by Calculated Risk on 8/03/2009 04:44:00 PM

From Bloomberg: Banks Urged to Consider Higher Home-Equity Reserves (ht Brian)

U.S. banks may need to boost reserves for potential losses on home-equity loans under guidance issued by the Federal Deposit Insurance Corp. as property prices slump from their peak in 2006.

The regulator, in a letter today to banks and examiners, urged lenders to consider issues such as whether borrowers’ total housing debt exceeds the value of their properties and whether homeowners’ first mortgages have been reworked when determining allowances for losses on the debt.
...
“Failing to properly consider the current effect of more senior liens on the collectibility of an institution’s existing junior lien loans is an inappropriate application” of accounting principles, the FDIC said in the letter.
...
In its letter, the FDIC said “the failure to timely recognize estimated credit losses could delay appropriate loss mitigation activity, such as restructuring junior lien loans to more affordable payments or reducing principal on such loans to facilitate refinancings.”

From the FDIC: Allowances for Loan and Lease Losses in the Current Economic Environment: Loans Secured by Junior Liens on 1-4 Family Residential Properties

The need to consider all significant factors that affect the collectibility of loans is especially important for loans secured by junior liens on 1-4 family residential properties, both closed-end and open-end, in areas where there have been declines in the value of such properties. ...

[D]elaying the recognition of estimated credit losses on junior lien loans secured by 1-4 family residential properties by failing to properly consider the current effect of more senior liens on the collectibility of an institution's existing junior lien loans is an inappropriate application of GAAP. Additional supervisory action may also be warranted based on the magnitude of the deficiencies in this aspect of the institution's [allowance for loan and lease losses] ALLL process. Furthermore, the failure to timely recognize estimated credit losses could delay appropriate loss mitigation activity, such as restructuring junior lien loans to more affordable payments or reducing principal on such loans to facilitate refinancings. Examiners will continue to evaluate the effectiveness of an institution's loss mitigation strategies for loans as part of their assessment of the institution's overall financial condition.

The FDIC wouldn't release a letter unless they felt many banks were delaying the recognition of home-equity losses.

by Calculated Risk on 8/03/2009 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 July (red, light vehicle sales of 11.24 million SAAR from AutoData Corp).

This is the highest vehicle sales since September 2008 (12.5 million SAAR).

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

Although sales were boosted by the "Cash-for-clunkers" program, I think sales would have rebounded some anyway. If "Cash-for-clunkers" is extended, then August will probably be over 11 million SAAR too, but I'd expect sales to falter a little later in the year.

by Calculated Risk on 8/03/2009 03:03:00 PM

From Reuters: U.S. raids Colonial Bank office in Florida (ht Jim the Realtor)

Federal agents working with the U.S. Treasury's Troubled Asset Relief Program (TARP) executed search warrants at two Florida banks on Monday and Colonial Bank (CNB.N) said one of them was its office in Orlando.
...
A spokeswoman with the office of the Special Inspector General for the Troubled Asset Relief Program, which buys assets from troubled financial institutions to stabilize the banking industry, would only say that its agents executed two search warrants in Florida on Monday.

Colonial is operating under a Cease & Desist order, and just Friday reported to the SEC: " ... management has concluded that there is substantial doubt about Colonial’s ability to continue as a going concern."

Colonial has about $25.5 billion in assets and would be the largest bank failure this year. No word on the purpose of the raid.

by Calculated Risk on 8/03/2009 01:17:00 PM

From Bloomberg: Mortgage-Bond Rally May End on Housing Reality, Barclays Says (ht James)

While an S&P/Case-Shiller index for May showed the first month-over-month price increase since 2006 and a 2 percent seasonally adjusted annualized drop, a more-accurate reading probably would have been an annualized decline of 10 percent to 15 percent, [Barclays' analysts Ajay Rajadhyaksha and Glenn Boyd] wrote.

... seasonally adjusted home-price data has been skewed higher during the spring months of this year and last year by an “amplified” version of typical patterns, according to the analysts. More homeowners sell their properties during those months, cutting the share of foreclosed homes being offloaded at distressed prices, as new buyers focus on “desirable neighborhoods” where values hold up better, they said.
...
Data reflecting a reversal of the seasonal benefit, as well as “a tide of new foreclosure sales” as a moratorium on the seizing of homes put in place by banks subsides, will lead to “renewed weakness” in the fall, they said.
...
They project that U.S. home prices will fall an additional 11 percent on average before bottoming next year, bringing the total decline to 40 percent from their peak.

This is similar to the argument Mark Hanson made last week (See: Housing Bottom? No, the Mother of All Head Fakes). I think we will see further price declines in the mid-to-high end bubble areas where the prices have still been sticky.

by Calculated Risk on 8/03/2009 11:19:00 AM

From CBS MarketWatch: Ford U.S. July sales rise 2.3%

Ford Motor said Monday that U.S. July sales rose 2.3% to 165,279 vehicles, reversing nearly two years of monthly year-over-year losses.

Ford said the "Cash for Clunkers" program helped July sales (no kidding).

This is the first year-over-year increase reported by Ford since November 2007.

Notes: The auto companies compare sales to the same month of the previous year (so this is compared to July 2008). Auto sales will be released all morning, and I'll post a saesonally adjusted graph when a summary is available.

by Calculated Risk on 8/03/2009 10:21:00 AM

Private residential construction spending increased slightly in June and is now 63.6%% below the peak of early 2006.

Private non-residential construction spending declined in June, but is only off 6.7% below the peak of last September.

Overall construction spending increased with a boost from public spending.

Click on graph for larger image in new window.

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

Residential construction spending increased slightly in June, and nonresidential spending declined a little. From other data (new housing starts), it appears that residential spending has stabilized and might increase in Q3 - however private nonresidential construction will be falling off a cliff.

The second graph shows the year-over-year change for private residential and nonresidential construction spending.

Nonresidential spending is off 4.8% on a year-over-year basis, and will turn strongly negative as projects are completed. Residential construction spending is still declining YoY, although the negative YoY change will get smaller going forward.

As I've noted before, these will probably be two key stories for late 2009: the collapse in private non-residential construction, and the probable bottom for residential construction spending. Both stories are still developing ...

From the Census Bureau: June 2009 Construction at $965.7 Billion Annual Rate

Spending on private construction was at a seasonally adjusted annual rate of $643.9 billion, 0.1 percent (±1.1%)* below the revised May estimate of $644.8 billion. Residential construction was at a seasonally adjusted annual rate of $246.1 billion in June, 0.5 percent (±1.3%)* above the revised May estimate of $244.7 billion. Nonresidential construction was at a seasonally adjusted annual rate of $397.9 billion in June, 0.5 percent (±1.1%)* below the revised May estimate of $400.0 billion.

In June, the estimated seasonally adjusted annual rate of public construction spending was $321.7 billion, 1.0 percent (±2.4%)* above the revised May estimate of $318.5 billion.

by Calculated Risk on 8/03/2009 10:00:00 AM

PMI at 48.9% up from 44.8% in June. Still contracting (below 50) but contracting at a slower pace.

From the Institute for Supply Management: July 2009 Manufacturing ISM Report On Business®

Economic activity in the manufacturing sector failed to grow in July for the 18th consecutive month, while the overall economy grew for the third consecutive month following seven months of decline, say the nation's supply executives in the latest Manufacturing ISM Report On Business®.

The report was issued today by Norbert J. Ore, CPSM, C.P.M., chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. "The decline in manufacturing was slower in July when compared to June, as the more leading components of the PMI — the New Orders and Production Indexes — rose significantly above 50 percent, thus setting an expectation for future growth in the sector. The Employment and Inventories Indexes are still contracting, but the rate is slowing and they are moving in the right direction. It is also worth noting that the New Export Orders Index shows growth following nine consecutive months of decline, suggesting that the global economy is recovering. Overall, it would be difficult to convince many manufacturers that we are on the brink of recovery, but the data suggests that we will see growth in the third quarter if the trends continue."
emphasis added

As noted, any reading below 50 shows contraction, although the pace of contraction has slowed and new orders suggest some growth later this year.

by Calculated Risk on 8/03/2009 08:56:00 AM

From The Times: UK manufacturing 'pulls out of nosedive' in July

British manufacturing grew for the first time in 16 months during July ...

According to the Chartered Institute of Purchasing & Supply (CIPS), the Purchasing Managers Index, which measures activity in the manufacturing sector, rose from a reading of 47.4 to 50.8 between June and July.

It is the first time the measure has risen above 50, the dividing line between contraction and growth, since March 2008.

David Noble, chief executive of CIPS said: "The manufacturing sector has clearly pulled out of the nosedive it was in earlier this year and is no longer plummeting.”

He said customers had cut inventories so severely in the downturn that they were now in need of new stock ...

The end of cliff diving isn't the same as new growth.

In the U.S., the ISM Manufacturing Index for July will be released this morning, and also July vehicle sales - with sales probably above 10 million units SAAR for the first time this year.

Construction spending for June will also be released this morning.

by Calculated Risk on 8/03/2009 12:32:00 AM

From Nick Timiraos and James Hagerty at the WSJ: High-End Homes Frozen Out of Budding Housing Rebound

Housing is fast dividing into two markets: Sales of low- and moderately priced homes are picking up and values have stopped falling in some parts of the nation. But on the upper end, sales remain mired in a deep slump and price declines are expected to accelerate.
...
The divide between the mass market and the high-end -- generally defined as homes that cost above $750,000 -- partly reflects the effects of Washington's housing-rescue plan, which is producing winners and losers.
...
To be sure, the affluent housing market is substantially smaller than the mass market. Sales of existing homes priced over $750,000 accounted for 2.3% of all sales in the first quarter of this year, compared to 4.4% of the housing market in 2007, according to the National Association of Realtors.

But what percentage of the market in 2005?

The low end is doing well because of first time buyers and investor groups buying properties (see previous post). Prices in the mid-to-high end are stickier and will probably decline for some time.

by Calculated Risk on 8/02/2009 08:32:00 PM

From Carolyn Said at the San Francisco Chronicle: Oakland group buying Contra Costa foreclosures (ht Walt, John)

Oakland's McKinley Partners is betting that low-end foreclosed homes in eastern Contra Costa County will double in value in five years.

The real estate development company has formed a $6 million fund to buy bank-owned homes in Antioch, Pittsburg and Bay Point.

It aims to spend about $100,000 per home, including rehab, and rent them out for $1,200 to $1,500 a month. Then it hopes to sell them for $200,000 each in five years.

McKinley is emblematic of a major force currently propelling the real estate market: investors and speculators snapping up foreclosed homes. Along with first-time buyers, they are a primary source of increased sales volume.

I know investor groups doing the same thing, and they pay cash too. As far as these numbers - good luck. The numbers only make sense at the low end, and rents are falling quickly. It is very unlikely the price will double in five years - or even ten years. As the price increases, investors will be selling properties, keeping prices down.

Think of investor owned properties as being in storage, and being removed from storage and sold as the price increases (although this is different than the investors during the bubble because of the positive cash flow).

There are headaches managing low end rental properties too. These will be high maintenance, and finding tenants with decent credit will be difficult.

A few of McKinley's buying guidelines are interesting:

-- It avoids newer homes in cookie-cutter subdivisions. "If they're all around the same vintage of mortgage, then they can all go upside down at the same time," [Gregor Watson, one of four managing partners] said. ...

-- It avoids higher-priced homes. "As the price point gets higher, rents don't cover (costs)," Watson said. ...

-- It's finding that inventory is limited because lenders are sitting on foreclosures. "Banks own 530 homes in this ZIP code (Pittsburg's 94565) but there are only 15 on the market," said [Paul Staley, president of Staley and MacArthur Real Estate Services] "It creates a hyper-competitive situation."

And how about that comment on ZIP code 94565? Only 15 houses on the market, but 530 REOs according to Staley.

by Calculated Risk on 8/02/2009 04:18:00 PM

Here is a collection of real estate and economic graphs for data released in July ...

Note: Click on graphs for larger image in new window. For more info, click on link below graph to original post.

********************
New Home Sales in June (NSA)

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

Note the Red columns for 2009. This is the 2nd lowest sales for June since the Census Bureau started tracking sales in 1963.

In June 2009, 36 thousand new homes were sold (NSA); the record low was 34 thousand in June 1982; the record high for June was 115 thousand in 2005.

From: New Home Sales increase in June, Highest since November 2008

********************
New Home Sales in June

This graph shows shows New Home Sales vs. recessions for the last 45 years.

"Sales of new one-family houses in June 2009 were at a seasonally adjusted annual rate of 384,000 ...

This is 11.0 percent (±13.2%)* above the revised May rate of 346,000, but is 21.3 percent (±11.4%) below the June 2008 estimate of 488,000."

From: New Home Sales increase in June, Highest since November 2008

********************
New Home Months of Supply in June

There were 8.8 months of supply in June - significantly below the all time record of 12.4 months of supply set in January.

"The seasonally adjusted estimate of new houses for sale at the end of June was 281,000. This represents a supply of 8.8 months at the current sales rate."

From: New Home Sales increase in June, Highest since November 2008

********************
Existing Home Sales in June

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

Sales in June 2009 (4.89 million SAAR) were 3.6% higher than last month, and were 0.2% lower than June 2008 (4.90 million SAAR).

From: Existing Home Sales increase in June

********************
Existing Home Inventory June

This graph shows nationwide inventory for existing homes. According to the NAR, inventory decreased to 3.82 million in June. The all time record was 4.57 million homes for sale in July 2008. This is not seasonally adjusted.

Typically inventory increases in June, and peaks in July or August. This decrease in inventory was a little unusual.

Also, many REOs (bank owned properties) are included in the inventory because they are listed - but not all. Recently there have been stories about a substantial number of unlisted REOs and other shadow inventory - so this inventory number is probably low.

From: Existing Home Sales increase in June

********************
Existing Home Inventory June, Year-over-Year Change

This graph shows the year-over-year change in existing home inventory.

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 (closer to 6 months compared to the current 9.4 months), and that will take some time. Plus remember the shadow inventory!

From: More on Existing Home Inventory

********************
Case Shiller House Prices for May

This graph shows the nominal Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

NOTE: This is not seasonally adjusted.

The Composite 10 index is off 33.3% from the peak, and up slightly in May.

The Composite 20 index is off 32.3% from the peak, and up slightly in May.

From: Case-Shiller House Prices for May

********************
NAHB Builder Confidence Index in July

This graph shows the builder confidence index from the National Association of Home Builders (NAHB).

The housing market index (HMI) increased to 17 in July from 15 in June. The record low was 8 set in January.

From: NAHB: Builder Confidence Increases Slightly In July

********************
Architecture Billings Index for June

"It appears as though we may have not yet reached the bottom of this construction downturn," AIA Chief Economist Kermit Baker said.

The Architecture Billings Index fell more than 5 points last month to a reading of 37.7, after a slight increase in the prior month, according to the American Institute of Architects...."

From: AIA: Architecture Billings Index Declines in June

********************
Housing Starts in June

Total housing starts were at 582 thousand (SAAR) in June, up sharply over the last two months from the all time record low in April of 479 thousand (the lowest level since the Census Bureau began tracking housing starts in 1959).

Single-family starts were at 470 thousand (SAAR) in June; 31 percent above the record low in January and February (357 thousand).

From: Housing Starts in June

********************
Construction Spending in May

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

Residential construction spending fell further in May, and nonresidential spending was up a little (because of private spending on power production), but will probably decline sharply over the next two years.

From: Constructon Spending Declines in May

********************
June Employment Report

This graph shows the unemployment rate and the year over year change in employment vs. recessions.

Nonfarm payrolls decreased by 467,000 in June. The economy has lost almost 5.7 million jobs over the last year, and 6.46 million jobs during the 18 consecutive months of job losses.

The unemployment rate rose to 9.5 percent; the highest level since 1983.

Year over year employment is strongly negative.

From: Employment Report: 467K Jobs Lost, 9.5% Unemployment Rate

********************
June Employment Comparing Recessions

The second graph shows the job losses from the start of the employment recession, in percentage terms (as opposed to the number of jobs lost).

For the current recession, employment peaked in December 2007, and this recession was a slow starter (in terms of job losses and declines in GDP).

However job losses have really picked up over the last 9 months (4.4 million jobs lost, red line cliff diving on the graph), and the current recession is now the 2nd worst recession since WWII in percentage terms - and also in terms of the unemployment rate (only early '80s recession was worse).

From: Employment Report: 467K Jobs Lost, 9.5% Unemployment Rate

********************
June Retail Sales

This graph shows the year-over-year change in nominal and real retail sales since 1993.

The Census Bureau reported that nominal retail sales decreased 10.3% year-over-year (retail and food services decreased 9.6%), and real retail sales declined by 9.7% on a YoY basis.

From: Retail Sales in June

********************
LA Port Traffic in June

This graph shows the loaded inbound and outbound traffic at the port of Los Angeles in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container). Although containers tell us nothing about value, container traffic does give us an idea of the volume of goods being exported and imported.

Inbound traffic was 22.2% below June 2008.

Outbound traffic was 19.2% below May 2008.

There had been some recovery in U.S. exports over the last few months (the year-over-year comparison was off 30% from December through February). And this showed up in the in the May trade report, but the port data suggests exports were a little weaker in June.

From: LA Area Port Traffic in June

********************
U.S. Imports and Exports Through May

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

Imports declined again in May, but U.S. exports were up slightly. On a year-over-year basis, exports are off 21% and imports are off 31%.

From: Trade Deficit Declined in May

********************
June Capacity Utilization

This graph shows Capacity Utilization. This series is at another record low (the series starts in 1967).

"Industrial production decreased 0.4 percent in June after having fallen 1.2 percent in May. ... The rate of capacity utilization for total industry declined in June to 68.0 percent, a level 12.9 percentage points below its average for 1972-2008. Prior to the current recession, the low over the history of this series, which begins in 1967, was 70.9 percent in December 1982."

From: Industrial Production Declines, Capacity Utilization at Record Low in June

********************
Vehicle Miles driven in May

This graph shows the comparison of month to the same month in the previous year as reported by the DOT.

"Travel on all roads and streets changed by +0.1% (0.2 billion vehicle miles) for May 2009 as compared with May 2008."

Year-over-year miles driven started to decline in December 2007, and really fell off a cliff in March 2008. This makes for an easier comparison for May 2009.
From: DOT: Vehicle Miles Flat YoY

********************
Unemployment Claims

The four-week average of weekly unemployment claims decreased this week by 8,250, and is now 99,750 below the peak of 16 weeks ago. It appears that initial weekly claims have peaked for this cycle.

The level of initial claims has fallen fairly quickly - but is still very high (over 580K), indicating significant weakness in the job market.

From: Weekly Unemployment Claims

********************
Restaurant Performance Index for June

"The Association’s Restaurant Performance Index (RPI) – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 97.8 in June, down 0.5 percent from May and its 20th consecutive month below 100.
...
Restaurant operators also reported negative customer traffic levels in June, marking the 22nd consecutive month of traffic declines."

From: Restaurants: 22nd Consecutive Month of Traffic Declines in June

********************
Philly Fed State Conincident Indicators for June

Here is a map of the three month change in the Philly Fed state coincident indicators. Forty seven states are showing declining three month activity.

This is what a widespread recession looks like based on the Philly Fed states indexes.

On a one month basis, activity decreased in 46 states in June, and was unchanged in 1 state.

From: Philly Fed State Coincident Indicators: Widespread Recession in June

********************
Light vehicle sales in June

This graph shows the historical light vehicle sales (seasonally adjusted annual rate) through June (red, light vehicle sales of 9.69 million SAAR from AutoData Corp).

June was about average for the year so far on seasonally adjusted basis, and sales are still on pace to be the worst since 1967.

From: Graphs: Auto Sales in June

********************
Personal Bankruptcy Filings Q2 2009

This graph shows the non-business bankruptcy filings by quarter.

Note: Quarterly data from Administrative Office of the U.S. Courts, Q1 and Q2 2009 based on monthly data from American Bankruptcy Institute.

The quarterly rate is close to the levels prior to when the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) took effect.

From: Personal Bankruptcy Filings increase 40% in June (YoY)

********************
Homeownership Rate Q2 2009

The homeownership rate increased slightly to 67.4% and is now at the levels of Q2 2000.

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 expect the rate to decline to the 66% to 67% range - and not all the way back to 64% to 65%.

From: Q2: Homeowner Vacancy Rate Declines, Rental Vacancy Rate at Record High

********************
Homeowner Vacancy Rate Q2 2009

The homeowner vacancy rate was 2.5% in Q2 2009. This is the lowest vacancy rate since mid-2006, but still very high. A normal rate for recent years appears to be about 1.7%.

This leaves the homeowner vacancy rate about 0.8% above normal, and with approximately 75 million homeowner occupied homes; this gives about 600 thousand excess vacant homes.

From: Q2: Homeowner Vacancy Rate Declines, Rental Vacancy Rate at Record High

********************
Rental Vacancy Rate Q2 2009

The rental vacancy rate increased to a record 10.6% in Q2 2009.

Even there has been a move from homeownership to renting, the surge in available units has been amazing - because of investors buying REOs for cash flow, condo "reconversions", builders changing the intent of new construction (started as condos but became rentals), flippers becoming landlords, or homeowners renting their previous homes instead of selling. See: The Surge in Rental Units

From: Q2: Homeowner Vacancy Rate Declines, Rental Vacancy Rate at Record High
********************

by Calculated Risk on 8/02/2009 01:51:00 PM

First, lifted from the comments on Corus: "Too toxic to fail." by Rob Dawg

On shadow inventory from Reuters: "Shadow" inventory lurks over U.S. housing recovery (ht Denny)

[A] massive supply of unsold homes is waiting in the wings and could easily swamp the recovery before it can gather speed.

"The number of homes listed officially on the market, while still at historically high levels, might be only the tip of the iceberg," said Stan Humphries, chief economist at real estate website Zillow.com in Seattle, Washington.

According to Zillow's latest Homeowner Confidence Survey, 12 percent of homeowners said they would be "very likely" to put their home on the market in the next 12 months if they saw signs of a real estate market turnaround, 8 percent said "likely," while 12 percent said "somewhat likely."

There are several categories of shadow inventory:

REOs. There are bank owned properties that have not been put on the market yet. Several sources have told me the number is growing - no one knows why except possibly for accounting reasons (the banks might have to take an addition write down when they sell the property).

Foreclosures in process. The delinquency rate has continued to rise, and this will probably lead to many more foreclosures later this year. The number of foreclosures depends somewhat on the success of the modification programs. Last year many delinquent homeowners listed their homes as "short sales" - so those homes were not shadow inventory, however fewer delinquent homeowners are listing their homes now as they try to work with their lenders on a modification. Some percentage of these homes are shadow inventory.

New high rise condos. These properties are not included in the new home inventory report from the Census Bureau, and do not show up anywhere unless they are listed.

Homeowners waiting for a better market. This was the group mentioned in the Reuters story (the article also mentioned foreclosures). These are homeowners waiting for better market conditions to sell.

Inventory is usually the best metric to follow for the housing market - and according to recent releases inventory is declining for both new and existing homes - however shadow inventory clouds this picture.

by Calculated Risk on 8/02/2009 10:49:00 AM

From Becky Yerak at the Chicago Tribune: Corus Bankshares Inc. on cusp of crisis (ht Walt)

[A] major hurdle for the [FDIC] is that $7.07 billion-asset Corus, with only 14 offices in the Chicago area, has operated more like a real estate investment company than a traditional bank.

As a result, bankers like John Kanas, chief executive of BankUnited, believe the FDIC would have a tough time finding banks eager to swallow Corus whole.

"There's no franchise value to the bank at all," he said, citing its limited branch network, a reliance on high-cost deposits and an unsustainable business model.

"It was a bank created around the asset side of the balance sheet: 'Let's go make a lot of loans and figure out a way to fund them later,' instead of a bank that had a valuable franchise of deposit collection and was looking for a place to put those deposits," Kanas said.

The article discusses why it is has been difficult to find a buyer for Corus. There is tremendous uncertainty on the asset side (see this article today in the Las Vegas Sun on the Streamline Tower), and the new proposed rules for private-equity firms has made bidding for assets of failed banks less attractive.

This is why the FDIC is discussing splitting failed banks into two pieces, and then selling the deposits and branches to another bank, and many of the assets to PE firms (or create a new RTC).

There is much more in the article ...

by Calculated Risk on 8/02/2009 08:54:00 AM

Note: According to a recent report, workers are starting to exhaust the extended unemployment benefits. The National Employment Law Project estimates 0.5 million workers will have exhausted their extended benefits by the end of September, and close to 1.5 million by the end of 2009. Unless the unemployment rate starts to decline, the numbers will continue to grow rapidly in 2010.

Treasury Secretary Geithner was on This Week with George Stephanopoulos today and touched on unemployment benefits. A few excerpts from the transcript:

STEPHANOPOULOS: What are the chances we're going to see a second dip later this year?

GEITHNER: That's something we're very focused on, again. We need recovery to be built on private demand, private spending. Businesses taking a chance again on the American economy. Putting investments to work. Starting to rebuild their employment base. That's the ultimate test for recovery. And a very important thing for us is to make sure we're sticking with this until we're very confident we have a strong private sector led recovery in place.

STEPHANOPOULOS: And what are you looking at that would give you some cause for concern that we could slip back.

GEITHNER: Well, I don't think you can see that risk now, again. In the stimulus program and what we've done in the financial sector are designed to have sustained impact. Again, the damage we had done to our economy was so great that it was just going to take a long sustained effort.

STEPHANOPOULOS: And that means unemployment will remain high for the rest of this year. At the same time we're seeing reports that up to 1 and a half million people could be losing their unemployment benefits by the end of this year. Does that mean that the Administration is going to have to look at extending unemployment benefits again?

GEITHNER: I think that is something that the Administration and Congress are going to look very carefully at as we get closer to the end of this year . And that's going to be one important thing to look at.

STEPHANOPOULOS: We already know that a million and half people are going to lose their benefits don't we?

GEITHNER: Again the most important thing we need people to understand is working with the Congress we're going to make sure we do enough to bring this economy back. But you know our job is not just to repair the damage done to this economy, bring growth back....
emphasis added

Geithner discussed several other subjects including the need to decrease the budget deficit.

by Calculated Risk on 8/01/2009 10:28:00 PM

An update: the following graph shows the decline in real GDP (quarterly) from the previous peak since 1947. GDP is now 3.9% below the recent peak. In terms of declines in real GDP, the current recession is the worst since quarterly records have been kept (starting in 1947).

Note: This includes the downward revisions to the previous quarters.

When the red line is at zero it indicates that that quarter is at an all time high in terms of real GDP.

It will be interesting to see how long it takes for real GDP to reach the pre-recession peak. With a a sluggish recovery, and assuming no more cliff diving, it could take until sometime in 2011.

Click on graph for larger image in new window.

by Calculated Risk on 8/01/2009 06:30:00 PM

The big question of the week was: "Are house prices near the bottom?"

My feeling has been that house prices are probably close to the bottom in the lower priced bubble areas with heavy foreclosure activity (Lawler's "de-stickification"). Inventories are very low in many of these areas, and activity has been fairly high as first time buyers and investors buy distressed properties.

However it appears there are more foreclosures coming, and the level of inventory will be the key to future price declines.

My view is that mid-to-high priced bubble areas - with far fewer distressed sales than the low-to-mid priced areas, and much higher inventory-to-sales levels, and few move-up buyers - will see continued real price declines, although the pace of price declines will probably slow.

That still seems reasonable, and it depends on location. Here is a look as tiered house price indices from Case-Shiller to see if the lower priced areas have fallen further than the high priced areas.

All graphs use the seasonally adjusted indices and nominal prices (not inflation adjusted).

Click on graph for larger image in new window. The first graph is for Phoenix. The low priced tier has fallen the furthest, but the high tier price range isn't very high - and is impacted by the mix of houses sold. Note the price range of the tiers changes by city.

The second graph is for Miami. Here is appears that all tiers are now at about the same level.

The third graph is for Los Angeles. Once again the low end area has fallen the furthest, however the high tier starts pretty low for Los Angeles because of the mix of homes that are selling. So this might be misleading for the mid-to-high end.

This graph is for Washington, D.C.

This graph is for Boston. The pattern is slightly different - the low end is still above the mid and high tiers.

Next up is San Diego. Although the low end tier has fallen the furthest, the high end tier pricing is pretty low for San Diego because of the mix.

The last graph is for San Francisco and show the the low end has increased more than the mid-to-high tiers, and has also fallen further.

This was an interesting exercise (at least for me!), but I'm not completely comfortable with the tiered pricing because the buckets are impacted by the mix of homes sold.

by Calculated Risk on 8/01/2009 03:35:00 PM

From the NY Times: Prolonged Aid to Unemployed Is Running Out

Over the coming months, as many as 1.5 million jobless Americans will exhaust their unemployment insurance benefits, ending what for some has been a last bulwark against foreclosures and destitution.

... laid-off workers in nearly half the states can collect benefits for up to 79 weeks, the longest period since the unemployment insurance program was created in the 1930s. But unemployment in this recession has proved to be especially tenacious, and a wave of job-seekers is using up even this prolonged aid.

Tens of thousands of workers have already used up their benefits, and the numbers are expected to soar in the months to come, reaching half a million by the end of September and 1.5 million by the end of the year, according to new projections by the National Employment Law Project, a private research group.

The National Employment Law Project report breaks down the extended benefit programs by state. The programs are triggered by the state unemployment rate. About half the states qualify for 53 weeks on top of the regular 26 weeks for unemployment benefits. Other states qualify for 46, 33 and 20 weeks of extended benefits.

From the report:

There are now an all-time high of 4.4 million Americans who have been out of work for more than six months, up dramatically from 2.6 million in February. That translates into 29% of jobless workers who have been out of work for six months, a record since data were first reported in 1948.

Here is a graph I posted earlier this week of the number of workers who have exhausted their regular benefits:

Click on graph for larger image in new window.

The blue line is the number of workers unemployed for 27 weeks or more. The red line is the same data as a percent of the civilian workforce.

According to the BLS, there are almost 4.4 million workers who have been unemployed for more than 26 weeks (and still want a job). This is 2.8% of the civilian workforce.

Right now very few workers have exhausted their unemployment benefits, but there is tidal wave coming. The Law Project estimates 0.5 million workers will have exhausted their extended benefits by the end of September, and close to 1.5 million by the end of 2009. Unless the unemployment rate starts to decline, the numbers will continue to grow rapidly in 2010.

by Calculated Risk on 8/01/2009 01:18:00 PM

From Costar: Post Office Looking at Consolidation of 3,243 of its 4,851 Largest Branches and Stations (ht John)

The Postal Service sent a notice to American Postal Workers Union executives this summer that it was considering consolidation options in every major metro market in the country and would consider closing 3,243 of its 4,851 largest branches and centers in the review process. ... The review process was to last most of the summer ... but they want the consolidation to occur by October 2010.
...
According to USPS records, it owns 8,546 facilities totaling 219.6 million square feet and leases another 25,272 locations totaling 912.2 million square feet. ...

[T]he USPS could be studying the consolidation of more than 14 million square feet of retail/office/industrial space across the country. To put that in perspective, 14 million square feet would be the equivalent of about all of the vacant retail space in a market such as Boston or Cleveland or Denver or the Inland Empire or Tampa.
...
In May, the U.S. Government Accountability Office (GAO) issued a report en titled "U.S. Postal Service - Network Rightsizing Needed to Help Keep USPS Financially Viable." The GAO study criticized the USPS for failing to take the necessary steps to remain viable, such as "rightsizing its retail and mail processing networks by consolidating operations and closing unnecessary facilities," and "reducing the size of its workforce."

Here is the GAO report:

Network rightsizing by consolidating operations and closing unnecessary facilities is likely to be only one of many steps that USPS will need to take to remain financially viable in the long run. ... We recognize that USPS faces formidable resistance to closing and consolidating facilities because of concerns about the effects of such actions on service, employees, and local communities.

Click on chart for larger image in new window.

The postal service has already reduced their footprint a little since 2003 as shown in the chart from the GAO.

But the GAO report suggests the next reductions may be much more significant. How about another 14 million square feet of vacant retail space on the market?

by Calculated Risk on 8/01/2009 08:00:00 AM

The FDIC closed five more banks on Friday, and that brings the total FDIC bank failures to 69 in 2009. The following graph shows bank failures by week in 2009.

Click on graph for larger image in new window.

Note: Week 1 on graph ends Jan 9th.

The pace has really picked up recently, with the FDIC seizing almost 5 banks per week in July, and with 5 months to go, it seems 125 to 150 bank failures this year is likely.

The current pace suggests there will be more failures in 2009 than in the early years of the S&L crisis. From 1982 thorough 1984 there were about 100 failures per year, and then the number of failures really increased as the 2nd graph shows.

There were 28 weeks during the S&L crisis when regulators closed 10 or more banks, and the peak was April 20, 1989 with 60 bank closures (there were 7 separate weeks with more than 30 closures in the late '80s and early '90s).

The 2nd graph covers the entire FDIC period (annually since 1934).

For a graph that includes the 1920s and early '30s (before the FDIC was enacted) see the 3rd graph here.

Of course the number of banks isn't the only measure. Many banks today have more branches, and far more assets and deposits.

With Colonial (about $25.5 billion in assets), Guaranty (Texas, with close to $15.4 billion in assets) and Corus ($7.7 billion) all on the ropes, the dollars could really add up later this year. Corus and Guaranty will probably be seized in the next few weeks.

The FDIC era source data is here - including by assets (in most cases) - under Failures and Assistance Transactions

The pre-FDIC data is here.

by Calculated Risk on 7/31/2009 11:59:00 PM