by Calculated Risk on 10/23/2009 04:00:00 PM

While we wait for the 100th bank failure of 2009 ...

Click on graph for larger image in new window.

From Doug Short of dshort.com (financial planner).

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

The S&P was off 1.2% today. The index is up about 60% from the bottom (and off 31% from the peak).

Two different views on CIT:

From Bloomberg: CIT Sees Recovery as Low as 6 Cents in Bankruptcy

CIT said in a regulatory filing today that if its reorganization plan fails, it “will likely face bankruptcy” and that those claims would fetch recoveries between 6 cents and 37 cents a dollar.

And from MarketWatch: Icahn urges bondholders not to accept CIT plan

Icahn said if assets on the comapny's balance sheet are "run off" in a controlled way, CIT bonds will be worth at least 80 cents to 85 cents on the dollar.

A few CRE stories:

Yesterday from the NY Times: Court Deals Blow to Owners of Apartment Complex

And more Tishman troubles, from Bloomberg: Tishman Speyer Office Park in L.A. Faces Foreclosure (ht Brian)

A Tishman Speyer Properties LP office park in California ... is the subject of a foreclosure lawsuit saying the owners failed to repay $154 million in debt due in July.

Tishman Speyer and Walton Street Capital LLC bought the Campus at Playa Vista at the top of the U.S. real estate boom in 2007. KeyBank National Association sued to foreclose against limited partnerships controlling the Los Angeles property ... The Los Angeles Business Journal reported Oct. 19 that a mortgage on the property was up for sale for $50 million.

If that LA Business Journal story is correct, the lenders were trying to sell the $150 million note for $50 million. Ouch.

And from Bloomberg: NYC Tower Buyers Wrestle Towering Vacancy Dilemma (ht Mike In Long Island, others!)

... Worldwide Plaza [is 40% vacant]. It’s one ... George Comfort & Sons Inc., was able to buy the ... in July for $590 million, two years after it sold for almost three times as much.

The purchase price may allow Duncan to undercut the rents competitors charge as he leases his 709,000 square feet. Manhattan has 59 million feet of available offices, according to brokerage Colliers ABR, the most since June 1996, and rents for the best space are down more than 30 percent from their peak last year.

by Calculated Risk on 10/23/2009 01:48:00 PM

"Never mistake activity for achievement."
Coach John Wooden
Normally a decline in inventory and the months-of-supply would be considered a positive for the existing home market, however much of the apparent recent improvement is related to an artificial - and likely short lived - boost in activity.

The following graph is a turnover ratio for existing home sales. This is annual sales and year end inventory divided by the total number of owner occupied units. For 2009, sales are estimated at 5.0 million units, and inventory at the September level.

Click on graph for larger image in new window.

Although the turnover ratio has fallen from the bubble years, the level is still above the median for the last 40 years. This suggests activity in 2009 is slightly above a normal year for existing homes.

The reason turnover hasn't fallen further is because of all the distressed sales (foreclosures and short sales) primarily in the low priced areas, and because of the "first-time" home buyer tax credit.

The distressed sales activity is a necessary step towards a healthy market, but the burst in activity associated with the "first-time" home buyer tax credit is "mistaking activity for achievement".

NAR chief economist Lawrence Yun argued this morning: "[W]e need a steady supply of qualified buyers to meaningfully bring inventories down ..."

Mr. Yun is making two obvious mistakes. First he is narrowly defining "inventories" as just inventories of existing homes. The total housing inventory includes existing homes, new homes, and rental properties.

If we think of a balloon that contains existing home inventory and vacant apartment units, the tax credit is like pushing a finger on the balloon - the indent makes the balloon look smaller, but the volume of the balloon remains the same (the decline in existing home inventory is offset by an increase in vacant apartments).

Note: there is some reduction in overall inventory as new households are formed, but not from incentivizing renters to become owners.

The higher rental vacancy rate is leading to lower rents, so the buy-or-rent decision will favor renting once Congress removes their finger from the balloon.

Yun also appears to be suggesting that the first-time home buyer tax credit is providing a "supply of qualified buyers". This is bubble type thinking. Did all the exotic loans during the housing bubble provide a "supply of qualified buyers"? Those buyers qualified for the loans, but they were not really ready for homeownership.

The same is true for buyers today obtaining FHA insured loans and using the $8,000 tax credit as their downpayment. Imagine a $200,000 purchase with no money down (except the tax credit). What happens in three or four years when the homeowner wants to sell? The transaction costs will be around $15,000 (about 7.5%) if they sell for the same price.

So a homeowner, who has been unable to save a down payment so far, will be expected to make a $15,000 down payment in arrears? I don't think so.

Oh wait. Haven't prices fallen significantly? Shouldn't prices just go up from here? Yun says we are returning "to a period of normal, steady price growth". So the homeowner can use their appreciation to pay the transaction costs? That is more bubble type thinking. Prices may go up. Prices may fall further. Loans should not be predicated on asset prices increasing.

“The next mistake will be a new way to make a loan that will not be repaid.”
William Seidman, "Full Faith and Credit", 1993.

Allowing buyers to use the first-time home buyer tax credit as a downpayment is "the next mistake".

Earlier post: Existing Home Sales Increase in September

by Calculated Risk on 10/23/2009 11:59:00 AM

NOTE: I'll have some more thoughts on existing home sales soon.

Click on graph for large image.

This graph shows the Freddie Mac single family delinquency rate since January 2005.

Here is the Freddie Mac portfolio data.


From Reuters: Freddie Mac Sept portfolio up, delinquencies jump (ht Ron at WallStreetPit)

Delinquencies ... jumped to 3.33 percent of its book of business in September from 3.13 percent in August and 1.22 percent in September 2008.

The multifamily delinquency rate accelerated slightly in September to 0.11 percent from 0.10 percent in August. A year earlier it was 0.01 percent..

by Calculated Risk on 10/23/2009 11:00:00 AM

Click on map for larger image.

Here is a map of the three month change in the Philly Fed state coincident indicators. Forty one states are showing declining three month activity. The index increased in 7 states, and was unchanged in 2.

Here is the Philadelphia Fed state coincident index release for September.

In the past month, the indexes increased in nine states (Idaho, Indiana, Louisiana, Montana, North Dakota, Ohio, South Dakota, Tennessee, and Vermont), decreased in 39, and remained unchanged in two (North Carolina and Nebraska) for a one-month diffusion index of -60. Over the past three months, the indexes increased in seven states (Indiana, Montana, North Dakota, Ohio, South Dakota, Tennessee, and Vermont), decreased in 41, and remained unchanged in two (Nebraska and South Carolina) for a three-month diffusion index of -68.

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).

A large percentage of states still showed declining activity in September.

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

The NAR reports: Big Rebound in Existing-Home Sales Shows First-Time Buyer Momentum

Existing-home sales – including single-family, townhomes, condominiums and co-ops – jumped 9.4 percent to a seasonally adjusted annual rate of 5.57 million units in September from a level of 5.10 million in August, and are 9.2 percent higher than the 5.10 million-unit pace in September 2008.
...
Total housing inventory at the end of September fell 7.5 percent to 3.63 million existing homes available for sale, which represents an 7.8-month supply2 at the current sales pace, down from an 9.3-month supply in August.

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 Sept 2009 (5.57 million SAAR) were 9.4% higher than last month, and were 9.2% higher than Sept 2008 (5.1 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. For the fourth consecutive month, sales were higher in 2009 than in 2008.

It's important to note that many of these transactions are either investors or first-time homebuyers. Also many of the sales are distressed sales (short sales or REOs).

Early information from a large annual consumer study to be released November 13, the 2009 National Association of Realtors® Profile of Home Buyers and Sellers, shows that first-time home buyers accounted for more than 45 percent of home sales during the past year. A separate practitioner survey shows that distressed homes accounted for 29 percent of transactions in September.

The third graph shows nationwide inventory for existing homes. According to the NAR, inventory decreased to 3.63 million in September (August inventory was revised upwards significantly). The all time record was 4.57 million homes for sale in July 2008. This is not seasonally adjusted.

Typically inventory peaks in July or August, so some of this decline is seasonal.

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

Months of supply was decline to 7.8 months.

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

It is important to note that sales in September were distorted by the first time home buyer tax credit, and this activity will fade - whether or not the credit is extended.

by Calculated Risk on 10/23/2009 08:30:00 AM

From Bloomberg: U.K. Economy Unexpectedly Shrinks in Longest Slump

GDP fell 0.4 percent from the previous three months, the Office for National Statistics said today in London. ... The economy has now shrunk over six quarters, the most since records began in 1955.
...
“The fact that the economy is still contracting despite the huge amount of policy stimulus supports our view that the recovery will be a long, slow process,” said Vicky Redwood, U.K. economist at Capital Economics Ltd in London and a former central bank official.
...
“This is desperately disappointing news, especially given that it was hoped that a modest recovery had begun,” said John Philpott, chief economist at the Chartered Institute of Personnel and Development. “The U.K. economy is continuing to shrink, with six quarters of contraction in output making this recession look more like a depression.”

This graph is from the Office for National Statistics: UK output decreases by 0.4 per cent

This is the sixth straight quarter of contraction.

Note that the U.K. reports GDP change per quarter, whereas the U.S. reports the annual rate of change. The 0.4% decline reported in the U.K. would be similar to a 1.6% decline reported in the U.S.

by Calculated Risk on 10/22/2009 10:20:00 PM

Tomorrow: Existing Home Sales and bank failure #100 for 2009 (probably) ...

From Jim the Realtor: Nothing Price Won't Fix

by Calculated Risk on 10/22/2009 07:02:00 PM

From Diana Olick at CNBC: Could HVCC Be History??

The House Financial Services Committee has just passed an amendment to the Consumer Financial Protection Agency Act to sunset the HVCC [Home Valuation Code of Conduct].
...
Now before all you realtors and mortgage brokers get all excited, remember this is just a committee vote. ... The bill will be voted out of committee later today and then have to go to the House floor in some form and then of course there's the Senate, etc.

I can understand fixing problems with the HVCC, but I can't understand going back to agents ordering appraisals. That was part of the systemic problem - some agents and appraisers abused the system.

From David Streitfeld at the NY Times in August: In Appraisal Shift, Lenders Gain Power and Critics

Mike Kennedy, a real estate appraiser in Monroe, N.Y., was examining a suburban house a few years ago when he discovered five feet of water in the basement. The mortgage broker arranging the owner’s refinancing asked him to pretend it was not there.

Brokers, real estate agents and banks asked appraisers to do a lot of pretending during the housing boom, pumping up values while ignoring defects. While Mr. Kennedy says he never complied, many appraisers did, some of them thinking they had no choice if they wanted work. A profession that should have been a brake on the spiral in home prices instead became a big contributor.

by Calculated Risk on 10/22/2009 04:00:00 PM

Just an update on the status of the Fed's Treasury and MBS purchase programs.

From the Atlanta Fed weekly Financial Highlights:

From the Atlanta Fed:

The Fed has purchased a total of $297 billion of Treasury securities through October 21, bringing it about 99% toward its goal. Of these purchases, $4.5 billion have been TIPS.

Last week, the Fed made a purchase on October 13 for $2.95 billion in the seven-to-10-year sector.

The NY Fed purchased $1.05 billion more yesterday, so there is just $2 billion more to come over the next week.

And from the Atlanta Fed:

The Fed purchased a net total of $16.1 billion of agency-backed MBS between October 8 and 14, bringing its total purchases up to about $945 billion, and by year-end [CR Note: by the end of Q1] the Fed will purchase up to $1.25 trillion.

The Fed purchased an additional $18.1 billion net in MBS over the last week, bringing the total to $963 billion.

The Treasury purchases will end next week - and will probably make the news. The MBS purchases are ongoing.

Market update:

The third graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears".

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

by Calculated Risk on 10/22/2009 02:52:00 PM

A key point on the impact of the stimulus on GDP ...

From Christina Romer, Chair, Council of Economic Advisers in Testimony before the Joint Economic Committee: From Recession to Recovery

In a report issued on September 10, the Council of Economic Advisers (CEA) provided estimates of the impact of the ARRA on GDP and employment. ...

These estimates suggest that the ARRA added two to three percentage points to real GDP growth in the second quarter and three to four percentage points to growth in the third quarter. This implies that much of the moderation of the decline in GDP growth in the second quarter and the anticipated rise in the third quarter is directly attributable to the ARRA.

Fiscal stimulus has its greatest impact on growth around the quarters when it is increasing most strongly. When spending and tax cuts reach their maximum and level off, the contribution to growth returns to roughly zero. This does not mean that stimulus is no longer having an effect. Rather, it means that the effect is to keep GDP above the level it would be at in the absence of stimulus, not to raise growth further. Most analysts predict that the fiscal stimulus will have its greatest impact on growth in the second and third quarters of 2009. By mid-2010, fiscal stimulus will likely be contributing little to growth.
emphasis added

The impact on GDP will be smaller going forward, and according to Dr. Romer, the impact will be around zero by mid next year, and will be a drag later in 2010 (as stimulus is reduced).