OT but still RE related.
Just talked to the brother-in-law who is in commercial RE. He is working his ass off holding down two jobs
Boston and DC. Can't hire help, losing experienced help and business is booming. Maybe in the DC area commerical will take up the slack in residential?
Very informative. As noted in nominal terms we are definitely back to pre-bubble sales levels, but isn't the picture actually a bit worse due to growth in the economy?
In terms of the role new housing is playing in the economy, it's almost certain we're back to 96. It's possible we've already returned to the levels of the tail end of the last collapse, which is rather jarring at this stage, at least from my perspective.
Lindsey notes that 100,000 house starts in 94 is larger than 100,000 house starts in 07 with an economy that is so much larger...and why some resort to a normalization (eg %gdp) to get a better picture of the real significance of these bald numbers.
Ok, and there may be other distortions too: size of house, cost of house (with all those fancy do-dads or bare?), distributions (1 fancy house or 10 semi-detached condos?)...
Will it look like sunny 82 or overcast 91 for the spring selling season?
Hard to believe that nano-tubes (whateva) are going to pick up the baton from housing and reinject the economy with some vitality. Way easier to believe that the half dozen years of air that has been pumped into the economy will be expelled as we make our way back to trend.
And way easier to believe the current downward house price movement will precipitate more as recent gainers sell off now in hopes of avoiding lower prices later.
HD indicates that the remodeling business will also be taking a big hit this year.
NEW YORK (CNNMoney.com) -- Home improvement retailer Home Depot said early Wednesday that a recovery in the battered housing and homebuilding market is still as much as a year away, and warned that its sales and earnings will take a hit.
The company said it doesn't expect residential construction and the housing market to improve until late 2007 or early 2008 and that current fiscal-year earnings are expected to fall 4 to 9 percent. Analysts surveyed by earnings tracker First Call had forecast that earnings excluding special items would fall only 2 percent to $2.78 a share in the current fiscal year.
Anony, the nanotube reference is a proxy ("whateva") for any industry ( size: $100B you say) that is going to replace housing as the driver.
Against this view (the driver model, that purports that there are a few key industries that pull the rest of the economy along) there is the view that, no, we have a balanced, diverse economy that has a multitude of driving points, that this is evidenced by employment stats that show construction and manufacturing jobs have been replaced by 'professional service' jobs.
It is a view that was not current when the housing market was booming. A convenient and, in my view, polyanna view.
New sales are tallied at signing. Used home sales are tallied at closing. There is a gap of up to several weeks in the timing of the two. Pending sales of used homes are closer to new home sales in timing. New home sales were up in December, which in timing is roughly in line with the rise in used home sales in January. We also need to take into account that both series are subject to substantial revisions. New sales have been revised down about 90k (annualized) over the past 2 releases.
Jim - I've been on the road and just had a chance to review the existing home sales report and the GDP revisions.
Existing homes were unbelievably bad because of the concentration of price and sales drops in the west. In every region, median and average sales prices were below 2005. The logical conclusion is that those high CLTV loans written in 2005 and resetting in 2007 are mostly underwater which will keep default rates rising. Worse yet, because of bracket compression the 75th percentile loans can be expected to take higher losses than the 50th or 25th percentile.
In terms of estimating portfolio losses, regional concentrations are very significant, because if the creditor must take the collateral and try to clear debt by selling it, the creditor will take a much higher loss in a region in which such homes are concentrated.
It was dreadful, honestly. Btw, one pretty successful model used in the past to predict losses assumed that every loan in which the borrower is underwater defaults.
Average Joe, thanks for catching the typo - it's a pain to fix on a graph, so I might ignore it!
MaxedOutMama, I think that is a good first approximation for defaults (every borrower underwater defaults). That is why the bubble areas will probably get hit really hard, and not just the subprime markets.
"Recession is becoming in my opinion a rather rare event, because the government has learned to manage the economy better," said Keitaro Matsuda, senior economist at Union Bank of California in San Francisco.
And this from Dr. Leamer:
"The economy is percolating along pretty well except for the housing sector," said Edward Leamer, director of the UCLA Anderson Forecast, adding, "We don't see anything in the data that we monitor that suggests the economy is having any real trouble."
Meanwhile housing is in recession, manufacturing is in recession, nonresidential investment appears headed for recession ... luckily consumers remain "remarkably resilient".
"Recession is becoming in my opinion a rather rare event, because the government has learned to manage the economy better," said Keitaro Matsuda, senior economist at Union Bank of California in San Francisco.
That's not really an opinion, is it? Business cycles all over the world have lengthened quite a bit in the last 30 years or so. Although I suppose there's another answer than governments have gotten better at managing the economy, but that would seem to be the best explanation.
Steve, I think it is a fact (fewer recessions looking back over the last 25 years), and an opinion looking forward. Delong had some comments on this today.
There is good news and bad news for NovaStar. The good news is that they managed to get a securitization done. The bad news is that they had to eat a lot more of it than usual. Looks like they couldn't sell anything rated worse than A. Here's the last few syndications, date, total amount and amount retained by NovaStar
I am most interested in what's happening in the credit markets. The recent discussions on sub-prime and CDS around them were fascinating.
To those in the know - what data should be tracked to know if the repricing of credit is spreading to other grades in the debt market - better "quality" mortgages, LBO junk bonds, etc.?
I am perplexed how this squares - it seems prime banks lend to hedge funds so that they can lever up - the hedge funds then write insurance on credit defaults - the prime banks and other investors of MBS/ABS buy this insurance. So aren't the prime banks really insuring themselves???
All is hunky dory when there are no claims and then the models work well too. What happens when there is a dislocation as we have seen over sub-prime over the past several weeks? Who ultimately in this chain takes the hit to capital?
Helicopter Ben to the rescue (singing out of the Bies hymnal):
"Subprime Mortgage Perceived Risk Decreases After Eight Days
2007-02-28 13:33 (New York)
Feb. 28 (Bloomberg) -- The perceived risk of owning low-
rated subprime mortgage bonds lessened for the first time in
nine days, derivatives suggest, after Federal Reserve Chairman
Ben S. Bernanke said the overall home loan market is healthy.
An index of credit-default swaps on 20 securities rated
BBB- and created in the second half of 2006 rose 1.2 percent
today to 63, according to Deutsche Bank AG. The ABX-HE-BBB- 07-1
index, which fell earlier in the day, had dropped by more than a
third since trading started Jan. 18.
There's not much indication at this point that subprime
mortgage issues have spread into the broader mortgage market,
which still seems to be healthy,'' Bernanke said in
congressional testimony today.It's a concern, but at this
point we don't see it as being a broad financial concern or a
major factor in assessing the course of the economy.''
Ken Heebner played the real estate bull market about as well as anyone. He cleaned up on REITs and homebuilders. He's got a different perspective than the "see no evil" crew at the Fed:
"Heebner Says Subprime-Loan Defaults Will Hurt Economy (Update1)
2007-02-28 13:38 (New York)
Feb. 28 (Bloomberg) -- Kenneth Heebner, the manager of the
top performing real estate fund over the past 10 years, said the
economic damage from high-risk mortgage defaults is only going
to get worse.
We have a trillion dollars of subprime mortgages and
we're going to have huge defaults,'' Heebner, 66, said in a
telephone interview today from his office in Boston.If you're
looking at the housing market, it's not the darkest before dawn,
it's the darkest before pitch black,'' Heebner said.
Heebner, cofounder of Capital Growth Management LP, said
the market for subprime loans could ``shut down'' as U.S.
mortgage companies including Freddie Mac stop buying them.
Delinquencies and defaults are the highest in at least seven
years, according to a Feb. 22 report by Barclays Capital. U.S.
economic growth will slow but not go into a recession, he said."
On the "Durable Goods" chart accompanying this article, please let me call your attention to a couple of points. Between December 2005 and January 2006 durable goods orders exhibited the same behavior as from December 2006 to January 2007. So why is this an indication that manufacturing is in recession now, when it wasn't the last time the same thing happened?
Point 2, although the December-to-January durable goods orders dropped, December 2006 orders were higher than December 2005, ditto with January 2007 over January 2006. In what way is this an indication that manufacturing is in recession?
the prime banks and other investors of MBS/ABS buy this insurance.
Do we even "know" this? I mean, I know apparently some people think they know this. I am still not sure I know this.
I do know that prime banks, for instance, who hold whole loans have purchased insurance on them through credit-default swaps with big, highly-rated couterparties like PMI. I have not recently read the regulations regarding such things, but I'm having a hard time believing that big prime banks with big whole loan portfolios are getting away with buying credit insurance from some murky unrated hedge fund. I can't see the regulators considering that risky a transaction being a valid reason to ease up capital requirements. Perhaps I am naive and an expert in CDS will tell me different.
But I get back to a question I asked a long time ago. Why is any bank buying credit insurance on a security? How bloody "secure" do the damn things have to be? How much yield do you spend on credit enhancement before you have no net yield?
If you aren't a regulated bank and you aren't buying the AAA stuff, well, then maybe that's different.
Even so, the vast majority of the CDS market is not protection buying on the part of the actual owner of the credits in question. It can't be. The numbers don't add up.
First a comment. Your blog and your comments deserve a lot of credit for what I have read for more than a year. When every media was saying, quoting or reproducing about housing that "the worst is over" you remained cautiously pesimistic with arguments.
Your first graph clearly indicates that new home sales increased steadily since the 91 recession. Rigth now, new home sales are still "buoyant" considering a historic perspective from 1971 as your graph provides. You cautiously refer to next spring results without trying to predict how it will result. If new home sales return to the "normal" rate during the last 40 years we would expect disappointing sales this spring, the next spring and the following. Unless there are demographic factors pushing demand above the average and considering credit standards going back to the "normal" in previous years I would expect new home sales to slow down for several quarters.
If you read the story, it also referenced the ISM survey which has a very good track record as a forecasting tool over a long period of time. It has been below 50 for 2 of the last 3 months, with a below 50 reading indicating a contraction of economic activity in mnf. Chicago PMI has been below 50 for two months. Philly Fed is just a hair above zero and was negative in December. Industrial production has been negative 4 of the last 5 months, capacity utilization has fallen every month but one since August. About the only one I can find that suggests expansion is the Empire State Mnf Survey. What are mnf data series are you looking at that suggest expansion?
Market is not having a stellar day recovering- wonder why?
skytrekker
But is it really that stellar? Looking at MarketWatch it shows the dow up 62 points about 1/2 hour before the close. That's only about 15% of what was lost yesterday. The NASDAQ is now up a paltry 9.75 which I think is only about 10% of what was lost yesterday.
I'm not surprised the markets are up today as there are lots of folks out there who are still going to buy on the dips and they see this as a great buying opportunity. But considering how far down they were yesterday, we didn't recover all that much.
When that auto parts manufacturer blew up last year (Delphi?) it defalted and it turned out the CDS trading on its bonds covered ten times the value of the bonds. I thin we talked about that here, how they had to resolve the issue because so many holders of the CDS didn't have the bonds to present for payment.
They're being traded the same way people in Chicago trade hog bellies, but really have no interest in hog bellies being delivered to their door.
So the CDS market is a measure of the "dispersion" of mortgage risk kind of like OTB parlors are a measure of the "dispersion" of racehorse ownership risk?
I left this message in the previous thread but as you're still making the same comparison, I'll rephrase.
YoY is immaterial in determining recessions. The NBER's recession is a decline in the economy, with the beginning being the peak from which the decline descends. By definition, then, the performance at the beginning of a recession is going to be higher YoY.
Your first chart is the most telling. it is saying that, based on historical relationships, we are going to have a recession, or "it is different this time".
I'm a huge football fan, and it occurs to me that CR & Tanta are like a great team of game announcers -- CR's play-by-play, Tanta's color commentary. Go Team!
Citigroup has signed a deal to buy subprime wholesale giant Argent Mortgage, Orange, Calif., from ACC Capital Holdings, a source familiar with the matter has told MortgageWire.
arbogast, Citi's move could be defensive. They may already have a big exposure to Argent via loans or EPDs on CITI sponsered MBS. It can minimize your losses sometimes to take control and deal with the problem in a businesslike manner rather than force a bankruptcy.
A little bit of color that no one has commented on yet. It looks like the worst hit area is the mid priced homes. New homes sales priced between $200K and $400k are down 35.0% year over year, while luxury homes (over $400k) are down 18.8% and starter homes are down "only" 9.1% year over year. This is more evidence that the implosion of the sub prime market has not really affected things yet. After all most sub prime borrowers are poor folk. Presumably they are going to be more concentrated in the low end starter homes than in the luxury area. Obviously the definition of starter and luxury home varies by grography, but the general point should hold. Another interesting factoid from todays report is sales and inventories by stage of competion. Sales of houses not yet started were down 20.0% yr/yr and sales of thoses started by the builder were down a whopping 40.6%. However, sales of already completed homes (i.e. builders models)were actually up 9.5%. It looks to me like builders were trying to clear out their bloated inventory. However they were not really that successful since completed home inventories are up (get this) 47.1% from a year ago. The inventory of houses under construction are down 12.3% and raw improved lots (i.e.e inventory fo houses for sale that are not started) are down 2.2%. Seems to me we still have a ways to go on the down side.
This looks like a rescue financing. It looks like their existing warehouse lenders are bailing or cutting their exposure and Citi is stepping into that role to inject liquidity. Importantly, ACH's majority shareholder, who I believe is an individual, is throwing in an unspecified amount of capital. I'm sure he wasn't eager to do this and it was probably a condition of Citi's participation. In addition, as part of the deal, Citi has an option to purchase the wholesale origination and servicing biz, provided that it meets certain operating milestones. We don't know what price they are paying, but one can presume given the other circumstances in the deal, it is not top dollar. My guess is that they would be loath to sell the servicing business at this point in time, if they had other choices, as that is probably their most consistent cash generator (Tanta I'd be interested in your thoughts on that).
Time will tell whether this was a good deal for Citi. The unusual nature of the terms suggests that warehouse lending is getting hard to come by and more expensive. But the deal does say indicate that at least Citi will step up if the terms are right.
After all most sub prime borrowers are poor folk. Presumably they are going to be more concentrated in the low end starter homes than in the luxury area.
You sure about that? Any data to back that statement up?
Automotive is in a very serious funk and that is one of the largest sectors of mfg. 'Yes' Toyota is doing well along with other transplants to a lesser degree... but their supply chain is nowhere near as deep here as the domestics. Loss greater than gain resulting in net loss in this sector.
Housing related mfg is slowing too - especially appliances and building components & materials. If lawn & garden is slow this spring, that will add an additional drag. I sell into all these industries & 'housing starts' are a key predictor of future demand. Starts continue to head down. Not good.
Telecomm & IT never really recovered completely from dotbomb... at least not domestically.
Whats up? Energy related anything. I was reading in SME (Mfg Engineering) that the oil patch equipment mfg is booming - I believe it. Posted a link to Steve about this a few days ago.
Plus I have friends who work building power transmission & distribution infrastructure - also booming.
Defense is still hot too, hotter than what we read in the press. Not a conspiracy, just not sexy & visible to reporters.
And there is always medical devices & pharma. They never seem to slow.
Overall less booming than busting right now & you can feel it if you are like me, in the business.
It looks like the worst hit area is the mid priced homes. New homes sales priced between $200K and $400k are down 35.0% year over year, while luxury homes (over $400k) are down 18.8% and starter homes are down "only" 9.1% year over year.
This could also be a result of people moving down - evacuating the middle.
I see that in my neighborhood from time to time (older working class neighborhood)... Folks move upscale then when things get too tight, they fall back to smaller more modest homes.
We had four homes in my neighborhood sell in the last month, more than in the previous four months. Meanwhile little is moving 'up on the hill'... where the nicer middle & upper middle class homes are.
BTW - I've been through that myself when my parents started a biz... sold their very nice executive home & bought a cheap shoebox ranch, the equity they freed up put food on the table for two years while the biz took off.
Thing is you have to be able to SELL the nicer home to make the fall back work.
My sense is that subprime borrowers are certainly not necessarily "poor folk," if by that you mean, say, people who earn 50% or less of the area median.
Subprime borrowers are, basically by definition, people with chronic cash-flow problems. In some cases that's just because they are commissioned or small-business owners whose income is sporadic or who do a lot of commingling of business and personal debt, which can sure be hell on the FICO score. By and large, though, they tend to live at or rather above their means, whatever those are. Subprime borrowers are the classic paycheck-to-paycheck, no reserves in the bank borrower. That said, I've seen quite a few who make substantially more money than I do, and while I've never claimed to be overpaid, you couldn't call me poor.
The overlap between low income and subprime credit is so frustrating for so many of us because a low FICO can easily result from a lack of credit usage, not irresponsible credit usage. These folks aren't over the ears in debt; in fact, they've never had any. They live in a cash economy, or perhaps they're just too young or too unassimilated to have any exposure to credit-grantors other than the rent-to-own store (god help them) or some other party who doesn't report to the bureaus. A lot of these folks got put into toxic subprime loans when they should have been put into an FHA loan, which doesn't have abusive terms, but which also doesn't let the broker collect five points. But that's another day's argument.
In any case, the "subprime jumbo" is a real phenomenon, and so while I would agree that the biggest part of the subprime segment is moderate income (80-120% of median or thereabouts), a substantial portion of it is not. They not only shoot horses, they also repo Beemers.
Brian, I'd be shocked to hear that Citi will pay the big bucks for Argent's servicing platform ($65B--it's either high-fee specialty stuff or it's just barely big enough to be profitable unless the credit crunch makes it so by extending durations). Nonetheless, it's hard for me to see what of value is left if Citi takes the wholesale lending and the servicing platforms, or how those retain much value for Citi as a separate business. I'd agree that the servicing portfolio probably has value to Citi insofar as it's filled with Citi-owned loans.
In some cases that's just because they are commissioned or small-business owners whose income is sporadic or who do a lot of commingling of business and personal debt, which can sure be hell on the FICO score.
MoM, CR. Absolutely no way that 100% of underwater borrowers default. MoM, what is the source of this 100% "model?" In Houston and Tulsa and Oklahoma City 100% of recent FHA/VA borrowers were underwater in the late 1980's, with fairly high job loss. While FICO scores for FHA were higher back then (or would have been, had they been in common use) FHA was always more your A- business than your prime business. Yet foreclosure rates never got near 100%. There were subdivisions in Houston built in the mid 80's where essentially everyone bought just before the bust, most with FHA or VA (share of govt. backed purchase loans in TX was almost 50% back then) and almost everyone in the neighborhood was underwater. I'll bet you couldn't find a single subdivision where foreclosure rates approached 50%. More recently, loan termination papers published in academic journals by guys like Anthony Pennington-Cross don't find foreclosure rates over 25% for delinquent subprime borrowers in flat appreciation places like MI or OH. A whole economics literature was spawned in the 1990's by the fact that underwater borrowers in the 1980's DIDN'T go to foreclosure all that often. In the mid 1990's I was underwater, as was probably about 20% of the building I lived in, yet we didn't have a single unit go under. In high appreciation environments you get foreclosure rates under 1% for prime and maybe 5% or less for subprime, in flat markets you get 2 to 3% for prime and maybe 20% for subprime, and I'll bet you that not even in San Diego or Detroit will you see subprime foreclosure rates go above 50%.
mort_fin - the 80s in Houston was pretty unusual. Similar to my experience with the farm crisis... in both cases if you had a loan at all you could about bet you were 'underwater'.
Maybe in times where being 'underwater' is the exception & not the norm, it makes a better predictor.
mort_fin, I wrote that wrong and thanks for pointing that out. I meant that households underwater is probably the best predictor of defaults (as opposed to say FICO scores). There is some excellent research on this topic. But I incorrectly implied that all underwater borrowers would default, and that is not correct.
Mort_fin - I concur. It's a method that works sometimes but not in a situation like this. I have always believed that it worked only because in traditional lending, it is extremely rare to have a borrower underwater and if that borrower gets underwater, it's because the borrower has exceptional problems and circumstances. I'm on a slow connection; when I get time I will look up the article I found that describes some different techniques, because it is an interesting problem.
However, if you take high DTI's correlated with being underwater, that is truly predictive. Of course, we have carefully done all these no-ratio loans so that we don't have any DTI's to work with.
That's probably why some of the companies are stepping up their QC by going through their stated loans and pulling tax returns on borrowers who aren't behind - they're trying to find them first and kick them back.
their FICO truck is empty. It is a "thin file" and essentially unscorable. You have to get a couple or 3 trade lines active and happy to fill the FICO tank. But look in any 18 year old's mailbox (if you are strong of heart) - they are all filled with credit card solicitations. It doesn't take long to get a score (Good or bad).
This time may be different. Since the credit bubble lending has been national at the 100%LTV rate this is creating a much bigger pool of possible foreclosure and short sales then the 80's or early 90's. I was upside down in the early 90's but I had made a 30% downpayment so I waited it out and sold for a profit by early 99.
The other point to keep in mind is that in Calif the size of these 100% LTV mortgages are huge compared to Texas in the 80's. Its not uncommon here in the bay area to have buyers doing a zero down on 800K to 1.5M dollar homes.
Probert, If you are Casey Serin you quit your day job, buy 8 houses in 8 months (and do some cash out deals along the way to pay yourself a "salary") and your FICO score goes to 700+. Go to his site and look up his post on his FICO score.
Kirk Spencer,
You indicated that YoY GDP comparisons are not useful in determining recessions? You meant predictive value, correct? I don't think we're in recession or even in the tipping point right now...6-9 months from now, I think that's another story.
Thanks for your insight.
No, not predictive. Sebastian's been saying that one of the ways we know this isn't a recession is that the GDP has grown in comparison to last year at this time. It's a false measure.
Note that he's made good points in other aspects of the discussion of "if and when" on an upcoming/current recession. I disagree with the word "all" when he uses unemployment as a predictor of recessions, but it's more common than not. But in this case, it's like saying, hmmm, try this analogy:
She can't be losing weight, she weighs more than she did this time last year. Since it ignores a possible peak within the last 11 months, it's a null argument.
I agree with that. I always thought unemployment rates were trailing indicators.
The liquidity issue cannot be overstated at this point. So much of our economy relates to selling houses and cars on credit.
If you review historical information, you'll see that in almost all recessions there's a climb in unemployment prior to the recession. If you stop there, then you could conclude unemployment is a leading indicator.
I happen to disagree for two reasons.
The first reason is that the only unemployment numbers that don't get revised based on subsequent data are the initial and ongoing claims numbers. All other rates are adjusted after the fact. In other words, for all but those two numbers what we have as a number "now" may be quite different from what someone six months ago may be told.
The second reason is that even for the two "good" numbers, the way we measure now isn't how it was measured then. Qualifying for unemployment has changed several times, as has the requirements for continuing unemployment -- and how long one can continue to receive unemployment even when meeting all the requirements.
Thus I remain skeptical about the reliability of -- much less the requirement for -- recessions being preceded by worsening unemployment rates.
typo jan new sales chart..2006 twice.
Awesome stuff cr thanks
OT but still RE related.
Just talked to the brother-in-law who is in commercial RE. He is working his ass off holding down two jobs
Boston and DC. Can't hire help, losing experienced help and business is booming. Maybe in the DC area commerical will take up the slack in residential?
Very informative. As noted in nominal terms we are definitely back to pre-bubble sales levels, but isn't the picture actually a bit worse due to growth in the economy?
In terms of the role new housing is playing in the economy, it's almost certain we're back to 96. It's possible we've already returned to the levels of the tail end of the last collapse, which is rather jarring at this stage, at least from my perspective.
Great post CR very informative!
Lindsey notes that 100,000 house starts in 94 is larger than 100,000 house starts in 07 with an economy that is so much larger...and why some resort to a normalization (eg %gdp) to get a better picture of the real significance of these bald numbers.
Ok, and there may be other distortions too: size of house, cost of house (with all those fancy do-dads or bare?), distributions (1 fancy house or 10 semi-detached condos?)...
Will it look like sunny 82 or overcast 91 for the spring selling season?
Hard to believe that nano-tubes (whateva) are going to pick up the baton from housing and reinject the economy with some vitality. Way easier to believe that the half dozen years of air that has been pumped into the economy will be expelled as we make our way back to trend.
And way easier to believe the current downward house price movement will precipitate more as recent gainers sell off now in hopes of avoiding lower prices later.
HD indicates that the remodeling business will also be taking a big hit this year.
NEW YORK (CNNMoney.com) -- Home improvement retailer Home Depot said early Wednesday that a recovery in the battered housing and homebuilding market is still as much as a year away, and warned that its sales and earnings will take a hit.
The company said it doesn't expect residential construction and the housing market to improve until late 2007 or early 2008 and that current fiscal-year earnings are expected to fall 4 to 9 percent. Analysts surveyed by earnings tracker First Call had forecast that earnings excluding special items would fall only 2 percent to $2.78 a share in the current fiscal year.
Nano-tubes needs to be a 100 billion industry to pick up the baton from housing. Do you believe that nano tech is that big next year?
Lead-in to a story in today's fishwrap :"Sales of existing homes rose in January by the largest amount in two years...."
How does this square with the negative news on new home sales ? Was there a discussion on CR that I missed ?
Anony, the nanotube reference is a proxy ("whateva") for any industry ( size: $100B you say) that is going to replace housing as the driver.
Against this view (the driver model, that purports that there are a few key industries that pull the rest of the economy along) there is the view that, no, we have a balanced, diverse economy that has a multitude of driving points, that this is evidenced by employment stats that show construction and manufacturing jobs have been replaced by 'professional service' jobs.
It is a view that was not current when the housing market was booming. A convenient and, in my view, polyanna view.
Jim,
New sales are tallied at signing. Used home sales are tallied at closing. There is a gap of up to several weeks in the timing of the two. Pending sales of used homes are closer to new home sales in timing. New home sales were up in December, which in timing is roughly in line with the rise in used home sales in January. We also need to take into account that both series are subject to substantial revisions. New sales have been revised down about 90k (annualized) over the past 2 releases.
Jim - I've been on the road and just had a chance to review the existing home sales report and the GDP revisions.
Existing homes were unbelievably bad because of the concentration of price and sales drops in the west. In every region, median and average sales prices were below 2005. The logical conclusion is that those high CLTV loans written in 2005 and resetting in 2007 are mostly underwater which will keep default rates rising. Worse yet, because of bracket compression the 75th percentile loans can be expected to take higher losses than the 50th or 25th percentile.
In terms of estimating portfolio losses, regional concentrations are very significant, because if the creditor must take the collateral and try to clear debt by selling it, the creditor will take a much higher loss in a region in which such homes are concentrated.
It was dreadful, honestly. Btw, one pretty successful model used in the past to predict losses assumed that every loan in which the borrower is underwater defaults.
Average Joe, thanks for catching the typo - it's a pain to fix on a graph, so I might ignore it!
MaxedOutMama, I think that is a good first approximation for defaults (every borrower underwater defaults). That is why the bubble areas will probably get hit really hard, and not just the subprime markets.
I was reading the LA Times this AM, and saw this:
"Recession is becoming in my opinion a rather rare event, because the government has learned to manage the economy better," said Keitaro Matsuda, senior economist at Union Bank of California in San Francisco.
And this from Dr. Leamer:
"The economy is percolating along pretty well except for the housing sector," said Edward Leamer, director of the UCLA Anderson Forecast, adding, "We don't see anything in the data that we monitor that suggests the economy is having any real trouble."
Meanwhile housing is in recession, manufacturing is in recession, nonresidential investment appears headed for recession ... luckily consumers remain "remarkably resilient".
Best to all.
Symbol Lookup from Yahoo! Finance
AMC announced they are cutting their dividend about 45%.
... luckily consumers remain "remarkably resilient".
Well, at least their credit cards do...
"Recession is becoming in my opinion a rather rare event, because the government has learned to manage the economy better," said Keitaro Matsuda, senior economist at Union Bank of California in San Francisco.
That's not really an opinion, is it? Business cycles all over the world have lengthened quite a bit in the last 30 years or so. Although I suppose there's another answer than governments have gotten better at managing the economy, but that would seem to be the best explanation.
Well, at least their credit cards do...
I suppose the theory is that if you have a house, you have an asset to pay off the credit cards.
Leamer and Matsuda seem like they are in perpetual bubble land.
As long as people go into debt with easy money- the party goes on- but that will end- then what?
Just about every component of the economy is in recession- but people keep buying right? Again how much longer.
Market is not having a stellar day recovering- wonder why?
consumers remain "remarkably resilient"
And resilience will continue until morale improves.
Steve, I think it is a fact (fewer recessions looking back over the last 25 years), and an opinion looking forward. Delong had some comments on this today.
Best Wishes.
There is good news and bad news for NovaStar. The good news is that they managed to get a securitization done. The bad news is that they had to eat a lot more of it than usual. Looks like they couldn't sell anything rated worse than A. Here's the last few syndications, date, total amount and amount retained by NovaStar
2/28/07 $1,888MM $107MM
12/6/06 $1,243MM $ 27MM
10/3/06 $1,293MM $ 25MM
8/31/06 $1,020MM $ 24MM
7/07/06 $1,094MM $ 19MM
I am most interested in what's happening in the credit markets. The recent discussions on sub-prime and CDS around them were fascinating.
To those in the know - what data should be tracked to know if the repricing of credit is spreading to other grades in the debt market - better "quality" mortgages, LBO junk bonds, etc.?
I am perplexed how this squares - it seems prime banks lend to hedge funds so that they can lever up - the hedge funds then write insurance on credit defaults - the prime banks and other investors of MBS/ABS buy this insurance. So aren't the prime banks really insuring themselves???
All is hunky dory when there are no claims and then the models work well too. What happens when there is a dislocation as we have seen over sub-prime over the past several weeks? Who ultimately in this chain takes the hit to capital?
Helicopter Ben to the rescue (singing out of the Bies hymnal):
"Subprime Mortgage Perceived Risk Decreases After Eight Days
2007-02-28 13:33 (New York)
Feb. 28 (Bloomberg) -- The perceived risk of owning low-
rated subprime mortgage bonds lessened for the first time in
nine days, derivatives suggest, after Federal Reserve Chairman
Ben S. Bernanke said the overall home loan market is healthy.
An index of credit-default swaps on 20 securities rated
BBB- and created in the second half of 2006 rose 1.2 percent
today to 63, according to Deutsche Bank AG. The ABX-HE-BBB- 07-1
index, which fell earlier in the day, had dropped by more than a
third since trading started Jan. 18.
There's not much indication at this point that subprime
mortgage issues have spread into the broader mortgage market,
which still seems to be healthy,'' Bernanke said in
congressional testimony today.It's a concern, but at this
point we don't see it as being a broad financial concern or a
major factor in assessing the course of the economy.''
Ken Heebner played the real estate bull market about as well as anyone. He cleaned up on REITs and homebuilders. He's got a different perspective than the "see no evil" crew at the Fed:
"Heebner Says Subprime-Loan Defaults Will Hurt Economy (Update1)
2007-02-28 13:38 (New York)
Feb. 28 (Bloomberg) -- Kenneth Heebner, the manager of the
top performing real estate fund over the past 10 years, said the
economic damage from high-risk mortgage defaults is only going
to get worse.
We have a trillion dollars of subprime mortgages and
we're going to have huge defaults,'' Heebner, 66, said in a
telephone interview today from his office in Boston.If you're
looking at the housing market, it's not the darkest before dawn,
it's the darkest before pitch black,'' Heebner said.
Heebner, cofounder of Capital Growth Management LP, said
the market for subprime loans could ``shut down'' as U.S.
mortgage companies including Freddie Mac stop buying them.
Delinquencies and defaults are the highest in at least seven
years, according to a Feb. 22 report by Barclays Capital. U.S.
economic growth will slow but not go into a recession, he said."
I wrote a little piece of the credit cancer spreading to other parts of the economy yesterday.
Credit Risk is spreading into all parts of the Economy Blogger: Page not found
Personally I think we are already in recession.
Anthony @ 3:18 - Agree.
Like Haley Joel Osment in The Sixth Sense, I see dead people . . . some of them don't even know they're dead.
Just replace that scenario with the economy. Most people are oblivious to what's already pretty obvious to some of us.
CR said: "...manufacturing is in recession..."
CR, you're killing me.
GLOBAL SELL-OFF; Orders for Durable Goods Dropped 7.8% Last Month - NY Times
On the "Durable Goods" chart accompanying this article, please let me call your attention to a couple of points. Between December 2005 and January 2006 durable goods orders exhibited the same behavior as from December 2006 to January 2007. So why is this an indication that manufacturing is in recession now, when it wasn't the last time the same thing happened?
Point 2, although the December-to-January durable goods orders dropped, December 2006 orders were higher than December 2005, ditto with January 2007 over January 2006. In what way is this an indication that manufacturing is in recession?
Sebastia
the prime banks and other investors of MBS/ABS buy this insurance.
Do we even "know" this? I mean, I know apparently some people think they know this. I am still not sure I know this.
I do know that prime banks, for instance, who hold whole loans have purchased insurance on them through credit-default swaps with big, highly-rated couterparties like PMI. I have not recently read the regulations regarding such things, but I'm having a hard time believing that big prime banks with big whole loan portfolios are getting away with buying credit insurance from some murky unrated hedge fund. I can't see the regulators considering that risky a transaction being a valid reason to ease up capital requirements. Perhaps I am naive and an expert in CDS will tell me different.
But I get back to a question I asked a long time ago. Why is any bank buying credit insurance on a security? How bloody "secure" do the damn things have to be? How much yield do you spend on credit enhancement before you have no net yield?
If you aren't a regulated bank and you aren't buying the AAA stuff, well, then maybe that's different.
Even so, the vast majority of the CDS market is not protection buying on the part of the actual owner of the credits in question. It can't be. The numbers don't add up.
First a comment. Your blog and your comments deserve a lot of credit for what I have read for more than a year. When every media was saying, quoting or reproducing about housing that "the worst is over" you remained cautiously pesimistic with arguments.
Your first graph clearly indicates that new home sales increased steadily since the 91 recession. Rigth now, new home sales are still "buoyant" considering a historic perspective from 1971 as your graph provides. You cautiously refer to next spring results without trying to predict how it will result. If new home sales return to the "normal" rate during the last 40 years we would expect disappointing sales this spring, the next spring and the following. Unless there are demographic factors pushing demand above the average and considering credit standards going back to the "normal" in previous years I would expect new home sales to slow down for several quarters.
Check out Mike Larson, who posts here frequently and writes at Interest Rate Roundup, for getting some ink from CNN Money...
http://money.cnn.com/2007/02/28/news/economy/newhome_sales/index.htm
Sebastian,
If you read the story, it also referenced the ISM survey which has a very good track record as a forecasting tool over a long period of time. It has been below 50 for 2 of the last 3 months, with a below 50 reading indicating a contraction of economic activity in mnf. Chicago PMI has been below 50 for two months. Philly Fed is just a hair above zero and was negative in December. Industrial production has been negative 4 of the last 5 months, capacity utilization has fallen every month but one since August. About the only one I can find that suggests expansion is the Empire State Mnf Survey. What are mnf data series are you looking at that suggest expansion?
If the economy is expanding at a good clip like some want us to believe. Why have oil prices not skyrocketed with the cuts made by OPEC?
Market is not having a stellar day recovering- wonder why?
skytrekker
But is it really that stellar? Looking at MarketWatch it shows the dow up 62 points about 1/2 hour before the close. That's only about 15% of what was lost yesterday. The NASDAQ is now up a paltry 9.75 which I think is only about 10% of what was lost yesterday.
I'm not surprised the markets are up today as there are lots of folks out there who are still going to buy on the dips and they see this as a great buying opportunity. But considering how far down they were yesterday, we didn't recover all that much.
Tanta,
When that auto parts manufacturer blew up last year (Delphi?) it defalted and it turned out the CDS trading on its bonds covered ten times the value of the bonds. I thin we talked about that here, how they had to resolve the issue because so many holders of the CDS didn't have the bonds to present for payment.
They're being traded the same way people in Chicago trade hog bellies, but really have no interest in hog bellies being delivered to their door.
So the CDS market is a measure of the "dispersion" of mortgage risk kind of like OTB parlors are a measure of the "dispersion" of racehorse ownership risk?
Sebastian,
I left this message in the previous thread but as you're still making the same comparison, I'll rephrase.
YoY is immaterial in determining recessions. The NBER's recession is a decline in the economy, with the beginning being the peak from which the decline descends. By definition, then, the performance at the beginning of a recession is going to be higher YoY.
Kirk
Your first chart is the most telling. it is saying that, based on historical relationships, we are going to have a recession, or "it is different this time".
Deja vue all over again?
Sebastion writes:
CR said: "...manufacturing is in recession..."
CR, you're killing me.
From the NY Times today: For Manufacturing, a Recession Has Arrived
Best to all.
I'm a huge football fan, and it occurs to me that CR & Tanta are like a great team of game announcers -- CR's play-by-play, Tanta's color commentary. Go Team!
Could someone possibly explain this to me:
Citi Inks Deal to Buy Argent Mortgage
Citigroup has signed a deal to buy subprime wholesale giant Argent Mortgage, Orange, Calif., from ACC Capital Holdings, a source familiar with the matter has told MortgageWire.
Are they insane? Is Citi going to immolate?
arbogast, Citi's move could be defensive. They may already have a big exposure to Argent via loans or EPDs on CITI sponsered MBS. It can minimize your losses sometimes to take control and deal with the problem in a businesslike manner rather than force a bankruptcy.
Or they may be crazy.
Citi is the holder for many HELOCs for the 80/20 mortgages issued in the last few years. I think Citi has had some management shakeups lately as well.
A little bit of color that no one has commented on yet. It looks like the worst hit area is the mid priced homes. New homes sales priced between $200K and $400k are down 35.0% year over year, while luxury homes (over $400k) are down 18.8% and starter homes are down "only" 9.1% year over year. This is more evidence that the implosion of the sub prime market has not really affected things yet. After all most sub prime borrowers are poor folk. Presumably they are going to be more concentrated in the low end starter homes than in the luxury area. Obviously the definition of starter and luxury home varies by grography, but the general point should hold. Another interesting factoid from todays report is sales and inventories by stage of competion. Sales of houses not yet started were down 20.0% yr/yr and sales of thoses started by the builder were down a whopping 40.6%. However, sales of already completed homes (i.e. builders models)were actually up 9.5%. It looks to me like builders were trying to clear out their bloated inventory. However they were not really that successful since completed home inventories are up (get this) 47.1% from a year ago. The inventory of houses under construction are down 12.3% and raw improved lots (i.e.e inventory fo houses for sale that are not started) are down 2.2%. Seems to me we still have a ways to go on the down side.
Arbogast,
This looks like a rescue financing. It looks like their existing warehouse lenders are bailing or cutting their exposure and Citi is stepping into that role to inject liquidity. Importantly, ACH's majority shareholder, who I believe is an individual, is throwing in an unspecified amount of capital. I'm sure he wasn't eager to do this and it was probably a condition of Citi's participation. In addition, as part of the deal, Citi has an option to purchase the wholesale origination and servicing biz, provided that it meets certain operating milestones. We don't know what price they are paying, but one can presume given the other circumstances in the deal, it is not top dollar. My guess is that they would be loath to sell the servicing business at this point in time, if they had other choices, as that is probably their most consistent cash generator (Tanta I'd be interested in your thoughts on that).
Time will tell whether this was a good deal for Citi. The unusual nature of the terms suggests that warehouse lending is getting hard to come by and more expensive. But the deal does say indicate that at least Citi will step up if the terms are right.
After all most sub prime borrowers are poor folk. Presumably they are going to be more concentrated in the low end starter homes than in the luxury area.
You sure about that? Any data to back that statement up?
jb
CR said: "...manufacturing is in recession..."
CR, you're killing me.
Sebastien,
Automotive is in a very serious funk and that is one of the largest sectors of mfg. 'Yes' Toyota is doing well along with other transplants to a lesser degree... but their supply chain is nowhere near as deep here as the domestics. Loss greater than gain resulting in net loss in this sector.
Housing related mfg is slowing too - especially appliances and building components & materials. If lawn & garden is slow this spring, that will add an additional drag. I sell into all these industries & 'housing starts' are a key predictor of future demand. Starts continue to head down. Not good.
Telecomm & IT never really recovered completely from dotbomb... at least not domestically.
Whats up? Energy related anything. I was reading in SME (Mfg Engineering) that the oil patch equipment mfg is booming - I believe it. Posted a link to Steve about this a few days ago.
Plus I have friends who work building power transmission & distribution infrastructure - also booming.
Defense is still hot too, hotter than what we read in the press. Not a conspiracy, just not sexy & visible to reporters.
And there is always medical devices & pharma. They never seem to slow.
Overall less booming than busting right now & you can feel it if you are like me, in the business.
It looks like the worst hit area is the mid priced homes. New homes sales priced between $200K and $400k are down 35.0% year over year, while luxury homes (over $400k) are down 18.8% and starter homes are down "only" 9.1% year over year.
This could also be a result of people moving down - evacuating the middle.
I see that in my neighborhood from time to time (older working class neighborhood)... Folks move upscale then when things get too tight, they fall back to smaller more modest homes.
We had four homes in my neighborhood sell in the last month, more than in the previous four months. Meanwhile little is moving 'up on the hill'... where the nicer middle & upper middle class homes are.
BTW - I've been through that myself when my parents started a biz... sold their very nice executive home & bought a cheap shoebox ranch, the equity they freed up put food on the table for two years while the biz took off.
Thing is you have to be able to SELL the nicer home to make the fall back work.
My sense is that subprime borrowers are certainly not necessarily "poor folk," if by that you mean, say, people who earn 50% or less of the area median.
Subprime borrowers are, basically by definition, people with chronic cash-flow problems. In some cases that's just because they are commissioned or small-business owners whose income is sporadic or who do a lot of commingling of business and personal debt, which can sure be hell on the FICO score. By and large, though, they tend to live at or rather above their means, whatever those are. Subprime borrowers are the classic paycheck-to-paycheck, no reserves in the bank borrower. That said, I've seen quite a few who make substantially more money than I do, and while I've never claimed to be overpaid, you couldn't call me poor.
The overlap between low income and subprime credit is so frustrating for so many of us because a low FICO can easily result from a lack of credit usage, not irresponsible credit usage. These folks aren't over the ears in debt; in fact, they've never had any. They live in a cash economy, or perhaps they're just too young or too unassimilated to have any exposure to credit-grantors other than the rent-to-own store (god help them) or some other party who doesn't report to the bureaus. A lot of these folks got put into toxic subprime loans when they should have been put into an FHA loan, which doesn't have abusive terms, but which also doesn't let the broker collect five points. But that's another day's argument.
In any case, the "subprime jumbo" is a real phenomenon, and so while I would agree that the biggest part of the subprime segment is moderate income (80-120% of median or thereabouts), a substantial portion of it is not. They not only shoot horses, they also repo Beemers.
Brian, I'd be shocked to hear that Citi will pay the big bucks for Argent's servicing platform ($65B--it's either high-fee specialty stuff or it's just barely big enough to be profitable unless the credit crunch makes it so by extending durations). Nonetheless, it's hard for me to see what of value is left if Citi takes the wholesale lending and the servicing platforms, or how those retain much value for Citi as a separate business. I'd agree that the servicing portfolio probably has value to Citi insofar as it's filled with Citi-owned loans.
In some cases that's just because they are commissioned or small-business owners whose income is sporadic or who do a lot of commingling of business and personal debt, which can sure be hell on the FICO score.
You talking to me?
I said YOU, talking to ME?
{dryfly in his best DeNiro 'Taxi' imitation...}
MoM, CR. Absolutely no way that 100% of underwater borrowers default. MoM, what is the source of this 100% "model?" In Houston and Tulsa and Oklahoma City 100% of recent FHA/VA borrowers were underwater in the late 1980's, with fairly high job loss. While FICO scores for FHA were higher back then (or would have been, had they been in common use) FHA was always more your A- business than your prime business. Yet foreclosure rates never got near 100%. There were subdivisions in Houston built in the mid 80's where essentially everyone bought just before the bust, most with FHA or VA (share of govt. backed purchase loans in TX was almost 50% back then) and almost everyone in the neighborhood was underwater. I'll bet you couldn't find a single subdivision where foreclosure rates approached 50%. More recently, loan termination papers published in academic journals by guys like Anthony Pennington-Cross don't find foreclosure rates over 25% for delinquent subprime borrowers in flat appreciation places like MI or OH. A whole economics literature was spawned in the 1990's by the fact that underwater borrowers in the 1980's DIDN'T go to foreclosure all that often. In the mid 1990's I was underwater, as was probably about 20% of the building I lived in, yet we didn't have a single unit go under. In high appreciation environments you get foreclosure rates under 1% for prime and maybe 5% or less for subprime, in flat markets you get 2 to 3% for prime and maybe 20% for subprime, and I'll bet you that not even in San Diego or Detroit will you see subprime foreclosure rates go above 50%.
mort_fin - the 80s in Houston was pretty unusual. Similar to my experience with the farm crisis... in both cases if you had a loan at all you could about bet you were 'underwater'.
Maybe in times where being 'underwater' is the exception & not the norm, it makes a better predictor.
mort_fin, I wrote that wrong and thanks for pointing that out. I meant that households underwater is probably the best predictor of defaults (as opposed to say FICO scores). There is some excellent research
on this topic. But I incorrectly implied that all underwater borrowers would default, and that is not correct.
Best Wishes.
Mort_fin - I concur. It's a method that works sometimes but not in a situation like this. I have always believed that it worked only because in traditional lending, it is extremely rare to have a borrower underwater and if that borrower gets underwater, it's because the borrower has exceptional problems and circumstances. I'm on a slow connection; when I get time I will look up the article I found that describes some different techniques, because it is an interesting problem.
However, if you take high DTI's correlated with being underwater, that is truly predictive. Of course, we have carefully done all these no-ratio loans so that we don't have any DTI's to work with.
That's probably why some of the companies are stepping up their QC by going through their stated loans and pulling tax returns on borrowers who aren't behind - they're trying to find them first and kick them back.
because a low FICO can easily result from a lack of credit usage
wow...back up that truck. I thought when someone turns 18 and/or get their first cc, their FICO tank is full. If not, what must they do to fill it?
their FICO truck is empty. It is a "thin file" and essentially unscorable. You have to get a couple or 3 trade lines active and happy to fill the FICO tank. But look in any 18 year old's mailbox (if you are strong of heart) - they are all filled with credit card solicitations. It doesn't take long to get a score (Good or bad).
mort_fin:
This time may be different. Since the credit bubble lending has been national at the 100%LTV rate this is creating a much bigger pool of possible foreclosure and short sales then the 80's or early 90's. I was upside down in the early 90's but I had made a 30% downpayment so I waited it out and sold for a profit by early 99.
The other point to keep in mind is that in Calif the size of these 100% LTV mortgages are huge compared to Texas in the 80's. Its not uncommon here in the bay area to have buyers doing a zero down on 800K to 1.5M dollar homes.
Probert, If you are Casey Serin you quit your day job, buy 8 houses in 8 months (and do some cash out deals along the way to pay yourself a "salary") and your FICO score goes to 700+. Go to his site and look up his post on his FICO score.
Mort_fin, Thanks for the clarification. Now that I know San Diego is only going to have 50% foreclosures I can sleep well.
Being underwater is no reason to defold if mortage cost are lower than comparitive rents after foreclosure.
This could be bad for the ex-urbs and high oil prices
Kirk Spencer,
You indicated that YoY GDP comparisons are not useful in determining recessions? You meant predictive value, correct? I don't think we're in recession or even in the tipping point right now...6-9 months from now, I think that's another story.
Thanks for your insight.
Lama,
No, not predictive. Sebastian's been saying that one of the ways we know this isn't a recession is that the GDP has grown in comparison to last year at this time. It's a false measure.
Note that he's made good points in other aspects of the discussion of "if and when" on an upcoming/current recession. I disagree with the word "all" when he uses unemployment as a predictor of recessions, but it's more common than not. But in this case, it's like saying, hmmm, try this analogy:
She can't be losing weight, she weighs more than she did this time last year. Since it ignores a possible peak within the last 11 months, it's a null argument.
I agree with that. I always thought unemployment rates were trailing indicators.
The liquidity issue cannot be overstated at this point. So much of our economy relates to selling houses and cars on credit.
Lama,
If you review historical information, you'll see that in almost all recessions there's a climb in unemployment prior to the recession. If you stop there, then you could conclude unemployment is a leading indicator.
I happen to disagree for two reasons.
The first reason is that the only unemployment numbers that don't get revised based on subsequent data are the initial and ongoing claims numbers. All other rates are adjusted after the fact. In other words, for all but those two numbers what we have as a number "now" may be quite different from what someone six months ago may be told.
The second reason is that even for the two "good" numbers, the way we measure now isn't how it was measured then. Qualifying for unemployment has changed several times, as has the requirements for continuing unemployment -- and how long one can continue to receive unemployment even when meeting all the requirements.
Thus I remain skeptical about the reliability of -- much less the requirement for -- recessions being preceded by worsening unemployment rates.