by Calculated Risk on 6/10/2009 10:46:00 PM

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Daily Summary:

Long rates are rising.

From CNBC: Treasury Holds 'Awful' Auction: 10-Year Yield Hits 3.95%

From the WSJ: Rate Rise Clouds Recovery

On Wednesday, rates on 30-year fixed-rate mortgages climbed to 5.79%, up from 5% two weeks ago, according to HSH Associates. That jump will cut roughly in half the number of borrowers with an incentive to refinance, according to FTN Financial.

From the MBA: Mortgage Rates Increase, Refinance Applications Decline

Here is a cool tool from Political Calculations: Predicting Mortgage Rates and Treasury Yields

Trade Deficit Increases Slightly in April

From the Fed: Beige Book: Economic conditions remained weak or deteriorated further

Economic Calender for Thursday

Retail Sales 8:30 AM ET

Weekly Jobless Claims 8:30 AM ET

Business Inventories 10 AM ET

Fed: Flow of Funds Report 12 PM ET

Hotel Occupancy Report (morning)

Atlanta Federal Reserve Bank President Dennis Lockhart 1:05 PM ET

Futures are up slightly: barchart.com

Bloomberg Futures.

And the Asian markets are mixed.

by Calculated Risk on 6/10/2009 08:50:00 PM

In early March it seemed like the "D" word was everywhere. That raised a question: What is a depression?

This is an update to that earlier post. Although there is no formal definition, most economists agree a depression is a prolonged slump with a 10% or more decline in real GDP.

In March I heard an analyst say that a 10% unemployment rate is a depression. But the unemployment rate peaked at 10.8% in 1982, and that period is not considered a depression.

Some people argue the duration of the economic slump defines a depression - and the current recession is already 18 months old (through May). That is longer than the recessions of '90/'91 and '01. The '73-'75 recession lasted 16 months peak to trough, and the early '80s recession (a double dip) was classified as a 6 month recession followed by a 16 month recession (22 months total). Those earlier periods weren't "depressions", so if duration is the key measure, the current recession probably still has a ways to go.

Here is a graph comparing the decline in real GDP for the current recession with other recessions since 1947. Depression is marked on the graph as -10%.

Click on graph for larger image in new window.
Q2 2009 is estimated at a -4.0% decline in real GDP (seasonally adjusted annual rate). This will push the cumulative decline (peak to trough) to about 4.2% from the peak of real GDP.

Note: Northern Trust is forecasting -3.6% real GDP (SAAR) in Q2, and Goldman Sachs is forecasting -3.0%. For the stress tests, the baseline scenario assumed -1.2% in Q2, and the "more adverse" scenarios assumed -4.3%.

Even though the current recession is already one of the worst since 1947, it is only about 42% of the way to a depression (assuming a weak Q2).

To reach a depression - assuming -4.0% in Q2 - the economy would have to decline at about a 5.8% annual rate each quarter for the next year.

by Calculated Risk on 6/10/2009 05:43:00 PM

California State Controller John Chiang wrote to Governor Schwarzenegger today. The following graph shows California's Cash Outlook starting in July 2009.

Click on graph for larger image in new window.

And here is the letter to Governor Schwarzenegger (note that May was worse than projections just a few weeks ago):

On May 29, 2009, I informed you of the precarious nature of the State’s cash condition and alerted you to impending risks which threaten the State’s ability to meet its payment obligations.

The situation has not improved. Based on actual revenues received during the month of May, and finalized May Revision data provided by the Department of Finance on June 1, I have the following updates to the State’s 2009-10 cash outlook:

• In the absence of legislative action, the State will not have sufficient cash to meet all of its payment obligations on July 28. By July 31, the cash deficit will increase to a negative $2.78 billion.

• In April, the State’s cash balance will fall to a negative $25.3 billion – the lowest point projected for Fiscal Year 2009-10. To put this shortfall into proper perspective, it is five times the $5.1 billion cash deficit we faced this past spring.

In the letter I sent you on May 29, I indicated we would have a negative cash balance of $1.02 billion at the end of July, and a low point for 2009-10 of $22 billion. The additional deterioration is a result of two factors: (a) May revenues coming in $827 million less than projected by the Governor’s May Revision, and (b) adjustments made by the Department of Finance to its revenue and expenditure projections. Attached is a chart detailing the projected cash low point for each month for the fiscal year starting July 1.

While the severity of the shortfall has worsened since my last letter, the time available to correct our budget and cash deficits has not materially changed. The State will run out of cash in less than 50 days without corrective action by the Legislature and Governor. ...

by Calculated Risk on 6/10/2009 04:02:00 PM

From the NY Post: AIG BLDG. FETCHES UNDER $140M (ht bill)

LOCAL owner/developer Youngwoo & Associates has teamed up with South Korea's Kumho Investment Bank to win the bidding for AIG's downtown headquarters complex that consists of the Art Deco 70 Pine St. and the more modern 72 Wall St.

Sources said the pricing for the buildings, which have a combined 1.4 million square feet of space, will be just under $100 a foot, bringing the total to less than $140 million.

Put that in your CMBS rating formulas ...

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

From the Fed: Beige Book

Reports from the twelve Federal Reserve District Banks indicate that economic conditions remained weak or deteriorated further during the period from mid-April through May. However, five of the Districts noted that the downward trend is showing signs of moderating. Further, contacts from several Districts said that their expectations have improved, though they do not see a substantial increase in economic activity through the end of the year.

On Real Estate and construction:

Although the residential real estate market remains weak, agents in the New York, Philadelphia, Cleveland, Richmond, Chicago, Kansas City, Dallas, and San Francisco Districts reported an uptick in home sales. The reasons cited include seasonal factors, low interest rates, declining house prices, and tax credits for first-time buyers. Much of the sales increase was found in the lower-priced end of the market. New home construction appeared to have stabilized at very low levels in Philadelphia, Cleveland, Atlanta, Chicago, Minneapolis, Dallas, and San Francisco, although Kansas City reported an uptick in construction. Home inventories were trending down in Philadelphia, Richmond, Atlanta, Kansas City, and Dallas. However, Chicago reported that inventories remain elevated.

Commercial real estate markets continued to weaken across all Districts. Vacancy rates for commercial properties were rising in many regions of the Boston, New York, Philadelphia, Richmond, Atlanta, Chicago, Minneapolis, Kansas City, and San Francisco Districts putting downward pressure on rents. Atlanta, Chicago, and St. Louis reported new construction projects being postponed or cancelled, and new construction in the New York, Philadelphia, and Minneapolis Districts dropped substantially. Eight Districts cited difficulty in obtaining financing as one of the primary reasons for delaying or stopping construction of new developments and for limiting sales of existing properties.
emphasis added

Commercial real estate (CRE) is following residential off the cliff (this is the typical pattern - CRE follows residential). CRE will be crushed this year and into 2010.

Beige Shoots (ht kilroy was here)

by Calculated Risk on 6/10/2009 01:08:00 PM

Here is a new tool from Political Calculations: Predicting Mortgage Rates and Treasury Yields

This is based off the chart I posted last Friday and is very timely with the Ten Year Yield pushing 4%.

Using their tool, with the Ten Year yield at 3.99%, this suggests that 30 year mortgage rates will rise to 5.8% based on the historical relationship between the Ten Year yield and mortgage rates.

According to the MBA the "average contract interest rate for 30-year fixed-rate mortgages increased to 5.57 percent" last week. So rates will probably be higher this week.

BTW, I first used the term "Bernanke's conundrum" in 2005 to describe what I thought would happen when the Fed rate was low following the housing bust - and the long rate started to rise.

by Calculated Risk on 6/10/2009 11:27:00 AM

From Lingling Wei and Kris Hudson: Relief for Commercial Real-Estate Debt? It Seems Possible

... developers and investors complain that only those who are delinquent can talk to servicers of ... CMBS. But now the Treasury is considering issuing guidance that would allow servicers to start talking about ways to avoid defaults and foreclosures sooner, possibly at least two years ahead of the maturity date of a loan ... The Treasury guidance, which could be released within weeks, would essentially enable loan-modification talks to take place without triggering tax consequences ... when CMBS offerings are created, the underlying mortgages are legally held by tax-free trusts. The trusts can be forced to pay taxes if the underlying loans are modified before they become delinquent, according to current CMBS rules.
...
Of particular concern is $154.5 billion of CMBS loans coming due between now and 2012. About two-thirds of that likely won't qualify for refinancing, according to a recent report by Deutsche Bank. The bank projected that the default rates on the $700 billion of outstanding CMBS eventually could hit at least 30%, and loss rates, which take into account the amounts recovered by lenders, could reach as much as 13%, more than the peak seen during the commercial-real-estate collapse of the early 1990s.

This is a follow up to:

S&P on CMBS: Potential Downgrades from AAA to A

CRE Mortgage Servicers Seek up to 5 Year Extensions (with Fitch comments)

From Bloomberg: U.S. Commercial Mortgage Defaults May Rise to 17-Year High

by Calculated Risk on 6/10/2009 08:43:00 AM

The Census Bureau reports:

The ... total April exports of $121.1 billion and imports of $150.3 billion resulted in a goods and services deficit of $29.2 billion, up from $28.5 billion in March, revised. April exports were $2.8 billon less than March exports of $123.9 billion. April imports were $2.2 billion less than March imports of $152.5 billion.

Click on graph for larger image.

The first graph shows the monthly U.S. exports and imports in dollars through April 2009.

Both imports and exports declined again in April. On a year-over-year basis, exports are off 21% and imports are off 31%!

The second graph shows the U.S. trade deficit, with and without petroleum, through April.

The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.

Import oil prices increased slightly to $46.60 in April - the second monthly increase in a row - and following eight consecutive monthly declines. Spot prices have increased sharply since April, so the decline in the trade deficit due to lower oil prices is over for now.

by Calculated Risk on 6/10/2009 08:37:00 AM

The MBA reports:

The Market Composite Index, a measure of mortgage loan application volume, was 611.0, a decrease of 7.2 percent on a seasonally adjusted basis from 658.7 one week earlier.
...
The Refinance Index decreased 11.8 percent to 2605.7 from 2953.6 the previous week and the seasonally adjusted Purchase Index increased 1.1 percent to 270.7 from 267.7 one week earlier.
...
The average contract interest rate for 30-year fixed-rate mortgages increased to 5.57 percent from 5.25 percent ...
emphasis added

The Purchase Index is now at the level of the late '90s.

30-year fixed mortgage rates were at 4.81% two weeks ago, and are now at 5.57%. With the 10 year yielding 3.9%, mortgage rates will probably rise again this week.

Click on graph for larger image in new window.

This graph shows the MBA Purchase Index and four week moving average since 2002.

Although we can't compare directly to earlier periods because of the changes in the index, this shows no pick up in overall sales activity.

by Calculated Risk on 6/10/2009 01:47:00 AM

When I saw the title of the following article, I was wary that the median price was being distorted by the mix of homes being sold (a mix of more low end homes lowers the median). But Peter Hong at the LA Times gives some specific examples of prices going back 20 years or more.

From the LA Times: Median home prices drop below 1989 levels in some parts of Southland

To return to the past, take a stroll down Mulberry Avenue in Lancaster. John A. Beatrice, 55, bought his spacious two-story Spanish-style house there brand-new for $120,000 in 1989. It was a price he could comfortably afford, and he planned on staying through retirement, so he wasn't worried about price swings.
...
But he never imagined his neighborhood would drop off the charts. In April, a slightly larger home two doors away sold for $66,500. That's just over half the $130,000 it went for new in 1992. In 2005, that house sold for $330,000.

And another example ...

[Patricia] Hynes bought her three-bedroom home in Lancaster brand-new for $119,000 in 1989 ... Her home is an island in a sea of repos. Houses on both sides have fallen into foreclosure; one is priced $10,000 less than the amount she paid 20 years ago.

Nearby, a four-bedroom, 2,100-square-foot home sold in May for $89,000.

Most of these areas are suffering negative absorption (families are moving out) and are the least desirable areas in SoCal. And there are more foreclosures coming ...

Another tsunami of foreclosures is threatening to swamp an already saturated market. In Palmdale and Lancaster, 903 homes were sold in April, but according to ForeclosureRadar, more than 7,500 are in some stage of foreclosure.

Some buyers who thought they were getting bargains didn't. In Lancaster, Beatrice's eldest son, Daniel, bought a house near his father's for $175,000 in April 2008; comparable properties are now selling for about $95,000.

Get ready for 1979 prices!