Saturday, July 31, 2010

How do you put recession bars on graphs using Excel?

by Calculated Risk on 7/31/2010 10:18:00 PM

Something a little different for a Saturday evening. This is a common question, using excel, how do you get from this:

Recession Shading
to this:
Recession Shading
I'll walk anyone interested through it (I use Excel 2007; I have 2010, but I haven't loaded it yet).

After the jump is a simple step-by-step example on one way to do it:

Growth of Problem Banks (Unofficial)

by Calculated Risk on 7/31/2010 05:19:00 PM

With the number of institutions on the unofficial problem bank list now over 800, here is a review of the growth of the unofficial list ...

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

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

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

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

This graph shows the number of banks on the unofficial list. The number of institutions has more than doubled since early August 2009 - even with all the bank failures (failures are removed from the list). The number of assets is up 50 percent.

On August 7, 2009, we listed 389 institutions with $276 billion in assets, and now the list has 808 institutions and $415 billion in assets.

Note: For Q2 2009, the FDIC listed 416 institutions and $299.8 billion in assets (slightly more than the unofficial list a month later). The FDIC Q2 2010 Quarterly Banking Profile will be released in a few weeks.

The four red dots are the number of banks on the official problem bank list as announced in the FDIC quarterly banking profile for Q2 2009 through Q1 2010. The dots are lagged one month because of the delay in announcing formal actions.

The unofficial count is close, but is slightly lower than the official count - probably mostly due to timing issues.

Based on the current trend, there is still a reasonable chance that the unofficial problem bank list will be over 1,000 banks later this year ...

Negative Equity Breakdown

by Calculated Risk on 7/31/2010 11:40:00 AM

Here is some data from a recent congressional briefing by Mark Zandi, Chief Economist of Moody's, and Yale Professor Robert Shiller. I believe all of this negative equity data was presented by Zandi.

A few key points, as of Q1 2010:

  • There is almost $2.4 trillion mortgage debt for homes in negative equity.

  • The total negative equity is $771 billion.

  • There are 4.1 million homeowners with more than 50% negative equity (they owe 50%+ more than their homes are worth).

    Homeowners in negative equity Click on graph for larger image in new window.

    This graph shows the percent of homeowners with negative equity (dashed line), percent of homeowners with mortgages with negative equity (blue), and the mortgage debt for homes with negative equity - all since Q1 2006.

    The good news is the percent of homeowners with negative equity, and the mortgage debt for homes with negative equity, peaked in 2009.

    The bad news is the declines have been relatively small even with all the distress sales, minor price increases, and some principal reduction modifications. As prices start to fall later this year (as I expect), the number of homeowners with negative equity will probably increase again (offset by foreclosures, short sales, and some modifications with principal reduction).

    Homeowners in negative equity The second graph shows the number of homeowners in negative equity, by the percent of negative equity.

    There are 4.1 million homeowners with more than 50% negative equity, and another 5 million homeowners with 20% to 50% negative equity.

    If prices fall 5%, the columns will essentially shift one to the left (ignoring remedies), and there will be 10.2 million homeowners with 20% or more negative equity.

    Homeowners in negative equity The third graph shows the percent of homeowners with mortgages in negative equity for 33 states and D.C.

    This is shown in three categories: >50%, 20% to 50%, and 0 to 20%.

    If you look at Nevada, 17.0% of homeowners (with mortgages) are more than 50% underwater, and another 35.2% are 20% to 50% underwater. These are the homeowners most at risk for foreclosure.

    Note: the Q2 CoreLogic negative equity report will be released soon, but that report doesn't provide this level of detail.

  • Restaurant Index shows contraction in June

    by Calculated Risk on 7/31/2010 08:56:00 AM

    This is one of several industry specific indexes I track each month.

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

    Same store sales and customer traffic both declined in June (on a year-over-year basis). This is the third consecutive month of declines.

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

    Note: Any reading above 100 shows expansion for this index.

    From the National Restaurant Association (NRA): Industry Outlook Softened in June as the Restaurant Performance Index Declined for the Third Consecutive Month

    As a result of a dampened outlook among restaurant operators, the National Restaurant Association's comprehensive index of restaurant activity declined for the third consecutive month in June. The Association's Restaurant Performance Index (RPI) - a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry - stood at 99.5 in June, down 0.3 percent from May and the lowest index level since February.

    In addition, the RPI stood below 100 for the second consecutive month, which signifies contraction in the index of key industry indicators.
    Restaurant operators reported a net decline in same-store sales for the third consecutive month in June, though the results were a modest improvement from the May performance.
    Restaurant operators also reported a net decline in customer traffic levels in June.
    Along with soft sales and traffic results, restaurant operators reported a dip in capital spending activity.
    Restaurant operators are also not as optimistic about the direction of the overall economy. ... Restaurant operators’plans for capital expenditures fell to a six-month low this month.
    emphasis added
    Restaurants are a discretionary expense, and this contraction could be because of the sluggish recovery or might suggest further weakness in consumer spending in the months ahead.

    Friday, July 30, 2010

    Unofficial Problem Bank List over 800 Institutions

    by Calculated Risk on 7/30/2010 11:59:00 PM

    Note: this is an unofficial list of Problem Banks compiled only from public sources.

    Here is the unofficial problem bank list for July 30, 2010.

    Changes and comments from surferdude808:

    FDIC actions this week led to many changes in the Unofficial Problem Bank List as they closed five institutions and finally released their enforcement actions for June 2010. The list total finally pushes through the much anticipated 800 level and finishes the week at 808 with aggregate assets of $414.8 billion.

    Along with the five failures -- LibertyBank ($768 million), The Cowlitz Bank ($537 million Ticker: CWLZ), Coastal Community Bank ($378 million), Northwest Bank & Trust ($168 million), and Bayside Savings Bank ($66 million) -- there were four other removals because of action termination-- Domestic Bank ($234 million), Plaza Bank ($178 million Ticker: PLZB), Citizens State Bank ($114 million), and Libertad Bank SSB ($41 million); and three other removals because of unassisted mergers -- Pamrapo Savings Bank ($551 million), Sterling Bank ($369 million Ticker: STBK), and Colorado Mountain Bank ($82 million).

    There are 28 additions this week with aggregate assets of nearly $9 billion. Most notable among the additions are Communityone Bank, National Association, Asheboro, NC ($2.0 billion Ticker: FNBN); The Palmetto Bank, Laurens, SC (1.3 billion Ticker: PLMT); Prosperity Bank, Saint Augustine, FL ($929 million); Jefferson Bank and Trust Company, Eureka, MO ($845 million); and Oxford Bank & Trust, Oak Brook, IL ($643 million). Geographically among the 28 additions are four based in Florida, three in Minnesota, and two in Illinois, Montana, and Wisconsin. The other change to report is a Prompt Corrective Action Order issued against Los Padres Bank ($902 million Ticker: HWFG) by the OTS.

    Bank Failure #107 & 108: Washington and Oregon

    by Calculated Risk on 7/30/2010 09:49:00 PM

    The Cowlitz Bank failed.
    Udderly Ridiculous!
    Their milk shake was drank.

    For whom the bell tolls?
    Liberty pushed out to sea
    Farewell to assets.

    by Soylent Green is People

    From the FDIC: Heritage Bank, Olympia, Washington, Assumes All of the Deposits of The Cowlitz Bank, Longview, Washington
    As of March 31, 2010, The Cowlitz Bank had approximately $529.3 million in total assets and $513.9 million in total deposits. Heritage Bank paid the FDIC a premium of 1.0 percent for the deposits of The Cowlitz Bank. ...

    The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $68.9 million. ... The Cowlitz Bank is the 107th FDIC-insured institution to fail in the nation this year, and the eighth in Washington. The last FDIC-insured institution closed in the state was Washington First International Bank, Seattle, on June 11, 2010.
    From the FDIC: Home Federal Bank, Nampa, Idaho, Assumes All of the Deposits of LibertyBank, Eugene, Oregon
    As of March 31, 2010, LibertyBank had approximately $768.2 million in total assets and $718.5 million in total deposits. Home Federal Bank paid the FDIC a premium of 1.0 percent for the deposits of LibertyBank. ...

    The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $115.3 million. .... LibertyBank is the 108th FDIC-insured institution to fail in the nation this year, and the third in Oregon. The last FDIC-insured institution closed in the state was Home Valley Bank, Cave Junction, on July 23, 2010.
    That makes 5 today.

    Estimate of July Decennial Census impact on payroll employment: minus 144,000

    by Calculated Risk on 7/30/2010 08:20:00 PM

    The Census Bureau released the weekly payroll data for the week ending July 17th this week (ht Bob_in_MA). If we subtract the number of temporary 2010 Census workers in the week containing the 12th of the month, from the same week for the previous month - this provides a close estimate for the impact of the Census hiring on payroll employment.

    The Census Bureau releases the actual number with the employment report.

    Census workers per week Click on graph for larger image in new window.

    This graph shows the number of Census workers paid each week. The red labels are the weeks of the BLS payroll survey.

    The Census payroll decreased from 344,157 for the week ending June 12th to 200,346 for the week ending July 17th.

    So my estimate for the impact of the Census on July payroll employment is minus 144 thousand (this will probably be close). The employment report will be released on August 6th, and the headline number for July - including Census numbers - will probably be negative again. But a key number will be the hiring ex-Census (so we will add back the Census workers again this month).

    The following table compares the weekly payroll report estimate to the monthly BLS report on Census hiring (the weekly report is revised slightly, so the correlation looks better than in real time):

     Weekly Pay PeriodChange (based on weekly report)Monthly BLSChange (monthly)
    Jan25 24 
    All thousands

    There will be one more large decline in temporary Census workers in August, and then most of the remaining workers will be let go over the next several months. I'll have more on July employment this Sunday in the weekly "Look ahead".

    Bank Failures #105 & 106: Florida

    by Calculated Risk on 7/30/2010 06:10:00 PM

    Florida condos
    Ghostly towers of failure
    Like area banks

    by Soylent Green is People

    From the FDIC: Centennial Bank, Conway, Arkansas, Acquires All of the Deposits of Two Institutions in Florida
    As of March 31, 2010, Bayside Savings Bank had total assets of $66.1 million and total deposits of $52.4 million. Coastal Community Bank had total assets of $372.9 million and total deposits of $363.2 million.
    The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $16.2 million for Bayside Savings Bank and $94.5 million for Coastal Community Bank. ... These two closings bring total closures for the year to 106 banks in the nation, and the 19th and 20th in Florida. Prior to these failures, the last bank closed in Florida was Sterling Bank, Lantana, on July 23, 2010.
    Three down today.

    Note: The FDIC released the June enforcement actions today, and the unofficial list will be over 800 tonight.

    Bank Failure #104: NorthWest Bank and Trust, Acworth, Georgia

    by Calculated Risk on 7/30/2010 05:30:00 PM

    Red ink rivers rise
    Bankers pray for sweet relief.
    Survival in doubt

    by Soylent Green is People

    From the FDIC: State Bank and Trust Company, Macon, Georgia, Assumes All of the Deposits of NorthWest Bank and Trust, Acworth, Georgia
    As of March 31, 2010, NorthWest Bank and Trust had approximately $167.7 million in total assets and $159.4 million in total deposits. ...

    The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $39.8 million. ... NorthWest Bank and Trust is the 104th FDIC-insured institution to fail in the nation this year, and the 11th in Georgia. The last FDIC-insured institution closed in the state was Crescent Bank and Trust Company, Jasper, on July 23, 2010.
    It is Friday!

    Existing Homes: Double Digit Months-of-Supply Watch

    by Calculated Risk on 7/30/2010 03:44:00 PM

    How the NAR calculates existing home inventory is a bit of a mystery. However housing economist Tom Lawler has been tracking inventory several different ways. For July, Lawler reports listings totaled 4,038,133, up about 1.6% from June (using And this brings us to the double digit months-of-supply watch ...

    For June, the NAR reported sales were at a 5.37 million seasonally adjusted annual rate (SAAR), and inventory was at 3.992 million.

    To calculated the months of supply, divide 3.992 by 5.37 and multiply by 12 months.

    This gives 8.92 months-of-supply (note: there is a seasonal pattern for inventory, but the NAR uses the NSA data).

    Existing Home Sales Months of SupplyClick on graph for larger image in new window.

    This graph shows the 'months-of-supply' metric.

    The NAR reported that the months-of-supply increased to 8.9 months in June.

    Since we know sales collapsed in July (based on pending home sales and other reports), and using Lawler's estimate for the level of inventory, we can calculate how far sales would have had to fall in July to hit double digits months-of-supply:

    For: Months of SupplyThen: July Sales (millions, SAAR)

    For 12 months of supply, the sales rate (SAAR) would equal inventory.

    My initial guess is we will see double digit months-of-supply in July, and for a number of the months thereafter. We might even break the cycle high of 11.2 months set in 2008. If months-of-supply increases sharply as I expect, then there will be additional downward pressure on house prices.

    Error Correction: Confused Annual and Quarterly Rates in previous post

    by Calculated Risk on 7/30/2010 02:04:00 PM

    In the previous post I confused annual rates and quarterly rates. Sorry.

    Real PCE is 0.85% below the pre-recession peak, so PCE would have to grow at 3.4% in Q3 for the economy to be back to the pre-recession level.

    Real GDP is 1.1% below the pre-recession peak, so GDP would have to grow at 4.3% in Q3 to be back to the pre-recession level.

    With a 2nd half slowdown, I don't expect to reach those levels until the end of the year or in 2011.

    Note: the graphs and quarterly data are all correct - just the annual comment that I added was in error (ht Tehan)

    Revisions: Real GDP and PCE well below previous peak

    by Calculated Risk on 7/30/2010 11:32:00 AM

    Error Correction: Sorry - I confused annual rates and quarterly rates.

    Real GDP is 1.1% below the pre-recession peak, so if GDP would have to grow at 4.4% in Q3 the economy to be back to the pre-recession level.

    Real PCE is 0.85% below the pre-recession peak, so PCE would have to grow at 3.4% in Q3 to be back to the pre-recession level.

    These two graphs show the revisions for real GDP and PCE.

    GDP revisions Click on graph for larger image in new window.

    The recession was clearly worse than originally estimated (we suspected this already using Gross Domestic Income).

    In fact real GDP in Q2 2010 was lower than originally reported for Q1 2010. And annualized real GDP is still 1.1% below the pre-recession peak. This means that real GDP would have to grow at a 4.3% rate over the next quarter to reach the recession peak.

    This shows that St Louis Fed President Bullard was too optimistic in a speech last month. From Bullard in June: The Global Recovery and Monetary Policy

    "As of the first quarter of 2010, real GDP stands just shy of the 2008 second quarter level, so that growth of about 1.25 percent would be sufficient to allow real GDP to surpass the previous peak. At that point, the U.S. economy would be fully "recovered" from the very sharp downturn of late 2008 and early 2009. To be clear, the 1.25 percent is a quarterly number, and would be 5.0 percent at an annual rate. Although I think that 5.0 percent at an annual rate is too much to expect for current quarter real GDP growth, it seems like a reasonable possibility over the next two quarters combined. Given these conditions, I expect the U.S. recovery in GDP to be complete in the third quarter of this year."
    I disagreed with him, and pointed out that GDI suggested downward revisions.

    PCE revisionsReal PCE was revised down even more.

    Annualized real PCE is now 0.85% below the pre-recession peak, and would have to grow 3.4% over the next quarter to reach the previous peak.

    Cleveland Fed President Sandra Pianalto had it right in February: When the Small Stuff Is Anything But Small
    [I]t may take years just to get back to the level of output we enjoyed in 2007, just before the economic crisis began.
    If things go well, the economy will be back to pre-recession levels later this year or in 2011. No wonder there is so little investment. And no wonder there is so little hiring!

    Chicago PMI shows expansion in July

    by Calculated Risk on 7/30/2010 09:45:00 AM

    From the Institute for Supply Management – Chicago:

    The Chicago Purchasing Managers reported the CHICAGO BUSINESS BAROMETER rebounded, marking a tenth month of growth.
    The overall index increased to 62.3 from 59.1. Note: any number above 50 shows expansion.

    Employment improved to 56.6 from 54.2 in June.

    The new orders index increased to 64.6 from 59.1.

    Overall this was a positive report. The national ISM manufacturing index will be released on Monday.

    Q2: real annualized GDP growth slows to 2.4%

    by Calculated Risk on 7/30/2010 08:30:00 AM

    From the BEA:

    Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.4 percent in the second quarter of 2010, (that is, from the first quarter to the second quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 3.7 percent.
    A few key numbers:

  • "Real personal consumption expenditures increased 1.6 percent in the second quarter, compared with an increase of 1.9 percent in the first."

    PCE is slowing.

  • Investment: Nonresidential structures increased 5.2 percent, in contrast to a decrease of 17.8 percent. Equipment and software increased 21.9 percent, compared with an increase of 20.4 percent. Real residential fixed investment increased 27.9 percent, in contrast to a decrease of 12.3 percent.

    Residential investment was boosted by the tax credit and will decline in Q3.

  • "The change in real private inventories added 1.05 percentage points to the second-quarter changein real GDP after adding 2.64 percentage points to the first-quarter change."

    That is probably the end of the inventory adjustment.

    And here is a summary of the revisions:
    QuarterGDPGDP RevisedChange
    2007-I 1.2%0.9%-0.3%
    2007-II 3.2%3.2%0.0%
    2007-III 3.6%2.3%-1.3%
    2007-IV 2.1%2.9%0.8%
    2008-I -0.7%-0.7%0.0%
    2008-II 1.5%0.6%-0.9%
    2008-III -2.7%-4.0%-1.3%
    2008-IV -5.4%-6.8%-1.4%
    2009-I -6.4%-4.9%1.5%
    2009-II -0.7%-0.7%0.0%
    2009-III 2.2%1.6%-0.6%
    2009-IV 5.6%5.0%-0.6%
    2010-I 2.7%3.7%1.0%
    2010-II 2.4% 

    The recession was worse in 2008 than originally estimated.

    Q1 2010 was revised up, but Q3 and Q4 2009 were revised down. So the recovery is a little weaker than originally estimated.

    I'll have some graphs soon.

  • Thursday, July 29, 2010

    House Prices rolling over Down Under?

    by Calculated Risk on 7/29/2010 11:14:00 PM

    I don't follow house prices in Australia ... or Canada ... but I'm asked all the time (my answer is always: I don't know!)

    But for those interested, here is an article from the Business Spectator: House prices fall 0.7% in June, flat in quarter (ht Mr Slippery)

    After 17 consecutive months of solid growth, dwelling values across Australia’s capital cities recorded their first monthly decline of 0.7 per cent in June, according to the RP Data-Rismark Hedonic Home Value Index.

    This was the largest monthly fall in home values since April 2008. "The June outcome follows on from a clear trend in the decline in monthly seasonally-adjusted growth rates in Australia’s capital cities," RP Data said.
    "This represents a striking deceleration in the quarterly rate of increase in home values," RP Data said

    ATA Truck Tonnage Index declines in June

    by Calculated Risk on 7/29/2010 07:56:00 PM

    From the American Trucking Association: ATA Truck Tonnage Index Fell 1.4 Percent in June

    The American Trucking Associations’ advance seasonally adjusted (SA) For-Hire Truck Tonnage Index decreased 1.4 percent in June, although May’s reduction was revised from 0.6 percent to just 0.1 percent. May and June marked the first back-to-back contractions since March and April 2009. The latest reduction lowered the SA index from 110.1 (2000=100) in May to 108.5 in June.
    Compared with June 2009, SA tonnage climbed 7.6 percent, which was just below May’s 7.7 percent increase and the seventh consecutive year-over-year gain. Year-to-date, tonnage is up 6.6 percent compared with the same period in 2009.

    ATA Chief Economist Bob Costello said that the two sequential decreases reflect an economy that is slowing. Furthermore, growth in truck tonnage is likely to moderate in the months ahead as the economy decelerates and year-over-year comparisons become more difficult. Nevertheless, Costello believes that tonnage doesn’t have to grow very quickly at this point since industry capacity has declined so much. “Due to supply tightness in the market, any tonnage growth feels significantly better for fleets than one might expect.”
    Truck Tonnage Index

    This graph from the ATA shows the Truck Tonnage Index since Jan 2006 (no larger image).

    This index is at about the same level as in December 2009.

    Rail traffic also weakened in June.

    Lawler: “Slam-Dunk” Stimulus? MS = Missing Something!!!!

    by Calculated Risk on 7/29/2010 04:40:00 PM

    CR NOTE: There have been a couple of "stimulus" proposals making the rounds over the last couple days from major analysts. Housing economist Tom Lawler takes a look at one proposal from Morgan Stanley ... the following lengthy discussion is from Lawler:

    “Slam-Dunk” Stimulus? MS = Missing Something!!!!

    Early this week Morgan Stanley put out a piece entitled “Slam Dunk Stimulus,” in which MS analysts argue that changing mortgage refinance “requirements” (for GSE or government mortgages) would “inject a significant amount of stimulus into the US household sector,” have “zero impact on the budget deficit,” and would “not require an exit strategy” and would “not distort markets.”

    Here is the gist of their argument:

    “If it were possible to inject a significant amount of stimulus into the household sector of the US economy over the near term and this stimulus had zero impact on the budget deficit, did not require an exit strategy, did not distort the markets, and took effect almost immediately, wouldn’t it seem like a slam dunk? Such an option actually exists in the form of a change to mortgage refinancing requirements. The Fed – and market forces – have pushed mortgage rates to historic lows. However, many homeowners are unable to take advantage of the low rates because they are blocked from refinancing by a high loan-to-value ratio (LTV), appraisal problems, unemployment, and low credit score, etc. This problem could be addressed if the Government merely recognized the guarantee that already exists on the principal value of a very large portion of the mortgage market – specifically, the mortgages that are backed by Fannie, Freddie and Ginnie – and acted to streamline the refi process.”
    The analysts note that with the “median” universe of outstanding 30-year fixed-rate mortgages being around 5.75%, and with current 30-year FRMs being around 4.50%, the potential rate reduction could average about 125 bp, which could translate into stimulus of around $46 billion a year.

    The “logic” of the proposal is straightforward: if the GSEs, FHA, and VA already “own” the credit risk on the mortgages they own or guarantee, then allowing a more “streamlined” refi process “makes sense.” The authors note that “(t)he notion that the Federal government should recognize the mortgage guarantee that is already in place when establishing the qualifications for refinancing has been raised by others in the past.”

    What the authors do NOT note, however – and this is truly shocking -- is that this “notion” was a major reason why the Administration/the GSEs rolled out the well-intentioned but poorly executed Home Affordable Refinance Program, or HARP!!!!! Recall that originally this program allowed GSE-owned refis up to a CLTV of 105% (the original reason for the restriction being that loans with higher CLTVs were NOT “TBA[to-be-announced]-eligible (which is NOT determined by the GSEs, by the way!!), though later this maximum CLTV was upped to 125%. In addition, FHFA “ruled” that loans with original LTVs at or below 80% that did not require mortgage insurance, but which today had current LTVs above 80%, did NOT require new mortgage insurance under the program despite wording in the GSEs charter suggesting otherwise – with the explicit rationale for the exemption being that the GSEs already “owned” the credit risk on the mortgages!!!!

    How these analysts could roll out this “slam dunk” proposal without even MENTIONING the HARP is astounding! The analysts also don’t even MENTION the FHA’s streamlined refinance program!!!! (The underwriting requirements of which were tightened up a bit last September because of program “abuses.) This is an almost inconceivable miss on their part!!!!

    The analysts also display a complete lack of understanding about the refinance process, transactions costs, and mortgage rates. E.g., the authors, presumably citing Freddie Mac’s Primary Mortgage Market Survey on average 30-year mortgage rates, note that current rates are about 4 ½%. However, that 4 ½ % “quote” (the latest survey showed 4.56%) includes a 0.7 point fee. More important, however, there are SIZABLE transactions costs associated with refinancing a mortgage.

    As an example, I went to Chase Mortgage’s website this morning, trying to get a quote for a refinance of a $180,000 mortgage on a property currently valued at $200,000 in Virginia. I “clicked” that my credit was “very good” (one below “excellent,” which is actually closer to the truth!!!). The first quote was 4 ¾% with 1.125 “loan discount points.” Here was the associated closing cost information Chase’s website produced.
    Closing Costs, $180,000 refinance, 30-year FRM, interest rate of 4.75%, Chase Mortgage
    Title Insurance$446.40
    Courier/Messenger Fees$35.00
    Processing/Underwriting Fee$595.00
    City/County Tax/Stamps$585.00
    Application Fee$395.00
    Recording Fees$46.00
    Abstract Title Search$180.00
    Settlement/Closing Fee$387.50
    Tax Service Fee$84.00
    Loan Discount Points$2,025.00
      Total Closing Costs$4,778.90
    Prepaid Fees:  
    Harzard Insurance Premium$450.00
    Mortgage Insurance$144.00
    Per diem interest (18 days)$374.72
    Mortgage Insurance Premium$0.00
    Escrow Fees 
    Hazard Insurance Reserves$75.00
    Real Estate Tax Reserves$500.00
    Total Cash Needed at Closing$6,322.62

    The website also said that for a 5% rate my discount points would be reduced to 0.25, but my total closing costs would still be $3,203.90 (and total cash needed at closing would be $6,322.62).

    Now if I were in a situation that I either couldn’t or didn’t want to pay any closing costs, I’m not sure what Chase’s quote would be for a no-closing-cost loan (they don’t show that option). But using a quick and dirty “yield per point” approach, I’d probably get a rate quote of around 5 ½% -- 100 basis points above the rate used by the hapless Morgan Stanley analysts in their “stimulus” piece!!! In the mortgage (and housing world) transactions costs are a BFD1, and it’s pretty shocking the MS analysts don’t appear to know that!

    What the analysts SHOULD have done, of course, was to focus on the HARP and the FHA streamlined refi programs, and suggest potential changes that might make the programs more successful.

    Fannie Mae, by the way, earlier this week put out an updated “frequently asked questions” piece on the Home Affordable Refinance Program.

    Here is a poorly written piece I wrote to someone else early this morning who asked what I thought of the Morgan Stanley piece. (I just don’t feel like rewriting/editing).

    Actually, HARP attempted, badly, to "do" this (streamline the GSE refinance process for high LTV loans) by "allowing" qualified borrowers whose loans were owned/guaranteed by the GSEs to get refi loans with current LTVs up to 125%. Moreover, for loans with original LTVs of 80% or below that did not have private mortgage insurance, the requirement that the borrower get private mortgage insurance on the new loan if the current LTV were above 80% was waived. The logic was explicitly related to the fact that the GSEs already “owned” the credit risk. However, it's generated a surprisingly low level of activity, for a couple of reasons:

    1. The GSEs have "loan level price adjustments" for high LTV/low credit score combos. E.g., in the Fannie refi plus program, the loan level price adjustment for borrowers with a LTV over 97% and a credit score under 640 is 2% (actually it shows a higher number, but the cumulative fees are capped. See here.) Thus the "savings" to some borrowers isn't as great as it first appears. Note that some of the loans eligible for refi had higher guaranty fees to begin with because they were "riskier2.”

    2. If the current loan has mortgage insurance, the new loan has to have mortgage insurance (with the same coverage) as well. Apparently this has been a troublesome process. The GSEs' reason is obvious: it had credit enhancement on the existing loan, so ... But, as I noted before, for loans that didn't originally have MI but whose current LTV exceeds 80%, the FHFA opined that new MI was "not needed" despite some folks' interpretation of the GSE charters, with the logic being that the GSEs already owned the credit risk.

    3. There's no "cash out" option (except I think for a $250 de minimus). This makes sense as well.

    4. Borrowers underwater or with very little equity in their homes are extremely averse to having to pay ANYTHING at closing on a refi (or to roll such costs into the loan balance, although the HARP does allow “typical” closing costs to be financed). As a result, to "make sense" most such borrowers would need to take out a "no closing cost" mortgage where the rate charged is higher but the originator recoups its costs/fees by packaging the loan into a "premium" (above par) MBS. As a result, such borrowers’ interest rate on a refi is materially above, say, the Freddie PMMS rate – by at least 50-75 bp.

    5. Loans with LTVs above 105% are not eligible for inclusion in a "TBA-eligible" MBS/PC, but must be included in a separate type of pool with a separate prefix3. This can adversely impact pricing of the MBS, and as such on the loan.

    6. The HARP is limited to borrowers who are current on their loans.

    7. Many borrowers aren’t that aware of HARP, and don’t know if their loan is owned or guaranteed by Fannie or Freddie – though both entities have an easy to use website that borrowers can use to find out. When I’ve gone to online sites to get refi quotes, none of the lenders really mention the HARP on their refi quote page, though some mention it if you do a site search – and a few suggest that the HARP is only available to loans that they service, which if believed by the borrower enables lenders to be “less aggressive” on HARPs (and refis in general), offering not great rates and charging more fees than “needed.”

    Obviously, the GSEs would not be and should not "refi" FHA/VA/other loans with high CLTVs, as they do not currently own the credit risk.

    The FHA has had a streamlined refi process for quite a while. However, last year it "tightened up" some of the underwriting requirements because of some of abuses. See, Letter 09-23.

    So...the HARP was sorta/kinda designed to make LTV less of an "issue" for borrowers with loans owned/guaranteed by the GSEs to refinance. However, for a number of reasons (including those shown above), the "effective" rate borrowers with not great credit scores AND with high LTVs are able to get on a refinance is a lot higher than many expect. And given the transactions costs involved in a refi, even very good credit borrowers cannot get a no-closing-cost rate anywhere close to 4 ½% on a 30-year FRM.

    The "winners and losers" section of the “more streamlined refi ‘proposal’” -- including the losers, which would be holders of the "premium" MBS that are paid off -- misses a big point. MBS investors would "lose" the cash flow associated with holding the "premium" MBS that are paid off faster, and this loss would not be "ameliorated" by a resumption of MBS purchases by the Fed. In simple terms: If I'm getting a 6% MBS coupon and you are paying, say, 6.5% on your mortgage (with 25 bp going to servicing and 25 bp being a "guaranty fee"), and you are able to refi into a, say, 5% mortgage and I find my 6% MBS pay off and have to "reinvest" in a 4.5% MBS, you "save" 150 bp a year but I lose 150 bp a year. Now it is true that the Fed holds a lot of MBS (though not many with that high a coupon); the GSEs also hold a lot; and as a result "the government" would "lose" (resulting, of course, ultimately in higher future taxes), other losers would be banks/thrifts (and their owners/shareholders), pension funds, MBS funds, etc. In other words, some folks interest income would fall even as other folks mortgage interest expense would fall, and if the GSEs/FHA offered “more aggressive” streamlined refis the result would in part at least be a sorta/kinda transfer or wealth, and the net stimulus effect wouldn't be anywhere close to what Morgan Stanley analysts say.

    So..."The notion that the Federal government should recognize the mortgage guarantee that is already in place when establishing the qualifications of refinancing" has not only "been recognized by others in the past" (page 4); that notion was explicitly behind the Home Affordable Refinance Program. There have been a number of technical issues and other impediments that have significantly limited the amount of refinancing done under the HARP (and the FHA streamlined refi program), and these programs can and probably should be “tweaked” (and quite frankly I think the GSE loan-level price adjustments should be lowered). However, in assessing the potential volume and the likely “savings,” analysts need to take into account the non-trivial costs associated with refinancing, How MS analysts could not take these into account, and not even MENTION the HARP and the FHA streamlined refi programs is something that is almost inconceivable.

    1 BFD: Big Financial Deal
    2 Since Fannie Mae already has the risk on the existing mortgage loan, why are LLPAs required?
    "LLPAs are required because Fannie Mae is putting a new loan on our books, which involves certain basic processing/administrative costs, accounting considerations, and the requirement for us to hold capital (based on the current risk) against every loan we acquire. Some Refi Plus loans may get better pricing than the borrower’s original loan did because risk characteristics may have changed."
    3 Why are loans with LTVs above 105 percent not permitted to be commingled in standard Fannie Mae TBA-eligible MBS pools?
    Permitting loans with LTVs greater than 105 percent in TBA (to-be-announced) securities would have tax reporting implications for investors that are subject to certain income and asset tests for federal income tax purposes (e.g., REITs must derive at least 75% of their income from real estate assets). Right now, 100 percent of Fannie Mae’s TBA MBS qualify as real estate assets, and thus there is no need for additional tax reporting. In addition, the introduction of LTVs in excess of 105 percent could create greater uncertainty around prepayment speeds for TBA pools since there is no significant track record of data on prepayment of loans with LTVs above 105 percent.

    CR Note: This post was from Tom Lawler.

    More Builder Evidence of impact of tax credit

    by Calculated Risk on 7/29/2010 02:26:00 PM

    Home builder Ryland announced Q2 earnings today. From (ht Brian):

    Ryland says that the big question from last quarter's conference call was what impact the expiration of the tax credit will have on the new home market. Says they found out the answer to that question in Q2, as sales slowed significantly. ... Says they knew there would be a slowdown in May once the event passed, but they didn't expect it to be as severe or prolonged as it's been...

    Hotel Occupancy Rate at 71.8% last week

    by Calculated Risk on 7/29/2010 01:17:00 PM

    Hotel occupancy is one of several industry specific indicators I follow ...

    From STR: Strong luxury results week ending 24 July

    Overall [year over year], the industry’s occupancy increased 7.3 percent to 71.8 percent, ADR rose 1.3 percent to US$99.60, and RevPAR increased 8.6 percent to US$71.54.
    The following graph shows the four week moving average for the occupancy rate by week for 2008, 2009 and 2010 (and a median for 2000 through 2007).

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

    Notes: the scale doesn't start at zero to better show the change. The graph shows the 4-week average, not the weekly occupancy rate.

    On a 4-week basis, occupancy is up 7.0% compared to last year (the worst year since the Great Depression) and 4.8% below the median for 2000 through 2007.

    On a weekly basis this is the second week since summer 2008 with the occupancy rate above 70%. However last week was probably the peak for the occupancy rate for 2010 - although the 4-week average will move up over the next few weeks.

    In 2009, the occupancy rate peaked at 67% in mid-July.

    Data Source: Smith Travel Research, Courtesy of

    Kansas City Fed: Manufacturing activity rebounded moderately in July

    by Calculated Risk on 7/29/2010 11:00:00 AM

    Note: Usually I don't post all the regional manufacturing surveys, however with the inventory adjustment over, export growth appearing to slow, and domestic consumer demand sluggish, these surveys might provide a hint of weakness in the manufacturing sector.

    From the Kansas City Fed: Tenth District manufacturing activity rebounded moderately in July

    Tenth District manufacturing activity rebounded moderately in July, and expectations for future production remained positive. However, plans for future hiring and capital spending were essentially flat. Price indexes were mostly unchanged.
    This was a little more positive than the other regional reports that are all showing a slowdown in growth:

  • From the July 15th Empire State Manufacturing Survey: "[T]he pace of growth in business activity slowed substantially over the month."

  • From the Philly Fed on July 15th: Firms See Slower Growth Rate

  • From the Dallas Fed on July 26th: Texas Manufacturing Activity Remains Sluggish

  • From the Richmond Fed on July 27th: Manufacturing Activity Moderates in July; Expectations Slip

    It appears overall that growth in the manufacturing sector moderated in July, and some of the internals are even weaker.

    Toss in the weaker tone of in the Fed's Beige Book (released yesterday), and this raises the question: Is Fed Chairman Bernanke and the FOMC behind the curve (again)? In his testimony last week, Bernanke said:
    My colleagues on the Federal Open Market Committee (FOMC) and I expect continued moderate growth ... Most FOMC participants expect real GDP growth of 3 to 3-1/2 percent in 2010
    That seems pretty optimistic.

  • Weekly Initial Unemployment Claims: Eight Months of Moving Sideways

    by Calculated Risk on 7/29/2010 08:30:00 AM

    The DOL reports on weekly unemployment insurance claims:

    In the week ending July 24, the advance figure for seasonally adjusted initial claims was 457,000, a decrease of 11,000 from the previous week's revised figure of 468,000. The 4-week moving average was 452,500, a decrease of 4,500 from the previous week's revised average of 457,000.
    The advance number for seasonally adjusted insured unemployment during the week ending July 17 was 4,565,000, an increase of 81,000 from the preceding week's revised level of 4,484,000.
    Weekly Unemployment Claims Click on graph for larger image in new window.

    This graph shows the 4-week moving average of weekly claims since January 2000.

    The four-week average of weekly unemployment claims decreased this week by 4,500 to 452,500.

    The dashed line on the graph is the current 4-week average.

    The 4-week average of initial weekly claims has been at about the same level since December 2009 (eight months) and the 4-week average of 452,500 is high historically, and suggests a weak labor market.

    Wednesday, July 28, 2010

    Blinder and Zandi Paper

    by Calculated Risk on 7/28/2010 10:41:00 PM

    For those interested, here is the paper by Alan Blinder and Mark Zandi that I mentioned last night: How the Great Recession Was Brought to an End

    More Builder Evidence of Tax Credit Goose, Post-Credit Bust

    by Calculated Risk on 7/28/2010 06:04:00 PM

    CR Note: This is from housing economist Tom Lawler.

    Meritage Homes, the 11th largest US home builder in 2009, reported that net home orders in the quarter ended 6/30/10 totaled 900, down 21.5% from the comparable quarter of 2009. Home deliveries, in contrast, jumped by 35.6% from a year ago to 1,207, reflecting buyers’ (and the builders) rush to close prior to the expected 6/30 closing date deadline for the federal home buyer tax credit. Compared to the previous quarter, net orders fell 15.4% while home closings surged by 49.4%. As a result, the company order backlog as of 6/30/10 fell to 1,044, down 22.7% from 3/31/10 and down 34.4% from a year ago.

    Company officials were reportedly “surprised” by the extent of the post-tax-credit slowdown, and some analysts were a little spooked by the company’s move to increase active communities this year in California, Arizona, and Florida, while reducing its footprint in “lower-margin” Texas markets, as well as its recent acquisitions of land/lots. Meritage noted that margins on its newer communities have been higher than on older communities, in part because it purchased “deeply discounted” lots – especially in CA/AZ/FL. The company also said that it had “reduced our incentives while maintaining prices,” though whether it can do so in the post-tax-credit world remained unclear. Meritage, btw, appears to be one of those builders cited in yesterday’s WSJ article that may increase building in troubled markets that have not fully recovered yet because of land/lot acquisitions. (“Housing Glut is Likely to Build,”, July 27th, p. A2. This article, by the way, vastly overstates the potential for an increase in housing production related to SOME builders buying land/lots, often mainly either from other troubled builders or from banks. It also ignored surveys of builders indicating that most have dramatically cut their building production plans following the post-tax-credit plunge in sales, and ignored the sharp drop in SF building permits in May and June!!!)

    M/I Homes, the 16th largest US home builder in 2009, reported that net home orders in the quarter ended 6/30/10 totaled 602, down 20.7% from the comparable quarter of 2009. Home deliveries last quarter totaled 790, up 60.6% form a year ago, as buyers (and the builder) rushed to close prior to the expected 6/30 closing date deadline for the federal home buyer tax credit. Compared to the previous quarter, net orders in the latest quarter fell by 21.3% while home deliveries surged by 64.9%. As a result, the company’s order backlog fell to 748 on 6/30/10, down 20.1% from 3/31/10 and down 32.4% from a year ago.

    M/I CEO Robert Schottenstein noted that “coincident with the expiration of the tax credit on April 30, 2010 (for contract signings), we experienced a noticeable decline in our sales activity for May and June, resulting in a 21% decline in sales for the quarter” (implying BIG declines in May and June!) – breaking the company's previous string of six consecutive YOY gains in net orders.

    At the risk of repeating myself (yet again!!!), the incoming data on home builders highlight that new home sales based on settlements actually surged in Q2/10 vs. Q1/10, even though contracts signed on a seasonally adjusted basis declined. Similarly, existing home sales closed in Q2 increased from Q1, even though new pending home sales declined. So for you “home data folks” who I guess because of ignorance add closed existing home sales to new SF home sales based on contracts signed/deposits taken (as reported by Census) to measure total home sales – stop it, it’s just wrong, and doing so makes you look like a fool!

    CR Note: This was from Tom Lawler.

    Schwarzenegger orders furloughs, California may start issuing IOUs in August

    by Calculated Risk on 7/28/2010 04:01:00 PM

    From the Sacramento Bee: Schwarzenegger orders more furloughs

    [Gov. Arnold Schwarzenegger's] new executive order requires employees take three unpaid days off per month. But unlike that policy, it has no termination date: Furloughs will end when lawmakers pass a 2010-11 budget.
    The governor made the decision this week after Controller John Chiang said that unless lawmakers enacted a budget soon, the state's cash would go into the red by October. Chiang said he'll start issuing IOUs in August or September to conserve funds as long as possible.
    And the beat goes on ...

    Fed's Beige Book: Activity continued to increase, "steady" in some districts

    by Calculated Risk on 7/28/2010 02:00:00 PM

    Note: This is based on information collected on or before July 19, 2010.

    From the Federal Reserve: Beige book

    Economic activity has continued to increase, on balance, since the previous survey, although the Cleveland and Kansas City Districts reported that the level of economic activity generally held steady.
    Manufacturing activity continued to expand in most Districts, although several Districts reported that activity had slowed or leveled off during the reporting period. Districts also noted improved conditions in the services sector.
    Reports on retail sales during the early summer months were generally positive, although in most Districts the increases were modest.
    And on real estate:
    Nearly all Districts reported sluggish housing markets in the months since the homebuyer tax credit expired on April 30. While some Districts, such as Boston and St. Louis, reported an increase in May and June home sales on a year-over-year basis, some contacts noted that these sales may reflect closings of homes under contract by the April tax credit deadline. The Boston, Philadelphia, Atlanta, and Kansas City Districts reported that home sales are expected to weaken going forward. Residential construction remained limited in several Districts. In the Atlanta District, residential construction activity softened from already weak levels. Homebuilders in the Cleveland District do not expect a turnaround in new home construction any time this year. Builders in the Chicago District are not introducing new inventory without a signed contract on a home. Housing starts were expected to decline for the second half of the year in the Dallas District and to increase slightly over the next three months in the Kansas City District.

    Commercial and industrial real estate markets continued to struggle in all twelve Districts. Overall, vacancy rates were flat to slightly increased and continued to exert downward pressure on rents. Construction activity remained weak in most Districts. ... The outlook for commercial and industrial real estate across the Districts ranged from further declines in activity to slow growth.

    Treasury: HAMP Re-default Rate incorrect

    by Calculated Risk on 7/28/2010 10:55:00 AM

    Several analysts noted the reported re-default rate appeared too low ... it was.

    Shahien Nasiripour at the HuffPo has the story: HAMP Report Revised After Analysts Question New Metric

    The Obama administration has revised its latest monthly report on its signature foreclosure-prevention plan, deleting a heavily-criticized performance metric used to measure whether assisted homeowners are re-defaulting on their taxpayer-financed mortgages.
    "Subsequent to releasing the report, Treasury received inquiries regarding the calculation methodology used in this table," spokesman Mark Paustenbach said Tuesday. "These inquiries were related to the treatment of modifications that are cancelled from HAMP and ultimately become ineligible for TARP incentives after 90 days delinquency.

    "In an effort to review and better explain the methodology, we learned from our program administrator, Fannie Mae, that not all cancelled loans were included in the underlying information provided to Treasury," Paustenbach continued. "The error caused inconsistent reporting of permanent modifications during the snapshots reported. These omissions have impacted our previous analysis... with respect to the performance of HAMP permanent modifications."
    In place of the now-deleted table, in a revised report posted Monday to their Web site, Treasury said:

    "Since the Making Home Affordable report was posted on July 20th, Fannie Mae, which administers the program, has reported to Treasury an issue in its implementation of the delinquency statistic methodology used to report performance of permanent modifications. Fannie Mae is now revising the data, and Treasury has retained a third-party consultant to provide additional review and validation. Upon completion of that independent review, a revised table will be provided.".
    As Nasiripour notes, most analysts think a majority of HAMP modifications will eventually re-default. Nasiripour mentions a Fitch analyst's forecast that 75 percent will re-default; Barclays estimates 60 percent.

    Last month, the reported median back end DTI1 was 63.7% AFTER modification. That just screams "re-default".

    From HAMP: 1 Ratio of total monthly debt payments (including principal and interest on the first mortgage, taxes, insurance, homeowners association and/or condo fees, plus payments on installment debts, junior liens, alimony, car lease payments and investment property payments) to monthly gross income.

    Durable Goods orders fall 1% in June

    by Calculated Risk on 7/28/2010 08:33:00 AM

    From the Census Bureau:

    New orders for manufactured durable goods in June decreased $2.0 billion or 1.0 percent to $190.5 billion, the U.S. Census Bureau announced today. This was the second consecutive monthly decrease and followed a 0.8 percent May decrease.
    Shipments of manufactured durable goods in June, down two consecutive months, decreased $0.7 billion or 0.3 percent to $195.0 billion. This followed a 0.7 percent May decrease.
    From Reuters: Durable Goods Orders Fall Short as Demand Stays Weak
    The Commerce Department said durable goods orders fell 1.0 percent after a revised 0.8 percent drop in May.

    Analysts polled by Reuters had forecast orders increasing 1.0 percent in June from May's previously reported 0.6 percent fall.
    This was well below expectations, and is further evidence of a slowdown in the manufacturing sector.

    MBA: Mortgage Purchase Applications increase slightly last week

    by Calculated Risk on 7/28/2010 07:53:00 AM

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

    The Refinance Index decreased 5.9 percent from the previous week. The seasonally adjusted Purchase Index increased 2.0 percent from one week earlier and is the highest Purchase Index observed in the survey since the end of June.
    The average contract interest rate for 30-year fixed-rate mortgages increased to 4.69 percent from 4.59 percent, with points decreasing to 0.88 from 1.04 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.
    MBA Purchase Index Click on graph for larger image in new window.

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

    Although the weekly applications index increased slightly, the 4-week average is still near the levels of 1996.

    This collapse in the mortgage application index has already shown up as a decline in new home sales, and will show up in the July and August existing home sales reports (counted at close of escrow).

    Tuesday, July 27, 2010

    Paper: Policy helped avert Great Depression II

    by Calculated Risk on 7/27/2010 10:58:00 PM

    Alan Blinder and Mark Zandi will release a new paper tomorrow analyzing the impact of the policy response to the crisis ... Sewell Chan at the NY Times has a preview: In Study, 2 Economists Say Intervention Helped Avert a 2nd Depression

    In a new paper, [Alan S. Blinder, a Princeton professor and former vice chairman of the Fed, and Mark Zandi, chief economist at Moody’s Analytics] argue that without the Wall Street bailout, the bank stress tests, the emergency lending and asset purchases by the Federal Reserve, and the Obama administration’s fiscal stimulus program, the nation’s gross domestic product would be about 6.5 percent lower this year.

    In addition, there would be about 8.5 million fewer jobs, on top of the more than 8 million already lost; and the economy would be experiencing deflation, instead of low inflation.
    I'll post a link tomorrow (if it is available). David Leonhardt adds:
    As Mr. Blinder and Mr. Zandi note, their estimates of the fiscal stimulus are similar to the estimates of othersincluding the Congressional Budget Office.
    Although Zandi completely missed the housing bubble, I've been using his estimates of the impact of policy (and estimates from Goldman Sachs), and I think they have been very useful in forecasting.

    How far will the homeownership rate fall?

    by Calculated Risk on 7/27/2010 07:32:00 PM

    Earlier today the Census Bureau released the homeownership and vacancy rates for Q2 2010.

    I posted a few graphs this morning, and I noted that the homeownership rate had fallen to the 1999 level of 66.9%.

    A few years ago - when the homeownership rate was at 69%, I forecast that the rate would probably fall to the 66% to 67% range. Here is a repeat of the graph from this morning showing the trend of the homeownership rate since 1965.

    Homeownership Rate Click on graph for larger image in new window.

    Note: graph starts at 60% to better show the change.

    As I noted this morning, the homeownership rate increased in the '90s and first half of the '00s because of changes in demographics and "innovations" in mortgage lending. My guess is the increase due to demographics (older population) will probably stick, but the mortgage "innovation" increase will disappear.

    Using the data from the Census Bureau on number of households per age cohort, we can calculate what would have happened to the overall homeownership rate if the rate per age cohort had stayed the same as in 1989 or in 1999.

    Using the 1989 percentages, the homeownership rate would have increased from 63.9% in 1989 to 66.2% in 2009 just because of the aging population. Using the 1999 homeownership percentages, the homeownership rate would be 66.8% given the changes in demographics. That was the basis for my original forecast of the homeownership rate falling to the 66% to 67% range.

    It is certainly possible that the homeownership rate might fall further than I originally expected since certain cohorts now own at a lower than historically normal rate - and many of these people might be turned off on home ownership for some time (if not forever).

    Homeownership Rate by Age CohortThe second graph shows the homeownership rate by age cohort for 1989, 1999, 2005 (peak of housing bubble), and Q2 2010.

    For those currently under 30, the homeownership rate is above the 1989 and 1999 levels - probably because most of these people were too young to participate in the insanity and some have taken advantage of the first time home buyer tax credit.

    For the 30 to 60 groups, the homeownership rate is currently below the 1989 and 1999 levels. These groups were in their early 20s to early 50s during the bubble years - the prime buying years.

    For the groups above 60 years old, the homeownership rate has stayed above the 1989 level. Most of these people already owned and probably didn't participate in the insanity.

    But notice the highest cohort (over 75 years old). The homeownership rate is above the bubble years! This could mean that some people are staying in their homes, perhaps waiting for a better market to sell.

    This does shows that the most impacted cohorts are currently in the 30 to 60 age groups, with the 30 to 35 year old cohort the hardest hit group (in their mid to late 20s during the bubble). The next hardest hit groups are the 45 to 59 cohorts - probably because some people were moving up to more home than they could afford.

    For now I'll stick with my prediction of the homeownership rate falling to 66% or so, but it could certainly fall lower.

    Survey: Local Government job losses projected to approach 500,000

    by Calculated Risk on 7/27/2010 05:02:00 PM

    As a follow-up to point 6 of the previous posts on the 2nd half slowdown (cutbacks at the state and local level), here is a new report released today: Job losses projected to approach 500,000 (ht Brian)

    The effects of the Great Recession on local budgets will be felt most deeply from 2010 to 2012. In response, local governments are cutting services and personnel. This report from the National League of Cities (NLC), National Association of Counties (NACo), and the U.S. Conference of Mayors (USCM) reveals that local government job losses in the current and next fiscal years will approach 500,000, with public safety, public works, public health, social services and parks and recreation hardest hit by the cutbacks.
    In May and June of 2010 NLC, NACo and USCM conducted a survey of cities and counties across the country for the purpose of gauging the extent of job losses. The survey was emailed and faxed to all cities over 25,000 in population and to all counties over 100,000 in population. The survey results presented below are based on 270 responses, 214 responses from cities and 56 responses from counties.
    The surveyed local governments report cutting 8.6 percent of total full-time equivalent (FTE) positions over the previous fiscal year to the next fiscal year (roughly 2009-2011). If applied to total local government employment nationwide, an 8.6 percent cut in the workforce would mean that 481,000 local government workers were, or will be, laid off over the two-year period. Projected cuts for the next fiscal year will likely increase as many of the nation’s local governments draft new budgets, deliberate about how to balance shortfalls and adopt new budgets.
    According to the BLS, local governments (ex-education) have cut 89,000 jobs over the last year, and this survey suggests there will be much deeper cuts ahead.

    The survey has a list or respondents (page 6) and several examples.

    2nd Half Slowdown Update

    by Calculated Risk on 7/27/2010 01:25:00 PM

    "For me a double-dip is another recession before we've healed from this recession ... The probability of that kind of double-dip is more than 50 percent. I actually expect it."
    Professor Robert Shiller, July 27, 2010 (via Reuters: Chance of Double-Dip US Recession is High: Shiller)
    Now that the 2nd half slowdown is here, it might be worth reviewing some of the arguments for a slowdown:

    1) less Federal stimulus spending in the 2nd half of 2010.

    The only additional stimulus has been the extension of the qualifying dates for unemployment benefits. Even with this extension, the overall stimulus peaked in Q2 or possibly Q3.

    2) the end of the inventory correction.

    This is pretty clear in the data, and we are seeing a slowdown in growth for the manufacturing sector (but not contraction). This is one of the reasons I'm tracking the regional manufacturing surveys so closely this week.

    3) more household saving leading to slower growth in personal consumption expenditures.

    This still isn't clear, although the personal saving rate ticked up in May.

    4) another downturn in housing (lower prices, less residential investment).

    It is clear that residential investment will be a drag on GDP in Q3. As far as prices, the declining prices will not show up until the September reports - or possibly the October reports (released with a significant lag). So this still seems correct, especially with the existing home months-of-supply in double digits. Diana Olick at CNBC quoted NAR chief economist Lawrence Yun:
    Even the always glass-is-half-full chief economist Lawrence Yun made clear several times in the briefing before the report's release, that he expects home prices to come under significant pressure over the coming months, as inventories rise.
    Inventories will surpass ten months," says Yun. "If sustained, prices will surely be under pressure." Yun added that he originally expected the drag after the tax credit expiration to last about two months; he's now pushing that forecast to three to four months.
    Usually Yun is too optimistic.

    5) slowdown in China and Europe and

    Growth in China has slowed, from the WSJ:
    China's central bank struck a confident note Tuesday, saying the country's current economic slowdown is beneficial for long-term sustainable growth, and there is little risk of a "double-dip" recession.

    "Although economic growth is showing signs of slowing down, China's current economic fundamentals are still very good. While a further slowdown and stabilization of growth is likely, the possibility of a double-dip is low," the People's Bank of China said in a quarterly report on the economy's performance.
    6) cutbacks at the state and local level.

    This is starting to happen, and I expect the number of layoffs to increase later this year.

    I still think we will avoid a technical double dip recession, but that won't matter to the people impacted by the slowdown.

    Note: if the economy does slide into a recession, it will probably be consider a continuation of the recession that started in December 2007, see: Recession Dating and a "Double Dip"

    Richmond Fed: Manufacturing Activity Moderates in July; Expectations Slip

    by Calculated Risk on 7/27/2010 11:13:00 AM

    Note: Usually I don't post all the regional manufacturing surveys, however with the inventory adjustment over, export growth appearing to slow, and domestic consumer demand sluggish, these surveys might provide a hint of weakness in the manufacturing sector.

    From the Richmond Fed: Manufacturing Activity Moderates in July; Expectations Slip

    In July, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — declined seven points to 16 from June's reading of 23. Among the index's components, shipments lost nine points to 22, new orders dropped 12 points to finish at 13, while the jobs index moved up six points to 15.
    Other indicators also suggested somewhat slower activity. The backlog of orders measure moved down two points to 1, and the index for capacity utilization fell eight points to 13.
    This is similar to the Dallas Fed report yesterday: Texas Manufacturing Activity Remains Sluggish. It appears growth in the manufacturing sector is slowing.

    Q2 2010: Homeownership Rate Lowest Since 1999

    by Calculated Risk on 7/27/2010 10:00:00 AM

    The Census Bureau reported the homeownership and vacancy rates for Q2 2010 this morning. Here are a few graphs ...

    Homeownership Rate Click on graph for larger image in new window.

    The homeownership rate declined to 66.9%. This is the lowest level since 1999.

    Note: graph starts at 60% to better show the change.

    The homeownership rate increased in the '90s and early '00s because of changes in demographics and "innovations" in mortgage lending. The increase due to demographics (older population) will probably stick, so I've been expecting the rate to decline to the 66% to 67% range - and not all the way back to 64% to 65%.

    I'll have to revisit this now that the homeownership rate has fallen back to the top of the range I expected!

    Homeowner Vacancy RateThe homeowner vacancy rate declined to 2.5% in Q2 2010.

    A normal rate for recent years appears to be about 1.7%.

    This leaves the homeowner vacancy rate about 0.8% above normal. This data is not perfect, but based on the approximately 75 million homeowner occupied homes, we can estimate that there are close to 500 thousand excess vacant homes.

    The rental vacancy rate was steady at 10.6% in Q2 2010.

    Rental Vacancy RateOther reports have suggested that the rental vacancy rate has declined slightly. This report is nationwide and includes homes for rent.

    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 close to 41 million rental units in the U.S. If the rental vacancy rate declined from 10.6% to 8%, then 2.6% X 41 million units or 1.07 million excess units would have to be absorbed.

    This suggests there are still about 1.6 million excess housing units. These excess units will keep pressure on housing starts, rents and house prices for some time.

    Case-Shiller: House Price indexes increase in May

    by Calculated Risk on 7/27/2010 09:00:00 AM

    IMPORTANT: These graphs are Seasonally Adjusted (SA). S&P has cautioned that the seasonal adjustment is probably being distorted by irregular factors. These distortions could include distressed sales and the various government programs.

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

    This includes prices for 20 individual cities, and two composite indices (10 cities and 20 cities).

    From S&P: For the Past Year Home Prices Have Generally Moved Sideways

    Data through May 2010, released today by Standard & Poor’s for its S&P/Case-Shiller1 Home Price Indices, the leading measure of U.S. home prices, show that the annual growth rates in 15 of the 20 MSAs and the 10- and 20-City Composites improved in May compared to those reported for April 2010. The 10-City Composite is up 5.4% and the 20-City Composite is up 4.6%from where they were in May 2009. While 19 MSAs and both Composites reported positive monthly changes in May over April, only 12 of the MSAs and the two Composites saw better month-over-month growth rates in May than those reported in April.
    Case-Shiller House Prices Indices Click on graph for larger image in new window.

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

    The Composite 10 index is off 29.3% from the peak, and up 1.0% in May (SA).

    The Composite 20 index is off 28.7% from the peak, and up 1.1% in May (SA).

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

    The Composite 10 is up 5.4% compared to May 2009.

    The Composite 20 is up 4.6% compared to May 2009.

    This is the fourth month with YoY price increases in a row.

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

    Case-Shiller Price Declines Prices increased (SA) in 15 of the 20 Case-Shiller cities in May seasonally adjusted.

    Prices in Las Vegas are off 56.1% from the peak, and prices in Dallas only off 4.8% from the peak.

    Case Shiller is reporting on the NSA data (19 cities with increasing prices), and I'm using the SA data. I'm not sure why S&P calls a 5% increase "moving sideways". Prices are probably starting to fall right now, but this will not show up in the Case-Shiller index for a few months.

    Monday, July 26, 2010

    Home builders to start building more homes?

    by Calculated Risk on 7/26/2010 09:13:00 PM

    The following article discusses both new and existing home supply. Here is a short excerpt on new homes ...

    From Robbie Whelan at the WSJ: Supply of Homes Set to Grow

    Home builders ... are stuck with thousands of acres that are prone to lose value as the market struggles. Many will build homes on the land, rather than write off its value and wait for the market to improve.

    ... "They're discounting the homes, they're making very small profit margins, but they're building homes." [said Brad Hunter, chief economist at Metrostudy]
    Other indicators also point to builders preparing to increase home construction, despite lagging sales. The number of finished vacant lots, or parcels of land that have been developed and readied for building, stands at about 1.2 million nationwide, according to Metrostudy, or just 5% below the peak in late 2008.
    In some communities with excess supply, home builders are competing with the distressed sales by building smaller homes. As an example, a couple months ago David Streitfeld at the NY Times wrote about a building boom in Las Vegas: In City of Homes That Sit Empty, Building Booms
    Home prices in Las Vegas are down by 60 percent from 2006 in one of the steepest descents in modern times. There are 9,517 spanking new houses sitting empty. An additional 5,600 homes were repossessed by lenders in the first three months of this year and could soon be for sale.

    Yet builders here are putting up 1,100 homes, and they are frantically buying lots for even more. ... Land and labor costs have fallen significantly, so the newest homes are competitively priced.
    But just because they have the lots, I hope they don't start overbuilding again.

    Jim the Realtor: Beach Cheapie?

    by Calculated Risk on 7/26/2010 05:57:00 PM

    Earlier (with graphs): New Home Sales: Worst June on Record

    I haven't checked in with Jim for some time. This 800 sq ft REO is "cheap"?

    Survey shows house prices falling in June, but long wait for house price indexes

    by Calculated Risk on 7/26/2010 02:20:00 PM

    Campbell Surveys put out a press release this morning: Home Prices Tumble in Most Categories During June (no link)

    A drop in homebuyer activity helped trigger a noticeable decline in home prices between May and June, according to the latest Campbell/Inside Mortgage Finance Monthly Survey of Real Estate Market Conditions.
    Average prices tumbled by 6.8% for move-in ready foreclosed properties, 6.3% for short sales, and 4.6% for non-distressed properties.
    “Prices are dropping…same house that had 2 showings a day in April with hopes of a closing by June at $139,000 now gets a showing of just one a week if we are lucky and at $129,000,” reported a real estate agent responding to the survey and located in Florida.

    “Buyers just plan on deducting the $8,000 off what they are going to offer now. So, now prices are dropping to compensate for the credit not being available,” stated an agent located in Ohio.
    “Contracts signed in June will be closing in July and August,” explained [Thomas Popik, research director for Campbell Surveys]. “That’s why we know prices for closed transactions will continue their decline. But this won’t be reflected in the publicly-released price indexes until October or November.”
    We already know existing home sales collapsed in July, however, as Popik notes, it will take some time for the impact on house prices to show up in the house price indexes.

    The Case-Shiller index is a three month average and is released with a two month lag. The Case-Shiller house price index to be released tomorrow will be for a three month average ending in May.

    The first Case-Shiller release with July prices will be released at the end of September - and that will include the months of May, June and July! And prices were probably up in May and June.

    And prices don't fall overnight. Based on the timing of the above survey, prices fell from May to June - and those transactions will probably mostly closed in August. That is why Popik is saying the price declines will not show up in house price indexes until October of November.

    The Corelogic data for July will also be released in September. There are other repeat sales measures (like from Radar Logic and Clear Capital), but in general it will be a long wait before reported house prices are falling.

    Dallas Fed: Manufacturing Activity Remains Sluggish in July

    by Calculated Risk on 7/26/2010 11:51:00 AM

    Usually I don't post all the regional manufacturing surveys, however with the inventory adjustment over, export growth appearing to slow, and domestic consumer demand sluggish, these surveys might provide a hint of weakness in the manufacturing sector.

    From the Dallas Fed: Texas Manufacturing Activity Remains Sluggish

    Texas factory activity rebounded slightly in July, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key indicator of state manufacturing conditions, rose from –2 to 5, suggesting output expanded slightly in July after contracting in June.

    Several indexes for factory activity continued to fall in July. The new orders and growth rate of orders indexes pushed deeper into negative territory, indicating a further contraction of demand. The index for capacity utilization dipped to –1, its first negative reading in nine months. The shipments index stabilized in July, rising from –9 to –1, with nearly equal shares of respondents noting an increase or decrease.

    The general business activity index fell sharply to –21, its lowest level since July 2009. Thirty-one percent of firms reported a worsening of activity, up from 22 percent in June. The company outlook index also fell to a 12-month low, as only 13 percent of manufacturers said their outlook had improved over the previous month, compared with 24 percent who said it had worsened.

    The employment index edged up and was positive for the fifth consecutive month, with 20 percent of firms reporting new hires.
    Although production was up slightly, new orders were down sharply. This was a weak report - I'll post a summary of the regional reports later this week.

    New Home Sales: Worst June on Record

    by Calculated Risk on 7/26/2010 10:00:00 AM

    Ignore all the month to previous month comparisons. May was revised down sharply and that makes the increase look significant. Here is the bottom line: this was the worst June for new home sales on record.

    The Census Bureau reports New Home Sales in June were at a seasonally adjusted annual rate (SAAR) of 330 thousand. This is an increase from the record low of 267 thousand in May (revised from 300 thousand).

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

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

    Note the Red columns for 2010. In June 2010, 30 thousand new homes were sold (NSA). This is a new record low for June.

    The previous record low for the month of June was 34 thousand in 1982; the record high was 115 thousand in June 2005.

    New Home Sales and Recessions The second graph shows New Home Sales vs. recessions for the last 47 years.

    Sales of new single-family houses in June 2010 were at a seasonally adjusted annual rate of 330,000 ... This is 23.6 percent (±15.3%) above the revised May rate of 267,000, but is 16.7 percent (±10.9%) below the June 2009 estimate of 396,000.
    And another long term graph - this one for New Home Months of Supply.

    New Home Months of Supply and RecessionsMonths of supply decreased to 7.6 in June from a revised 9.6 in May (revised from 8.5). The all time record was 12.4 months of supply in January 2009. This is still very high (less than 6 months supply is normal).
    The seasonally adjusted estimate of new houses for sale at the end of June was 210,000. This represents a supply of 7.6 months at the current sales rate.
    New Home Sales Inventory The final graph shows new home inventory.

    The 267 thousand annual sales rate for May is the all time record. This is a very sharp downward revision.

    The 330 thousand in June is the worst June on record. With all the gyrations, it is difficult to see what is happening month to month, but overall this was a very weak report.