by Calculated Risk on 8/18/2011 12:13:00 AM

From Louise Story at the NY Times: U.S. Inquiry Eyes S.&P. Ratings of Mortgages

The Justice Department is investigating whether the nation’s largest credit ratings agency, Standard & Poor’s, improperly rated dozens of mortgage securities ... the Justice Department has been asking about instances in which the company’s analysts wanted to award lower ratings on mortgage bonds but may have been overruled by other S.& P. business managers ... If the government finds enough evidence to support such a case ... it could undercut S.& P.’s longstanding claim that its analysts act independently from business concerns

There is no question that S&P incorrectly rated mortgage securities, but that was just their "opinion". This investigation is apparently focused on if the analysts wanted to downgrade the ratings, but they were overruled by managers. If so, S&P might lose their first amendment protection and then be open to lawsuits from investors.

by Calculated Risk on 8/17/2011 07:01:00 PM

From the Chicago Fed: Second Quarter Midwest Farmland Values Soar

Farmland values for the second quarter of 2011 climbed 17 percent from the level of a year ago in the Seventh Federal Reserve District. The value of “good” agricultural land increased 4 percent in the second quarter compared with the first quarter of 2011, according to a survey of 226 agricultural bankers in the District.
...
At 17 percent, the year-over-year increase in the value of District farmland for the second quarter of 2011 was the largest recorded since
the 1970s.

Apparently there is quite a bit of investor buying (Gold, guns and farmland?). The Chicago Fed will hold a conference on farmland values in November: Rising Farmland Values: Causes and Cautions

Back in the 1980s, when farmland values collapsed, many farmers lost their land - and many banks went under. I just hope the lenders and farmers remember the '80s and keep the loan-to-value for farmland down. I hope the regulators are paying attention too.

by Calculated Risk on 8/17/2011 03:35:00 PM

DataQuick has developed a new resource for tracking home sales that is updated weekly. It can be accessed by going to the DataQuick news site and clicking on the National Home Sales at the top (or directly here: National Home Sales Snapshot).

DataQuick provides sales and median prices using the most current 30/31 days based on 98 of the Top 100 US MSAs (excluding Louisville and Wichita). DataQuick estimates this is almost two-thirds of all US home sales. These are real sales counts (as opposed to the NAR approach that will probably be changed later this year). DataQuick also provides median prices.

Right now DataQuick is combining existing and new home sales, and they were kind enough to break out the data for me.

This resource will allow us to track sales weekly, although we have to remember this data is Not Seasonally Adjusted (NSA), and both the NAR and Census Bureau headline numbers are reported on a Seasonally Adjusted Annual Rate (SAAR) basis.

I decided to compare the DataQuick numbers to the NAR and Census Bureau reports. Both the NAR and Census Bureau report monthly, and the DataQuick data is weekly.

Click on graph for larger image in graph gallery.

This graph shows the NSA data for DataQuick and the NAR. The dashed line is scaling up the DataQuick numbers by .6625 (their estimate of sales coverage).

The NAR recognizes that their estimate are too high - and they are planning revising down their estimates this fall. However this suggests that the NAR might be overestimating by even more than the 10% to 15% that many analysts think. This also suggests sales in 2011 are very weak.

The second graph compares the DataQuick new home sales numbers with the Census Bureau. The Census Bureau reports when contracts are signed and DataQuick reports when the purchase is closed. So there are some timing issues.

The dashed line is using the same scaling factor as for existing homes. The new home data from the Census Bureau appears to be fairly close to the DataQuick numbers - although it is hard to tell because of the large spikes due to the homebuyer tax credit and because of the lag between contract signings and closings.

This appears to be very useful data for tracking home sales.

by Calculated Risk on 8/17/2011 12:42:00 PM

This morning the MBA reported that there was a sharp increase in mortgage refinance activity.

“Refinance application volume increased substantially for the week, although there was substantial variation across the market. In September MBA’s Weekly Applications Survey will transition to an expanded sample that covers 75% of the retail market rather than the current sample that covers roughly 50% of the retail market. That expanded sample showed a significantly larger increase in refinance applications than the current sample, with some lenders reporting increases in refinance applications in excess of 50 percent for the week. The big differences in refinance volumes were likely driven by the decisions of some lenders not to drop rates last week, largely due to the need to manage their pipelines.” [said Mike Fratantoni, MBA’s Vice President of Research and Economics

First, the increase in the sample size is good news. There have been times when the mortgage purchase activity index wasn't very useful because so many mortgage lenders were going out of business.

Also it is interesting that some lenders haven't lowered their rates (probably many of the biggest mortgage lenders).

Here is a graph of the MBA refinance index compared to the ten year treasury yield.

Click on graph for larger image in graph gallery.

Although refinance activity has picked up, it is still well below the level of the huge refinance boom of 2002/2003, and below the smaller refinance peaks in 2008, 2009 and last year.

It takes lower and lower rates to get people to refi (at least lower than recent purchase rates). However if interest rates fall much further there will probably be another large increase in refinance activity.

by Calculated Risk on 8/17/2011 09:44:00 AM

Note: This index is a leading indicator for new Commercial Real Estate (CRE) investment.

From AIA: Architecture Billings Index Drops for Fifth Straight Month

The American Institute of Architects (AIA) reported the July ABI score was 45.1 – the steepest decline in billings since February 2010 – after a reading of 46.3 the previous month. This score reflects a continued decrease in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 53.7, a considerable slowdown from a reading of 58.1in June.

“Business conditions for architecture firms have turned down sharply,” said AIA Chief Economist, Kermit Baker, PhD, Hon. AIA. “Late last year and in the first couple of months of this year there was a sense that we were slowly pulling out of the downturn, but now the concern is that we haven’t yet reached the bottom of the cycle. Current high levels of uncertainly in the economy don’t point to an immediate turnaround.”

Click on graph for larger image in graph gallery.

This graph shows the Architecture Billings Index since 1996. The index decreased in in July to 45.1 from 46.3 in June. Anything below 50 indicates a contraction in demand for architects' services.

Note: Nonresidential construction includes commercial and industrial facilities like hotels and office buildings, as well as schools, hospitals and other institutions. Note that the government sector is the weakest. The American Recovery and Reinvestment Act of 2009 is winding down, and state and local governments are still cutting back.

According to the AIA, there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction. So this suggests further declines in CRE investment in 2012.