Feb
28
Feb. 28 (Bloomberg) — Billionaire Warren Buffett said the economy will be “in shambles” for the rest of this year as financial firms take losses tied to reckless loans made during the housing boom.
The Standard & Poor’s 500 Index will probably gain in three-quarters of the next 44 years, just as it did in the period since Buffett took over Berkshire Hathaway Inc. in 1965, he said today in his annual letter to the company’s shareholders.
While Buffett and business partner Charlie Munger can’t predict how stocks will perform in 2009, they’re certain “that the economy will be in shambles throughout 2009 — and, for that matter, probably well beyond,” he wrote.
Gross domestic product shrank at a 6.2 percent annual pace from October through December, the most since 1982, the Commerce Department said yesterday in Washington. Buffett said the consequences of the U.S. housing bubble are now “reverberating through every corner of our economy.”
Home purchases should involve an “honest-to-God down payment of at least 10 percent,” Buffett said. “Putting people into homes, though a desirable goal, shouldn’t be our country’s primary objective.”
Buffett endorsed efforts by the U.S. government to prevent the failure of financial firms including Bear Stearns Cos., which was sold to JPMorgan Chase & Co.
‘Immediate Action’
“Whatever the downsides may be, strong and immediate action by government was essential last year if the financial system was to avoid a total breakdown,” Buffett said. “Had that occurred, the consequences for every area of our economy would have been cataclysmic. Like it or not, the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat.”
Buffett’s letter accompanied the release of Berkshire’s fourth-quarter results, in which net income fell 96 percent to $117 million on losses from derivative bets tied to stock markets. Berkshire shares have fallen 44 percent in the past year as the value of the firm’s top stock holdings dropped and losses increased on the derivatives.
By the fourth quarter of last year, “the credit crisis, coupled with tumbling home and stock prices, had produced a paralyzing fear that engulfed the country,” Buffett said. “A freefall in business activity ensued, accelerating at a pace that I have never before witnessed. The U.S. – and much of the world – became trapped in a vicious negative-feedback cycle. Fear led to business contraction, and that in turn led to even greater fear.”
Feb
26
Jobless Claims Spike to 26-Year High
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Number of Americans applying for first-time unemployment benefits rises to 667,000. Continuing claims top 5 million for the first time.
NEW YORK (CNNMoney.com) — The number of Americans filing initial claims for unemployment insurance spiked, and those living on unemployment benefits hit a record high, according to a government report released Thursday.
For the week ended Feb. 21, 667,000 Americans filed initial jobless claims, up 36,000 from a revised 631,000 the previous week. That’s the highest figure since October 1982.
Economists polled by Briefing.com were expecting claims to drop to 625,000.
In a sign that more jobless Americans are having trouble finding work, 5,112,000 continued on unemployment for the week ended Feb. 14, the most recent data available. That’s the highest number since the Labor Department began keeping records since 1967.
Initial claims are expected to sharply increase, and it’s likely they will reach 750,000 per week in the upcoming months, according to Ian Shepherdson, economist at High Frequency Economics in New York.
He noted that weekly filings, adjusted for population growth, would have to exceed the 1 million mark in order to break the jobless claims reported from the mid-1970s and early 1980s.
“We fervently hope that does not happen but we are not confident. Companies are throwing in the towel as they recognize that no sector is safe,” Shepherdson wrote in a note.
The 4-week moving average of initial claims was 639,000, an increase of 19,000 from the preceding week. The average is used to smooth fluctuations in data.
The 4-week moving average for people continuing on unemployment was 4,932,250, an increase of 89,250 from 4,843,000 in the previous week.
The insured unemployment rate is 3.8%, nearly double the 2.1% rate from a year ago.
Stimulus: The stimulus bill that President Obama signed into law has several provisions that help those living on unemployment benefits.
The weekly unemployment benefit will temporarily increase by $25 on top of the roughly $300 jobless workers currently receive.
In addition, the first $2,400 of benefits in 2009 would be exempt from federal income taxes.
The stimulus also provides jobless workers with an additional 20 weeks in unemployment benefits, and 13 weeks on top of that if they live in what’s deemed a high unemployment state.
Feb
25
Existing Home Sales Lowest Since ‘97
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Realtors say sales fell 5.3% in January, believing would-be buyers delayed purchases due to stimulus talk.
NEW YORK (CNNMoney.com) — Sales of existing homes fell in January to their lowest levels in nearly 12 years, with a real estate group saying buyers delayed purchases in anticipation of government programs to boost the housing market.
The National Association of Realtors said Wednesday that existing home sales dropped 5.3% last month, to a seasonally adjusted annual rate of 4.49 million units from a rate of 4.74 million in December.
January sales were the lowest since July 1997, and were far below the consensus estimate of 4.79 million units, according to a survey of economists compiled by Briefing.com.
The decline comes as some buyers forgo purchases in anticipation of government stimulus efforts aimed at boosting home ownership, according to the NAR.
“Given so much stimulus package discussion in January, some would-be buyers simply sat out for clarity and certainty on the nature of housing stimulus,” said Lawrence Yun, the NAR’s chief economist, in a statement. But sales could pick up in the coming months as prices continue to fall and interest rates ease, Yun said.
The national median existing-home price was $170,300 in January, down nearly 15% from last year when the median price was $199,800.
Despite the decline in sales, the number of homes on the market decreased to 3.6 million existing homes from 3.68 million in December. At the current sales rate, it will take an estimated 9.6 months to sell down 3.6 million homes, the report said.
“The drop in total inventory is an encouraging sign because the number of homes on the market has declined steadily since peaking in July 2008, and inventory is at the lowest level in two years,” Yun said.
In January 2008, there were 3.54 million homes for sale.
Existing home sales unexpectedly rose in December as rock-bottom prices attracted some buyers in certain distressed markets. That led some analysts to speculate that the housing market was nearing its bottom after months of weak sales and falling prices.
But January’s figures suggested otherwise, notes Weiss Research analyst Mike Larson.
“Another false dawn? That’s what December looks like, considering the dismal performance of the existing home market last month,” Larson wrote in a research report.
While tight credit and waning consumer confidence continue to depress home sales, the biggest challenge facing the housing market is unemployment, Larson said.
“If Americans are worried they won’t have a job next month, next quarter, or next year, you’ve got a real problem,” he said. “It doesn’t matter if mortgage rates are 3% or 8%. People just aren’t going to buy many houses.”
Feb
24
Home Prices in Record Drop
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S&P Case-Shiller national index down 18.2% in final three months of 2008.
NEW YORK (CNNMoney.com) — Home prices declined at a record pace around the nation in the final three months of 2008, according to an industry report released Tuesday.
The S&P Case-Shiller National Home Price Index reported that prices sank a record 18.2% during the last three months of 2008, compared with the same period in 2007.
Case-Shiller’s index of 20 major metropolitan areas fell 18.5%, also a record.
“The broad downturn in the residential real estate market continues,” said David Blitzer, chairman of the Index Committee at Standard & Poor’s, in a statement. “There are very few, if any, pockets of turnaround that one can see in the data.”
All 20 metro areas in the 20-city index recorded declines, with home prices falling more than 20% in eight of those cities. National home prices have dropped 26.7% since they peaked during the second quarter of 2006.
In a separate release from the government, the Federal Finance Housing Agency (FFHA) reported that prices on its home purchase index fell 8.2% during the quarter on a year-over-year basis, and 3.4% compared with the third quarter of 2008.
The government index, which used to be known as the OFHEO home price index, differs from the S&P Case-Shiller index in that it only compares sales of homes that are purchased with so-called “conforming loans”, ones guaranteed or bought by mortgage giants Fannie Mae and Freddie Mac.
Homes purchased without financing or ones too expensive to qualify for a Fannie-Freddie loan are not counted in the FFHA statistics.
No Slowdown
The decline does not seem to be slowing – just the opposite. The average home price dropped 2.5% between November and December in the 20 top metro areas. That was a larger increase than the 2.3% drop a month earlier.
“The deterioration in U.S. home prices continues apace, with the rate of decline picking up steam late last year,” said Mike Larson, an analyst with Weiss Research.”Rising foreclosure activity is putting pressure on prices, as lenders are increasingly pursuing a ‘take what we can get’ selling strategy.”
Karl Case, the Wellesley economist who, with Yale economist Robert Shiller, co-developed the index, pointed out during a news conference following the index’s release that the markets experiencing the steepest falls also enjoyed the biggest run-ups during the boom.
“Those markets were driven by subprime lending expansion from the summer of 2003 on,” he said. “After the [Federal Reserve's lowered interest rates] to fight against the recession of 2001, subprime took off like gangbusters.”
Sun Belt cities suffered the worst declines, with Phoenix down 34%, Las Vegas off 33% and San Francisco lower by 31.2%. Denver fared best, down 4%, while Dallas was lower by 4.3% and Cleveland slid 6.1%.
Of the nation’s three largest housing markets, New York home prices dipped by 9.2%, prices in Los Angeles dropped by 26.4% and Chicago prices declined 14.3%.
Despite the drop in home prices, which has given affordability a big boost, the pace of home sales continues very weak. Existing homes have been selling at an annualized rate of fewer than 5 million, down more than 40% from the peak.
New home sales, at an annualized rate of about 331,000, are at their lowest level since the Census Bureau began keeping records back in 1963.
The worst may be yet to come, according to Peter Schiff, president of Euro Pacific Capital, an investment firm specializing in overseas investments and a noted bear on home prices.
“Prices are going to continue to fall,” he said. “They have to reflect economic reality.”
That reality includes stock prices down to their lowest level in nearly 12 years. “Where would real estate prices be if they went back to where they were 12 years ago?” said Schiff.
The index statistics do not contain a lot of good news for the future, according to Case.
“We’ll learn more in the spring market,” he said. “Sales should pick up and we’ll begin to see how well the president’s program is working. There’s no evidence in the data to tell us that home prices will bottom out.”
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Feb
21
Credit Crisis “Visualized” (Video)
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The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.
Feb
18
Construction of new homes fell nearly 17% last month to an all-time low, signaling no clear end to the housing market troubles.
NEW YORK (CNNMoney.com) — Initial construction of U.S. homes fell to the lowest level on record in January, according to a government report released Wednesday.
Starts fell to a seasonally adjusted annual rate of 466,000 in January, according to the Commerce Department. That’s the lowest level since the government started keeping records in 1959.
The rate was down 16.8% from December’s revised reading of 547,000, and 56.2% lower than January 2008. Economists were expecting housing starts to decline to 529,000, according to consensus estimates compiled by Briefing.com.
January marked the fourth consecutive month in which housing starts fell to a new record low. Starts have fallen nearly 80% from their peak of 2.3 million in January 2006.
“It’s a weak report, but it’s not all that surprising,” said Mike Larson, an analyst at Weiss Research. “It reflects the state that the housing market has been in for over a year.”
New construction of single-family homes reached an all-time low rate of 347,000, or 12.2% below December’s level. Experts consider single-family homes to be the core of the housing market.
Housing starts were dragged down further by a 25% month-over-month drop in multi-family home starts during the last month. Construction of new multi-family housing fell to a rate of 114,000, down from 152,000 in December.
“Building activity is all dried up,” said Larson. “Some of it is voluntary cutbacks, because the inventory is excessive. But there are also involuntary cutbacks, as lenders are cutting off funding for developers.”
Applications for building permits, considered a reliable sign of future construction activity, fell by a seasonally adjusted annual rate of 521,000 last month – also an all-time low.
That’s 4.8% below the revised 560,000 rate in December and 50.5% lower than year-ago levels. Economists were expecting permit applications to fall to 527,000.
The sharp decline in building activity suggests that home building will continue to drag on the economy for a while. Many economists have identified the battered housing market as the root of the problem behind the recent credit crisis.
But the drop in building could actually help the struggling market rebound. Homebuilders continued to construct new homes well after the housing bubble burst, leading to an enormous glut of unsold homes on the market. Rising foreclosures have added to the number of unoccupied homes for sale.
Since demand for homes remains weak, the glut will only ease if fewer new homes are built.
“Until you get that inventory down, going to see housing starts and permits decline,” said Larson. “Arguably this is what has to happen.”
Feb
12
Home Prices in Record Plunge
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National Association of Realtors reports that home prices dropped a record 12.4% in 2008 – the biggest fall in 30 years.
NEW YORK (CNNMoney.com) — Home prices fell 12.4% during 2008, the largest yearly decline since the National Association of Realtors began keeping comprehensive records in 1979.
The median price for a U.S. home sold during the fourth quarter of 2008 fell to $180,100, down from $205,700 during the last quarter of 2007.
Distressed properties, the foreclosures and short sales that have flooded the market, accounted for 45% of all deals. That has driven sales volume up in Nevada, California and other states hit hard by foreclosures; but these heavily discounted homes have also pushed median prices down.
“People are responding to discounted prices and are slowly absorbing the excess inventory,” said NAR President Charles McMillan. “Buyers clearly see value in today’s pricing.”
Pain is Widespread
The vast majority of metropolitan areas, 134 out of 153, recorded price declines compared with the last quarter of 2007.
“Home markets are weak just about everywhere,” said Pat Newport, an analyst with HIS Global Insight, “but in a few states, distressed sales are driving transactions.”
Cape Coral-Ft. Myers, Fla., which has the third highest rate of foreclosure filings in the nation, according to RealtyTrac, prices fell a devastating 50.8% for the year, to $110,900 from $225,300. That was the most precipitous plunge for any metro area.
In Saginaw, Mich., prices fell 41.4%; Riverside-San Bernardino, Calif., prices dropped 40.8%; and San Jose, Calif., prices declined 37.7%.
The Beaumont-Port Arthur area of Texas bucked the national trend. Its median home price jumped 16.7% to $132,600 – the highest increase in the nation. Other winners included Bloomington, Ill., up 9.6%; Dover, Del., up 6.5%; and Bismarck, M.D., up 6%.
The high number of distressed sales pushed prices down for several reasons, according to Lawrence Yun, chief economist for NAR. For one thing, many sales were in low- and moderate-income housing developments where buyers during the boom years financed their purchases using subprime mortgages. In higher-end areas, fewer exotic mortgages were used.
“Take Orange County, Calif.,” said Yun. “It’s the lower priced areas there where homes are selling. The high priced areas along the coast are not. That has skewed the results.”
And the high number of foreclosures means banks are willing to slash prices deeply to move inventory. Many of the properties they’ve obtained through repossessions now sit vacant, soaking up lender money for maintenance, heating, property taxes and insurance. The banks willingly take lower prices to end those cash outlays, which brings down prices even for normal sellers.
Then there’s also what Yun calls a “frozen” jumbo-mortgage lending market, which has also slowed sales of higher priced homes and reduced median prices.
The good news is that bargain prices are bringing many new buyers into the market.”Many are first-time homebuyers who were priced out of the market during the boom,” Yun said.
Stimulus Help
NAR is hoping a piece of the stimulus bill before Congress will build on that momentum and provide an extra incentive for buyers.
“Assuming housing provisions in the economic stimulus package are quickly enacted and provide enough encouragement for homebuyers, we could see a quick lift in home sales for the critical spring home-buying season,” said Yun.
On Thursday, it appeared that the final iteration of the homebuyer’s tax credit, which had very different provisions in the House and Senate versions of the stimulus package, was shaping up to be closer to the House bill, according to Yun.
That means a credit of $7,500, perhaps $8,000, or 10% of home price for first-time homebuyers. This windfall will not have to be repaid by homebuyers and can be taken off 2008 taxes. NAR estimates that could draw in an additional half million buyers this year.
“It could help reduce the high inventory of homes for sale,” said Yun, “and get housing markets moving again. It’s hard to get the economy back to growth until that happened.”