by Calculated Risk on 11/24/2009 06:59:00 PM

So much data, so little time ... just catching up. This was released earlier today:

Click on map for larger image.

Here is a map of the three month change in the Philly Fed state coincident indicators. Thirty seven states are showing declining three month activity. The index increased in 12 states, and was unchanged in 1.

Here is the Philadelphia Fed state coincident index release for October.

In the past month, the indexes increased in 15 states (Kansas, Massachusetts, Michigan, Minnesota, Montana, North Carolina, New Hampshire, New Jersey, Ohio, Oregon, Rhode Island, Tennessee, Virginia, Vermont, and West Virginia), decreased in 27, and remained unchanged in eight (Arkansas, Colorado, Florida, Iowa, Indiana, Maine, Missouri, and Nevada) for a one month diffusion index of -24. Over the past three months, the indexes increased in 12 states (Indiana, Massachusetts, Minnesota, Montana, North Carolina, New Hampshire, Ohio, South Dakota, Tennessee, Virginia, Vermont, and West Virginia), decreased in 37, and remained unchanged in one (Idaho) for a three-month diffusion index of -50.

The second graph is of the monthly Philly Fed data of the number of states with one month increasing activity. Most of the U.S. was has been in recession since December 2007 based on this indicator.

Note: this graph includes states with minor increases (the Philly Fed lists as unchanged).

Although the number of states in recession has been declining, a majority of states still showed declining activity in October.

by Calculated Risk on 11/24/2009 04:00:00 PM

Here is the Q3 negative equity report from First American CoreLogic mentioned last night. From the report:

Negative equity, often referred to as “underwater” or “upside down,” means that borrowers owe more on their mortgage than their homes are worth.

Data Highlights

Nearly 10.7 million, or 23 percent, of all residential properties with mortgages were in negative equity as of September, 2009. An additional 2.3 million mortgages were approaching negative equity, meaning they had less than five percent equity. Together negative equity and near negative equity mortgages account for nearly 28 percent of all residential properties with a mortgage nationwide.

The distribution of negative equity is heavily concentrated in five states: Nevada (65 percent), which had the highest percentage negative equity, followed by Arizona (48 percent), Florida (45 percent), Michigan (37 percent) and California (35 percent). Among the top five states, the average negative equity share was 40 percent, compared to 14 percent for the remaining states. In numerical terms, California (2.4 million) and Florida (2.0 million) had the largest number of negative equity mortgages accounting for 4.4 million or 42 percent of all negative equity loans

Click on image for larger graph in new window.

This graph shows the negative equity and near negative equity by state.

Although the five states mentioned above have the largest percentgage of homeowners underwater, a number of other states have 20% or more homeowners with mortgages with little or negative equity.

Note: Louisiana, Maine, Mississippi, South Dakota, Vermont, West Virginia and Wyoming are NA in the graph above.

The second graph shows homeowners with severe negative equity for five states.

These homeowners are far more likely to default.

The rise in negative equity is closely tied to increases in pre-foreclosure activity. At one end of the spectrum, borrowers with equity tend to have very low default rates. At the other end, investors tend to default on their mortgages once in negative equity more ruthlessly: their default rate is typically two to three percent higher than owner-occupied homes with similar degrees of negative equity. For the highest level of negative equity, investors and owners behave very similarly and default at similar rates (Figure 4). Strategic default on the part of the owner occupier becomes more likely at such high levels of negative equity.

Here is figure 4 from the report.

The default rate increases sharply for homeowners with more than 20% negative equity.

This graph fits with figure 2 above and suggests a large number of future defaults in Nevada, Arizona, Florida and California.

Note below that negative equity is still a problem for buyers in 2009!

• The bulk of ‘upside down’ borrowers, as a group, share certain characteristics. They:

Financed their properties between 2005 and 2008, with 2006 being the peak year where 40 percent of borrowers were in negative equity (Figure 5). Negative equity continues to be a problem even for 2009 originations as evidenced by a negative equity share of 11 percent and another 5 percent near negative equity.

Purchased newly built homes that are concentrated in a small number of states. For homes built between 2006 and 2008, the negative equity share is over 40 percent.

Relied on adjustable rate mortgages (ARMs)

Bought less expensive properties. The average value for all properties with a mortgage is $270,200, but properties in negative equity have an average value of $210,300 or 22 percent less (Figure 8). The average mortgage debt for properties in negative in equity was $280,000 and borrowers that were in a negative equity position were upside down by an average of nearly $70,000. The aggregate property value for loans in a negative equity position was $2.2 trillion, which represents the total property value at risk of default, against which there was a total of $2.9 trillion of mortgage debt outstanding.

Most homeowners with negative equity will probably not default, but this does show that there could be several hundred billion more in losses coming from residential mortgages.

by Calculated Risk on 11/24/2009 02:00:00 PM

The FOMC now sees economic risks balanced, as opposed to tilted towards the downside (I think this is too optimistic). And they also expect unemployment to remain elevated for some time.

Here are the November FOMC minutes. Committee Policy Action:

[M]ost members projected that over the next couple of years, the unemployment rate would remain quite elevated and the level of inflation would remain below rates consistent over the longer run with the Federal Reserve's objectives. Based on this outlook, members decided to maintain the federal funds target range at 0 to 1/4 percent and to continue to state their expectation that economic conditions were likely to warrant exceptionally low rates for an extended period. Low levels of resource utilization, subdued inflation trends, and stable inflation expectations were among the important factors underlying their expectation for monetary policy, and members agreed that policy communications would be enhanced by citing these conditions in the policy statement. Members noted the possibility that some negative side effects might result from the maintenance of very low short-term interest rates for an extended period, including the possibility that such a policy stance could lead to excessive risk-taking in financial markets or an unanchoring of inflation expectations. While members currently saw the likelihood of such effects as relatively low, they would remain alert to these risks. All agreed that the path of short-term rates going forward would be dependent on the evolution of the economic outlook.
emphasis added

Economic outlook:

Most participants now viewed the risks to their growth forecasts as being roughly balanced rather than tilted to the downside, but uncertainty surrounding these forecasts was still viewed as quite elevated. Downside risks to growth included the continued weakness in the labor market and its implications for income growth and consumer confidence, as well as the potential for credit availability to remain relatively tight for consumers and some businesses. In this regard, some participants noted the difficulty that smaller, bank-dependent firms were having in securing financing. The CRE sector was also considered a downside risk to the forecast and a possible source of increased pressure on banks. On the other hand, consumer spending on items other than autos had been stronger than expected, which might be signaling more underlying momentum in the recovery and some chance that the step-up in spending would be sustained going forward. In addition, growth abroad had exceeded expectations for some time, potentially providing more support to U.S. exports and domestic growth than anticipated.
...
The weakness in labor market conditions remained an important concern to meeting participants, with unemployment expected to remain elevated for some time. Although the pace of job losses was moderating, the unusually large fraction of those who were working part time for economic reasons and the unusually low level of the average workweek pointed to only a gradual decline in the unemployment rate as the economic recovery proceeded. In addition, business contacts reported that they would be cautious in their hiring and would continue to aggressively seek cost savings in the absence of revenue growth. Indeed, participants expected that businesses would be able to meet any increases in demand in the near term by raising their employees' hours and boosting productivity, thus delaying the need to add to their payrolls; this view was supported by aggregate data indicating rapid productivity growth in recent quarters. Moreover, the need to reallocate labor across sectors as the recovery proceeds, as well as losses of skills caused by high levels of long-term unemployment and permanent separations, could limit the pace of gains in employment. Participants discussed the possibility that this recovery could resemble the past two, which were characterized by a slow pace of hiring for a time even after aggregate demand picked up.

by Calculated Risk on 11/24/2009 12:10:00 PM

Here are three key measures of house prices: Price-to-Rent, Price-to-Income and real prices based on the Case-Shiller quarterly national home price index.

Price-to-Rent

In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: 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 a similar graph through Q3 2009 using the Case-Shiller National Home Price Index (SA):

Click on image for larger graph in new window.

This graph shows the price to rent ratio (Q1 1987 = 1.0) for the Case-Shiller national Home Price Index. For rents, the national Owners' Equivalent Rent from the BLS is used.

Looking at the price-to-rent ratio based on the Case-Shiller index, the adjustment in the price-to-rent ratio is mostly behind us as of Q3 2009 on a national basis. However this ratio could easily decline another 5% to 10% or so, and with rents now falling, prices could fall even more.

Notice the price-to-rent ratio is currently almost as high as during the late '80s housing bubble.

Price-to-Income:

The second graph shows the price-to-income ratio:

This graph is based off the Case-Shiller national index, and the Census Bureau's median income tables, and flat for 2009.

Using national median income and house prices provides a gross overview of price-to-income (it would be better to do this analysis on a local area). However this does shows that the price-to-income is still too high, and that this ratio needs to fall another 10% or so. A further decline in this ratio could be a combination of falling house prices and/or rising nominal incomes.

Real Prices

This graph shows the real and nominal house prices based on the Case-Shiller national index. (Q1 2000 = 100 for nominal index)

Nominal prices are adjusted using CPI less Shelter.

The Case-Shiller real prices are still above prices in the '90s and perhaps real prices will decline another 10% or so. Prices can and do increase in real terms - especially in areas with land constraints. Also newer homes are larger than older homes - so the real prices are higher.

Summary

These measures are useful, but somewhat flawed. These measures give a general idea about house prices, but in the short run there are more important factors like inventory levels and credit issues. All of this data is on a national basis and it would be better to use local area price-to-rent, price-to-income and real prices.

It appears that house prices - in general - are still too high. However prices depend on the local supply and demand factors. In many lower priced bubble areas supply has declined sharply (because of the loan modification efforts and local moratoria), and demand was very strong in Q3 from the first-time home buyer frenzy and cash flow investors. This has pushed up prices at the low end, and suggests price might fall some again at the low end - although probably not to new lows.

However in the mid-to-high end of the bubble areas - with significant supply and little demand - prices are still too high. And I expect further declines in those areas and probably nationwide (although this isn't as obvious as it was in 2005 since most of the price declines are over).

by Calculated Risk on 11/24/2009 10:42:00 AM

The FDIC released the Q3 Quarterly Banking Profile today. The FDIC listed 552 banks with $345.9 billion in assets as “problem” banks in Q3, up from 416 banks with $299.8 billion in assets in Q2, and 252 and $159.4 billion in assets in Q4 2008.

Note: Not all problem banks will fail - and not all failures will be from the problem bank list - but this shows the problem is significant and still growing.

The Unofficial Problem Bank List shows 513 problem banks - and will probably increase this week.

Click on graph for larger image in new window.

This graph shows the number of FDIC insured "problem" banks since 1990.

The 552 problem banks reported at the end of Q3 is the highest since 1993.

The second graph shows the assets of "problem" banks since 1990.

The assets of problem banks are the highest since 1992.

On the Deposit Insurance Fund:

The Deposit Insurance Fund (DIF) decreased by $18.6 billion during the third quarter to a negative $8.2 billion (unaudited) primarily because of $21.7 billion in additional provisions for bank failures. Also, unrealized losses on available-for-sale securities, combined with operating expenses, reduced the fund by $1.1 billion. Accrued assessment income added $3.0 billion to the fund during the quarter, and interest earned, combined with realized gains from sale of securities and surcharges from the Temporary Liquidity Guarantee Program, added $1.2 billion.

Fifty insured institutions with combined assets of $68.8 billion failed during the third quarter of 2009, the largest number since the second quarter of 1990 when 65 insured institutions failed. Ninety-five insured institutions with combined assets of $104.7 billion failed during the first three quarters of 2009, at a currently estimated cost to the DIF of $25.0 billion. The DIF’s reserve ratio was negative 0.16 percent on September 30, 2009, down from 0.22 percent on June 30, 2009, and 0.76 percent one year ago. The September 30, 2009, reserve ratio is the lowest reserve ratio for a combined bank and thrift insurance fund since June 30, 1992, when the ratio was negative 0.20 percent.

The number of failures is now up to 124.

by Calculated Risk on 11/24/2009 09:56:00 AM

S&P/Case-Shiller released their monthly Home Price Indices for September this morning.

This monthly data includes prices for 20 individual cities, and two composite indices (10 cities and 20 cities). NOTE: This is the Not Seasonally Adjusted data - the link is broken for the SA data.

Click on graph for larger image in new window.

The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 29.9% from the peak, and up about 0.4% in September.

The Composite 20 index is off 29.1% from the peak, and up 0.3% in September.

The second graph shows the Year over year change in both indices.

The Composite 10 is off 8.5% from September 2008.

The Composite 20 is off 9.4% from September 2008.

This is still a very significant YoY decline in prices.

The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

Prices decreased (SA) in 11 of the 20 Case-Shiller cities in September (NSA).

In Las Vegas, house prices have declined 55.4% from the peak. At the other end of the spectrum, prices in Dallas are only off about 4.7% from the peak - and up in 2009. Prices have declined by double digits from the peak in 18 of the 20 Case-Shiller cities.

I'll have more on prices (compare to stress, price-to-rent) later.

by Calculated Risk on 11/24/2009 09:12:00 AM

Note: I will have graphs as soon as S&P releases the data online.

S&P reports the Composite 10 index increased 0.3% in September, and the Composite 20 index increased 0.3% (both SA). Eleven cities posted increases, nine showed price declines.

From S&P:

“We have seen broad improvement in home prices for most of the past six months,” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s. “However, the gains in the most recent month are more modest than during the seasonally strong summer months. Fewer cities saw month to month improvements in September than in August in both seasonally adjusted and unadjusted figures. Nationally, the U.S. National Composite rose by 3.1% in both the 2nd and 3rd quarters of 2009. Both the 10-City and 20-City Composites posted their fifth consecutive monthly increase with September’s report."

by Calculated Risk on 11/24/2009 08:30:00 AM

From the BEA:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.8 percent in the third quarter of 2009, (that is, from the second quarter to the third quarter), according to the "second" estimate released by the Bureau of Economic Analysis.
...
The second estimate of the third-quarter increase in real GDP is 0.7 percentage point lower, or $23.7 billion, than the advance estimate issued last month, primarily reflecting an upward revision to imports and downward revisions to personal consumption expenditures and to nonresidential fixed investment that were partly offset by an upward revision to exports.

Personal consumption expenditures (PCE) were revised down to 2.9% from 3.4%. And investment in nonresidential structures was revised down to -15.1% from -9.0%.

by Calculated Risk on 11/24/2009 12:43:00 AM

From the WSJ: 1 in 4 Borrowers Under Water

The proportion of U.S. homeowners who owe more on their mortgages than the properties are worth has swelled to about 23% ...

Home prices have fallen so far that 5.3 million U.S. households are tied to mortgages that are at least 20% higher than their home's value ...

[N]egative equity "is an outstanding risk hanging over the mortgage market," said Mark Fleming, chief economist of First American Core Logic. "It lowers homeowners' mobility because they can't sell, even if they want to move to get a new job."

The report should be available online soon.

by Calculated Risk on 11/23/2009 10:23:00 PM

Update on the Chicago Fed Index post: According to the Chicago Fed, the "CFNAI-MA3 moves significantly into positive territory a few months after the official NBER date of the trough". Earlier I was excerpting from the entering recession section. This suggests - using this index - it is still too early to call the end of the recession.

From Jerry Hirsch at the LA Times: Restaurants brace for dreary season as consumers lose appetite for dining out

The number of people visiting restaurants has plunged for four consecutive quarters, according to NPD Group, a market research firm. ... chains such as McCormick & Schmick's, the seafood house, and Morton's, the steak purveyor, saw same-store sales, or sales at restaurants open at least a year, fall 18.8% and 16.8%, respectively ... according to Bellwether Food Group, a food industry consulting firm.

Bellwether doesn't project an industry rebound to pre-recession levels until 2012.
...
Research firm NPD doesn't expect an industry turnaround any time soon. ... In 33 years of tracking restaurant traffic, NPD "has never seen this type of a weakness for this long of a period," [Bonnie Riggs, a restaurant industry analyst with NPD in Chicago] said ...

And from Joe Sharkey at the NY Times: For the Hotel Industry, Recovery is a Long Way Off

Bjorn Hanson, a clinical associate professor at the Tisch Center, said that average domestic hotel occupancy this year would be about 55 percent.

Average national occupancy has dipped below 60 percent only twice before since the 1920s, he said, during the Great Depression, and in the aftermath of the 2001 terrorist attacks.

The occupancy dip following the 9/11 attacks was barely below 60%, so, according to Hanson's comments, the current hotel recession is the worst since the Great Depression.