(an interoffice email)

A few observations:

1) when chart 1 peaked in 5/01, we still had six months of recession to deal
with and the Fed didn’t stop cutting until 12/01 at 1.75%.
2) data only goes back to 1990, but the 5/90 peak was BEFORE the recession even
started, it didn’t end until 3/91 and the Fed didn’t stop cutting until 8/92 @
3) EDM9 has two + hikes priced in (three at the recent lows).  the EDZ8 thru
EDU9 part of the eurodollar curve seems awfully cheap to me.

April   Jan.   Oct.   July  April   Jan.   Oct.   July
2008   2008   2007   2007   2007   2007   2006   2006
——————Percentage of Total——————
Large & mid-market      100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Tightened considerably   3.6%   1.8%   1.9%   0.0%   0.0%   0.0%   0.0%   0.0%
Tightened somewhat      51.8%  30.4%  17.3%   9.4%   3.8%   5.3%   7.4%   5.4%
Basically unchanged     44.6%  67.9%  80.8%  88.7%  88.7%  89.5%  85.2%  80.4%
Eased somewhat           0.0%   0.0%   0.0%   1.9%   7.5%   5.3%   7.4%  14.3%
Eased considerably       0.0%   0.0%   0.0%   0.0%   0.0%   0.0%   0.0%   0.0%
——————–Number of Banks——————–
Large & mid-market          56     56     52     53     53     57     54     56
Tightened considerably      2      1      1      0      0      0      0      0
Tightened somewhat         29     17      9      5      2      3      4      3
Basically unchanged        25     38     42     47     47     51     46     45
Eased somewhat              0      0      0      1      4      3      4      8
Eased considerably          0      0      0      0      0      0      0      0
NOTE: Large and middle-market firms are those with annual sales of $50 million
or more.

SOURCE: Federal Reserve  FRBA <GO>


Don’t forget to add ‘and the economy is improving’ with GDP looking a lot like it bottomed in Q4.

With fiscal adding a quick $170 billion or so of net financial assets/spending power to demand over the next few months watch for additional price pressures across the board.

4 Responses

  1. This was an op ed in todays journal

    The Housing Crisis Is Over
    May 6, 2008; Page A23

    The dire headlines coming fast and furious in the financial and popular press suggest that the housing crisis is intensifying. Yet it is very likely that April 2008 will mark the bottom of the U.S. housing market. Yes, the housing market is bottoming right now.

    How can this be? For starters, a bottom does not mean that prices are about to return to the heady days of 2005. That probably won’t happen for another 15 years. It just means that the trend is no longer getting worse, which is the critical factor.

    Most people forget that the current housing bust is nearly three years old. Home sales peaked in July 2005. New home sales are down a staggering 63% from peak levels of 1.4 million. Housing starts have fallen more than 50% and, adjusted for population growth, are back to the trough levels of 1982.

    Furthermore, residential construction is close to 15-year lows at 3.8% of GDP; by the fourth quarter of this year, it will probably hit the lowest level ever. So what’s going to stop the housing decline? Very simply, the same thing that caused the bust: affordability.

    The boom made housing unaffordable for many American families, especially first-time home buyers. During the 1990s and early 2000s, it took 19% of average monthly income to service a conforming mortgage on the average home purchased. By 2005 and 2006, it was absorbing 25% of monthly income. For first time buyers, it went from 29% of income to 37%. That just proved to be too much.

    Prices got so high that people who intended to actually live in the houses they purchased (as opposed to speculators) stopped buying. This caused the bubble to burst.

    Since then, house prices have fallen 10%-15%, while incomes have kept growing (albeit more slowly recently) and mortgage rates have come down 70 basis points from their highs. As a result, it now takes 19% of monthly income for the average home buyer, and 31% of monthly income for the first-time home buyer, to purchase a house. In other words, homes on average are back to being as affordable as during the best of times in the 1990s. Numerous households that had been priced out of the market can now afford to get in.

    The next question is: Even if home sales pick up, how can home prices stop falling with so many houses vacant and unsold? The flip but true answer: because they always do.

    In the past five major housing market corrections (and there were some big ones, such as in the early 1980s when home sales also fell by 50%-60% and prices fell 12%-15% in real terms), every time home sales bottomed, the pace of house-price declines halved within one or two months.

    The explanation is that by the time home sales stop declining, inventories of unsold homes have usually already started falling in absolute terms and begin to peak out in “months of supply” terms. That’s the case right now: New home inventories peaked at 598,000 homes in July 2006, and stand at 482,000 homes as of the end of March. This inventory is equivalent to 11 months of supply, a 25-year high – but it is similar to 1974, 1982 and 1991 levels, which saw a subsequent slowing in home-price declines within the next six months.

    Inventories are declining because construction activity has been falling for such a long time that home completions are now just about undershooting new home sales. In a few months, completions of new homes for sale could be undershooting new home sales by 50,000-100,000 annually.

    Inventories will drop even faster to 400,000 – or seven months of supply – by the end of 2008. This shift in inventories will have a significant impact on prices, although house prices won’t stop falling entirely until inventories reach five months of supply sometime in 2009. A five-month supply has historically signaled tightness in the housing market.

    Many pundits claim that house prices need to fall another 30% to bring them back in line with where they’ve been historically. This is usually based on an analysis of house prices adjusted for inflation: Real house prices are 30% above their 40-year, inflation-adjusted average, so they must fall 30%. This simplistic analysis is appealing on the surface, but is flawed for a variety of reasons.

    Most importantly, it neglects the fact that a great majority of Americans buy their houses with mortgages. And if one buys a house with a mortgage, the most important factor in deciding what to pay for the house is how much of one’s income is required to be able to make the mortgage payments on the house. Today the rate on a 30-year, fixed-rate mortgage is 5.7%. Back in 1981, the rate hit 18.5%. Comparing today’s house prices to the 1970s or 1980s, when mortgage rates were stratospheric, is misguided and misleading.

    This is all good news for the broader economy. The housing bust has been subtracting a full percentage point from GDP for almost two years now, which is very large for a sector that represents less than 5% of economic activity.

    When the rate of house-price declines halves, there will be a wholesale shift in markets’ perceptions. All of a sudden, the expected value of the collateral (i.e. houses) for much of the lending that went on for the past decade will change. Right now, when valuing the collateral, market participants including banks are extrapolating the current pace of house price declines for another two to three years; this has a significant impact on the amount of delinquencies, foreclosures and credit losses that lenders are expected to face.

    More home sales and smaller price declines means fewer homeowners will be underwater on their mortgages. They will thus have less incentive to walk away and opt for foreclosure.

    A milder house-price decline scenario could lead to increases in the market value of a lot of the securitized mortgages that have been responsible for $300 billion of write-downs in the past year. Even if write-backs do not occur, stabilizing collateral values will have a huge impact on the markets’ perception of risk related to housing, the financial system, and the economy.

    We are of course experiencing a serious housing bust, with serious economic consequences that are still unfolding. The odds are that the reverberations will lead to subtrend growth for a couple of years. Nonetheless, housing led us into this credit crisis and this recession. It is likely to lead us out. And that process is underway, right now.

    Mr. Moulle-Berteaux is managing partner of Traxis Partners LP, a hedge fund firm based in New York.

  2. Never met him but seems he’s been reading this blog!

    As you know, I think it’s already bottomed as per the ‘forward looking’ data, and agree with him regarding the ‘lagging data.’

  3. Sorry, I’m not in agreement.

    In past housing episodes, we saw rising wages and falling mortgage rates allowing for recovery. It’s just not happening this time. Few banks are offering new variable loans which should be in the 4-5% range, instead lending standards are tightening making it harder to get loans.

    I believe domestic investment coupled with immigration will play a key role in stopping the housing unwind, but not for a while.

  4. I think the government is going to have the final word on this.
    Looking like the next generation FHA program is going to replace the lost demand from sub-prime. On the other hand, I live in miami and I can tell you, based on anecdotal info, prices have a long way to go down before they become affordable based on local household income.

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