by Calculated Risk on 1/17/2010 06:22:00 PM

Since the NAHB Housing Market Index for January, and Housing Starts for December will both be released this week, here is a graph showing the relationship between the two series:

Click on graph for larger image in new window.

This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the December release for the HMI and the November data for single family starts.

This shows that the HMI and single family starts mostly move in the same direction - although there is plenty of noise month-to-month.

I know I'm a broken record, but residential investment is one of the best leading indicators for the economy, and the best indicators for RI are the NAHB HMI, housing starts, and new home sales. And these indicators are moving sideways (at best).

Note: The largest components of residential investment are new home construction, and home improvement. This includes brokers' commissions and some minor categories.

by Calculated Risk on 1/17/2010 01:00:00 PM

The last half of every month is filled with real estate related data, and this week the NAHB Housing Market Index (builder confidence for January) will be released on Tuesday, Housing Starts for December and the ABI Architecture Billings Index on Wednesday, and the Moodys/REAL Commercial Property Price Index for November will be released sometime this week.

Expectations are for housing starts to be essentially flat in December, from MarketWatch:

The consensus forecast of economists surveyed by MarketWatch calls for a 3% decline in starts to a seasonally adjusted rate of 555,000 from 574,000 in November.

In other economic news, the Producer Price Index will be released on Wednesday, the Philly Fed survey on Thursday, and the DOT's estimate of vehicle miles for November will be released this week.

The markets will be closed on Monday for Martin Luther King Jr. day.

And a summary of last week ...

BLS: Near Record Low Job Openings in November

Click on graph for larger image in new window.

This following graph shows job openings (yellow line), hires (purple Line), Quits (light blue bars) and Layoff, Discharges and other (red bars) from the JOLTS. Red and light blue added together equals total separations.

Notice that hires (purple line) and separations (red and light blue together) are pretty close each month. When the purple line is above total separations, the economy is adding net jobs, when the blue line is below total separations, the economy is losing net jobs.

According to the JOLTS report, there were 4.176 million hires in November, and 4.340 million separations, or 164 thousand net jobs lost. The comparable CES report showed a gain of 4 thousand jobs in November (after revisions).

Option ARM Recast Update

The following data is from Amherst Securities:

This chart shows the expected payment shock coming in 2010 and 2011 from Option ARMs. This chart includes projected increases in LIBOR (if LIBOR stays low, the shock will not be as high), and the recast due to reamortizing the loan over the remaining period.

For more details, see: Option ARM Recast Update and More on Option ARMs

On negative equity, this graph from Amherst shows the CLTV for various mortgage products. Note that subprime and Alt-A had a somewhat higher percent of borrowers with negative equity than prime - but Option ARMs (red) borrowers are mostly in negative equity!

As Laurie Goodman at Amherst Securities noted, Option ARM borrowers were a self selecting group (people stretching to buy homes) and that is why most have negative equity in their homes.

Industrial Production, Capacity Utilization Increase in December

This graph shows Capacity Utilization. This series is up from the record low set in June (the series starts in 1967), and still below the level of last year.

Note: y-axis doesn't start at zero to better show the change.

Industrial production is still 10.7% below the level of December 2007.

Here is the report from the Fed: Industrial production and Capacity Utilization

Trade Deficit Increases in November

This graph shows the monthly U.S. exports and imports in dollars through November 2009.

Both imports and exports increased in November. On a year-over-year basis, exports are off 2.3% and imports are off 5.5%.

Overall trade continues to increase, although both imports and exports are still off significantly from the pre-financial crisis levels. Net export growth had been one of the positives for the U.S. economy - but now imports are growing faster than exports.

Here is the Census Bureau report on trade.

Other Economic Stories ...

From Fitch: U.S. CMBS Delinquencies up 42bps; Peak Not Until 2012

HUD Probes FHA Lenders: HUD Inspector General Probes Morgage Companies with Significant Claim Rates

Rail Traffic in 2009: Lowest since at least 1988

From RealtyTrac: 2009 was Record Year for Foreclosure Filings

From Tom Petruno at the LA Times: California's debt rating cut to A-minus by S & P on budget woes

From The Times: Britain's recession the steepest for 88 years

And from Statistischen Bundesamtes Deutschland: Germany experiencing serious recession in 2009

Retail Sales decline slightly in December

From Treasury: Fact Sheet: Financial Crisis Responsibility Fee

Unofficial Problem Bank List Increases to 582

On Q4 GDP: Q4 GDP: Beware the Blip and from Professor Krugman: Blip

Best wishes to all. My thoughts are with the people of Haiti.

by Calculated Risk on 1/17/2010 09:43:00 AM

From Kenneth Harney at the LA Times: Mortgage lenders exploit a loophole in HUD's new 'good faith estimate' rules

Starting Jan. 1, mortgage lenders nationwide were required to begin issuing new "good faith estimates" [GFE] to applicants covering loan fees and settlement charges.

Under the regulations issued by the Department of Housing and Urban Development, the estimates that lenders provide upfront must be accurate -- the same or nearly the same as the fees that are later charged at closing.
...
So how have the first two weeks of the reforms been going? Not exactly as planned. Many loan officers and lending institutions are sidestepping the new, price-bound GFE by giving shoppers "work sheets" and "loan scenario" forms that come with no legal requirements for accuracy, and were not even contemplated under the reforms.

In effect they are substitutes for the new GFEs but, in the wrong hands, they are open to lowballing and bait-and-switch games.

The work sheets purport to contain much of the information provided by a GFE. Typically they are issued only when shoppers do not provide -- or are asked not to provide -- key information that constitutes an "application" under HUD's definition in the rules.

In certain circumstances this makes sense, although it is open to abuse. As Harney notes, some lenders used to low ball the estimate of fees, and then surprise the borrowers with higher costs at closing. The GFE was intended to eliminate this practice.

Perhaps HUD could add an additional rule that says "worksheets" must require: 1) a description of what a GFE is, and 2) a clear statement that the worksheet is not a GFE, and 3) what additional information the borrower needs to provide to get a GFE. Who could object to that?

by Calculated Risk on 1/17/2010 12:51:00 AM

Here is the link to the Colbert video.

The Colbert Report	Mon - Thurs 11:30pm / 10:30c
The Word - Honor Bound
www.colbertnation.com
Colbert Report Full Episodes Political Humor Economy

by Calculated Risk on 1/16/2010 09:08:00 PM

Even with occupancy rates at record lows since the Great Depression, there are still a number of hotel projects being completed. It takes a number of years to build a new hotel, and all these projects were planned during the bubble years.

This has significant implications for non-residential investment and construction employment in 2010. As these large projects are completed, there will be more construction job losses, and less investment in non-residential structures.

And it definitely doesn't help the occupancy rate to have more rooms!

From the LA Times: New L.A. luxury hotels face tough debuts

The newest downtown hotel complex buzzed with activity this week as carpenters, electricians and gardeners hustled to put the finishing touches on the $970-million skyscraper that rises over the Los Angeles Convention Center and the L.A. Live entertainment center.

But when the glass-sheathed tower that houses the JW Marriott and Ritz-Carlton hotels opens next month, it will face one of the worst slumps in years for the hospitality business.
...
In 2009, hotel revenues took their steepest decline in more than two decades, and the occupancy rate in Los Angeles now hovers at a meager 65%.
...
Other upscale hotels are also opening in Los Angeles under economic clouds this year, all aiming to survive the steep drop in demand.

The $360-million W Hollywood Hotel & Residences at the corner of Hollywood and Vine is scheduled to open Jan. 28.

by Calculated Risk on 1/16/2010 06:21:00 PM

As a followup to my previous post, Professor Krugman points out that Q1 2002 GDP growth¹ was originally reported as 5.8% with rising unemployment. Good point.

Although Q1 2002 GDP growth was later revised down to 3.5%, it is another good example of a "GDP blip" driven by changes in inventory (inventory changes added 2.63% to the final 3.5%), with weak underlying demand (PCE was 1% in Q1 2002 - and stayed weak into 2003).

Krugman notes "at the time there was much unwarranted celebration (unemployment didn’t peak until summer 2003)."

I expect some unwarranted celebration this time too - and the unemployment rate to continue to increase.

Note: I don't have a crystal ball, but I'm not just being bearish - I called the 2nd half recovery in GDP pretty early and I've been consistently concerned about 2010.

¹GDP growth refers to the headline BEA number. That is the seasonally adjusted annualized real rate of GDP growth.

by Calculated Risk on 1/16/2010 02:24:00 PM

In a research note released last night, Goldman Sachs raised their estimate of Q4 GDP from 4.0% to 5.8%. They cautioned that the "headline will be an eye-popper", but that this growth is mostly due to inventory changes: "More than two-thirds of our estimated increase comes from a sudden stabilization in inventories". They also noted "anything between 4½% and 7% is possible given the volatility of the inventory data".

The rest of the note cautions on 2010, and Goldman still sees sluggish growth of just under 2.0% with the unemployment rate peaking in early 2011.

This is what we've been discussing - GDP boosted by inventory changes in the 2nd half of 2009, followed by sluggish growth in 2010.

San Francisco Fed President described the impact of inventory changes back in September: The Outlook for Recovery in the U.S. Economy

I expect the biggest source of expansion in the second half of this year to come from a diminished pace of inventory liquidation by manufacturers, wholesalers, and retailers. Such a pattern is typical of business cycles. Inventory investment often is the catalyst for economic recoveries. True, the boost is usually fairly short-lived, but it can be quite important in getting things going. ...

But what if this doesn't "get things going"?

When was the last time we saw 5%+ GDP growth, due mostly to inventory changes, and increasing unemployment? It was in Q1 1981.

The 1980 recession ended in Q3 1980, and inventory changes boosted Q4 GDP by 3.8%, and Q1 1981 GDP by an amazing 6.4%! However underlying demand remained weak (as defined by GDP ex-inventory changes, and PCE) as shown in the following table:

	1980-IV	1981-I	1981-II	2009-III	2009-IV1
GDP	7.6%	8.6%	-3.2%	2.2%	5.8%est
GDP ex-Inventory Changes	3.8%	2.2%	0.8%	1.5%	2.0%est
PCE	3.4%	1.5%	0.0%	2.0%	1.7%est
Change in Unemployment Rate	-0.3%	0.2%	0.1%	0.3%	0.2%

Look at the blue period, and notice the boost in GDP from inventory changes in the Q4 1980, and Q1 1981. But PCE was only 1.5% in Q1 1980, and fell to 0.0% in Q2 1980. Since there was no pickup in underlying demand, the economy slid back into recession in July 1981.

Now the causes of the current recession are very different from the early '80s, but once again we are seeing a transitory boost from inventory changes and underlying demand remains weak. With the huge overhang of existing home inventory and record rental vacancies, and the ongoing repair of household balance sheets, I expect underlying demand to remain weak in 2010.

The blip in the 2nd half from inventory changes was expected, and I expect Q4 to be the best quarter for GDP for some time.

¹ Q4 2009 is estimated. GDP is from Goldman Sachs, and ex-inventory and PCE is from my own estimate.

by Calculated Risk on 1/16/2010 10:57:00 AM

Jillayne Schlicke writes: The Financial Crisis Inquiry Commission is Interviewing the Wrong People

If the Commission really does want to learn WHO knew what, when, then they’re interviewing the wrong people.

They need to interview the line workers. Mortgage loan processors, managers, escrow closers, underwriters from the banks, private mortgage insurance companies as well as wholesale lending, loan servicing default and loss mitigation workers and even consumers. Seasoned mortgage industry veterans who have proof in the form of saved memos or emails, that they informed senior management of the red flags, predatory lending, and the insane relaxation of underwriting guidelines that started to pop up as early as 2001 and 2002 yet were ignored or whose concerns were dismissed.

I think this is the key - instead of interviewing bank CEOs and top regulators, start with the field examiners and the "line workers" in the mortgage industry. And as Jillayne noted, talk to the consumers too.

by Calculated Risk on 1/16/2010 05:00:00 AM

From HUD: HUD takes action to speed resale of foreclosed properties to new owners (ht Soylent Green is People)

... With certain exceptions, FHA currently prohibits insuring a mortgage on a home owned by the seller for less than 90 days. This temporary waiver will give FHA borrowers access to a broader array of recently foreclosed properties.
...
In today's market, FHA research finds that acquiring, rehabilitating and the reselling these properties to prospective homeowners often takes less than 90 days. Prohibiting the use of FHA mortgage insurance for a subsequent resale within 90 days of acquisition adversely impacts the willingness of sellers to allow contracts from potential FHA buyers because they must consider holding costs and the risk of vandalism associated with allowing a property to sit vacant over a 90-day period of time.

The policy change will permit buyers to use FHA-insured financing to purchase HUD-owned properties, bank-owned properties, or properties resold through private sales. This will allow homes to resell as quickly as possible, helping to stabilize real estate prices and to revitalize neighborhoods and communities.
...
The waiver will take effect on February 1, 2010 and is effective for one year, unless otherwise extended or withdrawn by the FHA Commissioner. To protect FHA borrowers against predatory practices of "flipping" where properties are quickly resold at inflated prices to unsuspecting borrowers, this waiver is limited to those sales meeting the following general conditions:

•All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction.
•In cases in which the sales price of the property is 20 percent or more above the seller's acquisition cost, the waiver will only apply if the lender meets specific conditions.
•The waiver is limited to forward mortgages, and does not apply to the Home Equity Conversion Mortgage (HECM) for purchase program.

Specific conditions and other details of this new temporary policy are in the text of the waiver, available on HUD's website.

The title of the document is WaivPropFlip2010.pdf (probably stands for Waiver Property Flipper - aptly named)!

To be clear, this change isn't to help flippers buy - this change is to help homeowners to buy from flippers. Previously the flipper had to own the home for 90 days for the next buyer to obtain an FHA loan, now the period can be less. The 20% price increase is not a limit, however higher price increases require extra verification.

by Calculated Risk on 1/15/2010 11:59:00 PM

UPDATE: The trials modification period was originally 3 months, and then was extended to 5 months, and then extended to the end of January. This means that for the borrowers in the trial modification program, there will be no further extensions. For borrowers just entering the trial phase, they will have the normal three month period.

From the WSJ: Paperwork Woes Plague Mortgage Plan

The administration last month gave borrowers who were current on their payments after at least three months an extension until Jan. 31 to provide needed paperwork. But the administration doesn't plan to extend that deadline, Assistant Treasury Secretary Michael Barr said Friday.

"We are going to have further guidance for [mortgage] servicers at the end of the month," he said.

No extension, but "further guidance".

Unless something changes, distressed sales (foreclosures and short sales) should start to increase in February. BofA's estimates the number ...

"of homes being taken back by Bank of America [will] range from 11,000 to 14,000 a month in the early part of this year to 29,000 to 35,000 by November and December, said John Ciresi, vice president and portfolio manager for Bank of America in Towson, Md.
...
The system became "clogged" by a voluntary moratorium on foreclosures while banks met the requirements of President Obama's Making Home Affordable mortgage plan program and by state legislation requiring mediation before banks can start the foreclosure process, Ciresi said ...

Bank of America is getting 40,000 new offers a month on short sales, or homes offered for less than the mortgage balance, Ciresi said."

Here comes the next wave of distressed sales, and based on the BofA estimates, the wave will build all year.

Here was an earlier post today: HAMP: 66,465 Permanent Mods

Here is the Press Release from Treasury: Administration Releases December Loan Modification Report, Update on Conversion Drive and the December HAMP report.