by Calculated Risk on 2/26/2011 02:36:00 PM

With the exception of housing, most of the U.S. economic data last week was fairly positive. We were also reminded of several potential downside risks to the U.S. economy, as falling house prices, higher oil prices, the European financial crisis, and state and local government cutbacks, were all in the news.

The focus last week was once again on the Middle East and North Africa, and especially on the historic and tragic events in Libya. These events have pushed U.S. oil prices to around $100 per barrel and have raised questions about the possible drag of higher oil prices on the U.S. economy.

The European financial crisis has been on the back burner, but yields are still elevated and there are key Euro Zone meetings scheduled in March. I expect this to be front page news again soon.

And a downward revision to state and local government spending contributed to the downward revision in the Q4 real GDP growth estimate, revised down to 2.8% from 3.2%. And several state budgets were in the news, especially the Wisconsin political battles.

The Case-Shiller house price index showed house prices are still falling – for the sixth consecutive month – and more house price declines are expected with the high levels of inventory and a high percentage of distressed sales. Eleven of the twenty Case-Shiller cities are now at new post-bubble lows: Atlanta, Charlotte, Chicago, Detroit, Las Vegas, Miami, New York, Phoenix, Portland (OR), Seattle and Tampa, and more will probably follow. Also new home sales remained weak in January.

These are all risks to 2011 economic growth.

But other economic news was more positive. On employment, all of the preliminary indicators suggested an increase in hiring. The four week average of initial weekly unemployment claims fell to the lowest level since 2008. The regional manufacturing surveys all suggest an increase in employment. The Reuters / University of Michigan consumer sentiment index was at the highest level in three years.

And growth in manufacturing continues to be strong. The Richmond Fed reported Manufacturing Activity Advanced at a Healthy Pace in February, and the the Kansas City Fed reported Manufacturing activity matched an all-time survey high in February. This suggests a strong ISM manufacturing report on March 1st.

Below is a summary of economic data last week mostly in graphs:

• Case-Shiller: National Home Prices Are Close to the 2009Q1 Trough

S&P/Case-Shiller reported that home prices are close to a post-bubble low.

Click on graph for larger image in graph gallery.

This graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 31.2% from the peak and still 2.4% above the May 2009 post-bubble bottom.

The Composite 20 index is also off 31.2% from the and only 0.8% above the May 2009 post-bubble bottom and will probably be at a new post-bubble low in January.

The next graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

From S&P:

Eleven MSAs posted new index level lows in December 2010, since their 2006/2007 peaks. These cities are Atlanta, Charlotte, Chicago, Detroit, Las Vegas, Miami, New York, Phoenix, Portland (OR), Seattle and Tampa.

Prices are now falling just about everywhere, and more cities are hitting new post-bubble lows. Both composite indices are still slightly above the post-bubble low, but the indexes will probably be at new lows in early 2011.

• New Home Sales decreased in January

The Census Bureau reports New Home Sales in January were at a seasonally adjusted annual rate (SAAR) of 284 thousand. This is down from a revised 325 thousand in December.

This graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate. New home sales have averaged 293 thousand per month (annual rate) over the last nine months - all below the previous record low.

The last graph shows sales NSA (monthly sales, not seasonally adjusted annual rate).

In January 2010 (red column), 19 thousand new homes were sold (NSA). This is a new record low for the month of January.

The previous record low for January was 24 thousand in 2009 and 2010.

Starting in 1973 the Census Bureau broke down inventory into three categories: Not Started, Under Construction, and Completed.

The inventory of completed homes for sale fell to 78,000 units in January. And the combined total of completed and under construction is at the lowest level since this series started.

• January Existing Home Sales: 5.36 million SAAR, 7.6 months of supply

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

Sales in January 2010 (5.36 million SAAR) were 2.7% higher than last month, and were 5.3% higher than January 2010.

The next 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. According to the NAR, inventory decreased to 3.38 million in January from 3.56 million in December.

Although inventory decreased from December to January, inventory increased 3.1% YoY in January. This is the sixth consecutive month of year-over-year increases in inventory, although the increase in January was lower than the previous months. But any increase is bad news with the high level of inventory.

Inventory should increase in February and March, and this is something to watch closely over the next few months.

This graph shows existing home sales Not Seasonally Adjusted (NSA).

The red column in January is for 2011. Sales NSA were about the same level as the last three years. January is usually the weakest month of the year for existing home sales (followed by February). The real key is what happens in the spring and summer.

The bottom line: Sales increased slightly in January (using the old method to estimate sales), apparently due to an increase in investor purchases of distressed properties at the low end. Inventory remains very high, and the year-over-year increase in inventory is very concerning.

Special Note: Back in January, I noted that it appeared the NAR had overestimated sales by 5% or so in 2007, and that the errors had increased since then (perhaps 10% to 15% or more in 2009 and 2010). The numbers released this week will probably be revised down significantly this summer.

• AIA: Architecture Billings Index shows no change in January

From the American Institute of Architects: Billings at Architecture Firms Hold Steady in January

This graph shows the Architecture Billings Index since 1996. The index showed billings were at the same level in January as in December (at 50).

Note: Nonresidential construction includes commercial and industrial facilities like hotels and office buildings, as well as schools, hospitals and other institutions.

According to the AIA, there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction. So this indicator suggests the drag from CRE investment will end mid-year 2011 or so.

• Consumer Sentiment increases in February

The final February Reuters / University of Michigan consumer sentiment index increased to 77.5, the highest level in three years.

This was above the consensus forecast of 75.4.

In general consumer sentiment is a coincident indicator. This is still fairly low, but improving.

• Total REO decreased slightly in Q4

This graph from economist Tom Lawler shows an estimate of all the REO inventory. Lawler writes:

Based on the FDIC’s QBP report, as well as preliminary data on REO for private-label securities (using Barclay’s Capital data, as I don’t have data from my other source yet), REO inventory at “the F’s,” FDIC-insured institutions, and PLS would look as follows [see graph]

From CR: REO inventory is still below the levels in 2008 - but not much - and that was when prices were falling quickly. I think the various lenders are a little more careful disposing of REOs now, but the level of REOs suggest downward house price pressure.

• Other Economic Stories ...
• Q4 real GDP growth revised down to 2.8% annualized rate
• From Nick Timiraos: Home Sales Data Doubted
• From David Streitfeld at the NY Times: Shiller says house prices could fall 15% to 25%
• From MarketWatch: Consumer confidence jumps in February
• From the American Trucking Association: ATA Truck Tonnage Index Surged 3.8 Percent in January
• Unofficial Problem Bank list increases to 960 Institutions

Best wishes to all!

by Calculated Risk on 2/26/2011 12:24:00 PM

A few excerpts from Warren Buffett's annual letter to shareholders.

On Housing:

A housing recovery will probably begin within a year or so. In any event, it is certain to occur at some point.

He wrote the same thing last year:

[W]ithin a year or so residential housing problems should largely be behind us, the exceptions being only high-value houses and those in certain localities where overbuilding was particularly egregious.

Last year I disagreed, but now I think a recovery will probably "begin" within "a year or so".

On Clayton (manufactured homes):

At Clayton, we produced 23,343 homes, 47% of the industry’s total of 50,046. Contrast this to the peak year of 1998, when 372,843 homes were manufactured. (We then had an industry share of 8%.)

CR Note: This is close to the record low for manufacturing homes set in 2009 of 49.8 thousand units.

Clayton owns 200,804 mortgages that it originated. (It also has some mortgage portfolios that it purchased.) At the origination of these contracts, the average FICO score of our borrowers was 648, and 47% were 640 or below. Your banker will tell you that people with such scores are generally regarded as questionable credits.

Nevertheless, our portfolio has performed well during conditions of stress. ...

Our borrowers get in trouble when they lose their jobs, have health problems, get divorced, etc. The recession has hit them hard. But they want to stay in their homes, and generally they borrowed sensible amounts in relation to their income. In addition, we were keeping the originated mortgages for our own account, which means we were not securitizing or otherwise reselling them. If we were stupid in our lending, we were going to pay the price. That concentrates the mind.

If home buyers throughout the country had behaved like our buyers, America would not have had the crisis that it did. Our approach was simply to get a meaningful down-payment and gear fixed monthly payments to a sensible percentage of income. This policy kept Clayton solvent and also kept buyers in their homes.

... a house can be a nightmare if the buyer’s eyes are bigger than his wallet and if a lender – often protected by a government guarantee – facilitates his fantasy. Our country’s social goal should not be to put families into the house of their dreams, but rather to put them into a house they can afford.

Note: The worst performing mortgages originated during the housing bubble were NOT protected by a government guarantee, instead they were the product of the Wall Street driven originate-to-distribute model. But I agree with Buffett's comments on how prudent lending "concentrates the mind", and about putting people into homes they can afford.

by Calculated Risk on 2/26/2011 08:51:00 AM

Note: this is an unofficial list of Problem Banks compiled only from public sources.

Here is the unofficial problem bank list for Feb 25, 2011.

Changes and comments from surferdude808:

As anticipated, the FDIC released its enforcement actions for January 2011, which contributed to many changes for the Unofficial Problem Bank List. This week, there are three removals and 12 additions leaving the Unofficial Problem Bank List at 960 institutions. The net changes added $8.9 billion in assets, which is the largest weekly asset increase since June 18, 2010 when $19 billion was added. The average net weekly change has been about seven additions and $1.7 billion in assets. However, the aggregate assets on the list declined this week by $4.7 billion to $413.8 billion from $418.9 billion as 2010q3 financials were replaced by year-end figures. Positively, the change in financials caused a $13.6 billion decline in assets.

The three removals include the failed Valley Community Bank, St. Charles, IL ($124 million) and action terminations against Lafayette Community Bank, Lafayette, IN ($131 million) and American Continental Bank, City Of Industry, CA ($129 million).

Most notable among the 12 additions this week are BankAtlantic, Fort Lauderdale, FL ($4.5 billion Ticker: BBX); Bridgeview Bank Group, Bridgeview, IL ($1.5 billion); EVB, Tappahannock, VA ($1.1 billion Ticker: EVBS); PrimeSouth Bank, Blackshear, GA ($422 million); and West Pointe Bank, Oshkosh, WI ($409 million).

Other changes include the FDIC issuing a Prompt Corrective Action order against Seattle Bank, Seattle, WA ($468 million) and terminating one against Idaho First Bank, McCall, ID ($77 million).

After the monthly release of actions by the FDIC, it would not be unusual for the Unofficial Problem Bank List to trend down until the middle of next month as closings tend to outpace new order issuance during this part of the month. Until next week, try to have a safe & sound banking week.

CR Note: The FDIC released the Q4 Quarterly Banking Profile this week. The FDIC reported 884 official "problem" institutions at the end of 2010 (the highest since 1992) with $390 billion in assets. There are a total 6,529 commercial banks and 1,128 savings institutions, so about 11.5% are on the "problem" list. Assets of all institutions are $13.1 trillion, so problem institutions have just under 3% of total assets.

by Calculated Risk on 2/25/2011 09:15:00 PM

Update: From Cheyenne Hopkins at American Banker: Don't Believe Everything You Read: The Real Skinny on Servicer Settlement Talks (ht Nemo)

Regulators have not agreed on a dollar figure, and $20 billion is in the words of one source involved in the negotiations "a crazy figure."

From Nelson Schwartz and Eric Dash at the NY Times DealBook: 3 Banks Warn of Big Penalties in Mortgage Inquiries

Several big banks warned investors on Friday that they could face sizable financial penalties as a result of state and federal investigations into abusive mortgage practices.
...
The state and federal inquiries “could result in material fines, penalties, equitable remedies (including requiring default servicing or other process changes), or other enforcement actions, and result in significant legal costs,” Bank of America said

Wells Fargo said in its filing that it was “likely that one or more of the government agencies will initiate some type of enforcement action,” including possible “civil money penalties.”

Citigroup acknowledged that federal and state regulators were investigating its foreclosure processes, which could result in increased expenses, fines and other legal remedies ...

Earlier stories suggested the penalties and "equitable remedies" could total $20 billion for all mortgage servicers.

by Calculated Risk on 2/25/2011 06:06:00 PM

Midwest core meltdowns
Radioactive assets
Toxicity rise
by Soylent Green is People
From the FDIC: First State Bank, Mendota, Illinois, Assumes All of the Deposits of Valley Community Bank, St. Charles, Illinois

As of December 31, 2010, Valley Community Bank had approximately $123.8 million in total assets and $124.2 million in total deposits ... The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $22.8 million. ... Valley Community Bank is the 23rd FDIC-insured institution to fail in the nation this year, and the second in Illinois.

It is Friday ...

by Calculated Risk on 2/25/2011 04:54:00 PM

Yesterday I noted that the combined REO (Real Estate Owned) inventory for Fannie, Freddie and the FHA increased 71% compared to Q4 2009 (year-over-year comparison). As I noted, this is just a portion of the total REO inventory. Private label securities and banks and thrifts also hold a substantial number of REOs.

Click on graph for larger image in graph gallery.

This graph from economist Tom Lawler shows an estimate of all the REO inventory. Lawler writes:

Based on the FDIC’s QBP report, as well as preliminary data on REO for private-label securities (using Barclay’s Capital data, as I don’t have data from my other source yet), REO inventory at “the F’s,” FDIC-insured institutions, and PLS would look as follows [see graph]

From CR: REO inventory is still below the levels in 2008 - but not much - and that was when prices were falling quickly. I think the various lenders are a little more careful disposing of REOs now, but the level of REOs suggest downward house price pressure.

The 2nd graph (repeated from yesterday) just shows the REO inventory for Fannie, Freddie and FHA through Q4 2010.

The REO inventory for the "Fs" has increased sharply over the last year, from 172,368 at the end of 2009 to a record 295,307 at the end of 2010. Although this slowed in Q4 - as the "Fs" slowed foreclosures - this will probably increase some more in 2011.

by Calculated Risk on 2/25/2011 03:20:00 PM

This speech from Fed Vice Chair Janet Yellen provides the Fed's view of the impact of QE2: Unconventional Monetary Policy and Central Bank Communications (see Effectiveness of Asset Purchases and the associated graphs).

Yellen also commented on forward guidance:

Down the road, once the recovery is well established and the appropriate time for beginning to firm the stance of policy appears to be drawing near, the FOMC will naturally need to adjust its "extended period" guidance and develop an alternative communications strategy to shape market expectations about the policy outlook.

This is part of the timeline I outlined earlier this week: When will the Fed raise rates?

My view is the Fed will complete the $600 billion “QE2” large-scale asset purchase program (probably in June, but they may taper it off), then they will stop the reinvestment of maturing MBS and Treasury Securities (could be concurrent with the end of QE2), and then the FOMC will change the "extended period" language. That suggests the Fed will not raise until 2012 at the earliest.

Earlier today, Richmond Fed President Jeffrey Lacker suggested QE2 might end early, via MarketWatch:

Federal Reserve should seriously consider adjusting its $600 billion bond-buying program in light of a recent pickup in U.S. economic activity, said Jeffrey Lacker, president of the Richmond Federal Reserve Bank, on Tuesday.
...
“The distinct improvement in the economic outlook since the [bond-buying] program was initiated suggests taking that re-evaluation quite seriously,” Lacker said ...

I think it is very unlikely the program will end early. Note: I've heard suggestions that high oil prices might lead to an expanded QE2 (or QE3) - that also seems unlikely to me at this point. It would probably take renewed weakness in the U.S. economy before we see additional stimulus.

by Calculated Risk on 2/25/2011 12:30:00 PM

A few notes and stories ...
• The Irish election is today. The polls stay open until 10 PM (5 PM ET).
Here is the Irish Times for election results. The yield on Ireland's Ten Year bond is up to 9.35% - very near the all time high.

• There is a meeting of several EU leaders, apparently including Angela Merkel and Nicolas Sarkozy, in Helsinki on March 4th, and then a special eurozone debt crisis summit on March 11th.

• Portugal will probably be high on the agenda. The yield on Portugal's Ten Year bond is at 7.55% - an all time high.

• There has been some concern about Italy because they import a large amount of oil from Libya. The yield on Italy's Ten Year bond is up to 4.85% - but the WSJ reports Italy’s €9.5B Bond Sale Goes Smoothly.

• And on oil, Bloomberg reports: Spain Cuts Speed Limit on Highways as Oil Surges on Libya (ht Brian)

Spain will cut the speed limit on its highways, slash the price of train tickets and increase the use of biofuels after oil prices surged because of turmoil in North Africa.

Spain will reduce the speed limit on highways to 110 kilometers per hour (68 miles per hour) from 120 kilometers per hour ...

• Here are the Ten Year yields for Spain, Greece, and Belgium. Still elevated ...

by Calculated Risk on 2/25/2011 09:55:00 AM

The final February Reuters / University of Michigan consumer sentiment index increased to 77.5, the highest level in three years.

Click on graph for larger image in graphic gallery.

This was above the consensus forecast of 75.4.

In general consumer sentiment is a coincident indicator. This is still fairly low, but improving.

by Calculated Risk on 2/25/2011 08:30:00 AM

From the BEA: Gross Domestic Product, 4th quarter 2010 (second estimate)

The small downward revision came mostly from PCE, imports, and state and local government expenditures (see table at bottom for changes in contribution to GDP).

Click on graph for larger image in graph gallery.

This graph shows the quarterly GDP growth (at an annual rate) for the last 30 years. The current quarter is in blue.

The dashed line is the median growth rate of 3.05%. The current recovery is still below trend growth.

The following table shows the changes from the advance release (this is the Contributions to Percent Change in Real Gross Domestic Product).

Contributions to Percent Change in Q4 Real Gross Domestic Product
	Advance	2nd Estimate (Revision)	Change
Percent change at annual rate:
Gross domestic product	3.2	2.8	-0.4
Percentage points at annual rates:
Personal consumption expenditures	3.04	2.88	-0.16
Goods	2.26	2.2	-0.06
Durable goods	1.48	1.44	-0.04
Nondurable goods	0.78	0.76	-0.02
Services	0.78	0.68	-0.1
Gross private domestic investment	-3.2	-3.13	0.07
Fixed investment	0.5	0.57	0.07
Nonresidential	0.43	0.51	0.08
Structures	0.02	0.11	0.09
Equipment and software	0.41	0.39	-0.02
Residential	0.08	0.06	-0.02
Change in private inventories	-3.7	-3.7	0
Net exports of goods and services	3.44	3.35	-0.09
Exports	1.04	1.18	0.14
Goods	0.85	0.99	0.14
Services	0.19	0.19	0
Imports	2.4	2.17	-0.23
Goods	2.29	2.07	-0.22
Services	0.11	0.11	0
Government consumption expenditures and gross investment	-0.11	-0.31	-0.2
Federal	-0.01	-0.02	-0.01
National defense	-0.11	-0.12	-0.01
Nondefense	0.1	0.1	0
State and local	-0.1	-0.29	-0.19