by Calculated Risk on 7/03/2008 02:49:00 PM

Whenever Tanta doesn't post for a few days, I receive several emails asking about the health of my good friend and co-blogger. Thanks to everyone for your thoughts and concern.

First, Tanta posted as recently as Tuesday: When In Doubt, Blame the Accountants

Second, I spoke with her at length on Monday, and she assured me she is OK. Her health is a private matter, but she has disclosed this before: Tanta is on extended medical leave recovering from cancer treatment. Fortunately her cancer is in remission; unfortunately the effects of the cancer treatment linger on.

She is currently experiencing some back pain, and that limits her time at the computer. As we all know - see the UberNerd posts - Tanta writes very detailed and informative posts, and that takes extensive computer time.

I've encouraged her to write a few shorter posts now and then until her back recovers. Meanwhile, thanks to everyone for your thoughts.

by Calculated Risk on 7/03/2008 01:35:00 PM

Back in October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter: House Prices and Fundamental Value.

Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

Here is an update to their graph.

Click on image for larger graph in new window.

This graph shows the price to rent ratio (Dec 1982 = 1.0) for both the OFHEO House Price Index and the Case-Shiller National Home Price Index. For rents, the national Owners' Equivalent Rent from the BLS is used.

The Fed letter used the OFHEO index (Blue), but this index includes refinances and has other problems. The OFHEO index shows that prices have barely fallen from the recent peak, and therefore the price-to-rent ratio has barely declined.

Data is available quarterly for the Case-Shiller National Index starting in 1987. For this graph, the price-to-rent ratio for Case-Shiller in Q1 1987 was set to the OFHEO price-to-rent for Q1 1987.

Looking at the price-to-rent ratio based on the Case-Shiller index, the adjustment in the price-to-rent ratio is probably more than half way complete as of Q1 2008 on a national basis. This ratio will probably continue to decline with some combination of falling prices, and perhaps, rising rents. And the ratio may overshoot too.

The second graph shows the price-to-rent ratio for three cities: Los Angeles, Miami, and New York. On this monthly graph, January 1987 = 1.0. The OER from the BLS for each individual city is used.

Some combination of falling prices, and perhaps rising rents, will probably push the ratio back towards 1.0. By this measure of housing fundamentals, it appears that Miami has correct about 2/3 of the way to the eventual bottom, Los Angeles about half way, and New York about 40%.

This ratio has flaws, but it gives a general idea of how far prices need to fall (or rents increase). It would be nice to add Houston (with the booming energy business), but the data isn't available.

by Calculated Risk on 7/03/2008 10:14:00 AM

From MarketWatch: U.S. June ISM services falls sharply to 48.2%

Below 50% means services are contracting. Prices are rising sharply and employment falling.

by Calculated Risk on 7/03/2008 09:09:00 AM

First a correction: last week I mentioned that historically weekly claims increase after Congress passes an extension to unemployment insurance benefits. In the past, workers who had exhausted their benefits could reapply for extended benefits, and these workers were included in the first time claims report.

Although the above was true during previous downturns, the DOL BLS has apparently changed their methodology and the extended benefits are not included in first time claims anymore.

So the jump to 400K first time claims is not the result of Congress extending benefits (and it would be too soon anyway).

Here is the current report from the Department of Labor for the week ending June 28, showing initial unemployment claims increased to 404,000, and the 4-week moving average was 390,500.

This graph shows the weekly claims and the four week moving average of weekly unemployment claims since 1989.

The four week moving average has been trending upwards for the last few months, and is now at 390,500 - solidly above the possible recession level (approximately 350K).

by Calculated Risk on 7/03/2008 08:41:00 AM

From the BLS: Employment Situation Summary

This graph shows the unemployment rate and the year-over-year change in employment vs. recessions.
Click on graph for larger image.

Although the unemployment rate was unchanged from last month, the rate has jumped sharply from a cycle low of 4.4% to 5.5%; a strong recession indicator.

The YoY change in employment is close to zero (the economy has added only 15 thousand jobs in the last year), also suggesting a recession.

The private sector (excluding government jobs) declined 242 thousand over the last year.

Note the current recession indicated on the graph is "probable", and is not official.

This is the sixth straight month of job losses.

by Calculated Risk on 7/03/2008 01:28:00 AM

From the LA Times Money & Co: Regulators to Schumer on IndyMac: Please shut up

From a letter to Schumer today, John M. Reich, director of the Office of Thrift Supervision wrote:

"Dissemination of incomplete or erroneous information can erode public confidence, mislead depositors and investors, and cause unintended consequences, including depositor runs and panic stock trades. Rumors and innuendo cause damage to financial institutions that might not occur otherwise and these concerns drive our strict policy of privacy."

The LA Times also quotes John D. Hawke, the U.S. comptroller of the currency (regulator of national banks) from 1998 to 2004:

"If Schumer continues to go public with letters raising questions about the condition of individual institutions, he will cause havoc in the banking system," Hawke said.

"Leaking his IndyMac letter to the press was reckless and grossly irresponsible. I don't see how he can be trusted with confidential information in the future. What this incredibly stupid conduct does is put at risk the willingness of regulators to share any information with the [congressional] oversight committees. After this, you'd be crazy to share information with Schumer."

I agree. Naming an individual institution was reckless and irresponsible. I was very surprised that a letter like Schumer's was made public.

by Calculated Risk on 7/03/2008 12:32:00 AM

From the WSJ: Businesses Take Less Office Space Nationwide

For the second quarter in a row, businesses vacated more office space than they took nationwide, a phenomenon known as negative absorption. The national vacancy rate edged up to 13%, from 12.8% last quarter.
...
The worst-hit areas of the country in terms of office space are those whose local economies are reeling from the housing-bubble burst. ... Only 17 of the 79 markets Reis tracks saw rent growth outpace inflation.

With a combination of negative absorption, and much more office space being completed, the vacancy rate will most likely rise sharply over the next couple of years.

Here is a forecast from Grubb & Ellis back in April:

“With demand turning negative at the same time that the construction pipeline will deliver the 94 million square feet still underway, [office] vacancy is expected to peak at 18% by the end of 2009.”
Grubb & Ellis economist Robert Bach, April 2008

by Calculated Risk on 7/02/2008 09:26:00 PM

From Fortune Magazine: How Lehman lost its way (hat tip crispy&cole Bakersfield Bubble)

To understand what went wrong at Lehman Brothers, leave the canyons of Wall Street and head to the flatlands of Bakersfield, 120 miles northeast of Los Angeles.

That's where you'll find McAllister Ranch, envisioned as a 6,000-home, multibillion-dollar recreational community built around a Greg Norman-designed golf course, boating and fishing waters and a beach club. Now McAllister is three-square miles of fenced-off, almost lunar landscape punctuated by a half-finished clubhouse and a golf course gone to weeds.

Check out the pictures of the lunar landscape!

Here is a map. This is on the south east side of Bakersfield - at the southern end of the Central Valley.

by Calculated Risk on 7/02/2008 06:10:00 PM

Peter Viles at the L.A. Times provides some excerpts from an analyst report: Analyst sees 'ghost town' in Inland Empire

"At several properties, there were a significant number of fully built homes sitting vacant along with a large number of additional homes still under construction," Sandler O'Neill & Partners analyst Aaron Deer wrote today after touring developments in Corona and Ontario. "At one master plan community, the entire development appeared to be vacant -- with the exception of crews working on new construction, it was a ghost town."
...
"Perhaps the most interesting aspect to the development was what it revealed about the nature of the housing boom: that at the peak even the most undesirable and remote locations were worthy of expensive, high-end homes."

These remotes areas are getting crushed. Not only are house prices falling in general, but in areas like the Inland Empire a large percentage of homeowners worked in real estate (construction, mortgage brokers, real estate agents, etc.), so the unemployment rate is rising faster than for other areas. Add in almost $5 per gallon gasoline, and that makes these areas uneconomical, especially for people with large SUVs and trucks (like construction workers).

by Calculated Risk on 7/02/2008 05:06:00 PM

S&P Leveraged Commentary & Data released today: Harrah's joins 8 toggle issuers electing PIK; cash-pays buckle (link for those with access).

S&P reports Harrah's Entertainment announced today that it will be paying the $1.4 billion in senior PIK toggle bonds with additional debt instead of cash. According to S&P, this is the 9th toggle bond, totaling $4.1 billion in debt, electing the PIK option.

These Payment-in-kind (PIK) features can be toxic. The bond issuer just elects to issue more debt instead of making the interest payment, and this is usually bad news ... a NegAm loan for corporations!