by Calculated Risk on 9/15/2009 12:44:00 PM

From DataQuick: Southland home sales fall; median price edges up again

Home sales dipped in Southern California last month, the result of a thinning inventory of foreclosure properties and financial uncertainty among potential home buyers. ...

A total of 21,502 new and resale homes sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties in August. That was down 10.8 percent from 24,104 in July, and up 11.0 percent from 19,366 in August 2008, according to MDA DataQuick of San Diego.

Last month was the 14th in a row with a year-over-year sales increase. The decline from July to August was unusual, given an increase is normal for the season. August sales in DataQuick’s statistics, which go back to 1988, range from a low of 16,379 in 1992 to a high of 39,562 in 2003. The average is 27,458.

“There’s still a lot of uncertainty out there about prices, interest rates and the availability of mortgage money. Additionally, we don’t know if this drop in foreclosure resales is temporary. We’re hearing from public agencies and the banking industry that there’s still a lot of financial distress in the pipeline,” said John Walsh, MDA DataQuick president.

Foreclosure resales accounted for 38.8 percent of August’s resales activity, down from 40.7 percent in July and down from 45.5 percent in August 2008. In February this year it peaked at 56.7 percent. Most of the relative decline is due to an increase in non-foreclosure resales.
...
Changes in the median do not necessarily correspond to changes in home values in the current, atypical sales environment. Adjusting for shifts in market mix, it now appears that over the past two years homes in older, more costly neighborhoods have come down in value by about half as much as homes in newer, more affordable neighborhoods. Prices also fell sharply in some lower-cost, older communities where the use of risky subprime loans was high, triggering relatively high foreclosure rates.

... a common form of financing used by first-time home buyers in more affordable neighborhoods remains near record levels. Government-insured, FHA mortgages made up 37.4 percent of all purchase loans in August, up from 37.0 percent in July and 27.1 percent in August last year.

... Foreclosure activity remains near record levels. Financing with multiple mortgages is low, down payment sizes are stable, and non-owner occupied buying is above-average in some markets

Here are a few key points:

Foreclosure inventory has declined, leading to fewer sales at the low end.

FHA buying is at record levels. And investor buying is above normal levels in many areas.

The decline in sales was "unusual" and suggests that the first time buyer frenzy might be starting to fade.

by Calculated Risk on 9/15/2009 10:26:00 AM

From Bloomberg: Ghost Towns May Haunt Ireland in Property Loan Gamble (ht Mike In Long Island)

Finance Minister Brian Lenihan will detail tomorrow how much Ireland will pay for about 90 billion euros ($131 billion) of real estate loans now crippling what as recently as 2006 was one of Europe’s most dynamic economies.
...
The National Asset Management Agency, known as NAMA, will buy 18,000 loans at a discount from lenders led by Allied Irish Banks Plc and Bank of Ireland Plc. The agency will manage the loans, which amount to about half of Ireland’s gross domestic product. ... Most of the property-related loans of the biggest Irish banks are being taken over by the agency, excluding residential mortgages.
...
The office vacancy rate at the end of the second quarter was 21 percent in Dublin, compared with 8 percent in London and 10 percent in Berlin, according to CB Richard Ellis Group Inc. As many as 35,000 new homes are now vacant, estimates Davy, the country’s largest securities firm, up from 20,000 18 months ago.
emphasis added

The government is taking over most of the non-residential property loans in Ireland. It is amazing that these loans total about half of Ireland's GDP (not including residential).

by Calculated Risk on 9/15/2009 10:02:00 AM

Fed Chairman Ben Bernanke speaking on the financial crisis of 2008.

A live feed from C-SPAN.

From the Fed: Reflections on a Year of Crisis

NOTE: This is the same speech he gave last month. A history review ...

by Calculated Risk on 9/15/2009 08:30:00 AM

On a monthly basis, retail sales increased 2.7% from July to August (seasonally adjusted), and sales are off 5.3% from August 2008 (retail ex food services decreased 6.3%).

Excluding motor vehicles, retail sales were up 1.1%.

The following graph shows the year-over-year change in nominal and real retail sales since 1993.

Click on graph for larger image in new window.

To calculate the real change, the core PCI price index from the BLS was used (August prices were estimated as the average increase over the previous 3 months).

Real retail sales (ex food services) declined by 6.3% on a YoY basis.

The second graph shows real retail sales (adjusted with PCE) since 1992. This is monthly retail sales, seasonally adjusted.

NOTE: The graph doesn't start at zero to better show the change.

This shows that retail sales fell off a cliff in late 2008, and appear to have bottomed, but at a much lower level.

Here is the Census Bureau report:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for August, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $351.4 billion, an increase of 2.7 percent (±0.5%) from the previous month, but 5.3 percent (±0.7%) below August 2008. Total sales for the June through August 2009 period were down 7.6 percent (±0.3%) from the same period a year ago. The June to July 2009 percent change was revised from -0.1 percent (±0.5%)* to -0.2 percent (±0.2%)*.

It appears the cliff diving is over and the official recession probably ended in July. But retail sales are still far below the pre-recession level, and the recovery will probably be sluggish.

by Calculated Risk on 9/14/2009 11:04:00 PM

From the WSJ: Citigroup Explores Bid to Pare U.S. Stake

The tentative aim is for a joint stock sale. Under this scenario, Citigroup would issue as much as $5 billion in new shares, while the government would simultaneously sell an undetermined amount of the stock it is holding ... Citigroup could use proceeds from a stock sale to redeem some of the preferred stock the Treasury is holding ...

The government converted its preferred shares into common stock at $3.25 a share. Citigroup's shares closed Monday at $4.52. That means the government's 7.7 billion shares have gained about $9.8 billion.

If I have the numbers correct, the total U.S. bailout of Citi was $45 billion (not including guarantees). Then $25 billion of preferred stock was converted to common at $3.25 per share in February - and that is the 7.69 billion common shares we all own (through the Treasury).

So the U.S. still holds $20 billion in preferred stock. This would be a start, although it might be premature considering all the toxic assets Citi probably still holds.

by Calculated Risk on 9/14/2009 07:35:00 PM

From Bloomberg: U.S. Said to Explore Selling Stock Acquired in Citigroup Rescue (ht jb)

Bloomberg is reporting that the Treasury and Citigroup are discussing how the U.S. can sell the 34 percent stake (7.7 billion shares) that the U.S. acquired as part of the bailout. At $4.50 per share, the U.S. stake is worth almost $35 billion.

In the February bailout, the U.S. increased it's common stake in Citi by converting $25 billion in preferred shares into common. And the U.S. is still also guaranteeing about $306 billion in assets (per the bailout agreement last November).

But selling some common would be a good first step ...

by Calculated Risk on 9/14/2009 05:28:00 PM

This is a long excerpt, but worth reading ...

From San Francisco Fed President Janet Yellen: The Outlook for Recovery in the U.S. Economy

I am hugely relieved that our financial system appears to have survived this near-death experience. And, as painful as this recession has been, I believe that we succeeded in avoiding the second Great Depression that seemed to be a real possibility. Much of the recent economic data suggest that the economy has bottomed out and that the worst risks are behind us. The economy seems to be brushing itself off and beginning its climb out of the deep hole it’s been in.

That’s the good news. But I regret to say that I expect the recovery to be tepid. What’s more, the gradual expansion gathering steam will remain vulnerable to shocks. The financial system has improved but is not yet back to normal. It still holds hazards that could derail a fragile recovery. Even if the economy grows as I expect, things won’t feel very good for some time to come. In particular, the unemployment rate will remain elevated for a few more years, meaning hardship for millions of workers. Moreover, the slack in the economy, demonstrated by high unemployment and low utilization of industrial capacity, threatens to push inflation lower at a time when it is already below the level that, in the view of most members of the Federal Open Market Committee (FOMC) best promotes the Fed’s dual mandate for full employment and price stability. ...

I’m happy to report that the downturn has probably now run its course. This summer likely marked the end of the recession and the economy should expand in the second half of this year. A wide array of data supports this view. However, payrolls are still shrinking at a rapid pace, even though the momentum of job losses has slowed in the past few months. The housing sector finally seems to be improving. Home sales and starts are once again rising from very low levels, and home prices appear to be stabilizing, even rising in recent months according to some national measures. Meanwhile, manufacturing is also beginning to show signs of life, helped particularly by a rebound in motor vehicle production. Importantly, consumer spending finally is bottoming out.

A particularly hopeful sign is that inventories, which have been shrinking rapidly, now seem to be in better alignment with sales. That’s occurred because firms slashed production rapidly and dramatically in the face of slumping sales. Recent data suggest that this correction may be near an end and firms are now poised to step up production to match sales. In fact, I expect the biggest source of expansion in the second half of this year to come from a diminished pace of inventory liquidation by manufacturers, wholesalers, and retailers. Such a pattern is typical of business cycles. Inventory investment often is the catalyst for economic recoveries. True, the boost is usually fairly short-lived, but it can be quite important in getting things going. ...

The normal dynamics of the business cycle have also turned more favorable. Some economic sectors are growing again simply because they sank so low. The inventory adjustment I just discussed is one factor, although the biggest part of those benefits usually is only felt for a few quarters. But other business cycle patterns can be longer lasting. Demand for houses, durable goods such as autos, and business equipment is beginning to revive as households and firms replace or upgrade needed equipment and structures.
...
This time though rapid growth does not seem to be in store. My own forecast envisions a far less robust recovery, one that would look more like the letter U than V. ... A large body of evidence supports this guarded outlook. It is consistent with experiences around the world following recessions caused by financial crises. That seems to be because it takes quite a while for financial systems to heal to the point that normal credit flows are restored. That is what I expect this time. ...

Unfortunately, more credit losses are in store even as the economy improves and overall financial conditions ease. Certainly, households remain stressed. In the face of high and rising unemployment, delinquencies and foreclosures are showing no sign of turning around. The delinquency rate on adjustable-rate mortgages is now up to about 18 percent, and, on fixed-rate loans, it’s about 6 percent. Delinquencies on both types of loans have increased sharply over the past year and are still rising. ...

The chances are slim for a robust rebound in consumer spending, which represents around 70 percent of economic activity. Of course, consumers are getting a boost from the fiscal stimulus package. But this program is temporary. Over the long term, consumers face daunting issues of their own. In fact, it’s easy to draw a comparison between the financial state of households and that of financial institutions. For years prior to the recession, households went on a spending spree. This occurred during a period that economists call the “Great Moderation,” about two decades when recessions were infrequent and mild, and inflation was low and stable. Credit became ever easier to get and consumers took advantage of this to borrow and buy. Stock and home prices rose year after year, giving households additional wherewithal to keep spending. In this culture of consumption, the personal saving rate fell from around 10 percent in the mid-1980s to 1½ percent or lower in recent years. At the same time, households took on larger proportions of debt. From 1960 to the mid-1980s, debt represented a manageable 65 percent of disposable income. Since then, it has risen steadily, with a notable acceleration in the last economic expansion. By 2008, it had doubled to about 130 percent of income.

It may well be that we are witnessing the start of a new era for consumers following the traumatic financial blows they have endured. The destruction of their nest eggs caused by falling house and stock prices is prompting them to rebuild savings. The personal saving rate is finally on the rise, averaging almost 4½ percent so far this year. While certainly sensible from the standpoint of individual households, this retreat from debt-fueled consumption could reduce the growth rate of consumer spending for years. An increase in saving should ultimately support the economy’s capacity to produce and grow by channeling resources from consumption to investment. And higher investment is the key to greater productivity and faster growth in living standards. But the transition could be painful if subpar growth in consumer spending holds back the pace of economic recovery.

Weakness in the labor market is another factor that may keep the recovery in low gear for a while. ... While the August employment report offered more evidence that the pace of the decline has slowed, unemployment now stands at its highest level since 1983. My business contacts indicate that they will be very reluctant to hire again until they see clear evidence of a sustained recovery, and that suggests we could see another so-called jobless recovery in which employment growth lags the improvement in overall output. What’s more, wage growth has slowed sharply. Over the first half of this year, the employment cost index for private-industry workers has risen by a meager three-quarters of one percent. Unemployment, job insecurity, and low growth in incomes will undoubtedly take a toll on consumption. When the array of problems facing consumers is considered, it is hard to see how we can avoid sluggish spending growth.

Putting the whole puzzle together, the main impetus to growth in the second half of this year will be inventory investment. The boost it provides will be a big help for a while, but we will need to look to other sectors to sustain growth. The fact that the largest sector of the economy—consumer spending—is likely to be lackluster implies a less-than-robust expansion. Even the gradual recovery we expect will be vulnerable to shocks, especially from the financial sector. As I said, financial conditions are better, but not back to normal. And the likelihood of continuing losses by financial institutions will add new fuel to the credit crunch. In particular, small and medium-size banks could experience damaging losses on commercial real estate loans. Thus far, the largest losses have been on loans for construction and land development. Going forward, however, rising loan losses on other commercial real estate lending is likely because property values are falling, office vacancy rates are rising, and credit remains tight or nonexistent for those many property owners that will need to refinance mortgages over the next few years. Financial contagion from this sector is one of the most important threats to recovery.

The slow recovery I expect means that it could still take several years to return to full employment. The same is true for capacity utilization in manufacturing. It will take a long time before these human and capital resources are put to full use.

by Calculated Risk on 9/14/2009 03:35:00 PM

From CNBC: BofA Execs to Face Charges from NY's Cuomo: Source

Attorney General Andrew Cuomo's office is likely to file civil charges against the executives over their role in failing to alert shareholders to mounting losses as well as accelerated bonus payments at Merrill ...

Earlie today, from Bloomberg: Bank of America Settlement With SEC Over Merrill Bonuses Rejected by Judge

Bank of America Corp.’s $33 million settlement with the U.S. Securities and Exchange Commission over Merrill Lynch & Co. bonuses was rejected by a judge, who said the deal appeared to be a “contrivance” and ordered the case to trial on Feb. 1.
...
“The SEC gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger,” [U.S. District Judge Jed Rakoff] wrote. “The bank’s management gets to claim that they have been coerced into an onerous settlement by overzealous regulators. And all this is done at the expense not only of the shareholders, but also of the truth.”
...
“The parties’ submissions, when carefully read, leave the distinct impression that the proposed consent judgment was a contrivance designed to provide the SEC with the façade of enforcement and the management of the bank with a quick resolution of an embarrassing inquiry.”

Ouch. Bad day for BofA - but note that the NY charges will be civil, not criminal.

by Calculated Risk on 9/14/2009 01:36:00 PM

From Shahien Nasiripour at the HuffPost: Unable To Sell Their Houses, Millions Of Homeowners Are Turning Into Landlordsmaybe

Since 2007 about 2.5 million homes have been converted into rentals, according to an analysis performed for The Huffington Post by Foresight Analytics, a real estate market research firm based in Oakland, Calif. The conversions account for about 85 percent of the increase in rental homes.

The numbers are probably higher. As I noted in The Surge in Rental Units

Since Q2 2004, there have been over 4.3 million units added to the rental inventory.
...
Where did these approximately 4.3 million rental units come from?

The Census Bureau's Housing Units Completed, by Intent and Design shows 1.1 million units completed as 'built for rent' since Q2 2004. This means that another 3.2 million or so rental units came mostly from conversions from ownership to rentals.

These could be investors buying REOs for cash flow, condo "reconversions", builders changing the intent of new construction (started as condos but became rentals), flippers becoming landlords, or homeowners renting their previous homes instead of selling.

Note: I've been writing (and joking) about accidental landlords for several years.

From Nasiripour on a prominent accidental landlord:

[A] growing number of homeowners ... have become landlords, often reluctantly, as they struggle to sell during one of the worst housing markets in recent memory. The most prominent example may be U.S. Treasury Secretary Timothy Geithner, who after failing to sell his $1.6 million home in a New York City suburb found tenants instead.

I guess Geithner is holding on for a better market!

by Calculated Risk on 9/14/2009 10:53:00 AM

From the WaPo: Region's Office Space Vacancies Soaring

... property managers for the 1.4 million-square-foot [Constitution Center in Southwest Washington], which is scheduled to be completed in November, have yet to land any tenants ... Constitution Center is just one of several dozen existing, newly constructed or soon-to-be-completed office buildings in the Washington region that had vacancy rates in the 80 to 100 percent range as of midyear.

... In June ... the amount of vacant space in the region soared nearly 24 percent, to 47 million square feet from 38 million during the same month a year earlier.
...
Throughout the region, gleaming new office towers have sprouted, but with few or no tenants: a 275,000-square-foot building at 55 M Street SE in the emerging Capitol Riverfront area of the District; the 230,700-square-foot Piedmont Pointe II and 208,000 Redlands projects in Montgomery County; and the 215,000-square-foot Parkridge Center 6 and 178,000-square-foot Dulles View North in Fairfax County. Many other projects have been put on hold.
...
With many commercial real estate loans coming due soon, some foresee trouble for the region's properties. "We may see the commercial version of the subprime situation," said Steve Silverman, director of the Montgomery County Department of Economic Development.

This is happening all across the country: falling demand and still more office supply coming available as large commercial real estate projects are completed. This means falling rents and property values. And as the construction loans come due, there will be more and more losses for lenders.

And investment in non-residential structures will probably be a drag on GDP (and construction employment) at least through 2010 as projects are completed.

The only good news for the economy is that CRE is a trailing sector (See Business Cycle: Temporal Order).