by Calculated Risk on 6/17/2008 01:36:00 PM

Last week the Associated Press (AP) sent out a notice to a blogger demanding that all AP excerpts be removed from his blog. Needless to say this created quite a fire storm in the blogger world. The AP has backed down and is now working with some bloggers to create some guidelines for excerpts. Atrios has been following this story.

Here is the AP version of the story via the NY Times: AP to meet with blogging group to form guidelines

I think the AP is going about this all wrong. It seems to me the problem isn't bloggers violating "fair use". The real problem is the AP business model no longer works. The AP currently operates as a not-for-profit cooperative, owned by its membership (daily newspapers). It appears the AP charges members and subscribers for content to pay their expenses.

Compare this to most online newspapers that are based on an advertising model. They provide content that draws readers, and then they sell advertising on their websites. With this model, the newspapers encourage bloggers and other online sites to link to their content (with small excerpts).

In fact I frequently receive emails from journalists thanking me for linking to their stories - and I suppose helping to boost their traffic a little. This is a model that works, and they see blogging as a complementary product.

But this doesn't work for the AP. When the bloggers link to an AP story, it might be in Podunk Press, and yes - that would drive traffic to Podunk - but the AP doesn't receive any more revenue, and the other newspapers with the same AP story complain that they are getting scooped by the bloggers.

The answer is for the AP to innovate. Perhaps the AP could measure the traffic to each newspaper, and when Podunk is getting extra hits, Podunk would pay more for the story. Or perhaps the AP could have a specific AP news site for bloggers to link to. The AP could sell advertising on this site, and that would offset some of their expenses and reduce the costs for their members.

The answer is to change the model. Adapt. Innovate.

by Calculated Risk on 6/17/2008 12:30:00 PM

This graph is an update to the construction employment conundrum: completions have declined about 50% from the peak in 2006, and yet residential construction employment has declined about 500,000 jobs or about 15%.

Click on graph for larger image in new window.

Note that starts are shifted 6 months into the future since it takes a little over 6 months to complete a typical residential unit.

Many observers believe the difference in the percentage declines is because of uncounted illegal immigrants in the construction work force.

The uncounted illegal immigrant argument is important for the impact on the economy, but it doesn't seem to explain why the BLS employment numbers haven't fallen more. Although the BLS is missing the job losses for illegal workers on the way down, they also didn't count them on the way up either.

Here are two other possible explanations for the different percentage declines:

Some construction employees have moved from residential to commercial work, but they are still being reported as residential construction employees to the BLS.

Many workers are still employed, but they are working far fewer hours.

We will know more are CRE construction slumps in the 2nd half of 2008.

by Calculated Risk on 6/17/2008 10:07:00 AM

The Federal Reserve reported this morning that industrial production declined 0.2% in May.

Industrial production declined 0.2 percent in May after having fallen 0.7 percent in April. ... The rate of capacity utilization for total industry declined 0.2 percentage point, to 79.4 percent, a level 1.6 percentage points below its average for 1972-2007.

A decline in industrial production is one of the indicators of a recession (see quote at bottom). The following graph shows capacity utilization and recessions for the last 40 years.

Click on graph for larger image in new window.

The decline in capacity utilization suggests that the economy could be in recession.

Even more important is that industrial production is a key to the depth of the economic slowdown. So far exports have been strong, and the decline in industrial production has been mild. If the global economy slows significantly ("recoupling"), then industrial production and capacity utilization could fall sharply leading to a deeper recession.

Also, with capacity utilization below average, this probably means less investment in non-residential structures in the near future.

"[A] recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."
National Bureau of Economic Research (NBER)

by Anonymous on 6/17/2008 08:31:00 AM

The LA Times has a good piece out this morning on California community banks and their RE/mortgage problems, particularly with construction loans. Among others, there is this:

Security Pacific Bancorp of West L.A. -- which resembles in name only the former L.A.-based banking giant acquired in 1992 by what is now Bank of America Corp. -- has written off millions in dud Inland Empire housing loans. In a recent order, the Federal Deposit Insurance Corp. and state regulators required Security Pacific, with $585 million in assets, to diversify its operations, cut off deadbeat clients and "determine that the lending staff has the expertise necessary to properly supervise construction loans."

Hoocoodanode that you needed expertise to supervise construction loans?

If you are interested, the Security Pacific C&D is here.

by Calculated Risk on 6/17/2008 08:29:00 AM

Click on graph for larger image in new window.

The graph shows total housing starts vs. single family housing starts.

Both total starts and single family starts are at the lowest level since 1991.

Note that the current recession on the graph is not official.

Here is the Census Bureau reports on housing Permits, Starts and Completions.

Building permits decreased:

Privately-owned housing units authorized by building permits in May were at a seasonally adjusted annual rate of 969,000.
This is 1.3 percent below the revised April rate of 982,000 and is 36.3 percent below the revised May 2007 estimate
of 1,522,000.

Single-family authorizations in May were at a rate of 623,000; this is 4.0 percent below the April figure of 649,000.

The declines in permits suggest further declines in starts next month.

On housing starts:

Privately-owned housing starts in May were at a seasonally adjusted annual rate of 975,000. This is 3.3 percent below the
revised April estimate of 1,008,000 and is 32.1 percent below the revised May 2007 rate of 1,436,000.

Single-family housing starts in May were at a rate of 674,000; this is 1.0 percent (±9.9%)* below the April figure of 681,000.

And on completions:

Privately-owned housing completions in May were at a seasonally adjusted annual rate of 1,132,000. This is 11.6 percent above the revised April estimate of 1,014,000, but is 26.9 percent below the revised May 2007 rate of 1,549,000.

Single-family housing completions in May were at a rate of 869,000; this is 8.9 percent above the April figure of 798,000.

More on starts and completions later.

by Calculated Risk on 6/16/2008 09:47:00 PM

From McGraw-Hill via MarketWatch: 2008 Construction Starts Estimated at $558.5 Billion, Down 11%, McGraw-Hill Construction Reports

On Commercial Real Estate (CRE):

[T]he slower economy and tighter lending conditions are now causing [CRE] projects to be deferred, and the loss of momentum will take firmer hold as the year proceeds. For 2008, commercial building will retreat 8% in dollar volume and 16% in square feet. Stores and warehouses are the most vulnerable to decline in the near term, while lesser reductions are anticipated for hotels and office buildings.

This is similar to the recent CRE forecast from Wachovia.

by Calculated Risk on 6/16/2008 07:00:00 PM

Initially, in California, the foreclosure crisis hit mostly lower end areas. But the numbers are starting to grow in the more affluent areas now; like Orange County. Yes, many of these foreclosures are in the poorer areas of Santa Ana, but the problem is spreading (see photos earlier today).

Mathew Padilla at the O.C. Register has the story: O.C. foreclosures hit new record in May, break 1,000 in a month for first time

Click on graph for larger image in new window.

This graph is based on the DataQuick numbers from Matt's article.

The graphs shows the number of Notices of Default filed (NODs) and actually foreclosures per month.

Note: today was all housing for me. My earlier posts included comments from the NAHB conference call, the DataQuick numbers for Southern California, and more on the housing bust and worker mobility.

Also yesterday I posted another analysis of home improvement investment that might be of interest.

Best to all.

by Calculated Risk on 6/16/2008 04:09:00 PM

On Saturday I wrote about how the housing bust is impacting labor mobility. Here is some more ...

L.M. Sixel and Nancy Sarnoff have a terrific article today in the Houston Chronicle on how the housing bust is impacting the job market in Houston: Poor housing market takes many off the job market (hat tip slmortgagebroker)

Carole Hackett has some high-level management jobs to fill. But the vice president of human resources of The Methodist Hospital is having trouble because of the slumping real estate market.

Not in Houston, mind you. Hackett's problems are in Michigan, Illinois and Ohio.

That's because when Hackett identifies promising candidates for the vice president of quality and key nursing director positions, they can't move.
...
"My intuition is that the housing market crisis in the United States is greatly affecting labor mobility," said Barton Smith, director of the Institute for Regional Forecasting at the University of Houston.

As I noted on Saturday, from 2005 to 2006 (the most recent data), approximately 1.7 million owner-occupied households, moved to a different county or state in the United States. If approximately 1 in 8 households (the same proportion as with negative equity) will not accept a transfer now because of depressed home values that would be about 200,000 households per year that will be reluctant to accept job transfers.

One of the strengths of the U.S. labor market has been the flexibility associated with geographical mobility - households can move easily from one region to another for better employment. The housing bust will limit this flexibility.

by Calculated Risk on 6/16/2008 02:41:00 PM

O.C. Register photographer Eugene Garcia takes us on a tour of foreclosed homes in the O.C.: The real foreclosures of Orange County

Here are a couple of samples (photos used with permission):

My first stop is at 512 W. Camile St. in Santa Ana. This foreclosed 2 bedroom home sold for $585,000 in March of 2006. ... the starting bid is just $99,000. Hopefully they'll throw in some buckets of paint. But - hey- what's that passage down below? (see Eugene's photos for the answer)

This house sold for $585,000 in 2006?

NO AREA IMMUNE: Quite a change in environment here. This 4 bedroom, 2.5 bath foreclosure at 4 Langford Lane in Ladera Ranch sold at the peak in 2006 for $1,000,000. Neighbors said the last buyer owned a mortgage company that went under. Starting bid is $299,000.

by Calculated Risk on 6/16/2008 01:46:00 PM

From DataQuick: Southland home sales back to record low; median price slips again

Bargain shoppers helped push Southern California home sales higher in May compared with April - a normal, seasonal lift - but it was still the slowest May in more than 20 years. The median price paid fell a record 27 percent from a year ago, the result of sluggish high-end sales, more sellers dropping their asking prices and lenders selling off more of their aggressively priced, repossessed homes.
...
Sales of post-foreclosure homes continue to dominate many inland markets. Of all the Southland homes that resold in May, 37.4 percent had been foreclosed on at some point in the prior 12 months, compared with a revised 36.2 percent in April and 5.5 percent one year ago. Across the six-county area, these "foreclosure resales" ranged from 25.6 percent of resale activity in Orange County to 56.6 percent in Riverside County.
...
Foreclosure activity is at record levels ...

This is an REO market. Most of the sales activity is at the low end, and even the higher end areas are seeing substantial REO sales activity.

by Calculated Risk on 6/16/2008 01:00:00 PM

Paraphrasing: The outlook is grim. Congress needs to act "urgently". Americans are losing their jobs, losing their homes, losing their home equity. We need help!!!

NAHB wants a tax credit for homebuyers. Builders no longer asking for extension of Net Operating Loss (NOL) carry forward (this was getting too much bad publicity I think).

More: "Buyers are only buying for need (like relocations), not want." People can't move up - they can't sell their homes. Note: this is why the mobility issue I discussed last week is so critical.

"Activity so slow, companies aren't hiring any teenagers this summer."

Builder confidence hits record low.

The NAHB reports that builder confidence was at 18 in June, down from 19 in May. Usually housing bottoms look like a "V"; this one will probably look more like an "L". (this refers to activity like starts and sales, but will probably also be apparent in the confidence survey).

Click on graph for larger image in new window.

Current sales activity at record low of 17.

Chief Economist David Seiders: Expects further declines in new home sales. This survey was before the major run-up in interest rates. Interest rates is another threat to the housing market.

Caroline Baum Asks (my on the fly transcript):

"We've just been through the biggest housing bubble, housing bust in history. Housing is already tax advantaged. Why do we want to artificially stimulate demand when prices are still too high?"

More: Seiders still has sales at bottoming at the middle of this year. He now says risk to his forecast are to the downside - because of this HMI report and higher interest rates.

"Risk (for sales) are piling up on downside. Price erosion (for new homes) through 2009."
Seiders, June, 2008

by Calculated Risk on 6/16/2008 12:03:00 PM

National Association of Home Builders (NAHB) CEO Jerry Howard and Chief Economist David Seiders will announce the June Housing Market Index (HMI) results during the teleconference to representatives from the media and other interested parties on Monday at 1:00 p.m. Howard will focus on the policy side and will discuss the importance of passing economic stimulus legislation, while Seiders will analyze the June HMI numbers and explain how they fit into his overall housing forecast.

Members of the media will be given the opportunity to ask questions at the conclusion of the call. A press release and related data charts will also be released following the call, and will be posted at www.nahb.org/teleconference.

To participate in the call, please dial 1-800-860-2442 (toll-free) and ask for the "NAHB Housing Market Index Call."

If you are unable to participate in the teleconference, you may listen to a full replay of the call after the teleconference has concluded by calling 877-344-7529 and entering 420480 followed by the # sign when prompted for the account number. The replay will be accessible beginning at 4:00pm ET on June 16, and will available until 9:00am ET on July 1.

Source.

I don't know why they are holding a conference call. I doubt it's because builder confidence has improved - or why would they be pleading for help from Congress?

by Calculated Risk on 6/16/2008 08:59:00 AM

From MarketWatch: Lehman posts first loss as public company

Write-downs on soured debt securities and bad trading results led to Lehman Bros. Holdings Inc. reporting [a] second-quarter loss of $2.8 billion ...

A billion here, a billion there.

by Calculated Risk on 6/16/2008 05:00:00 AM

Alec Klein and Zach Goldfarb at the Washington Post present a three part series on the housing boom and bust. Here is the second part, The Bust, discussing the beginning of the housing bust. The third part will be released Tuesday.

On Feb. 27, [2007] ... Federal Reserve ... officials remained unruffled. They privately calculated that even if subprime losses were severe, the dollars involved would be no more than a blip in the overall economy. As late as June, Fed Chairman Ben S. Bernanke spoke via satellite to a conference of international economic officials in South Africa, predicting, "the troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system."

Ahhh. Memories of containment.

The full series, with some interactive timeline and other resources is available here.

Note: Tanta receives a nice mention in the resource section.

by Calculated Risk on 6/15/2008 07:02:00 PM

There was a blurb in the WSJ last week about hedge-fund manager Edward Lampert: Lampert Puts Money On Housing Rebound.

Although Lampert invested in several housing related stocks, the vast majority of his housing related investment is in home improvement (specifically Home Depot).

Let's take another look at home improvement (Important Note: this is not investment advice). Home Depot recently held an investor conference on June 5th, and here is the presentation material from CEO Frank Blake (hat tip Dave). In general I think Mr. Blake was very realistic about the tough economic environment for home improvement.

The first slide from Mr. Blake is very familiar to readers of CR:

Click on graph for larger image in new window.

This graph shows residential investment (RI) as a percent of GDP for the last 60 years. Blake has added the average of 4.8% on the graph, and clearly RI is well below the average.

Note: I usually present the last 50 years, and the average is closer to 4.6%.

This might convince some people that the end is near in the slump in RI. But let's break it down by two key components of RI: new single family structures and home improvement.

**************************
The next graph shows residential investment in new single family structures as a percent of GDP.

As everyone knows, investment in single family structures has fallen off a cliff. This is the component of RI that gets all the media attention - although usually from stories about single family starts and new home sales (related to RI in single family structures).

Currently investment in single family structures is below 1.6% of GDP, significantly below the average of the last 40 years of 2.4% - although still above the low in 1982 of 1.2%.

But what about home improvement?

The third graph shows home improvement investment as a percent of GDP.

Home improvement is at 1.3% of GDP, off the high of 1.4% in Q1 2007 - but still well above the average of the last 40 years of 1.07%.

This would seem to suggest there is significant downside risk to home improvement spending over the next few years.

And finally, Mr. Blake presented this graph on subprime and Alt-A mortgage origination.

This shows the stunning surge in subprime and Alt-A lending starting in 2004 and running well into 2007.

The graph is captioned: "The worst part of the mortgage market is behind us", but it probably should have been captioned "Worst part of mortgage origination is behind us".

The fallout from these poorly underwritten loans happens when these houses fall into foreclosure, and delinquency and foreclosure rates are still rising - and rising sharply for Alt-A and even prime loans. The worst of the origination is definitely behind us, but the worst of the impact on the economy from this poor underwriting is probably still to come.

Read on ... there is much more.

by Calculated Risk on 6/15/2008 05:18:00 PM

From the Financial Times: Barclays seeks to raise £4bn

Barclays is seeking to raise as much as £4bn ($8bn) from outside investors ... Analysts believe Barclays ... is being less conservative than some of its rivals in marking down assets ...

The confessional will still be busy.

by Calculated Risk on 6/15/2008 01:53:00 PM

From the WSJ: AIG Chief Expected to Step Down

The board of American International Group Inc. is meeting today to accept the possible resignation of Chief Executive Martin Sullivan ...

At the heart of AIG's current problems are the record-setting, multi-billion losses AIG has recorded in the last two quarters ...

Another Sunday board meeting. These are never good news.

Update: CNBC is reporting Lehman is meeting this weekend too:

Senior executives at Lehman Brothers, the embattled Wall Street securities firm, have been summoned this weekend for a series of meetings as the firm prepares to release second-quarter earnings on Monday and speculation swirls that the firm may be sold to a larger bank, CNBC has learned.

by Calculated Risk on 6/15/2008 09:49:00 AM

Alec Klein and Zach Goldfarb at the Washington Post present a three part series on the housing boom and bust starting today. The first part, The Bubble, discusses the causes of the housing market crisis. The next two parts will be released Monday and Tuesday.

The full series, with some interactive timeline and other resources is available here.

Note: Tanta receives a nice mention in the resource section.

The young woman who walked into Pinnacle's Vienna office in 2004 said her boyfriend wanted to buy a house near Annapolis. He hoped to get a special kind of loan for which he didn't have to report his income, assets or employment. Mortgage broker [Kevin] Connelly handed the woman a pile of paperwork.

On the day of the settlement, she arrived alone. Her boyfriend was on a business trip, she said, but she had his power of attorney. Informed that for this kind of loan he would have to sign in person, she broke into tears: Her boyfriend actually had been serving a jail term.

Not a problem. Almost anyone could borrow hundreds of thousands of dollars for a house in those wild days. Connelly agreed to send the paperwork to the courthouse where the boyfriend had a hearing. As it happened, he was freed that day. Still, Connelly said, "that was one of mine that goes down in the annals of the strange."

The problem was the strange was commonplace during the boom.

by Calculated Risk on 6/14/2008 06:41:00 PM

The WaPo had a story this morning, Held Back by the House, about a couple who moved from Florida to Washington because of a job change. They have been unable to sell their Florida home, and remarked:

"If we knew then what we know now, we would have stayed where we were."

Of course many homeowners now know they are trapped:

[D]epressed sales and sinking home prices in many parts of the country are complicating relocations and transfers for thousands of workers ... A survey last year by Worldwide ERC, a nonprofit association that represents relocation specialists, found that depressed home values emerged as the No. 1 reason for resisting job transfers for the first time in more than 10 years.

Of the member organizations that reported employee reluctance to move, 71 percent cited the sluggish real estate market as an impediment to a job-related move, up from 16 percent last year.

"This is a dramatic shift," said Cris Collie, the group's chief executive. "The top issue has consistently been family concerns, such as dual-career couples, children at a critical school age or caring for elderly parents who live nearby.

There are probably close to 10 million households currently with zero or negative equity in the U.S. For these homeowners, it will be very difficult to accept a job transfer to a different county or state.

Definition: Negative Equity: a homeowner owes more than their home is worth.

To size the problem: According to the Census Bureau, from 2005 to 2006 (the most recent data), approximately 1.7 million owner-occupied households, moved to a different county or state. If approximately 1 in 8 households (the same proportion as with negative equity) will not accept a transfer now because of depressed home values that would be about 200,000 households per year that will be reluctant to accept job transfers.

This will not only impact the earning potential of these households, but this could also impact the performance of various companies. A significant majority of households that migrate have incomes above the median - and negative equity situations will limit the ability of companies to transfer these senior employees.

by Calculated Risk on 6/14/2008 03:27:00 PM

Mathew Padilla at the O.C. Register has an interesting piece on rapidly rising delinquencies in Orange County, CA: Orange County’s mortgage market distress could soon top the U.S..

The report said O.C.’s delinquency rate of 3.14 percent, was less than California’s 4.34 percent and the nation’s 3.23 percent.

But, unfortunately, the county’s delinquency rate is rising more quickly than for both the state and nation.

Here are some comments from Keith Carson, a senior consultant for TransUnion, on why the delinquency rates are rising quickly in Orange County:

In Orange County, ... the rate at which you are accelerating is reason for concern. I think that is probably a function of the number of adjustable-rate loans that were made in Orange County in the 2005 to 2006 time frame. Some of those have reset (the interest rate has increased) to the point where occupants can’t afford the payments.
...
I think it is mostly due to the price of homes in California. There were a lot more ARMs used so people could afford to get into a home. For a lot of people the only way they could get into a home was with an ARM.

This is not a subprime problem. The reason the delinquency rate is rising rapidly in Orange County is because homes are very expensive, and a large number of recent home buyers used ARMs, especially Option ARMs, as affordability products.

Now that the interest rate is increasing - and in some cases the loans are hitting the maximum allowed principal ceiling - these loans are no longer affordable. Since these same homeowners have negative equity, selling the home is not an alternative.

The important point here is that delinquencies are starting to increase rapidly in middle to upper middle class neighborhoods where buyers used "affordability products" to buy more house than they could really afford.

We are all subprime now!