by Calculated Risk on 9/11/2008 09:44:00 AM

Lehman is off 40% in early trading.

From the WSJ: Lehman Struggles To Shore Up Confidence

As Lehman Brothers Holdings Inc. stock teetered in recent weeks, Chairman and Chief Executive Richard Fuld Jr. called Wall Street executives to make sure they were still trading with his embattled firm and offering it credit. Rumors about the firm's health kept popping up, he groused to other executives.

"I feel like I'm playing whack-a-mole every day," Mr. Fuld said, according to people familiar with the calls.

Probably more whack-a-mole today.

BTW, WaMu is off another 20%.

by Calculated Risk on 9/11/2008 09:05:00 AM

The DOL reports on weekly unemployment insurance claims:

In the week ending Sept. 6, the advance figure for seasonally adjusted initial claims was 445,000, a decrease of 6,000 from the previous week's revised figure of 451,000. The 4-week moving average was 440,000, an increase of 250 from the previous week's revised average of 439,750.

Click on graph for larger image in new window.

The first graph shows weekly claims. The four moving average is at 440,000.

This is a very high level, and indicates continued weakness in the labor market.

Continued claims are now above 3.5 million for the first time since 2003.

The advance number for seasonally adjusted insured unemployment during the week ending Aug. 30 was 3,525,000, an increase of 122,000 from the preceding week's revised level of 3,403,000. The 4-week moving average was 3,429,000, an increase of 36,750 from the preceding week's revised average of 3,392,250.

By these measures, the economy is clearly in recession.

by Calculated Risk on 9/10/2008 09:55:00 PM

Since investment in non-residential structures is about to slow (especially malls, hotels, and offices), a key question is how did the commercial real estate (CRE) investment boom compare to the residential housing bubble?

The following graph shows residential investment compared to investment in non-residential structures (excluding Power and Petroleum exploration) as a percent of GDP since 1960. All data from the BEA.

Note: Residential investment is primarily single family structures, multi-family structures, commissions, and home improvement.

Click on graph for larger image in new window.

The recent housing boom and bust is very clear (in red). But this shows that the recent boom in non-residential investment (ex power and petro) was not as excessive as the housing bubble.

Also, the recent boom for CRE was much less than the S&L related boom in the '80s, and even less than the late '90s office boom.

Some areas of non-residential investment have been overbuilt (especially hotels and malls, and offices somewhat). But those looking for a collapse in CRE investment of the same size as the current residential investment bust are wrong.

by Calculated Risk on 9/10/2008 04:55:00 PM

This morning the WSJ and the NY Times had articles on Mall troubles. See WSJ: Mall Glut to Clog Market for Years and NY Times: A Squeeze on Retailers Leaves Holes at Malls

This should come as no surprise. Historically investment in non-residential structures lagged investment in residential by 5 to 8 quarters. The reasons are pretty clear - the commercial builders (for malls, offices, lodging, etc.) don't build until the residential is in place, and the commercial build cycles are usually longer than residential.

It appears we are now at the end of a Commercial Real Estate (CRE) boom based on the following:

"[W]e’ve seen a dramatic contraction in design activity in recent months. ... This weakness in design activity can be expected to produce a contraction in [commercial and multifamily] construction sectors later this year and into 2009.”
AIA Chief Economist Kermit Baker, June 18, 2008

Click on graph for larger image in new window.

From the American Institute of Architects: Architecture Billings Index Continues in Negative Territory

As a leading economic indicator of construction activity, the ABI shows an approximate nine to twelve month lag time between architecture billings and construction spending.

The key here is that the index fell off a cliff in early 2008, and that there is "an approximate nine to twelve month lag time between architecture billings and construction spending". We should expect weaker non-residential structure investment in the second half of 2008 and throughout 2009.

From the Fed: The July 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices

Of particular interest is the increase in tighter lending standards for Commercial Real Estate (CRE) loans. This graph compares investment in non-residential structure with the Fed's loan survey results for lending standards (inverted) and CRE loan demand.

Note that any reading below zero for loan demand means less demand than the previous quarter. This is strong evidence of an imminent slump in CRE investment.

This graph based on data from the Federal Reserve shows the delinquency rates at the commercial banks for three key categories: residential real estate, commercial real estate, and consumer credit cards.

Commercial real estate delinquencies are rising rapidly, and are at the highest rate since Q1 '95 (as delinquency rates declined following the S&L crisis).

It should be no surprise that investment in CRE will decline in the 2nd half of 2008 and in 2009.

by Calculated Risk on 9/10/2008 02:29:00 PM

From the Lehman conference call:

"[The Lehman] base case assumes national home prices drop 32% peak to trough, vs. 18% to date, with California down 50% vs 27% to date."
Ian T. Lowitt, Lehman CFO

The 18% corresponds to the reported decline in the S&P Case-Shiller U.S. National Home Price Index through Q2 (so I believe Lehman is using the Case-Shiller index or something very similar).

In other words, Lehman's base case assumes that house prices have fallen just more than half way from the peak.

It was just last December that Ben Stein argued Goldman's projection of a 15% peak-to-trough decline in national home prices was implausible (Goldman is projecting another 10% decline now). And Professor Krugman responded to Ben Stein:

For what it’s worth, Goldman’s forecast of a 15 percent decline in home prices seems implausible to me, too — but on the low side. A 15 percent decline would bring prices back to their level in early 2005 — when the bubble was already well inflated. If prices fall back to their level in early 2003, that’s a 30 percent decline.

Price declines still have a ways to go (see here for a discussion of real prices, price-to-rent ratio and price-to-income ratio).

by Calculated Risk on 9/10/2008 12:40:00 PM

BofA Presentation material is here.

Webcast here.

BofA just concluded a presentation. No story yet, but here are some headlines (hat tip Joshua and Brian):

BofA sees some softening on Commercial Asset Quality

Q3 to be "a little choppy" in capital markets.

BofA sees higher loss rates.

BofA's $13B home builder portfolio "not pretty"

BofA home builder losses grew faster than expected.

BofA see elevated credit costs, no "major pain"

BofA other commercial / industrial loans show weakness.

by Calculated Risk on 9/10/2008 11:31:00 AM

WaMu off another 28%. From Reuters: WaMu's CDS spreads surge to record high-Phoenix

Five-year credit default swaps on Washington Mutual traded at 40 percent upfront, plus 500 basis points annually, up from 32 percent upfront plus 500 basis points a year on Tuesday, according to data from Phoenix Partners Group.

Wow.

by Calculated Risk on 9/10/2008 11:16:00 AM

Mathew Padilla at the Mortgage Insider and the O.C. Register is tracking 10 REOs in Huntingon Beach, CA. to determine pricing and how quickly they sell. See: Time to buy a foreclosure in Surf City?

Although this is a small sample, it will be interesting to follow. There is also a slide show of the properties.

My initial reaction is that these prices are still too high. The following 3 BR / 2BA, 1,123 sq. ft. REO is being offered at $449,900. The house was built in 1960, and last sold for $610,000 in Sept 2006.

As houses sell, I'll include an update ...

by Calculated Risk on 9/10/2008 09:39:00 AM

Downpayment Assistance Programs (DAPs) are a symbol of the excesses and lack of oversight during the housing bubble. Basically DAPs allow the seller to provide the buyer with the 3% downpayment as a "gift". The FHA has been trying to eliminate these programs for several years - the IRS has called them a "scam" - and one of the provisions in the recent housing bill was to eliminate DAPs for FHA loans.

Some in Congress will not give up. Inman News reports: Congress weighs reprieve for seller-funded gifts (hat tip Jim Klinge)

A last-ditch effort to head off an Oct. 1 ban on the use of seller-funded down-payment assistance with FHA-backed loans is picking up steam as a compromise bill, that would mend rather than end the practice, gains momentum.

HR 6694, which would allow home builders to continue funneling down-payment assistance through nonprofit groups to home buyers using FHA loans, is certain to pass the House of Representatives and has the blessing of the Department of Housing and Urban Development, Rep. Barney Frank, D-Mass., said at a hearing on foreclosures this weekend.

DAPs encourage appraisal fraud, and lead to higher default rates for FHA loans.

HUD has sought to end the use of seller-funded down-payment assistance with FHA loans outright, claiming the practice artificially inflates home prices and that borrowers who relied on the gifts are more likely to default.

Although FHA loan guarantee programs have always been self-sustaining -- they are funded by premiums paid by borrowers, and not taxpayers -- HUD said the enormous growth in the use of seller-funded gifts and the poor performance of the loans threatens to put the insurance fund in the red.
...
At Saturday's hearing, Merced Mayor Ellie Wooten [a local Realtor] said the down-payment assistance program offered by Nehemiah Corp. of America was "heavily used" in Merced County.

"We are an agricultural community, and (farmworkers) are solid people, but many people don't have bank accounts with the 20 percent down payment," Wooten said. The minimum down payment for FHA guaranteed loans is now 3 percent, and is being raised to 3.5 percent on Oct. 1.

Perhaps this is part of the reason the foreclosure rate is so high in Merced. And what is this comment about a 20% downpayment? The FHA only requires 3.5% as of Oct 1st, and any potential home buyer that can't save (or borrow from friends and family) a small downpayment probably isn't ready to be a homeowner.

by Calculated Risk on 9/10/2008 09:12:00 AM

“We missed a golden opportunity that would have avoided a lot of the problems we’re facing now, if we hadn’t had such a firm ideological position at the White House and the Treasury and the Fed [in 2005].
...
All the handwringing and bedwetting is going on without remembering how the House stepped up on this. What did we get from the White House? We got a one-finger salute.”
former Congressman Mike Oxley (R-Ohio), Sept 9, 2008

From the Financial Times: Oxley hits back at ideologues (hat tip Paul Krugman)

Note: Greenspan was at the Fed. John Snow was the Treasury Secretary.