by Calculated Risk on 9/23/2011 05:15:00 PM

The Department of Transportation (DOT) reported today:

Travel on all roads and streets changed by -2.5% (-6.7 billion vehicle miles) for July 2011 as compared with July 2010. Travel for the month is estimated to be 261.8 billion vehicle miles.

Cumulative Travel for 2011 changed by -1.2% (-21.5 billion vehicle miles).

The following graph shows the rolling 12 month total vehicle miles driven.

Click on graph for larger image in graph gallery.

In the early '80s, miles driven (rolling 12 months) stayed below the previous peak for 39 months.

Currently miles driven has been below the previous peak for 44 months - so this is a new record for longest period below the previous peak - and still counting!

The second graph shows the year-over-year change from the same month in the previous year. The current decline is not as a severe as in 2008, but this is significant.

With the slowdown at the end of July and in August, miles driven will probably decline further in August.

by Calculated Risk on 9/23/2011 03:25:00 PM

First on Europe ... it would really help to have a consistent message, or maybe Merkel and Schaeuble are just playing good cop, bad cop!

From the WSJ: New Doubts on Greece's Ability to Secure More Aid

New doubts about Greece's ability to secure further aid and avoid default emerged Friday ... German Finance Minister Wolfgang Schaeuble led the chorus, saying that Greece's creditors may need to revise the July 21 agreement on additional aid for the country, because conditions may have changed since the deal was reached.

... The week also saw increasing speculation that Greece may need to default or at least seek much more debt relief than was foreseen in July as a result of its repeated failures to meet targets for economic growth and deficit reduction.

"It would surprise me if the conditions for a disbursement of the next tranche of aid in September had changed, but not if the conditions for an additional program had changed," Mr. Schaeuble said at a news briefing on the sidelines of a series of international meetings in Washington. "However, I want to wait and see first."

From Bloomberg: Europe May Speed Permanent Fund Enactment

European governments are exploring speeding the setup of a permanent rescue fund ... Drawing on paid-in capital, the fund will wield a 500 billion-euro ($677 billion) war chest that could help shield countries like Italy. It also includes provisions for sharing costs with bondholders for countries with “unsustainable” debt.

Senior finance officials next week will examine the cost advantages of creating the fund, known as the European Stability Mechanism, in July 2012, a year ahead of schedule, according to a staff paper prepared for the meetings and obtained by Bloomberg News.

And on auto sales ...

From the LA Times: Car sales strengthen in September

The retail sales rate for new vehicles in the U.S. this month looks “much stronger than in August,” according to J.D. Power & Associates, which gathers sales data from about 8,900 dealers. That's about half of all the dealers selling cars nationally.

“Coming off a solid Labor Day sale, retail sales exhibited unexpected strength in the second week of September, as the recovering inventory levels have helped to bring buyers back into the market,” said Jeff Schuster, executive director of global forecasting at J.D. Power.

The annual sales rate for all vehicles, including the retail segment of the market and what rental car companies, commercial customers and government agencies purchase, will hit 12.9 million this month ...

From the WSJ: Ford Analyst Sees Strong Sales for Sector

The annualized rate of sales in September is tracking at about 12.5 million cars and light trucks on a seasonally adjusted rate, the highest since April.

Another sign of sluggish growth.

by Calculated Risk on 9/23/2011 01:54:00 PM

"[W]hen [bubbles] are underway, [they] are typically enjoyable. As a result, regulatory interventions that temper booms normally are going to be unpopular."

From NY Fed President William Dudley: Financial Stability and Economic Growth. Dudley makes several interesting comments. I've long argued that the primary causes of the housing bubble were rapid innovation in the mortgage market combined with a lack of regulatory oversight.

Here are a few excerpts:

Turning first to the issue of financial booms and busts, empirical observation makes it clear that financial markets are inherently unstable. Throughout history we have seen numerous sizable booms and damaging busts. The notion that financial markets are dynamically unstable is also supported by controlled experiments conducted by behavioral economists.
...
Although it is impossible to attribute the instability of financial markets to any one single driving force, recent experience suggests that in many cases innovation plays an important role. ... innovations that initially create real value generate feedback mechanisms that often fuel the development of excessive expectations—a boom that eventually reverses when the basic belief system that sustained it is contradicted by events.

Such innovations can occur in the real economy—consider the Internet—or in the financial sector—think of subprime lending and structured finance products. Although the role of innovation has differed across various booms and busts, some important common elements are evident in many of these episodes.

Early on in the cycle, an innovation can lead to changes in fundamental valuations or the creation of new markets and financial products. Examples of this might include the technology boom that followed the creation of the Internet or the subprime lending and the associated structured finance innovations that supported the housing boom.
...
As market participants respond to the innovation, this may cause a surge in business activity. ... This surge in activity drives up profits and prices, which in turn sustains the boom. As part of this process, feedback mechanisms work to reinforce beliefs in the importance and sustainability of the innovation. ... In the case of the subprime lending boom, the provision of credit led to increased demand, which pushed up prices, and rising prices, in turn, held down credit losses. These feedback mechanisms reinforce belief in the sustainability of the boom, often extending the boom far beyond activity levels or valuations justified by how the innovation has changed the “fundamentals.”

The process often comes to an abrupt end, and generally does so when the basic belief system that underpinned the boom is contradicted by events. ... the U.S. housing boom was unsustainable because it was not possible to indefinitely keep relaxing credit underwriting standards to qualify new buyers to stoke demand. It was also unsustainable because the rise in prices often led to a supply response that limited the prospect of further price increases.
...
When sudden reversals occur, large costs are imposed on the real economy and the financial system, costs that are not fully internalized by the market participants that may have benefited from the boom.
...
[A] critical objective of prudential oversight and regulation should be to enhance the system so that financial transactions of all forms reflect an assessment of risk and return by both the borrower and the lender that is as accurate as possible, recognizing that we live in an inherently uncertain world. This means that our reform efforts should be aimed at strengthening the quality of information and the system of incentives governing risk-taking by both institutions and individuals. And on those occasions when regulators judge that a systematic understatement and mispricing of risk may be occurring, we need to find better and more effective ways to actively lean against those dynamics. This includes using the bully pulpit to point out why a particular boom is likely to prove unsustainable.
...
[R]egulation needs to be oriented to establishing standards that will be appropriate throughout the cycle—for both the boom period and the bust. For example, in terms of subprime mortgage underwriting, this would have included enforcing standards with respect to loan valuation, loan-to-value ratios, household income verification, and the quality of loan documentation.
...
[N]o matter how effectively we reform the financial system, it seems unlikely that we will ever be able to completely eliminate booms and busts. There will be problems in identifying the boom—distinguishing between what is sustainable and what is unsustainable. There also will be broader and even more subtle obstacles—booms, when they are underway, are typically enjoyable. As a result, regulatory interventions that temper booms normally are going to be unpopular. So in practice even activist regulators may struggle to act early enough and with sufficient force to arrest a boom before it becomes a bubble. This suggests that to make the financial system secure, we are going to have to do much more than just act to temper booms and busts.

by Calculated Risk on 9/23/2011 11:40:00 AM

Still talking ...

From the WaPo: Banks to meet with state, federal officials over foreclosure deal

State and federal officials on Friday were again to meet with representatives of the nation’s largest banks, trying to finalize a much-anticipated settlement over shoddy foreclosure practices ... the session in Washington would center around how broad a release from future liability banks should receive in exchange for agreeing to overhaul their mortgage servicing practices and paying billions of dollars in penalties.
...
State and federal officials are hoping to extract about $20 billion in collective penalties from the banks involved, with Bank of America footing the largest share, followed by J.P. Morgan Chase and Wells Fargo. The final amount, however, likely will depend on the scope of the legal release.

There are a large number of seriously delinquent mortgage loans in limbo waiting for this settlement. According to LPS, at the end of August there were about 1.87 million loans seriously delinquent and another 2.15 million loans in the foreclosure process. This is only down slightly from a year ago when 4.4 million loans were seriously delinquent or in-foreclosure. Once the settlement is reached, the pace of foreclosures will pick up sharply.

The key issue is the release from future liabilities. Obviously the banks would like the release to be very broad, and the State AGs would like the release to be very narrow.

by Calculated Risk on 9/23/2011 08:29:00 AM

Just another day ...

From the NY Times: With a Joint Statement, the Leading Economies Try to Reassure World Markets

The world’s major economies released an unexpected joint statement Thursday night ...

“We are committed to supporting growth, implementing credible fiscal consolidation plans, and ensuring strong sustainable growth,” said the communiqué from the Group of 20 nations. “This will require a collective and bold action plan with everyone doing their part.”

From the WSJ: Moody's Downgrades 8 Greek Banks

Moody's Investors Service Inc. downgraded eight Greek banks by two notches Friday, citing expected losses due to their holdings of Greek government bonds, increasing concerns about the impact of a recession as well as fragile liquidity and funding positions.

"The government faces significant solvency challenges and historical experience shows that small sovereign debt restructurings have often been followed by larger sovereign defaults," Moody's warned.

From Reuters: Greek default talk gathers pace

Greek Finance Minister Evangelos Venizelos was quoted by two newspapers as saying an orderly default with a 50 percent haircut for bondholders was one of three possible scenarios for resolving the heavily indebted euro zone nation's fiscal woes.

And the denial: Greece Denies Reports on Default Scenarios

Given the history of the European financial crisis, denials are frequently taken as confirmation ...

The Greek 2 year yield was up to 67%. The Greek 1 year yield is at 134%.

The Portuguese 2 year yield is up to 17.6% (rising quickly) and the Irish 2 year yield was down to 9.05%.

by Calculated Risk on 9/22/2011 08:19:00 PM

Here is a new study released today of mortgage originations in 2010. From the Federal Reserve: The Mortgage Market in 2010: Highlights from the Data Reported under the Home Mortgage Disclosure Act

Back in 2003, about 35.5% of all homeowners refinanced. In 2010 only 10.7% of homeowners refinanced. On page 62, the study provides a table by FICO score, year of origination, and states with steep house price declines compared to all other states ("Steepest declines" consists of the five states with the steepest declines in house prices from 2006 to 2009: Arizona, California, Florida, Michigan, and Nevada; "other" consists of all remaining states.) Only a few borrowers with low FICO scores refinanced in 2010, and the rates for refinancing were lower in the five states than in the other states.

This is important - although we may see sub 4% conforming 30 year fixed rate mortgages soon, many borrowers will not be able to refinance.

I've excerpted a few key findings with highlights.

• Mortgage originations declined between 2009 and 2010 in the HMDA data from just under 9 million loans to fewer than 8 million loans. Most significant was the decline in the number of refinance loans despite historically low baseline mortgage interest rates throughout the year. Home-purchase loans also declined, but less so than the decline in refinance lending.

• We draw on data from a national credit bureau to highlight the importance of house price declines and changes in underwriting relative to earlier in the decade for refinance activity during 2010. We estimate that, in the absence of home equity problems and underwriting changes, roughly 2.3 million first-lien owner-occupant refinance loans would have been made during 2010 on top of the 4.5 million such loans that were actually originated.

• A sharp drop in home-purchase lending activity occurred in the middle of 2010, right alongside the June closing deadline (although the deadline was retroactively extended to September). The ending of this program during 2010 may help explain the decline in the incidence of home-purchase lending to lower-income borrowers between the first and second halves of the year.

• Home-purchase lending in highly distressed census tracts identified by the Neighborhood Stabilization Program (NSP) was 75 percent lower in 2010 than it had been in these same tracts in 2005. This decline was notably larger than that experienced in other tracts, and appears to primarily reflect a much sharper decrease in lending to higher-income borrowers in the highly distressed neighborhoods.

• National single-family home loan limits on both FHA loans and Freddie Mac and Fannie Mae purchases are scheduled to fall on October 1, 2011. Analysis of the 2010 HMDA data suggests that the number of loans affected by these limit changes is likely to be small. For example, about 1.3 percent of both the 2010 home-purchase and refinance loans fell into a size range affected by the proposed limit changes for Freddie Mac and Fannie Mae. Although the affected number of loans is small relative to the total number of loans, the analysis also shows that the number is large relative to the current jumbo loan market. How easily the private market would be able to absorb this potentially large increase in the market for jumbo loans is unclear.

by Calculated Risk on 9/22/2011 04:55:00 PM

The Case-Shiller House Price index for July will be released Tuesday. Here are a few other indexes:

• FNC: Home Prices Begin to Lose Momentum; Up 0.1% in July

Based on the latest data on non-distressed home sales (existing and new homes), FNC’s Residential Price Index™ (RPI) indicates that single-family home prices were up slightly in July to a seasonally unadjusted rate of 0.1%, following a strong performance in June that saw a 1.1% increase in a single month. As a gauge of underlying home value, the RPI excludes sales of foreclosed homes, which are often sold with large price discounts due to poor property conditions.

The FNC index tables for three composite indexes and 30 cities are here.

• CoreLogic reported earlier this month for July: Home Price Index increased 0.8% in July

July Home Price Index (HPI) which shows that home prices in the U.S. increased for the fourth consecutive month, inching up 0.8 percent on a month-over-month basis.

• The FHFA reported this morning: FHFA House Price Index Up 0.8 Percent in July

• From RadarLogic today As We Pass the Seasonal Peak in Home Prices, Signs Point to Trouble Ahead

In July, the 25-MSA RPX Composite price remained essentially unchanged on a month-over-month basis, but declined year over year for the 13th month in a row.
...
Last month, we predicted that the S&P/Case-Shiller 10-City composite for June 2011 would be about 156 and the 20-City composite would be roughly 142. In fact, the 10-City composite was 154.88 and the 20-City composite was 141.30.

This month, we expect the S&P/Case-Shiller composite indices to increase about one percent month over month, but to remain about three percent below their July 2010 levels. The July 2011 10-City composite index will be about 156, and the 20-City index will be roughly 143.

The consensus is that prices increased in July, but that prices will start falling again soon.

And there was another big move in the stock market today.

Here is a graph (click on graph for larger image) from Doug Short.

Pretty wild swings over the last couple of months!

by Calculated Risk on 9/22/2011 03:09:00 PM

Update: from Bloomberg: Europe Officials Weigh Forming Crisis ‘Firewall’

European officials said governments may leverage the region’s bailout program to erect a “firewall” around the sovereign debt crisis once a revamp of the fund is completed.

From the Financial Times: EU set to speed recapitalisation of 16 banks

European officials look set to speed up plans to recapitalise the 16 banks that came close to failing last summer’s pan-EU stress tests as part of a co-ordinated effort to reassure the markets about the strength of the 27-nation bloc’s banking sector.

A senior French official said the 16 banks regarded to be close to the threshold would now have to seek new funds immediately. Although there has been widespread speculation that French banks are seeking more capital, none is on the list.
excerpt with permission

From Bloomberg: Greece Speeds Budget Cuts to Ensure Aid

Measures announced yesterday following two rounds of talks with the European Union and the IMF include: a 20 percent cut in pensions of more than 1,200 euros ($1,650) a month, according to a government statement; pensions paid to those younger than 55 will be shaved by 40 percent for the amount exceeding 1,000 euros and wages will be lowered for 30,000 state employees.

With an 8 billion-euro aid payment in the balance, Greek creditors are also in the final stages of negotiating a bond exchange intended to reduce the country’s debt load of about 350 billion euros.

The Greek 2 year yield was up to 66.5%. The Greek 1 year yield is at 135%.

The Portuguese 2 year yield is up to 17.5% (rising quickly) and the Irish 2 year yield was down to 9.1%.

The Italian 10 year yield was down slightly to 5.7%.

Here are the links for bond yields for several countries (source: Bloomberg):

Greece	2 Year	5 Year	10 Year
Portugal	2 Year	5 Year	10 Year
Ireland	2 Year	5 Year	10 Year
Spain	2 Year	5 Year	10 Year
Italy	2 Year	5 Year	10 Year
Belgium	2 Year	5 Year	10 Year
France	2 Year	5 Year	10 Year
Germany	2 Year	5 Year	10 Year

by Calculated Risk on 9/22/2011 11:52:00 AM

From Bloomberg: Commercial Real Estate Prices in U.S. Increased 5% in July, Moody’s Says

The Moody’s/REAL Commercial Property Price Index advanced 5 percent from June. It’s up 1.2 percent from a year earlier and almost 13 percent from its post-peak low in April, the New York- based company said in a report today.

Demand was driven by middle-market properties that aren’t considered major assets.
...
“This month’s gain is more a continuation of the bottoming process than a harbinger of recovery,” the company said in the report. “Slow job growth will crimp expectations for the absorption of vacant space and for rent increases, which in turn will constrain near term price increases.”

Below is a comparison of the Moodys/REAL Commercial Property Price Index (CPPI) and the Case-Shiller composite 20 index. Beware of the "Real" in the title - this index is not inflation adjusted.

Click on graph for larger image in graph gallery.

CRE prices only go back to December 2000. The Case-Shiller Composite 20 residential index is in blue (with Dec 2000 set to 1.0 to line up the indexes).

According to Moody's, CRE prices are up 1.2% from a year ago and down about 42% from the peak in 2007. Some of this increase was probably seasonal - also this index is very volatile because there are relatively few transactions. Also, this report was for July, and the index will probably be weaker in August after the debt ceiling debate and the renewed fears about Europe.

by Calculated Risk on 9/22/2011 10:21:00 AM

• From Freddie Mac: Fixed-Rate Mortgages Hold Steady, Remain Near Record Lows

Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing fixed-rate mortgages changing little amid sluggish economic, mixed housing data, and ongoing concerns over the European debt markets. The 30-year fixed remained unchanged at 4.09 percent, while the 15-year fixed dropped a single basis point to 3.29 percent, marking a new record low.

There will be new record low mortgage rates reported next week.

• From MarketWatch: August economic indicators signal weak growth

The economy should exhibit "continued weak growth" through the fall and winter, the Conference Board said Thursday as it reported that its index of leading economic indicators grew 0.3% in August, compared with a 0.1% gain expected by economists polled by MarketWatch. "There is growing risk that sustained weak confidence could put downward pressure on demand and business activity, causing the economy to potentially dip into recession," said Ken Goldstein, a Conference Board economist ...

• From the FHFA: FHFA House Price Index Up 0.8 Percent in July

U.S. house prices rose 0.8 percent on a seasonally adjusted basis from June to July, according to the Federal Housing Finance Agency’s monthly House Price Index. The previously reported 0.9 percent increase in June was revised to a 0.7 percent increase. For the 12 months ending in July, U.S. prices fell 3.3 percent.

This is the GSE only index. The FHFA “expanded-data” House Price Index (HPI) that covers all homes is only released Quarterly. There will be more house price data released soon - and Case-Shiller next Tuesday.