by Calculated Risk on 7/27/2009 02:30:00 PM

With my post yesterday, Economy: A Little Sunshine and the New Home sales report this morning - it is worth repeating: There will probably be two bottoms for Residential Real Estate.

The first will be for new home sales, housing starts and residential investment. The second bottom will be for prices. Sometimes these bottoms can happen years apart. I think it is likely that we've seen the bottom for new home sales and single family starts, but not for prices.

It is way too early to try to call the bottom in prices. House prices will probably fall for another year or more. My original prediction (a few years ago) was that real house prices would fall for 5 to 7 years (after 2005), and we could start looking for a bottom in the 2010 to 2012 time frame for the bubble areas. That still seems reasonable to me.

However it is important to note that some lower priced areas - with heavy distressed sales activity - might be at or near the bottom.

For the first bottom, we have several possible measure - the following graph shows three of the most commonly used: Starts, New Home Sales, and Residential Investment (RI) as a percent of GDP.

Click on graph for larger image in new window.

The arrows point to some of the earlier peaks and troughs for these three measures.
The purpose of this graph is to show that these three indicators generally reach peaks and troughs together. Note that Residential Investment is quarterly and single-family starts and new home sales are monthly.

We could use any of these three measures to determine the first bottom, and then use the other two to confirm the bottom. But this says nothing about prices.

The second graph compares RI as a percent of GDP with the real Case-Shiller National house price index.

Although the Case-Shiller data only goes back to 1987, look at what happened following the early '90s housing bust. RI as a percent of GDP bottomed in Q1 1991, but real house prices didn't bottom until Q4 1996 - more than 5 years later!

Something similar will most likely happen again. Indicators like new home sales, housing starts and residential investment will bottom long before house prices.

Economists and analysts care about these housing indicators (starts, sales, RI) because they impact GDP and employment. However most people (homeowners, potential homebuyers) think 'house prices' when we talk about a housing bottom - so we have to be aware that there will be two different housing bottoms. And a bottom in starts and new home sales doesn't imply a bottom in prices.

by Calculated Risk on 7/27/2009 01:36:00 PM

CRE: Commercial Real Estate. NOD: Notice of Default.

From Bloomberg: Almost $165 Billion in Commercial Mortgages to Come Due in ’09

Almost $165 billion in U.S. commercial real estate [shops, offices, hotels, apartment buildings and land] loans will mature this year and need to be sold or refinanced as rents and occupancies fall, according to First American CoreLogic.
...
More than 5,000 properties in the 10 biggest U.S. metropolitan areas got at least one default notice in March, marking the first time that’s happened in First American records going back to January 2003.
...
“As long as prices contract, we expect loan performance will worsen and that will make financing difficult,” Sam Khater, senior economist for First American, said in an interview. “Delinquencies and notices of default are rising, and we expect that to continue.”

These defaults will push down CRE prices and also hit many regional and local banks that had excessive loan concentrations in Construction & Development (C&D) and CRE loans. The FDIC will be very busy ...

by Calculated Risk on 7/27/2009 11:38:00 AM

For graphs based on the new home sales report this morning, please see: New Home Sales increase in June, Highest since November 2008

Last week the National Association of Realtors (NAR) reported that distressed properties accounted 31 percent of sales in June. Distressed sales include REO sales (foreclosure resales) and short sales, and based on the 4.89 million existing home sales (SAAR) that puts distressed sales at about a 1.5 million annual rate in June.

All this distressed sales activity has created a gap between new and existing sales as shown in the following graph that I've jokingly labeled the "Distressing" gap.

This is an update including June new and existing home sales data.

Click on graph for larger image in new window.

This graph shows existing home sales (left axis) and new home sales (right axis) through June.

As I've noted before, I believe this gap was caused by distressed sales - in many areas home builders cannot compete with REO sales, and this has pushed down new home sales while keeping existing home sales activity elevated.

The second graph shows the same information, but as a ratio for existing home sales divided by new home sales.

Although distressed sales will stay elevated for some time, eventually I expect this ratio to decline back to the previous ratio. The small decline in June ratio was because of the increase in new home sales.

The ratio could decline because of increase in new home sales, or a decrease in existing home sales - or a combination of both.

The third graph shows the ratio back to 1969 (annual data before 1994).

Note: the NAR has changed their data collection over time and the older data does not include condos: Single-family data collection began monthly in 1968, while condo data collection began quarterly in 1981; the series were combined in 1999 when monthly collection of condo data began.

by Calculated Risk on 7/27/2009 10:00:00 AM

The Census Bureau reports New Home Sales in June were at a seasonally adjusted annual rate (SAAR) of 384 thousand. This is an increase from the revised rate of 345 thousand in May.

Click on graph for larger image in new window.

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

Note the Red columns for 2009. This is the 2nd lowest sales for June since the Census Bureau started tracking sales in 1963.

In June 2009, 36 thousand new homes were sold (NSA); the record low was 34 thousand in June 1982; the record high for June was 115 thousand in 2005.

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 June 2009 were at a seasonally adjusted annual rate of 384,000 ...

This is 11.0 percent (±13.2%)* above the revised May rate of 346,000, but is 21.3 percent (±11.4%) below the June 2008 estimate of 488,000.

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

There were 8.8 months of supply in June - significantly below the all time record of 12.4 months of supply set in January.

The seasonally adjusted estimate of new houses for sale at the end of June was 281,000. This represents a supply of 8.8 months at the current sales rate.

The final graph shows new home inventory.

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.

Months-of-supply for inventory has peaked, and there is some chance that sales of new homes has bottomed for this cycle - but we won't know for many months. However any recovery in sales will likely be modest because of the huge overhang of existing homes for sale.

I'll have more later ...

by Calculated Risk on 7/27/2009 08:37:00 AM

From Peter Hong at the LA Times: San Diego high-rise condo market goes from frenzy to fizzle

Drive through California's sprawling inland suburbs and you'll spot the familiar mileposts of a real estate bust: foreclosure signs, brown lawns and abandoned subdivisions.

To see the damage in downtown San Diego, walk a few blocks. Then look straight up.

There you'll see hundreds of unsold luxury condominiums stacked in vacant high-rises. ... Downtown San Diego, a 2.2-square-mile area, is now awash in condos. ... An additional 1,000 units that were under construction when the market soured are slated to be completed this year, adding to the glut and putting further downward pressure on prices.

Many of these new high-rise condos are part of the shadow inventory since they are not included in the new home sales report. High-rise condos were overbuilt in a number of cities like Miami, Las Vegas, San Diego, Chicago - and it will take several years to absorb all the inventory (or the units will be converted to rentals). Just another fine mess ... and of course a number of banks (like "Condo King" Corus Bank) will fail because of these projects.

by Calculated Risk on 7/27/2009 12:06:00 AM

Some of Merle's other videos:
Merle Hazard Meets Arthur Laffer
H-E-D-G-E
Mark to Market.
Merle chats with Stanford economist John Taylor
And that inspires Merle: Inflation or Deflation

by Calculated Risk on 7/26/2009 09:33:00 PM

From the Herald Tribune series on mortgage fraud in Florida: Lenders failed to heed red flags

Fraudulent property flippers had an unlikely accomplice during the real estate boom -- the lending industry.

A yearlong Herald-Tribune investigation into thousands of suspicious Florida flip deals found that lenders of all kinds approved risky deals and ignored obvious red flags for mortgage fraud.
...
What makes the flipping fraud so egregious is not just that it happened, but that it would have been so easy to stop.

Using public records and Internet searches, the Herald-Tribune identified hundreds of deals that exhibited classic red flags for fraud. They include sales between family members and business partners in which prices increased $100,000 or more overnight. In other cases, flippers repeatedly traded properties from their company to their own name, each time increasing the price and the amount they borrowed.

Lenders knew they were writing bad loans, but did it anyway because they were making so much money on underwriting fees, said Jack McCabe, a Deerfield Beach-based real estate consultant ...

"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!"
Upton Sinclair, 1935, "I, Candidate for Governor: And How I Got Licked"

by Calculated Risk on 7/26/2009 04:14:00 PM

This will be a very busy week for economic news, and some of the key data will be new home sales for June released on Monday, the Case-Shiller home price index for May released on Tuesday, and Q2 GDP from the BEA on Friday.

At the beginning of this dark and dreary¹ economic year, I was looking for a little sunshine. I argued that three key data series would find a bottom in 2009, and that the drag on employment and GDP from these industries would slow or stop.

This doesn't mean green shoots - just the end of cliff diving. So it is probably time for a review ...

Click on graph for larger image in new window.

This graph shows the historical light vehicle sales (seasonally adjusted annual rate) from the BEA.

Sales in June were at a 9.7 million at a Seasonally Adjusted Annual Rate (SAAR), up from 9.1 million in February.

Although this increase barely shows up on the graph, this is a fairly significant rebound, and I expect light vehicle sales over 10 million SAAR later this year.

Total housing starts were at 582 thousand (SAAR) in June, up sharply over the last two months from the all time record low in April of 479 thousand (the lowest level since the Census Bureau began tracking housing starts in 1959).

Single-family starts were at 470 thousand (SAAR) in June; 31 percent above the record low in January and February (357 thousand).

Although I don't expect much of a pickup from here (and I expect starts in July to be slightly lower than June based on permit activity), it appears likely that housing starts have bottomed. For more on housing starts, see Housing Starts: A Little Bit of Good News

The third graph shows New Home Sales vs. recessions for the last 45 years. New one-family house sales in May 2009 were 342 thousand SAAR.

Sales were barely above the record low of 329 thousand SAAR in January. Of the three key series, this is the one that is still closest to the bottom - and the June numbers (Monday) will be interesting.

Here is what I wrote at the beginning of the year:

2009 will be a grim economic year. The unemployment rate will rise all year, house prices will fall, commercial real estate (CRE) will get crushed ... but there might be a few rays of sunshine too.

... my guess is all three of these series [housing starts, new home sales, new vehicle sales] will find a bottom (or at least the pace of decline will slow significantly). This means that the drag on employment in these industries, and the drag on GDP, will slow or stop.

These will be rays of sunshine in a very dark season. That doesn't mean a thaw, but it will be a beginning ...

And on the dark side, CRE is still getting crushed - resulting in the seizure of many regional and local banks, house prices are still falling (that is my view) and the unemployment rate is still rising. But there is a little sunshine.

¹ From Longfellow ...
The Rainy Day
The day is cold, and dark, and dreary
It rains, and the wind is never weary;
The vine still clings to the mouldering wall,
But at every gust the dead leaves fall,
And the day is dark and dreary.

My life is cold, and dark, and dreary;
It rains, and the wind is never weary;
My thoughts still cling to the mouldering Past,
But the hopes of youth fall thick in the blast,
And the days are dark and dreary.

Be still, sad heart! and cease repining;
Behind the clouds is the sun still shining;
Thy fate is the common fate of all,
Into each life some rain must fall,
Some days must be dark and dreary.
Henry Wadsworth Longfellow, 1842

by Calculated Risk on 7/26/2009 12:49:00 PM

From David Streitfeld at the NY Times on credit card debt: When Debtors Decide to Default

[T]there is a small but increasingly noticeable group of strapped consumers who ... are deciding they will simply stop paying.

... They are upset — at the unyielding banks and often at their free-spending selves — and are pre-emptively defaulting. ... “You reach a point where you embrace the darkness of default,” said Adam Levin, chairman of the financial products Web site Credit.com.

The lending industry term for these people is “ruthless defaulters.” In a miserable economy where paychecks, savings and expectations are all diminished, their numbers will surely grow.

“They’ve done the math on their account and they’re very angry,” said Corey Calabrese, a Fordham Law student who is an administrator of the school’s walk-in clinic for debtors at Manhattan Civil Court. Public sentiment is on their side, she added: “For the first time, Americans are no longer blaming the borrower but are looking at the credit card companies.”

Streitfeld is writing about the growing wave of ruthless credit card defaults, but this also raises question about the credit card industry in general. Why aren't consumers being educated on the dangers of not paying off their credit card balance each month? Maybe that will be a good role for the new consumer financial protection agency. And why are transaction costs for retailers still so high with all the innovation and advances in technology?

by Calculated Risk on 7/26/2009 09:21:00 AM

Fed Chairman Ben Bernanke kicks off his reappointment tour with a town hall meeting today in Kansas City, Mo. Jim Lehrer will host.

From Don Lee at the LA Times: Chairman Ben Bernanke confronts challenges to Federal Reserve's record

With his term expiring Jan. 31 and his reappointment a question mark, Bernanke makes a rare public appearance today in a nationally televised forum that has all the earmarks of a reelection campaign.

At a town hall meeting in Kansas City, Mo., the soft-spoken, longtime economics professor can be expected to defend the Fed's record, explaining why the controversial bailouts and other efforts to revive moribund credit markets were necessary. ... He will take questions from news host Jim Lehrer and an invited audience ...

"This is an extraordinary time," he told The Times. "It's important for me to hear from people outside of Washington. And I want to answer the questions that I know people have about the economy, the Fed and the Fed's actions during this crisis."
...
[Laurence Meyer, a Washington economist and former Fed governor] and many others ... say odds favor Bernanke to be reappointed by Obama. Bernanke has strong backing from economists and is well regarded in the White House ...

Roubini says Bernanke should be reappointed: The Great Preventer

Ben Bernanke ... deserves to be reappointed. Both the conventional and unconventional decisions made by this scholar of the Great Depression prevented the Great Recession of 2008-2009 from turning into the Great Depression 2.0.
...
[A]n endorsement of Mr. Bernanke’s reappointment comes with many caveats. Mr. Bernanke, a Fed governor in the early part of this decade, supported flawed policies when Alan Greenspan pushed the federal funds rate (the policy rate set by the Fed as its main tool of monetary policy) too low for too long and failed to monitor mortgage lending properly, thus creating the housing and credit and mortgage bubbles.
...
Still, when a liquidity and credit crunch emerged in the summer of 2007, Mr. Bernanke engineered a U-turn in Fed policy that prevented the crisis from turning into a near depression.

Anna Schwartz say no: Man Without a Plan

As Federal Reserve chairman, Ben Bernanke has committed serious sins of commission and omission — and for those many sins, he does not deserve reappointment.

Mark Thoma at Economist's View agrees with Roubini: Should Bernanke Be Reappointed?

Here's how I see it. It's true that [Bernanke] failed to notice that the patient was getting sick. The signs of disease were there, but [Bernanke] either didn't see the signs or they were misdiagnosed. In fact, there's a case to be made that [Bernanke] saw some of the changes in the patient as signs of improving health. Had [Bernanke] made the correct diagnosis early enough, maybe we could have prevented the patient from getting sick ...

And once the patient showed up in the office and was clearly sick, [Bernanke] didn't get it right initially either. [Bernanke] thought the patient needed fluids - liquidity as they say - and the patient did need some of that, but [Bernanke] didn't immediately see that there were also some key nutrient deficiencies and chemical imbalances that were threatening to cause further problems.

But [Bernanke] kept at it with tests and other diagnostics, and eventually got a handle on the problem. ... The patient will get better, the deterioration was rapid and turning it around will be difficult - it won't happen fast enough to suit any of us - but what has been done prevented a complete collapse, and is helping to move the patient towards recovery.

So I'm with Nouriel, Bernanke should be reappointed.

Here is what I wrote about Bernanke last month (when he was being heavily criticized):

Given all the recent attacks, I'd be remiss if I didn't write something about Bernanke ...

I've been a regular critic of Ben Bernanke. I thought he missed the housing and credit bubble when he was a member of the Fed Board of Governors from 2002 to 2005. And I frequently ridiculed his comments when he was Chairman of the President Bush's Council of Economic Advisers from June 2005 to January 2006.

... once Bernanke started to understand the problem, he was very effective at providing liquidity for the markets. The financial system faced both a liquidity and a solvency crisis, and it is the Fed's role to provide appropriate liquidity.

I believe the attacks on Bernanke's personal integrity were unfair and unjustified. But I'm not sure he should be reappointed.

Professor Thoma's analogy to a doctor who kept getting it wrong - but never gave up trying new possible cures - is pretty good. Is that the kind of doctor I'd want?

I'd like a doctor who never gave up trying for a cure, but I'd prefer someone with better diagnostic skills. I don't oppose Bernanke for a second term, but I think there are better choices.

(San Francisco Fed President Janet Yellen, as an example, recognized what was happening much earlier than Bernanke).