Sunday, February 28, 2010

What about Financial Reform?

by Bill McBride on 2/28/2010 11:59:00 PM

First from Paul Krugman: Financial Reform Endgame

A weak financial reform ... wouldn’t be tested until the next big crisis. All it would do is create a false sense of security and a fig leaf for politicians opposed to any serious action — then fail in the clinch.

Auto Sales: Blame it on the Snow and Toyota

by Bill McBride on 2/28/2010 07:25:00 PM

In the Weekly Summary and a Look Ahead post, I included a consensus forecast of a decline in light vehicle sales to 10.4 million units in February, on a seasonally adjusted annual rate (SAAR) basis. That may be a little high ...

From The Detroit News: Snowstorms, Toyota problems cut into February auto sales

When results are released Tuesday, automotive research firm Edmunds.com predicts retail sales will increase 14.2 percent from a year earlier, while research firm TrueCar.com expects a nearly 9 percent bump. ... [On a SAAR basis] Edmunds predicting 10.6 million U.S. sales ... while TrueCar.com anticipates 10.04 million

Greece Bailout Plan and Further Austerity Measures moving forward

by Bill McBride on 2/28/2010 03:29:00 PM

From Stephen Castle and Landon Thomas Jr. at the NY Times: Europe Union Moves Toward a Bailout of Greece

[T]he European Union is moving toward the first bailout in the history of its common currency, which is expected to involve loan guarantees from the German and French governments to encourage their banks to buy Greek debt.

Even as the negotiations continue, the bloc is insisting that Athens impose further, painful austerity measures ...

Weekly Summary and a Look Ahead

by Bill McBride on 2/28/2010 11:55:00 AM

This will be a busy week for economic data, and the focus will be on the BLS February employment report to be released on Friday. The consensus is for a net loss of 50 to 80 thousand payroll jobs, and the unemployment rate to increase slightly to 9.8% (from 9.7%).

There is considerable debate on the impact of the snow storms on the employment report. The BLS will disclose and adjust for any snow related data collection issues, but some hiring might have been delayed because of the storms. However, if so, there will be a bounce back in March - however it is important to remember that the weekly unemployment claims were moving higher before the storms arrived. Also the temporary hiring for the 2010 Census will have increased slightly - I'm sure all of these issues will be widely discussed ...

On Monday, the BEA will release the Personal Income and Outlays report for January. This release is very useful for looking at both Personal Income and Personal Consumption Expenditures (PCE). Also on Monday, the ISM Manufacturing index (consensus is for expansion, but a slight decrease to 57.5% from 58.4%), and the January Construction Spending report from the Census Bureau (consensus is for a decline of 0.5%).

On Tuesday, the various manufacturers will release light vehicle sales for February. The consensus is for a decline to about 10.4 million on a Seasonally Adjusted Annual Rate (SAAR) basis from 10.8 million in January. Sales for Toyota will be closely watched. Also on Tuesday, the Personal Bankruptcy Filings estimate for February will be released.

1.2 Million to Lose Unemployment Benefits Today

by Bill McBride on 2/28/2010 08:59:00 AM

Just a reminder ...

From John Schmid at the Journal Sentinel: Unemployment benefits for 1.2 million Americans could expire Sunday

Nearly 1.2 million unemployed Americans ... face an imminent cutoff of government unemployment checks if Congress cannot pass emergency legislation to extend federal benefits before funding expires Sunday.

Saturday, February 27, 2010

Fed Balance Sheet and MBS Purchases

by Bill McBride on 2/27/2010 11:49:00 PM

Here is the Federal Reserve balance sheet break down from the Atlanta Fed weekly Financial Highlights:

Fed MBS Purchases Graph Source: Altanta Fed.

From the Atlanta Fed:

The balance sheet expanded $20 billion, to $2.3 trillion, for the week ended February 17.

  • Holdings of agency debt and mortgage backed securities increased $49 billion while short-term lending to financials, specifically the Term Auction Credit Facility, declined by $23 billion.
  • Daily Show on BofA's Hidden Credit Card Fees

    by Bill McBride on 2/27/2010 06:59:00 PM

    Some fun from the Daily Show. Link here if embed doesn't load.

    Living Rent Free: Homeowners become Squatters

    by Bill McBride on 2/27/2010 02:48:00 PM

    From Alana Semuels at the LA Times : Many borrowers in default stay put as lenders delay evictions

    Throughout the country, people continue to default on their home loans -- but lenders have backed off on forced evictions, allowing many to remain in their homes, essentially rent-free.

    Several factors are driving the trend, industry experts say, including government pressure on banks to modify loans and keep people in their homes.

    And with a glut of inventory in places like Southern California's Inland Empire, Nevada and Arizona, lenders are loath to depress housing prices further by dumping more properties into a weak market.

    Growth of Problem Banks (Unofficial)

    by Bill McBride on 2/27/2010 11:49:00 AM

    By request here is a graph of the number of banks on the unofficial problem bank list.

    We started posting the Unofficial Problem Bank list in early August 2009 (credit: surferdude808). The FDIC's official problem bank list is comprised of banks with a CAMELS rating of 4 or 5, and the list is not made public (just the number of banks and assets every quarter). Note: Bank CAMELS ratings are not made public.

    CAMELS is the FDIC rating system, and stands for Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk. The scale is from 1 to 5, with 1 being the strongest.

    As a substitute for the CAMELS ratings, surferdude808 is using publicly announced formal enforcement actions, and also media reports and company announcements that suggest to us an enforcement action is likely, to compile a list of possible problem banks in the public interest. Some of this data is released with a lag, for example the FDIC announced the January enforcement actions yesterday.

    Buffett on Housing

    by Bill McBride on 2/27/2010 08:33:00 AM

    Here is Warren Buffett's annual letter to shareholders. The following is an excerpt on housing (Buffett focuses on manufactured housing because Berkshire owns Clayton Homes):

    The [manufactured homes] industry is in shambles for two reasons, the first of which must be lived with if the U.S. economy is to recover. This reason concerns U.S. housing starts (including apartment units). In 2009, starts were 554,000, by far the lowest number in the 50 years for which we have data. Paradoxically, this is good news.

    People thought it was good news a few years back when housing starts – the supply side of the picture – were running about two million annually. But household formations – the demand side – only amounted to about 1.2 million. After a few years of such imbalances, the country unsurprisingly ended up with far too many houses.

    There were three ways to cure this overhang: (1) blow up a lot of houses, a tactic similar to the destruction of autos that occurred with the “cash-for-clunkers” program; (2) speed up household formations by, say, encouraging teenagers to cohabitate, a program not likely to suffer from a lack of volunteers or; (3) reduce new housing starts to a number far below the rate of household formations.

    Friday, February 26, 2010

    Unofficial Problem Bank List increases Significantly

    by Bill McBride on 2/26/2010 11:11:00 PM

    This is an unofficial list of Problem Banks compiled only from public sources. Changes and comments from surferdude808:

    The Unofficial Problem Bank List underwent major changes during the week as aggregate assets for all institutions were updated to 2009q4 from 2009q3 and the FDIC finally released its enforcement actions issued during January 2010.

    The list now includes 644 institutions, up from 617 last week, as 33 institutions with assets of $12 billion were added while 6 with assets of $1.3 billion were deleted. Despite the additions, aggregate assets fell from $329 billion to $326 billion. For the 616 institutions that stayed on the list from last week, their aggregate assets dropped $13.8 billion during the fourth quarter.

    Bank Failure #22: Rainier Pacific Bank, Tacoma, Washington

    by Bill McBride on 2/26/2010 09:12:00 PM

    Ranier Pacific
    Day of reckoning has come
    As sun sets westward

    by Soylent Green is People

    From the FDIC: Umpqua Bank, Roseburg, Oregon, Assumes All of the Deposits of Rainier Pacific Bank, Tacoma, Washington
    Rainier Pacific Bank, Tacoma, Washington, was closed today by the Washington Department of Financial Institutions, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver....

    As of December 31, 2009, Rainier Pacific Bank had approximately $717.8 million in total assets and $446.2 million in total deposits. ...

    Bank Failure #21: Carson River Community Bank, Carson City, Nevada

    by Bill McBride on 2/26/2010 08:06:00 PM

    Cheap Nevada thrills
    Bright lights! Fast Times! No Limits!
    Woe, The taps gone dry.

    by Soylent Green is People

    From FDIC: Heritage Bank of Nevada, Reno, Nevada, Assumes All of the Deposits of Carson River Community Bank, Carson City, Nevada
    Carson River Community Bank, Carson City, Nevada, was closed today by the Nevada Department of Business and Industry, Financial Institutions Division, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. ...

    As of December 31, 2009, Carson River Community Bank had approximately $51.1 million in total assets and $50.0 million in total deposits....

    The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $7.9 million. ... Carson River Community Bank is the 21st FDIC-insured institution to fail in the nation this year, and the first in Nevada. The last FDIC-insured institution closed in the state was Community Bank of Nevada, August 14, 2009.
    A small one ...

    Fannie Mae Reports $15.2 Billion Loss

    by Bill McBride on 2/26/2010 07:36:00 PM

    Press Release: Fannie Mae Reports Fourth-Quarter and Full-Year 2009 Results

    Fannie Mae reported a net loss of $15.2 billion in the fourth quarter of 2009 ... For the full year of 2009, Fannie Mae reported a net loss of $72.0 billion...

    The fourth-quarter loss resulted in a net worth deficit of $15.3 billion as of December 31, 2009, taking into account unrealized gains on available-for-sale securities during the fourth quarter. As a result, on February 25, 2010, the Acting Director of the Federal Housing Finance Agency submitted a request for $15.3 billion from Treasury on the company’s behalf. FHFA has requested that Treasury provide the funds on or prior to March 31, 2010.
    ...
    Although there have been signs of stabilization in the housing market and economy, we expect that our credit-related expenses will remain high in the near term due in large part to the stress of high unemployment and underemployment on borrowers and the fact that many borrowers who owe more on their mortgagees than their houses are worth are defaulting.
    ...
    We expect to have a net worth deficit in future periods, and therefore will be required to obtain additional funding from Treasury ...
    I'm old enough to remember when $15 billion was a large number.

    Restaurant Index declines in January

    by Bill McBride on 2/26/2010 05:12:00 PM

    Note: This index is based on year-over-year performance, and the headline index might be slow to recognize a pickup in business.

    Restaurant Performance Index Click on graph for larger image in new window.

    Unfortunately the data for this index only goes back to 2002.

    Note: Any reading below 100 shows contraction for this index.

    From the National Restaurant Association (NRA): Restaurant Performance Index Declines Slightly in January, But Optimism for Future Business Conditions Strengthens

    [T]he Association’s Restaurant Performance Index (RPI) ... stood at 98.3 in January, down 0.3 percent from December’s level.

    “Although the current situation indicators remained soft in January, the Expectations Index rose above 100 for the first time in 9 months,” said Hudson Riehle, senior vice president of Research and Knowledge Group for the National Restaurant Association. “Restaurant operators are relatively optimistic about improving sales growth and economic conditions in the months ahead, and their capital spending plans rose to the highest level in five months.”

    January’s mark of 98.3 represents the 27th consecutive month of an index below 100, which signifies contraction in the index of key industry indicators. The full report is available online.
    ...
    The Current Situation Index, which measures current trends in four industry indicators (same-store sales, traffic, labor and capital expenditures), stood at 96.6 in January – down 0.8 percent from December. In addition, January represented the 29th consecutive month below 100, which signifies contraction in the current situation indicators.
    ...
    Restaurant operators also reported softer customer traffic results in January. Twenty-six percent of restaurant operators reported an increase in customer traffic between January 2009 and January 2010, down from 30 percent who reported higher customer traffic in December. Fifty-four percent of operators reported a traffic decline in January, up from 47 percent who reported lower traffic in December.
    emphasis added

    Freddie Mac: Delinquencies Increase Sharply in January

    by Bill McBride on 2/26/2010 02:24:00 PM

    Here is the monthly Freddie Mac hockey stick graph ...

    Freddie Mac Seriously Delinquent Rate Click on graph for larger image in new window.

    Freddie Mac reported that the rate of serious delinquencies - at least 90 days behind - for conventional loans in its single-family guarantee business increased to 4.03% in January 2010, up from 3.87% in December - and up from 1.98% in January 2009.

    "Single-family delinquencies are based on the number of mortgages 90 days or more delinquent or in foreclosure as of period end ..."

    Just more evidence of the growing delinquency problem, although some of these loans may be in the trial modification programs and are still included as delinquent until they are converted to a "permanent mod". If the trial is cancelled, the loan stays delinquent (until foreclosure).

    The data from Fannie Mae will be released later ...

    Tax Credits: Vehicle and Existing Home Sales

    by Bill McBride on 2/26/2010 01:29:00 PM

    By request, here is a graph overlaying light vehicle sales and existing home sales - and showing the impact of "cash for clunkers" and the "first time home buyer" tax credit. (ht Brian)

    Homes Autos Stimulus Click on graph for larger image in new window.

    The red line (left axis) is vehicle sales. The blue line (right axis) is existing home sales since Jan 2008. Both are in millions of units at a Seasonally Adjusted Annual Rate (SAAR).

    The Cash for Clunkers program was effective on July 1, 2009, but didn't really start until near the end of July. The program was expanded in early August, and ended on August 24th.

    The First Time Home Buyer tax credit was passed in February with an initial deadline to close on the home by November 30, 2009. The home buyer tax credit was extended and expanded at the end of October, and now buyers must sign a contract by April 30, 2010, and close by June 30, 2010.

    There will probably be another surge in existing home sales in May and June (reported when sales close). And then sales will probably decline again.

    More on Existing Home Sales

    by Bill McBride on 2/26/2010 11:07:00 AM

    Earlier the NAR released the existing home sales data for January; here are a few more graphs ...

    Existing Home Sales NSA Click on graph for larger image in new window.

    This graph shows NSA monthly existing home sales for 2005 through 2010 (see Red column for Jan 2010).

    Sales (NSA) in January 2010 were 7% higher than in January 2009, and slightly lower than in January 2008.

    The second graph shows existing home sales (left axis) and new home sales (right axis) through January. I jokingly refer to this as the "distressing gap".

    Distressing Gap The initial gap was caused by the flood of distressed sales. This kept existing home sales elevated, and depressed new home sales since builders couldn't compete with the low prices of all the foreclosed properties.

    The recent spike in existing home sales was due primarily to the first time homebuyer tax credit.

    The following graph shows the same information as a ratio - existing home sales divided by new home sales - through January 2010.

    Ratio: Existing home sale to new home sales This ratio is just off from the all time high in November when existing home sales were artificially boosted by the first time home buyer tax credit.

    Eventually this ratio will return to the historical range of around 6 existing home sales per new home sale. Right now this graph shows that the housing market is far from normal.

    Existing Home Sales Decline Sharply in January

    by Bill McBride on 2/26/2010 10:00:00 AM

    The NAR reports: Existing-Home Sales Down in January

    Existing-home sales – including single-family, townhomes, condominiums and co-ops – dropped 7.2 percent to a seasonally adjusted annual rate1 of 5.05 million units in January from a revised 5.44 million in December, but remain 11.5 percent above the 4.53 million-unit level in January 2009.

    Total housing inventory at the end of January fell 0.5 percent to 3.27 million existing homes available for sale, which represents a 7.8-month supply at the current sales pace, up from a 7.2-month supply in December.
    Existing Home Sales Click on graph for larger image in new window.

    This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.

    Sales in Jan 2010 (5.05 million SAAR) were 7.2% lower than last month, and were 11.5% higher than Jan 2009 (4.53 million SAAR).

    This is a sharp drop from November when many of the transactions were due to first-time homebuyers rushing to beat the initial expiration of the tax credit (that has been extended). That pushed sales far above the historical normal level; based on normal turnover, existing home sales would be in the 4.5 to 5.0 million SAAR range.

    Existing Home Inventory The second graph shows nationwide inventory for existing homes. According to the NAR, inventory decreased to 3.27 million in January from 3.29 million in December. The all time record high was 4.57 million homes for sale in July 2008.

    This is not seasonally adjusted and this decline is mostly seasonal - inventory should increase in the Spring.

    Existing Home Sales Months of SupplyThe third graph shows the 'months of supply' metric.

    Months of supply increased to 7.8 months in January.

    A normal market has under 6 months of supply, so this is high - and probably excludes some substantial shadow inventory.

    I'll have more later ...

    Q4 GDP Revised to 5.9%

    by Bill McBride on 2/26/2010 08:30:00 AM

    The headline GDP number was revised up to 5.9% annualized growth in Q4 (from 5.7%), however most of the improvement in the revision came from changes in private inventories. Excluding inventory changes, GDP would have been revised down to around 1.9% from 2.2%.

    This table shows the changes from the "advance estimate" to the "second estimate" for several key categories:

     AdvanceSecond Estimate
    GDP5.7%5.9%
    PCE2.0%1.7%
    Residential Investment5.7%5.0%
    Structures-15.4%-13.9%
    Equipment & Software13.3%18.2%
    Note that PCE and Residential Investment (RI) - the two leading categories - were both revised down in Q4.

    Changes in private inventories are transitory (only lasts a few quarters at the start of a recovery), and although the headline number was revised up, final demand was weaker than in the advance estimate.

    FDIC to Test Principal Reduction

    by Bill McBride on 2/26/2010 12:47:00 AM

    From Renae Merle at the WaPo: FDIC to test principal reduction for underwater borrowers

    The Federal Deposit Insurance Corp. is developing a program to test whether cutting the mortgage balances of distressed borrowers who owe significantly more than their homes are worth is an effective method for saving homeowners from foreclosure.
    ...
    Under the FDIC program, borrowers would be eligible for a reduction in their mortgage balances if they kept up their payments on the mortgage over a long period. ... "We're thinking about it in terms of earned principal forgiveness. If you stay current on your mortgage, you would earn a principal reduction. It would only be for loans significantly underwater," said FDIC Chairman Sheila C. Bair.

    The program would ... apply only to loans acquired from a failed bank seized by the FDIC. That would be less than 1 percent of mortgages currently outstanding.
    ...
    Lenders have been reluctant to cut the principal balance owed by distressed borrowers, arguing that it would encourage homeowners to become delinquent even if they can afford their mortgage.
    This is a pretty limited program. If principal reduction was offered on a widespread basis, millions of homeowners would probably immediately default.

    Also - the FDIC's previous modification efforts - after the seizure of IndyMac - were mostly unsuccessful. It is unlikely this one will do much better.

    Thursday, February 25, 2010

    The Year of the Short Sale and more Foreclosure Delays

    by Bill McBride on 2/25/2010 09:30:00 PM

    Two informative articles ...

    Diana Golobay at HousingWire reports on the Mortgage Bankers Association (MBA) National Mortgage Servicing Conference 2010 in San Diego: Mortgage Servicers Kick Around HAMP Mod Options

    ... a session called “Loss Mitigation – When HAMP is Not an Option” proved to be extremely popular.
    ...
    The shift away from the government plan marks a shift in the strategy of servicers as 2009 “was all about HAMP” in terms of allocating time and resources, according to Alanna Brown, director of government programs and new initiatives at Fannie Mae National Servicing Organization.
    ...
    Rich Rollins, CEO of Infusion Technologies, said servicers are seeing increasing potential in short sales and leaseback options.

    He agreed with a general mentality at the conference that 2010 — and even 2011 — looks to be the “year of the short sale,” which he said gives investors “immediate positive cash flow” as a non-retention strategy.

    “HAFA gave [the short sale] credibility,” he told HousingWire.
    There is much more in Diana's article.

    Note: HAMP stands for the Treasury program: ""Home Affordable Modification Program", HAFA is part of HAMP and stands for "Home Affordable Foreclosure Alternatives" and is for short sales and deed-in-lieu (DIL) transactions.

    And apparently the administration is considering more changes to HAMP, from Dawn Kopecki at Bloomberg: Obama May Prohibit Home-Loan Foreclosures Without HAMP Review
    The Obama administration may expand efforts to ease the housing crisis by banning all foreclosures on home loans unless they have been screened and rejected by the government’s Home Affordable Modification Program.

    The proposal, reviewed by lenders last week on a White House conference call, “prohibits referral to foreclosure until borrower is evaluated and found ineligible for HAMP or reasonable contact efforts have failed,” according to a Treasury Department document outlining the plan.
    The only obvious solutions for when current modification efforts fail are: 1) private principal reduction (but not paid for by taxpayers since that would be very unpopular), 2) converting homeowners to renters for some period, and 3) short sales / DIL.

    Delaying tactics just drag out the problem ...

    More on Mortgage Rates and Fed MBS Purchases

    by Bill McBride on 2/25/2010 07:48:00 PM

    Earlier I discussed the possible impact of the end of the Fed's MBS (Mortgage Backed Securities) purchases on mortgage rates: Fed MBS Purchases and the Impact on Mortgage Rates. My estimate is that the spread between the Freddie Mac 30 year fixed mortgage rate and the Ten Year Treasury yield will increase by about 35 to 50 bps after March.

    Analysts at Amherst Securities wrote today that they "don’t think there will be much of a widening", perhaps less than 25 bps, because some usual investors are under weighted in MBS. They also noted that "the widening may not happen for a number of months" as under weight investors add to their positions.

    I also checked the recent residential MBS issuance and compared it to the same month Fed buying. The GSEs issued about $131 billion in residential MBS in December. And according to the NY Fed, net Fed agency MBS purchases were just over $62 billion in December. So the Fed bought about half of the new issuance; private buyers bought the other half.

    Just two points to remember: there are private bidders (it is just a matter of price), and the increase to the normal spread might take a few months.

    Reports on Possible Imminent Bank Failures

    by Bill McBride on 2/25/2010 04:26:00 PM

    A couple of the largest banks on the Unofficial Problem Bank List - in terms of assets - are in Puerto Rico. We haven't seen any bank failures in Puerto Rico yet this cycle, but according to the following report that is about to change ...

    From José Carmona and John Marino at caribbeanbusinesspr.com: Feds expected to take action against island banks next month

    Federal regulators are likely to begin taking action against troubled island banks sometime next month, government and industry sources told CARIBBEAN BUSINESS.

    Since the beginning of the year, the Federal Deposit Insurance Corp. (FDIC) has been beefing up its local ranks, recruiting accountants and auditors, leading to speculation about imminent action during this year’s first quarter.
    ...
    There are three local banks operating under FDIC cease & desist orders—R-G Premier Bank, Eurobank and Westernbank.
    ...
    According to reliable industry sources, one of the three local institutions under cease & desist orders will most likely fall into receivership status under the FDIC due to its inability to raise capital, while the other two will probably survive through consolidation.
    As of Q3 2009, Westernbank had $13.4 billion in assets, R-G Premier Bank had $6.4 billion and Eurobank had $2.8 billion in assets.

    And from David Johnson at Contrarian Pundit: Tamalpais Bank Update
    The bad news has continued for Tamalpais Bank since I broke the story last December that the institution had lent the equivalent of almost all its capital to the highly leveraged, publicly excoriated, and increasingly broke Lembi Group in the middle of the 2008 real estate crash. In January, the Federal Reserve took enforcement action against the parent company, following up on the bank’s cease and desist order from the FDIC last September. And on February 16, the bank announced total losses of $26.2 million for the last quarter and $37.6 million for 2009.

    As grim as the news has been, the bank may be in even worse shape than acknowledged in media reports.

    ... the bank is currently in violation of the terms of the FDIC’s cease and desist order.
    And in an update, David points out the bank has just received a "Prompt Corrective Action" giving the bank a March 21st deadline. Tamalpais had about $700 million in assets as of Q3.

    Fed MBS Purchases and the Impact on Mortgage Rates

    by Bill McBride on 2/25/2010 02:07:00 PM

    First, the following graph is from the Atlanta Fed Financial Highlights, and shows the weekly Fed MBS purchases since January 2009:

    Fed MBS PurchasesClick on graph for larger image.

    From the Atlanta Fed:

  • The Fed purchased a net total of $11 billion of agency-backed MBS through the week of February 17. This purchase brings its total purchases up to $1.199 trillion, and by the end of the first quarter of 2010 the Fed will have purchased $1.25 trillion (thus, it is 96% complete).
  • Freddie Mac report that mortgage rates increased last week. From Freddie Mac: Long-Term Rates Rise to Over 5 Percent for the First Time in Three Weeks
    Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®) in which the 30-year fixed-rate mortgage (FRM) averaged 5.05 percent with an average 0.7 point for the week ending February 25, 2010, up from last week when it averaged 4.93 percent. Last year at this time, the 30-year FRM averaged 5.07 percent.
    ...
    “Interest rates for 30-year fixed mortgages followed long-term bond yields higher and rose above 5 percent this week amid a mixed set of economic data reports” said Frank Nothaft, Freddie Mac vice president and chief economist.
    Mortgage Rates and Ten Year Treasury Yield And that brings us to this graph from Political Calculations based on some of my posts: Predicting Mortgage Rates and Treasury Yields

    Using their calculator and a Ten Year Yield of 3.75%, we would expect the 30 year Freddie Mac fixed mortgage rate to be around 5.62%. Current mortgage rates are lower than expected - as they have been since early in 2009 - and some of the difference from the expected rate is probably due to the Fed's MBS purchases (also prepayment speed is a factor - and also just randomness).

    Mortgage Rates and Ten Year Treasury Yield The final graph shows the expected mortgage rates (UPDATE: based on formula in previous graph) with Ten Year Treasury yields on the x-axis, and actual mortgage rates from Freddie Mac (weekly) since the beginning of 2009 on the y-axis.

    Note: Y-axis doesn't start at zero to better show the change.

    There are many factors in determining the spread between the Ten Year Treasury yield and the 30 year mortgage rates (like the supply of new MBS) - but this graph suggests to me that mortgage rates will rise 35 to 50 bps relative to the Ten Year when the Fed stops buying agency MBS at the end of March.

    Hotel Occupancy Up Slightly Compared to Same Week 2009

    by Bill McBride on 2/25/2010 11:49:00 AM

    From HotelNewsNow.com: Seattle tops US hotel weekly results

    Overall, the industry’s occupancy ended the week with a 2.4-percent increase to 55.4 percent, ADR dropped 4.4 percent to US$95.81, and RevPAR fell 2.2 percent to US$53.04.
    The following graph shows the occupancy rate by week since 2000, and the rolling 52 week average occupancy rate.

    Hotel Occupancy Rate Click on graph for larger image in new window.

    Note: the scale doesn't start at zero to better show the change.

    The graph shows the distinct seasonal pattern for the occupancy rate; higher in the summer because of leisure/vacation travel, and lower on certain holidays.

    Hotel Occupancy Rate The second graph shows the year-over-year (YoY) change in occupancy (using a three week average).

    This is a multi-year slump, and the YoY change suggests that occupancy rate may have bottomed, but at a very low level.

    As Smith Travel noted, room rates are still falling (off 4.4%) because of the low occupancy rate. Business travel will be very important for the next few months, and right now it appears the weekday occupancy rate (mostly business travel) is at about the same levels as last year during the worst of the recession.

    Data Source: Smith Travel Research, Courtesy of HotelNewsNow.com

    Fed's Pianalto: "May take years to get back to 2007 level of output"

    by Bill McBride on 2/25/2010 09:15:00 AM

    From Cleveland Fed President Sandra Pianalto: When the Small Stuff Is Anything But Small. A few excerpts:

    You know we have been through one of the most severe and longest recessions in our nation’s history. The recovery from the recession may also end up being one of the longest in our history. In fact, it may take years just to get back to the level of output we enjoyed in 2007, just before the economic crisis began.

    Some of you may think I am being too pessimistic. After all, we saw a strong GDP growth estimate for the fourth quarter of last year--nearly 6 percent at an annual rate. But I think that figure overstates the underlying strength of our economy right now.

    This is a case where paying attention to the small stuff--the details beneath that impressive number--reveals a more complicated story of what is shaping up to be a gradual recovery. Most of the thrust behind that impressive fourth-quarter GDP growth figure owes to a rebuilding of inventory stocks, which had been cut to the bone and could no longer support even a mild economic recovery. Over the course of this year, I expect overall growth in employment and output to be on the weak side for the early stages of an economic recovery.

    For many American households and businesses, this is a recovery that just does not feel much like a recovery. Let me point to two reasons why this is so. The first is due to the large amount of excess capacity that has accumulated. As spending declined in the recession, firms of all sizes cut back, drastically in many cases.
    ...
    Excess capacity is a dilemma for businesses of all sizes. They can maintain capacity for only so long without an uptick in sales, and they’re confronting a market where demand is only gradually recovering after having fallen off a cliff. In fact, according to the most recent survey of the National Federation of Independent Business, or NFIB (January 2010), members cited poor sales as their single most important problem. The latest American Express Open Pulse Survey also expresses a similar perspective. A very slow recovery in demand, which translates into low sales for most firms, makes it far tougher to maintain idle capacity over time. ...

    One of the forces holding back demand is the continuing high level of unemployment. Indeed, poor labor market conditions pose another large challenge to the recovery. ...

    The duration of unemployment is also a big concern. According to the Bureau of Labor Statistics, the share of workers who have been without jobs for 27 weeks or longer now stands at 41 percent--the highest number since this series began in 1948.

    Clearly, massive layoffs contributed to these large unemployment numbers, and fortunately, layoffs slowed months ago. Our current problem is a lack of job openings. In fact, the job-finding rate now stands at a historic low. Businesses are not creating new jobs very quickly, and where labor utilization is picking up, employers are simply restoring hours that had been previously cut.
    ...
    So, to sum up, while we are likely now in a period of recovery, it doesn't really feel much like one. All types of businesses are continuing to see weak levels of demand – in other words, they don't expect to see a bounce-back in sales for quite a while yet. This in turn creates excess capacity, which leaves businesses having to decide whether to maintain or shut idle plants and offices. In such an environment, firms are being cautious about new hiring and so unemployment persists at a high level, which in turn restrains spending. From any perspective this is not a pretty picture, but it is especially challenging for small business ...
    Some of these bloggers Fed Presidents are pretty pessimistic!

    Weekly Initial Unemployment Claims Increase to 496,000

    by Bill McBride on 2/25/2010 08:42:00 AM

    The DOL reports on weekly unemployment insurance claims:

    In the week ending Feb. 20, the advance figure for seasonally adjusted initial claims was 496,000, an increase of 22,000 from the previous week's revised figure of 474,000. The 4-week moving average was 473,750, an increase of 6,000 from the previous week's revised average of 467,750.
    ...
    The advance number for seasonally adjusted insured unemployment during the week ending Feb. 13 was 4,617,000, an increase of 6,000 from the preceding week's revised level of 4,611,000.
    Weekly Unemployment Claims Click on graph for larger image in new window.

    This graph shows the 4-week moving average of weekly claims since 1971.

    The four-week average of weekly unemployment claims increased this week by 6,000 to 473,750.

    The current level of 496,000 (and 4-week average of 473,750) are very high and suggest continuing job losses in February. This is the highest level since last November.

    Wednesday, February 24, 2010

    ATA Truck Tonnage Index increases in January

    by Bill McBride on 2/24/2010 11:59:00 PM

    From the American Trucking Association: ATA Truck Tonnage Index Jumped 3.1 Percent in January

    Truck Tonnage Click on graph for slightly larger image in new window.

    The American Trucking Associations’ advance seasonally adjusted (SA) For-Hire Truck Tonnage Index jumped 3.1 percent in January, following a revised 1.3 percent increase in December 2009. The latest gain boosted the SA index from 107 (2000=100) in December to 110.4 in January, its highest level since September 2008.
    ...
    For all of 2009, the tonnage index was down 8.7 percent (slightly larger than the previously reported 8.3 percent drop), which was the largest annual decrease since a 12.3 percent plunge in 1982.
    ...
    ATA Chief Economist Bob Costello said that the latest tonnage reading, coupled with anecdotal reports from carriers, indicates that both the industry and the economy are clearly in a recovery mode. “While I don’t expect tonnage to continue growing as robustly as it did in January, the industry is finally moving in the right direction. Although there are still risks that could throw the rebound off track, the likelihood of that happening continues to diminish.”
    ...
    Trucking serves as a barometer of the U.S. economy, representing nearly 69 percent of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods.
    Trucking is a coincident indicator - and some of this increase is related to the inventory cycle - but this suggests growth in January.

    Weather and the February Employment Report

    by Bill McBride on 2/24/2010 07:49:00 PM

    Note: I've added a list of "Posts Today" and "Posts Yesterday" on the right sidebar so everyone can find posts on recent economic releases (this has been a busy day and week)!

    On Monday I linked to an article by Floyd Norris at the NY Times: Horrid Job Number Coming. Norris wrote:

    "a lot of people who had jobs may report they did not work during the week, and companies may say they had fewer people on the payroll than they would have cited a week earlier or later. If so, we may get a truly horrid job number."
    Since then I've spoken to a BLS representative, and although they will not comment on upcoming releases, he told me the BLS would prominently disclose any possible impact of the recent snow storms on the employment report - similar to the disclosure after Hurricane Katrina. It is possible that the response rates will be lower than usual in certain areas (like Washington D.C.) - this will be disclosed and adjustments will be made.

    Other contacts - with knowledge of how the BLS conducts the surveys - have told me the snow storms will have little or no impact on the employment report (other on data collection as will be disclosed by the BLS).

    Heck, maybe the snow storm boosted employment because of all the people hired temporarily to shovel snow!

    97,000 Homeowners in "Loan Mod Limbo"

    by Bill McBride on 2/24/2010 05:03:00 PM

    Paul Kiel at ProPublica reports: Chase and Other Servicers Leave Many in Loan Mod Limbo; Treasury Threatens Penalties

    About 97,000 homeowners in the government’s mortgage modification program have been stuck in a trial period for over six months. Most of them, about 60,000, have their mortgages with a single mortgage servicer, JPMorgan Chase.

    Trial periods are designed to last only three months, after which mortgage servicers are supposed to either give homeowners a permanent modification or drop them from the program. According to a ProPublica analysis, about 475,000 homeowners have been in a trial modification for longer than three months.
    Paul Kiel has much more.

    A couple of key points on HAMP I've mentioned before:

  • When the HAMP program began, the requirements for putting a borrower in a trial program varied by servicer. Some servicers put anyone who answered the phone, and said they'd make a payment, in to a trial program. Other servicers required homeowners to provide some initial documentation of income, and make the first payment, before putting them in a trial program.

  • Although the HAMP trial program was supposed to last 3 months, the period was extended to 5 months - and then eventually to the end of January (no matter when the trial started).

    The January guidance from Treasury addressed both of the above points.
    Effective for all trial period plans with effective dates on or after June 1, 2010, a servicer may evaluate a borrower for HAMP only after the servicer receives the following documents, subsequently referred to as the “Initial Package”. The Initial Package includes:
  • Request for Modification and Affidavit (RMA) Form,
  • IRS Form 4506-T or 4506T-EZ, and
  • Evidence of Income
  • The trial period will start after the initial documents are received, a trial plan is sent to the borrower, and the borrower makes the initial payment.

    The second key component of the directive is how to handle all the current trial modifications. For the borrowers who have not made all of their payments, the directive requires the HAMP trial program to be canceled. For borrowers who have made payments, but are missing documentation, Treasury provides some additional guidelines.

    This suggests that there will be fewer trial modifications per month in the future (this is already happening, see graph below) and a surge of trial cancellations in February.

    HAMP This is graph is from the January Treasury report. This shows the cumulative HAMP trial programs started.

    Notice that the pace of new trial modifications has slowed sharply from over 150,000 in September to just over 80,000 in January 2010. This is slowest pace since May 2009 and is probably because of two factors: 1) servicers are now pre-qualifying borrowers, and 2) servicers are running out of eligible borrowers.

  • Housing: The Best Leading Indicator for the Economy

    by Bill McBride on 2/24/2010 02:24:00 PM

    Historically the best leading indicator for the economy (and employment) has been housing. I've been writing about this for years. For a great summary paper, see Professor Leamer's presentation from the 2007 Jackson Hole Symposium: Housing and the Business Cycle

    For housing as a leading indicator, I use Residential Investment (quarterly from the BEA's GDP report), and monthly data on Housing Starts and New Home sales from the Census Bureau, and builder confidence from the NAHB.

    Two key points:

  • Existing home sales is not a leading indicator (sales of existing homes does not add to the housing stock).
  • This time could be different - the recovery could be led by exports and technology - but I'll stick with housing.

    So here is a review of the three monthly leading indicators:

    Housing Starts

    Total Housing Starts and Single Family Housing Starts Click on graph for larger image in new window.

    Total housing starts were at 591 thousand (SAAR) in January, up 2.8% from the revised December rate, and up 24% from the all time record low in April 2009 of 479 thousand (the lowest level since the Census Bureau began tracking housing starts in 1959). Total starts had rebounded to 590 thousand in June, and have moved mostly sideways for eight months.

    Single-family starts were at 484 thousand (SAAR) in January, up 1.5% from the revised December rate, and 36% above the record low in January and February 2009 (357 thousand). Just like for total starts, single-family starts have been at about this level for eight months.

    Housing starts are moving sideways ...

    Builder Confidence

    Residential NAHB Housing Market Index This graph shows the builder confidence index from the National Association of Home Builders (NAHB).

    The housing market index (HMI) was at 17 in February. This is an increase from 15 in January.

    The record low was 8 set in January 2009. This is still very low - and this is what I've expected - a long period of builder depression. The HMI has been in the 15 to 19 range since May 2009.

    More moving sideways ...

    Note: any number under 50 indicates that more builders view sales conditions as poor than good.

    New Home Sales

    New Home Sales and Recessions The Census Bureau reports This graph shows New Home Sales vs. recessions for the last 45 years.

    New Home Sales in January were at a seasonally adjusted annual rate (SAAR) of 309 thousand. This is a record low and a sharp decrease from the 348 thousand rate in December.

    And it would be generous to even call this "moving sideways".

    So these leading indicators suggest any growth will be sluggish and choppy.

    Now some people might argue that housing starts and new home sales are about to increase sharply. Based on what? That seems unlikely with the large number of excess housing units (new and existing homes and rental units). See: Housing Stock and Flow

    As I noted above, it might be different this time with exports and technology leading the way, but I'll stick with housing as a business cycle indicator.

  • Freddie Mac: "Potential Large Wave of Foreclosures"

    by Bill McBride on 2/24/2010 11:55:00 AM

    "We start 2010 with some early signs of stabilization in the housing market, with house prices and home sales likely nearing the bottom sometime in 2010. We expect that low mortgage rates, relatively high affordability and the homebuyer tax credit will help continue to fuel the recovery. Still, the housing recovery remains fragile, with significant downside risk posed by high unemployment and a potential large wave of foreclosures."
    Freddie Mac Chief Executive Officer Charles E. Haldeman, Jr.
    The quote is from the Freddie Mac Q4 earnings release:
    Freddie Mac Releases Fourth Quarter and Full-Year 2009 Financial Results Fourth quarter 2009 net loss was $6.5 billion. After the dividend payment of $1.3 billion to the U.S. Department of the Treasury (Treasury) on the senior preferred stock, net loss attributable to common stockholders was $7.8 billion ... for the fourth quarter of 2009.
    ...
    Full-year 2009 net loss was $21.6 billion. After dividend payments of $4.1 billion during the year to Treasury on the senior preferred stock, net loss attributable to common stockholders was $25.7 billion ... for the full-year 2009.
    Another $7.8 billion in losses ...

    New Home Sales fall to Record Low in January

    by Bill McBride on 2/24/2010 10:15:00 AM

    Note: See previous post for video and discussion of Bernanke's testimony.

    The Census Bureau reports New Home Sales in January were at a seasonally adjusted annual rate (SAAR) of 309 thousand. This is a record low and a sharp decrease from the revised rate of 348 thousand in December.

    New Home Sales Monthly Not Seasonally Adjusted Click on graph for larger image in new window.

    The first graph shows monthly new home sales (NSA - Not Seasonally Adjusted).

    Note the Red column for 2010. In January 2010, 21 thousand new homes were sold (NSA).

    This is below the previous record low of 24 thousand in January 2009.

    New Home Sales and Recessions The second graph shows New Home Sales vs. recessions for the last 45 years. New Home sales fell off a cliff, but after increasing slightly, are now 6% below the previous record low in January 2009.

    Sales of new single-family houses in January 2010 were at a seasonally adjusted annual rate of 309,000 ... This is 11.2 percent (±14.0%)* below the revised December rate of 348,000 and is 6.1 percent (±15.1%)* below the January 2009 estimate of 329,000.
    And another long term graph - this one for New Home Months of Supply.

    New Home Months of Supply and RecessionsThere were 9.1 months of supply in January. Rising, but still significantly below the all time record of 12.4 months of supply set in January 2009.
    The seasonally adjusted estimate of new houses for sale at the end of January was 234,000. This represents a supply of 9.1 months at the current sales rate.
    New Home Sales Inventory The final graph shows new home inventory.

    Note that new home inventory does not include many condos (especially high rise condos), and areas with significant condo construction will have much higher inventory levels.

    Months-of-supply and inventory have both peaked for this cycle, but sales have set a new record low. New home sales are far more important for the economy than existing home sales, and new home sales will remain under pressure until the overhang of excess housing inventory declines much further.

    Obviously this is another extremely weak report.

    Bernanke Humphrey-Hawkins Testimony at 10 AM ET

    by Bill McBride on 2/24/2010 09:50:00 AM

    Federal Reserve Chairman Ben Bernanke is scheduled to provide the Semiannual Monetary Policy Report to the Congress before the House Committee on Financial Services at 10 AM ET.

    I'll add a link to the prepared testimony, and I'll be posting the New Home sales numbers shortly after 10 AM. Commenters: Hopefully we can discuss Bernanke's testimony (especially the Q&A) on this thread, and New Home sales on the following thread).

    Here is the CNBC feed.

    Here is the C-Span Link

    Prepared Testimony: Semiannual Monetary Policy Report to the Congress

    MBA: Mortgage Purchase Applications at Lowest Level Since May 1997

    by Bill McBride on 2/24/2010 08:12:00 AM

    The MBA reports: Mortgage Applications Decrease in Latest MBA Weekly Survey

    The Market Composite Index ... decreased 8.5 percent on a seasonally adjusted basis from one week earlier. ...

    “As many East Coast markets were digging out from the blizzard last week, purchase applications fell, another indication that housing demand remains relatively weak,” said Michael Fratantoni, MBA's Vice President of Research and Economics. “With home prices continuing to drift amid an abundant inventory of homes on the market, potential homebuyers do not see any urgency to lock in purchases.”

    The Refinance Index decreased 8.9 percent from the previous week. The seasonally adjusted Purchase Index decreased 7.3 percent from one week earlier, putting the index at its lowest level since May 1997. ...

    The refinance share of mortgage activity decreased to 68.1 percent of total applications from 69.3 percent the previous week. ...

    The average contract interest rate for 30-year fixed-rate mortgages increased to 5.03 percent from 4.94 percent, with points increasing to 1.34 from 1.09 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.
    MBA Purchase Index Click on graph for larger image in new window.

    This graph shows the MBA Purchase Index and four week moving average since 1990.

    Once again, the decline in purchase applications since October appears significant.

    Also, with mortgage rates back above 5% again, refinance activity declined too.

    AIA: Architecture Billings Index Shows Contraction in January

    by Bill McBride on 2/24/2010 01:13:00 AM

    Note: This index is a leading indicator for Commercial Real Estate (CRE) investment.

    Reuters reports that the American Institute of Architects’ Architecture Billings Index decreased to 42.5 in January from 43.4 in December. Any reading below 50 indicates contraction.

    The index has remained below 50, indicating contraction in demand for design services, since January 2008. Its lowest recent reading was in January 2009, when it reached a revised 33.9 level.
    The ABI press release is not online yet.

    AIA Architecture Billing Index Click on graph for larger image in new window.

    This graph shows the Architecture Billings Index since 1996. The index has remained below 50, indicating falling demand, since January 2008.

    Historically there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction. This suggests further significant declines in CRE investment through this year, and probably longer.

    Note: Nonresidential construction includes commercial and industrial facilities like hotels and office buildings, as well as schools, hospitals and other institutions.

    Tuesday, February 23, 2010

    Housing: Price-to-Rent Ratio

    by Bill McBride on 2/23/2010 08:27:00 PM

    In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

    Here is a similar graph through December 2009 using the two Case-Shiller Home Price Composite Indices:

    Price-to-Rent RatioClick on graph for larger image in new window.

    This graph shows the price to rent ratio (January 2000 = 1.0).

    This suggests that house prices are still a little too high on a national basis. But it does appear that prices are much closer to the bottom than the top.

    Also, OER declined again in January, and with rents still falling, the OER index will probably continue to decline - pushing up the price-to-rent ratio.

    Q4 Report: 11.3 Million U.S. Properties with Negative Equity

    by Bill McBride on 2/23/2010 05:27:00 PM

    First American CoreLogic released the Q4 negative equity report today.

    First American CoreLogic reported today that more than 11.3 million, or 24 percent, of all residential properties with mortgages, were in negative equity at the end of the fourth quarter of 2009, up from 10.7 million and 23 percent at the end of the third quarter of 2009. An additional 2.3 million mortgages were approaching negative equity at the end of last year, meaning they had less than five percent equity. Together, negative equity and near‐negative equity mortgages accounted for nearly 29 percent of all residential properties with a mortgage nationwide.
    From the report:
  • Negative equity continues to be concentrated in five states: Nevada, which had the highest percentage negative equity with 70 percent of all of its mortgaged properties underwater, followed by Arizona (51 percent), Florida (48 percent), Michigan (39 percent) and California (35 percent). Among the top five states, the average negative equity share was 42 percent, compared to 15 percent for the remaining 45 states. In numerical terms, California (2.4 million) and Florida (2.2 million) had the largest number of negative equity mortgages accounting for 4.6million, or 41 percent, of all negative equity loans.
  • Negative Equity by State Click on image for larger graph in new window.

    This graph shows the negative equity and near negative equity by state.

    Although the five states mentioned above have the largest percentgage of homeowners underwater, 10 percent or more of homeowners have negative equity in 33 states, and over 20% have negative equity or near negative equity in 23 states. This is a widespread problem.

    Sever Negative Equity Note: Louisiana, Maine, Mississippi, South Dakota, Vermont, West Virginia and Wyoming are NA in the graph above.

    The second graph shows homeowners with severe negative equity for five states.

    These homeowners are far more likely to default.
  • The rise in negative equity is closely tied to increases in pre‐foreclosure activity and is a major factor in changing homeowners’ default behavior. Once negative equity exceeds 25 percent, or the mortgage balance is $70,000 higher than the current property values, owners begin to default with the same propensity as investors.
  • Pre-foreclosure rate by negative equity Here is figure 4 from the report.

    The default rate increases sharply for homeowners with more than 20% negative equity.

    This graph fits with figure 2 above and suggests a large number of future defaults in Nevada, Arizona, Florida and California.
  • The aggregate dollar value of negative equity was $801 billion, up $55 billion from $746 billion in Q3 2009. The average negative equity for an underwater borrower in Q4 was ‐$70,700, up from ‐$69,700 in Q3 2009. The segment of borrowers that are 25 percent or more in negative equity account for over $660 billion in aggregate negative equity.
  • Most homeowners with negative equity will probably not default, but this does suggest there are many more foreclosures coming - and more losses.

    Case Shiller House Price Graphs for December

    by Bill McBride on 2/23/2010 02:42:00 PM

    Finally. The S&P website has been down all morning.

    S&P/Case-Shiller released the monthly Home Price Indices for December (actually a 3 month average).

    The monthly data includes prices for 20 individual cities, and two composite indices (10 cities and 20 cities). This is the Seasonally Adjusted monthly data - some sites report the NSA data.

    Case-Shiller House Prices Indices Click on graph for larger image in new window.

    The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

    The Composite 10 index is off 30.3% from the peak, and up about 0.3% in December.

    The Composite 20 index is off 29.4% from the peak, and up 0.3% in December.

    The impact of the massive government effort to support house prices is obvious on the Composite graph. The question is what happens to prices as these programs end over the next few months?

    Case-Shiller House Prices Indices The second graph shows the Year over year change in both indices.

    The Composite 10 is off 2.4% from December 2008.

    The Composite 20 is off 3.1% from December 2008.

    The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

    Case-Shiller Price Declines Prices decreased (SA) in 6 of the 20 Case-Shiller cities in December.

    In Las Vegas, house prices have declined 55.9% from the peak. At the other end of the spectrum, prices in Dallas are only off about 3.1% from the peak. Several cities are showing price increases in 2009 - San Diego, San Francisco, Boston, Washington D.C., Denver and Dallas.

    Shadow Rental Market Pushing down Rents

    by Bill McBride on 2/23/2010 12:57:00 PM

    Here is an audio interview from Jon Lansner: Scott Monroe of South Coast Apartment Association visits Jon Lansner of the OC Register

    "Rents are down and vacancies are up. Demand is off, and we attribute really to to the fact that here has been a pretty significant erosion of jobs in the Orange County markets. And it is having a trickle down effect. In addition to that, our members are saying that they are competing quite a bit with what historically has not been a competitor for us - that's the gray market or the shadow market - which are condominium rentals and single family home rentals and things of that nature. There is just a lot of product on the market."
    Scott Monroe, Pres. of South Coast Apartment Association
    Monroe says they are seeing much more multi-generational housing, and he expects "doubling up" to last for another 12 months or so.

    And this brings up a key point - the supply of rental units has been surging:

    Rental Units Click on graph for larger image in new window.

    This graph shows the number of occupied (blue) and vacant (red) rental units in the U.S. (Source: Census Bureau).

    The total number of rental units (red and blue) bottomed in Q2 2004, and started climbing again. Since Q2 2004, there have been over 4.7 million units added to the rental inventory.

    Note: please see caution on using this data - this number might be a little too high, but the concepts are the same even with a lower increase.

    This increase in units has more than offset the recent strong migration from ownership to renting, so the rental vacancy rate is now at 10.7% and the apartment vacancy rate is at a record high.

    Where did these approximately 4.7 million rental units come from?

    The Census Bureau's Housing Units Completed, by Intent and Design shows 1.1 million units completed as 'built for rent' since Q2 2004. This means that another 3.6 million or so rental units came mostly from conversions from ownership to rentals.

    These could be investors buying REOs for cash flow, condo "reconversions", builders changing the intent of new construction (started as condos but became rentals), flippers becoming landlords, or homeowners renting their previous homes instead of selling.

    As Scott Monroe noted, this huge surge in rental supply - what he calls the "gray or shadow market" - has pushed down rents, and pushed the rental vacancy rate to record levels. Yes, people are doubling up with friends and family during the recession, and some renters are now buying again, but the main reason for the record vacancy rate is the surge in supply. Eventually many of these "gray market" rentals will be sold as homes again - keeping the existing home supply elevated for years.

    FDIC Q4 Banking Profile: 702 Problem Banks

    by Bill McBride on 2/23/2010 10:48:00 AM

    The FDIC released the Q4 Quarterly Banking Profile today. The FDIC listed 702 banks with $403 billion in assets as “problem” banks in Q4, up from 552 banks with $346 billion in assets in Q3, and 252 and $159.4 billion in assets in Q4 2008.

    Note: Not all problem banks will fail - and not all failures will be from the problem bank list - but this shows the problem is significant and still growing.

    The Unofficial Problem Bank List shows 617 problem banks - and will continue to increase as more formal actions (or hints of pending actions) are released.

    Number of Problem Banks Click on graph for larger image in new window.

    This graph shows the number of FDIC insured "problem" banks since 1990.

    The 702 problem banks reported at the end of Q4 is the highest since 1992.

    The second graph shows the assets of "problem" banks since 1990.

    Assets of Problem Banks The assets of problem banks are the highest since 1992.

    On the Deposit Insurance Fund:

    The Deposit Insurance Fund (DIF) decreased by $12.6 billion during the fourth quarter to a negative $20.9 billion (unaudited) primarily because of $17.8 billion in additional provisions for bank failures. ... For the year, the fund balance shrank by $38.1 billion, compared to a $35.1 billion decrease in 2008.
    FDIC Reserve Ratio
    The DIF’s reserve ratio was negative 0.39 percent on December 31, 2009, down from negative 0.16 percent on September 30, 2009, and 0.36 percent a year ago. The December 31, 2009, reserve ratio is the lowest reserve ratio for a combined bank and thrift insurance fund on record.

    Forty-five insured institutions with combined assets of $65.0 billion failed during the fourth quarter of 2009, at an estimated cost of $10.2 billion. For all of 2009, 140 FDIC-insured institutions with assets of $169.7 billion failed, at an estimated cost of $37.4 billion. This was the largest number of failures since 1990 when 168 institutions with combined assets of $16.9 billion failed (excluding thrifts resolved by the RTC).
    Note: This doesn't mean the FDIC DIF is out of money or bankrupt. The FDIC reserves against future losses, and they don't include the prepay of assessments in the DIF (although they have the cash). The FDIC has plenty of cash right now - although there will probably be hundreds of bank failures over the next couple of years, and the FDIC might have to borrow from the Treasury in the future.

    Case-Shiller House Prices increase in December

    by Bill McBride on 2/23/2010 09:37:00 AM

    Note: as usual, the S&P website crashes when they release the monthly house price data. I'll post some graphs when the data is available.

    The WSJ reports:

    [The composite 10 and 20] indexes dropped 0.2% from the previous month, although adjusted for seasonal factors, they increased 0.3%.
    ...
    Month-to-month gainers were led by Los Angeles, which rose 1%. Chicago again fared worst, falling 1.6%.
    More from Reuters: Home Prices Fall 2.5% as Market Recovery Still Weak (note: Reuters is reporting the NSA data).

    Report: State Tax Revenues decline in Q4

    by Bill McBride on 2/23/2010 08:10:00 AM

    From the Rockefeller Institute: States Reported Fifth Consecutive Drop in Tax Collections in the Fourth Quarter of 2009 (ht Ann)

    State tax revenues declined by 4.1 percent nationwide during the final quarter of calendar 2009, the fifth consecutive quarter of reduced collections, according to a report issued today by the Rockefeller Institute of Government.

    The five straight quarters of year-over-year decline in overall tax collections represent a record length of such decreases, the Institute said.
    ...
    “Calendar 2009 will be remembered as bringing historically sharp declines in tax revenue to states,” the report says. “Revenue gains toward the end of calendar 2009 were often driven by legislated tax increases rather than growth in the economy and tax base.”

    Despite revenue gains in some states during the fourth quarter, the report concludes, “another negative quarter for the nation as a whole would not be unexpected. The troubling fiscal picture for states remains clearly in place.”
    Here is the report: Final Quarter of 2009 Brought Still
    More Declines in State Tax Revenue


    Tax revenues are still weak, and most states are still running large deficits. As a recent CNNMoney article notes:
    States are looking at a total budget gap of $180 billion for fiscal 2011, which for most of them begins July 1. These cuts could lead to a loss of 900,000 jobs, according to Mark Zandi, chief economist of Moody's Economy.com.
    This suggests that more state and local government job cuts are coming.

    Monday, February 22, 2010

    Judge Accepts "Half-baked justice" in BofA-SEC Settlement

    by Bill McBride on 2/22/2010 11:36:00 PM

    Louise Story at the NY Times writes: Judge Accepts S.E.C.’s Deal With Bank of America

    [A] federal judge wrote on Monday that he had reluctantly approved a $150 million settlement with the Securities and Exchange Commission.
    And from the Judge:
    "In short, the proposed settlement, while considerably improved over the vacuous proposal made last August in connection with the Undisclosed Bonuses case, is far from ideal. Its greatest virtue is that it is premised on a much better developed statement of the underlying facts and inferences drawn therefrom, which, while disputed by the Attorney General in another forum, have been carefully scrutinized by the Court here and found not to be irrational. Its greatest defect it that it advocates very modest punitive, compensatory, and remedial measures that are neither directed at the specific individuals responsible for the nondisclosures nor appear likely to have more than a very modest impact on corporate practices or victim compensation. While better than nothing, this is half-baked justice at best."
    Judge Jed S. Rakoff, Feb 22, 2010
    I always enjoy some judicial snark.

    Norris: Weather to Impact February Job Numbers

    by Bill McBride on 2/22/2010 08:32:00 PM

    Floyd Norris writes at the NY Times: Horrid Job Number Coming

    It snowed this month in much of the United States. ... Both the household survey (which produces the unemployment rate) and the employer survey (which produces the job count) ask about workers in the week during which the 12th of the month fell [the week of the blizzards].
    ...
    That means that a lot of people who had jobs may report they did not work during the week, and companies may say they had fewer people on the payroll than they would have cited a week earlier or later. If so, we may get a truly horrid job number.
    Apparently the weather negatively impacted the jobs report in January 1996, and net employment turned negative for one month in the middle of a huge job boom.

    Maybe the snow storms will impact the BLS report in February. Maybe not. ADP also uses payroll employment on the 12th of the month, so they should also be impacted.

    Perhaps we will be able to tell if the weather had an impact by looking at weekly initial unemployment claims and the ISM reports (monthly surveys). Just something to remember next week ...

    WSJ: Treasury Considering Appeal Process for HAMP

    by Bill McBride on 2/22/2010 05:07:00 PM

    From James Hagerty at the WSJ: U.S. Weighs Changes to Mortgage-Relief Program

    The U.S. Treasury is considering new ... proposals ... to give borrowers 30 days to respond after being denied a modification of their loan terms under the ... HAMP. During that period, which would allow borrowers to appeal against the decision, the servicer couldn't put the home up for sale at a foreclosure auction.
    ...
    A Treasury spokeswoman said the proposals are among "many ideas under consideration in the administration's ongoing housing stabilization efforts." She added: "This proposal has not been approved and there are no immediate planned announcements on the issue."

    Servicers also would be required to provide a "written certification" that a borrower isn't eligible for HAMP before a foreclosure sale can be held.
    ...
    These measures would likely further slow down the foreclosure process.
    Probably the main impact of HAMP has been to keep the supply of distressed properties down by delaying the inevitable. In most cases, this would just be another delay ...

    Survey: Short Sales Increase in January

    by Bill McBride on 2/22/2010 02:56:00 PM

    From Campbell Surveys: Short Sales See Big Jump in Activity During January

    According to the latest Campbell/Inside Mortgage Finance Monthly Survey of Real Estate Market Conditions, short sales accounted for a substantial 15.9% of home purchase transactions in January. This was well above the share of other distressed property activity – damaged real estate owned or REO (13.4%) and move-in ready REO (13.8%) – and represented a big jump for short sales.
    ...
    “Short sales activity took a temporary dip in November around the expected expiration of the first-time homebuyer tax credit,” reported Thomas Popik, research director for the Campbell/Inside Mortgage Finance survey. “Few first-time homebuyers wanted to take the chance that their short sale transaction wouldn’t be approved by the November 30 deadline. But now that the tax credit has been extended, we see first-time homebuyers once again snapping up attractively priced short sales.”

    Survey results showed that short sales typically sell for only 91% of listing price. In contrast, move-in ready REO sells for 99% of listing price, on average.
    Distressed Sales Click on graph for larger image in new window.

    Source: Campbell/Inside Mortgage Finance Monthly Survey of Real Estate Market Conditions, Campbell Communications, Jan 2010

    This graph, based on data from Campbell Communications, shows the break down of distressed sales of all transactions by three categories: 1) move in ready REOs, 2) damaged REOs (sold mostly to investors), and 3) short sales.

    I expect 2010 will be the year of the "short sale" and the percentage of short sales will increase further after the servicers implement the Treasury's HAFA program .