by Calculated Risk on 8/04/2009 06:32:00 PM

Mostly CRE here ...

by Calculated Risk on 8/04/2009 05:14:00 PM

Dr. Brad Setser, author of the blog "Follow the Money", has taken a new job with the National Economic Council. Unfortunately this means no more blogging for Brad.

Here is an excerpt from Brad's farewell post: All great things have to end

Fundamentally this blog was about an issue – the United States’ trade deficit, the offsetting trade surpluses in other parts of the world and the capital flows that made this sustained “imbalance” possible. Most of my early blog posts argued, in one way or another, that taking on external debt to finance a housing and consumption boom wasn’t the best of ideas. Even if (or especially if) the deficit was financed by governments rather than private markets.

Brad and I have had a number of great discussions over the years, and his blog always provided great information and insight. Brad's work really helped clarify the relationship between the U.S. current account deficit (trade deficit) and the housing bubble.

Brad, congratulations! Thanks for everything, and I wish you all the best at your new job!

by Calculated Risk on 8/04/2009 04:11:00 PM

Brian sent me these comments from Multi-Color Corp. (this company makes labels mostly for consumer product companies: P&G was 19% of Q1 sales and Miller Beer was 13%.)

Multi-Color: “While there is increasing evidence that the worst of the recession may be over, we remain cautious about sales volume for the remainder of the year. While you would expect inventories to be replenished as the economy stabilizes, we have not seen a trend of increasing orders to date.”

Analyst: Just a few questions. The first would be can you talk about the phasing of order flow by month over the course of the quarter? And can you provide any color on how July trended?

Frank Gerace, Multi-Color CEO: Yes, order flow actually was pretty decent during the month of June, better than May, and then as July came in, July began looking more like May, so there was an improvement during June and then it kind of went back to the way it was looking in May. And what we're seeing now is just steady, stable, steady orders, no increases that we can speak of to date.
emphasis added

The end of cliff diving is not the same as green shoots!

by Calculated Risk on 8/04/2009 03:15:00 PM

From D.R. Horton:

D.R. Horton ... today reported a net loss for its third fiscal quarter ended June 30, 2009 of $142.3 million ... The quarterly results included $110.8 million in pre-tax charges to cost of sales for inventory impairments and write-offs of deposits and pre-acquisition costs related to land option contracts that the Company does not intend to pursue. The net loss for the same quarter of fiscal 2008 was $399.3 million ... Homebuilding revenue for the third quarter of fiscal 2009 totaled $914.1 million, compared to $1.4 billion in the same quarter of fiscal 2008. Homes closed totaled 4,240 homes, compared to 6,167 homes in the year ago quarter.
...
Donald R. Horton, Chairman of the Board, said, “Our net sales orders in the June quarter reflected a 22% sequential increase from our March quarter which was stronger than our usual seasonal trend. However, market conditions in the homebuilding industry are still challenging, characterized by rising foreclosures, high inventory levels of available homes, increasing unemployment, tight credit for homebuyers and weak consumer confidence."
...
The Company’s cancellation rate (cancelled sales orders divided by gross sales orders) for the third quarter of fiscal 2009 was 26%.
emphasis added

Horton is the largest homebuilder in the U.S.

The bad news is they are still losing money and sales are way off from last year.

The good news is sales in calendar Q2 (fiscal Q3) were "stronger than [the] usual seasonal trend", and also cancellations are back to early 2006 levels.

The surge in cancellation rates was an important story after the bubble burst because the Census Bureau doesn't correct inventory levels if contracts are cancelled. Now it appears cancellation rates might be returning to more normal levels.

Note: What matters for inventory is the change in cancellation rate from a couple of quarters earlier, not the absolute level. For those interested in how the Census Bureau handles cancellations, see here.

Click on graph for larger image in new window.

This graph shows the cancellation rate for Horton since the top of the housing bubble.

There appears to be a seasonal pattern (fewer cancellations in Q1), so this decline in calendar Q2 is definitely significant.

The cancellation rate could rise again if mortgage rates move higher, but this is a little bit of good news for the builders. These cancellation rates are still above normal (Note: "Normal" for Horton is in the 16% to 20% range, so 26% is still high.), but most of the home builders are reporting the lowest cancellation rates since late 2005 or early 2006.

The really bad news for Horton - and all homebuilders - is that sales will not rebound for the reasons outlined by Mr. Horton above, especially because of the huge overhang of excess inventory. In the low priced areas where inventory is currently low and activity high, most of the homes are selling below replacement cost and the builders can't compete. The big question for the builders is: Can they make money at these sales levels? I think the answer for many of them is no.

by Calculated Risk on 8/04/2009 12:25:00 PM

From the American Bankruptcy Institute: Consumer Bankruptcy Filings Reach Highest Monthly Total Since 2005 Bankruptcy Law Overhaul

U.S. consumer bankruptcy filings reached 126,434 in July, the highest monthly total since the Bankruptcy Abuse Prevention and Consumer Protection Act was implemented in October 2005, according to the American Bankruptcy Institute (ABI), relying on data from the National Bankruptcy Research Center (NBKRC). The July 2009 consumer filing total represented a 34.3 percent increase nationwide from the same period a year ago, and an 8.7 percent increase over the June 2009 consumer filing total of 116,365. Chapter 13 filings constituted 28.3 percent of all consumer cases in July, slightly above the June rate.

"Today's bankruptcy filing number reflects the sustained and growing financial stress on U.S. households," said ABI Executive Director Samuel J. Gerdano. "Rising unemployment on top of high pre-existing debt burdens is a formula for higher bankruptcies through the end of this year."

Click on graph for larger image in new window.

This graph shows the non-business bankruptcy filings by quarter.

Note: Quarterly data from Administrative Office of the U.S. Courts, 2009 based on monthly data from the American Bankruptcy Institute.

The quarterly rate is close to the levels prior to when the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) took effect. There were over 2 million bankruptcies filed in Calendar 2005 ahead of the law change.

There have been 802 thousand personal bankrutpcy filings through July 2009, and the American Bankruptcy Institute is predicting over 1.4 million new bankruptcies by year end - I'll take the over!

by Calculated Risk on 8/04/2009 10:49:00 AM

Note from NMHC: "Market Tightness Index reading above 50 indicates that, on balance, apartment markets around the country are getting tighter; a reading below 50 indicates that market conditions are getting looser; and a reading of 50 indicates that market conditions are unchanged."

So the increase in the index to 20 implies lower occupancy rates and lower rents - "looser" apartment conditions - but at a slower pace of contraction than the previous month.

From the National Multi Housing Council (NMHC): Apartment Market Conditions Stabilizing, But Not Improving, According to NMHC Quarterly Survey

The apartment market continues to struggle, but shows early signs of possibly stabilizing, according to the National Multi Housing Council’s latest Quarterly Survey of Apartment Market Conditions.

All four of the survey's market indexes covering occupancy, sales volume, equity finance and debt finance remained below 50 (indicating conditions were worse than three months ago), but three of the four increased from the last quarter, with only the debt index recording a decline.

“Apartment demand remains tethered to an economy that continues to shed jobs at a fairly rapid pace,” noted NMHC Chief Economist Mark Obrinsky. “Financing is beginning to stabilize, but the market is still a long way from ‘normal’.”

“The survey also suggests that transaction activity is mainly being restrained by uncertainty in apartment property values—whether they have ‘bottomed out’—and not financing constraints. Only when this uncertainty fades are we likely to see a significant upturn in apartment transactions.”

Fears of future property value declines are behind the difficulty apartment firms are having in obtaining equity financing. In a special survey question, 67 percent of respondents said potentially falling property values best explained the lack of equity availability.
...
The Market Tightness Index rose from 16 to 20. This was the eighth straight quarter in which the index has been below 50, but it also the third straight quarter in which the index measure has been rising, as greater shares of respondents are reporting that vacancies are unchanged from the previous quarter rather than even looser.
emphasis added

Click on graph for larger image in new window.

This graph shows the quarterly Apartment Tightness Index.

A reading below 50 suggests vacancies are rising. Based on limited historical data, I think this index will lead reported apartment rents by 6 months to 1 year. Or stated another way, rents will probably fall for 6 months to 1 year after this index reaches 50. Right now I expect rents to continue to decline through most of 2010.

by Calculated Risk on 8/04/2009 10:01:00 AM

From the NAR: Uptrend Continues in Pending Home Sales

The Pending Home Sales Index, a forward-looking indicator based on contracts signed in June, rose 3.6 percent to 94.6 from an upwardly revised reading of 91.3 in May, and is 6.7 percent above June 2008 when it was 88.7.
...
"Activity has been consistently much stronger for lower priced homes,” [Lawrence Yun, NAR chief economist] said. “Because it may take as long as two months to close on a home after signing a contract, first-time buyers must act fairly soon to take advantage of the $8,000 tax credit because they must close on the sale by November 30.”

The increase in pending sales has been mostly from lower priced homes with demand from first time home buyers (taking advantage of the tax credit) and investors. As Yun notes, the demand from first time buyers will probably fade in another month or two.

by Calculated Risk on 8/04/2009 08:31:00 AM

From the BEA: Personal Income and Outlays, June 2009

Personal income decreased $159.8 billion, or 1.3 percent, and disposable personal income (DPI) decreased $143.8 billion, or 1.3percent, in June, according to the Bureau of Economic Analysis.
...
The June change in personal income reflects selected provisions of the American Recovery and Reinvestment Act of 2009, which boosted personal current transfer receipts in May much more than in June. Excluding these receipts ... personal income decreased $7.8 billion, or 0.1 percent, in June, following a decrease of $2.5 billion, or less than 0.1 percent, in May.
...
Real PCE -- PCE adjusted to remove price changes –- decreased 0.1 percent in June, in contrast to an increase of less than 0.1 percent in May.
...
Personal saving -- DPI less personal outlays -- was $504.8 billion in June, compared with $681.0 billion in May. Personal saving as a percentage of disposable personal income was 4.6 percent in June, compared with 6.2 percent in May.

The temporary boost in the May saving numbers due to timing of American Recovery and Reinvestment Act of 2009 stimulus payments was reversed in June.

Click on graph for large image.

This graph shows the saving rate starting in 1959 (using a three month centered average for smoothing) through the June Personal Income report. The saving rate was 4.6% in June. (5.4% with three month average)

Households are saving substantially more than during the last few years (when the saving rate was around 1.0%). The saving rate will probably continue to rise (an aging population usually pushes the saving rate higher) and a rising saving rate will repair household balance sheets, but this will also keep pressure on personal consumption.

The following graph shows real Personal Consumption Expenditures (PCE) through June (2005 dollars). Note that the y-axis doesn't start at zero to better show the change.

The quarterly change in PCE is based on the change from the average in one quarter, compared to the average of the preceding quarter.

The colored rectangles show the quarters, and the blue bars are the real monthly PCE.

PCE declined sharply in Q3 and Q4 2008 - the cliff diving - and has been relatively flat in Q1 and Q2 2009. Auto sales should gave a boost to PCE in Q3, but in general PCE will probably remain weak over the 2nd half of 2009 and into 2010 as households continue to repair their balance sheets.

by Calculated Risk on 8/03/2009 10:30:00 PM

Prices are falling at the high end ...

"Poof, another notch down practically overnight ..."
Jim the Realtor: E-Ranch Balloon

by Calculated Risk on 8/03/2009 07:42:00 PM

The S&P 500 closed above 1000 for the first time since last November.

Click on graph for larger image in new window.

The first graph shows the S&P 500 since 1990.

The dashed line is the closing price today.

The S&P 500 is up 48.2% from the closing bottom (326 points), and off 36% from the peak (563 points below the closing max).

The S&P 500 first hit this level in Feb 1998; over 11 years ago.

The British Bankers' Association reported that the three-month dollar Libor rates were fixed at a new record low of 0.472%. The LIBOR peaked at 4.81875% on Oct 10, 2008.

The A2P2 spread has declined to 0.26. The record (for this cycle) was 5.86 after Thanksgiving, and this is only slightly above the normal spread of around 20 bps.

This is the spread between high and low quality 30 day nonfinancial commercial paper.


Meanwhile the TED spread has decreased further and is now at 29.4. This is the difference between the interbank rate for three month loans and the three month Treasury.

The peak was 463 on Oct 10th and the spread is now in the normal range.

The final graph shows the spread between 30 year Moody's Aaa and Baa rated bonds and the 30 year treasury.

The spread has decreased sharply over the last few months. The spreads are still high, especially for lower rated paper.

The Moody's data is from the St. Louis Fed:

Moody's tries to include bonds with remaining maturities as close as possible to 30 years. Moody's drops bonds if the remaining life falls below 20 years, if the bond is susceptible to redemption, or if the rating changes.

Some of these indicators will be interesting to follow when the Fed eventually unwinds their current positions.

by Calculated Risk on 8/03/2009 04:44:00 PM

From Bloomberg: Banks Urged to Consider Higher Home-Equity Reserves (ht Brian)

U.S. banks may need to boost reserves for potential losses on home-equity loans under guidance issued by the Federal Deposit Insurance Corp. as property prices slump from their peak in 2006.

The regulator, in a letter today to banks and examiners, urged lenders to consider issues such as whether borrowers’ total housing debt exceeds the value of their properties and whether homeowners’ first mortgages have been reworked when determining allowances for losses on the debt.
...
“Failing to properly consider the current effect of more senior liens on the collectibility of an institution’s existing junior lien loans is an inappropriate application” of accounting principles, the FDIC said in the letter.
...
In its letter, the FDIC said “the failure to timely recognize estimated credit losses could delay appropriate loss mitigation activity, such as restructuring junior lien loans to more affordable payments or reducing principal on such loans to facilitate refinancings.”

From the FDIC: Allowances for Loan and Lease Losses in the Current Economic Environment: Loans Secured by Junior Liens on 1-4 Family Residential Properties

The need to consider all significant factors that affect the collectibility of loans is especially important for loans secured by junior liens on 1-4 family residential properties, both closed-end and open-end, in areas where there have been declines in the value of such properties. ...

[D]elaying the recognition of estimated credit losses on junior lien loans secured by 1-4 family residential properties by failing to properly consider the current effect of more senior liens on the collectibility of an institution's existing junior lien loans is an inappropriate application of GAAP. Additional supervisory action may also be warranted based on the magnitude of the deficiencies in this aspect of the institution's [allowance for loan and lease losses] ALLL process. Furthermore, the failure to timely recognize estimated credit losses could delay appropriate loss mitigation activity, such as restructuring junior lien loans to more affordable payments or reducing principal on such loans to facilitate refinancings. Examiners will continue to evaluate the effectiveness of an institution's loss mitigation strategies for loans as part of their assessment of the institution's overall financial condition.

The FDIC wouldn't release a letter unless they felt many banks were delaying the recognition of home-equity losses.

by Calculated Risk on 8/03/2009 04:00:00 PM

Click on graph for larger image in new window.

This graph shows the historical light vehicle sales (seasonally adjusted annual rate) from the BEA (blue) and an estimate for July (red, light vehicle sales of 11.24 million SAAR from AutoData Corp).

This is the highest vehicle sales since September 2008 (12.5 million SAAR).

The second graph shows light vehicle sales since the BEA started keeping data in 1967.

Although sales were boosted by the "Cash-for-clunkers" program, I think sales would have rebounded some anyway. If "Cash-for-clunkers" is extended, then August will probably be over 11 million SAAR too, but I'd expect sales to falter a little later in the year.

by Calculated Risk on 8/03/2009 03:03:00 PM

From Reuters: U.S. raids Colonial Bank office in Florida (ht Jim the Realtor)

Federal agents working with the U.S. Treasury's Troubled Asset Relief Program (TARP) executed search warrants at two Florida banks on Monday and Colonial Bank (CNB.N) said one of them was its office in Orlando.
...
A spokeswoman with the office of the Special Inspector General for the Troubled Asset Relief Program, which buys assets from troubled financial institutions to stabilize the banking industry, would only say that its agents executed two search warrants in Florida on Monday.

Colonial is operating under a Cease & Desist order, and just Friday reported to the SEC: " ... management has concluded that there is substantial doubt about Colonial’s ability to continue as a going concern."

Colonial has about $25.5 billion in assets and would be the largest bank failure this year. No word on the purpose of the raid.

by Calculated Risk on 8/03/2009 01:17:00 PM

From Bloomberg: Mortgage-Bond Rally May End on Housing Reality, Barclays Says (ht James)

While an S&P/Case-Shiller index for May showed the first month-over-month price increase since 2006 and a 2 percent seasonally adjusted annualized drop, a more-accurate reading probably would have been an annualized decline of 10 percent to 15 percent, [Barclays' analysts Ajay Rajadhyaksha and Glenn Boyd] wrote.

... seasonally adjusted home-price data has been skewed higher during the spring months of this year and last year by an “amplified” version of typical patterns, according to the analysts. More homeowners sell their properties during those months, cutting the share of foreclosed homes being offloaded at distressed prices, as new buyers focus on “desirable neighborhoods” where values hold up better, they said.
...
Data reflecting a reversal of the seasonal benefit, as well as “a tide of new foreclosure sales” as a moratorium on the seizing of homes put in place by banks subsides, will lead to “renewed weakness” in the fall, they said.
...
They project that U.S. home prices will fall an additional 11 percent on average before bottoming next year, bringing the total decline to 40 percent from their peak.

This is similar to the argument Mark Hanson made last week (See: Housing Bottom? No, the Mother of All Head Fakes). I think we will see further price declines in the mid-to-high end bubble areas where the prices have still been sticky.

by Calculated Risk on 8/03/2009 11:19:00 AM

From CBS MarketWatch: Ford U.S. July sales rise 2.3%

Ford Motor said Monday that U.S. July sales rose 2.3% to 165,279 vehicles, reversing nearly two years of monthly year-over-year losses.

Ford said the "Cash for Clunkers" program helped July sales (no kidding).

This is the first year-over-year increase reported by Ford since November 2007.

Notes: The auto companies compare sales to the same month of the previous year (so this is compared to July 2008). Auto sales will be released all morning, and I'll post a saesonally adjusted graph when a summary is available.

by Calculated Risk on 8/03/2009 10:21:00 AM

Private residential construction spending increased slightly in June and is now 63.6%% below the peak of early 2006.

Private non-residential construction spending declined in June, but is only off 6.7% below the peak of last September.

Overall construction spending increased with a boost from public spending.

Click on graph for larger image in new window.

The first graph shows private residential and nonresidential construction spending since 1993. Note: nominal dollars, not inflation adjusted.

Residential construction spending increased slightly in June, and nonresidential spending declined a little. From other data (new housing starts), it appears that residential spending has stabilized and might increase in Q3 - however private nonresidential construction will be falling off a cliff.

The second graph shows the year-over-year change for private residential and nonresidential construction spending.

Nonresidential spending is off 4.8% on a year-over-year basis, and will turn strongly negative as projects are completed. Residential construction spending is still declining YoY, although the negative YoY change will get smaller going forward.

As I've noted before, these will probably be two key stories for late 2009: the collapse in private non-residential construction, and the probable bottom for residential construction spending. Both stories are still developing ...

From the Census Bureau: June 2009 Construction at $965.7 Billion Annual Rate

Spending on private construction was at a seasonally adjusted annual rate of $643.9 billion, 0.1 percent (±1.1%)* below the revised May estimate of $644.8 billion. Residential construction was at a seasonally adjusted annual rate of $246.1 billion in June, 0.5 percent (±1.3%)* above the revised May estimate of $244.7 billion. Nonresidential construction was at a seasonally adjusted annual rate of $397.9 billion in June, 0.5 percent (±1.1%)* below the revised May estimate of $400.0 billion.

In June, the estimated seasonally adjusted annual rate of public construction spending was $321.7 billion, 1.0 percent (±2.4%)* above the revised May estimate of $318.5 billion.

by Calculated Risk on 8/03/2009 10:00:00 AM

PMI at 48.9% up from 44.8% in June. Still contracting (below 50) but contracting at a slower pace.

From the Institute for Supply Management: July 2009 Manufacturing ISM Report On Business®

Economic activity in the manufacturing sector failed to grow in July for the 18th consecutive month, while the overall economy grew for the third consecutive month following seven months of decline, say the nation's supply executives in the latest Manufacturing ISM Report On Business®.

The report was issued today by Norbert J. Ore, CPSM, C.P.M., chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. "The decline in manufacturing was slower in July when compared to June, as the more leading components of the PMI — the New Orders and Production Indexes — rose significantly above 50 percent, thus setting an expectation for future growth in the sector. The Employment and Inventories Indexes are still contracting, but the rate is slowing and they are moving in the right direction. It is also worth noting that the New Export Orders Index shows growth following nine consecutive months of decline, suggesting that the global economy is recovering. Overall, it would be difficult to convince many manufacturers that we are on the brink of recovery, but the data suggests that we will see growth in the third quarter if the trends continue."
emphasis added

As noted, any reading below 50 shows contraction, although the pace of contraction has slowed and new orders suggest some growth later this year.

by Calculated Risk on 8/03/2009 08:56:00 AM

From The Times: UK manufacturing 'pulls out of nosedive' in July

British manufacturing grew for the first time in 16 months during July ...

According to the Chartered Institute of Purchasing & Supply (CIPS), the Purchasing Managers Index, which measures activity in the manufacturing sector, rose from a reading of 47.4 to 50.8 between June and July.

It is the first time the measure has risen above 50, the dividing line between contraction and growth, since March 2008.

David Noble, chief executive of CIPS said: "The manufacturing sector has clearly pulled out of the nosedive it was in earlier this year and is no longer plummeting.”

He said customers had cut inventories so severely in the downturn that they were now in need of new stock ...

The end of cliff diving isn't the same as new growth.

In the U.S., the ISM Manufacturing Index for July will be released this morning, and also July vehicle sales - with sales probably above 10 million units SAAR for the first time this year.

Construction spending for June will also be released this morning.

by Calculated Risk on 8/03/2009 12:32:00 AM

From Nick Timiraos and James Hagerty at the WSJ: High-End Homes Frozen Out of Budding Housing Rebound

Housing is fast dividing into two markets: Sales of low- and moderately priced homes are picking up and values have stopped falling in some parts of the nation. But on the upper end, sales remain mired in a deep slump and price declines are expected to accelerate.
...
The divide between the mass market and the high-end -- generally defined as homes that cost above $750,000 -- partly reflects the effects of Washington's housing-rescue plan, which is producing winners and losers.
...
To be sure, the affluent housing market is substantially smaller than the mass market. Sales of existing homes priced over $750,000 accounted for 2.3% of all sales in the first quarter of this year, compared to 4.4% of the housing market in 2007, according to the National Association of Realtors.

But what percentage of the market in 2005?

The low end is doing well because of first time buyers and investor groups buying properties (see previous post). Prices in the mid-to-high end are stickier and will probably decline for some time.

by Calculated Risk on 8/02/2009 08:32:00 PM

From Carolyn Said at the San Francisco Chronicle: Oakland group buying Contra Costa foreclosures (ht Walt, John)

Oakland's McKinley Partners is betting that low-end foreclosed homes in eastern Contra Costa County will double in value in five years.

The real estate development company has formed a $6 million fund to buy bank-owned homes in Antioch, Pittsburg and Bay Point.

It aims to spend about $100,000 per home, including rehab, and rent them out for $1,200 to $1,500 a month. Then it hopes to sell them for $200,000 each in five years.

McKinley is emblematic of a major force currently propelling the real estate market: investors and speculators snapping up foreclosed homes. Along with first-time buyers, they are a primary source of increased sales volume.

I know investor groups doing the same thing, and they pay cash too. As far as these numbers - good luck. The numbers only make sense at the low end, and rents are falling quickly. It is very unlikely the price will double in five years - or even ten years. As the price increases, investors will be selling properties, keeping prices down.

Think of investor owned properties as being in storage, and being removed from storage and sold as the price increases (although this is different than the investors during the bubble because of the positive cash flow).

There are headaches managing low end rental properties too. These will be high maintenance, and finding tenants with decent credit will be difficult.

A few of McKinley's buying guidelines are interesting:

-- It avoids newer homes in cookie-cutter subdivisions. "If they're all around the same vintage of mortgage, then they can all go upside down at the same time," [Gregor Watson, one of four managing partners] said. ...

-- It avoids higher-priced homes. "As the price point gets higher, rents don't cover (costs)," Watson said. ...

-- It's finding that inventory is limited because lenders are sitting on foreclosures. "Banks own 530 homes in this ZIP code (Pittsburg's 94565) but there are only 15 on the market," said [Paul Staley, president of Staley and MacArthur Real Estate Services] "It creates a hyper-competitive situation."

And how about that comment on ZIP code 94565? Only 15 houses on the market, but 530 REOs according to Staley.