by Calculated Risk on 3/04/2008 12:58:00 AM

From the WSJ: Building Slowdown Goes Commercial. A few excerpts:

In the past few years, builders aggressively put up stores and strip malls amid easy financing and resilient consumer spending. Spending on construction of shopping centers leapt 67% in 2007 from 2005 levels.

Last year, developers built 144 million square feet of retail projects in the top 54 U.S. markets and are slated to build another 131 million square feet this year, according to Property & Portfolio Research Inc., a Boston research company. Property & Portfolio Research calculates that demand justified 36% of the new space built last year and will support 15.7% of the space slated to be completed this year.

A sign that construction is about to cool off, perhaps sharply: The American Institute of Architects' monthly index of billings at architecture firms was down 14% in January from its peak in July. That means fewer construction projects will start this year, said AIA Chief Economist Kermit Baker.

There are many other details in the story - it definitely appears the CRE slump has started.

by Calculated Risk on 3/03/2008 04:39:00 PM

Warren Buffett was interviewed for three hours on CNBC today. Here is the transcript and a brief excerpt on housing prices (hat tip cord):

LIESMAN: One of the most striking things in this poll is for the first time--we've done this for four quarters now--Americans now look for a decline in their home values. What's the significance of that from an economic point of view, Mr. Buffett?

BUFFETT: Well, it has a huge effect because, you know, with 60 percent-plus of the American people being homeowners, as being a huge asset--and in many cases it's a leverage asset--it obviously is going to be on their mind big time. And I get the figures every month. We have a number of real estate brokerage operations around the country, and I get the--I get the figures from many markets on listings and sales, and I've seen something like Dade and Broward County go from 6,000 listings and 3600 sales a month to where they're now, I think, 82,000 listings and about 1500 sales a month. So unless there's some major intervention by the government in some way, or something of the sort, home prices have not stopped going down. Now, they will at some point.

QUICK: Any of the intervention plans we've seen from the government strike you as being a good idea?

BUFFETT: Well, that--I haven't seen the details on many of them, but I think it's very hard to start interfering with markets without having a whole lot of unintended consequences.

And on a recession:

QUICK: Let's move on to David from Defiance, Ohio. He asks, `How would you define a recession?' This is something we talk an awful lot about on the show, but he says, `I've been listening to a lot of discussions on CNBC, some of which can be very annoying because they tend to be so outrageously vocal and the experts believe two quarters of negative growth qualifies as a recession.' Is that the surest definition of it? Or do you think it's broader than just that?

BUFFETT: Well, it's the standard definition, but if you think about it, population grows 1 percent of year. So you could have growth of GDP of a 1/2 a percent, but GDP per capita would be going down. So the very definition, you might say, is a little bit flawed if it--if it doesn't allow for the fact that GDP per capita can go down while growth GDP's going up. Beyond that, I would say by any common sense definition, we are in a recession. And...

QUICK: You would?

BUFFETT: Yeah, we wouldn't--we haven't had two consecutive quarters of GDP growth, but I will tell you that, on balance, most people's situation, certainly their net worth has been heading south now for a considerable period of time. And if you owned a house, and you had an 80 percent mortgage on it, and so you had 20 percent equity a year ago, you might not have any equity now. And millions of people are in positions somewhat similar to that, and people would--people that own municipal bonds feel poorer today than they did a few months ago.

QUICK: Mm-hmm.

BUFFETT: So business is slowing down. We have--we have retail stores in candy and home furnishings and jewelry; across the board I'm seeing a significant slowdown and, of course...

QUICK: That's the first time I've heard you say you think we're actually in a recession right now.

BUFFETT: Yeah, well, I think, when we talked earlier, I said we might be.

QUICK: Right.

BUFFETT: But it--no, I would--I would say that--but when I say we're in a recession, it doesn't meet the technical definition. We aren't in the second quarter of--we can't be because we don't know what the fourth quarter of last year was. But I think that, from a commonsense standpoint, we're in a recession now.

by Calculated Risk on 3/03/2008 02:21:00 PM

From MarketWatch: GM February U.S. light vehicle sales fall 12.9%

General Motors ... on Monday reported a 12.9% decline in February U.S. light vehicle sales to 308,411 cars and trucks.

Also from MarketWatch: Ford, Toyota sell fewer cars in February

Ford said it sold 196,681 cars and trucks last month, down 6.9% from 211,150 a year earlier.

Toyota ... reported that February U.S. sales fell 2.8% to 182,169 vehicles, down from 187,330 last year.

Maybe Chrysler will save the day ...

Update: Ooops, Guess not (Chrylser saving the day). From MarketWatch:

Chrysler Feb. U.S. sales fall 14% to 150,093 vehicles

by Calculated Risk on 3/03/2008 11:58:00 AM

Remarks from Secretary Paulson:

First, many in Washington and many financial institutions have been floating proposals for a major government intervention in the housing market, with U.S. taxpayers assuming the costs of the riskiest mortgages. Today, 93 percent of American homeowners – 51 million households - pay their mortgages on time. Many are on tight budgets, sacrificing other things in order to make that payment. Only 2 percent are in foreclosure.

Most of the proposals I've seen would do more harm than good --- bailing out investors, lenders or speculators who, instead of getting a free-pass, should be accountable for the risks they took. Let me be clear: I oppose any bailout. I believe our efforts are best focused on helping homeowners who want to stay in their homes.

Second, this is a shared responsibility of industry, government and homeowners. We in government are working to expand options through the FHA, and we've worked with the industry to reach as many homeowners as possible to let them know that help is available. There is more that government and industry can do, and our efforts will continue to evolve. Homeowners have responsibilities as well. If borrowers won't ask about solutions, there is only so much that can be done on their behalf.

Third, the current public discussion often conflates the number of so-called "underwater" homeowners – that is, those with mortgages greater than the value of their house – with projections of foreclosures. Let's be precise: being underwater does not affect your ability to pay your mortgage, nor create a government responsibility for assistance. Homeowners who can afford their mortgage should honor their obligations --- and most do.

Obviously, being underwater is not insignificant to homeowners in that position. But negative equity does not necessarily result in foreclosure. Most people buy homes as a long-term investment, as a place to raise a family and put down roots in a community. Homeowners who can afford their payments and don't have to move, can choose to stay in their house. And let me emphasize, any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator – and one who is not honoring his obligations.

We know that speculation increased in recent years; a resulting increase in foreclosures is to be expected and does not warrant any relief. People who speculated and bought investment properties in hot markets should take their losses just like day traders who speculated and bought soaring tech stocks in 2000.

by Calculated Risk on 3/03/2008 11:38:00 AM

From OFHEO: OFHEO, NY Attorney General, Fannie Mae and Freddie Mac Sign Agreements to Combat Appraisal Fraud

There are many significant provisions in the agreements that are designed to strengthen the independence of appraisers, including eliminating broker-ordered appraisals, prohibiting appraiser coercion, and reducing the use of appraisals prepared in-house or through captive appraisal management companies in underwriting mortgages. The agreements also enhance quality control in the appraisal process and establish a complaint hotline for consumers. The agreements include a Home Valuation Code of Conduct that the Enterprises will apply to lenders selling mortgages to Fannie Mae or Freddie Mac. The Code becomes effective on January 1, 2009.

The parties also agreed to establish and the Enterprises fund an Independent Valuation Protection Institute designed to supplement current efforts to provide an appraisal complaint process, mediation of appraisal disputes, and mortgage fraud reporting.

Tanta had some commentary last week: Fannie Mae New Rules for Appraisals

by Calculated Risk on 3/03/2008 10:07:00 AM

Spending declined in January for both residential and non-residential private construction. This is additional evidence that the non-residential slowdown is here.

From the Census Bureau: January 2008 Construction at $1,121.5 Billion Annual Rate

Spending on private construction was at a seasonally adjusted annual rate of $827.4 billion, 2.2 percent below the revised December estimate of $845.7 billion.

Residential construction was at a seasonally adjusted annual rate of $455.8 billion in January, 3.0 percent below the revised December estimate of $469.7 billion.

Nonresidential construction was at a seasonally adjusted annual rate of $371.6 billion in January, 1.2 percent below the revised December estimate of $376.0 billion.

Click on graph for larger image.

The graph shows private residential and nonresidential construction spending since 1993.

Over the last couple of years, as residential spending has declined, nonresidential has been very strong. This is additional evidence - along with the Fed's Loan Officer Survey and other data - that suggests the slowdown in nonresidential spending is here.

by Anonymous on 3/03/2008 08:34:00 AM

More credit tightening:

Take Robert Whittaker, a Sykesville, Md., homeowner who sought to refinance a $260,000 first mortgage when 30-year rates fell below 6 percent. Whittaker's interest-only adjustable rate loan was scheduled for a hefty payment reset.

Whittaker, who bought his house four years ago, contacted a mortgage broker who was able to arrange a new $260,000 loan at a fixed rate of 5.5 percent for 30 years. All that was needed was for the lender holding a $70,000 second mortgage on Whittaker's house to agree to a routine request that to keep its second lien "subordinated" to the new first mortgage. That would leave the lender in the second payoff position in a foreclosure.

Whittaker expected no problems: He wasn't seeking to increase his overall debt, his credit scores were solid, Fannie Mae approved the refinance transaction and his appraisal came in at $384,500 -- nearly $55,000 more than his combined mortgage balances.

His broker submitted the request to the second lender, Cleveland-based National City Corp., Feb. 1, expecting quick approval. On Feb. 18, the bank told employees in an internal memo that it was no longer approving requests nationwide for subordinations from second-mortgage customers, such as Whittaker, whose first mortgage was with another firm.

A spokesman for National City, William Eiler, declined to provide the number of loan customers affected and said the bank's reasons were "proprietary." Asked whether blocking customers' ability to refinance could push some of them into foreclosure after payment resets, Eiler said: "We cannot predict that this might occur." The memo, a copy of which was provided to me, acknowledged that the new policy "may not be widely accepted by our customers."

Whittaker's broker, Joseph Liberto, co-owner of Immediate Mortgage Inc. of Ijamsville, Md., called National City's action "outrageous. Here our [federal and state] governments are trying to help people facing big payment increases, and we've got lenders refusing to cooperate -- even when it makes sense for everyone involved."

Nancy Gusman, a real estate lawyer in Prince George's County, Md., outside Washington, D.C., says she is seeing lender roadblocks like Whittaker's every day. "And it's so counterproductive. All the articles you read quote the bank executives saying, 'Contact us. We want to work with you.' Then they turn around and pull stuff like this."

The change at National City illustrates how declining market conditions are affecting borrowers with second liens. Not only are equity credit lines being frozen or reduced, but issues such as subordination stymie borrowers' attempts to refinance.

When property values were soaring during the boom years, requests for subordination were rarely denied if homeowners had decent payment histories. But with prices depreciating in many markets, banks are worried that, even if customers have sterling credit, the bank's security interest in a property may be whittled away.

I'd like to know whether the point of this, for NCC, is to hold out for a pay-down (not necessarily payoff) of that second. (That, frankly, is what I'd be doing if I were National City.) If you assume that the current appraisal is not fantasy, a prime borrower with good credit should be able to get a Fannie Mae cash-out refi at 80% LTV. That would mean the borrower gets a new first lien for $307,600, which pays off the existing $260,000 first lien and leaves $47,600 to pay down the balance of that Nat City second, reducing NCC's exposure from $70,000 to $22,400. In exchange for that, they might be willing to subordinate. Even if this guy could get only a 75% cash-out, that would produce $28,375 to reduce the second lien balance.

Of course the appraisal might be fruitcake on a 1004*, but that's not what this borrower is saying or why all these people are outraged. It would not force this borrower to increase his total indebtedness any, although it would increase the interest rate somewhat on that new first lien, since it's a cash-out instead of a rate/term refi.

If Nat City is really refusing to subordinate in any circumstance, then I would say that's a pretty strange policy. But I really couldn't fault them for trying to negotiate a compromise with this particular borrower, as the details are presented. It means the guy doesn't get his 5.50% rate, but these things happen.

------

*That's insider for "standard appraisal form."

by Calculated Risk on 3/03/2008 12:32:00 AM

From the WSJ: Countrywide's Mortgage Woes Deepen

The ... lender's annual filing with the Securities and Exchange Commission ... showed a big increase in late payments on option adjustable-rate mortgages, known as option ARMs. ...

As of the end of 2007, payments were at least 90 days overdue on 5.4% of option ARMs held as investments by Countrywide's banking arm, up from 0.6% a year earlier. Countrywide held $28.42 billion of such loans as of Dec. 31. The company said 71% of the borrowers were making minimal payments. Only about a fifth of the borrowers were required to document fully their incomes before receiving the loans.
...
Countrywide disclosed that half of the $87.04 billion of mortgage loans held by its bank are backed by homes in California and Florida, two of the states hit hardest by falling home prices.

by Calculated Risk on 3/03/2008 12:29:00 AM

From the WSJ Heard on the Street: Wall Street Gears for Its New Pain

After suffering a beating from their exposure to home loans, banks and securities firms are about to take their lumps from office towers, hotels and other commercial real estate. And the losses could last longer than those from the subprime shakeout.

As the economy wobbles and financing costs rise because of the credit crunch, commercial-real-estate values are starting to slide, with analysts at Goldman Sachs Group Inc. projecting a decline of 21% to 26% in the next two years. That means misery for securities firms with exposure to commercial-real-estate loans and commercial- mortgage-backed securities.

by Calculated Risk on 3/02/2008 11:31:00 AM

Gretchen Morgenson at the NY Times provides us with some employment data from TrimTabs: The Buck Has Stopped

TRIMTABS, which estimates employment growth using data from an online job index and an analysis of income tax withheld versus job creation rates, has been far more accurate than the Bureau of Labor Statistics. For example, in 2006, the government’s initial estimates of employment growth came in at 1.52 million jobs. But the bureau revised that data upward in February 2007, for a total of 2.24 million.

By comparison, TrimTabs’ estimates of 2006 employment growth, using real-time data, totaled 2.39 million jobs. The firm reported those figures to clients contemporaneously.

Last week, TrimTabs told clients it estimated that 77,000 jobs would be lost in February; Wall Street economists are calling for a gain of 30,000 for the month.

Since October 2007, TrimTabs estimates, the economy has lost about 175,000 jobs, the first sustained employment drop since early 2003.

I don't know about the accuracy of the real time TrimTab estimates, but this reminds us that the BLS methodology is subject to signficant revisions (that might be lagged by a year), and that the BLS will almost certainly miss any turning point.

The BLS had acknowledged this weakness:

The most significant potential drawback ... is that time series modeling assumes a predictable continuation of historical patterns and relationships and therefore is likely to have some difficulty producing reliable estimates at economic turning points or during periods when there are sudden changes in trend.

This is something to think about for those that argue - because the BLS employment numbers haen't been consistently negative - the economy isn't in recession yet. Just wait for the revisions.

And on recessions, the NY Times reports in "A Rerun, Maybe, but of What Show?" that Citigroup's Tobias Levkovich and Byron Wien of Pequot Capital are also predicting a recession. Welcome to the dark side.