by Calculated Risk on 4/07/2008 08:35:00 PM

UPDATE2: Washington Mutual sent a memo to brokers today announcing the closing of their wholesale lending business. The last date for loan funding is June 13th (unless a previous commitment was issued). Excerpts:

Today, WaMu announced significant changes affecting our Home Loans business. As part of this announcement, and consistent with the company’s retail focused strategy, WaMu has made the very difficult decision to exit the Wholesale lending business.
...
WaMu will continue to originate loans through Consumer Direct and our Retail Lending channel.
...
This is a very hard day for WaMu and all of Wholesale Lending. We have appreciated your partnership and support over these many years and wish you the best as we move on to new opportunities.

UPDATE: Housing Wire has more, including an excerpt from an email allegedly from WaMu (unconfirmed):

“[C]onsistent with the company’s retail focused strategy, WaMu has made the very difficult decision to exit the Wholesale lending business.”

The Implode-o-Meter reports (not sourced):

Washington Mutual will announce later today they are backing out of Wholesale entirely, and Retail is retreating to the bank footprint. Expect an email blast to Brokers later today.

This is apparently part of the $5 billion cash infusion from TPG.

by Calculated Risk on 4/07/2008 06:13:00 PM

Note: A "V" shaped recession is usually short, and fairly shallow like in '90-'91 and '01. Both of those recessions lasted 8 months. A "U" shaped recession is longer and possibly deeper.

A "W" shaped recession is a double dip (like in '80 and '81/'82). And an "L" shaped recession is like the experience in Japan in the '90s.

Professor Roubini writes: The US Recession: V or U or W or L-Shaped?.

My view is ... a U-shaped recession as I expect that the economic contraction will last at least 12 months and possibly as long as 18 months through the middle of 2009. This view is based on the fact that the last two recessions – in 1990-91 and 2001 – lasted 8 months each and today the macro and financial conditions are worse – relative to those two previous recessions - in at least three dimensions:

1. We are experiencing the worst US housing recession since the Great Depression ...

2. In 2001 it was the corporate sector (10% of GDP or real investment) to be in trouble. Today it is the household sector (70% of GDP in private consumption) to be in trouble. ...

3. The US is experiencing its most severe financial crisis since the Great Depression. This is not just a subprime meltdown. ...

Could the US recession end up being W-shaped, i.e. a double-dip recession? This view is presented by those who argue that the recent fiscal stimulus – that will provide a tax rebate to US households in May-June – could lead - after negative growth in Q1 and Q2 - to a positive economic growth in Q3 and possibly part of Q4 to be followed by a relapse into a second recession by year end or early 2009 when the effects of such fiscal stimulus fade out. Such a W-shaped recession – effective a U-shaped recession with a small temporary upward blip in the middle of it (thus a W-shaped one) cannot be ruled out. ...

Finally, could the US experience an L-shaped recession, i.e. a protracted period of economic stagnation like the one experienced by Japan in the 1990s after the bursting of its housing and equity bubble? My view is that a protracted economic stagnation – bordering on an economic depression – is unlikely in the case of the US as the policy response of the US is already more aggressive than the one of Japan. ...

This will turn out to be the most severe recession and financial crisis that the US has experienced for decades. Thus, the current conditions and valuations in US equity and financial markets – that currently price a mild and shallow recession – will be proven wrong as the bottom of the real economic contraction and the bottom of the financial and credit losses are ahead of us rather than behind us. ...

My major area of disagreement with Roubini is the severity of the recession. I also think the recession will linger (at least the effects of the recession). And a double dip is very possible.

But to say this will be the "most severe recession" in decades suggests job losses - and a corresponding increase in the unemployment rate - that I don't see on the horizon. The good news is that manufacturing employment is holding up better than usual in a recession due to a combination of a weak dollar (strong exports) and relatively strong global growth. This doesn't mean the recession won't be painful for many - I think it will be. And the recession could be severe if manufacturing contracts sharply (probably due to a global recession), but I think this is less likely than Roubini.

by Calculated Risk on 4/07/2008 01:59:00 PM

From Reuters: U.S. mall vacancy rates rise as economy slides (hat tip deuces wild)

The vacancy rate at U.S. strip malls rose to the highest level since 1996 in the first quarter of 2008 ... research firm Reis said on Friday.

Strip mall vacancies rose 0.2 percentage points from the preceding quarter to 7.7 percent.

By the end of the year, the rate likely will reach or surpass 8 percent, Reis said.

Strip mall vacancy rates were 7.5% in Q4 2007, 7.4% in Q3, and 7.3% in Q2.

The 8% estimate for the end of 2008 seems pretty conservative.

by Calculated Risk on 4/07/2008 11:42:00 AM

From Reuters: NBER's Feldstein says U.S. sliding into recession

"I think that December/January was the peak and that we have been sliding into recession ever since then," [Martin] Feldstein, the president of the National Bureau of Economic Research, said on CNBC television.

Feldstein also said he thinks the recession will "linger" and that it might last twice as long as the previous two recessions (both lasted 8 months). He also thinks Q1 GDP might be misleading - his view is the economy is in recession even if the preliminary GDP report shows some positive real growth.

by Calculated Risk on 4/07/2008 10:17:00 AM

Jon Lansner at the O.C. Register writes: O.C. home demand rises for 1st time in 18 months

Deals to buy O.C. existing homes and condos are now above year-ago levels for the first time since Sept. 22, 2005, says the math of Steve Thomas at Re/Max Real Estate Services in Aliso Viejo. As of last Thursday, there were 2,285 deals created in the past 30 days, Thomas’ definition of demand. That’s 159 better (7%) than a year ago.

The following graph is based on DataQuick's sales data for Orange County.

Click on graph for larger image.

The graph shows the sales per month and the year-over-year change in the number of sales since the peak in activity. In Feb 2008, there were 1,471 sales reported in O.C., about 40% below Feb 2007. Feb 2008 was the weakest sales for February since DataQuick started keeping records in 1988.

Also note that many of these sales were Bank Real Estate Owned (REOs):

Of the homes that resold in February, about one-third, 33.5 percent, had been foreclosed on at some point since January 2007. A year earlier the figure was 3.5 percent. At the county level, the percent of homes resold in February that had been foreclosed on since January 2007 ranged from 25.3 percent in Orange County to 48.1 percent in Riverside County.

Note: DataQuick includes new homes sales.

The DataQuick numbers for March will be released soon, and I'm skeptical of the claim that the year-over-year change was positive in March.

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.