by Calculated Risk on 3/11/2008 05:05:00 PM

The WSJ reports: Glut of Homes on the Market Grows, New Data Shows

The supply of homes available for sale in major metropolitan areas grew modestly in February, new data show.

Total listings of homes in 29 metro areas at the end of last month were up 1.2% from a month earlier, according to figures compiled by ZipRealty Inc., a real-estate brokerage firm based in Emeryville, Calif.

In January, the inventory of existing homes increased 5.5% according to the National Association of Realtors (NAR). If the number of listed homes a further increased 1.2% in February (per ZipRealty's sample) that would still put the early season inventory increases above normal.

It is very likely that we will see record nominal inventory levels soon, possibly in April. Note: the current inventory record is 4.65 million units set last July. Last month the NAR reported a record January inventory of 4.19 million.

by Anonymous on 3/11/2008 02:22:00 PM

This is ugly:

Struggling to save their homes from foreclosure, more Americans are raiding their 401(k) retirement accounts to pay their bills — and getting slammed with taxes and penalties in the process, according to retirement plan administrators. . . .

Such hardship withdrawals began rising last year and, by January this year, had exceeded January 2007 levels. During the first month of the year, as the economic slowdown tightened pressure on mortgage holders, hardship withdrawals rose 23% at plans that Merrill Lynch (MER) administers, compared with the same period in 2007, says Kevin Crain, managing director of the Merrill Lynch Retirement Group.

The 401(k) withdrawals are rising mainly because people such as Campbell and her husband want to save their homes. Merrill Lynch found that the primary reason for the rise in hardship withdrawals was to prevent foreclosure or eviction, based on its sampling of applications filed in January.

Likewise, in the first month of the year, compared with January 2007, Great-West Retirement Services saw a 20% increase in hardship withdrawals to save a home. And Principal Financial (PFG) reports that in January it received 245 calls from participants who inquired about 401(k) withdrawals to prevent a foreclosure or eviction, up dramatically from 45 similar calls it received in January 2007.

by Calculated Risk on 3/11/2008 12:48:00 PM

From Fed Governor Randall S. Kroszner: The Importance of Fundamentals in Risk Management

Kroszner blasted banks for ignoring excessive risk concentration:

[I]n particular cases, senior management was not fully aware of the firm's latent concentrations to U.S. subprime mortgages, because they did not realize that in addition to the subprime mortgages on their books, they had exposure through off-balance sheet vehicles holding mortgages, through claims on counterparties exposed to subprime, and through certain complex securities.

And then he cautions on commercial real estate (CRE) loan concentrations:

Banks should also remember that past experience is not always predictive of future events, meaning that they should be somewhat creative in designing potential shocks. In CRE, for example, banks should move beyond considering single-name risk and include scenarios involving broader risks to the CRE sector and how such risk may be correlated in times of stress with other parts of the portfolio.

It's interesting that the Fed issued a guidance cautioning about CRE loan concentrations at the end of 2006, and yet the evidence suggests CRE loan concentrations at small and medium-sized institutions still continued to increase.

by Calculated Risk on 3/11/2008 10:52:00 AM

Professor Ed Leamer, Director of the UCLA Anderson Forecast, has a very good forecasting track record. He is arguing that the economy will not be weak enough to be called an official recession, but he is still pretty pessimistic and sees an extended period of sluggish growth.

From Peter Y. Hong at the LA Times: UCLA experts don't buy recession

"We are holding firm: no recession this time," UCLA Anderson Forecast Director Edward Leamer said in a report being released today.
...
UCLA predicts that GDP will dip by 0.4% in the second quarter of this year, but then rebound.
...
Unlike past recessions, the economy will not show dramatic improvements after this period of sluggishness, Leamer predicted.

"In the past 10 years, the U.S. economy has had two locomotives," Leamer said. One was the high-tech stock bubble of the late 1990s, the next was the run-up in housing.

"Looking to the future, there isn't another locomotive. There is still not a reason for great optimism," he said.

Home prices will also be slow to bounce back, and the UCLA forecasters do not predict when the housing market will recover.

Interesting. UCLA sees declining real GDP in Q2, but apparently positive GDP growth in Q1. Their primary reason for optimism (such as it is) is that not enough jobs will be lost in manufacturing for an official recession. This is similar to my argument that the the U.S. recession will not be severe (unemployment will not rise far enough), but I'm definitely more pessimistic than Leamer (I think a recession has already started).

by Calculated Risk on 3/11/2008 09:49:00 AM

The Census Bureau reported today for January 2008:

"a goods and services deficit of $58.2 billion, up from $57.9 billion in December, revised. January exports were $2.4 billion more than December exports of $145.9 billion. January imports were $2.7 billion more than December imports of $203.7 billion."

Click on graph for larger image.

The red line is the trade deficit excluding petroleum products. (Blue is the total deficit, and black is the petroleum deficit).

The ex-petroleum deficit is falling fairly rapidly, almost entirely because of weak imports (export growth is still strong).

Unlike the previous decline in the trade deficit (during the '01 recession), the value of petroleum imports - in dollar terms - are still strong. In barrels, imports appear to be flat year over year.

The trade deficit is mostly from oil imports and China. This now reminds me somewhat of the early '80s when the deficit was mostly oil and Japan.

by Calculated Risk on 3/11/2008 09:30:00 AM

From the Federal Reserve:

Since the coordinated actions taken in December 2007, the G-10 central banks have continued to work together closely and to consult regularly on liquidity pressures in funding markets. Pressures in some of these markets have recently increased again. We all continue to work together and will take appropriate steps to address those liquidity pressures.

To that end, today the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing specific measures.

Federal Reserve Actions
The Federal Reserve announced today an expansion of its securities lending program. Under this new Term Securities Lending Facility (TSLF), the Federal Reserve will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS. The TSLF is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally. As is the case with the current securities lending program, securities will be made available through an auction process. Auctions will be held on a weekly basis, beginning on March 27, 2008. The Federal Reserve will consult with primary dealers on technical design features of the TSLF.


In addition, the Federal Open Market Committee has authorized increases in its existing temporary reciprocal currency arrangements (swap lines) with the European Central Bank (ECB) and the Swiss National Bank (SNB). These arrangements will now provide dollars in amounts of up to $30 billion and $6 billion to the ECB and the SNB, respectively, representing increases of $10 billion and $2 billion. The FOMC extended the term of these swap lines through September 30, 2008.

The actions announced today supplement the measures announced by the Federal Reserve on Friday to boost the size of the Term Auction Facility to $100 billion and to undertake a series of term repurchase transactions that will cumulate to $100 billion.

by Calculated Risk on 3/11/2008 01:30:00 AM

Toll Brothers SEC filing 10-Q:

We have investments and commitments to certain joint ventures with unrelated parties to develop land. These joint ventures usually borrow money to help finance their activities. In certain circumstances, the joint venture participants, including ourselves, are required to provide guarantees of certain obligations relating to the joint ventures. As a result of the continued downturn in the homebuilding industry, some of these joint ventures or their participants have or may become unable or unwilling to fulfill their respective obligations. In addition, we may not have a controlling interest in these joint ventures and, as a result, we may not be able to require these joint ventures or their participants to honor their obligations or renegotiate them on acceptable terms. If the joint ventures or their participants do not honor their obligations, we may be required to expend additional resources or suffer losses, which could be significant.

And on cancellatons (a key metric for inventory):

[B]ased on the high cancellation rates reported by us and by other builders, non-speculative buyer cancellations are also adding to the supply of homes in the marketplace.
...
[W]e generally do not begin construction of our single-family detached homes until we have a signed contract with the home buyer, although in fiscal 2006 and 2007, due to an extremely high cancellation rate of customer contracts and the increase in the number of attached-home communities that we were operating from, the number of speculative homes in our inventory increased significantly ...

by Calculated Risk on 3/10/2008 10:00:00 PM

Here are the Kennedy-Greenspan estimates (NSA - not seasonally adjusted) of home equity extraction for Q4 2007, provided by Jim Kennedy based on the mortgage system presented in "Estimates of Home Mortgage Originations, Repayments, and Debt On One-to-Four-Family Residences," Alan Greenspan and James Kennedy, Federal Reserve Board FEDS working paper no. 2005-41.

Click on graph for larger image.
For Q4 2007, Dr. Kennedy has calculated Net Equity Extraction as $76.3 billion, or 3.0% of Disposable Personal Income (DPI). Note that net equity extraction for Q3 2007 has been revised downwards to $119.3 billion.

This graph shows the net equity extraction, or mortgage equity withdrawal (MEW), results, both in billions of dollars quarterly (not annual rate), and as a percent of personal disposable income.

MEW was declining in Q4 2007, however, these numbers are not seasonally adjusted. MEW in Q4 2006 was $94.6 Billion, so MEW has only fallen 20% from Q4 2006.

As homeowner equity continues to decline sharply in the coming quarters, combined with tighter lending standards, equity extraction should decline significantly and impact consumer spending.

by Calculated Risk on 3/10/2008 07:04:00 PM

Here is the long version of Summers' speech.

Here is the short version video of Larry Summers' speech last week (11 minutes).

"We are in nearly unprecedented times with respect to the financial strains." Summers, March 7, 2008 at Stanford

Here is also US Treasury Secretary Henry Paulson also on March 7th at Stanford (13 minutes).

by Calculated Risk on 3/10/2008 02:46:00 PM

From Paul Jackson at Housing Wire: Fitch Downgrades National City, Wamu, Others on Home Equity Concerns

Deterioration within home equity portfolios will clearly emerge in first-quarter 2008,” the agency said in a press statement late Friday, “which is earlier than Fitch previously expected.”
...
“Home equity delinquency rates are rising at a far more rapid pace than even most bankers’ and analysts’ grim outlook for 2008 had anticipated,” it said. The agency characterized home equity loans originated by brokers, and located in a locale enduring swift price declines such as California, as “particularly toxic.”

HELOCs. Alt-As. We are all subprime now.