by Calculated Risk on 8/10/2009 03:10:00 PM

From Crain's New York: Shadow units cast pall (ht Nick)

... In Manhattan in the first quarter, [condo] sales were halved from year-earlier levels even as more apartments flooded onto the market, leaving it choking on an 18.6-month supply of units. ...

As bad as those figures look, they may actually overstate the health of the market. Industry experts point to a growing mountain of so-called shadow inventory that is not reflected in the data. This includes units that are held by developers in soon-to-be completed buildings, as well as those kept off the market by banks and by individual owners who are waiting for conditions to improve before they tack up “For Sale” signs.

“We are undercounting the housing stock,” says Jonathan Miller, chief executive of appraisal firm Miller Samuel Inc. ... In a report on Manhattan residential real estate this spring, Mr. Miller estimated that in addition to the 10,445 condominiums that showed up in unsold inventory, there were as many as 7,000 shadow units.

There are plenty of details in the article. This shadow inventory is a significant issue, especially in areas with high rise condos.

Just a reminder - the Census Bureau new home inventory report does not include high rise condos, so if these units are not listed, they are not counted anywhere.

by Calculated Risk on 8/10/2009 12:49:00 PM

From Bloomberg: Freddie Mac Says Its Loss From Taylor Bean May Be 'Significant'

Freddie Mac ... said the collapse of lender Taylor, Bean & Whitaker Mortgage Corp. may cause it “significant” losses.
...
The Ocala, Florida-based lender accounted for about 5.2 percent of Freddie Mac’s single-family mortgage purchases last year ... Freddie Mac can force lenders to repurchase defaulted loans that weren’t of the credit quality they represented, a use of its contracts already made harder by the collapses of IndyMac Bancorp., Washington Mutual Inc. and Lehman Brothers Holdings Inc., the company said.
...
Brian Faith, a spokesman for Fannie Mae, Freddie Mac’s Washington-based rival, said last week his company hasn’t done business with Taylor Bean “for some time.”

From the SEC filing:

On August 4, 2009, we notified Taylor, Bean & Whitaker Mortgage Corp., or TBW, that we had terminated its eligibility, for cause, as a seller and servicer for us effective immediately. TBW accounted for approximately 5.2% and 2.7% of our single-family mortgage purchase volume activity for full-year 2008 and the six months ended June 30, 2009, respectively. We are in the process of determining our total exposure to TBW in the event it cannot perform its contractual obligations to us. The amount of our losses in such event could be significant.

by Calculated Risk on 8/10/2009 10:56:00 AM

The Fed has been a steady buyer of Treasury securities. It appears this program will end in September.

From the last FOMC statement:

[T]he Federal Reserve will buy up to $300 billion of Treasury securities by autumn.

From Bloomberg last week: Fed Set to End Purchases, Two Former Governors Say

The Federal Reserve is set to halt its purchases of up to $300 billion in U.S. Treasuries in mid- September as scheduled, and will probably announce the decision next week, two former central bank governors said.

Click on graph for larger image in new window.

According to the Cleveland Fed:

The Fed purchased $6.496 billion in Treasury securities on July 30, focused in the three–to-four year sector, and another $7.248 billion on August 5 with maturities between four and seven years.

To date, the Fed has purchased $236 billion of Treasuries and will purchase up to $300 billion by autumn.

The New York Fed reports additional purchases of $7.0 billion on August 6 (mostly 7 year maturity), and $6.594 billion on August 10 (mostly 3 to 4 year).

That puts the total Fed purchases at $250 billion of Treasuries, and the Fed will probably purchase $50 billion more - and then stop in September.

This will be an interesting sentence in the FOMC statement on Wednesday - and it will be interesting to see the reaction in the Treasury markets. The yield on the 10 year note is already creeping back up toward 4% (3.82% this morning), and that will push up mortgage rates.

Also from Bloomberg, on CRE and the Fed: Fed Focusing on Real-Estate Recession as Bernanke Convenes FOMC

The [CRE] industry is likely to be high on the agenda when Bernanke and his colleagues sit down in Washington tomorrow for the Federal Open Market Committee meeting on monetary policy. ... If nonresidential real estate remains in the doldrums, the Fed may be forced to leave emergency-lending programs in place and keep its benchmark interest rate close to zero for longer than some investors expect ...

There is no question private nonresidential real estate will be under pressure from some time - this is no surprise.

by Calculated Risk on 8/10/2009 09:01:00 AM

The following article is similar to the Chicago Tribune article last week, Corus Bankshares Inc. on cusp of crisis, but adds a little local color in Florida.

From the Miami Herald: Soured loans on South Florida condos sinking Corus Bankshares

Heavy with $182 million in construction loans, the long-awaited Trump International Hotel and Tower, a luxury hotel condominium in Fort Lauderdale beach, stands furnished, but empty, with not a single tenant inside.
...
Close to foreclosure, the structure is part of Corus Bank's deeply troubled loan portfolio, which as of May 31 includes 14 outstanding condo loans in South Florida, of which 12 are over 90 days past due. At almost $1 billion, these South Florida construction loans form half of the $2 billion nonperforming loans across the United States that led Corus to warn last month that it may fail.

Corus is long past the June 18 deadline imposed by regulators to raise $390 million in capital, and many believe the Federal Deposit Insurance Corp. will seize the bank within a month -- once it finds a buyer.
...
According to Corus' financial statements, a key reason it lent so much money in Florida was ``the existence and strength of pre-sale contracts.'' Unlike most other states, Florida allows developers to sell condominium units before construction begins. Buyers generally put down a 20 percent deposit, of which half is used on construction costs. Essentially, these act as interest-free loans for the developers, who typically take out short-term loans from banks (like Corus) to build the condos. If the depositors walk away, however, developers are left with an empty building.

Also on potential bank failures, check out the Problem Bank Link (unofficial) I posted late Friday (Credit: surferdude808).

by Calculated Risk on 8/09/2009 08:55:00 PM

From the WSJ: Maguire Properties Warns of Loan Defaults

Maguire Properties Inc., one of the largest office-building owners in Southern California, is planning to hand over control of seven buildings with some $1.06 billion in debt to creditors ...

Maguire ... notified the buildings' mortgage holders Friday that it expected "imminent default" on the loans.

All of these buildings have negative cash flow with rising vacancies and falling rents. This is more losses for the lenders (or CMBS investors for six of these buildings).

The seven buildings, with 4.2 million square feet, make up about 20% of Maguire's portfolio. ... The company still has $3.5 billion in debt, and some analysts say that amount exceeds the value of its remaining properties. "Almost every building in [Maguire's] portfolio is under water," says Michael Knott, an analyst with Green Street Advisors.

Maquire also owned the building recently built for subprime mortgage broker New Century in Irvine, and sold that building a couple of months ago for a substantial discount to construction costs.

by Calculated Risk on 8/09/2009 05:53:00 PM

From Bloomberg: Bernanke Should Be Appointed to a Second Term, Krugman Says

“He’s earned the right to a second term,” [Princeton University Economist Paul Krugman] ... said yesterday in an interview in Kuala Lumpur. “He turned the Fed into the financial intermediary of last resort. When the banking system failed to deliver capital where it was needed, he put the Fed into the markets.”
...
“I think Bernanke has done a really good job,” Krugman said. “He failed to see this coming and he was behind the curve in early phases. But he’s been really very good in the sense that it’s really very hard to see how anyone could have done more to stem this crisis.”

Stiglitz is unsure: Stiglitz Says U.S. Facing a ‘Very Slow’ Recovery From Recession

When asked whether Bernanke should be reappointed so he can remain Fed chief after his current term expires Jan. 31, Stiglitz replied: “That’s a hard question.” A replacement is “something we ought to consider,” he said.

And more from a couple of weeks ago: The Bernanke Reappointment Tour (Roubini says yes, Thoma says yes, and I'm uncertain).

by Calculated Risk on 8/09/2009 02:03:00 PM

Professor Arthur C. Nelson, Director of the Metropolitan Research Center at the University of Utah, has kindly sent me his new paper: "The New Urbanity: The Rise of a New America" (no link). Nelson sees a dramatic shift in American cities based on changes in demographics and in housing peferences. He believes this will lead to a "new era of infill and redevelopment."

Nelson also argues this will lead to a decline in the homeownership rate.

Note: Brief excerpts of Dr. Nelson's paper removed by request.

This graph shows the homeownership by age group for three different time periods: 1985, 2000, and 2007. Back in 1985, the homeownership rate declined significantly after people turned 70. However, more recently, the homeownership rate has stayed above 80% for those in the 70 to 75 cohort, and close to 80% for people over 75.

I noted in April:

I expect the homeownership rate to remain high for the boomer generation too. Although there will probably be a geographic shift as the boomer generation retires (towards the sun states) and some downsizing, I don't think the aging of the boomer generation will negatively impact the homeownership rate for 15 years or more.

So Dr. Nelson is coming to a different conclusion. He thinks the homeownership rate will fall to 63.5% by 2020, and I think it will stay a little higher as many older couples and singles stay in their homes.

This has significant implications for planning and homebuilders. If Nelson is correct, there will be a dramatic shift towards a "new urbanity" and away from suburbs. And also a shift towards more renting.

Professor Nelson sent me this projection:

Home Tenure	2005	2020	Change	Percent Change in Supply	Share of Change in Supply	Tenure 2005	Tenure 2020
Owner-Homes (occupied and vacant)	74,164	87,135	12,971	17%	43%	68.90%	63.50%
Renter-Homes (occupied and vacant)	35,903	53,254	17,351	48%	57%	31.10%	36.50%
Total	110,067	140,389	30,322
Source: Arthur C. Nelson, Director, Metropolitan Research Center

Notice the shift to rental units in Nelson's projections. Nelson does note that there were over 2 million excess units in 2005, and that needs to worked off first. Nelson is projecting a need for 30 million new housing units over the next 15 years (I think this is high, but Nelson is expecting many more single person households).

This has huge implications for builders. Using Nelson's figures, home builders will only have to build about 800 thousand (on average) single family units per year through 2020 (after the excess is worked off). This is far below the 1.25 million per year seen in 2004 and 2005. That level of production is not coming back. Here is something I wrote in 2007: Home Builders and Homeownership Rates

[With the rising homeownership rate] the homebuilders was ... had the wind to their backs. Instead of 800K of new owner demand per year (plus replacement of demolished units, and second home buying), the homebuilders saw an additional 500K of new owner demand during the period 1995 to 2005. This doesn't include the extra demand from speculative buying. Some of this demand was satisfied by condo conversions and owner built units ...

Looking ahead, if the homeownership rate stays steady, the demand for net additional homeowner occupied units would fall back to 800K or so per year (assuming steady population growth and persons per household). However the homeownership rate is declining, and this is now a headwind for the builders.

It appears the rate is declining at about 0.33% per year (Goldman's Hatzius estimated 0.5% per year). This would mean the net demand for owner occupied units would be 833K minus about 333K or 500K per year - about 40% of the net demand for owner occupied units for the period 1995 to 2005.

This means the builders have two problems over the next few years: 1) too much inventory, and 2) demand will be significantly lower over the next few years than the 1995-2005 period, and even when the homeownership rate stabilizes and the inventory is reduced, demand (excluding speculation) will only be about 2/3 of the 1995-2005 period.

I think Nelson is correct about the trend, but might be overestimating the shift towards renting. Also I think using age 75 would be better for figure 1, so I think this shift will be delayed by about 10 years.

by Calculated Risk on 8/09/2009 10:57:00 AM

From Bloomberg: U.S. Economy May Have Reached ‘Trough,’ Krugman Says

“It’s quite possible, though not certain, that retrospectively, we’ll say that the recession ended in July or August, maybe September,” Krugman said. “My guess is that we’ve bottomed out now, that August was probably the trough month.”
...
A second stimulus package for the economy is still needed, and should be directed at state and local governments as well as infrastructure spending, he said in an interview in Kuala Lumpur. The world economy may face several years of weak growth without falling into a “double-dip” recession, he said.
...
“What we’re seeing is stabilization,” Krugman said. “We’re seeing that the great freefall and the nosedive seems to be over. It’s leveling out but that is very different from returning to normality.”

The free fall may be over, but there are few green shoots at the bottom of the cliff.

by Calculated Risk on 8/08/2009 11:22:00 PM

Reader Mark sent me a link to a talk by Jon Fisher, a professor at the University of San Francisco School of Business. Jon made the point that housing starts and unemployment are inversely correlated.

Of course readers here know that housing lead the economy, and employment lags. So naturally housing and unemployment are inversely correlated with a lag.

Note: Dr. Leamer's Sept 2007 paper: Housing is the Business Cycle is an excellent overview of how housing leads the economy. (Something I covered extensively in 2005)

Click on graph for larger image in new window.

This graph shows housing starts (both total and single unit) and unemployment (inverted).

You can see both the correlaton and the lag. The lag is usually about 12 to 18 months, with peak correlation at a lag of 16 months for single unit starts. The 2001 recession was a business investment led recession, and the pattern didn't hold.

This suggests unemployment might peak in Spring 2010.

Professor Fisher argued that unemployment will rise to about 10.4% and then fall rapidly. He is basing the rapid decline on a "V shaped" housing recovery similar to previous recessions. I disagree with that point.

In most earlier recessions, the slumps were caused by the Fed raising interest rates to fight inflation. When the Fed cut rates, housing bounced back sharply (V shaped).

Although this recession was led by a housing bust - and that makes it look similar to some previous periods - this recession was not engineered by the Fed raising rates, rather it was the busting of the credit and housing bubbles, and all the related problems that led the economy into recession. Since there is still far too much existing home inventory, a sharp bounce back in housing starts is unlikely, so I think Fisher's forecast for a rapid decline in unemployment is also unlikely.

by Calculated Risk on 8/08/2009 07:10:00 PM

FAQ: How can the unemployment rate fall if the economy is losing net jobs, especially since the population is growing?

This data comes from two separate surveys. The unemployment Rate comes from the Current Population Survey (CPS: commonly called the household survey), a monthly survey of about 60,000 households.

The jobs number comes from Current Employment Statistics (CES: payroll survey), a sample of approximately 400,000 business establishments nationwide.

These are very different surveys: the CPS gives the total number of employed (and unemployed including the alternative measures), and the CES gives the total number of positions (excluding some categories like the self-employed, and a person working two jobs counts as two positions).

A couple of key concepts (from the BLS):

The CES employment series are estimates of nonfarm wage and salary jobs, not an estimate of employed persons; an individual with two jobs is counted twice by the payroll survey. The CES employment series excludes workers in agriculture and private households and the self-employed.
emphasis added

And the CPS:

The CPS estimate of employment is for the total number of employed persons. Included are categories of workers that are not covered by the Current Employment Statistics (CES) survey: self-employed persons, private household workers, agriculture workers, unpaid family workers, and workers on leave without pay during the reference period. Multiple jobholders are counted once in the estimate of total employed.

Unemployed persons include those who did not have a job during the reference week, had actively looked for work in the prior 4 weeks, and were available for work. Actively looking for work includes activities such as contacting a possible employer, contacting an employment agency or employment center, having a job interview, sending out resumes, filling out job applications, placing or answering job advertisements, and checking union or professional registers.

So in July, the headline CES number showed a loss of 247,000 non-farm private jobs (by the definitions above). The CPS showed a decline of 155,000 employed people.

These two surveys are almost always different, and both are useful.

But the unemployment rate fell, even though the CPS showed a decline in employed people. How can that be?

The CPS also showed a decline in the Civilian Labor Force Level by 422,000. And a decline in the number of unemployed people (U-3) of 267,000.

The unemployment rate is a ratio, with the numerator the number of unemployed, and the denominator the Civilian Labor Force - so these changes in both number lowered the unemployment rate to 9.4%.

If you want more details, see Monthly Employment Situation Report: Quick Guide to Methods and Measurement Issues

Although the CPS showed the labor force declined in July, over time the labor force will continue to grow - probably around 1.5 to 2.0 million people per year on average (once the economy starts to recover), and the CES will probably need to show the addition of around 125,000 jobs per month just to keep the unemployment rate steady (estimates vary of this number).

So remember, the jobs and unemployment rate come from two different surveys and are different measurements (one for positions, the other for people). Some months the numbers may not seem to make sense (lost jobs and falling unemployment rate), but over time the numbers will work out.