Tuesday, April 22, 2008

Busy Day for Economic News

Existing home sales fall in March

Sales of existing homes fell in March, the seventh drop in the past eight months, as the spring sales season got off to a rocky start.

The median price of a home was down compared with a year ago, and some economists predicted home prices could keep falling for many more months given all the troubles weighing on housing, from a severe credit crunch to a rising tide of foreclosures.

The median price of a home sold last month was $200,700, a decline of 7.7 percent from a year ago and the seventh consecutive year-over-year price drop. It was also the second biggest decline following a record 8.4 percent drop in February. These records go back to 1999.

Patrick Newport, an economist with Global Insight, said he believed existing home sales would keep declining for another six months, with home prices falling well into 2009 given all the headwinds facing the housing market, including sinking consumer sentiment.

Yale economist Robert Shiller, who developed one of the widely followed gauges of home prices, said in a speech Tuesday that home prices, which have already fallen about 15 percent from their peak in 2006, may fall further than the 30 percent drop experienced during the Great Depression of the 1930s, so far the biggest decline in home prices in the country.

"Basically we are in uncharted territory," Shiller said, noting that the 85 percent rise in home prices from 1997 to 2006 after adjusting for inflation had represented the biggest housing boom in U.S. history, so the fall in prices could be just as historic.

"It will be a long and painful end to the housing downturn because it will take a lot more price cutting to work off all of the inventory that is out there".

The inventory of unsold homes rose 1 percent in March to 4.06 million homes, representing a 9.9 month supply at the current sales pace, as rising foreclosures dump more homes on the market.

Supply Scare Sends Oil Toward $120

Oil was flirting with $120 on Tuesday, driven by a familiar theme: overseas supply concerns.

By late afternoon, light sweet crude for May delivery was up 13 cents to $119.50 on the New York Mercantile Exchange.

Oil's rise wasn't the result of oil alone, as the dollar weakened further and the National Association of Realtors reported a drop in both home sales and prices.

At the pump, the average price of a gallon of regular gas rose 0.8 cents Tuesday to a record $3.511, according to a survey of stations by AAA and the Oil Price Information Service. Although gas prices follow moves made by oil, gas is also being affected by falling supplies that comes with a seasonal switch made by refiners.

The high cost of oil has been drowning the highly oil-dependent airline industry. Airline stocks plunged Tuesday, after United Airlines parent UAL dropped the biggest earnings bombshell of the day, reporting a whopping first-quarter loss of $4.45 a share. United revealed plans to rein in costs in an effort to temper the impact of spiking jet fuel prices.

AirTran also announced that soaring fuel prices pushed it into the red during the first quarter, and kept it from enacting its expansion plans.

Euro breaks through $1.60 as dollar slumps to record low

The euro roared to another record high Tuesday, crossing $1.60 for the first time ever after a pair of European Central Bank governors said high inflation may cause the bank to raise interest rates. The U.S. dollar also fell against the Japanese yen and the British pound.

The euro rose as high as $1.6018, more than a penny above the $1.5916 it bought late Monday. The 15-nation currency, which was introduced in 1999, has traded as low as 82 cents. It has surged recently, rising 20 cents against the dollar in just five months and 10 cents in just two months.

The dollar has been weighed down by a combination of gloomy U.S. economic data and high European inflation — fueling expectations that the Fed will cut interest rates yet again while the European Central Bank will leave rates unchanged.

California home foreclosures climb as risky loans sour

Foreclosure proceedings against California homeowners jumped by more than 140 percent in the first quarter compared to a year ago, the result of risky loans during boom times, a real estate research firm said Tuesday.

Most loans that went into default originated between August 2005 and October 2006, according to DataQuick Information Systems, which said the market was shaking off its "'loans-gone-wild' activity" during that time.

Lenders sent homeowners 113,676 default notices from January through March, up 143.1 percent from 46,760 during the same period of 2007 and up 39.4 percent from 81,550 during the last three months of 2007.

The first quarter numbers marked the highest foreclosure level since DataQuick began keeping track in 1992.

Default notices hit their highest levels in nearly all of California's 58 counties, but Los Angeles County was just shy of its peak in the first quarter of 1996, DataQuick said.

One of every three resale homes sold in California from January through March had been foreclosed at some point during the previous year, up from 3.2 percent a year earlier, DataQuick said.

And I saved the best article for last:

Commercial Banks Heading for Huge Derivatives Losses- Credit Crisis Turning into Credit Armageddon (Click link above for entire article--snippets below)

While most investors are focused on the latest stock market rally, hidden from view is a monumental change that few recognize and fewer understand: Unprecedented amounts of old debts are coming due in America, and many are not getting refinanced.

Even worse, borrowers are going into default, lenders are taking huge losses, and outstanding loans are turning to dust.

The numbers are large; the government's response is equally massive. So before you look at one more stock quote or any other news item, I think it behooves you to understand what this means and what to do about it ...

First, the Federal Reserve is reporting a big contraction in short-term debts.

This is not a mere “slowdown” in new lending, which would be relatively routine. This is an actual reduction in the short-term loans outstanding, which is anything but routine ... which implies a rupture in the nation's credit spigots ... and which could deliver a new shock to the U.S. economy.

If this represented a planned and voluntary effort by lenders to begin trimming America's debt excesses, it might actually be a good thing.

But that's not the case here, not even close. Rather, this debt reduction is almost exclusively forced on lenders by the pressure of events — the plunging value of mortgages, the surging defaults by debtors, and the huge losses that have caught both banks and regulators off guard.

Second, the Comptroller of the Currency (OCC) is reporting havoc in the derivatives market.

In recent decades, derivatives have grown far beyond any semblance of reason. But in its latest report , the OCC reveals that in the fourth quarter of 2007 ...

- For the first time in history, the notional value of derivatives held by U.S. commercial banks plunged dramatically — by $8 trillion ...

- For the first time in history, U.S. banks suffered a massive overall loss on their derivatives — $9.97 billion, and, again ...

- These numbers do not yet reflect this year's disasters at Bear Sterns and other institutions.

The OCC's chart below illustrates the magnitude and drama of the decline:

The chart shows that, until the third quarter of last year, U.S. commercial banks had been making consistent profits from their derivatives quarter after quarter.

Their total revenue from these and related transactions (red line) never dipped into negative territory ... rarely suffered a significant decline ... and was even making brand new highs through the first half of 2007.

Then, suddenly, in the fourth quarter of last year, we witnessed a landmark game-changing event: For the first time ever, U.S. commercial banks lost big money in derivatives in the aggregate ( as you can plainly see by the sharp nosedive of the red line).

Again, if this were part of a planned retreat by the banks to more prudent trading approaches, it would be a positive. But it's anything but!

Indeed, the OCC specifically states in its report that the sudden and unusual reduction in derivatives was due entirely to the turmoil in the credit markets.

And ironically, nearly all of that turmoil was concentrated in “credit swaps” (blue line in the chart) — the one sector that was designed to protect investors from this precise situation.

These credit swaps were supposed to act as insurance policies that big banks and others bought to help cover their risk in the event of defaults and failures. But they're not working out as planned: Just in the fourth quarter, U.S. banks had a net loss (after all profitable trades) of $11.8 billion on credit swaps alone, according to the OCC.

Those losses helped wipe out all the profits they made in other derivatives, leaving a net overall loss of $9.97 billion.

Third, the International Monetary Fund (IMF) predicts that this crisis is barely ONE-THIRD over!

The Bottom Line for You Right Now

First, whether the stock market goes up or down in the near term, this crisis is far from over — and it's likely to get a lot worse.

Second, credit is already scarcer and is probably going to be even harder to get as this crisis progresses.

Bottom line: If you're looking forward to a future day when you can buy properties at bargain prices, don't count on doing so with a lot of borrowed money. Instead, be prepared to put up substantial amounts of cash.

Third, some banks won't survive this crisis.

Click here for the rest of this superb article


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