January 27, 2023

Economix Blog: Signs of a Bottom in Housing

A reminder that there is a housing crash in progress:

Home builders started construction on just 428,600 single-family homes in 2011 and completed just 444,900 single-family homes, the Census Bureau reported Thursday. Both were the lowest totals since the bureau started keeping records in 1959. And the last few years have been much worse than any other stretch during that period.

Source: Census Bureau

It is even more striking to adjust the level of construction for population growth. In 1982, the previous nadir, builders started construction on one new home for every 350 United States residents. In 2011, one new home was started for every 727 residents.

Source: Census Bureau

Including multifamily homes changes the picture somewhat. The 583,900 housing units completed in 2011 is stil the lowest number on record, but multifamily construction activity is starting to increase. Construction started on 606,900 units during the year, exceeding the totals in 2009 and 2010.

And there is growing sentiment among home builders and economists that the bottom has been reached and construction will increase in 2012. Builders are securing more permits, and the pace of housing starts rose in the fourth quarter.

“This is not another false dawn; it’s the real deal,” Ian Shepherdson, chief United States economist at High Frequency Economics, wrote in a note to clients this week.

Mortgage rates remain at record lows, more people are finding jobs, and Mr. Shepherdson sees signs that lenders are starting to loosen their purse strings. He points to a decline in average required down payments.

Add in the possibility of a huge settlement that could help some homeowners avoid foreclosure and allow lenders to foreclose on others more quickly, and there is reason to think the records set last year will endure.

Article source: http://feeds.nytimes.com/click.phdo?i=43e3e972843495ff7d465b63ee942b1d

Central Bank Loans May Ease Europe’s Crisis

Though it is too soon to gauge any longer-term benefits, the move, by the European Central Bank, could be a turning point in the Continent’s debt crisis — a cascading problem that for nearly two years has plagued financial markets around the world and now threatens global economic growth.

American officials and global economists have long urged the Europe’s central bank to take just such an aggressive stance — even as European political leaders have repeatedly failed to devise concrete near-term plans to address Europe’s debt problems and deteriorating finances.

Carl B. Weinberg, chief economist at the consulting firm High Frequency Economics and a professed bear on the European outlook, said he was stunned by the size of the monetary operation, saying it suggested that Europe’s central bank had “shown a path toward averting catastrophic collapse in Europe.”

Indeed, some analysts suggest the central bank’s new lending program represents a kind of back door to the easy-money policy pursued by the Federal Reserve after the collapse of Lehman Brothers in 2008, which is widely credited with averting a broader economic disaster.

The three-year loans the central bank made Wednesday come with a bargain-basement interest rate of 1 percent, providing the region’s financial institutions with the kind of cheap financing they can no longer get from the market. Among other requirements, Europe’s banks need the money to refinance about a trillion dollars in loans that mature in 2012. Wednesday’s infusion could also help reduce the pressure on beleaguered government borrowers on the periphery of the Continent, most significantly Italy and Spain. Those countries have not been able to directly tap European Central Bank funds, even as investors are increasingly reluctant to finance those countries’ debt by buying their bonds.

Now, though, by lending to commercial banks at such low rates for three years, the central bank might induce them to use some of the newly available money to buy shorter-term government bonds, which have higher yields, or interest rates. Spain’s two-year government bond, for example, is currently yielding 3.64 percent.

Mario Draghi, the central bank’s new president, has resisted calls to stand directly behind debtor governments by buying their bonds as necessary, without limit. But the volume of money pumped into the system on Wednesday suggested that Mr. Draghi was prepared to indirectly support those governments through their nation’s commercial banks.

“This is exactly what happened in the United States with the Fed in 2008,” said Mr. Weinberg, the economist. By buying up bad loans and other impaired assets, and lending money to the banks, government officials in the United States were able to buy time for American banks to strengthen their depleted balance sheets.

But in the current case, European officials confront an even trickier situation. Not only must the banks borrow, but indebted European governments have huge borrowing needs of their own, totaling 1.1 trillion euros ($1.4 trillion) in 2012.

Despite those twin threats, German political leaders have opposed any outright bailout either for the banking system or for troubled government borrowers like Italy and Spain, whose free-spending ways have long irked voters in Germany, Europe’s largest economy and a principal financier of any bailouts.

If it works, the quiet virtue of the European Central Bank’s new lending program will be that it helped buttress banks while easing the pressure on governments — without the appearance of a direct rescue.

Although the program did not take effect until this week, it was announced on Dec. 8 as part of a broader series of European Central Bank efforts to stabilize anxious credit markets. The central bank said it would offer three-year loans — rather than the one-year limit it had previously imposed — and would accept a wider variety of financial assets as collateral, to make it easier for banks to qualify for the loans.

The central bank is accepting the banks’ outstanding loans as security, a measure meant to help smaller community banks that might lack conventional forms of collateral like bonds.

Jack Ewing contributed reporting from Frankfurt.

Article source: http://feeds.nytimes.com/click.phdo?i=a19f5db2d33acd2680d08238118f5983

Central Bank Loans Ease Euro Credit Strain, for Now

The E.C.B., making an offer too good for Europe’s banks to refuse, reported Wednesday that it had doled out almost half a trillion euros in low-cost three-year loans to keep credit flowing at a time when European banks are finding it all but impossible to finance their operations through normal market channels.

The lending reduces the “risk of a Lehman-type situation, where banks go into the new year facing a wave of refinancing and are unable to access the market,” said Jacques Cailloux, the chief euro zone economist at Royal Bank of Scotland.

But it is probably only a temporary solution. By acting essentially as a lender of last resort to the European financial system, the E.C.B. managed mainly to buy time for Europe to work out its longer-range problems of excessive debts, lagging economic competitiveness and limited fiscal unity.

The E.C.B. allocated €489.2 billion, or $639 billion, to 523 institutions, well above the roughly €300 billion estimate of analysts polled by Reuters and Bloomberg News.

Even as Mario Draghi, the new E.C.B. president, continues to resist calls to stand directly behind sovereign debtors without limit, the scale of the liquidity injection suggested that the E.C.B. is prepared to indirectly support them through the banking system.

Carl B. Weinberg, chief economist at High Frequency Economics and a self-described bear on the European outlook, said he was stunned by the size of the monetary operation, saying it suggested Mr. Draghi had “shown a path toward averting catastrophic collapse in Europe.”

Coupled with an easing of reserve requirements announced this month, Mr. Weinberg said, the results suggested that the E.C.B. had injected around €400 billion into the financial system so far in December.

“This is exactly what happened in the United States with the Fed in 2008,” Mr. Weinberg said. “They bought toxic assets and withdrew them from the market, and gave the money they printed to the banks, who put that money into the government bonds that were sold to fund TARP.” (TARP is the acronym for one of the U.S. bailout funds used to protect the U.S. banking system from failure.)

Mr. Draghi has been reluctant to involve the E.C.B. directly in the market for sovereign debt, saying the bank is forbidden by treaty from financing governments or engaging in the sort of “quantitative easing,” or pumping money into the economy, carried out by the U.S. Federal Reserve and others.

But Carsten Brzeski, an economist in Brussels with ING Group, said the infusion of funds Wednesday nonetheless “amounted to a bit of a backdoor Q.E.,” because the funds made available to the banks could then be lent to European governments at higher rates with little risk. That should ease the strains within both the banking system and the market for European government bonds.

In exchange for collateral, lenders borrowed at the E.C.B.’s benchmark interest rate, currently 1 percent. Mr. Brzeski noted they could then use the funds to purchase the debt of euro zone governments, pocketing the difference as profit. Spanish bonds of two-year duration, for example, yield around 3.4 percent; in Italy rates are even higher.

Mr. Draghi acknowledged during a speech to the European Parliament on Monday that banks might be doing just that. “We don’t know how many government bonds they are going to buy,” he said.

Strong demand at recent Spanish debt auctions has driven down yields, suggesting that banks are loading up on the debt to use as collateral for the E.C.B. loans, analysts said. But there are limits to their appetites for sovereign debt at a time when they are trying to reduce their vulnerability to a potential debt default by a country like Greece or Italy, and protect themselves against the possibility of a breakup of the euro zone.

The injection of three-year funds was one of the new measures announced by the E.C.B. on Dec. 8 to calm European credit markets. It was the first time that the E.C.B. had extended such loans for longer than about a year.

Article source: http://www.nytimes.com/2011/12/22/business/global/demand-for-ecb-loans-surpasses-expectations.html?partner=rss&emc=rss

News Analysis: German Dissent Magnifies Uncertainty in Europe

Global financial markets are expected to go through another rough week as the euro zone’s debt crisis gets messier, and Germany, the euro’s self-styled guardian, is playing a large role in magnifying the uncertainty.

Despite repeated pledges by Chancellor Angela Merkel to keep Europe together, the cacophony of dissent within her country is becoming almost deafening. That is casting fresh doubt — whether justified or not — over the nation’s commitment to the euro.

“The German electorate is not in the mind-set to undertake actions it sees as subsidizing less worthy nations,” said Carl Weinberg, the chief economist of High Frequency Economics in Valhalla, N.Y. “As a result, the government is moving in a very isolationist way to try to establish a fortress Germany that’s economically secure despite the risks in its European Union partners.”

This weekend, Der Spiegel reported that the German government was starting to prepare for a Greek insolvency and was devising various responses to handle a potential default, including allowing Greece to abandon the euro and return to the drachma. The government in Berlin would not comment, but such reports only add to the doubts bedeviling the euro monetary union.

On Friday, a stalwart German member of the European Central Bank, Jürgen Stark, abruptly resigned — news that would have barely merited more than a few lines in the financial pages just a few years ago.

Today, it is considered a sign of disenchantment within Germany of the extraordinary measures being pursued to maintain stability in the euro zone, adding to the wild volatility in financial markets around the world.

“Mr. Stark’s departure could be seen by financial markets as another indication of growing disenchantment in Germany towards the euro,” Julian Callow, chief European economist at Barclays, wrote in a note to clients.

All this has generated severe discomfort in Washington, which has watched the market volatility stoked by the European debt crisis with growing alarm.

The U.S. Treasury secretary, Timothy F. Geithner, has been in regular contact with his European counterparts, repeatedly calling on them to speak with a single voice to help reduce confusion in financial markets. After a series of frank discussions with many of them Friday at the meeting of the Group of 7 finance ministers in Marseille, he declared that “European officials fully understand the gravity of the situation there.”

Finland, the Netherlands and Austria have all spoken with dissonant voices on the Greek bailout, revealing deep divisions among Europe’s strongest countries about how far they should go to save their weaker neighbors.

Continued fears over the state of European banks, and French ones in particular, have also roiled financial markets, especially after Christine Lagarde, the managing director of the International Monetary Fund, warned that European banks needed substantial additional capital.

Meanwhile, fears over Greece are only likely to intensify this week, after Mrs. Merkel’s finance minister, Wolfgang Schäuble, warned that Germany, for one, would not approve new financial assistance to help Athens continue to pay its bills through Christmas unless the Greek government fulfilled the conditions of its first bailout.

Prime Minister George A. Papandreou sought to placate European partners on Saturday yet again in a speech. To keep international rescue funds flowing, he vowed to meet tough new austerity targets despite a recession that could cause the Greek economy to contract by as much as 5 percent this year. Demonstrators frustrated with austerity clashed violently outside Parliament as he spoke.

In the midst of it all, Mrs. Merkel is putting on a brave face. In an interview published Sunday in Tagesspiegel, a Berlin newspaper, she urged Germans to be patient with Greece in its current struggle to overcome the debt crisis.

“What hasn’t been done in years cannot be done overnight,” she said. “Remember the reunification process,” she added, a reference to the considerable amount of time it took for East and West Germany to reunite after the fall of the Berlin Wall.

A few weeks earlier, she put on a show of unity at the Élysée Palace in Paris with President Nicolas Sarkozy of France. Giving one another air kisses before a phalanx of cameras, the pair reaffirmed their commitment to the euro and to fixing some of its worst features, including compelling countries to get their finances in better shape.

“Germany and France feel absolutely obliged to strengthen the euro as our common currency and further develop it,” Mrs. Merkel said.

Outside of Greece, some things have improved, if only haltingly. Italy’s lower house of Parliament is expected to approve a tough new fiscal package in coming days.

France, Portugal and Spain are adopting measures to make it easier to balance budgets, moves intended to reassure investors about their commitments to fiscal prudence.

Still, Mrs. Merkel must contend with a stark divide between her support for European unity and a German public that sees no reason, in the majority’s view, to pour good money after bad into the indebted countries of southern Europe. Her Christian Democrat Party has now lost five local elections this year. Yet even as many Germans complain bitterly about their southern neighbors, few in business and politics are ready to let the euro zone fall apart.

After all, if the weakest countries were to revert to their original currencies, a German-dominated euro would soar as investors flocked to it as a haven, devastating the business of exporters who have relied on its stability and relatively affordable level against other major currencies.

Further electoral losses could make it harder for her to get the votes needed to bolster the emergency bailout fund designed to keep the problems that began in Greece from infecting larger countries like Spain and Italy.

That is one thing that investors want to see addressed. A failure by Germany — whose Parliament may now delay a vote — or any other European country to vote for a timely expansion of the fund would deal a serious blow to the confidence of financial markets.

“Given the market volatility, from a German point of view you would think they want to do something about it because it’s affecting their own companies and their exports,” said Martin N. Baily, an economist at the Brookings Institution in Washington and a chairman of the Council of Economic Advisers under former President Bill Clinton.

“It is certainly the kind of thing that will keep you awake at night, and it should give an incentive to Chancellor Merkel” to take greater risks to keep the euro zone from unraveling, he said.

Article source: http://feeds.nytimes.com/click.phdo?i=a68f92178f4fe6f3e848c8b5ec047f07

Economix: Weak Stocks, Weak Economy?

Amidst the sell-off on Monday and the calmer waters this morning, here’s a thought from Ian Shepherdson, chief United States economist at the High Frequency Economics research firm: a weak stock market is not always a sign of a weak economy.

Remember Black Monday, 1987? By that October day, stocks had fallen 36 percent from their peak in August. Yet in 1988, the economy grew by 4.1 percent, even though the market had recovered only half its losses.

Admittedly, aside from the stock market slide, signs are not exactly great right now for the economy. But Mr. Shepherdson is taking heart from the 4.8 percent increase in chain store sales reported by Redbook Research during the first week of August compared with a year earlier.

Consumer confidence reports have been dismal recently, but Mr. Shepherdson points out that when you ask people “‘how do you feel, they say ‘miserable.’ But that doesn’t necessarily mean you don’t go shopping.”

So maybe that’s something to get a few of those traders to take their heads out of their hands.

Article source: http://feeds.nytimes.com/click.phdo?i=73b686e751f00bec428e1d5e9b818289

S.&P. Cuts Rating on Greek Debt, Shaking Confidence

The ratings agency’s forecast that Greece faces a de facto debt restructuring put European policy makers in a familiar position: forced onto the defensive by a relentless flow of negative news and market reaction that far outpaced the speed of government decision-making.

The S. P. downgrade, reducing Greece to the same creditworthiness as Belarus, followed several days of speculation ignited by a report on Friday by Spiegel Online that finance ministers from Europe’s largest countries were holding a secret meeting in Luxembourg at which they planned to discuss whether Greece should leave the euro zone.

E.U. leaders angrily denounced suggestions that they were considering such an apocalyptic situation, and it was unclear whether the meeting in Luxembourg was secret — or simply so routine that no one had bothered to mention it to the news media. Even Spiegel’s article portrayed a Greek exit from the euro zone as unlikely.

That was almost beside the point, though, as the reports awoke fears that Greece remained on a path to fiscal disaster and that European leaders did not have a convincing plan to prevent the country from defaulting.

The euro fell almost a cent against the dollar on Monday, to below $1.43, and major European stock market indexes were also down.

Analysts and investors said they did not see how Greece could get its debt under control when output was slumping, and there was little sign that efforts to restructure the economy were bearing fruit.

“Austerity is fine, but what you really need is investment and growth and we just don’t see that,” said Jonathan Lemco, a sovereign credit analyst at Vanguard, the mutual fund giant. “This is a deep junk credit.”

The idea of Greece spinning off from the euro area is “plainly ridiculous,” Carl Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y., said in a note.

But he said that Greece needed a new plan to cope with its debt because the old one was not working.

“Greece faces an imminent default and subsequent involuntary restructuring of its debt because the government has failed to perform as required under its fiscal and economic adjustment plan,” Mr. Weinberg wrote.

Greek officials acknowledge in private that they may miss coming fiscal targets set by the International Monetary fund because of a deeper-than-expected economic slump. In 2013, Greece will be required to raise as much as 30 billion euros, or $43 billion, from the debt markets.

“Next year will be the crunch point, and one cannot assume there will be more public money coming without private sector participation,” said Thomas Mayer, an economist at Deutsche Bank.

In a statement on Monday, S. P. noted increasing sentiment among governments in favor of giving Greece more time to repay 80 billion euros in loans from the European Commission. But the commission would probably insist that private bondholders also accept slower repayment, S. P. said.

“As part of such an extension, we believe the euro zone creditor governments would likely seek ‘comparability of treatment’ from commercial creditors in the form of their similarly extending bond and loan maturities,” S. P. said in a statement.

Even if creditors eventually get all of their money back, S. P. said, “such an extension of maturities is generally viewed to be less favorable to commercial creditors than repayment according to the original terms of the debt.”

The Greek government accused S. P. of responding to market and news media speculation. “There have been no new negative developments or decisions since the last rating action by the agency just over a month ago,” the Ministry of Finance said in a statement. The downgrade “therefore is not justified.”

Moody’s Investors Service said on Monday that it too might cut its Greek rating further, possibly by more than one notch, Reuters reported.

Amid the nervousness about Greece, Ireland also seemed to be angling for easier terms on its bailout.

“We carry a heavy burden of debt,” Prime Minister Enda Kenny told the Irish Parliament on Monday, according to Reuters. “Without strong growth, questions of sustainability will remain.”

European political leaders as well as the European Central Bank rule out any kind of restructuring of Greek debt, saying it would undermine confidence in other countries like Portugal and Ireland and potentially create panic in financial markets.

In Berlin, a government spokesman said that European leaders wanted to wait until examiners from the International Monetary Fund, the E.C.B. and the European Commission issued a report in June on Greece’s compliance with an austerity and economic restructuring program.

Greece will be on the agenda when Chancellor Angela Merkel of Germany meets José Manuel Barroso, the president of the European Commission, on Wednesday, and Herman Van Rompuy, president of the European Council, on Thursday. But a spokesman for Mrs. Merkel, Rüdiger Petz, said that was just one of several topics to be discussed, and he played down the importance of the meeting for Greece.

Landon Thomas Jr. contributed reporting from London and Stephen Castle from Brussels.

Article source: http://feeds.nytimes.com/click.phdo?i=aa351d208f6d241a6adbd4a6a28c0a00