Category: Real Estate

Economics Update

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Unemployment Chart Pr0n Courtesy Calculated Risk

Well, we have the initial unemployment claims out now (government link), and it appears to point to improvement. Initial claims were 550,000, a decrease of 26,000 from the revised figure of 576,000 (but the initial figure was 570,000, so the drop is 20K, not 26K apples to apples), the 4 week moving average was 570,000, down from 572,250, and the continuing claims number(seasonally adjusted) was 6,088,000, down 159,000 from last week’s revised level of 6,247,000 (only continuing claims were revised up from 6.23m, so the apples to apples drop is actually 142K, not 159K).

Anyone else knowing a pattern in revision numbers, or is it just me?

BTW, note that the continuing claims number drops as people lose benefits or move to emergency unemployment claims.

In any case, with foreclosures up 18% year over year, and poverty rate hitting an 11 year high, 13.2%, things really don’t indicate a rapid improvement.

The weekly claims number needs to be below 400K before we will start seeing increases in employment.

Additionally, we have a leading indicator in Japan, machinery (capital) orders are in the toilet, with orders being the lowest since the start of the survey in 1987.

I’d also stay out of the stock market, as insiders selling continuing to go crazy, and when people sell their own stocks it’s because they know something, even if this knowledge is not sufficient to trigger an criminal or civil investigation.

In the world of central banking, the Bank of England is leaving its benchmark unchanged, and continuing with bond purchases (quantitative easing).

Bonds did fairly well today, with the yields on mortgage backed bonds and US treasuries prices rising, which means that the yields are falling………Unless, of course, you are talking about Polish government bonds, which look to be heading into the world of hurt that their Baltic Republic neighbors are feeling.

Meanwhile, a week inventory report has pushed crude oil up, and the US dollar was up marginally, though whether this is a turn, or just a breather, is unclear.

Economics Update

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Good news everyone!

I invented a device that makes you read this in your head using my voice!

Well, the Fed’s Beige Book, more formally known as the “Summary of Commentary on Current Economic Conditions”, came out today, and they are seeing signs of improvement (also here).

It seems to me that we are talking about evidence of a bottom, or at least a moderation, as opposed to improvement, but it could be a prelude to a recovery, or a breather on the way down, but either way, it’s good news.

We still have CRE and insurance meltdowns to deal with.

There is also good news from Moody’s, that there is no expectation that they will cut the ratings on sovereign debt for any of the major industrialized nations, so the ratings of, “U.S., U.K., Germany, France. and Spain,” are safe.

Then again, if they are so safe, why did they even have to make this statement?

We also have further evidence of the credit markets thawing, with the 3-month Libor interbank lending rate hitting a record low, and the TED Spread, basically the interest rate spread between public and private debt, falling.

The dropping interest rates, kicked mortgage applications to a 3 month high.

Still, in the real world, single family home prices fell by 0.5% in July, and bankruptcy filings are up 22% in August year over year.

In energy we are now seeing statements from OPEC that there will be no changes to quotas which drove prices up 21¢ to $71.31/bbl, despite increases in inventories.

In currency, the dollar fell to a near 10-month low, despite a slight bump following the release of the Beige Book, to $1.4562:€1.0000 and $1.0000:¥91.61.

First Comes the Denial

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Case in point, the Federal Housing Administration (FHA), which is now denying that the increasing rates of defaults on the mortgages that it backs will require a bailout.

Next should come a statement of health, then a statement of robust health (or some synonym), and then comes the bailout.

Here is the statement from the FHA commissioner:

We will not comment directly on the FHA’s capital reserve ratio until we receive the annual actuarial study. However, contrary to certain misconceptions, the Congressionally-mandated capital reserve ratio, which the annual actuarial study calculates, measures EXCESS reserves above and beyond projected losses over the next 30 years. Even if that level falls below 2%, FHA continues to hold more than $30 billion in its reserves today, or more than 5% of its insurance in force. Given this reserve level, FHA will not need a congressional subsidy even if the congressional capital reserve ratio falls below 2%. Furthermore, FHA’s full faith and credit insurance means that there is no risk to homeowners or bondholders independent of the congressional capital reserve requirement. New FHA loans being issued today are not only critical to our economic recovery, but in addition, FHA continues to make money for the taxpayer; in fact, we project FHA’s FY 2010 book of business will produce $1.4 billion for the U.S. Treasury.

We believe you…..

Why Mortgage Workouts are Failing

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Martin Andelman, the founder of the Mortgage Lender Implode-O-Meter, has a pretty good explanation as to what is going on.

Basically, it comes down to the games that bankers play.

With the Federal Accounting Standards Board (FASB) backing down on reality based accounting of banks (here for background), it means that banks are continuing to account for these mortgages at full face value, but would have to write down these assets if they renegotiated the loan:

Why would a bank chose to foreclose and evict when there’s already someone living in the house who would love to buy it. By modifying the loan, the bank won’t have to pay all the associated costs of foreclosure, and then put the property on the market where it might not sell for some time. Selling an REO? Lucky to get 50% in some areas. Why not just write down the loan for the homeowner and save all the trouble? Again, it makes no sense.

Until I went back and thought about the partial suspension of the accounting regulations imposed under FAS 157 & 159, which applies only to banks and only as of last April or May, I believe. That’s when I started feeling queasy.

Under the partial suspension of the FSAB accounting rules, the banks don’t have to write down Level 3 [an asset without a regular market] assets to market value, if they state that the bank has no plans to sell the assets for an extended period. In other words, if the bank says that it’s not going to sell a given house anytime soon, they can keep it on its books at its full fictional value.

If they renegotiate loans, they rapidly become officially insolvent.

Of course, this means that by the standards of the reality based community, they are already insolvent.

As much as it pains me, I think that Andelman is wrong on blaming Timothy “Eddie Haskell” Geithner on this. The FASB set up these rules independently of Treasury, and under pressure from Congress, not from the T-men.

Economics Update

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Well, the first set of numbers for August job losses have come out, and ADP forecasts a drop of 298K non-farm payroll jobs, the lowest number since last September, and the Dickensian-named Challenger, Gray, and Christmas, has reported that there were 76,456 jobs cut, well down from July, but about 2K more than June. (Note: these are apples and oranges. The 1st is the total delta in employment, and the 2nd is total layoffs.)=

These numbers are not good, they are still on the minus side, but they are better, as is the revised BLS numbers for productivity, which show a 6.6% annual rate of increase.

Still, we saw consumer bankruptcies up 24% YoY, and they are on a pace to hit 1.4 million this year.

In finance, Treasuries were up, and yields down, on the release of the Federal Reserve Board’s minutes, which show a bit more concern about the recovery, and the VIX (Volatility IndeX) is up, which would tend to indicate that the current rally is on its last legs.

In real estate, mortgage applications fell, even though rates were down.

ADP’s job loss numbers pushed both the dollar and crude oil down, largely because even though they were an improvement over the prior month, they were worse than forecast.

Economics Update

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Auto Sales Graph Pr0n Courtesy Calculated Risk

Construction Spending Pron Also Courtesy of Calculated Risk

As is noted by Calculated Risk, light vehicle sales hit a 1¼ year high in August, but that was with the Cash for Clunkers program, which is now over, which begs the question, “What happens in September?”

I think that the trend is generally up, because the sales were so low that the fleet replacement time (fleet size/sales) was approaching 30 years, which is simply unsustainable. (click images for full size)

It should also be noted that for all the claims of recovery, both residential and non-residential construction spending continues to decline.

Additionally, notwithstanding the “green shoots”, the bond market is pricing in some very hard times ahead, with US Treasuries rising in price, which drops their yield.

This sentiment is also serving to drive the Yen and the dollar higher, and crude oil lower, as people look for a safe haven.

Economics Update, Yesterday’s

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And actually Tuesday’s too.

Between helping my kids try out recipes for a cooking contest, and general laziness, I’ve let it slide.

In any case, the big news is that consumer confidence beat expectations, and actually went into “optimistic” territory, though as Dean Baker observesmost of the increse in the index is, “Attributable to a 10.1 percentage point increase in the expectations index,” which, “is much more volatile than the current conditions index and has little relationship to spending,” so the numbers are not about hopped up consumers bringing on a recovery.

We also have reports that home sales and durable goods orders have increased, and the American Trucking Association’s Tonnage Index (top pic) all increased in July, though I will address how the home sales/prices may be a Chimera in a later post, and the durable goods orders are not as good as they appears, ex-Boeing and defense, they actually fall:

Orders for non-defense capital goods excluding aircraft, a barometer of business investment, fell 0.3 percent in July after rising 3.6 percent in June.

Additionally, the Philadelphia Fed State Coincident Indicator numbers came out (bottom pic), and all but 4 states are still contracting.

It should be noted that mortgage apps were up slightly this week.

We also had a major downgrade of an insurer, Massachusetts Mutual Life Insurance, which had its rating cut from AAA to AA+ by S&P.

I expect there to be more of this in insurance.

Despite a near record auction, US Treasuries were basically unchanged.

Meanwhile, the consumer confidence drove the dollar up, though oil fell, on the expectation of increases in inventories in today’s report.

Signs of the Apocalypse

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Rents in New York City are falling:

Manhattan apartment rents fell as much as 10 percent in August from a year ago as tenants gained negotiating power in the recession and forced landlords to offer concessions.

10% ain’t some sort of rounding error.

Real estate has been declining for some time, but the fact that rents, not purchases of condos or co-ops are falling is an indicator that the downturn in real estate has a ways to go before truly hitting bottom.

Economics Update

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The Big Picture looks at the sales numbers

Seeing as how I did not post on Friday, there was a tornado watch, and my kids were freaking, I’ll start with the big story from last week, which was that existing home sales rose to a 2 year high.

Of course, the 1st thing that comes to mind is that the National Association of Realtors (NAR) are supplying this data, and it’s suspect.

The 2nd thing that comes to mind is that a remarkably large portion of these sales are distressed.

The Big Picture runs the numbers more fully (chart pr0n is from this link, click to see full size), and while mentioning these two points, notes some other interesting bits of information:

  • “If not for a surprise and suspect 16k increase in Northeast condo sales, Existing Home Sales would have been lower month-over-month and only up 12k units from July 2008, which was the worst year on record for housing.”
  • Non-seasonally adjusted data actually shows a decrease, and given the high proportion of foreclosures and short sales, seasonal adjustment is actually not going to be accurate right now; the market is just too fracked right now.
  • Prices are still falling.
  • Sales less foreclosure activity (bottom pic) is way down.

Furthermore, we are also seeing the effect of the housing cash for clunkers tax credit, which allows a 10% tax credit (max $8K) on purchases for “New” (not owned a house in 3 years) buyers, but the home has to close before November 30, which really means having the sale done in the next 8 weeks or so, so it’s another blip, unless, as CR notes, the NAR and NAHB manage to successfully bribe lobby for an extension.

Note that the tax credit can be used for a down-payment, which further distorts the market.

He have a housing market that is really still heading down, albeit more slowly, despite massive federal subsidies.

If there were really a return to health in the housing market, then Taylor Bean, the 12th largest mortgage company in the US, would not be filing for bankruptcy.

As to housing news for the rest of us, the rate at which mortgage holders who have fallen behind catch up on their payments, the so-called “cure rate”, for holders of prime mortgages, has fallen to 6.6%, down from 45% in the years 2000-2006, and very close to the rate for Alt-A (4.3%) and sub-prime (5.3%).

Meanwhile, treasuries have risen again, driving yields down, though it is unclear how much is risk aversion increasing, and how much is the Federal Reserve buying more of the securities.

It does mean that investors believe that the Fed won’t be raising rates for a while yet, though the Bank of Israel just raised its benchmark rate, which indicates optimism on their part.

My guess is that they are wrong, simply because they are the 1st central bank to do so, and my money is on any first mover jumping the gun.

Then again, they could be right. The Chicago Fed July National Activity Index rose sharply in July, increasing to -0.74 in July from -1.82.

Even though the numbers still show contraction, the delta is impressive.

Meanwhile, in energy, crude oil is at a 10-month high on “green shoots” in the economy, and retail gasoline prices have remained basically unchanged, despite falls at the wholesale level.

The dollar was up slightly, largely in a holding pattern as traders wait for new consumer spending and housing data.

Economics Update

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Historical unemployment, courtesy Calculated Risk

Today is Jobless Thursday, and initial jobless claims unexpectedly rose by 15,000 to 576,000, (click pic for full size image) with the 4 week moving average, and the continuing claims were up marginally, to 6.241 million from 6.239 million, but it should be noted that as people move to extended benefits, or lose benefits completely, they are dropped from that number.

Closely related to this is the fact that mortgage delinquencies are rising, to 9.24% of all outstanding loans on 1-4 unit residences in the 2nd quarter, up .12% from the 1st quarter, and up 2.83% from last year, and loans overdue by more than 90 days, which is when foreclosure begins, are at an all time high of 7.97%.

Not surprisingly, “Helicopter” Ben Bernanke is on another buying binge, with Federal reserve assets up by 2.3% this week, buying treasuries, which is an how the Fed pumps up the stock market, and mortgage backed securities, which is how they are trying to cover up the increasing collapse in mortgages.

Still, there is good news, with the Federal Reserve Bank of Philadelphia’s general economic index giving an unexpectedly strong showing of +4.2, well above the predicted -2.0, and this is a real indicator of growth, not just a decline in the rate of decline, and the cost of insuring corporate bonds fell, on the expectation of better growth.

Oil and energy looked at the different numbers, with the dollar falling on the Philadelphia Fed data, which has people feeling less need for a safe haven, and oil falling on the new jobless numbers, which indicates that demand will still remain low for a while.

Economics Update

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Well, mortgage applications rose this week as rates fell 23 basis points (0.23%), not too surprising.

The Architecture Billings Index, one of the leading indicators of future construction activity, rose in July, (click pic for full size) but remained below 50, indicating continued contraction roughly 12 months out.

Meanwhile, we are seeing near record drops in producer prices in Germany, adding more weight to the idea that the current concern should be deflation, not inflation.

Energy is kind of confusing, with prices falling below $69/bbl today, largely on a 5% drop in prices in Chinese stocks, but prices rise to nearly $72/bbl tomorrow on reports of shrinking inventories.

It’s an international dateline thing. The drop was at market close in New York, and the increase was from places where it is tomorrow.

Meanwhile, the dollar is down on optimism about the world economy.

Economics Update

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Housing Starts, Courtesy Calculated Risk

I guess that it’s time to rejoice, because the IMF’s chief economist is saying that the global recession is over…Seeing as how they handled things like the Asian Financial Crisis of the 1990s, I’m inclined to believe that they are not a reliable source.

I would also note that he has a huge caveat in this, “we may not go back to the old growth path … potential output may be lower than it was before the crisis,” which to my mind sounds like a permanent decline in economic activity, and thus the recession might be over because normalcy is being redefined.

That being said, we are seeing signs of either a recovery, or a pause in the path downward, with credit card defaults moderating somewhat, so, for example, BoA’s charge-off rate dropped to 13.81% last month, down 0.05% from the level in June.

Basically, the numbers are still pretty horrible, but they aren’t getting any worse…yet.

We also have a stronger consumer confidence level in August, with the Investor’s Business Daily and TechnoMetrica Market Intelligence (IBD/TIPP) Economic Optimism Index rising to 50.3 in August from 46.3 last month, and this is a real positive number as 50 is the dividing line between optimism and pessimism.

In inflation, producer prices fell by -0.9% from the previous month, and the year over year price decline was -6.8%, beating the predictions of -0.3% and -5.9% respectively.

Meanwhile, in the UK, consumer inflation remained steady at 1.8%, but it had been predicted to drop to 1.5%.

Real estate is confusing, or at least the reporting of it is.

The data came out today, and the coverage is interesting, with Bloomberg noting that single-family housing starts rose for the 5th straight month, but CNN noting that housing starts and building permits declined with only single family housing starts showing an improvement, and that the year over year numbers are way down.

I’d go with CNN here, because:

  • We know that more than a third of single family home sales are distressed.
    • As an aside, we know that people are coming out of the woodwork looking for distressed sales, and prices are still falling, driven by foreclosures and short sales, as evidenced by the latest data out of California.
  • The month to month numbers are seasonally adjusted, but I think that the current market is so out of whack that the seasonal adjustments do not serve their intended purpose.
  • The drop in multi-residential buildings indicates that fewer people are moving into condos/townhouses, from which they would trade up to single family structures.

Then again, YMMV, and I always see the economic glass as half empty.

Oil was briefly back above $70/bbl before settling at $69.19, largely on a report that US crude inventories have dropped, and the dollar and Yen both fell against the Euro, largely on more optimistic business sentiment in Germany.

Economics Update

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You know, someone had better tell the ordinary people of the US that things are getting better, because they are not buying it. 63.2 in August, down from 66 in July.

What’s more, we are seeing more signs of deflation, with consumer prices falling by 2.1% year over year, the biggest drop since January, 1950.

What’s more, commercial real estate is going through the economy like a guy in a hockey mask through a road trip of teenage girls in a slasher flick, with commercial mortgage backed bonds falling, which has driven up their yields, and commercial real estate prices falling by 17% in the first ½ of the year.

We do have some good news in industrial production, where output rose by ½%, beating expectations, largely on “cash for clunkers”.

The confidence figures had currency traders moving to the Yen, and it also pummeled both crude oil and wholesale gasoline futures.

Will This Bank Make Tonight’s List

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There are reports that Colonial BancGroup is near collapse, and desperately attempting to sell itself off to BB&T.

If it fails, it would be the largest failure so far this year, and the 6th largest bank failure ever.

Of note is the fact that if the bank fails, then about 25% of all “warehouse lending” goes away.

Warehouse lending is a form of short term lending used most often by folks like independent mortgage brokers.

There would be some real repercussions here in the housing market, even with independent brokers having a much smaller piece of the pie than they did 3 years ago.

Economics Update

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Retail sales numbers courtesy of Calculated Risk

It’s Jobless Thursday, and initial claims rose by 4,000 to 558K, with the 4 Week moving average increasing to 565K from 556.5K, and continuing claims, falling by 141K to 6.2 million, though for the latter, I’m not sure how much is people exhausting claims and moving to extended benefits, and how much is people finding work.

My money is on a negative interpretation of the data, what with retail sales falling in July. (see graph pr0n)

In Europe, Germany’s and France’s GDP both rose at an annual rate of 0.3%, which has people shouting that they’ve left the recession, but a recession is more than raw GDP numbers, and industrial output in the EU tanked in June.

I’m a pessimist….I see it as a pause, not a reversal, we still have more down to go.

All in all, when one considers the that 35% increase in bankruptcy filings in the 2nd quarter , the abysmal foreclosure numbers, and the fact that video game sales are down for the 5th straight month, I just don’t basis for anything like a robust recovery.

In T-Bill news, I’m very confused.

First, the 3-year notes rose, then the 10 year notes fell, and today, 30 year Treasuries rose, and I cannot make any sense of that. (bonds rising=yields falling, and vise versa)

If Treasuries continue to rise though, it might reverse the reverse the rise in rates that has a depressed mortgage demand.

In any case, the economic news from Europe had the dollar tanking versus the Euro, to $1.4295:€1.0000, and it also pushed oil marginally higher.