by Calculated Risk on 1/21/2009 12:59:00 PM

This graph shows the builder confidence index from the National Association of Home Builders (NAHB).

The builder confidence index was at 8 in January, a new record low.

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).

Press release from the NAHB: Builder Confidence Edges Down Further In January

Concerns about the faltering economy and reluctant home buyers pushed builder confidence in the market for newly built single-family homes down further in January, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. The HMI edged down a single point to a new record low of 8 in January.
...
All of the HMI’s component indexes remained at or near historic lows in January. The index gauging current sales conditions recorded the greatest change, with a two-point decline to 6. Meanwhile, the indexes gauging sales expectations for the next six months and traffic of prospective buyers each rose a single point, to 17 and 8, respectively.

Regionally, the HMI fell one point to 10 in the Northeast, held even at 6 in the Midwest, rose one point to 11 in the South and fell three points to new record low of 4 in the West in January.

by Calculated Risk on 1/21/2009 11:25:00 AM

From the WSJ: Hancock at Center of 'Tranche Warfare' (hat tip Rich in SF)

Earlier this month, a Broadway fund defaulted on $700 million of debt tied to the Hancock tower and other buildings. The default triggered a scramble among investors holding debt tied to the acquisition, with some pushing for immediate foreclosure and others pushing to extend the loan in hopes of a real-estate rebound.
...
The disputed $700 million of debt in the Hancock battle is mezzanine debt that was divided up among nine investors. With real-estate values declining, not all of the investors would be paid off in a liquidation.

As a result, investors who believe they would be in the money are pressing for an immediate foreclosure ... Investors likely to lose out in foreclosure want to give Broadway more time to repay the loan.

The servicing agreement usually details what is supposed to happen in default, but many of these agreements haven't been tested before. Clearly holders of different tranches of debt have very different interests.

And, oh, on the vacancy rate:

[T]he vacancy rate in the John Hancock Tower has risen from practically zero to 15%.

I bet the investors didn't include that scenario in their pro forma analysis!

by Calculated Risk on 1/21/2009 09:39:00 AM

Here is the CNBC feed. (starts at 10 AM ET)

Here is the CSpan2 feed

From the NY Times: Tough Questions Expected for Geithner Today

The Senate Finance Committee hearing is scheduled to begin at 10 a.m.
...
Here’s a quick look at the tough questions that Mr. Geithner is likely to confront:

How will he use the second tranche of $350 billion in federal bailout money from the Troubled Asset Relief Program, or TARP?

Is the Obama administration likely to come back for even more bailout money? ...

How much additional regulation of the financial system, including hedge funds and private equity, does he think is needed?

As president of the Federal Reserve Bank of New York, he had oversight of banks like Citigroup. How does he grade his own performance?

Why was Lehman Brothers allowed to collapse in September? And why was American International Group saved by the government only 48 hours later?

Why didn’t the Treasury and the Federal Reserve act more aggressively to stabilize the financial system after the downfall of Bear Stearns last spring?

by Calculated Risk on 1/20/2009 10:28:00 PM

The building industry trade show started today in Las Vegas. The Las Vegas Review Journal has some details: Economists say housing market to remain unstable

David Crowe of the National Association of Home Builders said he was quite negative in his housing and economic outlook last year, but not negative enough.
...
"We have consumer confidence at or near a historic low," the economist said Tuesday at the building industry trade show, "and it will probably deteriorate in 2009."

The S&P/Case-Shiller Home Price Index fell 25.3 percent from March 2006 to October 2008.

Crowe said he expects prices to fall another 29 percent this year and new home sales to decline 14 percent.

... The nation has an excess "overhang" of 6.2 million homes for sale, about 1.5 million too many, he said.

There are negative comments from other economists in the article too.

The WSJ has more: Builders Predict More Housing Pain

Economists from Freddie Mac, the government-backed lending agency, mortgage insurer PMI Group Inc. and the Portland Cement Association trade group also predicted this year would be worse than 2008 in terms of starts and overall housing activity.
...
Frank Nothaft, chief economist for Freddie Mac, predicted the U.S. unemployment rate will jump to 8.7% by the fourth quarter of 2009 from 7.2% as of December.
...
The Portland Cement Association held a separate news conference Tuesday at which its chief economist sounded even more pessimistic about prospects for a recovery. "I see another full two years almost before a significant gain," said Mr. Sullivan, who was one of the first industry economists to predict the current downturn.

Grim and grimmer. Must be a fun convention.

by Calculated Risk on 1/20/2009 07:55:00 PM

David Rosenberg at Merrill Lynch wrote a research piece last week: "Not Your Father’s Recession ...(But Maybe Your Grandfather’s)" (no link)

Needless to say, the piece wasn't too upbeat.

But I was intrigued by some of the comments on vehicle sales. Rosenberg presented the following data (these are my graphs of the same data):

Click on graph for larger image in new window.

The first graph shows monthly vehicle sales (autos and trucks) as reported by the BEA at a Seasonally Adjusted Annual Rate (SAAR).

This shows that sales have plunged to just over a 10 million annual rate - the lowest rate since the early '80s recession.

The next graph shows the ratio of registered vehicles in the U.S. to the number of licensed drivers.

Rosenberg only plotted the data from 1975 through 2006 and the Y-axis was scaled from 1.0 to 1.2. This gave the appearance of a rapid increase in the ratio.

Looking at the raw data reveals that this includes private and commercial vehicles, so if someone drives a car to work - and then a different vehicle at work - that is counted as 2 vehicles per licensed driver. This would include truck drivers, police officers, and others. So a ratio of 1.2 vehicles per driver doesn't seem so high, although Rosenberg asks "Too many vehicles?"

This led me to plot the third graph (not in research piece).

This graph shows the total number of registered vehicles in the U.S. divided by the sales rate - and gives a turnover ratio for the U.S. fleet (this doesn't tell you the age of the fleet).

Currently this ratio is at 23.9 years, the highest ever. This is an unsustainable level (I doubt most vehicles will last 24 years!), and the ratio will probably decline over the next few years. This could happen with vehicles being removed from the fleet, but more likely because of a sales increase.

If the ratio of vehicles to licensed drivers declined to 1.1 (last seen in the early '90s recession), and the turnover ratio declined to 15 years, this would suggest sales would increase to 15 million vehicles per year. Although not as high as the recent boom years - this is still a sales increase of more than 40% above current levels.

Sales won't increase right away (look at the depressed sales during the early '80s), but this does suggest that auto sales are closer to the bottom than the top, and that auto sales will increase significantly in the future - although sales in 2009 will probably be dismal.

by Calculated Risk on 1/20/2009 05:54:00 PM

Actually Bailout Bitter! Click on photo for a larger image. Credit: Barley Enjoy Responsibly.

by Calculated Risk on 1/20/2009 04:58:00 PM

More banking news from Europe ...

From Bloomberg: King Says BOE May Start Buying Assets Within Weeks

Bank of England Governor Mervyn King said officials may start buying assets in the next weeks to loosen credit markets as the lowest interest rates since 1694 fail to avert a “marked” recession.

The U.K. central bank may acquire securities such as corporate bonds and commercial paper to bolster lending to companies and consumers as banks rebuild balance sheets damaged by the global financial crisis, King said today.

And from Reuters: Germany's Hypo gets extra 12 bln eur in guarantees

Stricken German investment bank Hypo Real Estate said on Tuesday it would get an additional 12 billion euros in state guarantees and it was still in talks with the state regarding further support.

by Calculated Risk on 1/20/2009 04:17:00 PM

Citigroup (C) off 20%

BoF (BAC) off 29%

JPMorgan (JPM) off 21%

Goldman Sachs (GS) off 19%

Wells Fargo (WFC) off 24%

Morgan Stanley (MS) off 16%

Did someone say "Nationalize"?

Another fun day ...

by Calculated Risk on 1/20/2009 02:36:00 PM

From CNBC: Layoffs Keep Growing—Is Your Firm On the List? (hat tip stay classy San Diego)

Bank of America may slash as much as 4,000 jobs as it absorbs Merrill Lynch, the Financial Times reported Tuesday.

CNBC has a list of layoffs announced since the beginning of the year.

Also from The Boston Globe: Bose confirms layoffs

Bose Corp., a Framingham company known for its audio products, confirmed news reports that it is cutting 1,000 jobs, or about 10 percent of its work force, as it seeks to adapt to a global economy in recession.

The beat goes on ...

by Calculated Risk on 1/20/2009 11:14:00 AM

Here is the CNBC feed of the inauguration. Mr. Obama takes the oath of office at noon ET.

From an economic perspective, Mr. Obama's first few weeks in office will be critical as his administration finalizes the stimulus package and addresses the ongoing crisis in the banking system.

Best wishes to Mr. Obama. You are now on the clock.

by Calculated Risk on 1/20/2009 10:00:00 AM

From Bloomberg: Roubini Predicts U.S. Losses May Reach $3.6 Trillion

“I’ve found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers,” Roubini said at a conference in Dubai today. “If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion. This is a systemic banking crisis.”

Professor Roubini has been steadily increasing his estimate of total U.S. credit losses, but I think this estimate might be too high.

I think the U.S. residential credit losses will be in the $1 to $1.5 trillion range and additional credit losses from corporate loans and bonds, commercial real estate, credit cards, and other consumer loans will probably add close to another $1 trillion in losses. That is still well short of Roubini's $3.6 trillion estimate - although give Roubini credit - he has definitely been right so far!

by Calculated Risk on 1/20/2009 09:37:00 AM

From Bloomberg: State Street Net Falls 71% on Costs to Support Funds

State Street Corp ... Results included costs of more than $800 million to offset losses in its stable value funds, cut jobs and write down the value of investment securities.

Here is the State Street presentation (hat tip Mike in Long Island)

Check out the acceleration in the Unrealized after-tax MTM losses on page 4.

Also Mike suggests looking at page 18 and the exposure to RMBS in Spain and Italy.

And from the WSJ: Regions Financial Swings to Loss on $6 Billion Write-Down

Regions Financial Corp. swung to a fourth-quarter loss as it took a $6 billion goodwill write-down and sharply raised loan-loss provisions, although non-performing assets fell slightly amid the continuing disposal of problem assets.

The bad news continues ...

by Calculated Risk on 1/19/2009 11:26:00 PM

From the WSJ: Fiat Nears Stake in Chrysler That Could Lead to Takeover

Under terms of a pact that is being hammered out, Fiat is likely to take a 35% stake in Chrysler by the middle of this year. It would have the option of increasing that to as much as 55% ...

Fiat ... wouldn't immediately put cash into Chrysler. Instead it would obtain its stake mainly in exchange for covering the cost of retooling a Chrysler plant to produce one or more Fiat models to be sold in the U.S. ...

Thirty five percent of Chrysler for the cost of retooling a plant ... that will make Fiats!

by Calculated Risk on 1/19/2009 08:53:00 PM

From The Times: Nationalisation calls as RBS teeters on the brink

RBS, worth £75 billion only two years ago, is now valued at £4.5 billion, even though it received £32 billion from taxpayers and shareholders less than three months ago.

The bank’s plight prompted calls for the outright nationalisation of RBS, with some MPs urging the Treasury to take over its day-to-day running.
...
The turmoil suggested that the Government’s second massive rescue package had failed to restore confidence to the financial sector. It was a graphic illustration of continued banking uncertainty that prompted calls on the Government from Labour MPs to nationalise the whole system, an idea resisted firmly by Alistair Darling, the Chancellor, last night.

The most recent bail out will increase public ownership of RBS to 70%, so it's not a huge step to complete nationalization.

by Calculated Risk on 1/19/2009 05:09:00 PM

From the National Multi Housing Council (NMHC): Job Losses, Credit Market Conditions Challenge The Apartment Sector, According to NMHC Survey

The stunning job losses and economic deterioration recorded over the past four months have eroded demand for apartments, putting the sector—like other real estate sectors and the economy itself—in a clearly "down" phase of the cycle, according to the National Multi Housing Council's (NMHC) latest Quarterly Survey of Apartment Market Conditions.
...
"The long-term prospects for the sector are strong," explained [Mark Obrinsky, NMHC's Chief Economist]. "The number of people between 20-34 years of age is rising rapidly, and as they enter the rental market, demand will rise correspondingly. For now, though, that demographic advantage is being trumped by the worsening job market, which is leading more people to move back in with family or take on roommates to save on housing costs."

"At the same time, the financial crisis is having a material impact on current or planned activities at most apartment firms," said Obrinsky. "Nearly two-thirds of respondents (62 percent) said the credit crisis has had a material impact on current and planned activities. The lack of capital has slowed sales volume, made it difficult to refinance maturing debt and caused many firms to cancel new developments."

The Market Tightness Index, which measures changes in occupancy rates and/or rents, declined sharply this quarter to 11 from 24. This is the third-lowest result on record, and the sixth straight quarter in which the index has been below 50.

Click on graph for larger image in new window.

This graph shows the quarterly Apartment Tightness Index.

As NMHC chief economist Obrinsky noted, it is common in a recession for apartment vacancies to rise, as households double up by moving in with a friend or family member. However an added factor in this recession is all the single family homes being offered as rentals. This is additional competition for apartments and might also be impacting demand for apartments.

by Calculated Risk on 1/19/2009 02:49:00 PM

For a laugh, here is a house in Carlsbad, CA west of the freeway selling for under $400 thousand ... from Jim the Realtor:

Wow. Who could live there? (backs to the "Detroit River" ROFLOL)

Houses are even cheaper in Detroit. From Dow Jones: How low can homes go? Try $0

[T]he median price of a home sold in Detroit last month was $7,500, according to Realcomp, a Farmington Hills, Mich., multiple-listing service, down 50 percent from last year.

[Detroit real estate agent Ian Mason] counted 1,228 homes listed for under $10,000, 209 of which were under $1,000.

"Many of them are in pretty decent shape," he said, "and some can be lived in."

Define "live".

by Calculated Risk on 1/19/2009 01:07:00 PM

From DataQuick: Southland home sales off bottom

The core trends of Southern California's 2008 housing market were on prominent display in December: Low-cost inland foreclosures sold briskly, builders had their worst month in decades, expensive markets remained in wait-and-see mode and lenders continued to hold back on making 'jumbo' home loans ...

While sales from September 2007 through last summer were at the lowest in at least two-decades, they've been up off the bottom ever since. Last month was the fifth-slowest December in DataQuick's statistics, which go back to 1988. December a year ago was the all-time slowest ...

The number of resale houses sold in Riverside County almost tripled on a year-over-year basis, from 1,238 in December 2007 to 3,617 last month. Just under 70 percent of Riverside County resales were foreclosure homes. ...

Regionwide, foreclosure resales accounted for 55.7 percent of December's resales activity, up from 54.7 percent in November, and up from 24.3 percent in December 2007.

A total of 1,813 newly-built homes were sold in December, easily the lowest number for that month in DataQuick's statistics. ...

The median price paid for a Southland home was $278,000 last month. That was down 2.5 percent from $285,000 for November, and down 34.6 percent from $425,000 for December a year ago. The median reached $505,000 in mid 2007.

In today's market, the drop in the median overstates the decline in home values. The more affordable inland markets with most of the discounted foreclosures account for a large share of today's sales, while homes in the upper half of the market are not selling well ...

This makes a few key points:

The median price is skewed by the mix.

Foreclosure resales ARE the market in many areas.

Builders had the worst December ever.

Significant price declines are probably coming in the more expensive areas. (price follows volume).

by Calculated Risk on 1/19/2009 12:09:00 PM

Bloomberg has an article on the Inland Empire: California Finds Public-Works Spending No Unemployment Cure-All. The focus of the article is on public works projects, but the more important point is that areas with the highest levels of construction employment during the housing boom are now suffering the most from unemployment (no surprise!).

Only four years ago, Riverside and nearby San Bernardino, often called the Inland Empire, were California’s economic powerhouse, accounting for more than a fifth of the state’s new jobs. Today, unemployment reigns in the sprawling region east of Los Angeles. The 9.5 percent jobless rate in the two counties matches Detroit’s as the highest of any major metropolitan area in the U.S.

Click on graph for larger image in new window.

This graph (using Not Seasonally Adjusted data) shows construction as a percent of total employment for the Inland Empire, California and the U.S.

Although there was a surge in construction employment in the U.S., and about a 50% increase in California (as a percent of total employment), construction employment doubled (as a percent of total employment) in the Inland Empire.

The second graph shows the percent of construction employment and the unemployment rate for the Inland Empire.

With the housing bust, the percent construction employment has declined sharply and the unemployment rate has risen to almost 10%. Is it any surprise that jobless rate in the Inland Empire matches Detroit’s as the highest of any major metropolitan area in the U.S.?

by Calculated Risk on 1/19/2009 09:10:00 AM

From The Times: RBS losses set to reach record £28 billion

Royal Bank of Scotland (RBS) confirmed today that losses for the full-year could reach as much as £28 billion ...

The bank said this morning that it will make an annual loss of between £7 billion and £8 billion, when it announces its results on February 26.

However, it also expects to announce a charge of between £15 billion and £20 billion related to last year's acquisition of ABN Amro, the Dutch bank, which it acquired with Spain's Santander and Fortis, the Belgium bank.

The potential £28 billion loss is nearly twice the size of Vodafone's £15 billion deficit in 2006, currently the biggest-ever corporate loss in UK history.

From the WSJ: RBS Expects Huge 2008 Loss

Royal Bank of Scotland Group PLC said Monday that tough market conditions in the fourth quarter and mounting impairment charges could push it to a 2008 full-year loss of as much as £28 billion ($41.29 billion), the U.K.'s biggest ever corporate loss.

Ouch!

by Calculated Risk on 1/19/2009 01:44:00 AM

Paul Krugman explains (once again) why "bad banks" won't work: Wall Street Voodoo

Also see Krugman's blog today: More on the bad bank