by Calculated Risk on 1/18/2010 10:13:00 PM

Note: Here is a weekly summary and a look ahead.

Below is a sign on the Broadway Auto Row in Oakland on Broadway. This is where the Chrysler/Jeep/Kia dealer used to be - the "Heart of the Marketplace".

Now dark and for lease. A sign of the times (photo credit: Bob)

by Calculated Risk on 1/18/2010 06:45:00 PM

First, from the NY Times back in April: Vandals Strip a Vacant Villa in California

Suzy Brown ... was sued by her neighbors and ran afoul of the local planning department over plans to use the villa as a “spiritual retreat” and high-end drug rehabilitation center.

But none of that prepared Ms. Brown for what happened last month when the 16,000-square-foot house fell into foreclosure. Vandals ripped out $1 million worth of fixtures, including toilets, according to a crime report filed on March 26 by a broker for Chevy Chase Bank.
...
Ms. Brown said she and 60 co-investors put $13 million into the construction and maintenance of the property, which they called Vivienda Estate, from 2004 to 2006, combining a $6 million down payment with $7 million from two mortgages and a private loan.

By the time she left last month, she had failed to make payments for one year and owed the bank $6.5 million, she said.

And a video from Jim today, the banked owned property is listed at $2.7 million. Crazy!

by Calculated Risk on 1/18/2010 04:00:00 PM

From Crain's ChicagoBusiness: Illinois enters a state of insolvency (ht Walt)

While it appears unlikely or even impossible for a state to hide out from creditors in Bankruptcy Court, Illinois appears to meet classic definitions of insolvency: Its liabilities far exceed its assets, and it's not generating enough cash to pay its bills. ... "I would describe bankruptcy as the inability to pay one's bills," says Jim Nowlan, senior fellow at the University of Illinois' Institute of Government and Public Affairs. "We're close to de facto bankruptcy, if not de jure bankruptcy."
...
Despite a budget shortfall estimated to be as high as $5.7 billion, state officials haven't shown the political will to either raise taxes or cut spending sufficiently to close the gap.

... Unpaid bills to suppliers are piling up. State employees, even legislators, are forced to pay their medical bills upfront because some doctors are tired of waiting to be paid by the state. The University of Illinois, owed $400 million, recently instituted furloughs, and there are fears it may not make payroll in March if the shortfall continues.

There is much more in the article, including a discussion of how pension payments are rising sharply.

For more on the problems of states, see the recent Rockefeller Institute report: Recession or No Recession, State Tax Revenues Remain Negative

The first three quarters of 2009 were the worst on record for states in terms of the decline in overall state tax collections, as well as the change in personal income and sales tax collections. The Great Recession hit virtually every single source of tax revenue and pushed a number of states to revise revenue forecasts numerous times throughout fiscal 2009 and 2010, with significant impacts on services.

Preliminary data for the October-December quarter suggest that fiscal conditions remain weak. ... While December data could change this troubling picture, there is little reason to expect reported revenues for that month to be strong. Continued weakness in revenues, along with continued if more moderate growth in expenditures, make further mid-year budget revisions and spending cuts highly likely.

According to the National Conference of State Legislatures (NCSL), new budget gaps have opened in at least 31 states since FY 2010 began. ... The continued weakening of state tax revenues in fiscal 2010 will force states to take further drastic measures.

by Calculated Risk on 1/18/2010 02:02:00 PM

Here is a followup to my earlier post about more hotel rooms coming online amid the worst occupancy slump since the Great Depression ...

From Jane Levere at the NY Times: Ailing Hotel Industry Is on Brink of Major Expansion

Though it may seem counterintuitive at a time when many hotels around the country are having trouble filling their rooms, nearly 100 hotels are scheduled to open in major American cities this year.

New York will have the most new hotels, 46, according to Smith Travel Research, a hotel research company in Hendersonville, Tenn., followed by Houston with 30. New hotels are opening as well in Atlanta, Boston, Chicago, Dallas, Miami, Los Angeles and Washington, D.C. That does not include new hotels opening in the suburbs of these cities.

So how can so many hotels be opening even though the economy and travel remain so slow?

The answer, according to Mark Lomanno, president of Smith Travel Research, is that “hotel building cycles rarely mesh just right with economic cycles.” Planning a new hotel can take two to four years and construction another one to four years. ...

This is probably the final surge in hotel construction related to the CRE bubble.

Click on graph for larger image in new window.

This graph shows investment in lodging as a percent of GDP since 1959 through Q3 2009 (data from BEA).

Even though lodging investment is falling rapidly, the level is still very high from a historical perspective because, as Mark Lomanno noted, it takes several years to finish major hotel projects.

As these hotels are completed in 2010, lodging investment will fall to low levels for several years as happened in previous investment busts. And that means more construction job losses are coming.

by Calculated Risk on 1/18/2010 11:05:00 AM

In late 2008 we discussed that the dramatic decline in oil prices would lead to a sharp decline in domestic investment in petroleum exploration and wells. Sure enough domestic investment was cut by 50% in the 2nd half of 2009 ...

The following graph compares real oil prices (data from the St. Louis Fed, adjusted with CPI) and real investment in petroleum exploration and wells in the U.S. (data from the BEA).

This doesn't include investment in alternative energy sources.

Click on graph for larger image in new window.

Not surprisingly there is a strong correlation between oil prices and investment. With oil prices now around $80 per barrel again, domestic investment will probably increase in 2010.

The increase in oil prices is also concerning. Notice that large increases in oil prices have frequently been followed by recessions. This is a topic that Professor Hamilton has researched and discussed several times over the years, see: Will rising oil prices derail the recovery? Of course oil prices are still far below the peak.

Note: right scale doesn't start at zero to show the correlation between the series.

by Calculated Risk on 1/18/2010 08:46:00 AM

A couple of quotes from an article by James Hagerty in the WSJ: Is Slashing Mortgage Principal the Answer?

... Assistant Treasury Secretary Michael Barr ... suggested that there would be a risk that such a [principal] program would change a lot of borrowers’ behavior. “Most people, most of the time, make their mortgage payments ... even if they’re underwater,” Mr. Barr noted. “You have to be quite careful not to design a program that induces more people to walk away” ...

This is a major concern. A couple weeks ago I wrote: New Research on Mortgage Modifications and Principal Reduction

Imagine what would happen to Wells Fargo or Bank of America if their borrowers found out that the banks would substantially reduce their principal if they were 1) underwater (negative equity), and 2) stopped making their payments. The delinquency rate and losses would skyrocket!

Because of this risk, a macro principal reduction program is very unlikely.

And another quote from the WSJ:

Tom Capasse, a principal at Waterfall Asset Management LLC, a New York-based investor in mortgages, says it’s too late to prevent a “seismic shift” in borrower behavior ... “There used to be a scarlet D on your forehead if you defaulted,” says Mr. Capasse. “Now it’s a badge of honor.”

Not quite a "badge of honor", but the widespread acceptance of "walking away" has been one of the greatest fears of lenders for some time.

by Calculated Risk on 1/17/2010 10:06:00 PM

From Eric Dash at the NY Times: Wall St. Weighs a Constitutional Challenge to a Proposed Tax

In an e-mail message sent last week to the heads of Wall Street legal departments, executives of the lobbying group, the Securities Industry and Financial Markets Association, wrote that a bank tax might be unconstitutional because it would unfairly single out and penalize big banks ... [and]has hired a top Supreme Court litigator to study a possible legal battle ...

Privately, executives at several large banks said they believed a legal battle was doomed to fail in Washington and risked escalating public rage over the bailouts of the banks.

The fee is imposed only on banks with "more than $50 billion in consolidated assets", and on the liabilities "excluding FDIC-assessed deposits and insurance policy reserves". It is hard to imagine that would be unconstitutional.

by Calculated Risk on 1/17/2010 06:22:00 PM

Since the NAHB Housing Market Index for January, and Housing Starts for December will both be released this week, here is a graph showing the relationship between the two series:

Click on graph for larger image in new window.

This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the December release for the HMI and the November data for single family starts.

This shows that the HMI and single family starts mostly move in the same direction - although there is plenty of noise month-to-month.

I know I'm a broken record, but residential investment is one of the best leading indicators for the economy, and the best indicators for RI are the NAHB HMI, housing starts, and new home sales. And these indicators are moving sideways (at best).

Note: The largest components of residential investment are new home construction, and home improvement. This includes brokers' commissions and some minor categories.

by Calculated Risk on 1/17/2010 01:00:00 PM

The last half of every month is filled with real estate related data, and this week the NAHB Housing Market Index (builder confidence for January) will be released on Tuesday, Housing Starts for December and the ABI Architecture Billings Index on Wednesday, and the Moodys/REAL Commercial Property Price Index for November will be released sometime this week.

Expectations are for housing starts to be essentially flat in December, from MarketWatch:

The consensus forecast of economists surveyed by MarketWatch calls for a 3% decline in starts to a seasonally adjusted rate of 555,000 from 574,000 in November.

In other economic news, the Producer Price Index will be released on Wednesday, the Philly Fed survey on Thursday, and the DOT's estimate of vehicle miles for November will be released this week.

The markets will be closed on Monday for Martin Luther King Jr. day.

And a summary of last week ...

BLS: Near Record Low Job Openings in November

Click on graph for larger image in new window.

This following graph shows job openings (yellow line), hires (purple Line), Quits (light blue bars) and Layoff, Discharges and other (red bars) from the JOLTS. Red and light blue added together equals total separations.

Notice that hires (purple line) and separations (red and light blue together) are pretty close each month. When the purple line is above total separations, the economy is adding net jobs, when the blue line is below total separations, the economy is losing net jobs.

According to the JOLTS report, there were 4.176 million hires in November, and 4.340 million separations, or 164 thousand net jobs lost. The comparable CES report showed a gain of 4 thousand jobs in November (after revisions).

Option ARM Recast Update

The following data is from Amherst Securities:

This chart shows the expected payment shock coming in 2010 and 2011 from Option ARMs. This chart includes projected increases in LIBOR (if LIBOR stays low, the shock will not be as high), and the recast due to reamortizing the loan over the remaining period.

For more details, see: Option ARM Recast Update and More on Option ARMs

On negative equity, this graph from Amherst shows the CLTV for various mortgage products. Note that subprime and Alt-A had a somewhat higher percent of borrowers with negative equity than prime - but Option ARMs (red) borrowers are mostly in negative equity!

As Laurie Goodman at Amherst Securities noted, Option ARM borrowers were a self selecting group (people stretching to buy homes) and that is why most have negative equity in their homes.

Industrial Production, Capacity Utilization Increase in December

This graph shows Capacity Utilization. This series is up from the record low set in June (the series starts in 1967), and still below the level of last year.

Note: y-axis doesn't start at zero to better show the change.

Industrial production is still 10.7% below the level of December 2007.

Here is the report from the Fed: Industrial production and Capacity Utilization

Trade Deficit Increases in November

This graph shows the monthly U.S. exports and imports in dollars through November 2009.

Both imports and exports increased in November. On a year-over-year basis, exports are off 2.3% and imports are off 5.5%.

Overall trade continues to increase, although both imports and exports are still off significantly from the pre-financial crisis levels. Net export growth had been one of the positives for the U.S. economy - but now imports are growing faster than exports.

Here is the Census Bureau report on trade.

Other Economic Stories ...

From Fitch: U.S. CMBS Delinquencies up 42bps; Peak Not Until 2012

HUD Probes FHA Lenders: HUD Inspector General Probes Morgage Companies with Significant Claim Rates

Rail Traffic in 2009: Lowest since at least 1988

From RealtyTrac: 2009 was Record Year for Foreclosure Filings

From Tom Petruno at the LA Times: California's debt rating cut to A-minus by S & P on budget woes

From The Times: Britain's recession the steepest for 88 years

And from Statistischen Bundesamtes Deutschland: Germany experiencing serious recession in 2009

Retail Sales decline slightly in December

From Treasury: Fact Sheet: Financial Crisis Responsibility Fee

Unofficial Problem Bank List Increases to 582

On Q4 GDP: Q4 GDP: Beware the Blip and from Professor Krugman: Blip

Best wishes to all. My thoughts are with the people of Haiti.

by Calculated Risk on 1/17/2010 09:43:00 AM

From Kenneth Harney at the LA Times: Mortgage lenders exploit a loophole in HUD's new 'good faith estimate' rules

Starting Jan. 1, mortgage lenders nationwide were required to begin issuing new "good faith estimates" [GFE] to applicants covering loan fees and settlement charges.

Under the regulations issued by the Department of Housing and Urban Development, the estimates that lenders provide upfront must be accurate -- the same or nearly the same as the fees that are later charged at closing.
...
So how have the first two weeks of the reforms been going? Not exactly as planned. Many loan officers and lending institutions are sidestepping the new, price-bound GFE by giving shoppers "work sheets" and "loan scenario" forms that come with no legal requirements for accuracy, and were not even contemplated under the reforms.

In effect they are substitutes for the new GFEs but, in the wrong hands, they are open to lowballing and bait-and-switch games.

The work sheets purport to contain much of the information provided by a GFE. Typically they are issued only when shoppers do not provide -- or are asked not to provide -- key information that constitutes an "application" under HUD's definition in the rules.

In certain circumstances this makes sense, although it is open to abuse. As Harney notes, some lenders used to low ball the estimate of fees, and then surprise the borrowers with higher costs at closing. The GFE was intended to eliminate this practice.

Perhaps HUD could add an additional rule that says "worksheets" must require: 1) a description of what a GFE is, and 2) a clear statement that the worksheet is not a GFE, and 3) what additional information the borrower needs to provide to get a GFE. Who could object to that?