Some housing bubble news from Wall Street and Washington. Independent, "A report by real estate giants CB Richard Ellis says that a 15 per cent drop in the value of new homes has been disguised through 'incentives' offered by developers to prospective buyers to encourage them to buy properties. The report also drives home the fact that Irish homeowners have seen the last of double-digit price growth."

"'Developers gave incentives to get people to buy their properties instead of lowering the price of new homes. These incentives equated to as much as 15 per cent of the value of the property so in real terms, the value of new homes probably fell by 15 per cent last year,' said Marie Hunt, director of research with CB Richard Ellis and author of the upcoming report. 'The decline in the value of new homes last year was not really as evident as it was in the second-hand market.'"

"First-time buyers who bought new homes last year are now sitting on losses of as much as €40,000 because the property slowdown has knocked up to 15 per cent off the value of their homes. This will push thousands more first-time buyers into negative equity this year."

"'The days of double-digit house price inflation are well and truly over,' said the report, which also found that land values have fallen by 20 per cent over the last year."

"'The development land market continues to suffer from a slowdown in the Irish housing sector and the ongoing difficulties in obtaining banking funding,' said Guy Hollis, managing director of CB Richard Ellis, Ireland."

The Scotsman. "The £10-15 billion financing package for the rescue of Northern Rock looked on a knife-edge this weekend as it seemed that fears of a potential house price crash were unnerving some potential backers."

"It is said that Royal Bank of Scotland, Citigroup and Deutsche Bank are increasingly concerned that it is difficult to value Northern's assets – against which their lending would be secured – against a backcloth of a fast-weakening property market."

"One analyst said: 'It is a fast-moving situation, and the worse the property market is looking the more difficult a call it is for those banks to make on what would be very big loans to the rescue-bidders.'"

"One sticking point with the RBS/Citigroup/Deutsche funding is said to be the Treasury's insistence that banks take as collateral part of Northern's entire mortgage book, including lower-quality as well as top-quality mortgage assets."

"One source said: 'One problem is that there has been a noticeable slump in the outlook for the housing industry in Britain between September, when the Northern crisis became public, and now. In some ways, it is the worst possible situation to try and mount a rescue operation for the bank.'"

From Bloomberg. "Banks may be required to set aside more capital to offset the risk of losses on new collateralized debt obligations and other complex securities, according to Moody's Investors Service."

"'The combination of financial innovation, opacity and leverage is generally explosive,' analysts led by Pierre Cailleteau in London wrote in a report published today. 'More capital buffers will be needed or required by counterparties and regulators.'"

"Merrill Lynch & Co. reported the biggest quarterly loss in its 93-year history in October after $8.4 billion of writedowns, almost double the New York-based firm's forecast three weeks earlier."

"'We need to restore confidence in financial results by instilling a more probabilistic view, based on the margin of errors for estimating the value of these positions,' Cailleteau said. 'There is a call for more information, but the emphasis should be on intelligibility rather than quantity.'"

"Citigroup Inc., the biggest U.S. lender, and HSBC Holdings Plc in London led banks that took on more than $100 billion of assets from structured investment vehicles they managed as the value of the funds plummeted since August. SIVs had the highest AAA grades from all three rating firms."

"The net asset value of SIVs...fell below 70 percent as U.S. home foreclosures rose to a record last year, according to Fitch Ratings. Mortgage debt made up 23 percent of SIV assets, with most having no direct subprime link, Moody's said in July."

"Moody's, Standard & Poor's and Fitch Ratings have been criticized for giving investment-grade rankings to structured securities linked to subprime mortgages."

"In the past, policy makers have had a 'Faustian pact' with banks in which they accepted the risk of occasional crises that comes with financial innovation because the products helped to maximize growth, Cailleteau wrote."

The Chicago Tribune. "The worst housing slump since World War II is showing no sign of abating. The mistakes banks and brokers made with mortgage-related bonds have left a lingering credit crunch, or a reluctance by lenders to make affordable loans to consumers and businesses."

"Options are dwindling for the people who will be strapped. About half of the borrowers have less than 10 percent equity in their homes, said Lehman Brothers economist Michelle Meyer, and as foreclosures quadruple to about 1 million in both 2008 and 2009, the supply of discounted homes on the market will cause prices to fall further."

"Certainly, if this cycle turns out as bad as some imagine, analysts will look back at a plethora of warnings that should have been taken seriously."

"Merrill Lynch economist David Rosenberg was among the economists sounding the early warnings. In September 2004, he said there was a clear housing bubble, and it could turn ugly. In particular, he raised concerns about consumers overindulging in adjustable-rate mortgages."

"When Rosenberg wrote his report, home prices in such markets as San Diego and Los Angeles already had climbed 80 percent, and Rosenberg described classic bubble characteristics: overheated prices, overownership, too much debt, speculation, complacency and denial."

"'About a third of first-time buyers,' he said at the time, 'have strapped on so much mortgage debt that roughly a third now pay at least 30 percent of their after-tax income on shelter, and half of the lowest-income households spend at least 50 percent of their income on housing.'"

"Citigroup economist Steven Wieting raised similar concerns. Morgan Stanley economist Stephen Roach also referred to an 'ominous surge in demand for adjustable-rate mortgages,' especially among lower-income people who wouldn't be able to afford higher payments."

"Roach noted that from 2001 to 2003, ARMs amounted to about 20 percent of new mortgages, but by May 2004 half of the people getting loans were taking chances on them."

"Meanwhile, Yale economist Robert Shiller emphasized to Barron's magazine that home buyers were making the dangerous assumption that 'nothing beats a home as an investment because prices just keep rising.'"

"While the economists were flashing warnings, consumer advocates also were busy asking Congress and the Federal Reserve to stop lenders from tantalizing homeowners with loans they would not be able to afford."

"Despite numerous hearings, Congress and the Federal Reserve failed to adopt the protections that consumer advocates were requesting. Advocates say they ran into heavy lobbying by mortgage lenders and Wall Street firms involved in securitization."

"In a House of Representatives hearing in November 2003 titled 'Protecting Homeowners: Preventing Abusive Lending While Preserving Access to Credit,' Cameron Cowan of the American Securitization Forum testified on behalf of the fast-growing $6.6 trillion industry."

"By fabricating bonds from the payments people are expected to make on everything from credit cards to mortgages, he said, the industry was making it possible for more people to get loans at low prices."

"Cowan urged Congress to avoid regulation and also to stop state and local governments from measures aimed at curbing predatory lending."

"The hearing, of course, occurred about four years before Wall Street's subprime-mortgage-related bonds turned into a debacle and a threat to banks and the economy. Cowan concluded his remarks at the hearing this way: 'Regulation in this area could easily cause more harm than good.'"

"In early 2001, economist Stephen Roach raised a warning flag that enraged many peers: The U.S. risks repeating Japan's mistakes of the 1990s."

"It was during the darkest days of the Nasdaq crash that Roach, then Morgan Stanley's chief economist, began worrying Japan's malaise could be repeated in the No. 1 economy. The concern was less about the loss of wealth than policy makers papering over economic cracks with easy money."

"Roach called it the 'bubble fix,' a policy then-Federal Reserve Chairman Alan Greenspan is now at great pains to justify. Ben Bernanke hasn't deviated from that strategy since succeeding Greenspan in February 2006."

"At its core is a Bank of Japan-like belief that low short- term rates and liquidity are the cure for sliding stocks, plunging real estate prices and lost investor confidence."

"'The only lesson the U.S. has learned from Japan is how to clean up the post-bubble mess,' says Roach, now chairman of Morgan Stanley in Asia. 'America has failed to learn the much more important lesson; how to avoid dangerously destabilizing bubbles in the first place. The Greenspan/Bernanke ideology still places disproportionate emphasis on the former while ignoring the latter at great peril.'"

"For years, regulators and investors sold an appealing tale: The U.S. has become so sophisticated and efficient at managing risk that a financial meltdown is unthinkable. That was a myth, of course. The aggressive and profitable repackaging of credit risks in recent years made global markets more volatile, not less."

"Faith is now being lost in the U.S. system. Look no further than Blackstone Group LP's recent experience. On Jan. 1, PHH Corp., the New Jersey-based mortgage and auto-leasing company, scrapped a $1.8 billion sale to General Electric Co. and Blackstone after the buyout firm said banks reneged on an agreement to lend the money."

"'Banks facing further writedowns are reluctant to lend, so the extra liquidity from the central banks isn't greasing the wheels of commerce as intended,' says Simon Grose-Hodge, an investment strategist at LGT Group in Singapore. 'When the likes of Blackstone are getting turned down, you've got a problem.'"

"What are the odds of the U.S. sliding into a Japan-like funk? While not great, there are at least two reasons why the risk can't be dismissed: Denial and easy money."

"There's still considerable denial about the magnitude of the U.S.'s problems. Also, all low rates and capital injections from central banks offer markets is breathing room. They treat symptoms of the problem, not the underlying disease."

From New Orleans City Business. "National homebuilder KB Home has scrapped 35 planned market rate homes in River Garden, the mixed-income development that replaced the St. Thomas housing project in New Orleans. KB Home was the first national homebuilder to invest in Louisiana following Hurricane Katrina."

"'It is not wise to flood the market with a number of homes that are not selling and we will not make a decision on what to do with the (remainder of the lots) until our homes sell,' said Clint Szubinski, president of the Gulf Coast Division for KB Home."

"KB has sold 11 homes in River Garden since the 2006 unveiling of a first model two-story shotgun home and plans to sell the 12 now under construction before stopping work on the candy-colored subdivision, where 58 market-rate homes were to have been built."

"Slow sales and sinking prices at River Garden, which was developed by HRI Properties and remains under its management, factored into the KB decision to leave the state, Szubinski said."

"'Our lack of success contributed to our decision to not make any future investments here,' he said."

"Market rate sales began to lag soon after KB sold the development’s first market-rate home for $329,000 in February 2007. Prices plunged by as much as 30 percent on the remaining homes by November, said real estate agent Polly Eagan of Keller Williams Realty."

"'(KB) was motivated to sell, they offered a huge drop in prices and now the houses are selling,' said Eagan."

"But some River Garden residents worry what will happen in undeveloped vacant lots."

"'People are concerned about the way things are going,' said Chris Daigle, who bought a new double-shotgun on South Chippewa Street last year. He paid $300,000 for the pumpkin-colored home before KB Home sheared prices."

"A nearby yellow New Orleans-style home with a wraparound porch at 1901 South Chippewa St. is listed down 34 percent to $279,000 from $425,000. Daigle does not begrudge his new neighbors for getting a deal he missed. He said the development will lack the density and economic diversity promised to him when he bought in."