by Calculated Risk on 6/06/2008 07:14:00 PM

From the LA Times: Housing downturn is a jolt to upscale Temecula

It wasn't supposed to happen here. Not like this. The crashes are expected to hit hard in the Fontanas and the Perrises of the world -- cities marketed more to working-class buyers, first-time buyers or sub-prime buyers. Indeed, Temecula is by no means the hardest-hit area of the Inland Empire; many communities here have plunged into record levels of foreclosure.
...
Today, said Rich Johnston, Temecula's deputy director of building and safety and code enforcement, as many as 15% of Temecula's 22,500 single-family homes are bank-owned or in some stage of foreclosure.

I remember visiting a friend in Temecula about 3 years ago. We were standing in his front yard, and he started telling me what his neighbors did for a living. "A mortgage broker lives there. A real estate agent there. That guy is in construction. Another mortgage broker there" ... and on and on. Over half of the households on his block were dependent on the housing market in way or another.

So it is no surprise that the housing bust is hitting Temecula hard.

But look at Temecula on this map. San Diego is far to the south - living in Escondido is a tough enough commute to work in San Diego. And Orange County is an even more difficult drive to the west. Imagine what $5 gasoline will do.


View Larger Map

by Calculated Risk on 6/06/2008 03:57:00 PM

It's Friday. Do you know if your bank failed today?

Note: Just asking because the FDIC usually announces bank failures Friday afternoon.

by Calculated Risk on 6/06/2008 02:07:00 PM

From MarketWatch: Wal-Mart sees growth both in U.S., overseas

Chief Financial Financial Officer Tom Schoewe also said it's "highly likely" that Wal-Mart's capital spending this fiscal year will be at the low end of its previous estimate of $13.5 billion to $15.2 billion ...

A billion less capital spending here, a billion there ... and the non-residential investment slump is here.

by Calculated Risk on 6/06/2008 10:27:00 AM

From Professor Hamilton: The Oil Shock of 2008

"Time to reassess the potential for recent oil price increases to contribute to an economic downturn.

The sharp spikes in oil prices associated with the 1973-74 oil embargo, the 1978 Iranian Revolution, the Iran-Iraq War in 1980, and the first Persian Gulf War in 1990 were each followed by an economic recession. However, when oil prices started to rise again five years ago, many of us suggested that things would be different this time, in part because the price was rising much more gradually and so should be less disruptive of consumer spending patterns. Others emphasized that, despite the price increases, oil was still cheaper than it had been historically if you took into account inflation. However, once you include the most recent data, neither of those claims would still be true."

From EconbrowserThe graph above shows that the real price of oil is now above the levels of the previous oil shocks.

Hamilton points out that American businesses and consumers are now clearly changing their behavior based on the price of oil. (see his post for more graphs)

Of course oil is a global commodity, and strong demand growth overseas can more than offset declining demand in the U.S. Just today Morgan Stanley analyst Ole Slorer said that he expects strong Asian demand to push prices to $150 by July.

Morgan Stanley analyst Ole Slorer said he expected strong demand in Asia that could drive prices to $150 by July 4. Shipments from the Middle East are mimicking patterns seen in the third quarter last year, when Morgan Stanley based its "oil price spike" predictions on Atlantic Basin draws, he said.

"We made the same call using the same parameters, but now we are starting from much lower inventory levels," Slorer said Friday.

"Asia is taking an unprecedented share" of Middle East exports to build up stocks, Slorer wrote in his report.

Interesting times.

by Calculated Risk on 6/06/2008 08:43:00 AM

From the BLS: Employment Situation Summary

The unemployment rate rose from 5.0 to 5.5 percent in May, and nonfarm payroll employment continued to trend down (-49,000), the Bureau of Labor Statistics of the U.S. Department of Labor reported today. In May, employment continued to fall in construction, manufacturing, retail trade, and temporary help services, while health care continued to add jobs.

The first graph shows the unemployment rate and the year-over-year change in employment vs. recessions.
Click on graph for larger image.

Unemployment jumped sharply and the rise in unemployment, from a cycle low of 4.4% to 5.5%, is a strong recession indicator.

Also concerning is the YoY change in employment is close to zero (the economy has added only 236 thousand jobs in the last year), also suggesting a recession.

Note the current recession indicated on the graph is "probable", and is not official.

The second graph shows residential construction employment.

Note: graph doesn't start at zero to better show the change.

Residential construction employment declined 25,100 in May, and including revisions to previous months, is down 494 thousand, or about 14.3%, from the peak in February 2006. (compared to housing starts off over 50%).

This is the fifth straight month of job losses. This is a weak report, and the jump in unemployment strongly suggests a recession.

by Anonymous on 6/06/2008 08:36:00 AM

Vikas Bajaj and Michael Grynbaum report in the Times:

The first three months of 2008 marked the worst quarter for American homeowners in nearly three decades, according to the report, issued by the Mortgage Bankers Association. The rate of new foreclosures and past-due payments surged to their highest level since 1979, when the group first started collecting the data.

All told, about 8.8 percent of home loans were past due or in foreclosure, or about 4.8 million loans. That is up from 7.9 percent at the end of December. (About a third of American homeowners do not have mortgages.)

Delinquency and foreclosure rates started rising from historically low levels in late 2006 and have picked up speed in nearly every quarter since. Analysts say at first past due mortgages represented mostly high-risk loans made to borrowers with blemished, or subprime, credit. Now, as the economy has weakened and home prices have fallen in many parts of the country, homeowners with better loans are also falling behind.

It's almost like . . . we're all subprime now.

by Anonymous on 6/06/2008 08:01:00 AM

Floyd Norris in the NYT:

This is a tale of sex, lies and foreclosures.

I figured you guys would need to read that.

by Calculated Risk on 6/06/2008 12:16:00 AM

From the WSJ: National City Is Under U.S. Scrutiny

National City Corp.'s banking unit, which has been buffeted by rising bad loans, has recently entered into a "memorandum of understanding" with federal regulators, effectively putting the bank on probation.

The confidential agreement with the Office of the Comptroller of the Currency was entered into over the past month or so. ... Such MOUs are agreements between regulators and bank management. They are considered serious and are fairly rare ...

The bank division of National City had $153 billion of assets at the end of March, up from $132 billion one year earlier ...

It is possible that National City will resolve these issues, but I can't help but think of FDIC Chairman Sheila Bair's comments today: "There is also the possibility that future failures could include institutions of greater size than we have seen in the recent past."

by Calculated Risk on 6/05/2008 08:00:00 PM

From MarketWatch: Fitch downgrades MGIC Investment, PMI ratings

Fitch Ratings on Thursday downgraded MGIC Investment Corp., noting it has become much more pessimistic on its outlook for the mortgage insurance sector. ... Fitch also cut PMI Mortgage Insurance's rating ...

Didn't Tanta once say it won't feel like a real housing bust until at least one mortgage insurer goes bankrupt?

by Calculated Risk on 6/05/2008 04:45:00 PM

PJ at Housing Wire has more on the rise in delinquencies for prime loans: Primed for Trouble: Pace of Mortgage Distress Shifts to Prime Borrowers

[A]n alarming shift of the mortgage mess towards prime borrowers appears to be taking place ... signaling that the credit crunch that began among those with less-than-perfect credit is now marching onward towards borrowers usually deemed better credit risks.

... the Q4 to Q1 change in severe delinquencies strongly favors prime borrowers, for example, with severe DQs increasing by 19.2 percent for prime and 13.7 percent for subprime borrowers.

See the entire article - the problems are accelerating rapidly for prime loans.

by Calculated Risk on 6/05/2008 04:39:00 PM

RSS Readers. Sorry for the inconvenience of a short feed, but I'm trying to discourage sites like this one from using our material without credit. Any suggestions?

by Calculated Risk on 6/05/2008 02:23:00 PM

From S&P: Ambac, MBIA Financial Strength Ratings Lowered

Standard & Poor's Rating Services today lowered its financial strength ratings on Ambac Assurance Corp. and MBIA Insurance Corp. to 'AA' from 'AAA' and placed the ratings on CreditWatch with negative implications.

The ratings on the holding companies, Ambac Financial Group and MBIA Inc., have also been lowered to 'A' and 'A-' from 'AA' and 'AA-', respectively, and placed on CreditWatch with negative implications.

The rating actions on the companies reflect our belief that these entities will face diminished public finance and structured finance new business flow and declining financial flexibility. In addition, we believe continuing deterioration in key areas of the U.S. residential mortgage sector and related CDO structures will place increasing pressure on capital adequacy.

by Calculated Risk on 6/05/2008 02:11:00 PM

Wachovia economists Mark Vitner and Anika R. Khan: Commercial Real Estate Chartbook: June 2008

The faltering housing market and generally sluggish pace of the overall economy are finally taking a toll on the commercial real estate market. Demand for office, industrial and retail space is waning, sending vacancy rates higher and property prices lower.

Click on graph for larger image in new window.

This graph shows the Wachovia forecast for real non-residential investment (green columns, and the Year-over-year forecast in red).

Real private nonresidential construction is expected to moderate in the second quarter and continue to slide under the weight of tightening underwriting standards and slower economic growth.

Here is my fairly long Non-Residential Investment Overview with similar conclusions.

Also - this coming slump in CRE is one of the reasons the FDIC and the Fed are so concerned with bank failures later this year.

by Calculated Risk on 6/05/2008 12:53:00 PM

From Reuters: Bigger U.S. bank failures may be coming - FDIC (hat tip Ed)

An increasing number of banks face high exposure to deteriorating conditions in commercial real estate and construction lending, [Federal Deposit Insurance Corp Chairman Sheila Bair] told a Senate Banking Committee hearing on the state of the banking industry.

"There is also the possibility that future failures could include institutions of greater size than we have seen in the recent past," Bair said. "Uncertainties in today's economic environment continue to pose significant challenges for the banking industry, households, and bank regulators."

The coming bank failures are no secret:

Feb 25, 2008: FDIC Bracing for Bank Failures

March 17, 2008: Federal Deposit Insurance Corporation Stresses Importance of Managing Commercial Real Estate Concentrations

April 17, 2008: Fed Vice Chairman Kohn Warns on CRE Concentrations at Small banks

Note: The largest bank to fail this year was ANB Financial with $2.1 billion in assets.

by Calculated Risk on 6/05/2008 11:25:00 AM

The Fed released the Q1 2008 Flow of Funds report today: Flow of Funds.

The Fed report shows that household real estate assets decreased from $20.046 trillion in Q4 to $19.717 trillion in Q1 2008. That is a decline of $328.9 billion.

When we subtract out new single family structure investment and residential improvement, the value of existing household real estate assets declined by $431 Billion.

Household percent equity was at an all time low of 46.2%.

Click on graph for larger image in new window.

This graph shows homeowner percent equity since 1952. Even though prices have risen dramatically in recent years, the percent homeowner equity has fallen significantly (because of mortgage equity extraction 'MEW'). With prices now falling - and expected to continue to fall - the percent homeowner equity will probably decline rapidly in the coming quarters.

Note: approximately 31% of household have no mortgage. So the 50+ milllion households with mortgage have far less equity than 46.2%.

The second graph shows household real estate assets and mortgage debt as a percent of GDP. Household assets as a percent of GDP is now declining, although mortgage debt as a percent of GDP only decreased slightly in Q1.

More later ...

by Calculated Risk on 6/05/2008 11:05:00 AM

From the MBA: Delinquencies and Foreclosures Increase in Latest MBA National Delinquency Survey (hat tip Ed)

The percent of loans on which foreclosure actions were started during the quarter was 0.99 percent on a seasonally adjusted basis, 16 basis points higher than the previous quarter and up 41 basis points from one year ago.

The seasonally adjusted total delinquency rate is the highest recorded in the MBA survey since 1979 ...

Once again this quarter, the rate of foreclosure starts and the percent of loans in the process of foreclosure are the highest recorded since [the survey started in] 1979.

ARMs are a key problem, both subprime and prime:

“[W]hile subprime ARMs represent 6 percent of the loans outstanding, they represented 39 percent of the foreclosures started during the first quarter. Prime ARMs represent 15 percent of the loans outstanding, but 23 percent of the foreclosures started. Out of the approximately 516,000 foreclosures started during the first quarter, subprime ARM loans accounted for about 195,000 and prime ARM loans 117,000, but the increase in prime ARM foreclosures exceeded subprime ARM foreclosures with increases of 29,000 and 20,000 respectively over the previous quarter.” [said] Jay Brinkmann, MBA’s Vice President for Research and Economics.

That last comment is important - even though there were still more subprime than prime ARM foreclosures in Q1, the problems are really accelerating in the prime ARM segment.

by Calculated Risk on 6/05/2008 10:54:00 AM

Fed Vice Chairman Donald L. Kohn testified today: Condition of the banking system. A short excerpt:

Consistent with trends in commercial banks overall, conditions at state member banks have weakened over the past year. Problems in residential mortgage, home equity, and loans to home builders have pushed the nonperforming assets ratio at these banks to 1.57 percent, more than twice the level of one year ago and the highest rate since 1993. Loan loss provisions have also accelerated, rising to a high of 1.14 percent of average loans during the first quarter of 2008 in large part reflecting the deterioration in residential real estate-related loan portfolios.
...
Over the coming months, we expect banking institutions to continue to face deteriorating loan quality. House prices are still declining sharply in many localities and losses related to residential real estate--including loans to builders and developers--are bound to increase further. In addition, weak economic conditions could well extend problems to other segments of lending portfolios including consumer installment or credit card loans, as well as corporate loan portfolios. Moreover, banking organizations must be prepared for the possibility that liquidity conditions become tighter if uncertainties in the capital markets fail to subside or if credit conditions deteriorate significantly. Accordingly, we anticipate that the number of banks with less than satisfactory supervisory ratings will continue to increase from the relatively low levels that have existed in recent years and we are monitoring developments at all supervised institutions closely.
emphasis added

This is why the FDIC is gearing up for many more bank failures.

by Calculated Risk on 6/05/2008 09:57:00 AM

From the WSJ: Backstage at a Bank Funeral (hat tip FFDIC).

This is a story (and slide show) about how the FDIC handles a bank failure:

It isn't easy for 75 federal officials and contractors to slip into a small town undetected and liquidate an 89-year-old bank without anyone knowing. But that's what just happened in this old railroad town, population 3,200. It's a scene that's likely to repeat itself across the country as banks struggle through a painful credit cycle, overwhelmed by troubled mortgages and soured construction loans.
...
In its role as receiver for failed banks, the FDIC acts as a SWAT team, playing equal parts secret agent, medical examiner, salesman and grief counselor. The first 48 hours are typically the most frantic, as the agency must turn a failed bank inside out and oversee its sale -- or its orderly burial.

This is a story that will probably be repeated frequently over the next couple of years.

by Calculated Risk on 6/05/2008 09:39:00 AM

From the WSJ: Some Chains Posts Strong Sales Despite Gas Prices, Low Confidence

Retailers posted stronger-than-expected same-store sales for May [despite a] surge in gasoline prices and tumbling consumer confidence.

Leading the way was Wal-Mart Stores Inc., which reported a 3.9% jump, excluding fuel, in U.S. same-store sales -- double the high end of its forecast of flat to up 2% ...

Even Wal-Mart's home-goods sales, which have been weak for some time, perked up last month and posted its first same-store-sales gain in more than two years.

Overall retailers reported fairly strong sales in May. It looks like $4 gasoline didn't use up the entire stimulus.

by Calculated Risk on 6/05/2008 01:31:00 AM

Definition of Negative Absorption: The absorption rate for a community is the number of new household formed per year. If there are 100 new households formed in a community, then the annual absorption rate would be 100 units (house or apartments).

A negative absorption rate means that there are fewer households in the community each year. This is usually because more families move out of the community than move in. Since housing is durable, a negative absorption rate implies there is always more supply than demand.

I spoke with a land developer tonight (the same one involved in the 15 cents on the dollar land deal in the Inland Empire earlier this year). He told me about two deals he is working on with lenders for foreclosed land at about 20 cents on the dollar. He said the lenders are still in shock at the price.

He also mentioned that his company's analysis shows that Santa Maria (a small town about 75 miles north of Santa Barbara) is facing 5 years of negative absorption for residential real estate. This means there are a declining number of households in Santa Maria - as people leave to find jobs elsewhere - and my source believes Santa Maria will need fewer houses each year for the next five years.

Right on cue, Peter Hong writes in the LA Times: Santa Maria house bought with no money down goes into foreclosure

Prado bought a $412,000 house with a so-called 80/20 mortgage. Those mortgages are actually a pair of loans -- one for 80% of the purchase price and another for the remaining 20%.
...
Property values, of course, began falling sharply last year. And that left people such as Prado, who bought near the top of the market, owing more in loans than their homes were worth.
...
She acknowledged that she stated her monthly income as $7,500 on the loan application -- nearly double what she was actually earning ... her husband ... was earning $20 an hour as a carpenter as builders turned the area's broccoli fields into housing developments.
...
Financially, Prado says she hasn't really lost anything, since she put no money down to get her mortgage. She's looking for a place to rent.

Houses like hers are now renting for between $1,300 to $1,600 a month ...

This brings up a couple of key points:

This is fraud. Yes, it is fraud for housing, as opposed to fraud for profit, and fraud for housing is rarely prosecuted. But this is still fraud. (I recommend reading Tanta's UberNerd piece on fraud from last year: Unwinding the Fraud for Bubbles)

To reach a cap rate of 7% (similar to the REO in Oceanside), this house would have to sell for from $157K (rent of $1300 per month) to $192K (rent of $1600 per month). That is about 55% to 60% off the price the house sold for two years ago. And with negative absorption, the rents may fall much further.

There is almost no bottom for prices in an area with negative absorption. Just ask the residents of Detroit.