by Calculated Risk on 7/31/2008 08:30:00 AM

Here is the data from the Department of Labor for the week ending July 26th.

In the week ending July 26, the advance figure for seasonally adjusted initial claims was 448,000, an increase of 44,000 from the previous week's revised figure of 404,000.

Click on graph for larger image in new window.

The first graph shows the continued claims since 1989.

Notice that following the previous two recessions, continued claims stayed elevated for a couple of years after the official recession ended - suggesting the weakness in the labor market lingered. The same will probably be true for the current recession (probable).

The second graph shows the weekly claims and the four week moving average of weekly unemployment claims since 1989.

Weekly unemployment claims were the highest since April 2003.

The four week moving average has been trending upwards for the last few months, and the level is now solidly above the possible recession level (approximately 350K).

Labor related gauges are at best coincident indicators, and this indicator suggests the economy is in recession.

Note: I'll have a post on GDP and investment later this morning.

by Calculated Risk on 7/30/2008 09:16:00 PM

A little mentioned provision in the Housing and Economic Recovery Act of 2008 amends the Home Sale Exclusion Rules.

I've copied the main portion of the provision at the bottom.

This applies to homeowners that move into a nonqualifed residence (that they already own) like a vacation home or rental unit. Here was the old rule from the IRS:

To exclude gain, a taxpayer must both own and use the home as a principal residence for two of the five years before the sale. The ownership and use periods need not be concurrent.

Under the new rule, the owner only gets a percentage of the exclusion based on a ratio of how long the property is their primary residence divided by how long they owned the property. This prevents people from moving into vacation homes or rental units for two years and then obtaining the entire exclusion. Here is an excerpt (see the bill for the entire text):

SEC. 3092. GAIN FROM SALE OF PRINCIPAL RESIDENCE ALLOCATED TO NONQUALIFIED USE NOT EXCLUDED FROM INCOME.
(a) IN GENERAL.—Subsection (b) of section 121 of the Internal Revenue Code of 1986 (relating to limitations) is amended by adding at the end the following new paragraph:

(4) EXCLUSION OF GAIN ALLOCATED TO NONQUALIFIED USE.
(A) IN GENERAL.—Subsection (a) shall not apply to so much of the gain from the sale or exchange of property as is allocated to periods of nonqualified use.
(B) GAIN ALLOCATED TO PERIODS OF NONQUALIFIED USE.—For purposes of subparagraph (A), gain shall be allocated to periods of nonqualified use based on the ratio which—
(i) the aggregate periods of nonqualified use during the period such property was owned by the taxpayer, bears to
(ii) the period such property was owned by the taxpayer.
(C) PERIOD OF NONQUALIFIED USE.
For purposes of this paragraph
(i) IN GENERAL.—The term ‘period of nonqualified use’ means any period (other than the portion of any period preceding January 1, 2009) during which the property is not used as the principal residence of the taxpayer or the taxpayer’s spouse or former spouse.
...
EFFECTIVE DATE.—The amendment made by this section shall apply to sales and exchanges after December 31, 2008.

Just another interesting provision.

by Calculated Risk on 7/30/2008 06:40:00 PM

From Nouriel Roubini: Global Recession Watch: Recoupling rather than Decoupling

[T]here is now fresh evidence that at least a dozen major economies and some emerging markets are at risk of a recessionary hard landing.
...
[W]hile we will not experience a global recession we will get close to one as the US will have a severe recession, Japan is entering one, a third of Europe will go into a recession, the rest of Europe will have a severe growth slowdown, the rest of the G-10 advanced countries is sharply slowing down and a few emerging market economies are entering a recession. And if the advanced economies are sharply slowing down or entering a recession the idea that China, India, the other BRICs and emerging markets can happily decouple from these recession or sharply slowing economies is far fetched.

This is an important key to the depth of the U.S. recession. As Professor Roubini notes, there are a number of key countries now either in, or flirting with, recession. If the global economy slows enough - causing U.S. exports to decline - we might start to see significant job losses in manufacturing, and then the current recession could be more severe than I currently expect.

by Calculated Risk on 7/30/2008 04:32:00 PM

“Decreased investment volumes have now become evident in all parts of the world."
Brett White, president and chief executive officer of CB Richard Ellis, July 30, 2008

Also from MarketWatch: Real-estate stocks fall on lower earnings, outlook

CB Richard Ellis blamed the decline on slowing economic conditions and the widening credit crunch, "which initially began in the U.S. and has now spread worldwide."

"I can best describe the current environment as being very challenging and still having a high probability of getting worse before we see improvement," said Chief Executive Brett White during Wednesday's conference call.
emphasis added

Prices aren't quite as sticky for commercial real estate as for residential real estate, but the pattern is similar - transaction volumes fall first, and then prices.

by Calculated Risk on 7/30/2008 03:28:00 PM

Mathew Padilla at the O.C. Register directs us to three foreclosure maps:

Notices of default by ZIP

Foreclosure density

Foreclosure percentage gains by ZIP

Click on graph for larger image in new window.

I've taken a portion of the current foreclosure map and animated it with the rate of increasing foreclosures. (click on map for animation)

This shows that foreclosures are spreading to the higher end areas of Orange County.

Although the high end areas will never have the elevated foreclosure rates we are seeing in the low end areas, it makes sense that the foreclosure crisis would spread. When I talked about this at the Inman Real Estate conference last week - and suggested agents should expect increasing foreclosures in high end areas - my comments were greeted with incredulity.

I wish I had this map with me.

On that topic, here is a repeat of a cartoon from Eric G. Lewis:



Eric G. Lewis is a freelance cartoonist living in Orange County, CA (used with permission).

Eric drew this cartoon in 2007, when many people in south Orange County, CA were stunned that prices could fall in their areas.

by Calculated Risk on 7/30/2008 11:27:00 AM

*** The post title is from Tanta.

President Bush signed the housing bill this morning. One of the provisions is for the elimination of Down-payment Assistance Programs (DAPs) for FHA loans.

The WSJ has some stats on how widespread DAPs had become: Builders Feel Pinch of Key Omission From the Housing Bill

[F]or the builders, the bill's elimination of seller-funded down-payment assistance on mortgages backed by the Federal Housing Administration is a big loss -- one that could eliminate as many as one in 10 home buyers from the market ... Starting in October, buyers using FHA loans can no longer accept down-payment "gifts" that are ultimately funded by the home seller, often a builder.
...
Miami-based Lennar Corp. used down-payment assistance on 33% of the mortgages it originated in the second quarter, while Ryland Group Inc. said 18% to 20% of its buyers used down-payment assistance during the first half of the year.
...
"There will undoubtedly be some impact, but we believe the buyers will adjust and the market will adjust," says Tim Eller, the chief executive of Centex Corp, which said that 25% of its sales in its fiscal year ended March 31 involved down-payment assistance.

Eliminating DAPs is a positive for the economy and housing. FHA loans using DAPs had significantly higher default rates than when the buyers actually made a down-payment.

"One in 10 home buyers". Wow. Not all of these buyers will disappear. Some buyers had the ability to make a down-payment, but used a DAP instead simply because they were available. Other buyers will borrow from parents and friends or will wait until they save the 3.5% down-payment.

The good news is default rates should decline on FHA loans.

by Anonymous on 7/30/2008 10:04:00 AM

If you haven't yet had a chance to read this article by John Gittelsohn in the Orange County Register about a real estate sale that was financed by Wells Fargo in January of this year, please do so now. And if you were, like most people, working on the assumption that lenders and other industry participants had at least cleaned up their acts in time for the 2008 mortgage vintage to be worth something, think again.

There isn't any significant fact about this transaction I can identify that isn't a red flag. A home in a foreclosure-wracked neighborhood was purchased at foreclosure auction in October of 2007 for $304,500, just over half what the defaulted buyer had paid in 2006. In January of 2008, the house was flipped to a non-English-speaking couple for an apparent sales price of $625,000 after some "sprucing up" by the property seller.

Ridiculous? Sure. It turns out that the seller provided the $125,000 down payment, and also executed an "addendum" to the sales contract agreeing to pay the buyers $30,000 in cash, cover the borrowers' first three mortgage payments, and toss in a 52-inch TV. Subtract out all that, and the true sales price of the property was $460,000. But apparently nobody did subtract out any of that, because Wells Fargo made a $500,000 loan to these buyers to purchase this property.

The OC Register reporter, bless his heart, tracked down the various parties who had their hands in this transaction, and got the following comments:

From the mortgage broker who put the deal together: "Whatever agreement the buyer and seller made, it was between them."

From the appraiser who dutifully came up with a value of $625,000: "Like Sanchez, she had no knowledge of the terms of the sale."

From the escrow agent who closed this loan: "It sounds to me like the seller helped out," she said. "If someone gave them $125,000, what's the problem? That's a beautiful thing, if you ask me."

From Wells Fargo: "In many instances, borrowers are able to use gifts from family members or friends for a portion of their down payment, provided the amount and source of the gifts are documented."

Excellent point, Wells Fargo. Too bad in this case the down payment didn't come from friends or family members and wasn't documented. Too bad that the broker who originated the loan seems to think the details of the purchase contract aren't any of his business. Too bad your escrow agent doesn't care where the down payment money came from, either. Too bad your appraiser has apparently never heard of the Uniform Standards of Professional Appraisal Practice, to which she is obligated to conform if she wants to do appraisals for Wells Fargo, that say she is required to inquire into "the terms of the sale."

I don't think the real issue with this story is the problem of whether or not to use foreclosure or "distressed" sales as comparables in an appraisal report. The problem is that there are no comparable sales of any kind that are a reliable measure of market value if they all involved transactions in which nobody ever actually bothered to verify and analyze the terms of the sale.

If this is the level of elementary due diligence we can expect after the most atrocious mortgage blowup in history, what will it take to scare people into doing their jobs?

by Calculated Risk on 7/30/2008 09:15:00 AM

From the Fed: Federal Reserve announces steps to enhance the effectiveness of its existing liquidity facilities

Actions taken by the Federal Reserve include:

Extension of the Primary Dealer Credit Facility (PDCF) and the Term Securities Lending Facility (TSLF) through January 30, 2009.

The introduction of auctions of options on $50 billion of draws on the TSLF.

The introduction of 84-day Term Auction Facility (TAF) loans as a complement to 28-day TAF loans.

An increase in the Federal Reserve's swap line with the European Central Bank to $55 billion from $50 billion.

In light of continued fragile circumstances in financial markets, the Board has extended the PDCF through January 30, 2009, and the Board and the Federal Open Market Committee (FOMC) have extended the TSLF through that same date.
emphasis added

The PDCF program - that allows investment banks access to the discount window - was set to expire in September. The credit crisis continues ...

by Calculated Risk on 7/29/2008 08:39:00 PM

From Jim the Realtor (4 min 16 sec): A Countrywide REO, 3br/2ba, 1,100sf house sold for $465,000 in 2005, now being offered for $180,900. That is 39% of the 2005 price (61% off).

Vista is an improving area (in general), although this is a low end area. It's hard to believe someone paid $465,000 for this in 2005!

by Calculated Risk on 7/29/2008 08:03:00 PM

Just to post the official announcement.

From the LA Times: Mervyns department stores files for bankruptcy

"After careful consideration of available alternatives, the company's management board determined that a Chapter 11 filing was a necessary and prudent step that allows us to operate our business without interruption as we seek to restructure our debt and other obligations in a controlled, court-supervised environment," John Goodman, Mervyns chief executive officer, said in a statement.

It sounds like they will try to continue to operate.

by Calculated Risk on 7/29/2008 05:19:00 PM

"The housing market worsened in the June quarter, and I don't expect to see it improve this fiscal year,"
Tim Eller, chairman and CEO of Centex Corp.

Note that Centex's fiscal year starts in April, so the CEO is seeing no improvement through March 2009.

From Centex: (hat tip Ken) Centex Reports First Quarter Results

Fiscal 2009's first quarter revenues were $1.13 billion, 41% lower than the same quarter last year. The loss from continuing operations for the first quarter was $169 million ... up from a loss of $132 million ... in the previous year's fiscal first quarter. Included in the first quarter of fiscal 2009's loss from continuing operations are $80 million of impairments and other land-related charges, including the Company's share of joint venture impairments.

The land impairments continue.

From the Centex Investor Materials (from 8-K filed with SEC):

Market conditions worsened in the quarter

Foreclosures are rising

Employment is weakening

Consumer confidence is waning

Mortgage qualification standards are tightening

Traffic and sales have diminished

Not exactly the most positive investor material I've seen!

Also, Centex is one of the companies I use to track changes in cancellation rates. They didn't report cancellations in the 8-K, so we will have to wait for the 10-Q. Cancellations had been trending down for Centex, but with these very negative comments, we might see another increase in cancellation rates.

by Calculated Risk on 7/29/2008 05:13:00 PM

A little spillover from the Merrill Lynch CDO sale ...

From Bloomberg: Citigroup Markdowns May Rise $8 Billion, Analyst Says

Citigroup Inc. will probably write down the value of collateralized debt obligations by $8 billion in the third quarter, Deutsche Bank AG analyst Mike Mayo said ...

by Calculated Risk on 7/29/2008 03:53:00 PM

As part of the monthly house price release, Case-Shiller presents tiered price indices for 20 major cities.

The following graphs are for Los Angeles using both nominal and real (inflation adjusted) prices.

Click on graph for larger image in new window.

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

The low price range is less than $401,614. Prices in this range have fallen 36.5% from the peak.

The mid-range is $401,614 to $606,600. Prices have fallen 29.8%.

The high price range is above $606,600. Prices in this range have fallen 20.0% from the peak.

The second graph shows the same data in real terms (inflation adjusted using CPI less shelter).

Looking at the data in real terms probably provides a better idea of how much further prices will fall. If prices fall to the January 2000 level in real terms (shown as 100 on the graph), then the high end has fallen about half way from the peak, and the low end about 2/3 of the way from the peak in Los Angeles.

I've noted this before: In a number of previous housing busts, real prices declined for 5 to 7 years before finally hitting bottom. That is my expectation for the duration of the price declines in the bubble areas. The bottom for real prices will probably be in the 2010 to 2012 period. The less bubbly areas will probably bottom sooner.

If this bust follows the historical pattern, we will continue to see real price declines for several more years, and the rate of decline will probably slow (imagine somewhat of a bell curve on those graphs).

by Calculated Risk on 7/29/2008 02:42:00 PM

More to come ... all is OK here. We were definitely rockin'

USGS is calling it 5.8.

by Calculated Risk on 7/29/2008 12:27:00 PM

From the WSJ: Bennigan's, Steak &Ale Close Doors, File for Bankruptcy Protection (hat tip Michael)

Long-time, national restaurant chains Bennigan's and Steak & Ale have closed their doors and filed for Chapter 7 bankruptcy protection, shuttering more than 300 sites and letting go of thousand of employees.

It is one of the country's largest restaurant bankruptcies ... The chains will liquidate and are not likely to re-open.

More empty space available. More bad debt. More consumer ripples.

by Calculated Risk on 7/29/2008 11:54:00 AM

As I noted this morning, the rate of monthly price declines has slowed a little. Update: Note there is some seasonality too.

Click on graph for larger image in new window.

This graph shows the annualized monthly price changes for the Case-Shiller Composite 20 since the beginning of 2006.

The rate of price declines has slowed over the last couple of months, but prices were still falling at a 8.9% annual rate in May (from April).

The second graph shows the annualized month-to-month price declines for Los Angeles in the early '90s.

This shows that price declines tend to come in surges and we shouldn't read too much into the slowing monthly rate of decline.

In general prices are still too way too high, and will continue to fall for some time.

by Calculated Risk on 7/29/2008 10:12:00 AM

Words a banker doesn't want to hear: "We’ll talk to you on Friday"

From the NY Times: Lax Lending Standards Led to IndyMac’s Downfall (hat tip warlock)

IndyMac executives suspected the end was near even before the regulators turned up. Examiners do not warn banks they are coming, but they typically take over failing institutions on Fridays so they can have a weekend to put things in order and reopen under government control on Monday.

As the lines grew outside IndyMac branches during the week of July 7, Mr. Perry talked with an Office of Thrift Supervision official to assess the situation.

“We’ll talk to you on Friday,” the official said, according to one bank official briefed on the call. As word of the call spread through IndyMac, executives began packing their personal belongings.

by Calculated Risk on 7/29/2008 09:00:00 AM

S&P/Case-Shiller released their monthly Home Price Indices for May this morning. This includes prices for 20 individual cities, and two composite indices (10 cities and 20 cities). Note: This is not the quarterly national house price index.

Click on graph for larger image in new window.

The first graph shows the nominal Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index was off 10.4% annual rate in May (from April), and is off 19.8% from the peak.

The Composite 20 index was off 8.9% annual rate in May (from April), and is off 18.4% from the peak.

The rate of price declines has slowed a little

The second graph shows the Year over year change in both indices.

The Composite 10 is off 16.9% over the last year.

The Composite 20 is off 15.8% over the last year.

More on prices later ... including selected cities, real prices, and some thoughts on the slowing rate of price declines.

by Calculated Risk on 7/28/2008 11:45:00 PM

From the WSJ: Mervyn's Is Close To Bankruptcy Filing (hat tip sunlight)

Lawyers for Mervyn's LLC are telling creditors that the regional department-store chain will file for bankruptcy protection in the next few days, barring a last-minute cash infusion ...

Mervyn's, which operates 177 stores, mostly in California, has been struggling in the face of sharp sales declines this year in California and Arizona, where the real-estate markets have collapsed.

More problems for mall owners. And more ripples from the real estate bust.

by Calculated Risk on 7/28/2008 07:33:00 PM

As part of Merrill's major announcement today, Merrill is offering "new common shares with gross proceeds of approximately $8.5 billion."

When Merrill sold stock last December (at $48 per share), Merrill offered to compensate Temasek Holdings if Merrill sold additional stock, at a lower price, within one year.

From the Merrill announcement today:

Merrill Lynch plans to raise $8.5 billion through the public offering of common stock announced today ... Temasek Holdings, Merrill Lynch’s largest shareholder, has committed to purchase $3.4 billion of common stock in the offering ...

In satisfaction of Merrill Lynch’s obligations under the reset provisions contained in the investment agreement with Temasek Holdings, Merrill Lynch has agreed to pay Temasek $2.5 billion, 100% of which Temasek has contractually agreed to invest in the offering at the public offering price without any future reset protection.

Basically the $2.5 billion is a reset on the previous purchase price (dilution without additional capital). Here is the Merrill SEC filing from last December:

If Company sells or agrees to sell any common stock (or equity securities convertible into common stock) within one year of closing at a purchase, conversion or reference price per share less than $48, then the Company must make a payment to Purchaser to compensate Purchaser for the aggregate excess amount per share paid by Purchaser. At the Company’s option, the Company may issue additional shares of common stock in lieu of cash to Purchaser with a market value equal to such excess amount.

Merrill should have been highly motivated to avoid paying this price protection penalty, and this shows a certain desperation - although the good news is there is no future reset protection for Temasek.