by Calculated Risk on 2/26/2009 04:22:00 PM

Yesterday I posted two graphs based on the Capital Assistance Program house price scenarios. The first graph was the change in nominal house prices, and the second was a house price-to-rent ratio (assuming rents are flat for the next two years).

But what if rents decline?

Here is a story from the Guardian in the UK: Steep fall in rents as unsold homes flood the market

A glut of unsold properties hitting the ­lettings market since the beginning of the year has pushed rents down by as much as 25% across Britain.
...
Average rents dropped to £795 a month in February compared to £950 in May last year, a fall of 16.3%, according to property search engine Globrix ...

It estimates that the number of new properties for let has jumped by 88% over the past year, with the biggest increase occurring since the start of 2009.

... FindaProperty said that the number of rental properties advertised on its site almost doubled between September 2008 and February 2009 ... average rental prices fell from £872 a month last year to £830 in February this year, and that landlords are offering lures such as free satellite TV and free weekly cleaner in a desperate attempt to secure new tenants.

Rents are declining in the U.S. too, although this hasn't shown up in the BLS' Owners Equivalent Rent.

Here is a graph that shows the price-to-rent ratio under three rent scenarios (using the "more severe" economic scenario). House prices are based on the Composite 10 index (used by Treasury) and are assumed to decline 22% in 2009 and 7% in 2010 under the "more severe" scenario.

Click on graph for larger image in new window.

This shows three scenarios for rents in the U.S. over the next two years: Flat, a 10% decline in rents, and a 25% decline in rents.

As I noted yesterday, with the "more severe" scenario and flat rents, the price-to-rent ratio will be slightly below the normal range. If rents fall 10%, this metric would be in the normal range, and with a 25% decline in rents house prices would be too high.

With the largest bubble in history, I'd expect house prices to overshoot and the price-to-rent ratio to decline to the bottom of the normal range. This suggests even a 10% decline in rents would make the "more severe" scenario too mild.

by Calculated Risk on 2/26/2009 03:25:00 PM

The FDIC released the Quarterly Banking Profile for Q4 today. Here is an excerpt from the FDIC press release:

Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported a net loss of $26.2 billion in the fourth quarter of 2008, a decline of $27.8 billion from the $575 million that the industry earned in the fourth quarter of 2007 and the first quarterly loss since 1990. Rising loan-loss provisions, losses from trading activities and goodwill write-downs all contributed to the quarterly net loss as banks continue to repair their balance sheets in order to return to profitability in future periods.
...
The FDIC's "Problem List" grew during the quarter from 171 to 252 institutions, the largest number since the middle of 1995. Total assets of problem institutions increased from $115.6 billion to $159 billion.
emphasis added

It is going to be a busy year for the FDIC.

by Calculated Risk on 2/26/2009 02:37:00 PM

From Bloomberg: AIG Rescue May Include Credit-Default Swap Backstop

American International Group Inc. may get a backstop from the U.S. to protect against further losses on credit-default swaps, according to a person familiar with the matter.

The federal guarantees may be included in New York-based AIG’s restructured bailout ...

There you have it.

This will probably be announced Sunday night or Monday morning.

by Calculated Risk on 2/26/2009 12:59:00 PM

From CNBC: Troubled Banks Could Get $250 Billion More in Budget

President Barack Obama penciled into his budget on Thursday the possibility that he may request an additional $250 billion to help fix the troubled U.S. financial system.

The figure, described as a "placeholder" and not a specific funding request, would support asset purchases of $750 billion via government financial stabilization programs, administration officials said.

Any additional request to Congress would come on top of the $700 billion financial bailout program enacted last year ...

"Additional action is likely to be necessary to stabilize the financial system and thereby facilitate economic growth," the White House said in budget documents released on Thursday.

What a surprise ...

by Calculated Risk on 2/26/2009 11:59:00 AM

I'm not talking about Cape Fear Bank, although they just entered into a written agreement with the Fed. Another bank to watch for on Friday afternoons ...

I'm more concerned with the stress tests, and I fear they will be inadequate.

Bloomberg reported today: Moody’s May Downgrade More Subprime-Mortgage Debt

Moody’s Investors Service said it’s reviewing all 2005, 2006 and 2007 subprime-mortgage bonds for credit-rating downgrades, covering debt with $680 billion in original balances.

The review reflects an increase in Moody’s expected losses on the underlying loan pools, the New York-based company said in a statement today. Losses for such mortgages backing 2006 securities will probably reach 28 percent to 32 percent, up from a previous projection of 22 percent, Moody’s said.

The ratings firm said that it boosted expected losses based on “the continued deterioration in home prices, rising loss severities on liquidated loans, persistent elevated default rates, and progressively diminishing prepayment rates.”

This is extremely timely.

I can understand Krugman's Feelings of despair

... Obama and Geithner say things like,

If you underestimate the problem; if you do too little, too late; if you don’t move aggressively enough; if you are not open and honest in trying to assess the true cost of this; then you will face a deeper, long lasting crisis.

But what they’re actually doing is underestimating the problem, doing too little too late, and not being open and honest in trying to assess the true cost.

by Calculated Risk on 2/26/2009 11:24:00 AM

From the FDIC: FDIC Closes on a $1.45 Billion Structured Sale of Distressed Loans

The Federal Deposit Insurance Corporation (FDIC) today announced the conclusion of the sale of $1.45 billion of performing and nonperforming residential and commercial construction loans in distressed markets through the use of two private/public partnership transactions. ...

In the two recent transactions, the FDIC placed the loans, which were exclusively from the failed First National Bank of Nevada, into a limited liability corporation (LLC). The FDIC retained an 80 percent interest in the assets with the winning bidder picking up an initial 20 percent stake. Once certain performance thresholds are met, the FDIC's interest drops to 60 percent. The future expenses and income will be shared on the percentage ownership of the purchaser and the FDIC.
...
The successful bidders on the two transactions were Diversified Business Strategies and Stearns Bank NA. ...

The closure of this sale brings the total amount of assets sold utilizing private/public partnership transactions to approximately $3.2 billion over the last year, in five separate transactions.

Although this press release doesn't provide all the details, there is clearly a market for these assets (the FDIC received 30 bids) - so these bids could help value assets at the 19 largest banks. Unfortunately I doubt they will use these prices ...

by Calculated Risk on 2/26/2009 10:00:00 AM

The Census Bureau reports New Home Sales in January were at a seasonally adjusted annual rate of 309 thousand. This is the lowest sales rate the Census Bureau has ever recorded (starting in 1963).

Click on graph for larger image in new window.

The first graph shows monthly new home sales (NSA - Not Seasonally Adjusted).

Note the Red column for January 2009. This is the lowest sales for January since the Census Bureau started tracking sales in 1963. (NSA, 23 thousand new homes were sold in January 2009).

As the graph indicates, sales in January 2009 are substantially worse than the previous years.

The second graph shows New Home Sales vs. recessions for the last 45 years. New Home sales have fallen off a cliff.

Sales of new one-family houses in January 2009 were at a seasonally adjusted annual rate of 309,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development.

This is 10.2 percent (±15.4%)* below the revised December rate of 344,000 and is 48.2 percent (±6.8%) below the January 2008 estimate of 597,000.

And one more long term graph - this one for New Home Months of Supply.

The months of supply is at an ALL TIME RECORD 13.3 months in January (this is seasonally adjusted)!

The seasonally adjusted estimate of new houses for sale at the end of January was 342,000. This represents a supply of 13.3 months at the current sales rate.

The final graph shows new home inventory. For new homes, both sales and inventory are falling quickly - since starts have fallen off a cliff.

Note that new home inventory does not include many condos (especially high rise condos), and areas with significant condo construction will have much higher inventory levels.

This is a another extremely weak report. Record low sales. Record high months of supply. More Cliff Diving. I'll have more on new home sales later today ...

by Calculated Risk on 2/26/2009 09:10:00 AM

Another step towards a second bailout or bankruptcy ...

From the WSJ: GM Posts $9.6 Billion Loss, Burns Through $6.2 Billion in Cash

GM's revenue fell as the worsening economic malaise drove most of GM's four regions into the red. The company burned through $6.2 billion in cash in the quarter, less than the $6.9 billion in the three months to Sept. 30.
...
The nation's biggest domestic auto maker said Thursday it lost $30.9 billion for the full year and expects an opinion from its auditors as to whether the company remains a "going concern" when its annual report is issued in March.
...
GM has lost more than $70 billion since 2005 ... The company has relied heavily in emerging markets, especially Latin America, Eastern Europe and Asia, to offset losses at home. But as the economic troubles that began with the mortgage meltdown and banking crisis in the U.S. spread around the globe, GM's is facing losses most everywhere it operates.

by Calculated Risk on 2/26/2009 08:37:00 AM

The DOL reports on weekly unemployment insurance claims:

In the week ending Feb. 21, the advance figure for seasonally adjusted initial claims was 667,000, an increase of 36,000 from the previous week's revised figure of 631,000. The 4-week moving average was 639,000, an increase of 19,000 from the previous week's revised average of 620,000.
...
The advance number for seasonally adjusted insured unemployment during the week ending Feb. 14 was 5,112,000, an increase of 114,000 from the preceding week's revised level of 4,998,000.

Click on graph for larger image in new window.

The first graph shows weekly claims and continued claims since 1971.

The four week moving average is at 639,000 the highest since 1982.

Continued claims are now at 5.11 million - another new record - above the previous all time peak of 4.71 million in 1982.

The second graph shows the 4-week average of initial weekly unemployment claims (blue, right scale), and total insured unemployed (red, left scale), both as a percent of covered employment.

This normalizes the data for changes in insured employment.

Another weak unemployment claims report ...

by Calculated Risk on 2/26/2009 01:09:00 AM

From the Financial Times: AIG considers break-up in bid to stay afloat

AIG and the US authorities are in advanced discussions over a radical restructuring that would split the stricken insurer into at least three government-controlled divisions in an attempt to keep it afloat...

Under the plan, the government would swap its current 80 per cent holding in the insurer for large stakes in three units – AIG’s Asian operations, its international life insurance business and the US personal lines business. A fourth unit, comprised of AIG’s other businesses and troubled assets, could also be formed.

In return, the authorities would relax the terms, or even cancel a large portion, of a $60bn five-year loan to AIG and convert $40bn-worth of preferred stock into shares...

AIG was on track to announce the overhaul on Monday, when it is expected to report a $60bn loss with its fourth-quarter results. The board is due to meet on Sunday.

Citi and AIG are keeping us waiting.

by Calculated Risk on 2/25/2009 11:06:00 PM

Another summary post and open thread (for discussion).

Existing home sales in January 2009 (4.49 million SAAR) were 5.4% lower than last month, and were 8.6% lower than January 2008 (4.91 million SAAR). See link for graphs of sales and inventory.

The Treasury announced the Capital Assistance Program today. The detail can be found on the Treasury site: http://www.financialstability.gov/. This included the stress test economic scenarios. Here is the table of the scenarios and graphs of what this means in terms of house prices.

Bernanke testified before the House Financial Services Committee today. Basically he repeated his Senate testimony, but he did argue that progress has been made. Here are some Credit Crisis indicators that suggest that is correct.

And oh yeah, the WSJ is reporting the Citi Deal Is Imminent.

by Calculated Risk on 2/25/2009 08:49:00 PM

Here is our daily "Citi deal is imminent" story.

From the WSJ: Citi Is Near Deal to Boost U.S.'s Stake by Up to 40%

Citigroup Inc. is closing in on an agreement to boost the federal government's stake in the company to as much as 40%, according to people familiar with the situation. A deal could be announced as soon as Thursday.

This could raise some interesting problems in foreign countries:

For example, a Mexican law bars any institution that is more than 10%-owned by a foreign government from running a bank in that country. As a result, some Citigroup executives are worried that an increased U.S. stake might subject the bank to pressure to relinquish some or all of its ownership of Grupo Financiero Banamex ...

UPDATE: This happened twice today. One government release says one thing, another says something different. I noted that the Treasury White Paper on the Capital Assistance Program said:

These shares can convert at the firm’s discretion (with the approval of their regulator) into common equity if needed to preserve lending in worse-than-expected economic environment at a conversion price set at a 10% discount from the prevailing level of the institution’s stock price as of February 9, 2009.

Nemo notes that the Term Sheet says:

Conversion price is 90% of the average closing price for the common stock for the 20 trading day period ending February 9, 2009, subject to customary anti-dilution adjustments.

One release from the FDIC called the program the "Capital Assessment Program" (and I labeled a couple of charts with that name), but the real name is the "Capital Assistance Program".

by Calculated Risk on 2/25/2009 06:15:00 PM

Form Bloomberg: Lewis Says Merrill, Countrywide Are ‘Stars’ This Year

Bank of America Corp. Chief Executive Officer Kenneth Lewis said Merrill Lynch & Co. and Countrywide Financial Corp., the acquisitions that some analysts say helped push down the bank’s share price, have been “stars” so far this year.

At first glance this seems absurd. One analyst is quoted in the story saying "I almost fell off my chair". However if you separate the acquired toxic assets from the ongoing performance, I can understand Lewis' comments. Countrywide is benefiting from the refinance boom. Most (if not all) of these loans are being sold to Fannie and Freddie (or guaranteed by them).

The key question is how toxic are the toxic assets BofA acquired with Merrill and Countrywide? Oh well, the Capital Assistance Program is here to help.

by Calculated Risk on 2/25/2009 03:59:00 PM

Here are a couple of graphs to illustrate the Capital Assistance Program house price scenarios. (see previous post) Note: the FDIC called it Capital Assessment Program (so the graph titles are incorrect!)

Click on graph for larger image in new window.

For whatever reason the Treasury is using the Case-Shiller Composite 10 index (I'd prefer the National Index). This graph shows nominal house prices under the two scenarios: baseline, and more severe.

Under the baseline scenario, nominal prices in the Composite 10 cities would return to mid-2002 prices. Under the more severe scenario, prices would return to early 2001 prices.

The second graph shows what this would mean for the price-to-rent ratio.

Note: this is price-to-rent for the Composite 10 index and Jan 2000 is set to 1.0.

This assumes rents stay flat for the next two years (recent reports suggest rents are falling - and that would mean prices would have to fall further).

This metric suggests that the severe price declines would bring the price-to-rent ratio below the normal range. Note: this requires the above assumption on rents.

NOTE: This is based on the Composite 10 index, and that index will most likely decline more than the national index. Even in these 10 cities, some areas will probably see larger price declines (as an example areas with significant Option ARM loans) and other areas less.

Repeating this table of the scenarios:

by Calculated Risk on 2/25/2009 02:42:00 PM

According to the Supervisory Capital Assessment Program FAQs, the Stress Tests will be completed "as soon as possible" but no later than the end of April.

Here are the economic scenarios for the stress tests:

Click on table for larger image in new window.

The more severe case is a 22% decline in house prices in 2009 and a 7% decline in 2010 (using the Case-Shiller Composite 10). I'll put up a graph with these projections soon.

by Calculated Risk on 2/25/2009 02:18:00 PM

From the U.S. Treasury: Terms of Capital Assistance Program

To view the White Paper, Term Sheet and FAQ, visit www.FinancialStability.gov.

Terms

Capital provided under the CAP will be in the form of a preferred security that is convertible into common equity at a 10 percent discount to the price prevailing prior to February 9th.

CAP securities will carry a 9 percent dividend yield and would be convertible at the issuer's option (subject to the approval of their regulator).

After 7 years, the security would automatically convert into common equity if not redeemed or converted before that date.

The instrument is designed to give banks the incentive to replace USG-provided capital with private capital or to redeem the USG capital when conditions permit.

With supervisory approval, banks will be able to request capital under the CAP in addition to their existing CPP preferred stock.

With supervisory approval, banks will also be allowed to apply to exchange the existing CPP preferred stock for the new CAP instrument.

Conditions

Recipients of capital under the CAP will be subject to the executive compensation requirements in line with the Emergency Economic Stabilization Act of 2008, as recently amended. The Treasury will shortly be releasing rules to implement these amendments.

As part of the application process, banks must submit a plan for how they intend to use this capital to preserve and strengthen their lending capacity – specifically, to increase lending above levels relative to what would have been possible without government support. The Treasury Department will make these plans public when the bank receives the capital under the CAP.

Taxpayers will be able to monitor the performance of banks receiving capital under the CAP. Banks receiving capital will be required to submit to Treasury monthly reports on their lending broken out by category. These will be posted on www.FinancialStability.gov.

Recipients will also be subject to restrictions on paying quarterly common stock dividends, repurchasing shares, and pursuing cash acquisitions.

Update: From the Treasury White Paper on Capital Assistance Program (see previous post):

These shares can convert at the firm’s discretion (with the approval of their regulator) into common equity if needed to preserve lending in worse-than-expected economic environment at a conversion price set at a 10% discount from the prevailing level of the institution’s stock price as of February 9, 2009.

Guess the date Citi's stock price peaked in February (closed at $3.95 on Feb 9th)

by Calculated Risk on 2/25/2009 01:10:00 PM

Real Time Economics at the WSJ excerpts some analyst comments about the existing home sales report: Economists React: ‘So Much for Signs of Stability’ in Housing. A few comments from analysts:

"So much for signs of stability."

"The drop back in the number of existing U.S. home sales in January dashes hopes that housing activity had found a floor."

"Overall, the longer housing activity remains in the doldrums, the less likely it is that the economy will see a decent recovery in 2010 as Fed Chairman Ben Bernanke hopes."

"The rate of decline in existing home sales over the last three months suggests that the market has not yet entered a bottoming phase and housing remains under considerable pressure."

I wouldn't look at existing home sales for signs of stability.

A large percentage of existing home sales (45% according to the NAR) are distressed sales: REO sales (foreclosure resales) or short sales. This has created a gap between new and existing sales as shown in the following graph that I've jokingly labeled the "Distressing" gap.

Click on graph for larger image in new window.

This graph shows existing home sales (left axis through January) and new home sales (right axis through December).

Update (Feb 26, 2009): The graph is updated through January now (and right axis label corrected).

For a number of years the ratio between new and existing home sales was pretty steady. After activity in the housing market peaked in 2005, the ratio changed. This change was caused by distressed sales - in many areas home builders cannot compete with REO sales, and this has pushed down new home sales while keeping existing home sales activity elevated.

If we are looking for the first "signs of stability" in the housing market, I think we should look for declining inventory, a bottom in new home sales, and the gap between new and existing home sales closing.

Note: Existing home inventory might be declining, see the 5th graph here. However this might be misleading (see caveats in post).

by Calculated Risk on 2/25/2009 12:23:00 PM

As Bernanke said today, some progress has been made ...

The yield on 3 month treasuries has risen to 0.30%. Better than zero!

The three month LIBOR has increased to 1.25%. The three-month LIBOR rate peaked (for this cycle) at 4.81875% on Oct. 10. Although this has increased recently, this is still very positive for all those adjusted rate mortgage loans tied to the LIBOR (or treasuries).

The TED spread is at 0.96. Although a normal spread is around 0.5, this is still a significant improvement.

The A2P2 spread as at 1.02.

This is a significant improvement from the high of 5.86 after Thanksgiving. The A2P2 spread is at the lowest level since the latest wave of the crisis started in Sept 2008. However this is still fairly high - look at those previous small peaks - those were considered serious at the time.

Note: This is the spread between high and low quality 30 day nonfinancial commercial paper.

Federal Reserve Assets

The Federal Reserve released the Factors Affecting Reserve Balances last Thursday. Total assets increased $72.2 billion to $1.92 trillion. The increase was mostly due to the Federal Reserve buying $57.9 billion in mortgage-backed securities (MBS) guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae.

After spiking last year to $2.31 trillion the week of Dec 18th, the Federal Reserve assets have declined somewhat. Now it looks like the Federal Reserve is starting to expand their balance sheet again.

Note: the graph shows Total Factors Supplying Federal Reserve Funds and is an available series that is close to assets.

These indicators do indicate some progress ...

by Calculated Risk on 2/25/2009 11:48:00 AM

Fed Chairman Ben Bernanke is testifying before the House Financial Services Committee today.

UPDATE: Here is the CNBC feed (opens in new window).

From Gregg Robb at MarketWatch: Bernanke tells Congress Fed knows what it is doing

"We're not making it up," Bernanke told the House Financial Services panel.

"We're working along a program that has been applied in various contexts," he said. "We're not completely in the dark."

I'm not making this up.

by Calculated Risk on 2/25/2009 10:30:00 AM

The NAR press release is in the previous post. Here are some graphs of existing home sales ...

Click on graph for larger image in new window.

The first graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.

Sales in January 2009 (4.49 million SAAR) were 5.4% lower than last month, and were 8.6% lower than January 2008 (4.91 million SAAR).

It's important to note that about 45% of these sales were foreclosure resales or short sales. Although these are real transactions, this means activity (ex-distressed sales) is under 3 million units SAAR. (edit: fixed typo)

The second graph shows nationwide inventory for existing homes. According to the NAR, inventory decreased to 3.6 million in January, from an all time record of 4.57 million homes for sale in July 2008.

Usually inventory peaks in mid-Summer, and then declines slowly through November - and then declines sharply in December as families take their homes of the market for the holidays. Typically inventory starts to increase again slightly in January, however this month there was a slight decrease.

Usually most REOs (bank owned properties) are included in the inventory because they are listed - but not all. Recently I've heard a number of stories about lenders holding REOs off the market, but I can't confirm this.

The third graph shows the 'months of supply' metric for the last six years.

Months of supply decreased to 9.6 months.

Even though the inventory level declined, sales fell even more, leading to a higher "months of supply".

Here is another way to look at existing homes sales - monthly, Not Seasonally Adjusted (NSA):

This graph shows NSA monthly existing home sales for 2005 through 2009. Sales (NSA) were slightly lower in January 2009 than in January 2008. This is the fourth straight year of declining sales.

Again - a significant percentage of recent sales were foreclosure resales, and although these are real sales, I think existing home sales could fall even further when foreclosure resales start to decline sometime in the future.

The last graph shows inventory by month starting in 2004.

Inventory levels were flat during the bubble, but started increasing at the end of 2005.

Inventory levels increased sharply in 2006 and 2007, but have been below the year ago level for the last six months. This might indicate that inventory levels are close to the peak for this cycle. Note: there is probably a substantial shadow inventory – homeowners wanting to sell, but waiting for a better market - so existing home inventory levels will probably stay elevated for some time. There is also the possibility of some ghost inventory (REOs being held off the market).

It is important to watch inventory levels very carefully. If you look at the 2005 inventory data, instead of staying flat for most of the year (like the previous bubble years), inventory continued to increase all year. That was one of the key signs that led me to call the top in the housing market!

If the trend of declining year-over-year inventory levels continues in 2009 that will be a positive for the housing market. Prices will probably continue to fall until the months of supply reaches more normal levels (in the 6 to 8 month range), and that might take some time.