by Calculated Risk on 7/31/2008 09:09:00 PM

From the Financial Times: Real estate sector fears huge increase in CMBS defaults (hat tip Raymond)

Defaults on [recent] commercial mortgage-backed securities ... will more than quadruple from their current levels under conditions in the US economy expected by the commercial real estate industry, according to a report from Fitch Ratings.
...
Borrowers would default on an average of 17.2 per cent of securitised commercial mortgages over 10 years if the US economy dips into a recession ... compared with current very low default rates of 4 per cent ...

[The problem is] inflated property values and weaker underwriting standards. .. in 2006 and 2007, as well as the weaker economy. Those bonds make up about 49 per cent of the outstanding CMBS market of more than $800bn.

Higher defaults and lower property values is one side of the commercial real estate (CRE) bust; this is the impact on existing CRE.

As discussed this morning, the CRE bust will also result in less new investment in non-residential structures, especially hotels, malls and office buildings (since those were the most overbuilt).

by Calculated Risk on 7/31/2008 06:09:00 PM

HousingWire has the story: Freddie Mac Pushes Out Foreclosure Timelines

Perhaps the boldest move by Freddie Mac on Thursday — and one that won’t get much press attention — was its decision to eliminate foreclosure timeline compensation altogether for servicers, effective immediately. In other words, servicers will no longer earn a bonus based on how quickly they can foreclose.

If that doesn’t scream “modify more loans,” then the GSE’s decision to double compensation for servicers in completing workouts certainly will. Freddie said it will now pay servicers $800 for a loan modification, $2,200 for a short payoff or make-whole preforeclosure sale, and $500 per repayment plan. Deeds-in-lieu of foreclosure didn’t get Freddie’s same endorsement, however, and will remain at the current incentive level of $250, the GSE said.

The decision to eliminate timeline compensation, however, was only part of a much broader program change rolled out by Freddie; the mortgage finance giant also said that it was increasing its allowable foreclosure timeline in 21 states to a whopping 300 days from last of date payment, and 150 days from initiation of foreclosure, effective on Friday.

There is much more.

by Calculated Risk on 7/31/2008 04:36:00 PM

From the SF Gate: Governor orders layoffs, steep pay cuts for thousands of state workers (hat tip Hernan)

Gov. Arnold Schwarzenegger ... today ordered the layoffs of thousands of state workers and steep pay cuts for most other state employees ... Cutting the pay of about 200,000 state workers to the federal minium wage of $6.55 an hour would save California as much as $1.2 billion a month, the governor's office said. Such workers would get regular pay plus back pay once a new budget is approved.

The layoffs of nearly 22,000 temporary, seasonal and student workers would save the state as much as $28.5 million a month, the governor's office added.

Many states are struggling, but California is in especially deep trouble because of rapidly falling house prices and a weakening economy.

by Calculated Risk on 7/31/2008 12:17:00 PM

From Abha Bhattari and Fred Bernstein at the NY Times: Terrible Timing for a Hotel Boom

A record number of hotels are opening this year, and the timing could not be worse.
...
Until recently, the industry was in the midst of a major boom, and it was during those good times that the hotel companies made plans to build many of the new rooms. ... Nationwide, hotel occupancy levels have been hovering around 65 percent, down about 5 percentage points from last year, according to Smith Travel Research.
...
The industry now has about 6,000 new hotels, with nearly 800,000 rooms, under development, a 27 percent increase from last year, according to Lodging Econometrics ...

Back in May I relayed a conversation I had with well known hospitality attorney Jim Butler. At that time it was clear that financing for hotels was becoming significantly tighter (see earlier post for his comments). For anyone interested, Jim writes a blog on hotel legal issues: Hotel Law Blog

I also posted this graph comparing investments in lodging vs investments in other non-residential structures:

Click on graph for larger image in new window.

This graph shows the strong growth in lodging in recent years (from the BEA supplemental tables). I'll have an update soon for Q2.

Clearly lodging investment has been in a quite a boom (as the NY Times story noted). But occupancy vacancy rates are already declining, and more inventory is coming online, suggesting there will be quite a bust in hotel investment.

Lodging is one of the three key components of non-residential investment that I expect to decline sharply. The other two are office buildings and multimerchandise shopping (malls!).

by Calculated Risk on 7/31/2008 10:09:00 AM

The BEA reported that GDP increased 1.9% in Q2 2008 at a seasonally adjusted annual rate (SAAR). But the underlying details - especially for investment - are weak.

Residential investment (RI) declined at a 15.6% (SAAR).

Investment in equipment and software declined 3.4% (SAAR).

The lone bright spot for investment was non-residential investment in structures. Non-RI structure investment increased at a 14.4% SAAR. But all evidence suggests this investment is about to slow sharply.

Click on graph for larger image in new window.

This first graph shows the typical relationship between residential investment and non-residential investment in structures. Note that residential investment is shifted 5 quarters into the future on the graph (non-residential investment usually follows residential by about 4 to 7 quarters).

The current non-residential boom has gone on a little longer than normal, probably for two reasons: 1) there was a slump in investment following the bursting of the tech bubble, and 2) loose lending standards kept non-residential investment lending strong until mid-year 2007, and it takes time to build non-residential structures.

All signs suggest that the bust is now here, and non-residential investment will probably be a drag on GDP for the next year or more.

The second graph shows non-residential investment as a percent of GDP. This shows the current boom is even greater than the boom in the late '90s.

Some of the current investment boom is energy related, and I'll break out the three key areas that will soon go bust - office buildings, multimerchandise shopping, and lodging - as soon as the underlying detail tables are available.

The third graph shows residential investment (RI) as a percent of GDP.

RI as a percent of GDP is at 3.5%, just above the cycle lows in 1982 and 1991. It is possible that RI, as a percent of GDP, will bottom later this year (or possibly in early 2009) since inventory is finally declining (housing starts are now below housing sales).

When RI finally bottoms, the good news is RI will no longer be a drag on GDP, but the bad news is RI will probably not recovery quickly because of the huge overhang of inventory. Unfortunately, by the time RI bottoms, non-residential investment will probably have taken over as a significant drag on GDP - suggesting the recession will linger.

Investment is usually the key to the economy, and investment remains weak.

by Calculated Risk on 7/31/2008 09:52:00 AM

From Bloomberg: U.S. Recession May Have Begun in Last Quarter of 2007

The U.S. economy may have tipped into a recession in the last three months of 2007 ... The world's largest economy contracted at a 0.2 percent annual pace in the fourth quarter of last year compared with a previously reported 0.6 percent gain ...

The revisions now reinforce measures such as employment and production that already signaled the economy was shrinking.

I've been showing Dec 2007 as the start of the recession on most of my graphs.

by Anonymous on 7/31/2008 09:05:00 AM

The failure of New London Security FCU the other day rather got lost in the news shuffle. This is probably because it had 365 members and reported assets of $12.7 million, which means it doesn't rank very high on the "systemic risk to the banking system" hot news alert scale. I must say, however, that for sheer weirdness this story delivers.

From The Day of New London, Connecticut:

A former manager of the credit union, who retired last year after decades and spoke on condition of not being identified, admitted Wednesday to being “computer illiterate.” She had been posting information manually for decades, she said.

Edwin F. Rachleff, the 82-year-old broker who handled the credit union's investments and who committed suicide on the day the institution was declared insolvent, also reportedly did not feel comfortable with computers.

Members seemed to view manual postings as part of the charm of the tiny credit union, which had only 365 members and $12.7 million in assets.

”It was a little hole in the wall,” said Jim Mallove, owner of Mallove Jewelers in Waterford, who opened accounts there several years ago for his two children. “But the deposits earned very good interest ... better than banks were offering.”

A quirk of the institution, Mallove remembers, is that the credit union would not accept monthly deposits of more than $100 per account. He had little idea why the credit union would limit deposits.

”My impression at the time was that they had a lot of money and were just basically sitting on it,” said Mallove, who received annual statements as a credit union member.

I feel that as a public service I should point out that a sound financial institution cannot "just basically sit on" a "lot of money" and still pay interest rates that are "better than what banks are offering." When you "just basically sit on" money, you get warm, flattened piles of money that retain the imprint of your buttocks. What you do not get is a competitive rate of return.

So what was New London Security doing with those miserly deposits it allowed its members to make?

Emerson added that its ratio of assets to loan amounts was extremely low. He said many credit unions have loans totaling 50 to 80 percent of their assets, though some are as low as 20 percent; New London Security, by comparison, had only about 2 percent of its assets in loans.

New London Security had more than $10 million of its assets in various investment vehicles, Emerson pointed out.

”They were into investments,” Emerson said, adding that he “wouldn't disagree” with the notion that New London Security had turned into a kind of investment club, a notion that was seconded by another credit union official who didn't want to be named.

Of course no one at this point is quite sure what these investments actually were, what with the suicide of broker and all the records being apparently handwritten on green ledger paper. It is hinted that they may be mortgage-backed securities, although for all we know it could be time-shares in the Poconos. Or postal coupons.

I feel that as a public service I should point out that an institution that does not make loans to its members in the normal course of business can be many things, but a "credit union" it is not. No matter how charming and small-town cute those hand-written passbook entries are.

(Thanks, Matt!)

by Calculated Risk on 7/31/2008 08:30:00 AM

Here is the data from the Department of Labor for the week ending July 26th.

In the week ending July 26, the advance figure for seasonally adjusted initial claims was 448,000, an increase of 44,000 from the previous week's revised figure of 404,000.

Click on graph for larger image in new window.

The first graph shows the continued claims since 1989.

Notice that following the previous two recessions, continued claims stayed elevated for a couple of years after the official recession ended - suggesting the weakness in the labor market lingered. The same will probably be true for the current recession (probable).

The second graph shows the weekly claims and the four week moving average of weekly unemployment claims since 1989.

Weekly unemployment claims were the highest since April 2003.

The four week moving average has been trending upwards for the last few months, and the level is now solidly above the possible recession level (approximately 350K).

Labor related gauges are at best coincident indicators, and this indicator suggests the economy is in recession.

Note: I'll have a post on GDP and investment later this morning.

by Calculated Risk on 7/30/2008 09:16:00 PM

A little mentioned provision in the Housing and Economic Recovery Act of 2008 amends the Home Sale Exclusion Rules.

I've copied the main portion of the provision at the bottom.

This applies to homeowners that move into a nonqualifed residence (that they already own) like a vacation home or rental unit. Here was the old rule from the IRS:

To exclude gain, a taxpayer must both own and use the home as a principal residence for two of the five years before the sale. The ownership and use periods need not be concurrent.

Under the new rule, the owner only gets a percentage of the exclusion based on a ratio of how long the property is their primary residence divided by how long they owned the property. This prevents people from moving into vacation homes or rental units for two years and then obtaining the entire exclusion. Here is an excerpt (see the bill for the entire text):

SEC. 3092. GAIN FROM SALE OF PRINCIPAL RESIDENCE ALLOCATED TO NONQUALIFIED USE NOT EXCLUDED FROM INCOME.
(a) IN GENERAL.—Subsection (b) of section 121 of the Internal Revenue Code of 1986 (relating to limitations) is amended by adding at the end the following new paragraph:

(4) EXCLUSION OF GAIN ALLOCATED TO NONQUALIFIED USE.
(A) IN GENERAL.—Subsection (a) shall not apply to so much of the gain from the sale or exchange of property as is allocated to periods of nonqualified use.
(B) GAIN ALLOCATED TO PERIODS OF NONQUALIFIED USE.—For purposes of subparagraph (A), gain shall be allocated to periods of nonqualified use based on the ratio which—
(i) the aggregate periods of nonqualified use during the period such property was owned by the taxpayer, bears to
(ii) the period such property was owned by the taxpayer.
(C) PERIOD OF NONQUALIFIED USE.
For purposes of this paragraph
(i) IN GENERAL.—The term ‘period of nonqualified use’ means any period (other than the portion of any period preceding January 1, 2009) during which the property is not used as the principal residence of the taxpayer or the taxpayer’s spouse or former spouse.
...
EFFECTIVE DATE.—The amendment made by this section shall apply to sales and exchanges after December 31, 2008.

Just another interesting provision.

by Calculated Risk on 7/30/2008 06:40:00 PM

From Nouriel Roubini: Global Recession Watch: Recoupling rather than Decoupling

[T]here is now fresh evidence that at least a dozen major economies and some emerging markets are at risk of a recessionary hard landing.
...
[W]hile we will not experience a global recession we will get close to one as the US will have a severe recession, Japan is entering one, a third of Europe will go into a recession, the rest of Europe will have a severe growth slowdown, the rest of the G-10 advanced countries is sharply slowing down and a few emerging market economies are entering a recession. And if the advanced economies are sharply slowing down or entering a recession the idea that China, India, the other BRICs and emerging markets can happily decouple from these recession or sharply slowing economies is far fetched.

This is an important key to the depth of the U.S. recession. As Professor Roubini notes, there are a number of key countries now either in, or flirting with, recession. If the global economy slows enough - causing U.S. exports to decline - we might start to see significant job losses in manufacturing, and then the current recession could be more severe than I currently expect.

by Calculated Risk on 7/30/2008 04:32:00 PM

“Decreased investment volumes have now become evident in all parts of the world."
Brett White, president and chief executive officer of CB Richard Ellis, July 30, 2008

Also from MarketWatch: Real-estate stocks fall on lower earnings, outlook

CB Richard Ellis blamed the decline on slowing economic conditions and the widening credit crunch, "which initially began in the U.S. and has now spread worldwide."

"I can best describe the current environment as being very challenging and still having a high probability of getting worse before we see improvement," said Chief Executive Brett White during Wednesday's conference call.
emphasis added

Prices aren't quite as sticky for commercial real estate as for residential real estate, but the pattern is similar - transaction volumes fall first, and then prices.

by Calculated Risk on 7/30/2008 03:28:00 PM

Mathew Padilla at the O.C. Register directs us to three foreclosure maps:

Notices of default by ZIP

Foreclosure density

Foreclosure percentage gains by ZIP

Click on graph for larger image in new window.

I've taken a portion of the current foreclosure map and animated it with the rate of increasing foreclosures. (click on map for animation)

This shows that foreclosures are spreading to the higher end areas of Orange County.

Although the high end areas will never have the elevated foreclosure rates we are seeing in the low end areas, it makes sense that the foreclosure crisis would spread. When I talked about this at the Inman Real Estate conference last week - and suggested agents should expect increasing foreclosures in high end areas - my comments were greeted with incredulity.

I wish I had this map with me.

On that topic, here is a repeat of a cartoon from Eric G. Lewis:



Eric G. Lewis is a freelance cartoonist living in Orange County, CA (used with permission).

Eric drew this cartoon in 2007, when many people in south Orange County, CA were stunned that prices could fall in their areas.

by Calculated Risk on 7/30/2008 11:27:00 AM

*** The post title is from Tanta.

President Bush signed the housing bill this morning. One of the provisions is for the elimination of Down-payment Assistance Programs (DAPs) for FHA loans.

The WSJ has some stats on how widespread DAPs had become: Builders Feel Pinch of Key Omission From the Housing Bill

[F]or the builders, the bill's elimination of seller-funded down-payment assistance on mortgages backed by the Federal Housing Administration is a big loss -- one that could eliminate as many as one in 10 home buyers from the market ... Starting in October, buyers using FHA loans can no longer accept down-payment "gifts" that are ultimately funded by the home seller, often a builder.
...
Miami-based Lennar Corp. used down-payment assistance on 33% of the mortgages it originated in the second quarter, while Ryland Group Inc. said 18% to 20% of its buyers used down-payment assistance during the first half of the year.
...
"There will undoubtedly be some impact, but we believe the buyers will adjust and the market will adjust," says Tim Eller, the chief executive of Centex Corp, which said that 25% of its sales in its fiscal year ended March 31 involved down-payment assistance.

Eliminating DAPs is a positive for the economy and housing. FHA loans using DAPs had significantly higher default rates than when the buyers actually made a down-payment.

"One in 10 home buyers". Wow. Not all of these buyers will disappear. Some buyers had the ability to make a down-payment, but used a DAP instead simply because they were available. Other buyers will borrow from parents and friends or will wait until they save the 3.5% down-payment.

The good news is default rates should decline on FHA loans.

by Anonymous on 7/30/2008 10:04:00 AM

If you haven't yet had a chance to read this article by John Gittelsohn in the Orange County Register about a real estate sale that was financed by Wells Fargo in January of this year, please do so now. And if you were, like most people, working on the assumption that lenders and other industry participants had at least cleaned up their acts in time for the 2008 mortgage vintage to be worth something, think again.

There isn't any significant fact about this transaction I can identify that isn't a red flag. A home in a foreclosure-wracked neighborhood was purchased at foreclosure auction in October of 2007 for $304,500, just over half what the defaulted buyer had paid in 2006. In January of 2008, the house was flipped to a non-English-speaking couple for an apparent sales price of $625,000 after some "sprucing up" by the property seller.

Ridiculous? Sure. It turns out that the seller provided the $125,000 down payment, and also executed an "addendum" to the sales contract agreeing to pay the buyers $30,000 in cash, cover the borrowers' first three mortgage payments, and toss in a 52-inch TV. Subtract out all that, and the true sales price of the property was $460,000. But apparently nobody did subtract out any of that, because Wells Fargo made a $500,000 loan to these buyers to purchase this property.

The OC Register reporter, bless his heart, tracked down the various parties who had their hands in this transaction, and got the following comments:

From the mortgage broker who put the deal together: "Whatever agreement the buyer and seller made, it was between them."

From the appraiser who dutifully came up with a value of $625,000: "Like Sanchez, she had no knowledge of the terms of the sale."

From the escrow agent who closed this loan: "It sounds to me like the seller helped out," she said. "If someone gave them $125,000, what's the problem? That's a beautiful thing, if you ask me."

From Wells Fargo: "In many instances, borrowers are able to use gifts from family members or friends for a portion of their down payment, provided the amount and source of the gifts are documented."

Excellent point, Wells Fargo. Too bad in this case the down payment didn't come from friends or family members and wasn't documented. Too bad that the broker who originated the loan seems to think the details of the purchase contract aren't any of his business. Too bad your escrow agent doesn't care where the down payment money came from, either. Too bad your appraiser has apparently never heard of the Uniform Standards of Professional Appraisal Practice, to which she is obligated to conform if she wants to do appraisals for Wells Fargo, that say she is required to inquire into "the terms of the sale."

I don't think the real issue with this story is the problem of whether or not to use foreclosure or "distressed" sales as comparables in an appraisal report. The problem is that there are no comparable sales of any kind that are a reliable measure of market value if they all involved transactions in which nobody ever actually bothered to verify and analyze the terms of the sale.

If this is the level of elementary due diligence we can expect after the most atrocious mortgage blowup in history, what will it take to scare people into doing their jobs?

by Calculated Risk on 7/30/2008 09:15:00 AM

From the Fed: Federal Reserve announces steps to enhance the effectiveness of its existing liquidity facilities

Actions taken by the Federal Reserve include:

Extension of the Primary Dealer Credit Facility (PDCF) and the Term Securities Lending Facility (TSLF) through January 30, 2009.

The introduction of auctions of options on $50 billion of draws on the TSLF.

The introduction of 84-day Term Auction Facility (TAF) loans as a complement to 28-day TAF loans.

An increase in the Federal Reserve's swap line with the European Central Bank to $55 billion from $50 billion.

In light of continued fragile circumstances in financial markets, the Board has extended the PDCF through January 30, 2009, and the Board and the Federal Open Market Committee (FOMC) have extended the TSLF through that same date.
emphasis added

The PDCF program - that allows investment banks access to the discount window - was set to expire in September. The credit crisis continues ...

by Calculated Risk on 7/29/2008 08:39:00 PM

From Jim the Realtor (4 min 16 sec): A Countrywide REO, 3br/2ba, 1,100sf house sold for $465,000 in 2005, now being offered for $180,900. That is 39% of the 2005 price (61% off).

Vista is an improving area (in general), although this is a low end area. It's hard to believe someone paid $465,000 for this in 2005!

by Calculated Risk on 7/29/2008 08:03:00 PM

Just to post the official announcement.

From the LA Times: Mervyns department stores files for bankruptcy

"After careful consideration of available alternatives, the company's management board determined that a Chapter 11 filing was a necessary and prudent step that allows us to operate our business without interruption as we seek to restructure our debt and other obligations in a controlled, court-supervised environment," John Goodman, Mervyns chief executive officer, said in a statement.

It sounds like they will try to continue to operate.

by Calculated Risk on 7/29/2008 05:19:00 PM

"The housing market worsened in the June quarter, and I don't expect to see it improve this fiscal year,"
Tim Eller, chairman and CEO of Centex Corp.

Note that Centex's fiscal year starts in April, so the CEO is seeing no improvement through March 2009.

From Centex: (hat tip Ken) Centex Reports First Quarter Results

Fiscal 2009's first quarter revenues were $1.13 billion, 41% lower than the same quarter last year. The loss from continuing operations for the first quarter was $169 million ... up from a loss of $132 million ... in the previous year's fiscal first quarter. Included in the first quarter of fiscal 2009's loss from continuing operations are $80 million of impairments and other land-related charges, including the Company's share of joint venture impairments.

The land impairments continue.

From the Centex Investor Materials (from 8-K filed with SEC):

Market conditions worsened in the quarter

Foreclosures are rising

Employment is weakening

Consumer confidence is waning

Mortgage qualification standards are tightening

Traffic and sales have diminished

Not exactly the most positive investor material I've seen!

Also, Centex is one of the companies I use to track changes in cancellation rates. They didn't report cancellations in the 8-K, so we will have to wait for the 10-Q. Cancellations had been trending down for Centex, but with these very negative comments, we might see another increase in cancellation rates.

by Calculated Risk on 7/29/2008 05:13:00 PM

A little spillover from the Merrill Lynch CDO sale ...

From Bloomberg: Citigroup Markdowns May Rise $8 Billion, Analyst Says

Citigroup Inc. will probably write down the value of collateralized debt obligations by $8 billion in the third quarter, Deutsche Bank AG analyst Mike Mayo said ...

by Calculated Risk on 7/29/2008 03:53:00 PM

As part of the monthly house price release, Case-Shiller presents tiered price indices for 20 major cities.

The following graphs are for Los Angeles using both nominal and real (inflation adjusted) prices.

Click on graph for larger image in new window.

The first graph shows the nominal Case-Shiller prices for homes in Los Angeles.

The low price range is less than $401,614. Prices in this range have fallen 36.5% from the peak.

The mid-range is $401,614 to $606,600. Prices have fallen 29.8%.

The high price range is above $606,600. Prices in this range have fallen 20.0% from the peak.

The second graph shows the same data in real terms (inflation adjusted using CPI less shelter).

Looking at the data in real terms probably provides a better idea of how much further prices will fall. If prices fall to the January 2000 level in real terms (shown as 100 on the graph), then the high end has fallen about half way from the peak, and the low end about 2/3 of the way from the peak in Los Angeles.

I've noted this before: In a number of previous housing busts, real prices declined for 5 to 7 years before finally hitting bottom. That is my expectation for the duration of the price declines in the bubble areas. The bottom for real prices will probably be in the 2010 to 2012 period. The less bubbly areas will probably bottom sooner.

If this bust follows the historical pattern, we will continue to see real price declines for several more years, and the rate of decline will probably slow (imagine somewhat of a bell curve on those graphs).

by Calculated Risk on 7/29/2008 02:42:00 PM

More to come ... all is OK here. We were definitely rockin'

USGS is calling it 5.8.

by Calculated Risk on 7/29/2008 12:27:00 PM

From the WSJ: Bennigan's, Steak &Ale Close Doors, File for Bankruptcy Protection (hat tip Michael)

Long-time, national restaurant chains Bennigan's and Steak & Ale have closed their doors and filed for Chapter 7 bankruptcy protection, shuttering more than 300 sites and letting go of thousand of employees.

It is one of the country's largest restaurant bankruptcies ... The chains will liquidate and are not likely to re-open.

More empty space available. More bad debt. More consumer ripples.

by Calculated Risk on 7/29/2008 11:54:00 AM

As I noted this morning, the rate of monthly price declines has slowed a little. Update: Note there is some seasonality too.

Click on graph for larger image in new window.

This graph shows the annualized monthly price changes for the Case-Shiller Composite 20 since the beginning of 2006.

The rate of price declines has slowed over the last couple of months, but prices were still falling at a 8.9% annual rate in May (from April).

The second graph shows the annualized month-to-month price declines for Los Angeles in the early '90s.

This shows that price declines tend to come in surges and we shouldn't read too much into the slowing monthly rate of decline.

In general prices are still too way too high, and will continue to fall for some time.

by Calculated Risk on 7/29/2008 10:12:00 AM

Words a banker doesn't want to hear: "We’ll talk to you on Friday"

From the NY Times: Lax Lending Standards Led to IndyMac’s Downfall (hat tip warlock)

IndyMac executives suspected the end was near even before the regulators turned up. Examiners do not warn banks they are coming, but they typically take over failing institutions on Fridays so they can have a weekend to put things in order and reopen under government control on Monday.

As the lines grew outside IndyMac branches during the week of July 7, Mr. Perry talked with an Office of Thrift Supervision official to assess the situation.

“We’ll talk to you on Friday,” the official said, according to one bank official briefed on the call. As word of the call spread through IndyMac, executives began packing their personal belongings.

by Calculated Risk on 7/29/2008 09:00:00 AM

S&P/Case-Shiller released their monthly Home Price Indices for May this morning. This includes prices for 20 individual cities, and two composite indices (10 cities and 20 cities). Note: This is not the quarterly national house price index.

Click on graph for larger image in new window.

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

The Composite 10 index was off 10.4% annual rate in May (from April), and is off 19.8% from the peak.

The Composite 20 index was off 8.9% annual rate in May (from April), and is off 18.4% from the peak.

The rate of price declines has slowed a little

The second graph shows the Year over year change in both indices.

The Composite 10 is off 16.9% over the last year.

The Composite 20 is off 15.8% over the last year.

More on prices later ... including selected cities, real prices, and some thoughts on the slowing rate of price declines.

by Calculated Risk on 7/28/2008 11:45:00 PM

From the WSJ: Mervyn's Is Close To Bankruptcy Filing (hat tip sunlight)

Lawyers for Mervyn's LLC are telling creditors that the regional department-store chain will file for bankruptcy protection in the next few days, barring a last-minute cash infusion ...

Mervyn's, which operates 177 stores, mostly in California, has been struggling in the face of sharp sales declines this year in California and Arizona, where the real-estate markets have collapsed.

More problems for mall owners. And more ripples from the real estate bust.

by Calculated Risk on 7/28/2008 07:33:00 PM

As part of Merrill's major announcement today, Merrill is offering "new common shares with gross proceeds of approximately $8.5 billion."

When Merrill sold stock last December (at $48 per share), Merrill offered to compensate Temasek Holdings if Merrill sold additional stock, at a lower price, within one year.

From the Merrill announcement today:

Merrill Lynch plans to raise $8.5 billion through the public offering of common stock announced today ... Temasek Holdings, Merrill Lynch’s largest shareholder, has committed to purchase $3.4 billion of common stock in the offering ...

In satisfaction of Merrill Lynch’s obligations under the reset provisions contained in the investment agreement with Temasek Holdings, Merrill Lynch has agreed to pay Temasek $2.5 billion, 100% of which Temasek has contractually agreed to invest in the offering at the public offering price without any future reset protection.

Basically the $2.5 billion is a reset on the previous purchase price (dilution without additional capital). Here is the Merrill SEC filing from last December:

If Company sells or agrees to sell any common stock (or equity securities convertible into common stock) within one year of closing at a purchase, conversion or reference price per share less than $48, then the Company must make a payment to Purchaser to compensate Purchaser for the aggregate excess amount per share paid by Purchaser. At the Company’s option, the Company may issue additional shares of common stock in lieu of cash to Purchaser with a market value equal to such excess amount.

Merrill should have been highly motivated to avoid paying this price protection penalty, and this shows a certain desperation - although the good news is there is no future reset protection for Temasek.

by Calculated Risk on 7/28/2008 05:47:00 PM

From Merrill Lynch: Merrill Lynch Announces Substantial Sale of U.S. ABS CDOs, Exposure Reduction of $11.1 Billion

First, here are the write-downs:

As a result of the transactions announced today, the company expects to record a pre-tax write-down in the third quarter of 2008 of approximately $5.7 billion. This write-down is comprised of a $4.4 billion loss associated with the sale of CDOs, a $0.5 billion net loss on the termination of hedges with XL Capital Assurance and an approximately $0.8 billion maximum loss related to the potential settlement of other CDO hedges with certain monoline counterparties.

Here is the info on the CDO sale:

On July 28, 2008, Merrill Lynch agreed to sell $30.6 billion gross notional amount of U.S. super senior ABS CDOs to an affiliate of Lone Star Funds for a purchase price of $6.7 billion. At the end of the second quarter of 2008, these CDOs were carried at $11.1 billion, and in connection with this sale Merrill Lynch will record a write-down of $4.4 billion pre-tax in the third quarter of 2008.

On a pro forma basis, this sale will reduce Merrill Lynch’s aggregate U.S. super senior ABS CDO long exposures from $19.9 billion at June 27, 2008, to $8.8 billion, the majority of which comprises older vintage collateral – 2005 and earlier. The pro forma $8.8 billion super senior long exposure is hedged with an aggregate of $7.2 billion of short exposure, of which $6.0 billion are with highly-rated non-monoline counterparties, of which virtually all have strong collateral servicing agreements, and $1.1 billion are with MBIA. The remaining net exposure will be $1.6 billion. The sale will reduce Merrill Lynch’s risk-weighted assets by approximately $29 billion.

Merrill Lynch will provide financing to the purchaser for approximately 75% of the purchase price. The recourse on this loan will be limited to the assets of the purchaser. The purchaser will not own any assets other than those sold pursuant to this transaction.

There is much more in the press release.

by Calculated Risk on 7/28/2008 02:43:00 PM

From MarketWatch: Four big banks to kick-start covered bond market

Appearing alongside Treasury Secretary Henry Paulson, representatives of the four largest U.S. banks agreed Monday to kick-start a market for covered bonds - an alternative way to provide mortgage loans - in the United States.
...
Under the practice, a bank borrows funds to lend to homeowners and holds the mortgages on its books. It uses the proceeds of the mortgages to repay investors.
...
Covered bonds are considered more secure than mortgage-backed securities (MBSs) because the purchasers of the bonds have a direct claim on the issuer's balance sheet.

I'm not very familiar with covered bonds, but reports suggest they are - or were - widely used in Europe. (italics added)

by Calculated Risk on 7/28/2008 09:39:00 AM

From the DOT: Nearly 10 Billion Fewer Miles Driven in May 2008 than May 2007 Seven-Month Decline in Travel Reflected in Highway Trust Fund

Secretary Peters said that Americans drove 9.6 billion fewer vehicle-miles traveled (VMT) in May 2008 than in May 2007, according to the Federal Highway Administration data. This is the largest drop in VMT for any May ... and is the third-largest monthly drop in the 66 years such data have been recorded. Three of the largest single-month declines - each topping 9 billion miles - have occurred since December.

VMT on all public roads for May 2008 fell 3.7 percent as compared with May 2007 travel, the Secretary added, marking a decline of 29.8 billion miles traveled in the first five months of 2008 than the same period a year earlier. This continues a seven-month trend that amounts to 40.5 billion fewer miles traveled between November 2007 and May 2008 than the same period a year before, she said.

Click on graph for larger image in new window.

This graph shows the the moving 12 month total for vehicle miles driven.

The miles driven (on a rolling 12 month basis) is just starting to decrease - similar to what happened during the oil crisis of the '70s.

And from the NY Times: Fuel Subsidies Overseas Take a Toll on U.S.

The oil company BP, known for thorough statistical analysis of energy markets, estimates that countries with subsidies accounted for 96 percent of the world’s increase in oil use last year — growth that has helped drive prices to record levels.
...
China raised gasoline and diesel prices on June 21, though still keeping them below world levels. World oil prices plunged more than $4 a barrel within minutes on the expectation that Chinese demand would slow.
...
Indonesia spends more on fuel subsidies, $20 billion this year, than any country except China. Some economists estimate that fuel use in Indonesia would fall by as much as a fifth if the government were to eliminate subsidies entirely.
...
Malaysia’s government incited public anger on June 4 when it raised gasoline prices by 40 percent. ... Before adjusting the prices, Malaysia was spending 7.5 percent of its entire economic output on fuel subsidies, a greater share than any other nation. Indonesia follows with 4 percent.

Further reductions in these subsidies would reduce demand, and lower world oil prices.

by Calculated Risk on 7/28/2008 09:33:00 AM

From the USA Today: Record deficit expected in 2009

The White House has increased its estimate for next year's deficit to nearly $490 billion, a record figure ... In February, President Bush predicted the 2009 deficit would be $407 billion.

The budget update shows this year's deficit headed under $400 billion ...

First, this is the Unified Budget deficit. By these projections, the General Fund deficit (the President's responsibility) will be around $600 billion this year, and $700 billion next year.

Second, these projections are probably optimistic.

by Calculated Risk on 7/28/2008 02:05:00 AM

The WSJ has some details from the DOT report due tomorrow: Funds for Highways Plummet As Drivers Cut Gasoline Use

A report to be released Monday by the Transportation Department shows that over the past seven months, Americans have reduced their driving by more than 40 billion miles. Because of high gasoline prices, they drove 3.7% fewer miles in May than they did a year earlier, the report says, more than double the 1.8% drop-off seen in April.

More demand destruction for oil.

by Calculated Risk on 7/27/2008 08:26:00 PM

This week the Census Bureau reported the homeownership and vacancy rates for Q2 2008. Here are a few graphs and some analysis ...

Click on graph for larger image in new window.

Although the homeownership rate increased slightly (just noise), the homeownership rate is now back to the levels of the summer of 2001. Note: graph starts at 60% to better show the change.

The second graph shows the homeowner vacancy rate since 1956. The homeownership vacancy rate decreased slightly to 2.8% (from a record 2.9% in Q1).

A normal rate for recent years appears to be about 1.7%. There is some noise in the series, quarter to quarter, so perhaps the vacancy rate has stabilized in the 2.7% to 2.9% range.

This leaves the homeowner vacancy rate almost 1.1% above normal, and with approximately 75 million homeowner occupied homes; this gives about 825 thousand excess vacant homes.

The rental vacancy rate decreased slightly to 10.0% in Q1 2008, from 10.1% in Q1. The rental vacancy rate had been trending down slightly for almost 3 years (with some noise).

It's hard to define a "normal" rental vacancy rate based on the historical series, but we can probably expect the rate to trend back towards 8%. According to the Census Bureau there are 35.5 million rental units in the U.S. If the rental vacancy rate declined from 10.0% to 8%, there would be 2.0% X 35.5 million units or about 710,000 units absorbed.

This would suggest there are about 710 thousand excess rental units in the U.S.

There are also approximately 200 thousand excess new homes above the normal inventory level (for home builders) - plus some uncounted condos.

If we add this up, 710 thousand excess rental units, 825 thousand excess vacant homes, and 200 thousand excess new home inventory, this gives about 1.75 million excess housing units in the U.S. that need to be absorbed over the next few years. (Note: this data is noisy, so it's hard to compare numbers quarter to quarter, but this is probably a reasonable approximation).

These excess units will keep pressure on housing starts and prices for some time.

by Calculated Risk on 7/27/2008 04:00:00 PM

From the TimesUnion on upstate New York: An ebbing retail tide (hat tip Justin)

Consider, for a moment, some of the national chains that in recent months have closed stores, declared bankruptcy or gone out of business entirely: Linens 'n Things, Steve & Barry's, Sharper Image, Starbucks, CompUSA, The Disney Store, Wilson's Leather, Talbots, Ann Taylor, Bombay Co.
...
"It's not a very happy time to be building a new shopping center, that's for sure," said Jeffrey Pfeil, co-owner of J.W. Pfeil & Co. Inc. in Saratoga Springs, a company with a long history in retail and commercial leasing.

Justin noted that he spoke to Mr. Pfeil at the end of last year, and at that time he was still "quite optimistic on local real estate". Times have definitely changed for CRE -especially for mall owners.

by Anonymous on 7/27/2008 12:21:00 PM

Then I don't want to know what defeat would be. Even I am getting tired of writing about Gretchen Morgenson columns, but this one cries out for demystification. Anyone who wants to claim that any homeowner who stops foreclosure and keeps her home has necessarily "won" anything or received any particular financial benefit needs to read this post. This is a profoundly important issue: the whole "stop foreclosure" movement is based on the assumption that stopping a foreclosure is always and everywhere a "win" for homeowners. Morgenson appears to buy this idea so much that her reporting crosses the line from its typical tendentiousness to outright distortion in order to sustain the myth. I suggest that no actually useful and successful response to the "foreclosure crisis" will ever come about as long as this kind of distortion goes unchallenged.

*************

Here's Morgenson:

MAMIE RUTH PALMER isn’t a celebrity. People magazine doesn’t chronicle her every move. The paparazzi don’t wait for a photo op outside of the modest Atlanta home where she has lived since 1987.

But in some mortgage circles, Ms. Palmer, a 74-year-old former housekeeper, has earned her moment of fame. After enduring six years in foreclosure hell, almost losing her home twice, Ms. Palmer has escaped intact.

Last month she received a settlement from the Bank of New York, the trustee for a vast pool of mortgages that included hers. Under the terms of the deal, the bank reduced Ms. Palmer’s loan balance to $59,000 from about $100,000 and has agreed to accept the proceeds of a reverse mortgage in full satisfaction of her obligation.

The settlement also eliminated about $12,000 in foreclosure fees added to her debt and called for the installation of central air-conditioning in Ms. Palmer’s home.

Roughly $10,000 in legal fees billed over five years by Ms. Palmer’s lawyer, Howard D. Rothbloom, will be covered by payments she has made toward her mortgage while she was battling foreclosure.

“I feel good,” Ms. Palmer said last week. “It’s been a long time coming.” To celebrate, she said, she is going to Florida to fish with her nephew.

Ms. Palmer’s case is hardly unique. It’s just one of a swelling number that revolve around the thorny issue of who owns the note on a home when it’s forced into foreclosure proceedings.

This case is not "about" who owns a note. It just isn't. Certainly, among the tens of thousands of dollars worth of objections and motions made by Palmer's attorneys over the course of six years, there was some question about the standing of the mortgage servicer. It appears that the servicer produced some pretty sloppy paperwork for the court. It appears that the Debtor's attorney also filed some pretty sloppy paperwork with the court, too, which dragged out the challenge to the servicer's standing for months. (If you want to read a first-rate judicial slapdown and you have a PACER account, don't miss Judge Massey's "Order Directing Debtor's Counsel to Withdraw Objection to Claim of HomeEq Servicing Corporation or To Litigate The Objection Properly," In re Palmer, Case No. 02-81333, docketed 3-31-03, US Bankruptcy Court, Northern District of Georgia.)

At the end of it, the mortgage servicer withdrew its proof of claim and the trustee of the security owning this loan (Bank of New York) entered the case directly. I do not see from my review of the documents on PACER that there was ever any question that Bank of New York as trustee for the MBS had standing in bankruptcy or was owed money.

The final complaint that resulted in a settlement of this case alleged that Bank of New York charged inappropriate fees. There was no challenge at all to BNY as the creditor.

At no time, it seems, was there ever any question about the fact that Palmer had a mortgage loan and did not make payments either pre- or post-petition. Documents in this case indicate that the mortgage loan in question was originated in October of 1996, and that Palmer began making late payments by June of 1997. Palmer failed to pay taxes and insurance on the property. She filed prior bankruptcies in 1999, 2000, and 2002, each of which was dismissed. When this $52,000 loan was first originated on what was then a $78,000 property, the monthly payment exclusive of taxes and insurance was $554.97, and it became clear within a year that Palmer could not afford that.

By November of 2005, Palmer owed (according to her servicer) $50,611.70 in principal, $10,104.98 in escrow advances, $19,802.60 in accrued but unpaid interest, and $11,379.90 in legal fees, late charges, etc. During most of this period she does not appear to have made any mortgage payments, or any payments for taxes and insurance.

The final complaint made by Palmer's attorneys alleged that some fees were inappropriate. By this time there was no question that Bank of New York had a proof of claim; the argument was about how much the debtor owed. I have no idea whether the $10,000 Morgenson reports as being the cost of Palmer's own attorney's efforts is "appropriate" or not. It appears that BNY just got seriously tired of all of this and did, indeed, decide to settle. But Morgenson's description of that settlement leaves a lot to be desired. I quote from Judge James E. Massey's Interim Consent Order of May 5, 2008:

The parties have reached a settlement of any and all claims that were or could have been raised in this case.

Plaintiff has been approved by Financial Freedom, a subsidiary of Indymac Bank, for a reverse mortgage to be secured by her residence. Plaintiff will receive approximately $79,530.00 in a principal limit. The lender will deduct approximately $6,436.00 for the cost of closing the loan and approximately $5,946.98 for servicing the loan. Approximately $7,300.00 must be set aside for repairs to be made as a condition of the loan. After all deductions, Plaintiff will receive approximately $59,847.02.

From the proceeds of the reverse mortgage, Plaintiff will pay the sum of $57,800.00 to Defendants and Defendants shall accept the sum of $57,800.00 in settlement and as full and final satisfaction of the entire debt owed by Plaintiff to Defendants. Upon receipt of these funds, Defendants shall cause the deed to secure debt on Plaintiff’s residence to be released and will withdraw the proof of claim filed by them in this case.

The Trustee shall not disburse any additional funds whatsoever to Defendants for ongoing mortgage payments or for any proof of claim filed by Defendants in the case.

The parties shall bear their own respective costs incurred in this adversary proceeding.

So this is how Mamie Palmer came out "intact": she began her case owing $51,000 in principal and around $76,500 in total, including interest, escrow, and legal fees. She now owes $79,530. She will also have to pay $10,000 to her attorney out of payments she made to the bankruptcy trustee. She gets $7300 worth of repairs to her home. Although her new mortgage, being a reverse mortgage, will not require her to make monthly payments, she will still have to pay taxes, insurance, and maintentance out of pocket, since the initial disbursement for this loan was equal to its full principal limit. If she does not make those payments, she can face foreclosure from IndyMac. Or, well, the FDIC. If the FDIC is willing ever to foreclose on any IndyMac loans.

I guess that punishes the investors in Palmer's mortgage loans and her mortgage servicer for having made an error on a mortgage assignment: they'll be writing off most of their accrued interest and all their legal expenses.

I suppose it's just more of the crashing irony of this story that Palmer's new loan now belongs to us taxpayers, unless the FDIC can find a buyer for IndyMac. That and the fact that a homeowner left the bankruptcy system owing more, not less, than she did when she started. One of our regular commenters likes to tell me this is called "rough justice," and I should "get used to it."

I'm not sure I'd call this "rough justice." I certainly will not call this a "victory" for a homeowner in "foreclosure hell." Whatever Morgenson is smoking, she needs to give it up.
Read On ..

by Calculated Risk on 7/27/2008 09:01:00 AM

Since I was out of town on Friday, here is a somewhat belated look at the New Home sales report from the Census Bureau.

According to the Census Bureau report, New Home Sales in June were at a seasonally adjusted annual rate of 530 thousand. Sales for May were revised up to 533 thousand (from 512 thousand).

Click on graph for larger image in new window.

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

Notice the Red columns for 2008. This is the lowest sales for June since the recession of '91. (NSA, 49 thousand new homes were sold in June 2008, just above the '91 recession low of 47 thousand homes).

As the graph indicates, there was no spring selling season in 2008.

The second graph shows New Home Sales vs. recessions for the last 45 years. New Home sales have fallen off a cliff.

Sales of new one-family houses in June 2008 were at a seasonally adjusted annual rate of 530,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 0.6 percent below the revised May rate of 533,000 and is 33.2 percent below the June 2007 estimate of 793,000.

And one more long term graph - this one for New Home Months of Supply.

"Months of supply" is at 10.0 months.

Note that this doesn't include cancellations, but that was true for the earlier periods too. The months of supply is down from the peak of 11.2 months in March 2008.

The all time high for Months of Supply was 11.6 months in April 1980.

And on inventory:

The seasonally adjusted estimate of new houses for sale at the end of June was 426,000. This represents a supply of 10.0 months at the current sales rate.

Inventory numbers from the Census Bureau do not include cancellations - and cancellations are near record levels. Actual New Home inventories are probably much higher than reported - my estimate is around 90K higher. 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.

Still the 426,000 units of inventory is well below the levels of the last year, and inventory is now falling fairly quickly. It appears the home builders are selling more homes than they are building, and it is very possible that months of supply has peaked for this cycle.

I now expect that 2008 will be the peak of the inventory cycle (in terms of months of supply) and could be the bottom of the sales cycle for new home sales. But the news is still grim for the home builders. Usually new home sales rebound fairly quickly following a bottom (see the 2nd graph above), but this time I expect a slow recovery because of the overhang of existing homes for sales (especially distressed properties). If the recession is more severe than I currently expect, new home sales might fall even further.

Looking forward, I'm much more pessimistic about existing home sales, and existing home prices, than new home sales.

by Calculated Risk on 7/26/2008 07:22:00 PM

UPDATE: This appears to be an up-to-date version of the bill.

by Calculated Risk on 7/26/2008 06:01:00 PM

From the NY Times: Congress Sends Housing Relief Bill to Bush

Here is the WSJ version: Congress Passes Housing Bill

First, I think the impact of the original part of the housing bill will be minimal. The provision allows the FHA to insure up to $300 billion in new mortgages for certain borrowers. The key is that the current lender has to voluntarily agree to write down the loan balance to 85% of the current appraised value before the FHA will insure the new loan.

The CBO has estimated that the FHA will only insure $68 billion in loans for about 325,000 homeowners. The number will be limited because only certain homeowners actually qualify, and also because lenders probably will not be eager to write down loans to 85% of the current appraised value.

My biggest concerns with this provision are appraisal fraud and adverse selection.

The other major provision of the housing bill is the Paulson Plan to support Fannie and Freddie. The cost to taxpayers is very uncertain, although I doubt it will be zero (the CBO's base case). The GSE support does appear to be almost unlimited (limited only by the debt ceiling that was increased to $10.6 trillion from $9.815 trillion).

The actual cost of the Paulson Plan is a huge concern.

There are many other provisions. As the NY Times mentions:

There are provisions, for example, that grant or extend Section 8 federal housing subsidy eligibility to residents of specific properties in Malden, Mass., and San Francisco. And there is a provision tailored narrowly for Chrysler to ensure that it can benefit from a corporate tax incentive even though the company is now structured as a partnership not a corporation. The bill does not name Chrysler but rather describes an unnamed automobile manufacturer “that will produce in excess of 675,000 automobiles” between Jan. 1 and June 30, 2008.

Weird.

The bill also has a tax credit for new home buyers (up to $7,500). This appears to be structured as a no interest loan that has to be repaid within 15 years.

The bill has many other provisions too, including permanently increasing the conforming loan limit to 115% of the local area median home price (with a ceiling of $625,000, from $417,000), and eliminating FHA related Downpayment Assistance Programs (DAPs). Tanta and I have been advocating eliminating DAPs for years.

Note: I could have some of the specifics wrong - I've read several stories, and the details vary.

I think the bill doesn't match the heated rhetoric on the internets (I've seen people write this is the "end of capitalism" and the "dollar is doomed"). Although I'm sure some commenters will confuse me with Pollyanna!

by Calculated Risk on 7/26/2008 02:08:00 PM

Here are some graphs (and analysis) based on the Existing Home sales report from the National Association of Realtors (NAR). (note: I was out of town this week, and couldn't post these earlier)

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 June 2008 (4.86 million SAAR) were the weakest June since 1998 (4.78 million SAAR).

It's important to note that a large percentage of these sales were foreclosure resales (banks selling foreclosed properties). The NAR suggested that "short sales and foreclosures [account] for approximately one-third of transactions". Although these are real transactions, this means that normal activity (ex-foreclosures) is running around 3.3 million SAAR.

*****************************
The second graph shows nationwide inventory for existing homes. According to NAR, inventory increased slightly to 4.49 million homes for sale in June. The typical pattern is for inventory to decline in December, and then to slowly rebound in January and February, and really start to increase from March through mid-Summer.

Some people are hoping that inventory is stabilizing at this level, however there is probably a significant "shadow inventory" waiting to come on the market.

Most REOs (bank owned properties) are including in the inventory because they are listed - but not all. Many houses in the foreclosure process are listed as short sales - so those would be counted too.

But there is some evidence lenders are holding off foreclosing, perhaps trying for workouts, or maybe the lenders are just overwhelmed - and many of these units are probably not included in inventory. And there are definitely homeowners waiting for a "better market" - and those homeowners will probably keep the supply high for a few years.

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

Months of supply increased to 11.1 months.

This follows the highest year end months of supply since 1982 (the all time record of 11.5 months of supply). Even if inventory levels stabilize, the months of supply could continue to rise - and possibly rise significantly - if sales decline later this year. I still expect to see 12 months of supply sometime later this year.

The fourth graph shows Not Seasonally Adjusted (NSA) existing home sales for 2005 through 2008. Sales are sharply lower in June 2008 compared to the previous three years.

NSA sales were reported at 504 thousand in June, however about one-third of those were foreclosure resales. This means regular sales are less than half the level of June 2005 and 2006.

Note that June is an important month for existing home sales; existing home sales usually peak in the June through August period. This is usually about as good as it gets for sales on a NSA basis.

The next graph shows annual existing home sales and year end inventory. Note: for 2008 I used the June sales and inventory numbers. All other numbers are annual sales, and year-end inventory.

If the red columns (inventory) rises above the blue column (sales) - something that is likely to happen this summer - then the "months of supply" number will be over 12.

The final graph shows the annual sales and year end inventory since 1982 (sales since 1969), normalized by the number of owner occupied units.

The graph shows that inventory is at an all time record level by this key measure.

This also shows the annual variability in the turnover of existing homes, with a median of 6% of owner occupied units selling per year. Currently 6% of owner occupied units would be about 4.6 million existing home sales per year.

This indicates that the turnover of existing homes - June sales were at a 4.86 million Seasonally Adjusted Annual Rate (SAAR) - is still above the historical median. The reason sales are so high is because of all the foreclosure resales.

This suggests to me that sales will fall further later this year and in 2009.

Read on ... there are many more graphs.

by Calculated Risk on 7/26/2008 11:50:00 AM

From Eric G. Lewis, a freelance cartoonist living in Orange County, CA.

Click on cartoon for larger image in new window.

Thank you Eric! (note: bumped from earlier)

by Anonymous on 7/26/2008 09:43:00 AM

I checked Google news this morning to see if there were any follow-up stories on Carlene Balderrama's suicide. There wasn't anything new, except this "press release" from some illiterate do-it-yerself PR website:

(Atlanta, Georgia) - Ransom Enterprizes, LLC a national real estate consulting firm has been consistent with training foreclosure consulting businesses how to properly assist homeowners with stopping foreclosures. Today the consulting firm announced to offer a free information report to homeowners facing foreclosures, an effort to prevent suicide attempts to stop foreclosure.

According to Kyle Ransom president of Ransom Enterprizes, LLC he was extremely sadden when he learned about homeowner Carlene Balderrama actually taking her life because she was unable to resolve her foreclosure problem.

One is then directed to Ransom Enterprizes' website for this "free information report."

The Foreclosure Rescue Kit™ comes fully loaded with information that you must know before approaching the bank to stop your foreclosure! Important forms to help make your forbearance package look professionally prepared. Answers and solutions to help you save your home from foreclosure fast! Complete step-by-step guide to surefire you STOP Your Foreclosure in 72 Hours or Less!

Ransom Foreclosure Rescue Kit™ Includes:

Blank Financial Statement Forms
Account Number and Property Address Placements
Required Documents Checklist
Foreclosure Process Overview
Foreclosure Prevention Overview
Hardship Letter Overview and Samples
Mortgage Financing Overview
Credit and Budgeting Overview
Professional Fax Coversheets

Make sure that you have all of the right knowledge to save your home from being foreclosed on by the bank. Your home is an investment that you must protect and you must act fast today to prevent the bank from foreclosing on it. Time is your worst enemy and the longer you wait the closer your home remains in danger of foreclosure.

Special Offer! Get Foreclosure Rescue Kit™ Today $99 Regularly $349 (Limited Time Offer)

Apparently the "free" part involves the wise counsel on this webpage, such as this:

If you file a bankruptcy the bank will not allow you to do a special forbearance or loan workout plan! Be careful of bankruptcy attorneys who encourage you to file bankruptcy before trying to work something out with the bank first. Once you see the fees that go directly to the bankruptcy attorney you will know exactly why they want you to file a bankruptcy.

It is, of course, simply false that filing BK means the bank will never work something out with you. But the chutzpah of someone who charges $349 for some blank forms, information that is freely available on the web or at a non-profit housing counseling agency, and a fax coversheet accusing BK attorneys of looking to enrich themselves is quite stunning.

Madre de Dios. If you or someone you know is seriously depressed because of financial matters and is contemplating suicide, you need to call your local suicide prevention hotline, your doctor, your priest or rabbi or minister, or if you have no other resources, 911. Ask whoever answers the phone for an emergency referral to a qualified counselor. The first priority here is to save a life, not deal with foreclosure paperwork.

Absolutely the last thing you need to do is send $99 or 99 cents to some huckster on the Internet who is simply offering to sell you a packet of papers that puts the onus back on you to try to solve a terribly stressful and complex problem. Someone who is trying to get you to pay for "professional fax cover sheets" is not trying to help you. If you are feeling suicidal, you are no longer in a position to try to do this yourself, with or without some "kit."

And if you aren't suicidal, you don't need to spend a dime on this "kit" either. I normally try not to make absolute claims about the world, but I will make one now: no mortgage workout negotiation has ever been turned down by a lender because your fax cover sheet wasn't pretty enough. Not now, not ever, not a happening kind of thing. Anyone who says or implies different is lying to you in order to make a fast buck off of you. And even if you want to believe that a pretty fax cover sheet could make a difference, you would want to obtain one from someone who can write grammatical and correctly-spelled English. Which would not be "Ransom Enterprizes."

I am not willing to hold the media outfits who have been flogging the Balderrama story responsible for its co-optation by sleazeballs. I am, however, suggesting that the media exploiters of this story just created a narrative line that lets the "stop foreclosure" hustlers position themselves as caring folk who just want to prevent suicides. And that makes me want to throw up.