by Calculated Risk on 5/13/2008 08:04:00 PM

From Peter Viles at the LA Times: Foreclosure flood: 1,000 auctions per day in California

The April total of foreclosure sales at auction -- 22,838 for the state -- represents a jump of 44% over March totals and the highest level ever in California, ForeclosureRadar reports.
...
It appears the pipeline of potential foreclosures is jampacked, too: the ForeclosureRadar reported 44,101 new "Notices of Default" filings in April, a new record for California. Notices of Default are the first step in the foreclosure process.

I've been tracking the quarterly data from DataQuick, and this monthly data suggests the graph from this earlier post was very conservative! (graph repeated)

Click on graph for larger image.

For 2008, the number of NODs was estimated at 4 times the Q1 rate. Based on recent experience - with NODs increasing every quarter for the last 3 years - this is probably conservative.

As bad as 2007 was, 2008 will be much much worse.

by Calculated Risk on 5/13/2008 04:56:00 PM

From Bloomberg: MBIA, Ambac Losses Elevate Aaa Concern, Moody's Says

MBIA Inc. and Ambac Financial Group Inc. had ``meaningfully'' higher losses on home-equity loans and collateralized debt obligations than anticipated, raising concern about their Aaa status, Moody's Investors Service said.

The first-quarter losses reported by the companies in the past two weeks elevate ``existing concerns about capitalization levels relative to the Aaa benchmark,'' Moody's, unit of Moody's Corp., said in a statement today.

Moody's also issued a report today on second liens: U.S. Subprime Second Lien RMBS Rating Actions Update (no link). Moody's noted that losses to date have "greatly exceeded" their expectations, and Moody's increased their loss projections:

... Moody's has increased its loss projections on loan pools backing recent vintage subprime second lien RMBS in light of their continued poor performance. Moody's expects 2005 vintage subprime second lien pools to lose 17% on average, 2006 vintage pools to lose 42% on average, and 2007 pools to lose 45% on average.

Ouch!

by Calculated Risk on 5/13/2008 02:55:00 PM

Here is a graph that is clogging up all those internet tubes:

Click on graph for larger image.

This graph, from the St. Louis Federal Reserve, shows the non-borrowed reserves of financial institutions. Looks like some serious cliff diving, but with a little research, we discover this graph is misleading.

The explanation is pretty simple. The Federal Reserve decided to classify the TAF and the primary dealer credit facility as borrowed reserves (see this table). If we back out these collateralized borrowings, you get the total reserves, and that has been very steady. False alarm.

A more interesting chart was present by Dr. Janet Yellen this morning showing the Fed's balance sheet.

This graph shows that about half the Fed's U.S. Treasuries have been committed to fight the liquidity crisis.

by Calculated Risk on 5/13/2008 02:43:00 PM

Update: here is an article from Dow Jones: Toll Bros. CEO: Customer Traffic 'Worst We've Ever Seen'

Click on graph for larger image.

A few headlines from Toll Conference call. So much for the 2008 Spring selling season. Well, there is always next year!

by Calculated Risk on 5/13/2008 01:30:00 PM

From San Francisco Fed President Janet Yellen: Credit, Housing, Commodities, and the Economy. (here is a PDF with graphs)

On housing:

Now let me turn to the second of the three main factors behind the current economic weakness—namely, the housing cycle. I have mentioned that earlier in this decade when financial markets were “awash in liquidity,” bubble-like conditions emerged in many areas of the economy, including housing. During this period, housing construction was very strong and housing prices soared. In fact, the ratio of house prices to rents—a kind of price-dividend ratio for housing—reached historical highs by early 2006, suggesting that house prices might be well above those that could be justified by fundamentals.

Since then, housing markets have “hit the skids.” In inflation-adjusted terms, residential construction fell by 13 percent in 2006 and by 14 percent in the first half of last year. Of course, once the financial shock hit last summer, things got even worse, with real residential construction dropping at a 24 percent rate on average since then. And, indicators of conditions in housing markets are pointing lower for the future. Housing starts and permits as well as sales are trending down, and inventories of unsold homes remain at very high levels. These inventories will need to be worked off before construction can begin to rebound.

Click on graph for larger image.

I’ve already discussed the precipitous fall in house prices nationally, so it’s striking to note that, even with these declines, the ratio of house prices to rents remains quite high by historical standards. That, of course, suggests that further price declines may be needed to bring housing markets into balance. This perspective is reinforced by futures markets for house prices, which expect further declines in a number of metropolitan areas this year. In particular, the Case-Shiller composite index for home prices shows a 15 to 20 percent year-over-year decline in the second half of this year.

The bottom line is that construction spending and house prices seem likely to continue to decline well into 2009.

by Calculated Risk on 5/13/2008 01:00:00 PM

Here is an overview of non-residential investment and commercial real estate (CRE) from our most recent newsletter.

Recently many companies have announced plans to cut capital spending in 2008. This probably means non-residential fixed investments will decline in 2008, as compared to 2007.

This decline in investment is an important indicator for the economy, since changes in fixed investment correlate very well with GDP. The first graph shows the change in real GDP and Private Fixed Investment over the preceding four quarters through Q1 2008.

Click on graph for larger image.

The red line is the year-over-year change in fixed investment, and the blue line (scale on left axis) is the year-over-year change in GDP. Correlation is 79%.

A decline in residential investment is one of the best indicators of a future recession, and that has been flashing a recession warning for some time. Now some of the focus is on non-residential investment, especially on commercial real estate, to determine if a recession has started.

The second graph shows two components of private fixed investment: residential (shifted 5 quarters into the future) and nonresidential structures.

This graph shows something very interesting: in general, residential investment leads nonresidential structure investment. There are periods when this observation doesn't hold - like '95 when residential investment fell and the growth of nonresidential structure investment remained strong.

Another interesting period was in 2001 when nonresidential structure investment fell significantly more than residential investment. Obviously the fall in nonresidential structure investment was related to the bursting of the stock market bubble.

However, the typical pattern is that residential investment leads non-residential structure investment. The normal pattern would be for investment in non-residential structures to have turned negative now.

There is plenty of evidence of an imminent slump in non-residential structure investment. Research firm Reis recently reported that the strip mall vacancy rate have risen to 7.7%, the highest level since 1996. For offices, the vacancy rate has risen to 13.6% nationally according to Grub & Ellis, and they expect the vacancy rate to rise sharply:

“With demand turning negative at the same time that the construction pipeline will deliver the 94 million square feet still underway, [office] vacancy is expected to peak at 18% by the end of 2009.”
Grubb & Ellis economist Robert Bach, April 2008

The Fed survey in April of Senior Loan officers provides further evidence of an imminent slump. The April survey showed an increase in tighter lending standards for Commercial Real Estate (CRE) loans. This graph compares investment in non-residential structure with the Fed's loan survey results for lending standards (inverted) and CRE loan demand. This suggests investment in non-residential structures should decline soon since lending has tightened considerably.

Another indicator is the architectural billing index from the American Institute of Architects. From the AIA (emphasis added):

“[T]he 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.”

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

The following 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 (and energy investment) is obvious on the graph, and we should probably ignore that period when looking at a typical CRE bust.

The two light red 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 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.
Read on ... there is MUCH more!

by Calculated Risk on 5/13/2008 10:43:00 AM

Retail sales in April (ex-auto) were decent. However, 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 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 (April PCE prices were estimated based on the increases for the last 3 months).

Although the Census Bureau reported that nominal retail sales increased 1.8% year-over-year (retail and food services increased 2.0%), real retail sales declined 1.3% (on a YoY basis).

This is a recessionary level for real retail sales.

by Calculated Risk on 5/13/2008 09:35:00 AM

From Bloomberg: Bank of America Sees Higher Losses on Home Equity

[BofA] expects losses to top 2.5 percent of its $118 billion in loans linked to home values ... The bank [last month] projected a loss rate of between 2 percent and 2.5 percent.

And on credit cards:

[BofA] is also seeing a ``recent sharp increase'' in spending on necessities by its credit-card customers. That has curbed retail, travel and entertainment purchases...

Credit cards spending is probably part of the reason retail sales (ex-autos) are holding up a little better than expected. See the WSJ: Weak Autos Push Down Retail Sales

Excluding the gas sector and the auto sector, demand at other retailers last month increased 0.6%.

by Anonymous on 5/13/2008 08:08:00 AM

Bloomberg reports:

May 13 (Bloomberg) -- The benchmark interest rate for $62 trillion of credit derivatives and mortgages for 6 million U.S. homeowners faces its biggest shakeup in a decade as lawmakers question if banks are understating borrowing costs.

For the first time since 1998, the British Bankers' Association is considering changing the way it sets the London interbank offered rate, according to Chief Executive Officer Angela Knight, who appeared before a parliamentary committee in London today. ``We've put Libor under review,'' Knight said in an interview yesterday. While she declined to discuss specifics, the BBA will announce changes May 30, she said. . . .

While the BBA set the one-month dollar Libor rate at 2.72 percent on April 7, the Federal Reserve said banks paid 2.82 percent for secured loans later that day. Secured loans typically yield less than unsecured debt.

``The Libor numbers that banks reported to the BBA were a lie,'' said Tim Bond, head of global asset allocation at Barclays Capital in London. ``They had been all the way along. The BBA has been trying to investigate them and that's why banks have started to report the right numbers.'' . . .

Libor rates jumped after the BBA said April 16 that any member banks found to be misquoting rates will be banned. The cost of borrowing in dollars for three months rose 18 basis points to 2.91 percent in the following two days, the biggest increase since the start of the credit squeeze last August. The one-month rate climbed 14 basis points, its biggest gain since November.

For your information, the vast majority of subprime and Alt-A hybrid ARMs--plus a significant number of prime hybrid ARMs--are indexed to the 6-month LIBOR. Option ARMs are frequently indexed to one-month money, and as far as I know are roughly split between the one-month LIBOR and the MTA index (Moving Treasury Average or Monthly Treasury Average, depending on whom you ask. You will also see it called the MAT index. I just work here.) In any event, spikes in short LIBOR rates will most immediately be felt by Option ARM borrowers.

Style sheet question, for those of you in the reportorial class: when did LIBOR get to be "Libor" in the USA?

by Calculated Risk on 5/12/2008 07:00:00 PM

From Bloomberg: JPMorgan to Cut 1 Million Square Feet of Office Space

``We've already identified a million feet that will be eliminated,'' [CEO] Dimon said. ``The other small piece of good news here is that it stops us from having to spend $3 billion to build an investment banking headquarters downtown.''
...
Manhattan office vacancies rose to 6.1 percent in the first quarter, the highest in more than a year as financial firms were beset by mortgage losses cut jobs, Cushman & Wakefield Inc. said in a report last month.

This should help the vacancy rate in New York!