Articles that I have written for VoiceofSanDiego.org, a local news publication that provides continuing coverage of San Diego housing and economic issues.

A New Flavor of Mortgage Trouble

Submitted by Rich Toscano on June 27, 2007 - 7:43am

The financial press is all worked up about the recent travails of two hedge funds involved in the world of structured mortgage finance.

The reader may wonder at this point why everyone is so upset over a couple of hedge funds -- let alone why the typical San Diegan, uninvolved in the financial industry as he or she is likely to be, should care at all.

The answer is that the hedge funds blowups may illuminate similar vulnerabilities facing many financial institutions. Closer to home, they do a great job of illustrating just how it was that mortgage lending ever got so incredibly lax -- and just why the easy lending we've all come to know and love may not be with us for too much longer.

Germany's first chancellor Otto von Bismarck once remarked, "Laws are like sausages. It's better not to see them being made." I believe Bismarck would have a similar feeling about mortgage-backed structured finance. I know I do. But for the sake of background, let's go through the creation and funding of a typical batch of high-risk mortgages.

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Where the Jobs Are, May Edition

Submitted by Rich Toscano on June 22, 2007 - 3:41pm

Here is a look at which job sectors gained and lost the most jobs between May 2006 and May 2007:

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May Jobs

Submitted by Rich Toscano on June 21, 2007 - 11:21am

The employment sectors that benefitted from our erstwhile housing boom, while having experienced seasonal growth in recent months, continue to shed jobs based on a year-over-year comparison. Between May 2006 and May 2007, the construction industry lost 6,900 jobs, retail lost 1,800 jobs, and finance and real estate gave up 3,200 jobs. The three sectors shed 11,900 jobs between them.

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Yet More Confusion at the Transcript

Submitted by Rich Toscano on June 11, 2007 - 2:33pm

San Diego Daily Transcript executive editor George Chamberlin has once before been featured on these pages for making misleading statements in his "Money in the Morning" column. It is, unfortunately, time for a followup.

Last Friday's edition of Chamberlin's Money in the Morning (subscription required) included the following paragraph:

Speaking of real estate, I finally found a Wall Street analyst who thinks it's a good time to buy a house. "We believe many recent 'bad reports' on housing, rather than suggesting a worsening collapse, merely reflect what has already happened. Although reports will remain volatile, evidence is mounting the worst in housing is already behind us and a bottom is nearing," wrote James Paulsen, chief investment strategist at Wells Capital Management. That's one guy you'll never see on CNBC or hear about from the UT.

I don't even know where to begin with this one. There are certainly real estate bears to be found in the investment business, but on the whole, Wall Street analysts have for years tended strongly to err on the side of over-optimism when it came to the housing market. This should not come as a big surprise, considering how many of these same analysts are employed by firms that have earned jaw-dropping profits from the mortgage securitization boom.

If Chamberlin is having trouble finding Wall Street analysts who are sanguine about housing, he's just not looking.

But it's the last sentence of that paragraph that really blows me away. The suggestion that the Union-Tribune refuses to quote bullish housing pundits is absolutely ludicrous...

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What Could Save the Housing Market?

Submitted by Rich Toscano on May 15, 2007 - 7:43pm

The speculative housing bubble that launched San Diego home prices so high is now in the process of deflating. Prices have been on the decline for over a year, but they remain well above the levels the would be justified by the economic fundamentals now that the bubble-era forces of rampant buyer optimism and unsustainably lax lending are disappearing before our eyes.

Using the analytical framework described above, and considering the precedents set by past boom/bust cycles in the San Diego housing market, it sure seems that the most likely outcome is for San Diego home prices to continue declining for some time to come. But nothing is ever for certain in the financial markets, so today I'd like to discuss the following question: what could prevent a serious decline in home prices?

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Lereah Out With a Bang

Submitted by Rich Toscano on May 11, 2007 - 4:53pm

It's already been widely reported that National Association of Realtors Chief Economist David Lereah, who spearheaded the NAR propaganda tactics that I often criticized on these pages, is on his way out.

Less widely reported was the absurdity of one of Lereah's parting shots.

To his credit, Lereah finally adopts an appropriately concerned tone in a recent Chicago Tribune article, admitting among other things that "[w]e're in a real estate recession." But then he follows it up with this whopper:

"Just four months ago, it looked like we were on the road to a very nice recovery," Lereah said. "Then the subprime [mortgage] market blew up, and that has substantially inhibited lending.

"It was a monkey wrench that was thrown in; no one would have predicted it two years ago, no one."

This claim is absolutely laughable...

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Misinterpreting the Median

Submitted by Rich Toscano on May 3, 2007 - 7:47pm

As if on cue, the Anderson Forecast has offered up an example of how the median price routinely gets interpreted incorrectly. According to Kelly Bennet's article at voiceofsandiego.org, Ryan Ratcliff, the Anderson Forecast's go-to guy San Diego, claimed that "prices have stayed relatively stable for about six months." The Union-Tribune's take on the same topic echoed a similar sentiment from Ratcliff:

He added that despite the gloomy statistics, the foreclosures have so far had no impact on local prices. In fact, San Diego's median sales price has stabilized over the past three quarters, even as foreclosures rose.

It's true that the median sale price has stabilized over the past three quarters, but as I described in excruciating detail in my article on home price metrics, this does not mean that the market price of any given home is stabilizing.

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Measuring Home Prices

Submitted by Rich Toscano on May 1, 2007 - 10:39am

It's simple to track price movements in most financial markets. One share of Coca-Cola stock, to cite one of endless examples, is priced identically to any other share of stock in that company. An ounce of pure gold from one mine is worth the same as an ounce extracted from a mine on the other side of the world.

In contrast, every home is different. Even two houses with identical floorplans in the same neighborhood may have different views, lot sizes, fixtures, traffic noise, landscaping, Indian burial ground proximity... the list goes on.

This lack of fungiblility, as it is known, makes it difficult to determine the changes to a home's marketable price. If someone sells a share of Coke stock for $50, that means that for the time being, your Coke shares (and everyone else's, for that matter) are all worth $50. But if someone sells a house down the street for $500,000, that gives you a far more limited idea either about how much people would pay for your house or about what's happening with home prices in general.

In short, it's tough to measure changes in home prices with any accuracy. But that doesn't stop people from trying.

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Where the Jobs Are, March Edition

Submitted by Rich Toscano on April 29, 2007 - 10:17am

Here is the promised update to the sector-by-sector job growth chart. The relative growth didn't change much in March. Government employment edged out professional services for the number two spot, and retail trade recovered a bit to make a better showing than financial services (the two were tied last month).

While the compensation shifted a bit, March's overall annual employment gain was exactly what it was in February: an additional 8,600 jobs.

This article originally appeared at voiceofsandiego.org.

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March Jobs

Submitted by Rich Toscano on April 23, 2007 - 12:31pm

The industries that benefitted most from the housing boom -- construction, retail, and finance/real estate -- all grew between February and March, but all three industries are smaller than they were at this time last year.

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Where the Jobs Are

Submitted by Rich Toscano on April 19, 2007 - 8:04pm

As noted in the most recent job market update, job losses in the housing beneficiary sectors were more than offset by employment gains elsewhere. I thought it would be interesting to look at where those new jobs were being created, so I put together a chart showing how many San Diego jobs were gained or lost in various Bureau of Labor Statistics sectors over the past year:

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The Real Credit Risk

Submitted by Rich Toscano on April 18, 2007 - 4:16pm
According to the mortgage news site HousingWire, credit rating agency Fitch Ratings is coming around to the idea that credit scores aren't such a great predictor of who will default on their exotic mortgages. Says the HousingWire article:

After studying the collateral attributes of early payment default (EPD) loans and comparing them to loans that did not default in the first 12 months after issuance, Fitch found that Fair Isaac Corp. (FICO) scores have become less significant as an early default indicator when other high risk loan attributes, such as piggyback second liens or loans with no-income verification, are present.

“While FICO scores continue to be highly predictive measures of relative credit risk for loans with similar characteristics, FICO scores play a lesser role when additional risk layers are added,” said Glenn Costello, Managing Director, RMBS, Fitch Ratings.

“In the case of the 2006 vintage delinquencies, additional risk layers that are factoring into the sharply higher delinquencies include high combined loan to value ratios (CLTVs) and stated income loan programs as borrowers with higher FICO scores tend to be highly levered.”

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Confusion at the Transcript

Submitted by Rich Toscano on April 16, 2007 - 8:59am

The Bureau of Labor Statistics released its monthly employment survey results last Friday. According to the survey, the 180,000 new jobs created in March brought the nationwide unemployment rate down to 4.4 percent.

But this good news has been completely misinterpreted by local economic pundit George Chamberlin. Chamberlin, who serves as executive editor at the San Diego Daily Transcript, had this to say in his Friday column:

Most U.S. financial markets are closed today in observance of Good Friday. But, that didn't stop the Labor Department from issuing a strong report on the nation's job market. Payrolls in March rose by 180,000, well above expectations. And, January and February reports were revised to show a total increase of 32,000 jobs. Add all those jobs together and you can see why the unemployment rate dipped to 4.4 percent, the lowest since October. The last time the jobless rate was lower was in 2001. Sure doesn't sound like an employment report for a country that many people suggest is on the brink of a recession. [emphasis added]

Chamberlin is correct in noting that last time the unemployment rate was below 4.4 percent was in May 2001. What he fails to mention is that in May 2001, the nation was two months into a recession.

The fact is that the unemployment rate almost never rises substantially until after a recession has already begun. (See the excellent economagic.com chart generator for a visual). Low unemployment is good news, of course, and a low jobless rate does not by any means imply that a recession is near. But Chamberlin’s suggestion that low unemployment rules out an imminent recession is completely lacking in any factual basis.

Chamberlin managed to make a second misleading statement in the very same column, writing the following paragraph about the a new foreclosure website and the “so-called real estate bust”...

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Sales and Must-Sell Inventory

Submitted by Rich Toscano on April 4, 2007 - 12:12pm

I speculated in an earlier entry that measuring monthly home sales against monthly notices of default would provide a fairly good read on the health of the housing market.

This idea is borne of the observation that excessive inventory does not by itself put much downward pressure on home prices. As long as sellers can hold out for higher prices, they can be depended upon to sit tight and do just that. Prices don't fall substantially until too many motivated sellers -- those who are forced for one reason or another to sell at whatever prices they can get -- enter the market.

But how many motivated sellers is "too many?" That's where the sales volume comes in. If must-sell properties account for just a small number of the homes being sold, the must-sellers are unlikely to have much effect on aggregate prices. But if enough transactions involve highly motivated sellers, prices could suffer.

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February Jobs

Submitted by Rich Toscano on April 1, 2007 - 11:53am

Last month, San Diego once again enjoyed a robust rate of employment growth outside of the housing boom beneficiary industries . Excluding the construction, retail, and finance/real estate sectors, the Bureau of Labor Statistics indicates that San Diego added 19,900 jobs between February 2006 and February 2007. The non-housing boom sectors grew by a healthy 2.1 percent.

However, the housing boom sectors continue to drag down overall employment growth at an increasing pace.

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