by Calculated Risk on 2/02/2010 04:00:00 PM

Click on graph for larger image in new window.

This graph shows the historical light vehicle sales (seasonally adjusted annual rate) from the BEA (blue) and an estimate for January (red, light vehicle sales of 10.78 million SAAR from AutoData Corp).

The second graph shows light vehicle sales since the BEA started keeping data in 1967.

This is the lowest level since October and below the levels of last July. Obviously sales were boosted significantly by the "Cash-for-clunkers" program in August and some in July.

The current level of sales are still very low, and are still below the lowest point for the '90/'91 recession (even with a larger population).

by Calculated Risk on 2/02/2010 01:02:00 PM

A few excerpts from the D.R. Horton conference call (ht Brian). A couple of key points:

Their business is heavily dependent on government life support, this includes government mortgage programs (the bulk of their sales) and the housing tax credit.

Horton thinks they have "two more challenging years ahead".

D.R. Horton CEO: Profitability in the second quarter will be challenging as we will not close as many homes in the second quarter as we did in the first quarter [CR Note: their fiscal 2nd quarter is the calendar year 1st quarter].

We are entering the quarter with 4,136 homes in backlog and we will need to realize a backlog conversion rate over greater than 100% to reach profitability. With the extension and expansion of the home buyer tax credit and with our available housing inventory, a high backlog conversion rate is entirely achievable. But we do not expect to be as profitable as we were this quarter.

In the third quarter, we expect strong closings since homes must close by June 30th for the extended tax credit [Once again, he is referring to calendar Q2]. The third quarter will probably be our strongest quarter for profits this year. We expect our September quarter will be the most challenging as the tax credit for home sales will have expired. As we move past the selling season, we'll be able to get a better read on core demand and we'll adjust our business accordingly.”

[CR Note: The question is: what is the core demand? Most of their current sales are first time homebuyers, and homebuyers using government loan programs]

“90% of our mortgage company's business was captive during the quarter. Our company wide capture rate was approximately 61%. Our average FICO score was 702 and our average combined loan to value was 93%. Our product mix in the quarter was essentially 100% agency eligible with government loans accounting for 63% of our volume.

Our homes in inventory at the end of the December, totaled 11,500. Of which, 1,100 were models, 7,300 were speculative, and 2,900 of these specs were completed.

Of the first quarter closings captured by our mortgage company, 66% were to first time buyers who typically purchase spec homes, so we manage our total number of homes in inventory and number of speculative homes to match expected demand. Our unsold completed homes older than six months were 600 homes at December 31st, 2009, down from 800, at September 30th. We are prepared for the spring selling season and for current demand created by the Federal home buyer tax credit with our current spec level.

We will continue to manage our spec levels very closely as we move closer to the April 30th sales contract deadline for the home buyer tax credit.

Analyst: When you talk about fourth quarter being potentially your most difficult quarter and you just talked about that on margin, is that the expectation that you might have to lower prices after the expiration of the tax credit and do you actually think that 4Q volumes to be lower than say 2Q, which could be pretty rare?

Horton: Actually we do believe that fourth quarter volumes will be less than the second quarter and the third quarter volumes just simply we believe a number of sales, we don't know exactly how many, but we believe that a number of sales are being driven by the tax credit. So to the extent that that tax credit expires, clearly that will adversely affect our sales in the fourth quarter. Relative to inventory we're focusing on reducing our inventory post March to comply with the expiration of the tax credit. To the extent that there's more volume than we anticipate in the fourth quarter, we can ramp our inventory back up again.

Analyst: You provided some pretty good color on your expectations for gross margins over the rest of the year. Just wondering if you might also provide a little color on normalized gross margins in a healthy new homes selling environment being kind of anywhere in the 18 to 22% range. The 17% that you've sort of implicitly guided toward is a bit low, just wondering on your view, how high does it get and how long do you think it might take to get there?

Horton: Well first of all, I think you need to have job growth in the economy, and there's obviously no job growth to speak of today and secondly I think we have to have consumer confidence and thirdly I believe that a number of people in the country are still under water on their mortgages, and I think those three things have to be cleared up before we start to have, to get back to more normalized margins. The way that we are managing our business model here is, is that we certainly think that we've got two more challenging years ahead of us. I don't expect job growth or consumer confidence to change dramatically, so I don't expect 18 to 22% gross margins on a consistent basis for a couple of years.

by Calculated Risk on 2/02/2010 12:00:00 PM

From MarketWatch: Ford U.S. January sales rise 25% to 116,534 units

Ford FORD KICKS OFF 2010 WITH 24 PERCENT SALES INCREASE.

This is based on an easy comparison; in January 2009 U.S. light vehicle sales fell sharply to 9.6 million (SAAR) following the financial crisis and reports of the then impending bankruptcy of GM and Chrysler.

I'll add reports from the other major auto companies as updates to this post. Toyota will be especially interesting because of the shutdown related to quality issues.

Update: MarketWatch: GM January U.S. sales rise 14% to 146,825 units

Update2: MarketWatch: Chrysler U.S. Jan. sales fall 8.1% to 57,143 units

Update3: MarketWatch: Toyota Jan. U.S. sales down 15.8% to 98,796 units

NOTE: Once all the reports are released, I'll post a graph of the estimated total January sales (SAAR: seasonally adjusted annual rate) - usually around 4 PM ET. Most estimates are for a decline into the mid 10s from the 11.2 million SAAR in December.

by Calculated Risk on 2/02/2010 10:00:00 AM

The Census Bureau reported the homeownership and vacancy rates for Q4 2009 this morning. Here are a few graphs ...

Click on graph for larger image in new window.

The homeownership rate declined to 67.2% and is now at the levels of early 2000.

Note: graph starts at 60% to better show the change.

The homeownership rate increased in the '90s and early '00s because of changes in demographics and "innovations" in mortgage lending. The increase due to demographics (older population) will probably stick, so I've been expecting the rate to decline to the 66% to 67% range - and not all the way back to 64% to 65%.

The homeowner vacancy rate was 2.7% in Q4 2009.

A normal rate for recent years appears to be about 1.7%.

This leaves the homeowner vacancy rate about 1.0% above normal, and with approximately 75 million homeowner occupied homes; this suggests there are close to 750 thousand excess vacant homes.

The rental vacancy rate was 10.7% in Q4 2009.

It's hard to define a "normal" rental vacancy rate based on the historical series, but we can probably expect the rate to trend back towards 8%. According to the Census Bureau there are close to 41 million rental units in the U.S. If the rental vacancy rate declined from 10.7% to 8%, there would be 2.7% X 41 million units or about 1.1 million units absorbed.

This suggests there are still over 1.8 million excess housing units, and these excess units will keep pressure on housing starts, rents and house prices for some time.

by Calculated Risk on 2/02/2010 08:36:00 AM

From Dina ElBoghdady and Dan Keating at the WaPo: Rising FHA default rate foreshadows a crush of foreclosures

The share of borrowers who are falling seriously behind on loans backed by the Federal Housing Administration jumped by more than a third in the past year ... About 9.1 percent of FHA borrowers had missed at least three payments as of December, up from 6.5 percent a year ago, the agency's figures show.

... The problems are rooted in FHA mortgages made in 2007 and 2008. Those loans are now maturing into their worst years because failures most often occur two to three years after a mortgage is made.

... the FHA projects that it will pay out claims to lenders on one out of every four loans made in 2007 -- the worst rate in at least three decades. The claim rate should be nearly the same on the vastly larger volume of loans made in 2008.

Ouch.

by Calculated Risk on 2/01/2010 10:58:00 PM

From the Las Vegas Sun: Short sales soar while foreclosure sales slacken (ht sportsfan)

Short sales averaged about 7 percent to 8 percent of total [Las Vegas] existing-home closings in early 2009, but averaged 22 percent of the market by the end of the year and in early January ...

“We have seen a decrease in foreclosure activity in Las Vegas, which was puzzling to us,” said Daren Bloomquist, marketing manager for California-based RealtyTrac, which monitors foreclosures in Nevada. “Maybe Las Vegas has become somewhat of a test ground for streamlining short sales. It sounds like it could have an impact in Las Vegas.”
...
Dennis Smith, president of Home Builders Research, said short sales will be the “story of the year” because of the effect they will have on the housing market.
...
John Mechem, a spokesman for the Mortgage Bankers Association, said what is happening in Las Vegas is occurring across the country. It is costly for lenders to go through the legal process of foreclosing, and he added that homes can be damaged over time. The return is better on short sale, he said.

As I've noted, I think short sales will be the story of 2010. It is probably the best solution for many homeowners and lenders.

As the story mentions, Treasury has started pushing Short Sale and Deed-in-Lieu of Foreclosure as an alternative to modifications.

The Treasury Department is offering incentives on short sales by providing a $2,500 subsidy, $1,000 to the servicer and $1,500 to the seller for moving expenses. In addition, investors can get $1,000 by allowing subordinate lenders to get $3,000 in proceeds from the sale. The program is effective April 5, but servicers can implement it earlier.

This is better than "walking away" for the lender - the losses are less than for a foreclosure. And this is better for the homeowner too because Treasury requires that "the borrower will be released from all liability for repayment of the first mortgage debt", although the borrower will still take a credit hit.

by Calculated Risk on 2/01/2010 07:40:00 PM

As part of the annual budget, the Obama Administration released the underlying economic assumptions too (see Page 13 of PDF)

For GDP, they are forecasting real GDP growth of 2.7% in 2010, followed by 3.8%, 4.3% and 4.2% in 2013.

For unemployment, the forecast is for an average of 10% in 2010, with a decline to 9.2% in 2011, 8.2% in 2012 and 7.3% in 2013 as shown on the following graph:

Click on graph for larger image in new window.

The blue line is the actual historical monthly unemployment rate. The red line is the Obama Administration annual forecast.

Based on this forecast, the current "human recession" will last for several years for many Americans.

by Calculated Risk on 2/01/2010 04:44:00 PM

More from the Q4 GDP underlying detail tables ...

Note: Residential investment (RI), according to the Bureau of Economic Analysis (BEA), includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories.

Back in Q4 2008 - for the first time ever - investment in home improvements exceeded investment in new single family structures. This has continued through Q4 2009.

Click on graph for larger image in new window.

This graph shows the various components of RI as a percent of GDP for the last 50 years. The most important components are investment in single family structures followed by home improvement.

Investment in home improvement was at a $153.3 billion Seasonally Adjusted Annual Rate (SAAR) in Q4, significantly above the level of investment in single family structures of $110.9 billion (SAAR).

Home improvement spending, as a percent of GDP, is close to the long term median. Brokers' commissions are above the median after being boosted by the homebuyer tax credit.

Of course investment in single family structures is still fairly close to the record low set in Q2 2009, and far below the normal level. Also far below normal is investment in multifamily structures. These two categories will not increase significantly until the number of excess housing units is reduced (I'll have more on the number of excess housing units tomorrow after the Census Bureau releases the Q4 Housing Vacancies and Homeownership report).

by Calculated Risk on 2/01/2010 02:00:00 PM

From the Fed: The January 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices

The January survey indicated that commercial banks generally ceased tightening standards on many loan types in the fourth quarter of last year but have yet to unwind the considerable tightening that has occurred over the past two years. The net percentages of banks reporting tighter loan terms continued to trend lower. Banks reported that loan demand from both businesses and households weakened further, on net, over the survey period.
emphasis added

In general banks have stopped tightening lending standards, however demand continues to weaken. For real estate - especially commercial real estate - the banks are still tightening standards:

Questions on residential real estate lending. Banks continued to tighten standards on residential real estate loans over the past three months. In line with recent patterns, a small net fraction of banks tightened standards on prime residential real estate loans over that period, and somewhat larger net fractions of banks tightened standards on nontraditional residential real estate loans. In addition, a moderate net fraction of banks reported weaker demand from prime borrowers for residential real estate loans.

Questions on commercial real estate lending. ... a substantial share of domestic banks, on net, reported having tightened standards on CRE loans and having experienced weaker demand for such loans again in the fourth quarter of 2009.

by Calculated Risk on 2/01/2010 12:43:00 PM

Here are graphs of office, mall and lodging investment through Q4 2009 based on the underlying detail data released by the BEA ...

Click on graph for larger image in new window.

This graph shows investment in offices as a percent of GDP. Office investment as a percent of GDP peaked at 0.46% in Q3 2008 and has declined sharply to a new all time low (as percent of GDP).

Reis reported that the office vacancy rate rose to a 15 year high in Q4 to 17.0%, from 16.5% in Q3 and from 15.9% in Q2. The peak vacancy rate following the 2001 recession was 16.9%. With the office vacancy rate rising, office investment will probably decline through 2010.

Office investment is usually the most overbuilt in a boom, but this time the office market struggled for a few years after the stock market bubble burst and there was comparatively more investment in malls and hotels.

The second graph is for investment in malls.

Investment in multimerchandise shopping structures (malls) peaked in 2007 and has fallen by 50% (note that investment includes remodels, so this will not fall to zero). Mall investment will probably continue to decline through 2010.

Reis reported that the mall vacancy rate in Q4 was the highest on record at 8.8% for regional malls, and 10.6% for strip malls. From Reis economist Ryan Severino:

"Our outlook for retail properties as a whole is bleak ... we do not foresee a recovery in the retail sector until late 2012 at the earliest."

The third graph is for lodging (hotels).

The recent boom in lodging investment was stunning. Lodging investment peaked at 0.32% of GDP in Q2 2008 and has declined rapidly to 0.16% in Q4 2009.

I expect lodging investment to continue to decline through at least 2010, to perhaps one-third of the peak or even lower (investment as percent of GDP).

As projects are completed there will be little new investment in these categories probably at least through 2010. This will be a steady drag on GDP (nothing like the decline in residential investment though), and a steady drag on construction employment.

Notice that investment in all three categories typically falls for a year or two after the end of a recession, and then usually recovers very slowly. Something similar will probably happen again, and there will not be a recovery in these categories until the vacancy rates fall significantly.