by Calculated Risk on 3/04/2009 09:30:00 PM
Wednesday, March 04, 2009
CRE: Investment in Hotels, Offices and Malls
There was a strong downward revision in non-residential structure investment in the Q4 GDP report. The CRE investment bust is here - and will get much worse based on the Fed's recent Senior Loan Officer Opinion Survey and the Architecture Billings Index.
Click on graph for larger image in new window.
This graph shows investment in lodging (based on data from the BEA) as a percent of GDP. The recent boom in lodging investment has been stunning. Lodging investment is now at 0.33% of GDP - slightly below the all time high set in Q3 2008 - and preparing to cliff dive!
Note: prior to 1997, the BEA included Lodging in a category with a few other buildings. This earlier data was normalized using 1997 data, and is an approximation.
Investment in multimerchandise shopping structures (malls) decreased in Q4 2008 to .21% of GDP, after peaking in Q4 2007 at .25% of GDP. This is a pretty steep decline, but now it appears that new mall construction is about to almost stop.
As David Simon, Chief Executive Officer or Simon Property Group, the largest U.S. shopping mall owner said a few weeks ago:
"The new development business is dead for a decade. Maybe it’s eight years. Maybe it’s not completely dead. Maybe I’m over-dramatizing it for effect."The third graph shows office investment as a percent of GDP since 1972. Office investment decreased slightly in Q4 2008. With the office vacancy rate rising sharply, office investment will probably decline all this year.
Note: In 1997, the Bureau of Economic Analysis changed the office category. In the earlier years, offices included medical offices. After '97, medical offices were not included (The BEA presented the data both ways in '97).
Investment in all three categories - malls, lodging and offices - will decline sharply in 2009.
Fed's Lockhart on Real Estate
by Calculated Risk on 3/04/2009 08:04:00 PM
From Atlanta Fed President Dennis Lockhart: On Real Estate and Other Risks to the Economic Outlook A few excerpts. First on the rental market:
I should also comment on the weakening multifamily residential real estate picture. No two rental markets are exactly alike. But to generalize, those markets trending the worst probably share one or more characteristics. They had excessive condo construction or condo conversion activity. Such markets are seeing unsold units return as rentals. They had very high home price appreciation in the years 2004—07 with large amounts of speculative house construction activity. Today, in several markets, houses compete with apartments as rentals. And they have been experiencing high and rising foreclosure rates.Although Lockhart mentioned that houses are competing with apartments as rentals, he doesn't mention that this is happening for two reasons: 1) homeowners who can't sell their homes (or are "waiting for a better market") are renting their homes, and 2) many REOs are being purchased by cash flow investors as rentals helping to increase rental supply and push down rents.
And on Commercial real estate (CRE):
While historically smaller than residential real estate, commercial real estate (or nonresidential structures) accounts for a not-insignificant portion of the American economy—at least 4 percent of GDP directly and perhaps more, depending on estimates. ...This is good data. Although the CRE bust will be significant, it will not be as large an impact as the residential bust.
There are currently some $2.5 trillion of commercial property loans on the balance sheets of financial institutions and in commercial mortgage-backed securities (CMBS) markets. In contrast, residential mortgage debt amounts to about $11 trillion.
Some 25 percent of commercial real estate debt is securitized, compared with 60 percent of outstanding home mortgage debt. The volume of CMBS has more than doubled since 2003, a bit faster than the growth of overall commercial real estate debt.
There are several subsectors of commercial real estate: retail, office, hotel, and industrial. All are facing problems.This gives me an excuse, in the next post, to update the graphs of office, mall and hotel investment based on the revisions to Q4 GDP.
There is a growing imbalance of retail space for several reasons. A lot of new retail space was added in areas that saw a high level of home construction, much of which has not been absorbed.
This imbalance is aggravated by general weakness in the retail industry. Established retail centers are seeing rising vacancy rates. When an anchor tenant leaves a shopping center, or overall occupancy falls below a threshold level, other tenants are often free to cancel their leases. Industry data indicate that abandoned retail store expansions and store closings have reached levels not seen since the recession and real estate slump of 1991–92.
The hotel subsector is facing excess supply in the face of soft demand. Occupancy rates declined about 8 percentage points in the fourth quarter of 2008, according to industry sources. Summer tourism was hurt by high gas prices, and now business travel is declining as companies scale back in a weak economy.
Also, with the decline in the economy and rising unemployment, office and industrial vacancies have been rising. In virtually all segments of commercial real estate, there is downward pressure on property values because of new construction coming on stream—construction started before the recession fully set in—coupled with the effects of the economic downturn.
Interestingly, the only property type currently withstanding downward pressures is warehouse. This seems to be, perversely, at least partly because of the back-up of inventories resulting from weak consumer spending and adverse retail and manufacturing conditions.
Mortgage Modification and 2nd Mortgages
by Calculated Risk on 3/04/2009 06:19:00 PM
I'm back from my civic duty, and starting to read the newly released details of the Mortgage Modification Plan. The second mortgage sections are interesting.
This first reference to 2nd liens seems to be part of Home Affordable Refinance Program (Part I of the plan).
From the Making Home Affordable, Updated Detailed Program Description Fact Sheet
Second Liens: While eligible loan modifications will not require any participation by second lien holders, the program will include additional incentives to extinguish second liens on loans modified under the program, in order to reduce the overall indebtedness of the borrower and improve loan performance. Servicers will be eligible to receive compensation when they contact second lien holders and extinguish valid junior liens (according to a schedule to be specified by the Treasury Department, depending in part on combined loan to value). Servicers will be reimbursed for the release according to the specified schedule, and will also receive an extra $250 for obtaining a release of a valid second lien.So the 2nd lien holder will have a choice: do nothing, or take some unspecified compensation to extinguish the 2nd.
Then there is this section that seems to be in Part II: Home Affordable Modification Program Housing Counselor Q&As:
What if the borrower has a second mortgage and would like to apply for a Home Affordable Modification?Is that saying they will pay the 2nd holder up to $1000 under Part II?
Under the Home Affordable Modification program, junior lien holders will be required to subordinate to the modified loan. However, through the Home Affordable Modification an incentive payment of up to $1,000 is available to pay off junior lien holders. Servicers are eligible to receive an additional $500 incentive payment for efforts made to extinguish second liens on loans modified under this program.
Note: Part I is the section allowing homeowner with Fannie and Freddie held mortgages to refinance upto 105% LTV. This section makes sense since this lowers Fannie and Freddie's risk on loans they already own or guarantee. Under Part II the lender must bring the total monthly payments on mortgages to 38% of the borrowers gross income, and then the U.S. will match dollar for dollar from 38% down to 31% debt-to-income ratio for the borrower.
LA Times: Housing Development Sites Become "Wasteland"
by Calculated Risk on 3/04/2009 05:00:00 PM
From the LA Times: As projects grind to a halt, home sites turn to wasteland
By day, it's far too quiet at the site of a planned housing and retail development on a former Navy base in Oakland.Some of these units have been mothballed (with fences and guards), others essentially abandoned. This is just more supply waiting for the market to improve.
At night, neighbors can hear the thieves come out.
They rip out copper wire, haul away pipes and take anything else they can steal from dozens of buildings on the site, abandoned after Irvine developer SunCal Cos. fell victim to the economy.
It's a scene not uncommon throughout California...
"I hear hacking and see scary bonfires in the middle of the night," said Don Johnson, a retired Coast Guard employee who lives near the defunct Oak Knoll Naval Medical Center in Oakland.
Nearly 250 residential developments with a combined total of 9,389 houses and condominiums have been halted in California, according to research firm Hanley Wood Market Intelligence. The units, worth close to $3.5 billion, were in various stages of development.
Market Rebound
by Calculated Risk on 3/04/2009 03:59:00 PM
The Fed may say the economy has weakened (see Beige Book), but the markets rebounded today ...
Dow up 2.2%
S&P 500 up 2.4%
NASDAQ up 2.5%
Back to full posting later today ...
Fed's Beige Book
by Calculated Risk on 3/04/2009 03:00:00 PM
Reports from the twelve Federal Reserve Districts suggest that national economic conditions deteriorated further during the reporting period of January through late February. Ten of the twelve reports indicated weaker conditions or declines in economic activity; the exceptions were Philadelphia and Chicago, which reported that their regional economies "remained weak." The deterioration was broad based, with only a few sectors such as basic food production and pharmaceuticals appearing to be exceptions. Looking ahead, contacts from various Districts rate the prospects for near-term improvement in economic conditions as poor, with a significant pickup not expected before late 2009 or early 2010.And on real estate:
Residential real estate markets remained in the doldrums in most areas, with only scattered, very tentative signs of stabilization reported. The pace of sales remained very low in most areas and declined further in some; most Districts reported small declines, but New York cited a sales drop of 60 to 65 percent in Manhattan compared with twelve months earlier. By contrast, Cleveland, Richmond, Dallas, and San Francisco each reported a rising or better-than-expected sales pace for existing or new homes in some areas, attributed largely to falling prices and improved financing terms for some types of home mortgages. House prices continued to decline, reportedly at double-digit paces in some areas, with little or no signs of a deceleration evident. Builders in various Districts generally remain pessimistic regarding recovery prospects this year, and consequently the pace of new home construction declined further in most areas.Grim outlook, especially for CRE. (sorry for slow post, I'm on jury duty!)
Demand for commercial, industrial, and retail space fell further during the reporting period, with some evidence of more rapid deterioration than in preceding periods. Vacancy rates rose and lease rates declined on a widespread basis; New York noted that commercial real estate markets "weakened noticeably," while Atlanta described reports on commercial real estate that were "decidedly more negative" than in previous periods. Construction activity has declined commensurately, and assorted reports suggest that market participants expect this weakness to continue at least through the end of 2009. Cleveland noted that public works projects have shown stability of late, although they declined in the San Francisco District as a result of the budgetary struggles of some state and local governments there. Credit constraints and uncertainty were reported to be a drag on commercial construction and leasing activity in the Philadelphia, Chicago, Dallas, and San Francisco Districts.
emphasis added
Employment Data
by Calculated Risk on 3/04/2009 11:49:00 AM
I don't have much confidence in the ADP numbers, but here they are anyway ...
From CNBC: ADP Shows Record Job Losses; Planned Layoffs Down
ADP said on Wednesday that private employers cut 697,000 jobs in February versus a revised 614,000 jobs lost in January.And on the Challenger layoff report:
The January job cuts were originally reported at 522,000.
It was the biggest job loss since the report's launch in 2001 ...
[P]lanned layoffs at U.S. firms fell 23 percent in February from January's seven-year peak, but remained well above long term averages as the protracted U.S. recession took a heavy toll on employment, ...The consensus for the BLS report on Friday is about 650,000 fewer jobs, but I've seen some forecast much higher (in the 850,000 range). We can be pretty sure the number will be very ugly.
"The decline in job cuts last month offers some hope that January was the peak and we will now see layoffs begin to fall or at least stabilize," said John A. Challenger, chief executive officer of Challenger, Gray & Christmas, in a statement.
But he said monthly job cuts may remain above 100,000 in the first half of the year and possibly for the rest of 2009.
February ISM Non-Manufacturing Index Shows Faster Contraction
by Calculated Risk on 3/04/2009 10:00:00 AM
From the Institute for Supply Management: February 2009 Non-Manufacturing ISM Report On Business®
"The NMI (Non-Manufacturing Index) registered 41.6 percent in February, 1.3 percentage points lower than the 42.9 percent registered in January, indicating contraction in the non-manufacturing sector for the fifth consecutive month at a slightly faster rate. The Non-Manufacturing Business Activity Index decreased 4 percentage points to 40.2 percent. The New Orders Index decreased 0.9 percentage point to 40.7 percent, and the Employment Index increased 2.9 percentage points to 37.3 percent. The Prices Index increased 5.6 percentage points to 48.1 percent in February, indicating a slower decrease in prices from January. According to the NMI, one non-manufacturing industry reported growth in February. Respondents are concerned about the soft market conditions, the negative outlook for employment and the overall state of the economy."This is another weak report.
Treasury Releases Detailed Guidelines on Mortgage Modification Plan
by Calculated Risk on 3/04/2009 09:24:00 AM
From MarketWatch: Treasury says mortgage plan to help up to 9 mln homeowners
The Treasury Department released guidelines to its mortgage modification plan on Wednesday and said that the program will help up to 9 million homeowners avoid foreclosure. The guidelines will enable servicers to begin modifying mortgages right away ... The Treasury program also includes incentives for removing second liens on loans.From financialstability.gov (Treasury site):
Summary of Guidelines
Modification Program Guidelines
Counselor Q&A
Fact Sheet
Report: 8.3 Million U.S. Homeowners with Negative Equity
by Calculated Risk on 3/04/2009 09:08:00 AM
From Bloomberg: More Than 8.3 Million U.S. Mortgages Are Underwater
More than 8.3 million U.S. mortgage holders owed more on their loans in the fourth quarter than their property was worth as the recession cut home values by $2.4 trillion last year, First American CoreLogic said.Late last year Mark Zandi at Moody's Economy.com estimated that there were "roughly 12 million households, or 16%, owe more than their homes are worth". The difference between the estimates is probably because a large number of homeowners have little equity - and small changes in home price assumptions change the number underwater significantly. The differences in percentages is because CoreLogic is using only households with mortgages; Zandi used all households (about 31% of households have no mortgages).
An additional 2.2 million borrowers will be underwater if home prices decline another 5 percent, First American, a Santa Ana, California-based seller of mortgage and economic data, said in a report today. Households with negative equity or near it account for a quarter of all mortgage holders.
Toll Brothers: More Losses, No Pick-up in Activity
by Calculated Risk on 3/04/2009 06:48:00 AM
"We have not yet seen a pick-up in activity at our communities other than ordinary seasonal increases for this time of year."Press Release: Toll Brothers Reports 1st Qtr 2009 Results
Robert I. Toll, chairman and chief executive officer, March 4, 2009
Toll Brothers ... today reported a FY 2009 first quarter net loss of $88.9 million ... which included pre-tax write-downs totaling $156.6 million.Toll's normal cancellation rate is about 7%.
...
Joel H. Rassman, chief financial officer, stated: "Given the numerous uncertainties related to sales paces, sales prices, mortgage markets, cancellations, market direction and the potential for and size of future impairments, it is particularly difficult in the current climate to provide guidance for the rest of FY 2009. As a result, we will not provide earnings guidance at this time."
...
FY 2009's first-quarter cancellation rate (current-quarter cancellations divided by current-quarter signed contracts) was 37.1% ...
In summary: More losses. More write-downs. More cancellations. No guidance. No pick-up in activity.
Tuesday, March 03, 2009
Interesting Technical Pattern Developing*
by Calculated Risk on 3/03/2009 09:30:00 PM
Click on graph for larger image in new window.
Reader Nate suggests the S&P 500 is just tracing out the Mortgage Pig™. (ht Nate and IF)
* IF suggested the post title.
Mortgage Pig™ says: "In UR Poolz Killin your convexity."
For those interested, here are few sources for futures and the foreign markets.
Bloomberg Futures.
CBOT mini-sized Dow
CME Globex Flash Quotes
Futures from barchart.com
And the Asian markets.
And a graph of the Asian markets.
Best to all.
Office Furniture: Cliff Diving
by Calculated Risk on 3/03/2009 08:32:00 PM
From Reuters: U.S. office furniture orders, shipments plunge in January
U.S. office furniture orders and shipments fell about 25 percent in January, reflecting the biggest year-over-year percentage declines since the 2001-02 recession, a trade group said.Click on graph for larger image in new window.
The Business and Institutional Furniture Manufacturers Association said January orders fell 25 percent to $565 million and shipments fell 26 percent to $630 million.
BIFMA also lowered its 2009 forecast for orders to a decline of 26.5 percent, compared with its prior estimate of a drop of 11.6 percent.
This graph shows the actual consumption of office furniture in the U.S. (including imports) and the Business and Institutional Furniture Manufacturers Association forecast for 2009.
The slump in the office market - with rapidly rising office vacancies - is having a secondary impact on office suppliers. This is similar to what happened to the home furnishing bust over the last few years because of the bursting of the housing bubble. Based on this forecast, the U.S. office furniture market will probably be back to the 1994 to 1995 level.
Pensions: Another Trillion Dollar Bailout?
by Calculated Risk on 3/03/2009 05:25:00 PM
From David Evans at Bloomberg: Hidden Pension Fiasco May Foment Another $1 Trillion Bailout (ht James & Bob)
Public pension funds across the U.S. are hiding the size of a crisis that’s been looming for years. Retirement plans play accounting games with numbers, giving the illusion that the funds are healthy.Evans points out that many pension plans have been funded based on optimistic projections of future investment returns. He gives several examples including:
...
The misleading numbers posted by retirement fund administrators help mask this reality: Public pensions in the U.S. had total liabilities of $2.9 trillion as of Dec. 16, according to the Center for Retirement Research at Boston College. Their total assets are about 30 percent less than that, at $2 trillion.
With stock market losses this year, public pensions in the U.S. are now underfunded by more than $1 trillion.
The nation’s largest public pension fund, California Public Employees’ Retirement System, has been reporting an expected rate of return of 7.75 percent for the past eight years, and 8 percent before that, according to Calpers spokesman Clark McKinley.There is much more in the article.
Its annual return during the decade from Dec. 31, 1998, to Dec. 31, 2008, has been 3.32 percent, and last year, when markets tanked, it lost 27 percent.
Note: Back in 2007 Evans wrote a great article on a Florida state run investment pool investing in SIVs.
Stock Market: S&P 100 points from 1995
by Calculated Risk on 3/03/2009 03:49:00 PM
The S&P 500 closed below 700 today at 696 and change. We are back to 1996 prices ...
Click on graph for larger image in new window.
By popular demand I've extend this graph back to 1990.
The low in 1996 was 598.48.
The second graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears". (If not updated right way, Doug should update in a few minutes)
The 2nd worst bear market in the U.S. in 100 years.
Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.
GM Sales off 53%, Toyota Off 40%
by Calculated Risk on 3/03/2009 01:52:00 PM
Headline from MarketWatch: GM U.S. February sales down 53% to 126,170 units
Also from MarketWatch: Toyota U.S. sales down 39.8% to 109,583 units in February
Last month GM reported U.S. sales fell 48.9% compared to January 2008, so the numbers are still getting worse.
Transportation: Record Idle Ships, Trucking Tonnage Increases Slightly
by Calculated Risk on 3/03/2009 01:05:00 PM
From the Journal of Commerce: Idle Box Fleet Reaches 1.35M TEUs (hat tip Vincent)
Idled ocean container capacity on March 2 reached a record 1.35 million TEUs with 453 ships without work as carriers continue to axe services in the face of collapsing cargo volumes and tumbling freight rates across all trade routes.From the American Trucking Association: ATA Truck Tonnage Index Rose 3 Percent in January
The jobless figure, up from 392 vessels of 1.1 million TEUs two weeks ago, is equivalent to 10.7 percent of the world cellular container ship fleet in capacity terms, according to AXS-Alphaliner, the Paris-based consultant.
This is the highest unemployment rate in the history of container shipping and is three times the 3.5 percent jobless figure in the depth of the 2002 bear market.
Click on graph for larger image in new window.
The American Trucking Associations’ advanced seasonally adjusted For-Hire Truck Tonnage Index climbed 3 percent in January 2009, marking only the second month-to-month increase in the last seven months. Still, the gain did little to erase the revised 7.8 percent contraction in December 2008. In January, the seasonally adjusted tonnage index equaled just 104.7 (2000 = 100), its second-lowest level since October 2002. ...
Compared with January 2008, the index declined 10.8 percent, which was slightly better than December’s 12.5 percent year-over-year drop.
ATA Chief Economist Bob Costello said that there was no reason to get excited about January’s 3 percent month-to-month improvement. “Tonnage will not fall every month, and just because it rises every now and then doesn’t mean the economy is on the mend,” Costello said. “Furthermore, tonnage is contracting significantly on a year-over-year basis, which is highlighting the current weakness in the freight environment.”
Ford U.S. Sales Down 46.3% in February
by Calculated Risk on 3/03/2009 12:10:00 PM
Update: From CNBC: Ford Sales Fall Sharply but Match Forecasts
Sales at [Ford] fell 46.3 percent on an adjusted basis ... Ford sold 99,060 vehicles last month, compared with 192,248 the same month in 2008.The decline of 46.3% is a comparison to a year ago February.
In January, Ford reported a 42.1% decline in total U.S. sales compared to January 2008. In December 2008, Ford reported a 32.4% YoY decline. And in November, Ford reported a 31.5% YoY decline (compared to November 2007).
The comparisons just keep getting worse.
Pending Home Sales Index Down 7.7%
by Calculated Risk on 3/03/2009 10:00:00 AM
From the NAR: Pending Home Sales Down but Housing Affordability at Record
The Pending Home Sales Index, a forward-looking indicator based on contracts signed in January, fell 7.7 percent to 80.4 from a downwardly revised reading of 87.1 in December, and is 6.4 percent below January 2008 when it was 85.9. The index is at the lowest level since tracking began in 2001, when the index value was set at 100.This suggests a further decline in existing home sales for the March report (January was the most recent report). Note: there still might be a slight increase in existing home sales in February based on the December Pending Home Sales report.
Lawrence Yun, NAR chief economist, said ... “We expect similarly soft home sales in the near term ... "
emphasis added
Note: Existing home sales are reported at the close of escrow, pending home sales are reported when contracts are signed. The Pending Home Sales index leads existing home sales by about 45 days, so the January report suggests existing home sales will decrease from February to March.
Finally, ignore the "affordability index". That really just tells us that interest rates are low - something we already know.
Fed: TALF to Begin Disbursing Funds March 25th
by Calculated Risk on 3/03/2009 09:25:00 AM
In carrying out the Financial Stability Plan, the Department of the Treasury and the Federal Reserve Board are announcing the launch of the Term Asset-Backed Securities Loan Facility (TALF), a component of the Consumer and Business Lending Initiative (CBLI). The TALF has the potential to generate up to $1 trillion of lending for businesses and households.TALF Terms and Conditions (88 KB PDF)
The TALF is designed to catalyze the securitization markets by providing financing to investors to support their purchases of certain AAA-rated asset-backed securities (ABS). These markets have historically been a critical component of lending in our financial system, but they have been virtually shuttered since the worsening of the financial crisis in October. By reopening these markets, the TALF will assist lenders in meeting the borrowing needs of consumers and small businesses, helping to stimulate the broader economy.
Under today’s announcement, the Federal Reserve Bank of New York will lend up to $200 billion to eligible owners of certain AAA-rated ABS backed by newly and recently originated auto loans, credit card loans, student loans, and SBA-guaranteed small business loans. Issuers and investors in the private sector are expected to begin arranging and marketing new securitizations of recently generated loans, and subscriptions for funding in March will be accepted on March 17, 2009. On March 25, 2009, those new securitizations will be funded by the program, creating new lending capacity for additional future loans.
...
Today the Board also released revised terms and conditions for the facility and a revised set of frequently asked questions. ...
The Treasury Department also released a new white paper outlining efforts to unlock credit markets. On February 10, 2009, the Board and Treasury announced an expansion of TALF to include new asset categories that could generate up to $1 trillion in new lending. Teams from the Treasury Department and Federal Reserve are analyzing the appropriate terms and conditions for accepting commercial mortgage-backed securities (CMBS) and are evaluating a number of other types of AAA-rated newly issued ABS for possible acceptance under the expanded program. The expanded program will remain focused on securities that will have the greatest macroeconomic impact and can most efficiently be added to the TALF at a low and manageable risk to the government.
...
Increased TALF lending and other actions to stabilize the financial system have the potential to greatly expand the Federal Reserve’s balance sheet. In order for the Federal Reserve to conduct monetary policy over time in a way consistent with maximum sustainable employment and price stability, it must be able to manage its balance sheet, and in particular, to control the amount of reserves that the Federal Reserve provides to the banking system. The amount of reserves is the key determinant of the interest rate that the Federal Reserve uses to pursue its monetary policy objectives. Treasury and the Federal Reserve will seek legislation to give the Federal Reserve the additional tools it will need to enable it to manage the level of reserves while providing the funding necessary for the TALF and for other key credit-easing programs.
TALF Frequently Asked Questions (102 KB PDF)
TALF White Paper
Fun reading for all. Here comes another significant expansion of the Fed's balance sheet.