by Calculated Risk on 2/03/2010 01:12:00 AM

Note from NMHC: "Market Tightness Index reading above 50 indicates that, on balance, apartment markets around the country are getting tighter; a reading below 50 indicates that market conditions are getting looser; and a reading of 50 indicates that market conditions are unchanged."

So the increase in the index to 38 implies lower occupancy rates and lower rents - "looser" apartment conditions - but at a slower pace of contraction than the previous quarter.

From the National Multi Housing Council (NMHC): Apartment Market Conditions Steady; Sales Volume and Equity Financing Improve, According to NMHC Quarterly Survey

The Market Tightness Index’s sub-50 reading of 38 indicates that vacancy and/or rent conditions deteriorated over the last quarter. Thirty percent of respondents said markets were looser, meaning higher vacancies and/or lower rents; only seven percent reported that markets were tighter.
...
“This quarter saw a continued uptick in sales volume and equity financing, which represent another step, albeit a small one, toward a more normal transactions market, after 2009 recorded the lowest number of transactions of the decade,” said NMHC Chief Economist Mark Obrinsky.

“The weakest performing index is the Market Tightness Index,” said Obrinsky, “underscoring the fact that full recovery of occupancy and rents will require job growth to return to the economy. When that happens, and as a large wave of Echo Boomers begins to enter a supply-constrained market, we should see above average rent growth.”
emphasis added

Click on graph for larger image in new window.

This graph shows the quarterly Apartment Tightness Index.

A reading below 50 suggests vacancies are rising. Based on limited historical data, I think this index will lead reported apartment rents by 6 months to 1 year. Or stated another way, rents will probably fall for 6 months to 1 year after this index reaches 50. Right now I expect rents to continue to decline through most of 2010.

This data is for apartment buildings. The data released yesterday from the Census Bureau - showing a 10.7% rental vacancy rate - includes all rental units.

by Calculated Risk on 2/02/2010 09:03:00 PM

“We’re now at the point of maximum vulnerability. People’s emotional attachment to their property is melting into the air.”
Sam Khater, senior economist at First American CoreLogic.

From David Streitfeld at the NY Times: No Aid or Rebound in Sight, More Homeowners Just Walk Away. A few excerpts:

New research suggests that when a home’s value falls below 75 percent of the amount owed on the mortgage, the owner starts to think hard about walking away, even if he or she has the money to keep paying.
...
The number of Americans who owed more than their homes were worth was virtually nil when the real estate collapse began in mid-2006, but by the third quarter of 2009, an estimated 4.5 million homeowners had reached the critical threshold, with their home’s value dropping below 75 percent of the mortgage balance.

Streitfeld is referring to the recent negative equity report from First American CoreLogic, see: Negative Equity Report for Q3

Some excerpts from that report:

Nearly 10.7 million, or 23 percent, of all residential properties with mortgages were in negative equity as of September, 2009. An additional 2.3 million mortgages were approaching negative equity, meaning they had less than five percent equity. Together negative equity and near negative equity mortgages account for nearly 28 percent of all residential properties with a mortgage nationwide.

The rise in negative equity is closely tied to increases in pre-foreclosure activity. At one end of the spectrum, borrowers with equity tend to have very low default rates. At the other end, investors tend to default on their mortgages once in negative equity more ruthlessly: their default rate is typically two to three percent higher than owner-occupied homes with similar degrees of negative equity. For the highest level of negative equity, investors and owners behave very similarly and default at similar rates (Figure 4). Strategic default on the part of the owner occupier becomes more likely at such high levels of negative equity.

Here is figure 4 from the report.

The default rate increases sharply for homeowners with more than 20% negative equity.

As Streitfeld noted, there are an estimated 4.5 million homeowners with more than 25% negative equity. According to the chart, maybe only 10% of them are currently in default. If, as First American CoreLogic senior economist Sam Khater said, "people's emotional attachment to their property is melting into the air", then we might see a surge in defaults by homeowners with negative equity.

And more from the NY Times:

In 2006, Benjamin Koellmann bought a condominium in Miami Beach. By his calculation, it will be about the year 2025 before he can sell his modest home for what he paid. Or maybe 2040.

Benjamin Koellmann paid $215,000 for his apartment in Miami Beach in 2006, but now units are selling in foreclosure for $90,000. “There is no financial sense in staying,” he said.

“People like me are beginning to feel like suckers,” Mr. Koellmann said. “Why not let it go in default and rent a better place for less?”

by Calculated Risk on 2/02/2010 06:11:00 PM

A couple of key points:

The ABI is forecasting more personal bankruptcy filings in 2010 than in 2009 (just over 1.4 million)

Filings were down 10% from December, but up 15% from January 2009.

From the American Bankruptcy Institute: January Consumer Bankruptcy Filings Decrease 10 Percent from December

The 102,254 consumer bankruptcies filed in January represented a 10 percent decrease nationwide from the 113,274 consumer filings recorded in December, according to the American Bankruptcy Institute (ABI) relying on data from the National Bankruptcy Research Center (NBKRC). NBKRC’s data also showed that the January 2010 consumer filings represented a 15 percent increase over the 88,773 consumer filings recorded in January 2009.

“While January represented a drop in filings from the previous month, high unemployment rates, unsustainable mortgage burdens and other economic stresses will push more consumers to seek the financial relief of bankruptcy in 2010,” said ABI Executive Director Samuel J. Gerdano. “Consumer filings this year will likely surpass the 1.4 million consumer filings recorded in 2009.”
emphasis added

by Calculated Risk on 2/02/2010 04:00:00 PM

Click on graph for larger image in new window.

This graph shows the historical light vehicle sales (seasonally adjusted annual rate) from the BEA (blue) and an estimate for January (red, light vehicle sales of 10.78 million SAAR from AutoData Corp).

The second graph shows light vehicle sales since the BEA started keeping data in 1967.

This is the lowest level since October and below the levels of last July. Obviously sales were boosted significantly by the "Cash-for-clunkers" program in August and some in July.

The current level of sales are still very low, and are still below the lowest point for the '90/'91 recession (even with a larger population).

by Calculated Risk on 2/02/2010 01:02:00 PM

A few excerpts from the D.R. Horton conference call (ht Brian). A couple of key points:

Their business is heavily dependent on government life support, this includes government mortgage programs (the bulk of their sales) and the housing tax credit.

Horton thinks they have "two more challenging years ahead".

D.R. Horton CEO: Profitability in the second quarter will be challenging as we will not close as many homes in the second quarter as we did in the first quarter [CR Note: their fiscal 2nd quarter is the calendar year 1st quarter].

We are entering the quarter with 4,136 homes in backlog and we will need to realize a backlog conversion rate over greater than 100% to reach profitability. With the extension and expansion of the home buyer tax credit and with our available housing inventory, a high backlog conversion rate is entirely achievable. But we do not expect to be as profitable as we were this quarter.

In the third quarter, we expect strong closings since homes must close by June 30th for the extended tax credit [Once again, he is referring to calendar Q2]. The third quarter will probably be our strongest quarter for profits this year. We expect our September quarter will be the most challenging as the tax credit for home sales will have expired. As we move past the selling season, we'll be able to get a better read on core demand and we'll adjust our business accordingly.”

[CR Note: The question is: what is the core demand? Most of their current sales are first time homebuyers, and homebuyers using government loan programs]

“90% of our mortgage company's business was captive during the quarter. Our company wide capture rate was approximately 61%. Our average FICO score was 702 and our average combined loan to value was 93%. Our product mix in the quarter was essentially 100% agency eligible with government loans accounting for 63% of our volume.

Our homes in inventory at the end of the December, totaled 11,500. Of which, 1,100 were models, 7,300 were speculative, and 2,900 of these specs were completed.

Of the first quarter closings captured by our mortgage company, 66% were to first time buyers who typically purchase spec homes, so we manage our total number of homes in inventory and number of speculative homes to match expected demand. Our unsold completed homes older than six months were 600 homes at December 31st, 2009, down from 800, at September 30th. We are prepared for the spring selling season and for current demand created by the Federal home buyer tax credit with our current spec level.

We will continue to manage our spec levels very closely as we move closer to the April 30th sales contract deadline for the home buyer tax credit.

Analyst: When you talk about fourth quarter being potentially your most difficult quarter and you just talked about that on margin, is that the expectation that you might have to lower prices after the expiration of the tax credit and do you actually think that 4Q volumes to be lower than say 2Q, which could be pretty rare?

Horton: Actually we do believe that fourth quarter volumes will be less than the second quarter and the third quarter volumes just simply we believe a number of sales, we don't know exactly how many, but we believe that a number of sales are being driven by the tax credit. So to the extent that that tax credit expires, clearly that will adversely affect our sales in the fourth quarter. Relative to inventory we're focusing on reducing our inventory post March to comply with the expiration of the tax credit. To the extent that there's more volume than we anticipate in the fourth quarter, we can ramp our inventory back up again.

Analyst: You provided some pretty good color on your expectations for gross margins over the rest of the year. Just wondering if you might also provide a little color on normalized gross margins in a healthy new homes selling environment being kind of anywhere in the 18 to 22% range. The 17% that you've sort of implicitly guided toward is a bit low, just wondering on your view, how high does it get and how long do you think it might take to get there?

Horton: Well first of all, I think you need to have job growth in the economy, and there's obviously no job growth to speak of today and secondly I think we have to have consumer confidence and thirdly I believe that a number of people in the country are still under water on their mortgages, and I think those three things have to be cleared up before we start to have, to get back to more normalized margins. The way that we are managing our business model here is, is that we certainly think that we've got two more challenging years ahead of us. I don't expect job growth or consumer confidence to change dramatically, so I don't expect 18 to 22% gross margins on a consistent basis for a couple of years.

by Calculated Risk on 2/02/2010 12:00:00 PM

From MarketWatch: Ford U.S. January sales rise 25% to 116,534 units

Ford FORD KICKS OFF 2010 WITH 24 PERCENT SALES INCREASE.

This is based on an easy comparison; in January 2009 U.S. light vehicle sales fell sharply to 9.6 million (SAAR) following the financial crisis and reports of the then impending bankruptcy of GM and Chrysler.

I'll add reports from the other major auto companies as updates to this post. Toyota will be especially interesting because of the shutdown related to quality issues.

Update: MarketWatch: GM January U.S. sales rise 14% to 146,825 units

Update2: MarketWatch: Chrysler U.S. Jan. sales fall 8.1% to 57,143 units

Update3: MarketWatch: Toyota Jan. U.S. sales down 15.8% to 98,796 units

NOTE: Once all the reports are released, I'll post a graph of the estimated total January sales (SAAR: seasonally adjusted annual rate) - usually around 4 PM ET. Most estimates are for a decline into the mid 10s from the 11.2 million SAAR in December.

by Calculated Risk on 2/02/2010 10:00:00 AM

The Census Bureau reported the homeownership and vacancy rates for Q4 2009 this morning. Here are a few graphs ...

Click on graph for larger image in new window.

The homeownership rate declined to 67.2% and is now at the levels of early 2000.

Note: graph starts at 60% to better show the change.

The homeownership rate increased in the '90s and early '00s because of changes in demographics and "innovations" in mortgage lending. The increase due to demographics (older population) will probably stick, so I've been expecting the rate to decline to the 66% to 67% range - and not all the way back to 64% to 65%.

The homeowner vacancy rate was 2.7% in Q4 2009.

A normal rate for recent years appears to be about 1.7%.

This leaves the homeowner vacancy rate about 1.0% above normal, and with approximately 75 million homeowner occupied homes; this suggests there are close to 750 thousand excess vacant homes.

The rental vacancy rate was 10.7% in Q4 2009.

It's hard to define a "normal" rental vacancy rate based on the historical series, but we can probably expect the rate to trend back towards 8%. According to the Census Bureau there are close to 41 million rental units in the U.S. If the rental vacancy rate declined from 10.7% to 8%, there would be 2.7% X 41 million units or about 1.1 million units absorbed.

This suggests there are still over 1.8 million excess housing units, and these excess units will keep pressure on housing starts, rents and house prices for some time.

by Calculated Risk on 2/02/2010 08:36:00 AM

From Dina ElBoghdady and Dan Keating at the WaPo: Rising FHA default rate foreshadows a crush of foreclosures

The share of borrowers who are falling seriously behind on loans backed by the Federal Housing Administration jumped by more than a third in the past year ... About 9.1 percent of FHA borrowers had missed at least three payments as of December, up from 6.5 percent a year ago, the agency's figures show.

... The problems are rooted in FHA mortgages made in 2007 and 2008. Those loans are now maturing into their worst years because failures most often occur two to three years after a mortgage is made.

... the FHA projects that it will pay out claims to lenders on one out of every four loans made in 2007 -- the worst rate in at least three decades. The claim rate should be nearly the same on the vastly larger volume of loans made in 2008.

Ouch.

by Calculated Risk on 2/01/2010 10:58:00 PM

From the Las Vegas Sun: Short sales soar while foreclosure sales slacken (ht sportsfan)

Short sales averaged about 7 percent to 8 percent of total [Las Vegas] existing-home closings in early 2009, but averaged 22 percent of the market by the end of the year and in early January ...

“We have seen a decrease in foreclosure activity in Las Vegas, which was puzzling to us,” said Daren Bloomquist, marketing manager for California-based RealtyTrac, which monitors foreclosures in Nevada. “Maybe Las Vegas has become somewhat of a test ground for streamlining short sales. It sounds like it could have an impact in Las Vegas.”
...
Dennis Smith, president of Home Builders Research, said short sales will be the “story of the year” because of the effect they will have on the housing market.
...
John Mechem, a spokesman for the Mortgage Bankers Association, said what is happening in Las Vegas is occurring across the country. It is costly for lenders to go through the legal process of foreclosing, and he added that homes can be damaged over time. The return is better on short sale, he said.

As I've noted, I think short sales will be the story of 2010. It is probably the best solution for many homeowners and lenders.

As the story mentions, Treasury has started pushing Short Sale and Deed-in-Lieu of Foreclosure as an alternative to modifications.

The Treasury Department is offering incentives on short sales by providing a $2,500 subsidy, $1,000 to the servicer and $1,500 to the seller for moving expenses. In addition, investors can get $1,000 by allowing subordinate lenders to get $3,000 in proceeds from the sale. The program is effective April 5, but servicers can implement it earlier.

This is better than "walking away" for the lender - the losses are less than for a foreclosure. And this is better for the homeowner too because Treasury requires that "the borrower will be released from all liability for repayment of the first mortgage debt", although the borrower will still take a credit hit.

by Calculated Risk on 2/01/2010 07:40:00 PM

As part of the annual budget, the Obama Administration released the underlying economic assumptions too (see Page 13 of PDF)

For GDP, they are forecasting real GDP growth of 2.7% in 2010, followed by 3.8%, 4.3% and 4.2% in 2013.

For unemployment, the forecast is for an average of 10% in 2010, with a decline to 9.2% in 2011, 8.2% in 2012 and 7.3% in 2013 as shown on the following graph:

Click on graph for larger image in new window.

The blue line is the actual historical monthly unemployment rate. The red line is the Obama Administration annual forecast.

Based on this forecast, the current "human recession" will last for several years for many Americans.