Category: Real Estate

Economics Update

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I think that we have to start with the fact that U.S. Treasury Credit Default Swaps risk premiums just hit record levels.

If that sounds arcane and obscure, that’s because it is, because the brokers like it that way, but here is a slightly clearer statement, returns on insurance against a defaults on US Treasuries hit a new high….Meaning that investors are pricing in the possibility of a US government default.

This means that a Lot of people are betting that the full faith and credit of the United States of America means nothing.

The US defaulting is the Stay-Puft Marshmallow man moment of US society, and an increasingly large segment of the investing world is betting on it.

At its core, the problem is that this bubble is something that people cannot walk away from, housing and shelter, and the realtor-pimps are now saying that existing home sales are softening, though the staid New York Times is saying that home prices are plunging.

Existing home sales down over 3.1%, and prices down 11.3% year over year.

In the mean time, the Citi bailout is pushing on both currency and energy, with
the dollar falling, because people realize that the printing presses are running non-stop.

That being said, the falling dollar is not helping the ruble, where the Russian central bank has reduced support for the currency for the 2nd time in as many weeks.

It also drove oil up about a fin spot, though retail gasoline prices fell for 68th straight day.

It’s not going to get better any time soon, because MasterCard is reporting falling retail sales.

Meanwhile, Calculated Risk’s Credit Crisis Indicators are slightly worse today.

Economics Update

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Well, the obvious lede is the unemployment numbers, with the weekly new unemployment claims, which are a very noisy metric, and continuing claims, which are not, beinb positively ghastly.

Weekly numbers rose to 542,000, whichn is the highest since mid 1992, and well above the estimate of 502,000 and continuing unemployment claims hit 4,012,000, up 109,000, the highest level since 1982.

Therefore, it is no surprise that the index of leading economic indicators fell in October, as die the Philadelphia Federal Reserve’s business activity index, to an 18 year low, and the Architecture Billings Index, an indicator of future construction activity, fell to an all time low.

Meanwhile in the bond market, so many people are fleeing to US treasuries that rates have been driven to historic, and near historic lows, while the costs of insuring private bonds has returned to the stratosphere.

For what it’s worth, we have some good news for a bond insurer, specifically Ambac, which has managed to negotiate a cancellation of $3.5 billion in insurance contracts, which is obviously a serious reduction in liabilities.

In energy, oil briefly fell under $50/bbl, and retail gasoline prices seem to be heading below $2/gallon.

In currency, the dollar is mixed.

Economics Update

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Well, it looks like the deflationary trap may be here, with the CPI down 1% last month, and core CPI falling 0.1%, the first drop since 1982.

The fact that housing starts and requests for building permits are falling off reinforces the idea that we are heading towards a major downturn.

Of course, it’s not just residential real estate. We are now seeing that mortgage backed securities for commercial properties are seeing increasing insurance costs and delinquencies.

In the larger world of the credit crunch, Calculated Risk’s Credit Crisis Indicators are largely unchanged.

BTW, S&P has downgraded monoliner bond insurer Ambac again.

In energy, oil fell again, on high inventory reports.

In currency, the dollar fell in response to continued news of a recession.

Let’s see…Anything else??? Oh…Yeah, the Dow closed below 8,000 for the first time in 5 years, 7,997.28.

Sometimes, Good Legislation Comes Back Too

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In this case, a change to bankruptcy laws that would allow judges to modify mortgages on primary residences.

Right now it can be done on a vacation home, recreational boat, etc., but not on a primary residence, but Senator Dick Durbin (D-IL) is bringing back a change in bankruptcy law to change this.

According to reports, this will be a priority of Obama, but we are hearing that about a lot of things right now.

This is a very good law for a number of reasons:

  • Modifying mortgages is cheaper than foreclosure.
  • With mortgages sliced and diced 6 ways from Sunday, it is currently impossible to get consent from the holders of the mortgages to renegotiate the loans.
  • It punishes the players who created the bubble.
  • The cost to people taking out mortgages is minuscule, on the order of 25-75 basis points (¼-¾%), which should not make a significant difference in home affordability.
  • It makes the use of arcane financial instruments on home mortgages less certain, and hence less likely.

Economics Update

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Well, I’ll be referencing some mora alarming economic data in another post, but let’s have at the routine stuff, shall we?

First, the U.S. Producer Prices Index fell by 2.8%, the most on record. Note: this is not a, “low inflation, hurray,” thing. This is a, “prices are falling off a cliff like they were in 1932,” thing.

Part of this, of course is falling oil prices, so it’s no surprise that oil hit 21-month low today.

Not unsurprisingly, we also see the home builders’ sentiment index falling to a 9 month low.

Honestly, if I were surveying home builder sentiment, my worry would be them tossing themselves out of windows.

Out of force of habit, because the fundamentals of the U.S. economy do not merit it any more, people continue to flee to the dollar in times of uncertainty, so the dollar strengthened today.

Oh, and if you follow stock prices, Fannie Mae is facing delisting from the New York Stock Exchange.

Economics Update

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Well, in a case of stating the blatantly obvious, the Philadelphia Fed;s Survey of Professional Forecasters says that we are in a recession, and have been since Spring, though the Conference Board has not yet chimed in on this, so it’s not yet “official”.

In any case, Japan is officially in recession. I guess that they have better record keeping than we do.

In the mean time Calculated Risk’s Credit Crisis Indicator interest rate metrics are basically unchanged.

We also have some mixed numbers in industry, with post hurricane industrial production, but the New York Fed’s Empire State index of hitting its lowest level ever.

In the UK, they are seeing an explosion in jingle mail, where mortgage holders mail their keys back to the bank, either figuratively or literally.

In the US, pending sales are down from September to October, but up against last October, which Barry Ritholtz catches, it’s really a net up, who wants to buy a house in October, but the National Association of Realtors does not get.

In currency, then dollar is down on recession worries, though my guess is also that the G20 meeting being hosted by a drooling idiot did not help.

In energy, oil is at a 21-month low, and retail gasoline prices fell for 61st straight day, which does not surprise me, as I filled up for $1.979/gallon yesterday.

Economics Update

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Retail sales are imploding Down 2.8% from September, and down 4.1% year over year,

Here is a historical data, courtesy of Calculated Risk, just so you know how bad these numbers look.

Of course, the financial press always has to find a silver lining, so they make note of the fact that consumer confidence rose from to 57.9 from 57.6, the article attributes this to falling gas prices, but I ascribe it to three words, “Buh Bye Bush.” With the election, they realize that Bush will soon be gone, and so the number goes, though the number still reflects major suckage.

In the overseas economy, yesterday, it was Germany, well today, it’s been confirmed that it’s actually the whole Euro Zone that is in recession.

Also, we have automotive news from that side of the pond, with the three major credit insurers in Europe pulling insurance coverage to suppliers of Ford and GM. Basically this means that if either of the auto makers default, the suppliers are on their own.

They have basically decided that the risk of a default is too much for them to cover.

And in domestic bad news cast as good news, we make note of the fact that banks and bank like institutions borrowed less from the Fed this week. Only an average daily borrowing rate of 95.4 billion, down from $110 billion.

Down to an average of 95.4 average daily borrowing list week. Let’s run the numbers 95.4 billion/business days * 250 days a year = 28.85 trillion…$23,850,000,000,000.00…By comparison, the US GDP in 2006 was 13.6 trillion.

We also have Freddie Mac tapping a $100 billion bailout fund that was not counted in the above.

As Calculated Risk notes, “Remember Fannie and Freddie have much lower default rates than the loans packaged by Wall Street. If conditions worsened dramatically for Freddie and Fannie, imagine how bad it is for Wall Street MBS and loans held by lenders like Wachovia (Wells Fargo) and WaMu (JPMorgan Chase).”

As to energy, oil is down on demand concerns, and and retail gasoline is down almost $2/gallon from peak.

There is a part of me that wonders if the swing in oil/gas was some sort of electioneering, but it clearly did not work.
In currency, the dollar rose, because when people are frightened, they still flee to the dollar for safety…for a while at least.

Economics Update

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Weekly initial unemployment claims are at 516,000, up from 484,000, well above the estimate of 479,000, and the highest number since 2 weeks after the 911 attacks.

With the caveat that weekly unemployment figures have a lot of noise, I would like to segue to a much noisier indicator, the Dow Jones Industrial Average, when fell below 8,000, though it rallied and ended up for the day.

Yean, I know, stock gyrations are really completely noise, but crossing 8K is a big deal for the markets, even if the Dow ended the day up 500+ points.

A better indicator of what is going on in the world is the fact that Germany is now officially in a recession, having experience two consecutive quarters of negative growth.

Calculated Risk’s regular post of credit crisis indicators, a very useful collection of interest rates and interest rate spreads really did not do much today.

That being days, CR does have a nice chart of spreads between 30 Year corporate bonds and treasuries, and it is not pretty:

Of course if you want to be scared, the fact that foreclosures are up 25% year over year, and that Ranieri’s Franklin Bank has filed chapter 7 (liquidation).

They are the 3rd largest lender to fail this year.

Speaking of failures, there is already General Motors, and Goldman Sachs has suspended its rating of the auto maker, which is a polite way of saying, “Absent a bailout, it’s done.”

In the meantime, oil rose at the end of the day, along with the rising Dow, which indicates that oil traders are complete morons who trade on chicken entrails and other spooky omens.

The dollar was mixed today.

Economics Update

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Well, Calculated Risk has your daily inventory of interest ratescredit crisis indicators, and today, they are pretty neutral.

In Hank Paulson and His Evil Minions™ news, he has finally publicly eschewed the idea of buying distressed assets.

I think that the reason for this is that the sales price would either be so low that all of his Wall Street friends would be technically insolvent, or so high as to land his corrupt ass in jail, because the big sh$#pile is near worthless. That’s why there is no market. Wall street cannot handle the truth.

It also looks like he will start requiring some level of private capital to match any bailout money. My translation is that now that he’s bailed out his Wall Street friends, anyone else who wants money needs to work for it.

Of course none of this will do much for the economy, with estimates that holiday sales will drop 1%, the first decrease since 1985, and home values falling for the 7th straight quarter.

What we should be thinking about is not how to rescue Wall Street, but rather how to amputate it from out economy, because these parasites are on a path to destroy more than 10% of US GDP.

Speaking of parasites, it looks like GE capital just got the FDIC to insure $139 billion of their debt. It appears that, “GE’s finance businesses are able to seek FDIC debt coverage because its GE Capital subsidiary also owns a federal savings bank and an industrial loan company, both of which already qualify.”

Like I said, parasites.

In the mean time, recession worries drove oil down again today, to a 21 month low, and it appears that the world thinks that the UK is in worse shape than the US, because not only was the dollar up today, it hit a 6-year high vs. the pound.

If you are worried about a resurgent Russia though, you have less to worry about, with Russia easing up support on the Ruble, which promptly fell.

Economics Update

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Well, it’s a bank holiday, so it’s a little bit slow, but the fact that American Express is filing to become a bank holding company, so that it can take part in the Federal Reserve’s sh&%pile for cash program.

My guess would be that they are seeing their default rate going up, and that they can’t find anyone to buy the debt.

In retail, General Growth Properties, the 2nd largest mall operator in the US, said that it may file for bankruptcy protection, and National Wholesale Liquidators filed for bankruptcy.

In other impending bankruptcies, option ARM lender Downey Savings and Loan just said in it’s 10Q that it cannot see a way to avoid being taken over by the Office of Thrift Supervision.

Most of the interest rate indicators were unavailable today because of the holiday, but the LIBOR (the L stands for London) was down a bit again today.

Also from that little island off the coast of France, retail and home sales are heading south quickly there too.

The joys of Anglo-Saxon capitalism, I guess.

In any case, there is no joy in Mudville, if by Mudville you mean the real estate market, so Fannie Mae and Freddie Mac have instituted a new program to modify mortgages to minimize foreclosures.

I still think that bankruptcy changes are the best solution here.

In any case, the impending recession drove oil to a 19 month low, and drove the dollar up, as people tend to flee to the dollar in bad times.

Falling oil is also absolutely killing the Ruble, which appears to be on the brink a devaluation.

Economics Update

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Let’s start with retail, where the inestimable Barry Ritholtz points us to a pretty picture on the retail collapse from the NY Times (click on image for the NY times article):

I would note that the 4 weeks before November 1 are now firmly part of the Christmas season, and the Christmas season is typically 40% of revenue, and 80% of profits.

In related news Circuit City files chapter 11, this should come as no surprise for the people who have followed this sad tale, as was predicted when they laid off senior sales staff and replaced them with clueless low wage drones while issuing large executive bonuses: (Story dated December 22, 2007)

Circuit City laid off 3,400 workers in March to replace them with lower-paid new hires. This week, it announced the approval of millions of dollars in cash incentives to retain its top talent after the departure of several key executives over the past year. Executive vice presidents could claim retention awards of $1 million each, and senior vice presidents could get $600,000, provided they stay with the company until 2011, according to a filing with the Securities and Exchange Commission.

If you don’t have competent sales staff, then why won’t your customers go to the Amazon and Walmart?

Karma, Neh?

In the world of mortgages, we have Fannie Mae Posting a ecord $29 billion loss for the quarter, which is actually worse than it seems, since the last quarter’s profits were largely from banking losses as tax breaks.

It will likely never see those tax breaks, because a profitable year is so far off.

Yesterday, it was monoliner Ambac, today, Moody’s cuts MBIA. No surprise….dead insurers walking.

Meanwhile, in energy, it appears that the House of Saud is actually adhering to the OPEC oil production cuts, which along with China’s announcement of a $586 billion stimulus package should drive commodities up.

The Russians are hoping that it will work, as falling oil prices seems to indicate a devaluation in the Ruble.

So far, it appears to be working, oil finished the day up $4.52/bbl….Good for them, bad for us.

In any case the Chinese stimulus package has had the effect of driving the dollar down, though I’m not sure why…I just don’t know the underlying theory.

Carnegie Taken Over by Swedish Government, to Be Sold

Finally, we have a report from Calculated Risk on credit crisis indicators:

  • Libor down (good)
  • 3 month treasury yields down (bad)
  • TED spread up a smidgen (a smidgen bad)

They also have a nice scare picture of the Federal reserve balance sheet here:

Basically, it’s how much of the sh%$pile that the Fed owns, and this is fracking terrifying.

This is very funny.

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There have been any number of Youtube mashups of the scene in the Downfall (Der Untergang), where you hear the original German dialogue, and you see English subtitles about something different (the one about being banned from the XBox network was prize).

Well, Barry Righoltz found this on Youtube, and it’s very funny, at least it’s funny if you do not know German, which I don’t.

Economics Update

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Unemployment rose to 6.5% from 6.1%, a 14 year high, and total non farm employment fell by 240 thousand.

Can we call it a recession already?

If not, how about I draw you a picture:

Meanwhile, the Institute for Supply Management’s manufacturing report fell to 38.9%, the worst number since September 1983.

And, just so now, the real estate recovery ain’t coming soon, not with Property & Portfolio Research Inc. the New York City metro commercial property vacancy rate hitting 17.6%.

FWIW, they had predicted a peak of 13% 3 months ago, but it’s already at 12%.

Meanwhile the National Association of Realtors® says that pending home sales fell 4.6% in Septmeber.

At least we are not in the UK, where house prices fell 15% year over year.

That being said, some of the indicators for the finance market appear to be moderating, with spreads edging down, and money flowing back into mutual funds for the first time in 3½ months.

Additionally, it looks like consumers are using their credit cards a bit more.

The bad economic news news has driven the dollar down, and the weak dollar appears to have beaten recession today on the oil markets, where crude is up a smidgen.

Not surprisingly, Gasoline is down at the pump, the 51st day in a row.

If You Can’t Make It There, YOu Can’t Make it Anywhere

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Because New York City commercial property sales are collapsing, and those sales that are made are being done by
companies leaving Manhattan for Brooklyn in order to save costs.

And while we are at it, we have a hollow condo in Brooklyn, One Brooklyn Bridge Park, which is still 2/3 empty.

If you cannot make money in real estate in New York, you cannot make money in real estate anywhere.

Economics Update

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Calculated Risk: Fannie Mortgage Bond Spreads Decline

Well, we have payroll services firm ADP saying that job cuts in October totaled 157,000, above the 100,000 predicted, with September numbers up too, and Challenger, Gray & Christmas, the grim reapers of the corporate world reporting that more firms are planning to cut jobs.

Meanwhile the ISM’s non-manufacturing index, an index of the service economy, fell to 44.4 the worst number recorded since the index was created in 1997.

It’s not just the US either. U.K. factory output is dropping like a stone.

In the credit crunch, while gross interest are improving, the spreads between these interest rates and treasury notes remain high.

For example, the LIBOR rate has fallen to 2.51% from 4.82% on 10/10, but the spread remains 151 basis points (1.51%) over the Fed’s target rate

Prior to the credit crunch it averaged 22 basis points.

This may be mortgage applications are down, banks are still skittish, and costs are higher.

This is a normal response by banks when you consider that you have things like the bath that Glitnir swap sellers took. They look to being left with 3¢ on the dollar.

The swaps in question are a sort of bond insurance, so it’s no surprise that the two largest, monoliners Ambac and MBIA just posted big losses.

It appears that there are expectations of more rate cuts, as the dollar is down, though paradoxically, so is crude oil….Normally, they tend to move in opposite directions.

0.11¢ on the Dollar?????

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Whiskey Tango Foxtrot????

In any case, this is what an an acquantance of Mr. Mortgage related to him that he, “Bought 27 second mortgages with a face value of $2,153,400 for $2400.”

It’s part of a whole package, but this is remarkably grim, though the friend in question notes that it was a, “very small pool and not typical,” (scroll down in the comments) but still…..

Economics Update

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Well, the idea the economies have decoupled is once more giving the lie by the India central bank cutting its interest rate by 50 basis points, the Australia central bank cut its benchmark interest rate by 75 basis points, and South Korea announcing an $11 billion stimulus package.

Of course, those are just the official actions, on the level of the financial markets, we have a number of German property funds freezing redemptions, and because they are heavily into UK real estate, “German funds have been among the most active in snapping up City of London and West End properties this year,” this does not bode well for either the UK or German financial systems.

When we finally get to the United states, we have Institute for Supply Management’s its manufacturing index falling to 38.9 in from 43.5 last month, the lowest reading since . It was the lowest reading since September 1982.

Additionally, construction spending in September fell 0.3%, which is better than the 0.8% expected, but Lehman’s collapse probably came late enough not to move that number much.

The October construction number will be positively grim, because it runs on credit, which is still nearly non-existent.

Speaking of credit, it appears that the LIBOR and other interest rates are down, indicating some loosening of credit. (see also here)

On the other hand it appears that while banks are slightly less reticent to lend to each other, they are still tightening lending to everyone else, according to a Fed survey of lending practices.

I don’t blame them, after all Iceland Bank Swaps are losing 97¢ on the dollar.

All this news has pushed oil prices lower, which is no surprise.

Economics Update

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OK, the markets went wild on the expectation that the Fed will cut rates tomorrow….I’m not impressed, truth be told….As I’ve said before, I think that the Fed is pushing on a string with interest rates.

What is or more interest is the fact that the Federal Reserve’s intervention in the commercial paper market has appeared to raise rates, rather than lower them. From Bloomberg:

Yields on commercial paper rose as the Federal Reserve began buying the debt directly from companies, showing the central bank’s efforts to unfreeze short- term credit markets have yet to take hold.

I think that the Fed is looking at a monetary solutiuon, when the solution is government legislation and government spending.

Still, this has not stopped GMAC from going in with the Fed’s commercial paper facility.

BTW, the Fed is doing something else, currency swaps with other central banks, most recently the Central Bank of New Zealand, though it has set up similar arrangements with Australia, Canada, and Japan too.

It’s supposed to help maintain liquidity, but I have no clue how this works. Anyone want to explain this to me?

What I do understand is the Federal Reserve going into the commercial paper market in the US. Ge just borrowed $5 billion from the fed.

Of course, even there, there is stuff that I don’t get, like why is the Federal Reserve starting to buy foreign commercial paper?

In any related news, the Treasury is looking at extending the bailout to privately held banks, though one wonders how they get a meaningful equity stake, as Bush Paulson and His Evil Minions™ had promised for any direct aid.

I’m not sure if this is working, as is noted at Calculated Risk:

  • 3 month treasuries are essentially unchanged.
  • TED spread is marginally better.
  • The two year swap spread is a bit worse.

Of course, that is just the world of banking. In the real world, the perceptions are actually worse, with the Conference Board’s measure of Consumer Confidence hitting the lowest reading ever recorded, dropping to 38 from September’s 61.4

This graph (click for full size), courtesy of Calculated Risk, of the Case Shiller numbers and makes a good counterpoint to the most recent housing data, also from Calculated Risk, and it is rather grim.

Short form, house prices are retrenching in a major way, and I would expect significant overshoot on the way down:

  • The Composite 20 index is off 20.3% from the peak.
  • The Composite 10 is off 17.7% over the last year.
  • The Composite 20 is off 16.6% over the last year.

In energy, oil has continued to fall rapidly, and I think that I have finally come across a good reason for this, which I will cover in a separate post.