by Calculated Risk on 10/03/2006 01:58:00 PM

So far the housing bust has had little impact on employment. The following two graphs are the areas I've been watching closely: residential construction and retail employment.

Click on graph for larger image.Note the scale doesn't start from zero: this is to better show the change in employment.

Residential construction employment is down about 1% from the peak in February. There is probably a significant cash economy (including illegal immigrants) working in residential construction, and these workers might be the first to be let go. But I expect BLS reported employment in residential construction will start declining soon.

Professor Roubini expects housing to impact the employment numbers this week:

I expect that September payroll figures could be as low as 70,000 (against a consensus of 128,000) as the housing and housing related sectors will start to take a toll on employment.

Retail employment has been trending down, and the YoY change in retail employment is now -0.7%. The YoY decrease in retail employment is concerning: see Retail Employment

On retail, the Chicago Tribune reports (hat tip Kett82): Housing skid's latest victim: Holiday hiring

If you need a little extra cash for the holidays, finding a temp sales job at the local mall could be tougher this year, says Challenger, Gray & Christmas Inc.

The Chicago-based outplacement firm predicts that seasonal hiring won't keep pace with the 5 percent to 5.5 percent sales increase economists are forecasting for the October through December holiday season.

The reasons: Stores are taking a cautious approach to the holiday in light of the slowdown in housing demand. Rising interest rates means fewer consumers are pulling cash out of their homes. And the spread of self-serve checkout lanes and electronic inventory control means retailers need fewer sales clerks and stockroom workers to sell merchandise.

If there is a downward cycle associated with the housing bust, it will come from lower housing related employment and less borrowing from the home ATM. There has been some evidence that mortgage equity extraction decreased slightly in Q2, but so far housing related employment has been steady.

by Calculated Risk on 10/03/2006 02:28:00 AM

My post on Angry Bear: Bogus Budget Projections

Just something to think about when we start hearing about "progress on the deficit."

by Calculated Risk on 10/03/2006 12:11:00 AM

The NY Times summarizes a new Census Bureau report: Across Nation, Housing Costs Rise as Burden

Click on map for National data.

The burden of housing costs in nearly every part of the country grew sharply from 2000 to 2005, according to new Census Bureau data being made public today. The numbers illustrate vividly the impact, often distributed unevenly, of the crushing combination of escalating real estate prices and largely stagnant incomes.

While many of the highest home values were on the coasts, in places like Southern California and Manhattan, many of the biggest jumps in the percentage of people paying a burdensome amount of their income for housing occurred in the Midwest and in suburbs nationwide, making it clear that the housing squeeze has reached deep into the middle class.
...
"Housing prices have gone up much more than incomes have," said Christopher Jones, vice president for research at the Regional Plan Association in New York City. "Clearly, you can’t sustain that sort of imbalance over the long run. There’s only so long that housing prices can go up without sustained increases in income to support them."

by Calculated Risk on 10/02/2006 12:40:00 PM

The Treasury Department reported today that the National Debt increased $574.3 Billion in Fiscal 2006, compared to $553.7 Billion in Fiscal 2005. The record annual increase was $595.8 Billion in Fiscal 2004.

Click on graph for larger image.
The Bush Administration pulled out all the tricks in Fiscal 2006 to make the deficit look better.

Also they suspended Medicare payments for the last nine days of the fiscal year:

The Centers for Medicare & Medicaid Services (CMS) has been instructed by the United States Congress in the Deficit Reduction Act (DRA) of 2005, to place a brief hold on Medicare payments for ALL claims (e.g., initial claims, adjustment claims, and Medicare Secondary Payer (MSP) claims) for the last 9 days of the Federal fiscal year, i.e., September 22, 2006 through September 30, 2006.

Not paying your bills and relying on accounting tricks doesn't make the fiscal situation better; it just makes it look better in the short term.

by Calculated Risk on 10/01/2006 12:40:00 AM

From the NY Times: Is the Corporate Profit Machine About to Sputter? Here are some negative comments:

Thomas M. Doerflinger, equity strategist at UBS [is concerned about the] weakness in housing and a slowdown in consumer spending will eat into profit growth next year, he said. “We are looking for a significant slowdown” in profit growth, to about 4 percent in 2007, he said.

William W. Priest, chief executive of Epoch Investment Partners ... says he believes that some factors that have swelled corporate earnings in the last few years are beginning to turn. Access to cheap labor overseas, along with productivity gains in the United States that have exceeded wage gains, created the best of all worlds for big companies, Mr. Priest said.
...
Mr. Priest also expects to see increasing evidence of retrenchment by consumers. “In the last few years, there’s been an acceleration of consumption relative to income,” he said. “It’s essentially come from the home A.T.M. machine.” But the combination of higher interest rates and declining property values in many areas will make it harder for consumers to draw on the value of their homes.

Over all, Mr. Priest expects profit growth to slow to 3 to 5 percent next year.

Even more pessimistic is Douglas Cliggott, chief investment officer at the hedge fund Race Point Asset Management. Mr. Cliggott expects profits to shrink next year by 10 to 15 percent.

“We’re downshifting from a very favorable environment,” said Mr. Cliggott ...

And the housing bust is the main concern:

Predictions of a worsening housing slump that eventually crimps consumer spending are at the heart of bearish profit forecasts. Already, inventories of unsold homes have been rising, along with mortgage foreclosures, and there is growing evidence of falling prices. Several homebuilders have warned of profits that will not meet forecasts.

And now for some positive views:

But some of the more bullish market watchers do not believe that housing woes will set off a full-blown, profit-smashing recession. “Housing activity is declining faster than we expected, but we don’t expect the spillover effects to produce a general decline in G.D.P.,” said Brian Gendreau, investment strategist at ING Investment Management, a unit of the ING Group. “People still have a large reservoir of housing net worth they can draw on.”.

Steven Wieting, lead economist for domestic equities at Citigroup, is also sanguine about the possible effects of a decline in the housing market. “Industries boom and bust simultaneously,” he said. “Housing could bust and other industries continue to flourish.”

The consumer wealth effect from the long, sustained climb in housing prices should survive any downturn, he said. “If we’re approaching a housing decline, it follows years of wealth accumulation, and that’s not going to be easily reversed.” Still, Mr. Wieting expects a gradual deceleration in profit growth next year, to roughly 7.5 percent.

Do homeowners still have "a large reservoir of housing net worth they can draw on"? Yes and no.

Household equity is at an all time high - because of the rapid increases in prices - but the percentage of equity in household real estate is at a record low of 54.1%. (graph from a previous post)

That may sound like a high percentage of equity, but according to Robert Broeksmit, Chairman of the Residential Board of Governors, Mortgage Bankers Association (from the Senate hearing on Nontraditional Mortgages):

"More than a third of homeowners, approximately 34 percent, own their homes free and clear."

This group is probably risk adverse and it's unlikely they will borrow significantly on their homes to fuel consumption. So the entire debt burden falls on the other 66%. With a record low percentage of household equity, and record homeowner financial obligations ratios, it's hard to see how the housing ATM will continue to support the economy. Especially if home prices start to fall.

And finally some comments from Dirk Van Dijk at Zacks:

AT Zacks, which compiles the analysts’ forecasts that now call for double-digit earnings gains through next year, the research director, Dirk Van Dijk, wonders whether the rosy numbers will come to bloom. “There is some doubt in my mind as to the ’07 numbers,” he allowed. “There are a lot of yellow flags out there in the macro picture.”

I think there are some red flags too.

by Calculated Risk on 9/30/2006 04:03:00 PM

From the Orange County Register: Office landlords vulnerable to housing woes

Orange County's office market is one of the most highly exposed markets in the nation to the housing industry, an industry report says.

The county and Las Vegas tie for third among major markets that lease a high percentage of space to housing-related companies, says a study by Grubb & Ellisand PNC Real Estate Finance.

Housing companies accounted for 21 percent of all leasing activity in the county since 2000.

Yet in recent months, the trend shifted, brokers say.

Mortgage companies have vacated more than a million square feet of office space this year amid a drop in demand for home loans, brokers say. A slowing housing market and slightly higher interest rates are to blame, they say.
...
Housing-related companies include homebuilders, sellers of materials such as lumber, mortgage and other real estate finance firms, and professional firms such as architects.

Nationwide, the effect of the housing slowdown on the office market is likely to be modest, Grubb's report says.

The #1 office market with exposure to the housing bust is the Inland Empire!

by Calculated Risk on 9/29/2006 06:00:00 PM

From Caroline Baum at Bloomberg: Think Housing's Stabilized? See Cancellations

... cancellations are rising, and they aren't being captured in the aggregate statistics because of the way the survey is designed. Hence, sales are being overstated and inventories understated.

``Once a sales contract is signed, there's no way of recording the cancellation or putting the home back in inventory,'' says Dave Seiders, chief economist at the National Association of Homebuilders in Washington. ``Builders keep track of gross and net sales; we don't have a net sales number from Commerce.''

The Census Bureau, which is one of the Commerce Department's statistical agencies, counts an initial new home sale: Sales go up and the ``for sale'' inventory is reduced. If the sale is canceled, it isn't reflected in revisions to previous months. What happens? When the home is ``resold,'' statisticians ignore that transaction.

``We don't double count,'' says Steven Berman, the survey statistician for the residential branch of the Census Bureau's manufacturing and construction division.

When the cancellation rate is changing -- in either direction -- it can distort both sales and inventories.

We know from big builders that cancellation rates are rising. Seiders says the rate ``has roughly doubled over the last year'' and is ``more serious at the big companies.''
...
The effect of higher cancellations is ``to overstate the overall level of sales and understate the level of inventories,'' Carson says. The opposite is true at the bottom of the economic cycle, when sales pick up and the resold homes aren't registered as a sale or removed from the ``for sale'' pile.

What makes the current situation so worrisome is the ``unprecedented inventory overhang, encompassing new and existing markets and many of the largest metropolitan areas,'' Carson says. ``Its sheer size raises the odds that prices will fall more and longer nationwide than they did in the 1990s.''

This is the clearest discussion I've seen about how the Census Bureau accounts for cancellations.

1) When a house is sold, the Census Bureau includes the sale and reduces inventory by one.

2) If the house is cancelled, the Census Bureau does nothing. Sales are not reduced; inventory is not increased.

3) When the same house is resold, the Census Bureau does nothing. It is not included in Sales.

So if 100K houses have been cancelled and not resold, inventory is actually 100K higher than reported by the Census Bureau. Because of the recent high cancellations rates, this means that new home sales are probably much lower than reported by the Census Bureau - and inventories are significantly higher.

by Calculated Risk on 9/29/2006 02:38:00 PM

The Hartford Courant reports: Lenders Will Be Spotting Income Fibs Much Faster

Starting Monday, it's going to get much riskier to fib about your income when you apply for a home mortgage. That's because the Internal Revenue Service is overhauling a key income verification tool used by lenders - making it faster and easier to pull up electronically the confidential income tax information of borrowers.
...
Many lenders in recent years have offered "stated income" and other limited documentation mortgages aimed especially at self-employed applicants. Dubbed "liar loans" by industry critics, stated-income mortgage programs allow applicants to bypass standard underwriting requirements for W-2s or copies of personal and corporate income tax records.

Instead, applicants simply assure the loan officer or broker that, yes indeed, we earn enough to qualify for the mortgage, and the transaction proceeds to closing. Often lenders will ask borrowers to fill out what is known as an IRS Form 4506-T along with their other mortgage documents.

That form authorizes the lender or the investor providing the money for the mortgage to obtain transcripts from the IRS summarizing income and tax data for as many as four years. The form must be signed by the borrower and can be used only during the 60-day period after the date of signing.

Until now, the process of faxing in 4506-T requests to the IRS and obtaining transcripts has been paper-driven and non-electronic - making income verifications slow and difficult to fit into lenders' highly automated loan underwriting systems. Most lenders have used 4506-T forms as a way to perform quality-control checks on pools of closed mortgages.

But now, with the IRS promising to provide electronic transcript tax data within one to two business days in an electronic format, more lenders are likely to run income checks before closing - even on loans to applicants who are not self-employed or using stated-income programs.

by Calculated Risk on 9/29/2006 11:55:00 AM

From the Federal Reserve: Federal Financial Regulatory Agencies Issue Final Guidance on Nontraditional Mortgage Product Risks

The federal financial regulatory agencies today issued final guidance to address the risks posed by residential mortgage products that allow borrowers to defer repayment of principal and sometimes interest (Interagency Guidance on Nontraditional Mortgage Product Risks).

These products, referred to variously as "nontraditional," "alternative," or "exotic" mortgage loans (referred to below as nontraditional mortgage loans), include "interest-only" mortgages and "payment option" adjustable-rate mortgages. These products allow borrowers to exchange lower payments during an initial period for higher payments later.

While similar products have been available for many years, the number of institutions offering them has expanded rapidly. At the same time, these products are offered to a wider spectrum of borrowers who may not otherwise qualify for a similar-size mortgage under traditional terms and underwriting standards. The agencies are concerned that some borrowers may not fully understand the risks of these products. While many of these features exist in other adjustable-rate mortgage products, the agencies' concern is elevated with nontraditional products because of the lack of principal amortization and the potential for negative amortization. In addition, institutions are increasingly combining these loans with other features that may compound risk ("risk layering"). These features include making simultaneous second-lien mortgages and relying on reduced or no documentation in evaluating an applicant's creditworthiness.

The final guidance discusses the importance of carefully managing the potential heightened risk levels created by these loans. Toward that end, management should:

Ensure that loan terms and underwriting standards are consistent with prudent lending practices, including consideration of a borrower's repayment capacity;

Recognize that many nontraditional mortgage loans, particularly when they have risk-layering features, are untested in a stressed environment. These products warrant strong risk management standards, capital levels commensurate with the risk, and an allowance for loan and lease losses that reflects the collectibility of the portfolio; and

Ensure that consumers have sufficient information to clearly understand loan terms and associated risks prior to making a product or payment choice.

The agencies published for comment proposed interagency guidance on Nontraditional Mortgage Products on December 29, 2005. Comments were received from financial institutions, trade associations, consumer and community organizations, state and financial regulatory organizations, and other members of the public. The agencies made a number of changes to the proposal to respond to the commenters' concerns and to provide additional clarity.

Addendum
NTM attachment 1 (104 KB PDF) (note: this is the guidance)
NTM attachment 2 (261 KB PDF)

by Calculated Risk on 9/29/2006 11:36:00 AM

David Streitfeld writes in the LA Times: More Home Buyers Stretch Truth, Budgets to Get Loans

Mortgage fraud continues to escalate in Southern California, FBI figures show, raising concerns of increased defaults and foreclosures as the housing market cools down.

Lenders filed 4,228 reports of suspicious activity in the region during the first 11 months of the government's fiscal year, which ends Saturday, the FBI said. That puts 2006 on track to nearly double last year's total.

The jump in reports of suspicious activity even as home sales have declined may stem in part from a lag in reporting. But the FBI and industry experts say the trend also reflects growing deceit by average borrowers who overstated their income, exaggerated their assets or hid their debts simply to qualify for a mortgage in the region's sky-high housing market.
...
During the boom, people who lied about their income to get a loan — and then struggled to make the payments — had the option of making ends meet by tapping their newfound equity through refinancing or by selling the property for a profit.

But now, with prices flattening out or declining, those without sufficient equity could be forced to sell for a loss or even default on payments. That could accelerate any downturn in the market by swamping it with foreclosed and bargain-priced properties.

"It's only when the tide goes out that you learn who's been swimming naked." Warren Buffett.