by Calculated Risk on 4/06/2008 08:34:00 PM

The San Francisco Chronicle has a story about how the credit crunch is hitting higher income homeowners: Lenders retreat as housing market plummets

[Brent] Meyers began his landscaping project in January, expecting to draw on his home equity loan to pay [the landscaper $75,000 for the project].

When Meyers took out the credit line in November 2006, his home was valued at $1.475 million. With less than $1 million in principal outstanding on his first mortgage, he had a comfortable equity cushion to cover the line.

A few weeks ago, Meyers got a letter from Bank of America informing him that the line had been suspended in its entirety. When he called to ask why, he was told that his house had dropped to an estimated $1.09 million in value, which left insufficient equity to cover the line.
...
Meyers isn't exactly a hardship case. Unlike some who have had their credit cut off, he has other resources to fall back on. He intends to complete his landscaping project and will sell stock to pay for it.
...
Still, losing the credit line is prompting him and his wife, Deborah, to retrench.

"I'm going to change my spending behavior because I lost access to $180,000," he said. "We're going to be deferring other expenditures to build a pot of money to replace what Bank of America took away."

This shift from borrowing to savings is probably happening all across the country as the "home ATM" is being closed. In the long run this is healthy for the economy. In the short run, more savings has a negative impact on consumer spending and home improvement spending.

by Anonymous on 4/06/2008 08:05:00 AM

Does anyone else remember when this buy-as-much-suburban-house-as-you-can thing was all about having a great place to raise your kids?

From the NYT Magazine's long piece on Maricopa, Arizona, "The Boomtown Mirage":

There were plenty of other cities in Arizona that were experiencing a housing-market boom at the same time. But most of those cities already had an infrastructure in place to deal with the influx of people. Nearby Casa Grande had, for instance, a courthouse, a police station, zoning laws, a fire department, a city hall, a local government and a sewer system. Maricopa had none of the above. There was one school in town, built in the 1950s, a four-building campus where Maricopa’s children were educated from kindergarten to 12th grade. . . .

Ideally, a growing city will negotiate with developers to reduce the impact that new residents will have on the area; it might offer the builder smaller setbacks from the road in exchange for providing space for a school or widening roads. But at the beginning of Maricopa’s growth, the city was unincorporated, and all these negotiations were made by a three-person county board of supervisors that was working from rural zoning codes dating back to 1962. As a result, in those early years, decisions about Maricopa were driven by the concerns of developers, who left little space in their plans for business or commerce — just lots and lots of houses. They created blocks of identical homes, because it was more efficient to build with as little variation as possible. They built sidewalks on only one side of the street to save money. They happily left space in subdivisions for playgrounds and five new elementary schools, which they thought would help bring in the young families they were targeting, but they did not leave space for parks for older kids or for a high school. . . .

By the time Maricopa became a city, though, almost half of its land was owned by developers. In 2005, the local school district appointed a superintendent, John Flores, who began pleading with the developers for space for a high school (for a while, Maricopa schools were admitting 300 new students every month). But it was to no avail. Amy Haberbosch, Maricopa’s former director of planning, told me that developers believed high schools lowered property values; she said one developer told her he’d rather build a jail on his property than a high school. . . .

At Fry’s, I met Adrianna Roberts, who is 16 and recently moved to Maricopa from Illinois. Her parents had wanted to get out of a bad neighborhood and into a bigger house, and her older sister, a real estate agent, had recommended Maricopa. Roberts and her friend Alajeda Howard, a recent transplant from Missouri, bagged groceries at the store, and they came to Fry’s even when they weren’t scheduled to work, because, they said, there was nothing else to do.

Roberts and Howard, who is also 16, live in Palo Brea, one of the least inhabited subdivisions in town. The roads in Palo Brea were each marked with a green street sign and a curb, and the lots had been wired for electricity and water, but they were mostly empty; just a few streets had homes on them. Roberts and Howard told me they missed their old neighborhoods. “Here you have to have someone drive you 45 minutes just to do something on the weekend, and everyone falls asleep on the way there,” Howard said, fiddling with a package of cheese she was supposed to return to the dairy cooler. Roberts concurred: “In Illinois, you could get home and walk anywhere you wanted to go — to the corner store or up the street to the YMCA. The mall was two blocks away.”

Shawn Bellamy, a 19-year-old store manager, came by to offer his two cents about Maricopa. “The only thing good is Fry’s. Without Fry’s, I wouldn’t have met anyone here. It’s just slit-your-throat-and-wrists boring.”

Although Howard and Roberts both live in Palo Brea, they had not met each other until they started to work at Fry’s. “Everyone makes friends at this store,” Howard explained. “This is the hangout for Maricopa.”

For some reason, these teenagers don't seem sufficiently grateful to have been saved from the horrors of urban life--YMCAs, corner stores, malls, sidewalks, high schools--and plopped into a community with a big golf course, no business district, and no social activities that don't require a driver's license, a car, gas, and 45 minutes of travel time. If the developers are horrified by the thought of having a high school around to bring down property values, you can imagine what they'd think of a YMCA. So the kids all hang out at a supermarket.

It sounds like a great supermarket, by the way. They put in couches, a TV, and internet access and clearly don't shoo those kids out as if the mere presence of teenagers near a business meant an uncontrollable crime wave. Then again, maybe they have no choice: while the developers might prefer jails to high schools, it looks like they didn't get a jail either.

Many of you no doubt noticed the big hissy fit over this story, in which a perfectly responsible mom let her perfectly responsible kid ride the subway by himself in New York, and ended up with a fondue-fork wielding crowd after her for "child abuse." Obviously she should move to Maricopa with the kid. He can have absolutely nothing to do until he's old enough to get a job at Fry's, which can become the focus of his social life. But he won't get mugged on the subway.

by Calculated Risk on 4/06/2008 12:04:00 AM

Jeffrey H. Birnbaum at the WaPo reports that the Mortgage Bankers Association (MBA) is "about to find it harder than it imagined to pay its own mortgage": Housing Crisis Hits Its Own

A year ago, the Mortgage Bankers Association was thrilled to sign a contract to buy a fancy new headquarters building in downtown Washington. Interest rates were low, the group's revenues were steady and the prospects for quickly renting out part of the structure were strong.

But since then, the association has fallen on tough times ...

The lobbying group is about to sign the final papers to buy the 12-story building on L Street NW for about $100 million. Like many of the companies it represents, the organization is facing a triple whammy of woes: Its financing costs are up, its income is down, and the leasing market is slow, leaving it, so far, without a single tenant.
emphasis added

This shows several aspects of the credit crisis. MBA members are struggling (or gone), so revenue is down. Financing costs have risen. And the market for office space has slowed sharply.

I guess they could always just walk away.

by Calculated Risk on 4/05/2008 05:19:00 PM

Earlier this week, the Census Bureau reported that private non-residential construction spending had declined for the third straight month.

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. However, it now appears that non-residential construction spending is declining.

Looking ahead to the Q1 GDP report from the BEA, this implies that real non-residential investment (non-RI) will probably decline in Q1 2008. This follows a number of quarters of positive contributions to GDP from non-RI in structures. Over the last three quarters, non-RI in structures added 0.78% to GDP in Q2, 0.52% in Q3, and 0.41% in Q4 2007.

This graph compares the nominal Census Bureau non-residential construction spending with the BEA non-residential investment in structures. Note: Construction spending numbers are not available for March yet.

Although the data sets are different, there is a high correlation between the two series. These are nominal numbers, and in real terms this suggests strongly that non-residential investment declined in Q1.

by Calculated Risk on 4/05/2008 12:58:00 PM

Yesterday I posted excerpts from an article about house prices in Denver. The article in the U.S. News & World Report featured a graph showing house prices neighborhood by neighborhood. In some areas prices are flat or rising, in other areas - especially those with signficant foreclosure activity - prices are falling.

The USAToday has an article about those neighborhoods in Denver being devastated by foreclosure: Mortgage defaults force Denver exodus

Foreclosures are ripping through the rows of new homes in the flatlands where Denver turns to prairie. Every week, 10 more families here need to find someplace else to live.
...
This small corner of the Mile High City represents an extreme example of how foreclosures are transforming lives and neighborhoods. On some blocks, as many as one-third of the residents have lost their homes, making this one of the worst hotspots in a city that was among the first to feel the pinch of the foreclosure crisis. Many houses here remain empty, bank lockboxes on the front doors.

The foreclosure epidemic has swept so quickly through this part of Denver that in less than two years, lenders took action on 919 of the roughly 8,000 properties here, according to city records. Their owners defaulted on more than $171 million in mortgages they had used to buy their way out of apartments and into cul-de-sacs.

This is why those looking for a price bottom in Denver are probably too optimistic - there is simply too much supply, and much of the supply is distressed.

by Calculated Risk on 4/04/2008 07:11:00 PM

Andrew Leonard at Salon provides some Congressional testimony after the S&L Crisis in "The next time we have Black Monday"

Prescient is too mild a word to describe [Stephen] Pizzo's testimony. I recommend reading it in its entirety, so as to savor the full flavor of his brimstone and fire. But here is a choice excerpt, featuring Pizzo's prediction as to the likely baleful consequences of allowing commercial banks to play with securities. ...

As we autopsied dead savings and loans, we were absolutely amazed by the number of ways thrift rogues were able to circumvent, neuter, and defeat firewalls designed to safeguard the system against self-dealing and abuse. ...

... billions of federally insured dollars will disappear ...

That will happen, not might happen but will happen, and when it does these too-big-to-fail banks will have to be propped up with Federal money. In the smoking aftermath, Congress can stand around and wring its hands and give speeches about how awful it is that these bankers violated the spirit of the law, but once again, the money will be gone, the bill will have come due, and taxpayers will again be required to cough it up.

by Calculated Risk on 4/04/2008 05:19:00 PM

From Bloomberg: MBIA Loses AAA Insurer Rating From Fitch Over Capital

Fitch Ratings cut the rating on MBIA Inc.'s insurance unit to AA from AAA, saying the bond insurer no longer has enough capital to warrant the top ranking.
...
Fitch issued the new, lower rating even though Armonk, New York-based MBIA asked the ratings company last month to stop assessing its credit worthiness.

by Calculated Risk on 4/04/2008 02:57:00 PM

Luke Mullins at U.S. News and World Report writes: Some Home Prices Are Actually Rising in Denver. This is an excerpt from an interview with Ryan Tomazin, the director and chief financial officer of Integrated Asset Services.

Mullins: Let's look at a specific area. What's happening in Denver, where prices overall have dropped more than 5 percent in the past year?

Tomazin: As a whole, it's down. We're seeing historic all-time highs for foreclosures, all those types of things that are currently the storylines. But within the city, there are areas that are very hard hit in Denver, and yet there are areas that have been relatively unaffected or even appreciating.

[see interesting neighborhood by neighborhood map in article]

Q: The map reflects the price change for detached, single-family homes over the past year, according to Integrated Asset Services. Why are the property values of some neighborhoods [those in green or blue] rising?

Tomazin: In Denver specifically, what we're seeing is there are some neighborhoods that are very valuable—old historic neighborhoods. Their values have historically held up just because there is a limited supply. They are located very centrally, and they are in fairly affluent areas.

Q: What about the neighborhoods in red?

Tomazin: Denver had some of the most unregulated lending practices in the country. And many of the borrowers in these areas are not able to meet the new payments of the adjustable-rate mortgages.

This story reminds us that all areas aren't the same; price action can be different neighborhood by neighborhood.

And Denver did not see much house appreciation compared to many other cities, so prices will probably not fall as far either.

Click on graph for larger image.

This graph show the real (inflation adjusted) Case-Shiller house price indices for Denver and Los Angeles. Real prices have been flat in Denver for about six years - before turning down recently - so prices are probably much closer to the bottom in Denver than in Los Angeles.

Still Tomazin might be a little optimistic that prices are near the bottom in Denver - mostly because there is too much inventory right now - and my guess is there will be further price declines.

by Calculated Risk on 4/04/2008 01:32:00 PM

From Mike Freeman at the San Diego Union-Tribune: Local office vacancy rate skyrockets

San Diego's office vacancy rate spiked to its highest level since 1996 in the first quarter thanks to a combination of weak demand and new buildings coming to market.

Direct vacancy – landlord-controlled office space that's empty – was 15.1 percent countywide, according to a CB Richard Ellis report issued yesterday. That's up from 11.5 percent a year earlier.
...
Net absorption – a real estate term that measures the amount of space leased versus the amount vacated – was negative 190,000 square feet for the quarter.
...
The slumping demand comes after a wave of office construction over the past couple of years.

For residential real estate, San Diego was one of the first cities impacted by the housing bust (declining transactions, falling prices). So it's not surprising that San Diego would also be one the first cities with falling demand for office space - while the supply is still rising due to the commercial real estate construction boom of recent years.

The combination of falling demand for office space, and increasing supply, will probably be repeated in many cities across the country.

by Calculated Risk on 4/04/2008 11:59:00 AM

This first graph shows real Case-Shiller house prices for Los Angeles and the Composite 20 Index (20 large cities). The indices are adjusted with CPI less Shelter.

Click on graph for larger image.

The most obvious feature is the size of the current housing price bubble compared to the late '80s housing bubble in Los Angeles.

The Composite 20 bubble looks similar (although larger) to the previous Los Angeles bubble. (Note the Composite 20 index started in 2000).

Perhaps we can overlay the current Composite 20 bubble on top of the previous Los Angeles bubble and learn something about the possible duration of the current bust.

In the second graph, the real price peaks are lined up for late '80s bubble in Los Angeles, and the current Composite 20 bubble. Note that the real price peak for the Composite 20 was flat for several months, so the real peak was chosen as May '06. It could also be a few months later.

The peak and trough for the Los Angeles bubble are marked on the graph.

Prices are falling faster this time, probably because the bubble was larger.

It might be reasonable to expect that the dynamics of the current bust will be similar to the previous bust. After another year (or two) of rapidly falling prices, it's very likely that real prices will continue to fall - but at a slower pace. During the last few years of the bust, real prices will be flat or decline slowly - and the conventional wisdom will be that homes are a poor investment.

The Los Angeles bust took 86 months in real terms from peak to trough (about 7 years) using the Case-Shiller index. If the Composite 20 bust takes a similar amount of time, the real price bottom will happen in early 2013 or so. (But prices would be close in 2010).