Sean Crowley

Over the last two weeks we have seen a number of cancellations of listings. The number of condominiums for sale in Wailea-Makena has declined to 160, down from an average of 180 over the last year. Single family homes have similarly declined to 42 from a high of 50. We will keep you apprised as to whether this is a permanent decision on the part of owners or merely frustration with the events of the past few weeks.

Since the original 110 page Bailout bill couldn't get approved, Congress added 340 pages of tax cuts, tax breaks, regulatory changes and other assorted unrelated items to create the actual bailout bill. But the portion devoted to the bailout remains the same and is summarized here. Implementation has begun though it will take about a month for Treasury to devise auction rules, hire portfolio managers etc. In other important news, Wells Fargo has offered to purchase Wachovia for 15.4 billion. Wachovia had previously agreed to, with FDIC prompting, be sold to Citigroup for substantially less. It begs the question, if things are so bad, why would Wells Fargo pay so much more? The news on the economy was troubling this week as non-farm payrolls declined 159,000 in September. That's a number that indicates a recession. In fact Goldman Sachs is now predicting that the third quarter will show no economic growth at all and that a recession is likely. Finally, the rates for jumbo mortgages remain elevated and Libor, the rate at which banks lend money overnight to one another remains very high. So what does this all mean for Maui real estate?

While it is possible the bailout settles down the credit markets and we see renewed mortgage lending, and indeed, renewed lending in general, it will take time for that to filter down to real estate values everywhere, including Maui. It now seems likely we are in for a protracted period of economic stagnation and job losses nationally.

President of the Federal Reserve Bank of Atlanta Dennis Lockhart spoke today to a group in New Orleans. Here are some key snippets of his speech:

Credit markets remain quite strained. This is particularly the case in interbank markets in the United States and abroad. The interbank markets are a fundamental element of the plumbing of the financial world. Banks with excess balances put them to work by lending to other banks that have clients/companies and individuals who need the funds.The loan portfolios of U.S. banks and financial institutions are, as you would expect, mostly dollar-denominated. But foreign banks in recent years have also built sizeable "books of business" in dollars. The dollar interbank credit contraction is a worldwide problem that affects not only our banks here but banks overseas, particularly in Europe. When banks lend or take on other forms of exposure to each other, they gauge the counterparty risk. In recent weeks, there has been a widespread withdrawal of confidence in counterparties that has resulted in efforts to reduce exposure.As part of this, maturities have shortened, risk spreads (typically measured as the interest rate spread over U.S. Treasuries) have widened, the cost of hedging against default risk (another measure of perceived counterparty risk) has risen dramatically, and the range of assets accepted as collateral has narrowed. Also, demand for liquidity provided by the Federal Reserve has intensified.This contraction in availability and rise of the cost of credit have worsened as well for corporate and business borrowers. We've heard anecdotes confirming this from contacts throughout the Southeast. In short, Main Street is being affected.

Here is his views on implications for the broader economy:

At the root of today's financial turmoil is housing sector weakness. In recent months, housing starts have declined sharply, and inventories of unsold new and existing homes remain high. With oversupply, house prices in most markets have continued to decline. Financial instability has affected house prices by tightening credit to potential home buyers.Prior to September, we at the Federal Reserve Bank of Atlanta had a rather downbeat outlook for the second half of 2008 and early 2009. We expected, and continue to expect, a very weak second half reflecting contracting consumer spending, weaker business investment, and slower export volume.

The news just isn't good.

Here is the full text of the bill. Here are some key elements:

• Secretary of the Treasury is the key decisionmaker and has great latitude
• The scope of securities purchases can go beyond just mortgage-related securities
• Can hold or sell securities based on what is best for the taxpayer
• Auctions will likely be an important mechanism
• Initial amount is $250 billion outstanding without additional Congressional ok, $700 billion overall
• No sales of troubled securities to TARP (Troubled Asset Relief Program) at prices higher than price when purchased by a Financial Institution
• Treasury may guarantee securities and collect premiums for doing so
• Oversight Board shall consist of Fed Chairman, Director of FHFA, SEC Chairman and HUD Secretary
• Semi-annual report to Congress
• Will maximize assistance to homeowners and direct servicers in such a manner
• Limits on executive pay while Treasury owns securities purchased from a specific institution
• Treasury can own stock or warrants in a financial institutions at his discretion if an auction is not feasible
• All trades shall be available on the internet
• SEC can suspend "mark to market" accounting
• "Recoupment Tax" in five years if taxpayers have lost money on this program

So what does this mean? Well, assuming the bill on-line now is the one that is voted upon? It means the following:

• The Secretary of the Treasury has immense power and discretion over how this works
• There will be significant foreclosure mitigation efforts designed to keep people in their homes
• This will be a reasonably transparent process
• This may not be the last step the Treasury takes to combat the credit crisis
• This will probably slow down and stretch out the housing decline
• This should have a significant near-term impact on the credit markets
• This will NOT stop additional bank failures which will be coming
• This will distort the market for mortgage backed securities for years and we will not see that market return soon

The direct impact on Maui real estate?

• This will settle the buyer panic down a little
• Fewer foreclosures

We will continue to think about the impact of this bailout.

The National Association of Realtors has released the existing home sales results for August.

Existing-home sales were down in August following a healthy gain in July as tight mortgage credit curtailed activity, according to the National Association of Realtors^®. Sales rose in the Midwest and South but fell in the Northeast and West...The national median existing-home price2 for all housing types was $203,100 in August, down 9.5 percent from a year ago when the median was $224,400.

The red chart shows that existing home sales have been about flat on a seasonally adjusted basis for most of 2008. The more important chart in our view is the green months of supply which appears to have peaked at least temporarily. A good sign. Thanks to Calculated Risk for the charts.