by Calculated Risk on 12/26/2008 11:33:00 AM

From the Miami Herald: Refinance rates low; few qualify

Recent drops in interest rates have homeowners rushing to call local banks and mortgage lenders about refinancing. Loan applications are pouring in.

Yet, South Florida homeowners are mostly getting a big fat ''No!'' from the bank when they ask to refinance. The chief reason: Falling home values mean they owe more than their homes are worth.
...
In South Florida, four in 10 homeowners who bought or refinanced over the past five years owe more on their home than it is worth, according to sales and mortgage data analyzed by Zillow.com ... Many of them chose adjustable-rate loans and other expensive mortgages because that was the only way they could afford the payments.
...
''This is only putting people who are in a good position in a better position,'' [Justin Miller, a broker with Resource Mortgage Group in Plantation] said.
...
Before LaPenta begins processing an application, he said he makes sure customers are aware of the essential criteria needed to refinance: 20 percent equity in the property, a homestead exemption, a credit score of 700 or higher, a mortgage debt-to-income ratio of no more than 45 percent and the ability to fully document income and assets.

This is a key point - these lower rates don't help underwater homeowners. Also, I think the 45% debt-to-gross income ratio is a little higher than most lenders will allow now.

by Calculated Risk on 12/26/2008 09:55:00 AM

From MarketWatch: Japan November industrial output falls 'off the cliff'

Japan's industrial output tumbled at a record pace in November, stoking fears the country's recession may stretch longer and be more painful than anticipated.

Industrial production fell as much as 8.1% in November from the previous month -- the biggest drop in the measure since the government started releasing comparable figures in 1953 -- as Japanese companies produced less automobiles and other machinery on vanishing demand.

The drop was steeper than the 6.8% fall expected by economists, and came after a 3.1% decline in October.

"Industrial production in Japan is falling off the cliff," wrote Merrill Lynch Economist Takuji Okubo ...

I think the proper phrase is "cliff diving".

Light posting today ... I'm traveling. Best to all.

by Calculated Risk on 12/25/2008 09:45:00 PM

From the WSJ: Retail Sales Plummet

[T]otal retail sales, excluding automobiles, fell over the year-earlier period by 5.5% in November and 8% in December through Christmas Eve, according to MasterCard Inc.'s SpendingPulse unit.

When gasoline sales are excluded, the fall in overall retail sales is more modest: a 2.5% drop in November and a 4% decline in December.

"This will go down as the one of the worst holiday sales seasons on record," said Mary Delk, a director in the retail practice at consulting firm Deloitte LLP.

These preliminary numbers suggest that retail sales in December were even weaker than in October and November.

by Calculated Risk on 12/25/2008 12:17:00 PM

A special present for UberNerds - a previously unpublished Tanta post (written Dec 31, 2007):

Pig Rulz
There have been some misconceptions in the comments about Mortgage Pig™. I do not wish to enter a new year on the wrong track.

Mortgage Pig™ does not have a "name" except Mortgage Pig™. Assertions about Mortgage Pig™'s "name," "address," "job," "significant other," or favorite swill are not canonical. Anyone who asserts knowledge of such things in any communication, written or otherwise, is creating an Internet Urban Legend. Next thing you know they'll be telling you that you can Get Rich Qwik in RE investing.

And from Tanta's 2007 Post: A Very Nerdy Christmas (see her post for an explanation of the origins of the Mortgage Pig™)

Click on Pig for larger image in new window.

Happy Holidays to all! CR

by Calculated Risk on 12/24/2008 06:35:00 PM

Happy Holidays to all (live from Rockefeller Center):

by Calculated Risk on 12/24/2008 05:32:00 PM

From the Fed: Order Approving Formation of Bank Holding Companies and Notice to Engage in Certain Nonbanking Activities. Here is interesting part on ownership:

To address concerns that GM could control GMAC and GMAC Bank for purposes of the BHC Act, GM has committed to the Board that before consummation of the proposal, GM will reduce its ownership interest in GMAC to less than 10 percent of the voting and total equity interest of GMAC. GM’s remaining equity interest in GMAC will be transferred to a trust that has a trustee acceptable to the Board and the Department of the Treasury, who will be entirely independent of GM and have sole discretion to vote and dispose of the GMAC equity interests. The trustee must dispose of the equity interests held in the trust within three years of the trust’s creation.
...
To ensure that Cerberus’s holdings in GMAC are consistent with the Board’s precedent on noncontrolling investments in banks and bank holding companies, each Cerberus fund that holds interests in GMAC will distribute its equity interests in the company to its respective investors. As a result of this distribution, the aggregate direct and indirect investments controlled by Cerberus and its related parties would not exceed 14.9 percent of the voting shares or 33 percent of the total equity of GMAC LLC.
...
In addition, Cerberus employees and consultants would cease providing services to, or otherwise functioning as dual employees of, GMAC, and neither Cerberus nor any affiliated entity will have any advisory relationships with GMAC or any investor regarding the vote or sale of shares or the management or policies of GMAC or GMAC Bank.

by Calculated Risk on 12/24/2008 03:57:00 PM

From MarketWatch: Oil tumbles 9.3% as Cushing inventories hit record

Crude-oil futures fell for a third session Wednesday, tumbling 9.3% to close below $36 a barrel as government data showed inventories at a key delivery point hit a record.

Crude inventories at Cushing, Okla., the delivery point for crude futures contracts traded on the New York Mercantile Exchange, reached 28.7 million barrels in the week ended Dec. 19, the Energy Information Administration reported.

It was the highest since at least April 2004, when the government started collecting Cushing data.
...
Crude for February delivery ended down $3.63 at $35.35 a barrel in Nymex dealings.

And all these Gulf States need $50 per barrel just to pay for their government programs.

And this is hitting other oil producers too, from Bloomberg: Russia’s Central Bank Devalues Ruble for Third Time in Week

Russia devalued the ruble for the third time in a week, sending the currency to its lowest level against the dollar since January 2006, as oil’s drop below $37 a barrel dimmed the outlook for growth.
...
The economy, which recovered from the government’s 1998 debt default to expand an average 7 percent in the eight years to 2007, may slip into a recession in the first half of 2009, Kremlin economic adviser Arkady Dvorkovich told Bloomberg Television on Dec. 19.

The government will post a budget deficit next year for the first time in a decade and will use its $132.6 billion reserve fund, or extra oil revenue the government has set aside, to cover the financing gap, Dvorkovich told reporters in Moscow today.

by Calculated Risk on 12/24/2008 01:01:00 PM

Freddie Mac reported Long-Term Rates Fall for Eight Consecutive Week Setting Another New Low

Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®) in which the 30-year fixed-rate mortgage (FRM) averaged 5.14 percent with an average 0.8 point for the week ending December 24, 2008, down from last week when it averaged 5.19 percent. Last year at this time, the 30-year FRM averaged 6.17 percent. The 30-year FRM has not been lower since Freddie Mac started the Primary Mortgage Market Survey in 1971.

The MBA reported: Near Record Low Mortgage Rates Boost Mortgage Applications in Latest MBA Weekly Survey

The average contract interest rate for 30-year fixed-rate mortgages decreased to 5.04 percent from 5.18 percent, with points increasing to 1.17 from 1.13 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. The contract rate for 30-year fixed-rate mortgages is the lowest recorded in the survey since the record low of 4.99 percent for the week ending June 13, 2003.

Note the surge in refinance applications too!

However, Bloomberg reports: Jumbo Mortgage Shoppers Get Little Relief From Rates

Jumbo mortgage shoppers in the most expensive U.S. housing markets such as New York and San Francisco aren’t getting much relief from lower borrowing costs.

The average 30-year fixed rate for home loans of more than $729,750 remains almost 2 percentage points above conforming rates and the spread between them may set a record this month, according to financial data firm BanxQuote.
...
The difference between the two averaged 2.13 percentage points in December, 10 times the spread from 2000 to 2006 and above last month’s 1.95 percentage points that was the highest on record.

It's jumbos rates that matter for most of California and other higher priced markets.

by Calculated Risk on 12/24/2008 11:33:00 AM

Here is a graph of the U.S. savings rate as a percent of disposable personal income.

Click on graph for larger image in new window.

It looks like savings from lower gasoline prices is showing up as savings - as opposed to other consumption - and this process of increasing savings is a necessary step towards restoring healthy household balance sheets.

This is one of the areas some analysts really got wrong during the housing bubble. As an example, here is Larry Kudlow in 2006: Riding the Right Curve

Despite the grim picture the mainstream media continue to paint about just about everything ... there’s one thing they just can’t taint: This U.S. economy remains very healthy.
...
The latest chant is that ... a day of reckoning marked by a housing-price crash and an overwhelming debt burden is headed our way. This is utter nonsense.
...
Family net wealth, the nation’s true savings rate, advanced 8 percent in 2005 to a record level of $52 trillion.

By focusing on net wealth (inflated by the housing bubble and excessive stock prices), Mr. Kudlow completely missed the biggest story of our time. As I noted then, the savings rate (as calculated by the BEA), is the true savings rate. The savings rate was too low then - and the rate remains too low now - but it is starting to recover.

by Calculated Risk on 12/24/2008 09:26:00 AM

Last quarter I was the first to note that PCE would probably be negative in the quarter based on the "two month estimate". That was the first decline in PCE since Q4 1991.

This quarter the two month estimate suggests PCE will be negative again. However most analysts might be a little too pessimistic for Q4 2008.

The BEA reports on Personal Income and Outlays:

Personal consumption expenditures (PCE) decreased $56.1 billion, or 0.6 percent.

That may sound bad, but it is somewhat better than expected.

Maybe December will be especially weak, or maybe October and November will be revised downwards, but the two month estimate suggests real PCE will decline in Q4 by about 2.9% (annual rate).

Other components of GDP - especially invesment - will be very weak in Q4, but most estimates of negative 5% GDP change (annualized) included a decline of PCE in the negative 4% to 4.5% range.

As an example, here is the Northern Trust forecast (last page) of -5.0% GDP, and -4.0% PCE in Q4 2008. Since PCE accounts for about 71% of GDP, maybe these forecasts will be revised up slightly.

by Calculated Risk on 12/24/2008 09:10:00 AM

The DOL reports on weekly unemployment insurance claims:

In the week ending Dec. 20, the advance figure for seasonally adjusted initial claims was 586,000, an increase of 30,000 from the previous week's revised figure of 556,000. The 4-week moving average was 558,000, an increase of 13,750 from the previous week's revised average of 544,250.
...
The advance number for seasonally adjusted insured unemployment during the week ending Dec. 13 was 4,370,000, a decrease of 17,000 from the preceding week's revised level of 4,387,000.

Click on graph for larger image in new window.

The first graph shows weekly claims since 1968.

The four week moving average is at 558,000; the highest since December 1982.

Continued claims are now at 4.37 million.


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.

by Calculated Risk on 12/24/2008 02:13:00 AM

From the Chicago Tribune: Chicago hotel occupancy falls 13% in November

Downtown Chicago hotels saw a 13.1 percent dive in the average occupancy rate, to 69 percent last month from a year earlier, according to Smith Travel Research. Nationwide, occupancy dropped 10.6 percent, to a 51.9 percent rate.

Pricing dropped as well, leading to double-digit declines in revenue per available room, a key measure of profitability. In downtown Chicago, the decline was 20.6 percent; nationally, it was 12.9 percent.

A double digit RevPAR decline (revenue per available room) is stunning.

Also, Deutsche Bank reported in their Commercial Real Estate Outlook: Q4 2008 (no link), that "hotel loan deterioration now beginning to take-off" and that the 30-day delinquency rate has risen from 6bp to 55bp in just the last three months.

Falling hotel occupancy rates - leading to lower revenues and higher delinquency rates ... what a surprise!

by Calculated Risk on 12/23/2008 08:15:00 PM

Video from CNBC.

From Bloomberg: Cerberus Caps Withdrawals From Hedge Fund After Loss

Cerberus Capital Management LLC, the $27 billion investment firm founded by billionaire Stephen Feinberg, limited investor withdrawals from one of its hedge funds after it lost 16 percent this year through November.

As we all know, Cerberus is the three-headed dog who guards the gates of Hell. And at least one head is making sure investors' money doesn't escape from money hell.

by Calculated Risk on 12/23/2008 07:12:00 PM

From Reuters: Manhattan office vacancy rate hits two-year high

The overall vacancy rate rose to 10.9 percent in the fourth quarter, the highest level in two years and more than three percentage points greater than a year ago, according to the report released by FirstService Williams.

Space available directly from a landlord registered an 8.1 percent vacancy rate in the fourth quarter, while sublease space weighed in at 2.8 percent -- the highest rate in more than three years.
...
"With leasing activity languishing and tenant space choices growing exponentially, it is not surprising that the overall asking rent for Manhattan dropped by 4 percent from the previous quarter," Mark Jaccom, FirstService Williams chief executive, said in a statement.

This fits with the report Mayor Bloomberg released on the NY City economy in November.

Click on graph for larger image in new window.

This graph shows the actual and projected (by the NYC OMB) rents and office vacancy rate for NYC Class A buildings (note: the Reuters story was all office space).

The Class A vacancy rate is expected to rise from about 7.5% to 13%, and rents are expect to decline by 20% or more from the peak.

by Calculated Risk on 12/23/2008 04:23:00 PM

Lots of housing news today ...

New Home Sales Lowest since 1982

Existing Home Sales Plunge

And here is an analysis of existing home turnover (not pretty), and NSA data showing the existing home sales plunge was worse than the headline number.

And now some more graphs ...

Click on graph for larger image in new window.

This graph compares New and Existing home sales. Although sales tracked pretty well from 1994 through 2005, existing home sales have outperformed new home sales for the last few years.

One of the key reason for the difference is lender REO sales (foreclosure resales).

From the NY Times:

Lawrence Yun, chief economist of the National Association of Realtors, said that 45 percent of all home sales in November were so-called “distressed sales,” meaning that the sellers faced foreclosure, or they were forced to sell their home for less than the value of the mortgage.

If we remove REOs, existing home sales have tracked much closer to new home sales. REO sales are real sales, but this shows as long as the REO volume is high, new home sales (and non-REO existing home sales) will be under severe pressure.

The following graph shows both annual new home sales (from the Census Bureau) and sales through November.

In 2008, sales through November (before revisions) have totaled 461 thousand. This is slightly behind of the pace in 1991 (471 thousand sales through November).

However sales slowed in the 2nd half of 2008, and it definitely appears that annual sales will be below the 509 thousand in 1991. This would mean sales would be the lowest since 1982 (412 thousand).

Of course the U.S. population and the number of households were much lower in 1982. In 1982 there were 54.2 million owner occupied units in the U.S., in 1991 there were 61.0 million, and there are approximately 76 million today.

If we use a ratio of owner occupied units to compare periods, the low in 1982 was 412 thousand X (76/54.2) = 578 thousand units (based on the number of owner occupied units today).

The calculation for 1991 gives 634 thousand units (to compare to today).

By this measure, 2008 is the worst year for new home sales since the Census Bureau started tracking new home sales (starting in 1963).

by Calculated Risk on 12/23/2008 02:48:00 PM

Here is the Philadelphia Fed state coincident index release for September.

The Federal Reserve Bank of Philadelphia has released coincident indexes for all 50 states for November 2008. The indexes increased in eight states for the month, decreased in 37, and were unchanged in the remaining five (a one-month diffusion index of -58). For the past three months, the indexes increased in 11 states, decreased in 38, and remained unchanged only in Tennessee (a three-month diffusion index of -54).

Click on map for larger image.

Here is a map of the three month change in the Philly Fed state coincident indicators. Most states are in recession, although a portion of the central U.S. is still growing (from Texas up to Wymong). This might change with falling oil prices.

This is what a recession looks like based on the Philly Fed states indexes.

This is a graph of the monthly Philly Fed data of the number of states with one month increasing activity.

Note: the Philly Fed calls some states unchanged with minor changes.

Most of the U.S. was has been in recession since late last year based on this indicator.

by Calculated Risk on 12/23/2008 12:00:00 PM

OK, this is a long one on turnover and NSA (not seasonally adjusted) data. The NSA data was much worse than the seasonally adjusted data.

There have been 4.55 million existing home sales in 2008 through November. This puts 2008 on track for about 4.85+ million home sales, the fewest annual sales since 1997 (4.37 million).

Click on graph for larger image in new window.

This graph shows annual existing home sales (since 1969) and year end inventory (since 1982). For this graph, sales for 2008 were estimated at 4.85 million and year end inventory at 4.2 million.

This shows sales are the lowest level since 1997, and inventory is at (or will be close) to a record at year end. I expect inventory to decline in December, so 2008 might be below December 2007.

However this has been an above normal year for transactions based on the turnover rate. Long term real estate agents have told me this has been a decent year for volume, although many of the sales are "one and done". Usually real estate sales are like a chain reaction - one family both sells and buys, and the seller then goes out and buys ... and on and on. But with so many REO (Lender "Real Estate Owned") sales by banks, agents have told me they frequently just have the one sale, and there is no move-up buyer - no chain reaction.

The second graph shows sales and inventory as a percent of Owner Occupied Units (a measure of turnover).

By this measure sales are still above the normal range of about 6% per year. Inventory is well above the usual range too. I've been expecting turnover to decline to the 5% to 6% per year range, and stay there for an extended period. With 76 million owner occupied households, this suggested that existing home sales would decline to the 3.8 to 4.5 million range. Sales are finally in the predicted range with November sales at a 4.49 million annual rate.

The turnover rate was boosted in recent years by:

Speculative buying (flippers).

Speculative buying by first time home buyers (using excessive leverage).

Move up buying, especially by Baby Boomers.

and recently by investors / first time buyers buying REOs.

Although slowing, the turnover rate is still above the median for the last 40 years and substantially above previous troughs. Both types of speculative buying is now over. And the Baby Boomers have probably bought move up homes, and the next major move will be downsizing in retirement (still a number of years away). And although REO sales will continue to be significant in 2009, they will probably slow some as foreclosures move up the price range.

And finally - and probably a very important point - homeowners with negative equity, who manage to avoid foreclosure, will be stuck in their homes for years. This suggests the turnover rate - and existing home sales - will decline further.

Not Seasonally Adjusted (NSA) data

Here is another way to look at existing homes sales - monthly, Not Seasonally Adjusted (NSA):

This graph shows NSA monthly existing home sales for 2005 through 2008. Sales (NSA) were about 17% lower in November 2008 than in November 2007 - this is a much larger decline than the reported seasonally adjusted decline.

Note: I've disagreed with the NAR method for seasonal adjustment before. The NAR uses a standard procedure to adjust for weekends and holidays in November. But since the sales were signed in September and October, I think they should adjust for holidays in those months instead. Using a different method, I think sales were closer to 4.2 million SAAR in November than the NAR reported 4.5 million - but it will all come out eventually. (note that NSA sales were 17% below Nov 2007, but SA sales were reported as 10.5% lower).

The second graph shows inventory by month starting in 2002.

Inventory levels were flat for years (during the bubble), but started increasing at the end of 2005.

Inventory levels increased sharply in 2006 and 2007, but have only increased slightly in 2008. In fact inventory for the last four months was slightly below the levels of last year. This might indicate that inventory levels are close to the peak for this cycle (inventory has peaked for 2008), however there is probably a substantial shadow inventory – homeowners wanting to sell, but waiting for a better market - so existing home inventory levels will probably stay elevated for some time.

by Calculated Risk on 12/23/2008 10:35:00 AM

From the NAR: Existing-Home Sales Decline in Economic Uncertainty

Existing-home sales – including single-family, townhomes, condominiums and co-ops – fell 8.6 percent to a seasonally adjusted annual rate of 4.49 million units in November from a downwardly revised level of 4.91 million in October, and are 10.6 percent below the 5.02 million-unit pace in November 2007.

Lawrence Yun, NAR chief economist, expected a decline. “The quickly deteriorating conditions in the job market, stock market, and consumer confidence in October and November have knocked down home sales to another level. We hope the home sales impact from the stock market crash turns out to be short-lived, as was the case in 1987 and 2001,” he said.
...
Total housing inventory at the end of November rose 0.1 percent to 4.20 million existing homes available for sale, which represents an 11.2-month supply at the current sales pace, up from a 10.3-month supply in October.

Click on graph for larger image in new window.

The first graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.

Sales in November 2008 (4.49 million SAAR) were 8.6% lower than last month, and were 10.5% lower than November 2007 (5.02 million SAAR).

It's important to note that a large percentage of these sales were foreclosure resales (banks selling foreclosed properties). NAR economist Yun suggested said a couple of months ago that "distressed sales are currently 35 to 40 percent of transactions". Distressed sales include foreclosure resales and short sales. Although these are real transactions, this means activity (ex-foreclosures) is running around 3 million units SAAR.

The second graph shows nationwide inventory for existing homes. According to NAR, inventory increased slightly to 4.20 million in November, from an all time record of 4.57 million homes for sale in July. Usually inventory peaks in mid-Summer, so July was the peak for inventory this year.

It is a little unusual for supply to increase in November (from October), and looking forward, usually supply falls sharply in December as homeowners take their properties off the market for the holidays. Something to watch for next month.

Most REOs (bank owned properties) are included in the inventory because they are listed - but not all. Some houses in the foreclosure process are listed as short sales - so those would be counted too.

The third graph shows the 'months of supply' metric for the last six years.

Months of supply increased to 11.2 months.

This follows the highest year end months of supply since 1982 (the all time record of 11.5 months of supply).

I still expect sales to fall further over the next few months, although inventory has peaked for the year. I'll have more on existing home sales soon ...

by Calculated Risk on 12/23/2008 10:01:00 AM

The Census Bureau reports, New Home Sales in November were at a seasonally adjusted annual rate of 407 thousand. This is the lowest sales rate since 1982.

Click on graph for larger image in new window.

The first graph shows monthly new home sales (NSA - Not Seasonally Adjusted).

Notice the Red columns for 2008. This is the lowest sales for November since 1981. (NSA, 28 thousand new homes were sold in November 2008, 27 thousand were sold in November 1981).

As the graph indicates, sales in 2008 are substantially worse than the previous years.

The second graph shows New Home Sales vs. recessions for the last 45 years. New Home sales have fallen off a cliff.

Sales of new one-family houses in November 2008 were at a seasonally adjusted annual rate of 407,000, according to
estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development.

This is 2.9 percent below the revised October of 419,000 and is 35.3 percent below the November 2007 estimate of 629,000.

And one more long term graph - this one for New Home Months of Supply.

"Months of supply" is at 11.5 months.

The months of supply for October was revised up to 11.8 months - the ALL TIME RECORD!

For new homes, both sales and inventory are falling quickly.

And on inventory:

The
seasonally adjusted estimate of new houses for sale at the end of November was 374,000. This represents a supply of 11.5 months at the current sales rate.

Inventory numbers from the Census Bureau do not include cancellations and cancellations are falling, but are still near record levels. Note that new home inventory does not include many condos (especially high rise condos), and areas with significant condo construction will have much higher inventory levels.

This is a another very weak report. I'll have some charts on existing home sales and more on new home sales later today ...

by Calculated Risk on 12/23/2008 10:00:00 AM

The NAR reported this morning that existing home sales were at a 4.49 million rate in November, 8.6% below the 4.91 million rate in October.

The months of supply increased to 11.2 months. I'll have some charts shortly (New Home sales is being released today too).