by Calculated Risk on 10/15/2009 01:21:00 PM

From HotelNewsNow.com: New Orleans leads increases in STR weekly numbers

Overall, in year-over-year measurements, the industry’s occupancy fell 5.4 percent to end the week at 59.8 percent. ADR dropped 7.0 percent to finish the week at US$99.21. RevPAR for the week decreased 12.0 percent to finish at US$59.28.

Click on graph for larger image in new window.

This graph shows the occupancy rate by week for each of the last four year (2006 through 2009 labeled by start of month).

This shows the distinct seasonal pattern, with occupancy higher in the summer (because of leisure travel), and lower on certain holidays. This also shows that hotels are in two year occupancy slump. The year-over-year comparisons are easier now since business travel fell off a cliff last October. Comparing to the same week two years ago, occupancy rates are off over 12%.

Notes: the scale doesn't start at zero to better show the change. Data Source: Smith Travel Research, Courtesy of HotelNewsNow.com. Thanksgiving was late in 2008, so the dip doesn't line up with the previous years.

And more on business travel:

First, from MarketWatch on business travel: Southwest Airlines CEO: the worst is not behind us

Chief Executive Gary Kelly said Thursday that the worst was not yet behind the low-cost carrier because of higher energy prices and the lack of business travel.

“We have significant demand at our discounted pricing levels. We have very weak demand at our full-fare levels.”
Southwest Airlines CEO Gary Kelly, Oct 15, 2009

by Calculated Risk on 10/15/2009 11:25:00 AM

Both the Philly Fed Index and NY Fed index were positive today on manufacturing conditions in those regions ...

Here is the Philadelphia Fed Index released today: Business Outlook Survey.

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, fell from a reading of 14.1 in September to 11.5 this month. The index has now remained positive for three consecutive months following a nearly continuous string of negative readings since the beginning of the recession in December 2007.
...
Labor market conditions remain weak, although there are signs that widespread declines have moderated considerably. The current employment index, although still negative, increased eight points, from ‐14.3 to ‐6.8, its highest reading since September 2008.

Click on graph for larger image in new window.

This graph shows the Philly index for the last 40 years.

The index has been positive for three months now, after being negative for 19 of the previous 20 months. Employment is still weak.

From the NY Fed: Empire State Manufacturing Survey

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers improved significantly in October. The general business conditions index climbed 16 points to 34.6, its highest level in five years. The new orders index rose 11 points, and the shipments index shot up 30 points, to 35.1. Both employment indexes were positive for the first time in more than a year.

And a two miscellaneous stories:

From Reuters: Capital One credit card defaults rise in September

... Capital One said the annualized net charge-off rate ... for U.S. credit cards had risen to 9.77 percent in September from 9.32 percent in August.

From the Sacramento Bee: California Senate approves $10,000 tax credit for new-home buyers (ht Brad)

The Senate voted 35-1 to reauthorize the use of $30 million in credits ... That should allow the state to give tax credits to about 4,300 more buyers of new unoccupied homes ... Eligible buyers would get a maximum of $3,333 in credits for each of the next three years.

by Calculated Risk on 10/15/2009 09:20:00 AM

From RealtyTrac: U.S. Foreclosure Activity Increases 5 Percent in Q3

RealtyTrac® ... today released its U.S. Foreclosure Market Report™ for Q3 2009, which shows that foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on 937,840 properties in the third quarter, a 5 percent increase from the previous quarter and an increase of nearly 23 percent from Q3 2008. One in every 136 U.S. housing units received a foreclosure filing during the quarter — the highest quarterly foreclosure rate since RealtyTrac began issuing its report in the first quarter of 2005.

Foreclosure filings were reported on 343,638 properties in September, a 4 percent decrease from the previous month but a 29 percent increase from September 2008. Despite the monthly decrease, September’s total was still the third highest monthly total since the RealtyTrac report began in January 2005, behind only July and August of this year.

“Bank repossessions, or REOs, jumped 21 percent from the second quarter to the third quarter, corresponding to jumps in defaults and scheduled auctions in the previous two quarters,” said James J. Saccacio, chief executive officer of RealtyTrac. “REO activity increased from the previous quarter in all but two states and the District of Columbia, indicating that lenders may be starting to work through some of the pent-up foreclosure inventory caused by legislative delays, loan modification efforts and high volumes of distressed properties.”

by Calculated Risk on 10/15/2009 09:01:00 AM

From the BLS: Consumer Price Index Summary

On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers (CPI-U) rose 0.2 percent in September, the Bureau of Labor Statistics reported today. The increase was less than the 0.4 percent rise in August. The index has decreased 1.3 percent over the last 12 months on a not seasonally adjusted basis.

And on rents:

The increase occurred despite declines in the indexes for rent and owners' equivalent rent, the first decreases in those indexes since 1992.

The decrease in OER was at an annual rate of 1.7%. And rents will continue to fall for some time.

Also, it is now official, there will be no increase in Social Security benefits next year (see: Social Security: No Increase to 2010 Benefits or Maximum Contribution Base)

by Calculated Risk on 10/15/2009 08:30:00 AM

The DOL reports weekly unemployment insurance claims decreased to 514,000:

In the week ending Oct. 10, the advance figure for seasonally adjusted initial claims was 514,000, a decrease of 10,000 from the previous week's revised figure of 524,000. The 4-week moving average was 531,500, a decrease of 9,000 from the previous week's revised average of 540,500.
...
The advance number for seasonally adjusted insured unemployment during the week ending Oct. 3 was 5,992,000, a decrease of 75,000 from the preceding week's revised level of 6,067,000.

Click on graph for larger image in new window.

This graph shows the 4-week moving average of weekly claims since 1971.

The four-week average of weekly unemployment claims decreased this week by 9,000 to 531,500, and is now 127,250 below the peak in April.

Initial weekly claims have peaked for this cycle. The key question is: Will claims continue to decline sharply, like following the recessions in the '70s and '80s, or will claims plateau for some time at an elevated level, as happened during the jobless recoveries in the early '90s and '00s?

The level is still high - indicating continuing job losses - and the four-week average of initial weekly claims will probably have to fall below 400,000 before total employment stops falling.

by Calculated Risk on 10/14/2009 09:54:00 PM

From Austin Kilgore at Housing Wire: Chances Are, Most HAMP Mods Won’t Work: Amherst

The Making Home Affordable Modification Program (HAMP) adds another layer of uncertainty for private label securitization investors, making it more difficult to predict cash flows, according to a report by analysts at Amherst Securities Group, who added they expect relatively few HAMP workouts to be successful.

Additionally, it’s taking longer for bad mortgages to move from last payment to liquidation, and the pace varies by servicer: “The trial modification period essentially holds the loan in a suspended state for 90 days, making it difficult to assess what is happening with modifications,” the report said ...

While HAMP workouts are keeping the pools of real estate owned (REO) property relatively small, Amherst predicts a low percentage of eventual success of HAMP modifications is inevitable.
emphasis added

A few comments:

The trial period has been extended for an additional 60 days - so make it suspended animation for 150 days! See One Company Responsible For Nearly Half Of All Permanent Mortgage Modifications

Treasury and COP note that many of those temporary modifications may be in process of getting paperwork submitted in order for them to achieve permanent status. Treasury granted a two-month extension -- on top of the three-month trial -- for borrowers and servicers to get their documentation ready.

Much depends on the success of HAMP. If many of these modifications don't become permanent there will be another flood of foreclosures on the market. BofA has already promised a "spike" in foreclosure at the end of this year, see: Delayed Foreclosures Stalk Market

We are going to see a spike from now to the end of the year in foreclosures as we take people out of the running" for a loan modification or other alternatives, says a Bank of America Corp. spokeswoman.

In many areas the "the pools of real estate owned (REO) property" has all but dried up. The HAMP program is restricting supply.

Note: On the demand side, the first-time homebuyer tax credit combined with loose FHA underwriting, is boosting demand. Restricted supply and more demand has created a buying frenzy and pushed up prices in some low end areas.

by Calculated Risk on 10/14/2009 06:20:00 PM

The real estate market has gone crazy. At the low end we've been seeing many offers per house for some time, and recently agents have been telling me there is almost no inventory. Jim the Realtor has been reporting on this in San Diego, see: Hot All Over and The “Euphoria Express”

And from Diana Olick at CNBC today: Lunacy in Las Vegas Housing (ht Larry)

Olick include an email from a real estate agent to a client "Katie":

- This market is crazy and many things are just not going to make any sense.
...
- Properties are selling in the blink of an eye.

- Properties are getting multiple offers within a few days of being on the market, the most offers I’ve heard a house had recently was 44 offers (I know, crazy).
...
- 40% of all transactions are cash purchases, which makes it harder for the buyers who are financing to get their offers accepted.

- We have 1/2 the inventory we had a year ago and 4 times as many buyers as we did a year ago.

And more ...

It definitely seems crazy.

by Calculated Risk on 10/14/2009 04:00:00 PM

From March 29, 1999: A CNBC Promo ...

Click on graph for larger image in new window.

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 10/14/2009 02:00:00 PM

There are several key points here:

The pace of economic growth in 2009 and 2010 "was unlikely to reduce the unemployment rate appreciably".

There are different views on future asset purchases, although they agreed to remain "flexible" and will expand the asset purchase programs "should the economic outlook deteriorate".

There is "considerable uncertainty" about economic growth once government "supports were withdrawn or their effects waned".

Here are the September FOMC minutes. Committee Policy Action:

With respect to the large-scale asset purchase programs, some members thought that an increase in the maximum amount of the Committee's purchases of agency MBS could help to reduce economic slack more quickly than in the baseline outlook. Another member believed that the recent improvement in the economic outlook could warrant a reduction in the Committee's maximum purchases. ... Members discussed the importance of maintaining flexibility to expand the asset purchase programs should the economic outlook deteriorate or to scale back the programs should economic and financial conditions improve more than anticipated.
emphasis added

Economic outlook:

In their discussion of the economic situation and outlook, meeting participants agreed that the incoming data and information received from business contacts suggested that economic activity had picked up following its severe downturn; most thought an economic recovery was under way. Many participants noted that since August, they had revised up their projections for the second half of 2009 and for subsequent years. A number of factors were expected to support growth over the next few quarters: Activity in the housing sector was evidently rising, and house prices had apparently stabilized or even increased; ; reports from business contacts and regional surveys were consumer spending seemed to be in the process of leveling outconsistent with firms making progress in bringing inventories into better alignment with sales and with production stabilizing or beginning to rise in many sectors; the outlook for growth abroad had also improved, auguring well for U.S. exports; and financial market conditions had continued to improve over the past several months. Despite these positive factors, many participants noted that the economic recovery was likely to be quite restrained. Credit from banks remained difficult to obtain and costly for many borrowers; these conditions were expected to improve only gradually. In light of recent experience, consumers were likely to be cautious in spending, and business contacts indicated that their firms would also be cautious in hiring and investing even as demand for their products picked up. Some of the recent gains in activity probably reflected government policy support, and participants expressed considerable uncertainty about the likely strength of the upturn once those supports were withdrawn or their effects waned. Overall, the economy was projected to expand over the remainder of 2009 and during 2010, but at a pace that was unlikely to reduce the unemployment rate appreciably. Subsequently, as the housing market picked up further and financial conditions improved, economic growth was expected to strengthen, leading to more-substantial increases in resource utilization over time.

by Calculated Risk on 10/14/2009 12:23:00 PM

The WSJ has an article today on Stuy Town: An Apartment Complex Teeters

One of the biggest, most high-profile deals of the commercial real-estate boom is in danger of imminent default ... signaling the beginning of what is expected to be a wave of commercial-property failures.

According to Lingling Wei and Craig Karmin at the WSJ the interest reserve could be depleted by the end of the year, and that could put the property in default.

According to Realpoint, the property is worth less than 40% of the $5.4 billion purchase price.

Here is a September article from the NY Times: Buyers of Huge Manhattan Complex Face Default Risk

Tishman Speyer and BlackRock spent $6.3 billion — the $5.4 billion purchase price and the creation of four reserve funds totaling $890 million — to buy Stuyvesant Town and Peter Cooper Village from the original owner, Metropolitan Life.
...
At Stuyvesant Town, there is a $3 billion first mortgage, or commercial mortgage-backed security, and a $1.4 billion second loan held by SL Green and others.

Finally, there is $1.9 billion in equity put up by Tishman Speyer, BlackRock and their investors.

The equity and the second loan will probably be wiped out.

by Calculated Risk on 10/14/2009 10:10:00 AM

Update: see bottom of post for Q&A.

"While we seeing some initial signs of consumer credit stability, we are not certain that this trend will continue."
JPMorgan CEO Jamie Dimon, Oct 14, 2009

A few excerpts (ht Brian):

JPM:

“We continue to see initial signs of stability in the consumer, early bucket delinquency trends, but we are not ready to declare that's a sustained trend but it is continuing to be what we actually observe. Another overall comment is that as far as the impact of foreclosures moratorium, the trial mods which have been very active in doing, and just the overall extension of processing of REO through the courts, those things are obviously having an affect on overall delinquency and stats but we are doing everything we can to stay on top of the income statement taking recognizing losses through charge offs and adding to reserves without regard for the impact that those factors would be causing in the overall delinquency.

Looking ahead to what we see, we are not changing any of these numbers [loss estimatse by loan category] and obviously whether we advance to these levels is going to be a function of whether some of the early bucket delinquency trends that we described continue or not. But we measure impairment at sub portfolio levels for purposes of accounting impairments, and so as we look at the prime portfolio, not option arms just the prime mortgage portfolio, we see some weakness. We obviously measure that in terms of expected lifetime losses on that portfolio, and have added $1.1 billion, that is put on the books in the form of a loan loss reserve as opposed to an incremental mark.

Brian notes that these comments about prime loans relate to the purchased WaMu portfolio, and that this charge is over and above the $30B write down they took at the time of the acquisition.

This table on Card Services (Managed) is from the JPMorgan investor presentation.

Click on table for larger image in new window.

The net charge-off rate rose to 9.41% in Q3, and JPM expects charge offs to hit 11% on the non-Wamu portfolio in Q1, Wamu losses could approach 24%!

Credit card losses tend to track unemployment, so the charge-off rate will probably stay elevated for some time.

Update from the Q&A:

Analyst: Loans were down about 5% linked quarter 16% year-over-year. Is that supply or demand, what are some of the ins and outs there?

JPM: Consumer portfolios, you have run off portfolios from Washington mutual and in retail, some tightening of underwriting standards in those businesses generally. So expect that at the origination levels, that for a period of time here, we are going to have downward pressure on those balances. We're in the business of making loans against our underwriting standards today. So it is active supply, meeting demand on that score. On the commercial side, you have seen it a little further down this quarter, and that is you know more, it is a little bit of everything but it is more demand clearly because we see extended credit lines utilized at the lowest levels of all time. You can see a swing in those numbers as soon as confidence returns in our commercial clients and they have some use for that money.

On the housing market:

Analyst: Would you comment on California housing market?

JPM: In the major MSAs you have seen a stabilization in fact an increase in the last couple of months, call it stabilization of home prices. That was more true for lower priced than higher priced but also happens in places where price is down dramatically, and obviously parts of Florida are still bad, parts of California we are seeing some improvement. We see that improvement in areas with a high percent of sales from forecloses and also in areas where foreclosure sales aren't as high of a percent. So I would agree with you there's a lot of distortion in that number but all things being equal it is a good fact not a bad fact.

Comment on delinquency trends and the denominator effect:

Analyst: I was hoping just to flush out some comments with respect to delinquency trends in home lending, can you talk to stabilization on Slide 17 on, in the slide deck, it looks like all of those lines are going up and it can be the discrepancy between percentage, delinquencies, come down maybe you can talk to that

JPM: Clearly on the overall 30 plus you get the distortion. I won't try to take that number down too much. You see those, in percentage terms on 17 you do see those affects rolling through. On a dollar basis it is stabilization that we are seeing across those portfolios and again it is portfolios [denominator] coming down.

On the economy

Analyst: As we look at the overall numbers they can be confusing as to the economic outlook but as you get the data kind of first-hand from people that are running the businesses that are dealing with small business, mid size and consumer, what does it tell you about the economic outlook?

JPM: You actually all see pretty much what we see, and there seems to be in the environment, in terms of consumer spending, confidence, in terms of delinquencies a little bit of improvement, and in home price. Those are actual data, and you know that can be forming the base of a recovery or not but we are not going to spend a lot of time guessing about that. The only thing anecdotally is that business, small business, middle market, large corporate, they kind of poised and waiting to see if the recovery is taking hold, they have growth plans, to me it would be a good sign if that's true because maybe, you know, people get a little more comfortable taking risks and making more investments in the future.”

On mortgage mods

Analyst: The mortgage mod, can you tell us has the process smoothed at this point? What the pipeline looks like and how long do you think its going be to get that pipeline fulfilled.

JPM: Growing pains in these processes. So we have been active. One thing it is just still early to see how effective people are in making their payments which is obviously one important thing but the other issue there is just people complying with all of the terms of what is required under the Governments guidelines in terms of amount, types of documentation before it can be declared [permanent]. So there's still I would call it growing pains in the process a little early to say it has stabilized and worked through. A lot of energy going into it adding a lot of people to it, ourselves and across the industry.

Analyst: Do you see this as something that's going to be permanent in the business, is this a pressure that will go away or is this something you guys have to live with to some degree or another permanently?

JPM (Dimon): The right way to look at it is it is so large the problem in housing today we certainly hope there’s nothing like this ever again. We have always had work out the department, the REO department, and it is just a prime delinquency that is ten times what you would have are expected, ten times expect in almost any environment. So it will come down to a much more normal thing eventually and you will have delinquency and charge offs and foreclosure that are just much smaller than they are today. It will never be this, probably never be this big again in our lifetime.

by Calculated Risk on 10/14/2009 08:30:00 AM

On a monthly basis, retail sales decreased 1.5% from August to September (seasonally adjusted), and sales are off 5.7% from September 2008 (retail ex food services decreased 6.4%).

Excluding motor vehicles, retail sales were up 0.5%.

Click on graph for larger image in new window.

This graph shows real retail sales (adjusted with PCE) since 1992. This is monthly retail sales, seasonally adjusted.

NOTE: The graph doesn't start at zero to better show the change.

This shows that retail sales fell off a cliff in late 2008, and appear to have bottomed, but at a much lower level.

The second graph shows the year-over-year change in nominal and real retail sales since 1993.

To calculate the real change, the core PCI price index from the BLS was used (August prices were estimated as the average increase over the previous 3 months).

Real retail sales (ex food services) declined by 7.9% on a YoY basis.

Here is the Census Bureau report:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for September, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $344.7 billion, a decrease of 1.5 percent (±0.5%) from the previous month and 5.7 percent (±0.7%) below September 2008. Total sales for the July through September 2009 period were down 6.6 percent (±0.3%) from the same period a year ago. The July to August 2009 percent change was revised from +2.7 percent (±0.5%) to +2.2 percent (±0.2%).

The large decrease in retail sales was because of the end of Cash-for-clunkers in August. Excluding autos, retail sales increased in September, but are still far below year ago levels.

by Calculated Risk on 10/13/2009 10:58:00 PM

From Steven Pearlstein at the WaPo: Don't Reinflate the Old Bubbles

What we're witnessing here is pretty simple: another bubble in financial assets. All that "liquidity" created by the Federal Reserve and other central banks has accomplished its task and prevented a global financial meltdown. ...

Many analysts now look at the economy and conclude that unemployment is still way too high and the threat of inflation still way too low for the Fed to even think about beginning to raise interest rates again. ...

The right policy response is for the Fed to begin withdrawing some of this extraordinary monetary stimulus even as the rest of the government steps up its effort to stimulate the real economy. That means more money for extended unemployment benefits; more aid to the states so that they can maintain the most vital public services; and more money to expand mass transit, state college and university systems, efficient energy production and basic scientific research. ...

What would surely not be good policy, by the way, is to extend and expand the current tax break for first-time home buyers that is set to expire at the end of the year, as many in Congress are now advocating.

It is tricky to balance monetary and fiscal policy. It appears the next stimulus package will include an extension to the inefficient first-time home buyer tax credit, and will not include some of the items Pearlstein suggests.

by Calculated Risk on 10/13/2009 07:54:00 PM

“You can’t modify someone if they don’t have income or a job. We have to be realistic going forward. If we are going to play a numbers game, we are going to see a smaller percentage of borrowers in default able to be modified. It’s an unfortunate and difficult fact we are going to have to face.”
John Courson, president and CEO of the MBA, Oct 13, 2009.

Quote from Denver Business Journal: MBA: Creative efforts needed to deal with foreclosures

Maybe those NINJA loans weren't such a good idea either? (No income, no job and no assets)

The MBA also released their economic forecast for 2010: MBA Expects Economic Growth to Slow in First Half of 2010 Before Picking Up in Second Half, Originations Volume to Hit $1.5 Trillion

MBA expects economic growth to continue through the rest of 2009 before slowing in the first half of 2010. Unemployment is expected to climb to 10.2 percent by the middle of 2010 before beginning to moderate as economic growth resumes sustained growth in the second half of the year.

Although I think this is optimistic, it does highlight a key point.

The key drivers of positive growth in the second half of 2009 are inventory restocking, growth in residential investment (some increase in single family starts from the very depressed levels earlier this year), exports, and the fiscal stimulus.

The impact of the fiscal stimulus will wane in early 2010 (the stimulus won't add to GDP because it is at the peak level right about now, and will act as a drag later in 2010 as the American Recovery and Reinvestment Act starts to wind down).

Inventory restocking is transitory, and without an increase in end demand, inventory investment will slow.

And any growth in residential investment will probably be sluggish, as Fed Vice Chairman Kohn noted today.

I guess that leaves exports ... but I suspect any growth in early 2010 will be very sluggish.

by Calculated Risk on 10/13/2009 04:12:00 PM

Fed Vice Chairman Donald Kohn spoke at the National Association for Business Economics conference in St. Louis, Missouri today: The Economic Outlook

Kohn outlines why he expects a moderate recovery (not V-shaped), and why he believes the risks to inflation are on the downside ...

A few excerpts:

All told, I expect that the recovery in U.S. economic activity will proceed at a moderate pace in the second half of this year before strengthening some in 2010. As we move into and through next year, inventory investment is likely to play a smaller role in supporting the growth of output, and aggregate activity should increasingly be propelled by stronger gains in final demand ...

[W]hy do I expect a gradual strengthening of economic activity? The fiscal stimulus program enacted earlier this year is likely playing a role, and it will continue to do so for a while as the states spend their stimulus funds to pay for infrastructure projects, hire more teachers, and finance other types of spending. But what will support economic activity as fiscal stimulus wanes?

Most importantly, support for private demand should come from a continuation of the improvements we've seen lately in overall financial conditions. Low market interest rates should continue to induce savers to diversify into riskier assets, which would contribute to a further reversal in the flight to liquidity and safety that has characterized the past few years. As the economy improves and credit losses become easier to size, banks will be able to build capital from earnings and outside investors, making them more able and willing to extend credit--in effect, allowing the low market interest rates to show through to the cost of capital for more borrowers. A more stable economic environment and greater availability of credit should contribute to the restoration of business and household confidence, further spurring spending.

An encouraging aspect of the improvement in economic and financial conditions in recent months has been the firming in house prices that I mentioned earlier. House prices can affect economic activity through several channels. One channel is through the influence of house prices on the net worth of households and, thereby, on consumer spending. Another channel is through the effect of anticipated capital gains or losses from investing in residential real estate on the demand for housing. Finally, greater stability in house prices should help reduce the uncertainty about the value of mortgages and mortgage-related securities held on the balance sheets of banks and other financial institutions, which should have a positive effect on their willingness to lend. This circumstance should nourish a constructive feedback loop between the financial sector and the real activity.

Given this possibility, another reasonable question might be, Why do I expect the economic recovery to be so moderate? To be sure, many times in the past, a deep recession has been followed by a sharp recovery. But, for a number of reasons, I don't think a V-shaped recovery is the most likely outcome this time around. First, although financial conditions are improving and market interest rates are very low, credit remains tight for many borrowers. In particular, the supply of bank credit remains very tight, and many securitization markets that do not enjoy support from the Federal Reserve or other government agencies are still impaired. Consumers as well as small and medium-sized businesses are especially feeling the effects of constraints on credit availability. Banks are still rebuilding their capital positions, and their lending will be held back by the need to work through the embedded losses in their portfolios of consumer and commercial real estate loans. Over time, as I already have noted, bank balance sheets should improve, and the supply of bank credit should ease. But the financial headwinds are likely to abate slowly, restraining the economic recovery.

In addition, I do not anticipate that the recovery in homebuilding will exhibit its typical cyclical pattern. Even though the decline in residential construction began well in advance of the overall contraction in real activity, the sector continues to have an oversupply of vacant homes. To be sure, by August, the inventory of unsold, newly built single-family houses had fallen appreciably from its peak level in the summer of 2006. Nonetheless, when compared with still low levels of sales, the supply of new houses remains elevated. In addition, the overhang of vacant houses on the market for existing homesis sizable, and the pace of foreclosures is likely to remain very elevated for a while, which should further add to that overhang. Thus, even with affordability quite favorable and house price expectations brighter, I anticipate a relatively subdued pickup in housing starts over the coming year.

In the business sector, the extraordinary amount of excess capacity is likely to be another factor tempering the rate of recovery. In manufacturing, the utilization rate currently is below 67 percent--noticeably less than the low points reached in prior post-World War II recessions. I expect that the wide margin of unused capacity, combined with the tight credit conditions faced by firms that have to rely primarily on bank lending, will lead many businesses to be quite cautious about the pace at which they increase their capital spending.

In part, the gradual pace I expect in the recovery of the economy toward full employment reflects the process of shifting the composition of aggregate demand and the way it is financed in response to the events of the past few years. In particular, consumers probably will do more saving out of their income, reflecting the likelihood that household net worth will be lower relative to income than over the past decade or so and that credit, appropriately, will be somewhat less available than during the boom that preceded the crisis. In addition, housing is almost certainly going to be a smaller part of the economy than it was earlier in this decade, as financial institutions maintain tighter underwriting standards that also more adequately reflect underlying risks. Such an increase in private saving propensities and a reduced demand for residential capital should prompt movements in relative prices and other factors that will, in turn, make room for a larger role for business investment and net exports in overall economic activity.

The transition to full employment and the complete emergence of this new configuration will take time, in part because the rebalancing of the economy involves repairs to balance sheets, the movement of capital and labor across sectors of the economy, and shifts in the global pattern of production and consumption--adjustments that are likely to be gradual under any conditions. Current circumstances, however, may slow the re-equilibration process more than might otherwise be the case because of the essential role of changes in the relative cost of finance in the adjustment process. But with the nominal federal funds rate essentially constrained at zero, and spreads in markets already having narrowed, reductions in the effective cost of capital will mainly take place as conditions at financial institutions improve and lenders ease borrowing standards, which as I have already discussed I expect to happen gradually.

As noted earlier, I expect that inflation will likely be subdued, and that, for a while, the risk of further declines in underlying rates of inflation will be greater than the risk of increases. That outlook rests importantly on two judgments: First, that the economy will be producing well below its potential for some time, which will directly restrain production costs and profit margins; and second, that inflation expectations are more likely to fall than rise over time as the level of real activity remains persistently less than its potential and actual inflation remains low.
...
But it's not the current level of inflation or of output that figure into our policy decisions directly--rather, it is the expected level some quarters out, after the lags in the effects of policy actions have worked themselves out. In that regard, the projection of only a gradual strengthening of demand and subdued inflation imply that that these gaps--of inflation and output below our objectives--are likely to persist for quite some time. In these circumstances, at its last meeting, the FOMC was of the view that economic conditions were likely to warrant unusually low levels of interest rates for an extended period.
emphasis added

by Calculated Risk on 10/13/2009 03:15:00 PM

From an article by Jody Shenn and Dawn Kopecki on Bloomberg: JPMorgan Pitches Interest-Only Mortgages to Boost Obama Plan

Banks will push the Obama administration to expand its mortgage-modification program to allow interest-only periods on reworked loans ... while recognizing concern that it may only postpone defaults, according to JPMorgan Chase & Co.

“We’re working with our peers to develop a proposal to present,” Douglas Potolsky, a senior vice president at JPMorgan’s Chase home-loan unit, said yesterday at a Mortgage Bankers Association conference in San Diego.

This is simply more extend and pretend, and only postpones defaults.

The article also has some comments from Laurie Anne Maggiano, director of the Treasury’s policy office for homeownership preservation. Maggiano acknowleges that only "a couple thousand" modification are now permanent, and she notes that the trial period has been extended an extra two months (I guess a disappointing number of trial modifications are becoming permanent).

The key numbers to track going forward will be the number of permanent modificatons, and the redefault rate for permanent modifications. So far it is "a couple thousand" and too early to say.

The article also quotes Maggiano on the short sale initiative that should be announced next week. Housing Wire has more: Treasury to Announce New Program to Avoid Foreclosure

The Chief of the Homeowner Preservation Office at the Treasury, Laurie Maggiano, released information on the Home Affordable Foreclosure Alternatives (HAFA) while speaking at the MBA’s 96th Annual Convention going on in San Diego. The official launch is expected in the next week or so.
...
Maggiano adds that HAFA will offer financial incentives to both servicers and borrowers, and associated secondary investors, in order to facilitate a short sale or deed in lieu of the property.

by Calculated Risk on 10/13/2009 01:23:00 PM

From DataQuick: Southern California home sales inch up; median price steady

Last month 21,539 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties. That was up 0.2 percent from 21,502 in August and up 5.1 percent from 20,497 a year earlier, according to MDA DataQuick of San Diego.

September marked the 15th month in a row with a year-over-year sales gain, although last month’s was the smallest of those increases. ... The small uptick in September sales from August was atypical. On average, sales have fallen 9.5 percent between those two months.
...
“There were more than just normal, seasonal forces at work in these September sales numbers. More attempts at short sales, which typically take longer, and new appraisal rules no doubt delayed some deals this summer, causing them to close in September rather than August. September probably also got a boost from people opting to buy sooner rather than later to take advantage of the federal tax credit for first-time buyers, which is set to expire next month,” said John Walsh, MDA DataQuick president.
...
Foreclosure resales – houses and condos sold in September that had been foreclosed on at some point in the prior 12 months – made up 40.4 percent of all Southland homes resold last month. That was down slightly from a revised 41.7 percent foreclosure resales in August and down from a high of 56.7 percent in February this year.
...
A common form of financing used by first-time buyers in more affordable neighborhoods remained near record levels. Government-insured FHA mortgages made up 36.4 percent of all home purchase loans last month ...

Foreclosure activity remains high by historical standards.
emphasis added

Although DataQuick doesn't track short sales, we can estimate from the Sacramento data that another 15% or so of sales in SoCal were short sales - so probably over half the sales are distressed.

This report suggests sales were strong in September - similar to other regional reports.

We will probably see a decrease in year-over-year sales soon, as the first-time homebuyer tax credit buying frenzy subsides later this year.

by Calculated Risk on 10/13/2009 11:18:00 AM

Voit released Q3 quarterly reports today for CRE in Las Vegas, San Diego and Orange County.

The reports show the vacancy rates are up and lease rates falling. It also shows new construction has slowed sharply. Here are a couple of graphs for Orange County and San Diego. We are seeing a similar pattern nationwide ...


Click on graph for larger image in new window.

This graph shows the annual Orange County office vacancy rate and new construction since 1988. See Voit report for more.

Note that in the previous slumps, office construction didn't pick up until the vacancy rate dropped below 10%.

From the Voit report:

Net absorption for the county posted a negative 438,803 square feet for the third quarter of 2009, giving the office market a total of 1.92 million square feet of negative absorption for the year.
...
The average asking Full Service Gross (FSG) lease rate per month per foot in Orange County is currently $2.24, which is a 16.73% decrease over last year’s rate of $2.69 and five cents lower than last quarter’s rate.
...
Total space under construction checked in at 166,455 square feet at the end of the third quarter, which is less than half the amount that was under construction this same time last year.
emphasis added

The second graph is for San Diego. The dynamics are similar, but absorption is slighly positive in San Diego. From Voit:

Net absorption for the county posted a positive 346,030 square feet for the third quarter of 2009, giving the office market a total of 653,537 square feet of positive absorption for the year.
...
The average asking Full Service Gross (FSG) lease rate per month per foot in San Diego County is currently $2.39, which is a 12.8% decrease over last year’s rate of $2.74 and eight cents lower than last quarter’s rate. The record high rate of $2.76 was established in the first and second quarter of 2008.

Once again, investment in new office space will probably not increase until the vacancy rate is below 10%.

Although Voit didn't provide a similar graph for Las Vegas, the situation is clearly worse:

The amount of occupied space valley-wide fell to 38.2 million, a level not witnessed since the second quarter of 2007. The average vacancy rate reached 22.7 percent, which represented a 0.7-point increase from the preceding quarter (Q2 2009). Compared to the prior year (Q3 2008), vacancies were up 5.7 points from 17.0 percent.
...
On an annualized basis, new supply has dwindled and less than one million square feet of new supply is expected to enter the market during 2009, a figure not seen since 2003. We expect even less development in 2010 with a plug on the development pipe until the supply-demand imbalance corrects itself.

New office construction has slowed significantly in these markets, and will not pick up until vacancy rates drop sharply.

by Calculated Risk on 10/13/2009 08:23:00 AM

From Reuters: CIT debt swap struggles, bankruptcy looms. Reuters is reporting that "sources familiar with the matter" say bondholders are showing little interest in the debt exchange offer and a bankruptcy is now more likely.

Also this morning CIT announced that CEO Jeffrey Peek is resigning effective Dec 31st.

The possible bankruptcy of CIT is a major concern because CIT provides financing for about one million small businesses. And small businesses are already having trouble obtaining credit.

From Peter Goodman in the NY Times: Credit Tightens for Small Businesses

Many small and midsize American businesses are still struggling to secure bank loans, impeding their expansion plans and constraining overall economic growth ...

Most banks expect their lending standards to remain tighter than the levels of the last decade until at least the middle of 2010, according to a survey of senior loan officers conducted by the Federal Reserve Board. ... Bankers worry about the extent of losses on credit card businesses ...[and] are also reckoning with anticipated failures in commercial real estate. Until the scope of these losses is known, many lenders are inclined to hang on to their dollars rather than risk them on loans to businesses in a weak economy ...

Also see: Small Business and Employment

A CIT bankruptcy will probably lead to even tighter credit for many small businesses exacerbating the current credit situation.

by Calculated Risk on 10/12/2009 10:07:00 PM

Usually this would be a "duh", but with some of the Fed talk recently, this is worth noting ...

From Bloomberg: Bullard Says Lower Unemployment Condition to Tighten

...“You want some jobs growth and unemployment coming down. That is a prerequisite” for an increase in interest rates, Bullard said. “It doesn’t mean you need unemployment all the way down to more normal levels.”
...
Bullard, referring to a prior jobless rate of 10.8 percent, said “I don’t think we will quite hit the peak we hit in 1982, but things have surprised us before.”
...
“I’m the north pole of inflation hawks,” Bullard said. “But we are trying to describe optimal policy, some optimal outcomes in an environment where inflation is below target -- we have an implicit target of 1.5 to 2 percent -- and you have the specter of a Japanese-style outcome, which I have worried about and some other members of the FOMC have worried about.”
...
“It is a little disappointing that private-sector economists are thinking so much about when we are going to move our fed funds rate up,” he said. “We are at zero. We are going to be there awhile. The focus should be more on” the Fed’s asset purchase program.

As Paul Krugman noted this weekend, we are a long way from when the Fed will raise rates.