by Calculated Risk on 11/18/2008 01:55:00 PM

From DataQuick: Southland October home sales climb to highest level of the year

Southern California home sales rose unseasonably last month from September as buyers shook off gloomy financial news and took advantage of often-steep discounts. The median sale price fell to $300,000 - a 67-month low - as foreclosures once again accounted for half of all resales ...

Fueled by lower prices, Southland sales have risen on a year-over-year basis for four consecutive months, breaking a 33-month streak of annual declines.
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"You could easily imagine a meaningful decline in sales last month, given the seasonal norm and the dire financial news that potential buyers had to ponder in September. But we have yet to see any big, sudden drop in the number of transactions closing escrow. It tells us there were a lot of very serious buyers in the market during late summer and early fall - buyers who consider housing a relatively good buy or investment," said John Walsh, DataQuick president.

Last month's record annual sales increase reflects two things: Very weak sales a year ago on the heels of the August credit crunch and earlier subprime meltdown, and this year's big sales gains in inland markets where prices have fallen 30 percent or more. Depreciation in such areas has triggered record foreclosures, which tend to sell at a discount, attracting bargain hunters.

Fifty-one percent of existing homes that closed escrow in October were foreclosed on at some point in the prior 12 months. That's up from a revised 50.0 percent in September and 16.0 percent in October 2007.

by Calculated Risk on 11/18/2008 01:03:00 PM

From MarketWatch:Home builders' index falls to record-low 9 in November

U.S. home builders have never been as anguished about their industry as they were in early November, with their monthly market index gauge plunging five points to a record low 9, the National Association of Home Builders reported Tuesday. "We are in a crisis," said Sandy Dunn, chairman of the NAHB.

This graph shows the builder confidence index from the National Association of Home Builders (NAHB).

The builder confidence index was at a record low in November.

Usually housing bottoms look like a "V"; this one will probably look more like an "L". (this refers to activity like starts and sales, but will probably also be apparent in the confidence survey).

Press release from the NAHB: Builder Confidence Plummets; Congress Needs To Act

Builder confidence in the market for newly built single-family homes plunged in November as worsening problems in the financial markets, job market weakness and overwhelming uncertainty about the economy continued to negatively impact consumer behavior, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. The HMI sank five points to 9, the lowest level recorded since the series was created in January of 1985.

“Today’s report shows that we are in a crisis situation. If there’s any hope of turning this economy around, Congress and the Administration need to focus on stabilizing housing,” said NAHB Chairman Sandy Dunn, a home builder from Point Pleasant, W.Va.. “Tremendous economic uncertainties have driven consumers from the housing market, and it’s going to take some major incentives to bring them back. Beyond the work that is being done to help reduce foreclosures, Congress must immediately incorporate such incentives for qualified buyers in a new economic recovery package.”

“The housing downturn has already cost America three million jobs in construction and related industries, and this downward momentum cannot be stemmed without substantive government intervention,” agreed NAHB’s new Chief Economist, David Crowe.

by Calculated Risk on 11/18/2008 11:53:00 AM

Another indicator that the CRE slump is here from HousingWire: Study: Real Estate Woes Move into CRE

Residential real estate woes are spreading into commercial real estate markets across the nation, with a report released Tuesday morning showing a 17 percent annual decline in the number of environmental site assessments conducted across the U.S. in the third quarter.

The data, released as part of a report from Environmental Data Resources Inc., is a key leading indicator of overall CRE market health; phase I environmental site assessments (called ESAs, in industry speak) are a standard pre-closing activity for many commercial real estate transactions.

The non-residential investment slump will be a signficant drag on Q4 GDP. Goldman Sachs is estimating business investment will subtract 0.8% from GDP in Q4 (worst case 2.7%!).

by Calculated Risk on 11/18/2008 10:40:00 AM

Fed Chairman Bernanke testified to Congress this morning that he sees some credit market progress:

"There are some signs that credit markets, while still quite strained, are improving. Interbank short-term funding rates have fallen notably since mid-October, and we are seeing greater stability in money market mutual funds and in the commercial paper market. Interest rates on higher-rated bonds issued by corporations and municipalities have fallen somewhat, and bond issuance for these entities rose a bit in recent weeks."

That is all true, but there has been no progress for the last few days.

The three month LIBOR declined slightly to 2.22% from 2.24%. The three-month LIBOR rate peaked (for this cycle) at 4.81875% on Oct. 10. (unchanged)

The yield on 3 month treasuries increased to 0.14% from 0.17%. (unchanged).

With the effective Fed Funds rate at 0.34% (as of yesterday), this is probably somewhat in the right range. At some point, I'd like to see the effective Fed funds rate close to the target rate (currently 1.0%) and the 3 month yield within 25 bps of the target rate.

But for now, the Fed is engaged in quantitative easing.

The TED spread: 2.10, up from 2.07 (unchanged)

The TED spread is stuck above 2.0, and still too high. The peak was 4.63 on Oct 10th. I'd like to see the spread move back down to 1.0 or lower. A normal spread is around 0.5.

The two year swap spread from Bloomberg: 104.25, down slightly from 108.75 (unchanged). This spread peaked at near 165 in early October, so there has been significant progress, but I'd like to see this below 100.

Weekly Fed Balance Sheet (update weekly on Thursday)

The Federal Reserve assets increased $139 billion last week to $2.214 trillion.

The A2P2 spread increased to 4.42 from 4.05, and down from 4.72 two weeks ago. (Worse).

This is the spread between high and low quality 30 day nonfinancial commercial paper.

The Fed is buying higher quality commercial paper (CP) and this is pushing down the yield on this paper (0.50% yesterday!) - and increasing the spread between AA and A2/P2 CP. So this indicator has been a little misleading. Also the recession is creating concern for lower rated paper. Still, if the credit crisis eases, I'd expect a significant decline in this spread.

Note: The Fed's balance sheet is interesting and I'll try to have more on how the Fed is funding their initiatives and quantitative easing. See Bernanke's paper from 2004: Conducting Monetary Policy at Very Low Short-Term Interest Rates One thing is clear - the target Fed funds rate is pretty much meaningless right now.

Another day with no improvement ... if anything, the minor movement is in the wrong direction.

by Calculated Risk on 11/18/2008 09:31:00 AM

From Federal Reserve Chairman Ben Bernanke's Testimony to Congress: Troubled Asset Relief Program and the Federal Reserve's liquidity facilities

There are some signs that credit markets, while still quite strained, are improving. Interbank short-term funding rates have fallen notably since mid-October, and we are seeing greater stability in money market mutual funds and in the commercial paper market. Interest rates on higher-rated bonds issued by corporations and municipalities have fallen somewhat, and bond issuance for these entities rose a bit in recent weeks. The ongoing capital injections under the TARP are continuing to bring stability to the banking system and have reduced some of the pressure on banks to deleverage, two critical first steps toward restarting flows of new credit. However, overall, credit conditions are still far from normal, with risk spreads remaining very elevated and banks reporting that they continued to tighten lending standards through October. There has been little or no bond issuance by lower-rated corporations or securitization of consumer loans in recent weeks.

by Calculated Risk on 11/18/2008 08:51:00 AM

From the Home Depot Press Release today:

Given the continued softness in the housing and home improvement markets as well as negative macro economic conditions, the Company now believes that fiscal 2008 sales could be down as much as 8 percent for the year.

Back in August, Home Depot forecast 2008 sales off 5%:

[T]he Company believes fiscal 2008 sales will decline by approximately five percent ...

This forecast revision - just 3 months later - suggests a double digit sales decline in the 2nd half of '08 (to make up the difference in forecasts).

Ouch.

by Calculated Risk on 11/17/2008 11:13:00 PM

For those that miss all the yelling from the talking heads during the political season, the Onion panel debates if the government should stop dumping money into a hole (1 minuted 56 seconds). (hat tip jb)

by Calculated Risk on 11/17/2008 08:59:00 PM

Goldman Sachs has a research note out tonight asking: Fourth-Quarter GDP – How Bad Could It Be? Their answer: pretty bad.

The Goldman forecast is for a 3.5% annualized decline in GDP for Q4. But in the research note tonight they calculate some alternative scenarios.

In a "just awful" scenario, Goldman estimates GDP could decline by 6% annualized in Q4, and in a "worst case" scenario by 7.8% (either would be the worst quarter since the early '80s). GDP was -7.8% annualized in Q2 1980 and -6.4% in Q1 1982.

Looking at the details, I think the "just awful" scenario is possible (with consumer spending off 5%), but the worst case is very unlikely. We will know more as PCE is released monthly.

Compare that to the National Association for Business Economics (NABE) forecast released this morning, from the WSJ NABE: ‘Prolonged’ Recession Expected:

According to NABE, 96% of survey respondents said the U.S. is in recession, with respondents split on whether it began in late 2007 to early 2008 or in the third quarter of this year. Gross domestic product contracted 0.3%, at an annual rate, during the third quarter. The NABE panel expects GDP to fall at a 2.6% rate this quarter and 1.3% in the first quarter of 2009.

Even though most NABE economists finally recognize the recession, I think they are still too optimistic. But the consensus could be correct - guessing inventory changes, government spending and even net exports is always tricky.

But the number could be shockingly bad, even for those of us that expect a really bad number.

by Calculated Risk on 11/17/2008 07:40:00 PM

From The Times: House rents fall as unsold properties flood market (hat tip James)

Rents fell for the first time in five years between July and October as home-movers flooded the rental market with properties that they could not sell.
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It is the first time since 2003 that the gauge of rental yields has turned negative. James Scott-Lee, of RICS, said: “Many vendors have been forced to become amateur landlords, creating an inevitable downward pressure on rents.”

Usually in a recession some people double up with friends or family - and that puts downward pressure on rents. This time there is also a huge number of "amateur landlords" renting out their unsold properties, and that is additional downward pressure on rents.

This is also happening in the U.S., see: Apartment Market Weakens

by Calculated Risk on 11/17/2008 06:21:00 PM

One of the credit indicators I was tracking was the activity in the Treasury's Supplementary Financing Program (SFP). This was the Treasury program to raise cash for the Fed's liquidity initiatives.

Once the Fed started paying interest on reserves, the supplemental financing program wasn't needed any more to sterilize the expansion of the Fed's balance sheet. The Treasury announced today that the program will be unwound.

The balance in the Treasury's Supplementary Financing Account will decrease in the coming weeks as outstanding supplementary financing program bills mature. This action is being taken to preserve flexibility in the conduct of debt management policy in meeting the government's financing needs.

More from MarketWatch: Unwind of special T-bill program will free up capital

The Treasury said the balance in its so-called supplementary financing account will decrease in coming weeks as bills in the program mature.
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The special financing program was created two months ago. The Treasury said it would issue bills separate from its regular borrowing program to help the Federal Reserve manage the impact of its efforts to pump extra money into the financial system, such as by lending money to broker-dealers.

The program, which peaked at $559 billion, effectively drained cash from the financial system, offsetting some of the Fed's efforts to pump more money into markets. An offsetting mechanism was necessary for the Fed to keep its effective fed funds target rate from slipping to 0%.
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The need for the Treasury's special financing program waned after the Fed started paying interest on bank reserves, which also took money from the financial markets, analysts said.

This is a minor but necessary step ...