by Calculated Risk on 7/31/2007 10:34:00 AM

From MarketWatch: Home prices fall further in May, Case-Shiller says

The Case-Shiller 20-city index fell 2.8% compared with a year earlier, S&P said. ... "At a national level, declines in annual home price returns are showing no signs of a slowdown or turnaround," said Robert J. Shiller, chief economist at MacroMarkets LLC., and the co-inventor of the price index.

The typical pattern for a housing bust is small steady real price declines over several years, so this is probably just the beginning of the price declines.

The closely watched OFHEO House Price Index is schedule to be released August 30th for Q2.

by Calculated Risk on 7/31/2007 09:59:00 AM

From the Census Bureau: June 2007 Construction Spending at $1,175.4 Billion Annual Rate

The U.S. Census Bureau of the Department of Commerce announced today that construction spending during June 2007 was estimated at a seasonally adjusted annual rate of $1,175.4 billion, 0.3 percent below the revised May estimate of $1,178.4 billion. The June figure is 2.4 percent (±2.1%) below the June 2006 estimate of $1,204.0 billion.

During the first 6 months of this year, construction spending amounted to $550.0 billion, 3.5 percent below the $570.1 billion for the same period in 2006.
...
[Private] Residential construction was at a seasonally adjusted annual rate of $544.3 billion in June, 0.7 percent below the revised May estimate of $548.3 billion.

[Private] Nonresidential construction was at a seasonally adjusted annual rate of $346.6 billion in June, 0.3 percent above the revised May estimate of $345.6 billion.

Click on graph for larger image.

This graph shows private construction spending for residential and non-residential (SAAR in Billions). While private residential spending has declined significantly, spending for private non-residential construction has been strong.

The second graph shows the YoY change for both categories of private construction spending.

The normal historical pattern is for non-residential construction spending to follow residential construction spending. However, because of the large slump in non-residential construction following the stock market "bust", it is possible there is more pent up demand than usual - and that the non-residential boom will continue for a longer period than normal.

Over the weekend, the Chicago Tribune reported: Subprime pain spreads into office market

"The downturn in the residential sector has spilled over into the commercial side as the mortgage lenders, title companies, real estate and mortgage brokers shut down or downsize," said Doug Shehan, a senior director at Cushman & Wakefield Illinois Inc.

Over the past several months the contraction of these firms has kept vacancy rates high, rents modest and building sales uncertain, he said.

"It's changed the landscape of the suburban markets dramatically," Shehan said. "Now, what will be the next industry to absorb the space?"
...
But the pain is not restricted to companies in real estate. Businesses that provide their technology, accounting and marketing also might be feeling the pinch, said Faith Ramsour, Cushman's research director.
...
"The ripple effect could be very deleterious because no other industry is growing enough to fill the space," said Geoffrey Hewings, an economics professor and regional job market expert at the University of Illinois.

That story describes the normal historical pattern; nonresidential construction spending follows residential. The question is: Will we see the normal pattern?

I think the answer is yes.

by Tanta on 7/31/2007 09:00:00 AM

Via Bloomberg, "Bear, Lehman, Merrill, Goldman Traded as Junk, Derivatives Show":

Bonds of U.S. investment banks lost about $1.5 billion of their face value this month as the risk of owning the securities increased the most since at least October 2004, according to Merrill indexes. Prices of credit-default swaps based on the debt imply that their credit ratings are below investment grade, data compiled by Moody's Investors Service show.

The highest level of defaults in 10 years on subprime mortgages and a $33 billion pileup of unsold bonds and loans for funding acquisitions are driving investors away from debt of the New York-based securities firms. Concerns about credit quality may get worse because banks promised to provide $300 billion in debt for leveraged buyouts announced this year.

Tanta's Muddled Metaphor Index registers in the Severe Danger Zone:

``We have been adding, I wouldn't say we've been power- lifting,'' Kiesel said. ``You want to leave some powder dry as you've got an unprecedented amount of high-yield supply that's hitting the market. That's a train coming down the tracks. So stepping in front of that takes some guts.''

by Tanta on 7/31/2007 08:25:00 AM

Regarding American Home Mortgage's troubles:

To survive, American Home needs the secondary credit markets to stabilize, so the company can re-sell its loans for a profit. "They need it to happen very, very quickly," Miller says.

One wonders how quickly the credit markets will stabilize when players like AHM are reneging on dividends and halting trading and failing to cough up reports. I believe our broker brethren describe this as a "viscous cycle."

by Tanta on 7/31/2007 08:20:00 AM

I post this with some trepidation. Our general interest in these matters on this blog involves the effects on housing, credit markets, and the general economy of deteriorations in the residential mortgage book and the availability of residential mortgage credit. In other words, we aren't trading IMB. You know.

What I got from IndyMac's report: things are not good in Alt-A land. Indy's Non-Performing Assets were up 342%, from 0.46% to 1.63%. Repurchases of loans are slowing down, but are still winding their way through the food chain:

A positive to note is that loan repurchases, while high at $219 million for the quarter, declined from $224 million last quarter. Importantly, repurchase demands received, which peaked at $527 million in the first quarter, fell to $221 million for all of Q207, with May and June coming in at $44 million and $43 million, respectively. This indicates that the guideline tightening we did earlier this year has had the desired impact of improving the credit quality of our loan production, which should materially improve our credit costs in this segment of our business in the second half of the year.

Credit guideline tightening is slowing new production; on the other hand, slower prepayments are helping with income for servicers (like IndyMac). My own sense of this report is that if Indy weren't a thrift, it would be in the middle of a serious "liquidity crisis" like C-BASS or AHM. Certainly nothing I've seen suggests that the worst is over for anyone in the Alt-A space who hasn't already "deleveraged."

by Tanta on 7/31/2007 07:00:00 AM

This is what a credit crunch looks like:

At the beginning of 2007, we had $302 million of liquidity, representing greater than 30% of our capital of $926 million. During the first 6 months of 2007, a very tumultuous time in the subprime mortgage market, C-BASS' disciplined liquidity strategy enabled the company to meet $290 million in lender margin calls. During the first 24 days of July alone, C-BASS met an additional $260 million of margin calls, representing greater than a 20% decline in the lender's value. We believe that nothing justifies this substantial amount of margin calls received in such a short period of time, particularly as there has been no change in the underlying fundamentals of our portfolio.

by Calculated Risk on 7/30/2007 08:28:00 PM

From MarketWatch: Sowood hedge funds lose more than half their value

The Sowood Alpha Fund Ltd. and the Sowood Alpha Fund LP are down roughly 57% and 53% in July, respectively, and about 56% and 51% so far this year ...

According to the letter from Sowood posted at the WSJ, Sowood has shut down both funds, sold the assets to Citadel Investment Group and will distribute the remaining assets to shareholders soon. A 50%+ haircut is better than a total loss (like for the Bear Stearns hedge funds).

UPDATE: Apparently the loss was $1.5+ Billion (from just over $3 Billion).

by Calculated Risk on 7/30/2007 07:06:00 PM

See video at HousingDoom.

Cramer is exaggerating the problems in housing. As an example, it is extremely unlikely that 100% of 2/28s will default. But I agree with him on the Inland Empire; I've been arguing that California's Inland Empire was going to get crushed for some time.

by Calculated Risk on 7/30/2007 06:21:00 PM

Press Release: MGIC Investment Provides Update on C-BASS Investment

MGIC Investment Corporation announced today that it has concluded that the value of its investment in Credit-Based Asset Servicing and Securitization LLC has been materially impaired.

The investment (including $50 million within the last 10 days):

MGIC's investment in C-BASS consists of approximately $466 million of equity as of June 30, 2007 and an additional $50 million drawn on July 20 and 23, 2007 under a $50 million unsecured credit facility that MGIC provided to C-BASS.

And the kicker:

MGIC has not determined the range of an impairment charge, although the upper boundary of the range could be MGIC's entire investment, less any associated tax benefit.

UPDATE: Radian makes the same comments: Radian Comments on C-BASS Investment

Since February 2007, the market for subprime mortgages has experienced significant turmoil, with market dislocations accelerating to unprecedented levels beginning in mid-July 2007 and further deteriorating in the last few days.

Radian's investment in C-BASS consists of approximately $468 million of equity as of June 30, 2007 and an additional $50 million drawn on July 20 and 23, 2007 under a $50 million unsecured credit facility that Radian provided to C-BASS. On a pro forma basis reflecting the amounts drawn under this credit facility, Radian's investment in C-BASS was approximately $518 million. Radian has not determined the impairment charge, although it could be Radian's entire investment, less any associated tax benefit.

by Tanta on 7/30/2007 01:04:00 PM

Marketwatch:

On July 19, American Home's stock slumped amid speculation that the company's credit lines were being pulled.

However, analysts dismissed the notion, saying the company told them that its credit lines were intact. . . . .

The following day, Mary Feder, vice president and investor relations director at American Home, told MarketWatch that none of the company's credit lines were being pulled.

But reassuring analysts and investors less than two weeks before warning about margin calls has undermined the credibility of American Home's management team, according to RBC's Ackor.

"Recent conversations with management reaffirmed to us that many of the factors negatively influencing the company's fundamentals were being effectively addressed, and that recent market rumors of liquidity concerns were completely unfounded," the analyst wrote.

"We certainly acknowledge that the recent and severe erosion in the global debt markets was rapid and unforeseen," Ackor added. "We are concerned, however, that management appears to have either been caught entirely off guard (implying they may not fully understand the implications of a difficult operating environment), has not accurately conveyed the potential impact of these operating challenges to the investment community, or both."

American Home announced its financing problems and the decision to halt dividends after 10 pm on Friday, a move that won't help, Ackor said. He added: "The company's dividend-delay confessional at 10:20 p.m. on a Friday night makes us think that both of these points may have merit."