by Calculated Risk on 4/03/2012 08:44:00 AM

Several people have sent me this Bloomberg article by Kathleen Howley: Home Prices Seen Dropping 10% in U.S. on Foreclosures: Mortgages

From the second paragraph:

Sales of repossessed properties probably will rise 25 percent this year from 1 million in 2011, according to Moody’s Analytics Inc. Prices for the homes could drop as much as 10 percent because they deteriorated as they were held in reserve during investigations by state officials resolved in February, according to RealtyTrac Inc.

So RealtyTrac is saying prices for some repossessed properties could fall 10 percent "because they deteriorated" while in the foreclosure process. That sounds correct, but that isn't overall prices.

Later in the article, Howley does quote an economist predicting a further 5% to 10% price decline this year:

The [Case-Shiller Composite 20] index probably will fall 5 percent to 10 percent this year, a range that depends on the condition of the mothballed homes, [Patrick Newport, an economist at IHS Global Insight] said.

That compares with a forecast for a 2.9 percent decline by Celia Chen, a housing economist at Moody’s Analytics in West Chester, Pennsylvania, and a prediction of a 3.9 percent decline by Diane Swonk, chief economist of Mesirow Financial Inc. in Chicago.

An added thought: The most recent Case-Shiller report was for January. If the Composite 20 index fell as much from January through March as in 2011, prices are already down 3% this year as of the end of March (Compare that to Celia Chen and Diane Swonk's predictions for the year).

by Calculated Risk on 4/03/2012 12:18:00 AM

Jim makes some interesting comments on multiple offers in the following video.

It probably seems strange to hear Jim talking about the "lower end" while showing a $655,000 house, but this is in an expensive area of coastal north county in San Diego.

Jim discusses some other recent listings that have had multiple offers - one with eight offers, another with 14 offers that for 10% over list price.

by Calculated Risk on 4/02/2012 07:18:00 PM

From the WaPo: Senior citizens continue to bear burden of student loans

New research from the Federal Reserve Bank of New York shows that Americans 60 and older still owe about $36 billion in student loans ... More than 10 percent of those loans are delinquent. As a result, consumer advocates say, it is not uncommon for Social Security checks to be garnished or for debt collectors to harass borrowers in their 80s over student loans that are decades old.

The NY Fed research has some data and graph on student debt: Grading Student Loans

The outstanding student loan balance now stands at about $870 billion,1 surpassing the total credit card balance ($693 billion) and the total auto loan balance ($730 billion). With college enrollments increasing and the costs of attendance rising, this balance is expected to continue its upward trend.

This chart from the NY Fed shows the student debt outstanding by age. From the NY Fed:

Among people under thirty years old, 40.1 percent have outstanding student loan debt. Among people between the ages of thirty and thirty-nine, 25.1 percent have outstanding student loan debt. In contrast, only 7.4 percent of people who are at least forty years old have outstanding student loan debt. As a result, $580 billion of the total $870 billion in student loan debt is owed by people younger than forty.

There is much more in the research paper.

by Calculated Risk on 4/02/2012 02:59:00 PM

Earlier this year I argued that there was a good chance house prices would bottom this year (I predicted a bottom in Not Seasonally Adjusted prices in March - of course that data will not be released for several months). There are several other analysts and economists who now see prices bottoming this year or early next year.

Wells Fargo economists put out a special commentary on housing this morning: Spring Came Early for the Housing Market

The latest data on home prices also came in a little better than expected, and the survey data from the NAHB/Wells Fargo Homebuilders Survey as well as anecdotal reports from builders and realtors all suggest better days are ahead for the industry.

Drawing definitive conclusions from the winter housing data is perilous. The winter months account for the smallest proportion of the year’s housing activity, and unseasonably mild weather during the winter months can cause the data to bounce around quite a bit from month to month. The March and April data are much more important, and all indications suggest that the key spring selling season has gotten off to a solid start.
...
We have nudged our forecast for home sales and new home construction slightly higher, as the spring selling season appears to have gotten off to a strong start. ... the anecdotal evidence is hard to dismiss. Most builders and realtors report significant gains in buyer interest and sales. Moreover, the gains are organic rather than incentive induced. Unfortunately, conservative appraisals and tight mortgage underwriting continue to undermine a large number of deals. We suspect that the undertow from these two hindrances will subside over the course of this year, as the fog surrounding shadow inventories lightens up a bit and more lenders come back to the market.
...
We expect home prices to definitively bottom by the middle of this year, as the backlog of foreclosures finally begins clear. For properties not in foreclosure, prices have probably already bottomed, but should remain relatively low nonetheless given the competition and perceived competition from foreclosures.

Wells Fargo believes the housing recovery will unfold slowly, and they only expect new home sales to increase 12% in 2012 to 340 thousand, and housing starts to increase to 710 thousand (includes multifamily, owner built and more).

It is important to note that Wells Fargo is forecasting a very weak year for housing - just an increase from the weakest years on record. Their forecast would be the 3rd worst year for new home sales since 1963, only behind the 2011 and 2010 - and about half the median annual sales since 1963.

Their forecast would be the 4th worst year for housing starts since 1959. Note: starts bottomed in 2009, and most of the increase since then has been from multifamily starts). The Wells Fargo forecast is for about half the median for annual housing starts since 1959.

Sometimes I see commentary saying there is no recovery in housing, and the commentator then points to the current low level of sales and starts. However, when most people use the word "recovery" they mean an increase from the previous period - not the absolute level of sales and starts. Sales and starts will be weak in 2012, but better than 2011.

by Calculated Risk on 4/02/2012 12:09:00 PM

Catching up ... This morning the Census Bureau reported that overall construction spending declined in February:

The U.S. Census Bureau of the Department of Commerce announced today that construction spending during February 2012 was estimated at a seasonally adjusted annual rate of $808.9 billion, 1.1 percent (±1.3%)* below the revised January estimate of $818.1 billion. The February figure is 5.8 percent (±1.8%) above the February 2011 estimate of $764.2 billion.

Private construction spending was also declined in February:

Spending on private construction was at a seasonally adjusted annual rate of $527.3 billion, 0.8 percent (±1.1%)* below the revised January estimate of $531.7 billion. Residential construction was at a seasonally adjusted annual rate of $246.5 billion in February, nearly the same as (±1.3%)* the revised January estimate of $246.4 billion. Nonresidential construction was at a seasonally adjusted annual rate of $280.8 billion in February, 1.6 percent (±1.1%) below the revised January estimate of $285.3 billion.

Click on graph for larger image.

This graph shows private residential and nonresidential construction spending, and public spending, since 1993. Note: nominal dollars, not inflation adjusted.

Private residential spending is 63.5% below the peak in early 2006, and up 10% from the recent low. Non-residential spending is 32% below the peak in January 2008, and up about 15% from the recent low.

Public construction spending is now 13% below the peak in March 2009.

The second graph shows the year-over-year change in construction spending.

On a year-over-year basis, both private residential and non-residential construction spending are positive, but public spending is down slightly on a year-over-year basis. The year-over-year improvements in private non-residential are mostly due to energy spending (power and electric).

The year-over-year improvement in private residential investment is an important change (the positive in 2010 was related to the tax credit), and this suggest the bottom is in for residential investment.
All Housing Investment and Construction Graphs

by Calculated Risk on 4/02/2012 10:00:00 AM

PMI was at 53.4% in March, up from 52.4% in February. The employment index was at 56.1%, up from 53.2%, and new orders index was at 54.5%, down from 54.9%.

From the Institute for Supply Management: March 2012 Manufacturing ISM Report On Business®

Economic activity in the manufacturing sector expanded in March for the 32nd consecutive month, and the overall economy grew for the 34th consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business®.

The report was issued today by Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. "The PMI registered 53.4 percent, an increase of 1 percentage point from February's reading of 52.4 percent, indicating expansion in the manufacturing sector for the 32nd consecutive month. The Production Index increased 3 percentage points from February's reading of 55.3 percent to 58.3 percent, and the Employment Index increased 2.9 percentage points to 56.1 percent. Of the 18 industries included in the survey, 15 are experiencing overall growth. Comments from the panel remain positive, with several respondents citing increased sales and demand for the next few months."

Click on graph for larger image.

Here is a long term graph of the ISM manufacturing index.

This was slightly above expectations of 53.0%. This suggests manufacturing expanded at a faster rate in March than in February. It appears manufacturing employment expanded in March with the employment index at 56.1%.

by Calculated Risk on 4/02/2012 08:48:00 AM

From Reuters: Unemployment in Euro Zone Hit New High in February

Unemployment in the euro zone reached its highest level in almost 15 years in February, with more than 17 million people out of work, according to figures released Monday.

Joblessness in the 17-nation currency zone rose to 10.8 percent, up by 0.1 point from January, Eurostat said Monday.
...
Separate data released Monday showed manufacturing activity in the euro zone shrank for an eighth successive month in March, providing further support for Brussels’s forecast that euro zone output will shrink 0.3 percent this year.

Here is the Eurostat data by country.

Rising unemployment, falling manufacturing, declining output ... no surprise.

by Calculated Risk on 4/01/2012 06:57:00 PM

A long article from Edward Robinson at the WaPo: Foreclosures give rise to new industry. A few excerpts:

Waypoint, which owns 1,100 houses and is buying five more a day, is betting that converting foreclosures into rentals is a better way to make a profit. Other firms, such as Landsmith in San Francisco, are now cropping up and pursuing the same strategy in Arizona, California and Nevada.

With many suburban homes selling for half their peak values and demand for rentals from prospective tenants climbing, Waypoint was earning a return of
8 to 9 percent on its capital as of Dec. 31, according to a quarterly report. That beats the 6.3 percent gain in the BI NA Multifamily REIT Index, which tracks the performance of 27 apartment-building operators.
...
The home rental market boasts a total property value of $3 trillion, according to Morgan Stanley housing analyst Oliver Chang. Yet institutions have long shunned it as too scattered and impractical to be profitable.
...
Oaktree Capital Management, the investment firm co-founded by billionaire Howard Marks, announced a $450 million deal with Carrington Capital Management to acquire and convert foreclosed single-family homes into rental properties. Carrington rents out more than 3,000 houses in California and other states.

Starwood Capital Group is poised to enter the foreclosure-to-rental market, according to an investor familiar with its plans. So, too, are Zell and the real estate arm of Apollo Investment Management.
...
Investors are already having an effect: The supplies of homes for sale in Phoenix, Orlando and other hard-hit markets have fallen more than 60 percent from their post-crash highs as bargain hunters scoop up foreclosures.

I've talked to several smaller investor groups, and they have all done very well. Now the larger groups are moving in.

Investors buying foreclosures to rent is one of the reasons inventory levels of existing homes has fallen so sharply.

Yesterday:
• Summary for Week Ending March 30th
• Schedule for Week of April 1st

by Calculated Risk on 4/01/2012 11:43:00 AM

For the question contest in March, the leaders were:

1) Bill (Calculated Risk)
2) Billy Forney
3) Bryant Dodson
4) Charles Chuckray
5 tie) Walt Tucker
5 tie) Ed Hodder

Congratulations to all.

For fun I've added a monthly question contest on the right sidebar. It takes a Facebook login.

In April, I'll ask some economic predictions several times a week: For April 2nd, I'm asking: Will the March ISM Manufacturing Index be over 53? (Note: I'm leaving the market predictions out for April).

Contestants receive 1 point for each correct answer. At the end of each month, I'll list the leaders in a post on the blog.

For both February and March, the winner was ... CR. Hey, play along and beat CR!

Yesterday:
• Summary for Week Ending March 30th
• Schedule for Week of April 1st

by Calculated Risk on 4/01/2012 09:45:00 AM

I've been reading former PIMCO managing director Paul McCulley for years (great insights). The following piece discusses the current liquidity trap and the failure of austerity in Europe: "Fiscal austerity does not work in a liquidity trap and makes as much sense as putting an anorexic on a diet."

From Paul McCulley and Zoltan Pozsar: Does Central Bank Independence Frustrate the Optimal Fiscal-Monetary Policy Mix in a Liquidity Trap? (ht Richard)

An excerpt:

The United States and much of the developed world are in a liquidity trap. However, policymakers still have not embraced this diagnosis which is a problem as solutions to a liquidity trap require specific sets of policies. There are policies that will work, and there are policies that will not work. Correct diagnosis is necessary to prescribe the right policy medication.

A liquidity trap is a circumstance in which the private sector is deleveraging in the wake of enduring negative animal spirits caused by the bursting of joint asset price and credit bubbles that leave private sector balance sheets severely damaged. In a liquidity trap the animal spirits of the private sector cannot be revived by a reduction in short-term interest rates because there is no demand for credit. This effectively means that conventional monetary policy does not work in a liquidity trap.
...
This is not to say that the private sector should not deleverage. It has to. It is a part of the economy’s healing process and a necessary first step toward a self-sustaining economic recovery.

However, deleveraging is a beast of a burden that capitalism cannot bear alone. At the macro level, deleveraging must be a managed process: for the private sector to deleverage without causing a depression, the public sector has to move in the opposite direction and re-lever by effectively viewing the balance sheets of the monetary and fiscal authorities as a consolidated whole.
...
[McCulley reviews several recent cases]
...
These historical cases of acting responsibly, irresponsibly and half-heartedly irresponsibly relative to orthodoxy carry telling lessons for the outlooks of the Eurozone, U.K. and U.S. today.

First, acting responsibly relative to orthodoxy in the Eurozone and following the German “dictat” of sado-fiscalism and internal devaluation are reminiscent of several defining economic episodes and frictions of the interwar gold standard.
...
On a more systemic level, Germany’s refusal to inflate at the core while insisting on internal devaluation in the periphery is eerily similar to the frictions caused by the imbalance between gold surplus countries refusing to inflate and deficit countries unable to sufficiently deflate during the 1920s and early 1930s.

Just as laboring classes could not bear the pain of adjustments required by the gold standard’s orthodoxies, laboring classes in peripheral Eurozone economies may not be able to bear the pain of adjustments required by the single currency’s orthodoxies.

If history is our guide, painful adjustments will ultimately lead to some countries abandoning the euro, or politics overruling monetary orthodoxies: (1) legal restrictions against monetizing debt today versus the fixed exchange rate mentality of the gold standard, and (2) the independence of the ECB.
...
Second, acting responsibly relative to orthodoxy on the fiscal front, but acting irresponsibly relative to orthodoxy on the monetary front, policies in the U.K. are also unlikely to work.
...
Third, to date, the U.S. has acted irresponsibly relative to orthodoxy on both the fiscal and monetary front. This is good.

However, risks are rising that while the monetary authority will remain committed to acting irresponsibly, the government will choose to act responsibly relative to fiscal orthodoxy and adopt austerity.

I agree with McCulley that most of the world is in a liquidity trap and it appears that austerity alone will eventually fail at the ballot box, see from Reuters: Resistance to Austerity Stirs in Southern Europe