by Calculated Risk on 6/23/2009 10:52:00 PM

From the SF Gate: Housing, unemployment woes leave movers shaken

Sinking home prices and a weak job market have forced normally restless Americans to stay put in an uncharacteristic shift that has, among other things, clobbered the moving industry.

"Property values have dropped so much people can't pick up and move the way they used to," said Michael Hicks, a demographer at Ball State University in Indiana who has tracked the nationwide slowdown using data from several sources, including moving companies.

That industry data mirrors a Census Bureau report that looked at moves in 2008, said William Frey, a demographer at the Brookings Institution in Washington, D.C.

"The annual migration rate has gone way down to historic low levels," Frey said. "This includes long distance moves and moving across town."

During the 1950s and 1960s, Frey said, as many as 20 percent of Americans moved in any given year. Mobility rates slowed to 15 percent to 16 percent during the 1990s. But in 2008, only 11.9 percent of Americans moved, he said.

A few previous mobility posts: Housing Bust Impacts Worker Mobility April 2008, Housing Bust Impacting Labor Mobility, Dec 2008, Housing Bust and Geographical Mobility, April 2009

by Calculated Risk on 6/23/2009 08:19:00 PM

From Martin Wolf in the Financial Times: Reform of regulation has to start by altering incentives

Proposals for reform of financial regulation are now everywhere. The most significant have come from the US, where President Barack Obama’s administration last week put forward a comprehensive, albeit timid, set of ideas. But will such proposals make the system less crisis-prone? My answer is, no. The reason for my pessimism is that the crisis has exacerbated the sector’s weaknesses. It is unlikely that envisaged reforms will offset this danger.

At the heart of the financial industry are highly leveraged businesses. Their central activity is creating and trading assets of uncertain value, while their liabilities are, as we have been reminded, guaranteed by the state. This is a licence to gamble with taxpayers’ money. The mystery is that crises erupt so rarely.

Wolf discusses how it is rational for management and shareholders to gamble when the risks are asymmetrical (huge potential winnings, limited losses). And he argues that "creditors ... appear to have lent to a bank. In reality, they have lent to the state." He also discusses how tighter regulation isn't enough because the banks will find a way round the new regulations.

Wolf concludes:

Such a crisis is not only the result of a rational response to incentives. Folly and ignorance play a part. Nor do I believe that bubbles and crises can be eliminated from capitalism. Yet it is hard to believe that the risks being run by huge institutions had nothing to do with incentives. The unpleasant truth is that, today, the incentive to behave in this risky way is, if anything, even bigger than it was before the crisis.

Regulatory reform cannot end with incentives. But it has to start from incentives. A business that is too big to fail cannot be run in the interests of shareholders, since it is no longer part of the market. Either it must be possible to close it down or it has to be run in a different way. It is as simple – and brutal – as that.

Talk about pessimism.

Another financial crisis is unfortunately inevitable - all we hope to do with reform is to put it off for a couple of decades or more.

by Calculated Risk on 6/23/2009 04:50:00 PM

From the WSJ: Red Roof Inn Defaults on Mortgage Debt (hat tips to all in the comments!)

Red Roof Inn Inc. ... defaulted on $332 million of mortgage debt ... Red Roof confirmed the defaults Tuesday.

All told, Red Roof's properties carry at least $1 billion in debt, including mortgages, mezzanine loans and other notes.

"As a result of the extraordinary stress in the hospitality industry and the economy overall, we have entered into some restructuring discussions with our lenders," said Andrew Alexander, an executive vice president of Red Roof.
...
Occupancy at Red Roof's properties, which averaged 62% when the mortgages were originated in 2007, sank to 50.7% in the first four months of this year.

The drop in occupancy rates are similar to the overall industry decline. And not only are occupancy rates off sharply, but so are room rates. Smith Travel Research reported last week that revenue per available room (RevPAR) was off 18.6 percent for the comparable week last year. I think this is just the beginning for the hotel related defaults.

by Calculated Risk on 6/23/2009 02:31:00 PM

From FHFA Director James B. Lockhart, June 23, 2009:

“Although monthly data are volatile, we may be starting to see signs of stabilization in prices for houses funded by conventional conforming loans, as the HPI is only down 0.3 percent for the first four months of the year.”

From the National Association of Realtors, June 23, 2009:

The national median existing-home price for all housing types was $173,000 in May, down 16.8 percent from a year earlier. Distressed properties, which declined to 33 percent of all sales in May from 45 percent in April, continue to downwardly distort the median price because they generally sell at a discount relative to traditional homes.

Which is it? The answer is both are flawed.

James Hagerty at the WSJ has a good analysis: FHFA Data May Signal False Bottom in Housing

The Realtors’ data cover a broader range of the market than does the FHFA index. ... But the Realtors’ median price is skewed by changes in the mix of homes sold each month. ...

The FHFA index, like the S&P Case-Shiller index, is based on repeat sales of the same homes and so avoids the distortions of a shifting mix in sales. But the Case-Shiller index includes more foreclosure-related transactions and gives more weight to higher-priced homes than to lower-priced ones. Thus, when sales of higher-end homes increase, the Case-Shiller index is likely to look much worse, even as the Realtors’ median price will look better.

As the sales of mid-to-high end houses pick up (sales at the high end have slowed to a trickle in many areas), the median price might rise even as prices continue to fall because of change in the mix - and this will confuse some observers.

And the FHFA index is based on GSE loans, and as the most recent data showed, a higher percentage of the problem loans were non-GSE private label loans. Also, the FHFA misses many larger loans in general, and high end prices have held up better so far - but that will change when people realize there are few move-up buyers!

The following graphic (repeat) is from the Harvard Report on Housing 2009. Note: this data is informative, but use caution when using the Harvard analysis (see: Harvard on Housing 2005)

Click on image for larger graph in new window.

This shows that the worst mortgages were the private label securities (as an example mortgages originated by New Century, and securitized by Bear Stearns).

The Freddie and Fannie portfolios accounted for 56% of all mortgages in Dec 2008, but only 20% of the seriously delinquent loans. So the FHFA index is based on some of the better performing loans. Case-Shiller (to be released next Tuesday) includes these other loans.

by Calculated Risk on 6/23/2009 01:56:00 PM

From MarketWatch: S&P downgrades prime jumbo mortgage securities

S&P said it lowered ratings on 102 classes from 33 U.S. prime jumbo residential mortgage-backed securities that were issued from 1998 to 2004. The rating agency also affirmed ratings on 669 classes from 32 of the downgraded deals, as well as 34 other deals.

"The downgrades reflect our opinion that projected credit support for the affected classes is insufficient to maintain the previous ratings, given our current projected losses," S&P said in a statement.

From 1998?

by Calculated Risk on 6/23/2009 11:59:00 AM

Click on map for larger image.

Here is a map of the three month change in the Philly Fed state coincident indicators. Forty nine states are showing declining three month activity.

This is what a widespread recession looks like based on the Philly Fed states indexes.

On a one month basis, activity decreased in 47 states in May, and was unchanged in 2 more states. Here is the Philadelphia Fed state coincident index release for May.

The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for May 2009. In the past month, the indexes have increased in one state (North Dakota), decreased in 47, and were unchanged in the other two (South Dakota and Vermont), for a one-month diffusion index of -92. Over the past three months, the indexes have increased in one state (again, North Dakota) and decreased in the other 49 states, for a three-month diffusion index of -96.

The second graph is of the monthly Philly Fed data of the number of states with one month increasing activity. Most of the U.S. was has been in recession since December 2007 based on this indicator.

Note: this graph includes states with minor increases (the Philly Fed lists as unchanged).

Almost all states showed declining activity in May. Still a very widespread recession ...

by Calculated Risk on 6/23/2009 10:07:00 AM

The previous post was the NAR release for May existing home sales. Here are some graphs ...

Click on graph for larger image in new window.

The first graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.

Sales in May 2009 (4.77 million SAAR) were 2.4% higher than last month, and were 3.6% lower than May 2008 (4.95 million SAAR).

Here is another way to look at existing homes sales: Monthly, Not Seasonally Adjusted (NSA):

This graph shows NSA monthly existing home sales for 2005 through 2009. Continuing the recent trend, sales (NSA) were lower in May 2009 than in May 2008.

It's important to note that the NAR says about one-third of these sales were foreclosure resales or short sales. Although these are real transactions, this means activity (ex-distressed sales) is much lower.

The third graph shows nationwide inventory for existing homes. According to the NAR, inventory decreased to 3.80 million in May. The all time record was 4.57 million homes for sale in July 2008. This is not seasonally adjusted.

Typically inventory increases in May, and then really increases over the next couple months of the year until peaking in the summer. This decrease in inventory was a little unusual, and the next few months will be key for inventory.

Also, many REOs (bank owned properties) are included in the inventory because they are listed - but not all. Recently there have been stories about a substantial number of unlisted REOs - this is possible.

The fourth graph shows the 'months of supply' metric for the last six years.

Months of supply declined to 9.6 months.

Sales increased slightly, and inventory decreased, so "months of supply" decreased. A normal market has around 6 months of supply, so this is still very high.

Here is another graph of inventory. This shows inventory by month starting in 2004.

Inventory in May 2009 was below the levels in May 2007 and 2008 (this is the 4th consecutive month with inventory levels below 2 years ago). Inventory levels have been below the year ago level for ten consecutive months.

It is important to watch inventory levels very carefully. If you look at the 2005 inventory data, instead of staying flat for most of the year (like the previous bubble years), inventory continued to increase all year. That was one of the key signs that led me to call the top in the housing market!

Note: there is probably a substantial shadow inventory – homeowners wanting to sell, but waiting for a better market - so existing home inventory levels will probably stay elevated for some time. And as noted above, there are also reports of REOs being held off the market, so inventory is probably under reported.

The final graph shows the year-over-year change in existing home inventory.

If the trend of declining year-over-year inventory levels continues in 2009 that will be a positive for the housing market. Prices will probably continue to fall until the months of supply reaches more normal levels (closer to 6 months compared to the current 9.6 months), and that will take some time.

I'll have more on Existing Home sales tomorrow after New Home sales are released tomorrow.

by Calculated Risk on 6/23/2009 10:00:00 AM

The NAR reports: May Existing-Home Sales Continue Rising Trend

Existing-home sales – including single-family, townhomes, condominiums and co-ops – rose 2.4 percent to a seasonally adjusted annual rate of 4.77 million units in May from a downwardly revised level of 4.66 million units in April, but remained 3.6 percent below the 4.95 million-unit pace in May 2008.
...
Total housing inventory at the end of May fell 3.5 percent to 3.80 million existing homes available for sale, which represents a 9.6-month supply at the current sales pace, down from a 10.1-month supply in April.
...
Distressed properties, which declined to 33 percent of all sales in May from 45 percent in April ...

Yun said the appraisal problem is serious. “Lenders are using appraisers who may not be familiar with a neighborhood, or who compare traditional homes with distressed and discounted sales,” he said. “In the past month, stories of appraisal problems have been snowballing from across the country with many contracts falling through at the last moment. There is danger of a delayed housing market recovery and a further rise in foreclosures if the appraisal problems are not quickly corrected.”

Graphs soon (as soon as the NAR updates their site).

by Calculated Risk on 6/23/2009 08:48:00 AM

A couple of morning stories ...

From Bloomberg: Bernanke Set to Defend Record as Reappointment Debate Begins

Besides keeping Bernanke, Obama’s options include appointing Summers or Janet Yellen [San Francicso Fed President]

Summers, 54, a former Treasury secretary who heads Obama’s National Economic Council, is considered the front-runner should the president want a change. San Francisco Fed President Yellen, 62, was previously a Fed governor and chairman of the Council of Economic Advisers ....

Summers wants the job, Senator Robert Bennett of Utah [said]. Asked if he would support Summers for Fed chairman, Bennett said: “I am told that Larry would very much like me to. I would have no objection to Larry.”

And Paul Krugman directs us to a site tracking the news from 1930 day by day. A couple quotes from June 23, 1930:

Col. Ayres, VP Cleveland Trust, predicts an abrupt recovery in stock and commodity prices by Labor Day due to current consumption exceeding production. Distinguishes between two types of depression, “V”-shaped and “U”-shaped.

And heard on the Street:

“'Things are getting back to normal,' remarked the head of a Broadway house. 'Again the main topic of discussion among our customers is the 18th amendment.'” [Prohibition]

by Calculated Risk on 6/23/2009 12:05:00 AM

The Fed is meeting over the next two days, and although there is no chance of a change in the federal funds rate, it is possible the Fed will announce additional purchases of Treasury securities or agency MBS (I think this is unlikely) or change the Fed statement to reflect the view that the federal funds rate will stay at essentially zero for some time (this is very possible).

The most recent statement read:

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

The "exceptionally low levels" phrase might have confused some people into thinking that a modest rate hike was coming soon, so it is possible that the Fed will change that phrase to indicate "the current low levels ... for an extended period."

No one expects a rate change this week, but a few investors expect a rate increase by August. This graph from the Cleveland Fed shows public expectations of the Fed Funds rate after the August meeting. Maybe the Fed will try to change those expectations.



A short preview from Bloomberg ...