Housing Doom

From CNBC this morning:

Federal Deposit Insurance Corp (FDIC) might have to borrow money from the Treasury Department to see it through an expected wave of bank failures, the Wall Street Journal reported.

 

The borrowing could be needed to cover short-term cash-flow pressures caused by reimbursing depositors immediately after the failure of a bank, the paper said.

The borrowed money would be repaid once the assets of that failed bank are sold.

"I would not rule out the possibility that at some point we may need to tap into [short-term] lines of credit with the Treasury for working capital, not to cover our losses," Chairman Sheila Bair said in an interview with the paper.

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Yes banks have got trouble- big, big trouble: [Thanks L!]

WASHINGTON (AP) — U.S. banking industry profits plunged by 86 percent in the second quarter and the number of troubled banks jumped to the highest level in about five years, as slumps in the housing and credit markets continued.

 

Federal Deposit Insurance Corp. data released Tuesday show federally-insured banks and savings institutions earned $5 billion in the April-June period, down from $36.8 billion a year earlier. The roughly 8,500 banks and thrifts also set aside a record $50.2 billion to cover losses from soured mortgages and other loans in the second quarter.

The FDIC said 117 banks and thrifts were considered to be in trouble in the second quarter, up from 90 in the prior quarter and the biggest tally since mid-2003.

And this won’t be the end.  According to Sheila Bair, FDIC Chairman:

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From Reuters this morning- more worthless economic "news":

WASHINGTON (Reuters) - Sales of newly constructed U.S. single-family homes in July were lower than economists expected but rose from a June pace that was the slowest in nearly 17 years, a government report showed on Tuesday.

Economists polled by Reuters were expecting to sales to remain unchanged at the 530,000 annual pace first reported for June. The actual sales pace in July of 515,000 climbed from the revised June level of 503,000, which was the lowest since a 487,000 pace in September 1991.

It’s hard to get real excited about that increase when you read the actual report from the Commerce Department:

Sales of new one-family houses in July 2008 were at a seasonally adjusted annual rate of 515,000, according to estimatesreleased jointly today by the U.S. Census Bureau and the Department of Housing and Urban  Development. This is 2.4 percent (±11.6%)* above the revised June rate of 503,000, but is 35.3 percent (±7.3%) below the July 2007 estimate of 796,000.

Note that this purported month to month "increase" is way less than the margin of error. The year-over-year 35.3% drop, however, is not.

Dollars to donuts this "rise" is revised downward next month anyway. 

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The widely watched Case-Shiller Home Price Index was released today.  Home price drops are either slowing or accelerating, depending on how you prefer your spin.  If you don’t want anything to cloud your morning, you might prefer Bloomberg’s version:

Home prices in the U.S. fell at a slower pace in the second quarter, signaling the worst housing slump in more than 25 years may be starting to stabilize, a private survey showed today.

Home values declined 0.5 percent in the three months through June from the previous three months, compared with a 0.9 percent drop in the first quarter. Compared with a year earlier, values dropped 15.4 percent, the most since record keeping started 20 years ago. [OK, so the last sentence wasn't so positive.  They needed a little "balance".]

The housing slump, currently in its third year, is declining at a slower pace as the drop in property values has made homes more affordable.
 

Prefer something a little more downbeat to start the day?  How about this from Yahoo Finance:

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Lenders, homeowners and even real estate agents are having a hard time selling properties.  Apparently a number of cities now think they can do it better:

As a wave of home foreclosures courses through the United States, some of the nation’s hardest hit cities think they have found a way to ease the blight left on their communities by the crisis.

Using taxpayer and private money, Boston, Minneapolis, San Diego and a handful of other places are buying foreclosed properties to refurbish and resell them to developers and homeowners in an effort to prevent troubled neighborhoods from sliding into urban decay.

The efforts so far have been taken on a small scale. But local officials say they can become an important pillar of any housing recovery with the help of $4 billion in federal grants that were part of a housing bill Congress approved in July.

The housing market has been hammered by an excess of properties for sale, not enough buyers, difficult financing, and pricing in many areas is still out of line with local incomes.  While cities might be able to subsidize sell homes for less than their purchase price, that will hardly serve to prop up local home prices or limit further foreclosures.

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Doom salutes Olympic Champion Hank Paulson, winner of the Gold Medal in the Press Dissemblathon at the Beijing Summer Games

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Yesterday’s missile from John Mauldin [1] delivered another dose of concern with how the banking system will face its present challenges. In particular, he is worried about whether the FDIC will be strong enough to cover losses to all the bank deposits it insures. At the same time the WSJ posted a report [2] celebrating new ways that an individual investor can optain FDIC insurance on millions of dollars of CDs bought at one institution. Those two stories taken together sound like the scenario where an irresistable force meets an immovable object.

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We know that high supply, low demand and more expensive credit have put downward pressure on prices.  There is another reason however, that hasn’t gotten as much press- there’s a bunch of really crummy houses out there:

NEW YORK (CNNMoney.com) — Mold, maggots and piles of festering trash - no wonder home prices are in freefall.

It’s not just the subprime mortgage crisis that’s to blame for plummeting home prices. A flood of squalid properties on the market is helping to exaggerate the post-bubble price declines.

"Part of the reason home prices are declining is a fundamental deterioration in the housing stock," said Glenn Kelman, CEO of the online, discount broker Redfin. "During the boom, nine out of 10 houses for sale in many markets were in prime condition. Now, for every 10 houses, at least three are dogs."

Most of these mutts are foreclosed properties that have been permitted to fall into disrepair by lenders overwhelmed with thousands of vacant homes. If these houses sell at all, they’re going for bargain basement prices that are hurting home values throughout the neighborhood.

"I’ve never seen so many houses in this condition before," said Ray Anderson of Buyer’s Advantage Real Estate in Auburn Calif., near Sacramento. "And I’ve been in the business 20 years. I’ve seen bank-owned properties in the past. They were never like this."
 

Traditionally, "same house" price studies have been considered more accurate than median price, as they have tracked the resale value of the same house.  However, with many homes going into foreclosure and often being vandalized, this could mean comparing a house that used to have cherry cabinets and granite countertops with a property that is missing fixtures and air handlers.

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It’s Friday, and the foreclosures keep on coming in Phoenix:

Home foreclosures in the Phoenix area dropped from June to July, but still are staggeringly higher than the same time last year.

Default Research finds that foreclosure activity from June to July dropped by 6 percent. However, the number of trustee sales recorded in the Phoenix area increased 95 percent from July 2007 to July 2008.

The total number of trustee sales in Maricopa County was 5,504, while Pima County recorded 391 in July. About 3 percent of Maricopa households had a notice of trustee sale filed against the property, while Pima County recordings accounted for about 1 percent.

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A big hat tip to the Big Picture for this great "press release" from Capitalist Banter:

DES PLAINES, IL - McDonald’s Corp. held a press conference today to unveil its latest sandwich: the Big Freddie Mac. Priced at 50 cents, the Big Freddie Mac is the first fast food hamburger to be subsidized by the federal government. “The economy - not that there’s anything wrong with it - is causing Americans to cut back on eating hamburgers,” explained McDonald’s spokesperson Donald McDonald (no relation). “Washington has decided that the burger is too big to fail, so the Treasury Department has agreed to kick in three bucks for every Big Freddie Mac sold.”

The Big Freddie Mac, while similar in appearance, is significantly different from the McDonald’s mainstay - the Big Mac. Big Freddie’s bun is inflated to look twice as large as it actually is, while the two all-beef patties are actually one all-beef patty sliced in half width-wise and pumped up by puffy lettuce. The “special” sauce is French dressing which is this week’s “special” at the dollar store next to McDonald’s headquarters. The number of sesame seeds has been reduced to one with a promise of more in two years if the burger market bubble continues. Each Big Freddie Mac comes in a special wrapper printed with suggestions on how to “flip the burger” for profit by selling it to people who are new to fast foods or kids who haven’t learned to read yet.

 The Big Freddie Mac program does not mean we will be bailing out other fast food menu items,” said Federal Reserve Chairman Ben Bernanke. “As they say in the business, it’s for a ‘limited time only’.” However, he did not rule out a similar plan to help Starbucks, which has recently been forced to close 600 stores. Rumors out of Starbucks headquarters in Seattle hint that the company is about to roll out a government-subsidized coffee called the Frappe Mae.

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