Topic: Finance, Banking & Monetary Policy

The Foreclosure Five Dominate Case-Shiller Price Indexes

A report, “Home prices in record drop,” posted a scary map labeled “Falling Homes Sales.” But it actually shows falling home prices. Within the S&P Case-Shiller sample of 20 metropolitan areas, the steepest drop in prices (not sales) were in Phoenix, Las Vegas, San Francisco, Los Angeles, San Diego, Tampa and Detroit.

All 7 of those metropolitan areas (7 out of 20 in that index) lie within 5 states with by far the worst mortgage problems, as shown in my February 21 article, “The Foreclosure Five.” Yet I also showed that states with the steepest price declines also have had huge increases in home sales, which makes the label on the CNNMoney map doubly misleading.

My article used third quarter house prices because fourth quarter figures were not yet available. That turns out to make even less difference than I expected.

The fourth quarter Federal Housing Finance Agency (FHFA) figures show home prices down 21.8% for the year in Nevada, 20.5% in California, 15.2% in Arizona, 19.5% in Florida, and 11.8% in Michigan. Prices were down 3.7% in the median state, North Carolina, but up 21.6% over five years. That means prices fell by less than 3.7% last year in 24 states— including a half dozen states with home prices up a bit, and New York with only a 3.3% decline.

CNNMoney says, “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.” The FHFA data for all 50 states, by contrast, show a small 0.1% increase in home prices between November and December.

The article goes on say, “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 FHFA, by contrast, shows that prices fell just 8.2% during the last three months of 2008, or 3.7% if using a median average. Ten percentage points is quite a wide gap.

What accounts for such huge differences between Case-Shiller and federal price indexes? CNNMoney imagines it’s because “Homes purchased without financing or ones too expensive to qualify for a Fannie-Freddie loan are not counted in the FFHA (sic) statistics.” That’s more than unlikely. The inclusion of cash sales and jumbo loans (larger than $729,750 in pricey area) can’t possibly explain why price declines in the Case-Shiller index look so much more dramatic those in the OFHEO/FHFA index.

The real reason is simple: Case-Shiller indexes are hugely dominated by the Foreclosure Five. In the Case-Shiller index of only 20 “top” metro areas, the Foreclosure Five account for 41.2% of that value-weighted index with California alone accounting for 27.4%.

The “national” Case-Shiller index totally excludes 13 states, such as Indiana and South Carolina, and samples only a fraction of many others. The Foreclosure Five account for 28.3% of that “national” index, with California amounting to 17.1%.

As is true of nearly all reprorting about foreclosures, underwater mortgages and falling house prices, what the Case-Shiller price index really shows is that many people are confusing what has been happening in the Foreclosure Five with what has been happening in the nation as a whole.

New Podcast: ‘Most Banks Are Fine’

If it ain’t broke, don’t fix it, says Cato Senior Fellow Gerald P. O’Driscoll Jr. of the country’s banking system. Since more than 90 percent of U.S. banks are doing fine, why all the talk about nationalizing them?

In today’s Cato Daily Podcast, O’Driscoll explains:

If you think the bank is insolvent, certainly it should be resolved. But do we really want to see the government running very large financial institutions? In effect, we already have seen that movie, it’s Fannie Mae and Freddie Mac, and they’re not doing such a good job of it.

Toxic TARP: Mr. Geithner’s Takeover Targets

A front-page story in the February 23 Wall Street Journal describes a plan to let the government convert its preferred shares in Citigroup to common stock, taking 25-40% ownership.

It could be worse.  A brilliant February 19 Journal report by Peter Eavis warned that “Government capital injections sit like ill-disguised Trojan horses in the nation’s largest banks,” showing that under Treasury Secretary Geithner’s socialist scheming the government could seize 74% of Citigroup and 66% of Bank of America. Meanwhile, most other reporters kept claiming bank stocks collapsed simply because Geithner had left out a few details.  On the contrary, he said too much, not too little.

The newer Journal report says, “When federal officials began pumping capital into U.S. banks last October, few experts would have predicted that the government would soon be wrestling with the possibility of taking voting control of large financial institutions… . Citigroup’s low share price already reflects, at least in part, a fear among shareholders that their stakes might be further diluted. A government move to take a big stake could backfire, potentially spurring investors to flee other banks, even healthier ones [emphais added].”

Why is any of this a surprise?  Even before the scary “capital purchase program” was unveiled, I wrote in the October 20, 2008 issue of National Review that, “Conservative legislators who expressed fear about letting the Treasury buy mortgage-backed bonds were strangely enthusiastic about inviting the Treasury to acquire equity in companies.  Critics of derivatives became enthusiasts for warrants … which would give the Treasury secretary virtually unlimited power to confiscate the wealth of stockholders of any company foolhardy enough to play this game.” 

More recently, in a February 11 New York Post piece (subtly titled “A Plan to Kill Banks”) I explained that, “Once a bank or insurance company gets in bed with the government, the property rights of that company’s stockholders become uniquely insecure. When the government jumps into the cockpit, smart stockholders bail out.  And depressed stock prices deflate the banks’ capital cushion.”

If “few experts” predicted these consequences of Treasury purchases of bank preferred shares and warrants, then why are they called experts?

How European Governments Hate Low Taxes

The European Union held a summit over the weekend at which the assembled politicoes announced a variety of steps to increase regulation of European financial markets.  But that isn’t all.

Reports the Daily Telegraph:

The EU communique also called for punitive action against tax havens. “A list of uncooperative jurisdictions and a toolbox of sanctions must be devised as soon as possible,” it said.

Ah, so now we see what is really important to European governments:  squeezing more money out of their peoples.

As Cato’s Dan Mitchell has oft pointed out, competition among taxing jurisdictions is good for everyone other than governments.  Tax havens, so-called, are an important tool for promoting such competition.  Similar efforts are underway in the U.S. with efforts to tax the internet, for instance.

The U.S. Didn’t Cause the World Recession

In the Washington Post, Ricardo Caballero of MIT has a novel and promising idea about “How to Lift a Falling Economy.”  Unfortunately, he echoes the mantra that all the world’s economic problems can be traced to the U.S. in general, and to big U.S. banks in particular.  “Already,” he says, “this illness has spread to the global economy.”

Already?  Industrial production in Japan began collapsing in November 2007, two months ahead of the U.S., and the Japanese industrial decline has been twice as fast.

Unlike the U.S., real GDP began falling in the second quarter of 2008 in Germany, France, Italy, Japan, Singapore and Hong Kong.  By no coincidence, that was when the price of oil rose as high as $145 a barrel.  Soaring oil prices raise the cost of production and distribution for many industries, and reduce real household incomes and therefore consumption.   Nine of the ten postwar U.S. recessions were preceded by a major spike in the price of oil.

In a piece for the Claremont Review of Books (written last November), I conclude , “This recession is not just a U.S. problem, not just about housing, and not just financial.”

Compare the decline in real GDP over the past 4 quarters (from The Economist):













Does it make sense to blame the largest declines in GDP on one country with the smallest decline?  If so, then we need some explanation of how some uniquely American “illness has spread” to so many innocent victims.

If the explanation is supposed to be falling U.S. imports, then the worst decline by far would have been in Canada and Mexico (where real GDP was rising even in the third quarter).  If the alleged causality is supposed to be because of some undefined links between financial centers, then Italy would not be among the hardest hit.

When it comes to trade, in fact, the shoe is mainly on the other foot: Collapsing foreign economies crushed U.S. exports.

In the second quarter of 2008, U.S. exports accounted for 1.54 percentage points of the 2.83% annualized rise in real GDP.  But falling exports subtracted 2.84 percentage points from fourth quarter GDP.  Falling exports, not falling consumption, were the biggest single contributor to the overall drop of 3.8%.

After looking at which economies fell first and fastest, it might be more accurate to say that some foreign  illness has spread to the U.S. economy than to assert or assume the causality ran only in the opposite direction.

Those Federal Strings that Come with Bail-Out Cash

Companies tend to like getting bailed out.  Heck, I wouldn’t mind a personal bail-out.  I mean, that nice Nigerian fellow promised me a share of the unclaimed bank account from his country’s late dictator.  It isn’t my fault the deal didn’t work out!

Government cash has led naturally to restrictions on employee compensation.  It has also encouraged people to turn to politicians to get loans from banks.  There was the notorious case in Chicago (full, it seems, of notorious cases!) where workers demanded that Bank of America bail out their failing firm because it canceled the line of credit to the firm.  After all, BoA had received federal money.  That meant it was supposed to willy-nilly give cash away, irrespective of the prospect of being repaid.  Illinois politicians piled on and naturally the bank caved.

Now people are calling their congressmen when they get rejected for a loan at banks that collected government checks.  Reports McClatchy Newspapers:

Rep. Mel Watt is used to dealing with constituents who need help with government agencies.

But once Congress passed a $700 billion bailout of the banking system, some people started turning to the Charlotte Democrat for help with the private sector. They’ve asked him to assist their appeals of rejected loan applications from banks that collected federal bailout money.

It’s an unusual type of request for Watt, who views the pleas as a sign of the times. An increasingly unsettled American public is looking for help with their own economic hardship but also asking for accountability because banks and other big businesses are getting bailed out by the government.

On the one hand, this is outrageous.  On the other hand, if the taxpayers have to support the banks, why shouldn’t the banks support the taxpayers?  The logic is obvious even if the consequences are potentially catastrophic.

It won’t be easy to roll back the federal government’s leap into socialism American-style.  But if we don’t halt the federal subsidy express, there might not be much real “free enterprise” left in America when we finish.

David Brooks — An Update

After carefully transcribing and then posting the nearly indecipherable argument forwarded yesterday on NPR’s All Things Considered by David Brooks, I thought, well, even the smartest people in the world can make a verbal hash of things when put on the spot with a live radio or television interview.  I had a nagging feeling that there must have been a well-thought-ought perspective knocking around in those words somewhere.  Was I being unfair to the man?  

And this morning — what do you know! — I open up Friday’s New York Times (I didn’t get to it yesterday) and see an op-ed length treatment of the very argument Brooks tried to make on NPR.  Alas, even when Brooks had a couple of days to think about each and every word, he still managed to be only a smidge less opaque than on NPR.