by Calculated Risk on 3/10/2011 02:35:00 PM

The Federal Reserve released the Q4 2010 Flow of Funds report this morning: Flow of Funds.

According to the Fed, household net worth is now off $8.8 Trillion from the peak in 2007, but up $8.1 trillion from the trough in Q1 2009.

Update: Household net worked peaked at $65.7 trillion in Q2 2007. Net worth fell to $48.7 trillion in Q1 2009 (a loss of almost $17 trillion), and net worth was at $56.8 trillion in Q4 2010 (up $8.1 trillion from the trough).

The Fed estimated that the value of household real estate fell $260 billion to $16.37 trillion in Q4 2010. The value of household real estate has fallen $6.3 trillion from the peak - and is still falling in 2011.

Click on graph for larger image in graph gallery.

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 fell sharply in 2007 and 2008.

In Q4 2010, household percent equity (of household real estate) declined to 38.5% as the value of real estate assets fell by almost $260 billion.

Note: something less than one-third of households have no mortgage debt. So the approximately 50+ million households with mortgages have far less than 38.5% equity - and 11.1 million households have negative equity.

The third graph shows household real estate assets and mortgage debt as a percent of GDP.

Mortgage debt declined by $55 billion in Q4. Mortgage debt has now declined by $542 billion from the peak. Studies suggest most of the decline in debt has been because of defaults, but some of the decline is from homeowners paying down debt.

Assets prices, as a percent of GDP, have fallen significantly and are only slightly above historical levels. However household mortgage debt, as a percent of GDP, is still historically very high, suggesting more deleveraging ahead for households.

by Calculated Risk on 3/10/2011 11:04:00 AM

Notes: CoreLogic reports the year-over-year change. The headline for this post is for the change from December to January 2011. The CoreLogic HPI is a three month weighted average of November, December and January and is not seasonally adjusted (NSA).

From CoreLogic: CoreLogic® Home Price Index Shows Year-Over-Year Decline for Sixth Straight Month

CoreLogic ... January Home Price Index (HPI) which shows that home prices in the U.S. declined for the sixth month in a row. According to the CoreLogic HPI, national home prices, including distressed sales, declined by 5.7 percent in January 2011 compared to January 2010 after declining by 4.7 percent in December 2010 compared to December 2009. Excluding distressed sales, year-over-year prices declined by 1.6 percent in January 2011 compared to January 2010 and by 3.2 percent in December 2010 compared to December 2009. Distressed sales include short sales and real estate owned (REO) transactions.

The January data shows home prices continuing to slide. Mark Fleming, chief economist with CoreLogic, said, “A number of factors continue to dampen any recovery in the housing market. Negative equity, which limits the mobility of homeowners, weak demand and the overhang of shadow inventory all continue to exert downward pressure on housing prices. We are looking out for renewed demand in the coming months as the spring buying season gets underway to hopefully reduce the downward pressure.”

Click on graph for larger image in graph gallery.

This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100.

The index is down 5.7% over the last year, and off 32.8% from the peak.

This is the sixth straight month of year-over-year declines, and the seventh straight month of month-to-month declines. The index is now 1.6% below the previous post-bubble low set in March 2009, and I expect to see further new post-bubble lows for this index over the next few months.

by Calculated Risk on 3/10/2011 09:12:00 AM

The Department of Commerce reports:

[T]otal exports of $167.7 billion and imports of $214.1 billion resulted in a goods and services deficit of $46.3 billion, up from $40.3 billion in December, revised. January exports were $4.4 billion more than December exports of $163.3 billion. January imports were $10.5 billion more than December imports of $203.6 billion.

Click on graph for larger image.

The first graph shows the monthly U.S. exports and imports in dollars through January 2011.

Exports are up sharply and are now above the pre-recession peak. Imports have surged over the last two months, largely due to the increase in oil prices.

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

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.

The petroleum deficit increased in January as both quantity and import prices continued to rise - averaging $84.34 in January, up from $79.78 in December. Prices will be even higher in February and March. The trade deficit with China was $23.3 billion (NSA) in January. Once again the oil and China deficits are essentially the entire trade deficit (or even more).

by Calculated Risk on 3/10/2011 08:30:00 AM

The DOL reports on weekly unemployment insurance claims:

In the week ending March 5, the advance figure for seasonally adjusted initial claims was 397,000, an increase of 26,000 from the previous week's revised figure of 371,000. The 4-week moving average was 392,250, an increase of 3,000 from the previous week's revised average of 389,250.

Click on graph for larger image in graph gallery.

This graph shows the 4-week moving average of weekly claims for the last 40 years. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased this week by 3,000 to 392,250.

The 4-week average is still below the 400,000 level, and although there is nothing magical about 400,000 - staying below that level is a good sign for the labor market.

by Calculated Risk on 3/09/2011 11:35:00 PM

The previous post was about the problems with principal reductions. One effective way to reduce principal is a short sale ... but it is a very difficult process.

The president of the California Association of Realtors, Beth Peerce, sent out an "open letter" tonight. Here is an excerpt on short sales:

Short sales can play an important role in our state’s economic recovery by accelerating the pace of home sales and reducing the inventory of bank-owned homes on the market. There are other benefits as well. ...

Unfortunately, many homeowners are unable to successfully negotiate a short sale. According to a recent survey of 2,150 California REALTORS® who have assisted clients with a short sale, only three out of five transactions closed – even when there was an interested and qualified buyer.

What’s the problem? For one, no two mortgage agreements are the same, so it can be difficult to standardize short sale processes and procedures. Many homeowners have second mortgages, which further complicate matters. Then there’s the challenge of convincing multiple parties to take a financial loss or, in the case of loan servicers, to forego fees they otherwise might earn during the course of the foreclosure process. Poor and slow service by many banks and servicers has only exacerbated the problem. Horror stories abound from potential homebuyers and REALTORS® forced to wait 90 or more days for a response to a purchase offer or being required to fax short sale applications or other paperwork as many as 50 times. These delays discourage potential homebuyers from considering a short sale purchase ...

Increasing the number of closed short sales by speeding up and streamlining the short sale process is one important way we can help California families avoid foreclosure and move our economy closer to recovery. ... We’re meeting with major banks, U.S. Treasury officials, government-sponsored entities (including Fannie Mae and Freddie Mac), and others to urge them to standardize processes, comply with federal guidelines, improve communication with other stakeholders and increase staffing with the goal of eliminating service issues. ...

But we can’t do it alone. That’s why we’re focusing the spotlight on short sales and calling on regulators, elected officials, nonprofits, business organizations, companies, and individuals with a stake in California’s economic future to resolve this issue and others that get in the way of a recovery.

by Calculated Risk on 3/09/2011 07:10:00 PM

From Chris Foote, Kris Gerardi and Paul Willen at the Atlanta Fed: The seductive but flawed logic of principal reduction (ht Dean).

The researchers point out that principal reduction seems to make sense if a borrower is going to default and the lender foreclose, but that it is hard to predict exactly who is going to default (and not cure). If lenders aggressively offered principal reductions to underwater homeowners who are delinquent, then borrowers who are current would have an incentive to stop paying their mortgages.

I noted this a couple of years ago:

If it became widely known that lenders routinely reduce the principal balance for delinquent borrowers with negative equity, this would be an incentive for a large number of additional homeowners to stop paying their mortgages.

And from another old post:

Some people point to Lewis Ranieri's apparent success with principal reductions, from Fortune: Lewis Ranieri wants to fix the mortgage mess

Now Ranieri is championing an inventive solution for fixing the mess he's accused of enabling in the first place. Ranieri has raised $825 million from 31 foundations and corporate and public pension funds, including the South Carolina Retirement Systems, to form the Selene Residential Mortgage Opportunity Fund.

Selene's mission is simple: to buy delinquent mortgages at a deep discount, work with homeowners to get them paying again, and resell the now stable loans for profit. To get homeowners to do their part, Ranieri is taking the radical step of substantially lowering their mortgage balances.

This only works because Ranieri bought the distressed mortgages at a deep discount, and his company has no reputation risk. Ranieri wants his borrowers to know that he will reduce their principal.

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

Here are some excerpts from the new research:

The idea of principal reduction starts with a correct premise: borrowers with positive equity—that is, houses worth more than the unpaid principal balance on their mortgages—rarely ever lose their homes to foreclosure.
...
With this idea in mind, it then follows that if we could somehow get everyone back into positive-equity territory, then we could end the foreclosure crisis. To do that, we either need to inflate house prices, which is difficult to do and probably a bad idea anyway, or reduce the principal mortgage balances for negative-equity borrowers. So we have a cure for the foreclosure crisis: if we can get lenders to write down principal to give all Americans positive equity in their homes, the housing crisis would be over.
...
The logic that principal reduction can prevent foreclosures at no cost is compelling and seductive, and proposals to encourage principal reduction were common early in the foreclosure crisis.
...
Ultimately the reason principal reduction doesn't work is what economists call asymmetric information: only the borrowers have all the information about whether they really can or want to repay their mortgages, information that lenders don’t have access to. If lenders weren't faced with this asymmetric information problem—if they really knew exactly who was going to default and who wasn't—all foreclosures could be profitably prevented using principal reduction.

I think that is the key reason lenders have been reluctant to offer principal reductions.

by Calculated Risk on 3/09/2011 03:43:00 PM

First on oil and gasoline:

• From Jim Hamilton at Econbrowser: What will Saudi Arabia do?. Hamilton reviews the reaction to Saudi Arabia to past oil disruptions:

One key question in determining the impact of instability in Libya and elsewhere on world oil markets is how much other countries can and will increase production to offset the shortfall. Here I review the critical role of Saudi Arabia in past disruptions and discuss the current situation ...

And he concludes:

If all of Libyan production gets knocked out, we'd need 1.8 mb/d to replace it. If the Saudis weren't able or willing to go above those production levels in 2008 when oil was selling for over $140 a barrel, why would you expect them to do so now with West Texas only at $106?

My answer is, I don't.

• From David Baker at the SF Chronicle: California gas to hit $4 soon

California appears poised to win a dubious distinction - becoming the first state this year to pay an average of $4 for a gallon of regular gas.

And Libya looks like a prolonged civil war:

• From the NY Times: Qaddafi Forces Batter Rebels in Strategic Refinery Town

Forces loyal to the Libyan leader, Col. Muammar el-Qaddafi, repulsed a rebel push to the west on Wednesday and then counterattacked with airstrikes and increasingly accurate artillery fire on the strategic refinery town of Ras Lanuf, which the rebels have held for several days.

In the western half of the country, elite government troops continued to pound the besieged, rebel-held city of Zawiyah, only 30 miles from Colonel Qaddafi’s stronghold, the capital city of Tripoli.

• From the Telegraph: Libya live

• From Bloomberg: Qaddafi Forces Strike Oil Ports to Halt Rebels’ Advance

• From al Jazeera: Libya Live Blog - March 9

10:28pm Libyan oil output is down by more than two-thirds from 1.6 million barrels per day to just 500,000 amid the uprising, National Oil Corporation head, Shukri Ghanem, said on Wednesday.

by Calculated Risk on 3/09/2011 11:29:00 AM

The eurozone debt crisis summit scheduled is on Friday and this meeting is to prepare for the next meeting of all 27 EU leaders in Brussels on March 24th and 25th - so I expect no major announcement on Friday.

However it is interesting that To Vima quoted Prime Minister Georgios Papandreou as telling his cabinet that these meetings are "all or nothing", implying a comprehensive solution or ... ?

Also from To Vima this morning: Nightmare: 14.8% Unemployment

Explosive growth of unemployment recorded in Greece, with a total number of unemployed is at 733,645, according to data from the Greek Statistical Authority (ELSTAT) that were released Wednesday.

The percentage of registered unemployed reached 14.8% in December 2010 an increase of one percentage point compared with November.

The number of the employed workforce in the country fell to 4.23 million from 4.3 million the same period. Record low unemployment, record the ages of 15 -24 which rose 39% from 28.9% compared with December 2009.

This is politically untenable.

And on Ireland, the new government's plan is worth reading "Towards Recovery: Programme for a National Government 2011-2016". Here is an excerpt from page 6:

In our engagement with the lenders, we will pursue a number of different strategies to achieve this end.

• We will seek a reduced interest rate as part of a credible re-commitment to reducing Government deficits to ensure sustainability of our public finances.
...
• The Government accepts that enabling provisions in legislation may be necessary to extend the scope of bank liability restructuring to include unsecured, unguaranteed senior bonds.emphasis added

Sounds like haircuts ...

The Greek ten year yield is at 12.9% (up again today). The Irish ten year yield is down a little to 9.5%.

by Calculated Risk on 3/09/2011 09:00:00 AM

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

Click on graph for larger image in new window.

This graph shows the index since January 2000.

Press Release: February PCI Continues to Signal Slow Growth

The Ceridian-UCLA Pulse of Commerce Index™ (PCI), issued today by the UCLA Anderson School of Management and Ceridian Corporation fell 1.5% on a seasonally and workday adjusted basis in February, after falling 0.3% in January. The PCI in the first two months of 2011 has now given up all of December’s exceptional 1.8% gain. Because of the very strong performance in December, however, the three month annualized moving average in the index was still up 5.4% over the previous three month period. Furthermore, February marked the 15th consecutive month of year-over-year growth in the index. Both of these data points suggest that the economic recovery is intact, but it remains tepid.
...
Over time, the PCI has shown a strong correlation with Industrial Production and with the goods components of GDP. The PCI results over the past two months suggest a small decline in industrial production in February when that data is released by the Federal Reserve on March 17.
...
The February daily data were impacted by the massive snowstorm that was centered in the heavily-trucked Midwest early in the month. However, the daily data also suggests that much of the volume that was “lost” during the first week of the month was “found” later in the month, meaning that weather was not the major reason for the decline in the PCI this month.
...
February’s spike in fuel prices likely did not contribute to weakness in the PCI this month. However, if the trend persists, higher prices will likely have an impact in the coming months as consumers are robbed of spending power. As a leading indicator for shipping and production, the PCI is very sensitive to this dynamic and should provide an early indication as higher fuel prices impact the broader economy.
...
The Ceridian-UCLA Pulse of Commerce Index™ is based on real-time diesel fuel consumption data for over the road trucking ...

This index was useful in tracking the slowdown last summer and the back-to-back monthly declines in this index are concerning. The rail traffic reports have shown a shift to intermodal traffic (more rail traffic using shipping containers) and that might be negatively impacting the diesel fuel index.

Note: This index does appear to track Industrial Production over time (with plenty of noise) and this suggests a weak reading for February. Industrial Production for February will be released March 17th.

by Calculated Risk on 3/09/2011 07:00:00 AM

The MBA reports: Mortgage Applications Increase in Latest MBA Weekly Survey

The Refinance Index increased 17.2 percent from the previous week and was the highest Refinance Index observed since the week ending January 14, 2011. The seasonally adjusted Purchase Index increased 12.5 percent from one week earlier and was the highest Purchase Index recorded this year.
...
The average contract interest rate for 30-year fixed-rate mortgages increased to 4.93 percent from 4.84 percent, with points decreasing to 0.87 from 1.29 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.

Click on graph for larger image in graph gallery.

This graph shows the MBA Purchase Index and four week moving average since 1990.

On a weekly basis, this is the highest level since December. The four-week moving average of the purchase index is still at 1997 levels, and even with the large percentage of cash buyers recently, this still suggests fairly weak home sales through April.