by Calculated Risk on 7/18/2009 10:10:00 PM

From Roger Vincent at the LA Times: Commercial brokers are swimming in empty space

Nearly 16% of office space in Los Angeles County is sitting vacant as tenants close up shop or move out of expensive properties. Nearly a third of the space around up-market Playa Vista sits empty; office buildings in the Inland Empire and parts of Orange County are completely vacant.

It all adds up to less work for brokers like [Carl] Muhlstein, who make their living facilitating the sale and leasing of these properties.

And some recent national CRE data:

Strip Mall Vacancy Rate Hits 10%, Highest Since 1992

U.S. Office Vacancy Rate Hits 15.9% in Q2

Hotel Occupancy Off 19% Compared to 2007

Apartment Vacancy Rate at 22 Year High

by Calculated Risk on 7/18/2009 05:29:00 PM

For the last few years, whenever housing starts increased, I wrote that was bad news because there was already too much inventory.

Now, even though there is still too much existing home inventory, and too much new home inventory in some areas, it appears that new home sales have stabilized. Since single family housing starts (built for sale) have been below new home sales for six consecutive quarters (through Q1), this suggests single family housing starts should also bottom soon. There is a good chance that has already happened.

Why is that good if there is still too much housing inventory overall?

This increase in starts means that the drag from Residential Investment will slow or stop, and also that residential construction employment is close to the bottom. Residential investment has been a drag on the economy for 14 straight quarters, and just removing that drag will seem like a positive.

And residential construction has lost jobs for several years, and even though construction employment will probably not increase significantly, not losing jobs will also seem like a positive.

This removes drags from the economy - and that is the little bit of good news.

To be clear, this is not great news for the homebuilders. It will take some time to work off all the excess inventory, so new home sales and single family housing starts will probably stay low for some time. And it is possible that new home sales and housing starts could still fall further.

Are new home sales actually below single family starts (built for sale)?

Monthly housing starts (single family starts) cannot be compared directly to new home sales, because the monthly housing starts report from the Census Bureau includes apartments, owner built units and condos that are not included in the new home sales report.

However it is possible to compare "Single Family Starts, Built for Sale", from the Census Bureau's "Quarterly Starts and Completions by Purpose and Design" to New Home sales on a quarterly basis.

The quarterly report shows that there were 52,000 single family starts, built for sale, in Q1 2009 and that is less than the 87,000 new homes sold for the same period. This data is Not Seasonally Adjusted (NSA). This suggests homebuilders are selling more homes than they are starting.

Note: new home sales are reported when contracts are signed, so it is appropriate to compare sales to starts (as opposed to completions), although this is not perfect because homebuilders have recently been stuck with “unintentional spec homes” because of the high cancellation rates. However cancellation rates for most homebuilders have fallen sharply recently.

Click on graph for larger image in new window.

This graph provides a quarterly comparison of housing starts and new home sales. In 2005, and most of 2006, starts were higher than sales, and inventories of new homes rose sharply. For the last six quarters, starts have been below sales – and new home inventories have been falling.

What is Residential Investment?

Residential investment is a major investment category reported by the Bureau of Economic Analysis (BEA) as part of the GDP report.

Residential investment, according to the BEA, includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories.

This graph shows the various components of RI as a percent of GDP for the last 50 years. The most important components are investment in single family structures and home improvement.

Investment in home improvement was at a $162.3 billion Seasonally Adjusted Annual Rate (SAAR) in Q1, significantly above investment in single family structures of $113.7 billion (SAAR).

Let's take a closer look at investment in single family structures (usually the largest category):

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

In Q1, investment in single family structures was at 0.8% of GDP, significantly below the average of the last 50 years of 2.35% - and also below the previous record low in 1982 of 1.20%.

Based on the housing starts report, investment in single family structures will probably increase in Q2 for the first time since Q1 2006. This doesn't guarantee that residential investment increased in Q2, because home improvement and the other categories might offset the gains in single family structure investment, but most of the drag on GDP should be gone.

by Calculated Risk on 7/18/2009 03:19:00 PM

I'm working on a housing start post, but first ...

Barry Ritholtz presents the following graph and asks:

"I cannot figure out why people continue to call for a bottom in Real Estate — as if there is going to be this snap back any day now."

Well I'm one of the people who wrote yesterday that a bottom for single family housing starts might have happened:

It now appears that single family starts might have bottomed in January.

A few quick points:

If single family housing starts bottomed in January, on a seasonally adjusted annual rate (SAAR) basis, the 12 month moving average of unadjusted data won't bottom until October or so (depending on the shape of the recovery). Using this method adds a lag to the analysis.

Barry also conflates calling a bottom in housing starts with: 1) "a bottom in Real Estate" and 2) "a snap back".

First, there will probably be two bottoms for Residential Real Estate. The first will be for new home sales, housing starts and residential investment. The second bottom will be for prices. For more on this, see: More on Housing Bottoms

Most people think prices when they hear the word "bottom", and the bottom for prices usually trails the bottom for housing starts - sometimes the two bottoms can happen years apart!

Second, looking for a bottom in housing starts doesn't imply "a snap back" in activity. As I noted yesterday, "I expect starts to remain at fairly low levels for some time as the excess inventory is worked off."

I'll have more on why the housing start report is somewhat good news soon.

by Calculated Risk on 7/18/2009 10:53:00 AM

Here is a graph from Jan Hatzius at Goldman Sachs (no link):

Click on graph for larger image in new window.

The graph shows the end of cliff diving for retail sales, auto sales, home sales, and capital goods orders - but so far no recovery.

But GDP can still turn slightly positive.

Here is a speech from San Francisco Fed President Janet Yellen in March: The Uncertain Economic Outlook and the Policy Responses.

[I]t takes less than many people think for real GDP growth rates to turn positive. Just the elimination of drags on growth can do it. For example, residential construction has been declining for several years, subtracting about 1 percentage point from real GDP growth. Even if this spending were only to stabilize at today’s very low levels—not a robust performance at all—a 1 percentage point subtraction from growth would convert into a zero, boosting overall growth by 1 percentage point. A decline in the pace of inventory liquidation is another factor that could contribute to a pickup in growth. Inventory liquidation over the last few months has been unusually severe, especially in motor vehicles—a typical recession pattern. All it would take is a reduction in the pace of liquidation—not outright inventory building—to raise the GDP growth rate.
emphasis added

This is a very important point for forecasters - to distinguish between growth rates and levels. Even if the economy has bottomed, it is at a very low level compared to the last few years, and the recovery will probably be very sluggish.

by Calculated Risk on 7/18/2009 08:38:00 AM

Jim the Realtor takes us on a tour of the 679-unit Vantage Point complex in downtown San Diego. "They had been taking $25,000 deposits since 2004, but could only generate around 200 sales - not enough to qualify for Fannie/Freddie financing (need 70% pre-sold)."

Jim says the developer has returned the deposits, converted a part of the building to apartments - and is now to trying to sell again at a lower price - that Jim thinks is still too high.

Note: these new high rise condos aren't included as inventory by either the Census Bureau (new homes) or the NAR (existng homes).

Here is some info on the condo lending rules from the WSJ on June 22nd: Changes Urged to Rules on Condo Loans

In March, Fannie Mae said it would no longer guarantee mortgages on condos in buildings where fewer than 70% of the units have been sold, up from 51%. Fannie Mae also won't purchase mortgages in buildings where 15% of owners are delinquent on condo association dues or where one owner has more than 10% of units, which the firm sees as signals that a building could run into financial trouble. Freddie Mac will implement similar policies next month.
...
Fannie Mae officials say the new rules haven't been as taxing as some claim. The mortgage company said the 70% rule doesn't apply to loan applications submitted through an underwriting program used by major lenders, and that hundreds of projects submitted through that program since March 1 have been approved even though their sales levels are below 70%. Developers are also able to apply for exemptions to the new policies for loans that are manually underwritten.
...
Fannie and Freddie have also boosted fees on mortgages for condos. Buyers without a minimum 25% down payment have to pay closing-cost fees equal to 0.75% of their loan, regardless of their credit score, under new rules that took effect in April. Fannie has said it will drop that fee in August for cooperative apartments and detached condos.

by Calculated Risk on 7/18/2009 12:07:00 AM

Click on painting for larger image in new window.

"The Money Game"

Image posted with permission from Laguna Beach artist Scott Moore.

This images is of a five foot by seven and a half foot oil painting.

Scott posted a step-by-step outline here of how he designed and painted the image (with much more detail). In the detail you can see Fannie and Freddie, Madoff, Countrywide, and much more. Enjoy.

by Calculated Risk on 7/17/2009 09:23:00 PM

This makes four today. We've discussed these two before ...

Pitcher throws to home
Failure swings.... to deep center
A double this time.
by Soylent Green is People
From the FDIC: California Bank & Trust, San Diego, California, Assumes All of the Deposits of Vineyard Bank, National Association, Rancho Cucamonga, California

Vineyard Bank, National Association, Rancho Cucamonga, California, was closed today by the Office of the Comptroller of the Currency, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver.
...
As of March 31, 2009, Vineyard Bank, N.A. had total assets of $1.9 billion and total deposits of approximately $1.6 billion.
...
The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $579 million. ... Vineyard Bank, N.A. is the 56th FDIC-insured institution to fail in the nation this year, and the seventh in California. The last FDIC-insured institution to be closed in the state was Mirae Bank, Los Angeles, on June 26, 2009.

From the FDIC: First-Citizens Bank and Trust Company, Raleigh, North Carolina, Assumes All of the Deposits of Temecula Valley Bank, Temecula, California

Temecula Valley Bank, Temecula, California, was closed today by the California Department of Financial Institutions, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver.
...
As of May 31, 2009, Temecula Valley Bank had total assets of $1.5 billion and total deposits of approximately $1.3 billion.
...
The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $391 million. ... Temecula Valley Bank is the 57thth FDIC-insured institution to fail in the nation this year, and the eighth in California. The last FDIC-insured institution to be closed in the state was Vineyard Bank, National Association, Rancho Cucamonga, also today.

by Calculated Risk on 7/17/2009 08:08:00 PM

No surprise ...

From the NY Times: State Tax Revenues at Record Low, Rockefeller Institute Finds (ht Ann)

The anemic economy decimated state tax collections during the first three months of the year ... The drop in revenues was the steepest in the 46 years that quarterly data has been available.

Over all, the report found that state tax collections dropped 11.7 percent in the first three months of 2009, compared with the same period last year.
...
All the major sources of state tax revenue — sales taxes, personal income taxes and corporate income taxes — took serious blows ...

Here is the report: State Tax Decline in Early 2009 Was the Sharpest on Record

And it looks much worse in Q2:

Early figures for April and May of 2009 show an overall decline of nearly 20 percent for total taxes, a further dramatic worsening of fiscal conditions nationwide.

Note: an earlier report was on state pesonal income taxes - this is all state taxes.

by Calculated Risk on 7/17/2009 06:14:00 PM

Lets chug a lug, lug
Two down, many to follow
Quaff to banks gone bye.
by Soylent Green is People
From the FDIC:

BankFirst, Sioux Falls, South Dakota, was closed today by the South Dakota Division of Banking, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Alerus Financial, National Association, Grand Forks, North Dakota, to assume all of the deposits of BankFirst.
...
As of April 30, 2009, BankFirst had total assets of $275 million and total deposits of approximately $254 million.
...
The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $91 million. ... BankFirst is the 55th FDIC-insured institution to fail in the nation this year, and the first in South Dakota. The last FDIC-insured institution to be closed in the state was First Federal Savings Bank of South Dakota, Rapid City, on April 24, 1992.

That makes two today ...

by Calculated Risk on 7/17/2009 05:47:00 PM

Summer days heat up
Does Taxpayers cool cash quench?
Not so for Piedmont.
by Soylent Green is People
From the FDIC:

First Piedmont Bank, Winder, Georgia, was closed today by the Georgia Department of Banking and Finance, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with First American Bank and Trust Company, Athens, Georgia, to assume all of the deposits of First Piedmont Bank.
...
As of July 6, 2009, First Piedmont Bank had total assets of $115 million and total deposits of approximately $109 million.
...
The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $29 million. ... First Piedmont Bank is the 54th FDIC-insured institution to fail in the nation this year, and the tenth in Georgia. The last FDIC-insured institution to be closed in the state was Neighborhood Community Bank, Newnan, on June 26, 2009.

by Calculated Risk on 7/17/2009 04:00:00 PM

A few graphs ...

Click on graph for larger image in new window.

The first graph shows the high and low unemployment rates for each state (and D.C.) since 1976. The red bar is the current unemployment rate (sorted by the current unemployment rate).

Sixteen states now have double digit unemployment rates.

Missouri, Washington, New Jersey and West Virginia are getting close.

Eight states are at record unemployment rates: Rhode Island, Oregon, South Carolina, Nevada, California, Florida, Georgia, and Delaware.

The Atlanta Fed is now posting Economic Highlights and Financial Highlights weekly.

I cover most of the economic data as it is released, but these are good summaries.

This graph shows the composition of the Fed's assets. From the Atlanta Fed:

While the overall size of the Fed’s balance sheet has been shrinking slightly over the last two months, the composition of the balance sheet has changed.

There have been sizeable declines in short-term lending to financials and lending to nonbank credit markets. For example, combined, TAF credit, currency swaps, and the CPFF have fallen by about one-half from over $1 trillion on April 8 to just under $500 billion on July 8.

Offsetting these declines have been increases in holdings of agency debt, agency mortgage backed securities (MBS), and U.S. Treasury securities. Combined, these three categories have increased by about $430 billion since April 8.

And on the market ...

This graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears".

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

by Calculated Risk on 7/17/2009 03:02:00 PM

From CNBC: CIT Talks Now Include Possible Financing in Bankruptcy

CIT Group's talks with many lenders have transitioned primarily to how the company would receive financing once it files for bankruptcy, CNBC has learned.

Although talks are continuing on financing outside of bankruptcy, sources said that discussions are also focused on a so-called debtor-in-possession loan, in which CIT would receive money after a bankruptcy filing.

For that reason, a bankruptcy filing is unlikely on Friday, although the situation remains fluid.

A bad sign ...

by Calculated Risk on 7/17/2009 12:43:00 PM

From HotelNewsNow.com: STR reports U.S. performance for week ending 11 July 2009

In year-over-year measurements, the industry’s occupancy fell 9.7 percent to end the week at 60.3 percent. Average daily rate dropped 9.6 percent to finish the week at US$93.97. Revenue per available room for the week decreased 18.4 percent to finish at US$56.65.

Although the occupancy rate was off 9.7 percent compared to the same week in 2008, in both 2006 and 2007 the occupancy rate for the week after the 4th of July weekend was over 74 percent (last year it was 66.8 percent). The occupancy rate is off about 19 percent compared to 2007.

Click on graph for larger image in new window.

This graph shows the YoY change in the occupancy rate (3 week trailing average).

The three week average is off 8.2% from the same period in 2008.

The average daily rate is down 9.6%, and RevPAR is off 18.4% from the same week last year.

Note: Business travel is off much more than leisure travel - so the summer months will probably not be as weak as other times of the year.

Data Source: Smith Travel Research, Courtesy of HotelNewsNow.com

by Calculated Risk on 7/17/2009 11:10:00 AM

Note: the BLS started keeping state records in 1976.

From the BLS: Regional and State Employment and Unemployment Summary

Michigan again reported the highest jobless rate, 15.2 percent, in June. (The last state to have an unemployment rate of 15.0 percent or higher was West Virginia in March 1984.) The states with the next highest rates were Rhode Island, 12.4 percent; Oregon, 12.2 percent; South Carolina, 12.1 percent; Nevada, 12.0 percent; California, 11.6 percent; Ohio, 11.1 percent; and North Carolina, 11.0 percent. The Nevada, Rhode Island, and South Carolina rates were the highest on record for those states. Florida, at 10.6 percent, Georgia, at 10.1 percent, and Delaware, at 8.4 percent, also posted series highs.

by Calculated Risk on 7/17/2009 09:39:00 AM

Some comments from the GE Conference call (comments from Brian):

GE: If you look at the environment and the global landscape not much has changed from how we saw it at EPG [investor presentation?]. We're seeing growth in selected markets. Parts of the globe are still robust. China and the middle east, India, places like that. Deflation is helping our margins.

just talking about orders and backlog, we had about $18 billion of second quarter orders, slightly below first quarter and down about 23% FX adjusted versus last year. We're down about 16% year to date. The backlog remains strong. The orders were about the same level as '06 and '07. Backlog remains very strong at $169 billion. If you just look at the orders in some context we had a record first half of '08. That was really the peak of what we saw for major equipment orders. We built $30 billion of backlog over the last four years so we really expected orders to be down even without the recession. A couple positives with major equipment, cancellations are very low. Cancellations are like $100 million…If you look at our backlog conversion rate and current orders and look forward, maybe 12 months, and you think about the fact that about two-thirds of any given year's revenue convert from backlog, and the other third represent current year orders, we look at a rough estimate for 2010 at about, with equipment revenue down about 10 to 15%, some where in that range.

Quick update on stimulus and global growth. First with stimulus. We talked about at EPG having about $190 billion potential from a stimulus standpoint. Almost nothing has come out from this so far. The major buckets are clean energy, affordable healthcare, and then a scattering of other projects. We're seeing some early wins in smart grid with orders up 70%. As we said, the wind tax credits have been clarified. China spending is very strong. We're starting to get some bidding on health information changes and seeing some decent activity around the nuclear business. If you look at it from a global standpoint, some of the global regions are still extremely strong. China was up 31%, India up 46%, Middle East up 10% despite the fact that we're only beginning the Iraq shipments and order completion.

GE Capital

Delinquencies – Equipment and Real Estate [US improved and Asia is worse????]

Next is an update on our delinquencies in non earnings. On the left side is the commercial equipment finance data. You can see the 30 plus day delinquencies for equipment are down six basis points in Q2 versus Q1. That was driven by a decline in delinquencies in the Americas where 30 plus went from 2.81% to 2.45%. So we're very interested in watching this trend and seeing how this develops as we go through the year. That was partially offset by, we had some increased delinquencies in our Asia and European equipment books. We continue to see pressure on non earnings, up 18 basis points versus the first quarter but again the pace of that growth has also leveled off a bit. It's driven by senior secured loans where we're well collateralized. In terms of real estate, which is not in the delinquency for the equipment bar up above, delinquencies increased up to 4% [up 178BP Q/Q] on the real estate book and non earnings are up to 2.9% [up 166BP Q/Q]. You can see we continue to see pressure in the commercial real estate book,

Click on graph for larger image in new window.

From the GE Investor Presentation material.

Delinquencies – Consumer

On the right side, consumer data, and this is really developing into the two different categories by type of exposure. We broke out mortgage, global mortgage, and nonmortgage because loss dynamics are so different. You can see the improvements in the non mortgage delinquency as the delinquency went from 6.02 in the first quarter down to 5.92 in the second quarter and that's driven by North America . North American delinquencies are down 14 basis points to 6.96%. We're seeing better entry rates in delinquency. We're seeing improved late-stage collection effectiveness. The non earnings balance was flat to the prior quarter, and the reason the rate increase a little bit is because the balance is down. So as a percent it's a little higher, but we are getting the benefit of all the underwriting actions that we took last year as well as some seasonality benefits. And then the second category are the global mortgage assets. We continue to see growth in 30 plus delinquencies and non earnings. UK mortgage book drives most of the changes

Reserves

Next is an update on how we think about the non earning assets and our reserve coverage. The left side is commercial. Non earnings ended the quarter at 6.4 billion. It's up 1.9 billion from Q1. This represents 2.9% of financing receivables. The bars show the benefit of being senior secured lender. We expect 1.9 billion of non earnings to have 100% recovery. We have another 1.2 billion some type of workout where we expect full recovery. We'll have a renegotiation, some changes to the documents and terms, and then we have another 1.9 billion where we're protected by collateral value. At the end of the day that leaves with you 1.4 billion of estimated loss exposure today. You can see we have 173% coverage with our reserves. [To summarize, they are expecting a 78% recovery on what is largely a junk grade portfolio albeit in a senior secured position]

On the right side of the consumer non-earning assets of $6.6 billion and they were up over Q1, represent about 4.7% of the financing receivables. The consumer dynamics are very different between the mortgage and the nonmortgage assets so the green bar represents our non mortgage non earning assets, principally the US retail business, the credit card business and retail sales finance. We have 1.7 billion dollars of non earnings in that book. And we have 3.3 million of reserves against it, 189% coverage. And then the remainder of the non-earning assets on the global mortgage book we expect 1.5 billion of that to cure. With our underwriting positions we expect to recover $2.9 billion of exposure based on loan to value position. We underwrite at about 70 to 75% loan to value. Today they're at about 85% loan to value as house prices have declined. We have some mortgage insurance we expect to recover on leaving with expected loss of $500 million, 173% coverage without that. We believe we're appropriately reserved for non-earning loss exposure. We'll cover more in detail on the 28th meeting. [To summarize, they expect 30% of their non performing mortgage assets to cure, the value of the underlying assets in their mortgage book are down 12-18% from origination, they expect a 15% loss severity rate (including a modest benefit from mortgage insurance) - these guys must the gods of mortgage underwriting – if anyone wants to bet on the trend of future loss estimates, I’ll take the over – their corporate motto “Imagination at Work” seems fully appropriate here )

by Calculated Risk on 7/17/2009 08:30:00 AM

Click on graph for larger image in new window.

Total housing starts were at 582 thousand (SAAR) in June, up sharply over the last two months from the all time record low in April of 479 thousand (the lowest level since the Census Bureau began tracking housing starts in 1959).

Single-family starts were at 470 thousand (SAAR) in June; 31 percent above the record low in January and February (357 thousand).

Permits for single-family units were 430 thousand in May, suggesting single-family starts might decline some in July.

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

Building Permits:
Privately-owned housing units authorized by building permits in June were at a seasonally adjusted annual rate of 563,000. This is 8.7 percent (±3.0%) above the revised May rate of 518,000, but is 52.0 percent (±3.6%) below the June 2008 estimate of 1,174,000.

Single-family authorizations in June were at a rate of 430,000; this is 5.9 percent (±1.4%) above the revised May figure of 406,000. Authorizations of units in buildings with five units or more were at a rate of 109,000 in June.

Housing Starts:
Privately-owned housing starts in June were at a seasonally adjusted annual rate of 582,000. This is 3.6 percent (±11.3%)* above the revised May estimate of 562,000, but is 46.0 percent (±4.3%) below the June 2008 rate of 1,078,000.

Single-family housing starts in June were at a rate of 470,000; this is 14.4 percent (±11.8%) above the revised May figure of 411,000. The June rate for units in buildings with five units or more was 101,000.

Housing Completions:
Privately-owned housing completions in June were at a seasonally adjusted annual rate of 818,000. This is 0.4 percent (±15.7%)* below the revised May estimate of 821,000 and is 27.7 percent (±9.0%) below the June 2008 rate of 1,131,000.

Single-family housing completions in June were at a rate of 538,000; this is 8.9 percent (±14.7%)* above the revised May figure of 494,000. The June rate for units in buildings with five units or more was 271,000.

Note that single-family completions of 538 thousand are still significantly higher than single-family starts (401 thousand).

It now appears that single family starts might have bottomed in January. However I expect starts to remain at fairly low levels for some time as the excess inventory is worked off.

by Calculated Risk on 7/17/2009 01:00:00 AM

Just a little preview for BFF ...

From Bloomberg: Corus Bankshares May Be Seized as FDIC Weighs Potential Bidders

U.S. regulators are poised to seize Corus Bankshares Inc., the Chicago lender crippled by loans for condominium construction, and are preparing to auction the entire company or its assets, people briefed on the matter said.
...
Corus’s fate has shifted into the hands of the FDIC because the lender and its financial adviser, Bank of America Corp., haven’t found a buyer willing to complete a deal in the absence of government assistance.

Note: Corus had $7.7 billion in assets at the end of Q1.

Guaranty Financial (another candidate for BFF) had $15.4 billion in assets at the end of Q3 2008. They have been filing NT forms since Q3 (Notification of inability to timely file).

by Calculated Risk on 7/16/2009 10:51:00 PM

If video doesn't load, here is the link.

by Calculated Risk on 7/16/2009 09:41:00 PM

Earlier today, DataQuick reported that home sales increased in the California Bay Area. The report mentioned "a perception among potential buyers that prices have bottomed out."

First, a little history: When the housing bubble was inflating, the demand for housing surged with the widespread use of non-traditional mortgage products. Looking at a supply-demand diagram, this surge in demand pushed the curve to the right.

At the same time speculators were buying up properties, reducing the supply with the intention of selling later at a higher price. This activity shifted the supply curve to the left (this activity was classic storage).

So with the surge in demand, combined with speculators removing supply from the market, prices skyrocketed.

This is exactly what I described in April 2005: Housing: Speculation is the Key

Of course, once the bubble burst, the supply curve shifted back to the right with speculators unloading properties and all the distressed sales. At the same time, demand declined sharply as speculators disappeared and lenders tightened standards.

If housing was a perfect market, prices would have fallen rapidly to the market clearing price. However housing prices are sticky downward - as I described in 2005 post: "[R]eal estate prices display strong persistence and are sticky downward. Sellers tend to want a price close to recent sales in their neighborhood, and buyers, sensing prices are declining, will wait for even lower prices.

This means real estate markets do not clear immediately, and what we usually observe is a drop in transaction volumes."

This doesn't mean prices are stuck - just sticky. Prices have been falling in most areas for three years, and will probably fall further.

And this brings us back to the DataQuick article. Just because demand is picking up a little, doesn't mean prices have bottomed. Note: Ignore the median price in the article - that is rising because of the change in mix.

Assume the following diagram shows the current housing market supply and demand. With the current supply and demand curves, and a perfect market, prices would be at P₀ and quantity Q₀. However prices were actually at P₁.

Note that demand doesn't fall to zero just because the price is above the market clearing price.

Now prices have fallen from P₁ to P₂.

Click on graph for larger image in new window.

This has increased the demand from Q₁ to Q₂.

I've drawn the diagram to show P₂ is still above P₀ (typo fixed). Naturally the current buyers think "prices have bottomed out", but they haven't for the market shown.

There are clues in the DataQuick report that prices are still too high. The volume of sales is still below normal, foreclosure resales are 37.3 percent of the resale market (a very high percentage) - and foreclosure activity "remains near record levels". And the foreclosure resale statistic don't include short sales, and the recent data from Sacramento suggest short sale activity is fairly strong.

There are other reasons to believe prices will fall further, but I just want to point out that the small pickup in demand doesn't suggest a price bottom.

by Calculated Risk on 7/16/2009 08:56:00 PM

From Forbes: Bank Earnings: Beauty Is Skin-Deep (ht Brett)

The banking industry is bracing for continued losses from consumer loans, considering the rising unemployment rate, and an expected wave of commercial real-estate losses. At a Senate Banking Committee hearing in Washington on Thursday, Sen. Jim Bunning, R-Ky., related a comment to him by Federal Deposit Insurance Corp. Chairman Sheila Bair that another 500 banks could fail "unless something dramatic happens."

Note that this is Bunning's recollection of a discussion with FDIC Chairman Sheila Bair - so this might not be exactly what Bair said.

UPDATE: FDIC spokesman, Andrew Gray, disputed Bunning’s recollection (ht we will not monetize):

“In both public and private settings, the chairman and the FDIC is always careful to not make predictions on the number of upcoming bank failures,” Gray said in an e-mail. “No estimate” was given during the meeting, which took place last week, Gray said.

“We would regret any miscommunication, but she did not say that,” Gray added.