by Calculated Risk on 11/26/2010 05:38:00 PM

From the NY Times: Europeans Striving to Calm Nerves in Markets

[T]he team of European Union and International Monetary Fund specialists in Ireland was racing to complete terms of its financing package before markets reopen on Monday.

Looks like Sunday will be busy again.

And from the Irish Times: Reports that bailout will attract 6.7% rate rejected

The interest rate for a nine-year EU/IMF loan would be lower than the 6.7 per cent being quoted in some reports today, a source involved in the talks has indicated.

University College Dublin professor Karl Whelan earlier estimated an EFSF borrowing rate close to 6%: Borrowing Rates from The EFSF

And more stress tests are coming in Spain (from NY Times article):

In Spain, the central bank ... said it would carry out further stress tests to show ... financial institutions ... could absorb a “problematic exposure” of 180 billion euros, or $238 billion, to the country’s collapsed construction and real estate sectors.

by Calculated Risk on 11/26/2010 01:42:00 PM

We are constantly bombarded with housing supply numbers: 3.86 million existing homes for sale, 10.5 month-of-supply, 2.1 million "pending sales", 7 million mortgages delinquent.

Recently NY Fed president William Dudley said "We estimate that there are roughly 3 million vacant housing units more than usual", and other sources have mentioned there are close to 19 million vacant housing units in the U.S.!

What does it all mean?

The number to start with is the "visible supply" reported monthly from the National Association of Realtors (NAR). At the end of October, the NAR reported there were 3.86 million homes for sale.

Click on graph for larger image in graph gallery.

This graph shows nationwide inventory for existing homes.

Notice that inventory started to increase in the 2nd half of 2005. That was one of the indicators I used to call the top of the housing bubble.

Also notice the seasonal pattern for inventory - inventory increases in the spring, and usually peaks during the summer months, and then falls off sharply in December as homeowners take their homes off the market for the holidays. I expect NAR reported inventory to fall to around 3.5 million of so in December (down from 3.86 million in October, but up from 3.283 in December 2009).

This brings up an interesting point about how the NAR calculates "months-of-supply". The simple formula is months-of-supply = inventory divided by sales. The NAR uses the Seasonally Adjusted Annual Rate (SAAR) of sales, but the Not Seasonally Adjusted (NSA) inventory - even though there is a clear seasonal pattern for inventory.

The NAR formula is: months-of-supply = (inventory (NSA) /sales (SAAR)) * 12 months. (edit: oops, inverted initially, correct above) For October, the NAR reported 4.43 million sales (SAAR), and 3.86 million units of inventory, so that equals 10.5 months of supply.

If inventory drops to 3.5 million in December (normal seasonal decline), but the sales rate stay at 4.43 million, the months-of-supply metric will decline to 9.5 months. Some analysts might report that decline as "good news" even though it is just because of the normal seasonal change in inventory.

A couple more points:
• Historically year end inventory is around 3% to 3.5% of the total number of owner occupied units. Currently there are about 75 million owner occupied units, so a normal level of year end inventory would be around 2.3 to 2.6 million units. So the visible inventory at around 3.5 million would be significantly above the normal level.
• It is the visible inventory that impacts prices. Also important is the level of distressed sales (short sales and foreclosures).

CoreLogic reports the number of distress sales in their monthly US Housing and Mortgage Trends.

This graph (posted with permission) shows the percentage of short sales and REO (lender Real Estate Ownder) sales since January 2006. From CoreLogic:

Distressed sales fell 10 percent in August to 68,700, the lowest level since May 2008. Although the level of distressed sales declined, it simply reflects the weak demand in the market overall because total sales also declined and the distressed sale share remained stable at 28 percent.

So both the level of visible inventory and the percentage of distressed sales is elevated - and that puts downward pressure on house prices.

The next number is the "pending sales" of 2.1 million units. This was reported by CoreLogic this week:

This graph from CoreLogic shows the breakdown of "pending sales" by category. For this report, CoreLogic estimates the number of 90+ day delinquencies, foreclosures and REOs not currently listed for sale. Obviously if a house is listed for sale, it is already included in the "visible supply" and cannot be counted as a pending sale.

CoreLogic estimates the "pending sale" (by this method) at about 2.1 million units. This number is useful - especially the trend - because it suggests that the visible inventory will stay elevated for some time. And also that the number of distressed sales will stay elevated.

Some analyst have called the number of REOs and total delinquent loans as the "shadow inventory". This is incorrect for two reasons: 1) some homes are listed for sale and are visible (CoreLogic removed these homes from their pending sales metric), and 2) some loans will cure from the borrower catching up, the sale of the home, or with a loan modification.

This graph from Lender Processing Services shows the number of cures by the previous month status. Notice that a very large number of 30 and 60 day loans cure every month (right hand scale). This is common even in good times.

A fairly large number of 90+ day and in-foreclosure loans are curing too. This is probably because of modifications - and there will probably be a high percentage of redefaults - but this shows why you can't include all delinquent loans as part of the "shadow inventory".

And that brings us to the 7 million delinquent loans. There are two sources for the number of delinquent loans: the Mortgage Bankers Association (MBA) quarterly National Delinquency Survey, and a monthly report from Lender Processing Services (LPS).

This graph shows the percent of loans delinquent by days past due through Q3 according to the MBA.

The MBA reported that 13.52 percent of mortgage loans were either one payment delinquent or in the foreclosure process in Q3 2010 (seasonally adjusted). This is down from 14.42 percent in Q2 2010.

Note: the MBA's National Delinquency Survey (NDS) covered "about 44 million first-lien mortgages on one- to four-unit residential properties" and the "NDS is estimated to cover approximately 88 percent of the outstanding first lien mortgages in the market." This gives about 50 million total first lien mortgages or about 6.75 million delinquent or in foreclosure.

And from LPS Applied Analytics October Mortgage Performance data:

This graph provided by LPS Applied Analytics shows the percent delinquent, percent in foreclosure, and total non-current mortgages.

The percent in the foreclosure process is trending up because of the foreclosure moratoriums.

According to LPS, 9.29 percent of mortgages are delinquent, and another 3.92 are in the foreclosure process for a total of 13.20 percent. It breaks down as:

• 2.72 million loans less than 90 days delinquent.
• 2.24 million loans 90+ days delinquent.
• 2.09 million loans in foreclosure process.

For a total of 7.04 million loans delinquent or in foreclosure.

And finally, what about those "3 million excess vacant housing units"?

This number comes from the Census Bureau's quarterly Housing Vacancies and Homeownership. This report shows almost 19 million total vacant housing units, but that number is pretty meaningless and includes 2nd homes, partially constructed new homes, and much more.

The 3 million number is calculated using the homeowner and rental vacancy rates, and estimating the number of excess units above the normal frictional level. There is always some number of vacant homeowner and rental units as people move and for other reasons. So the excess is the number above this frictional level. The NY Fed also added in a part of the increase in "Vacant, held off market, other" to obtain the 3 million estimate.

I think this last portion of the "excess vacant inventory" is less reliable, and I just use the homeowner and rental vacancy rates. My current estimate is about 1.55 million excess vacant units. This is a key number because once the excess is absorbed in an area as new households are formed, then new construction will begin - and that will mean a pickup in economic activity and employment.

The key numbers to follow for the housing market are 1) existing home inventory, 2) number of delinquent loans, and 3) the excess vacant inventory.

by Calculated Risk on 11/26/2010 08:23:00 AM

From the previous post excerpting from Michael Pettis:

Its official – Spain and Portugal will need to be bailed out soon. How do I know? In one of my favorite TV shows, Yes Minister, the all-knowing civil servant Sir Humphrey explains to cabinet minister Jim Hacker that you can never be certain that something will happen until the government denies it.

From the Financial Times: Portugal denies facing bail-out pressure

Portugal has denied as “totally false” reports that it is under pressure ... to request an international financial bail-out.

“There is no truth to these reports,” a government spokesman told the Financial Times.
excerpt with permission

And from the Financial Times: Spain issues defiant warning to markets

José Luis Rodríguez Zapatero, Spanish prime minister, on Friday ruled out any rescue package for the country ... “I should warn those investors who are short selling Spain that they are going to be wrong and will go against their own interests,” Mr Zapatero said

by Calculated Risk on 11/25/2010 09:01:00 PM

From Michael Pettis on Europe: Chinese inflation and European defaults

Its official – Spain and Portugal will need to be bailed out soon. How do I know? In one of my favorite TV shows, Yes Minister, the all-knowing civil servant Sir Humphrey explains to cabinet minister Jim Hacker that you can never be certain that something will happen until the government denies it.

And Portugal and Spain have just rejected the possibility of a bailout (a joke with a lot of truth).

Pettis offers a few pessimistic predictions including:

Greece will be forced to default and restructure its debt, and the restructuring will come with a significant amount of debt forgiveness. The idea that it can grow its way out of the current debt burden is a fantasy.

And ...

Greece will not be the only defaulter. Spain, Portugal, Ireland, Italy, Belgium and much of Eastern Europe will also face severe financial distress and possible default.

Best wishes to all.

by Calculated Risk on 11/25/2010 03:15:00 PM

First, a great overview from Raphael Minder at the NY Times: A Spanish Bailout Would Test Europe’s Strained Finances

[A]ny bailout of Spain — with an economy twice the size of [Greece, Ireland and Portugal] combined — could severely stress the ability of Europe’s stronger countries to help the financially weaker ones, and spell deep trouble for the euro, Europe’s common currency.
...
The looming question is whether Spanish banks are really as healthy as the government and the banks say they are. ... Last July, Spanish banks emerged relatively unscathed from stress tests carried out across Europe ... But the credibility of the stress tests has since been undermined by the collapse of Irish banks.

There is much more in the article.

And from the WSJ: EU Hopes to Double Bailout Fund. Concerns about Spain is the reason for doubling the fund.

by Calculated Risk on 11/25/2010 09:15:00 AM

A few housekeeping notes for a holiday ...

• Every weekend I post a weekly schedule of economic data for the coming week. The current schedule can be accessed in the menu bar above: "Weekly Schedule".

• Receive blog posts via email. Sign up here for free (No subscription information will be sold or otherwise provided to third parties).

• Follow on Twitter.

• Graph Galleries are now active. You can access the galleries by clicking on a graph, or use "Graph Galleries" in the menu bar above.

The galleries are graphs grouped by category:
1) Employment,
2) New Home sales,
3) Existing home sales,
4) Home prices,
5) Housing (like starts and homeownership rate)
6) Mortgage Delinquency
7) Transportation
8) Manufacturing
9) GDP
10) Commercial Real Estate (CRE)
11) Retail
12) Trade
13) Employment Participation Rate (an analysis)
14) Inflation (CPI)

Two examples:

Click on graph for larger image in new window.

This graph is based on data from MBA's National Delinquency Survey (NDS)and shows the percent of loans delinquent by days past due.

If you click on the graph, the link will take you to the same graph in the "delinquency" gallery.

The title for the graph "MBA Q3 Delinquency Data, Nov 18, 2010" is a link to the related blog post - and the date is when the graph was posted.

Note the "print" link at the bottom. That will display the full size image (The graphs are free to use on websites or for presentations. All I ask is that online sites link to my site, http://www.calculatedriskblog.com/, and printed presentations credit www.calculatedriskblog.com.)

And another example from the existing home sales report this week.

Clicking on the graph will take you to the "existing home" gallery. There are seven related graphs in the gallery (Existing home sales, inventory, months-of-supply, etc). You can click on the thumbnails at the bottom to view each graph.

Enjoy!

And on Europe:

• Ireland 10-year yield is over 9%

• Spanish 10-year bond yields have hit a record 5.2%.

• Portugal 10-year yield is at 7%.

Thanks to all for reading. Have a great Thanksgiving!