by Calculated Risk on 9/05/2008 10:17:00 AM

From MarketWatch: Homes in foreclosure process set another record

The rate of mortgages entering foreclosure hit another record high in the second quarter, as did the percentage of loans somewhere in the foreclosure process, the Mortgage Bankers Association reported on Friday.

The delinquency rate, which measures mortgages that aren't in foreclosure but have at least one overdue payment, also was the highest ever recorded in the MBA's quarterly survey.
...
The percentage of loans that entered the foreclosure process in the second quarter was 1.08%, up from 1.01% in the first quarter and 0.59% a year ago. Meanwhile, 2.75% of loans in the survey were somewhere in the foreclosure process, up from 2.47% last quarter and 1.4% in the second quarter of 2007.

The delinquency rate was 6.41% of all loans outstanding, according to the survey. The rate was 6.35% in the first quarter, and 5.12% a year ago.

Update: There are problems everywhere (as I've pointed out numerous times), but there are several states that stand out (California and Florida top the list). A key question is subprime vs. Alt-A and Prime delinquencies - I don't have an answer yet.

by Calculated Risk on 9/05/2008 08:40:00 AM

Click on graph for larger image.

This graph shows the unemployment rate and the year over year change in employment vs. recessions.

Nonfarm payrolls decreased by 84,000 in August.

The unemployment rate has risen to 6.1 percent.

Year over year employment is now negative (fewer American were employed in Aug 2008 than in Aug 2007). This is a very weak report - more to come.

by Anonymous on 9/05/2008 08:24:00 AM

Well, actually, it appears we've all been fraudulently induced for a long time but just didn't catch on until recently. Dear reader East Northport Slob sent me the link to this Village Voice article, which you think when you start reading it is just another one of those "lenders hose up foreclosure paperwork" things we've been reading for a long time, but then suddenly gives you this:

Catherine Austin Fitts, former Assistant Secretary of Housing and Urban Development, adds a new twist: She believes that borrowers can fight foreclosure because "most mortgages issued in this country from 1996 on were fraudulently induced."

Fitts said in cases of fraudulently induced loans lenders "knew they were issuing mortgages that were not affordable to the borrower," and the borrower "may not owe the money back because they essentially failed to disclose something about [the borrowers]' financial situation that they knew and the borrower didn't."

I'm sure we all have the same questions here: Who the hell is Catherine Austin Fitts? Why 1996? And how do you fraudulently induce people to sign a mortgage by failing to disclose to people some fact about their own financial situation?

I don't think I can help you with the last two, but I did some checking with Dr. Google on the first one. Let's let Ms. Fitts introduce herself:

In 1989, I was serving as Assistant Secretary of Housing. The housing bubble of the 1990’s had burst, and foreclosures were rising.

The "housing bubble of the 1990's" burst in 1989? Is there a wrinkle in the time-space continuum? Is The Truth Out There?

The mortgage insurance funds of the Federal Housing Administration (FHA) were experiencing dramatic losses. We were losing $11 mm a year in the single-family fund. All funds had lost $2 billion in the southwest region the year before.

My staff and I did an analysis of what had caused the losses. What were the actions that we could take?

Fraud aside, the single biggest cause of losses in the FHA portfolio was a falling Popsicle Index – an index that we coined as a rule of thumb to express the health of the living equity within a place.

The Popsicle Index is the percent of people who believe that a child can leave their home, go to the nearest place to buy a popsicle, and come home alone safely. It’s an expression of the sense of intimacy and well being in a place.

Not surprisingly, there is a correlation between the financial equity or wealth in a place and the living equity or human and natural wealth. Where the people, living things and land are happy, businesses thrive, and the value of real estate is good.

This seems to imply that if we could just cheer up our shrubberies, real estate values would improve substantially. I confess to wondering what could cause a "bubble" under this conception of things, but this may be because I'm still stuck in the wrong paradigm:

The Popsicle Index is the % of people who believe a child can leave their home, go to the nearest place to buy a popsicle or snack, and come home alone safely. For example, if you feel that 50% of your neighbors believe a child in your neighborhood would be safe, then your Popsicle Index is 50%. The Popsicle Index is based on gut level feelings of the people who have intimate knowledge of a place, rather than facts and figures.

I'm pretty sure that I feel that at least 50% of my neighbors believe that granite countertops are like a retirement account you can put hot pans on, but certain ugly facts and figures keep intruding on the conversation. Or, well, maybe not, given that since 1996 most of us weren't told the facts and figures about our financial situation in order to fraudulently induce us to buy homes with borrowed money. Or something like that.

Frankly, the Village Voice reporter should have hung up the phone here and gone out for a Popsicle. In fact, I suggest we all go out for a Popsicle. I for one feel safer out on the streets than indoors reading the news some days.

by Calculated Risk on 9/05/2008 12:06:00 AM

Some people asked for photos of my hike along a portion of the John Muir Trail. This photo is of Cathedral Lake, about 18 miles from Yosemite Valley. It is quite a climb to this point - about 5,700' of elevation gain from Yosemite Valley over Cathedral Pass.

Click on photo for larger image in new window.

Unfortunately one of my friends had to drop out at Tuolumne Meadows, and I wasn't able to continue (minor foot injury) after reaching Red's Meadow near Mammoth the second day.

It was still great fun. Hopefully I'll have more photos of my next trip.

For those wanting more, here are some photos I posted from my Yellowstone trip in 2005.

by Calculated Risk on 9/04/2008 07:47:00 PM

This is an update to an earlier post in April.

Click on graph for larger image in new window.

This graph shows the loaded containers per month - inbound and outbound - for the ports of Los Angeles and Long Beach combined.

Note: container traffic doesn't tell us about value, but it gives us a general idea on import and export volumes. We have to wait for the monthly trade deficit report for dollar values.

Imports have been surging for years, but import traffic started to decrease last year. For the last two month, import traffic averaged a decrease of 12.1% year-over-year.

Recently exports have picked up, and for the last two months export traffic has increased an average of 17.8% year-over-year.

Although this is just two Los Angeles area ports, this fits with the declining trade deficit (see 2nd graph). For export businesses in the U.S., these have been good times. However, as San Francisco Fed President Dr. Yellen noted this morning, the global slowdown might start to impact exports:

"[E]xport growth alone contributed one-half of the total real GDP growth registered in the second quarter. This element has been an important source of strength in our economy for over a year, being buoyed by strong growth abroad and by the weakening of the dollar. However ... in recent months the dollar has risen somewhat and economic growth in many of our industrialized trading partners has slowed or even turned negative, suggesting that we can no longer count on exports as an important source of strength."

Here is a graph of the trade deficit (June is the most recent data).

The red line is the trade deficit excluding petroleum products. (Blue is the total deficit, and black is the petroleum deficit). The oil deficits in July and probably August will be ugly, but it now looks like the oil deficit will decline sharply later this year. Note: import oil prices are calculated when oil is delivered, so there is a lag between future prices and import prices.

The ex-petroleum deficit is already falling fairly rapidly with weak imports and strong exports.

Back in April I asked what would be the impact of slowing imports on China and on oil prices? I noted the dramatic decline in the Shanghai index:

The Shanghai SSE composite index is now below 2,277, the lowest since the amazing run up started in 2006. The index is off over 61% from the peak. This suggests a slowdown in the Chinese economy, and probably less business investment in China.

And the SSE index will probably fall further tonight after the 344 decline in the DOW today.

And as far as oil prices, the decline has been sharp, with prices now down by about one third from the peak. This could have serious implications for OPEC, see the NY Times: As Oil Prices Fall, OPEC Faces a Balancing Act and my speculation back in March: Petroleum Prices and GCC Spending

There is no longer any discussion of decoupling of the U.S. and world economies (something that never made sense to me). Now the questions are: Will U.S. exports continue to grow as economic growth slows or turns negative for U.S. trading partners? And will a combination of some U.S. export growth and lower oil prices provide enough of a cushion to keep the U.S. out of a severe recession? I think so, but the next several quarters will be especially ugly in the U.S. with rising unemployment, less business investment, and probably negative Personal Consumption Expenditures (PCE), or in Dr. Yellen's words "decidedly subpar" (and she wasn't discussing golf).

by Calculated Risk on 9/04/2008 05:56:00 PM

Tropical Storm Hanna is threatening the Carolinas (and the eastern seaboard), but Hurricane Ike might be a more serious concern for Miami and South Florida. It's still early, and Ike could stay at sea - but this reminds me that the 1920s Florida housing bust had just begun when the Great Miami Hurricane of 1926 struck ... from Wikipedia:

The 1926 Miami Hurricane (or Great Miami Hurricane) was an intense hurricane that devastated Miami, Florida in September 1926. The storm also caused significant damage in the Florida Panhandle, the U.S. state of Alabama, and the Bahamas. The storm's enormous regional economic impact helped end the Florida land boom of the 1920s ...

by Calculated Risk on 9/04/2008 02:38:00 PM

From San Francisco Fed President Janet Yellen: The U.S. Economic Situation and the Challenges for Monetary Policy

Regrettably, the nation's economy has been in rough waters for over a year now. Last summer, a precipitous slide in house prices triggered a crisis in financial markets and a credit crunch that is making it hard for consumers and some firms to borrow. These developments are ongoing and perhaps deepening, as banks and other financial intermediaries are continuing to delever by scaling back their balance sheets and shrinking their lending activity. Indeed, some sources of funding have completely dried up. In the face of these developments, firms and consumers have also been pulling back, causing unemployment to rise.

And on the U.S. outlook:

Turning to the national economy, it was recently reported that growth in the second quarter came in at a fairly robust rate of 3¼ percent.
...
While one might be tempted to interpret the recent strong numbers as a sign that things are turning around, there are three important reasons to think that the strength will not hold up, and that economic performance will be decidedly subpar in the second half of the year. First, consumer spending in the second quarter came in at only a moderate rate, even though it was boosted by substantial tax rebates. But there are no plans in place to repeat those rebates, so by the fourth quarter, the economy will no longer benefit from that fiscal stimulus.

Second, export growth alone contributed one-half of the total real GDP growth registered in the second quarter. This element has been an important source of strength in our economy for over a year, being buoyed by strong growth abroad and by the weakening of the dollar. However, as I discussed, in recent months the dollar has risen somewhat and economic growth in many of our industrialized trading partners has slowed or even turned negative, suggesting that we can no longer count on exports as an important source of strength.

Third, the problems in the housing markets, financial markets, and labor markets continue to be a drag on growth and employment. Fortunately, the recent fall in commodity prices should help to cushion some of this downward pressure on activity. Overall, I anticipate that real GDP growth in the second half of this year will come in below the growth of potential output which implies that the unemployment rate will rise. On its own, this obviously is not good news. And its interaction with the housing and financial markets raises the potential for worse news—a deepening of the adverse feedback loop I've been describing: more unemployment causing more people to fall behind on their mortgage payments, leading to further delinquencies and foreclosures, tighter credit conditions and further downward pressure on activity and employment. This kind of process represents a downside risk for the economy, especially if it intensifies the sagging consumer and business confidence we've seen.
all emphasis added

Dr. Yellen has probably been the most bearish Fed President, especially on housing. Her focus on unemployment (and exports) and the potential negative adverse feedback loops is very important. "Decidedly subpar" is about as close as a Fed President ever comes to predicting a recession.

by Calculated Risk on 9/04/2008 01:47:00 PM

"I think it likely that our movement through the muck and the flotsam and jetsam of the credit and housing debacle will be sluggish, and it may take some time into 2009 for us to get the economy back up to a snappier cruising speed."
Dallas Fed President Richard W. Fisher

From Dallas Fed President Richard W. Fisher: Economic Challenges

The housing market has yet to find its bottom; credit markets remain tempestuous; creditors are tightening their standards; consumers and businesses are battening down the hatches and reefing in their sails. The prices of Chinese and other emerging country labor and inputs we have come to depend on have been rising; business margins are being squeezed; consumers are suffering from declining real incomes; savers and investors are confronted with negative real rates of return. These are hardly fortuitous circumstances.

My view is Fisher has been behind the curve on the economic slowdown, although he is clearly more pessimistic now.

by Calculated Risk on 9/04/2008 11:36:00 AM

Peter Viles at the LA Times (L.A. Land blog) has some excerpts from a Credit Suisse report projecting that house prices might bottom in late 2009. See: Credit Suisse: Home price declines likely until late '09

The report, using two separate methods of predicting home price trends, says both methods "point to home prices moving back in line with past historical 'equilibrium' levels in 12 to 18 months..." The report notes that housing prices could "overshoot" their equilibrium levels, and fall for even longer than 12 to 18 months, in which case, "'cheap' housing is still about two years away."

I think price to rent ratios are helpful, but have flaws. I wouldn't use median house prices because the mix of homes impacts the median price.

Also the Credit Suisse projection of prices declining for another 12 to 18 months is based on prices continuing to fall at the current rate. Historically, during a housing bust, price fall slowly at first, then decline more rapidly for a couple of years, and then slowly for several more years until the eventual bottom. Right now we are in the rapid price decline phase. So I'm still expecting prices to fall for some time (although I expect price declines to start to slow), with a price bottom in the 2010 to 2012 period in the bubble areas, and perhaps sooner in other areas (less bubbly areas and certain low end areas).

One thing is pretty certain - as long as inventory levels are elevated, prices will continue to decline. And right now the inventory of existing homes (especially distressed properties) is at an all time high.

On price to rent ratios, back in October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter: House Prices and Fundamental Value.

Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

I've posted on this before, and here is an update to their graph through Q2 2008:

Click on image for larger graph in new window.

This graph shows the price to rent ratio (Dec 1982 = 1.0) for both the OFHEO House Price Index and the Case-Shiller National Home Price Index. For rents, the national Owners' Equivalent Rent from the BLS is used.

The Fed letter used the OFHEO index (Blue), but this index includes refinances and has other problems. The OFHEO index shows that prices have barely fallen from the recent peak, and therefore the price-to-rent ratio has barely declined.

Data is available quarterly for the Case-Shiller National Index starting in 1987. For this graph, the price-to-rent ratio for Case-Shiller in Q1 1987 was set to the OFHEO price-to-rent for Q1 1987.

Looking at the price-to-rent ratio based on the Case-Shiller index, the adjustment in the price-to-rent ratio is probably 60% complete as of Q2 2008 on a national basis. This ratio will probably continue to decline with some combination of falling prices, and perhaps, rising rents. And, as Credit Suisse analysts noted, the ratio may overshoot too.

The second graph shows the price-to-rent ratio for three cities: Los Angeles, Miami, and New York. On this monthly graph, January 1987 = 1.0. The OER from the BLS for each individual city is used.

Some combination of falling prices, and perhaps rising rents, will probably push the ratio back towards 1.0. By this measure of housing fundamentals, it appears that Miami has corrected about 75% of the way to the eventual bottom, Los Angeles about 60%, and New York about 40%.

Some people are seeing the start of a price bottom in Florida, from Bloomberg: Florida Real Estate Bottom Signaled by Sale of Distressed Condo

Sales of distressed Miami properties have begun, signaling a bottom for south Florida's real estate market and the end of waiting for vulture funds armed with about $30 billion to spend.
...
``There's a purging going on,'' [Jack McCabe, McCabe Research & Consulting LLC] said. ``It's my belief that the vulture buyers would form the bottom of the real estate market, and we're almost there. That bottom may last for three years as foreclosure sales go on.''

The price-to-rent ratio would suggest that parts of Florida are indeed "almost there". But with the high level of inventory, prices will probably decline further, and the bottom in real terms is probably still a few years away.

Price-to-rent ratios are useful, but somewhat flawed. They give a general idea about house prices, but there are other important factors (like inventory levels, price to income and credit issues). We are getting closer on prices, but I think we still have a ways to go.

by Calculated Risk on 9/04/2008 10:06:00 AM

"Respondents' comments remain mixed about business conditions and reflect concern about the uncertainty of the economy."
Anthony Nieves, ISM Vice President

From the Institute for Supply Management (ISM):

Economic activity in the non-manufacturing sector grew in August, say the nation's purchasing and supply executives ...

The index increased 1.1 percentage points in August to 50.6 percent. Anything above 50 indicates expansion. So this report suggests modest expansion in the service sector in August after two months of contraction.

The employment index declined to 45.4.