NEW YORK (Reuters) – Hedge fund firm Pine River, which makes big bets on housing, is bracing for a double dip in that market, its chief executive officer said on Tuesday.

“There are still issues in the housing markets and it would not surprise us to see the recovery turn down,” Brian Taylor, who founded the $1.6 billion hedge fund eight years ago, said at the Reuters Private Equity and Hedge Funds Summit in New York.

For Pine River, where Taylor and his seven partners work to identify relative value mispricings ahead of the curve, both a full-fledged recovery or a double-dip recession would provide a chance to make money for clients, Taylor said. “There is opportunity to profit either way.”

Last year, Pine River gained about 90 percent, far more than the average hedge fund’s roughly 20 percent return.

As Taylor sees it, the market for residential mortgage-backed securities turned from dull to exciting virtually overnight during the financial crisis, leaving his team with large opportunities that few others seek now.

“The amount of risk has never been greater,” he said. “Armageddon was avoided in late 2008 and 2009,” but the housing finance market is still awful, he said, with millions of homeowners sitting on liabilities that exceed their assets.

“Today there are still pockets of undervaluation left over from 2008,” Taylor said.

Additionally Pine River is benefiting from a lack of competition thanks to the retreat of government-controlled mortgage buyers Freddie Mac (FRE.N) and Fannie Mae (FNM.N) from relative value investing in the RMBS market.

(Reporting by Svea Herbst-Bayliss. Editing by Robert MacMillan)

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By MARTIN CRUTSINGER

The Associated Press

4:20 p.m. Wednesday, February 24, 2010

WASHINGTON — Sales of new homes plunged to a record low in January, underscoring the formidable challenges facing the housing industry as it tries to recover from the worst slump in decades.

The Commerce Department reported Wednesday that new home sales dropped 11.2 percent last month to a seasonally adjusted annual sales pace of 309,000 units, the lowest level on records going back nearly a half century. The big drop was a surprise to economists who were expecting a 5 percent increase over December’s pace.

While winter storms were partly to blame, home sales have fallen for three straight months despite sweeping government support. Economists were already worried that an improvement in sales in the second half of last year could falter as various government support programs are withdrawn.

“There is no doubt that January and February are going to be messy months for housing, given the severe weather conditions, but that doesn’t take away from the fact that the housing sector has taken another big step back, even with the government aid,” Jennifer Lee, a senior economist at BMO Capital Markets, said in a research note.

A rebound in housing in the second half of last year helped to boost overall economic growth back into positive territory. Each new home built, for example, creates about three jobs for a year and generates about $90,000 in taxes paid to local and federal authorities, according to the National Association of Home Builders.

However, economists are worried that if housing falters in coming months, that will be one more headwind the recovery will have to overcome. The decline to an annual purchase rate of 309,000 in January was 6 percent below the previous record low set in January last year.

“I don’t think we are going to have a double-dip recession in housing, but it is going to take us longer to recover from a very deep hole,” said Patrick Newport, an economist at IHS Global Insight.

January’s weakness was evident in all regions except the Midwest, where sales posted a 2.1 percent increase. Sales were down 35 percent in the Northeast, 12 percent in the West and almost 10 percent in the South.

The drop in sales pushed the median sales price down to $203,500. That was down 5.6 percent from December’s median sales price of $215,600, and off 2.4 percent from year-ago prices.

New home sales for all of 2009had fallen by almost 23 percent to 374,000, the worst year on record. The National Association of Home Builders is forecasting that sales will rise to more than 500,000 sales this year, an improvement from 2009 but still far below the boom years of 2003 through 2006 when builders clocked more than 1 million new home sales per year.

January’s data increased concerns that the housing rebound could falter in coming months as the government withdraws the support it has used to try to bolster the housing market. The real estate crisis was the epicenter of the country’s overall recession, the worst downturn since the 1930s.

The Federal Reserve has been holding down mortgage rates by buying $1.25 trillion in mortgage-backed securities, but that program is set to end March 31. And temporary tax credits to bolster home buying are scheduled to expire at the end of April.

Federal Reserve Chairman Ben Bernanke told Congress Wednesday that by holding the securities on its books the central bank would continue to help keep mortgage rates low. Economists believe that as long as the Fed owns the securities it will reduce the overall supply and thus help support the price.

Bernanke, delivering the Fed’s twice-a-year economic report to Congress, said that the Fed’s record low interest rates were still needed to attack high unemployment levels and help the overall economy recover.

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A Look at Case-Shiller, by Metro Area (February Update)

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Ben S. Bernanke, having survived a surprising challenge to his second term as Federal Reserve chairman, now faces the delicate task of beginning to pull the central bank out of its extraordinary effort to prop up the economy, Sewell Chan writes in The New York Times.

The main question is when and how the Fed should start raising short-term interest rates, which have been at a record low for more than a year. Related is the issue of how to manage, and eventually shrink, the record $2.2 trillion balance sheet that the Fed amassed as it pumped vast sums of money into the economy, starting in 2008. On Wednesday morning, the Fed will release a statement outlining Mr. Bernanke’s views on moving away from its exceptionally easy monetary policy.

As a policy tool, Mr. Bernanke is expected to consider a little-known mechanism — referred to as the interest rate on excess reserves — that gives the Fed leverage over $1.1 trillion in bank deposits.

Most of those deposits were created as the Fed gobbled up mortgage-backed securities and Treasury notes and bonds during the financial crisis. The banks in turn parked the funds at the Fed as reserves. In the months and years ahead, the Fed wants to make sure that banks do not reduce their reserves too quickly, because it could create inflationary pressures as banks step up their lending.

To achieve its goal, according to Fed officials and speeches, the central bank will raise the interest rate on excess reserves, now 0.25 percent. It also plans to lift its target for the fed funds rate — what banks charge one another for overnight loans and the centerpiece of its policy statements since 1994. But officials stress that rates will remain quite low for months to come.

“We’re in a different situation than ever before, and the tools we are using are entirely new,” said Lyle E. Gramley, a former Fed governor who now works at the Potomac Research Group, an investment advisory firm.

Mr. Gramley predicted that Mr. Bernanke would try to reassure the markets that the new tools would work. “There’s an awful lot of talk that we’re going to have inflation down the road,” he said. “But this Fed is determined to maintain price stability. They’ve said that over and over again, and they want to communicate that to the markets.”

Mr. Bernanke has used the term “exit strategy” to describe his task. Much like the American military’s withdrawal from Iraq, the Fed’s plan has few precedents and carries much uncertainty. At a minimum, officials have signaled, it will have to be carried out delicately, be flexible when circumstances change, and, most likely, be gradual.

With unemployment at 9.7 percent, the Fed may be months away from raising rates, but it is discussing the plan now to prepare the markets and tamp down inflation fears, said Vincent R. Reinhart, a former director of monetary affairs for the Fed.

“The reason they’re starting to talk about the exit now is to reassure investors, so that they aren’t pressed to head for the exit prematurely,” said Mr. Reinhart, now a scholar at the American Enterprise Institute. “Chairman Bernanke has to walk a very, very fine line.”

If the Fed raises interest rates too hastily, it could choke off the fragile recovery. If it dallies, it might set off market jitters about rising prices.

But that decision occurs in the context of an economy whose normal rules have been reshaped. As Mr. Bernanke put it in a speech last April, “we no longer live in a world in which central bank policies are confined to adjusting the short-term interest rate.”

The Fed’s balance sheet has nearly tripled since the summer of 2007. At the end of that year, the Fed found new ways to lend to banks, and in early 2008, it began to cut interest rates aggressively, pushing the target rate for fed funds to nearly zero in December 2008.

By that month, the Fed’s balance sheet had ballooned to $2.2 trillion as the central bank doled out loans to commercial banks, issuers of commercial paper and foreign central banks. The American International Group, the bailed-out insurance giant, and JPMorgan Chase, which bought Bear Stearns, also received aid.

Many of those programs are winding down. Two of the biggest — the Fed’s purchase of $1.25 trillion of mortgage-backed securities and of about $175 billion in debts guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae — are to be completed by March 31.

The Fed in essence created new money to buy those securities, and now holds $1.1 trillion in reserves that the banks can demand when they wish. “The Fed’s great worry is that instead of holding onto these reserves, the banks would decide they’d rather take the money they’re tying up and lend it out,” said Anil K. Kashyap, a professor of economics and finance at the University of Chicago’s business school. If they did that, “you’d see broad measures of money growing quickly, and presumably that would be the start to having some inflation.”

In the short term, that prospect seems remote, as banks have been wary and tightfisted in lending since the financial crisis erupted. But in the long run, a huge balance sheet carries risks.

The ability to charge an interest rate on excess reserves was created in 2006, after decades of discussion, when Congress granted the Fed such authority. (One reason it took so long is that the interest payments will reduce the amount the Fed turns over to the Treasury each year.) The tool — which is used by other central banks, like those in England and Canada — was to become available in 2011, but Congress moved up the date during the crisis. The Fed started paying the interest in October 2008.

Mr. Bernanke has argued that the new rate will eventually serve as an interest-rate floor, with the discount rate — the rate at which the Fed lends directly to banks — functioning as the ceiling, and the fed funds rate fluctuating in between them.

Looking longer term, Mr. Bernanke has four other tools that could be used gingerly to tighten monetary policy. The first is reverse repurchase agreements, or reverse repos, in which the Fed would sell securities from its portfolio with an agreement to buy them back at a slightly higher price at a later date. The second is term deposits, analogous to the certificates of deposit banks offer to customers. Third, the Treasury could sell bills and deposit the proceeds at the Fed.

Finally, the Fed could sell some of its long-term securities, including those backed by mortgages, taking more money out of the system. That strategy would carry risk given that the Fed’s ownership of such securities is helping keep mortgage rates low and support the housing market.

Mr. Bernanke’s statement was initially to be presented at a House hearing scheduled for Wednesday. After the hearing was postponed because of snow, he decided to release it anyway.

The New York Times

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NEW YORK (Reuters) – Home buyers in much of the United States paid thousands of dollars below asking prices in December and for the first time in 11 months gained negotiating power, real estate website Zillow.com said on Tuesday.

According to December Zillow Real Estate Market Reports, buyers paid 2.7 percent less, or a median of $5,618 below the listing price on homes bought in December, up from $5,538, or 2.6 percent, for homes bought in November.

The gain, however, was still far less than December 2008 when buyers bargained a median 4.5 percent, or $10,018, off the last listing price, Zillow said.

The data is calculated by comparing the last listing price of individual homes and the final sale price.

November had marked the 10th consecutive month discounts shrunk, meaning buyers were negotiating less and less off the final asking price each month.

More buyer negotiating power tends to put downward pressure on overall home prices and may push more mortgages “underwater.” This negative equity has been one of the biggest banes of homeowners, making many unqualified for home loan refinancing and preventing some from selling.

Borrowers in negative equity, meaning they owe more on their mortgage than their home is currently worth, are more prone to defaults and foreclosures.

Buyers’ negotiating power peaked in January of 2009 when buyers were paying 4.5 percent off the asking price, a median of $10,178, Zillow said.

In December, 20.5 percent of the listings on Zillow had a price cut, unchanged versus November. In December 2008, 32.3 percent of listings had a price cut.

In some markets, buyers continued to negotiate large discounts.

Vero Beach, Florida, once again topped the list in December. Buyers in the metropolitan statistical area, or MSA, were again most firmly in the driver’s seat and negotiated 8.8 percent off the last listing price — a median discount of $20,214.

In many markets in California, sellers continued to be in the driver’s seat, and homes often sold for more than asking price. Many of these markets were among the hardest-hit in the country by the housing downturn, and foreclosure re-sales have made up more than 50 percent of all home sales in some areas.

Listing prices across the nation showed a slight increase December, with the median price of homes listed on Zillow at $209,900. That marks a 0.4 percent increase since November, but a decrease of 6.7 percent since December 2009, the reports showed.

Jan 21st 2010 | WASHINGTON, DC | From The Economist print edition

WHEN American house prices finally started rising in June last year, ending a three-year decline, homeowners and economists rejoiced. The steep plunge in values, about 33% nationally from peak to trough, caused widespread damage in the American economy and abroad. The stabilisation of prices turned out to be a precursor to broader economic recovery.

Since bottoming out between May and June, prices have ticked upwards every month, while sales have risen from their recession lows. And yet gloom persists. The pace of foreclosures has not abated, and there has been no improvement in employment in residential construction.

Worse still, the momentum now seems to be ebbing. Mortgage applications for purchases fell sharply in November, to their lowest level since 1997. Confidence among home-builders declined in November for a second consecutive month. And figures released on January 20th showed that new housing construction, which recovered from the record lows of early 2009 to plateau late last year, fell by 4% between November and December. The fear is that prices will soon start to fall again, touching off another round of pain for homeowners, workers and banks.

The stalling housing market can be blamed, in part, on the end of the government supports that have buoyed recovery. Purchases of mortgage-backed securities by the Federal Reserve and the government’s bailed-out mortgage giants, Fannie Mae and Freddie Mac, helped keep mortgage credit flowing and interest rates low. But Fed purchases, the bulk of the support, are due to end in March.

Other interventions are less admirable. A large tax credit originally offered to first-time buyers was extended in November to cover all buyers with incomes under a certain threshold, and to last until the end of April. Although this has boosted sales, it has largely done so by moving them forward (at no small expense to taxpayers). With the end of the programme the bill will come due, in terms of reduced sales.

All told, government support boosted house prices by about 5% last year, according to a recent Goldman Sachs analysis. As their end approaches concern has grown, not least because the underlying fundamentals remain shaky. With many mortgage loans underwater, continuing job losses are pushing ever more households into default. Nearly 3m properties entered foreclosure last year, and filings increased by 14% from November to December. Foreclosures place downward pressure on house prices, contributing to a vicious cycle of economic pain.

In all likelihood, prices will not begin a new and steep decline. Economic output is now growing again, and most economists believe the economy will begin adding jobs by the spring. Equally important, house prices are no longer out of line with fundamentals. Relative to rents, for instance, house prices are now 3% below their long run average using the S&P/Case-Shiller national index. At the peak of the bubble, they were 40% overvalued. But the end of government support will put housing markets under great strain. It is a difficulty the American economy had better get used to.

Jan. 27 (Bloomberg) — Sales of new homes in the U.S. unexpectedly dropped in December, capping the worst year on record and signaling the government’s tax-credit extension has yet to shore up demand.

Purchases declined 7.6 percent to an annual pace of 342,000, marking the fourth decrease in the past five months, the Commerce Department said today in Washington. For all of 2009, sales declined 23 percent to 374,000, the lowest level since records began in 1963.

The falloff following the expected expiration of an $8,000 incentive for first-time buyers indicates the market remains dependent on government assistance. A setback in housing, combined with a jobless rate projected to average 10 percent this year and record foreclosures that will push up supply, may pressure home prices and builder profits for much of 2010.

“It’s going to be a long slog for housing,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc., a New York forecasting firm. “We will see a decline in home prices and there is still a lot of shadow inventory out there that we need to get through.”

Federal Reserve policy makers today retained a pledge to phase out programs aimed at keeping mortgage rates low, bringing an end to another form of government help.

Mortgage Rates

The end of the $1.25 trillion program of mortgage-debt purchases by the central bank on March 31 raises the risk that borrowing costs will jump. The plan helped send the rate on a 30-year fixed loan down to 4.71 percent in early December, the lowest level in Freddie Mac data going back to 1972.

The Fed “will probably stop the purchases and see how things go,” said Shapiro. “If rates shoot up, then they will probably be back in the game.”

Stocks rose after the Fed also pledged to keep interest rates lot to sustain the expansion. The Standard & Poor’s 500 Index rose 0.5 percent to close at 1,097.5. The S&P Supercomposite Homebuilder Index climbed 1 percent.

The government tax credit to first-time buyers was originally due to expire on Nov. 30, which probably caused demand to swell in prior months, economists said. The Obama administration and Congress extended the credit to cover closings through June 30, and expanded it to include some current owners.

Weather Effect

Bad weather may have also played a role in depressing December new-home sales, economists said. Last month was the 14th coldest December and 11th wettest in 115 years of record keeping, according to the National Climatic Data Center, in Asheville, North Carolina.

“December was a pretty cold month and that probably hurt shopping for homes,” said Adam York, an economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “Winter housing data is notoriously volatile.”

The median price of a new house decreased 3.6 percent from December 2008, to $221,300, today’s report from the Commerce Department showed.

Fed Action

Fed Chairman Ben S. Bernanke and fellow central bankers said today they will keep the target rate for overnight bank lending near zero for an “extended period.” Bernanke is also battling to win support from senators considering his nomination to a second term as Fed leader.

Sales of existing homes plunged 17 percent in December, the month after the credit was to end. The decline was the biggest since records began in 1968, the National Association of Realtors said two days ago. For all of 2009, existing home sales rose 4.9 percent to 5.16 million, the first gain in four years.

New-home purchases, while accounting for less than 10 percent of the market, are considered a leading indicator because they are based on contract signings. Sales of previously owned homes, which make up the remainder, are compiled from closings and reflect contracts signed weeks or months earlier.

Rising foreclosures and joblessness near a 26-year high will weigh on any housing recovery. A record 3 million U.S. homes will be repossessed by lenders this year as unemployment and depressed home values leave borrowers unable to make mortgage payments or sell, according to a RealtyTrac Inc. forecast on Jan. 14. That compares with 2.82 million foreclosures last year.

Lower prices, while supporting demand, are hurting builders’ earnings. Record foreclosures have depressed the value of the previously owned homes that compete with new houses, prompting construction firms to also lower prices.

Lennar Corp., the third-largest U.S. homebuilder by revenue, reported a 29 percent decline in revenue in the quarter ended Nov. 30 even as profits rose due a tax benefit and cost cuts, the company said Jan. 7.

Businessweek

Home sales in the Midwest declined from November to December, but ended the last month up 9 percent from prior-year levels, the National Association of Realtors said Monday.

There were 86,000 sales in the 11-state region last month, with a median sales price of $173,600, up almost 4 percent.

That was slightly weaker than the national trend. Total home sales across the country were up nearly 15 percent in December, without adjusting for seasonal factors. The median home price nationally gained nearly 4 percent, to $225,400.

Buyers “are still making incredibly conservative decisions,” said Linda Hart, an agent with Re/Max Traditions in Cleveland. She said doctors moving to the city to work at the Cleveland Clinic for a couple years often used to buy a house, for example, but now rent for fear prices will continue to fall.

Sales fell in nine of the 12 major Midwestern cities tracked in the Associated Press-Re/Max Monthly Housing Report, also released on Monday.

Eight of the cities showed median sales price gains over December 2008, including a nearly 32 percent jump in Detroit. The AP-Re/Max report tallies sales by all real estate agents in the metro area, regardless of company affiliation.

Here are some of the highlights from the region:

– Biggest sales decline: Cleveland home sales declined 19 percent annually in December 2008 — the biggest decline in the region.

Hart said she stayed busy throughout the fall because of the homebuyer tax credit — which covers sales contracts signed by April 30 and completed by June 30. She also said sales in the suburbs on the east side of Cleveland, where she primarily works, remained stronger than citywide numbers show.

“I’m hoping there will be people that missed the first one that will buy this spring,” she said.

But sales remain hard to predict because of the economic uncertainty.

Wichita sales dropped 15 percent and Omaha sales fell 14 percent in the region’s only other double-digit annual declines.

– Biggest sales increases: Chicago sales jumped 50 percent over the previous year in December to lead the region.

Jim Merrion, regional director of Re/Max Northern Illinois, said the homebuyer tax credit helped boost home sales in late 2009.

Median home prices in Chicago declined 8 percent to $178,500 in December. Merrion said the price declines have been painful but may have been necessary to bring inflated home prices back within reason.

“We’re seeing some extraordinary bargains in the market right now,” said Merrion, whose firm serves most of northern Illinois.

Detroit and Des Moines were the only other cities to record sales increases, and both those increases were less than 5 percent.

– Biggest price gains: The median home price in Detroit soared 32 percent between December 2008 and last month to hit $70,000.

Conrad Chojnacki, with Keller Williams Realty, said the overall numbers for Detroit can be misleading because of the vast differences between areas of the city and its suburbs.

The Detroit market is still seeing a lot of foreclosures and short sales because people who owe more than their homes are worth want to unload them, he said. Those kind of sales have hurt home prices in the area.

“It’s difficult to try and figure out what the value really is,” Chojnacki said. “A lot of people are still shocked at how much their home is worth.”

But still Chojnacki remains optimistic.

“It’s been a tough market,” Chojnacki said. “I’m confident it’s going to get better, but in southeast Michigan, it may take longer than the rest of the country.”

– Shrinking inventory: All 12 cities reported smaller inventories in December, compared to a year earlier. Wichita posted the smallest decrease with 4 percent fewer homes on the market while Detroit saw the biggest decrease with 35 percent fewer homes up for sale.

ChicagoTribune.com