by Calculated Risk on 5/15/2008 06:30:00 PM

From Bloomberg: Fed's Direct Loans to Banks Climb to Record Level

The Federal Reserve's direct loans of cash to commercial banks climbed to the highest level on record in the past week, a sign of continued stress in financial markets that threatens to curtail credit for households and companies.

Funds provided through the so-called discount window for banks rose by $2.8 billion to a daily average of $14.4 billion in the week to May 14, the central bank said today in Washington. Separately, the Fed's loans to Wall Street bond dealers rose by $75 million to $16.6 billion.

The increase indicates financial firms' emergency needs for cash haven't receded.

by Calculated Risk on 5/15/2008 05:17:00 PM

From Paul Kasriel and Asha Bangalore at Northern Trust: In the Eye of the Economic Hurricane

There seems to be sentiment developing that the U.S. has weathered the worst of the current cyclical economic storm and blue skies are ahead. We disagree. Any blue skies you see are likely to be short lived. The economy is in the relative calm of the eye of the business-cycle hurricane. The mortgage credit problems are not over. And credit problems in other sectors are just beginning as the housing recession spreads to the rest of the economy.

The "eye of the hurricane" meme is definitely gaining traction! Here are some comments on Q1 GDP:

Click on graph for larger image.

The plus-sign in front of the Commerce Department’s preliminary estimate of the change in first-quarter real GDP was deceiving. Real final sales of domestic product, which is real GDP excluding the change in business inventories, contracted at an annual rate of 0.2% in the first quarter. Except for the negative impact of Hurricane Katrina in Q4:2005, this was the first decline in real final sales since the first quarter of 2002. Real private final domestic sales – i.e., the sum of personal consumption expenditures and private fixed investment expenditures – contracted at an annualized rate of 1.0% in the first quarter, which was the largest contraction since the fourth quarter of 1991 (see Chart 1). So, the housing recession is now spreading to consumer spending, business equipment spending and nonresidential construction spending.

The worst of the "credit crisis" might be over, but the real effects of tighter lending, less capital spending, rising unemployment, and consumer defaults on credit cards and auto loans is just starting.

There is much more in the Northern Trust commentary.

by Calculated Risk on 5/15/2008 02:33:00 PM

This is a very sad story from the USA Today: Foreclosures take an emotional toll on homeowners (hat tip Cathy and others)

The escalating pace of foreclosures and rising fears among some homeowners about keeping up with their mortgages are creating a range of emotional problems, mental-health specialists say. Those include anxiety disorders, depression and addictive behaviors such as alcoholism and gambling. And, in a few cases, suicide.

Crisis hotlines are reporting a surge in calls from frantic homeowners. The American Psychological Association (APA) and other mental-health groups are publishing tips on how to handle the emotional stress triggered by the real estate meltdown. Psychologists say they're seeing more drinking, domestic violence and marital problems linked to mortgage concerns ...

Cathy comments:

"I wonder if the mortgage brokers, securitizers, rating agencies, realtors, banks, investment banks, rating agencies and everyone else who raked in millions during the bubble ever feel even a shred of remorse or shame ..."

For some reason this reminds me of this creepy advertisement (Note the title is "Debate").

by Calculated Risk on 5/15/2008 01:00:00 PM

"[T]he message is very clear: The single-family housing market is still deteriorating..."
NAHB President Sandy Dunn

"[T]he housing market has shown no evidence of improvement thus far. In fact, conditions have continued to deteriorate in recent times...”
NAHB Chief Economist David Seiders

Click on graph for larger image. The NAHB reports that builder confidence was at 19 in May, from 20 in April. 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. Note that "present sales" is now at an all time low of 17.

From NAHB: Builder Confidence Edges Downward In May

Home builders remained considerably downbeat as market conditions continued to erode in May, according to the NAHB/Wells Fargo Housing Market Index (HMI), released today. The HMI fell a single point to 19, bringing it within one point of the record low 18 set in December 2007 (the series began in January of 1985).

“With the HMI hovering in the historically low two-point range that’s prevailed over the past nine months, the message is very clear: The single-family housing market is still deteriorating ..." said NAHB President Sandy Dunn, a home builder from Point Pleasant, W.Va. ...

“Despite the Federal Reserve’s concerted efforts to lower short-term interest rates, free up credit markets and shore up the national economy, the housing market has shown no evidence of improvement thus far. In fact, conditions have continued to deteriorate in recent times,” said NAHB Chief Economist David Seiders. “The latest HMI shows that even fewer builders now foresee market conditions improving over the next six months compared with our April survey, and builder ratings of buyer traffic through model homes also have dropped off over the past month on a seasonally adjusted basis. ...”
...
The HMI’s component index gauging current sales conditions declined one point to 17 in May — its lowest level since the series began in January 1985. Meanwhile, the component gauging sales expectations for the next six months declined three points to 27, and the component gauging traffic of prospective buyers declined two points to 17.

The HMI fell in three out of four regions in May, with a four-point decline to 18 registered in the Northeast, a three-point decline to 12 registered in the Midwest (also an all-time low) and a two-point decline to 22 posted in the South. The West posted a three-point gain to 20 this month but remained well below the level of a year earlier.

by Calculated Risk on 5/15/2008 11:49:00 AM

"[A] recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."
National Bureau of Economic Research (NBER)

The Federal Reserve reported this morning that industrial production declined 0.7% in April. From the WSJ: Industrial Output Fell Last Month

U.S. industrial production plunged in April, suffering a broad decline in output ranging from cars to furniture and business equipment.

Industrial production decreased 0.7%, following a revised 0.2% climb in March, the Federal Reserve said Thursday. Originally, production in March was seen up 0.3%.

Capacity utilization receded sharply to 79.7% in April, a sign of easing inflationary pressure. March capacity use was 80.4%, revised down from an originally reported 80.5%. The 1972-2007 average is 81.0%.

A decline in industrial production is one of the indicators of a recession (see quote at top). The following graph shows capacity utilization and recessions for the last 40 years.

Click on graph for larger image.

The decline in capacity utilization suggests that the economy could be in recession.

Even more important is that industrial production is a key to the depth of the economic slowdown. So far exports have been strong, and the decline in industrial production has been mild. If the global economy slows significantly ("recoupling"), then industrial production and capacity utilization could fall sharply leading to a deeper recession.

Also, with capacity utilization below average, this probably means less investment in non-residential structures in the near future.

by Calculated Risk on 5/15/2008 09:20:00 AM

A "Foreclosure Magazine" arrived on my doorstep yesterday. There were close to 200 homes offered for sale as distressed properties, mostly in Orange County, CA with some in the Inland Empire.

Although most of the listing in Orange County are in the $400 to $800 thousand range, there are a number of higher end homes. For example:
Huntington Harbor Pre-Foreclosure (on the water), $1,750,000
Irvine, Giant 5 BD View Home, "Beat the Bank", $1,199,000
Corona, 5 BD Gated, Views, Bank Owned, $999,999
Orange, Custom Home, Gated Community, Short Sale, $1,875,000

It appears foreclosures are moving up the housing chain ...

From the WaPo: Luxury Foreclosures

The foreclosure signs that have been sprouting up in less-affluent communities since 2006 are beginning to appear in the well-off suburbs, attached to houses that once cost $1 million or more. Although those kinds of homes are in the minority now, real estate agents predict the numbers will swell.

In Loudoun County, 60 houses priced over $750,000 are among the 932 foreclosures and short sales -- an exit strategy of selling the house at a loss with the bank's blessing to avoid foreclosure.

Affluent neighborhoods have been able to stave off foreclosure longer, but the effects of once-popular loans, such as adjustable-rate and interest-only mortgages, are beginning to take their toll, economists and real estate agents said.

by Calculated Risk on 5/14/2008 07:58:00 PM

As I mentioned in the previous post, most condos are not included in the new home sales and inventory numbers from the Census Bureau (they are included in housing starts).

Here are some numbers for the Chicago market from the Chicago Tribune: Record condo numbers to saturate downtown (hat tip Lee)

Gail Lissner, vice president of Appraisal Research Counselors, said 2008 is the biggest year so far for downtown condos. Her firm says 5,984 units will come on the market this year. That compares with 4,794 last year and a projected 4,160 next year.

Yet buyers are not showing up.

Sales of newly built downtown condominiums plummeted by about 83 percent during the first quarter, to 201 units from 1,207 units a year earlier, according to a report to be released Wednesday by Appraisal Research Counselors.

Those sales numbers are quarterly, so 1,200 sales in Q1 2007 was reasonable compared to the 4,794 new condos added last year. But with close to 6,000 units being added this year, and sales of only 201 units in Q1, there is a serious oversupply - with more units coming in 2009.

There are probably many areas with similar or worse numbers for new condos - like San Diego, Miami, Las Vegas, Orange County and more.

by Calculated Risk on 5/14/2008 05:29:00 PM

The NY Times has an article on the negative externalities of some Condo Life: Foreclosures, Higher Fees and Mowing the Lawn

When people buy condos, they expect their monthly fees will cover many of the responsibilities that they would otherwise have as single-family homeowners, like cutting the grass and paying the water bills. Now many find themselves nagging each other in the hallways to pay their assessments and adding special fees while haggling over chores. In Miami, Chicago and San Diego, condo owners are adjusting to the economic woes, sometimes by mowing themselves and working shifts for building security — all while lamenting their lost community.

The article also mentions that condos are not included in some of the housing stats - something I've mentioned several times. Many condos (especially high rise) are not included in the new home sales and inventory report from the Census Bureau (they are included in housing starts).

Many of the numbers compiled on home sales specifically exclude condos, which account for one out of eight homes in the nation, and that missing data may be masking just how weak the housing market really is. Sales of existing condo units were down 26 percent in March from a year earlier, compared with an 18 percent decline for single-family homes, according to the National Association of Realtors.

The pain in the condo market, mostly urban areas, may not only be deeper than the rest of the housing market during this downturn but more prolonged.

For those areas with a large number of high rise condos, the supply of housing units could be much higher than the Census Bureau statistics would indicate.

by Calculated Risk on 5/14/2008 02:55:00 PM

From Bloomberg: Freddie Mac Accounting Changes Reduce Losses By $2.6 Billion (hat tip SC)

A change in the way the company values some assets that aren't traded reduced credit losses by $1.3 billion, while a separate rule that lets the company pick and choose which assets to measure contributed an equal amount as well, Freddie Mac said.
...
Financial Accounting Standard 157 allows companies to estimate a value on holdings that aren't traded. Freddie Mac increased its Level 3 assets under FAS 157 to $156.7 billion, or 23 percent of its assets, from $31.9 billion as of December. The company also adopted FAS 159, which lets it pick which financial assets and liabilities to measure at fair value through earnings.
...
Chief Executive Officer Richard Syron said the new accounting better reflects ``the underlying performance of our business'' as the market continues to deteriorate.

So much for transparency.

Also, from the WSJ: Freddie Mac Posts $151 Million Loss

Freddie also reported that the "fair value," or estimated market value, of its net assets was a negative $5.2 billion as of March 31, compared with a positive $12.6 billion three months earlier. That means the estimated market value of assets falls short of estimated liabilities, largely stemming from the costs of mortgage defaults. [Chief financial officer] Mr. Piszel said the negative fair value reflects current distressed prices for mortgage securities and has "no impact" on the operations of a company like Freddie that is a long-term holder of mortgages.

by Calculated Risk on 5/14/2008 01:21:00 PM

More from the conference call:

Analyst: Quick question on your direction in terms of housing price declines and the impact on credit costs. Have you looked at the impact of rising LTV's have on the projected credit cost. In other words, if people get close to and then get under water, does the propensity for them to default, does that go up geometrically, and is that captured in your numbers?

Freddie Mac: Yes, clearly it is. And you know you have identified one of the key attributes of the loans in '06 and '07 that are contributing to the higher defaults. As I said in that remarks it has caused us to look hard at what the maximum LTV we're willing to purchase, and it also results in our raising delivery fees to that portion of the population. So it clearly is contributing to higher default costs. It is captured in our numbers. And we have responded both with tightening of terms and raising prices.

Analysts: What do you see? Is it in line with historical default rates as they get underwater or does it ...

Freddie Mac: No, it is different. The rate of increase in defaults in that part of the population is much steeper. For those borrowers that bought a home based on rapid house price appreciation as a way to grow wealth, if they find themselves quickly underwater - you know we're even seeing it when we try to modify and renegotiate those loans - they are walking away. They're finding it not constructive. I do think the raft in defaults for that portion of the population is steeper than historical observations, and we are reflecting that in our expectations.
emphasis added