by Calculated Risk on 3/09/2007 08:15:00 PM

From Reuters (hat tip: Cal): Stricter lending seen barring 1 mln US home buyers

Tougher lending standards stemming from the shakeout in the beleaguered subprime mortgage industry could prevent up to 1.1 million U.S. homebuyers from getting mortgages this year, a Bear Stearns analyst told investors on Friday.

Banks and mortgage companies would sharply scale back lending to two groups: subprime and "Alt-A" borrowers, said Dale Westhoff, Bear Stearns' head of mortgage-backed research.
...
Westhoff estimated a 30 percent, or $180 billion, contraction in the subprime sector in 2007 from 2006, and forecast a 25 percent, or $100 billion, decline in Alt-A loan production from last year.

"This implies a purchase contraction of 1.1 million borrowers," said Westhoff who was speaking at Bear Stearns mortgage conference here. "That's a non-trivial number."

As I've been writing, Wall Street's 2007 housing forecasts are "No longer operative". I'd like to welcome Westhoff to the fold, and I'll write more about this later.

by Calculated Risk on 3/09/2007 08:13:00 PM

From Reuters (hat tip: realist): Countrywide Financial ends no down-payment lending

Countrywide Financial Corp. ... on Friday told its brokers to stop offering borrowers the option of no-money-down home loans ...

by Calculated Risk on 3/09/2007 06:59:00 PM

So far BLS reported residential construction employment has only fallen 4% from the peak in 2006. Meanwhile housing starts have fallen about 35%. What gives?

Click on graph for larger image.

The most important reason employment hasn't decreased significantly - yet - is that employment tracks completions, and completions are still near record levels. This graph shows starts and completions since 1968. Clearly starts have "fallen off a cliff", yet completions are still near record levels. But completions will follow starts off the cliff soon ... and so will residential construction employment.

As a techinical note: historically, on average, completions have followed starts by about 6 months for single family homes according to the Census Bureau, and by about 9 months for buildings with 2 units or more. However because of the increase in building size in recent years, the multi-family buildings are now taking an average of over 11 months from start to completion. Because of the longer period from start to completion, it has taken a little longer this time for completions to follow starts off the cliff.

There are other possible reasons too: In the construction industry there are many cash workers and illegal immigrants. These workers were probably the first to be let go, and they don't show up in the BLS statistics. See this WaPo article: Immigrants' Jobs Vanish With Housing Slowdown

"There's no work here anymore."
Amilcar Guzman, immigrant construction worker from El Salvador, Dec 27, 2006

Another possible reason BLS reported jobs haven't fallen significantly is because some employers might be hoping for a spring rebound in the housing market, and they don't want to lay off valued employees only to have to search for skilled employees in a few months. At my company, we would avoid layoffs during slow periods if we thought a turnaround was only a few months away. So this is another possible explanation.


And finally a possible technical reason based on how the BLS reports employment.

Residential construction employment is very seasonal. This graph shows both the Not Seasonally Adjusted (NSA) and Seasonally Adjusted (SA) residential construction employment from the BLS. Note: the residential specialty series starts in January 2001, so earlier totals were estimated from the residential building series.

This graph shows a key point: the next four months (March through June) are the main months for hiring construction workers. If NSA construction stays flat through the summer, the BLS will report approximately 300K lost residential construction jobs over the next four months. With the excess inventory in the housing market, it is very possible that NSA residential construction employment will actually fall during the peak hiring months!

So I'm sticking with my forecast of 400K to 600K residential construction jobs lost over the first 6 months of 2007.

by Calculated Risk on 3/09/2007 04:50:00 PM

From Bloomberg (hat tip: Brian): Subprime Defaults Are `Beginning of Wave,' Bies Says

Banks' losses from risky home loans made at low introductory rates are just beginning, U.S. Federal Reserve Governor Susan Bies said.

Bies, who has been Fed's top banking policy official in her tenure at the U.S. central bank, said today banks are likely to see more missed payments and foreclosures as consumers with weak credit histories begin to face higher monthly mortgage payments.

"What's happening is the front end of this wave of teaser- rate loans that are coming into full pricing," Bies said at a risk-management forum in Charlotte, North Carolina. "So what we're seeing in this narrow segment is the beginning of the wave -- this is not the end, this is the beginning."

by Calculated Risk on 3/09/2007 09:16:00 AM

From Bloomberg: Rising Subprime Mortgage Defaults Add to Unsold Homes Inventory

Rising mortgage defaults by subprime borrowers may add more than 500,000 homes to a residential real estate market already beset by slumping prices, according to CreditSights Inc.

In January, 4.09 million new and existing homes were offered for sale, down from 4.43 million in July 2006, the National Association of Realtors and the U.S. Commerce Department said. New homes accounted for 536,000 of the January total, down from a record 573,000 in July.
...
"We estimate that the effect of looser lending standards could translate into another 533,000 homes coming onto the market as borrowers default -- an unwelcome phenomenon given the existing supply surplus," Sarah Rowin and Frank Lee of bond research firm CreditSights wrote in a March 1 report.

The article makes the point that New Home inventories are probably understated because of how the Census Bureau treats cancellations. But the comparison to July 2006 could also mention seasonal factors. It is common for inventory levels to fall during the holiday season, and then to rise again in the spring. A better comparison might be January 2007 to January 2006, and that shows existing home inventories are up 23% YoY from January 2006.

by Calculated Risk on 3/09/2007 08:28:00 AM

The BLS reports: U.S. nonfarm payrolls rose by 97,000 in February, after a revised 146,000 gain in January. The unemployment rate declined slightly to 4.5% in February.

Click on graph for larger image.

Here is the cumulative nonfarm job growth for Bush's 2nd term. The gray area represents the expected job growth (from 6 million to 10 million jobs over the four year term). Job growth has been solid for the last two years and is near the top of the expected range.

The following two graphs are the areas I've been watching closely: residential construction and retail employment.


Residential construction employment decreased by 23,500 jobs in February and is down 135.3 thousand, or about 4%, from the peak in February 2006. This is probably just the beginning of the loss of hundreds of thousands of residential construction jobs over the next year or so.

Note the scale doesn't start from zero: this is to better show the change in employment.

Nonresidential construction employment fell 38.5K in February. After increasing significantly in 2006 (up 4.6% in one year), nonresidential construction employment has been flat over the last four months. This might indicate the expected slowdown in nonresidential construction has started.


Retail employment gained 7,000 jobs in January. YoY retail employment is unchanged.

Overall this is a solid report. With the revisions to January and December, the economy has added 156K jobs net jobs per month for the last three months. The expected job losses in residential construction employment has just started, but the spillover to retail isn't significant yet. I expect the rate of residential construction job losses to increase over the next few months.

by Calculated Risk on 3/08/2007 04:32:00 PM

New Century filed an 8-K with the SEC (hat tip Brian):

One of the Company’s lenders has extended to the Company $265 million in financing secured by the Company’s REIT mortgage loan portfolio and certain residual assets. The net proceeds from the financing will be used to refinance and/or satisfy some of the Company’s existing obligations. This lender has also provided financing to the Company to refinance the remaining balance of approximately $710 million in mortgage loans currently financed through another lending facility. This refinancing was undertaken in response to that lender’s notice to the Company exercising its rights to effect a repurchase by the Company of the loans and other assets it had financed for the Company.

Furthermore, the Company is in discussions with lenders and other third parties regarding a refinancing and other alternatives to obtain additional liquidity. No assurance can be given that any of these discussions will be successful.

The Company has not yet obtained waivers of the net income covenant from its remaining five financing arrangements since filing the Form 12b-25 on March 2, 2007. In addition, the Company has received an aggregate of approximately $150 million of margin calls, approximately $80 million of which has been satisfied. The Company has approximately $70 million in outstanding margin calls from five lenders.

The Company has only been able to fund a portion of its loans this week. In addition, its capacity to fund new originations is substantially limited due to its lenders’ restrictions or refusals to allow the Company to access their financing arrangements. The Company has been in frequent discussions with its lenders to identify ways to address their concerns in order to allow a greater funding volume in the near term. However, there can be no assurance that these efforts will succeed.

As a result of the Company’s current constrained funding capacity, the Company has elected to cease accepting loan applications from prospective borrowers effective immediately while the Company seeks to obtain additional funding capacity. The Company expects to resume accepting applications as soon as practicable, however, there can be no assurance that the Company will be able to resume accepting applications.

by Calculated Risk on 3/08/2007 03:50:00 PM

From Reuters: New Century shares sink on bankruptcy speculation

New Century Financial Corp.'s shares fell by more than one-third on Thursday amid market speculation it would seek bankruptcy protection, a day after activist hedge fund manager David Einhorn quit the subprime lender's board.

New Century spokeswoman Laura Oberhelman said the real estate investment trust does not comment on market rumors.

A BK is definitely likely, and I wouldn't be surprised if a BK is announced at any time.

by Calculated Risk on 3/08/2007 03:02:00 PM

The Federal Reserve released the Flow of Funds report today for Q4 2006. The report shows that homeowner mortgage debt increase $148.6 Billion in Q4, 2006, or at an annualized rate of 6.4% (NSA).

This is the slowest percentage increase in homeowner mortgage debt since Q1 2000, and in dollar terms, this is the slowest increase since Q1 2002.

Click on graph for larger image.

This graph shows the annualized percentage increase in homeowner mortgage debt, not seasonally adjusted.

Note from Fed: "Includes loans made under home equity lines of credit and home equity loans secured by junior liens".

The slower increase in mortgage debt is probably caused by both the housing slowdown, and less equity extraction from homes. I'll try to estimate the Mortgage Equity Withdrawal (MEW) for Q4 while we wait for the Fed's calculation.

by Calculated Risk on 3/08/2007 08:56:00 AM

From MarketWatch: Wal-Mart Feb. sales miss Street view

Wal-Mart Stores Inc. said Thursday that February same-store sales rose moderately, missing Wall Street's expectations, hurt by weakness in clothing, home merchandise and hardlines.

For March, the world's largest retailer expects sales at stores open at least one year to rise 1% to 2%, and it expects the softness in clothing and home goods to remain through spring.

Bentonville, Ark.-based Wal-Mart the world's largest retailer, said February total U.S. same-store sales rose 0.9%.

And from AP: Retailers Post Disappointing Feb. Sales

The nation's retailers had a slow start to the spring season as unseasonably cold weather in February chilled demand for lightweight apparel and left merchants with disappointing sales. The slowing economy, particularly the weakening housing market, could challenge shoppers in the months ahead.
...
"Cooler weather clearly dampened spring apparel sales," said Ken Perkins, president of RetailMetrics LLC ... But Perkins also said major concerns for consumer spending in the months ahead are the defaults and delinquencies in the mortgage industry. That, coupled with the decline of mortgage equity withdrawls that give consumers extra cash, could curtail spending.

According to Thomson Financial, of 35 merchants that reported February same-store sales results so far, 10 beat estimates, while 24 missed and one met expectations. Same-store sales are sales at stores open at least a year and are considered the best measure of a retailer's health.

Was it the weather? Or is this a sign of spillover from the housing slump? It is way too early to tell.