by Calculated Risk on 6/22/2010 02:34:00 PM

Earlier I mentioned that a normal housing market usually has under 6 months of supply. The current 8.3 months of supply is significantly above normal, and is especially concerning because the reported inventory is already historically very high.

After the tax credit related activity ends, the months of supply will probably increase, and the ratio could be close to double digits later this year. That level of supply will put additional downward pressure on house prices.

Click on graph for larger image in new window.

This graph show months of supply and the annualized change in the Case-Shiller Composite 20 house price index (inverted).

Below 6 months of supply (blue line) house prices are typically rising (red line, inverted).

Above 6 months of supply house prices are usually falling (although there were many programs to support house prices over the last year).

Later this year the months of supply will probably increase, and I expect house prices to fall further as measured by the Case-Shiller and CoreLogic repeat sales house price indexes.

by Calculated Risk on 6/22/2010 11:28:00 AM

Earlier the NAR released the existing home sales data for May; here are a couple more graphs ...

The first graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Inventory is not seasonally adjusted, so it really helps to look at the YoY change.

Click on graph for larger image in new window.

Inventory increased 1.1% YoY in May. This is the second consecutive month of a year-over-year increases in inventory. Although the YoY increase is small, I expect it will be higher later this year.

This increase in inventory is especially concerning because the reported inventory is already historically very high, and the 8.3 months of supply in May is well above normal. The months of supply will probably stay near this level in June, because of more tax credit related sales (reported at closing), but the months-of-supply could be close to double digits later this year.

And a double digit months-of-supply would be a really bad sign for house prices ...

The second graph shows NSA monthly existing home sales for 2005 through 2010 (see Red columns for 2010).

Sales (NSA) in May 2010 were 17.7% higher than in May 2009, and also higher than in May 2008.

We will probably see sales at around this level in June because of the tax credit, however I expect to see existing home sales below last year in the 2nd half of this year.

This was definitely a weak report. Sales were up year-over-year because of the tax credit pulling sales forward, but that does very little for the economy. The key is the inventory and months-of-supply, and if these two measures increase later this year as I expect, then there will be additional downward pressure on house prices.

by Calculated Risk on 6/22/2010 10:00:00 AM

The NAR reports: May Shows a Continued Strong Pace for Existing-Home Sales

Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, were at a seasonally adjusted annual rate of 5.66 million units in May, down 2.2 percent from an upwardly revised surge of 5.79 million units in April. May closings are 19.2 percent above the 4.75 million-unit level in May 2009; April sales were revised to show an 8.0 percent monthly gain.
...
Total housing inventory at the end of May fell 3.4 percent to 3.89 million existing homes available for sale, which represents an 8.3-month supply at the current sales pace, compared with an 8.4-month supply in April. Raw unsold inventory is 1.1 percent above a year ago, but is still 14.9 percent below the record of 4.58 million in July 2008.

Click on graph for larger image in new window.

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

Sales in May 2010 (5.66 million SAAR) were 2.2% lower than last month, and were 19.2% higher than May 2009 (4.75 million SAAR).

The second graph shows nationwide inventory for existing homes.

According to the NAR, inventory decreased to 3.89 million in May from 4.04 million in April. The all time record high was 4.58 million homes for sale in July 2008.

Inventory is not seasonally adjusted and there is a clear seasonal pattern with inventory increasing in the spring and into the summer. The increase in April 2010 was partially related to sellers hoping to take advantage of the housing tax credit, and a decline in May was expected (I'll have more on inventory later).

The last graph shows the 'months of supply' metric.

Months of supply decreased slightly to 8.3 months in May. A normal market has under 6 months of supply, so this is high - and probably excludes some substantial shadow inventory. And the months of supply will probably increase sharply this summer as sales fade.

This was a very weak report - as anticpated by Tom Lawler yesterday (see Lawler: Home Sales in May: A Look at the Data ). I'll have more ...

by Calculated Risk on 6/22/2010 08:36:00 AM

Moody's reported today that the Moody’s/REAL All Property Type Aggregate Index increased 1.7% in April, after declining for the previous two months. This is a repeat sales measure of commercial real estate prices.

Below is a comparison of the Moodys/REAL Commercial Property Price Index (CPPI) and the Case-Shiller composite 20 index.

Notes: Beware of the "Real" in the title - this index is not inflation adjusted. Moody's CRE price index is a repeat sales index like Case-Shiller - but there are far fewer commercial sales - and that can impact prices.

Click on graph for larger image in new window.

CRE prices only go back to December 2000.

The Case-Shiller Composite 20 residential index is in blue (with Dec 2000 set to 1.0 to line up the indexes).

It is possible that commercial real prices have bottomed - in general - but it is hard to tell because the number of transactions are very low and there are a number of distressed sales. Prices have been choppy and mostly moving sideways.

Commercial real estate values are now down 16% over the last year, and down 41% from the peak in late 2007.

by Calculated Risk on 6/21/2010 10:32:00 PM

Last week I mentioned the potential law change in California: Under California law, purchase money loans are non-recourse. However once a homeowner refinances, the entire mortgage is recourse ... that is probably going to change ...

Note: This bill, if passed, will take effect June 1, 2011. Here is the proposed bill (ht pastafarian)

From David Streitfeld at the NY Times: Battles in California Over Mortgages

Lenders in California rarely chase foreclosed borrowers for deficiency judgments. Pursuing such cases in court can be an arduous process, and few of those in foreclosure have the assets or incomes to make it worthwhile.

But the threat of such action can come in handy for lenders, servicers and collection agencies. By raising the possibility of a court fight, they can negotiate favorable terms when agreeing to loan modifications and workouts, surrenders of deeds and sales for less than the full amount owed, also known as short sales.

“Using the threat of a deficiency, full-recourse lenders often prevail upon distressed borrowers to sign new, unsecured obligations in exchange for their assent to a proposed short sale or surrender of a deed,” said William A. Markham, a lawyer with Maldonado & Markham in San Diego. “This practice will nearly vanish overnight if the new measure becomes law.”

There is much more in the article. Of course the bankers are fighting to make this apply only to new loans after June 2011. The realtors are fighting to make it apply to current loans ...

by Calculated Risk on 6/21/2010 07:15:00 PM

CR Note: As mentioned in the Look Ahead post, the consensus for existing home sales (to be announced Tuesday) is for an increase to 6.2 million sales in May (SAAR), from 5.77 million in April (SAAR). For new home sales, the consensus is for a sharp decrease in sales to around 400K (SAAR), down from 504K in April.

Housing economist Tom Lawler is taking the under. The following is from Tom:

While most (though by no means all) of the country appears to have experienced a sharp gain in existing home sales (closed) this May vs. a year ago, the nationwide increase does not appear to have been as high as the surge in pending sales (related to the expiring tax credit) in March and April would have suggested. Last year’s “comp,” of course, was pretty low: the NAR estimates that existing home sales last May ran at a seasonally adjusted annual rate of 4.75 million, and unadjusted sales were estimated at 447,000. While this May’s “seasonal factor” should be lower than last May’s (meaning flat unadjusted sales would produce a seasonally adjusted increase), I estimate that unadjusted sales this May vs. last May would have to be up about 19.2% for seasonally adjusted sales to be flat to April. Obviously sales in many areas of the country were up a lot more than that, but in some large states sales showed much smaller gains, and a few saw declines.

Dataquick estimates that new and resale home sales in California were up 4.9%, with the “small” gain mainly resulting from a decline in foreclosure sales. While this stat is based on deeds recorded and includes new sales, MLS data I’ve seen aren’t too far off. The Michigan Association of Realtors reported a YOY decline in sales in May, with the drop coming many in foreclosure sales in very distressed areas. Sales in both Las Vegas and Phoenix were also down from a year ago, with both areas seeing sizable declines in foreclosure sales.

Many other states saw YOY sales gains that were decent, but hardly explosive. Based on realtor data from North Texas, Houston, San Antonio, Austin, Lubbock, and Wichita Falls, it appears as if Texas sales increased about 19.2%. Other states with “so-so” YOY sales gains include Iowa (20.8% statewide), Colorado (18% for Denver and Colorado Springs combined), Birmingham (16.8%), Indiana (14% Indianapolis and Fort Wayne combined), Minneapolis-St-Paul (10.7%), Greater Northern Virginia (6.2%), and quite a few (but not all) Florida markets showed very modest gains.

To be sure, many areas of the country saw sizable increases, but interestingly the vast bulk of these areas saw smaller YOY sales gains in May than in April.

When I add everything I have up, and make estimates for areas where I couldn’t find any reliable data, I come up with an estimated seasonally adjusted annual rate for existing home sales that is much smaller than I would have expected a few weeks ago – something in the range of 5.83 to 5.84 million, which would translate into an unadjusted YOY sales gain of around 20.5 to 20.6%, and would be a boatload under consensus.

Of course, my regional tracking – which until the last few months has easily produced a better-than-consensus estimate, of late has been low to the downside. More troubling (to me, at least), I’ve had trouble “reconciling” to the NAR data even after getting state/local realtor sales data not available until the day of the existing home sales report (or later in some cases!).

Nevertheless, the “raw” data I’ve seen so far suggests that existing home sales in May will come in well under “consensus” – for reasons that are unclear, and until recently to my surprise.

On the new home sales front (to be reported by the Census Bureau), anecdotal reports from a wide range of builders, as well as from some local realtors, suggest that new home sales as defined by the CD probably ran a bit lower than last May, when sales (based on contracts signed/deposits taken) ran at a SAAR of 367 k. I’m “guessing” that the preliminary number for May will be somewhere around 330 k, which would be a monthly decline from April of 34.5% (which is probably close to the monthly decline we’ll see in the pending home sale index scheduled to be release by the NAR on July 1.

CR Note: This was from housing economist Tom Lawler. Note the caveats, but clearly the data suggests a downside surprise.

by Calculated Risk on 6/21/2010 03:48:00 PM

The Obama administration has introduced a "monthly housing scorecard". Here is the website: www.hud.gov/scorecard

Some excerpts and a couple of graphs:

• Home price performance has improved. After 30 straight months of decline and an expectation of continued significant deterioration, home prices have leveled off in the past year and expectations have adjusted upward. Homeowners have benefitted from the stabilization, as owner equity has increased by over $1 trillion since the first quarter of 2009

Click on graph for larger image in new window.

This graph from the Obama Administration "scorecard" shows the actual house prices, and future house prices. The light blue line was the projected house prices based on futures in January 2009 - before the Obama administration started supporting house prices with various programs to limit supply and boost demand.

Note: I don't know why they use washed out colors on the graphs.

I believe the overall goal of supporting house prices was a mistake. It wasn't horrible - because prices were much closer to the bottom than the top - but by keeping prices too high, the market hasn't cleared and there is still a huge overhang of existing home inventory.

The second graph from the housing scorecard shows the Obama administration's estimate of the housing overhang.

I'm not confident in the "held off market" category, but that is probably their method of estimating the shadow inventory (not all "held off market" is shadow, but some probably is). The existing home inventory - and shadow inventory - are still very high.

More from the report:

• More than 2.5 million first time homebuyers have purchased a home using the First-Time Homebuyer Tax credit, helping to stabilize home sales and prices and increase affordability.

This is really sad news. This program was a disaster - most of these buyers would have bought anyway, and the others was just pulling forward future demand at a higher price. Now that the program is almost over (hopefully), demand and prices will probably fall again.

• Martgages are now more affordable. Due to historically low interest rates, more than 6 million homeowners have refinanced, saving an estimated $150 per month on overage and more than $11 billion in total.

• Servicers report that the number of homeowners receiving restructured mortgages since April 2009 has increased to 2.8 million. This includes more than 1.2 million homeowners who have started HAMP trial modifications and nearly 400,000 who have benefitted from FHA loss mitigation activities. Of those in the HAMP program, 346,000 have entered a permanent modification saving a median of more than $500 per month. In addition, HUD approved mortgage counselors have assisted 3.6 million families.

• Based on newly available survey data, nearly half of homeowners unable to enter a HAMP permanent modification enter an alternative modification with their servicer, and fewer than 10 percent of cancelled trials move to foreclosure sale.

Note: the Obama administration needs a better spellchecker (what is a "martgage"?. And I think it is "benefited" with one "t")

This raises more questions: fewer than 10% of cancelled trials have moved to a foreclosure sale? What about short sales? Does that mean that the homeowners are curing the delinquency (getting caught up), or does that mean there are many more distressed sales to come?

There are many more graphs (and a list of sources) in the report and this report might not have much good news in the coming months ...

by Calculated Risk on 6/21/2010 01:35:00 PM

From Treasury: HAMP Servicer Performance Report Through May 2010

Click on table for larger image in new window.

About 347 thousand modifications are now "permanent" - up from 299 thousand last month - and 430 thousand trial modifications have been cancelled - up sharply from 277 thousand last month.

According to HAMP, there are 467,672 "active trials", down from 637,353 last month. However if we add the trials started since December (5 months!), there should only be 300,000 thousand borrowers in trial programs. That means there is still a huge number of borrowers in limbo, but with all the cancellations, the number is declining.

The second graph shows the cumulative HAMP trial programs started.

Notice that the pace of new trial modifications has slowed sharply from over 150,000 in September to just over 30,000 in May (down from 47,160 in April 2010). This is the slowest pace since the program started, probably because of two factors: 1) servicers are now pre-qualifying borrowers, and 2) servicers are running out of eligible borrowers. The program continues to slow down ...

Debt-to-income ratios worsen

If we look at the HAMP program stats (see page 5), the median front end DTI (debt to income) before modification was 44.8% - about the same as last month. And the back end DTI was an astounding 79.8 (down slightly from 80.2% last month).

Think about that for a second: for the median borrower, about 80% of the borrower's income went to servicing debt. And it is almost 64% after the modification.

And that is the median - and just imagine the characteristics of the borrowers who can't be converted!

Summary:

A large number of trial programs were cancelled (finally). This will mean more foreclosures (or short sales) in the near future.

A large number of borrowers are still in modification limbo. We should expect another 150 thousand cancellations pretty quickly (maybe in June).

The program is slowing down quickly (only 30,000 new trials started in May).

The borrowers DTI characteristics are poor - suggesting a high redefault rate over the next year or two.

by Calculated Risk on 6/21/2010 11:30:00 AM

David Rosenberg, chief economist at Gluskin Sheff + Associates, wrote this morning:

"We heard from Ivy Zelman (top-rated real estate research) on Friday that the bill that included an extension for the closing date of the homebuyer tax credit fell two votes short of passing in the Senate. This virtually assures that it will not become law prior to the June 30th deadline. Ivy says that while it is difficult to quantify the impact, the fact that as of yet there is no extension, which was widely expected in this bailout nation, it could trigger a jump in cancellations beginning in July if a sizeable number of sales are not closed in time."

Rosenberg is referring to H.R.4213 the "American Jobs and Closing Tax Loopholes Act of 2010".

The amendment (S.AMDT.4344) to extend the closing date for the tax credit passed last week on a vote of 60 to 37.

The Senate is still debating the other tax extenders, and was unable to obtain cloture (this is what Zelman was referring to). This bill also includes the extension of the date (not duration) of unemployment benefits and other provisions. One of the sticking points is the extension of the COBRA benefit.

by Calculated Risk on 6/21/2010 08:38:00 AM

From Reuters: China's Yuan Jumps After Flexibility Pledge

The yuan closed at 6.7976 against the dollar, up 0.42 percent from Friday's close ...

The yuan has been essentially pegged at 6.83 since July 2008.

On Saturday China announced more exchange rate flexibility ... here are some excerpts from the statement (via WSJ):

In view of the recent economic situation and financial market developments at home and abroad, and the balance of payments (BOP) situation in China, the People´s Bank of China has decided to proceed further with reform of the RMB exchange rate regime and to enhance the RMB exchange rate flexibility.
...
The global economy is gradually recovering. The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability. It is desirable to proceed further with reform of the RMB exchange rate regime and increase the RMB exchange rate flexibility.