by Calculated Risk on 9/24/2009 11:54:00 AM

First, on the "shadow inventory" from Bloomberg: Housing Crash to Resume on 7 Million Foreclosures, Amherst Says

The crash in U.S. home prices will probably resume because about 7 million properties that are likely to be seized by lenders have yet to hit the market, Amherst Securities Group LP analysts said.

The “huge shadow inventory,” reflecting mortgages already being foreclosed upon or now delinquent and likely to be, compares with 1.27 million in 2005, the analysts led by Laurie Goodman wrote today in a report. Assuming no other homes are on the market, it would take 1.35 years to sell the properties based on the current pace of existing-home sales, they said.
...
“The favorable seasonals will disappear over the coming months, and the reality of a 7 million-unit housing overhang is likely to set in,” they said.

The report suggests that modifications might help - but not much. From the report:

We don’t think they can help significantly. The 12-month recidivism rate on modifications has historically been about 70%. ... We have argued ... that HAMP modifications are unlikely to be successful in the long run as it does not address negative equity, the single most important determinant of default. And the borrower will still face payment shock as the payments begins to ramp up after the 5 year period in which the payments are fixed.

Let’s say we are wrong and the HAMP modifications work much better than older style modifications. How much of the 7 million unit overhang can be cured by modification? The answer is “not much.”

The analysts estimate the overhang could be reduced by about 1 million units if the modifications are more successful than historical modifications.

However HAMP could spread out the flow of this shadow inventory over several years. So the size of the wave of more inventory is uncertain.

On the timing, from the WSJ yesterday:

"There's going to be a flood [of bank-owned homes] listed for sale at some point," says John Burns, a real-estate consultant based in Irvine, Calif.
...
"We are going to see a spike from now to the end of the year in foreclosures as we take people out of the running" for a loan modification or other alternatives, says a Bank of America Corp. spokeswoman. Foreclosure sales had dropped to "abnormally low" levels in response to government efforts to stem foreclosures, she adds.

I think the 7 million estimate is probably high (that is HUGE), but there is definitely a large shadow inventory for the existing home market - so keep that in mind when looking at the following graphs:

Click on graph for larger image in new window.

Here is another graph of inventory. This graph shows inventory since 2002 by year.

The dotted lines (2002 - 2004) are for the boom years. 2005 (dashed green) is the transition year at the end of the boom. And the solid colors are for the bust years.

Inventory levels in August were below the levels of 2006.

The second graph shows months of supply for the same years.

"Months of supply" is lower than in 2007 and 2008, but higher than in 2006 since sales are lower. The level is still high.

The third graph shows the year-over-year change in existing home inventory.

In general prices would probably continue to fall until the months of supply reaches more normal levels (closer to 6 months compared to the current 8.5 months).

Without the huge overhang of shadow inventory, this general trend of declining year-over-year inventory levels would be considered a strong positive for the housing market. However - right now - these declines are probably misleading.

by Calculated Risk on 9/24/2009 10:00:00 AM

The NAR reports: Existing-Home Sales Ease Following Four Monthly Gains

Existing-home sales – including single-family, townhomes, condominiums and co-ops – declined 2.7 percent to a seasonally adjusted annual rate1 of 5.10 million units in August from a pace of 5.24 million in July, but remain 3.4 percent above the 4.93 million-unit level in August 2008. In the previous four months, sales had risen a total of 15.2 percent.
...
Total housing inventory at the end of August fell 10.8 percent to 3.62 million existing homes available for sale, which represents an 8.5-month supply at the current sales pace, down from a 9.3-month supply in July. Unsold inventory totals are 16.4 percent lower than a year ago

Click on graph for larger image in new window.

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

Sales in Aug 2009 (5.1 million SAAR) were 2.7% lower than last month, and were 3.4% higher than August 2008 (4.93 million SAAR).

Here is another way to look at existing homes sales: Monthly, Not Seasonally Adjusted (NSA):

This graph shows NSA monthly existing home sales for 2005 through 2009. As in June and July, sales (NSA) were slightly higher in August 2009 than in August 2008.

It's important to note that many of these transactions are either investors or first-time homebuyers. Also many of the sales are distressed sales (short sales or REOs).

An NAR practitioner survey shows first-time buyers purchased 30 percent of homes in August, and that distressed homes accounted for 31 percent of transactions; both were unchanged from July.

The third graph shows nationwide inventory for existing homes. According to the NAR, inventory decreased to 3.62 million in August. The all time record was 4.57 million homes for sale in July 2008. This is not seasonally adjusted.

Typically inventory peaks in July or August.

Note: many REOs (bank owned properties) are included in the inventory because they are listed - but not all. Recently there have been stories about a substantial number of unlisted REOs and other shadow inventory - so this inventory number is probably low.

The fourth graph shows the 'months of supply' metric for the last six years.

Months of supply was steady at 8.5 months.

Sales decreased, but inventory decreased more, so "months of supply" declined. A normal market has under 6 months of supply, so this is still very high.

Note: New Home sales will be released tomorrow.

by Calculated Risk on 9/24/2009 08:33:00 AM

The DOL reports weekly unemployment insurance claims decreased to 530,000:

In the week ending Sept. 19, the advance figure for seasonally adjusted initial claims was 530,000, a decrease of 21,000 from the previous week's revised figure of 551,000. The 4-week moving average was 553,500, a decrease of 11,000 from the previous week's revised average of 564,500.
...
The advance number for seasonally adjusted insured unemployment during the week ending Sept. 12 was 6,138,000, a decrease of 123,000 from the preceding week's revised level of 6,261,000.

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 decreased this week by 11,000 to 553,500, and is now 105,250 below the peak in April.

Initial weekly claims have peaked for this cycle, however the continuing high level of weekly claims indicates significant weakness in the job market. The four-week average of initial weekly claims will probably have to fall below 400,000 before total employment stops falling.

by Calculated Risk on 9/23/2009 11:10:00 PM

Former Fed Chairman Paul Volcker testifies in front of the House Financial Services Committee at 9 AM ET on Thursday about financial reform.

For those interested, here is the webcast.

Here is his prepared statement. A few excerpts:

However well justified in terms of dealing with the extreme threats to the financial system in the midst of crisis, the emergency actions of the Federal Reserve, the Treasury, and ultimately the Congress to protect the viability of particular institutions – their bond holders and to some extent even their stockholders – have inevitably left an indelible mark on attitudes and behavior patterns of market participants.

• Will not the pattern of protection for the largest banks and their holding companies tend to encourage greater risk-taking, including active participation in volatile capital markets, especially when compensation practices so greatly reward short-term success?

• Are community or regional banks to be deemed “too small to save”, raising questions of competitive viability?

• Does not the extension of support to non-banks, and even to affiliates of commercial firms, undercut the banking/commerce divide, ultimately weakening the commercial banking system?

• Will not investors in money market mutual funds find reassurance in the fact that when push came to shove, the Treasury with an extreme interpretation of its authority, took action to preserve those funds ability to meet their declared commitment to pay their investors at par upon demand?

What all this amounts to is an unintended and unanticipated extension of the official “safety net”, an arrangement designed decades ago to protect the stability of the commercial banking system. The obvious danger is that with the passage of time, risk-taking will be encouraged and efforts at prudential restraint will be resisted. Ultimately, the possibility of further crises – even greater crises – will increase.

There is no easy answer, no one-size fits all contingencies. Experience, not only here but in every country with highly developed, inter-connected financial systems and institutions bears out one point. Governments are not willing to withhold financial and other support for failing institutions when there is a clear threat to the intertwined fabric of the financial system. What can be done is to put in place arrangements to minimize the extent of emergency intervention and to damp expectations of government “bailouts”.

Volcker goes on to disagree with the Treasury plan to name banks that are “systemically important” or "too big to fail".

Think of the practical difficulties of such designation. Can we really anticipate which institutions will be systemically significant amid the uncertainties in future crises and the complex inter-relationships of markets? Was Long Term Capital Management, a hedge fund, systemically significant in 1998? Was Bear Stearns, but not Lehman? How about General Electric’s huge financial affiliate, or the large affiliates of other substantial commercial firms? What about foreign institutions operating in the United States?

All hard questions. In practice the “border problem” seems intractable. In fair financial weather, the important institutions will feel competitively hobbled by stricter standards. In times of potential crisis, it would be the institution left out of the “too big to fail” club that will fear disadvantage.

Volcker argues for a more traditional approach that sounds like the return of Glass-Steagall.

by Calculated Risk on 9/23/2009 07:09:00 PM

Just so you know, builders are still building in parts of San Diego (Carmel Valley). Pretty amazing ...

"Completely sold out. Sold out of all available properties. They're still building more. ... how about this, 250 people on the waiting list."