by Calculated Risk on 4/24/2008 10:20:00 PM

From the WSJ: Economy, Credit Woes Take Toll On Builders' Grand Plans. This story is mostly about some major commercial real estate projects being put on hold, but there is also this tidbit:

Office construction plunged 28% in March across the U.S., compared with February ... according to an April report published by McGraw-Hill Construction, a trade publication.

by Calculated Risk on 4/24/2008 06:09:00 PM

Last year we had "subprime" and "contained", two words frequently used together as by Bernanke in March 2007:

"the problems in the subprime market seems likely to be contained".

Contained became a joke at the end of many posts, and Tanta's brilliant - "We're all subprime now!" - must have been the phrase of the year (at least for UberNerds).

Of course Merriam-Webster chose w00t. Yes, the housing bears owned the housing bulls - again.

Reader Matt suggests "perfect storm" for 2008. He has seen the words perfect storm used to describe the results of 'airlines, food, oil, foreclosures, condo sales, and credit problems'.

I'm leaning towards "negative equity" or perhaps "Hoocoodanode?" (makes a great post tag line). Of course it's still early ...

by Calculated Risk on 4/24/2008 03:02:00 PM

From S&P (via MarketWatch): S&P sees oil at $91 at year-end, U.S. in a recession

The American economy is in a recession, which is projected to be short and mild, while oil will likely trade at $91 a barrel by the end of the year, though the range of that forecast is plus or minus $50, Standard & Poor's said Thursday.

"I don't think it [the U.S. recession] will have as much downward impact on commodity prices because [a lot of] commodities demand comes from outside the U.S.," said David Wyss, chief economist at Standard & Poor's, at an oil and gas roundtable in downtown Manhattan on Thursday.

Not a very precise prediction; from $41 to $141 per barrel by year end. Much depends on decoupling vs. recoupling of the world economy. If the global economy slides into recession, then oil prices will probably fall sharply - assuming production stays steady.

Without the strong world economy, oil prices would probably already be falling. From BusinessWeek: Not Guzzling Quite So Much Gas

Traffic levels are trending downward nationwide. Preliminary figures from the Federal Highway Administration show it falling 1.4% last year. Now, with nationwide gasoline prices having recently passed the inflation-adjusted record of $3.40 a gallon set back in 1981, the U.S. Energy Information Administration (EIA) is predicting gas consumption will actually fall 0.3% this year. That would be the first annual decline since 1991. Others believe the falloff in consumption is actually steeper than the government's numbers show.

The supply and demand curves are both very steep for oil, so a small decline in consumption would usually result in a significant decline in price. However, right now global demand is more than making up for any decline in domestic consumption.

by Calculated Risk on 4/24/2008 01:12:00 PM

Here is a glimpse of the future, especially for commercial real estate.

From the American Institute of Architects: Architecture Billings Index Drops to its Lowest Level Ever

Click on graph for larger image.

Emblematic of the various struggling sectors in the overall economy, the Architecture Billings Index (ABI) dropped two points in March and fell to its lowest level since the survey’s inception in 1995. As a leading economic indicator of construction activity, the ABI shows an approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the March ABI rating dropped to 39.7, following its steep 9-point decline in February (any score above 50 indicates an increase in billings). The inquiries for new projects score was 48.0, also the lowest mark for the survey.

“We’ve seen an 11-point fall-off in the first quarter of the year and the prognosis for commercial construction later this year is not favorable at this point,” said AIA Chief Economist Kermit Baker, PhD, Hon. AIA. “Aside from historically low project demand, all regions are showing very poor business conditions. This is not likely to reverse itself anytime soon."
emphasis added

The prognosis is "not favorable". There is an understatement!

by Calculated Risk on 4/24/2008 10:24:00 AM

For more graphs, see March New Home Sales, Lowest since 1991.

Click on graph for larger image.

This graph shows New Home Sales vs. recessions for the last 45 years. New Home sales were falling prior to every recession, with the exception of the business investment led recession of 2001.

It appears the U.S. economy is now in recession - possibly starting in December - as shown on graph.

New home sales in March were the lowest since 1991. This is what we call Cliff Diving!


The second graph shows monthly new home sales (NSA - Not Seasonally Adjusted).

Notice the Red columns for 2008. This is the lowest sales for March since the recession of '91.

As the graph indicates, the spring selling season has never really started.

And one more long term graph - this one for New Home Months of Supply.


"Months of supply" is at 11 months; the highest level since 1981. Note that this doesn't include cancellations, but that was true for the earlier periods too.

The all time high for Months of Supply was 11.6 months in April 1980.

Once again, the current recession is "probable" and hasn't been declared by NBER.

by Calculated Risk on 4/24/2008 10:01:00 AM

According to the Census Bureau report, New Home Sales in March were at a seasonally adjusted annual rate of 526 thousand. Sales for February were revised down to 575 thousand.

Click on Graph for larger image.

Sales of new one-family houses in March 2008 were at a seasonally adjusted annual rate of 526,000 ... This is 8.5 percent below the revised February rate of 575,000 and is 36.6 percent below the March 2007 estimate of 830,000.



The seasonally adjusted estimate of new houses for sale at the end of March was 468,000.

Inventory numbers from the Census Bureau do not include cancellations - and cancellations are near record levels. Actual New Home inventories are probably much higher than reported - my estimate is about 100K higher.

Still, the 468,000 units of inventory is below the levels of the last year, and it appears that even including cancellations, inventory is now falling.


This represents a supply of 11.0 months at the current sales rate.

This is reverse cliff diving!

This is another very weak report for New Home sales, and I'll have some analysis later today.

by Calculated Risk on 4/24/2008 09:20:00 AM

From the WSJ: Credit Suisse Swings to Large Loss, Taking $5.2 Billion in Write-Downs

Credit Suisse Group Thursday said it swung to a worst-than-expected first-quarter net loss after taking 5.3 billion Swiss francs ($5.2 billion) in write-downs for big buyout loans and mortgage securities.
...
Credit Suisse took the bulk -- 2.66 billion francs -- of write-downs for collateralized debt obligations, but also marked down 1.68 billion francs for buyout loans granted but failed to sell to investors, as well as 944 million francs for mortgage securities.

A few billion more.

by Anonymous on 4/24/2008 08:46:00 AM

Reuters has the news:

LIVONIA, Michigan (Reuters) - Realtors in many U.S. states say lenders are demanding excessively high prices before allowing distressed borrowers to offload their homes in "short sales," making the housing crisis worse.

In a short sale, a borrower dumps the home at below-market value and the bank forgives the rest of the debt. The borrower's credit rating is hurt but for less time than in a foreclosure. Such sales have been touted by banks as a way out for homeowners unable to pay their mortgages.

Below market, huh? And I thought the idea was they were trying to sell these homes at market, which unfortunately happens to be less than the loan amount. Whatever. My head is still spinning over the banks having "touted" such sales. Was I having a nap when that happened? How come nobody woke me up?

We get one "example":

Borrowers like Judie Quinn echo that, saying their lenders have been uncooperative and have passed up solid offers.

Quinn, 67, is a steel industry sales representative whose home in the Detroit suburb of Belleville had been on sale since August 2005. After back surgery in 2007 left her with large medical bills and out of work for two months, she decided she could not afford the $2,200 monthly mortgage payment.

"I wanted to save my credit rating, so I tried to arrange a short sale," Quinn said at the Livonia, Michigan, office of Linda McGonagle, a Realtor at Quality GMAC Real Estate.

The loan was from Wells Fargo & Co (WFC.N: Quote, Profile, Research) and serviced through an affiliate, America's Servicing Co.

Between April and October 2007, Quinn received four offers, McGonagle said. The first offer of $289,900 -- the asking price was $299,000 -- was rejected by the lender because Quinn was not yet in loan default. "No one at the bank mentioned she had to be in default until after that offer was rejected," she said.

She said the lender ignored the third and best offer of $299,000 long after the bidder had given up. The home went into foreclosure in October.

"The lender was unresponsive and unhelpful, so Judie wasted time and money trying to do the right thing," McGonagle said. "I tell other agents to avoid short sales because you just can't win. This is a commission-based business and if you can't get deals done, you don't get paid," she added.

How much does Judie owe on this house? We didn't get that part. Could the fact that the home had been "on sale" for two years before Judie decided she needed to sell short imply something problematic about Judie's expectations? When did she acquire this property, anyway? And at what exact time yesterday was her Real Estate Professional born? Nobody at the bank mentioned that short sales are widely held to be "work out options" for delinquent loans? That without any indication that the lender would have to foreclose, the lender is not highly motivated to accept a short sale that is "less loss" than the foreclosure that doesn't appear to be on the table? The bank has to mention this?

But I really liked this part:

Some Realtors said banks have an inflated view of what they can expect when home values in many areas have fallen sharply.

"Some lenders harbor unrealistic expectations of what they can get in a down market," said Van Johnson, president of the Georgia Association of Realtors.

He said widespread use by lenders of "broker price opinions" -- quick, inexpensive online property assessment -- resulted in only a "simple best guess."

Andrea Gellar, a Realtor at Sudler Sotheby's in Chicago, said property appraisals there are fair because "appraisers are being called on the carpet to be accurate" after years of inflated evaluations during the property boom.

Banks have inflated ideas of what these houses could sell for. How come? Because they rely on "price opinions" that are prepared by real estate brokers. Like the real estate brokers quoted in the article. Who are now claiming that it's really only the appraisers who have any clue. Because they've been "called on the carpet" and now are afraid to make stuff up.

The solution seems obvious to me: welcome to the carpet, brokers. We expect your next price opinion to be somewhat more sober.

by Calculated Risk on 4/23/2008 11:40:00 PM

Here are some more Ambac comments. Note: here is the referenced Ambac Presentation

Sean Leonard, CFO: ... David, you could discuss kind of the breakout of some of the HELOC portfolio being that big portion of the portfolio is related to large bank transactions versus [investment bank generated] shelf transactions.

David Wallis, Chief Risk Officer: Yes, it is very striking. One has various hypotheses about this, and we are investigating those hypotheses. But it is very striking how concentrated, how very concentrated, some of the poor performers are, and that gives rise to all sorts of obvious questions.

I mentioned that we have diagnostic and forensic people working on some of these deals. We are beginning to see stuff back from that. The diagnostic is basically running tapes looking at delinquencies and trying to figure out given what you now know and what you knew then, would you have expected that delinquency or not? And if the answer is not, well, that is interesting.

So, in other words, you have an incredibly low FICO within a pool, and it is delinquent. Well, maybe you expected that. But if it is incredibly high and the LTV was incredibly low, then maybe you would not expect that.

So then what you do is, you take an adverse sample, so you run the tape through a program, take an adverse sample, i.e. looking for the suspicious ones, and then what you do is you go look at the files. That is a very difficult long process, but you look in the files. You look at the transcripts of servicing records, and you see what you see. And all I will say is that there is some pretty amazing stuff to see. So very concentrated adverse exposures, that is really the message here.
emphasis added

"Pretty amazing stuff to see." It's not clear if he is referring to fraud - but it sounds like it.

Q: Analyst: Can you clarify for the home equity and the Alt-A reserve strengthening, are the credit reserves there now kind of reflective of estimated lifetime losses? And if so, I guess that is my understanding of how it works per quarter. What has changed if you look at Q1 where we are versus Q4? And what could move us further down back that in terms of changes as we look forward through the year?

David Wallis, Chief Risk Officer: Sure, let me take a go at that ... the notion is that we're taking a present value of the losses or the claims that we expect to pay over the life of the deal.

Just to relate that, people always like to relate it to cumulative loss because that is the statistic that people bandy around. Let me just give you a bit more insight onto that. I think in the presentation we talked about -- in fact, it is the most egregious example, the Bear Stearns deal, where we are expecting or re-modeling at least around 82% of collateral loss. So you've got 100 people in the round that took out a closed-end second in this deal, 82 have walked out and not paid you a whole lot back, 100% severity.

Just in relation to other transactions, just to give you some more data and just be open with what we're looking at here, I mentioned that in mid prime [Alt-A], we are kind of 20 to 25% collateral loss. In HELOC they vary, the ones we have reserved from I think about a low of mid-20s to a high of just north of 50. So that is collateral loss.

In terms of what has happened and where does it go from here, probably a good thing to do is to look at the chart on page 31, and you get a pretty good sense of what has happened in the last few months. You know, basically losses have taken off in that transaction.

Sometimes you get perplexing movements. I will draw your attention to one. If you look at the First Franklin deal, which is also in the charts that I presented, you will see four months ago I think it was quite a marked flattening in delinquencies. That proved to be a false dawn because, although delinquencies -- the trajectory there has flattened, actually losses have continued to escalate. So the data is difficult. You get very odd data.

To give you a sense of how odd the data is, the remits are actually beginning to come in somewhat late because sometimes people don't believe the data that is being presented, and they send it back and say, well, that cannot be right. But, in fact, unfortunately some of it is right, and the numbers are huge.

Where can it go? Again, look at page 31, and I admit this is the extreme example. A criticism might be, well, look at the very sharp dimunition in monthly realized loss that is being projected here through the role rate methodology. And it is true, it is a fairly sharp diminution. However, it has to be because if it is not, you end up with more than 100% of collateral loss, which does not make any sense either.

So I think further discussion that Mike just had in relation to subprime and what is outstanding and what does that imply about future default and severity rates to get to a given collateral loss, we're seeing some of the same things certainly in relation to our most stressed transactions. You know, how bad can it get? 81 people in 100 walking away sounds pretty bad to me.

by Calculated Risk on 4/23/2008 08:28:00 PM

From Reuters: Foreclosures to affect 6.5 mln loans by 2012-report

Falling U.S. home prices and a lack of available credit may result in foreclosures on 6.5 million loans by the end of 2012 ...

The foreclosures could put 12.7 percent of all residential borrowers out of their homes ...

Credit Suisse expects home prices will fall by 10 percent in 2008 and 5 percent in 2009, before rebounding.

The forecast includes the 1.2 million homes currently in foreclosure or already bank Real Estate Owned (REO). Credit Suisse sees 2008 as the peak year for foreclosures, even though they see the price bottom (25% off the peak) in 2009. The normal pattern is for the foreclosure activity to peak in the same year as housing prices bottom. Note: I expect prices to decline for a few years in the bubble areas.

Of the 1.2 million current foreclosures, Credit Suisse estimates about half are due to subprime borrowers, and about half other borrowers (alt-A, prime). Although Credit Suisse expects a much higher percentage of subprime borrowers in foreclosure (over 50%!), the pool of other borrowers is much larger, and Credit Suisse expects close to 4 million other borrowers to lose their homes to foreclosure through 2012.