by Calculated Risk on 4/15/2008 01:40:00 PM

The DataQuick numbers for SoCal will be available soon.

From Jon Lansner at the O.C. Register: March home price ($506,000) is a 4-year low

DataQuick’s final count of Orange County home-buying activity last month shows the median selling price for all residences at $506,000 — the lowest since March ‘04 and off 19.6% from a year ago. Buyers grabbed 1,663 homes last month down 46.9% from a year ago. It’s the 30th consecutive month where total sales failed to beat the year-ago level.

by Calculated Risk on 4/15/2008 01:00:00 PM

Click on graph for larger image. The NAHB reports that builder confidence was at 20 in April, unchanged from 20 in March. Usually housing bottoms look like a "V"; this one will probably look more like an "L". (this refers to activity like starts and sales, but will probably also be apparent in the confidence survey).

Here are the individual components.

From NAHB: Builder Confidence Remains Unchanged In April

Builder confidence in the market for new single-family homes remained unchanged for a third consecutive month in April, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. The HMI held at 20, up marginally from the record low of 18 set in December of 2007 (the series began in January of 1985).

“With the traditional home buying season now well underway, we have not seen the bump in sales activity that we normally would this time of year,” said Sandy Dunn, NAHB president and a home builder from Point Pleasant, W.Va. “At this point, all eyes are on Congress and its efforts to craft meaningful legislation to help support the housing market and stabilize our nation’s economy before it heads deeper into recession.”
emphasis added

Also from the NAHB: Nation Now In Mild Recession, Says NAHB Chief Economist

The deepening slump in the nation’s housing markets has seriously eroded consumer sentiment and pushed the economy into a mild recession, according to the chief economist for the National Association of Home Builders (NAHB).

“The worse-than-anticipated housing downturn, combined with systematic weakening of the labor market and rapidly rising energy and food prices, has taken a heavy toll on American consumers,” said NAHB’s David Seiders. “It’s now clear that we have entered what we anticipate will be a mild recession, running through the first half of this year, and there are substantial downside risks to this economic scenario.”
...
Given the ongoing erosion in housing finance markets and buyer demand, Seiders has adjusted NAHB’s official housing forecast to indicate continuing downward movement in housing starts through the end of 2008, bringing the decline for the year to 30 percent. A month ago, Seiders expected housing starts to bottom out in the third quarter, with a 27 percent decline for 2008.

“This change in our forecast indicates that, barring immediate action by Congress to stimulate housing and the economy, the housing sector will continue to be a serious drag on economic growth until the beginning of 2009,” Seiders said.

by Calculated Risk on 4/15/2008 10:14:00 AM

Greg Morcroft at MarketWatch provides an overview of regional bank results: Bad loans paint grim landscape for regional banks

Several of the nation's major regional banks, from the Deep South through the Midwest, said on Tuesday that plummeting housing prices and other financial strains on borrowers are forcing large loan write-offs and provisions for bad loans, undermining quarterly profits.
...
They also said they expect the pain to continue through 2008.

Here are a couple of examples. From Regions Financial Corp in Alabama:

Net loan charge-offs rose to $125.8 million, or an annualized 0.53% of average net loans, in the first quarter of 2008, up from $107.5 million, or an annualized 0.45%, in the prior quarter.

"The linked-quarter increase was primarily driven by the previously discussed residential homebuilder portfolio and the company's home equity portfolio, both of which are closely tied to the housing market slowdown," Regions said.

And from U.S. Bancrop:

In Minnesota, U.S. Bancorp saw quarterly loan-loss provisions soar to $485 million from $177 million.

"Declining home prices in many of our markets, in addition to stress in the residential home building and mortgage-related industries, are expected to continue through the balance of the year," the company said.

The individual bank losses might not grab the headlines (like the billions in losses at the large investment banks), but the losses at the regional banks are starting to grow. The regional banks will probably be hit hard later this year by defaults on construction & development (C&D) loans and commercial real estate (CRE) loans.

by Calculated Risk on 4/15/2008 09:36:00 AM

From Bloomberg: U.S. Foreclosures Jump 57% as Homeowners Walk Away

U.S. foreclosure filings jumped 57 percent and bank repossessions more than doubled in March from a year earlier as adjustable mortgages increased and more owners gave up their homes to lenders.

More than 234,000 properties were in some stage of foreclosure, or one in every 538 U.S. households, Irvine, California-based RealtyTrac Inc., a seller of default data, said today in a statement. Nevada, California and Florida had the highest foreclosure rates. Filings rose 5 percent from February.
...
``We're not near the bottom of this at all,'' said Kenneth Rosen, chairman of Rosen Real Estate Securities LLC, a hedge fund in Berkeley, California and chairman of the Fisher Center for Real Estate at the University of California at Berkeley. ``The foreclosure process will accelerate throughout the year.''

It is very likely that the foreclosure activity will continue to increase throughout 2008, negatively impacting inventory and house prices.

Note that the "walk away" headline isn't supported by any evidence in the article.

by Calculated Risk on 4/14/2008 09:45:00 PM

Here are two scary stories:

From CNN: Riots, instability spread as food prices skyrocket

Riots from Haiti to Bangladesh to Egypt over the soaring costs of basic foods have brought the issue to a boiling point and catapulted it to the forefront of the world's attention, the head of an agency focused on global development said Monday.

From the WSJ: Russian Output Slumps As Oil Hits New Highs

Russian output fell for the first time in a decade in the first three months of this year, according to the International Energy Agency, which represents industrialized oil-consuming countries. It said Russian production averaged about 10 million barrels a day, a 1% drop from the first-quarter of 2007.

These stories are related. High food prices are due in large part to high oil prices.

Falling oil prices would really help cushion the U.S. recession. If oil prices stay high because of global demand - then at least U.S. exports will probably be strong. But if oil prices stay high because of falling production, then the recession will be much worse than I currently expect. And the impact on the World's poor will be severe.

These stories are much scarier than the TED spread expanding again.

by Calculated Risk on 4/14/2008 06:36:00 PM

Here are some comments from the Wachovia conference call (hat tip Brian).

On "walking away":

Q: Kevin Fitzsimmons, Sandler O'Neill: Could you give a little more detail on -- you cited dramatic change in customer behavior or consumer behavior and that led to the decision to cut the dividend, increase capital and so just wondering if you could be particular by -- I'm assuming it's California, but are you talking about people walking away from houses and if you can give any specific examples, thanks.

Ken Thompson, Wachovia Corporation - CEO: I'll let Don talk specifically but I would just say that what we are seeing is that when equity in the home approaches zero, behavior changes. And that's what the model tries to do is to then take that behavior along with house price depreciation and factor that into future losses. Don?

Don Truslow, Wachovia Corporation - SEVP, Chief Risk Officer Ken, that's exactly right. And Kevin, it's just this pattern almost that somewhere -- I don't know where the tipping point is, but somewhere when a borrower crosses the 100% loan to value, somewhere north of that and they presumably run into some sort of cash flow bump, whether it's reduced income or kind of normal things in life that have created past dues before, their propensity to just default and stop paying their mortgage rises dramatically and I mean really accelerates up and it's almost regardless of how they scored, say, on FICO or other kinds of character, credit characteristics.

It's difficult on the walk-away part of the question, that is going on, clearly and there's lots of evidence of that in the market. It's hard to quantify though, from the standpoint of how many of our defaults are just walk-away and the reason is people, they don't tell you. And so we do our best to try to gauge but that portion of the defaults is just kind of hard to quantify. But that behavior is going on. We're seeing in our portfolio the most significant declines and defaults activity in California and of course it's the largest concentration for us in the pick a payment portfolio by far. What I don't know and I guess we're just learning over time is whether the same sort of behavioral trends and patterns will spread to other markets or be observed in other markets at the same pace that they have been in California. But in essence, it built our correlations in the model to assume that they do.

Ken Thompson, Wachovia Corporation - CEO: I might just add that you also see evidence of what Don is talking about if you look across our industry and look at credit statistics on equity loans and equity lines. Because there, at many banks, you're seeing those loans going obviously above 100% loan to value and you're seeing dramatically increasing default rates and losses.”

On REOs and outlook for the housing market:

Truslow (Risk Officer): “[W]e are focused in our efforts to quickly move foreclosed properties related to the pick a pay portfolio as we've talked about before and during the quarter, we took in about 1100 homes and the team did a great job of getting over 800 sold during the quarter in a tough time of the year and in a tough market. So we ended the quarter with just over 900 homes in inventory originated through the pick a payment channel and part of this aggressive action basically served to provide the severity that we recognized on average in the first quarter up to about 32% from about 24% in the fourth quarter and I would just also remind people that included in those severities, we have accounted for basically the disposition cost such as the brokerage fees and even costs that are normally accounted for in period costs such as mowing the grass and fixing up the homes.”

“... the overarching assumption here is that we're about halfway through the decline in housing prices with the trough expected to occur sometime around the middle of 2009.”

On the dramatic change in outlook and "shadow" inventory:

Q: Jonathan Adams, Oppenheimer Capital - Analyst: [I]f I look on page 19 of your presentation, it strikes me that there's nothing in the 90 day past due trends that would justify the kind of change that you have made in your outlook. You can pick a different -- a number of different metrics, whether it's the dividend in suggesting that over a broad range of scenarios it wouldn't need to be cut and then five or six weeks later coming to a different conclusion, or it's some other metrics as well. But it just strikes me as difficult to understand how management's view of the environment has changed so dramatically.

Don Truslow, Wachovia Corporation - SEVP, Chief Risk Officer: Well, I guess -- this is Don. One thing that doesn't show on the chart is the level of cures between 90 days and further severities and defaults have been dropping. The severities in the market place when we take a house back, it takes a lower price to get homes sold and our outlook is -- and as I think everybody has been reading, there is an expectation that there's a broad accumulation of foreclosed properties that haven't hit the market yet and perhaps even some shadow foreclosures that haven't emerged as yet. So our concern, looking forward is that -- and again, what we're beginning to see more evidence of and sense more of in the first quarter is that conditions are going to continue to get tougher and there's an overhang of inventory out there that is going to be costly for the industry to work through.

So on the default rates at 90 days, not a dramatic change in pace but it's more the role rates, the propensity to go all the way to foreclosure, the higher severities taken on disposing of properties and then the, just further understanding and recognition that there is an inventory of foreclosed properties building out there that are eventually going to have to get dealt with.

All emphasis added.

by Calculated Risk on 4/14/2008 03:02:00 PM

From a Moody's Credit Card Credit Indices (via Dow Jones): Credit Card Charge-Off, Delinquency Rates Up In Feb (no link)

The charge-off rate climbed to 5.59% in February - the highest rate since December 2005 - from 4.51% a year earlier. That was the fifth consecutive monthly increase from the previous month and the 14th month in a row that the rate was higher than the year-earlier period.

The February delinquency rate was 4.53%, the highest since March 2004. The delinquency rate, which was 3.89% a year earlier, measures the proportion of account balances for which a monthly payment is more than 30 days late as a percent of total balances.
...
The percentage of credit card balances being paid fell to 17.3% in February from 17.7% a year earlier. That was the sixth month in a row that the rate fell from the year-earlier period.

This is more evidence of consumer stress.

by Calculated Risk on 4/14/2008 09:56:00 AM

Retail sales were slightly higher in March due to increases in gasoline prices. Excluding gasoline stations, nominal sales were flat in March compared to February.

More importantly, in real terms - inflation adjusted - retail sales are now below the year ago level.

This graph shows the year-over-year change in nominal and real (inflation adjusted) retail sales since 1993.

Click on graph for larger image.

To calculate the real change, the monthly PCE price index from the BEA was used (March PCE prices were estimated).

Although the Census Bureau reported that nominal retail sales increased 2.1% year-over-year, real retail sales declined almost 1.1% (on a YoY basis).

This is a recessionary level for retail sales.

UPDATE: From the National Retail Federation: Tough Economy, Cooler Weather Blamed for March Retail Sales Decline

While consumers continue to battle high gas, energy and food prices, retailers reported a dip in March retail sales. According to the National Retail Federation, retail industry sales for March (which exclude automobiles, gas stations, and restaurants) dipped 0.9 percent unadjusted over last year and were down 0.3 percent from the prior month.

March retail sales released today by the U.S. Commerce Department show total retail sales (which include non-general merchandise categories such as autos, gasoline stations and restaurants) increased 0.2 percent seasonally adjusted from the previous month and increased 0.1 percent unadjusted year-over-year.

“Unseasonably cooler weather created a challenging sales environment for many apparel retailers last month,” said NRF Chief Economist Rosalind Wells. “With the earliest Easter in 95 years, the calendar shift will likely impact April sales as well. In order to get a true picture of retail performance, we will need to look at both March and April sales combined.”

Many retailers felt the brunt of the troubled economy as well. Clothing and clothing accessories stores sales decreased 0.5 percent seasonally adjusted from last month and 2.0 percent unadjusted year-over-year. Sales at electronics and appliance stores decreased 0.4 percent seasonally adjusted month-to-month and 1.0 percent unadjusted year-over-year.

Note that March sales were boosted by an early Easter, and that the NRF expects April sales to be negatively impacted by the calendar shift.

by Calculated Risk on 4/14/2008 09:15:00 AM

From the WSJ: Cash-Strapped Fremont to Sell Its Investment and Loan Bank

Cash-strapped mortgage lender Fremont General Corp., acceding to regulators' demands, has reached a deal to sell it investment and loan bank to a California industrial bank to be formed by CapitalSource Inc.

This is no surprise since the FDIC ordered Fremont in March to recapitalize or sell the division.

Fremont's troubles come as regulators over the past several weeks have started demanding that banks, especially small and midsize ones, get more aggressive at marking down the value of loans they are holding and that they correspondingly beef up their reserves. That is likely to force an increasing number of banks to raise fresh capital ... At the same time, as mounting defaults take a toll on banks, the FDIC and other regulators say they are bracing for more lenders to fail.

I spoke with a regional banker last week, and she told me the FDIC is definitely getting more aggressive - especially with regards to write-downs for their construction & development (C&D) and commercial real estate (CRE) loans. The coming wave of bank failures - some estimates are for 100 or more failures over the next two years - will probably be related to these C&D and CRE loans.

by Calculated Risk on 4/14/2008 09:03:00 AM

From the WSJ: Wachovia Swings to Loss, Plans to Raise Capital

Wachovia Corp. said it will raise $7 billion in capital through stock sales and cut its dividend by 41% ...

The infusion represents Wachovia's second dip into the capital trough this year. ... The second round is a sign that banks' fortunes have continued to deteriorate over the past month. ... many observers believe that this is the beginning of the troubles for regional banks ...

Credit-loss provision were increased to $2.83 billion from $177 million as net charge-offs soared to 0.66% of average net loans from 0.15%. Nonperforming assets, those loans near default, ballooned to 1.70% of loans from 0.42%.

The regional banks are now lining up at the confessional.