by Calculated Risk on 9/21/2009 12:14:00 PM

From Baltimore Business Journal: Architects report drop in future projects in August

... The American Institute of Architects said August’s Architectural Billings Index, an economic indicator of future construction activity, fell to 41.7 during the month, which is down from 43.1 in July.
...
“While there have been occasional signs of optimism over the last few months, the overwhelming majority of architects are reporting that banks are extremely reluctant to provide financing for projects and that new equity requirements and conservative appraisals are making it even more difficult for developers to get loans,” said Kermit Baker, AIA chief economist. “Until the anxiety within the financial community eases, these conditions are likely to continue.”

Click on graph for larger image in new window.

This graph shows the Architecture Billings Index since 1996. The index has remained below 50, indicating falling demand, since January 2008.

Note: Nonresidential construction includes commercial and industrial facilities like hotels and office buildings, as well as schools, hospitals and other institutions.

Historically there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on commercial real estate (CRE). This suggests further dramatic declines in CRE investment through most of next year - at least.

by Calculated Risk on 9/21/2009 11:09:00 AM

From Reuters: Mortgage Delinquencies Rise Alongside Unemployment (ht Ron Wallstreetpit)

Reuters reports that a record 7.58% of U.S. homeowners with mortgages were 30+ days delinquent in August, up from 7.32% in July ... and up from 4.89% in August 2008.

Reuters also notes that delinquencies are rising at "an accelerating pace".

This is one part of the coming "triple whammy" at the end of this year that Tom Lawler mentioned this morning: rising foreclosures, end of the Fed buying MBS, and the end of the housing tax credit.

We have to be a little careful with the delinquency numbers because they include homeowners in the trial period for modifications.

Note: This uses a different approach than the MBA. The MBA reported 9.24% of all loans outstanding were delinquent at the end of the 2nd quarter. Another 4.3% of loans were in the foreclosure process.

by Calculated Risk on 9/21/2009 08:43:00 AM

"We could be facing a triple whammy at the end of the year: the expiration of the tax credit, the end of the Fed mortgage-buying program and rising foreclosures.”
Thomas Lawler, housing economist

From Bloomberg: Housing Suffering Relapse Confronts Bernanke Credit Conundrum (ht Mike in Long Island) A few excerpts:

The Fed’s purchases of mortgage-backed debt so far this year have dwarfed net issues of such securities by Fannie Mae, Freddie Mac and government-run mortgage-bond insurer Ginnie Mae, which totaled about $440 billion through the end of August, said Walt Schmidt, a mortgage-bond strategist in Chicago at FTN Financial.

Once the Fed exits the market, the spread between yields on mortgage-backed debt and Treasury securities will have to rise, perhaps by a half percentage point, in order to attract other buyers, he said.
...
The impact of terminating the tax credit will show up first in the new-home market, said David Crowe, chief economist of the home-builders’ association.

“It takes at least four months to build a house, and you need to buy it before Dec. 1 to qualify,” he said. “If you haven’t started building it by now, it’s too late.”
...
Residential construction and home sales led the way out of the previous seven recessions going back to 1960, according to David Berson, chief economist of PMI Group, a mortgage insurer in Walnut Creek, California.

These excerpts make three key points:

The spread between Mortgage rates and treasuries will increase when the Fed stops buying MBS (my guess is about 35 bps),

the end of the housing tax credit will probably show up in new home sales data first, and

housing is usually one of the key engines of recovery (along with consumer spending). The overall recovery will probably be sluggish because both housing and consumer spending will be under pressure for some time.

by Calculated Risk on 9/20/2009 11:46:00 PM

From Paul Krugman on financial reform: Reform or Bust

I was startled last week when Mr. Obama, in an interview with Bloomberg News, questioned the case for limiting financial-sector pay: “Why is it,” he asked, “that we’re going to cap executive compensation for Wall Street bankers but not Silicon Valley entrepreneurs or N.F.L. football players?”

That’s an astonishing remark — and not just because the National Football League does, in fact, have pay caps. Tech firms don’t crash the whole world’s operating system when they go bankrupt; quarterbacks who make too many risky passes don’t have to be rescued with hundred-billion-dollar bailouts. Banking is a special case ...

Inferior goods in Japan! From the NY Times: Once Slave to Luxury, Japan Catches Thrift Bug

Across the board, discount retailers are reporting increases in revenue — while just about everyone else is experiencing declines, in some cases, by double digits.

As a result, the luxury boutiques, once almighty here, are reeling.
...
In the 1970s and ’80s, and even as the economy limped through the ’90s, a wide group of consumers spent generously on Louis Vuitton bags and Hermès scarves — even at the expense of holidays, travel and, sometimes, meals and rent.

Now, the Japanese luxury market, worth $15 billion to $20 billion, has been among the hardest hit by the global economic crisis, according to a report by the consulting firm McKinsey & Company.

Futures are off slightly ...

Futures from barchart.com

Bloomberg Futures.

CBOT mini-sized Dow

CME Globex Flash Quotes

And the Asian markets are mixed.

Best to all.

by Calculated Risk on 9/20/2009 08:41:00 PM

Earlier today I posted a couple of bullish views and I disagreed with the projections of an "Immaculate Recovery". Former IMF chief economist Michael Mussa suggested that consumer spending wouldn't lead this recovery, but that business investment would be strong.

This graph shows the general relationship between capital spending and consumer spending (ht Jan Hatzius, Capital Spending: The Caboose of a Slow Train). Note: Consumer spending lagged two quarters for best fit.

Click on graph for larger image in new window.

This suggests that consumer spending needs to pickup to above 1.5% year-over-year growth rate for business investment in equipment and software to be positive. If businesses expects consumer spending to pick up sharply, maybe they'd invest more - but few business owners expect a sharp pickup.

There might be a boost in capital spending because of a replacement cycle, but with all the slack in the economy (capacity utilization is near record lows and almost double digit unemployment), I definitely don't expect business spending to lead the recovery (as Mussa suggested).