by Calculated Risk on 2/02/2010 09:03:00 PM

“We’re now at the point of maximum vulnerability. People’s emotional attachment to their property is melting into the air.”
Sam Khater, senior economist at First American CoreLogic.

From David Streitfeld at the NY Times: No Aid or Rebound in Sight, More Homeowners Just Walk Away. A few excerpts:

New research suggests that when a home’s value falls below 75 percent of the amount owed on the mortgage, the owner starts to think hard about walking away, even if he or she has the money to keep paying.
...
The number of Americans who owed more than their homes were worth was virtually nil when the real estate collapse began in mid-2006, but by the third quarter of 2009, an estimated 4.5 million homeowners had reached the critical threshold, with their home’s value dropping below 75 percent of the mortgage balance.

Streitfeld is referring to the recent negative equity report from First American CoreLogic, see: Negative Equity Report for Q3

Some excerpts from that report:

Nearly 10.7 million, or 23 percent, of all residential properties with mortgages were in negative equity as of September, 2009. An additional 2.3 million mortgages were approaching negative equity, meaning they had less than five percent equity. Together negative equity and near negative equity mortgages account for nearly 28 percent of all residential properties with a mortgage nationwide.

The rise in negative equity is closely tied to increases in pre-foreclosure activity. At one end of the spectrum, borrowers with equity tend to have very low default rates. At the other end, investors tend to default on their mortgages once in negative equity more ruthlessly: their default rate is typically two to three percent higher than owner-occupied homes with similar degrees of negative equity. For the highest level of negative equity, investors and owners behave very similarly and default at similar rates (Figure 4). Strategic default on the part of the owner occupier becomes more likely at such high levels of negative equity.

Here is figure 4 from the report.

The default rate increases sharply for homeowners with more than 20% negative equity.

As Streitfeld noted, there are an estimated 4.5 million homeowners with more than 25% negative equity. According to the chart, maybe only 10% of them are currently in default. If, as First American CoreLogic senior economist Sam Khater said, "people's emotional attachment to their property is melting into the air", then we might see a surge in defaults by homeowners with negative equity.

And more from the NY Times:

In 2006, Benjamin Koellmann bought a condominium in Miami Beach. By his calculation, it will be about the year 2025 before he can sell his modest home for what he paid. Or maybe 2040.

Benjamin Koellmann paid $215,000 for his apartment in Miami Beach in 2006, but now units are selling in foreclosure for $90,000. “There is no financial sense in staying,” he said.

“People like me are beginning to feel like suckers,” Mr. Koellmann said. “Why not let it go in default and rent a better place for less?”

by Calculated Risk on 2/02/2010 06:11:00 PM

A couple of key points:

The ABI is forecasting more personal bankruptcy filings in 2010 than in 2009 (just over 1.4 million)

Filings were down 10% from December, but up 15% from January 2009.

From the American Bankruptcy Institute: January Consumer Bankruptcy Filings Decrease 10 Percent from December

The 102,254 consumer bankruptcies filed in January represented a 10 percent decrease nationwide from the 113,274 consumer filings recorded in December, according to the American Bankruptcy Institute (ABI) relying on data from the National Bankruptcy Research Center (NBKRC). NBKRC’s data also showed that the January 2010 consumer filings represented a 15 percent increase over the 88,773 consumer filings recorded in January 2009.

“While January represented a drop in filings from the previous month, high unemployment rates, unsustainable mortgage burdens and other economic stresses will push more consumers to seek the financial relief of bankruptcy in 2010,” said ABI Executive Director Samuel J. Gerdano. “Consumer filings this year will likely surpass the 1.4 million consumer filings recorded in 2009.”
emphasis added

by Calculated Risk on 2/02/2010 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 January (red, light vehicle sales of 10.78 million SAAR from AutoData Corp).

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

This is the lowest level since October and below the levels of last July. Obviously sales were boosted significantly by the "Cash-for-clunkers" program in August and some in July.

The current level of sales are still very low, and are still below the lowest point for the '90/'91 recession (even with a larger population).

by Calculated Risk on 2/02/2010 01:02:00 PM

A few excerpts from the D.R. Horton conference call (ht Brian). A couple of key points:

Their business is heavily dependent on government life support, this includes government mortgage programs (the bulk of their sales) and the housing tax credit.

Horton thinks they have "two more challenging years ahead".

D.R. Horton CEO: Profitability in the second quarter will be challenging as we will not close as many homes in the second quarter as we did in the first quarter [CR Note: their fiscal 2nd quarter is the calendar year 1st quarter].

We are entering the quarter with 4,136 homes in backlog and we will need to realize a backlog conversion rate over greater than 100% to reach profitability. With the extension and expansion of the home buyer tax credit and with our available housing inventory, a high backlog conversion rate is entirely achievable. But we do not expect to be as profitable as we were this quarter.

In the third quarter, we expect strong closings since homes must close by June 30th for the extended tax credit [Once again, he is referring to calendar Q2]. The third quarter will probably be our strongest quarter for profits this year. We expect our September quarter will be the most challenging as the tax credit for home sales will have expired. As we move past the selling season, we'll be able to get a better read on core demand and we'll adjust our business accordingly.”

[CR Note: The question is: what is the core demand? Most of their current sales are first time homebuyers, and homebuyers using government loan programs]

“90% of our mortgage company's business was captive during the quarter. Our company wide capture rate was approximately 61%. Our average FICO score was 702 and our average combined loan to value was 93%. Our product mix in the quarter was essentially 100% agency eligible with government loans accounting for 63% of our volume.

Our homes in inventory at the end of the December, totaled 11,500. Of which, 1,100 were models, 7,300 were speculative, and 2,900 of these specs were completed.

Of the first quarter closings captured by our mortgage company, 66% were to first time buyers who typically purchase spec homes, so we manage our total number of homes in inventory and number of speculative homes to match expected demand. Our unsold completed homes older than six months were 600 homes at December 31st, 2009, down from 800, at September 30th. We are prepared for the spring selling season and for current demand created by the Federal home buyer tax credit with our current spec level.

We will continue to manage our spec levels very closely as we move closer to the April 30th sales contract deadline for the home buyer tax credit.

Analyst: When you talk about fourth quarter being potentially your most difficult quarter and you just talked about that on margin, is that the expectation that you might have to lower prices after the expiration of the tax credit and do you actually think that 4Q volumes to be lower than say 2Q, which could be pretty rare?

Horton: Actually we do believe that fourth quarter volumes will be less than the second quarter and the third quarter volumes just simply we believe a number of sales, we don't know exactly how many, but we believe that a number of sales are being driven by the tax credit. So to the extent that that tax credit expires, clearly that will adversely affect our sales in the fourth quarter. Relative to inventory we're focusing on reducing our inventory post March to comply with the expiration of the tax credit. To the extent that there's more volume than we anticipate in the fourth quarter, we can ramp our inventory back up again.

Analyst: You provided some pretty good color on your expectations for gross margins over the rest of the year. Just wondering if you might also provide a little color on normalized gross margins in a healthy new homes selling environment being kind of anywhere in the 18 to 22% range. The 17% that you've sort of implicitly guided toward is a bit low, just wondering on your view, how high does it get and how long do you think it might take to get there?

Horton: Well first of all, I think you need to have job growth in the economy, and there's obviously no job growth to speak of today and secondly I think we have to have consumer confidence and thirdly I believe that a number of people in the country are still under water on their mortgages, and I think those three things have to be cleared up before we start to have, to get back to more normalized margins. The way that we are managing our business model here is, is that we certainly think that we've got two more challenging years ahead of us. I don't expect job growth or consumer confidence to change dramatically, so I don't expect 18 to 22% gross margins on a consistent basis for a couple of years.

by Calculated Risk on 2/02/2010 12:00:00 PM

From MarketWatch: Ford U.S. January sales rise 25% to 116,534 units

Ford FORD KICKS OFF 2010 WITH 24 PERCENT SALES INCREASE.

This is based on an easy comparison; in January 2009 U.S. light vehicle sales fell sharply to 9.6 million (SAAR) following the financial crisis and reports of the then impending bankruptcy of GM and Chrysler.

I'll add reports from the other major auto companies as updates to this post. Toyota will be especially interesting because of the shutdown related to quality issues.

Update: MarketWatch: GM January U.S. sales rise 14% to 146,825 units

Update2: MarketWatch: Chrysler U.S. Jan. sales fall 8.1% to 57,143 units

Update3: MarketWatch: Toyota Jan. U.S. sales down 15.8% to 98,796 units

NOTE: Once all the reports are released, I'll post a graph of the estimated total January sales (SAAR: seasonally adjusted annual rate) - usually around 4 PM ET. Most estimates are for a decline into the mid 10s from the 11.2 million SAAR in December.