KeNo's Housing and Economic Portal: Wednesday June 17 Housing and Economic stories

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TOP STORIES:

Obama and Labor Secretary Manipulating Unemployment Numbers? Solis Says ‘Rumor’ of U.S. Job-Report Error ‘False’ - (www.bloomberg.com) U.S. Labor Secretary Hilda Solis dismissed speculation that the Bureau of Labor Statistics underestimated the drop in payrolls in May, helping spur a recovery in stocks. “The rumor was false,” Solis said today on a conference call with reporters after her department reported the economy lost the fewest jobs in eight months. Stock-index futures surged and Treasury securities slumped in the minutes after the report, released at 8:30 a.m. in Washington, showed the U.S. lost 345,000 jobs in May. The deceleration in job losses reinforced signs the recession was starting to abate. Concern among some traders the data might have been miscalculated erased the gains and pushed the Standard & Poor’s 500 Stock Index down 0.9 percent by 10:13 a.m. in New York. Shares recovered after Solis said the speculation was unfounded; the S&P index was up 0.2 percent at 1:46 p.m. “There’s no effort under way to change the data which was released this morning,” Gary Steinberg, spokesman for the Bureau of Labor Statistics, said in a telephone message. “There’s no problem with the BLS data that were released.” Labor’s estimate of the net jobs created by the formation of new companies and the demise of established firms, known as the birth/death model, fed the confusion. 220,000 Boost: The calculation added 220,000 jobs to payrolls before the figures were seasonally adjusted, 25 percent larger than the May 2008 estimate. The increase may have suggested to some observers that the government was trying to artificially boost total payrolls. “Please remain calm,” Michael Feroli, an economist at JPMorgan Chase & Co. in New York, wrote in a note to clients. “We’d caution against jumping to conclusions about the reported 220,000 ‘addition’ to payrolls from the birth/death” model. “This factor is always a large positive in May,” Feroli wrote in a second note. “We don’t agree with the notion that this is a distortion and we take the headline number at face value.” “The slowing in payroll losses over the last two months is a hopeful sign that the economy is on track for a second-half recovery,” he added.

Why Home Prices May Keep Falling - (www.nytimes.com) HOME prices in the United States have been falling for nearly three years, and the decline may well continue for some time. Even the federal government has projected price decreases through 2010. As a baseline, the stress testsrecently performed on big banks included a total fall in housing prices of 41 percent from 2006 through 2010. Their “more adverse” forecast projected a drop of 48 percent — suggesting that important housing ratios, like price to rent, and price to construction cost — would fall to their lowest levels in 20 years. Such long, steady housing price declines seem to defy both common sense and the traditional laws of economics, which assume that people act rationally and that markets are efficient. Why would a sensible person watch the value of his home fall for years, only to sell for a big loss? Why not sell early in the cycle? If people acted as the efficient-market theory says they should, prices would come down right away, not gradually over years, and these cycles would be much shorter. But something is definitely different about real estate. Long declines do happen with some regularity. And despite the uptick last week in pending home sales and recent improvement in consumer confidence, we still appear to be in a continuing price decline. There are many historical examples. After the bursting of the Japanese housing bubble in 1991, land prices in Japan’s major cities fell every single year for 15 consecutive years. Why does this happen? One could easily believe that people are a little slower to sell their homes than, say, their stocks. But years slower? Several factors can explain the snail-like behavior of the real estate market. An important one is that sales of existing homes are mainly by people who are planning to buy other homes. So even if sellers think that home prices are in decline, most have no reason to hurry because they are not really leaving the market. Furthermore, few homeowners consider exiting the housing market for purely speculative reasons. First, many owners don’t have a speculator’s sense of urgency. And they don’t like shifting from being owners to renters, a process entailing lifestyle changes that can take years to effect.

Countrywide exec often warned about mortgage risks - (www.reuters.com) John P. McMurray made it clear to his Countrywide Financial Corp bosses that they were playing a dangerous game with risk. But they didn't listen. Even so, he is being called a hero. Warnings from McMurray are cited often in a lawsuit filed by the U.S. Securities and Exchange Commission against Countrywide's co-founder Angelo Mozilo and two lieutenants. McMurray was chief risk officer of the lender that became a symbol of some of the worst excesses of the subprime mortgage crisis. Mozilo, now the most prominent defendant in investigations into the U.S. housing bust and subsequent financial crisis, was charged on Thursday with securities fraud and insider trading as he made profits of more than $139 million from share sales in 2006 and 2007. Countrywide's former president David Sambol and former chief financial officer Eric Sieracki were also charged with fraud. McMurray, who is mentioned 31 times in the complaint filed by the SEC, comes across as an internal watchdog who raised concerns that were ignored by company officers. It is a story that may have some echoes of the role played by internal whistleblowers in other corporate scandals like Enron and WorldCom, where executives were warned about financial problems but the messengers were shunned or ignored. "He is the classic whistleblower," said Stephen Kohn, president of the Washington, D.C.-based National Whistleblowers Center, who reviewed the 53-page complaint. "He reported significant issues that would impact investors, the public, and apparently the company did not listen to him, which really caused tremendous harm."

Consumer Credit in U.S. Falls Second-Most on Record - (www.bloomberg.com) Borrowing by U.S. consumers had the second-biggest drop on record in April as the jobless rate reached its highest in a quarter century and accessing loans remained difficult. Consumer credit fell $15.7 billion, or 7.4 percent at an annual rate, to $2.52 trillion, according to a Federal Reserve report released today in Washington. Credit decreased by a record $16.6 billion in March, more than previously estimated. Spending by consumers declined for a second consecutive month in April as the unemployment rate increased to 8.9 percent, a level not seen since 1983. The number of people collecting jobless benefits broke records for 17 weeks before the end of May, causing Americans to put off purchases out of fear they might lose their jobs or take longer to find new ones. “Consumers have retrenched in the face of rising unemployment and are paying down their debts and increasing their savings,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “Those consumers who do want to spend are having their credit limits cut left and right by banks that are increasing their credit-risk checks.” Economists had forecast consumer credit would drop $6 billion in April, according to the median of 29 responses in a Bloomberg News survey. Projections ranged from a $9 billion drop to a gain of $1.5 billion. The Fed initially reported that consumer credit decreased by $11.1 billion in March.

Stuck at Unemployed: When A Layoff Becomes a Lifestyle - (www.washingtonpost.com) When Matthew Thomas of Alexandria was laid off in September from a downtown Washington advocacy group, he wasn't too worried. The 49-year-old office worker had severance and never had trouble finding work. He sent a few résumés out, signed up with a few temporary agencies and waited. And waited. His severance ran out. The proceeds from cashing out his retirement savings ran out next. He filed for unemployment benefits. Those expired a couple of weeks ago. He received an extension, which was to start last week. When the check was late, he called the unemployment office, frantic. "I have up days and down days," he said. "I keep trying to tell myself this is my only moment [away from work]. I have to do my damnedest to enjoy it." The pace of job losses may be slowing -- the government reported yesterday that employers shed a net 345,000 jobs in May, far less than economists had expected -- but for Thomas and other U.S. workers, things feel like they're still getting worse. The unemployment rate is now at 9.4 percent, and a record 27 percent of the nation's 14.5 million jobless have been unemployed for about six months or longer. Many are only now seeing their unemployment benefits expire, their homes falling into foreclosure and their lives upended. The ranks of the long-term unemployed are not expected to recede until job growth picks up in earnest, and if past recessions are any guide, that's not likely to happen for at least another year. After the recession of the early 1980s, it took seven months for the number of long-term unemployed to peak; after the 2001 recession, which was followed by historically anemic job growth, it took 19 months. "While the overall unemployment rate was higher in the '80s, people are getting stuck in unemployment longer than they did in that recession," said Heidi Shierholz, an economist with the Economic Policy Institute. The recent surge in long-term unemployment reflects the causes of the current downturn and decades-long shifts in the labor force.

Drinking to Excess Is Banking’s Hangover Cure: David Reilly - (www.bloomberg.com) If you can’t blind investors with brilliance, baffle them with gussied-up balance sheets. That’s the approach banks have taken to try and escape the legacy of bad lending and investing. First, banks got bought-and-paid-for backers in Congress to ram through an easing of accounting rules that let them pretend they know better than financial markets when it comes to the value of securities they hold. Now, the banking industry is fighting a rear-guard action to keep trillions of dollars in assets hidden in vehicles that don’t show up on their books. Investors will again be the losers if banks pull off this latest effort to fudge their true financial condition. After all, banks’ use of these so-called off-balance-sheet vehicles to churn out dodgy loans helped get the financial system into its current predicament. The latest battle is brewing over changes to off-balance- sheet rules approvedby the Financial Accounting Standards Board in May. Although these revisions have been in the works for more than a year, banks acting through the guise of a coalition of financial industry and real estate groups on June 1wrote to Treasury Secretary Timothy Geithner to try and derail them. A similar coalition wrote to FASB the same day, also asking for a postponement of the rule changes. Now it’s likely only a matter of time before banks get Congress back in on the act. In the debate over the use of market values, banks -- after greasing plenty of palms on Capitol Hill -- used Congress to browbeat FASB into changing these so-called mark-to-market rules, as the Wall Street Journal reported earlier this week. Looking Weak: It’s easy to see why banks don’t want to come clean about off-balance-sheet activities. Consolidating these hidden assets will make their balance sheets look weaker than they already are. In some cases it may even mean that banks, which in recent weeks have issued billions of dollars in common equity to shore up their capital, have to go out and raise even more money. Raising equity helps build up the cushion banks have on hand to absorb losses. New equity, though, also dilutes existing shareholders, making it painful, even if necessary, medicine. Off-balance-sheet vehicles, along with the billions of dollars in fees they generate, are a big deal for banks. The country’s four biggest banks by assets -- Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co. and Wells Fargo & Co. -- had $5.2 trillion in assets in these vehicles at the end of 2008, according to their annual filings. That compared with about $7.2 trillion in total assets that the banks had on their books at the end of the year.