by Calculated Risk on 4/28/2008 03:45:00 PM

From Reuters: Morgan Stanley see big bank woes just beginning

"More capital hikes and dividend cuts (are) coming as our credit deteriorates and forward earnings decline," [Morgan Stanley] analysts led by Betsy Graseck wrote in a report. "We think we are only in the third inning of the credit cycle and expect this credit cycle will be worse than (the slump in) 1990-91."

The Milken conference panel participants didn't address the timing of the credit crisis directly - although the general view was the crisis was overblown and it's just a matter of "confidence". I was disappointed that the panel didn't spend more time on forecasting when real estate would bottom (the title of the session was: Real Estate: Where Is the Bottom?

by Calculated Risk on 4/28/2008 12:52:00 PM

Sam Zell started by saying we need to separate commercial from residential. Commercial will be fine in his view (not my view). Also Zell thinks losses are overstated for investment banks and CDOs.

Update: Zell isn't talking about new construction (CRE), rather he is talking about prices for existing CRE. He feels there is too much global demand ("liquidity") for prices to fall too far - especially for Class-A buildings.

Brian Fabbri, Chief U.S. Economist for North America, BNP Paribas: Builders still overbuilding. Prices still too high. Recession started in December, recession will last year. Housing may bottom well into 2009.

Michael Van Konynenburg, President, Eastdil Secured, CMBS OK unless credit crunch lasts until 2010. Then there could be a huge problem with significant CMBS needing to be refi'd.

Unfortunately most of the discussion is on general economics, and not real estate.

I'll have some quotes later - I believe there was complete agreement that the economy is currently in recession. Those tht commented on the recession (Fabbri especially) seemed to feel the recession started in December 2007, and would last all through 2008 - and the stimulus plan wouldn't help much.

by Calculated Risk on 4/28/2008 12:45:00 PM

From the Census Bureau: CENSUS BUREAU REPORTS ON RESIDENTIAL VACANCIES AND HOMEOWNERSHIP

Homeownership vacancy hit 2.9% in Q1 2008.

Graphs later (I'm at the conference)

by Anonymous on 4/28/2008 10:46:00 AM

That was fast:

Alan Nevin, chief economist for the California Building Industry Association and San Diego-based MarketPointe Realty Advisors, predicted foreclosure sales could account for as many as 15,000 out of 25,000 total sales this year. But at some point, the foreclosures will drop off, he Nevin said.


“Anybody who's going to walk away from a house or condo has already done it,” Nevin said. “Now it's just a matter of the pig going through the snake.”

by Calculated Risk on 4/28/2008 09:41:00 AM

I'm off to LA this morning to attend the Milken Institute Global Conference. Here is the first session I'll be attending:

Real Estate: Where Is the Bottom?

Monday, April 28, 2008
9:35 AM - 10:50 AM (PT)
Speakers:
Brian Fabbri, Chief U.S. Economist for North America, BNP Paribas
Bobby Turner, Managing Partner, Canyon Capital Advisors LLC
Michael Van Konynenburg, President, Eastdil Secured
Sam Zell, Chairman and President, Equity Group Investments LLC; Chairman and CEO, Tribune Company

Best to all.

by Calculated Risk on 4/27/2008 05:27:00 PM

From the NY Times: Recession Diet Just One Way to Tighten Belt

Spending data and interviews around the country show that middle- and working-class consumers are starting to switch from name brands to cheaper alternatives, to eat in instead of dining out and to fly at unusual hours to shave dollars off airfares.
...
Wal-Mart Stores reports stronger-than-usual sales of peanut butter and spaghetti, while restaurants like Domino’s Pizza and Ruby Tuesday have suffered a falloff in orders, suggesting that many Americans are sticking to low-cost home-cooked meals.

This is classic behavior in tough economic times. In economics, "inferior goods" doesn't refer to the quality of the goods, instead it refers to goods where demand changes inversely with income. As incomes rise, people buy less of the inferior good. But as incomes fall, they buy more.

The excerpt above describes people buying more spaghetti to cook at home (inferior good), and ordering less Pizza (a "normal good"). And on beer:

Sales of inexpensive domestic beers, like Keystone Light, are up; sales of higher-price imports, like Corona Extra, are down ...

I expect to see more generic brands (inferior good) soon on the grocery shelves!

by Calculated Risk on 4/27/2008 01:14:00 PM

A key historical investment pattern is for non-residential investment in structures to follow residential investment by about 4 to 7 quarters (both up and down). See Investment Matters for some graphs on this subject.

Clearly the CRE slump is here. Now the questions is how deep and how fast will CRE investment fall. One way to think about this is to look at previous declines in non-residential investment.

Click on graph for larger image.

This graph shows non-residential investment in structures as a percent of GDP since 1960. Over time there has been a decline in spending (as a percent of GDP), probably related to globalization (more factories were being built overseas).

The non-residential investment boom related to the S&L crisis is obvious on the graph, and we should probably ignore that period when looking at a typical CRE bust.

The two light green circles show the investment busts during the '90/'91 and '01 recessions.

The decline in non-residential investment was fairly rapid during the previous two recessions (a decline in non-residential investment is usually more rapid than a decline in residential investment). In fact most of the decline in investment happened within four quarters.

During the '90/'91 investment slowdown, non-residential investment declined 17% in total, and about 14% in the first year. For the '01 investment slowdown, non-residential investment declined almost 20%, and 19% in the first four quarters.

It is very possible - based on tighter lending standards (see graph 3 in Investment Matters) - that the decline in non-residential investment will be greater (on a percentage basis) than the previous two busts. However, based on commercial vacancy rates, it doesn't appear that some segments of commercial are as overbuilt as in the '90/'91 and '01 periods.

These two factors somewhat balance out, and my guess - based on these two previous busts - is that non-residential investment will decline about 15% to 20% over the next four quarters, from a $501 billion seasonally adjusted annual rate (SAAR) in Q4 2007, to about $400 billion to $425 billion in Q4 2008 - and that most of the bust will happen during 2008.

by Calculated Risk on 4/26/2008 08:18:00 PM

Bandos - squatters in abandoned homes.

Vandos - vandals that damage abandoned homes.

This is becoming a frequent story - from the WaPo: Foreclosed Homes Attract Vandalism

The growing foreclosure crisis has forced suburban law enforcement agencies to tackle a new challenge: policing empty houses.

As evictions mount and many houses remain unsold for months, even years, vacant properties have become havens for squatters, vandals, thieves, partying teenagers and worse, officials said.

And here is the source of "bandos", from the AP: Some homeless turn to foreclosed homes

Bandos is a funny name, but abandoned homes are a real pain for the neighbors; a classic negative externality.

by Calculated Risk on 4/26/2008 05:41:00 PM

I'm working on a new layout for the blog. Hopefully I'll make the changes in early May. Thanks to all who have commented before (I've been sharing the proposed layout in the comments). There is still more to do, but here is a preliminary layout - all comments are appreciated.

Best to all, CR

by Calculated Risk on 4/26/2008 02:46:00 PM

Roubini writes:

[On CNBC] I fleshed out my arguments on why the US recession will be severe and protracted, lasting four to six quarters.

... later in the CNBC program Nobel Prize winner Joe Stiglitz explicitly agreed with my view that this will be the worst U.S. recession since the Great Depression. In some ways Stiglitz was even gloomier than I have been.

Later that morning on CNBC Mohamed El-Erian, co-CEO of Pimco, fleshed out the arguments on why this crisis is not over. That interview followed up his excellent op-ed column on the FT today where he argued that we are now moving to a new stage of the economic and financial downturn.

Here is the Financial Times piece by Mohamed El-Erian: Why this crisis is still far from finished

... During the next few months there will be a reversal in the direction of causality: the unusual adverse contamination by the financial sector of the real economy is now morphing into the more common phenomenon of recessionary forces threatening to undermine the financial system.

Economic data in the US have taken a notable turn for the worse. Most im­portantly, the already weakening employment outlook is being further undermined by a widely diffused build-up in inventory and falling profitability. History suggests that the latter two factors lead to significant employment losses.

... The sharp slowdown in the US real economy will occur in the context of continued global inflationary pressures. As such, the Federal Reserve’s dual objectives – maintaining price stability and solid economic growth – will become increasingly inconsistent and difficult to reconcile. Indeed, if the Fed is again forced to carry the bulk of the burden of the US policy response, it will find itself in the unpleasant and undesirable situation of potentially undermining its inflation-fighting credibility in order to prevent an already bad situation from becoming even worse.

It is still too early for investors and policymakers to unfasten their seatbelts. Instead, they should prepare for renewed volatility.