovereign debt owners. One danger is that there is a known lack of adequate reserve capital at several European banks due to their investment in the sovereign debt of Greece and other over indebted countries. Compounding the problem is the lack of detailed information about credit default swaps intended to hedge risk on Greek debt. Lack of information deepens the fear.

The probability of Greece's default is high as reflected in the yields for their debt. Greek 2 year bonds yield 65.24% and their 10 year debt costs them 22.67% as of 9/29/2011. For reference, 10 year bond yields in other EMU countries are Germany at 2.01%, Italy at 5.58% and Portugal at 11.16%. The US Treasury 10 year is at 2.00%. The problem is how to contain the eventual wreck.

Residential New Construction Prognosis

U.S. home building likely won't return to normal levels until 2014, and then only if housing prices rebound and foreclosures drop sharply, research from the San Francisco Federal Reserve Bank showed.
Continued weakness in the housing market is dragging on the U.S. economy, which is losing ground under the weight of 9.2 percent unemployment and declining consumer confidence.

Research released by William Hedberg, a San Francisco Fed research associate, and John Krainer, a senior economist there, indicate the drag from housing is likely to continue for years.
"Our analysis suggests that even an unusually strong period of real house price appreciation would not, on its own, lift starts to long-run average levels," the researchers wrote in the regional Fed bank's latest Economic Letter. "A significant easing of the drag on housing stemming from the inventory of foreclosed homes is also needed."
Foreclosures would need to drop by 50,000 homes per quarter starting in 2012, the researchers found, and home prices would need to stop falling by 2013 and then begin to rise, for housing starts to return to pre-2004 levels by 2014.
Such a scenario is optimistic, they said, because the inventory of foreclosed homes is still rising, and the 50,000 unit-per-quarter decrease would match the sharp pace of increase in foreclosures when they began in 2006.
Article from Reuters.com

Housing Starts Making Case For New Stimulus

Today's report on new housing construction shows that home builders backed away from beginning new single family projects after the federal tax credit program ended at the end of April. This is one of the first housing reports to follow the end of the tax incentive. I'm reading analysis at Calculated Risk to see what conclusion he draws from the data. He is very thorough in his real estate coverage. I believe that the deep rooted importance of home construction and ownership in our economy is going to motivate a new federal incentive program. Here is the housing report...

FHA Home Financing Guideline's Tightened?

The NYTimes, in January, reported on the new lending standards required for loans insured by the FHA. If you believe loans are now more difficult to get, read on.

As of December, the F.H.A. was insuring 5.8 million single-family residences that had a total loan balance of $750 billion. More than half a million of the loans were seriously delinquent and heading toward foreclosure.

Many of these troubled loans were made in 2007 and 2008 as the market was plunging. Last fall, the agency said its cash reserves had tumbled to 0.5 percent of its loans outstanding, far below the 2 percent mandated by Congress.

Meredith Whitney on Banks & Housing Deflation

This 6 minute video clip from CNBC features Meredith Whitney who is well known as a banking analyst. In this interview she tells us that the banking model is broken and likely to shrink, new payment systems are likely to take market share from legacy banks and the housing market is definitely going to go through a second round of deflation.

Housing Starts, a leading indicator

This was found at Bloomberg yesterday:

Housing starts looked good for November but most of the gain was largely a comeback and then some in multifamily starts-a volatile component. The single-family component posted only a partial rebound. Construction companies picked up the pace of groundbreaking for new homes as housing starts in November rebounded 8.9 percent, following a revised 10.1 percent plummet in October. The November pace of 0.574 million units annualized came in right at the market forecast for 0.575 million units and was down 12.4 percent on a year-ago basis. The latest comeback was led by a 67.3 percent rebound in multifamily starts, following a sharp 29.5 percent plunge in October. Meanwhile the single-family component edged up 2.1 percent after a 7.1 percent fall the month before.

A housing start is registered at the start of construction of a new building intended primarily as a residential building. The start of construction is defined as the beginning of excavation of the foundation for the building.