by Calculated Risk on 2/25/2008 05:34:00 PM

This is just for afternoon entertainment and isn't a reflection of Tanta or my views. CR

by Calculated Risk on 2/25/2008 03:53:00 PM

We've been debating in the comments whether the Commercial Real Estate (CRE) bust would be similar to the Residential Real Estate bust.

Richard Berner at Morgan Stanley writes that the "contraction in [CRE construction] outlays will be shallow", see: Recession Claims Its Next Victim: Commercial Construction

Recession is about to claim its next victim: Commercial construction. A downturn in such activity would represent a significant turnaround from last year’s boom: Although nonresidential or structures investment accounted for only 3.4% of (nominal) GDP, the 16% jump in real outlays contributed half a point to overall real GDP growth over the four quarters of 2007. Such a gain — the sharpest 4-quarter rise since 1984 — is unsustainable, and we think this economic asset is about to turn into a liability. Tighter financial conditions, uncertain tenancy, rents, and property values all will contribute to a downturn in office, retail and warehouse activity. Soaring construction costs are also a negative. Weakness is already showing: Nonresidential construction starts tumbled 13% from a year ago in January, according to Reed Construction Data.

Despite these hurdles, we think that the contraction in outlays will be shallow by historical comparison. The key factor limiting the downturn in traditional commercial construction is that the overall growth in supply for much of this expansion has been modest by historical standards. The “capital discipline” theme that governed corporate spending in this expansion partly extended to construction as well. For example, commercial construction excluding healthcare facilities rose by only 3.9% annualized over the past five years.

But discipline seems to have faded over the past year, when construction accelerated in virtually all categories, and with the slowdown in business activity, vacancy rates have begun to rise. There are clear pockets of excess in financial services office building and in retail and lodging. A slowdown in office employment and shakeouts in retail and wholesale activity may pressure rents just as lenders and investors tighten credit availability and raise its price. However, mining, power, and healthcare construction may buck the trend.

This is similar to my view that the CRE bust is here, but that it will not be as bad as the residential bust - simply because CRE wasn't as overbuilt as residential.

by Calculated Risk on 2/25/2008 02:41:00 PM

From Standard & Poor's: S&P Takes Additional Bond Insurer Rtg Actions (no link)

NEW YORK (Standard & Poor's) Feb. 25, 2008-Standard & Poor's Ratings Services today took rating actions on several monoline bond insurers following additional stress tests with respect to their domestic nonprime mortgage exposure.

The financial strength ratings on XL Capital Assurance Inc. (XLCA) and XL Financial Assurance Ltd. (XLFA) were lowered to 'A-' from 'AAA' and remain on CreditWatch with negative implications;

The financial strength rating on Financial Guaranty Insurance Co. (FGIC) was lowered to 'A' from 'AA' and remains on CreditWatch with developing implications;

The 'AAA' financial strength rating on MBIA Insurance Corp. was removed from CreditWatch and a negative outlook was assigned;

The 'AAA' financial strength rating on Ambac Assurance Corp. was affirmed and remains on CreditWatch with negative implications; and

The 'AAA' financial strength ratings on CIFG Guaranty, CIFG Europe, and CIFG Assurance North America Inc. were affirmed and retain a negative outlook.

The downgrades on XLCA, XLFA, XL Capital Assurance (UK) Ltd., and Twin Reefs Pass-Through Trust (a committed capital facility supported by, and for the benefit of, XLFA) reflect our assessment that the company's evolving capital
plan has meaningful execution and timing risk.

The downgrades on FGIC, FGIC Corp., and Grand Central Capital Trusts I-VI (a committed capital facility supported by, and for the benefit of, FGIC) reflect
our current assessment of potential losses, which is higher than previous estimates.

The removal from CreditWatch of, and assignment of negative outlooks on, MBIA Insurance Corp., MBIA Inc., and North Castle Custodial Trusts I-VIII (a committed capital facility supported by, and for the benefit of, MBIA) reflect MBIA's success in accessing $2.6 billion of additional claims-paying resources, which, in our view, is a strong statement of management's ability to address the concerns relating to the capital adequacy of the company.
...

by Calculated Risk on 2/25/2008 02:14:00 PM

Here is a graph of Not Seasonally Adjusted existing home sales for 2005 through 2008.

Click on graph for larger image.

This graph shows that sales have plunged in January 2008 compared to the previous three years. This also shows that January is typically the least important month of the year for existing home sales.

The data for March will be much more important since that is the beginning of the Spring selling season.

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

January 2008 (4.89 million SAAR) was the weakest January since 1998 (4.37 million SAAR).

Finally the inventory increase of about 5% from December to January was typical. Last year, from December 2006 to January 2007, inventory increased 2.5% (from 3.45 millon to 3.539 million). The total inventory increase in 2007 was almost 33% from December 2006 to July 2007 (4.561 million).

A similar inventory increase this year would put inventory at 5.2 million or about 15% above the all time record set last July.

by Calculated Risk on 2/25/2008 11:43:00 AM

Goldman Sachs, in a research note this morning, noted that they expect "major write-downs" in leveraged loans this quarter. They estimated leveraged debt write-downs this quarter of $1B to $2B for several firms, with write-downs at Citi of $2.2B and Merrill of $1.3B.

Update: This is just the leveraged debt write-downs. Total write-downs at Citi could be $12 Billion (see MarketWatch: More credit costs seen weighing on banks, brokers)

They also noted there will be significant write-downs for RMBS and CMBS (residential and commercial mortgage backed securities) with special concern about CMBS.

Of course Goldman doesn't cover Goldman. But others do ...

From the WSJ: Goldman's Profit Magic May Be Fading

One of the biggest worries is Goldman's large exposure to leveraged loans, which totaled $42 billion at the end of the firm's last quarter, according to analyst calculations. During the deal boom, Goldman was a huge player in financing private-equity buyouts. But investors started to avoid buyout loans last summer, causing the debt to pile up on balance sheets and their market values to drop.

The result: Goldman is in the sort of sticky situation it largely avoided with subprime mortgages. The firm's leveraged-loan exposure is equivalent to 1.1 times its net worth, versus an average of 0.7 times for U.S. brokerage firms, according to Credit Suisse analyst Susan Roth Katzke. Write-downs on leveraged loans could total as much as $1.7 billion in the current quarter, Mr. Trone estimates.

And it could be worse if one or more of the large LBO companies defaults on their debt. As the WSJ noted:

[A]larming news, like the bankruptcy filing of a company overwhelmed by its LBO-related debt, would raise the specter of more steep markdowns.

by Calculated Risk on 2/25/2008 10:49:00 AM

This morning, Lowe's reported same-store sales declined 7.6% for the quarter.

But sequentially sales are even worse.

From the Lowe's conference call:

Same Store sales fell 4% in November (YoY)

Same store sales fell 9% in December

Same store sales fell 11% in January

CEO Niblock said he was "a bit surprised" by the weakness.

by Calculated Risk on 2/25/2008 10:00:00 AM

The NAR reports that Existing Home sales were at 4.89 million (SAAR) unit rate in January.

Existing-home sales – including single-family, townhomes, condominiums and co-ops – slipped 0.4 percent to a seasonally adjusted annual rate1 of 4.89 million units in January from an upwardly revised level of 4.91 million in December, and are 23.4 percent below the 6.44 million-unit pace in January 2007.

Click on graph for larger image.

The first graph shows monthly sales (SAAR) since 1993.

This shows sales have now fallen to the level of July 2000.




The second graph shows nationwide inventory for existing homes. According to NAR, inventory increased to 4.19 million homes for sale in January.

Total housing inventory rose 5.5 percent at the end of January to 4.19 million existing homes available for sale, which represents a 10.3-month supply at the current sales pace, up from a 9.7-month supply in December.

The typical pattern is for inventory to decline in December, and then start to rebound in January. This is probably just the beginning of the inventory build for 2008.

I'd expect record levels of existing home inventory later this spring and summer.


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

Months of supply increased to 10.3 months. This follows the highest year end months of supply since 1982 (the all time record of 11.5 months of supply).

Even if inventory levels stabilize, the months of supply could continue to rise - and possibly rise significantly - if sales continue to decline.

More later today on existing home sales.

by Calculated Risk on 2/25/2008 09:19:00 AM

From the WSJ: Lowe's Posts Lower Net Amid Housing Downturn

Lowe's Cos.'s fiscal fourth-quarter net income slumped 33% on continued sales weakness, which the home-improvement retailer expected to persist for several more quarters.

... same-store sales declined 7.6%.

Chairman and Chief Executive Robert A. Niblock said sales were below expectations "as we faced an unprecedented decline in housing turnover, falling home prices in many areas and turbulent mortgage markets that impacted both sentiment related to home improvement purchases as well as consumers' access to capital."

He went on to say "the next several quarters will be challenging on many fronts as industry sales are likely to remain soft."

In an earlier post, I noted that real home improvement spending had held up pretty well.

This graph shows the major components of residential investment (RI) normalized by GDP.

Click on graph for larger image.

The largest component of RI is investment in new single family structures. This includes both homes built for sale, and homes built by owner.

The second largest component of RI is home improvement. This investment could be seriously impacted by declining mortgage equity withdrawal (MEW) over the next few quarters.

This data is from the Bureau of Economic Analysis (BEA), supplemental tables. (see Section 5: Table 5.4.5AU. Private Fixed Investment in Structures by Type, near the bottom).

by Calculated Risk on 2/24/2008 04:41:00 PM

From Financial Week: Commercial property values in for steep drop, says loan liquidator

In what may well be a sign of things to come, Mission Capital Advisors said it is accepting bids for a $131.2 million portfolio of non-performing loans secured by commercial mortgages foreclosed on by a Midwestern bank.

... [David Tobin, a principal at Mission Capital] predicted commercial property values are heading for a steep fall due to the rising tide of troubled portfolio sales by banks, as they move to get non-performing assets off their books.

... Eventually, Mr. Tobin believes the declines in the commercial real estate market could mimic those being registered in the residential market now.

The CRE slowdown is here, but I don't think the CRE bust will be as bad as the residential bust.

by Calculated Risk on 2/24/2008 12:16:00 PM

A robber in a ski mask blamed the bank for what he was about to do, The Associated Press reported Feb. 22.

"You took my house, now I'm going to take your money!" the assailant hollered. Talk about a reverse mortgage!

The FBI plans to review the bank's foreclosure records for clues.

The suspect is presumed to be ARM'ed and dangerous.
(hat tip Sam frm SNL)