by Calculated Risk on 6/29/2007 04:49:00 PM

Bank of America analysts Daniel Oppenheim, Michael R. Wood, and Michael G. Dahl, released a research note this morning:

BofA Monthly Real Estate Agent Survey
Buyers Take Their Time and Watch Prices Drift Lower

The analysts wrote:

"Another leg down in June as traffic and prices worsen further. Our traffic index fell to 21.9 in June (down 4.5 points from 26.3 in May), the lowest level since we started the survey."
underline emphasis in research note
Excerpted with permission

This fits my view that housing activity is continuing to decline.

by Calculated Risk on 6/29/2007 02:26:00 PM

If you read this AP article - Consumer Spending Up As Incomes Rebound - you might think that the Personal Income and outlays report showed strong real growth in May. You'd be wrong.

From the AP:

Consumers boosted their spending in May as their incomes grew solidly, an encouraging sign that high gasoline prices haven't killed people's appetite to buy. Inflation moderated.

It was the second month in a row that consumer spending went up 0.5 percent, the Commerce Department reported on Friday.

Incomes, the fuel for future spending, rebounded in May, growing 0.4 percent.

Incomes up "solidly". Spending up. Inflation moderated. What's not to like?

From the Census Bureau report on real Disposable Personal Income (DPI):

Real DPI -- DPI adjusted to remove price changes -- decreased 0.1 percent in May.

And spending?

Real PCE -- PCE adjusted to remove price changes -- increased 0.1 percent in May.

So real disposable income declined in May and real spending barely increased. Oh, and that great 0.1% increase in spending is really 0.06% rounded up. Annualize that!

by Calculated Risk on 6/29/2007 10:56:00 AM

From the Fed: Federal Financial Regulatory Agencies Issue Final Statement on Subprime Mortgage Lending

The federal financial regulatory agencies today issued a final Statement on Subprime Mortgage Lending to address issues relating to certain adjustable-rate mortgage (ARM) products that can cause payment shock.

Here is the Statement on Subprime Mortgage Lending.

by Calculated Risk on 6/29/2007 10:36:00 AM

From the Census Bureau: February 2007 Construction Spending at $1,170.8 Billion Annual Rate

The U.S. Census Bureau of the Department of Commerce announced today that construction spending during May 2007 was estimated at a seasonally adjusted annual rate of $1,176.6 billion, 0.9 percent above the revised April estimate of $1,166.0 billion.
...
[Private] Residential construction was at a seasonally adjusted annual rate of $549.0 billion in May, 0.8 percent below the revised April estimate of $553.6 billion.

[Private] Nonresidential construction was at a seasonally adjusted annual rate of $343.1 billion in May, 2.7 percent above the revised April estimate of $334.1 billion.

Click on graph for larger image.

This graph shows private construction spending for residential and non-residential (SAAR in Billions). While private residential spending has declined significantly, spending for private non-residential construction has been strong.

The second graph shows the YoY change for both categories of private construction spending.

The normal historical pattern is for non-residential construction spending to follow residential construction spending. However, because of the large slump in non-residential construction following the stock market "bust", it is possible there is more pent up demand than usual - and that the non-residential boom will continue for a longer period than normal.

This will probably be one of the keys for the economy going forward: Will nonresidential construction spending follow residential "off the cliff" (the normal historical pattern)? Or will nonresidential spending stay strong. I'll have some comments on this question later today.

by Anonymous on 6/29/2007 08:50:00 AM

Hat tip to Ministry of Truth for bringing up this startling Bloomberg article, "S&P, Moody's Hide Rising Risk on $200 Billion of Mortgage Bonds." (How much did Fitch pay to get out of the headline?) As our fine commenters have noted, that's an amazingly bearish headline for Bloomberg. It's also a startlingly bald accusation: there's a line between asserting that the rating agencies are not downgrading bonds as fast as some observers think they should, and asserting that they are "hiding rising risk," without the usual "may be" weasel. Bloomberg just stomped right over that line, which suggests to me that tempers have become a bit short:

Standard & Poor's, Moody's Investors Service and Fitch Ratings are masking burgeoning losses in the market for subprime mortgage bonds by failing to cut the credit ratings on about $200 billion of securities backed by home loans.

"Are masking burgeoning losses"? That's even worse than "hiding rising risk." One rather hopes that Bloomberg has its numbers right.

This particular blogger is not sure she understand's Bloomberg's numbers. We get, in order:

1. "$200 billion of securities backed by home loans" should have their ratings cut.
2. "Almost 65 percent of the bonds in indexes that track subprime mortgage debt don't meet the ratings criteria in place when they were sold"
3. "the $800 billion market for securities backed by subprime mortgages"
4. "$1 trillion of collateralized debt obligations, the fastest growing part of the financial markets"
5. "estimates that collateralized debt obligations . . . will lose $125 billion"
6. "25 percent of the face value of CDOs is in jeopardy, or $250 billion"
7. "asset-backed bonds, securities that use consumer, commercial and other loans and receivables as collateral . . . which includes mortgage securities, has doubled to about $10 trillion"
8. "the $6.65 trillion in outstanding mortgage-backed debt"
9. "Investors snapped up $500 million of the securities [CDOs] globally last year"
10. "subprime-related debt made up about 45 percent of the collateral backing the $375 billion of CDOs sold in the U.S. in 2006"
11. "Of the 300 bonds in ABX indexes, the benchmarks for the subprime mortgage debt market, 190 fail to meet the credit support standard . . . Most of those, representing about $200 billion, are rated below AAA"

OK. So we know right off the bat that item 9 has to be off by an order of magnitude if item 10 is true. If the true size of "the market" of subprime-backed mortgage bonds is $800B, that makes it 80% of the size of the CDO market, 12% of the size of the total MBS market, and 8% of the size of the total ABS market.

If $375B of CDOs were sold in 2006 in the U.S. and 45% of that involved "subprime-related debt," and we assume just for fun that "subprime-related debt" means subprime-backed MBS and that CDOs invest mostly in subordinate tranches (because we aren't sure otherwise where they get enough high-yield to make their numbers work), that suggests that there were at least $169B of low-rated tranches of subprime securitizations available to resecuritize into a CDO last year. That would be just over 20% of this "total market" of $800B. That would imply a pretty thick layer of subordination. I'm thinking that either those CDOs are buying higher-rated paper than we've been led to believe, or else, possibly, "subprime-related debt" includes things like credit default swaps on subprime paper, which implies that brains will explode before we'll be able to line up bond balances on one hand and the notional value of CDO holdings on the other.

Whatever. My brain exploded a good 20 minutes ago. Does anyone else want to take a stab at estimating the potential principal losses that exceed the current estimated principal losses on $200B in subprime ABS, so that we have some idea of how many dollars of losses the rating agencies are "hiding"?

by Calculated Risk on 6/28/2007 05:27:00 PM

From Reuters: American Home Mortgage pulls outlook on credit losses

American Home Mortgage Investment Corp. on Thursday withdrew its 2007 earnings forecast, and will likely suffer a surprise second-quarter loss as it takes "substantial" charges for credit-related losses.

Another "surprise".