by Calculated Risk on 6/12/2009 12:34:00 AM

Update: This is ugly from the Irish Times: Annual deflation rate hits 4.7% (ht Brian)

Prices fell 4.7 per cent in the year to May, the steepest rate since 1933, according to new data from the Central Statistics Office (CSO).

The Consumer Price Index (CPI) fell 4.7 per cent on an annual basis and by 0.5 per cent in the month. This compares to an increase of 0.8 per cent recorded in May 2008.

From Nelson Schwartz at the NY Times: U.S. Recovery Could Outstrip Europe’s Pace

Some private economists are even predicting that the American economy will resume growth in the fourth quarter, while Europe’s economy is expected to remain in recession well into 2010, after contracting an estimated 4.2 percent this year compared with an expected 2.8 percent decline in the United States.

“The shock originated in the U.S., but Europe is paying a higher price,” said Jean Pisani-Ferry, a former top financial adviser to the French government who is now director of Bruegel, a research center in Brussels.
...
“I think America is further ahead in terms of fixing problems with the banks,” said Mr. Pisani-Ferry, “and countries like Germany have been hurt tremendously by the decline in world trade.”

Figures released this week showed that German exports plunged 28.7 percent in April from a year earlier, the steepest drop since the government began keeping records in 1950.
...
Underscoring the risk that hopes for a quick turnaround anywhere may be premature, the World Bank said Thursday that it expected the global economy to shrink by nearly 3 percent in 2009, far deeper than the 1.7 percent contraction it predicted just over two months ago.

And both Europe and the United States face the specter of rapidly rising unemployment, even if a rebound is beginning.

Not much to say - misery loves company.

by Calculated Risk on 6/11/2009 08:20:00 PM

I was going to post something on this CDS trade, but Professor Hamilton did a much better job than I could: How to lose on a sure-fire bet

Read Hamilton's take ...

Here are the details of the trade from the WSJ: A Daring Trade Has Wall Street Seething

The trade involved credit-default swaps and securities backed by subprime mortgages. The original securities ... were backed by $335 million of subprime mortgages mostly on homes in California made at the housing bubble's peak in 2005 ...

Following a wave of refinancing and defaults, only $29 million of the loans were left outstanding by March 2009, half of which were delinquent or in default...

Believing the securities would become worthless, traders at J.P. Morgan bought credit-default swaps over the past year from Amherst ... Other banks including RBS Securities ... and BofA also bought swaps on the securities from different trading partners.

The banks ... paid as much as 80 to 90 cents for every dollar of insurance, the going rate last fall according to dealer quotes, expecting to receive a dollar back when the securities became worthless ...

At one point, at least $130 million of bets had been made on the performance of around $27 million in securities ...

In late April, traders at some banks were shocked to find out from monthly remittance reports that the bonds they had bet against had been paid off in full. Normally an investor can't pay off loans like that but if the amount of outstanding loans falls to less than 10% of the original pool, the servicer ... can buy them and make bondholders whole.

That's what happened in this case. In April, a servicer called Aurora Loan Services at the behest of Amherst purchased the remaining loans and paid off the bonds.

by Calculated Risk on 6/11/2009 05:11:00 PM

One of the headlines from the Fed's Flow of Funds report this morning was that household percent equity had fallen to a record low 41.4%.

Click on graph for larger image in new window.

This graph shows homeowner percent equity since 1952.

This is a simple calculation: divide home mortgages ($10,464 billion) by household real estate assets ($17,870 billion) gives us the percent mortgage debt (58.6%). Subtract from one gives us the percent homeowner equity (41.4%).

But what does this tell us?

What we really want to know is the percent equity for homeowners with mortgages. According to the Census Bureau, 31.6% of all U.S. owner occupied homes had no mortgage in 2007 (most recent data). These homeowners tend to be older, or more risk adverse, and few of them will probably borrow from their home equity.

You can't do a direct subtraction because the value of these paid-off homes is, on average, lower than the mortgaged 68.4%. But we can construct a model based on data from the 2007 American Community Survey.

Note: See data at bottom of this post.

Click on graph for larger image in new window.

This graph shows the distribution of U.S. households by the value of their home, with and without a mortgage. This data is for 2007.

By using the mid-points of each range, and solving for the price of the highest range to match the then Fed's estimate of household real estate assets at the end of 2007: $20.5 Trillion, we can estimate the total dollar value of houses with and without mortgages.

Using this method, the total value of U.S. houses, at the end of 2007, with mortgages was $15.1 Trillion or 73.6% of the total. The value of houses without mortgages was $5.4 Trillion or 26.4% of the total U.S. household real estate.

Assuming 73.6% of current total assets is for households with mortgages (so $13.2 trillion of $17.87 trillion total), and since all of the mortgage debt ($10.464 trillion) is from the households with mortgages, these homes have an average of 20.4% equity. It's important to remember this includes some homes with 90% equity, and millions of homes with zero or negative equity.

Data from 2007 American Community Survey:

	United States
	Estimate	Margin of Error
Total:	75,515,104	+/-227,236
With a mortgage:	51,615,003	+/-152,731
Less than $50,000	2,037,849	+/-21,748
$50,000 to $99,999	6,443,236	+/-45,023
$100,000 to $149,999	8,023,775	+/-48,465
$150,000 to $199,999	7,318,809	+/-43,489
$200,000 to $299,999	9,538,216	+/-46,625
$300,000 to $499,999	10,196,919	+/-44,000
$500,000 or more	8,056,199	+/-35,865
Not mortgaged:	23,900,101	+/-91,776
Less than $50,000	3,577,700	+/-30,890
$50,000 to $99,999	4,665,031	+/-35,455
$100,000 to $149,999	3,765,972	+/-28,355
$150,000 to $199,999	2,968,680	+/-24,691
$200,000 to $299,999	3,227,661	+/-23,430
$300,000 to $499,999	3,080,889	+/-21,963
$500,000 or more	2,614,168	+/-17,619

by Calculated Risk on 6/11/2009 03:40:00 PM

From HotelNewsNow.com: STR reports US performance for week ending 6 June 2009

In year-over-year measurements, the industry’s occupancy fell 13.9 percent to end the week at 56.6 percent. Average daily rate dropped 10.5 percent to finish the week at US$95.90. Revenue per available room [RevPAR] for the week decreased 22.9 percent to finish at US$54.24.

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 11.8% from the same period in 2008.

The average daily rate is down 10.5%, so RevPAR is off 22.9% from the same week last year.

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

by Calculated Risk on 6/11/2009 03:01:00 PM

From Bloomberg: Bondholders Face Losses From Commercial Mortgages(th Ron)

Investors in bonds that packaged $62 billion of debt for U.S. offices, hotels and shopping malls are bracing for more loan defaults through 2010 as Bank of America Merrill Lynch says landlords’ monthly payments may jump 20 percent or more.

Principal is coming due on the so-called partial interest only loans ... About $179 billion of such loans were written between 2005 and 2007 and bundled into bonds ... About 87 percent of mortgages sold as securities in 2007 allowed owners to put off paying principal for several years or until maturity, compared with 48 percent in 2004

Hey, Option ARMs for commercial real estate ... hoocoodanode prices would fall?