by Calculated Risk on 5/20/2008 12:00:00 PM

From the Philadelphia Fed:

The Federal Reserve Bank of Philadelphia produces a monthly coincident index for each of the 50 states. The indexes are released a few days after the Bureau of Labor Statistics (BLS) releases the employment data for the states.

Here is the release for April:

The indexes increased in 26 states for the month, decreased in 16, and were unchanged in the remaining eight (a one month diffusion index of 20). For the past three months, the indexes increased in 25 states, decreased in 21, and were unchanged in the other four (a three month diffusion index of eight).

Click on graph for larger image.

This is a graph of the monthly Philly Fed data of the number of states with increasing activity.

I've added the current probable recession. About half of the U.S. was in recession in April based on this indicator.

Note: the Philly Fed calls some states unchanged with minor changes. The press release says there were 26 states with increasing activity, but including small changes, there were 28 (as graphed).


This map is from the Philly Fed report for April, and shows the Three Month change for all 50 states. If the economy is in recession, this map should turn very red over the next few months.

California is definitely in recession by most measures, but the Philly Fed Three Month change shows the state economy is still growing slightly. This is probably true for other states too, and I expect the map to turn more and more red in the coming months.


For comparison to April, here is the December 2007 map (bottom).

Clearly there is more red in the April (top) map as the recession spreads.

by Calculated Risk on 5/20/2008 10:08:00 AM

From Bloomberg: Credit Crisis Will Extend Into 2009, Oppenheimer Says

The U.S. credit crisis will extend into and even beyond 2009 as banks will write off more than $170 billion of additional reserves by the end of next year, according to Oppenheimer & Co. estimates.

``The real harrowing days of the credit crisis are still in front of us and will prove more widespread in effect than anything yet seen,'' analysts led by Meredith Whitney wrote in a research note today. ``Just as strained liquidity pushed so many small and mid-sized specialty finance companies to beyond the brink, we believe it will do the same with the U.S. consumer.''

From the report titled: Far From Over: We Believe The Credit Crisis Will Extend Well Into 2009

"... in our opinion the "next shoe to drop," is what became an over-reliance on the securitization market for consumer liquidity. Herein, we draw a direct correlation between a shutdown in securitization volumes and accelerating losses on bank balance sheets. As we see no near or medium term come back in securitization volumes, we believe losses will only accelerate further and far worse than even the most draconian estimates."

And the opposite view: TED Spread at Nine-Month Low, Signals Credit Easing

Lending confidence at banks rose to the highest level in more than nine months, according to a key indicator, signaling the global credit crunch may be easing.

The so-called TED spread, the difference between what the U.S. government and banks pay to borrow in dollars for three months, dropped below 78 basis points for the first time since August.
...
``The worst of the fears about the liquidity crisis appear to be alleviating,'' said Peter Jolly, head of markets research in Sydney at NabCapital, the investment-banking arm of National Australia Bank Ltd. ``Liquidity is becoming more available ever since the bold moves by the Fed.''

by Calculated Risk on 5/20/2008 09:04:00 AM

From the WSJ: Home Depot's Net Falls 66% As Homeowners Cut Projects

Home Depot Inc. reported a 66% drop in fiscal first-quarter net income, thanks in part to restructuring charges, as it continues to suffer amid economic conditions that have been discouraging homeowners from spending on home-improvement projects.
...
"The housing and home-improvement markets remained difficult in the first quarter. In fact, conditions worsened in many areas of the country," Chairman and Chief Executive Frank Blake said.

This is not a surprise. And it could get much worse.

by Anonymous on 5/20/2008 08:53:00 AM

Last week--I think it was last week--CR asked me at one point if I were going to write anything about Freddie's financials and the FAS 157 Uproar and I remember saying that our blog colleague Accrued Interest had just that day remarked that he might well write about the subject. I therefore fervently hoped he would do so, and I could just link to it, which would save me the trouble of having to have my own opinion.

So he finally got around to it. Go read it. It's well worth your time.

by Anonymous on 5/20/2008 08:19:00 AM

Here's a wee bit of cognitive dissonance with your coffee, courtesy of TheStreet.com:

Neighborhoods across the U.S. are being ransacked.

In fact, about 50% of homes have substantial damage following foreclosure, according to a survey of 1,500 real estate agents by Campbell Communications in Washington, D.C. (This is not just due to homeowners looting their foreclosing properties; some do not have the financial capabilities for the home's upkeep, and other times vandals are responsible.)

To keep real estate agents from being left to sell homes with floor and carpet damages, holes in the wall, and removed appliances, a preventive measure is being offered to homeowners facing foreclosure known as "cash for keys."

I have been wanting some real numbers--not just a few splashy anecdotes--about the "trash out" thing. This is because it's exactly the sort of car-crash story the press loves, so it's the sort of thing always in danger of getting overstated (like the "burn outs").

The thing is, "trash outs" have as far as I know existed ever since the invention of foreclosure; they were simply rather rare. Not that most foreclosed homes were ever in pristine condition. But that's the thing: for most of my experience in this business the vast majority of REO damage was in fact due to the mortgagor's inability to afford repairs (indeed, the exploding water heater that damaged several hundred square feet of carpet might well have been the financial catastrophe that sent a struggling household into foreclosure in the first place). The rest was a function of vacancy: either vandalism or simply weather damage like frozen pipes, green pools, brown lawns, etc.

So I'm a touch skeptical about the claim that 50% of REO has "substantial damage" and most of that is willful trashing of the property. It would have been nice for the reporter to supply the details here. I became even more skeptical when I read this:

Lenders see cash for keys as a small price to pay when compared with the cost of repairs. Indeed, the price impact when people damage their houses can be up to 25% of what the home is worth, according to Campbell Communications. (That means a $400,000 home's repairs might cost around $100,000.)

I freely admit it has been a while since my wrinkled reptilian snout has had to read a lot of detailed repair estimates. However, I think I need someone to explain to me how anyone can do $100,000 worth of damage to a three-bedroom two-and-a-half bathroom home with doors that are not wide enough to admit a backhoe. I suppose it's possible, but can the average repair bill be even close to that?

Then there's this:

How many people are biting?

It depends. Cash for keys is not always considered a bargain by homeowners. Losing their home and credit is a heavy burden.

"Most people don't want cash for keys," says the researcher Popik. "They want their credit ratings to stay intact."

Having been assured by all kinds of people that homeowners are just ruthlessly walking away, I'm struggling with the idea that they're too pissed to collect an extra couple grand for the keys. They'd rather "mail them in" and get nothing? Because this might have something to do with their credit ratings? They really think they can make more than $3,000 net ripping out the furnace and selling it on eBay? That's easier than taking a check from the servicer?

My theory is that whenever the emerging popular narratives are this contradictory--homeowners are cold and calculating enough to just walk away from an upside-down investment, but they are also emotional and irrational enough to prefer the revenge of knocking holes in the drywall to getting a check to cover moving expenses; they can afford their mortgages but choose not to pay them, but they also can't afford basic maintenance before the foreclosure; they care about their credit ratings except they don't care about their credit ratings; they are the victims of servicers who won't answer the phone, but they are also bitter people who thumb their noses at a generous check the servicer is offering--we have an excellent opportunity to recognize that:

1. The category "homeowner" is extremely diverse.

2. All kinds of people do all kinds of things for all kinds of reasons, not all of which are obvious to anyone including the people who do these things.

3. Any discussion of "psychology" that assumes a universal, perfectly consistent and easily-predictable human response to falling home values or foreclosures is not a very sophisticated understanding of human psychology (Hi, Dr. Shiller!).

4. Any argument about "bailouts" that seems to depend on characterizing all homeowners in the same way, and imputing to them all the same experiences and motives and the same responses to incentives or disincentives, is not worth listening to.

5. I wouldn't hang a dog on the basis of a survey of real estate agents at this point.

by Calculated Risk on 5/19/2008 11:19:00 PM

“I used to take the weak ones. Now I’m taking the whole herd.”
Boat Repo Man Jeff Henderson

From David Streitfeld at the NY Times: Economic Tide Is Rising for Repo Man

Some people lose their house or their boat to abrupt setbacks: illness, job loss, divorce. [49-year-old Robert] Dahmen, who works as a technology manager for a car manufacturer, belongs to a second, probably larger group: he simply spent beyond his means. He is one of the millions of reasons the consumer-powered American economy did so well for most of this decade, and one of the reasons its prospects look so bleak now.
...
He originally bought a smaller, more affordable boat, but a salesman talked him into an upgrade. “Oh yeah, I said, that would be cool.”
...
The merriment came at a price, though. Toy Box cost $175,000.

... Meanwhile, he lost his condominium when his mortgage readjusted and those payments went up. His 401(k) is down to $9,000.

“I oversaturated myself with long-term debt,” he said. “It was a risk, a calculated risk. I obviously lost.” He is declaring bankruptcy.
...
From now on, Mr. Dahmen said, the consumer economy would have to get by without him. “I have no intention of ever buying anything, ever,” he said. “I don’t think I could if I wanted to.”

There is much more in the article about the boat repo business.

by Anonymous on 5/19/2008 05:30:00 PM

I fear that if the complaint in this case is written with anything like the care and clarity of this press release, Downey probably has little to worry about.

The Complaint charges that Downey and certain of its officers and directors violated federal securities laws by issuing materially false statements regarding the Company's financial results. Specifically, the Complaint alleges that defendants concealed the following: (i) Downey's portfolio of Option ARMs contained millions of dollars worth of impaired and risky securities, many of which were backed by subprime mortgage loans; (ii) prior to the Class Period, Downey had seen Countrywide's growth and had started to get more aggressive in acquiring loans from brokers such that the loans were extremely risky; (iii) defendants failed to properly account for highly leveraged loans; (iv) Downey had very little real underwriting, which led to large numbers of bad loans; and (v) Downey had not adequately reserved for Option ARM loans, which provided that during the initial term of the loan borrowers could pay only as much as they desired with any underpayment being added to the loan balance.

I can't wait to find out what the evidentiary standard is for (ii).

by Calculated Risk on 5/19/2008 05:01:00 PM

From Reuters: U.S. senators say have deal on housing rescue bill

The two top members of the U.S. Senate Banking Committee announced on Monday that they have a deal that will create a multi-billion dollar mortgage rescue fund and a new regulator for Fannie Mae and Freddie Mac.

No specifics yet.

And from the WSJ: New Housing Deal Reached

The committee didn't immediately release details of the agreement and what changes had been made to the bill. The legislation combines the regulatory reforms for government-sponsored enterprises Fannie Mae and Freddie Mac with a proposal to use the Federal Housing Administration to offer up to $300 billion in federal guarantees to help refinance struggling borrowers into new mortgage loans.

by Calculated Risk on 5/19/2008 01:19:00 PM

From DataQuick: Southland home sales highest in eight months

Southern California home sales surged last month to the highest level since August as bargain shoppers took advantage of price slashing. Although some higher-end costal markets also posted gains, the swell in transactions mainly reflects more sales of homes under $500,000 in inland areas where depreciation and foreclosures have been greatest, a real estate information service reported.

A total of 15,615 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties in April. That was up 21.9 percent from 12,808 the previous month but down 19 percent from 19,269 in April last year, according to DataQuick Information Systems.

Sales from March to April have risen on average 1.2 percent since 1988, when DataQuick's statistics begin. Although last month's sales total was the highest for any month since August 2007, when 17,755 homes sold, it was still the weakest April since April 1995, when 15,303 homes sold, and the second-lowest April on record. Last month was 38 percent below of the April average of 25,311 sales.

Post-foreclosure homes continued to play a major role in the Southland market. Of all the homes that resold in April, 37.5 percent had been foreclosed on at some point in the prior 12 months, compared with a revised 35.8 percent in March and 4.6 percent a year ago. Across the six-county area, "foreclosure resales" ranged from 26.9 percent of resale activity in Orange County to 52.7 percent in Riverside County.

Last month's upswing in sales was most pronounced for homes priced under $500,000, which accounted for two-thirds of the Southland's sales gain over March. Riverside County, the epicenter of Southland foreclosure activity and price declines, posted the region's only year-over-year sales increase -– that county's first in two years.
...
"Quite a few more buyers stepped off the sidelines last month to snap up homes at substantial discounts relative to the market's short-lived peak," said Marshall Prentice, DataQuick president. "It's no surprise, given the magnitude of the price declines in inland areas and the fact sales have been so amazingly low for so long. We continue to look for evidence of a sales bounce in the mid-priced and higher-end markets along the coast. If the higher conforming loan limits are making a difference in those areas, it's certainly not a large one, at least not as of the end of April."

The median price paid for a Southland home was $385,000 last month, unchanged from March but down 23.8 percent from the peak median of $505,000 in April 2007.
...
Foreclosure activity is at record levels ...
emphasis added

This is interesting. The pickup in sales is mostly in the areas with steep price declines and severe foreclosure activity (like the Inland Empire).

by Calculated Risk on 5/19/2008 12:16:00 PM

From Reuters: US Commercial property price fall most since 2000 -Moody's

Moody's said prices of retail properties have dropped 5.7 percent from their peak in 2007, compared with declines of 3.4 percent for apartment buildings and 2.3 percent for industrial real estate, respectively. Office property prices are down 2 percent from their peak, according to quarterly data.

On a monthly basis, commercial property prices fell 2.3 percent in March, the most since Moody's began collecting the data in 2000.

The CRE bust is here.