by Calculated Risk on 9/25/2007 10:50:00 AM

My Internet Connection (Time Warner) is down.

From NAR Press Release.

Total existing-home sales – including single-family, townhomes, condominiums and co-ops – were down 4.3 percent to a seasonally adjusted annual rate1 of 5.50 million units in August from a level of 5.75 million in July, and are 12.8 percent below the 6.31 million-unit pace in August 2006.

Graphs will be posted soon (hopefully).

Sales: 5.5 Million SAAR.

Months of Supply: 10.0

Best to all.

by Calculated Risk on 9/25/2007 09:37:00 AM

From AP: Home Prices Post Biggest Drop in 16 Years

The decline in U.S. home prices accelerated nationwide in July, posting the steepest drop in 16 years, according to the S&P/Case-Shiller home price index released Tuesday.

Home prices have fallen by more every month since the beginning of the year.

An index of 10 U.S. cities fell 4.5 percent in July from a year ago. That was the biggest drop since July 1991.

"The further deceleration in prices is still apparent across the majority of regions," MacroMarkets LLC Chief Economist Robert Shiller said in a statement.

Table from the WSJ: Home Prices Tumble, Case-Shiller Index Reports

by Calculated Risk on 9/24/2007 05:45:00 PM

From Reuters: Lowe's warns profit could trail prior forecast

The second-largest home improvement chain behind Home Depot Inc ... said "current sales are trending below" expectations as drought in the mid-Atlantic, Southeastern and Western parts of the United States hurt sales of outdoor products.

From MarketWatch: Target cuts September sales outlook

Target Corp. on Monday evening cut its forecast for September sales at stores open more than a year to an increase of 1.5% to 2.5%, down from its previous forecast of 4% to 6%. In a recorded message, the Minneapolis-based discount retailer said there was weaker guest traffic in September than expected ...

Is this the start of Hamlet Act V?.

by Calculated Risk on 9/24/2007 04:13:00 PM

Here is a video of Nouriel Roubini on CNBC this morning.

Also, the Video of the Day (bottom of the posts) is a great interview with Alan Greenspan.

by Calculated Risk on 9/24/2007 02:44:00 PM

From The Times: Wolseley's fresh alert on US housing market

Wolseley, the plumbing and heating engineer, which makes half its income in America, gave warning today that revenues of its US building materials business have collapsed by almost 75 per cent.

It has eliminated 3,500 staff and shut 46 branches.
...
Chip Hornsby, the chief executive, said that there were no signs of a turnaround in the residential housing market and that "the repairs, maintenance and improvement market is now beginning to soften".

Real spending on home improvement has held up pretty well so far. If this housing bust is similar to the early '80s or '90s, real home improvement investment will slump 15% to 20%.

Click on graph for larger image.
This graph shows real home improvement investment (2000 dollars) since 1959. Recessions are in gray (source: BEA)

Although real spending declined slightly in Q2 2007, home improvement spending has held up pretty well compared to the other components of Residential Investment. With declining MEW, it is very possible that home improvement spending will slump like in the early '80s and '90s.

by Anonymous on 9/24/2007 02:34:00 PM

Ye Gods. That's almost as bad as laundry in the backyard.

The Wall Street Journal treats us to "The Invasion of Renters." I for one am unable to determine how far my leg is being pulled here, or how seriously this reporter is taking his own story. We begin with the familiar narrative build-up:

Mark Spector was happy with his new neighborhood. Then the renters started moving in.

In 2004, Mr. Spector and his wife, Deanna, paid $350,000 for a six-bedroom house in Bridgewater, a new development in Wesley Chapel, Fla., about 25 miles north of Tampa. They moved into their home and looked forward to meeting their neighbors.

Then Florida's once-feverish housing market started to cool. Investors who'd bought a large percentage of the properties in Bridgewater found they couldn't flip them for a quick profit, and brought in tenants, instead. By last year, Mr. Spector estimates, close to half of the residents in the subdivision of 750-plus homes were renters.

I have no idea how Mr. Spector can keep tabs on the occupancy status of 750 homes; I'm just glad he isn't my neighbor. Anyway, you're wondering what happened next, right?

The result, Mr. Spector says: overgrown lawns, drug deals in the park and loud parties in the "frat houses" down the street. "You'll see some driveways with a dozen cars parked in the driveway and on the grass," he says.

So, basically, we don't like abandoned homes, we don't like unsold homes, and we don't like renters. We also don't want to drop our sales prices so that those homes can be sold to owner-occupants. I am torn between wondering how bad those parties really are--as if owner-occupants never have parties that involve more than 12 parked cars--and wondering what people expected in the no-doc mortgage frenzy. Anecdotal evidence suggests that at least some of those no-doc loans involved drug money laundering to start with. How renters could be worse news than the owners is hard to fathom.

The extent of the problem is also hard to get a grasp on:

In another manifestation of the housing slump, thousands of property owners across the country are now renting out homes they cannot sell. As a result, developments and condos that once were largely owner-occupied are filling up with renters who some neighbors say are less engaged in their communities and less concerned about maintenance.

"Thousands"? Across the whole country? How many thousands?

I don't know, but I do know that mixing horror stories of drug deals and criminal complaints with stuff like this is not winning sufficient sympathy from me:

Denver, Colo., resident Neval Gupta says that when his 63-unit condo complex began running into problems as the number of renters grew, the board stepped up enforcement of its rules, including bans on storing bicycles on balconies and doing auto repairs in the parking garage. "We really crack down on the owners now to be accountable for their renters," says Mr. Gupta, the president of the condo board. "We do have a problem with some owners who put any renter they can find in there."

Mr. Gupta and other residents say such vigilance has helped cut down on some problems. But it has also created new ones. Craig White, who bought his unit as an investment and rents it out, says his last tenants left when they got tired of being "harassed" by over-zealous owner-occupants. "If you put your bike out [on the balcony] for a day or two, you're going to get a phone call," Mr. White says.

Just exactly when did "auto repairs" become a problematic thing to do in a garage? Are we really talking about someone blocking access with a major engine rebuild, or just some poor sap topping off the washer fluid? Do you trust anyone who has convulsions over a bike on a balcony to tell the difference?

Of course, plenty of renters cut their grass, take in the garbage cans and turn down the music at 9 p.m. And not all homeowners are model neighbors. Denise Bower, of Community Management, Inc., which manages 122 developments around Portland, Ore., says renters are often more responsive to complaints because they know they run the risk of losing their leases if they don't. "I have more problems with owners, by far," Ms. Bower says. "They get stubborn."

No, really? Might that stubborness be why some of these owners "have to" rent the place? Can't get more than what you paid in 2005?

by Calculated Risk on 9/24/2007 11:41:00 AM

The August existing home sales report is scheduled to be released tomorrow.

Preliminary evidence suggests sales declined sharply in August. As an example, for California, DataQuick reported that August sales of new and existing homes declined 5% from July. The usual seasonal pattern is for sales to increase from July to August (by 5% to 10%), so on a seasonally adjusted basis, the decline in August is even more significant.

Also the NAR Pending Home Sales Index, based on contracts signed in July, was off 12%. The usual period from signing to closing is about 45 to 60 days for existing homes. This index is for contracts signed in July, so there will probably be some impact on the reported existing home sales for August, and even more of an impact on sales in the report for September.

But what about inventory?

The usual seasonal pattern is for inventory to peak in late summer. If 2007 follows the usual pattern, inventory levels in August will be about the same as the all time record set in July (4.592 million units). However 2007 isn't a "typical year" for housing, and it will be interesting to see if inventory levels follow the usual pattern - or continue to increase.

The other measure of inventory, "Months of Supply", will be through the roof!

The following graph shows existing home sales, inventory and months of supply since 1969 (inventory since 1982). Note: All data is end of the year, except 2007 is for July.


Click on graph for larger image.

For July, months of supply was 9.6 months. Depending on how far sales fell in August, months of supply could be well over 10 months in August, just shy of the year end record set in 1982 (with 11.5 months at year end).

Sales will be the headline number in the report tomorrow, but inventory will also be interesting.

by Anonymous on 9/24/2007 10:15:00 AM

Via Clyde, a fascinating (well, if you're mortgage- and rating agency-obsessed) discussion from Institutional Risk Analytics. I thought former regulator Thomas Day's remarks on the surreal nature of his own mortgage experience were quite interesting; imagine how surreal it was for those who never worked for the Federal Reserve.

But this is certainly Quote of the Day material:

The next speaker was Sylvain Raynes of RR Consulting, who also teaches at Baruch College in New York. Raynes began by reminding the audience that while it may seem easy to criticize the actions of the major ratings agencies, "most people are trying to find ways to look beyond the rating agencies. Most regulators have stopped believing in them a long time ago, at least five years ago, as far as I can see. But what you cannot do is throw the captain overboard in the middle of a storm because then you become the captain. This is the Caine mutiny strategy.

by Anonymous on 9/24/2007 09:22:00 AM

It used to be basically impossible to keep up with the terms of newly-issued mortgage deals, but you could at least stay up to date with downgrades. Now that the situation is completely reversed, I thought it might be interesting to look at the terms of one of the very few new issues out there.

This Bear Stearns deal (Asset Backed Securities I Trust, Series 2007-AC6) just got rated. With 7.90% credit enhancement to the AAA tranches for an Alt-A deal--that's more than you used to get in some subprime--I thought it might be interesting to look at the prospectus.

Remember the uproar earlier in the year about Bear buying delinquent loans out of securities in an attempt, it was alleged, to "manipulate" the market? This prospectus has a new bit I've never seen before that clarifies that:

[A]s described in this prospectus supplement, the sponsor has the option to repurchase mortgage loans that are 90 days or more delinquent or mortgage loans for which the initial scheduled payment becomes thirty days delinquent. The sponsor may exercise such option on its own behalf or may assign this right to a third party, including a holder of a class of certificates, that may benefit from the repurchase of such mortgage loans. These repurchases will have the same effect on the holders of the certificates as a prepayment of the mortgage loans. You should also note that the removal of any such delinquent mortgage loan from the issuing entity may affect the loss and delinquency tests that determine the distributions of principal prepayments to the certificates, which may adversely affect the market value of the certificates. A third party is not required to take your interests into account when deciding whether or not to direct the exercise of this option and may direct the exercise of this option when the sponsor would not otherwise exercise it. As a result, the performance of this transaction may differ from transactions in which this option was not granted to a third party.

You have been warned, I guess. There is also this:

The sponsor may from time to time implement programs designed to encourage refinancing. These programs may include, without limitation, modifications of existing loans, general or targeted solicitations, the offering of pre-approved applications, reduced origination fees or closing costs, or other financial incentives. Targeted solicitations may be based on a variety of factors, including the credit of the borrower or the location of the related mortgaged property. In addition, The sponsor may encourage assumptions of mortgage loans, including defaulted mortgage loans, under which creditworthy borrowers assume the outstanding indebtedness of the mortgage loans which may be removed from the mortgage pool. As a result of these programs, with respect to the mortgage pool underlying any issuing entity, the rate of principal prepayments of the mortgage loans in the mortgage pool may be higher than would otherwise be the case, and in some cases, the average credit or collateral quality of the mortgage loans remaining in the mortgage pool may decline. . . .

Modifications of mortgage loans implemented by the related servicer or the master servicer in order to maximize ultimate proceeds of such mortgage loans may have the effect of, among other things, reducing or otherwise changing the loan rate, forgiving payments of principal, interest or other amounts owed under the mortgage loan, such as taxes or insurance premiums, extending the final maturity date of the mortgage loan, capitalizing or deferring delinquent interest and other amounts owed under the mortgage loan, or any combination of these or other modifications. Any modified loan may remain in the issuing entity, and the reduction in collections resulting from a modification may result in reduced distributions of interest or principal on, may extend the final maturity of, or result in an allocation of a realized loss to, one or more classes of the certificates.

You have been even more warned. Furthermore,

The underwriter intends to make a secondary market in the offered certificates, but the underwriter has no obligation to do so. We cannot assure you that a secondary market will develop or, if it develops, that it will continue. Consequently, you may not be able to sell your certificates readily or at prices that will enable you to realize your desired yield. The market values of the certificates are likely to fluctuate, and such fluctuations may be significant and could result in significant losses to you.

The secondary markets for asset backed securities have experienced periods of illiquidity and can be expected to do so in the future. Illiquidity can have a severely adverse effect on the prices of certificates that are especially sensitive to prepayment, credit or interest rate risk, or that have been structured to meet the investment requirements of limited categories of investors.

In case you hadn't noticed, you're getting warned again.

As far as the mortgage pool? It's fixed-rate Bridge Mix: 18% full doc; WA FICO of 701 with range from less than 600 to more than 800; average balance just under $306,000 with a range from $33,000 to $2MM; 14% non-owner-occupied; 29% CA and 10% FL; 35% interest only. The sort of thing that would have skated by a year ago, in other words. The big difference here: only 28% of loans are purchase-money, and only 19% have subordinate financing.

The loans are also rather older than new production issues have been in the last few years--averaging 7-10 months--which suggests that it took a while to put this deal together. I'd say this is less an indicator of what kind of loans are being made today than it is what kind of loans have been parked in Bear Stearns' inventory since the first quarter, waiting for the RMBS market to revive. And with subordination levels of nearly 8.00% on fixed rate "Alt-A," it's quite clear that rates to consumers for "non-conforming" loans have nowhere to go but up.

by Calculated Risk on 9/23/2007 11:32:00 PM

Quote of the day:

"Economists tend to think people are crazy because they won’t sell their houses for less than they paid for them — and people think economists are crazy for thinking things exactly like that."
Professor Christopher Mayer, director of the Paul Milstein Center for Real Estate at Columbia Business School

From the NY Times: A Reality Check for Home Sellers

This article discusses homeowners not want to sell for a loss. But even homeowners with some profit reluctantly reduce their prices, unrealistically hoping for a price close to recent sales in their neighborhood. As the article notes:

... the [housing] market went into a deep freeze as many people held out for market prices that no one would reasonably pay.

We will see how much of a "deep freeze" later this week when the new and existing home sales reports are released.