by Calculated Risk on 12/05/2008 10:15:00 AM

Update: 10% of Homeowners with mortgages. Approximately 31% of homeowners have no mortgage.

From the Mortgage Bankers Association (MBA): Delinquencies Increase, Foreclosure Starts Flat in Latest MBA National Delinquency Survey

The delinquency rate for mortgage loans on one-to-four-unit residential properties stood at 6.99 percent of all loans outstanding at the end of the third quarter of 2008, up 58 basis points from the second quarter of 2008, and up 140 basis points from one year ago on a seasonally adjusted basis, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey.

The delinquency rate includes loans that are at least one payment past due but does not include loans somewhere in the process of foreclosure.
...

The seasonally adjusted total delinquency rate continues to be the highest recorded in the MBA survey.
...
The percentage of loans in the foreclosure process at the end of the third quarter was 2.97 percent, an increase of 22 basis points from the second quarter of 2008 and 128 basis points from one year ago. The percentage of loans in the process of foreclosure set a new record this quarter.
emphasis added

All new records. There is more detail in the press release:

The seasonally adjusted delinquency rate increased 41 basis points to 4.34 percent for prime loans, increased 136 basis points to 20.03 percent for subprime loans ... The seriously delinquent rate, the non-seasonally adjusted percentage of loans that are 90 days or more delinquent, or in the process of foreclosure, was up from both last quarter and from last year. ... Compared with last quarter, the seriously delinquent rate increased for all loan types. The rate increased 52 basis points for prime loans to 2.87 percent, increased 171 basis points for subprime loans to 19.56 percent ...

Most concerning is the surge in the prime delinquency rate. The prime problem appears to be concentrated in a few states (California and Florida lead the way), and is mostly due to prime ARM loans.

by Calculated Risk on 12/05/2008 08:31:00 AM

From the BLS:

Nonfarm payroll employment fell sharply (-533,000) in November, and the unemployment rate rose from 6.5 to 6.7 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. November's drop in payroll employment followed declines of 403,000 in September and 320,000 in October, as revised. Job losses were large and widespread across the major industry sectors in November.

Click on graph for larger image.

This graph shows the unemployment rate and the year over year change in employment vs. recessions.

Nonfarm payrolls decreased by 533,00 in November and October was revised down to a loss of 320,000 jobs. The economy has lost 1.25 million jobs over the last 3 months alone!

The unemployment rate rose 6.7 percent; the highest level since 1993.

Year over year employment is now strongly negative (there were 1.87 million fewer Americans employed in Nov 2008 than in Nov 2007). This is an extremely weak employment report and I'll have more soon ...

by Calculated Risk on 12/04/2008 11:05:00 PM

Home builder Kimball Hill filed for bankruptcy protection back in April. Now they are closing down ... and this reminds me of this great photo. Click on photo for larger image in new window. This photo of a Kimball Hill advertisment was taken at the Sacramento Airport by Itamar in January 2008. Hmmm ... bubble anyone?

From the Sacramento Bee: Another home builder falls

The prolonged housing downturn has claimed a new casualty, Chicago-based Kimball Hill Homes, a Sacramento and north San Joaquin Valley home builder since 1995.

The firm announced Tuesday it is going out of business.

The announcement came eight months after the privately held, medium-size builder filed for Chapter 11 bankruptcy protection. It builds houses in Sacramento, Rancho Cordova and Stockton.

by Calculated Risk on 12/04/2008 07:37:00 PM

About two weeks ago I posted about a friend's company obtaining a new loan for expansion, and also including an expanded revolving line of credit. Although this was just one story - and a fairly small loan of around $100 million - I saw this as a positive step.

Hold the presses. The bank just pulled their funding. Not good.

by Calculated Risk on 12/04/2008 05:00:00 PM

From Brad Setser at Follow the Money: China is starting to sound like a normal creditor country

Most creditors believe that the debtor needs to take the lead in addressing their own problems. China is, apparently, no different.

Brad references two articles, the second, James Fallows' interview with China's Gao Xiqing is here: “Be Nice to the Countries That Lend You Money” Worth reading ...

Also there were stories floating around this morning about People's Bank of China Gov. Zhou Xiaochuan making an unscheduled visit to the U.S. Actually it is a scheduled meeeting according to Dow Jones: China, US Open Talks But Breakthroughs Unlikely

People's Bank of China Gov. Zhou Xiaochuan left for the U.S. soon after giving his morning speech at the [Strategic Economic Dialogue] SED. He will attend the Group of 30 meeting in the U.S. being hosted by Timothy Geithner, Obama's nominee for Treasury Secretary.

According to a person at the international department of the PBOC who declined to be named, Zhou will attend the G30 meeting in New York from Dec. 4-6.

by Calculated Risk on 12/04/2008 03:25:00 PM

The stunning flight to treasuries continues across the board.

Click on graph for larger image in new window.

The 10-year yield fell to a record low of 2.59% today.

The graph shows the 10 year yield since 1962. The smaller graph shows the teh year yield for this year - talk about cliff diving!

The yield on 3 month treasuries is 0.005% (bad). Let's just call it zero! I think we know where the banks are parking all that TARP money - in three month treasuries!

Here are a few other indicators of credit stress once again suggesting little progress over the last few days.

The three month LIBOR has decreased slightly to 2.19%. The three-month LIBOR rate peaked (for this cycle) at 4.81875% on Oct. 10. (unchanged)

The TED spread is at 2.18, basically unchanged. (unchanged) The TED spread is stuck above 2.0, and still too high. The peak was 4.63 on Oct 10th. I'd like to see the spread move back down to 1.0 or lower. A normal spread is around 0.5.

The A2P2 spread decreased to 4.64 from a record (for this cycle) 5.86 on Friday (probably related to the holiday). This is way too high. (Bad).

This is the spread between high and low quality 30 day nonfinancial commercial paper. If the credit crisis eases, I'd expect a significant decline in this spread - and the graph makes it clear this indicator is still in crisis.

The two year swap spread from Bloomberg: 115.00, slightly higher. (slightly worse). This spread peaked at near 165 in early October, so there has been significant progress, but I'd like to see this below 100.

For the LIBOR, the TED spread, and the two-year swap, there has been clear progress - but there is still a ways to go. For the A2P2 spread (and all treasury yields), the markets are still in crisis.

The weekly Federal Reserve balance sheet update will be released this afternoon ... might be interesting.

by Calculated Risk on 12/04/2008 02:43:00 PM

From Fed Chairman Ben Bernanke: Housing, Mortgage Markets, and Foreclosures

Home sales and single-family housing starts held unusually steady through the 2001 recession and then rose dramatically over the subsequent four years. National indexes of home prices accelerated significantly over that period, with prices in some metropolitan areas more than doubling over the first half of the decade. One unfortunate consequence of the rapid increases in house prices was that providers of mortgage credit came to view their loans as well-secured by the rising values of their collateral and thus paid less attention to borrowers' ability to repay.

However, no real or financial asset can provide an above-normal market return indefinitely, and houses are no exception. When home-price appreciation began to slow in many areas, the consequences of weak underwriting, such as little or no documentation and low required down payments, became apparent. Delinquency rates for subprime mortgages--especially those with adjustable interest rates--began to climb steeply around the middle of 2006. When house prices were rising, higher-risk borrowers who were struggling to make their payments could refinance into more-affordable mortgages. But refinancing became increasingly difficult as many of these households found that they had accumulated little, if any, housing equity. Moreover, lenders tightened standards on higher-risk mortgages as secondary markets for those loans ceased to function.
...
As house prices have declined, many borrowers now find themselves "under water" on their mortgages--perhaps as many as 15 to 20 percent by some estimates. In addition, as the economy has slowed and unemployment has risen, more households are finding it difficult to make their mortgage payments. About 4-1/2 percent of all first-lien mortgages are now more than 90 days past due or in foreclosure, and one in ten near-prime mortgages in alt-A pools and more than one in five subprime mortgages are seriously delinquent. Lenders appear to be on track to initiate 2-1/4 million foreclosures in 2008, up from an average annual pace of less than 1 million during the pre-crisis period.

Predictably, home sales and construction have plummeted. Sales of new homes and starts of single-family houses are now running at about one-third of their peak levels in the middle part of this decade. Sales of existing homes, including foreclosure sales, are now about two-thirds of their earlier peak. Notwithstanding the sharp adjustment in construction, inventories of unsold new homes, though down in absolute terms, are close to their record high when measured relative to monthly sales, suggesting that residential construction is likely to remain soft in the near term.

"Predictably"? ROFLOL. Hey, hoocoodanode?

Most of the speech focuses on foreclosure prevention, and I'll get to that later.

by Calculated Risk on 12/04/2008 12:47:00 PM

CR does requests ...

Click on graph for larger image in new window.

This graph shows the 4-week average of initial weekly unemployment claims (blue, right scale), and total insured unemployed (red, left scale), both as a percent of covered employment.

This normalizes the data for changes in insured employment.

By these measures, the current recession is already worse than the '01 recession, but not as bad as the '90/'91 recession. I'll try to add the unemployment rate too.

by Calculated Risk on 12/04/2008 10:50:00 AM

From the WSJ: November Is as Bad as Feared

Retailers reported some of the weakest sales figures in years for November, with many missing downbeat expectations, but Wal-Mart Stores Inc. continued its recent outperformance as it topped estimates on increased store traffic and transaction size.

Layoffs everywhere it seems:

From Bloomberg: AT&T Plans to Reduce 12,000 Jobs, Spending as Slump Deepens

From Bloomberg: State Street Joins Fidelity, Legg Mason in Shedding Fund Jobs

State Street Corp., the world’s largest money manager for institutions, plans to cut 1,700 jobs, the latest in a wave of financial-sector layoffs during the worst year for U.S. stocks since the Great Depression.

State Street will shed about 6 percent of its 28,700 employees by March ...

From MarketWatch: DuPont cuts view, plans major workforce reduction

DuPont Co. slashed its fourth-quarter earnings forecast on Thursday and announced plans to dismiss 6,500 workers, including contractors, due to the downturn in the construction market and a sharp drop off in consumer spending.

And from the WSJ: Nokia Sees Shrinking Handset Market

Nokia Corp., the world's largest mobile handset maker, Thursday cut its global handset market forecasts for the second time in three weeks, warning that the slowdown has accelerated more rapidly than expected.

From Bloomberg: Factory Orders in the U.S. Decrease 5.1%, Most in 8 Years

Orders placed with U.S. factories in October fell by the most in 8 years, signaling a decline in manufacturing will contribute to deepening the recession.

Demand dropped 5.1 percent, more than forecast and the biggest fall since July 2000, after a revised 3.1 percent decrease in September, the Commerce Department said today in Washington. ...

``The general deterioration in both domestic and external demand suggests bleaker times lie ahead for America's factories,'' Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, said before the report.

This isn't intended to be exhaustive - just a sample of the headlines.

by Calculated Risk on 12/04/2008 08:46:00 AM

The DOL reports:

In the week ending Nov. 29, the advance figure for seasonally adjusted initial claims was 509,000, a decrease of 21,000 from the previous week's revised figure of 530,000. The 4-week moving average was 524,500, an increase of 6,250 from the previous week's revised average of 518,250.
...
The advance number for seasonally adjusted insured unemployment during the week ending Nov. 22 was 4,087,000, an increase of 89,000 from the preceding week's revised level of 3,998,000.

It is time for a long term graph!

Click on graph for larger image in new window.

This graph shows the four week moving average of initial weekly unemployment claims. The moving average is at 524,500, the highest level since the early '80s - and higher than the peaks of the last two recessions.

This graph is not adjusted for changes in population or increases in the workforce.

Continued claims are now at 4.087 million - the highest level in 26 years.

Note that the weekly unemployment claims tends to peak towards the end of a recession - just something to remember.

Also, the Monster Employment index came in very weak:

The Monster Employment Index fell seven points in November, as further economic uncertainty and workforce reductions continued to weigh on U.S. online recruitment activity. Year-over-year, the Index is now down 22 percent, with U.S. online job availability at its lowest level since 2004.

The BLS reports tomorrow ...

by Calculated Risk on 12/04/2008 12:17:00 AM

From Comscore: E-Commerce Spending Jumps 15 Percent on Cyber Monday to $846 Million, the Second Heaviest Online Spending Day on Record

For the holiday season-to-date, $12.03 billion has been spent online, marking a 2 percent decline versus the corresponding days last year. However, Cyber Monday saw $846 million in online spending, up 15 percent. The four-day period from Black Friday through Cyber Monday saw e-commerce spending jump 13 percent as both weekend days and Monday all achieved double-digit gains.

Click on graph for larger image in new window.

This graph from Comscore shows the weekly sales for compared to the last 5 years. Of course Thanksgiving was late this year, and that probably boosted "Cyber Monday". The most important weeks are coming up ...

For some very interesting analysis, Brian suggests these two posts from Rimm Kaufmann. Online Retail Stats: CyberMonday 2008 vs. 2007 and Online Retail Sales Stats: Consumers Buying But Spending Less

This suggests sales are basically flat, but volumes are up suggesting some serious discounting. Also note:

Impressions grew faster than clicks, indicating the engines earned lower effective CPM rates on their inventory.

Not the best of news for Google.

by Calculated Risk on 12/03/2008 09:18:00 PM

There were two stories published today concerning house prices and interest rates.

The first story came out this morning, and quoted a report from Global Insight suggesting "the housing market is now slightly undervalued". Please stop laughing ...

And later today, the WSJ reported that the Treasury would "purchase securities underpinning [GSE mortgage] loans at a price equivalent to the 4.5% rate". The purpose, according to the WSJ:

Treasury views this plan as potentially halting the slide in home prices by enabling borrowers to afford bigger mortgages, thus increasing demand for homes and pushing up home values.

The Treasury plan is only for purchase loans, not refis.

If we look at the Global Insight methodology for evaluating home prices, we see:

For example, a conventional 30-year mortgage of $200,000 carries a monthly cost of $1,468 with mortgage interest rates of 8 percent. At 6 percent, however, a homebuyer could service a far higher $245,000 mortgage with the same monthly expense.

Clearly both stories draw a strong connection between house prices and interest rates. But what is the relationship?

It is true that the rent vs. buy decision moves in the "buy" direction with lower interest rates.

Say someone is paying $1000 per month in rent, and they are interested in buying a $240,000 house with $24,000 down (10%). With a 6% mortgage rate the principle & interest (P&I) payment alone would be $1295 per month. Add in insurance, maintenance, mortgage insurance, property taxes and other costs and fees (like HOA) and subtract the income tax break, and it probably doesn't work.

We need a spreadsheet and more details to work it out exactly.

But at a lower mortgage rate - say 4.5% - the P&I would be $1,095 and depending on the other costs, and with all else being equal, buying might make sense.

But why would this push up prices as suggested by the Global Insight analysis? Prices would increase because of higher demand - not directly because of lower interest rates. A rational buyer wouldn't pay more just because the interest rate is lower - although they might have to pay more because the demand is greater. But the current buyer wouldn't pay much more, because the rational buyer would realize interest rates will probably not be artificially low when they try to sell, and their future buyer would have a higher interest rate and a lower price.

This suggests the Global Insight analysis is flawed, as is the "affordability index" from the NAR, or any other measure of house prices based on interest rates. In fact house prices are still too high as suggested by the price-to-income ratio and real prices.

The WSJ article correctly noted that lower interest rates "increas[e] demand for homes", but do they push up home values? The answer in the current environment is probably no.

This may be a little surprising since lower interest rates will likely increase demand.

In a perfect market, an increase in demand would push up prices. And an increase in supply with steady demand would lower the price enough to clear the market.

However, housing is an imperfect market - house prices are sticky downwards and typically take several years to adjust (what we are seeing!) - so even though there is currently far too much supply, prices still have not fallen far enough to balance supply and demand.

An increase in demand from current renters deciding to buy, would probably only make a small dent in the huge excess supply. And house prices would continue to fall - so the goal of supporting house prices would not be met.

In fact, it could be worse. Landlords, already struggling with high vacancy rates and falling rents, would probably lower their rents further and make the rent vs. buy decision more difficult again. So lower interest rates might not boost demand very much, it might just lead to lower rents.

This is a bad idea from the Treasury. And leaking this story is a terrible idea, since some potential homebuyers might potentially wait for lower interest rates.

This is very different than the Fed program to buy agency MBS. That program makes sense since the GSEs have effectively been nationalized (in Conservatorship) and also helps current homeowners refinance, although I don't understand why the government just doesn't announce the GSE debt is backed by the U.S. Government.

by Calculated Risk on 12/03/2008 05:24:00 PM

OK, two ...

“Our worry is that you have these very large players in distressed situations where they are going to have to sell assets at any price they can get. That can really weigh on the commercial real estate market.”
Joel Bloomer, Morningstar analyst commenting on General Growth Properties and Centro in Retail Traffic (hat tip Justin)

And from the Fed's Beige book:

Commercial real estate markets weakened broadly. Vacancy rates rose in Boston, New York, Richmond, Chicago, Kansas City and San Francisco, but were mixed across markets in the St. Louis District. Leasing activity was down in almost all Districts. Rents fell in the Boston, New York and Kansas City Districts. Despite reductions in construction materials costs, commercial building activity declined in many Districts with tighter credit conditions as a factor.

And just like with residential real estate, the CRE bust impacts other suppliers down stream, as an example from Reuters: U.S. office furniture orders fall 6 pct in Oct

U.S. office furniture orders fell 6 percent in October to $945 million compared with a year ago, its largest decline since May 2003, a trade group said on Wednesday.

The CRE downturn is here. This is the typical pattern - residential real estate leads the economy into a recession, and then CRE turns down during the recession. Usually new residential investment (RI) also leads the economy out of recession too - but any recovery in RI will probably be weak this time because of the huge overhang of inventory, and because house prices are still too high. Yes - I saw the article about Global Insight suggesting that the "housing market is now slightly undervalued" - uh, right. I'll have more on their analysis later.

by Calculated Risk on 12/03/2008 04:32:00 PM

From the WSJ: Treasury Considers Plan to Stem Home-Prices Decline

The Treasury Department is considering a plan to revitalize the U.S. housing market by reducing mortgage rates for new home loans ... The plan, which is in the development stages, would use mortgage giants Fannie Mae and Freddie Mac to bring loan rates down as low as 4.5%, a full percentage point lower than the prevailing rates for 30-year fixed mortgages.
...
Under the plan, Treasury would buy securities underpinning loans guaranteed by the two mortgage giants...

Oh my ...

by Calculated Risk on 12/03/2008 03:50:00 PM

From the Charlotte Business Journal: Charlotte CEOs see tough times, hope for recovery in 2009

Ken Lewis, CEO at BofA ... said he was hopeful conditions would improve in the second half of next year. He sees no bright spots for the economy before then.

“Times are really tough, and we don’t see any short-term rays of sunshine,” he told the more than 600 attendees at the Westin Charlotte hotel. When the panel was asked for advice on how to get through the next six months, Lewis recommended a conservative strategy of hoarding cash and capital and waiting for the storm to pass. “Think of getting through this as the primary objective,” he said.

Hoarding cash doesn't sound like lending ...

by Calculated Risk on 12/03/2008 01:17:00 PM

Tanta and her sister were working on a line of Mortgage Pig™ Wear before Tanta passed away. Please see the note from Cathy (Tanta's sister).

Check it out - a great holiday gift - and the proceeds go to cancer cure and care organizations.

Also, I'm putting together a chronological compendium of Tanta's posts. This is still a work in progress (it takes some time to find and add the posts). I'm not sure where this will lead, but this is a key first step ... enjoy!

Links for both the Mortgage Pig™ Wear and Compendium are in the right sidebar if you check back later.

by Calculated Risk on 12/03/2008 11:51:00 AM

I've heard from industry insiders (not confirmed) that Fannie Mae is putting a limit on the debt service-to-income (DTI) ratio of borrowers regardless of the Automated Underwriting System (AUS) decisions for loans requiring mortgage insurance (Loan-to-value (LTV) > 80%). This is apparently due to pressure from the mortgage insurers (MIs).

These are essentially caps on DTI. Previously the max was determined by the AUS.

For conforming loans in stable markets (as defined by MIs), the DTI limit is 45% when PMI is required (LTV > 80%). For expanded approval loans in stable markets, the DTI limit is 41%.

In soft markets, the max DTI is 41%. Previously this could be exceeded if approved by DU/LP (Desktop Underwriter Version 7.0® / Loan Prospector® ).

This raises a great point. The MIs were locked out (luckily for them) of many of the worst loans, because Wall Street securitized 2nds instead of using MI. Now that MI is needed again for loans with LTVs greater than 80%, the MIs once again have a say in the underwriting process.

I'm sure Krugman would respond with YHTMAAAIYP.

by Calculated Risk on 12/03/2008 10:43:00 AM

Professor Hamilton is not prone to hyperbole, so when he writes about a "frightening new phase in the economic downturn", I pay close attention:

When I first saw the figure for November sales of cars manufactured in North America-- 236,000 units-- I thought maybe somebody had mistyped the first digit. Even 336,000 would have been a very bad month.
...
The wrenching changes that might be immediately ahead could mark the beginning of a frightening new phase in the economic downturn.

And here is his chart of NSA auto sales. The decline in November was stunning - even for those expecting bad news.

Source: Econbrowser / Wardsauto.com

by Calculated Risk on 12/03/2008 10:00:00 AM

From the Institute for Supply Management: November 2008 Non-Manufacturing ISM Report On Business®

"The NMI (Non-Manufacturing Index) registered 37.3 percent in November, 7.1 percentage points lower than the 44.4 percent registered in October, indicating contraction in the non-manufacturing sector for the second consecutive month. The Non-Manufacturing Business Activity Index decreased 11.2 percentage points to 33 percent. The New Orders Index decreased 8.6 percentage points to 35.4 percent, and the Employment Index decreased 10.2 percentage points to 31.3 percent. These are the lowest levels for each of these indexes since they were first reported in 1997."

There is much more in the press release, but basically the service economy is very weak. Here is a key sentence:

Respondents' comments reflect concern about the time line for the economy to stabilize and the impact it is having on discretionary spending and employment.

Discretionary spending always gets hit hard when households and businesses are uncertain about the future. And this is more evidence of a very weak employment report for November.

by Calculated Risk on 12/03/2008 09:19:00 AM

From ADP: November Employment Report

Nonfarm private employment decreased 250,000 from October to November 2008 on a seasonally adjusted basis, according to the ADP National Employment Report®. The estimated change in employment from September to October was revised down from a decrease of 157,000 to a decrease of 179,000.

Note: ADP only covers private employment and has been consistently more positive than the BLS report in recent months. See the report for some graphs of employment and a comparison to the BLS report.

And from Rex Nutting at MarketWatch: Corporate layoffs surge to nearly 7-year high

Led by massive cuts at Citigroup and other banks, major U.S. corporations announced 181,671 layoffs in November, the highest total in nearly seven years, according to a survey conducted by outplacement firm Challenger Gray & Christmas and released on Wednesday.
...
The report comes two days before the Labor Department is scheduled to release its report on employment in November. Analysts surveyed by MarketWatch expect payrolls to fall by 350,000, which would be the biggest decline since May 1980.
So far in 2008, announced layoffs have totaled 1.06 million, up 46% from the same period a year ago.

Also first time unemployment claims are running over 500 thousand per week - so all of the data suggests that the BLS employment report on Friday will show large job losses in November.