by Calculated Risk on 10/20/2009 10:10:00 AM

Just a quick comment ...

Probably the best leading indicator for the economy is investment in housing¹.

We can use new home sales, housing starts (usually single-family starts), or residential investment (from the BEA GDP report), as indicators of housing.

We can probably also use the NAHB builder confidence index.

Those expecting a "V-shaped" or immaculate recovery - with unemployment falling sharply in 2010 - are clearly expecting single family housing starts to rebound quickly to a rate significantly above 1 million units per year.

Not. Gonna. Happen.

There are just too many excess housing units for a rapid recovery in new home sales and single family housing starts. Yes, new home inventory has declined significantly, and existing home inventory has also decreased (although still very high). But there are also a record number of vacant rental units - with the vacancy rate approaching 11% - and the housing inventory includes these units too.

Notice what is not included as a leading indicator: existing home sales.

The sale of an existing home adds a little to the economy (some commissions and fees), and sometimes some added spending on improvements. Only the improvements add to the housing stock (not commissions). And right now marginal buyers have very little to spend on improvements (see this story).

Those looking at existing home sales for economic guidance are confusing activity with accomplishment.

¹I've written about this extensively, but I'll put up another post on housing investment leading the economy soon.

by Calculated Risk on 10/20/2009 08:30:00 AM

Click on graph for larger image in new window.

Total housing starts were at 590 thousand (SAAR) in September, up 0.5% from the revised August rate, and up sharply from the all time record low in April of 479 thousand (the lowest level since the Census Bureau began tracking housing starts in 1959). Starts had rebounded to 590 thousand in June, and have move sideways for four months.

Single-family starts were at 501 thousand (SAAR) in September, up 3.9% from the revised August rate, and 40 percent above the record low in January and February (357 thousand). Just like for total starts, single-family starts have been at this level for four months.

Here is the Census Bureau report on housing Permits, Starts and Completions.

Building Permits:
Privately-owned housing units authorized by building permits in September were at a seasonally adjusted annual rate of 573,000. This is 1.2 percent (±1.8%)* below the revised August rate of 580,000 and is 28.9 percent (±2.2%) below the September 2008 estimate of 806,000.

Single-family authorizations in September were at a rate of 450,000; this is 3.0 percent (±1.0%) below the revised August figure of 464,000.

Housing Starts:
Privately-owned housing starts in September were at a seasonally adjusted annual rate of 590,000. This is 0.5 percent (±9.9%)* above the revised August estimate of 587,000, but is 28.2 percent (±6.7%) below the September 2008 rate of 822,000.

Single-family housing starts in September were at a rate of 501,000; this is 3.9 percent (±9.3%)* above the revised August figure of 482,000.

Housing Completions:
Privately-owned housing completions in September were at a seasonally adjusted annual rate of 693,000. This is 10.2 percent (±10.4%)* below the revised August estimate of 772,000 and is 39.6 percent (±5.7%) below the September 2008 rate of 1,148,000.

Single-family housing completions in September were at a rate of 464,000; this is 8.3 percent (±14.3%)* below the revised August figure of 506,000.

Note that single-family completions of 464 thousand are below the level of single-family starts (501 thousand). This suggests residential construction employment maybe be near a bottom.

It appears that single family starts bottomed in January. However, as expected, it appears starts are now moving sideways - and will probably stay near this level until the excess existing home inventory is reduced.

by Calculated Risk on 10/20/2009 12:12:00 AM

From the National Retail Federation: Economy to Impact Two-Thirds of Families this Holiday Season, According to NRF Survey

Retailers are about to embark on the holiday season of the serious bargain hunter. According to NRF’s 2009 Holiday Consumer Intentions and Actions Survey, conducted by BIGresearch, U.S. consumers plan to spend an average of $682.74 on holiday-related shopping, a 3.2 percent drop from last year’s $705.01.

It comes as no surprise that the economy was an overriding theme throughout this year’s survey. Two-thirds of Americans (65.3%) say the economy will affect their holiday plans this year, with the majority of these consumers saying they’re adjusting by simply spending less ...

Retailers are compensating for soft sales this holiday season by cutting back on inventory. ... “In anticipation of weak demand, many retailers scaled back on inventory levels to prevent unplanned markdowns at the end of the season,” said NRF President and CEO Tracy Mullin ...

“While the economic climate has shown some improvement from last holiday season, retailers are not out of the woods yet,” said Phil Rist, Executive Vice President, Strategic Initiatives, BIGresearch. “With a variety of factors still up in the air, including uncertainty over job security, many Americans just aren’t buying into the talk of recovery.”

And this will mean few seasonal retail hires too.

The NRF is so depressing ...

by Calculated Risk on 10/19/2009 08:48:00 PM

John Mckinnon at the WSJ reports: Home-Buyer Credit Is Focus of Inquiry

The Internal Revenue Service is examining more than 100,000 suspicious claims for the first-time home-buyer tax break ...

The tax credit is completely refundable, even if the homebuyer has no tax liability - and this makes it a target for fraud. From the IRS:

"[The tax credit is] fully refundable, meaning the credit will be paid out to eligible taxpayers, even if they owe no tax or the credit is more than the tax owed."

Also, the credit is separate from the closing, and the WSJ article suggests this is contributing to the "widespread" fraud.

Bonnie Speedy, national director of AARP Tax-Aide ... suggested that abuse of the home-purchase credit appeared to be widespread ...

And - not mentioned in the article - the homebuyers are required to pay back the tax credit if they do not own and live in the home for three years ... so there will probably be more fraud in the future. More IRS:

The obligation to repay the credit on a home purchased in 2009 arises only if the home ceases to be your principal residence within 36 months from the date of purchase. The full amount of the credit received becomes due on the return for the year the home ceased being your principal residence.
emphasis added

I hope these people stretching to buy - like the buyer mentioned in the previous post paying 54% of her income for her house, including multiple jobs - realize they have to pay back the entire credit if they don't own and occupy the home for three years.

by Calculated Risk on 10/19/2009 05:21:00 PM

Scott Jagow at American Public Media MarketPlace provides an example of a recent FHA insured loan homebuyer: On the flip side...

Denise works three jobs so she can afford her new house. She makes $2470 a month but pays $1328 to service her mortgage. That means 54% of her income goes to the house, leaving her with $285 a week to live on. Doable, but tight. She’s breaking the 30% rule and then some, not to mention she’s still spending out of pocket to renovate the yard, fix the roof and paint.

Apparently 20 year old Denise bought the home for $155,000, and according to the comments, obtained an additional $28,000 on a "203K HUD supplemental loan to renovate the home" for a total of $183,000.

Not exactly up to the new proposed FSA standards of affordability!

Rolfe Winkler has a speech from David Einhorn Einhorn on gold, sovereign default, and more. Here is the pfd of the speech. I don't agree with everything he says, but he is entertaining!

Paul Kiel at Propublica writes: Four Banks in Govt’s ‘Healthy Bank’ Bailout Struggle to Survive.

The government has doled out billions to 687 banks [1] over the past year through a program meant to bolster already “healthy” banks. But an increasing number of those are troubled. Four banks in particular are foundering, including one that has acknowledged its executives cooked its books.

Paul has the details.

by Calculated Risk on 10/19/2009 02:59:00 PM

From Bloomberg: U.S. Commercial Property Values Fall 3% in August (ht James)

The Moody’s/REAL Commercial Property Price Indices fell 3 percent in August from July, bringing the market’s decline to almost 41 percent since its peak in October 2007, Moody’s Investors Service said in a statement today. ...

“We can’t call a bottom at this point, but it’s an encouraging sign to see the deceleration in the decline,” said Connie Petruzziello, a Moody’s analyst and co-author of the commercial property price report.
...
August was the 11th consecutive month the commercial property index fell.

The August report was based on prices for 73 properties that sold during the month and for which Moody’s has previous price records.

Here is a comparison of the Moodys/REAL Commercial Property Price Index (CPPI) and the Case-Shiller composite 20 index.

Notes: Beware of the "Real" in the title - this index is not inflation adjusted - that is the name of the company (an unfortunate choice for a price index). Moody's CRE price index is a repeat sales index like Case-Shiller - but there are far fewer commercial sales - only 73 repeat sales in August - and that can impact prices.

Click on graph for larger image in new window.

CRE prices only go back to December 2000.

The Case-Shiller Composite 20 residential index is in blue (with Dec 2000 set to 1.0 to line up the indexes).

This shows residential leading CRE (although we usually talk about residential investment leading CRE investment, but in this case also for prices), and this also shows that prices tend to fall faster for CRE than for residential.

by Calculated Risk on 10/19/2009 02:21:00 PM

Excerpts posted with permission from Campbell Surveys

In September the housing market took a major turn to the upside, according to respondents to the Campbell/Inside Mortgage Finance Monthly Survey of Real Estate Market Conditions. Real estate agent survey respondents reported average residential property prices rose 6% from August to September ...

The reported month-to-month price increase of 6% was driven by high demand for REO –also commonly referred to as foreclosed properties--according to transaction data reported by survey respondents. ...

The average price for non-distressed properties remained nearly constant between August and September. ...

Strong demand for moderately priced REO caused time-on-market for these properties to decline markedly. In August, damaged REO stayed on the market an average of 9.4 weeks; by September, time-on-market had declined to 7.0 weeks. For move-in ready REO, time-on-market declined from 8.0 weeks in August to 5.9 weeks in September. In contrast, average time-on-market for non-distressed properties rose from 13.0 weeks in August to 14.2 weeks in September.

First–time homebuyer demand for properties continued to be strong in the month of September. First-time homebuyers accounted for 42% of home purchase transactions in September. ...

Many agents indicated an REO buying frenzy in local markets, especially California. “Entry level REO's are taken by the storm! Many multiple offers!” exclaimed a California agent. “Low inventory and high demand are resulting in 20-60 offers on most properties in the entry level to moderate price points. First-time homebuyers have difficulty competing with investors and high down-payment buyers,” reported another real estate agent located in California. “Banks and listing agents are pricing these REO's at liquidation prices to encourage a bidding war and it's working,” wrote a real estate agent located in Florida.

Despite reporting strong increases in both average prices and number of transactions, real estate agents responding to the survey gave a hint of looming problems caused by rising unemployment. For the third month in a row, the survey’s inventory index showed rising inventories of short sale properties, while inventories of REO properties were flat or declining.
emphasis added

As we've discussed before, there is a buying frenzy right now in the existing home market, especially at the low end. Unfortunately existing home sales add little to the economy (compared to new home sales). And the impact is even less than usual right now because many of the marginal buyers are using the first-time homebuyer tax credit as their downpayment, and have little additional money to spend on furniture or upgrades.

For the economy, the numbers to track are housing starts, new home sales, and residential investment - not existing home sales.

by Calculated Risk on 10/19/2009 01:00:00 PM

Click on graph for larger image in new window.

This graph shows the builder confidence index from the National Association of Home Builders (NAHB).

The housing market index (HMI) decreased to 18 in October from 19 in September. The record low was 8 set in January. Note that Traffic of Prospective Buyers declined sharply.

This is still very low - and this is what I've expected - a long period of builder depression.

Note: any number under 50 indicates that more builders view sales conditions as poor than good.

This second graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the October release for the HMI and the August data for starts (September starts will be released tomorrow).

This shows that the HMI and single family starts mostly move in the same direction - although there is plenty of noise month-to-month. Those expecting a sharp rebound in starts are probably wrong.

Press release from the NAHB (added): Builder Confidence Slips in October

“This is the first time since November of 2008 that all three component indexes of the HMI have declined,” noted NAHB Chief Economist David Crowe. “Clearly, builders are experiencing the effects of the expiring tax credit on their sales activity, since it would be virtually impossible at this point to complete a new home sale in time to take advantage of that buyer incentive before Nov. 30.”
...
Each of the HMI’s component indexes recorded declines in October. The component gauging current sales conditions fell one point to 17, while the component gauging sales expectations for the next six months declined two points to 27 and the component gauging traffic of prospective buyers fell three points to 14.

On a regional basis, the Northeast was the only part of the country to record an improvement in its HMI score, with a one-point gain to 25. Meanwhile, the Midwest and South each recorded one-point declines to 18 and the West recorded a four-point decline to 14.

by Calculated Risk on 10/19/2009 09:55:00 AM

Bloomberg reviewed 23 recent Inspector General reports of bank failures and concluded that the FDIC "failed to enforce its own guidelines to rein in excessive commercial real estate lending" (CRE).

From Bloomberg: FDIC Failed to Limit Commercial Real-Estate Loans, Reports Show (hts Mike in Long Island, Ron at WallStreetPit)

... The FDIC’s Office of Inspector General analyzed 23 lenders taken over by regulators from August 2008 to March and found that for 20, the agency’s examiners didn’t identify the issue early enough or should have taken stronger supervisory action after recognizing the banks had dangerously high levels of the loans before they failed. ...

“It’s often we’ll see in our reports that the FDIC detected problems in the bank in a timely fashion, but in some cases forceful corrective action wasn’t required by the FDIC to be taken quickly enough,” Jon Rymer, the FDIC’s inspector general, said in a telephone interview.

This is recurring theme. The examiners in the field, for both the FDIC and the Fed, recognized problems fairly early, but the agencies failed to take aggressive action.

Here are two related posts: Inspector General: FDIC saw risks at IndyMac in 2002 and Federal Reserve Oversight and the Failure of Riverside Bank of the Gulf Coast

The from a state regulator:

“We should have been more strict,” Joseph Smith, North Carolina’s bank commissioner and chairman of the Conference of State Bank Supervisors, said in a telephone interview. ...

“Had we required the reduction of CRE lending, it would have been thought of as an intrusion by regulators into the businesses of banks and to the operations of local economies,” Smith said. “Yes, it would have been the right thing to do. It would have caused a firestorm then. That might have been better than a firestorm now.”

I believe the regulators should have clamped down on CRE lending in 2006 - and the FDIC was aware of the problem. Here is a proposed interagency guidance on CRE lending from January 13, 2006.

Concentrations of CRE loans may expose institutions to unanticipated earnings and capital volatility in the event of adverse changes in the general commercial real estate market. ... The proposed guidance reinforces existing guidelines for real estate lending and provides criteria for identifying institutions with CRE loan concentrations that may warrant greater supervisory scrutiny.

The final comments from Joseph Smith provide a clue as to the real problem. The examiners in the field were finding the problems, but the regulators were failing to act because "it would cause a firestorm" and it would be "thought of as an intrusion by regulators".

by Calculated Risk on 10/19/2009 08:40:00 AM

From the FSA:

The Financial Services Authority (FSA) today sets out proposals for the major reforms required in the UK mortgage market to ensure that it works better for consumers and is sustainable for all market participants.

The proposals, published in the mortgage market review discussion paper, reflect the FSA’s changed approach to a more intrusive and interventionist style of regulation.
...
“The paper sets out the main findings of the FSA’s comprehensive analysis of the mortgage market. It clearly shows a rapid explosion in mortgage products; the emergence of high risk lending strategies which typically focused on higher risk borrowers; relaxed credit standards; and a mutual assumption by too many borrowers and lenders that the good times could not end.

“The FSA needs to ensure that firms only lend to people who can afford to pay the money back. The reforms that we have announced today will ensure that the mortgage market works better for consumers and that it is sustainable for firms.”
...
The discussion paper is out for discussion until 30 January 2010 and the FSA will be actively seeking views from consumer groups and industry. A feedback statement will be published in March. Implementation will be phased ...

•Affordability tests: the DP proposes making the lender ultimately responsible in every sale for verifying affordability. It also proposes that in each case a lender should assess the consumer’s ability to repay, i.e. calculate the free disposable income a consumer has to pay for the mortgage.

•Self-certification: the DP proposes requiring verification of income for all mortgage applications;

• Toxic combinations: the DP discusses whether a type of product regulation likely to be more effective in protecting consumers would be to prohibit loans to borrowers that exhibit certain multiple high-risk characteristics, such as prohibiting loans to credit-impaired borrowers that are also at high loan-to-income.

• Arrears: the FSA will publish specific proposals in January to toughen up rules on arrears handling as well as banning administration charges where a borrower is adhering to an arrangement to repay arrears; and prohibiting the charging of early redemption charges on arrears fees.

• Requiring all mortgage advisers to be personally accountable to the FSA; DP proposes extending the Approved Persons regime to mortgage advisers who deal with consumers and to advisers and/or arrangers who are responsible for overseeing compliance ...
emphasis added

They are going to ban stated income loans, limit risk layering (a key problem), limit arrears charges, hold mortgage lenders personally accountable, and require affordability tests.

This is a good model for the U.S.

For amusement, here is The Times headline: Homebuyers face questions on alcohol spending

Homebuyers could be forced to provide detailed information about the amount of money they spend on alcohol each month to qualify for a new mortgage under a new clampdown on reckless lending. ... It said lenders should delve deeper into homebuyers' personal spending including the amount they spend on alcohol and tobacco.