In Depth Analysis: CalculatedRisk Newsletter on Real Estate (Ad Free) Read it here.

Thursday, December 18, 2008

S&P Negative Outlook for CMBS

by Calculated Risk on 12/18/2008 12:10:00 PM

Excerpts from S&P Press release (no link):

It's become clear during the past few months--and especially in the past few weeks--that the problems facing the global financial markets and the U.S. economy have left the commercial mortgage-backed securities (CMBS) sector in a fundamentally weaker credit position. As a result, Standard & Poor's Ratings Services is expecting an increase in the number and severity of CMBS downgrades in 2009 ...

"Now that the U.S. is officially in a recession, and since commercial real estate performance typically tends to lag U.S. economic developments, we're expecting property values to continue to drop and loans with marginal cash flow to default with increasing frequency," said credit analyst James Manzi. "We believe that borrowers with negative equity have little incentive to come 'out of pocket' to bring their payments current," he said.

Evidence of this malaise appears to be mounting: The delinquency rate has been increasing significantly, and Standard & Poor's internal reporting measures show an acceleration in the volume of troubled loans, especially large loans. "Any current change in property prices is hard to measure accurately because of the marked reduction in transaction volume during 2008, but estimates we've seen indicate a decline of roughly 10%-15% from the peaks of early 2007. And the gap between offered prices and asking prices, in our view, signals that valuations must decline further to restart any meaningful trading activity," said credit analyst Barbara Duka.
emphasis added
Unlike with residential real estate, commercial owners are much more willing to "walk away" from their properties. As we've discussed before, many commercial properties were purchased with interest reserves - and those reserves are currently covering the negative cash flow. When the interest reserves run out, the owners will probably default.

Freddie Mac: 30 Year Mortgage Rates Lowest Since Survey Started

by Calculated Risk on 12/18/2008 11:47:00 AM

From MarketWatch: 30-year fixed-rate mortgage at 37-year low

The benchmark 30-year fixed-rate mortgage tumbled to a national average 5.17% this week, the lowest level since Freddie Mac began its weekly rate survey in 1971.
"Interest rates for 30-year fixed-rate mortgage rates fell for the seventh consecutive week, moving these rates to the lowest since the survey began in April 1971," said Frank Nothaft, Freddie Mac chief economist. "The decline was supported by the Federal Reserve announcement on Dec. 16, when it cut the federal funds target to a record low and stated it stood ready to expand its purchases of mortgage-related assets as conditions warrant."
Yeah, but what about jumbo rates?

As an example Wells Fargo is offering a 30 year fixed at 4.75% (up to $417K), but their rates are 7.375% for loans above that limit.

Philly Fed: Manufacturing sector conditions "continued to deteriorate"

by Calculated Risk on 12/18/2008 10:00:00 AM

Here is the Philadelphia Fed Index for December activity released today: Business Outlook Survey.

Conditions in the region's manufacturing sector continued to deteriorate this month, according to firms polled for the December Business Outlook Survey. All of the survey's broad indicators remained negative this month and at relatively low levels. Firms reported declines in input prices and the prices for their own manufactured goods this month. Consistent with the weakness in current activity, most of the survey's indicators of future activity slid further into negative territory, suggesting that the region's manufacturing executives expect continued declines over the next six months.

The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, improved from -39.3 in November to -32.9 this month. The index, which fell a dramatic 41 points in October, has remained near its current low reading for the past three months ...
The current employment index fell for the third consecutive month, decreasing four points, to its lowest reading since September 1982.
Philly Fed Index Click on graph for larger image in new window.

This graph shows the Philly index vs. recessions for the last 40 years.

The manufacturing sector had performed somewhat better than other sectors of the economy until October. Now the manufacturing sector is clearly in recession.

Weekly Unemployment Claims

by Calculated Risk on 12/18/2008 09:24:00 AM

The DOL reports on weekly unemployment insurance claims:

In the week ending Dec. 13, the advance figure for seasonally adjusted initial claims was 554,000, a decrease of 21,000 from the previous week's revised figure of 575,000. The 4-week moving average was 543,750, an increase of 2,750 from the previous week's revised average of 541,000.
The advance number for seasonally adjusted insured unemployment during the week ending Dec. 6 was 4,384,000, a decrease of 47,000 from the preceding week's revised level of 4,431,000.
Weekly Unemployment Claims Click on graph for larger image in new window.

The first graph shows weekly claims since 1968.

The four week moving average is at 543,750; the highest since December 1982.

Continued claims are now at 4.384 million.

Weekly Unemployment Claims This graph shows the 4-week average of initial weekly unemployment claims (blue, right scale), and total insured unemployed (red, left scale), both as a percent of covered employment.

This normalizes the data for changes in insured employment.

By these measures, the current recession is already worse than the '01 recession, and close to the '90/'91 recession.

Wednesday, December 17, 2008

UK Report: New Government Scheme to Restart Business Lending

by Calculated Risk on 12/17/2008 09:52:00 PM

From The Times: Alistair Darling aims to guarantee business lending

The Chancellor is considering a national lending scheme under which the Government would guarantee new lending to businesses of all sizes as one of his leading options.

If past loan schemes are followed, the Government would cover most of the risk on each loan, possibly up to 80 per cent, and the bank would bear the rest. The taxpayer could be faced with a big bill if companies defaulted, as some certainly would. The default rate of firms involved in government loan schemes since 1981 is 28 per cent.
The article notes that the government is trying to limit this program to new loans only, and not for refis of existing business loans.

The problem is partially that banks have tightened standards, but also that loan demand has fallen sharply (not many companies are looking to expand or invest right now). Guaranteeing lending might loosen standards, but I fail to see how it encourages companies to borrow.

Chrysler Shuts Down All Factories

by Calculated Risk on 12/17/2008 05:07:00 PM

From MarketWatch: Chrysler to idle all factories for at least a month

Chrysler said Wednesday that it will idle all of its manufacturing operations starting this Friday through at least January 19 in an effort to keep inventories more aligned with plunging U.S. demand for new cars and trucks.
Doesn't sound good.

Earlier today from the WSJ: Chrysler Warns Dealers About Loans to Fund Car Inventories
In a letter dated Dec. 12, Chrysler Financial Chief Executive Tom Gilman said dealers have been withdrawing up to $60 million a day from the fund, according to a copy of the letter that was reviewed by The Wall Street Journal.

Dealers familiar with the matter said they started pulling money from the "cash management account" because of fears that Chrysler's auto operations could be forced to file for bankruptcy.

OPEC Cuts Output Target, Oil Prices Fall

by Calculated Risk on 12/17/2008 04:01:00 PM

From the WSJ: OPEC Announces Biggest Cut in Decades

OPEC announced on Wednesday an unprecedented production cut of 2.2 million barrels a day as the group added heft to its recent fledgling efforts to shore up the price of crude.
"We needed to do something big. Demand is falling fast," Kuwait oil minister Mohammad Al Olaim told Dow Jones Newswires after the meeting. The new cut represents more than 2.5% of world oil demand.
From MarketWatch: Oil futures fall 8% after OPEC cartel cuts output
Crude-oil futures tumbled 8% Wednesday, paying little heed to a widely expected production cut of 2.2 million barrels in current oil output by the OPEC oil cartel.

Crude for January delivery fell $3.54, or 8%, to end at $40.06 a barrel on the New York Mercantile Exchange
OPEC members "are shooting themselves in the foot. The market priced in these production cuts," said Dan Flynn, an energy trader at Alaron Trading in Chicago.

"I believe right now we have a glut of oil in the United States," Flynn said. "Because of the global economic slowdown, demand is going to be down in all sectors."

Flynn expects oil prices to be between $30 and $35 a barrel over the next few weeks.
Besides the weak global economy, everyone believes OPEC members will cheat if they can.

HUD: Mortgage Modification Program "a failure"

by Calculated Risk on 12/17/2008 01:50:00 PM

From the WaPo: HUD Chief Calls Aid on Mortgages A Failure

Secretary of Housing and Urban Development Steve Preston said the centerpiece of the federal government's effort to help struggling homeowners has been a failure and he's blaming Congress.
The three-year program was supposed to help 400,000 borrowers avoid foreclosure. But it has attracted only 312 applications since its October launch because it is too expensive and onerous for lenders and borrowers alike, Preston said in an interview.
One of several federal and state foreclosure prevention initiatives facing difficulties, HUD's Hope for Homeowners program has been especially hamstrung. For instance, a program launched by the Federal Deposit Insurance Corp. on behalf of IndyMac Bank customers has modified more than 3,500 mortgages in two months of operation.
I don't if Congress is to blame, or if the program was implemented poorly, but it is funny that they hold up the IndyMac program (with just 3,500 mods) as being more successful.

Here was Tanta on IndyMac in October: IndyMac-FDIC Mortgage Modification Plan: Still in the Real World
I wrote a snotty post at the end of August after Sheila Bair's plan for "affordability modifications" of the former IndyMac loans was announced, the burden of snot wisdom of which was my prediction that Bair was going to discover that it's a lot harder than she thinks to get successful mortgage modifications done on a wide scale in a very short period of time. However, I did express the hope that the Bair plan would prove remarkably successful and indicated my willingness to eat my words should it prove necessary.

Looks like I'll have to stick to my usual dry toast and bananas after all.
Read it all! I think more people are discovering that successful mortgage mods are hard to do.

Architecture Billings Index hits another All Time Low

by Calculated Risk on 12/17/2008 12:14:00 PM

The American Institute of Architects reports: Architecture Billings Index Drops to All Time Low for Second Straight Month

AIA Architecture Billing Index Click on graph for larger image in new window.

Business conditions at architecture firms continue to deteriorate, with the Architecture Billings Index (ABI) posting its lowest level since the survey began in 1995 for the second month in a row. As a leading economic indicator of construction activity, the ABI shows an approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the November ABI rating was 34.7, down from the 36.2 mark in October (any score above 50 indicates an increase in billings). The inquiries for new projects score was 38.3, also a historic low point.

“With mounting job losses, declines in retail sales, and travel cut-backs the need for new commercial facilities has dropped considerably recently,” said AIA Chief Economist Kermit Baker, PhD, Hon. AIA. “What’s just as troubling is that the institutional sector --schools, hospitals and public buildings -- is also beginning to react to tighter credit conditions and a weakening economy.”
This is the 2nd leg down for the index this year. There is "an approximate nine to twelve month lag time between architecture billings and construction spending", so we should expect the first decline in architecture billing to impact non-residential structure investment this quarter (Q4 2008), and a further downturn in non-residential construction activity in mid-2009.

Bad housing policy proposals never die ...

by Calculated Risk on 12/17/2008 11:04:00 AM

they just get recycled on the WSJ opinion page.

R. Glenn Hubbard and Christopher Mayer are back again: Low-Interest Mortgages Are the Answer.

Here was my response to their previous proposal.

I found this sentence interesting:

"While fundamental factors clearly played a role in driving down house prices that were at excessive levels two years ago ..."
Oh yeah? Well why didn't they say that two or three years ago? Instead, Dr. Mayer wrote in 2005 (with Charles Himmelberg and Todd Sinai) that there was "little evidence of housing bubbles in almost any of the markets we have studied". I disagreed with Dr. Mayer in 2005, and I disagree with him today.

And look at this logic:
[A] 4.5% mortgage rate will raise housing demand significantly. A simple forecast can be obtained by applying the 2003-2004 homeownership rates to 2007 households. We use the 2003-2004 home ownership rates because those were the years of the lowest previous mortgage rates (the average mortgage rate was 5.8%).
Oh my. Yes, rates were lower in the 2003-2004 period, but lending standards were already lax (especially in 2004). Are the authors suggesting a return to the "fog a mirror, get a loan" standards of a few years ago to raise homeownership rates? Bring back the liar loans, NINJAs, DAPs, pick-a-pay lunacy - and yes, maybe a few more people will buy homes. Of course now lenders would also have to ignore recent foreclosures too.

And this brings me to a serious comment. One of the tragedies of the housing bubble was that some people were enticed to buy a home before they were really ready to be homeowners, and others to extend themselves too far. Many of these people are now soured on the wonders of homeownership, and they will not be buyers for an extended period of time. Only the passage of time will salve their wounds. There is nothing anyone can do to convince them to buy right now. I've seen this behavior before in California after previous (and much smaller) bubbles - and I believe we will see it again now. I wonder how this behavior factors into the author's forecast.