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Home Prices Fall for 10th Straight Month

The decline in home prices accelerated and spread to more regions of the country in October, according to a series of private indexes released Wednesday.

Prices fell 6.1 percent from October 2006 in 20 large metropolitan areas, according to Standard & Poor’s/Case-Shiller indexes, compared with a 4.9 percent decline in September. All but three of the 20 regions saw real estate values fall, and even the three places — Seattle, Portland, Ore., and Charlotte, N.C. — where prices were up from a year ago saw prices fall from a month earlier.

The quickening decline in home prices could hurt the broader economy by leading to more foreclosures as homeowners have more difficulty refinancing mortgages and by sapping consumer spending as Americans feel less wealthy. But economists also noted that a faster descent from boom-era prices would allow the housing market to right itself sooner by removing vacant homes from the market.

Stocks fell modestly Wednesday in response to the latest home price data and on weaker than expected retail sales. The Standard & Poor’s 500-stock index was down 0.4 percent, or 5.32 points, to 1,491.12; the Dow Jones industrial average was down 36.09 points, or 0.3 percent, to 13,513.24.

“The one disconcerting thing about the number is the rate that prices are falling is accelerating,” said Patrick Newport, an economist at Global Insight, a research firm outside Boston.

The housing market will probably exert significant influence on the health of the broader economy in the coming year. In recent months, growth has slowed but strong exports and rising wages have offset some of the weakness in housing and the financial markets. Consumer spending in the holiday season has been weaker than some retailers had hoped, though reports indicate it is still growing.

“It has been surprisingly resilient,” Robert J. Shiller, the Yale economist and a creator of the home price indexes, said about the economy. He added that it was difficult to determine what impact the weakness in housing would have on the economy going forward. “We are in uncharted territory,” he said. “This was the biggest housing boom we have ever seen.”

By Mr. Shiller’s calculation, the decline in home prices is greater than at any time since 1941 when the housing market was faltering at the start of World War II. Since their peak in July 2006, home prices in the 20 regions have dropped 6.6 percent. Many economists are predicting that home prices will fall 10 percent to 15 percent from their peak to their trough, though some pessimists believe the drop could be as large as 30 percent.

Prices are dropping fastest in the Midwest, which has been hit hard by job losses in manufacturing, and in California, Florida and the Southwest, where the housing boom was at its frothiest. Prices have fallen the most in Miami (12.4 percent from a year ago), Tampa (11.8 percent) and Detroit (11.2 percent). Prices are also falling in the nation’s two largest metropolitan areas — Los Angeles (8.8 percent) and New York (4.1 percent).

In Charlotte, Seattle and Portland, where the local economies are relatively healthier, prices were up from a year ago but lower than in September. “It suggests to me that the psychological factor is very important,” Mr. Shiller said. “Even in cities that are doing well people see what is going on nationwide and they don’t want to bid as much.”

The Case-Shiller indexes, which Mr. Shiller created with Karl E. Case, an economics professor at Wellesley College, track same-home sales over time in an effort to remove the influence of the changing composition of homes sold from month to month. The government has a similar index based on mortgages bought by Fannie Mae and Freddie Mac that covers more of the country but does not track sales where home loans are greater than $417,000.

Fed Cuts Key Interest Rate by a Quarter Point

The Federal Reserve cut a key short-term interest rate today by a quarter of a percentage point, to 4.25 percent, signaling its concern that the credit crisis might be gradually damaging the broader economy beyond housing.

Policy makers also cut the discount rate to 4.75 percent, from 5 percent, essentially encouraging bankers to turn to borrow from the Fed to keep up their lending to the consumes and businesses.

The cut in the so-called federal funds rate came at a meeting of the Fed’s policymakers in Washington. It was the third consecutive cut at these periodic meetings since the credit crisis erupted in August. The federal funds rate governs the cost of loans that banks and other lending institutions make to each other. Consumer credit, mortgage rates and auto loans all fluctuate with changes in the federal funds rate, which was 5.25 percent when credit problems began.

The rate cut comes as the Federal Reserve struggles to deal with a weakening economy, with no one sure how much damage the tight credit market, which erupted in August, might do. The Fed’s policy makers suggested in late October that they might have done enough. By then, they had cut the federal funds rate, in two steps, by three-quarters of a percentage point, to 4.5 percent.

And there the matter stood until late November when the Fed’s top policy makers — Ben S. Bernanke, the chairman, and Donald L. Kohn, the vice chairman — signaled that there would be another rate cut, at today’s meeting.

In speeches a day apart, the two men expressed concern that subprime mortgage problems might be making banks and other lenders reluctant to lend not only for housing but for other activities as well.

There is a key question for central bankers, Mr. Kohn declared, and that is “what is happening to credit for other uses, and how much restraint are financial market developments likely to exert” on the willingness of banks and other lenders to offer credit to consumers and to business.

Today’s cut in the rate at which financial institutions lend money to each other for very short periods might not end that reluctance to lend, some economists say, and that could push a still-growing economy toward recession.

Housing is by far the weakest sector. Home sales are down and prices have fallen not just on the East and West coasts, as they did in previous slumps, but in almost every region. Consumer spending has been less than robust in the opening weeks of the holiday shopping season, but well above the recession levels in the first two years of the decade.

Corporate profits, which had held up well through most of the decade, are showing signs of retreat, and some economists say that capital spending on new machines and equipment might also be weakening. Job growth has clearly weakened in the last two years, but not drastically. Employers added 127,100 a month, on average, over the last year, despite the tight credit market, and the unemployment rate held below 5 percent.

A big concern is economic growth, which surged to an annual rate of 4.9 percent in the third quarter and now, by most estimates, is sinking to 1 percent or less in the last three months of the year, and perhaps less in next year’s first quarter.

“A mild recession is now likely, with no growth for the year ahead,” Richard Berner, chief domestic economist at Morgan Stanley, declared in a report to clients this week.

But others see an economy with an underlying growth rate of 2 to 2.5 percent. They argue that the third-quarter surge and this quarter’s sharp decline are exceptions on either side of a growth trend not yet affected by the tight credit market.

“Take out trade and inventories, and real finalsales to domestic buyers, including business investment, is 2.4 percent,” the chief domestic economist at Global Insight. Nigel Gault, said.

Some housing bubble news from Wall Street and Washington. “The Pending Home Sales Index…remained 18.4 percent below the October 2006 index of 106.8 The PHSI in the Northeast is 11.1 percent below a year ago. In the West, the index is 16.9 percent lower than October 2006. The index in the Midwest is 11.7 percent below a year ago. In the South, the index is 25.3 percent below October 2006.”

“New-home sales are forecast at 788,000 this year and 693,000 in 2008, down from 1.05 million 2006; no sustained improvement is seen for new homes until 2009. Housing starts, including multifamily units, will probably total 1.36 million this year and 1.16 million in 2008, down from 1.80 million last year.”

The Associated Press. “The trade group’s seasonally adjusted index of pending sales for existing homes (was) the third-largest year-over year decline on record.”

“The revised monthly forecast from the National Association of Realtors, which followed nine straight months of downward revisions, calls for U.S. existing home sales to fall 12.5 percent this year to 5.67 million,- the lowest level since 2002.”

“Bucking conventional wisdom, (the) trade group said the battered housing market is on the verge of stabilizing and inched up its outlook for 2007 and 2008 home sales.”

“‘Despite over-exaggerated negative coverage on the housing conditions, many local markets are actually seeing price increases,’ said the trade group’s chief economist, Lawrence Yun at a press briefing. ‘Mortgage availability is improving.’”

The New York Times. “UBS became the latest Western bank to seek a financial lifeline from the cash-rich East today, selling a stake of more than 10 percent to investors from Singapore and the Middle East as it wrote down $10 billion more in mortgage-related assets.”

“The two investors — the Government of Singapore Investment Corporation and an unidentified Middle East investor — will inject $9.7 billion and $1.8 billion, respectively, into the troubled Swiss bank.”

“For UBS, said said David Williams, the head of banking research in London at (an) investment bank, it was an ‘interesting and depressing’ day. ‘Only a year ago,’ he noted, ‘this was considered one of the most financially sound institutions in the world.’”

From Business Week. “Lloyds TSB PLC said Monday that it was taking a $410.6 million hit from its exposure to the global credit crisis. The 201-million pound writedown came from an array of financial instruments affected by the crunch, including an 89 million pound ($181.8 million) exposure to mortgage-backed bonds and a 90 million pound ($183.8 million) exposure to Cancara, a ‘conduit’ company used to raise short-term funds.”

“A further 22 million pounds ($44.9 million) was lost on structured investment vehicles, or SIVs.”

Dow Jones Newswires. “French bank Societe Generale SA on Monday said it will bail out an $4.3 billion investment fund it owns that was hit by the global credit turmoil. The move by France’s second-largest bank by market value, to take this fund, a structured investment vehicle or SIV, onto its own balance sheet underscores still deteriorating liquidity conditions in credit markets.”

“As of Nov. 30, PACE had a total asset size of $4.3 billion and is composed of 75% of Moody’s Aaa rated assets, 13% rated Aa, 9% rated A, and 3% rated Baa.”

“Pierre Chedeville, a Paris-based analyst said this is obviously bad news for SocGen. ‘But, above all, it shows that the crisis is not over yet, contrary to what some people thought,’ he added.”

From Bloomberg. “Societe Generale is following London-based HSBC Holdings Plc and Rabobank Groep NV of Utrecht, Netherlands, in rescuing structured investment vehicles. Societe Generale was ‘very close’ to having to cede control of its Premier Asset Collateralized Entity Ltd., or PACE, to an outside trustee, Standard & Poor’s said Dec. 7.”

“‘They jumped before they were pushed to avoid being forced to sell assets,’ said Nigel Myer, a credit analyst in London.”

“The bailouts by Societe Generale, HSBC and Rabobank further limit the role of the proposed $80 billion ‘SuperSIV’ fund being set up by Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. and sponsored by U.S. Treasury Secretary Henry Paulson.”

“The so-called master liquidity enhancement conduit, or M- LEC, is aimed at addressing the fallout from U.S. home loan defaults. Investors have shunned the short-term debt used by SIVs to finance purchases of higher-yielding securities because of concern about holdings related to mortgages.”

“Today, after a month of false starts, a new superfund created by the banks to keep the crisis in housing-related debt from deepening will begin raising money from financial institutions. But the role of this new entity, established at the behest of the Treasury, is already coming into question. And HSBC and several other European banks are moving to solve their problems on their own.”

“The new superfund, announced with much fanfare in mid-October, now looks increasingly irrelevant. Originally it was thought that the entity, called M-LEC, might raise as much as $80 billion that could prevent a sharp sell-off in securities owned by structured investment vehicles, or SIVs. Now, the M-LEC, known on Wall Street as the Super SIV, may raise just $60 billion, in part because many of the troubled SIVs are winding down themselves.”

“‘Who needs a Super SIV anyway?’ asks Alex Roever, a JPMorgan Chase fixed-income analyst, in a new research report. ‘There certainly seems to be a shrinking supply of SIVs to save.’”

The Wall Street Journal. “Over the past decade, Wall Street built a market for more than $2 trillion in securities sold globally and backed by loans to U.S. homeowners on two long-accepted beliefs and one newer one. The prevailing logic: The value of the American home would never fall nationwide, and people would almost always make their mortgage payments.”

“In a matter of months, though, much of the promise of the new financial architecture — together with its underlying assumptions — has proven to be a mirage.”

“The new financial system, shifting risk from banks to securities markets, has worked ‘pretty well’ up until now, says former Federal Reserve Chairman Paul Volcker. ‘We’re going to find out if it works well for a major-league crisis.’”

“Housing fits a pattern George Soros, the 77-year-old chairman of Soros Fund Management, has observed since he entered the investment business in the 1960s. But often a flood of capital makes an asset’s fundamentals seem sounder than they really are, attracting even more capital.”

“‘Eventually, you reach a turning point,’ he says, ‘where the value of the collateral begins to decline, which reduces the willingness to lend, which reinforces the fall in the value of the collateral.’”

“‘There usually has to be a flaw in people’s perceptions to set a boom-bust sequence into motion,’ Mr. Soros says. In the case of housing, he says, it was the assumption that, because home prices fall nationwide only in a severe economic slump, a diversified portfolio of U.S. mortgages made for a very safe investment.”

“‘We’ve seen an unprecedented decline in market liquidity, really beyond what we thought possible,’ says Noel Kirnon, executive VP in charge of structured finance at Moody’s Investors Service, one of the two large ratings firms.”

The Washington Post. “It will take years to determine who bears the primary responsibility for the current mortgage mess. But a piece of the puzzle fell into place last week with a story by my Post colleague David Hilzenrath about Freddie Mac’s decision in 2005 to begin dealing in a significant way with ‘piggyback’ loans that effectively allowed homeowners to borrow more than 80 percent of a property’s value — the limit set by Freddie’s congressional charter.”

“‘I think that what happened over time is we found that our own caution was making us less and less relevant, and we weren’t sure, quite frankly, that our competitors [on Wall Street] were being crazy,’ explained Anthony Piszel, Freddie’s chief financial officer. ‘Could we have run for the hills and said we’re not going to do any of that? What if things didn’t go down? We would basically be just taking our whole future and giving it away.’”

National Mortgage News. “Rags to riches loan officer/loan broker stories. “Imagine my surprise when I attended a family reunion two years ago and found out that my niece’s new husband is now a loan officer. Now mind you, he is a decent guy, but for crying out loud he has zero training in finance and was previously waiting tables. It gets even better. Then my older sister comes to me and tells me that she is now a loan officer! Yikes, this girl is a hairdresser. She can’t manage her own finances and of course has zero training as well!’ — R.W.”

The Telegraph. “The seven pillars of global demand over the last year - measured by current account deficits - have been the United States ($793bn) (£388bn), Spain ($126bn), Britain ($87bn), Australian ($50bn) Italy ($48bn), Greece ($42bn), and Turkey ($34bn). Most are facing a housing bust. All are in trouble.”

“Note that Goldman Sachs, Morgan Stanley, and Lehman Brothers, have all begun to tear up the ‘decoupling” manual. - the pre-crunch script assuring us that the world could get along fine as the US buckled.’”

“‘What began as a U.S.-specific shock is morphing into a global shock,’ said Peter Berezin, a Goldman Sachs strategist. ‘There is a clear risk that some of the hot housing markets in Europe and some emerging markets will cool dramatically.’”

“In Europe, not a single junk bond has been issued since August. Spreads on Euribor - the rate used to price mortgages in Spain, France, Italy, and Ireland - reached 93 basis points last week, a new record. This is tantamount to four rate rises for homeowners.”

“Investors expect the global credit squeeze to continue beyond the first quarter of 2008, according to the Bank for International Settlements.”

“Models using derivatives based on money-market rates signal ‘expectations of a persistent lack of liquidity and lasting concerns about counterparty risk,’ the BIS said in its latest quarterly survey.”

The Independent. “Let’s just pretend that 2006 never happened. Certainly, it shouldn’t have happened. The Stalinesque idea of airbrushing last year from the economic history books came from Ulster Bank economist Pat McArdle.”

“The blip was caused by the housing market, and ended because of it. Once people finally got it into their heads that house prices were too high, they stopped buying. So few sales are taking place that figures for current prices are largely meaningless.”

“In a rational world, the 12per cent rise would not have taken place and prices would have fallen as rates rose. A drop of 5-10 per cent might have maintained affordability at its historically stable figure of around 28 per cent of disposable income. Now, even allowing for rising incomes, they will have to fall by 15-20 per cent. This has probably happened already, but few are willing to sell. Until now.”

“The world is not rational and there are few things as irrational as a market in the grip of manic optimism or terror. It is remarkable, though, how they tend to exhibit the same characteristics. The US market turned down some months before ours, and is worth watching. For the first 15 months or so, sellers maintained their asking prices. Then they cracked.”

“Lo and behold, some 15 months after the Irish downturn comes news that apartments in Ashtown, Co Dublin, have had their prices cut by 20 per cent. The danger, as other developers well know, is that once this starts, it can go beyond what is rational.”

“In the early Nineties, Irish houses were so cheap they could be bought with little more than 20 per cent of disposable income.”

The Gazette. “For years, observers have asked when the Dubai housing market was going to crash. Yet every year, prices for the upscale homes, villas and condominiums going up across the city of 1.6 million people show no sign of faltering.”

“‘This is what people ask and we never know the answer,’ said Linda Mahoney, the Montreal-born CEO of the Dubai real estate agency Better Homes.”

“‘But there’s no bubble,’ insisted Mahoney, who has about 400 employees. ‘You know how many years I’ve been listening to this bubble stuff? The economy here is very strong. This doesn’t have a flavour-of-the-month feeling.’”

“‘Ever since I came here, people said this couldn’t possibly continue,’ DMG managing director Bernard Walsh said. ‘But it does. The ambition is endless.’”

“According to the database company Proleads, there are 3,400 active construction projects in these Gulf countries, with a total combined value exceeding $2.4 trillion.”

“‘It’s like Las Vegas on crack,’ one Canadian businesswoman observed.”

“Robert Lee, executive director of investment projects with the Dubai government-run real-estate group Nakheel, said his company’s grandiose projects - including three man-made islands in the shape of palms - are based on due diligence.”

“‘Coming from the West we’re trained to be risk-aware. Here, we’re trained to take smart risks,’ the Vancouver native said. ‘When a consultant says you can’t do it, we say: ‘Great, we’ll do it because no one else will be doing it.’”

Deal Reached on Mortgage Rate Freeze

By THE ASSOCIATED PRESS

WASHINGTON, Dec. 5 (AP) — Congressional aides said today that the Bush administration had hammered out an agreement with industry to freeze interest rates for certain subprime mortgages for five years in an effort to combat a soaring tide of foreclosures.

These aides, who spoke on condition of anonymity because the details have not yet been released, said the five-year moratorium represented a compromise between desires by banking regulators for a longer time frame of as much as seven years and industry arguments that the freeze should only last one to two years.

Another person familiar with the matter said the rate-freeze plan would apply to borrowers with loans made at the start of 2005 through July 30 of this year with rates that are scheduled to rise between Jan. 1, 2008, and July 31, 2010.

The administration said President Bush would speak on the agreement at the White House on Thursday, and the Treasury Department announced that Treasury Secretary Henry M. Paulson Jr. and Housing and Urban Development Secretary Alphonso R. Jackson would hold a joint news conference Thursday afternoon with officials of the mortgage industry.

Treasury officials also announced that there would be a technical briefing to explain more of the details of the proposal.

Mr. Paulson, who has been leading the effort to craft a plan, said on Monday that the program would only be available for owner-occupied homes — as a way to make sure that the break is not granted to real estate speculators.

The plan emerged from talks between Mr. Paulson and other banking regulators and banks, mortgage investors and consumer groups trying to address an avalanche of foreclosures that are feared as an estimated two million subprime mortgages reset from lower introductory rates to higher rates.

The higher rates in many cases will increase monthly payments by as much as 30 percent, making it extremely difficult for many people to keep current with their loans.

The plan is aimed at homeowners who are making payments on time at lower introductory mortgage rates but cannot afford a higher adjusted rate.

Inheritance brings up different kinds of taxes

December 2, 2007

Question: Will the real estate tax rate increase if I inherit my father's house? My dad said it might not if I take the home as a distribution.

Answer: I think you are confusing different kinds of tax situations. The real estate tax that you pay to your county or state normally is based on the value of your property.

Another tax is called the capital gains tax, and this is calculated on any profit that you make when the property is sold.

Consider this example: Your dad bought the house years ago for $100,000, and it is now appraised at $500,000. Assume for this discussion that no improvements were made to the house. The Internal Revenue Service looks at the tax basis of the property, and in our example, the basis is $100,000. (If improvements were added to the house, that would increase the tax basis.)

If you buy the house now from your father at the market price of $500,000, two things will happen. First, your father might have to pay capital gains tax on the profit he has made -- in our example, $400,000. (However, if he has lived in the house for two of the five years before it was sold, he can exclude up to $250,000 of this gain -- or if he is married and files a joint tax return, he can exclude up to $500,000.)

Second, I suspect that the real estate tax division in your county or state will want to increase the assessment up to your purchase price, which means that it is likely that your real estate tax will increase.

On the other hand, if you inherit the property on your father's death (which is what you refer to as "distribution"), you will get the stepped-up basis. This means that the market value of the house on the date of death will become your tax basis. So if the value is $500,000 when he dies and you sell it for that same amount, you will not have to pay any capital gains tax.

But, at some point, the real estate taxing authorities will get notice of the real value of the property and eventually they will raise your real estate tax. The real estate tax is based on the value of the property; it has nothing to do with how you take title to the house.

In my opinion, it is not a good idea for your father to give you the house now. Under the tax law, the tax basis of the donor (the person giving the gift) becomes the tax basis of the donee. So in our example, if your father gives you the house, your tax basis would be $100,000. If you decide to sell now for $500,000 -- and you have not lived in the house for at least two years -- you will have to pay capital gains tax on $400,000.

Live-in companion's interest

Q: My mother-in-law has been living with a 48-year-old man in the same house for the past 10 years or so. Only his name is on the mortgage and deed because she was not working and is retired. They both bought the house and both contribute to the monthly payments.

His health might be failing, and the family is concerned her interest is not covered. What should she do?

A: Have you or your wife talked to your mother-in-law? Does she understand that she does not have any interest in the property? In fact, have you checked the land records in the county where the property is to confirm that she is not on the title?

Though siblings can always raise questions so as to protect their inheritance, only your mother-in-law can solve the problem -- if, indeed, there is a problem. If he dies first, then his heirs will get the house and your mother-in-law -- and her children -- will get nothing. This fact should be called to her attention.