by Calculated Risk on 5/06/2009 10:10:00 AM

From Bloomberg: Rich Americans Default on Luxury Homes Like Subprime Victims (ht Lance)

Chuck Dayton put down a quarter of the $950,000 purchase price when he bought his house in Newport Beach, California, in 2004. ... Dayton, 43, went into default four months ago because he couldn’t afford payments on the three-bedroom home, located within a block of the Pacific Ocean.
...
Dayton said he financed the purchase of his home, 40 miles south of Los Angeles in Orange County, with a payment-option adjustable-rate mortgage now serviced by JPMorgan’s Washington Mutual.
...
Dayton refinanced in February 2007 with a $1 million loan from Washington Mutual ... He also took out two private mortgages and now has a balance of $106,000 on those loans ... Dayton went into default on Jan. 29 and owes $46,584 in delinquent payments and penalties, according to First American CoreLogic ...

The number of U.S. homes valued at more than $729,750, the jumbo-loan limit in the most affluent areas, entering the foreclosure process jumped 127 percent during the first 10 weeks of this year from the same period of 2008, data compiled by RealtyTrac Inc. of Irvine, California, show. The rate rose 72 percent for homes valued at less than $417,000 and 78 percent for all homes

The next wave of defaults is building ... this time in the mid-to-high range.

by Calculated Risk on 5/06/2009 08:50:00 AM

The ADP employment report hasn't been very useful in predicting the BLS numbers, but here it is anyway: April ADP Report:

Nonfarm private employment decreased 491,000 from March to April 2009 on a seasonally adjusted basis, according to the ADP National Employment Report®. The estimated change of employment from February to March was revised by 34,000, from a decline of 742,000 to a decline of 708,000.

And from Bloomberg: U.S. April Job Cuts Rise 47% From a Year Ago, Challenger Says

Job cuts announced by U.S. employers in April increased 47 percent from a year earlier, led by government agencies and companies in the automotive industry, while the total was the lowest since October.
...
“Job cuts are still at recession levels, but the fact that they are falling is certainly promising and may suggest that employers are starting to feel a little more confident about future business conditions,” John A. Challenger, chief executive officer of the placement company, said in a statement. Still, he said, “state and local governments, as well as school districts, are really feeling the impact of this downturn.”

The BLS report for April will be released Friday. Hopefully the pace of job losses has slowed - over the last 5 months the BLS has reported 3.3 million net jobs lost!

by Calculated Risk on 5/05/2009 11:58:00 PM

From Reuters: Bank of America to need $34 billion in capital: source

Bank of America (BAC.N) has been deemed to need an additional $34 billion in capital, according to the results of a government stress test, a source familiar with the results said on Tuesday.

From the WSJ: BofA Needs $35 Billion Jolt

And Bloomberg: Tests Said to Show Bank of America Has Biggest Need

Regulators have determined that Bank of America Corp. has the largest need for new capital among the 19 biggest U.S. banks subjected to stress tests, according to people familiar with the matter.

Citigroup Inc.’s shortfall is more limited because the company already plans to convert government preferred shares to common stock, the people said.

by Calculated Risk on 5/05/2009 09:47:00 PM

There is substantial disagreement on the number of homeowners underwater (they owe more than their homes are worth). At the end of 2008, American CoreLogic estimated there were 8.2 million homeowners underwater.

Zillow.com is now estimating 26.9 million homeowners with negative equity.

From the WSJ: House-Price Drops Leave More Underwater

Real-estate Web site Zillow.com said that overall, the number of borrowers who are underwater climbed to 26.9 million at the end of the first quarter from 16.3 million at the end of the fourth quarter.
...
Moody's Economy.com estimates that of 78.2 million owner-occupied single-family homes, 14.8 million borrowers, or 19%, owed more than their homes were worth at the end of the first quarter, up from 13.6 million at the end of last year.

This is a substantial difference. Apparently Zillow assumes that borrowers with HELOCs have drawn down the maximum amount, and I suppose they use their house price software. My guess is Economy.com's estimate is closer.

No matter - the number is huge. And many of these borrowers are in danger of default if they experience a negative event (death, disease, divorce, unemployment, etc.)

by Calculated Risk on 5/05/2009 07:18:00 PM

From the WSJ: U.S. to Set Condition for Banks Repaying TARP (ht MrM)

Banks that want to return Troubled Asset Relief Program funds will have to demonstrate their ability to wean themselves off ... a guarantee of debt issuance offered by the Federal Deposit Insurance Corp. ...

Firms will have to show they don't need the FDIC guarantee to issue debt ... Regulators could detail the complete set of guidelines dictating how banks can repay TARP as early as Wednesday.

One of the running jokes is that the banks will repay the TARP funds "soon". If the banks have to wait until they are weaned off the FDIC loan guarantee program, "soon" will probably be a couple of years.

There are 97 financial institutions that have issued $336 billion in debt under the FDIC Temporary Liquidity Guarantee Program (TLGP). Summary here.

However most of this debt was issued by just 31 very large Bank and Thrift Holding Companies (update: cap is based on secured debt, not just liabilities).

by Calculated Risk on 5/05/2009 05:39:00 PM

Several major homebuilders have just reported. Here are a few quotes:

“The operating environment for housing remained very difficult during the first quarter of 2009. The housing market continues to face rising unemployment, tight mortgage availability, increased foreclosure activity and declining home prices, all putting negative pressure on buyer demand."
Richard J. Dugas, Jr., President and CEO of Pulte Homes, Press Release

["M]arket conditions in the homebuilding industry are still challenging, characterized by rising foreclosures, high inventory levels of both new and existing homes, increasing unemployment, tight credit for homebuyers and eroding consumer confidence."
Donald R. Horton, Chairman of the Board, D.R. Horton Press Release

"Housing markets remained challenged throughout the quarter, with the positives of historic affordability and low interest rates offset by rising foreclosures and high resale inventories."
Timothy R. Eller, chairman and CEO of Centex, Press Release

Challenging. Difficult. Rising Foreclosures. High inventory levels. Still a very difficult environment for the homebuilders.

The little bit of good news was the cancellation rate improved (after skyrocketing in the 2nd of 2008):

Pulte: The cancellation rate improved to 21% for the first quarter of 2009 compared with 47% for the fourth quarter of 2008 and 28% for the first quarter of 2008.

D.R. Horton: The Company’s cancellation rate (cancelled sales orders divided by gross sales orders) for the second quarter of fiscal 2009 was 30%.

These cancellation rates are still above normal (Note: "Normal" for Horton is in the 16% to 20% range, so 30% is still high.), but these are the lowest cancellation rates since early 2006.

by Calculated Risk on 5/05/2009 03:49:00 PM

From Newsweek: Prisoners of the White House (ht Jonathan)

On the night of April 27, for instance, the president invited to the White House some of his administration's sharpest critics on the economy, including New York Times columnist Paul Krugman and Columbia University economist Joseph Stiglitz. Over a roast-beef dinner, Obama listened and questioned while Krugman and Stiglitz, both Nobel Prize winners, pushed for more aggressive government intervention in the banking system.

I haven't seen any comments from Stiglitz or on Krugman's blog - maybe the food wasn't very good.

Update: Krugman: Nothing to say "... the conversation was off the record."

by Calculated Risk on 5/05/2009 02:36:00 PM

Last week a number of blogs posted a video from VisionVictory of new homes being demolished in Victorville, CA.

Here is the story from Peter Hong in the LA Times: Housing crunch becomes literal in Victorville

The Victorville demolition is one of the most dramatic ends to a bad bet made during the housing boom, but abandoned developments have become an all-too-common sight in California. Nearly 250 residential developments totaling 9,389 homes have been halted across the state, according to one research firm.

The developer of the Victorville project had hoped to sell the houses for more than $300,000 as they were being built last year, Forrester said. But reality quickly diverged from that vision. ...

Officials of Guaranty Bank of Austin, Texas, which took over the development last year, were unavailable for comment. But Victorville city spokeswoman Yvonne Hester said the bank decided not to throw good money after bad.

"It just didn't pencil out for them," she said. "They'd have to spend a lot of money to turn around and sell the houses. They just made a financial decision to just demolish them."

And from the WSJ: No Sale: Bank Wrecks New Houses

A video of a backhoe knocking down homes in Victorville, Calif., was posted on YouTube by the founder of a Web site called Vision Victory.

A Texas bank is about done demolishing 16 new and partially built houses acquired in Southern California through foreclosure, figuring it was better to knock them down than to try selling them in the depressed housing market.

Guaranty Bank of Austin is wrecking the structures to provide a "safe environment" for neighbors of the abandoned housing tract in Victorville, a high-desert city about 85 miles northeast of Los Angeles, a bank spokesman said.

And more video at MarketWatch.

by Calculated Risk on 5/05/2009 12:26:00 PM

Here are some comments by Fed Chairman Ben Bernanke on real estate:

Bernanke: "The housing market, which has been in decline for three years, has also shown some signs of bottoming."

Data: Existing home sales peaked in June 2005, new home sales in July 2005, and housing starts in January 2006. Prices peaked in July 2006 (Case-Shiller Composite 10 index) and residential investment has been a drag on GDP starting in Q1 2006. If anything, the housing market has been in decline for almost four years.

Bernanke: "Sales of existing homes have been fairly stable since late last year, and sales of new homes have firmed a bit recently, though both remain at depressed levels."

Click on graph for larger image in new window.

This graph shows existing home sales (left axis) and new home sales (right axis) since January 1994 through March 2009.

If you look closely, you can see that Bernanke is correct that existing home sales have been "fairly stable since late last year" and "new homes have firmed a bit recently".

Note: I believe the recent gap between existing and new home sales was caused by distressed sales. With all of the REO and short sales, builders can't compete. This has pushed down new home sales, and kept existing home sales relatively high (compared to new home sales).

But I believe Bernanke is wrong about both new and existing home sales being at "depressed levels".

The second graph shows New Home Sales vs. recessions for the last 45 years. New Home sales have fallen off a cliff.

There is no question that new home sales are at depressed levels. This is the lowest level of new home sales activity since the Census Bureau started tracking the data in 1963. And this data is not adjusted for changes in population (or number of households), and that would make the current slump even worse.

But the story is different for existing home sales:

This graph shows existing home turnover as a percent of owner occupied units. Sales for 2009 are estimated at the March rate of 4.57 million units.

I've also included inventory as a percent of owner occupied units (all year-end inventory, except 2009 is for March).

The turnover rate is just below the median of the last 40 years - and will probably fall further in coming years.

Existing home sales are not at "depressed levels", unless you exclude all the foreclosure resales.

Bernanke: "Although some of the boost to sales in the market for existing homes is likely coming from foreclosure-related transactions, the increased affordability of homes appears to be contributing more broadly to the steadying in the demand for housing."

I think foreclosure resales are much more significant than lower mortgage rates. According to the NAR, something like 40% to 45% of all existing home sales are distressed (Foreclosure resales or short sales). And according to DataQuick in California:

Of the existing homes sold last month [March], 57.4 percent were properties that had been foreclosed on. A year ago it was 35.5 percent.

I'd argue that the primary reason existing home sales appear to have stabilized is because of foreclosure-related activity.

Bernanke: "With sales of new homes up a bit and starts of single-family homes little changed from January through March, builders are seeing the backlog of unsold new homes decline--a precondition for any recovery in homebuilding."

This is correct. New home inventory is declining and new home sales have been higher than new home "built for sale" starts since late 2007 (see Quarterly Housing Starts and New Home Sales). Progress is being made on reducing inventory, but the months of supply is still elevated (at 10.7 months in March).

Bernanke: "Conditions in the commercial real estate sector are poor. Vacancy rates for existing office, industrial, and retail properties have been rising, prices of these properties have been falling, and, consequently, the number of new projects in the pipeline has been shrinking."

"Poor" doesn't describe the level of distress, but Bernanke is correct. About a month ago I compiled a summary of articles and data for retail, offices, apartments and lodging: Vacancies, vacancies, vacancies ... and falling rents There has been more data since then, but it all shows vacancy rates are rising in all categories (occupancy rates falling for hotels), and rents (and room rates) are falling. Conditions in CRE are definitely grim.

My only disagreement with Dr. Bernanke is on the existing home market. I don't think current existing home sales are "depressed" and I believe sales will fall further in the future.

by Calculated Risk on 5/05/2009 12:06:00 PM

This was released earlier this morning ...

From the ISM: April 2009 Non-Manufacturing ISM Report On Business®

Economic activity in the non-manufacturing sector contracted in April ...

"The NMI (Non-Manufacturing Index) registered 43.7 percent in April, 2.9 percentage points higher than the 40.8 percent registered in March, indicating contraction in the non-manufacturing sector for the seventh consecutive month, but at a slower rate. The Non-Manufacturing Business Activity Index increased 1.1 percentage points to 45.2 percent. The New Orders Index increased 8.2 percentage points to 47 percent, and the Employment Index increased 4.7 percentage points to 37 percent. The Prices Index increased 0.9 percentage point to 40 percent in April, indicating a slightly slower decrease in prices from March." [said Anthony Nieves, C.P.M., CFPM, chair of the Institute for Supply Management™ Non-Manufacturing Business Survey Committee]

Still contracting, but at a slower rate.