by Calculated Risk on 6/02/2009 10:51:00 PM

"Credit is so loose today that I can buy the groceries I need on a credit card, eat the food tonight, discard the food by tomorrow at noon and finance my debt on a 30-year, amortized loan. How stupid is that? But people do it all the time - and then they wonder why they're in foreclosure."
Mortgage Broker quoted in Denver Post, March 30, 2005 (link no longer works)

And today from Peter Goodman at the NY Times: Promised Help Is Elusive for Some Homeowners. This article is about homeowners struggling to get loan modifications, but this section reminded me of that Denver Post article:

Ms. Ulery, 63, is the face of the latest wave of troubled American homeowners, a surge of people in financial danger not because of reckless gambling on real estate, but because of lost income.

Far from being one of those who used easy-money loans to speculate on homes proliferating across the desert soil of greater Phoenix, she has lived in the same modest, stucco-sided condo in suburban Mesa for a dozen years. She bought the two-bedroom home in 1997 for $77,500.

So far so good ... but:

Like tens of millions of other American homeowners, she added to her mortgage balance as the value of her condo swelled, at one point exceeding $200,000. She refinanced to pay off some credit cards and settle into a 30-year, fixed-rate loan. Later, she took out a home equity line of credit to buy a new Hyundai. She refinanced again in 2007, borrowing $20,000, mostly for a new roof.

Money is fungible, but a general guideline is to match the term of the debt with the useful life of the asset. A 30 year loan for a house. A 5 to 7 year loan for a car. Pay cash for lunch.

Then - if the useful life and debt term match - when it comes time to replace the asset, the debt will have been retired. But this article provides an example of buying lunch on your credit card, paying off the credit card with a larger mortgage and essentially financing lunch for 30 years!

And I'm sorry, but I'd call excessive use of the Home ATM as gambling.

by Calculated Risk on 6/02/2009 07:39:00 PM

From Bloomberg: Fed Said to Raise Standards for Banks’ TARP Repayment

Federal Reserve officials surprised bankers in the past week by demanding they raise specific amounts of new capital before repaying taxpayer funds, applying a more stringent assessment than the stress tests in May.

JPMorgan Chase & Co. and American Express Co. were told they need to boost common equity ... Morgan Stanley was directed to raise more funds after already selling stock to cover its stress-test shortfall. One firm was told only yesterday ...

From the WSJ: Banks' Telethon Is Nearly Over

J.P. Morgan Chase & Co., Morgan Stanley, American Express Co. and regional bank KeyCorp said Tuesday they sold a combined $8.7 billion in common stock. That pushed the total ... to at least $65 billion since the [stress test] results were announced May 7.

This will be interesting next week. I don't expect to see BofA, Wells Fargo, Citi or GMAC on the list. Heck, GMAC was queued up at the FDIC lending facility today.

by Calculated Risk on 6/02/2009 06:26:00 PM

"Our contract cancellation rate of 24% for the second quarter is at a more normalized level, the likes of which we have not reported since the third quarter of 2005,"
Ara K. Hovnanian, President and CEO Hovnanian Enterprises, June 2, 2000

The surge in cancellation rates was an important story after the bubble burst. Now it appears cancellation rates might be returning to more normal levels.

The following graph shows the average cancellation rates for some selected homebuilders that I've been tracking.

Click on graph for larger image in new window.

There appears to be a seasonal pattern (fewer cancellations in Q1), but most of the builders are reporting the lowest cancellation rates since the bubble burst.

The cancellation rate could rise again if mortgage rates move higher, but this is a little bit of good news for the builders. Here are a couple of comments I posted last month:

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 for most builders since late 2005 or early 2006.

by Calculated Risk on 6/02/2009 04:01:00 PM

Click on graph for larger image in new window.

This graph shows the historical light vehicle sales from the BEA (blue) and an estimate for May (red, light vehicle sales of 9.91 million SAAR from AutoData Corp).

May was the best month of 2009 (on seasonally adjusted basis), but sales are still on pace to be the worst since 1967.

The second graph shows light vehicle sales since the BEA started keeping data in 1967.

The small increase in May hardly shows up on the graph.

In 1967 there were 103 million drivers; now there are about twice that many (205.7 million licensed drivers in 2007). Compared to the number of drivers, the current sales rate is the lowest since the BEA started tracking auto sales.

by Calculated Risk on 6/02/2009 02:04:00 PM

From MarketWatch: GM May U.S. vehicle sales drop 29%

GM ... reported a 29% drop in May U.S. light vehicle sales ... GM posted sales of 190,881 vehicles, down from 268,892 a year ago.

Also from MarketWatch: Toyota U.S. May sales fall 40.7%

Toyota said ... May U.S. sales declined 40.7% to 152,583 vehicles from 257,406 a year ago

More on auto sales soon (with a graph of course)

by Calculated Risk on 6/02/2009 11:54:00 AM

From MarketWatch: Ford U.S. May sales fall 24.2%

Ford Motor Co. said Tuesday that total U.S. May sales fell 24.2% to 161,531 vehicles from 213,238 a year ago. ... Ford said it will increase North American production by 10,000 vehicles to 445,000 in the second quarter, and by 42,000 vehicles to 460,000 vehicles in the third quarter

Note: This is year-over-year (May 2009 vs. May 2008)

Previous months:
Ford April U.S. vehicle sales off 31.3%

Ford U.S. March sales dropped 40.9%

February Ford sales were off 46.3% YoY

January off 42.1%

December off 32.4%

November off 31%

by Calculated Risk on 6/02/2009 10:00:00 AM

From the NAR: Pending Home Sales Up for Three Months in a Row

The Pending Home Sales Index, a forward-looking indicator based on contracts signed in April, rose 6.7 percent to 90.3 from a reading of 84.6 in March, and is 3.2 percent above April 2008 when it was 87.5.
...
[Lawrence Yun, NAR chief economist] cautions that the reporting sample for pending home sales is smaller than that of existing-home sales, so it is subject to greater variability. “In addition, the relationship between contracts on pending home sales and closings on existing-home sales is taking longer than in the past for several reasons,” he said. “Mortgage processing time has increased, it is taking many months to close on those homes requiring short sales with lender approval, and some sales are falling through at the last moment.”

This is for contracts signed in April and that are expected to close in late May or June.

Note: Ignore the "affordability index". That just means interest rates were low in April.

by Calculated Risk on 6/02/2009 08:42:00 AM

NY Times Editorial: Foreclosures: No End in Sight

A continuing steep drop in home prices combined with rising unemployment is powering a new wave of foreclosures. Unfortunately, there’s little evidence, so far, that the Obama administration’s anti-foreclosure plan will be able to stop it.
...
One of the biggest problems is that the plan focuses almost entirely on lowering monthly payments. But overly onerous payments are only part of the problem. For 15.4 million “underwater” borrowers — those who owe more on their mortgages than their homes are worth — a lack of home equity puts them at risk of default, even if their monthly payments have been reduced. They have no cushion to fall back on in the event of a setback, like job loss or illness.
...
There will be no recovery until there is a halt in the relentless rise in foreclosures. Foreclosures threaten millions of families with financial ruin. By driving prices down, they sap the wealth of all homeowners. They exacerbate bank losses, putting pressure on the still fragile financial system. Lower monthly payments are a balm, but they are no substitute for home equity. And until more Americans can find a good job and a steady paycheck, the number of foreclosures will continue to rise.

In previous housing busts, foreclosures continued to rise until prices finally bottomed. And prices will fall - and foreclosures rise - for some time. There is no end in sight.

by Calculated Risk on 6/02/2009 12:22:00 AM

Here is an open thread for discussion.

The automakers will release May sales results Tuesday. There is a good chance that sales in May were below the February 9.3 million seasonally adjusted annual rate (SAAR). To find a lower sales month, we need to go back to December 1981: 9.05 million SAAR. May could be the lowest sales month since 1970 ...

U.S. futures are flat.

Futures from barchart.com

Bloomberg Futures.

CBOT mini-sized Dow

CME Globex Flash Quotes

And the Asian markets are almost up 1% or so.

Best to all.

by Calculated Risk on 6/01/2009 09:30:00 PM

Just some excerpts ...

From the WSJ: Filings Reveal Depth of Problems

General Motors Corp.'s $82.2 billion in assets and $172 billion in liabilities spell out the extent of its problems and sheer breadth of the 101-year-old giant's bankruptcy.

In a torrent of filings at the U.S. Bankruptcy Court in Manhattan, GM's mind-numbing scale is evident: It has 463 subsidiaries and has built 450 million cars and trucks over the years. It employs 235,000 people worldwide. This includes 91,000 in the United States, which it pays $476 million each month, and 493,000 retirees with various benefits. It spends $50 billion a year buying parts and services from 11,500 vendors in North America.

More details from Bloomberg: GM Files Bankruptcy to Spin Off More Competitive Firm

From the WSJ: GM to Announce Tentative Hummer Sale

General Motors Corp., fresh off filing for bankruptcy protection Monday, will start its second day of court proceedings by announcing the tentative sale of the Hummer brand ...

Auto sales for May will be announced tomorrow. The bankruptcy of Chrysler - and now GM - will probably depress auto sales further for a few months, although probably not by much.