Housing Doom

"You mean to tell me that the coins being stamped out at the Mint are, the very same night, melted down into bullion on Threadneedle Street?" [1]

Yesterday, Doomer NVmike asked: "John, can you explain, in simple terms, the differences between “Agency” and “Treasury” debt?"  This post is an attempt at a response.  The plan is to start off simply, and then go off on a rant.  There’s more here than meets the eye, and some of the issues are critical.

Doomer Yossarian’s reply to NVmike’s query is a good place to start.  It points to this rather dated (Sallie Mae has been privatized) summary of the Treasury and Federal Agency securities markets.  A Government Sponsored Enterprise (GSE) is a company that has been granted a government charter to perform some socially useful purpose, and has therefore been given certain powers and privileges to carry out those purposes.  Agency Debt is the senior debt (that is, bonds issued by) a GSE.  Many but not all GSEs are financial services companies.  The Tennessee Vallue Authority (TVA), was about the first GSE, and it’s a power utility.

The charters and privileges of GSEs differ as to the amount of support their bonds get. As of August 2008, it was obvious that Ginnie Mae’s Agency Debt was more explicitly guaranteed than were Fannie’s and Freddie’s.[2] However, all Agency Debt is supposed to have at least strong backing from Washington.  I don’t think a US agency bond has ever defaulted, but the Agency Debt issued by Fannie, Freddie, etc. consists of Mortgage Backed Securities (MBS) and there has been concern about default risk as house prices plummet and homeowners go into default.  Officials have been giving agencies ambiguous support lately, which has spooked some investors.

According to this page of the Treasury Dept site, "Treasury bills, like other marketable Treasury securities, are debt obligations of the U.S. Government and are backed by the Government’s full faith and credit. A bill is a short-term investment issued for a year or less." This makes Treasury Debt the safest, constitutionally protected, debt the government has to offer.  Often said to be "risk free."

     "I understand. But it sounds like a scheme to make something out of nothing–a perpetual motion machine. Somewhere, somehow, in some unfathomable way, it must have repercussions."
     "Quite possibly," said Pontchartrain, "but I cannot make out where and how exactly. You must understand, the King has asked me to double his revenues to pay for the war. Double! The usual taxes and tariffs have already been squeezed dry. I must resort to novel measures." [3]

Foreign central banks have lately demonstrated that they appreciate the subtle distinction between Treasury Debt (risk free) and Agency Debt (Oh God, oh God, we’re all going to die?):

Thanks again to twist for that marvelous extension of Setser’s chart she got up on very short notice Tuesday evening.  The discontinuity was touched off in mid-July 2008 when the markets realized that Fannie Mae and Freddie Mac might eventually have to consolidate their off-balance-sheet vehicles (Fannie calls them QSPEs) and recognize the need for more risk-based capital.  Under pressure from the implied threat to their debt, officials first seemed to offer an explicit government guarantee (Jim Lockhart) which within hours degenerated into the farce of an "effective" guarantee ambiguously capped at $200 billion (to start).  The waters are still terribly muddied on that one, and cenbanks’ confidence is obviously shot.

     "But, Daniel, that never happens. Mrs. Bligh, if she wants coffeebeans, can go down to the docks and shew her book–or her Lectern, in a pinch–to a merchant and say, ‘Behold, every powerful man in London is in debt to me, I have collateral, lend me a ton of Mocha and you’ll never be sorry!’"
     "Roger, what is Mrs. Bligh’s bloody book–by your leave, Mrs. Bligh!–but squiggles of ink? I have ink, Roger, a firkin of it, and can molest a goose to obtain quills, and make ink-squiggles all night and all day. But they are just forms on a page. What does it say of us that our commerce is built ‘pon forms and figments while that of Spain is built ‘pon silver?"
     "Some would say it speaks to our advancement." [4]

Now here’s the punch-line of the joke.[5] It came out just the other day that the Fed has hired four companies to sell it half a trillion dollars worth of MBS over the next 6 months.  Most of that paper will be agencies.  And what is it buying that stuff with?  The half-trillion dollars net buy of treasuries over the last 52 weeks represented by the tip of the yellow line in twist’s chart above.  Now you should be able to see the point of the quote at the head of this post.  What we’ve got here is a tight little circle.  A short circuit going pfzzzt!  There’s really no difference between the two types of paper at all.

UPDATE (May 9, 2009): I’m presently about half-way through Neil’s new (and relatively slow-paced) philosophical fantasy. It’s had its moments.

Read the rest of this entry »

You’ll love this one from the Austin Business Journal.  The number of housing permits has fallen in the Austin, TX area, and job creation has slowed considerably.  However if you combine the two,  Voilà!  Things start looking much better:

While the last two years of declines in new housing activity have been difficult for Central Texas, some housing market indicators show Austin is relatively balanced, according to a report from the Austin Chamber of Commerce.

Residential permits for 2008 will be at their lowest level in decades, at approximately 14,000 units, a total similar to the activity of the late 1990’s. But, according to research the Chamber cites from Residential Strategies Inc., Austin’s “employment change to residential permit ratio”–measured over a nearly two-decade period–is at a healthy 1 single family permit to 2.15 net new jobs.

The employment change-to-permit ratio is one metric used to examine the balance between supply and demand in the market, based on the assumption that new jobs create demand for new homes. In other words, for every 2.15 new jobs created since 1990, one single-family residential building permit has been issued.

Read the rest of this entry »

"Central banks were the main source of financing for the US deficit all along." [1]

We have quietly achieved another historic milestone in this story.  To put it starkly, the blue line in Chart 1 of Brad Setser’s Oct 16th blog post has just plunged below the x-axis for the very first time.

UPDATE: Twist is on the job working her chart magic.  Here’s Doom’s first cut at what Setser’s chart extended to the present now looks like.  Note that twist is using Doom-standard yellow for treasuries and red for agencies.  The long-term back-and-forth between the two types of paper as the dominant contributor to cenbank buying becomes obvious.  Also, the historic collapse of the Agency Debt purchasing helps to explain why Paulson has suddenly developed an insatiable appetite for GSE paper, when just months ago the very idea was unspeakable.  Will that treasuries bottle-rocket trend stabilize instead of collapsing like it did around 2004/2005?  Stay tuned for the next exciting episode of our historical financial crisis.

According to The NY Fed’s weekly figures on net foreign central bank holdings (as compiled by Housing Doom) of Agency debt going back to February 9, 2000, this is the first time on record that the cenbanks have ever collectively had a net sell-off of agencies over a 52 week period.

Agency Debt holdings as of December 26, 2007: $831.694 billion

Agency Debt holdings as of December 25, 2008: $818.992 billion

Net central bank purchase of Agency Debt (52 weeks): -12.702 billion

Read the rest of this entry »

Falling home prices haven’t just put a strain on budgets, they’ve put a strain on marriages- and divorces.  No one wants custody of an underwater house:

With nearly one in six homes worth less than the mortgage owed on it, according to Moody’s Economy.com, divorce lawyers and financial advisers across the country say the logistics of divorce have been turned around.

"We used to fight about who gets to keep the house," said Gary Nickelson, president of the American Academy of Matrimonial Lawyers. "Now we fight about who gets stuck with the dead cow."

As a result, divorce has become more complicated and often more expensive, with lower prospects for money on the other side. Some divorce lawyers say that business has slowed down or that clients are deciding to stay together because there are no assets left to help them start over.

In a normal economy, couples typically build equity in their homes, then divide that equity in a divorce, either after selling the house or with one partner buying out the other’s share. But after the recent boom and bust cycle, more couples own houses that neither spouse can afford to maintain and that they cannot sell for what they owe.

Divorces are already plagued with the tension of a failed marriage, he said. Things get tougher when there are fewer assets to divide because people need that money to retire, make mortgage payments or pay off debt. Now that investments and stock values have crashed, a divorce leaves both parties with less money to meet their obligations — so they start fighting for every penny they can get.

"It does make emotions run a lot higher, he said. "There’s a whole lot more at stake."

Read the rest of this entry »

"In hindsight, many economists say, the United States should have recognized that borrowing from abroad for consumption and deficit spending at home was not a formula for economic success. Even as that weakness is becoming more widely recognized, however, the United States is likely to be more addicted than ever to foreign creditors to finance record government spending to revive the broken economy." [1]

Everyone seems to have figured out that the one safe spot on the world’s economic "ship" is US Treasury Debt, so just about everyone is racing there. That can’t bode well for the stability of the "ship," even as the Treasury prepares to offer a practically unlimited supply.

UPDATE: Just realized something noticing the slight acceleration in Agency Debt selling over the last few weeks:

TOTAL FOREIGN CENTRAL BANK PURCHASES FOR THE LAST 52 WEEKS — AND FOR THE CALENDAR YEAR 2008 TO NOW — BOTH STAND AT A BIT OVER NEGATIVE $10 BILLION

This week’s Reuters report [2] has foreign central banks once again buying a very large $25.259 billion net of Treasury Debt. This is down only slightly from last week’s number, the 2nd largest weekly treasuries move ever recorded. This week’s figure was good enough for #4 on our Top 10 list. The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.[3] Here is Doom’s updated CSV version of the agencies and treasuries foreign central bank holdings data set.[4]

Similarly, the cenbanks sold a significant amount, $14.315 billion, of Agency Debt in the week. This is less than a billion lower than last week’s figure of $15.2 billion, which remains at #10 on the Top 10 list for agencies moves. The combined move was therefore a net buy of US obligations of $10.945 billion, just a bit less than last week’s figure.

The big picture shows continued divergence of rising treasuries holdings as compared with steadily declining agencies holdings.

Twist’s ratios graphs simply continue their history plunge.

Read the rest of this entry »

The [Canadian] federal and provincial government’s willingness to backstop the [ABCP] restructuring came amid a threat earlier this month from the foreign banks involved in the restructuring that they would walk away and scuttle the reorganization. [1]

The dead period between Christmas and New Years is an especially good time to pillage the public purse — especially with Washington in lame-duck mode with potentially $100s of billions burning a hole in Neel’s pocket.  Was the Madoff Ponzi really too big to fail?  Tribune Corp? CalPERS?  Please drop us a line if you’ve got a hint as to where our great-grandchildren’s tax dollars are going.  In Week I of the quiet time there were some humdingers, including the socialization of the risks to Canada’s ABCP fiasco.  Let’s see if we can top that in Week II.

Read the rest of this entry »

Things are rough everywhere these days, even at the North Pole.  More expensive gift requests have hit Santa hard: [Hat tip Freedom's Phoenix!]

Read the rest of this entry »

The H.4.1 statistical release for the week ended December 24, 2008, will be published on Monday, December 29, 2008, because the federal government is closed on both Thursday, December 25 and Friday, December 26. [1]

That was decent of the government to give everyone Boxing Day off this year Doom was waiting with bated breath for the release until we saw this article [2] that noted the announcement buried in last week’s version.

Read the rest of this entry »

 January’s Realtor magazine is out, and in an article titled Overcoming Buyer Reluctance, the authors outline various arguments for convincing buyers that now is the time to buy.  Among other things, they recommend the following exercise: [The comments in blue are mine.]

 A simple technique to prove to potential buyers, or even sellers, that they can’t perfectly time the market is to do this easy demonstration: Take out a blank sheet of paper and pen. Now, starting at the top of the paper, draw a line going down and at the same time ask the buyers to stop you when the market has bottomed out. [I'd be worried to perform this particular part of the exercise with potential buyers myself.  Clients might notice what a lot of us have noticed- that there can be a lot more downside than you anticipate.]

As long as your line keeps going straight down they won’t be able to. The moment you start back up, they’ll say "there!" but of course they missed the bottom. Now, keep drawing your line up while asking them to tell you when the market has peaked. Again, they won’t be able to tell you until you’ve rounded the top and started back down. Then they’ll say "there!" and once again they’ll be behind the peak. [Wow, if you listen to this guy, you might think that market bottoms and peaks only last a few days- then the market takes off like a shot.  Why buy now then?  Wait a few days for it to come back around and try again.]

This should be a moment of truth for them. Buyers cannot perfectly time a market—no one can. The smartest people know this. They play in the safe zone. The safe zone is where smart people plan to buy and sell. Anyone who buys at the top of a market is just unlucky and anyone who buys at the bottom of a market is just lucky. [Anyone who buys at the top is not paying attention.  Luck might help you find the bottom, but likely as not, if you find it, you've been doing your research.]

People who buy in a buyers’ market are the smart ones. They aren’t looking for a killing because they know that’s a matter of luck, not planning. They’re looking for a sound decision with a predictable result and, therefore, ask the question: "Has the market dropped enough now to make a sensible purchase?" More often than not, when they’re asking this question, they’re already in the safe zone and the answer is yes. [A "buyers' market" is a rather arbitrary designation by the National Association of Realtors, who never use the "hold" designation.  Consequently they end up encouraging their customers to make a lot of bad timing decisions. If a buyer wants to make a safe purchase, the question isn't "Has the market dropped enough?" but rather "How much farther is the market likely to fall?"  It's safer to overshoot the bottom and buy on the upswing than it is to buy too soon.]

Logic says that you can’t predictably time the market to be able to buy at the absolute bottom and sell at the absolute top. [Logic says that you don't want to get your information about when to buy from someone who's telling you that timing when to buy and sell is a matter of luck.]

After their comments about timing and luck, the authors offer this astounding bit of advice:

Read the rest of this entry »

"I believe each government partner has contributed a fair proportion to facilitate this restructuring plan in keeping with its interests. I am confident that the use of this backstop facility is not likely to be required, and the risk to taxpayers is low." [1]

Yeah, Jim, and that’s why you’re going to pretend that Monday is too late for second thoughts, or parliamentary debate. At least the auto-industry bailout made a pretense of public participation.

Read the rest of this entry »