by Calculated Risk on 11/19/2009 10:00:00 AM

The MBA reports a record 14.4 percent of mortgage loans were either one payment delinquent or in the foreclosure process in Q3 2009. This is an increase from 13.2% in Q2 2009.

From the MBA: Delinquencies Continue to Climb in Latest MBA National Delinquency Survey

The delinquency rate for mortgage loans on one-to-four-unit residential properties rose to a seasonally adjusted rate of 9.64 percent of all loans outstanding as of the end of the third quarter of 2009, up 40 basis points from the second quarter of 2009, and up 265 basis points from one year ago, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey. The non-seasonally adjusted delinquency rate increased 108 basis points from 8.86 percent in the second quarter of 2009 to 9.94 percent this quarter.

Top Line Results

The delinquency rate breaks the record set last quarter. The records are based on MBA data dating back to 1972.

The delinquency rate includes loans that are at least one payment past due but does not include loans somewhere in the process of foreclosure. The percentage of loans in the foreclosure process at the end of the third quarter was 4.47 percent, an increase of 17 basis points from the second quarter of 2009 and 150 basis points from one year ago. The combined percentage of loans in foreclosure or at least one payment past due was 14.41 percent on a non-seasonally adjusted basis, the highest ever recorded in the MBA delinquency survey.

The percentage of loans on which foreclosure actions were started during the third quarter was 1.42 percent, up six basis points from last quarter and up 35 basis points from one year ago.

The percentages of loans 90 days or more past due, loans in foreclosure, and foreclosures started all set new record highs. The percentage of loans 30 days past due is still below the record set in the second quarter of 1985.

Increases Driven by Prime and FHA Loans

“Despite the recession ending in mid-summer, the decline in mortgage performance continues. Job losses continue to increase and drive up delinquencies and foreclosures because mortgages are paid with paychecks, not percentage point increases in GDP. Over the last year, we have seen the ranks of the unemployed increase by about 5.5 million people, increasing the number of seriously delinquent loans by almost 2 million loans and increasing the rate of new foreclosures from 1.07 percent to 1.42 percent,” said Jay Brinkmann, MBA’s Chief Economist.

“Prime fixed-rate loans continue to represent the largest share of foreclosures started and the biggest driver of the increase in foreclosures. 33 percent of foreclosures started in the third quarter were on prime fixed-rate and loans and those loans were 44 percent of the quarterly increase in foreclosures. The foreclosure numbers for prime fixed-rate loans will get worse because those loans represented 54 percent of the quarterly increase in loans 90 days or more past due but not yet in foreclosure.

“The performance of prime adjustable rate loans, which include pay-option ARMs in the MBA survey, continue to deteriorate with the foreclosure rate on those loans for the first time exceeding the rate for subprime fixed-rate loans. In contrast, both subprime fixed-rate and subprime adjustable rate loans saw decreases in foreclosures.

“The foreclosure rate on FHA loans also increased, despite having a large increase in the number of FHA-insured loans outstanding. The number of FHA loans outstanding has increased by about 1.1 million over the last year. This increase in the denominator depresses the delinquency and foreclosure percentages. If we assume these newly-originated loans are not the ones defaulting and remove the big denominator increase from the calculation results, the foreclosure rate would be1.76 percent rather than 1.31 percent reported.
....
“The outlook is that delinquency rates and foreclosure rates will continue to worsen before they improve. First, it is unlikely the employment picture will get better until sometime next year and even then jobs will increase at a very slow pace. Perhaps more importantly, there is no reason to expect that when the economy begins to add more jobs, those jobs will be in areas with the biggest excess housing inventory and the highest delinquency rates. Second, the number of loans 90 days or more past due or in foreclosure is now a little over 4 million as compared with 3.9 million new and previously occupied homes currently for sale, although there is likely some overlap between the two numbers. The ultimate resolution of these seriously delinquent loans will put added pressure on the hardest hit sections of the country.”

by Calculated Risk on 11/19/2009 08:30:00 AM

The DOL reports on weekly unemployment insurance claims:

In the week ending Nov. 14, the advance figure for seasonally adjusted initial claims was 505,000, unchanged from the previous week's revised figure of 505,000. [Revised from 502,000] The 4-week moving average was 514,000, a decrease of 6,500 from the previous week's revised average of 520,500.
...
The advance number for seasonally adjusted insured unemployment during the week ending Nov. 7 was 5,611,000, a decrease of 39,000 from the preceding week's revised level of 5,650,000.

Click on graph for larger image in new window.

This graph shows the 4-week moving average of weekly claims since 1971.

The four-week average of weekly unemployment claims decreased this week by 6,500 to 514,000, and is now 144,750 below the peak in April.

The level is still very high suggesting continuing job losses in November.

by Calculated Risk on 11/18/2009 10:33:00 PM

This is a recurring theme: a bank fails, the Inspector General reviews the failure and discovers that the field examiners saw problems starting around 2002, and ... nothing happened for years.

We saw this with the Federal Reserve and the failure of Riverside Bank of the Gulf Coast, and with the FDIC / OTS and the failure of IndyMac.

Eric Dash at the NY Times has more: Pathology of a Crisis

At bank after bank, the examiners are discovering that state and federal regulators knew lenders were engaging in hazardous business practices but failed to act until it was too late. At Haven Trust, for instance, regulators raised alarms about lax lending standards, poor risk controls and a buildup of potentially dangerous loans to the boom-and-bust building industry. Despite the warnings — made as far back as 2002 — neither the bank’s management nor the regulators took action. Similar stories played out at small and midsize lenders from Maryland to California.

This is screaming for an open and transparent Congressional investigation (or something like the Pecora Commission, ht Mock Turtle). After the examiners discovered problems at the banks in a timely fashion, what happened next? Were further actions blocked by supervisors? Did examiners feel each bank was an isolated incident? How will the new regulatory structure solve this problem?

And a chilling quote from Eric Dash's article:

“Hindsight is a wonderful thing,” said Timothy W. Long, the chief bank examiner for the Office of the Comptroller of the Currency. “At the height of the economic boom, to take an aggressive supervisory approach and tell people to stop lending is hard to do.”

But isn't that the regulator's job?

Note: Alison Vekshin at Bloomberg had an excellent article last month on the same topic: FDIC Failed to Limit Commercial Real-Estate Loans, Reports Show

by Calculated Risk on 11/18/2009 08:30:00 PM

Another busy day and I skipped the MBA market index earlier ... note: The MBA Q3 delinquency report will be released tomorrow.

The MBA reports: Mortgage Applications Decrease in Latest MBA Weekly Survey

The Market Composite Index, a measure of mortgage loan application volume decreased 2.5 percent on a seasonally adjusted basis from one week earlier. ...

The Refinance Index decreased 1.4 percent from the previous week and the seasonally adjusted Purchase Index decreased 4.7 percent from one week earlier. The seasonally adjusted Purchase Index has declined for six consecutive weeks and is at its lowest level since November 1997.
...
The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.83 percent from 4.90 percent, with points increasing to 1.17 from 1.03 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. This is the lowest contract rate observed by the survey since mid-May of this year.

It appears the post home buyer tax credit slump is in full swing. The tax credit was extended and the eligibility expanded, but interest will probably wane (you can only pull so much demand forward).

Click on graph for larger image in new window.

This graph shows the MBA Purchase Index and four week moving average since 2002.

Note: The increase in 2007 was due to the method used to construct the index: a combination of lender failures, and borrowers filing multiple applications pushed up the index in 2007, even though activity was actually declining.

by Calculated Risk on 11/18/2009 05:42:00 PM

"It's déjà vu all over again".
Yogi Berra
From the NY Times (edit): Jobless Benefits Set to Expire Unless Congress Acts

About one million laid-off workers will see their unemployment benefits end in January ...

The [recently] added federal benefits were built on a series of previous extensions that are slated to end on Dec. 31 ...

According to projections released Wednesday by the National Employment Law Project, an advocacy group that worked with state officials to develop the numbers, 474,111 unemployed workers will exhaust their state benefits during January ... An additional 581,000 workers will see their federal benefits end in January, according to the study.

Note: I'm surprised that any lawmakers were "surprised". The expiration date was in the recent bill, and I mentioned that another extension would be coming soon.

by Calculated Risk on 11/18/2009 03:30:00 PM

After reading some of the commentary regarding the housing starts report this morning, it might be useful to reiterate these three points:

Residential investment is the best leading indicator for the economy.

Residential investment will not recover rapidly because of the large overhang of existing vacant housing units.

Existing home sales are largely irrelevant for the economy.

Residential investment is reported quarterly by the Bureau of Economic Analysis (BEA) as part of the GDP report. We can also use monthly housing starts and new home sales as indicators of residential investment. I've written extensively about how residential investment is an excellent leading indicator for the economy (also see Dr. Leamer's paper: Housing and the Business Cycle)

This morning several commentators suggested that housing starts were depressed in October because of the expiration of the tax credit (new home buyers had to close by Nov 30th to get the tax credit), and also because of the weather. Probably. But the key point is that housing starts will not increase rapidly because of the large overhang of existing vacant housing units (see 2nd graph here). And that suggests that the economy will not recover quickly either.

Another key point is that existing home sales are largely irrelevant for the economy. This is an important point to remember next week when the NAR announces that existing home sales surged to 5.8 million units or so in October (seasonally adjusted annual rate). Some reporters and analysts will jump on the existing home sales report as evidence of a housing recovery. Others will point to it as showing that the first-time home buyer tax credit is helping the economy.

Both points are wrong.

The only contribution from existing home sales to the economy are some commissions and fees. That is good news for real estate agents and mortgage brokers, but not for the overall economy.

The good news is the level of inventory for new and existing homes is declining. The bad news is the inventory of rental units is at record levels - as is the combined inventory of vacant single family homes and rental units. Residential investment will not increase significantly until this overhang is reduced.

The key to reducing the overall inventory is new household formation (encouraging renters to become owners accomplishes nothing in reducing the overall housing inventory). And the key to new household formation is jobs. And usually the best leading indicator for jobs is residential investment. Somewhat of a circular trap.

And that suggests the recovery will be sluggish and unemployment will stay high for some time.

by Calculated Risk on 11/18/2009 01:56:00 PM

The Census Bureau has released the "Quarterly Starts and Completions by Purpose and Design" report for Q3 2009.

Monthly housing starts (even single family starts) cannot be compared directly to new home sales, because the monthly housing starts report from the Census Bureau includes apartments, owner built units and condos that are not included in the new home sales report.

However it is possible to compare "Single Family Starts, Built for Sale" to New Home sales on a quarterly basis. The quarterly report shows that there were 93,000 single family starts, built for sale, in Q3 2009, and that is less than the 105,000 new homes sold for the same period. This data is Not Seasonally Adjusted (NSA). This suggests homebuilders are selling more homes than they are starting.

Note: new home sales are reported when contracts are signed, so it is appropriate to compare sales to starts (as opposed to completions). This is not perfect because homebuilders were stuck with “unintentional spec homes” during the housing bust because of the high cancellation rates, but cancellation rates are now much closer to normal.

Click on graph for larger image in new window.

This graph provides a quarterly comparison of housing starts and new home sales. In 2005, and most of 2006, starts were higher than sales, and inventories of new homes rose sharply. For the two years starts have been below sales – and new home inventories have been falling.

The second graph shows the NSA quarterly starts intent for four categories since 1975: single family built for sale, owner built (includes contractor built for owner), starts built for rent, and condos built for sale.

Condo starts in Q3 tied the all time record low for Condos built for sale set in Q1 and Q2 of this year (5,000); the previous record was 8,000 set in Q1 1991 (data started in 1975).

Owner built units are above the record low set in Q1 (42,000 units compared to 24,000 units in Q1 2009), however the pickup in owner built starts was probably mostly seasonal (this is NSA data).

Units built for rent were near the record low (23,000 units in Q3 2009 compared to the all time record low of 21,000 units). With the vacancy rate at a record high, the demand for new rental units will stay low for some time.

by Calculated Risk on 11/18/2009 11:25:00 AM

From the BLS report on the Consumer Price Index this morning:

The rent index decreased 0.1 percent, the index for owners' equivalent rent [OER] was unchanged ...

The rent index decreased at a -1.3% annualized rate, and OER declined in three of four ranges (only the Northeast Urban Region saw an increase - see Cleveland Fed).

The rent index and OER will probably continue to fall for some time, keeping CPI and core CPI low.

Most of the reports of falling rents are focused on the coasts, but here is a report from MN Reader in Minneapolis:

The Minneapolis rental market was OK through the end of July. It has deteriorated sharply since then. Internal apartment industry figures show an 8.0% physical vacancy rate as of 8/31/09. The economic vacancy rate, which includes free rent offers, etc, was 11.8% as of that same date. Both figures have gone up significantly since then. All landlords in the market are fighting desperately for residents. Effective asking rents are dropping rapidly.

The vacancy losses seem to be caused by (1) home buying using the $8,000 tax credit; (2) job losses/cutbacks among existing residents; and (3) lack of new jobs for residents who would have rented. Unlike the coasts, there is only a small pool of permanent renters in Minneapolis. Most residents will eventually buy — it is only a question of the rate at which they depart. That rate has definitely picked up this year. [A large part] of the rental market is recent college graduates who rent an apartment after they get their first career job. That hiring and renting has not happened this year.

One difference between Minneapolis and warmer climates is that the rental market is extremely seasonal here. There is very little rental traffic during the winter months. Typically, our movements in and out follow a bell-shaped curve, peaking in the summer months. While in-bound traffic drops in the cold months, the out-bound traffic also typically drops as well. The drop off in out-bound traffic did not occur this year. Resident move-outs stayed very high all fall, as people rushed to beat the 11/30th tax credit deadline. The timing of the scheduled end of the credit could not have been worse for us. The extension until the end of April/June means that the bleeding will go on all winter.

by Calculated Risk on 11/18/2009 09:30:00 AM

From the American Institute of Architects : Index remains in negative category despite improvement

Amidst a continued high level of inquiries for possible new projects, the Architecture Billings Index (ABI) reached its highest mark since August 2008, just before the serious credit problems emerged in our economy. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the October ABI rating was 46.1, up sharply from 43.1 in September. This score, however, indicates a continued decline in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry score was 58.5, following the 59.1 mark in September.

“This news could prove to be an early signal towards a recovery for the design and construction industry,” said AIA Chief Economist Kermit Baker, PhD, Hon. AIA. “On the other hand, because we continue to get reports of architecture firms struggling in a competitive marketplace with a continued decline in commercial property values, it is far too early to think we are out of the woods.”

Click on graph for larger image in new window.

This graph shows the Architecture Billings Index since 1996. The index has remained below 50, indicating falling demand, since January 2008.

Note: Nonresidential construction includes commercial and industrial facilities like hotels and office buildings, as well as schools, hospitals and other institutions.

Historically there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on commercial real estate (CRE). This suggests further significant declines in CRE investment through most of 2010, if not longer.

by Calculated Risk on 11/18/2009 08:30:00 AM

Click on graph for larger image in new window.

Total housing starts were at 529 thousand (SAAR) in October, down 10.6% from the revised September rate, and up from the all time record low in April of 479 thousand (the lowest level since the Census Bureau began tracking housing starts in 1959). Starts had rebounded to 590 thousand in June, and have move sideways (or down) for five months.

Single-family starts were at 476 thousand (SAAR) in October, down 6.8% from the revised September rate, and 33 percent above the record low in January and February (357 thousand). Just like for total starts, single-family starts have been at this level for five months.

The following graph shows total housing starts and the percent vacant housing units (owner and rental) in the U.S. Note: this is a combined vacancy rate based on the Census Bureau vacancy rates for owner occupied and rental housing.

It is very unlikely that there will be a strong rebound in housing starts with a record number of vacant housing units.

The vacancy rate has continued to climb even after housing starts fell off a cliff. Initially this was because of a significant number of completions. Also some hidden inventory (like some 2nd homes) have become available for sale or for rent, and lately some households have probably doubled up because of tough economic times.

Here is the Census Bureau report on housing Permits, Starts and Completions.

Housing Starts:
Privately-owned housing starts in October were at a seasonally adjusted annual rate of 529,000. This is 10.6 percent (±8.7%) below the revised September estimate of 592,000 and is 30.7 percent (±8.3%) below the October 2008 rate of 763,000.

Single-family housing starts in October were at a rate of 476,000; this is 6.8 percent (±7.5%)* below the revised September figure of 511,000.

Housing Completions:
Privately-owned housing completions in October were at a seasonally adjusted annual rate of 740,000. This is 1.9 percent (±12.4%)* above the revised September estimate of 726,000, but is 29.9 percent (±9.7%) below the October 2008 rate of 1,055,000.

Single-family housing completions in October were at a rate of 528,000; this is 10.7 percent (±14.5%)* above the revised September figure of 477,000.

It appears that single family starts bottomed in January. However, as expected, it appears starts are now moving sideways - and will probably stay near this level until the excess existing home inventory is reduced.