by Calculated Risk on 5/20/2009 08:15:00 PM

Goldman Sachs tracks the rents at a large number of apartment REITs - and rents are now falling (excerpted from research report with permission):

REITs tend to adjust more rapidly to changing market conditions than the typical landlord, so changes in their behavior are useful signals of turns in the market ... Public REITs typically report the rent increases they have achieved on a year-over-year, comparable-unit basis with each quarterly filing. ... [the tracked] REITS managed 300,000 units that were comparable to the year-before period in the first quarter of 2009 ... In the first quarter of 2009, the major REITs collectively reported an outright decline in rents for the first time since 2004.

Goldman notes that declining rents for REITS typically lead declines in the CPI measures of rent: Owners' equivalent rent of primary residence (OER) and Rent of primary residence.

The following graph shows the year-over-year (YoY) in the REIT rents (from Goldman), Owners' equivalent rent of primary residence and Rent of primary residence (both from the BLS). The Apartment Tightness Index from the National Multi Housing Council is on the right Y-axis.

Click on graph for larger image in new window.

This graph shows that the Apartment Tightness Index leads REIT rents, and that the BLS measures of rent follow.

This suggests further declines in the YoY REIT rents, and future disinflation for the BLS measures of rent.

This is important for house prices too. With falling rents, house prices need to fall further to bring the house price-to-rent ratio back to historical levels.

by Calculated Risk on 5/20/2009 06:28:00 PM

From Eric Lipton at the NY Times: Bankruptcies Swell Deficit at Pension Agency to $33.5 Billion

The deficit at the federal agency that guarantees pensions for 44 million Americans more than doubled in the last six months to a record high, reaching $33.5 billion ...

The Pension Benefit Guaranty Corporation, as of October, had faced a shortfall of $11 billion. But the combined effect of lower interest rates, losses on its investment portfolio and the increase in the number of companies filing for bankruptcy protection resulted in a deepening of its estimated deficit, officials said Wednesday.
...
With the bankruptcy of Chrysler and a possible similar move by General Motors, the agency is facing a record surge in demand. The new deficit estimate takes into account both pensions it has taken over in the last six months, and others it believes it will have to assume control of soon.

Here is the PBGC statement: PBGC Deficit Climbs to $33.5 Billion at Mid-Year, Snowbarger to Tell Senate Panel

The $22.5 billion deficit increase was due primarily to about $11 billion in completed and probable pension plan terminations; about $7 billion resulting from a decrease in the interest factor used to value liabilities; about $3 billion in investment losses; and about $2 billion in actuarial charges.

Snowbarger notes that as of April 30, the PBGC’s investment portfolio consisted of 30 percent equities, 68 percent bonds, and less than 2 percent alternatives, such as private equity and real estate. All the agency’s alternative investments have been inherited from failed pension plans.

Last year the PBGC voted to allow equity investments, but luckily the entire portfolio wasn't moved into equities - and they only lost $3 billion on their $56 billion asset portfolio.

Unfortunately there is much more to come:

The PBGC is closely monitoring companies in the auto manufacturing and auto supply industries. According to PBGC estimates, auto sector pensions are underfunded by about $77 billion, of which $42 billion would be guaranteed in the event of plan termination. The pension insurer also faces increased exposure from weak companies across all sectors of the economy, including retail, financial services and health care.

With companies moving away from defined benefit plans, there will be fewer companies paying for insurance in the future - so the PBGC will probably have to be bailed out.

by Calculated Risk on 5/20/2009 04:00:00 PM

By popular demand ...

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 compares four significant bear markets: the Dow during the Great Depression, the NASDAQ, the Nikkei, and the current S&P 500. See Doug's: "The Mega-Bear Quartet and L-Shaped Recoveries".

The third graph shows the S&P 500 since 1990. The dashed line is the closing price today. The market is only off 42% from the peak.

CNBC's Jeff Macke's head explodes...

by Calculated Risk on 5/20/2009 02:01:00 PM

From the Fed: Minutes of the Federal Open Market Committee April 28-29, 2009

Some FOMC members suggested buying more Treasury securities:

Members also agreed that it would be appropriate to continue making purchases in accordance with the amounts that had previously been announced—that is, up to $1.25 trillion of agency MBS and up to $200 billion of agency debt by the end of this year, and up to $300 billion of Treasury securities by autumn. Some members noted that a further increase in the total amount of purchases might well be warranted at some point to spur a more rapid pace of recovery; all members concurred with waiting to see how the economy and financial conditions respond to the policy actions already in train before deciding whether to adjust the size or timing of asset purchases. The Committee reaffirmed the need to monitor carefully the size and composition of the Federal Reserve’s balance sheet in light of economic and financial developments.
emphasis added

The economic projections are near the end. Although the Fed lowered their economic outlook (compared to January), they are still fairly optimistic. As an example, the central tendency for GDP growth in 2010 is 2% to 3%, not far below trend growth, and above trend growth in 2011 (3.5% to 4.8% central tendency of projections). The Fed is also optimistic about the unemployment rate peaking below 10% later this year or in early 2010. In January, the members saw unemployment peaking in 2009, and the central tendency for unemployment was 8.5% to 8.8% in 2009 - we are already at 8.9% in April!

by Calculated Risk on 5/20/2009 01:32:00 PM

The Dept of Transportation reports on U.S. Traffic Volume Trends:

Travel on all roads and streets changed by -1.2% (-3.1 billion vehicle miles) for March 2009 as compared with March 2008. Travel for the month is estimated to be 245.1 billion vehicle miles.

Click on graph for larger image in new window.

The first graph shows the annual change in the rolling 12 month average of U.S. vehicles miles driven. Note: the rolling 12 month average is used to remove noise and seasonality.

By this measure, vehicle miles driven are off 3.3% Year-over-year (YoY); the decline in miles driven was worse than during the early '70s and 1979-1980 oil crisis. However miles driven - compared to the same month of 2008 - has only been off about 1% for the last couple months.

The second graph shows the comparison of month to the same month in the previous year as reported by the DOT.

As the DOT noted, miles driven in March 2009 were 1.2% less than in March 2008.

Year-over-year miles driven started to decline in December 2007, and really fell off a cliff in March 2008. Although this data isn't seasonally adjusted, it appears that miles driven has stabilized.

by Calculated Risk on 5/20/2009 11:42:00 AM

From Bloomberg: Geithner Says Toxic-Asset Plan to Start in Six Weeks

Treasury Secretary Timothy Geithner said he expects a pair of government programs to help banks remove their distressed assets will start by early July ...

The Treasury’s Public-Private Investment Program will use $75 billion to $100 billion of government funds to finance sales of as much as $1 trillion in distressed mortgage-backed securities and other assets.

Here is Geithner's prepared statement.

by Calculated Risk on 5/20/2009 09:44:00 AM

Matt Padilla at the O.C. Register presents a new reset / recast chart from Credit Suisse: Loan reset threat looms till 2012

Credit Suisse is using recast dates for Option ARMs and reset dates for all other loans.

As Tanta noted: "Reset" refers to a rate change. "Recast" refers to a payment change.

Resets are not a huge problem as long as interest rates stay low, but recasts could be significant.

Note that Wells Fargo expects only a small percentage of their $115 billion "pick-a-pay" Option ARM portfolio they acquired via Wachovia (originally from World Savings / Golden West) to recast by 2012 (because Golden West had very generous NegAM terms). I'm not sure how that fits with this chart.

by Calculated Risk on 5/20/2009 09:00:00 AM

From the AIA: Architecture Billings Index Points to Possible Economic Improvement

After an eight-point jump in March, the Architecture Billings Index (ABI) fell less than a full point in April. 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 April ABI rating was 42.8, down from the 43.7 mark in March. This was the first time since August and September 2008 that the index was above 40 for consecutive months, 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 56.8.

“The most encouraging part of this news is that this is the second month with very strong inquiries for new projects. A growing number of architecture firms report potential projects arising from federal stimulus funds,” said AIA Chief Economist Kermit Baker, PhD, Hon. AIA. “Still, too many architects are continuing to report difficult conditions to feel confident that the economic landscape for the construction industry will improve very quickly. What these figures mean is that we could be seeing things turn around over a period of several months.”

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.

Back in 2005, Kermit Baker and Diego Saltes of the American Institute of
Architects wrote a white paper: Architecture Billings as a Leading Indicator of Construction

The following graph is an update from their paper.

This graph compares the Architecture Billings Index and year-over-year change in non-residential construction spending from the Census Bureau.

This graph suggests the non-residential construction collapse will be very sharp, and although there isn't enough data to know if this is predictive of the percentage decline in spending, it does suggest a possible year-over-year decline of perhaps 20% to 30% in non-residential construction spending.

by Calculated Risk on 5/20/2009 08:32:00 AM

From the Detroit News: Feds to inject $7.5B more into GMAC (ht jb)

The Treasury Department is preparing to announce as early as today that it will invest an additional $7.5 billion in GMAC LLC in a deal that could allow the U.S. government to hold a majority stake in the Detroit-based auto finance company.

The Stress Test results showed GMAC needs another $11.5 billion in capital, so there is probably more coming.

by Calculated Risk on 5/19/2009 11:11:00 PM

From Bloomberg: Japan’s Economy Shrank Record 15.2% Last Quarter (ht creditcriminalslovetarp, Angry Saver, and others)

Japan’s economy shrank at a record 15.2 percent annual pace last quarter as exports collapsed and consumers and businesses cut spending.

The contraction followed a revised fourth-quarter drop of 14.4 percent ...

Exports plunged an unprecedented 26 percent last quarter ...