by Calculated Risk on 2/15/2011 01:09:00 PM

My first post of the year was: What about those Option ARMs? (with those old scary option ARM charts)

2011 was supposed to be the year that the Option ARM borrowers defaulted in mass. (An "Option ARM" is an adjustable rate mortgage with several payment options including interest only and negatively amortizing options).

However, as I noted, "many of the loans have already defaulted ... and 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."

Prashant Gopal and Jody Shenn at Bloomberg have more: Option ARM Time Bomb Blows Early, Easing Damage to U.S. Housing (ht Mike in Long Island)

In a 2006 cover story in BusinessWeek magazine titled “Nightmare Mortgages,” George McCarthy, a housing economist at the Ford Foundation in New York, compared the looming resets to a neutron bomb.

“It’s going to kill all the people but leave the houses standing,” he said at the time.

What he and other analysts didn’t anticipate was that so many option ARMs would go bad before resetting, and that interest rates would stay low enough to minimize the impact of the adjustments on borrowers ...

And the banks have targeted Option ARM borrowers for modifications:

Terms on about 20 percent of option ARMs have been revised, sometimes with a switch to a fixed rate, said Michael Fratantoni, vice president of research at the Mortgage Bankers Association ... JPMorgan has reworked about a quarter of the $40 billion of option ARMs it inherited when it acquired Washington Mutual in 2008. The New York-based bank plans to adjust terms on an additional $2 billion to $4 billion before resets kick in ... Wells Fargo has modified more than 80,000 loans since the beginning of 2009. The company’s outstanding balance of Pick-A- Pay Loans fell to $54 billion on Dec. 31, 2010, from $101.3 billion at the end of 2008, primarily through payoffs and modifications. The company has forgiven $3.7 billion in principal, [Tom Goyda, a spokesman for the bank] said.

Although there will be more delinquent Option ARM loans this year, the feared "2nd wave" of defaults will be much smaller than originally feared.

by Calculated Risk on 2/15/2011 10:00:00 AM

The National Association of Home Builders (NAHB) reports the housing market index (HMI) was unchanged at 16 in February. This was slightly below expectations of an increase to 17. Confidence remains very low ... any number under 50 indicates that more builders view sales conditions as poor than good.

Click on graph for larger image in new window.

This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the February release for the HMI and the December data for starts (January housing starts will be released tomorrow).

Both confidence and housing starts have been moving sideways at a very depressed level for over two years.

Press release from the NAHB: Builder Confidence Unchanged for Fourth Consecutive Month in February

Builder confidence in the market for newly built, single-family homes remained unchanged at 16 for a fourth consecutive month in February, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today.
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"Builders are telling us that some pockets of optimism have begun to emerge, but many prospective purchasers are concerned about selling their existing home in the current market, or face difficulty securing credit for a home purchase -- even when they are well-qualified," said NAHB Chief Economist David Crowe
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On a positive note, two out three of the HMI's component indexes edged slightly upward in February. The component gauging current sales conditions improved by two points to 17, while the component gauging sales expectations in the next six months rose a single point, to 25. Meanwhile, the component gauging traffic of prospective buyers held unchanged, at 12.

On a regional basis, HMI scores were mixed in February, with gains reported in two parts of the country and declines in two others. The Northeast registered a two-point gain to 22, the South posted a one-point gain to 18, the Midwest posted a one-point decline to 12 and the West posted a two-point decline to 13.

by Calculated Risk on 2/15/2011 08:30:00 AM

On a monthly basis, retail sales increased 0.3% from December to January(seasonally adjusted, after revisions), and sales were up 7.8% from January 2010.

Click on graph for larger image in new window.

This graph shows retail sales since 1992. This is monthly retail sales, seasonally adjusted (total and ex-gasoline).

Retail sales are up 13.7% from the bottom, and now 0.4% above the pre-recession peak.


The second graph shows the year-over-year change in retail sales (ex-gasoline) since 1993.

Retail sales ex-gasoline increased by 7.1% on a YoY basis (7.8% for all retail sales).

Here is the Census Bureau report:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for January, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $381.6 billion, an increase of 0.3 percent (±0.5%) from the previous month, and 7.8 percent (±0.7%) above January 2010.

This was below expectations for a 0.5% increase. Retail sales ex-autos were up 0.3%; also below expectations of a 0.5% increase. Although lower than expected, retail sales are now above the pre-recession peak in November 2007.

• Also, from the NY Fed: Empire State Manufacturing Survey

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers continued to improve in February. The general business conditions index rose 3.5 points to 15.4. The new orders index edged down just slightly, to 11.8. The shipments index retreated 14 points, reversing much of January's 18-point surge, but remained positive at 11.3. The inventories index continued to climb from its December low, reaching its highest level since April. The index for number of employees fell, but the average workweek measure moved up. The prices paid index climbed to a two-and-a half-year high in February, but the measure for prices received was little changed, suggesting some pressure on profit margins. The forward-looking indexes continued to signal widespread optimism, though to a somewhat lesser degree than in January. Indexes for expected prices, both paid and received, declined moderately, after reaching multiyear highs last month.

This was slightly above expectations for an increase to 15.0.

by Calculated Risk on 2/14/2011 08:20:00 PM

By request, an update on the Middle East:

• From the NY Times: Officials in Iran Use Force as Unrest Spreads Across Mideast

Hundreds of riot police officers deployed in key locations in central Tehran and other major Iranian cities on Monday, beating protesters and firing tear gas to thwart opposition marches that marked the most significant street protests since the end of 2009, news reports and witnesses’ accounts from Iran said.

• From the LA Times: In Iran, Bahrain and Yemen, protesters take to streets

• From the Financial Times: Vast march in Tehran defies ban

• From the Telegraph: Iranian police fire tear gas into protesters as unrest spreads across Middle East

• From the WSJ: Tehran Beats Back New Protests

• From al Jazeera: Thousands rally across Yemen

by Calculated Risk on 2/14/2011 05:36:00 PM

I've been following the Sacramento market to see the change in mix (conventional, REOs, short sales) in a distressed area. The Sacramento Association of REALTORS® started breaking out REOs in May 2008, and short sales in June 2009. Here are the statistics.

Click on graph for larger image in graph gallery.

This graph shows the percent of REO, short sales and conventional sales. There is a seasonal pattern for conventional sales (strong in the spring and summer), and distressed sales happen all year - so the percentage of distressed sales increases every winter. The tax credits might have also boosted conventional sales in 2009 and early 2010.

Note: Prior to June 2009, it is unclear if short sales were included as REO or as "conventional" - or some of both.

In January 2011, 73.1% of all resales (single family homes and condos) were distressed sales. This is the highest level of distressed sales since Sacramento started breaking out short sales, and might be the highest since February 2009.

And a high level of distressed sales suggests falling prices. And this isn't just happening in Sacramento. Housing economist Tom Lawler noted today:

"January is seasonally the weakest month for home sales (closings); distressed share of sales went up in many areas last month, suggesting that repeat transactions HPIs in early 2011 will show weakness."

My guess is both the Case-Shiller and CoreLogic repeat sales indexes will fall to post-bubble lows once the January data is released.

by Calculated Risk on 2/14/2011 01:52:00 PM

An economic letter from Justin Weidner and John Williams at the SF Fed: What Is the New Normal Unemployment Rate?

In the past, the U.S. labor market has proven to be very flexible and recessions have not usually been followed by long-lasting increases in the unemployment rate. But, in the wake of the most recent recession, many economists are concerned that developments such as mismatches in the skills of workers and jobs, extended unemployment benefits, and a rise in long-term joblessness may have raised the “normal” or “natural” rate of unemployment above the 5% level that was thought to be typical before the downturn. Indeed, a few economists have gone so far as to argue that the rise in the unemployment rate to its current level of 9% primarily reflects an increase in the natural rate, implying there is little slack in labor markets and therefore little downward pressure on inflation.
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[see paper for estimates of “natural” rate of unemployment]
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Economists have cited a number of possible reasons why the natural rate of unemployment may have risen in recent years. In early 2009, eligibility for unemployment benefits was extended from 26 weeks to as much as 99 weeks. Extended benefits reduce the hardship on unemployed workers and their families during this severe downturn. However, they may also reduce the incentive of the unemployed to seek and accept less desirable jobs, which in turn may raise the measured unemployment rate.
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A second explanation is that the degree of mismatch between job seekers and potential employers has increased. The construction, finance, and real estate sectors have shrunk after the bursting of the housing bubble and the subsequent financial crisis. The skills of workers who used to be employed in those sectors may not be easily transferable to growing sectors such as education and health care (see Rissman 2009 and Barnichon et al. 2010). Similarly, the housing bust has left millions of homeowners underwater on their mortgages, which locks them into their homes and may make it more difficult for them to move to higher growth areas. These sectoral and geographic mismatches between workers and job openings may be making it harder for employers to fill vacancies.
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A third explanation involves the sizable increase in long-term unemployment over the past few years. Workers out of jobs for extended periods may experience higher rates of unemployment owing to deterioration of skills and weakening labor market attachment.
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Mounting evidence suggests that structural factors may have increased the “normal” rate of unemployment to about 6.7%. Much of this increase is likely to be temporary. In particular, the extension of unemployment benefits probably accounts for about half of the increase. But, even with a 6.7% natural rate, current and forecasted levels of unemployment imply that significant labor market slack will persist for several years. It is important to stress that each of the methods used to estimate the natural rate is subject to considerable error, especially given the limited experience of very high unemployment in the post-World War II U.S. economy.

The key is most of the increase in the unemployment rate is cyclical.