by Calculated Risk on 6/10/2010 04:00:00 PM

Quote of the day via Bloomberg (ht Bob_in_MA):

We do believe the recovery is strong,” Dominique Strauss-Kahn said in an interview with Bloomberg HT television in Istanbul. While rising debt levels are a risk to growth, mainly in Europe, authorities in the region “are now really committed to solve it” and “the problem has been contained,” he said.

And this reminds us of Fed Chairman Bernanke's testimony on March 28, 2007:

"[T]he impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained."

Uh oh, not another problem "contained"!

Click on graph for larger image in new window.

And a market graph from Doug Short of dshort.com (financial planner).

This graph shows the ups and downs of the market since the high in 2007.

And on short sale fraud, from Bloomberg: Banks Face Short-Sale Fraud as Home ‘Flopping’ Rises (ht Mike in Long Island, Brian, Alex)

Two Connecticut real estate agents ... are scheduled to be sentenced in Hartford’s federal court in August after pleading guilty to fraud. Their crime involved persuading lenders to approve the sale of homes for less than the balance owed --known as a short sale -- without disclosing that there were better offers. They then flipped the houses for a profit.

There are many versions of short sale fraud. Here is a story I recently heard from a reliable source:

A homeowner in California's Inland Empire bought for $350,000, refinanced during the boom for over $700,000 (cash out), and put in a pool, fixed up the house, and bought some toys. After house prices collapsed, and his loan reset to the fully amortizing rate, he talked his bank into a short sale (the homeowner is a real estate agent) - to his cousin for $350,000! The previous homeowner is now leasing the home from his cousin ...

The house was listed on the MLS for one minute at midnight (to satisfy the bank). And then listed as pending. These one minute listings are a red flag for possible fraud. Whether the transaction is not arms length (as above), or the listing agent is just trying to get both sides of the commission - this is not the best deal for the lenders (and frequently taxpayers).

This is a classic agency problem. As part of a short sale agreement, I think the bank should hire the listing agent - and also require the property to be listed openly for a minimum period.

by Calculated Risk on 6/10/2010 11:59:00 AM

The Federal Reserve released the Q1 2010 Flow of Funds report today: Flow of Funds.

According to the Fed, household net worth is now off $11.4 Trillion from the peak in 2007, but up $6.3 trillion from the trough in Q1 2009. A majority of the decline in net worth is from real estate assets with a loss of about $6.4 trillion in value from the peak. Stock market losses are still substantial too.

Click on graph for larger image in new window.

This is the Households and Nonprofit net worth as a percent of GDP.

This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages). Note that this does NOT include public debt obligations.

Note that this ratio was relatively stable for almost 50 years, and then we saw the stock market and housing bubbles.

This graph shows homeowner percent equity since 1952.

Household percent equity (as measured by the Fed) collapsed when house prices collapsed in 2007 and 2008.

In Q1 2010, household percent equity (of household real estate) was up to 38.2% from the all time low of 33.3% last year. The increase was due to both an increase in the value of household real estate and a $99 billion decline in mortgage debt.

Note: something less than one-third of households have no mortgage debt. So the approximately 50+ million households with mortgages have far less than 38.2% equity.

The third graph shows household real estate assets and mortgage debt as a percent of GDP. Household assets as a percent of GDP decreased slightly in Q1 as the value of real estate assets declined slightly, and GDP increased.

Mortgage debt declined by $99 billion in Q1. Mortgage debt has now declined by $377 billion from the peak.

by Calculated Risk on 6/10/2010 11:20:00 AM

This is the new UCLA Anderson Forecast and Ceridian Corporation index using real-time diesel fuel consumption data: Pulse of Commerce Index^TM

Press Release: PCI Strikes Optimistic Note For U.S. Economy with 3.1 Percent Gain in May

With a monthly increase not seen since February 1999, the Ceridian-UCLA Pulse of Commerce Index™ (PCI) by UCLA Anderson School of Management climbed 3.1 percent in May. The increase represents the strongest indicator yet from the PCI that the U.S. economy is on the upswing.
...
“Absent good news from the usual recovery indicators – consumer optimism expressed by buying homes and cars, and business optimism expressed by hiring – the spike in the PCI is indeed very welcome news for the economy,” said Ed Leamer, the PCI’s chief economist. “One month does not make a trend, but at least we are back in a recovery groove.”

The May result makes up for April’s decline of 0.3 percent and for the PCI’s flat, overall performance during the first four months of 2010.
...
The PCI is based on an analysis of real-time diesel fuel consumption data ...

Click on graph for larger image in new window.

This graph shows the index since January 1999.

Note: This index appears to lead Industrial Production (IP), but there is a significant amount of monthly noise. This is a new index and might be interesting to follow along with the Trucking and Railroad data.

Here is a video of Leamer's comments on the report. After a few months of almost no growth, this index increased sharply in May.

by Calculated Risk on 6/10/2010 09:07:00 AM

The Census Bureau reports:

[T]otal April exports of $148.8 billion and imports of $189.1 billion resulted in a goods and services deficit of $40.3 billion, up from $40.0 billion in March, revised. April exports were $1.0 billion less than March exports of $149.8 billion. April imports were $0.8 billion less than March imports of $189.9 billion.

Click on graph for larger image.

The first graph shows the monthly U.S. exports and imports in dollars through April 2010.

On a year-over-year basis, exports are up 20% and imports are up 24%. This is an easy comparison because of the collapse in trade at the end of 2008 and into early 2009.

The second graph shows the U.S. trade deficit, with and without petroleum, through April.

The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.

Import oil prices increased slightly to $77.13 in April - and are up 97% from the low of February 2009 (at $39.22). Oil import volumes were down in April.

Although both imports and exports were off slightly in April, both have been increasing sharply - but are still below the pre-crisis levels. Once again China and oil are the major contributors to the trade deficit.

by Calculated Risk on 6/10/2010 08:30:00 AM

The DOL reports on weekly unemployment insurance claims:

In the week ending June 5, the advance figure for seasonally adjusted initial claims was 456,000, a decrease of 3,000 from the previous week's revised figure of 459,000 [revised up from 453,000]. The 4-week moving average was 463,000, an increase of 2,500 from the previous week's revised average of 460,500.
...
The advance number for seasonally adjusted insured unemployment during the week ending May 29 was 4,462,000, a decrease of 255,000 from the preceding week's revised level of 4,717,000.

Click on graph for larger image in new window.

This graph shows the 4-week moving average of weekly claims since January 2000.

The four-week average of weekly unemployment claims increased this week by 2,500 to 463,000.

The dashed line on the graph is the current 4-week average. Initial weekly claims first fell to this level in December 2009, and have been at the same level for about 6 months. The current level of 456,000 (and 4-week average of 463,000) is still high, and suggests ongoing weakness in the labor market.

by Calculated Risk on 6/09/2010 10:05:00 PM

Under California law, purchase money loans are non-recourse. However once a homeowner refinances, the entire mortgage is recourse ... that is probably going to change:

From Jim the Realtor: SB 1178 – Amended

SB 1178, the bill passed by the California State Senate by a 30-4 vote, is on its way to the Assembly.

The new intent:

This bill preserves a borrowers protection from a deficiency judgment when loans are refinanced, but only to the extent that the refinance is used to pay debt incurred to purchase the real property. The provisions of this bill become operative on June 1, 2011.

Yes, there was an amendment slipped in last week that eliminated the cash-out refinances, even those used for home improvement. The current bill is only applies to those who refinanced the mortgage used to purchase the home.

Jim wonders if some homeowners will wait until June 1, 2011 to default. I doubt it. Most borrowers I've spoken with have no idea about recourse vs. non-recourse, and purchase money vs. refinance.

Note that additional money borrowed above the original purchase loan amount will still be recourse if this becomes law.

by Calculated Risk on 6/09/2010 05:50:00 PM

From Bloomberg: Waste on Freight Cars Gains Most Since ’94 Confirming Rebound (ht Brian)

If garbage is any indication, the U.S. economy is strengthening.

The number of freight cars carrying waste jumped 45 percent in April and May from the same period last year ... according to the Washington-based Association of American Railroads.
...
Shipments of waste and scrap have a higher correlation with economic growth than coal or copper, according to data compiled by Bloomberg News.

And here is the graph:

Click on graph for larger image in new window.

From the Association of American Railroads: Rail Time Indicators: Waste and Scrap Materials traffic in May 2010 was "up 37.1% from May 2009 and down 20.4% from May 2008."

Waste traffic was down from the April level. The Bloomberg article suggests this confirms the "economy is strengthening" - I'd say this shows the recovery has been sluggish (still well below the May 2008 level) and the economy might have slowed in May (although one month doesn't make a trend).

by Calculated Risk on 6/09/2010 02:00:00 PM

From the Federal Reserve: Beige book

Economic activity continued to improve since the last report across all twelve Federal Reserve Districts, although many Districts described the pace of growth as "modest."

On Real Estate:

Residential real estate activity improved since the last report. Most Districts noted an increase in home sales and construction prior to the April 30th deadline for the homebuyer tax credit, with contacts in many of these Districts also indicating a corresponding slowing in activity in May. Tight credit, the elevated inventory of homes available for sale, and the "shadow inventory" of foreclosed properties on banks' balance sheets held back residential development in the New York, Cleveland, Atlanta, and Chicago Districts. Commercial real estate activity generally remained weak. Office, industrial, and retail vacancy rates continued to drift upward in many Districts putting downward pressure on rents. However, lower rents were said to have led to an increase in leasing activity in New York, Philadelphia, Richmond, Kansas City, Dallas, and San Francisco. The elevated inventory of existing properties for sale or rent continued to weigh on new private nonresidential construction. However, stronger industrial demand was noted in several Districts. Public construction increased in Philadelphia, Cleveland, and Chicago, but slowed in Minneapolis.

This is the first mention of shadow inventory on banks' balance sheet (at least recently).

by Calculated Risk on 6/09/2010 12:30:00 PM

Jon Lansner at the O.C. Register notes the fifth anniversary of then Fed Chairman Alan Greenspan's "Froth" speech: Greenspan’s froth not bubble, 5 years later

“Although a ‘bubble’ in home prices for the nation as a whole does not appear likely, there do appear to be, at a minimum, signs of froth in some local markets where home prices seem to have risen to unsustainable levels.” [said Fed Chairman Alan Greenspan, June 9, 2005 in testimony to Congress]

Perhaps to celebrate "Froth Day", Fed Chairman Bernanke made this statement:

[U]nderlying housing activity appears to have firmed only a little since mid-2009, with activity being weighed down, in part, by a large inventory of distressed or vacant existing houses and by the difficulties of many builders in obtaining credit.

So there are too many "distressed or vacant existing houses", and not enough credit for builders to add to that oversupply.

by Calculated Risk on 6/09/2010 09:50:00 AM

Fed Chairman Ben Bernanke will testify before the House Budget Committee at 10 AM. The topic is State of the Economy: View from the Federal Reserve

Note: Bernanke has promised not to discuss fiscal policy.

Here is the CNBC feed. (starts at 10 AM ET)

Here is the CSpan feed

Prepared testimony: Economic and financial conditions and the federal budget