by Calculated Risk on 3/17/2009 04:25:00 PM

Update: Please don't confuse a bottom in single family housing starts with a bottom in house prices! See next post: Housing: Two Bottoms.

The title to this post would have been laughable in 2008 or 2007, but as I noted in Looking for the Sun, there is a reasonable chance housing starts will bottom sometime this year - so I suppose it is not too early to start looking.

A few key points:

Single-family starts may still fall further. Although I've started looking for the bottom for housing starts, this seems a little early in the year.

Focus on single-family starts. Ignore total housing starts. Multi-family starts are very volatile. Single family starts increased by 1.1% in February - not much.

One month does not make a trend, and housing data is revised significantly. The slight increase in February might just disappear.

Permits for single-family housing units jumped to 373,000 SAAR (starts were 357,000 in February). This suggests starts will probably be higher in March.

Supply is still too high. Months of supply was at an all time record high 13.3 months in January.

Click on graph for larger image in new window.

From the Census Bureau: "The seasonally adjusted estimate of new houses for sale at the end of January was 342,000. This represents a supply of 13.3 months at the current sales rate."

But the increase in Months of Supply has been driven by the denominator (sales), even though the numerator (inventory) has been falling steadily. note: Months of supply = inventory / sales.

The second graph shows the level of hard inventory for new homes (completed plus under construction). With starts below sales, hard inventory has been falling for some time.

Unless sales fall further, the months of supply should start to decline even with the current level of starts.

And this brings up a key point:

It is incorrect to directly compare monthly housing starts to monthly new home sales. The monthly housing starts report from the Census Bureau includes apartments, owner built units and condos that are not included in the new home sales report.

However it is possible to compare "Single Family Starts, Built for Sale" to New Home sales on a quarterly basis. The quarterly report shows there were 65,000 single family starts, built for sale, in Q4 2008 and that is less than the 82,000 new homes sold for the same period. This data is Not Seasonally Adjusted (NSA). This suggests homebuilders were selling more homes than they are starting – but not by much.

However starts have fallen much further in Q1 (almost 25% from Q4) although sales have fallen too (we only have January data for sales so far).

Note: new home sales are reported when contracts are signed, so it is appropriate to compare sales to starts (as opposed to completions), although this isn’t perfect because homebuilders have recently been stuck with “unintentional spec homes” because of the high cancellation rates.

This graph provides a quarterly comparison of housing starts and new home sales. In 2005, and most of 2006, starts were higher than sales, and inventories of new homes rose sharply. For the last several quarters, starts have been below sales – and new home inventories have been falling - but it continues to be a race to the bottom between starts and sales.

Of course, unless sales stabilize soon, starts might have to fall further.

The housing market is still very weak. The NAHB homebuilder index was near the record low this month. Housing starts are just off the record lows of last month. New home sales were at a record low in January. And sales and starts are nominal numbers - not adjusted for changes in population!

Do not expect a sharp rebound in housing starts. Even if this is the bottom in starts (or close to the bottom), there is still too much inventory - especially distressed existing home inventory - for a meaningful rebound in housing starts.

Impact on the economy: If this is near the bottom for housing starts, then the drag on GDP from Residential Investment (RI) will subside (new construction is usually the largest component of RI). As completions fall to the level of starts, the drag on residential construction employment will also ease. And finally, in the temporal order of a business cycle recovery, usually RI has to bottom first ...

by Calculated Risk on 3/17/2009 04:12:00 PM

Another up day with the NASDAQ up over 4%, and the S&P up 3.2%. The S&P 500 is now up 15% from the closing lows. Here are a couple of graphs:

Click on graph for larger image in new window.

The first graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears".

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

The second graph shows the S&P 500 since 1990.




The dashed line is the closing price today.

This puts the 15% rally into perspective - the S&P is still off more than 50% from the 2007 high.

by Calculated Risk on 3/17/2009 03:40:00 PM

From Reuters: Thornburg Mortgage may file Chapter 11 bankruptcy

Thornburg Mortgage ... a large and troubled provider of "jumbo" mortgage loans, on Tuesday said it may file for Chapter 11 bankruptcy protection.
...
A bankruptcy filing would make Thornburg one of the largest U.S. mortgage providers to seek protection from creditors since the housing slump began ...

Thornburg has specialized in making mortgages larger than $417,000 to borrowers with good credit ...

Last March, Thornburg arranged a $1.35 billion bailout from the distressed debt investor MatlinPatterson Global Advisors LLC and other investors to stay out of bankruptcy.

According to a Tuesday regulatory filing, MatlinPatterson surrendered all of its Thornburg common stock -- 120.8 million shares -- on March 12 and 16 without any compensation. ...

We're all subprime now!

by Calculated Risk on 3/17/2009 01:18:00 PM

Note: I ignore the median price data because it is skewed by the mix of homes sold. A repeat sales index like Case-Shiller is a better indicator of price changes.

From DataQuick: Southland home sales outpace last year again; median price steady

Southland home sales stayed above year-ago levels for the eighth consecutive month in February ... Market activity was dominated by bargain-hunting in affordable neighborhoods while buying and selling in more expensive established areas remained largely on hold ...

A total of 15,231 new and resale homes sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month. That was essentially unchanged from 15,227 for January, and up 41.3 percent from 10,777 for February 2008, according to MDA DataQuick of San Diego.
...
Regionwide, foreclosure resales accounted for 56.4 percent of February’s resales activity, which was the same as the revised January figure and up from 36.2 percent in February 2008.

Sales are up because of foreclosure resales in less expensive neighborhoods. Meanwhile, sales in "more expensive established areas" have slowed to a trickle. This build up in supply will eventually lead to more price declines in the expensive areas ...

by Calculated Risk on 3/17/2009 10:58:00 AM

Here is a quick look at a few credit indicators:

First, the British Bankers' Association reported that the three-month dollar Libor rates were fixed at 1.30%, down from 1.31% on Monday. This has been a slight improvement over the last week.

Click on table for larger image in new window.

The first graph shows the spread between 30 year Moody's Aaa and Baa rated bonds and the 30 year treasury.

There has been some increase in the spread the last few weeks, but the spread is still way below the recent peak. The spreads are still very high, even for higher rated paper, but especially for lower rated paper.

The Moody's data is from the St. Louis Fed:

Moody's tries to include bonds with remaining maturities as close as possible to 30 years. Moody's drops bonds if the remaining life falls below 20 years, if the bond is susceptible to redemption, or if the rating changes.

There has been improvement in the A2P2 spread. This has declined to 0.84. This is far below the record (for this cycle) of 5.86 after Thanksgiving, but still above the normal spread.

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

Meanwhile the TED spread has decreased a little over the last week, and is now at 107.5. This is the difference between the interbank rate for three month loans and the three month Treasury. The peak was 463 on Oct 10th and a normal spread is around 50 bps.

This graph shows the at the Merrill Lynch Corporate Master Index OAS (Option adjusted spread) for the last 2 years.

This is a broad index of investment grade corporate debt:

The Merrill Lynch US Corporate Index tracks the performance of US dollar denominated investment grade corporate debt publicly issued in the US domestic market.

The recent surge in this index was a cause for alarm, but the index appears to have stabilized over the last week.

All of these indicators are still too high, but at least none of them are increasing this week.

by Calculated Risk on 3/17/2009 08:30:00 AM

Click on graph for larger image in new window.

Total housing starts were at 583 thousand (SAAR) in February, well off the record low of 477 thousand in January (the lowest level since the Census Bureau began tracking housing starts in 1959).

Single-family starts were at 357 thousand in February; just above the record low in January (353 thousand).

Permits for single-family units increased in February to 373 thousand, suggesting single-family starts could increase in March.

Here is the Census Bureau report on housing Permits, Starts and Completions.

Building permits increased slightly:

Privately-owned housing units authorized by building permits in February were at a seasonally adjusted annual rate of 547,000. This is 3.0 percent (±3.5%)* above the revised January rate of 531,000, but is 44.2 percent (±1.2%) below the revised February 2008 estimate of 981,000.

Single-family authorizations in February were at a rate of 373,000; this is 11.0 percent (±2.1%) above the January figure of 336,000.

On housing starts:

Privately-owned housing starts in February were at a seasonally adjusted annual rate of 583,000. This is 22.2 percent (±13.8%) above the revised January estimate of 477,000, but is 47.3 percent (±5.3%) below the revised February2008 rate of 1,107,000.

Single-family housing starts in February were at a rate of 357,000; this is 1.1 percent (±11.0%)* above the January figure of 353,000.

And on completions:

Privately-owned housing completions in February were at a seasonally adjusted annual rate of 785,000. This is 2.3 percent (±14.8%)* above the revised January estimate of 767,000, but is 37.3 percent (±7.7%) below the revised February 2008 rate of 1,251,000.

Single-family housing completions in February were at a rate of 505,000; this is 8.2 percent (±11.8%)* below the January figure of 550,000.

Note that single-family completions are still significantly higher than single-family starts. This is important because residential construction employment tends to follow completions, and completions will probably decline further.

One month does not make a trend - and the graph shows this is just a slight increase in total starts (and single family starts are basically flat with the record low). However I do expect housing starts to bottom sometime in 2009.

by Calculated Risk on 3/16/2009 09:58:00 PM

From the WSJ: Obama Seeks to Avoid Auto Bankruptcies

The leaders of President Barack Obama's auto task force are focused on restructuring General Motors Corp. and Chrysler LLC outside of bankruptcy court ...
...
"It sometimes becomes a necessary place for some companies, but it's certainly not a desired place and it is certainly not our goal to see these companies in bankruptcy, particularly considering the consumer-facing nature of their businesses," [Steven Rattner, a private-equity executive leading the team] said in an interview.
...
By the end of the month, the government plans to lay out its view on the companies' viability and what the industry should look like in future years, Mr. Rattner said.

Meanwhile: Chrysler Presses Request for Loans. Just another $5 billion by the end of the month ...

by Calculated Risk on 3/16/2009 07:56:00 PM

From Reuters: U.S. credit card defaults rise to 20 year-high

U.S. credit card defaults rose in February to their highest level in at least 20 years, with losses particularly severe at American Express ... and Citigroup ...

AmEx ... said its net charge-off rate ... rose to 8.70 percent in February from 8.30 percent in January.

... Citigroup Inc (C.N) ... default rate soared to 9.33 percent in February, from 6.95 percent a month earlier ...
...
Chase ... reported its charge-off rate rose to 6.35 percent in February from 5.94 percent in January. ...

Capital One Financial Corp's ... default rate increased to 8.06 percent in February from 7.82 percent in January.
...
Analysts estimate credit card chargeoffs could climb to between 9 and 10 percent this year from 6 to 7 percent at the end of 2008.

The Treasury and Federal Reserve haven't publicly released the indicative loss rates for various asset classes associated with the two stress test economic scenarios (baseline and more adverse), but these numbers are probably approaching the "more adverse" scenario range for credit cards.

by Calculated Risk on 3/16/2009 06:06:00 PM

Here is a comparison of the National Association of Home Builders (NAHB) Housing Market Index and new home sales from the Census Bureau. Since new home sales are released with a lag, the NAHB index provides a possible leading indicator for sales.

Note: the NAHB index released this morning was for a March survey. New Home sales for February will be released on March 25th - so the NAHB is released almost 6 weeks ahead of the corresponding sales numbers.

Click on graph for larger image in new window.

This shows that major tops and bottoms (green arrows) for the two series line up pretty well (usually within 1 month). However both series are noisy month to month, and there are plenty of head fakes in between the significant peaks and troughs. Also the new home sales data is revised significantly (this graph uses revised data).

Just something to watch going forward ...

by Calculated Risk on 3/16/2009 03:46:00 PM

From Bloomberg: FASB Moves Toward Giving Banks More Flexibility on Fair-Value (ht Justin)

The Financial Accounting Standards Board, pressured by lawmakers to change the fair-value rule blamed for worsening the financial crisis, proposed permitting companies to use “significant judgment” in valuing assets.

Companies would be able to apply the revised rule to their first-quarter financial statements, FASB Chairman Robert Herz said today during a meeting at the U.S. accounting rulemaker’s Norwalk, Connecticut, headquarters. The board is set to vote on the proposal April 2, after a 15-day public comment period. ...

From the American Bankers Association: Breaking News: FASB to Propose Improvements to Mark-to-Market, OTTI

Mark-to-Market. The proposal for estimating market values will take into consideration whether there is an active market (such as the number of recent transactions, whether price quotes are based on current information, whether price quotes vary substantially, etc.). If there is not an active market, then the quoted price is a distressed transaction unless certain other conditions exist. For distressed transaction prices, “Level 3” techniques (such as present values of future cash flows) are used instead of the distressed prices and should reflect an orderly transaction between market participants, including a reasonable profit margin for uncertainty in a non-distressed situation.

Other-Than-Temporary-Impairment. FASB will also propose that the full market loss continue to be reported through earnings (and capital) only if the entity intends to sell or will be required to sell the security prior to its recovery. For all other OTTI, the amount of market loss will be split between the credit portion of the loss, which will be reported in earnings, and the remainder of the loss, which will be reported in “other comprehensive income.”