by Calculated Risk on 12/04/2008 12:17:00 AM

From Comscore: E-Commerce Spending Jumps 15 Percent on Cyber Monday to $846 Million, the Second Heaviest Online Spending Day on Record

For the holiday season-to-date, $12.03 billion has been spent online, marking a 2 percent decline versus the corresponding days last year. However, Cyber Monday saw $846 million in online spending, up 15 percent. The four-day period from Black Friday through Cyber Monday saw e-commerce spending jump 13 percent as both weekend days and Monday all achieved double-digit gains.

Click on graph for larger image in new window.

This graph from Comscore shows the weekly sales for compared to the last 5 years. Of course Thanksgiving was late this year, and that probably boosted "Cyber Monday". The most important weeks are coming up ...

For some very interesting analysis, Brian suggests these two posts from Rimm Kaufmann. Online Retail Stats: CyberMonday 2008 vs. 2007 and Online Retail Sales Stats: Consumers Buying But Spending Less

This suggests sales are basically flat, but volumes are up suggesting some serious discounting. Also note:

Impressions grew faster than clicks, indicating the engines earned lower effective CPM rates on their inventory.

Not the best of news for Google.

by Calculated Risk on 12/03/2008 09:18:00 PM

There were two stories published today concerning house prices and interest rates.

The first story came out this morning, and quoted a report from Global Insight suggesting "the housing market is now slightly undervalued". Please stop laughing ...

And later today, the WSJ reported that the Treasury would "purchase securities underpinning [GSE mortgage] loans at a price equivalent to the 4.5% rate". The purpose, according to the WSJ:

Treasury views this plan as potentially halting the slide in home prices by enabling borrowers to afford bigger mortgages, thus increasing demand for homes and pushing up home values.

The Treasury plan is only for purchase loans, not refis.

If we look at the Global Insight methodology for evaluating home prices, we see:

For example, a conventional 30-year mortgage of $200,000 carries a monthly cost of $1,468 with mortgage interest rates of 8 percent. At 6 percent, however, a homebuyer could service a far higher $245,000 mortgage with the same monthly expense.

Clearly both stories draw a strong connection between house prices and interest rates. But what is the relationship?

It is true that the rent vs. buy decision moves in the "buy" direction with lower interest rates.

Say someone is paying $1000 per month in rent, and they are interested in buying a $240,000 house with $24,000 down (10%). With a 6% mortgage rate the principle & interest (P&I) payment alone would be $1295 per month. Add in insurance, maintenance, mortgage insurance, property taxes and other costs and fees (like HOA) and subtract the income tax break, and it probably doesn't work.

We need a spreadsheet and more details to work it out exactly.

But at a lower mortgage rate - say 4.5% - the P&I would be $1,095 and depending on the other costs, and with all else being equal, buying might make sense.

But why would this push up prices as suggested by the Global Insight analysis? Prices would increase because of higher demand - not directly because of lower interest rates. A rational buyer wouldn't pay more just because the interest rate is lower - although they might have to pay more because the demand is greater. But the current buyer wouldn't pay much more, because the rational buyer would realize interest rates will probably not be artificially low when they try to sell, and their future buyer would have a higher interest rate and a lower price.

This suggests the Global Insight analysis is flawed, as is the "affordability index" from the NAR, or any other measure of house prices based on interest rates. In fact house prices are still too high as suggested by the price-to-income ratio and real prices.

The WSJ article correctly noted that lower interest rates "increas[e] demand for homes", but do they push up home values? The answer in the current environment is probably no.

This may be a little surprising since lower interest rates will likely increase demand.

In a perfect market, an increase in demand would push up prices. And an increase in supply with steady demand would lower the price enough to clear the market.

However, housing is an imperfect market - house prices are sticky downwards and typically take several years to adjust (what we are seeing!) - so even though there is currently far too much supply, prices still have not fallen far enough to balance supply and demand.

An increase in demand from current renters deciding to buy, would probably only make a small dent in the huge excess supply. And house prices would continue to fall - so the goal of supporting house prices would not be met.

In fact, it could be worse. Landlords, already struggling with high vacancy rates and falling rents, would probably lower their rents further and make the rent vs. buy decision more difficult again. So lower interest rates might not boost demand very much, it might just lead to lower rents.

This is a bad idea from the Treasury. And leaking this story is a terrible idea, since some potential homebuyers might potentially wait for lower interest rates.

This is very different than the Fed program to buy agency MBS. That program makes sense since the GSEs have effectively been nationalized (in Conservatorship) and also helps current homeowners refinance, although I don't understand why the government just doesn't announce the GSE debt is backed by the U.S. Government.

by Calculated Risk on 12/03/2008 05:24:00 PM

OK, two ...

“Our worry is that you have these very large players in distressed situations where they are going to have to sell assets at any price they can get. That can really weigh on the commercial real estate market.”
Joel Bloomer, Morningstar analyst commenting on General Growth Properties and Centro in Retail Traffic (hat tip Justin)

And from the Fed's Beige book:

Commercial real estate markets weakened broadly. Vacancy rates rose in Boston, New York, Richmond, Chicago, Kansas City and San Francisco, but were mixed across markets in the St. Louis District. Leasing activity was down in almost all Districts. Rents fell in the Boston, New York and Kansas City Districts. Despite reductions in construction materials costs, commercial building activity declined in many Districts with tighter credit conditions as a factor.

And just like with residential real estate, the CRE bust impacts other suppliers down stream, as an example from Reuters: U.S. office furniture orders fall 6 pct in Oct

U.S. office furniture orders fell 6 percent in October to $945 million compared with a year ago, its largest decline since May 2003, a trade group said on Wednesday.

The CRE downturn is here. This is the typical pattern - residential real estate leads the economy into a recession, and then CRE turns down during the recession. Usually new residential investment (RI) also leads the economy out of recession too - but any recovery in RI will probably be weak this time because of the huge overhang of inventory, and because house prices are still too high. Yes - I saw the article about Global Insight suggesting that the "housing market is now slightly undervalued" - uh, right. I'll have more on their analysis later.

by Calculated Risk on 12/03/2008 04:32:00 PM

From the WSJ: Treasury Considers Plan to Stem Home-Prices Decline

The Treasury Department is considering a plan to revitalize the U.S. housing market by reducing mortgage rates for new home loans ... The plan, which is in the development stages, would use mortgage giants Fannie Mae and Freddie Mac to bring loan rates down as low as 4.5%, a full percentage point lower than the prevailing rates for 30-year fixed mortgages.
...
Under the plan, Treasury would buy securities underpinning loans guaranteed by the two mortgage giants...

Oh my ...

by Calculated Risk on 12/03/2008 03:50:00 PM

From the Charlotte Business Journal: Charlotte CEOs see tough times, hope for recovery in 2009

Ken Lewis, CEO at BofA ... said he was hopeful conditions would improve in the second half of next year. He sees no bright spots for the economy before then.

“Times are really tough, and we don’t see any short-term rays of sunshine,” he told the more than 600 attendees at the Westin Charlotte hotel. When the panel was asked for advice on how to get through the next six months, Lewis recommended a conservative strategy of hoarding cash and capital and waiting for the storm to pass. “Think of getting through this as the primary objective,” he said.

Hoarding cash doesn't sound like lending ...

by Calculated Risk on 12/03/2008 01:17:00 PM

Tanta and her sister were working on a line of Mortgage Pig™ Wear before Tanta passed away. Please see the note from Cathy (Tanta's sister).

Check it out - a great holiday gift - and the proceeds go to cancer cure and care organizations.

Also, I'm putting together a chronological compendium of Tanta's posts. This is still a work in progress (it takes some time to find and add the posts). I'm not sure where this will lead, but this is a key first step ... enjoy!

Links for both the Mortgage Pig™ Wear and Compendium are in the right sidebar if you check back later.

by Calculated Risk on 12/03/2008 11:51:00 AM

I've heard from industry insiders (not confirmed) that Fannie Mae is putting a limit on the debt service-to-income (DTI) ratio of borrowers regardless of the Automated Underwriting System (AUS) decisions for loans requiring mortgage insurance (Loan-to-value (LTV) > 80%). This is apparently due to pressure from the mortgage insurers (MIs).

These are essentially caps on DTI. Previously the max was determined by the AUS.

For conforming loans in stable markets (as defined by MIs), the DTI limit is 45% when PMI is required (LTV > 80%). For expanded approval loans in stable markets, the DTI limit is 41%.

In soft markets, the max DTI is 41%. Previously this could be exceeded if approved by DU/LP (Desktop Underwriter Version 7.0® / Loan Prospector® ).

This raises a great point. The MIs were locked out (luckily for them) of many of the worst loans, because Wall Street securitized 2nds instead of using MI. Now that MI is needed again for loans with LTVs greater than 80%, the MIs once again have a say in the underwriting process.

I'm sure Krugman would respond with YHTMAAAIYP.

by Calculated Risk on 12/03/2008 10:43:00 AM

Professor Hamilton is not prone to hyperbole, so when he writes about a "frightening new phase in the economic downturn", I pay close attention:

When I first saw the figure for November sales of cars manufactured in North America-- 236,000 units-- I thought maybe somebody had mistyped the first digit. Even 336,000 would have been a very bad month.
...
The wrenching changes that might be immediately ahead could mark the beginning of a frightening new phase in the economic downturn.

And here is his chart of NSA auto sales. The decline in November was stunning - even for those expecting bad news.

Source: Econbrowser / Wardsauto.com

by Calculated Risk on 12/03/2008 10:00:00 AM

From the Institute for Supply Management: November 2008 Non-Manufacturing ISM Report On Business®

"The NMI (Non-Manufacturing Index) registered 37.3 percent in November, 7.1 percentage points lower than the 44.4 percent registered in October, indicating contraction in the non-manufacturing sector for the second consecutive month. The Non-Manufacturing Business Activity Index decreased 11.2 percentage points to 33 percent. The New Orders Index decreased 8.6 percentage points to 35.4 percent, and the Employment Index decreased 10.2 percentage points to 31.3 percent. These are the lowest levels for each of these indexes since they were first reported in 1997."

There is much more in the press release, but basically the service economy is very weak. Here is a key sentence:

Respondents' comments reflect concern about the time line for the economy to stabilize and the impact it is having on discretionary spending and employment.

Discretionary spending always gets hit hard when households and businesses are uncertain about the future. And this is more evidence of a very weak employment report for November.

by Calculated Risk on 12/03/2008 09:19:00 AM

From ADP: November Employment Report

Nonfarm private employment decreased 250,000 from October to November 2008 on a seasonally adjusted basis, according to the ADP National Employment Report®. The estimated change in employment from September to October was revised down from a decrease of 157,000 to a decrease of 179,000.

Note: ADP only covers private employment and has been consistently more positive than the BLS report in recent months. See the report for some graphs of employment and a comparison to the BLS report.

And from Rex Nutting at MarketWatch: Corporate layoffs surge to nearly 7-year high

Led by massive cuts at Citigroup and other banks, major U.S. corporations announced 181,671 layoffs in November, the highest total in nearly seven years, according to a survey conducted by outplacement firm Challenger Gray & Christmas and released on Wednesday.
...
The report comes two days before the Labor Department is scheduled to release its report on employment in November. Analysts surveyed by MarketWatch expect payrolls to fall by 350,000, which would be the biggest decline since May 1980.
So far in 2008, announced layoffs have totaled 1.06 million, up 46% from the same period a year ago.

Also first time unemployment claims are running over 500 thousand per week - so all of the data suggests that the BLS employment report on Friday will show large job losses in November.