by Calculated Risk on 6/25/2008 06:51:00 PM

From the LA Times: Times poll: 75% blame Bush's policies for deteriorating economy

[A]ccording to a Los Angeles Times/Bloomberg poll ... Nine percent of respondents said the country's economic condition has become better off since Bush became president, compared with 75% who said conditions had worsened. Among Republicans, 42% said the country is worse off, while 26% said it is about the same, and only 22% thought economic conditions had improved.
...
All together, 82% of respondents said the economy is doing badly, compared with 71% who felt that way when the question was asked in February. And the pessimism has intensified: 50% of respondents said the economy is doing "very badly," compared to 38% in February.

This is kind of like blaming the quarterback for a loss; there are many other factors (although I share the view that the Bush administration has done a poor job on economic matters). This is a very high level of pessimism, and is probably related to higher gasoline prices, something that is very visible to every American.

On energy:

Seventy percent of respondents said the rising cost of fuel had caused hardship for their families and the pain appeared spread across all income groups: 79% of people with incomes of less than $40,000 a year said the higher prices were a hardship, but so did 55% of respondents with incomes above $100,000.

In general confidence polls are coincident indicators (they tell you what you already know about spending patterns), so this doesn't suggest anything about future consumer spending. But it's pretty clear that Americans are not happy.

by Calculated Risk on 6/25/2008 04:25:00 PM

Here is some more evidence of consumers shifting to inferior goods - from Bloomberg via the LA Times: Earnings jump 15% at Kroger, operator of Ralphs.

Consumers bought more store-branded products ...

Generic or store-branded products are classic inferior goods. Sales for store-branded products typically increase during tough economic times, and decrease when times are good (as consumers shift back to name brands).

On the same store sales increase of 5.5% - isn't that just related to higher prices for food products?

by Calculated Risk on 6/25/2008 02:12:00 PM

From the FOMC:

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.

Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.

The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.

by Calculated Risk on 6/25/2008 12:19:00 PM

"Frankly, there's very few levers left ... [T]his energy crisis is affecting consumers ... People aren't spending. People aren't driving. Really, you need to look at ways to control what's happened in the inflationary world and really take the risk that by raising rates, you may actually cause some demand to go weaker. I think it's back to where Paul Volcker was in the early '80s. There's a real risk here and we've got stagflation. You can only break out of it one way and you better take on inflation head-on."
Andrew Liveris, chairman and CEO of Dow Chemical, June 24, 2008

Meanwhile, from the NY Times: Dow Chemical Raises Prices for Second Time in a Month

The Dow Chemical Company said Tuesday that it was raising prices for the second time in a month to offset a “relentless rise” in energy costs, a sign that companies may increasingly have to pass on price increases to their customers.

The increase of as much as 25 percent — the largest in the company’s history — comes after a 20 percent rise last month that the company said did not go far enough given the continuing surge in energy prices.

by Calculated Risk on 6/25/2008 11:23:00 AM

There was no Spring this year. This year saw the smallest increase in sales from the Winter doldrums, to the Spring selling season, since the Census Bureau started tracking new home sales in 1963.

Note: Please see my earlier post for more on new home sales.

Click on graph for larger image in new window.

This graph shows the Not Seasonally Adjusted (NSA) new home sales for the last 45 years.

Usually sales increase in the spring - but not this year. The previous worst spring on record was 1982 - in the midst of a severe recession, with 30 year fixed mortgage rates at 17%, and close to double digit unemployment.

In 1982, sales picked up late in the year as interest rates declined sharply (30 year fixed rates fell from 17% to about 13% at the end of the year).

The second graph shows monthly new home sales NSA for the last few years (repeated from this morning).

The Red columns are for 2008. This is the lowest sales for May since the recession of '91.

Once again, the 2008 spring selling season has never really started. And it's probably all downhill from here.

No wonder the home builders are so pessimistic.

by Calculated Risk on 6/25/2008 10:00:00 AM

According to the Census Bureau report, New Home Sales in May were at a seasonally adjusted annual rate of 512 thousand. Sales for April were revised down slightly to 525 thousand (from 526 thousand).

Click on graph for larger image in new window.

The first graph shows monthly new home sales (NSA - Not Seasonally Adjusted).

Notice the Red columns for 2008. This is the lowest sales for May since the recession of '91.

As the graph indicates, the spring selling season has never really started.

The second graph shows New Home Sales vs. recessions for the last 45 years. New Home sales have fallen off a cliff.

Sales of new one-family houses in May 2008 were at a seasonally adjusted annual rate of 512,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 2.5 percent below the revised April rate of 525,000 and is 40.3 percent below the May 2007 estimate of 857,000.

And one more long term graph - this one for New Home Months of Supply.

"Months of supply" is at 10.9 months. Note that this doesn't include cancellations, but that was true for the earlier periods too.

The all time high for Months of Supply was 11.6 months in April 1980.

Once again, the current recession is "probable" and hasn't been declared by NBER.

And on inventory:

The seasonally adjusted estimate of new houses for sale at the end of May was 453,000. This represents a supply of 10.9 months at the current sales rate.

Inventory numbers from the Census Bureau do not include cancellations - and cancellations are near record levels. Actual New Home inventories are probably much higher than reported - my estimate is just under 100K higher.

Still, the 453,000 units of inventory is below the levels of the last year, and it appears that even including cancellations, inventory is now falling.

This is another very weak report for New Home sales and I'll have more later.

by Anonymous on 6/25/2008 08:12:00 AM

As usual, I can't tell if this sounds a little absurd because the complaint is this weak or because all I have to go on is the Gretchen Morgenson Version of the complaint.

The Illinois complaint was derived from 111,000 pages of Countrywide documents and interviews with former employees. It paints a picture of a lending machine that was more concerned with volume of loans than quality.

For example, former employees told Illinois investigators that Countrywide’s pay structure encouraged them to make as many loans as they could; some reduced-documentation loans took as little as 30 minutes to underwrite, the complaint said.

Volume-based compensation structures? There have been volume-based compensation structures in this business since long before Tanta got into it. Does it create perverse incentives? Sure. Do we have to like it? No. Has it operated all these years in plain sight of regulators, investors, and the public? Yes. Is CFC's pay structure all that different from anyone else's? I profoundly doubt it.

And if anyone who has ever underwritten a loan in 30 minutes has to go to jail, the jails will be full indeed. I wonder if they'll let me take my new Kindle. Jesus H. Christ on a Process Re-engineering Consultant Binge, folks, anybody who didn't tell the analysts on the conference calls that they'd got their average underwriting time down to 30 minutes was Nobody back in 2000. Not to mention the AUS side of the business where underwriting had gotten down to 30 seconds.

The lawsuit cited Countrywide documents indicating that almost 60 percent of its borrowers in subprime adjustable rate mortgages requiring minimal payments in the early years, known as hybrid A.R.M.’s, would not have qualified at the full payment rate. Countrywide also acknowledged that almost 25 percent of the borrowers would not have qualified for any other mortgage product that it sold.

It is now grounds for a lawsuit that you have borrowers in your lowest credit quality product who do not qualify for any alternative product? Um. We used to think that if borrowers in your lowest credit quality product could have qualified for an alternative product, you might be guilty of predatory "steering." Now you're also guilty of predatory lending if indeed the borrowers at the bottom of the pile only qualify there? Every lender has borrowers in, say, its FHA product who could not not qualify for any other mortgage product it sells. Are we going to call that a problem? That'd get pretty interesting pretty fast.

Even more surprising, Ms. Madigan said, was her office’s discovery of e-mail messages automatically sent by Countrywide to its borrowers offering complimentary loan reviews one year after they obtained their mortgages from the company.

“Happy Anniversary!” the e-mail messages stated. “Many home values skyrocketed over the past year. That means that you may have thousands of dollars of home equity to borrow from at rates much lower than most credit cards.”

Ms. Madigan said, “I was just struck that on the first anniversary of these people’s loans they would get these e-mails luring them into a refinance, into another unaffordable product to generate more fees and originate more loans.”

Lisa Madigan cannot be such a Pangloss as to be bowled over by the idea that lenders solicit their current loan customers for refinances. She can't.

Nobody has to like any of these business practices. But they have been hiding in plain sight for a long, long time. This ginned-up outraged innocence--all directed at Countrywide, as if everyone else in the industry had never heard of any of this--is truly getting on my nerves.

by Calculated Risk on 6/25/2008 01:40:00 AM

Peter Goodman at the NY Times writes about an upscale Denver exurb that is getting hit hard by a combination of the housing bust and high oil prices: Rethinking the Country Life as Energy Costs Rise. Here is a great quote:

“Living closer in, in a smaller space, where you don’t have that commute,” [Denver exurbanite Phil Boyle] said. “It’s definitely something we talk about. Before it was ‘we spend too much time driving.’ Now, it’s ‘we spend too much time and money driving.’ ”

Michael Corkery at the WSJ writes in the Development blog: Rising Gas Prices Crushing Housing Recovery in Inland Empire

Even though falling prices in California’s Inland Empire are making homes more affordable, rising gasoline prices are crushing hopes of a housing recovery in this area, east of Los Angeles.
...
“Land that was purchased with expanding metro areas in mind has already been hard hit in value,” says [Deutsche Bank analyst Nishu Sood]. ”Sustained higher gas prices could render it effectively worthless.”

This is a problem all over the country, see this Bloomberg story on the Washington area: Wealth Evaporates as Gas Prices Clobber McMansions, or this post on Temecula, CA.

As I noted before, any lifestyle dependent on low gas prices - and low gas mileage vehicles - is becoming uneconomical. For those that own a home in a remote location, work in construction, and drive a low gas mileage vehicle, this must feel like a depression.

by Calculated Risk on 6/25/2008 12:08:00 AM

From MarketWatch: Wachovia hires Goldman to help sort loan portfolio (hat tip Mark)

Wachovia Corp. said Tuesday that it has hired Goldman Sachs Group to review its loan portfolio, another sign that the bank is bracing for further mortgage-related trouble when it reports earnings next month.
...
Wachovia has written down more than $5 billion in bad investments over the last year ...

The key problem for Wachovia is the $120 Billion Pick-a-pay portfolio (Option ARMs) that came with the Golden West acquisition in 2005.

by Calculated Risk on 6/24/2008 07:45:00 PM

From Matt Padilla at the O.C. Register: How bad are things at WaMu?

Lately equities analysts seem to be competing on who can make the most dire prediction for Washington Mutual’s future loan losses.

Reuters reports today that WaMu, as the company is known, may set aside as much as $30 billion in credit losses through 2011, predicts Lehman Brothers analyst Bruce Harting.

That tops the $27 billion of losses that UBS analyst Eric Wasserstrom on June 9 said the nation’s largest thrift could face.

Wow. $30 billion. That is a huge number. But in the current environment, I'll take the over. Or is that the under when we are talking about losses? See Matt's post for more.

by Calculated Risk on 6/24/2008 05:32:00 PM

Here is a look at the Case-Shiller data by price tiers for two cities. See this spread sheet from S&P for tiered pricing for all 20 cities in the Composite 20 index. (note: this is an S&P excel spread sheet, not mine.).

Click on graph for larger image in new window.

The first graph shows the real Case-Shiller prices for homes in Los Angeles.

The low price range is less than $408,960 (current dollars). Prices in this range have fallen 37.9% from the peak in real terms.

The mid-range is $408,960 to $617,001. Prices have fallen 32.5% in real terms.

The high price range is above $617,001. Prices have fallen 24.1% in real terms.

The second graphs show the real Case-Shiller prices for homes in Minneapolis.

The low price range is less than $173,578 (current dollars). Prices in this range have fallen 28.8% from the peak in real terms.

The mid-range is $173,578 to $247,371. Prices have fallen 23.1% in real terms.

The high price range is above $247,371. Prices have fallen 23.2% in real terms.

In both of these cities, the low end areas saw the most appreciation, and have seen the fastest price declines.

In a number of previous housing busts, real prices declined for 5 to 7 years before finally hitting bottom. If this bust follows that pattern, we will continue to see real price declines for several more years - but if that happens, the rate of decline will probably slow (imagine somewhat of a bell curve on those graphs).

However, with the record foreclosure activity, prices might adjust quicker than normal (lenders are less prone to sticky prices than ordinary homeowners).

by Calculated Risk on 6/24/2008 03:58:00 PM

This story (2 min 44 secs) starts with that guy in Las Vegas destroying his home. But there is more here - check out the house with all the appliances removed.

by Calculated Risk on 6/24/2008 02:23:00 PM

A research analyst at Harvard Joint Center for Housing Studies (JCHS) has been kind enough to send me (Thanks!) an update to the median house price to median income ratio I discussed yesterday (see: Ratio: Median Home Price to Median Income)

JCHS didn't post this data because they changed both the data source they use, and their methodology to calculated the ratio - and JCHS analysts felt this would be confusing because the ratios are different from previous releases. However the trends are the same - and therefore useful for us.

Here is some price-to-income data from the 2008 report (data through 2007). Once again I picked a few key cities and plotted the national average (dashed). Note: the new data only goes back to 1989.

Click on graph for larger image in new window.

Different areas have different price to income ratios. There are several reasons for this (land restrictions, demographics), but on a national basis, the median price to median income ratio rose from around 3.5 in the 1990s, to 4.7 in 2005, and has started to decline since then. This would suggest that a combination of falling prices and rising incomes would need to adjust this ratio by about 25% from peak to trough.

For Los Angeles, it is reasonable to expect the price to income ratio to fall to below 5. This suggests prices at the peak were about twice as high as normal.

Hold on, you say ... the above graph shows the price-to-income ratio for Los Angeles only declined about 3% from 2006 to 2007, but Case-Shiller showed prices in Los Angeles declined 14% in 2007 ... what gives?

Although I don't know the exact methodology used by JCHS, the likely reason for the difference is the JCHS data is based on the annual average, whereas the Case-Shiller data is from the end of 2006 to the end of 2007.


The second graph illustrates this point for Los Angeles. The red line is the JCHS median price to median income ratio for LA.

UPDATE: For Case-Shiller Index, Jan 2000 = 100.

The blue line is the annual average of the mid tier Case-Shiller index (mid tier was used to approximate the median price). The difference between the red and blue lines is that nominal median incomes are increasing. This is exactly what we would expect.

The dashed line is the monthly Case-Shiller mid tier price index. This has fallen off a cliff. It is very likely that the median price to median income ratio (on a monthly basis if it was available) would now be around 7 or lower - well on the way to the historical norm of around 4.7.

by Anonymous on 6/24/2008 12:37:00 PM

The rhetoric of this Bloomberg report has to be read to be believed. Apparently, Fannie and Freddie have power make benefit glorious Nation of Jumbo, and they're blowing it all on people with downpayments in non-bubble markets instead of single-handedly throwing themselves on the grenade to Save the Housing Economy. Really:

June 24 (Bloomberg) -- Three months after Fannie Mae and Freddie Mac won the freedom to step up home-loan purchases, the government-chartered mortgage-finance companies are doing what critics in the Federal Reserve and Congress had predicted. . . .

``They were granted expanded opportunity to help recovery in a troubled housing market and yet have appeared to focus on their own recovery,'' said former U.S. Representative Richard Baker, a critic of the companies who left office earlier this year to run the Managed Funds Association in Washington. . . .

The slowness of Fannie Mae and Freddie Mac in injecting cash for new jumbo loans may have exacerbated the housing slump in markets including California and Florida, where prices have already fallen more than the national average, said Jerry Howard, 53, president of the National Association of Home Builders.

``Had they been quicker into the marketplace, they could have helped slow the downward spiral in housing prices,'' Howard said. . . .

``Fannie and Freddie are catering to low-risk homeowners with high credit scores and a lot of equity in their homes,'' said Dan Green, a loan broker at Mobium Mortgage Group Inc. in Cincinnati and Chicago. ``I'm sure there will be some high-cost areas in the country that will benefit. They just don't happen to be Florida, Michigan, California, Nevada.''

by Calculated Risk on 6/24/2008 10:40:00 AM

As noted earlier, S&P reported that the Case-Shiller home price composite indices declined sharply in April. The Case-Shiller composite 20 index (20 large cities) was off 15.3% YoY through April, and off 17.8% from the peak.

Note: the composite 20 index is not the National Price index, but this does suggests the national index will be off sharply in Q2.

However, 8 of the 12 cities in the composite 20 saw month to month price increases.

Click on graph for larger image in new window.

This graph shows the price changes for several selected cities that I've been following. Prices continue to fall in the 'bubble' cities, like San Diego, Miami, and Las Vegas.

Prices actually rose slightly in areas that saw less appreciation, like Denver and Cleveland. However this could just be seasonal noise, as these cities saw small increases last year at this time too.

by Calculated Risk on 6/24/2008 09:36:00 AM

From MarketWatch: Four years of home gains have been wiped out

Home prices in 20 major U.S. cities have dropped a record 15.3% in the past year and are now back to where they were in 2004, according to the Case-Shiller home price index released Tuesday by Standard & Poor's.

Prices in the 20 cities are now down 17.8% from the peak two years ago. The biggest declines were seen in Las Vegas, Miami and Phoenix, with prices falling by 25% or more in the past year. Prices in 10 cities have fallen by more than 10%.

Prices were lower in April than they were a year earlier in all 20 cities tracked by the Case-Shiller index.

Note that the Composite 20 is not the national index, but this show prices are still falling in many areas of the country - and still falling quickly (the Composite 20 fell 1.4% in April alone).

More later on individual cities ...

by Calculated Risk on 6/23/2008 09:30:00 PM

When I first heard of Down-payment Assistance Programs (DAPs), I knew we would see higher default rates on FHA loans. Heck, the IRS has called DAPs a "scam". The FHA has vowed to eliminate DAPs ... and yet, amazingly, the percent of FHA loans using DAPs is still increasing.

DAPs simply will not die.

To understand DAPs in nerdy detail, see Tanta's DAP for UberNerds.

From the WSJ: Government Mortgage Program Fuels Risks

The offers -- including "100% financing" -- are made possible due to down-payment assistance programs run by nonprofit organizations. These programs are funded largely by home builders and also by private homeowners desperate to sell. The seller-funded groups provide enough down-payment money to buyers that they can qualify for a mortgage backed by the Federal Housing Administration, which requires at least a 3% down payment.

These are not real down-payments from disinterested third parties. These programs are designed to have the seller (including home builders) funnel money to the buyer through a "nonprofit" to get around the FHA down-payment requirements. The buyer still has no skin in the game.

The FHA estimates that down payments provided by nonprofit groups account for 34% of all 200,000 loans backed by the FHA so far this year, up from 18% in all of 2003 and less than 2% in 2000. And the agency says that borrowers are two to three times as likely to default on their payments when they receive a down payment from a nonprofit.

D.R. Horton Inc., the nation's largest home builder by volume, is touting "100% financing" for its two- and three-bedroom condominiums near the beach in Maui, Hawaii, which start at $498,000. In the Seattle area, local builder Quadrant Corp. is advertising townhouses that can be purchased with as little as $500 down. "Use your coffee budget to move into a new home," says an online promotion.

Here are some previous posts by Tanta and I about DAPs:

FHA Going After DAP Again? Tanta, June 10, 2008

DAP for UberNerds, Tanta, Oct 19, 2007 **** READ this one for nerdy details! ****

FHA to Ban DAPs, CR, Sept 29, 2007

Housing: IRS Raps DAPs, June 2, 2006

More on Housing, CR, Feb 24, 2005

by Calculated Risk on 6/23/2008 05:17:00 PM

From Bloomberg: UPS Reduces Outlook on Fuel Costs, Slowing Economy

United Parcel Service ... lowered its second- quarter profit forecast because of rising fuel costs and a slowing U.S. economy.
...
UPS said the ``anemic'' U.S. economy was causing customers to cut back on air shipments, its most profitable offering, and that international packages coming into the U.S. were also declining.

Meanwhile from the WSJ: GM Extends Plant Shutdowns, Offers More Sales Incentives

Expanding its efforts to address a steep decline in sales of pickup trucks and sport-utility vehicles, General Motors Corp. plans to extend the summer shutdowns at six plants and to offer more sales incentives to clear its bloated inventory of large vehicles.

by Calculated Risk on 6/23/2008 03:48:00 PM

The Harvard Joint Center for Housing Studies report: "The State of the Nation's Housing 2008" is now online. Unfortunately the table I was really hoping they would update is the House Price to Income ratio by metropolitan statistical areas (MSA).

Here is the excel file from the 2007 report: Metropolitan Area House Price-Income Ratio, 1980-2006

Here is some price-to-income data from the 2007 report (data through 2006). I picked a few random cities and plotted the national average (dashed). Check out the excel file for your MSA.

Click on graph for larger image in new window.

Different areas have different price to income ratios. There are several reasons for this (land restrictions, demographics), but on a national basis, the median price to median income ratio rose from around 3.0 to 4.6 by the end of 2006 (and has probably declined sharply since then). This would suggest that a combination of falling prices and rising incomes would need to adjust this ratio by about 1/3 from peak to trough.

For Los Angeles, it is reasonable to expect the price to income ratio to fall to between 4 and 5 (the historical average). This suggests price at the peak were about twice as high as normal.

Imagine buying a home at 10 times income. With 10% down, and a 6.0% 30 year mortgage, the P&I payments alone (pre-tax) would be about 54% of the homebuyers gross income. Add in taxes, insurance, maintenance and this homeowner is "house poor" from the get go.

And that brings us to table A-7 in the current report. This table shows that 8.8 million owner occupied households dedicate more than 50% of their income to housing in 2006. Another 13.3 million owner occupied households dedicate 30% to 50% of their income to housing.

Of those 8.8 million owner occupied households with housing a severe burden, approximately 3.3 million are in the middle 50% of household incomes - and this is the fastest growing segment - the middle class with housing a severe burden.

by Calculated Risk on 6/23/2008 12:57:00 PM

In his daily Market Memo, economist David Rosenberg at Merrill Lynch writes: The bad news on the banks is definitely 'out there' (hat tip Bernie)

The WSJ may have well devoted a whole section to the sector's travails - "Investors Hide as Banks Come Knocking"; "Citi to Slash Investment Banking Jobs World-Wide"; "More Bank Bailouts Ahead?" and "Regional Bank Bargains". links added

We could add New Crisis Threatens Healthy Banks from the WaPo:

Increasing struggles by consumers and businesses to make payments on a variety of loans, not just mortgages, are setting off a new wave of trouble in the financial sector that is battering even institutions that had steered clear of the subprime-home-loan debacle.

Late payments on home-equity loans are at a record high, according to fresh data from the Federal Deposit Insurance Corp. The delinquency rates on loans for cars, small businesses and construction are spiking to levels not seen in a decade or more.

Rosenberg makes a similar point as the WaPo noting that "concerns are spreading" from mortgages to other consumer and commercial debt. Rosenberg adds:

... regional banks which may find it difficult to find suitors since accounting rules require that a takeover target's portfolio is marked to market at the time of acquisition ...

And that might just leave FDIC receivership as the only option for many banks. From the WSJ:

There is often only one option left for a capital-starved U.S. bank that can't attract a suitor -- receivership under the auspices of the Federal Deposit Insurance Corp. While hardly ideal, that works fine as long as only a few banks stumble. But if the pressures of the credit crunch cause too many to fail, the FDIC could be overwhelmed. ... No wonder FDIC Chairwoman Sheila Bair has said bank problems are giving her heartburn.