by Calculated Risk on 12/13/2006 02:58:00 PM

Videos of speeches and panels are now available here.

I especially recommend Panel 1: Outlook for the U.S. Housing Market (windows media)

by Calculated Risk on 12/13/2006 01:59:00 PM

DataQuick reports: Southland home sales slowest since 1997

Southern California home sales remained at their slowest pace in nine years last month as the market continued to rebalance itself after several years of heated activity. Prices are still leveling off, a real estate information service reported. ...

The median price paid for a Southland home was $487,000 last month, up 0.6 percent from $484,000 in October and up 1.7 percent from $479,000 for November a year ago. The year-over-year increase was the lowest since February 1997 when the $160,000 median was up 1.3 percent from $158,000 a year earlier.

Southern California Median Home Prices
Area	Nov '04	Nov '05	Nov '06	Pct Change
Los Angeles	$416K	$497K	$510K	2.6%
Orange County	$541K	$616K	$616K	0.0%
San Diego	$487K	$518K	$482K	-6.9%
Riverside	$346K	$405K	$426K	5.2%
San Bernardino	$284K	$350K	$380K	8.6%
Ventura	$507K	$612K	$562K	-8.2%
Southern California	$415K	$479K	$487K	1.7%

I added the November 2004 median prices to give a two year perspective on prices.

A total of 20,388 new and resale homes sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month. That was down 7.8 percent from 22,117 in October, and down 26.2 percent from 27,637 for November a year ago, according to DataQuick Information Systems.

A decline from October to November is normal for the season. Last month's sales count was the lowest for any November since 1997 when 18,305 homes were sold. Since 1988 November sales have ranged from 13,537 in 1991 to last year's 27,637, the average for the month is 21,200.

Southern California Homes Sold
Area	Nov '04	Nov '05	Nov '06	Pct Change
Los Angeles	9,404	9,066	7,351	-18.9%
Orange County	3,560	3,503	2,475	-29.3%
San Diego	4,350	3,937	2,987	-24.1%
Riverside	4,978	5,904	3,794	-35.7%
San Bernardino	4,065	3,992	2,926	-26.7%
Ventura	1,102	1,135	855	-30.8%
Southern California	27,459	27,637	20,388	-26.2%

by Calculated Risk on 12/13/2006 01:39:00 PM

From MarketWatch: Mortgage delinquencies jump

U.S. homeowners had a harder time keeping up with their mortgage payments in the third quarter, the Mortgage Bankers Association said Wednesday, with the delinquency rate rising to 4.67% from 4.39% in the second quarter. A year ago, 4.44% of mortgage holders were 90 days or more past due on their loans.

The foreclosure rate inched higher in the third quarter, with 1.05% of mortgages in the foreclosure process vs. 0.99% in the second quarter, the MBA said. While delinquency rates on all types of loans rose in the third quarter, it was the subprime category -- loans made to less creditworthy borrowers, that shot up the most to 12.56% from 10.76% a year ago.

"As we expected, in the third quarter delinquency rates increased across the board. However, increases were noticeably larger for subprime loans, particularly for subprime ARMs," said Doug Duncan, chief economist for the MBA.

"This is not surprising given that subprime borrowers are more likely to be susceptible to the cumulative increases in rates we've experienced and the slowing of home-price appreciation that has resulted," Duncan said.

by Calculated Risk on 12/13/2006 09:30:00 AM

The November advanced monthly retail sales from the Census Bureau show an increase in sales.

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for November, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $368.9 billion, an increase of 1.0 percent the previous month and up 5.6 percent from November 2005. Total sales for the September through November 2006 period were up 5.3 percent from the same period a year ago. The September to October 2006 percent change was revised from -0.4 percent to -0.1 percent.

The following graph shows real monthly retail sales with and without gasoline stations.

Click on graph for larger image.

Note: Adjusted using Median CPI from Cleveland Fed, Nov estimated. Graph starts at $200 Billion to show changes.

Although real retail sales bounced back in November, sales are still below the level of a few months ago.

The Fed noted yesterday that "recent indicators have been mixed", and that comment could be applied to almost all the data. Just when it looks like the economy is really slowing down, the MBA data (previous post) and the retail sales show some strength.

by Calculated Risk on 12/13/2006 12:09:00 AM

The Mortgage Bankers Association (MBA) reports: Refinance Applications Hit Highest Levels in Over a Year

Click on graph for larger image.

The Market Composite Index, a measure of mortgage loan application volume, was 721.2, an increase of 11.4 percent on a seasonally adjusted basis from 647.6 one week earlier. On an unadjusted basis, the Index increased 10.2 percent compared with the previous week and was up 22.2 percent compared with the same week one year earlier. The Market Index is at its highest level since October 2005.

“The substantial decline in mortgage rates over the past six months, greater than 80 basis points in total, has led to a significant increase in refinance activity. Additionally, we are seeing a steady increase in purchase applications,” said Mike Fratantoni, Senior Economist at the Mortgage Bankers Association.

The seasonally adjusted Refinance Index increased by 15.8 percent to 2304.4 from 1989.7 the previous week and the Purchase Index increased by 8.7 percent to 463.8 from 426.6 one week earlier. The Refinance Index is at its highest level since September 2005 while the Purchase Index is at its highest since January 2006.

Mortgage rates were mixed:

The average contract interest rate for 30-year fixed-rate mortgages increased to 6.02 from 5.98 percent ...

The average contract interest rate for one-year ARMs decreased to 5.76 percent from 5.79 ...

The second graph shows the Purchase Index and the 4 and 12 week moving averages since January 2002. The four week moving average is up 3.1 percent to 424.6 from 411.9 for the Purchase Index.

The refinance share of mortgage activity increased to 52.6 percent of total applications from 50.1 percent the previous week. The refinance share is at its highest level since April 2004. The adjustable-rate mortgage (ARM) share of activity increased to 24.9 from 23.9 percent of total applications from the previous week.

With the dramatic drop in the ten year yield, the 30 year mortgage had fallen briefly under 6% two weeks ago. Based on Freddie Mac's monthly data, that was the first time the 30 year rate has been below 6% since September 2005.

by Calculated Risk on 12/12/2006 09:43:00 PM

From the New Haven Register: Hubbell to cut 1,000 jobs

In a conference call, President and CEO Timothy H. Powers said Hubbell is laying off 1,000 employees in response to plunging demand for its products — electrical, lighting and telecommunications equipment as well as construction materials and test and measurement systems.

"We are seeing weakness in our business, with lower-than-anticipated orders in both residential and non-residential construction and the utility sector," Powers said.

It appears all sectors of construction are slowing:

Orders for nonresidential construction, which accounts for 40 percent of Hubbell’s revenues, have slipped in both square footage and contract awards in recent months, the statement said.

Residential construction — 15 percent of Hubbell’s business — is showing "more weakness than previously forecast," Powers said.

And the utility sector — 23 percent of Hubbell’s business — is seeing lower order rates, largely due to a quieter than normal storm season.

With the abrupt slowdown, Hubbell has gone from overtime, to standard workweeks, to layoffs in the span of eight weeks:

The broadening slowdown became apparent over the last eight weeks, Powers said.
...
"As little as eight weeks ago we had been pushing very hard in many of our plants to catch up with deliveries that were late, particularly in the lighting area," Powers said. "Then we went from overtime to standard workweeks to layoffs."
...
"We have seen a quite rapid and sudden slowdown across the board," Powers [said]. ... "Residential building is slowing at a rate much faster than everybody predicted, and (a slowdown in lighting sales) has accelerated dramatically. It’s an unpleasant surprise."

Click on graph for larger image.

This graph shows housing starts (shifted 6 months into the future), completions and residential construction employment. Residential construction employment tracks completions, and completions follows starts by about 6 months.

Completions were still near record levels in October; just 6 weeks ago. No wonder Hubbell was working their employees overtime. But now completions and employment should follow starts off the cliff, and Hubbell is responding by laying off employees.

Also note that Hubbell reports nonresidential construction is soft.

by Calculated Risk on 12/12/2006 09:52:00 AM

Tanta comments on the Fitch’s 2007 Global Structured Finance Outlook

On RMBS:

“More borrowers today than historically are sensitive to a slowdown in HPA due to the increased amount of leverage assumed to afford the higher house prices of recent years. For the entire non-agency sector [prime jumbo plus Alt-A plus subprime], combined LTVs have increased to 83% in 2006 to date from 73% in 2002. The increase in combined LTVs has been driven by a growing number of “combination” first and second liens (also known as “piggyback” second liens), which allow borrowers to purchase homes with little or no downpayment. Also, since 2002, debt-to-income ratios (“DTIs”) are up on average from 37% to 41%. The increase in DTIs is likely understated as the percentage of borrowers choosing “stated-income” documentation programmes has increased to 60% this year from 37% in 2002. Fitch has not seen any strong indications that the trend of increased leverage is abating and the trend will likely continue through 2007.” [emphasis added]

“Under these [Nontraditional Mortgage] guidelines, originators will have to qualify borrowers at a fully indexed, fully amortising rate. Since these guidelines are generally already practiced for prime and Alt-A IO products, the change will likely have the greatest impact on sub-prime IO loan originations and, to a lesser degree, Alt-A option ARM originations. Sub-prime IO borrowers have traditionally been qualified at the IO payment and some Alt-A originators [can anyone say WaMu?] have not used the fully indexed rate to qualify borrowers for option ARMs. Fitch expects the new guidelines to push more subprime borrowers into 40-year loans and to result in a decline in option ARM issuance in the Alt-A sector.”

Tanta: So we have guidance adoption pushing subprime borrowers into 40-year loans. Can anyone out there sketch a pricing model that would make a 40Y FRM affordable to your average overleveraged deeply indebted subprime borrower? Or, alternately, model loss severity expectations on a slowly amortizing 40Y ARM that is a substantial improvement over an IO? I thought not.

Prime Jumbos:

“Credit characteristics of loans originated in 2006 have continued the trend in recent years of weakening risk attributes in the sector. Averages show a trend of increased risk every year since 2003 in almost every major category, with the exception of Fair Isaac Corp (“FICO”) score. The weighted average LTV ratio in 2006 (70.6%) is the highest since 2001. The 2006 DTI ratio (37%), non-owner occupied property (9%) and non-full documentation loans (55%) are all at the highest levels on record. Additionally, more prime borrowers are choosing mortgage products with interest-rate and payment shock risk. Hybrid ARM IO loans now make up the greatest share of new originations. . . . Although still early, there appears to be a marked distinction between fixed-rate and ARM loans when the performance of recent origination is compared with prior vintages at comparable points in their seasoning. Both 15- and 30-year fixed-rate loans originated in 2005 and 2006 are outperforming prior vintages to date when age-adjusted. Conversely, recently originated ARM loans are underperforming prior vintages. The 2006 vintage ARM performance has the highest age-adjusted delinquency of any vintage since 2001.”

Alt-A:

“Credit attributes for Alt-A loans originated in 2006 continue to exhibit the trend towards increased borrower leverage in recent years. While the reported LTV ratios of loans securitised have remained relatively stable, the percentage of loans reporting a subordinate second lien has more than doubled since 2002. Additionally, the weighted average DTI ratio (37%) and the percentage of borrowers using non-full documentation (82%) are both at all-time highs. The high percentage of borrowers with non-full documentation was driven by the growing number of option ARM loans, almost 90% of which chose non-full documentation in 2006. Affordability products dominate the sector, with approximately 75% of the Alt-A loans originated in 2006 falling into that category. . . . The rise in recent vintage delinquency is dramatic relative to earlier vintage option ARM performance, but remains very low in absolute terms and well below the delinquency of other Alt-A products. However, the increase in delinquency does not fully reflect the deterioration in performance of that product. The dramatic increase in short-term rates between 2003 and 2006 has meant much higher interest rates for option ARM borrowers once the teaser period ended. Option ARM borrowers from the 2006 vintage are facing coupons above 7% by month six, several hundred basis points higher than option ARM borrowers from prior vintages at similar points in their seasoning. The result has been a significant increase in the number of borrowers choosing the minimum payment, which negatively amortises the loans. Over 90% of option ARM borrowers from the 2006 vintage are already negatively amortising. However, while the incidence of this is high, the amount of the negative amortisation is relatively small to date. Of those borrowers in this situation, the average rate of negative amortisation is between 1-2% a year. [emphasis added]

Tanta: 90% of Option ARMs originated in 2006 were low or no doc. The rate shock at reset is extreme. Plus 90% of them are negatively amortizing at something like 100% of nominal house price appreciation (at best). But they had a nice-looking FICO when they were originated!

Subprime:

"[T]he loans originated in 2006 have exhibited increased leverage from prior years. While the LTV ratios of the loans securitised has remained relatively stable in recent years, the number of borrowers with reported subordinate second liens has almost doubled since 2004. Additionally, the weighted-average DTI ratio (42%) and the percentage of borrowers choosing non-full documentation (44%) in 2006 are both at all-time highs. [emphasis added]

“The performance of loans originated in 2005 and 2006 generally reflects the increased leverage and delinquencies are up across all product types relative to the age-adjusted delinquency of the 2003 and 2004 vintages. However, the largest challenge of the 2005 and 2006 vintages still lies ahead when roughly three-quarters of those borrowers are required to make a higher monthly payment with the scheduled rate adjustment at month 24. The 2/28 hybrid ARMs originated in 2005 and 2006 have an initial rate below their fully indexed rate and are scheduled to face a rate increase . . . even if Libor remains flat.”

Tanta: A “2/28 hybrid” means the rate is fixed for two years, and then adjusts each 6 months for the remaining 28 years based on the six-month LIBOR. The margin over index could be anything from 300 to 450 basis points. And we are seeing record delinquencies in the first two years, during the fixed period with a discounted start rate.

by Calculated Risk on 12/11/2006 07:16:00 PM

One of the incredible stories of the housing boom was the surge in brokers' commissions over the last 5 years. Brokers' commissions are included in residential investment, and are the third largest category behind new single family residential construction and home improvements. See BEA GDP underlying Table 5.4.5BU, line 43.

Click on graph for larger image.

This graph shows the dollar value of existing home sales as a percent of GDP, and the dollar value of commissions as a percent of GDP. Commissions have averaged approximately 6% of gross sales for years. (2006 estimated from first three quarters).

My initial reaction was that the surge in commissions, and the total value of existing home sales, was primarily related to the recent rapid increase in house prices.

Actually the increase in house prices is the second most important factor with respect to the rapid increase in commissions (as percent of GDP). The most important factor was the increase in turnover of the existing stock.

The second graph shows existing home sales and inventory normalized by the number of owner occupied units. This shows the extraordinary level of sales for the last few years, reaching 9.5% of owner occupied units in 2005. The median level is 6.0% for the last 35 years. Inventory is only available since 1982.

The primary factor in the rapid increase in commissions, as a percent of GDP, was the increased turnover of existing stock. If sales return to normal (6% of existing stock per year), commissions will drop dramatically from the levels of recent years.

When brokers talk about the housing market returning to "normal", I don't think they mean sales dropping to 6% of existing stock (or about 4.5 million units per year currently). From CNN: Realtors: Home sales may keep falling in 2007

Next year will likely bring a second annual decline in existing home sales, the National Association of Realtors predicted Monday.

Sales of existing homes are expected to decline 8.6 percent to 6.47 million for 2006 and contract another 1 percent to 6.40 million units next year.

Still, the housing sector should see a rebound by the end of next year, said David Lereah, the association's chief economist.

So NAR is forecasting another year with sales above 8% of existing stock; far above the median level of the last 35 years.

by Calculated Risk on 12/11/2006 06:35:00 PM

The Office of Thrift Supervision hosted a National Housing Forum today. An archived recording will be available soon.

The forum included four panels:

Panel 1: Outlook for the U.S. Housing Market and Potential Impact on Banks and Thrifts

Panel 2: Challenges & Emerging Risks in the Home Mortgage Business

Panel 3: Critical Consumer Protection Issues in Housing Finance Today

Panel 4: Mortgage Fraud

Here are some excerpts from an AP article: Mortgage delinquencies a rising threat

Mortgage delinquency and foreclosure rates are on the rise, and the impact could be greatest on low-income families that took out higher-interest loans for risky borrowers, some experts said Monday.
...
Some experts are concerned that the increase in mortgage foreclosure rates could affect the banking system's financial health.

There have started to be "early signs of credit distress" in financial institutions' holdings of so-called "subprime" mortgages, especially in California, Richard Brown, chief economist for the Federal Deposit Insurance Corp., said at the conference.
...
William Longbrake, a senior policy adviser to the Financial Services Roundtable, an industry group, said he is among a minority of experts "who believe the worst is still ahead in the housing market" for home prices to continue to fall.

"There is worse to come. ... The bottom is probably still many months ahead," Longbrake said. He noted that the rise in delinquencies and foreclosures in subprime mortgages particularly affects low-income families.

Mortgage defaults could snowball in the coming months, a situation that bears close watching, he said.

by Calculated Risk on 12/11/2006 10:55:00 AM

From David Streitfeld, Times Staff Writer: A loan that'll get ugly fast

EVERY day, Will Hertzberg owns a little less of his three-bedroom house in Corona.

Like hundreds of thousands of other homeowners around the state, Hertzberg has a mortgage that lets him choose how much he pays each month.

Like many of them, he always chooses to pay as little as possible.

For the moment, this allows the 56-year-old Hertzberg to continue living in his tract home despite being only marginally employed. But his debt is swelling, and his mortgage company controls his fate.

"I am rather screwed," he said.

And here are his payment options:

One of his options is to pay $2,513 a month. That would cover the principal and interest as if it were a traditional 30-year loan.

A second possibility is to pay $2,279, which would cover only the interest.

But each month he always takes the cheapest option: paying $1,106 and promising to make up the shortfall later.

Hertzberg is not alone. The use of option ARMs have really taken off, especially in California:

In 2003, only about 8 of every 1,000 people buying a home or refinancing a mortgage in California got a pay option loan ...

Last year, 1 in 5 loan applicants got one.

In the first eight months of 2006... Nearly 1 in 3 California loan applicants are now choosing them.

But the impact is a still a "big unknown":

Just how many of these homeowners will end up in trouble is the big unknown for the housing market and the economy. Although many economists expect the loans to prompt a certain degree of turmoil, they don't think it would cause a recession.

UPDATE: And from Reuters: U.S. home lenders brace for bad news, legislation

During the recent U.S. housing boom, mortgage lenders touted so-called exotic mortgages that allowed people to buy houses they could not otherwise afford. Now those lenders are bracing for the not-so-happy story of borrowers...
...
A mortgage survey due on Wednesday is expected to show that more and more Americans are in danger of losing their homes. The quarterly report from the Mortgage Bankers Association is also expected to show that the same mortgage products that helped send the housing market into the stratosphere are now weighing homeowners down.

In a hint at Wednesday's data, October saw more foreclosure actions than any other month this year ...