Goldman Sachs published a good research piece the other day addressing homes being turned into rental units, since buyers aren’t coming to the surface. Basically demand for owner-occupied housing has gone down, and in addition displaced homeowners need rental units since their credit (assuming they lost their own home) has deteriorated. Goldman said that over a million units have swung from the owner-occupied market to the rental market over the last two years.  This shift has been driven by units switching markets rather than by a change in the mix of new units constructed, as there has not been an increase in construction of units for rental purposes. In turn, this increase in the supply of rental housing implies continued low rental inflation.  Although demand for rental housing has increased, supply has increased faster. The shift of houses toward rental uses also points to another problem for the real estate market: a large amount of “shadow” housing supply that could come back into the market at signs of improvement.  Just as housing converted to rental, it can be converted back if demand shifts.  Signs of price stabilization, or improvement, would be greeted by owners as an opportunity to bring homes back onto the for-purchase market.  In addition to rental conversions, over the past two years there have been sharp increases in the number of homes either “held off the market for other reasons” or “seasonally vacant”; the combined increases in the two compared to the start of 2006 are nearly a million homes.

Fannie & Freddie on the ropes? Highly doubtful, but Fortune Magazine came out with an article on their troubles, in spite of the agencies' regulator - Office of Federal Housing Enterprise Oversight – saying that future accounting rules would not impact the capital requirements at the two mortgage-finance giants. This seems to have reassured investors. Fortune’s “The Fannie and Freddie doomsday scenario” What would it take for the government to step in and help Fannie Mae and Freddie Mac, and how would a rescue the taxpayer?

http://money.cnn.com/2008/07/09/news/companies/benner_fanniefreddie.fortune/?postversion=2008071007

In other “great” news, US foreclosure filings rose 53% in June from a year earlier and bank repossessions almost tripled as deteriorating property values and higher payments on adjustable mortgages forced more people to give up their homes. According to RealtyTrac, more than 252,000 properties, or one in every 501 U.S. households, were in some stage of foreclosure. Nevada, California and Arizona had the highest foreclosure rates.

Economy-wise, yesterday the MBAA’s lock tallies for the previous week showed that if your locks increased, you’re in the club. Their application index rose 7.5% last week with the Purchase Index +6.7% and the Refi Index +8.7%. On the shaky news, the 10-yr yield dropped to 3.81%, mortgages improved, and our stock market got beat up again: the DOW had its lowest close of the year and is down 15% for year. Treasury 10-year note yields held near a one-month low. We’re a touch worse this morning, with the 10-yr up to 3.83%, after the number of U.S. workers filing new claims for jobless benefits dropped by a much bigger-than-expected 58,000 last week to 346,000. It was the largest one-week drop since September 2005 and the lowest weekly claims tally since the week ended April 19 – are folks just not filing? A Labor Department official said the claims data is volatile this time of year because of auto plant shutdowns and this week's unexpectedly large decline could be offset by increased claim applications in coming weeks. Ahead of us we have Bernanke and Paulson testifying at a House Financial Services Committee hearing, along with an $8 billion Treasury 10-yr auction.

Thank you to Cindy T.:

In the hospital the relatives gathered in the waiting room, where their family member lay gravely ill. Finally, the doctor came in looking tired and somber. "I'm afraid I'm the bearer of bad news," he said as he surveyed the worried faces. "The only hope left for your loved one at this time is a brain transplant. It's an experimental procedure, very risky but it is the only hope. Insurance will cover the procedure, but you will have to pay for the brain yourselves...”
The family members sat silent as they absorbed the news. After a great length of time, someone asked, "Well, how much does a brain cost?"
The doctor quickly responded, "$5,000 for a male brain, and $200 for a female brain."
The moment turned awkward. Men in the room tried not to smile, avoiding eye contact with the women, but some actually smirked.
A man unable to control his curiosity, blurted out the question everyone wanted to ask, "Why is the male brain so much more?"
The doctor smiled at the childish innocence and explained to the entire group, "It's just standard pricing procedure. We have to mark down the price of the female brains, because they've actually been used."

Rob