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Feb Consumer Confidence was awful as it fell 10 pts to 46, the lowest since April ’09. Expectations were for a small drop to 55. The Present Situation fell almost 6 pts to the lowest since Feb ’83 while Expectations fell by 13.5 pts to the lowest since July ’09. Those that said Business Conditions are Good fell to a record low dating back to 1967. Those that said business was Bad rose 1.6 pts but is almost 5 pts below the Mar ’09 high. Those that said business will get better over 6 mo’s fell by 4 pts and those saying it will get worse rose by 2.6 pts. Those that said jobs were Plentiful fell .8 pts to 3.6 but remains above the low of 3.1. Those that said jobs were Hard to Get rose 1.1 pts to 47.7 but is below the high of 49.4. Those that plan to buy a home within 6 mo’s did rise by .3 pts to the highest since Aug ’09 and those planning to buy major appliances rose to the most since May ’09. Those that plan to buy a car fell .4 pts. Whatever recovery we think we are having is still not believed by those who are trying to generate it.

Feb Consumer Confidence was awful as it fell 10 pts to 46, the lowest since April ’09. Expectations were for a small drop to 55. The Present Situation fell almost 6 pts to the lowest since Feb ’83 while Expectations fell by 13.5 pts to the lowest since July ’09. Those that said Business Conditions are Good fell to a record low dating back to 1967. Those that said business was Bad rose 1.6 pts but is almost 5 pts below the Mar ’09 high. Those that said business will get better over 6 mo’s fell by 4 pts and those saying it will get worse rose by 2.6 pts. Those that said jobs were Plentiful fell .8 pts to 3.6 but remains above the low of 3.1. Those that said jobs were Hard to Get rose 1.1 pts to 47.7 but is below the high of 49.4. Those that plan to buy a home within 6 mo’s did rise by .3 pts to the highest since Aug ’09 and those planning to buy major appliances rose to the most since May ’09. Those that plan to buy a car fell .4 pts. Whatever recovery we think we are having is still not believed by those who are trying to generate it.

The Dec 20 city S&P/Case-Shiller home price index fell 3.08% y/o/y, about in line with expectations and fell .24% m/o/m NSA. Seasonally adjusting the m/o/m figure results in a rise of .32%. Of the 20 cities, 7 saw gains on a y/o/y basis, led by San Francisco, Dallas and San Diego. The y/o/y decline was led by Las Vegas which is down 20.6%, followed by Tampa, Detroit, Miami and Phoenix. Overall, the index fell to the lowest since July ’09. It is 4.8% above the low back in April ’09 but is down 29.4% from its record back in July ’06. The slowdown in the foreclosure rate (now about 1/3 of sales down from a high of 1/2), the home buying tax credit, and the artificial suppression of mortgage rates have all helped to cushion the decline in prices but when much of this wears off this summer, the market will be put to another test.

At 4am, the release of Germany’s slightly weaker than expected business confidence figure, the IFO, reversed all major markets as stocks fell, the US$ rallied, commodities dropped and sovereign bonds rose. The Feb IFO was 95.2 vs expectations of 96.1 and down from 95.8 in Jan. The components though were mixed as the Current Assessment fell as some blamed the winter weather but Expectations were above forecasts and rose to the highest since July ’07. The head of the Public Debt Management Agency in Greece squelched expectations that they would come to market this week to sell 10 yr notes but due to their upcoming refinancing needs it’s coming soon. While the Dec S&P/Case-Shiller HPI is a focus today, the key data point to watch for are the answers to the labor market questions in today’s Feb Consumer Confidence report.

Following the obvious news in Greece over the past few months, Fitch just downgraded the credit ratings of Greece’s 4 largest banks to BBB from BBB+. “The Rating actions reflect Fitch’s view that the banks already weakening asset quality and profitability will come under further pressure due to anticipated considerable adjustments in Greece. In particular, Fitch believes the required fiscal tightening that needs to be made by the Greek government will have a significant effect on the real economy, affecting loan demand and putting additional pressure on asset quality.”

The latest Case Shiller data for their National Home Price Index is out. It shows the “the pace of deterioration has stabilized for now.”

For Q4 2009, US Home prices dropped 2.5%. vs Q4 ’08. For all of 2009, quarterly price drops were:

Q1 = 19.0%
Q2 = 14.7%
Q3 = 8.7%
Q4 = 2.5%

For the month of December, the 20 city index fell 3.1% over November 2009. In December, 15 of the 20 metro areas showed a decline in December over November, with Chicago posting the sharpest decline, down 1.6%. Las Vegas finally posted its first positive print in more than three years, with +0.2%.

There is a conference call with Professor Shiller at 10:00am EST; info on the call, and Ginormous charts follow the jump . . .

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I am in Tampa meeting with Raymond James Chief Investment Officer Jeff Saut, who graciously took us out on his boat yesterday in what I am told was the first good weather Florida has had in months. I need to get out like that more. It was good to take a weekend away with no computer. But I am back at it today, with your Outside the Box arriving on schedule.

We were all assured by Ben Bernanke that the subprime problem would be contained. In this week’s Outside the Box, my good friend Todd Harrison, founder and CEO of Minyanville (www.minyanville.com) wonders about what contagion from Greece and sovereign debt crisis would look like. Todd is a very thoughtful investor and trader, and someone who I pay attention to. He has created a community of analysts and traders at www.minyanville.com that is quite unique. They graciously post my work each week as well as that of a lot of really interesting people from all over. Plus, they offer running commentary by dozens of analysts on what’s happening in the markets real time. There is something for everyone, even a place to help teach your kids about money and finance. Check it out. (I have left links to other Minyanville articles referred to by Todd for those who want to look deeper.)

John Mauldin, Editor
Outside the Box

A Five-Step Guide to Contagion

By Todd Harrison Feb 10, 2010 7:35 am

Why European debt matters to the United States

Times are tough and those struggling to make ends meet have focused their efforts close to home.

That’s a natural instinct but it doesn’t change the fact that problems on the other side of the world affect us all. To fully understand the depth and complexity of our current conundrum, we must appreciate how we got here.

It is widely accepted that grieving arrives in five stages: denial, anger, bargaining, sadness, and acceptance. If we apply that psychological continuum to the financial market construct, it offers a valuable lens with which to view this evolving crisis.
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The Dec 20 city S&P/Case-Shiller home price index fell 3.08% y/o/y, about in line with expectations and fell .24% m/o/m NSA. Seasonally adjusting the m/o/m figure results in a rise of .32%. Of the 20 cities, 7 saw gains on a y/o/y basis, led by San Francisco, Dallas and San Diego. The y/o/y decline was led by Las Vegas which is down 20.6%, followed by Tampa, Detroit, Miami and Phoenix. Overall, the index fell to the lowest since July ’09. It is 4.8% above the low back in April ’09 but is down 29.4% from its record back in July ’06. The slowdown in the foreclosure rate (now about 1/3 of sales down from a high of 1/2), the home buying tax credit, and the artificial suppression of mortgage rates have all helped to cushion the decline in prices but when much of this wears off this summer, the market will be put to another test.

One of the most disappointing policy initiatives of the Administration to date has been the expensive and ineffective attempts to fight foreclosures at all costs.

The net impact of this is to artificially prop up home prices and reduce the number of real estate transactions. In the high foreclosures regions (California, South Florida, Arizona, Las Vegas), the foreclosure process have driven prices down to the point where buyers have materialized and sales numbers are improving significantly. The uptick in real estate transactions benefits durable good sales, increases mortgage volume, and positively impacts other real estate related activities.

As wrenching and unpleasant a process as foreclosures may be, the net impact of artificially high real estate prices is even more problematic. It punishes savers and first time home buyers (think Newlyweds).

This is what makes the latest proposal out of Treasury — found here: Supplemental Directive: Foreclosure & Bankruptcy Changes — so disappointing. It seeks to mandate Foreclosure Abatements and Mortgage mods. These (and other related) policies that have shown themselves to be ineffective, and ultimately, counter-productive.

Some of the highlights of the proposal:

• Mandate a 30 day freeze on foreclosures until a delinquent borrower is evaluated and found ineligible for HAMP;
• Once a borrower is in a mortgage mod program, “servicers must stop all foreclosure action” during the trial period;
• Banks must produce “written certification that a borrower is not HAMP eligible” prior to proceeding to foreclosure;
• Requires servicers to consider borrowers in bankruptcy for HAMP’ (!?!)
• Removes other bankruptcy barriers for mortgage mods;

In this proposal, all 60+ delinquent borrowers (who meet eligibility) must be solicited for HAMP. Even newly bankrupt mortgagees should be considered for mortgage mods.

The problem we have in housing is that over the past decade, 5-10 million people bought homes they cannot afford. Many of these homes are now worth less than their underlying mortgages.

The best options in these cases are: 1) A negotiated capital cost reduction (i.e,, “cramdown”) with their lenders; 2) A short sale; 3) Walkaways.

The Treasury Department proposal accomplishes nothing more than keeping people in homes they cannot afford with payments that are onerous. The mortgage mods are failing in huge numbers because lowering the interest rate and or/extending the terms does not address the basic issue . . .

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Previously:
Coming Soon: 5 Million More Foreclosures (February 16th, 2010)
http://www.ritholtz.com/blog/2010/02/coming-soon-more-foreclosures/

Stopping Counter-Productive Mortgage Mods and Foreclosure Abatements (January 5th, 2010)
http://www.ritholtz.com/blog/2010/01/stop-counter-productive-mods-abatements/

All prior foreclosure posts can be found here

Policy Proposals SD 10-02

With Case Shiller out later today, its as good a time as any to take a look at what the actual cost of home ownership is.

The current Fed policy of ultra low rates, have made ownership costs on a monthly basis appear cheap. However, the most important ratio — median annual Income to Housing costs — shows that prices still remains elevated at at 363% versus the prior decade ratio of 300-325%.

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via Visual Economics