by Calculated Risk on 2/05/2009 05:37:00 PM

With crashing house prices in Dubai, the owners are "driving away" as opposed to walking away ...

From The Times: Driven down by debt, Dubai expats give new meaning to long-stay car park (hat tip James)

[F]aced with crippling debts as a result of their high living and Dubai’s fading fortunes, many expatriates are abandoning their cars at the airport and fleeing home rather than risk jail for defaulting on loans.

Police have found more than 3,000 cars outside Dubai’s international airport in recent months. Most of the cars – four-wheel drives, saloons and “a few” Mercedes – had keys left in the ignition.
...
Those who flee the emirate are known as skips.
...
“There is no way of tracking actual numbers, but the anecdotal evidence is overwhelming. Dubai is emptying out,” said a Western diplomat.

by Calculated Risk on 2/05/2009 02:40:00 PM

From Bloomberg: Moody’s to Review $302.6 Billion in Commercial Debt (hat tip Bob_in_MA, Brian for the post title!)

Moody’s Investors Service is reviewing the ratings of $302.6 billion in commercial mortgage-backed securities as real-estate values drop and property owners fall behind on payments.

The review encompasses 52 percent of outstanding U.S. commercial mortgage-backed debt ranked by Moody’s ...

And so it begins for CMBS. First the reviews, then the downgrades, followed by the bank write-downs, and then more reviews ...

by Calculated Risk on 2/05/2009 12:30:00 PM

From a presentation this morning titled "Looking For a Bottom", Moody's Economy.com chief economist Mark Zandi projected:

House prices will fall "at least" another 10%.

Inventories have peaked.

Housing starts will bottom in the first half of 2009, but the rebound will be slow as excess existing home inventory is reduced.

I think it is a little early to call the peak in inventories, although this is something I've been watching. Here is graph from a previous post: Existing Home Sales (NSA)

This graph shows inventory by month starting in 2002.

Inventory levels were flat for years (during the bubble), but started increasing at the end of 2005.

Inventory levels increased sharply in 2006 and 2007, but have been close to 2007 levels for most of 2008. In fact inventory for the last five months was below the levels of last year. This might indicate that inventory levels are close to the peak for this cycle.

I agree with Zandi that housing starts will bottom in 2009. See: Looking for the Sun

However I think it is still too early to forecast the bottom in house prices, especially in the mid to high priced areas.

And it is important to note that Zandi might be starting to look for the bottom in some stats (like starts), but he is forecasting a very sluggish recovery.

by Calculated Risk on 2/05/2009 11:17:00 AM

From CNBC: White House Now Plans Limited Bank Aid Package

The Obama administration has decided on a new package of aid measures for the financial services industry, including a bad bank component, and is expected to announce them next Monday, according to a source familiar with the planning

The plan will be "smaller" than originally expected, said the industry source, and centered around government guarantees and insurance of troubled assets, what's called a "ring fence" concept.
...
Under the emerging plan, the government will buy toxic assets below the banks "carrying value," which is basically market value, but not at fire sale levels ...

If the government buys assets below the banks carrying value, then the banks will have to take additional write-downs and will need more capital. With this plan the taxpayers are still taking all the risk, and the shareholders of the banks receive the rewards. That still doesn't make sense.

by Calculated Risk on 2/05/2009 08:42:00 AM

The DOL reports on weekly unemployment insurance claims:

In the week ending Jan. 31, the advance figure for seasonally adjusted initial claims was 626,000, an increase of 35,000 from the previous week's revised figure of 591,000. The 4-week moving average was 582,250, an increase of 39,000 from the previous week's revised average of 543,250.
...
The advance number for seasonally adjusted insured unemployment during the week ending Jan. 24 was 4,788,000, an increase of 20,000 from the preceding week's revised level of 4,768,000.

Click on graph for larger image in new window.

The first graph shows weekly claims and continued claims since 1971.

The four week moving average is at 582,250, the highest since 1982.

Continued claims are now at 4.79 million - another new record - just above the previous all time peak of 4.71 million in 1982.

The second graph shows the 4-week average of initial weekly unemployment claims (blue, right scale), and total insured unemployed (red, left scale), both as a percent of covered employment.

This normalizes the data for changes in insured employment.

A very weak report ...

by Calculated Risk on 2/04/2009 10:15:00 PM

From David Herszenhorn at the NY Times: Senate Approves Tax Break for Homebuyers

The measure would give buyers a tax credit of 10 percent of the price of a primary residence purchased within the year, up to $15,000 ...

“We do have a history in this country with housing and it goes back to the crash of 1974, which actually in terms of inventory and price declines was comparable to what’s happening now,” [Senator Johnny Isakson, Republican of Georgia] said at a news conference. “Within one year of the inception of that tax credit, two-thirds of the available inventory that was on the market was gone. The market moved back to a balanced inventory, values stabilized and things became very healthy. The only reason I know all of that is I was selling houses in 1974, that’s what I was doing to feed my family and make a living.”

In early 1975, a $2000 tax credit on the purchase of only new homes only in calendar year 1975 was passed into law (I believe this is correct). The current tax credit is good for both new and existing home purchases. The difference is the purchase of new homes does stimulate the economy by creating construction jobs - the purchase of existing homes does not.

Click on graph for larger image.

New home sales increased from a 477 thousand SAAR in March 1975 to over 600 thousand SAAR later in the year. But that was from a depressed level as shown on the graph. The real boom in sales happened when the economy recovered - so I'm not sure of the actual impact of the 1975 tax credit.

by Calculated Risk on 2/04/2009 08:47:00 PM

I was asked earlier today about UCLA Anderson Forecast's current outlook. They are forecasting a severe recession, with GDP turning slightly positive in the 2nd half of 2009, but unemployment to continue to rise into 2010.

Here are a few recent 2009 GDP forecasts from UCLA Anderson Forecast, Paul Kasriel at Northern Trust, and David Rosenberg at Merrill Lynch.

Rosenberg is fairly optimistic on GDP growth in the 2nd half of 2009 based on the impact of the stimulus package (although he thinks GDP growth in 2010 will be tepid). He sees unemployment rising to double digit rates in 2010.

Looking at the details, I'm more pessimistic than Merrill on non-residential structures, and a little less pessimistic on residential investment going forward.

Click on graph for larger image in new window.

Kasriel's forecast is available online and he is projecting unemployment to rise to 8.8% by the end of 2009. Although he thinks GDP growth will turn positive in Q4, he is concerned about a double dip recession.

Just some forecasts to discuss on the comments ...

by Calculated Risk on 2/04/2009 05:57:00 PM

Press Release: MIT commercial property price index posts record drop (hat tip Michael)

Transaction sale prices of commercial property sold by major institutional investors fell by more than 10 percent -- a record -- in the fourth quarter of 2008, according to an index developed and published at the MIT Center for Real Estate that also posted a record 15 percent drop for the year.

The 10.6 percent drop in the transactions-based index (TBI) for the fourth quarter is the largest quarterly decline in the gauge's history, which dates to 1984. The previous record was a 9 percent drop in the fourth quarter of 1987. The 15 percent fall in 2008 is also a record, topping the 10 percent and 9 percent declines in 1992 and 1991, respectively.

The index's performance means that prices in institutional commercial property deals that closed during the fourth quarter for properties such as office buildings, warehouses and apartment complexes are now 22 percent below their peak values attained in the second quarter of 2007. The index has fallen in five of the past six quarters, but the recent drop is by far the steepest.

"With the index already having fallen 22 percent in the current downturn, it now seems likely that this down market will be at least as severe as that of the early 1990s for commercial property," said Professor David Geltner, director of research at the Center for Real Estate. In the last major downturn in the U.S. commercial property market 20 years ago, the TBI declined a total of 27 percent from 1987 through 1992, with most of that drop occurring in 1991-92.

Professor Geltner's comment about "as severe as that of the early 1990s for commercial property" is referring to the price decline, not the coming decline in non-residential investment. These are two different issues. The price declines will impact property owners who are now underwater and can't refinance, and also impact banks and other investors in CMBS who will experience see higher default rates. The coming decline in non-residential investment will impact GDP and construction employment, but that decline will probably not be as severe as after the S&L related boom.

For price charts for various sectors, see Transactions-Based Index. It is interesting that prices for retail properties have only started to decline.

by Calculated Risk on 2/04/2009 04:32:00 PM

Here are some comments from BRE, an apartment REIT (hat tip Brian):

You know there really may not be an adequate description to frame what occurred during the fourth quarter with jobs and the nation's economy.

Our Enterprise priorities, like that of many real estate companies, lead with capital preservation and enhanced liquidity. And our tactical decisions are tied to the four key risks that we believe face our industry. First, the depth and duration of this recession, or depression, and the impact on operations and EBITDA; second, the availability and the cost of public capital both near and long term; third, the availability of secured debt from the GSEs; and finally transaction risks, or the ability to sell properties to source capital.

Did he she really just say "depression"?

Existing home sales have picked up and standing inventories have declined, but in most markets the level of inventory ranges between five and ten months. There does remain a favorable rent-to-own gap in most of our markets, but it is being challenged.

With jobs, we expect the first quarter to rival the fourth quarter with respect to job losses. We then expect to see a deceleration in the layoff momentum with job losses continuing early into 2010 before stabilizing. With respect to housing we expect to see a continued clearing of inventories and the possibility of a bottom in home prices identified in the second half of the year. And finally we believe foreclosures will continue into 2010, but become less of a factor once the market identifies the bottom for prices. We believe we are looking at a negative rent curve for the next two years.

We believe on a composite basis, market rents in 2009 could fall between 3 and 6% from peak levels in 2008. And the rent cuts in 2010 could be deeper, depending on how this next phase of the economy plays out.

Note that apartments typically compete with lower priced homes. So when he is talking about a price bottom, he is talking about pricing in some lower priced neighborhoods with significant foreclosure activity.

On New Development:

In early January, we announced the deceleration of our development program. We recorded a 5.1 million, non-routine charge to abandon three sites we had under control, two in the Inland Empire and one in San Jose.
...
The past quarter was an inflection point. The level of economic deterioration was strong enough to render certain [development] sites across the industry infeasible.

So they are cutting back on new development. And they are being hit by job cuts in retail:

Operationally we are facing the toughest conditions in decades. As planned, since October, we have cut market rents more than 3% across the portfolio, with the deepest cuts in Southern California. We are seeing decent traffic and focusing on resident renewals and aggressive leasing to solve for occupancy.
...
the job numbers for the fourth quarter and year end go beyond bleak. ... The headline is the retail impact. Retail job losses are at the top of most of our core markets. Many retail workers' rent, and these layoffs trigger higher move-outs and terminations; and we don't get the feeling the retail industry is finished with their job cuts.

And on the Seattle market:

Seattle is no longer immune to the economic fallout. During the fourth quarter Seattle shed 16,000 jobs or a drop of 1% in 90 days as market dropped all the job growth experienced in the first nine months of the year, bringing employment back to December '07 levels. During the fourth quarter the Washington Mutual job cuts kicked off, and in January Microsoft laid of 1,000 workers. Boeing announced it will cut 10,000 jobs, half of those in Seattle, and Starbucks announced another round of layoffs, estimated at 1,000 jobs.

Certain sub-markets have already been impacted. Downtown rents have fallen almost 9% in the fourth quarter and are continuing to drop.

And on households "doubling up":

Q: Can you just address with the drop in occupancy and the employment losses ... what's your sense in terms of where are people moving? Are they going to lower quality units, are they doubling up, going with parents, I mean, where are people going?

A: ... I think it's pretty similar to past cycles. ... while there's some exodus of households out of California the numbers aren't that great, so it would indicate that people are doubling up, tripling up, moving back to couches, moving back with mom and dad.

They also noted that there will probably be few apartment transactions this year:

I don't think anybody feels a real sense of urgency to jump in and buy at the beginning of a two year declining rent curve. I think we'll probably see transactions begin to move up in the first half of '10 as you get closer to the end of that declining rent curve.

by Calculated Risk on 2/04/2009 02:58:00 PM

From Martin Wolf, Why Davos Man is waiting for Obama to save him

Instead of an overwhelming fiscal stimulus, what is emerging is too small, too wasteful and too ill-focused. Instead of decisive action to recapitalise banks, which must mean temporary public control of insolvent banks, the US may be returning to the immoral and ineffective policy of bailing out those who now hold the “toxic assets”.
emphasis added

And Yves Smith shreds the new plan: The Bad Bank Assets Proposal: Even Worse Than You Imagined

[T]his program is a crock ... it has [been] cooked up in the complete and utter absence of any serious due diligence on the toxic holdings of the big banks.

Exactly. Get in there and find out what they are holding. If the banks are insolvent, Nationalize Preprivatize them.