by Calculated Risk on 1/08/2009 11:14:00 AM

From Bloomberg: No Recovery for Real Estate as Speculators Dominate Sales (hat tip James)

As the U.S. housing recession enters its fourth year, there’s no sign of a recovery because speculators account for most of the rise in sales.
...
While the purchases are trimming the inventory of unsold properties, most of those bought by speculators will likely return to the market when prices rise again, hampering any recovery, said Nobel laureate economist Joseph Stiglitz and Yale University Professor Robert Shiller in interviews.

“We’re creating a shadow inventory of homes that will be right back on the market as soon as the economy and the housing market begin to improve,” said Stiglitz, a Columbia University professor of economics. “We could see a double-dip in the housing recession if that happens.”
...
“You don’t have it in strong hands, you have flippers,” said Shiller, who helped create the S&P/Case Shiller real estate price indexes. “These speculators are preventing the market from crashing now, and when they get out it could fall again.”

Uh, no. In this case I believe Shiller is wrong.

First, we have to distinguish between speculators and investors. My view is speculators buy with the intention of flipping or re-selling as soon as possible. Investors buy for cash flow. The Bloomberg article offers this example:

Robert Arnold, a real estate investor who rents out a dozen homes near Orlando, Florida ... bought an Orlando foreclosure in June for $60,000, about a third of its appraised value, and spent $20,000 repairing it. Four months ago he rented it for $950 a month....

“Most of the houses I buy are junkers, but with a little work they become cash cows,” Arnold said.

Arnold is not a flipper, and according to the real estate agents I've spoken with recently, most of the recent non-owner occupied buyers are buying for cash flow just like Arnold.

Yes, these investors will probably keep price appreciation down in the future, but I'd argue a cash flow investor is a "strong hand" and I think they will hold the property longer than Shiller expects.

by Calculated Risk on 1/08/2009 09:25:00 AM

From the WSJ: U.S. Retailers Post Weak Same-Store Sales

Wal-Mart reported its U.S. same-store-sales, excluding gasoline, grew 1.7% amid a 1.9% increase at its namesake chain and 0.1% rise at Sam's Club.

Vice Chairman Eduardo Castro-Wright said the company, which last month projected growth at the higher end of the quarter's predicted 1% to 3% advance, said Thursday the holidays were more challenging than expected for retailers because of the economy and "severe winter weather" in some parts of the country."

Wal-Mart sales had held up pretty well as consumers switched to inferior goods, but now it appears December was especially weak. This is more evidence of a sharp slow down last month.

by Calculated Risk on 1/07/2009 09:51:00 PM

From the WSJ: Commercial Property Loses Shelter

Delinquencies on mortgages for hotels, shopping malls and office buildings were sharply higher in the fourth quarter ... New data from Deutsche Bank show that delinquencies on commercial mortgages packaged and sold as bonds, which represent nearly a third of the commercial real-estate debt market, nearly doubled during the past three months, to about 1.2%. ...

The delinquency rate will likely hit 3% by the end of 2009, its highest point in more than a decade, says Richard Parkus Deutsche Bank's head of research on such bonds, known as commercial-mortgage-backed securities, or CMBS.

This is not only a problem for CMBS, but many banks and thrifts have excessive exposure to CRE loans:

According to research firm Foresight Analytics, soured commercial mortgages on banks' books jumped to 2.2% as of the third quarter of last year, from 1.5% at the end of 2007. The research firm estimates that the rate could rise to 2.6% in the fourth quarter of 2008.
...
Banks and thrifts would suffer in a commercial-real-estate downturn because they own nearly 50% of all commercial mortgages outstanding. ... According to Foresight Analytics, as of Sept. 30, 2008, some 1,400 commercial banks and savings institutions had more than 300% of their Tier 1 capital in commercial mortgages.

Here are some comments from Fed Vice Chairman Donald L. Kohn back in April 2008:

Setting aside the 100 largest banks, the share of commercial real estate loans in bank loan portfolios nearly doubled over the past 10 years and is approaching 50 percent. The portfolio share at these banks of residential mortgage and other consumer loans, which are more readily securitized, fell by 20 percentage points over the same period.

This is a key point that we've been discussing for a few years - most small to mid-sized institutions were not overexposed to the housing bubble because those loans were mostly securitized. Therefore the housing bust led directly to relatively few bank failures over the last couple of years (although some larger banks like WaMu, Wachovia and National City were heavily exposed to residential loans).

However, many small to mid-sized banks have a heavy concentration in commercial real estate (CRE) loans, and also in construction & development (C&D) loans. Now that CRE is weakening - and the C&D loans are coming due - there will probably be a sharp increase in bank failures over the next couple of years.

Concentration risk is another familiar risk that is appearing in a new form. Banks have always had to worry about lending too much to one borrower, one industry, or one geographic region. But as smaller banks hold more of their balance sheet in types of loans that are difficult to securitize, concentration risks can develop. Concentrations of commercial real estate exposures are currently quite high at some smaller banks. This has the potential to make the banking sector much more sensitive to a downturn in the commercial real estate market.

I expect 100s of small bank failures over the next couple of years due to excessive CRE loan concentrations. I predict Bank Failure Fridays will be even busier in 2009 than 2008.

by Calculated Risk on 1/07/2009 06:03:00 PM

From the Guardian: M&S chief pleads for government help after sales slump

Marks & Spencer chief Sir Stuart Rose today called on the government to do all it could to restore consumer confidence as the high street giant unveiled dire Christmas trading, the closure of 27 stores and confirmed more than 1,200 staff were to be axed in a bid to cut costs.
...
The 125-year-old retailer, which has 600 outlets, said like-for-like sales were down 7.1% in the 13 weeks to 27 December, despite holding two one-day pre-Christmas sales, when 20% was slashed off the price of all goods. Like-for-like sales of general merchandise – clothing and homewares – were down nearly 9% and food sales declined 5.2% from 2007 levels.
...
Rose said the looming recession was "the sharpest downturn in the shortest time" he had witnessed in 38 years in the retail business, and the outlook remained challenging.

I suspect December retail sales will be very ugly (worse than October and November).

by Calculated Risk on 1/07/2009 02:17:00 PM

From the National Restaurant Association (NRA): Restaurant Performance Index Fell to a Record Low in November as Economy Continued to Worsen

The outlook for the restaurant industry worsened in November, as the National Restaurant Association’s comprehensive index of restaurant activity fell to a record-low level. The Association’s Restaurant Performance Index (RPI) – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 96.7 in November, down 0.4 percent from October and its 13th consecutive month below 100.

“The November decline in the Restaurant Performance Index was the result of broad-based declines across the index components, with the Current Situation index falling to a new record low,” said Hudson Riehle, senior vice president of Research and Information Services for the Association. “A solid majority of restaurant operators reported negative same-store sales and traffic levels in November, while nearly one-half expect their sales in six months to be lower than the same period in the previous year.”

“The continued deterioration in economic conditions is reflected in operator sentiment, with a record 47 percent of restaurant operators saying the economy is currently the number-one challenge facing their business,” Riehle added. “Looking forward, restaurant operators aren’t particularly optimistic about an improvement either, with 49 percent expecting economic conditions to worsen in six months.”

Click on graph for larger image in new window.

Unfortunately the data for this index only goes back to 2002.

The index values above 100 indicate a period of expansion; index values below 100 indicate a period of contraction.

Based on this indicator, the restaurant industry has been contracting since November 2007.

by Calculated Risk on 1/07/2009 09:49:00 AM

Intel provides another example of the rapidly deteriorating business environment.

On Oct 14th, Intel projected revenue for Q4 2008:

Revenue: Between $10.1 billion and $10.9 billion.

Then Intel warned on November 12th and lowered their revenue projection to $8.7 billion to $9.3 billion:

Intel Corporation today announced that fourth-quarter business will be below the company's previous outlook. The company now expects fourth-quarter revenue to be $9 billion, plus or minus $300 million, lower than the previous expectation of between $10.1 billion and $10.9 billion. Revenue is being affected by significantly weaker than expected demand in all geographies and market segments. In addition, the PC supply chain is aggressively reducing component inventories.

And now today Intel reported a significant miss: Intel Announces Preliminary Fourth-Quarter Financial Information

Intel Corporation today announced preliminary fourth-quarter financial information with revenue of approximately $8.2 billion, down 20 percent sequentially and down 23 percent year over year. Revenue will be lower than the company's previous expectation, provided on Nov. 12, 2008, as a result of further weakness in end demand and inventory reductions by its customers in the global PC supply chain.

This is a pretty significant decline in revenues and suggests much lower business investment in equipment and software in Q4 2008.

by Calculated Risk on 1/07/2009 09:16:00 AM

From Bloomberg: U.S. Shopping Mall Vacancies Reach 10-Year High as Stores Fail

Vacancies at U.S. malls and shopping centers approached 10-year highs in the fourth quarter, and are set to rise further as declining retail sales put more stores out of business, research firm Reis Inc. said.

Regional mall vacancies rose to 7.1 percent last quarter from 6.6 percent in the third quarter. It was the highest vacancy rate since Reis began tracking regional malls in 2000, as well as the largest quarter-to-quarter jump in vacancies, according to New York-based Reis.

Click on image for larger graph in new window.

This graph shows the strip mall vacancy rate since Q2 2007. Note that the graph doesn't start at zero to better show the change.

At neighborhood and community shopping centers, the vacancy rate rose to 8.9 percent from 8.4 percent in the third quarter, the highest since Reis began publishing quarterly data in 1999.

Strip mall vacancy rates are headed for double digits next this year.

by Calculated Risk on 1/07/2009 01:01:00 AM

Dr. Hamilton points out that the sales decline in recent months was very different from earlier in 2008:

Overall, in the fall of 2008 we saw a big decline in all categories-- cars and SUVs, imports and domestics. That is very different from the problems last spring and summer, when SUVs were clobbered, but domestic cars were not hit too badly and sales of imported cars were actually up slightly.

... In early 2008, the primary problem for U.S. auto manufacturers was the sharp hike in gasoline prices, which explains the collapse of sales of SUVs at the same time that imports of smaller cars were on the way up.

... By contrast, the current problems for the auto sector resulted from the broad collapse in overall consumer spending.

Here is the graph for auto sales - see Professor Hamilton's post to compare autos and light trucks (including SUVs):

Source: Econbrowser / Wardsauto.com

by Calculated Risk on 1/06/2009 05:51:00 PM

From the WSJ: Alcoa to Eliminate 15,000 Positions

Acknowledging that earlier cost-cutting moves are insufficient due to the sustained economic downturn, aluminum maker Alcoa Inc. announced deeper work-force cuts, more plant closures and a 50% reduction in capital expenditures.

By the end of this year, there will be 15,000 fewer positions at the company, or roughly 14.5% of its current employees and contractors, Alcoa said Tuesday.

Also Bloomberg is reporting: IBM May Cut Thousands of Jobs, Employee Group Says

International Business Machines Corp., the biggest technology employer, may cut thousands of jobs this month amid the global economic slowdown, according to the employee group Alliance for IBM.
...
A post on the Alliance’s Web site said the company may cut 16,000 jobs ...

Obviously earlier cost cutting efforts were insufficient. And the beat goes on ...

by Calculated Risk on 1/06/2009 02:17:00 PM

The Fed projects GDP to decline in 2009 "as a whole", and unemployment to "rise significantly into 2010". The Fed also expects disinflationary pressures to continue into 2010.

From the FOMC Minutes:

In the forecast prepared for the meeting, the staff revised down sharply its outlook for economic activity in 2009 but continued to project a moderate recovery in 2010. Real GDP appeared likely to decline substantially in the fourth quarter of 2008 as conditions in the labor market deteriorated more steeply than previously anticipated; the decline in industrial production intensified; consumer and business spending appeared to weaken; and financial conditions, on balance, continued to tighten. Rising unemployment, the declines in stock market wealth, low levels of consumer sentiment, weakened household balance sheets, and restrictive credit conditions were likely to continue to hinder household spending over the near term. Homebuilding was expected
to contract further. Business expenditures were also likely to be held back by a weaker sales outlook and tighter credit conditions. Oil prices, which dropped significantly during the intermeeting period, were assumed to rise over the next two years in line with the path indicated by futures market prices, but to remain below the levels of October 2008. All told, real GDP was expected to fall much more sharply in the first half of 2009 than previously anticipated, before slowly recovering over the remainder of the year as the stimulus from monetary and assumed fiscal policy actions gained traction and the turmoil in the financial system began to recede. Real GDP was projected to decline for 2009 as a whole and to rise at a pace slightly above the rate of potential growth in 2010. Amid the weaker outlook for economic activity over the next year, the unemployment rate was likely to rise significantly into 2010, to a level higher than projected at the time of the October 28-29 FOMC meeting. The disinflationary effects of increased slack in resource utilization, diminished pressures from energy and materials prices, declines in import prices, and further moderate reductions in inflation expectations caused the staff to reduce its forecast for both core and overall PCE inflation. Core inflation was projected to slow considerably in 2009 and then to edge down further in 2010.
emphasis added