by Calculated Risk on 3/10/2007 04:53:00 PM

Gretchen Morgenson writes in the NY Times: Crisis Looms in Mortgages. This article is a must read. A couple of quotes:

"I think there is no doubt that home sales are going to be weaker than most anybody who was forecasting the market just two months ago thought."
Thomas A. Lawler, founder of Lawler Economic and Housing Consulting, March 10, 2007

I think I was more bearish than most, and even I am considering revising my forecast downwards.

“There are delayed triggers in many of these investment vehicles and that is delaying the recognition of losses. I do think the unwind is just starting. The moment of truth is not yet here.”
Charles Peabody, founder of Portales Partners, an independent research boutique in New York, March 10, 2007

by Calculated Risk on 3/10/2007 02:12:00 PM

From Annette Haddad and E. Scott Reckard at the LA Times: Loan turmoil closes doors for buyers

Many would-be home buyers, and homeowners who want to refinance, are finding that virtually overnight their status has changed: They no longer are eligible for the kind of easy-credit loans that helped millions of people join the ranks of property owners during the housing boom.

This is an excellent summary article of the events of the last few weeks. It does seem like an "overnight change"!

A key concern: whether the problems of sub-prime lenders and borrowers could drag the economy into recession by causing a broader credit crunch.

Many economists, as well as Fed officials, say they don't believe that sub-prime borrowers account for a big enough share of the housing market to have a dramatic effect on the economy.

First, the problems in the sub-prime segment alone could be large enough to significantly impact the economy. As the LA Times article noted, 21.5% of all mortgages in 2006 were sub-prime. Some estimates are that about one fourth of all sub-prime borrowers will be locked out the market in 2007. That would represent 300K or more potential home buyers.

And the problem is much worse because of the dynamics of the housing market. Each first time home buyer (and many sub-prime borrowers are first time buyers) is the start of a mini-chain reaction in the housing market. As an example, when a first time buyer buys a home, the seller buys a move-up home, then that seller buys a larger home, and that seller buys a Toll Brothers' McMansion. The loss of one sub-prime borrower may result in the loss of several sales. The loss of 300K buyers will be in, the words of Bear Stearns' Dale Westhoff, "non-trivial".

And second, the problem is already spreading to Alt-A and will probably impact many prime borrowers - especially the borrowers that used non-traditional mortgages, like option ARMs, as "affordability products".

by Calculated Risk on 3/09/2007 08:15:00 PM

From Reuters (hat tip: Cal): Stricter lending seen barring 1 mln US home buyers

Tougher lending standards stemming from the shakeout in the beleaguered subprime mortgage industry could prevent up to 1.1 million U.S. homebuyers from getting mortgages this year, a Bear Stearns analyst told investors on Friday.

Banks and mortgage companies would sharply scale back lending to two groups: subprime and "Alt-A" borrowers, said Dale Westhoff, Bear Stearns' head of mortgage-backed research.
...
Westhoff estimated a 30 percent, or $180 billion, contraction in the subprime sector in 2007 from 2006, and forecast a 25 percent, or $100 billion, decline in Alt-A loan production from last year.

"This implies a purchase contraction of 1.1 million borrowers," said Westhoff who was speaking at Bear Stearns mortgage conference here. "That's a non-trivial number."

As I've been writing, Wall Street's 2007 housing forecasts are "No longer operative". I'd like to welcome Westhoff to the fold, and I'll write more about this later.

by Calculated Risk on 3/09/2007 08:13:00 PM

From Reuters (hat tip: realist): Countrywide Financial ends no down-payment lending

Countrywide Financial Corp. ... on Friday told its brokers to stop offering borrowers the option of no-money-down home loans ...

by Calculated Risk on 3/09/2007 06:59:00 PM

So far BLS reported residential construction employment has only fallen 4% from the peak in 2006. Meanwhile housing starts have fallen about 35%. What gives?

Click on graph for larger image.

The most important reason employment hasn't decreased significantly - yet - is that employment tracks completions, and completions are still near record levels. This graph shows starts and completions since 1968. Clearly starts have "fallen off a cliff", yet completions are still near record levels. But completions will follow starts off the cliff soon ... and so will residential construction employment.

As a techinical note: historically, on average, completions have followed starts by about 6 months for single family homes according to the Census Bureau, and by about 9 months for buildings with 2 units or more. However because of the increase in building size in recent years, the multi-family buildings are now taking an average of over 11 months from start to completion. Because of the longer period from start to completion, it has taken a little longer this time for completions to follow starts off the cliff.

There are other possible reasons too: In the construction industry there are many cash workers and illegal immigrants. These workers were probably the first to be let go, and they don't show up in the BLS statistics. See this WaPo article: Immigrants' Jobs Vanish With Housing Slowdown

"There's no work here anymore."
Amilcar Guzman, immigrant construction worker from El Salvador, Dec 27, 2006

Another possible reason BLS reported jobs haven't fallen significantly is because some employers might be hoping for a spring rebound in the housing market, and they don't want to lay off valued employees only to have to search for skilled employees in a few months. At my company, we would avoid layoffs during slow periods if we thought a turnaround was only a few months away. So this is another possible explanation.


And finally a possible technical reason based on how the BLS reports employment.

Residential construction employment is very seasonal. This graph shows both the Not Seasonally Adjusted (NSA) and Seasonally Adjusted (SA) residential construction employment from the BLS. Note: the residential specialty series starts in January 2001, so earlier totals were estimated from the residential building series.

This graph shows a key point: the next four months (March through June) are the main months for hiring construction workers. If NSA construction stays flat through the summer, the BLS will report approximately 300K lost residential construction jobs over the next four months. With the excess inventory in the housing market, it is very possible that NSA residential construction employment will actually fall during the peak hiring months!

So I'm sticking with my forecast of 400K to 600K residential construction jobs lost over the first 6 months of 2007.