RSS Feed by Calculated Risk on 1/01/2011 02:15:00 PM
Saturday, January 01, 2011
What about those Option ARMs?
I've seen versions of the following chart being used to warn about Option ARM defaults in 2011. This chart is from the IMF in early 2007: Assessing Risks to Global Financial Stability
This chart from Credit Suisse, via the IMF, showed the substantial subprime resets in 2007 and 2008, and it showed the potential reset/recast problems with Alt-A and Option ARM loans in 2010 through 2012.
There were many subprime defaults in 2007 and 2008, and many people have been worried about a "2nd wave" of Option ARM and Alt-A defaults.
Here is an updated chart from Zach Fox at SNL Financial as of February 2010: Credit Suisse: $1 trillion worth of ARMs still face resets
Most of the resets are expected to occur through 2012. Between 2010 and 2012, the chart indicates that $253.25 billion of option ARMs will adjust, while Alt-A loans totaling $163.71 billion will reset over that time. Altogether, $1.010 trillion worth of ARMs will reset or recast during the three-year period.
excerpts with permission
Click on graph for larger image in new window.Source: SNL Financial.
The chart is labeled "resets" with a comment on "recasts" at the bottom. Resets are not a problem right now with low interest rates.
From Tanta on resets and recasts:
"Reset" refers to a rate change. "Recast" refers to a payment change. ... "Recast" is really just a shorter word for "reamortize": you take the new interest rate, the current balance, and the remaining term of the loan, and recalculate a new payment that will fully amortize the loan over the remaining term.Looking at the 2nd chart, it appears there is another wave coming in 2011 and 2012 - but probably not a large wave for several reasons.
First, many of the loans have already defaulted. There is a difference between the original recast date, and the actual recast date - because negatively amortizing loans hit the recast ceiling earlier than the original forecast - and those loans have already defaulted (or have been modified).
Second, some of these loans were modified (Option ARMs and Alt-A loans were targeted by the banks for internal modification programs), and some of these borrowers have probably refinanced - the few that had some equity.
Also some of the loans (mostly Wells Fargo with 10 year recast) will probably recast later than the Credit Suisse chart.
There was a peak on the 2nd chart in 2010, and so far there hasn't been a huge surge in Option ARM and Alt-A defaults (they were already defaulting in large numbers). Here are a couple of graph from LPS Applied Analytics' November Mortgage Performance data.
Click on graph for larger image in graph gallery.This graph provided by LPS Applied Analytics shows the percent delinquent by product type. As the graph shows, the Option ARM and Alt-A loans have already been defaulting in large numbers.
The Option ARM defaults did increase in 2010 but nothing like what the Credit Suisse chart seemed to suggest.
We also need to include the loans in the foreclosure process. The percent in the foreclosure process is trending up recently because of the foreclosure moratoriums. But what these graphs don't show is a huge spike in Option ARM and Alt-A loans delinquent or in the foreclosure process. Although there will probably be more delinquent Option ARM and Alt-A loans next year, I'm more concerned about falling house prices and negative equity than a huge wave of Option ARM and Alt-A defaults.
Schedule for Week of January 2, 2011
by Calculated Risk on 1/01/2011 08:30:00 AM
Happy New Year!
The key report for this week will be the December employment report to be released on Friday, Jan 7th. Other key reports include the ISM manufacturing index on Monday, vehicle sales on Tuesday, and the ISM non-manufacturing (service) index on Wednesday.
10:00 AM: ISM Manufacturing Index for December. The consensus is for an increase to 57.2 from 56.6 in November.
10:00 AM: Construction Spending for November. The consensus is for a 0.2% increase in construction spending.
10:00 AM: Manufacturers' Shipments, Inventories and Orders for November. The consensus is for a 0.2% decrease in orders.
2:00 PM: FOMC Minutes, Meeting of December 14, 2010.
All day: Light vehicle sales for December. Light vehicle sales are expected to increase slightly to 12.3 million (Seasonally Adjusted Annual Rate), from 12.2 million in November.
Click on graph for larger image in graph gallery.If correct, this will be the highest sales rate since September 2008, excluding Cash-for-clunkers in August 2009.
This graph shows light vehicle sales since the BEA started keeping data in 1967. The dashed line is the November sales rate.
Edmunds is forecasting:
Edmunds.com analysts predict that December's Seasonally Adjusted Annualized Rate (SAAR) will be the year’s highest, 12.34 million, up from 12.21 in November 2010.
7:00 AM: The Mortgage Bankers Association (MBA) will release the mortgage purchase applications index for the last two weeks. This index has only recovered slightly over the last few months - suggesting reported home sales through early 2011 will be weak. Also refinance activity has collapsed over the last few weeks as mortgage rates have increased.
8:15 AM: The ADP Employment Report for December. This report is for private payrolls only (no government). The consensus is for +100,000 payroll jobs in December, up from the +93,000 jobs reported in November.
10:00 AM: ISM non-Manufacturing Index for December. The consensus is for a slight increase to 55.5 from 55.0 in November.
8:30 AM: The initial weekly unemployment claims report will be released. The number of initial claims has been trending down over the last couple of months. The consensus is for an increase to 400,000 from 388,000 last week.
8:30 AM: Employment Report for December.
The consensus is for an increase of 140,000 non-farm payroll jobs in December, after the disappointing 39,000 jobs added in November. This graph shows the net payroll jobs per month (excluding temporary Census jobs) since the beginning of the recession. The estimate for December is in blue.
The consensus is for the unemployment rate to decline to 9.7% from 9.8% in November.
9:30 AM: Fed Chairman Ben S. Bernanke, Testimony before the Committee on the Budget, U.S. Senate, Washington, D.C. "The Economic Outlook and Monetary and Fiscal Policy"
3:00 PM: Consumer Credit for November. The consensus is for consumer credit to be unchanged.
After 4:00 PM: The FDIC will probably have another busy Friday afternoon ...
4:30 PM: Panel Discussion, Fed Vice Chair Janet L. Yellen, "The Federal Reserve's Asset Purchase Program", Denver, Colorado
December Personal Bankruptcy Filings
Reis is expected to release their Q4 Office, Mall and Apartment vacancy rate reports.
Friday, December 31, 2010
Happy New Year!
by Calculated Risk on 12/31/2010 11:45:00 PM
| A cartoon from Eric G. Lewis Click on cartoon for larger image in new window. My New Year's resolution: Get lost in the Sierra for a week this summer. Happy New Year to all! |  |
Evening Reading
by Calculated Risk on 12/31/2010 08:24:00 PM
• From the WSJ: Euro-Zone Bonds to Start New Year With Old Problems
Portugal is the biggest question mark right now, and its borrowing costs have been soaring. Yields on its 10-year bonds jumped to 6.682% at the end of 2010, from 4.065% at the end of 2009.• From Reuters: Estonia joins crisis-hit euro club, others wary. Good luck to Estonia!
• From Catherine Rampell at the NY Times: Career Shift Often Means Drop in Living Standards (ht Ann)
A new study of American workers displaced by the recession sheds light on the sacrifices a large number have made to find work. Many, it turns out, had to switch careers and significantly reduce their living standards.• From Doug Short: Current Market Snapshot: S&P 500 Up 12.78% for the Year
The S&P 500 closed the day down 0.02%, the week up 0.07%, the month up 6.53%, and the year up an impressive 12.78%.
The index is 85.9% above the March 9 2009 closing low, which puts it 19.6% below the nominal all-time high of October 2007.
And a couple previous posts:
• Question #1 for 2011: House Prices
• A Summary of 2010 in Graphs
Question #1 for 2011: House Prices
by Calculated Risk on 12/31/2010 04:20:00 PM
Two weeks ago I posted some questions for next year: Ten Economic Questions for 2011. I'm working through the questions and trying to add some predictions, or at least some thoughts for each question before the end of year.
1) House Prices: How much further will house prices fall on the national repeat sales indexes (Case-Shiller, CoreLogic)? Will house prices bottom in 2011?
There is no perfect gauge of "normal" house prices. Changes in house prices depend on local supply and demand. Heck, there is no perfect measure of house prices!
That said, probably the three most useful measures of house prices are 1) real house prices, 2) the house price-to-rent ratio, and 3) the house price-to-median household income ratio. These are just general guides.
Real House Prices
The following graph shows the Case-Shiller Composite 20 index, and the CoreLogic House Price Index in real terms (adjusted for inflation using CPI less shelter).
Click on graph for larger image in graph gallery.
In real terms, both indexes are back to early 2001 prices. Also both indexes are at post-bubble lows.
As I've noted before, I don't expect real prices to fall to '98 levels. In many areas - if the population is increasing - house prices increase slightly faster than inflation over time, so there is an upward slope in real prices.
If real prices fall to 100 on this index (seems possible) that implies about a 10% decline in real prices. However what everyone wants to know is the change in nominal prices (not inflation adjusted). If real prices eventually fall 10%, that doesn't mean nominal prices will fall that far. House prices tend to be sticky downwards, except in areas with a large number of foreclosures. That is key a reason why prices have been falling for years, instead of adjusting immediately.
Price-to-Rent
In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.
Here is a similar graph through October 2010 using the Case-Shiller Composite 20 and CoreLogic House Price Index.
This graph shows the price to rent ratio (January 1998 = 1.0).
I'd expect this ratio to decline another 10% to 20%. That could happen with falling house prices or rents increasing (recent reports suggest rents are now increasing).
Price to Household Income
The third graph shows the Case Shiller National price index (quarterly) and the median household income (from the Census Bureau, 2010 estimated).
Once again this ratio is still a little high, and I'd expect this ratio might decline another 10%. That could be a combination of falling house prices and an increase in the median household income.
This isn't like in 2005 when prices were way out of the normal range by these measures, but it does appear prices are still a little too high.
House Prices and Supply
The final graph (repeat) shows existing home months-of-supply (left axis), and the annualized change in the Case-Shiller composite 20 house price index (right axis, inverted).
House prices are through October using the composite 20 index. Months-of-supply is through November.
We need to continue to watch inventory and months-of-supply closely for hints about house prices. Right now house prices are falling at about a 10% annual rate.
Note: there have been periods with high months-of-supply and rising house prices (see: Lawler: Again on Existing Home Months’ Supply: What’s “Normal?” ) so this is just a guide.
My guess:
I think national house prices - as measured by these repeat sales indexes - will decline another 5% to 10% from the October levels. I think it is likely that nominal house prices will bottom in 2011, but that real house prices (and the price-to-income ratio) will decline for another two to three years.
Ten Questions:
• Question #1 for 2011: House Prices
• Question #2 for 2011: Residential Investment
• Question #3 for 2011: Delinquencies and Distressed house sales
• Question #4 for 2011: U.S. Economic Growth
• Question #5 for 2011: Employment
• Question #6 for 2011: Unemployment Rate
• Question #7 for 2011: State and Local Governments
• Question #8 for 2011: Europe and the Euro
• Question #9 for 2011: Inflation
• Question #10 for 2011: Monetary Policy
House Price Predictions
by Calculated Risk on 12/31/2010 02:19:00 PM
Here are a few predictions on house prices (I'm working on mine):
• From Peter Schiff in the WSJ: Home Prices Are Still Too High
[The Case Shiller] index would need to decline an additional 20.3% from current levels just to get back to the trend line.So put Schiff down for another 30% or so.
...
With a bleak economic prospect stretching far out into the future, I feel that a 10% dip below the 100-year trend line is a reasonable expectation within the next five years ...
• From Gary Shilling: House Prices Will Now Drop Another 20%
• From Jan Hatzius at Goldman Sachs: Another 5% in 2011.
[W]e now expect house prices to fall another 5% during 2011. The reason is the still-large excess supply, as we have only unwound about one-third of the pre-bubble increase in the homeowner vacancy rate so far.I'll post my prediction soon.
