by Calculated Risk on 6/23/2009 10:52:00 PM

From the SF Gate: Housing, unemployment woes leave movers shaken

Sinking home prices and a weak job market have forced normally restless Americans to stay put in an uncharacteristic shift that has, among other things, clobbered the moving industry.

"Property values have dropped so much people can't pick up and move the way they used to," said Michael Hicks, a demographer at Ball State University in Indiana who has tracked the nationwide slowdown using data from several sources, including moving companies.

That industry data mirrors a Census Bureau report that looked at moves in 2008, said William Frey, a demographer at the Brookings Institution in Washington, D.C.

"The annual migration rate has gone way down to historic low levels," Frey said. "This includes long distance moves and moving across town."

During the 1950s and 1960s, Frey said, as many as 20 percent of Americans moved in any given year. Mobility rates slowed to 15 percent to 16 percent during the 1990s. But in 2008, only 11.9 percent of Americans moved, he said.

A few previous mobility posts: Housing Bust Impacts Worker Mobility April 2008, Housing Bust Impacting Labor Mobility, Dec 2008, Housing Bust and Geographical Mobility, April 2009

by Calculated Risk on 6/23/2009 08:19:00 PM

From Martin Wolf in the Financial Times: Reform of regulation has to start by altering incentives

Proposals for reform of financial regulation are now everywhere. The most significant have come from the US, where President Barack Obama’s administration last week put forward a comprehensive, albeit timid, set of ideas. But will such proposals make the system less crisis-prone? My answer is, no. The reason for my pessimism is that the crisis has exacerbated the sector’s weaknesses. It is unlikely that envisaged reforms will offset this danger.

At the heart of the financial industry are highly leveraged businesses. Their central activity is creating and trading assets of uncertain value, while their liabilities are, as we have been reminded, guaranteed by the state. This is a licence to gamble with taxpayers’ money. The mystery is that crises erupt so rarely.

Wolf discusses how it is rational for management and shareholders to gamble when the risks are asymmetrical (huge potential winnings, limited losses). And he argues that "creditors ... appear to have lent to a bank. In reality, they have lent to the state." He also discusses how tighter regulation isn't enough because the banks will find a way round the new regulations.

Wolf concludes:

Such a crisis is not only the result of a rational response to incentives. Folly and ignorance play a part. Nor do I believe that bubbles and crises can be eliminated from capitalism. Yet it is hard to believe that the risks being run by huge institutions had nothing to do with incentives. The unpleasant truth is that, today, the incentive to behave in this risky way is, if anything, even bigger than it was before the crisis.

Regulatory reform cannot end with incentives. But it has to start from incentives. A business that is too big to fail cannot be run in the interests of shareholders, since it is no longer part of the market. Either it must be possible to close it down or it has to be run in a different way. It is as simple – and brutal – as that.

Talk about pessimism.

Another financial crisis is unfortunately inevitable - all we hope to do with reform is to put it off for a couple of decades or more.

by Calculated Risk on 6/23/2009 04:50:00 PM

From the WSJ: Red Roof Inn Defaults on Mortgage Debt (hat tips to all in the comments!)

Red Roof Inn Inc. ... defaulted on $332 million of mortgage debt ... Red Roof confirmed the defaults Tuesday.

All told, Red Roof's properties carry at least $1 billion in debt, including mortgages, mezzanine loans and other notes.

"As a result of the extraordinary stress in the hospitality industry and the economy overall, we have entered into some restructuring discussions with our lenders," said Andrew Alexander, an executive vice president of Red Roof.
...
Occupancy at Red Roof's properties, which averaged 62% when the mortgages were originated in 2007, sank to 50.7% in the first four months of this year.

The drop in occupancy rates are similar to the overall industry decline. And not only are occupancy rates off sharply, but so are room rates. Smith Travel Research reported last week that revenue per available room (RevPAR) was off 18.6 percent for the comparable week last year. I think this is just the beginning for the hotel related defaults.

by Calculated Risk on 6/23/2009 02:31:00 PM

From FHFA Director James B. Lockhart, June 23, 2009:

“Although monthly data are volatile, we may be starting to see signs of stabilization in prices for houses funded by conventional conforming loans, as the HPI is only down 0.3 percent for the first four months of the year.”

From the National Association of Realtors, June 23, 2009:

The national median existing-home price for all housing types was $173,000 in May, down 16.8 percent from a year earlier. Distressed properties, which declined to 33 percent of all sales in May from 45 percent in April, continue to downwardly distort the median price because they generally sell at a discount relative to traditional homes.

Which is it? The answer is both are flawed.

James Hagerty at the WSJ has a good analysis: FHFA Data May Signal False Bottom in Housing

The Realtors’ data cover a broader range of the market than does the FHFA index. ... But the Realtors’ median price is skewed by changes in the mix of homes sold each month. ...

The FHFA index, like the S&P Case-Shiller index, is based on repeat sales of the same homes and so avoids the distortions of a shifting mix in sales. But the Case-Shiller index includes more foreclosure-related transactions and gives more weight to higher-priced homes than to lower-priced ones. Thus, when sales of higher-end homes increase, the Case-Shiller index is likely to look much worse, even as the Realtors’ median price will look better.

As the sales of mid-to-high end houses pick up (sales at the high end have slowed to a trickle in many areas), the median price might rise even as prices continue to fall because of change in the mix - and this will confuse some observers.

And the FHFA index is based on GSE loans, and as the most recent data showed, a higher percentage of the problem loans were non-GSE private label loans. Also, the FHFA misses many larger loans in general, and high end prices have held up better so far - but that will change when people realize there are few move-up buyers!

The following graphic (repeat) is from the Harvard Report on Housing 2009. Note: this data is informative, but use caution when using the Harvard analysis (see: Harvard on Housing 2005)

Click on image for larger graph in new window.

This shows that the worst mortgages were the private label securities (as an example mortgages originated by New Century, and securitized by Bear Stearns).

The Freddie and Fannie portfolios accounted for 56% of all mortgages in Dec 2008, but only 20% of the seriously delinquent loans. So the FHFA index is based on some of the better performing loans. Case-Shiller (to be released next Tuesday) includes these other loans.

by Calculated Risk on 6/23/2009 01:56:00 PM

From MarketWatch: S&P downgrades prime jumbo mortgage securities

S&P said it lowered ratings on 102 classes from 33 U.S. prime jumbo residential mortgage-backed securities that were issued from 1998 to 2004. The rating agency also affirmed ratings on 669 classes from 32 of the downgraded deals, as well as 34 other deals.

"The downgrades reflect our opinion that projected credit support for the affected classes is insufficient to maintain the previous ratings, given our current projected losses," S&P said in a statement.

From 1998?

by Calculated Risk on 6/23/2009 11:59:00 AM

Click on map for larger image.

Here is a map of the three month change in the Philly Fed state coincident indicators. Forty nine states are showing declining three month activity.

This is what a widespread recession looks like based on the Philly Fed states indexes.

On a one month basis, activity decreased in 47 states in May, and was unchanged in 2 more states. Here is the Philadelphia Fed state coincident index release for May.

The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for May 2009. In the past month, the indexes have increased in one state (North Dakota), decreased in 47, and were unchanged in the other two (South Dakota and Vermont), for a one-month diffusion index of -92. Over the past three months, the indexes have increased in one state (again, North Dakota) and decreased in the other 49 states, for a three-month diffusion index of -96.

The second graph is of the monthly Philly Fed data of the number of states with one month increasing activity. Most of the U.S. was has been in recession since December 2007 based on this indicator.

Note: this graph includes states with minor increases (the Philly Fed lists as unchanged).

Almost all states showed declining activity in May. Still a very widespread recession ...

by Calculated Risk on 6/23/2009 10:07:00 AM

The previous post was the NAR release for May existing home sales. Here are some graphs ...

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 May 2009 (4.77 million SAAR) were 2.4% higher than last month, and were 3.6% lower than May 2008 (4.95 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. Continuing the recent trend, sales (NSA) were lower in May 2009 than in May 2008.

It's important to note that the NAR says about one-third of these sales were foreclosure resales or short sales. Although these are real transactions, this means activity (ex-distressed sales) is much lower.

The third graph shows nationwide inventory for existing homes. According to the NAR, inventory decreased to 3.80 million in May. The all time record was 4.57 million homes for sale in July 2008. This is not seasonally adjusted.

Typically inventory increases in May, and then really increases over the next couple months of the year until peaking in the summer. This decrease in inventory was a little unusual, and the next few months will be key for inventory.

Also, 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 - this is possible.

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

Months of supply declined to 9.6 months.

Sales increased slightly, and inventory decreased, so "months of supply" decreased. A normal market has around 6 months of supply, so this is still very high.

Here is another graph of inventory. This shows inventory by month starting in 2004.

Inventory in May 2009 was below the levels in May 2007 and 2008 (this is the 4th consecutive month with inventory levels below 2 years ago). Inventory levels have been below the year ago level for ten consecutive months.

It is important to watch inventory levels very carefully. If you look at the 2005 inventory data, instead of staying flat for most of the year (like the previous bubble years), inventory continued to increase all year. That was one of the key signs that led me to call the top in the housing market!

Note: there is probably a substantial shadow inventory – homeowners wanting to sell, but waiting for a better market - so existing home inventory levels will probably stay elevated for some time. And as noted above, there are also reports of REOs being held off the market, so inventory is probably under reported.

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

If the trend of declining year-over-year inventory levels continues in 2009 that will be a positive for the housing market. Prices will probably continue to fall until the months of supply reaches more normal levels (closer to 6 months compared to the current 9.6 months), and that will take some time.

I'll have more on Existing Home sales tomorrow after New Home sales are released tomorrow.

by Calculated Risk on 6/23/2009 10:00:00 AM

The NAR reports: May Existing-Home Sales Continue Rising Trend

Existing-home sales – including single-family, townhomes, condominiums and co-ops – rose 2.4 percent to a seasonally adjusted annual rate of 4.77 million units in May from a downwardly revised level of 4.66 million units in April, but remained 3.6 percent below the 4.95 million-unit pace in May 2008.
...
Total housing inventory at the end of May fell 3.5 percent to 3.80 million existing homes available for sale, which represents a 9.6-month supply at the current sales pace, down from a 10.1-month supply in April.
...
Distressed properties, which declined to 33 percent of all sales in May from 45 percent in April ...

Yun said the appraisal problem is serious. “Lenders are using appraisers who may not be familiar with a neighborhood, or who compare traditional homes with distressed and discounted sales,” he said. “In the past month, stories of appraisal problems have been snowballing from across the country with many contracts falling through at the last moment. There is danger of a delayed housing market recovery and a further rise in foreclosures if the appraisal problems are not quickly corrected.”

Graphs soon (as soon as the NAR updates their site).

by Calculated Risk on 6/23/2009 08:48:00 AM

A couple of morning stories ...

From Bloomberg: Bernanke Set to Defend Record as Reappointment Debate Begins

Besides keeping Bernanke, Obama’s options include appointing Summers or Janet Yellen [San Francicso Fed President]

Summers, 54, a former Treasury secretary who heads Obama’s National Economic Council, is considered the front-runner should the president want a change. San Francisco Fed President Yellen, 62, was previously a Fed governor and chairman of the Council of Economic Advisers ....

Summers wants the job, Senator Robert Bennett of Utah [said]. Asked if he would support Summers for Fed chairman, Bennett said: “I am told that Larry would very much like me to. I would have no objection to Larry.”

And Paul Krugman directs us to a site tracking the news from 1930 day by day. A couple quotes from June 23, 1930:

Col. Ayres, VP Cleveland Trust, predicts an abrupt recovery in stock and commodity prices by Labor Day due to current consumption exceeding production. Distinguishes between two types of depression, “V”-shaped and “U”-shaped.

And heard on the Street:

“'Things are getting back to normal,' remarked the head of a Broadway house. 'Again the main topic of discussion among our customers is the 18th amendment.'” [Prohibition]

by Calculated Risk on 6/23/2009 12:05:00 AM

The Fed is meeting over the next two days, and although there is no chance of a change in the federal funds rate, it is possible the Fed will announce additional purchases of Treasury securities or agency MBS (I think this is unlikely) or change the Fed statement to reflect the view that the federal funds rate will stay at essentially zero for some time (this is very possible).

The most recent statement read:

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

The "exceptionally low levels" phrase might have confused some people into thinking that a modest rate hike was coming soon, so it is possible that the Fed will change that phrase to indicate "the current low levels ... for an extended period."

No one expects a rate change this week, but a few investors expect a rate increase by August. This graph from the Cleveland Fed shows public expectations of the Fed Funds rate after the August meeting. Maybe the Fed will try to change those expectations.



A short preview from Bloomberg ...

by Calculated Risk on 6/22/2009 10:18:00 PM

Note: For visitors of many Google hosted blogs, the redirect feature from a blogspot address to a custom URL failed for six days (from late Tuesday June 16th until Monday afternoon June 22nd). This is now resolved. Welcome back! I apologize for any inconvenience.

Here are a few posts and links that might interest you:

Over the weekend, I looked at some historical data for house prices and the unemployment rate. Here is the national data, and for several cities: Miami, Chicago, Dallas, Washington, D.C., Los Angeles, New York, San Francisco, Boston, Seattle, and Detroit.

On Saturday, Matt Padilla of Mortgage Insider posted a guest book review of Jim Grant's book: Mr. Market Miscalculates: The Bubble Years and Beyond: The Greenspan Problem (all views are Matt's)

A quote via Bloomberg:

“I am not particularly of the green shoots group yet,” [General Electric Co. Vice Chairman John] Rice said ... “I have not seen it in our order patterns yet. At the macro level, there may be statistics suggesting the economy is starting to turn. I am not seeing it yet. ... We are preparing for 12 or 18 months of tough sledding.”

From the BLS: Record Unemployment Rates in Eight States

State Personal Income Tax Cliff Diving and More on State Income Taxes

Once again, welcome back!

by Calculated Risk on 6/22/2009 08:00:00 PM

From the WSJ: Three Banks Suspend Their TARP Dividends (ht jb)

Treasury spokeswoman Meg Reilly said Monday that "a number of banks" that got taxpayer-funded capital under TARP are no longer paying dividends to the government.
...
"Here the government has given the banks money at great terms, but the fact that they can't keep up with it is worrisome," said Michael Shemi, an investor at New York hedge-fund firm Christofferson, Robb & Co. "It tells you of the deep problems of community and regional banks."

The article mentions three banks by name: Pacific Capital Bancorp, of Santa Barbara, Seacoast Banking Corp. of Florida, of Stuart, and Midwest Banc Holdings Inc., of Melrose Park, Ill.

These banks received the funds in December.

Note: missing up to six dividend payments was allowed under the TARP agreement, so this isn't a default.

by Calculated Risk on 6/22/2009 06:00:00 PM

Michael sent me this photo of the halted Waterview Tower project in Chicago.

Click on image for larger graph in new window.

Photo Credit: Michael C.

The development was halted at 26 stories - the plan was for a 90 story building with a combination of condos and a hotel.

Every CRE bust leaves what Crain's Chicago Business calls the Waterview: "a 26-story concrete monument symbolizing the excesses of the real estate boom" ... here are couple of recent stories on the Waterview.

From Crain's Chicago Business: Waterview Hotel project on the market

CB Richard Ellis Inc. is taking on one of the toughest jobs in today’s languishing downtown real estate market: finding a buyer for the stalled Waterview Tower and Shangri-La Hotel project on Wacker Drive.
...
The developer is tangling in court with the Bank of America, which is trying to collect on a $20-million loan, and construction firms that claim they’re owed a combined $85 million.

And from the Chicago Sun-Times: City wants high-rise crane removed

Impatient about the stillborn construction site on Wacker Drive, city officials are demanding the removal of the high-rise crane at the proposed Waterview Tower. No work has been done on the planned 90-story building since last year, and now it stands as a shell about 27 stories tall at the southwest corner of Wacker and Clark.

A spokesman for the city's Buildings Department said it is worried that an unused crane can pose a safety hazard.

Another CRE eyesore.

by Calculated Risk on 6/22/2009 04:00:00 PM

The AP reports that White House spokesman Robert Gibbs says Obama expects "10 percent unemployment within the next few months".

By popular demand ...

Click on graph for larger image in new window.

The first graph shows the S&P 500 since 1990.

The dashed line is the closing price today.

The S&P 500 is up almost 32% from the bottom (235 points), and still off almost 43% from the peak (672 points below the max).

The second graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears".

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

by Calculated Risk on 6/22/2009 02:17:00 PM

From Dow Jones: Commercial Real-Estate Prices Fall 8.6% On Month In April

Commercial real-estate prices fell 8.6% in April ... which leaves prices down one-quarter from a year earlier ...

"The size of April's decline, following a 5.5% decline in January, also suggests that sellers are beginning to capitulate to the realities of commercial real-estate markets," says Moody's Managing Director Nick Levidy. ...

Prices in the CRE market are not as sticky as the residential market, so prices fall much quicker. We've seen plenty of half off sales for distressed CRE, and this report suggests the average decline is about 25% over the last year.

by Calculated Risk on 6/22/2009 01:17:00 PM

Just so you know ... I used to make fun of the Harvard reports.

Here is the Harvard State of the Nation's Housing 2005 report (ht curious)

The unprecedented length and strength of the boom has, however, fanned fears that the rate of construction far exceeds long run demand. Although averaging more than 1.9 million units annually since 2000, housing starts and manufactured home placements appear to be roughly in line with household demand. As evidence, the inventory of new homes for sale relative to the pace of home sales is near its lowest level ever. Given this small backlog, new home sales would have to retreat by more than a third—and stay there for a year or more—to create anywhere near a buyer’s market.

Moreover, the US mortgage finance system is now well integrated into global capital markets and offers an ever-growing array of products. This gives borrowers more flexibility to shift to loans tied to lower adjustable rates in the event of an interest-rate rise. Although adjustable loans do increase the risk of payment shock at the end of the fixed-rate period, borrowers are increasingly choosing hybrid loans that allow them to lock in favorable rates for several years.

With homes appreciating so rapidly over the last few years, there is concern that house price bubbles have formed in many markets. Clearly, ratios of house prices to median household incomes are up sharply and now stand at a 25-year high in more than half of evaluated metro areas.
...
Whether the hottest housing markets are now headed for a sharp correction is another question. The current economic recovery may give house prices in these locations the room to cool down rather than crash if higher interest rates slow the sizzling pace
of house price appreciation. Moreover, in several metropolitan areas where house prices have appreciated the fastest, natural or regulatory-driven supply constraints may have resulted in permanently higher prices.
...
For now, though, house prices should keep rising as long as job and income growth continue to offset the recent jump in short term interest rates. House prices would come under greater pressure, however, if the economy stumbles and jobs are lost.

There were plenty of warnings and caveats in the 2005 report (covers through 2004), but for the most part they missed the housing bubble and the coming crash.

And from the 2006 report (covers 2005):

[T]he housing sector continues to benefit from solid job and household growth, recovering rental markets, and strong home price appreciation. As long as these positive forces remain in place, the current slowdown should be moderate.

Over the longer term, household growth is expected to accelerate from about 12.6 million over the past ten years to 14.6 million over the next ten. When combined with projected income gains and a rising tide of wealth, strengthening demand should lift housing production and investment to new highs.
...
Fortunately, most homeowners have sizable equity stakes to protect them from selling at a loss even if they find themselves unable to make their mortgage payments. As measured in 2004—before the latest house price surge—only three percent of owners had equity of less than five percent, and fully 87 percent had a cushion of at least 20 percent.
...
The greatest threat to housing markets is a precipitous drop in house prices. Fortunately, sharp price declines of five percent or more seldom occur in the absence of severe overbuilding, dramatic employment losses, or a combination of the two. The fact that these conditions did not exist and that interest rates were so low explains why the housing boom was able to continue without interruption when the recession hit in 2001. With building levels still in check and the economy expanding, large house price declines appear unlikely for now.
...
Despite the current cool-down, the long-term outlook for housing is bright. New Joint Center for Housing Studies projections—reflecting more realistic, although arguably still conservative, estimates about future immigration—put household growth in the next decade fully 2.0 million above the 12.6 million of the past decade. On the strength of this growth alone, housing production should set new records.

by Calculated Risk on 6/22/2009 12:29:00 PM

“The best that can be said of the market is that house price corrections and steep cuts in housing production are creating the conditions that will lead to an eventual recovery. For now, markets remain under considerable stress.”
Eric S. Belsky, Executive Director of the Joint Center for Housing Studies of Harvard University.

From Jeff Collins at the O.C. Register: Harvard: Housing recovery yet to emerge

The U.S. housing market will rebound eventually, according to a Harvard University report. Demographics and underbuilding are conspiring to up demand and revive home prices.

But that day still is a long way off, perhaps not until sometime after 2010, the university’s Joint Center for Housing Studies said in its 2009 State of the Nation’s Housing report
...
•Read the press release: HERE!
•Read the fact sheet: HERE!
•Read the report: HERE!

Jeff has more. I think this graphic is informative:

Click on image for larger graph in new window.

This shows that the worst mortgages were the private label securities (as an example mortgages originated by New Century, and securitized by Bear Stearns).

by Calculated Risk on 6/22/2009 09:39:00 AM

Here we go again on this hotly debated topic: How much do changes in house prices impact consumption?

Charles W. Calomiris of Columbia University, Stanley D. Longhofer of the Barton School of Business and William Miles of Wichita State University argue at the WSJ Real Time Economics blog that the wealth effect of housing has been overstated: The (Mythical?) Housing Wealth Effect

...[M]any still fear that lower home values will depress consumer spending. This “wealth effect,” a drop in home values that causes consumers to cut back on purchases, is thought to dampen economic growth and hamper any recovery.

At first glance, it seems reasonable to expect such a wealth effect. If consumers are less wealthy because of declines in the value of the assets they own, whether they be stocks or their homes — it seems logical that they would cut back on their spending. Indeed, many prominent economists have conducted research purporting to find large housing wealth effects, and often argue that the wealth effect from homes exceeds that from equities. Moreover, the Federal Reserve employs a model, which presumably guides its policies, that assumes the housing wealth effect is large.

A more careful look at the data, guided by economic theory, however, suggests that much of this evidence has been misinterpreted and that the reaction of consumption to housing wealth changes is probably very small. ... an increase in house prices raises the value of the typical homeowner’s asset, but such a price increase is also an equivalent increase in the cost of providing oneself housing consumption. In the aggregate, changes in house prices will have offsetting effects on value gain and costs of housing services, and leave nothing left over to spend on non-housing consumption.

Up to this point, we have neglected the question of whether housing wealth change affects consumption through another, indirect channel — a financing channel — by affecting consumers’ access to credit.

[CR note: this is MEW or the Home ATM]

... Some observers point to the latest housing boom, and the increased use of HELOCS and other mortgages during the boom, as evidence that housing prices spurred consumption through this financing channel. While this indirect financing channel is a theoretical possibility, it is an empirical question whether it is significant in its effect, and even if the indirect financial effect is present it should not produce a “first-order” effect of housing wealth on consumption; housing wealth should still matter much less for consumption than other forms of wealth.

... We put the data through numerous robustness checks, and found in most model specifications housing wealth had zero effect on consumption. In those few cases where housing wealth did have an impact on consumer spending, the impact was always smaller in magnitude than that from stock wealth, contrary to Case, Quigley and Shiller’s findings. We conclude that the impact of housing wealth on consumption, if it exists at all, is much smaller than popularly feared.

I haven't read their paper (update: I have a copy).

There are two parts here: 1) how do changes in house prices affect consumption, and 2) how does access to the Home ATM effect consumption. On the second point, I think the answer is MEW had a significant impact on consumption ... I frequently heard from auto, RV, boat, motorcycle, and home accessory retailers that their customers were borrowing from their homes during the boom to buy these products. All of these areas have seen sharp declines in consumption as MEW had declined.

This severe decline in consumption was easy to predict - and it happened. Meanwhile these authors dismiss it as simply "a theoretical possibility".

However, on the key point, I think most of the decline in consumption related to declining MEW is behind us.

Here is a recent paper on Mortgage Equity Withdrawal (MEW): House Prices, Home Equity-Based Borrowing, and the U.S. Household Leverage Crisis by Atif Mian and Amir Sufi (both University of Chicago Booth School of Business and NBER) (ht Jan Hatzius)

From the authors abstract (the entire paper is available at the link):

Using individual-level data on homeowner debt and defaults from 1997 to 2008, we show that borrowing against the increase in home equity by existing homeowners is responsible for a significant fraction of both the sharp rise in U.S. household leverage from 2002 to 2006 and the increase in defaults from 2006 to 2008. Employing land topology-based housing supply elasticity as an instrument for house price growth, we estimate that the average homeowner extracts 25 to 30 cents for every dollar increase in home equity. Money extracted from increased home equity is not used to purchase new real estate or pay down high credit card debt, which suggests that consumption is a likely use of borrowed funds. Home equity-based borrowing is stronger for younger households, households with low credit scores, and households with high initial credit card utilization rates. Homeowners in high house price appreciation areas experience a relative decline in default rates from 2002 to 2006 as they borrow heavily against their home equity, but experience very high default rates from 2006 to 2008. Our estimates suggest that home equity based borrowing is equal to 2.3% of GDP every year from 2002 to 2006, and accounts for over 20% of new defaults in the last two years.
emphasis added

A couple of key points:

"[W]e estimate that the average homeowner extracts 25 to 30 cents for every dollar increase in home equity."

"[T]hese findings lend support to the view that home equity-based borrowing is used for consumption."

And here are the Kennedy-Greenspan estimates (NSA - not seasonally adjusted) of home equity extraction through Q4 2008, provided by Jim Kennedy based on the mortgage system presented in "Estimates of Home Mortgage Originations, Repayments, and Debt On One-to-Four-Family Residences," Alan Greenspan and James Kennedy, Federal Reserve Board FEDS working paper no. 2005-41.

This graph shows what Dr. Kennedy calls "active MEW" (Mortgage Equity Withdrawal). This is defined as "Gross cash out" plus the change in the balance of "Home equity loans".

This measure has fallen close to zero, and is an estimate of the impact of MEW on consumption. I believe that when people refinance with cash out or draw down HELOCs, they usually spend the money.

Instead of focusing on the wealth effect from house prices, I think the more important channel for consumption was home equity extraction.

by Calculated Risk on 6/22/2009 08:37:00 AM

From the Atlanta Journal-Constitution: Foreclosure numbers don’t add up (ht Mark)

When the most frequently quoted source of foreclosure information released its April statistics, it estimated that 3,746 properties in metro Atlanta’s five core counties had been slapped with foreclosure sale notices.

But a review of local legal advertisements – the only official source of Georgia foreclosure information – suggested a decidedly different number for April, with 7,462 properties slated for auction on the courthouse steps.

What’s the right number? That’s a surprisingly difficult question to answer.

At a time when an explosion in the number of distressed mortgage loans has emerged as the most pressing economic issue in decades, there is no official government source for foreclosure statistics.
...
RealtyTrac has faced questions for months about the reliability of its numbers.

An AJC review of the company’s data in 2007 prompted RealtyTrac to admit serious inaccuracies in Georgia. The company reported a 75 percent increase in foreclosures from June 2007 to July 2007, but later admitted errors and said the filings actually increased by 14 percent.
...
Some economists believe it’s time for the federal government to produce its own foreclosure statistics. And experts say many are kicking around ways to make that happen.

“Ideally we would have a national database of mortgage transactions,” said [Dan Immergluck, a Georgia Tech professor].

It is very frustrating trying to find reliable foreclosure data. I use a series from DataQuick in California (for Notice of Defaults) that goes back to the early '90s. But that is just one state, and just one step in the foreclosure process and doesn't tell us how many NODs are cured. Very frustrating.

by Calculated Risk on 6/22/2009 12:52:00 AM

From Bloomberg: World Bank Cuts Forecast for Global Economy, Developing Nations

The world economy is forecast to contract 2.9 percent this year, compared with a prior estimate of a 1.7 percent decline, the Washington-based lender said in a report released today. Global growth will return next year with a 2 percent expansion, the bank said, cutting its forecast from a 2.3 percent prediction about three months ago.
...
“While the global economy is projected to begin expanding once again in the second half of 2009, the recovery is expected to be much more subdued than might normally be the case,” the report said. “Unemployment is on the rise, and poverty is set to increase in developing economies, bringing with it a substantial deterioration in conditions for the world’s poor.”

They say "subdued", I say "sluggish".

You like potato and I like potahto,
You like tomato and I like tomahto;
Potato, potahto, tomato, tomahto!
Let's call the whole thing off!
George and Ira Gershwin, Let's Call the Whole Thing Off