by Calculated Risk on 10/05/2009 11:38:00 AM

Senators John Cornyn and Charles Schumer appeared on ABC's 'This Week' with George Stephanopoulos and commented on the housing market: (CQ Transcript)

Sen. John Cornyn , R-Texas: [Senator] Johnny Isakson of Georgia has been championing the -- the tax credit for home purchases. Now it’s getting ready to expire, and it’s limited to $8,000 for first-time purchasers. His argument is, and I think he’s right, is that the housing inventories, or excess housing inventories are what are dampening the recovery. And I think he’s right.

A key problem for housing and the economy is that there are too many housing units compared to the number of households. However it is important to note that the two key categories of housing inventory are owner occupied units and rental units.

The so-called "first-time" homebuyer tax credit just moves people from renting to owning, and doesn't reduce the overall number of excess housing units. As I've noted before, the tax credit policy will push the rental vacancy rate above 11% soon.

And how will that impact all the "accidental landlords"? From Shahien Nasiripour at the HuffPost: Unable To Sell Their Houses, Millions Of Homeowners Are Turning Into Landlords:

[A] growing number of homeowners ... have become landlords, often reluctantly, as they struggle to sell during one of the worst housing markets in recent memory. The most prominent example may be U.S. Treasury Secretary Timothy Geithner, who after failing to sell his $1.6 million home in a New York City suburb found tenants instead.

By just shuffling housholds from renting to owning, the tax credit will force some of these accidental landlords into foreclosure.

And although a higher vacancy rate and lower rents is good news for renters, this will also lead to more apartment defaults, higher default rates for apartment CMBS, and more losses for small and regional banks.

Since the tax credit is poorly targeted and inefficient, it might be hurting the economy more than helping. And it does nothing to reduce the excess inventory problem.

And from Senator Schumer:

Sen. Charles E. Schumer , D-N.Y. : ... I’d be for extending the housing tax credit, which has helped get the housing market out of the severe depression it was in.

The new home market is definitely in a depression, and will not recover until the excess housing inventory is reduced. However most of the tax credit was aimed at the existing home market - and existing home sales are at about a normal level (not depressed), although the mix is skewed toward the lower end and distressed sales (not a healthy market).

Note: no one should expect the new home market to recover to the level of the boom years (I wrote about the new home housing market his weekend: The Impact of the Declining Homeownership Rate)

And finally from the host:

George Stephanopoulos: So we have agreement: extend unemployment benefits, extend health care benefits for people who are unemployed, and extend the housing tax credit.

I don't think there is agreement. The Obama administration is talking about "extending the safety net", and no one can argue the tax credit is part of the safety net.

If Senators Cornyn and Isakson want additional stimulus, then providing more aid to the unemployed (13 weeks won't last long), or aid to the states, would be far more effective use of money than the homebuyer tax credit. More jobs will create more households - and more households is the key to the housing market.

by Calculated Risk on 10/05/2009 09:58:00 AM

From the Institute for Supply Management: September 2009 Non-Manufacturing ISM Report On Business®

Economic activity in the non-manufacturing sector expanded in September, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.

The report was issued today by Anthony Nieves, C.P.M., CFPM, chair of the Institute for Supply Management™ Non-Manufacturing Business Survey Committee; and senior vice president — supply management for Hilton Hotels Corporation. "The NMI (Non-Manufacturing Index) registered 50.9 percent in September, 2.5 percentage points higher than the 48.4 percent registered in August, indicating growth in the non-manufacturing sector after 11 consecutive months of contraction. The Non-Manufacturing Business Activity Index increased 3.8 percentage points to 55.1 percent. This is the second consecutive month this index has reflected growth since September 2008. The New Orders Index increased 4.3 percentage points to 54.2 percent, and the Employment Index increased 0.8 percentage point to 44.3 percent. The Prices Index decreased 14.3 percentage points to 48.8 percent in September, indicating a significant reversal and decrease in prices paid from August. According to the NMI, five non-manufacturing industries reported growth in September. Even with the overall month-over-month growth reflected in the report this month, respondents' comments vary by industry and remain mixed about business conditions and the overall economy.
emphasis added

by Calculated Risk on 10/05/2009 08:56:00 AM

Something similar to these requirements will probably be enacted internationally ...

From the Financial Times: FSA sets out tough new liquidity rules

UK banks and investment firms would have to increase their holdings of cash and government bonds by £110bn and cut their reliance on short-term funding by 20 per cent in the first year of tough liquidity standards put forward by the Financial Services Authority on Monday.
Excerpted with permission.

In future years, banks would have to reduce their reliance on short-term funding by 80 per cent from current levels and hold additonal liquid assets.

From the FSA:

Paul Sharma, FSA director of prudential policy, said:

"The FSA is the first major regulator to introduce tighter liquidity requirements for firms. We must learn the lessons of the financial crisis and we believe that implementing tougher liquidity rules is essential to ensure we are in a better position to face future crises.
...
The FSA will not tighten quantitative standards before economic recovery is assured. It plans to phase in the quantitative aspects of the regime in several stages, over an adjustment period of several years. This is to take into account the fact that all firms at present are experiencing a market-wide stress.
...
The qualitative aspects of the regime will be put into place by December 2009.

The FSA strongly supports the liquidity workstreams that are underway internationally although recognises that it may be some time before there is international agreement on specific proposals, Therefore, the structure of the new regime is sufficiently flexible to allow the FSA to amend it through time to reflect any new international standards.

by Calculated Risk on 10/04/2009 11:30:00 PM

From Bloomberg: Roubini Says Stocks Have Risen ‘Too Much, Too Soon, Too Fast’

“I see the risk of a correction, especially when the markets now realize that the recovery is not rapid and V-shaped, but more like U- shaped. That might be in the fourth quarter or the first quarter of next year.” [Roubini said in an interview in Istanbul on Oct. 3.]
...
“The real economy is barely recovering while markets are going this way,” Roubini said. If growth doesn’t rebound rapidly, “eventually markets are going to flatten out and correct to valuations that are justified. I see a growing gap between what markets are doing and the weaker real economic activities.”

As I've noted several times, a V-shaped or "Immaculate" recovery seems very unlikely.

Futures are up slightly ...

Futures from barchart.com

Bloomberg Futures.

CBOT mini-sized Dow

CME Globex Flash Quotes

And the Asian markets are mixed.

Best to all.

by Calculated Risk on 10/04/2009 06:56:00 PM

CR Note: This is a guest post from albrt.

MERS v. Kansas

Although the internet discussion has died down considerably, I thought it might be helpful to offer some background and some explanation of what happened in the recent Kansas MERS case. I am not involved in the case, but I used to read Tanta’s posts about this sort of thing and I did some research, so I guess I am well-qualified to opine.

What is MERS?

MERS is part of an attempt by bankers to homogenize mortgages so they can be traded among banks more easily. In many cases the ultimate goal is to bundle the mortgages into bonds. From the MERS website:

About MERS

MERS was created by the mortgage banking industry to streamline the mortgage process by using electronic commerce to eliminate paper. Our mission is to register every mortgage loan in the United States on the MERS® System.

* * *

MERS acts as nominee in the county land records for the lender and servicer. Any loan registered on the MERS® System is inoculated against future assignments because MERS remains the nominal mortgagee no matter how many times servicing is traded. MERS as original mortgagee (MOM) is approved by Fannie Mae, Freddie Mac, Ginnie Mae, FHA and VA, California and Utah Housing Finance Agencies, as well as all of the major Wall Street rating agencies.

Got it? I didn’t think so. MERS’ claim that its loans are “inoculated against future assignments” is an unmixed, but also unenlightening metaphor. Inoculation most commonly means exposing someone to a pathogenic organism or other immunologically active material in order to promote the development of antibodies. I can’t think of anything in the MERS process that can be profitably compared to either a pathogen or an antibody.

What actually happens is that a MERS mortgage is recorded once, usually with MERS shown as the “nominee” of the lender. MERS then tracks loan assignments, including both repayment rights and servicing rights. The output of the tracking system is approximately as good as the input from the lenders. When something happens, MERS is supposed to notify the interested parties.

In some cases MERS will act for the interested parties in lawsuits. If a MERS lender wants MERS to file a foreclosure suit, the lender is supposed to find the original note, endorse it in blank, and give it to a certifying MERS officer before the foreclosure is filed. That makes MERS a “holder” of the note, even if MERS is not actually the owner of the note. Being a holder is generally sufficient to allow MERS to foreclose.

Tanta explained how endorsement works here. MERS apparently has more computers involved, but when it comes time to produce the note in litigation it still amounts to pretty much the same thing. Pathogens and antibodies aside, MERS can’t really provide protection from all the potential errors and problems that came up when loans were being traded and securitized at warp speed all over the country. Many of the cases where MERS has gotten in trouble involved a misplaced note, but it is generally not clear that the problem was MERS’ fault, and it is not all that much different from what happens when a non-MERS lender files a foreclosure suit without having the original note handy.

This should be enough background to understand what happened (and did not happen) in the recent Kansas Supreme Court case.

The Kansas Supreme Court case

In Landmark National Bank v. Kesler , Landmark held a first mortgage and foreclosed on Mr. Kesler’s property. Landmark obtained a default judgment and was able to sell the property for more than the balance due on the first mortgage.

There was also a second mortgage on the property. The document for the second mortgage showed an outfit called “Millennia” as the lender, and showed MERS as the lender’s nominee. The document said notice should be sent to the lender, and did not say much about the nominee. Landmark sent notice of the foreclosure suit to Millennia, but not to MERS.

As it turned out, the second mortgage had been sold to an outfit called “Sovereign,” so Millennia no longer had an interest in the case. After the foreclosure judgment and sale, but before the distribution of the proceeds from the sale, Sovereign entered the case and tried to set aside the foreclosure judgment. Sovereign’s problem was that it never recorded anything to show that it held an interest in the property, so it really didn’t have much of an argument that it was entitled to notice of the foreclosure.

In order to address this problem, MERS joined in the case a couple of months later. MERS was essentially on Sovereign’s side, arguing that even if Sovereign wasn’t entitled to notice, MERS was on the original mortgage and was entitled to notice, and MERS would have notified Sovereign if MERS had received notice.

Not surprisingly, the judge held Sovereign was not entitled to notice because it didn’t register the assignment of the loan in the public records. The judge also held MERS was an agent of the lender at most, and did not have a sufficient interest to be able to show up late and overturn the judgment.

The Kansas Supreme Court upheld the judge’s decision, based in part on the conclusion that MERS didn’t own an interest in the note or the mortgage. This is what got a lot of attention on the internets, but most commentators seem to have missed the point. The court did not say the mortgage was invalidated because MERS separated the mortgage from the note. The court said MERS did not appear to own either the mortgage or the note. Part of the reason for the court’s conclusion was that you can’t separate a mortgage from the note it secures.

The key to the Kansas decision, like most judicial decisions, is in the details. The actual mortgage document required notice to the lender, not to MERS. The mortgage document listed MERS as a “nominee,” but never really defined what a nominee was or provided any basis for arguing that a nominee is entitled to notice above and beyond the notice given to the lender.

The only broad effect of this decision is that the court refused to make a special exception for MERS mortgages and require precautionary notice to MERS regardless of what the document said. Most MERS mortgages do say that MERS should get notice. If the mortgage document says that, most courts will enforce it.

There are other cases discussing MERS, some of which provide more general information than the Kansas case. One I would recommend is a decision by bankruptcy judge Linda Riegle on a group of bankruptcy cases in Nevada. The essence of Judge Riegle’s decision is that MERS isn’t entitled to any special status, and needs to have the note in order to take any action on it. The decision is available on Westlaw under the name Hawkins at 2009 WL 901766. Substantially the same decision is publicly available under the case name Mitchell, No. BK-S-07-16226-LBR .

What is the problem?

Mortgages are complicated. Most mortgage primers start with the distinction between states maintaining a “title” theory of mortgages and states maintaining a “lien” theory. This is mostly nonsense, as summed up by an eminent commentator nearly a hundred years ago: “There is no complete adoption of a logical theory in any of the American jurisdictions.” Manley O. Hudson, Law of Mortgages Real & Chattel, in 8 Modern American Law, at 297 (E. A. Gilmore & W. C. Wermuth eds. 1917).

So there are really two basic problems reflected in the MERS cases: (1) mortgages are complicated, and (2) the creation of MERS did not really reduce the complications, it just papered over them.

1. Mortgages are complicated

Mortgages are not homogenous. Not at any level. The borrowers are different, the mortgaged real estate is different, the practices of the banks are different, state laws are different, and federal government involvement is different for different types of lenders and borrowers. An important corollary of principle number one is that whatever a lender does, and whatever MERS does on behalf of lenders, will have different effects in different cases.

As Tanta wisely noted a few years ago, it is very difficult to see how an increasingly centralized industry can deal with all these details, and do it cheaply enough to make a profit when interest rates are at five percent and spreads are thin. In order to do it cheaply enough, the industry got rid of most of its Tanta-caliber people and replaced them with inexperienced temps, or perhaps with MERS. The main reason it worked for a few years was because problem mortgages could be refinanced so easily, and fees could be charged for each refinancing.

2. The creation of MERS did not really reduce the complications.

MERS undoubtedly provides some useful services to banks, but it does not “inoculate” them from dealing with necessary administrative costs. The administrative costs, especially in a lousy market, will probably make high-velocity mortgage loan trading and securitizing an unprofitable venture. As Tanta said, “the true cost of doing business is belatedly showing up.”

The goal of the people who created MERS was to design a system that has traction in local recording systems, and is flexible enough that it could be made to work under the law of every state. The MERS system probably meets this goal when it is done right. In theory, using the term “nominee” gives MERS flexibility in defining the duties and obligations of the relationship. It may also give MERS some flexibility in explaining how the court should treat a nominee after something has gone wrong, as the law of the jurisdiction or the facts of a particular case seem to require. Unfortunately for MERS, experienced judges are wise to this trick and will most likely to continue placing reasonable limits on the ability of MERS to claim it is all things to all lenders.

But setting all the cleverness of the MERS system aside, the system still requires the last lender in the chain to endorse the note over to MERS before the foreclosure can begin. If the lenders have been ignoring their paperwork because they think they are “inoculated against future assignments,” it is possible the lenders are worse off than they would have been without MERS. From what I can see, that is not the case. The way lenders were acting in 2005, if left to their own devices they would probably have lost about 90% of everything. With MERS, they probably did better than that.

So is this a nothingburger?

Sort of. MERS isn’t obscuring land titles in a way that will interfere with future transactions. If a mortgage is paid off, it should be released in the local public records. The odds that somebody screwed something up may go up a little or down a little, but a title company should be able to insure any subsequent sale.

We can also be reasonably certain the MERS cases are not going to invalidate millions of mortgages at one swipe. Because mortgages are complicated, whatever a lender does and whatever MERS does on behalf of lenders will have different effects in different cases. Most of the problems can be attributed to non-standard mortgage documents, poorly drafted foreclosure complaints, or foreclosure complaints filed prematurely without verifying the status of the mortgage and who is holding the note. These problems affect non-MERS lenders in more or less the same way they affect MERS lenders. Having MERS involved might help get things straightened out in some cases, or it might make the problem worse in some cases.

I think the important question is whether, on balance and in the aggregate, the MERS system works well enough to allow lenders to re-start the private label securitization money machine in a few years. I think the answer is probably no.

Of course, since the residential lending industry has effectively been nationalized, it would not be particularly surprising to see fundamental change on a national level that would allow the resumption of securitization. But that would probably bring us back to something like the plain vanilla Fannie and Freddie system that existed before 2000, not the insanely profitable liar loan system that Wall Street had created by 2005.

This post is intended as a tribute to Tanta, who already wrote pretty much everything you need to know to understand these issues, and did it much more cleverly than I can. I have not been able to read all the comments recently, so I apologize if I have inadvertently stolen anyone’s ideas besides Tanta’s.

CR Note: This is a guest post from albrt.

by Calculated Risk on 10/04/2009 02:59:00 PM

As a companion to the Oct 2nd Problem Bank List (unofficial), below is a list of failed banks since Jan 2007.

From the FDIC FAQs: (ht JB)

11. When is the DIF expected to go negative?

FDIC estimates that the DIF balance as of September 30, 2009 will be negative.

However the DIF reserves against future losses, and the DIF still has cash to pay for bank closures - but I show the DIF balance as zero on the following graph:

Click on graph for larger image in new window.

The graph shows the cumulative estimated losses to the FDIC Deposit Insurance Fund (DIF) and the quarterly assets of the DIF (as reported by the FDIC). Note that the FDIC takes reserves against future losses in the DIF, and collects fees and special assessments - so you can't just subtract estimated losses from assets to determine the assets remaining in the DIF.

The cumulative estimated losses for the DIF, since early 2007, is now over $44.5 billion.

Regulators closed three more banks on Friday, and that brings the total FDIC insured bank failures to 98 in 2009. Although regulators have slowed down in recent weeks, they are still on pace to close over 130 banks this year - the most since 1992.

Failed Bank List

Deposits, assets and estimated losses are all in thousands of dollars.

Losses for failed banks in 2009 are the initial FDIC estimates. The percent losses are as a percent of assets. Note that losses for the Irwin banks were combined by the FDIC, so one of the banks shows up as zero percent in the table.

See description below table for Class and Cert (and a link to FDIC ID system).

The table is wide - use scroll bars to see all information!

Click here for a full screen version.

NOTE: Columns are sortable - click on column header (Assets, State, Bank Name, Date, etc.)




Class: from FDIC

The FDIC assigns classification codes indicating an institution's charter type (commercial bank, savings bank, or savings association), its chartering agent (state or federal government), its Federal Reserve membership status (member or nonmember), and its primary federal regulator (state-chartered institutions are subject to both federal and state supervision). These codes are:

N National chartered commercial bank supervised by the Office of the Comptroller of the Currency

SM State charter Fed member commercial bank supervised by the Federal Reserve

NM State charter Fed nonmember commercial bank supervised by the FDIC

SA State or federal charter savings association supervised by the Office of Thrift Supervision

SB State charter savings bank supervised by the FDIC

Cert: This is the certificate number assigned by the FDIC used to identify institutions and for the issuance of insurance certificates. You can click on the number and see "the last demographic and financial data filed by the selected institution".

by Calculated Risk on 10/04/2009 07:41:00 AM

Consumer spending was up in August because of Cash-for-Clunkers, but auto sales were down sharply in September.

August PCE and Saving Rate

Light Vehicle Sales 9.2 Million (SAAR) in September

Click on graph for larger image in new window.

This graph shows the historical light vehicle sales (seasonally adjusted annual rate) from the BEA (blue) and an estimate for September (red, light vehicle sales of 9.22 million SAAR from AutoData Corp).

This is the third lowest vehicle sales this year.

Industrial indicators stalled:

ISM Manufacturing shows expansion in September

Chicago Purchasing Managers Index Declines in September

Housing: House Prices increased, meanwhile delinquencies and foreclosure are rising.

Case-Shiller House Prices increase in July

Fannie Mae Serious Delinquency Rate increases Sharply

OCC and OTS: Foreclosures, Delinquencies increase in Q2

This data is from the Office of the Comptroller of the Currency and the Office of Thrift Supervision: OCC and OTS Release Mortgage Metrics Report for Second Quarter 2009

Seriously delinquent loans continue to rise rapidly, especially for prime loans.

OCC and OTS: Modification Re-Default Rates

About 25% to 30% of modifications fail in the first three months. For Q1 and Q2 2008, about 55% of borrowers have re-defaulted. Q3 2008 will probably be worse, and Q4 2008 and Q1 2009 about the same.

The Labor Market was very weak.

Employment Report: 263K Jobs Lost, 9.8% Unemployment Rate for graphs of unemployment rate and a comparison to previous recessions.

The graph compares the job losses from the start of the employment recession in percentage terms (as opposed to the number of jobs lost).

The dashed line is an estimate of the impact of the large benchmark revision (824 thousand more jobs lost).

Instead of 7.2 million net jobs lost since December 2007, the preliminary benchmark estimate suggests the U.S. has lost over 8.0 million net jobs during that period.

Unemployment: Stress Tests, Unemployed over 26 Weeks, Diffusion Index

Employment-Population Ratio, 10% Unemployment, Part Time Workers

Weekly Unemployment Claims: 551,000

by Calculated Risk on 10/03/2009 08:00:00 PM

Proposals:

Extend Unemployment benefits.

Extend enhanced unemployment benefit (extra $25-a-week)

Extend the COBRA premium reduction (pay 65% of health insurance).

Extend "first-time" homebuyer tax credit (very inefficient).

If this is just a safety net extension, then the "first-time" homebuyer tax credit doesn't qualify. And if this is the "Next Stimulus Package", providing more aid to the unemployed (13 weeks won't last long), or aid to the states, would be a far more effective use of money than the homebuyer tax credit ...

A couple of stories, first from the WSJ: Democrats Weigh Extending Key Parts of Stimulus

Obama administration economists said they would like the enhanced unemployment-insurance program to extend beyond its Dec. 31 expiration date. They also want to maintain a program that offers tax credits to pay 65% of the cost of health insurance policies under the COBRA program, which allows laid-off workers to purchase the health plans they had through their previous employer.

White House officials said they also are examining whether to extend a soon-to-expire tax credit for first-time homebuyers, but that provision faces a stiffer headwind.

From the NY Times: After More Job Losses, Democrats Move to Extend Benefits

The House on Friday approved legislation that would provide 13 more weeks of benefits to states with unemployment rates of 8.5 percent or higher. Democratic leaders in the Senate are pushing a measure that would also provide aid to states that do not meet the threshold.

Senator Harry Reid of Nevada, the majority leader, is promoting legislation that would provide four more weeks of unemployment coverage to all states, while states over the 8.5 percent threshold would get 12 more weeks.

Lawrence H. Summers, director of the National Economic Council, said in an interview with The Atlantic online that the administration should “continue to support people who are in need, whether it’s unemployment insurance, or the Cobra program,” which provides health insurance for the unemployed.

by Calculated Risk on 10/03/2009 05:00:00 PM

This is an update to a 2007 post: Home Builders and Homeownership Rates¹

From 1995 to 2005, the U.S. homeownership rate climbed from 64% to 69%, or about 0.5% per year.

Click on graph for larger image in new window.

The first graph shows the homeownership rate since 1965. Note the scale starts at 60% to better show the recent change.

The reasons for the change in homeownership rate are discussed in the 2007 post ( a combination of demographics and changes in mortgage "innovation"), but here are two key points: 1) During the boom, the change in the homeownership rate added about half a million new homeowners per year, as compared to a steady homeownership rate, 2) the homeownership rate (red arrow is trend) is now declining.

The U.S. population has been growing at close to 3 million people per year on average, and there are about 2.4 people per household. Assuming no change in these rates, there would be close to 1.25 million new households formed per year in the U.S. (The are just estimates, and fewer households are formed during a recession - a key problem right now).

Since about 2/3s of all households are owner occupied, an increase of 1.25 million households per year would imply an increase in homes owned of about 800K+ per year. If an additional 500K per year moved to homeownership - as indicated by the increase in the homeownership rate from 1995 to 2005 - then the U.S. would have needed 1.3 million additional owner occupied homes per year.

Important note: these number can't be compared directly to the Census Bureau housing starts and new home sales. There are many other factors that must be accounted for to compare the numbers.

During that same period, since about 1/3 of all households rent, the U.S. would have needed about 400K+ new rental units per year, minus the 500K per year of renters moving to homeownership. So the U.S. needed fewer rental units per year from 1995 to 2005.

The second graph shows the number of occupied (blue) and vacant (red) rental units in the U.S. (all data from the Census Bureau).

Sure enough, the number of rental units in the U.S. peaked in early 1995 and declined slowly until 2005. The builders didn't stop building apartment units in 1995, instead the decline in the total units came from condo conversions and units being demolished (a fairly large number of rental and owner owned units are demolished every year).

Even though the total number of rental units was declining, this didn't completely offset the number of renters moving to homeownership, so the rental vacancy rate started moving up - from about 8% in 1995 to over 10% in 2004.

Since 2004 there has been a surge in rental units. Most of this increase is not new apartment buildings, rather a combination of investors buying REOs for cash flow, condo "reconversions", builders changing the intent of new construction (started as condos but became rentals), flippers becoming landlords, or homeowners renting their previous homes or 2nd homes instead of selling. This increase in rental units is more than offsetting the decline in the homeowership rate, and the rental vacancy rate was at a record 10.6% in Q2. (and will probably be over 11% soon because of the "first-time" homebuyer tax credit).

This increase in the homeownership rate, from 1995 through 2005, meant the homebuilders had the wind to their backs. Instead of 800K of new owner demand per year (plus replacement of demolished units, and second home buying), the homebuilders saw an additional 500K of new owner demand during the period 1995 to 2005. This doesn't include the extra demand from speculative buying. Some of this demand was satisfied by condo conversions and owner built units, but the builders definitely benefited from the increase in homeownership rate.

Looking ahead, if the homeownership rate stays steady, the demand for net additional homeowner occupied units would fall back to 800K or so per year (assuming steady population growth and persons per household). However the homeownership rate is declining, and this is now a headwind for the builders.

It appears the rate is declining at about 0.5% per year. This means the net demand for owner occupied units would be 833K minus about 500K per year or about 333K per year - about 25% of the net demand for owner occupied units for the period 1995 to 2005. (Not including replacing demolished units and 2nd home buying).

Although we can't compare this number directly to new home sales (because of 2nd home buying, replacement of demolished units, and other factors) this does suggest new home sales will probably remain at a low level until the homeownership rate stops declining.

The third graph shows New Home Sales for the last 45 years. the Census Bureau reported: "Sales of new one-family houses in August 2009 were at a seasonally adjusted annual rate of 429,000."

Once the homeownership rate stops declining - probably at about the same time the excess existing home units are mostly absorbed - new home sales will probably increase to a steady state rate based on population growth. However this level will be substantially below the average for the period from 1995 to 2005 when the homebuilders benefited from the increasing homeownership rate.

The "first-time" homebuyer tax credit (and new homebuyer tax credit in California) probably boosted new home sales a little this year, so the homeownership rate might increase in the 2nd half of 2009. However that increase will probably be temporary, and the homeownership rate will probably start declining again.

Key points:

New Home sales will probably remain at a low level until the homeownership rate stops declining.

Once the homeownership rate stops declining, new home sales will increase to a steady state rate based on population growth - but far below the levels during the housing boom.

Residential investment (a usually engine of recovery) will not provide much of a boost until the homeownership rate stops declining - that will probably happen when the excess existing home inventory is mostly absorbed.

¹ A special thanks to Jan Hatzius. Several of the ideas for this post are from his piece: "Housing (Still) Holds the Key to Fed Policy", Nov 27, 2007

by Calculated Risk on 10/03/2009 01:43:00 PM

From the NY Times: Retailers Expect Flat Christmas Sales This Year

[A] lot of people are thinking about it, and taking surveys to test the mood of the American consumer, and deciding that this Christmas will be as bad as last — which is to say, one of the worst on record.

Retailers are relieved to hear that prediction. Flat sales this holiday season would at least mean that things had stopped getting worse ... several reports published in the last few days, including surveys by Nielsen and Deloitte, forecast no change in holiday sales from last year to this year.

And that suggests that seasonal retail hiring will be weak too. Here is a repeat of a graph from a post a couple weeks ago: Seasonal Retail Hiring

Typically retail companies start hiring for the holiday season in October, and really increase hiring in November. This graph shows the historical net retail jobs added for October, November and December by year.

Click on graph for larger image in new window.

This really shows the collapse in retail hiring in 2008. This also shows how the season has changed over time - back in the '80s, retailers hired mostly in December. Now the peak month is November, and many retailers start hiring seasonal workers in October.

Given the expectation of no growth in holiday spending, retailers will probably be very cautious hiring again this year.