by Calculated Risk on 7/18/2008 12:40:00 AM

From the WSJ: Mortgage Giant Freddie Mac Considers Major Stock Sale

Freddie Mac ... is considering raising capital by selling as much as $10 billion in new shares to investors ...

The main buyers for any new-stock issues are likely to be existing shareholders world-wide, according to one person involved in the discussion, adding that a definitive plan hasn't yet been determined.

In the short term, a sale of new shares might eliminate the need for the Treasury's help, but a government bailout might still be required later.

A little stock rally, and, well ... this seems extremely unlikely to me.

by Calculated Risk on 7/17/2008 09:17:00 PM

From Jon Lansner at the O.C. Register: O.C. office construction plummets 91%

Voit Commercial Brokerage reports that construction of O.C. office buildings plunged 90.8% in the second quarter to 325,276 square feet. Last year in the second quarter, 3.5 million square feet was under construction.
...
All the added space pushed the second quarter office vacancy rate to 14.46%. A year [ago], vacancies were at 8.95%. ... “You have two negatives — a lot of new product without tenants and you have got an economic slowdown,” says [Jerry J. Holdner Jr., Voit vice president of market research].

Take a drive at sunset down the 405 and you will see through a number of new buildings. Nice shiny empty glass towers ...

by Calculated Risk on 7/17/2008 07:00:00 PM

Cartoonist Stu Reese has drawn a series of a real estate related cartoons.

Here is his main site: Stu's Views.

Stu has generously offered to allow CR readers to preview, rate and offer suggestions on his new real estate cartoons.

Here is the preview page (removed) with 18 cartoons. This will only be posted for a short period.

You guys know real estate - and you know funny too - I'm sure he'd appreciate any suggestions.

by Calculated Risk on 7/17/2008 06:00:00 PM

Conference Call: (hat tip Brian) all emphasis added

Comments on the economy:

“While these credit metrics reflect modest credit pressure in the second quarter, there was a more pronounced deterioration in economic indicators. We assume this will translate into additional credit pressure in future quarters causing us to increase our [provisions for losses] in the second quarter. You may recall that we began tightening our under writing in the fourth quarter of 2007. You can see the affects of this tightening in our loan growth in quarter. Managed loans declined $800 million as we have been more selective in originating new loans. We have been focused on those business segments with [stronger profitability]”

Outlook for charges in the card business:

“The managed charge off rate increased in the quarter consistent with the low 6% range of expectations we discussed a quarter ago. The increase in charge off rate resulted mostly from the continuing deterioration of the U.S. economic environment. We expect average offs in the third quarter to remain in the low 6% range and rise to about 7% in the fourth quarter. We expect charge offs to increase as a result of three factors. First, expected seasonal patterns would result in higher charge off levels in the fourth quarter, all else equal. Second, [ we see deterioration] in economic indicators. The impact of economic weakening is likely to be evident in our U.S. charge offs in the fourth quarter and finally the initial impacts of the payments [regulations] that I discussed last quarter are expected to begin in the fourth quarter”

More bad news for the consumers looking for car loans:

“Looking beyond the second quarter our auto finance business continues to face challenges from the season of 2006 and 2007 originations and cyclical headwinds. Auto resale values are falling as a result of declining auto sales and the rapid shift in consumer preferences to more fuel efficient cars as gas prices continue to rise. To address these challenges we took aggressive steps to retrench and reposition our auto business last quarter... We are pulling back on originations and shrinking loans outstanding while improving the credit characteristics of the portfolio. We are leveraging pricing opportunities in the face of shrinking supply and we are reducing operating costs. Originations for the second quarter were $1.5 billion, 38% lower than the first quarter and 49% than a year ago. We expect auto loan originations for the full year of 2008 to be at least 40% lower than 2007 originations The total auto loan portfolio shrank by $1.7B to date.”

by Calculated Risk on 7/17/2008 05:19:00 PM

From the WSJ: Write-Downs Push Merrill Lynch Into Red for 4th Straight Quarter

Merrill Lynch & Co. posted its fourth consecutive quarterly loss on $9.75 billion in additional write-downs on assets tied to the tanking housing market.
...
The negative revenue resulted from $3.5 billion in write-downs on collateralized debt obligations, a $2.9 billion loss related to hedges with financial guarantors, a $1.7 billion write-down on the investment portfolio of Merrill Lynch's U.S. banks, and $1.3 billion write-down related to residential mortgage exposures and a $348 million write-down related to leveraged finance commitments.
...
Moody's Investors Service downgraded Merrill's senior long-term debt after the report one notch to A2 ...

This is far worse than expected. CNBC forecast write downs of $3 billion to $5 billion. Ouch.

by Calculated Risk on 7/17/2008 04:23:00 PM

Update: Here is the Merrill Press Release. (hat tip Dwight)

From MarketWatch: Merrill reports quarterly net loss of $4.65 billion

Merrill Lynch ... reported a $4.65 billion second-quarter net loss late Thursday as the brokerage firm continued to be hit by write-downs on large mortgage-related exposures.

On Capital One: Capital One income falls 40% on drop in U.S. card income

Capital One ... added $37.6 million to its second-quarter provision expenses. The managed charge-off rate for its national lending division increased 0.33 of a point to 5.67% from the first quarter.

The Merrill story (waiting for details) is more mortgage losses. The Capital One story is the spillover into credit card debt.

by Calculated Risk on 7/17/2008 02:47:00 PM

From DataQuick: Bay Area median price dives below $500K; sales near record low

The median price paid for a Bay Area home plunged to $485,000 in June, marking the first time in more than four years that it was below the half-million mark, DataQuick Information Systems reported.

The price barometer fell an unprecedented 27 percent from its record level a year ago as more sellers settled for less, lenders unloaded more aggressively-priced foreclosures and more sales activity shifted to less- expensive areas, mainly inland. Credit remained tightest for potential high- end buyers on the coast, where sales were generally anemic and prices showed signs of increased erosion, the real estate information service reported.

June's $485,000 median was 6.2 percent below May's $517,000 and 27.1 percent lower than the peak $665,000 median reached in June and July of 2007. Last month's median was the lowest since it was $469,500 in March 2004. The median first surpassed $500,000 in May 2004.

The median has fallen on a year-over-year basis for seven consecutive months, the result of both widespread depreciation, most pronounced inland, and a shift of sales towards lower-priced markets.
...
A total of 7,178 new and resale houses and condos sold across the nine- county Bay Area in June. That was up 15.5 percent from 6,216 in May but down 9.9 percent from 7,964 for June 2007.

Although last month's sales were the highest since last August, it was still the second-lowest June in DataQuick's statistics, which go back to 1988. The last time June sales were lower was in 1993, when 7,118 homes sold.
...
Last month foreclosure resales made up 28.7 percent of all Bay Area resales, up from 27.6 percent in May and 3.5 percent a year ago. They ranged from as little as 3 percent of resales in San Francisco to as much as 57.7 percent in Solano County.
...
Foreclosure activity is at record levels ...

Median prices are distorted by the mix - so I prefer the Case-Shiller repeat sales index for prices. Just like in SoCal, foreclosure resales are dominating the market in the lower priced areas - and foreclosures are increasing almost everywhere (although only 3% of San Francisco sales).

by Anonymous on 7/17/2008 02:14:00 PM

Mr. Dimon of JP Morgan, via Housing Wire:

“Prime [mortgage book] looks terrible,” he told analysts on the call. “And we’re sorry, and there’s nothing else we can say."

by Calculated Risk on 7/17/2008 01:29:00 PM

First, the reason overall starts were higher in June was because a pending change in the building code in New York temporarily boosted multi-family starts. See: New York Anomaly Lifts Housing Starts

“All the increase in headline starts and permits reflects a rush to begin multi-family construction projects ahead of a change in the N.Y.C. building code.”
Ian Shepherdson, an economist at High Frequency Economics

Next month multi-family starts will probably decline. As I noted this morning, single family starts are at the lowest level since 1991.

Also important is that single family completions will probably decline another 20% over the next 6 months.

Click on graph for larger image in new window.

This graph compares single family housing starts (shifted 6 months into the future) with single family completions. This suggests that unless housing starts rebound quickly (like in '91), completions will probably fall to under 700 thousand by the end of 2008.

This decline in completions will impact residential construction employment and suggests a further significant decline in residential investment.

So will starts rebound? The answer is probably in the home builder confidence index.

This is the builder confidence index from the NAHB. In 1991, the housing bottom looked like a "V" for both housing starts and builder confidence.

This time builder confidence is staying at record lows suggesting there will be no rebound this year - and completions, residential investment and residential construction employment will continue to decline sharply.

This is exactly what we expect based on supply and demand too. There is too much supply of existing homes, especially distressed supply like foreclosures and short sales,and too little demand with tighter lending standards, for any rebound in new home sales and single family starts this year.

by Calculated Risk on 7/17/2008 10:16:00 AM

Here is the Philadelphia Fed Index for July activity released today: Business Outlook Survey.

Here are a couple key point:

Manufacturing is contracting, but not getting crushed like in previous recessions. This is helping to keep the unemployment rate from rising too quickly.

Prices are rising. "The prices paid index increased six points, to 75.6, its highest reading since March 1980."

Click on graph for larger image in new window.

This graph shows the Philly index vs. recessions for the last 40 years. There were a times the index was this low without a recession - so the reading today doesn't mean the economy is in recession. However it is very likely that the economy is already in recession.

From the release, weaker conditions and higher prices :

Indicators Reflect Continued Weakening

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, edged slightly higher, from -17.1 in June to -16.3 this month. The index has now been negative for eight consecutive months. Other broad indicators remained negative and little changed. The survey’s new orders index was essentially unchanged at -12.1, and the current shipments index decreased one point, from -6.7 in June to -8.0 this month. Indexes for unfilled orders and delivery times, already negative, declined six points and three points, respectively.

Indicators for employment and hours worked were consistent with negative readings in other broad indicators. The current employment index declined from -6.9 in June to -7.3, its sixth negative reading in seven months. The percentage of firms reporting a decrease in employment (24 percent) exceeded the percentage reporting an increase (17 percent). The average workweek index fell four points; it has now been negative for seven consecutive months.

Manufacturers Continue To Report Price Pressures

A larger share of firms — 77 percent, up from 72 percent in June — reported higher input prices this month. The prices paid index increased six points, to 75.6, its highest reading since March 1980.