by Calculated Risk on 6/05/2008 11:25:00 AM

The Fed released the Q1 2008 Flow of Funds report today: Flow of Funds.

The Fed report shows that household real estate assets decreased from $20.046 trillion in Q4 to $19.717 trillion in Q1 2008. That is a decline of $328.9 billion.

When we subtract out new single family structure investment and residential improvement, the value of existing household real estate assets declined by $431 Billion.

Household percent equity was at an all time low of 46.2%.

Click on graph for larger image in new window.

This graph shows homeowner percent equity since 1952. Even though prices have risen dramatically in recent years, the percent homeowner equity has fallen significantly (because of mortgage equity extraction 'MEW'). With prices now falling - and expected to continue to fall - the percent homeowner equity will probably decline rapidly in the coming quarters.

Note: approximately 31% of household have no mortgage. So the 50+ milllion households with mortgage have far less equity than 46.2%.

The second graph shows household real estate assets and mortgage debt as a percent of GDP. Household assets as a percent of GDP is now declining, although mortgage debt as a percent of GDP only decreased slightly in Q1.

More later ...

by Calculated Risk on 6/05/2008 11:05:00 AM

From the MBA: Delinquencies and Foreclosures Increase in Latest MBA National Delinquency Survey (hat tip Ed)

The percent of loans on which foreclosure actions were started during the quarter was 0.99 percent on a seasonally adjusted basis, 16 basis points higher than the previous quarter and up 41 basis points from one year ago.

The seasonally adjusted total delinquency rate is the highest recorded in the MBA survey since 1979 ...

Once again this quarter, the rate of foreclosure starts and the percent of loans in the process of foreclosure are the highest recorded since [the survey started in] 1979.

ARMs are a key problem, both subprime and prime:

“[W]hile subprime ARMs represent 6 percent of the loans outstanding, they represented 39 percent of the foreclosures started during the first quarter. Prime ARMs represent 15 percent of the loans outstanding, but 23 percent of the foreclosures started. Out of the approximately 516,000 foreclosures started during the first quarter, subprime ARM loans accounted for about 195,000 and prime ARM loans 117,000, but the increase in prime ARM foreclosures exceeded subprime ARM foreclosures with increases of 29,000 and 20,000 respectively over the previous quarter.” [said] Jay Brinkmann, MBA’s Vice President for Research and Economics.

That last comment is important - even though there were still more subprime than prime ARM foreclosures in Q1, the problems are really accelerating in the prime ARM segment.

by Calculated Risk on 6/05/2008 10:54:00 AM

Fed Vice Chairman Donald L. Kohn testified today: Condition of the banking system. A short excerpt:

Consistent with trends in commercial banks overall, conditions at state member banks have weakened over the past year. Problems in residential mortgage, home equity, and loans to home builders have pushed the nonperforming assets ratio at these banks to 1.57 percent, more than twice the level of one year ago and the highest rate since 1993. Loan loss provisions have also accelerated, rising to a high of 1.14 percent of average loans during the first quarter of 2008 in large part reflecting the deterioration in residential real estate-related loan portfolios.
...
Over the coming months, we expect banking institutions to continue to face deteriorating loan quality. House prices are still declining sharply in many localities and losses related to residential real estate--including loans to builders and developers--are bound to increase further. In addition, weak economic conditions could well extend problems to other segments of lending portfolios including consumer installment or credit card loans, as well as corporate loan portfolios. Moreover, banking organizations must be prepared for the possibility that liquidity conditions become tighter if uncertainties in the capital markets fail to subside or if credit conditions deteriorate significantly. Accordingly, we anticipate that the number of banks with less than satisfactory supervisory ratings will continue to increase from the relatively low levels that have existed in recent years and we are monitoring developments at all supervised institutions closely.
emphasis added

This is why the FDIC is gearing up for many more bank failures.

by Calculated Risk on 6/05/2008 09:57:00 AM

From the WSJ: Backstage at a Bank Funeral (hat tip FFDIC).

This is a story (and slide show) about how the FDIC handles a bank failure:

It isn't easy for 75 federal officials and contractors to slip into a small town undetected and liquidate an 89-year-old bank without anyone knowing. But that's what just happened in this old railroad town, population 3,200. It's a scene that's likely to repeat itself across the country as banks struggle through a painful credit cycle, overwhelmed by troubled mortgages and soured construction loans.
...
In its role as receiver for failed banks, the FDIC acts as a SWAT team, playing equal parts secret agent, medical examiner, salesman and grief counselor. The first 48 hours are typically the most frantic, as the agency must turn a failed bank inside out and oversee its sale -- or its orderly burial.

This is a story that will probably be repeated frequently over the next couple of years.

by Calculated Risk on 6/05/2008 09:39:00 AM

From the WSJ: Some Chains Posts Strong Sales Despite Gas Prices, Low Confidence

Retailers posted stronger-than-expected same-store sales for May [despite a] surge in gasoline prices and tumbling consumer confidence.

Leading the way was Wal-Mart Stores Inc., which reported a 3.9% jump, excluding fuel, in U.S. same-store sales -- double the high end of its forecast of flat to up 2% ...

Even Wal-Mart's home-goods sales, which have been weak for some time, perked up last month and posted its first same-store-sales gain in more than two years.

Overall retailers reported fairly strong sales in May. It looks like $4 gasoline didn't use up the entire stimulus.

by Calculated Risk on 6/05/2008 01:31:00 AM

Definition of Negative Absorption: The absorption rate for a community is the number of new household formed per year. If there are 100 new households formed in a community, then the annual absorption rate would be 100 units (house or apartments).

A negative absorption rate means that there are fewer households in the community each year. This is usually because more families move out of the community than move in. Since housing is durable, a negative absorption rate implies there is always more supply than demand.

I spoke with a land developer tonight (the same one involved in the 15 cents on the dollar land deal in the Inland Empire earlier this year). He told me about two deals he is working on with lenders for foreclosed land at about 20 cents on the dollar. He said the lenders are still in shock at the price.

He also mentioned that his company's analysis shows that Santa Maria (a small town about 75 miles north of Santa Barbara) is facing 5 years of negative absorption for residential real estate. This means there are a declining number of households in Santa Maria - as people leave to find jobs elsewhere - and my source believes Santa Maria will need fewer houses each year for the next five years.

Right on cue, Peter Hong writes in the LA Times: Santa Maria house bought with no money down goes into foreclosure

Prado bought a $412,000 house with a so-called 80/20 mortgage. Those mortgages are actually a pair of loans -- one for 80% of the purchase price and another for the remaining 20%.
...
Property values, of course, began falling sharply last year. And that left people such as Prado, who bought near the top of the market, owing more in loans than their homes were worth.
...
She acknowledged that she stated her monthly income as $7,500 on the loan application -- nearly double what she was actually earning ... her husband ... was earning $20 an hour as a carpenter as builders turned the area's broccoli fields into housing developments.
...
Financially, Prado says she hasn't really lost anything, since she put no money down to get her mortgage. She's looking for a place to rent.

Houses like hers are now renting for between $1,300 to $1,600 a month ...

This brings up a couple of key points:

This is fraud. Yes, it is fraud for housing, as opposed to fraud for profit, and fraud for housing is rarely prosecuted. But this is still fraud. (I recommend reading Tanta's UberNerd piece on fraud from last year: Unwinding the Fraud for Bubbles)

To reach a cap rate of 7% (similar to the REO in Oceanside), this house would have to sell for from $157K (rent of $1300 per month) to $192K (rent of $1600 per month). That is about 55% to 60% off the price the house sold for two years ago. And with negative absorption, the rents may fall much further.

There is almost no bottom for prices in an area with negative absorption. Just ask the residents of Detroit.

by Calculated Risk on 6/05/2008 12:00:00 AM

Here is a video from TheStreet.com concerning that buy one house, get a second one free offer in Escondido, California. The video features Paul Kedrosky of Infectious Greed.

I've driven by the row homes, and they are on the corner of two busy streets - "Conveniently located on the corner of Midway Drive and Grand Avenue in Escondido" according to the builder - and not in the best neighborhood.

This is obviously just a gimmick to generate interest ... and it accomplished that goal.

by Calculated Risk on 6/04/2008 08:00:00 PM

An article in the WSJ today reminded me of the residential construction employment conundrum. From the WSJ: Housing Slump Hits Hispanic Workers, But Most Immigrants Remain in U.S.

The housing slump has disproportionately hurt Hispanic workers, provoking a jump in unemployment that has hit the immigrants among them the hardest, according to a new study.
...
Many undocumented workers don't appear on employment rosters because they work as independent contractors or are hired indirectly by big developers through subcontractors or labor brokers who don't officially hire every worker. "They were ghosts to begin with," says Rose Quint, an economist at the National Association of Homebuilders. Thus, she says, "the decline in employment is probably bigger than numbers are showing."

Here is the report: Latino Labor Report, 2008: Construction Reverses Job Growth for Latinos

This graph shows the construction employment conundrum: why have starts and completions declined about 50% from the peak in 2006, and yet residential construction employment is off only 14%?

Click on graph for larger image in new window.

Note that starts are shifted 6 months into the future since it takes a little over 6 months to complete a typical residential unit.

Last year Greg Ip at the WSJ reviewed an analysis from Deutsche Bank economists suggesting that the illegal immigrant explanation accounts for most of the missing job losses:

[E]conomists at Deutsche Bank estimate construction employment should have fallen about 900,000 since early 2006 when in fact it’s only down 150,000. They conclude 500,000 of the unexplained gap is attributable to layoffs of illegal Hispanic workers.

To update the numbers, residential construction employment is off 477,000 from the peak, but there are still close to 1 million too many jobs based on starts and completions.

The uncounted illegal immigrant argument is important for the impact on the economy, but it doesn't seem to explain why the BLS employment numbers haven't fallen more. Although the BLS is missing the job losses for illegal workers on the way down, they also didn't count them on the way up either.

Although miscounted illegal workers probably explains some of the fewer than expected BLS reported job losses, there are two other explanations that make sense:

Some construction employees have moved from residential to commercial work, but they are still being reported as residential construction employees to the BLS.

Many workers are still employed, but they are working far fewer hours.

The answer is probably a combination of all of the above.

by Calculated Risk on 6/04/2008 06:43:00 PM

From the LA Times:



Merced provides a great contrast to Oceanside. Both areas have been inundated with foreclosures, and REOs are driving prices sharply lower.

In Oceanside (at least some areas), the prices have reached levels attractive to some investors. The rental market is tight in coastal north county San Diego, and these investors will provide somewhat of a floor on prices.

However in Merced, it appears there are simply more homes than households. This is farm land, and is definitely not a 2nd home location.

by Calculated Risk on 6/04/2008 05:36:00 PM

Here is an email from Accredited:

Dear Valued Brokers, In recent months, the associates at Accredited Home Lenders, Inc. (Accredited) have made great strides to carry the Company through the challenging business climate our industry is facing and to position Accredited for a successful future.  Today, we will be taking steps that will further enable us to allocate our resources in the most efficient manner possible with minimal disruption to our brokers.  Accordingly, Accredited's operations centers in Orange, California; Beaverton, Oregon; St. Petersburg, Florida; and Woodcliff Lake, New Jersey will be closing today.  Loan files currently on site at these locations will be expedited to our Headquarters in San Diego, California, where they will continue to be processed with the high levels of service you have come to expect from Accredited.  We are committed to working diligently toward ensuring there are no delays in the underwriting, closing, or funding of these re-routed files, or the files currently in process in San Diego. Accredited will be providing brokers affected by these closures with more specific information and contacts in the San Diego office this afternoon. As always, we appreciate your business and look forward to continuing a successful partnership in the future.