by Calculated Risk on 4/22/2009 09:08:00 AM

From Reuters: Architecture billings index jumps in March: AIA

Update: From AIA: Architecture Billings Index Shows Early Signs of Improving Business Conditions

After a series of historic lows, the Architecture Billings Index (ABI) was up more than eight points in March. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the March ABI rating was 43.7, up from the 35.3 mark in February. This was the first time since September 2008 that the index was above 40, but the score still indicates an overall decline in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry score was 56.6.

“This news should be viewed with cautious optimism,” said AIA Chief Economist Kermit Baker, PhD, Hon. AIA. “The fact that inquiries for new projects increased is encouraging, but it will likely be a few months before we see an improvement in overall billings. Architects continue to report a diversity of business conditions, but the majority is still seeing weak activity levels.”

Click on graph for larger image in new window.

This graph shows the Architecture Billings Index since 1996. The index is still below 50 indicating falling demand.

Historically there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on commercial real estate (CRE). So there will probably be further dramatic declines in CRE investment later this year.

by Calculated Risk on 4/22/2009 08:41:00 AM

Form the Financial Times: Bank tests we should get stressed about (ht MrM)

[T]he tests suggested a concrete way to differentiate between the solid institutions that can raise private capital, and those that will (and must) feel a heavy government hand.
...
First, transparency is key. Whether the government likes it or not, hundreds of analysts around the world will reverse engineer the stress tests. The government would be well advised to assist the process through clarity ...

Second, the results of the stress tests must be part of a comprehensive, forward-looking package to resolve problems at banks. Out-performing banks should be provided with exit mechanisms from the exceptional government support that they have been receiving and, presumably, no longer need. At the other end, there must be clarity as to how capital-deficient banks that no longer have access to private capital will be handled.

There is more, but I think these are the two key points: Transparency is key. And the results should be announced as part of a comprehensive plan.

by Calculated Risk on 4/22/2009 01:23:00 AM

By popular request, an open thread and a few sources for futures and the foreign markets.

Bloomberg Futures.

CBOT mini-sized Dow

CME Globex Flash Quotes

Futures from barchart.com

And the Asian markets.

And a graph of the Asian markets.

And a little music ...

Best to all.

by Calculated Risk on 4/21/2009 10:09:00 PM

From David Leonhardt at the NY Times: For Housing Crisis, the End Probably Isn’t Near

Note: See article for graphic on house prices to median income by city.

... I decided to go to an auction at a hotel ballroom in Washington — and to study the results of several others elsewhere — with an eye to figuring out whether prices may now be close to bottoming out.
...
The winning bid on the first home auctioned off, a two-bedroom townhouse in Virginia Beach, was $115,000. Just last July, it sold for $182,000, according to property records. A four-bedroom brick house with a two-car garage in Upper Marlboro, Md., went for $375,000. Last year, it sold for $563,000.

Leonhardt provides other auction examples, and concludes prices are still falling sharply:

[T]he great real estate crash is not over, either. So if you are part of the 30 percent of American households who rent and you’re trying to decide when to buy, relax.

The market is still coming your way.

As I've noted before, most housing busts have two bottoms; the first bottom will be for residential investment (RI), and the second will be for existing home prices. The second bottom will come later, possibly much later. We haven't even seen the bottom for RI yet!

Given the huge excess supply, especially of distressed properties, I think Leonhardt is correct that prices will continue to fall.

by Calculated Risk on 4/21/2009 06:45:00 PM

Conference call notes (ht Brian):

Economic deterioration continued at a rapid pace during the first quarter driving increasing delinquency and charge off rates across most of our lending businesses. U.S. card charge off rate increased to 8.4% for the first quarter, above the 8.1% charge off rate expectation we articulated a quarter ago. Expected seasonal increases in bankruptcies and declining loan balances resulted in higher charge off rates compared to the fourth quarter of 2008. The increase in charge off rates beyond our expectations resulted from several factors related to the pace of economic deterioration in the quarter. Bankruptcies were higher than expected, increasing charge-offs directly without impacting delinquency rates. Recoveries on already charged off debt were lower than expected. We also observed an acceleration of later stage delinquency balances slowing to charge off in the quarter. For context recall that when we articulated our expectations last January the unemployment rate was 7.2% and we assumed it would increase to about 8.7% by the ends of 2009. The unemployment rate has already deteriorated to 8.5% and is expected to move beyond 8.7% well before year end. Even though our U.S. card charge off rate was higher than the expectation we had last quarter delinquencies and charge-offs were a bit better than we would have expected given the actual economic worsening we've seen in the quarter. ...

Credit Loss outlook

We expect further increases in U.S. card charge off rate through 2009 as the economy continues to weaken. It is likely that will our U.S. card charge off rate will increase at a faster pace than the broader economy as a result of the denominator effect and our implementation of OCC minimum payment requirements ... We expect monthly U.S. card charge off rates to cross 10% in the next couple of months.

Economic Outlook

I'll update our economic outlook. Unemployment and home prices have been and continue to be the economic variables with the greatest impact on our credit results. We now expect unemployment rate to increase to around 9.6% by the ends of 2009. Our prior assumption for home prices was for the Case Shiller 20 city index to fall by around 37% peak to trough. We now expect a modestly worse peak to trough decline of around 39%. ...

The expected 'greater than 10% charge-off rate' is probably worse than the expected credit card loss rates for the "more adverse" scenario. I'll be curious if the Federal Reserve white paper, to be released on Friday, will mention the expected loss rates by category.

by Calculated Risk on 4/21/2009 05:16:00 PM

Here is a letter from the FHFA to Chairman Dodd that was released today (ht James, Tim, Brian)

Update: here is the news release from FHFA: FHFA Expands Reporting on Homeowner Assistance

The tables show that the number of prime 60 days+ delinquent rose to 743,686 in January, from 497,131 in December. This is an increase from 1.93% in December to 2.89% in January.

The number of non-prime 60 day+ delinquent loans increased too; from 428,705 in December to 485,365 in January. But the foreclosure problem is now mostly a prime problem!

Or as Tanta used to say: "We're all subprime now!"

by Calculated Risk on 4/21/2009 04:13:00 PM

Pier loans: Bridge loans that couldn't be sold.

From the WSJ: Bankers Rebuff U.S. on Chrysler Debt

Chrysler owes ... lenders, which include banks such as Citigroup Inc. and J.P. Morgan Chase & Co., about $6.9 billion. But President Barack Obama and his auto team had demanded that the banks cut that to $1 billion, while gaining no equity stake in a restructured Chrysler.

In their five-page counteroffer, the lenders said they are prepared to cut Chrysler's first-lien debt by $2.4 billion, or down to about $4.5 billion, in exchange for a minority equity stake, likely to be 35% to 40% ...

The lenders have told Treasury ... they could recover at least 65% of their loans to the company if it is liquidated in bankruptcy.

Chrysler is probably worth more dead than alive - at least to these debt holders. That complicates the negotiations.

Nine days to go ...

by Calculated Risk on 4/21/2009 02:31:00 PM

Here are the links to the reports released today (IMF and SIGTARP):

SIGTARP:

Website: Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP)

April 21, 2009 - Quarterly Report to Congress

IMF:

IMF: Global Financial Stability Report website

by Calculated Risk on 4/21/2009 01:55:00 PM

Voit released quarterly reports today for CRE in Las Vegas, San Diego and Orange County.

The reports show the vacancy rates are up, and lease rates (falling rents), net absorption, transactions and construction are all down.

It appears new construction has all but stopped. Here are a couple of graphs for Orange County and San Diego. We are seeing a similar pattern nationwide, although new construction in these areas probably slowed earlier than most of the country.


Click on graph for larger image in new window.

This graph shows the annual Orange County office vacancy rate and new construction since 1998. (See Voit report for more.

In 2007 the rapid increase in the vacancy rate was due to a huge increase in new space combined with negative absorption as a number of Orange County financial companies (like New Century) went under. New construction has almost stopped, but the net absorption rate is still negative, so the vacancy rate is still rising.

Because of the concentration of subprime lenders in Orange County, the office space market was hit earlier than other areas of the country.

From the Voit report:

Total space under construction checked in at 173,209 square feet at the end of the first quarter, which is almost 80% lower than the amount that was under construction this same time last year. ... The office vacancy rate (for direct and sublease space) finished the year at 15.58%, constituting an increase over last year’s rate of 13.28%.

Although the chart only goes back to 1998, the record year for new development in Orange County was 1988, when 5.7 million square feet of new space was added. The vacancy rate peaked at approximately 24% in 1988 (the S&L crisis related office boom).

The second graph is for San Diego. The dynamics are similar, but construction halted later than in Orange County. From Voit:

The office vacancy rate (for direct and sublease space) finished the quarter at 16.03%, constituting a 25.23% increase over last year’s first quarter rate of 12.80%. This increase is a result of the new construction, 2.5 million square feet during 2008, coupled with a slowing economy ...

Currently there is 1.3 million square feet of Office construction underway, and total construction is lower than it was a year ago when 3.2 million square feet was under construction. This is a decrease of 59% when compared to last year ...

Although Voit didn't provide a similar graph for Las Vegas, the situation is clearly worse:

The valley-wide average vacancy rate reached 19.6 percent, which represented a 2.0-point increase from the preceding quarter (Q4 2008). Compared to the prior year (Q1 2008), vacancies were up 4.9 points from 14.7 percent.
...
The northwest witnessed the completion of Montecito Point near the intersection of key freeways, the Interstate 215 and US-95. The 186,300-square-foot building remains substantially vacant.
...
As of the close of the quarter, approximately 1.9 million square feet was in some form of construction. The southwest reported nearly 1.1 million square feet underway. As market conditions continue to shift, the timing of selected projects remains uncertain. Nearly 30 percent of product identified as under construction has delayed timing, halted material development activity or in the foreclosure process ...
emphasis added

Although each market is different, clearly new office construction has all but halted.

by Calculated Risk on 4/21/2009 12:22:00 PM

From Bloomberg: Pandit Says He’ll Repay ‘Every Dollar’ of TARP Funds

Citigroup Inc. Chief Executive Officer Vikram Pandit, speaking at the company’s annual shareholder meeting, said he will repay “every dollar with interest” of funds received [from TARP].

More from the WSJ:

Citigroup Chief Executive Vikram Pandit struck a positive, even hopeful tone, at the embattled banking giant's annual meeting, insisting that it is well prepared for success in an economic recovery.

In his review of Citi's 2008, Pandit said, "The vital signs of Citi are improving." He predicted Citi will have "strong operating leverage" going forward once the economy recovers.

Remember Pandit took over in December 2007, not long after Chuck - “As long as the music is playing, you’ve got to get up and dance. We’re still dancing.” - Prince resigned.