by Anonymous on 5/27/2008 11:09:00 AM

Bloomberg reports:

Foreclosure filings in 10 towns and cities within 10 miles of military facilities, including Norfolk, Virginia, home of the Navy's largest base, rose by an average 217 percent from January through April from a year earlier. Nationally, the rate was 59 percent in the same period, according to RealtyTrac, which tallies bank seizures, auctions and default notices.

The biggest surge was in Columbia, South Carolina, home to Fort Jackson, where the Army trains recruits for combat in Afghanistan and Iraq. Properties in some stage of foreclosure rose 492 percent from a year earlier, RealtyTrac said. The second-biggest increase was 414 percent in Woodbridge, Virginia, next to the Marine Corps Base Quantico.

Foreclosure filings tripled in the cities surrounding Norfolk Naval Base and the Camp Pendleton Marine Corps Base near Oceanside, California, RealtyTrac said. Havelock, North Carolina, site of Marine Corps Air Station Cherry Point, saw foreclosures more than double.

Military families were of course favored targets of the subprime industry.

by Calculated Risk on 5/27/2008 10:00:00 AM

According to the Census Bureau report, New Home Sales in April were at a seasonally adjusted annual rate of 526 thousand. Sales for March were revised down to 509 thousand.

Click on graph for larger image.

Sales of new one-family houses in April 2008 were at a seasonally adjusted annual rate of 526,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 3.3 percent above the revised March rate of 509,000, but is 42.0 percent below the April 2007 estimate of 907,000.

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.

New home sales in April were the lowest April 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 April 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 10.6 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.

And on inventory:

The seasonally adjusted estimate of new houses for sale at the end of April was 456,000. This represents a supply of 10.6 months at the current sales rate.

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 just under 100K higher.

Still, the 456,000 units of inventory is below the levels of the last year, and it appears that even including cancellations, inventory is now falling.

This is another very weak report for New Home sales.

by Calculated Risk on 5/27/2008 09:05:00 AM

S&P Case-Shiller reported that house prices fell sharply in Q1 2008.

Click on graph for larger image.

The first graph shows the Case-Shiller index since 1987. The index fell to 159.18 in Q1 2008, from 170.62 in Q4. A decline of 6.7%, or almost 30% at an annual rate.

This is the lowest level for the index since Q3 2004.

The second graph shows the year-over-year change in the Case-Shiller index.

Prices fell 14.1% over the last four quarters according to Case-Shiller.

The index is off 16.2% from the peak.

by Calculated Risk on 5/26/2008 09:57:00 PM

From Eric Dash at the NY Times: As Credit Tightens, the Auto Industry Feels the Pain

Home equity loans, which had been used in at least one of every nine deals, when lenders were more generous, are no longer a source of easy money for many prospective buyers.
...
As home values have declined, millions of consumers have maxed out on home equity debt. In hot markets like California, nearly 30 percent of all consumers tapped into the value of their homes to help finance their new cars, according to CNW Marketing Research. In Florida, about 20 percent used home equity loans. New car sales in both states are down about 7 percent.

According to the NY Times graphic "Mortgaging the House to Buy a Car" (see article), about 1.9 million new cars were purchased using HELOCs in 2007, or 11.8% of the 16.2 million total new cars sold in 2007.

Although HELOCs were used for a variety of household expenditures, probably the two most common uses were for new cars and home improvements. It's not surprising that these two areas are being severely impacted as lenders sharply restrict HELOC borrowing.

by Calculated Risk on 5/26/2008 05:12:00 PM

The following two scatter plots compare existing home Months of Supply vs. the quarterly change (both nominal and real) in the Case-Shiller National Home Price index. (hat tip Langley Financial Planning blog for the idea)

Note: these graphs use data since Q1 1994. In prior periods, Months of Supply appeared to be higher with less negative impact on prices, see 2nd graph of Existing Homes: Months of Supply vs. Real Prices

Click on graph for larger image.

The first graph compares the Months of Supply and the quarterly change in the nominal Case-Shiller National Home Price index. The best linear fit has been added to the graph (plus the formula with an R² of 0.6).

This is a limited amount of data (since Q1 1994), but this does suggest a relationship between price changes and Months of Supply (something we would normally expect). This suggests when there are more than 7 months of supply, nominal prices will decline (with some variability).

The average Months of Supply in Q1 2008 was just over 9.9 months, suggesting a nominal price decline of about 3.1% for Q1 (+/-2% or so). The Case-Shiller price index will be released on Tuesday.

The second graph compares the Months of Supply and the quarterly change in the real (adjusted for inflation using CPI less shelter) Case-Shiller National Home Price index. The linear best fit is also added, and R² is 0.54.

In real terms, prices start to decline when Months of Supply are greater than 6.3 months. This suggests the Case-Shiller index will decline about 3.4% in real terms in Q1 2008.

In April, the existing homes Months of Supply hit 11.2 months, and will probably be over 12 months this summer. This suggests nominal price declines of over 5% in Q2.

by Calculated Risk on 5/26/2008 03:24:00 PM

From Bloomberg: UBS Falls After Saying More Mortgage Losses Possible

UBS, in the prospectus for its 16 billion-franc rights offer, said the bank's losses on non-U.S. residential and commercial real-estate securities ``could increase in the future.''
...
``UBS will have to fight against negative news flow for at least several more quarters,'' said Rolf Biland, who helps manage about $3.1 billion, including UBS shares, as chief investment officer at VZ Vermoegenszentrum in Zurich. ``The U.K. housing market is almost as overheated as in the U.S., and could lead to losses for banks.''

U.K. home values fell for an eighth month in May ...

The confessional is still open.

by Calculated Risk on 5/26/2008 12:39:00 PM

Real Time Economics at the WSJ has a nice summary today: Oil Bubble? The Debate Rages

For reference, here is Justin Lahart's article today: Commodity Prices Soar, But Are They in a Bubble?, and Professor Hamilton has a new research paper on the subject that covers all the key issues: Understanding crude oil prices

First, what is a bubble? Back when I was arguing there was a bubble in housing, I wrote: Housing: Speculation is the Key

A bubble requires both overvaluation based on fundamentals and speculation. It is natural to focus on an asset’s fundamental value, but the real key for detecting a bubble is speculation ...

From Real Time Economics:

It is far from clear that the first part of the bubble definition — prices in excess of their fundamental value — is in place. But the second part — that people are buying in anticipation of selling at a higher price — certainly is.

I'm not so sure. Speculation requires storage - something that was obvious in the housing bubble, but isn't so obvious for oil.

From Real Time Economics:

Harvard’s Jeffrey Frankel, has argued for the idea that speculation is behind the run-up in price. He says that such behavior is due to the sharp reduction in interest rates by the U.S. Federal Reserve. Low rates encourage commodity stockpiling, he says, by making it less attractive to sell commodities and put the proceeds into bonds and other debt instruments.

Critics of Mr. Frankel’s theory, including Paul Krugman, say the expected rise in commodity inventories hasn’t shown up.

Mr. Frankel has acknowledged that, but also notes that perhaps oil producers are leaving those inventories in the ground.

Frankel's argument is similar to the one I suggested here (based on research from Professor Krugman!): Petroleum Prices and GCC Spending.

[T]here is a possibility that what has looked like peak oil to some observers (something I believe is coming), was actually GCC countries investing by not extracting oil. If oil prices start to fall, and with rising expenditures, the GCC countries might increase production - causing prices to fall further.

So is oil a bubble? Is there evidence of speculation and storage? Some people have cited recent comments by Saudi Arabia's King Abdullah as evidence of storage, from Reuters: Saudi King says keeping some oil finds for future

"I keep no secret from you that when there were some new finds, I told them, 'no, leave it in the ground, with grace from god, our children need it'."

I'm skeptical of this comment (and similar comments from Saudi officials over the years), because I think it is intended for domestic purposes.

The alternative to speculation is that oil prices being driven by the fundamentals of supply and demand - with strong growth in global demand, even as demand weakens in the U.S. - and suppliers are struggling to keep up.

On supply, from the WSJ: Energy Watchdog Warns Of Oil-Production Crunch

The Paris-based International Energy Agency is in the middle of its first attempt to comprehensively assess the condition of the world's top 400 oil fields. Its findings won't be released until November, but the bottom line is already clear: Future crude supplies could be far tighter than previously thought.
...
For several years, the IEA has predicted that supplies of crude and other liquid fuels will arc gently upward to keep pace with rising demand, topping 116 million barrels a day by 2030, up from around 87 million barrels a day currently. Now, the agency is worried that aging oil fields and diminished investment mean that companies could struggle to surpass 100 million barrels a day over the next two decades.

The decision to rigorously survey supply -- instead of just demand, as in the past -- reflects an increasing fear within the agency and elsewhere that oil-producing regions aren't on track to meet future needs.

Oil prices aren't an obvious bubble like housing or tech stocks. It seems the key question is: Are the oil exporting countries producing as much as possible - or are they investing by cutting oil extraction (and leaving the oil in the ground)? The lack of transparency for the GCC countries, and several other oil producing countries, makes it unclear.

by Calculated Risk on 5/26/2008 11:12:00 AM

Here is part one of a Financial Times interview with Professor Nouriel Roubini (5 min 42 sec):



For parts 2 & 3, see the Financial Times video site.

by Calculated Risk on 5/25/2008 05:35:00 PM

Note: It is not my intention to embarrass Mr. Kudlow, rather to simply show why his analysis was wrong (typical of many back in 2005) - and why the "housing bears" were correct.

Back in June 2005, Larry Kudlow wrote: The Housing Bears Are Wrong Again

"If [the housing bears] had put a little elbow grease into their analysis, they would have learned that new-housing starts for private homes and apartments haven’t changed much during the past three and a half decades.

Although year-to-date housing starts have kicked up to 2 million, average new construction since the early 1970s has hovered around 1.5 million to 1.75 million new starts per year. During the same period, the number of American households has increased by 48 million, or 75 percent, according to the U.S. Census Bureau. It is plain to see that the family demand for homes has far outstripped the supply of newly built residences. So it should not be shocking that home prices have tended to rise on a steady basis, averaging 6.5 percent price gains over the last 35 years."

*******************

Click on graph for larger image.

This graph shows housing starts from 1970 to the present. Kudlow's claim that housing starts "haven’t changed much" and "hovered around 1.5 million to 1.75 million per year" was not quite accurate. Housing starts did average 1.59 million per year from 1970 through 2005, but there was a wide variation in starts.

Then Kudlow goes on to state:

"During the same period, the number of American households has increased by 48 million, or 75 percent, according to the U.S. Census Bureau. It is plain to see that the family demand for homes has far outstripped the supply of newly built residences."

According to the Census Bureau's Housing and Homeownership data, the number of occupied housing units increased from 63.6 million in 1970 to 108.2 million in 2005, or about 44.6 million.

Looking at the same Census data, we can see that total housing units increased from 69.8 million in 1970, to 123.9 million in 2005, or about 54.1 million during that same period. We can obtain a similar number by adding the total starts from 1970 through 2005, about 57 million starts.

Some of these housing units are second homes, but why is it "plain to see" that demand for homes had "outstripped" supply? There were significantly more housing units built (57 million starts) during this period than new households formed (44.6 million) in the U.S.!

Perhaps Kudlow, when looking at those peaks of housing starts in the '70s and early '80s, was fooled into thinking that the recent peak in activity wasn't extraordinary, especially since the U.S. population is growing. This was an inaccurate view.

The second graph shows the trend of people per household (and people per total housing units) in the United States since 1950. Before the period shown on this graph there was a long steady down trend in the number of people per household.

Note: the dashed lines indicates estimates based on the decennial Census for 1950 and 1960.

Starting in the late '60s there was a rapid decrease in the number of persons per household until about the late '80. This was primarily due to the "baby boom" generation forming new households en masse.

It was during this period - of rapid decline in persons per household - that the peaks in housing starts occurred. Many of those starts, especially in the '70s, were for apartments. Even if there had been no increase in the U.S. population, the U.S. would have needed approximately 27% more housing units at the end of this period just to accommodate the change in demographics (persons per household).

Now look at the period since 1988, the persons per household has remained flat. The increase in 2002 was due to revisions, and isn't an actual shift in demographics.

Here is a simple formula for housing starts (assuming no excess inventory):

Housing Starts = f(population growth) + f(change in household size) + demolitions.

f(change in household size) was an important component of housing demand in the '70s and early '80s. In recent years, f(change in household size) = zero.

So, unless Kudlow is arguing for a significant further reduction in housing size, he shouldn't have been comparing starts in recent years to starts in the '70s and '80s.

And finally, Kudlow should have been looking at the rampant speculation in 2005, both with flippers and homebuyers using excessive leverage. That is what defines a bubble, and that is what I focused on in April 2005: Housing: Speculation is the Key.Read on ... there is much more.

by Calculated Risk on 5/25/2008 11:41:00 AM

Here is a graph of existing home Months of Supply vs. quarterly Real Case-Shiller National house prices since Jan 1994.

Click on graph for larger image.

A couple of notes: The Case-Shiller data is the National Index adjusted for inflation using CPI less shelter. The graph is monthly, but the Case-Shiller national data is quarterly (so the price data is stair-stepped). I only have monthly inventory and sales data back to Oct '93. Also, I'm missing some 2000 inventory data, and I extrapolated for a few months in 2000.

From this graph, it appears real prices are flat with about 6 months of inventory - prices rising with less than 6 months - and prices falling with more than 6 months. So perhaps we could argue house prices will fall until Months of Supply declines to close to 6 months.

However this relationship between price and Months of Supply doesn't seem to fit with earlier data. I have year end inventory and sales data back to 1982, and the following graph shows year end months of supply since 1982 (and April 2008).

Year end inventory data is usually the low point for the year (as homeowners take their houses off the market for the holidays). So the months of supply was probably higher during the spring and summer selling months.

From Q1 1987 through Q3 1989, real national prices rose almost 10% according to the Case-Shiller National Index, even though year end Months of Supply was close to 7 months (and likely higher during the summer).

So maybe prices will flatten out when Months of Supply declines to 8 months or so.

With inventory levels approaching 12 months (11.2 months in the most recent report), prices will probably continue to fall for some time.