by Calculated Risk on 6/23/2008 11:21:00 AM

"When the bankers are selecting color schemes, you know a project isn't going well"
reader Brian, June 23, 2008

This article from Bloomberg is a good summary of the banks exposure to commercial real estate (CRE): Deutsche Bank Lost in Vegas as Defaults Make Lenders Decorators

Workers building the $3.5 billion Cosmopolitan Resort & Casino on the Las Vegas strip are getting used to their financiers from Deutsche Bank AG. Lately, the weekly visitors from 60 Wall Street have been critiquing plans that called for a black-and-white decor.

``They are considering changing the color palettes and finishes,'' said Travis Burton, a vice president for lead contractor Perini Corp., who outfits the bankers with safety vests and hard hats before touring the site.
...
Deutsche Bank ... is one of a dozen investment banks that rode a five-year boom in commercial real estate by financing developers and landlords while profiting by packaging loans into securities. Then credit markets seized up in 2007, sticking banks and brokerage firms with commercial mortgages and bonds. The amount for large U.S. banks alone: $169 billion ... The resolution may take more than providing advice on drapes as the economy falters and mall vacancies increase.

by Calculated Risk on 6/23/2008 09:02:00 AM

Note: Dean Baker comments on the Joint Center for Housing Studies at Harvard University. As I noted below, the JCHS outlook sections always seem too optimistic, but the report does provide some excellent data.

Hat tip Ben Zipperer in Baker's comments:

When America's housing boom finally ends, don't expect a loud pop.

"It's not going to be a big dramatic event," says William Apgar, senior scholar at Harvard University's Joint Center for Housing Studies.
From the WSJ in August 2005: How Will Home Boom End?

"But comparing the [sudden price declines in the] stock market and the housing market is misleading at best. Because people live as well as invest in their homes, many owners stay put when prices first show signs of softening. This reduces the number of houses on the market and helps bring supply and demand back into balance, forestalling faster and sharper price declines."
-- from a 2005 Joint Center report

"With the slowdown in the entire residential construction sector, the home improvement market has downshifted to a more sustainable rate of growth... The dip in spending should, however, be both mild and short-lived. The fundamentals of remodeling demand remain positive, and the backlog of under-improved homes ensures a ready market for upgrades in the near term. And with home equity still at record levels, owners have the means as well as the motivation to continue to invest in their properties over the coming years."
-- from a 2007 Joint Center report

From the San Diego Union: Harvard report: Housing outlook remains bleak

In a grim report on the weakened state of the housing industry, Harvard University says the United States is caught in a real estate market downturn “that is shaping up to be the worst in a generation.”

The decline in housing construction and home sales “already rivals the worst downturns in the post World War II era,” said the report out today from Harvard's Joint Center for Housing Studies. Price drops and mortgage failures “are the worst on records that date back to the 1960s and 1970s.”

Hopefully the report will be available online soon (check here). The annual Harvard report is a great source of data, however for the last few years I've noted that the report seemed too optimistic.

Despite the “State of the Nation's Housing” report's somber tone, some analysts said it might be understating the problem.

“We have never had anything like this happen,” said Christopher Thornberg, an economist with the Beacon Economics research firm in Los Angeles. “It's a bloodbath. Prices are falling because they are too high. You would have to have prices in California fall 40 percent in order to get back to an historical level of affordability relative to incomes.”
...
“I think it is going to take another year nationwide for us to work through all of our problems in the housing market, at least to make a significant dent,” [Mark Zandi, chief economist for Moody's Economy.com] said. “In some parts of the country, the market will remain depressed well into the next decade. It is going to be a slog.”

by Calculated Risk on 6/23/2008 01:23:00 AM

From the NY Times: Home Not-So-Sweet Home

Listening to politicians, you’d think that every family should own its home — in fact, that you’re not a real American unless you’re a homeowner. ... Even Democrats seem to share the sense that Americans who don’t own houses are second-class citizens.
...
And the belief that you’re nothing if you don’t own a home is reflected in U.S. policy. Because the I.R.S. lets you deduct mortgage interest from your taxable income but doesn’t let you deduct rent, the federal tax system provides an enormous subsidy to owner-occupied housing.
...
In effect, U.S. policy is based on the premise that everyone should be a homeowner. But here’s the thing: There are some real disadvantages to homeownership.

Krugman lists three disadvantages to owning that we've discussed:

Financial risk: "At this point there are probably around 10 million households with negative home equity — that is, with mortgages that exceed the value of their houses."

Less labor mobility.

The cost of commuting.

Krugman concludes:

All I’m suggesting is that we drop the obsession with ownership, and try to level the playing field that, at the moment, is hugely tilted against renting.

And while we’re at it, let’s try to open our minds to the possibility that those who choose to rent rather than buy can still share in the American dream — and still have a stake in the nation’s future.

Hear, hear!

by Calculated Risk on 6/22/2008 07:14:00 PM

The WSJ is reporting: Citi to Slash Investment Banking Jobs World-Wide

Citigroup ... will dismiss thousands of investment-banking employees world-wide as part of a plan to cut the roughly 65,000-employee group by 10% ...

According to the WSJ the cuts will probably happen tomorrow, with entire trading desks eliminated in New York and other cities.

Update: from the Financial Times: Job fears mount as Goldman sheds staff (hat tip crispy&cole)

... it emerged that Goldman Sachs ... cut staff at its investment banking division last week.

The Wall Street bank is now expected to cut up to 10 per cent of staff in the division that handles mergers and acquisition advice and corporate fundraisings over the course of 2008 ...

The FT article ends with:

“Any bank that says it’s not cutting is lying,” said one industry insider on Sunday. “It’s getting to halfway through the year and everyone can see that business hasn’t picked up.”

It is becoming more clear that the '2nd half recovery' was a mirage - not only for the financial industry, but for the economy in general.

by Calculated Risk on 6/22/2008 05:13:00 PM

From the LA Times: Tax cushion for falling property values

Assessors in the five-county Los Angeles area are now in the process of cutting property taxes on more than half a million homes because of plunging home values. ...

Although savings will vary widely, the average annual property tax reduction in Los Angeles County is expected to be about $750. In Riverside County, it'll be around $1,200.

In California, the assessed value is set to the sales price (in most cases), and then the assessed value is limited to a maximum increase of 2% per year. Property taxes are 1% of the assessed value.

Homeowners who bought years ago will still see their property taxes increase 2% per year (since the assessed value is still below the market value). However for recent home buyers, with falling prices, the market value will likely be below the purchase price. These homeowners can appeal the assessment value - or as in this case, the assessors office may reduce the assessed value automatically.

A decline of $1,200 per year in Riverside suggests assessed values have fallen $120,000 on average.

Those tax breaks will go only to selected homeowners who bought their homes around the market's peak in 2005 and 2006. The Los Angeles County Assessor's office, for example, reviewed only properties purchased since July 1, 2004, and will be lowering taxes on 128,000 out of the 318,000 examined.

Assessors in Orange, Riverside, San Bernardino and Ventura counties reviewed sales since Jan. 1, 2004, and say they expect to reduce taxes on about two-thirds of those homes.

This is both good news and bad news for homeowners. Imagine opening a letter from the assessors office saying your property taxes have decreased $1,200 per year - but that the value of your home has declined $120,000. Ouch!

My guess is the assessors office will have to review sales back to 2003 or even 2002 next year.

by Calculated Risk on 6/22/2008 10:53:00 AM

Here is a story from Bloomberg on the "Oil Summit" in Saudi Arabia: Saudi Arabia Boosts Oil Supply, May Pump More Later

``Saudi Arabia is prepared and willing to produce additional barrels of crude above and beyond the 9.7 million barrels per day, which we plan to produce during the month of July, if demand for such quantities materializes and our customers tell us they are needed,'' [Saudi Oil Minister Ali al- Naimi] said.

Saudi Arabia's capacity will be 12.5 million barrels a day by the end of 2009 and may rise to 15 million after that if necessary, he said.

by Calculated Risk on 6/22/2008 01:13:00 AM

From The Guardian: Number of new houses being built plummets nearly 60%

The National House Building Council, which has 20,000 registered house builders on its books, said there were 6,890 new starts in the private sector in May, compared with 15,713 this time last year. This represents a drop of 56%.
..
This news came on the same day as Halifax, the UK's biggest mortgage lender, announced that it would be raising its fixed rates on loans by half a percentage-point from today ... Homeowners who have more than 25% equity in their houses now face an increase on a two-year fixed-rate mortgage from 6.49 to 6.99%.

And on house prices in the UK: HBOS predicts 9% fall in house prices and sales to halve

House prices will fall 9% this year, HBOS warned yesterday in its gloomiest prediction for the housing market since 1989.

Just a reminder that the housing bust is global not just in the U.S.

by Calculated Risk on 6/21/2008 08:08:00 PM

I wonder if he has a demolition permit? (30 secs) Be careful what you buy!

by Calculated Risk on 6/21/2008 08:07:00 PM

Peter Viles at the LA Times (L.A. Land blog) has the story: Did Bank of America write the Dodd bailout bill?

Update: I don't like the system, but I don't see a scandal here. Bank of America employees have given to almost all candidates, and almost legislation is written by lobbyists.

by Calculated Risk on 6/21/2008 10:08:00 AM

The previous post discussed the incentives being offered by mall owners to marginal retailers. Move in incentives are common in retail (and frequently in commercial too), but according to the WSJ in the case of Steve & Barry's the incentives were essential:

Without these payments, the stores are barely profitable, if at all ...

That shows the desperation of mall owners with vacancy rates rising rapidly.

Just like for residential, there was substantial overbuilding in multimerchandise shopping space in recent years.

Click on graph for larger image in new window.

This graph shows investment in multimerchandise shopping space starting in 1997 in current dollars (inflation adjusted Q1 2008). The circle shows the probable period of overinvestment.

It appears that $20 billion per year or so would be a normal level of investment. However, with the recent over investment, non-residential investment in multimerchandise shopping structures will probably fall below $20 billion per year for a few years.

Unfortunately the investment data for multimerchandise shopping is only available starting in 1997.