Troubled Banks

Finally!
A blogger has gone to the trouble of quantifying which banks are in trouble.

This list is unofficial. I also like how the author has composed a list of banks that have reserves that far exceed FDIC guidelines. The author 'tubeguy' calls them nice banks. Those could be called safe havens.

Nicebanks part 1
Nicebanks part 2

Largest watch banks are Westbank (Puerto Rico), AM trust of Georgia, and Chevy Chase. In other words, banks that are a fraction of the size of Indymac. (Whew!) I think some large banks will get into trouble, but if that's more than a year away... they will have the time to earn a bit of income decreasing their chance of trouble.

Black backgrounds are banks that the FDIC has already started to play their role.

The first seventy are colored red (if not black) due to 'an effective tier 1 leverage ratio less than 4%' (below FDIC guidelines, but not officially) In rough numbers, every bank colored red would need to fail to create the impact of Indymac's failure. This is good news. It implies that there is a less chance of a premature shock to the financial system. (Assuming stocks hold up, we do not have another Indymac that went from 'officially healthy' to receivership in two weeks, etc.)



Do note that there are about 6000 banks in the US (I think that number includes credit unions). So most banks are healthy and thus can be skipped in this discussion. I'll be following this list to see how it grows.









































Every Friday one has to look to see what (if any) banks failed:

Today's failure,
Note: West coast failures could still happen. Its a 3 day weekend... a typical time for the FDIC to clear house. But lookie... 100% coverage of all deposits. So head to the new bank and just order checks (a 'no biggie') :)





http://www.geocities.com/tubeguy@rogers.com/troubledbanks.htm





Please also look at gasoline deliveries. We're in a bad recession if those numbers are not revised up:
http://tonto.eia.doe.gov/dnav/pet/hist/a103600001m.htm

Next day edit:
Economist article on American Banks

From the above: The trajectory is steep: Institutional Risk Analytics, which monitors the health of banks, expects more than 100 lenders—most, but by no means all, tiddlers—to fold over the next year alone. Alarmingly, the ratio of loan-loss provisions to duff credit is at its lowest level in 15 years.

.....

Ms Bair has indicated that banks with risky profiles—which already pay up to ten times more than the typical five cents per $100 insured—will be asked to “step up to the plate” with even higher premiums. This would ensure that safer banks are not unfairly burdened. But it will heap yet more financial pressure on strugglers. Bankers’ groups have already started to protest loudly.

How much will be needed? Possibly far more than the FDIC is letting on, reckons Joseph Mason of Louisiana State University. Extrapolating from the savings and loan crisis of the early 1990s, and allowing for the growth in bank assets, he puts the possible cost at $143 billion.


Got Popcorn?
Neil

CR chart on seasonality of home prices

Just a short time ago the question was raised in the comments if home prices were that seasonal. CR brings it up at the end of this post:

Please see the graph at the bottom of this CR article and the comments below the graph.

By the way, the book "Home buying for Idiots" and the book "Home selling for idiots" also bring up how during certain months of the year you will get more (or less) selling a house.

Interesting BBC video on Spain's housing meltdown (planned ex-urb):
http://news.bbc.co.uk/2/hi/business/7584047.stm

Its global folks.

Got Popcorn?
Neil

Bank Issues

Minyanville on Bank Health

I'm struggling to understand how the FDIC can first put a bank on its problem list just 2 weeks before it becomes the third largest bank failure in US history. (Indymac)

I'm going to have to concur with Minyanville. How could a bank with more assets/liabilities than all of the other 1Q2008 'troubled banks' combined not be added onto their troubled lender list until 2 weeks before it failed (and long before the FDIC reports the quantity of banks on the list)?

The FDIC needs to speed up the process. Yes, yours truly is advocating a government department speed up hiring! Sit down, breath deeply. You won't see that advice from me often. ;) The best thing for the economy is to shake out this issue and get it over as quick as possible.

The greatest danger to the economy is to small businesses. For a small business to function, its too common for them to need more than $100k in their accounts (or $200k for a 'mom and pop' business) to function. The FDIC limit must become inflation adjusted and take into account the impact on small businesses. $250k/individual or $500k for a mom and pop operation seems a reasonable level of insurance.
CR didn't miss that the FDIC's fund is running low

Indymac to cost FDIC more than predicted

So now the healthy banks are going to be required to pay more for the mandatory insurance. Gee... that won't do anything to exacerbate the current credit crunch... or could it? ;) Yes, my proposal would put more accounts into the insured category. Sadly, that should have been the case for years.

Oh... and put the reserve limits back at the old standards. That would tighten credit short term, but would allow for 'flexibility' during the next credit shock. Sigh... why were the old lessons so thoroughly forgotten?

Late edit:
Bankruptcy filings up 29%

Business filings were up 41%. Ouch.

Got Popcorn?
Neil

Case Shiller for June Released

I speculate we're season a seasonal effect in the reported Case-Shiller numbers. The rates of decreases are dropping with a few cities flat (+/- .25%/month) and we're even seeing Boston, Denver, Atlanta, and Minneapolis having healthy price increases! All of the cities that broke a Case-Shiller of 200 are still declining.

















Most of the cities that broke 200 will continue to drop. The best months of the year have yet to be reported on and it looks like DC will go flat for August with a small chance of it going positive.










Notice that the large drops started last year in September and reached their peak in January/February. It wouldn't be that surprising to see a seasonality in the rate of losses.



One thing that annoys me about predictors is when they won't admit the data isn't supporting an earlier predictions. One should of course update predictions based on new data. While I've been avoiding making predictions for this time of year, I must admit that the strength of what I believe to be the seasonality is doing much better than my expectations. So we need to look at the data going forward to see if:

1. This is a seasonal slowdown in the pain or...

2. Home prices have dropped enough to regain "stickyness"

I believe that the securitization rate of mortgages points to #1, but one must always consider all of the alternatives. Even alternatives that didn't seem to make sense six months ago.

My prediction remains that we'll enter the 18 months of the greatest home price drops starting this Fall (late Fall?). If I sum it up, about 1/3rd of the cities are still dropping quickly. About 1/3rd of the cities are near flat (within +/- .25%/month), and a third of the cities are seeing good appreciation. Yes, the cities dropping are dropping far faster than those appreciating.

Further note on Seasonality: Traditionally August and June are the two strongest selling months of the year. So if this is not seasonality, we would expect July to be stronger than June. If July is weaker than June its still possible to have August the strongest sales (by prices) of the year.

But then there is that pesky credit crisis. ;)

Got Popcorn?
Neil

National July Sales/Ineventory news out

July Existing Home Sales: Record Inventory

The best graphs, as always, are at the above link.

What struck me is this: July sales 501k
Fraction of July sales Foreclosures or Short Sales: ~1/3rd.
In other words, normal resales are at less than half of the peak! (2005)

Also notice something from the curves, 2008 is constantly a lower fraction of 2007 than 2007 is of 2006. In plain Englinsh: The downside is accelerating.

August normally will vie with June to be the strongest sales month of the year Nationally, and for most places that will hold true. But not for Florida and a few other areas that have their best weather at other times of the year.

The WSJ has its take on the data:
The slight increase in the headline will provide some support to claims of a bottom in the market forming. However, the fact that 40% of sales activity came from banks selling foreclosed homes tends to suggest that absent a fire sale in housing sector, we have some ways to go before things truly stabilize. More troubling was the continued increase in inventories. … The data supports our call of the housing sector not seeing anything resembling stabilization until mid 2009 at the earliest. – Joseph Brusuelas, Merk Investments

Whoa... in California foreclosure sales are still happening slower than properties entering foreclosure. Yikes! I believe the ~33% value versus the 40% number. I'm bearish... to a limit. Real estate cycles are slow. Once the California foreclosures really pick up speed, good luck restarting the jumbo market. That is when we'll see the 25%+ down payment requirements. Not for months... But probably sometime in 2009.

Inventories are very high relative to sales rates, and would probably be even more so if all those wishing to sell their home actually had the house on the market instead of pulling it off in the face of weak demand and eroding prices. … [T]here is still a considerable distance to travel before prices sink to levels necessary to balance supply and demand in the housing market. By our estimation, the national home price measure as calculated by S&P/Case-Shiller, which shows a cumulative 18% drop through May from the July 2006 peak, is roughly two-thirds of the way through its ultimate total decline in this cycle. – Joshua Shapiro, MFR Inc.

I agree with everything in the above except the 'two-thirds of the way through' bit. I think we're about 40% of the way through to as much as 50%. No more.

We're also still in the seasonally best time of year to sell a home. As I noted above, August and June vie to be the peak selling months of the year normally (see CR's graphs). CR thinks we'll peak at 12 months of inventory, I think we'll pass that this Fall/Winter. Not by a lot though. (I hope... the alternative is rather scary.)

Got Popcorn?
Neil

Illegal Immegrants returning home?

One press release from the Mexican consulate in Dallas is making the MSM rounds.

Fox News

The illegal immigrant population in the U.S. has dropped 11 percent since August of last year, according to the Center for Immigration Studies. Its research shows 1.3 million illegal immigrants have returned to their home countries.

While this is good news (proper liquidity in the labor markets) if true... I wonder.

I guess Mexico will have a large labor force to get those oil fields pumping again. ;)

Now, how many Spanish speaking children were born in the US last year? Sorry, but one reason our economy works is one set of laws and one language. I'm pro-immigration, but I would prefer a system that required English proficiency testing first. Oh, I'm all for offering English classes to those already here (and to the Koreans... Ghad, how can so many Ghettos of LA have 70%+ of their population unable to speak English?)

OT: One of my side interests is exploring how the world is consolidating to five major languages (all the others are shrinking): Mandarin, Spanish, Russian, Arabic, and English.

Got Popcorn?
Neil

2008 Job losses

463,000 jobs have been lost in 2008.

However, there could be a lag in the recovery of the labor market, as there was following the end of the 2001 recession.

"Job losses tend to be persistent, and the economy does turn before the job market," Karl added.

And Crary concedes that the credit crunch remains a big wild-card for any economic and job market predictions.

Although I couldn't help but notice the optimistic economist is predicting job gains for 2009 and 2010. Automotive?!? Sorry, but downsizing vehicles are here for a few years. With China and India coming online and the horrid mis-management of the Mexican oil fields (production down 37%), I see no return to the SUV craze nor the *need* for surplus vehicles as we saw during the bubble.

Jobs lag the economy. The economy is turning down. We're over-invested in too many sectors for a quick recovery.

Got Popcorn?
Neil

Best Places to Earn a living

Because not everything is gloom and doom. ;)

Forbes has this article

In Forbes' order:
Houston
Minneapolis
Boston
Washington D.C.
New York, NY
Pittsburg
San Francisco
Dallas
Milwaukee
Philidelphia
Funny though.. .Minneapolis and Boston are having major real estate declines...

Milwaukee is known to be having major issues due to the drop in tooling orders (its America's #1 city for 'old school' machine tools).

Houston I see as #1. Why? Its doing a phenomenal job of attracting high end manufacturing. Its not just the commodities bubble.

Pittsburg is doing well too. It didn't bubble too much and the banks there (e.g., Mellon) are among the healthiest.

Dallas I'm a bit surprised... I wonder if this article was written on stale data.

So overall, I think this article was bunk. Yea... NY and DC are still doing better than most. But some of the cities on their are in economic dire straits and thus this is just a fluff article. But its a fluff article that will make people feel good.

But is that enough to get us through the credit crunch and the Fall/Winter slump in real estate sales? I don't think so.

Got Popcorn?
Neil

Apartment Buildings lose immunity to housing chill

Hattip http://bubblemeter.blogspot.com/

WSJ Article on Apartment real estate

But now the specter of job losses is beginning to spread the gloom into that sector as well. As would-be renters are doubling up in apartments or moving in with friends and families, rents and occupancy rates are beginning to fall in many cities.

Its only going to accelerate.

Economist quoting Bernanke
he (edit: Bernanke) suggested that the worst “second-round” effects of the financial crisis are about to be felt: “the financial storm that reached gale force some weeks before our last meeting here in Jackson Hole has not yet subsided, and its effects on the broader economy are becoming apparent in the form of softening economic activity and rising unemployment.”

Yet the primary drivers haven't peaked. Credit is still tightening, foreclosures continue to grow, and now layoffs.

In my opinion the greatest risk to the economy is the impact of bank failures upon small businesses. Small businesses need to keep $200k to $2M of cash in their checking accounts just to operate. (e.g., payroll, inventory) Since the FDIC limit hasn't been inflation adjusted in... too long. I propose lifting it to $500k ($1M for a couple). Yes, this will weaken the dollar (due to the Fed printing money). But a planned recovery has less downside potential than the current process of covering 50% of Jumbos at Bank A, 100% at the First Bank of Podunk, and 0% at another bank.

We're in a recession that is going to get worse. But there is no reason it should be any worse than the 1974 recession; but that would require sensible regulatory changes.

But let's look back at apartments (WSJ article):
But that competition isn't nearly as big a problem as job-loss trends. "A lot of folks think it's the shadow market that's softening rents. It's really a jobs issue," says Richard Campo, chief executive of Camden Property Trust. The Houston-based REIT saw rents fall 1.4% last quarter from a year earlier in Phoenix. Arizona shed some 87,000 jobs in June and July.

Yet for only six months have the drivers been strong enough to cause doubling up. Jobs going forward will be weak for at least 18 months. Expect rents to continue to soften. The housing surplus is too great to ignore.

Got Popcorn?
Neil

Repost of this month's inventory, affordability, and SoCal foreclosures

This is a long post and it took a bit of work to create. So rather than have it lost after so other posts, I'm bringing the charts back to the front. Please grab a drink as there are a ton of charts to wade through. But I ask you the reader to look at them as a group; they're related. We're in a new point of the market. You'll find sales and foreclosures for DQ news, afford ability from Wells Fargo, and inventory from ziprealty and the MRIS.

If you're not a bit scared after reviewing these graphs... I think you've missed something. We have proof of tight credit, foreclosures exceeding sales in more and more markets, and a general bear market that is entrenched in real estate. In California, foreclosures are happening faster than sales. In other words, the current sales spike that is foreclosure dominated isn't enough to slow the decline nor even the driving forces behind the decline! California and Florida on their own are going to end the mortgage market as we knew it. Too many Billions have been destroyed as is.

Do remember that during the 1990's SoCal downturn, the communities that were immune through 1992... were the ones hardest hit. The overall market only dropped 18%. But the "immune" areas had late price drops that went to almost 40%!!! That is the pattern we're currently following. This time Nationally. Edit from the first posting: I have no charts to 100% prove this. Believe or not. My main prediction is that 2009 will be the year of the greatest price drops in US real estate. We're not quite yet in the timeframe of the greatest price drops, but we will be soon.


Affordability is shooting up. But wait... this assumes income measurement are following the historical pattern! Please, do not get me wrong. I appreciate Wells Fargo Keeping the same methodology. But one assumption about these charts is that grey market income is *not* declining. Can we assume that anymore? Certainly not in Southern California. I believe, as with many metrics, that the change in incomes is being under-recorded. I do not fault Wells Fargo, they are doing the best job possible. LA is also in trouble due to Hedge funds cutting the funding of "Hollywood." Also, do you see advertising spending going up or down in 2009? Advertising has been keeping the Westside market alive. If that revenue drops significantly, expect things to get worse quickly.

I've selected the same cities for a while. Notice the spike up in affordability. Its all due to a drop in sales price. Mostly due to foreclosure sales and


















Here is a close up on the latest. Do review the previous graph of where affordability has been historically. Note: For some cities (e.g., DC), I expect the new plateau to be at a slightly lower level of affordability (due to the city establishing 'economy of scale' in the world market).
















National inventory isn't growing like it used to. If it wasn't for all of the markets with huge amounts of 'shadow inventory,' I would think this downturn was closer to being done than it is. We'll hit a bottom; but not before 2011 and more likely in 2013 or so.




















If there is one thing to scare you, it should be the drying up of the Jumbo mortgage market. Look at the hit SoCal is taking. Thankfully, DQ News has published information on the distribution of mortgages.
















I'm going to be posting this chart I from Deutsche Bank over at Patrick.net. It really shows how the real estate market is in a brave new world:















We're at the point where many markets are now driven by foreclosures. Since there is better data for Southern California than many other markets, I'm plotting my home region. But these charts plot a trend that would be true of Florida, Arizona, Nevada, Ohio, Michigan, Virginia, and a few other markets. Its brutal now for a home owner to try and sell. The competition from foreclosures will even impact the 'immune' markets. I'm seeing high end properties skip foreclosure (jingle mail) and go straight on the market as bank owned.















I'm plotting California sales and foreclosures by quarter to take out noise in the data. Compare this graph to the next one and Note that foreclosures exceeded sales in California in the first and second quarter! California is getting ready to really implode.

















Compare this graph to the above one:














Now on to other cities. Sales are down, but not too bad:

















But note the Median price is down. I haven't been in DC for a year, but I'd bet bargain hunting is going on:



























Las Vegas is in a later stage of implosion. I know of too many people holding on in Las Vegas who should be selling, so the small drop in published inventory is masking a rising shadow inventory. Once the recession really gets going, expect the next wave of the Tsunami to spank Las Vegas. US Air 'de-hubbed' in Las Vegas for a reason: The Origination and Destination market is dying.













Phoenix has been the poster child of the bubble for a while. IIRC, 40% of the jobs in Phoenix are for growing Phoenix. I'm an airline fan, so I wonder if US air will get into trouble in Phoenix too.
















Overall, DC's inventory hasn't climbed much over 2007. But look at Case-Shiller prices, inventory is too high in the region to sustain current prices overall. Counter is that DC's median income has gone up ~6%.

Houston is an interesting case. I posted before how it has the fastest job growth in the USA. But how much is due to the commodities bubble? Part of the reason I'm curious about Houston is that high end manufacturing and IT outsourcing is drifting to the city. Is it enough to insulate it during the later parts of this recession?















This is where I plan to buy. But there is a disconnect between official inventory and what I see on the street. Can we say shadow inventory? ;) Seriously, prices peaking at 11.2X income was insane! Ok, Wells Fargo put it at 9.3X income and now at 6.3X income. Per Wells Fargo, the last recession hit a trough at 3.5X income. My oh my... that leave a lot of downside. Note: Per Wells Fargo incomes have dropped ~3%. Personally, I think the income drop is accelerating.









I've skipped a lot of comment, but note that LA's decline in inventory is mostly due to foreclosures taking homes temporarily off the market. Mostly in the ex-urbs.












This is quite a bit to review here. I ask my readers patience to note the pattern these graphs lay out. Its showing the impact of the credit crunch, income loss, and the recession we are in. I still make no definitive predictions until we get to "Fall, probably late Fall." But soon we will see data showing a major transition. Soon might be November data... Heck, late Fall technically is until 12/20, so it could be in the December data; but I suspect it won't happen at the end of Fall.

Other bloggers are noting the bottom will be a two to three year bog where prices stay low due to the economy and credit tightening. I see no reason to debate that.

Got Popcorn?
Neil

Weak Financial Institutions

Mish has done a great jobhas done a great job of tracking what financial institutions seems to be in trouble.


Financial Entities On The Brink

Lehman (LEH)
Washington Mutual (WM)
Fannie Mae (FNM)
Freddie Mac (FRE)
Corus Bank (CORS)
BankUnited (BKUNA)
Downey Savings (DSL)
Wachovia (WB)
Regions Financial (RF)
MBIA (MBI)
Ambac (ABK)


By no means is this the complete list. Nor will every entity on this list necessarily fail (or more precisely not be rescued).

This chart from Calculatedrisk shows where we are circa June:


Got Popcorn?
Neil

Ad revenue declining

My previous article has quite a few interesting graphs! (Inventory, sales, mortgage stats.)

One item I predicted a long time ago (mostly on HBB comments) was a decline in ad revenue. Traditionally, the 'rule of thumb' of a large established industry is to spend ~25% of revenue advertising (note: This can be a fancy store front, no necessarily TV or Radio time and is distributed between the manufacturer and the retailer.). For example, Beer, Cars, soap, and many other consumer goods.

Last week Gannett announced that they were cutting 1,000 jobs because of a decline in revenue.

Ouch. The article puts the blame on Craigslist for the decline of newspaper ad revenue. I think its due to the recession with hard times pushing businesses to Craigslist as a last resort (due to lack of revenue to fund traditional advertising).

Got Popcorn?
Neil

Affordability, Inventory, and SoCal foreclosures

This is a long post. Please grab a drink as there are a ton of charts to wade through. But I ask you the reader to look at them as a group; they're related. We're in a new point of the market. You'll find sales and foreclosures for DQ news, afford ability from Wells Fargo, and inventory from ziprealty and the MRIS.

If you're not a bit scared after reviewing these graphs... I think you've missed something. We have proof of tight credit, foreclosures exceeding sales in more and more markets, and a general bear market that is entrenched in real estate. In California, foreclosures are happening faster than sales. In other words, the current sales spike that is foreclosure dominated isn't enough to slow the decline nor even the driving forces behind the decline! California and Florida on their own are going to end the mortgage market as we knew it. Too many Billions have been destroyed as is.

Do remember that during the 1990's SoCal downturn, the communities that were immune through 1993... were the ones hardest hit. The overall market only dropped 18%. But the "immune" areas had late price drops that went to almost 40%!!! That is the pattern we're currently following. This time Nationally.


Affordability is shooting up. But wait... this assumes income measurement are following the historical pattern! Please, do not get me wrong. I appreciate Wells Fargo Keeping the same methodology. But one assumption about these charts is that grey market income is *not* declining. Can we assume that anymore? Certainly not in Southern California. I believe, as with many metrics, that the change in incomes is being under-recorded. I do not fault Wells Fargo, they are doing the best job possible. LA is also in trouble due to Hedge funds cutting the funding of "Hollywood." Also, do you see advertising spending going up or down in 2009? Advertising has been keeping the Westside market alive. If that revenue drops significantly, expect things to get worse quickly.

I've selected the same cities for a while. Notice the spike up in affordability. Its all due to a drop in sales price. Mostly due to foreclosure sales and


















Here is a close up on the latest. Do review the previous graph of where affordability has been historically. Note: For some cities (e.g., DC), I expect the new plateau to be at a slightly lower level of affordability (due to the city establishing 'economy of scale' in the world market).
















National inventory isn't growing like it used to. If it wasn't for all of the markets with huge amounts of 'shadow inventory,' I would think this downturn was closer to being done than it is. We'll hit a bottom; but not before 2011 and more likely in 2013 or so.




















If there is one thing to scare you, it should be the drying up of the Jumbo mortgage market. Look at the hit SoCal is taking. Thankfully, DQ News has published information on the distribution of mortgages.
















I'm going to be posting this chart I from Deutsche Bank over at Patrick.net. It really shows how the real estate market is in a brave new world:















We're at the point where many markets are now driven by foreclosures. Since there is better data for Southern California than many other markets, I'm plotting my home region. But these charts plot a trend that would be true of Florida, Arizona, Nevada, Ohio, Michigan, Virginia, and a few other markets. Its brutal now for a home owner to try and sell. The competition from foreclosures will even impact the 'immune' markets. I'm seeing high end properties skip foreclosure (jingle mail) and go straight on the market as bank owned.















I'm plotting California sales and foreclosures by quarter to take out noise in the data. Compare this graph to the next one and Note that foreclosures exceeded sales in California in the first and second quarter! California is getting ready to really implode.

















Compare this graph to the above one:














Now on to other cities. Sales are down, but not too bad:

















But note the Median price is down. I haven't been in DC for a year, but I'd bet bargain hunting is going on:



























Las Vegas is in a later stage of implosion. I know of too many people holding on in Las Vegas who should be selling, so the small drop in published inventory is masking a rising shadow inventory. Once the recession really gets going, expect the next wave of the Tsunami to spank Las Vegas. US Air 'de-hubbed' in Las Vegas for a reason: The Origination and Destination market is dying.













Phoenix has been the poster child of the bubble for a while. IIRC, 40% of the jobs in Phoenix are for growing Phoenix. I'm an airline fan, so I wonder if US air will get into trouble in Phoenix too.
















Overall, DC's inventory hasn't climbed much over 2007. But look at Case-Shiller prices, inventory is too high in the region to sustain current prices overall. Counter is that DC's median income has gone up ~6%.

Houston is an interesting case. I posted before how it has the fastest job growth in the USA. But how much is due to the commodities bubble? Part of the reason I'm curious about Houston is that high end manufacturing and IT outsourcing is drifting to the city. Is it enough to insulate it during the later parts of this recession?















This is where I plan to buy. But there is a disconnect between official inventory and what I see on the street. Can we say shadow inventory? ;) Seriously, prices peaking at 11.2X income was insane! Ok, Wells Fargo put it at 9.3X income and now at 6.3X income. Per Wells Fargo, the last recession hit a trough at 3.5X income. My oh my... that leave a lot of downside. Note: Per Wells Fargo incomes have dropped ~3%. Personally, I think the income drop is accelerating.









I've skipped a lot of comment, but note that LA's decline in inventory is mostly due to foreclosures taking homes temporarily off the market. Mostly in the ex-urbs.












This is quite a bit to review here. I ask my readers patience to note the pattern these graphs lay out. Its showing the impact of the credit crunch, income loss, and the recession we are in. I still make no definitive predictions until we get to "Fall, probably late Fall." But soon we will see data showing a major transition. Soon might be November data... Heck, late Fall technically is until 12/20, so it could be in the December data; but I suspect it won't happen at the end of Fall.


Got Popcorn?
Neil

Major Bank to Fail? Secondary market almost Stopped.

BBC has a scoop

The global financial crisis is set to get worse, with a large US bank likely to collapse in the next few months, a former IMF chief economist has warned.

US banks are very dependent upon foreign loans. Without the return of our trade deficit via loans, we're a poor nation.

Despite hopes that the US economy had turned the corner, Mr Rogoff claimed it was "not out of the woods".

"I would even go further to say 'the worst is to come'," he said.

Without easy credit, our economy will contract. The Alt-A resets do not really get going until the spring. If you thought Subprime caused a credit crisis, wait for the Alt-A crisis (which is concentrated in 'high end' areas).

I found this chart from Deutsche Bank over at Patrick.net:







If that chart doesn't convince you that any property requiring a jumbo mortgage are ready to drop in price... Notice that all the data is normalized onto a annual basis! So every bar is comparable to every other bar. Notice that Alt-A stopped?!? Liar loans drove up the nice areas artificially.


Are you a good enough credit risk for the bank to hold the loan? Do realize, banks can only do about 10% of the mortgages they were doing without the flood of funds from the secondary market!

And you wonder why the Europeans believe our banks are in trouble and the worst is still ahead. (It is... 18 months of pain starting soon.)

I'm going to be a broken record: "We have not yet entered the tightest credit markets of this downturn." We're close. Within 90 days. I've blogged for a long time (two years?) about the mortgage rules during the 'darkest days of this downturn.' That doesn't start before next summer. Yes... summer 2009.

Its going to be a dark and cold Fall and Winter. While there is a chance of one last bear rally... I'm becoming less sure it will happen.

Less than 90 days until the start of the great squish down. Jim the Realtor came up with that term to describe how high end real estate was overbuilt more than other tiers during the bubble. The high end will push everything else down.

Got Popcorn?
Neil

Job growth

I'm working on an inventory/sales post. But lack of sleep (new baby) is delaying it.

But look what I found:
www.houston.org/blackfenders/10AW001.pdf

US job losses are here year on year. If that isn't a recession...

LA is leading the drop in jobs.
Houston is growing the quickest(no wonder the PDF was found on houston.org).
DC is doing pretty well.

Got Popcorn?
Neil

Default distribution

CNN article on foreclosures

The delinquency rate for prime mortgages worth less than $417,000 was 2.44% in May, compared with 1.38% a year earlier, according to LoanPerformance, a unit of First American (FAF, Fortune 500) CoreLogic that compiles and analyzes residential mortgage statistics.

Delinquencies jumped even more for prime loans of more than $417,000, so-called jumbo loans. They rose to 4.03% of outstanding loans in May, compared with 1.11% a year earlier.

And prime loans issued in 2007 are performing the worst of all, failing at a rate nearly triple that of prime loans issued in 2006, according to LoanPerformance.

Think about that. Normally Jumbo prime mortgages have a *lower* default rate than those worth less than $417k. 4.03% is unsustainable. Expect to see down payment requirements continue to increase.

Oh yea... I've been predicting 25% required down payments for Jumbo for a while. For Superjumbo, I expect those mortgages to require pledged collateral that exceeds 40% of the home's 'value.' (Not an actual down payment, we're talking individuals who can pledge assets that the bank could accept. e.g., a medical practice.)

That 4% default rate is scary. Yes, its concentrated in CA, FL, NV, AZ, and the VA ex-urbs. But its spreading! The major recasts of Alt-A haven't started yet. Once that happens, we will see the jumbo market really fall apart.

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Neil

Calm Before Storm: Ted Spread

Bloomberg's Ted Spread Charting tool










It looks like we're coming off another credit wave. Late Fall might indeed be the next transition; but if the trend continues, the peak won't be until January or February. Note: The charts tab has an even better image although there is no 5 year chart per se. Do look at the longer term chart to see how the floor has moved to at/above the previous peaks!

I find it interesting how the other indicators are correlating with the real estate emotions. Credit availability (or lack thereof) is a major component of my predictions. Even Dubai (WSJ, subscription) is having cash flow troubles! Note: Due to their massive infrastructure programs absorbing the wealth inflow the local banks are short on cash as they also try to fight massive inflation.

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Neil

Spain pledges economic stimulus

The housing bubble is global. Its impacts will, mostly via the credit crunch, be felt globally too.

BBC article on Spain

The government has admitted that 2008 and 2009 will be tough, with Span's GDP growth rate slowing sharply.

But it said Spain should return to GDP growth of about 3% starting in 2010.

Understatement. Spain is the Florida of Europe. The overbuilding was spectacular. While the greatest concentration of investors were British, the mania wasn't limited to them.

Easyjet specialized in flying people to their various investment homes. I wonder how that airline will do? (I like their business model, but it could be falling apart.)

I plan to start posting more and more articles on how the real estate downturn is having a global impact. There is no "its different here." 2009 is going to have the greatest drop in global home prices ever. We'll also see the greatest drop in National home prices too. If your area hasn't taken its medicine... its about to. Oh, some should do ok until the fall. But bond buyers have wised up.

Even Sallie May is having trouble organizing all of the FHA insurance. Remember their huge losses in the S&L crisis? Since the majority of 2008 home buyers have already forfeited their down payment, I see down payment requirements only increasing. At some point, no one will sign up to insure FHA loans. (Not yet, not even really that close to that point. But it will happen. Maybe in 2010?)

Interesting times ahead. This global downturn is past the point of being able to ignore. I'm curious to see if freighter rates stay low or if they can spike back up for Christmas.

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Neil

Foreclosures

Foreclosures continue to climb

During the great depression, about 25% of all the homes in the US were foreclosed upon. I do not think we'll hit even close to that limit. However, foreclosures continue to climb.


Ok, I cry uncle. I didn't expect Las Vegas to be the first to be *almost* at 1% of the properties in foreclosure. 1 in 106 homes are in some process of foreclosure in Nevada!

California: 1 in 182 (Merced is the worst hit with 1 in 73, Stockton/Modesto at 1 in 82)
Florida: 1 in 186 (Cape Coral, with 1 in 64 wins the national booby prize)
Arizona: 1 in 195

Now here is a quote that scares me:
But, according to Sharga, that decrease was helped along by rule changes in Massachusetts and Maryland that prevented lenders from issuing filings for up to an additional 90 days after borrowers first fall behind in their payments.
Would you lend where you cannot foreclose? Probably not without some 'meat in the game' to cover the added costs. :)

Oh wait:
"Now, both states are creeping back up," he said. "The 90-day lull in Massachusetts is being followed by a whole run of properties [in delinquency]."

What about "Immune" Arlinton?
Well, a triple cluster of foreclosures. But this quote stuck out:
“There have been very few home sales,” she said, “Because people haven’t really come to reality and dropped their prices enough … [But] you hear about some of these whole developments out in Fairfax or Loudoun where you’ve got 20 to 30 percent of the houses foreclosed. It’s not like that.”

Diffusion theory of Real Estate... it always holds true in the long term. :)

NY foreclosures up 44% But a small fraction overall. But this is global. You can google and find the increase in Britain, Spain, Australia, and most locations in the world.

Just think... the Alt-A resets do not really start until the spring. Those loans were mostly into premium areas.

Not to mention, credit overall is tightening. Quite a few banks are one the watch list: Downey Savings, WaMu, Chevy Chase, Wachovia (note: Can they BK their divisions off and keep the main bank going? They seem to have done brilliant firewalls a la their Bluepoint Insurance group.)


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Neil

MLS listings are missing large amounts of distressed inventory

This article at Sacramento Real Estate Comments is worth a read.

The foreclosure wave has added another way in which MLS listings are not accurately reflecting true resale inventory conditions. Based on our analysis, MLS based listing inventory is significantly understating the extent of foreclosure inventory in many markets. In Figure 19 below, we compare distressed inventory vs. MLS listings in major metro areas across the US. A certain portion of distressed inventory is included in MLS listings – if it were all included we would expect MLS listings to be higher than distressed inventory…


While the article focuses on the hardest hit areas, the inventory is probably true of most of the US. Anecdotally, I know of two multi-million dollar foreclosures that should be in the MLS, but are not. Hence... this hasn't begun.

Bloggers speculate that banks are holding inventory off the books to keep from having to 'mark to market.' The list of banks going deep into unhealthy territory is almost unprecedented. Why almost? The previous real estate mania that led to the "S&L crisis" gives us a clue about what is about to happen. Go to www.bankrate.com and see how well your financial institution is doing. I only know of a few two star banks on the immanent 'watch list.' But if you are banking at a one star institution... Think about getting under $100k. I know too many people still trying to get their insured (through joint accounts) money that was above $100k from Indymac.

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Neil

Retail For Lease

The number of retail stores offered for lease is staggering. I'd guess 70% of the square footage offered is still occupied.

The one exception I'm seeing is well designed medical retail plazas. Our pediatrician occupies one three blocks from our rental. I *really* thought it was a very poor location for any retail back when I first noticed it under construction.

The various medical offices are doing wonderfully! The Pediatrician is hopping (a 25+ year practice that needed a larger office), the Dialysis center lobby was overflowing. There is even a small non-chain specialty Pharmacy that seems to be doing really well! Now, the center isn't fully set up (yet). The 'imaging center' is still moving in the machines.

But what struck me is that the liquor store and coffee/bagel place are struggling.

So there is some long term upside out there. Recessions are a good thing as they move surplus labor from overstaffed industries into growth industries. Its going to be interesting, for medical requires quite a bit of training to transition.

I'll be more curious to see how many people are willing to accept a manufacturing job who previously were 'white collar professionals.' ;)

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Neil

Inventory

A few graphs. My first child has been born and that's keeping me... from sleeping! (And blogging.) Mom and Child are doing extremely well. :) So with very little comment, I'm posting inventory graphs. The one big change is high foreclosure areas are seeing a sharp drop in inventory. But that's a false drop in inventory; soon enough the homes will be back on the market. However, I do expect banks will market a la builders: One MLS listing for dozens of homes.
































Why am I still posting? To stay sane! 24/7 feeding/cleaning/codling doesn't activate the mind. Oh... I was going through the graphs seeing how the squiggles indicate trends... but I'm not going to be able to post concisely tonight, so I will do so another month.

Friends are still listening to Realtors (tm). Somehow they still have credit with people! Sigh... I *think* I just convinced a good friend to wait six months before buying. Six months in an area dropping 2% per month! Yet the Realtors were able to convince them that its not really dropping. Sigh... (These friends also recently had a kid.) The "it will drop enough to put you child through your alma mater" seemed to be the winning argument.

How do I know this? The Credit Crunch. LA is dependent on "Hollywood" and Hollywood is dependent upon suckers loaning them money on favorable terms. In 2009, far fewer movies are going to be shot. I'm very curious to see the terms of financing for 2010 movies. We're looking at a multi-Billion dollar haircut in 2009. Mostly by cutting known unprofitable projects that somehow still get funded.

The next big hit is going to be the California budget. That just scares me. That budget will effect the whole US economy. In general, when states cut spending is when a recession is recognized.

Expect my posts to be infrequent for a while. I'll focus on:
1. Inventory
2. Real Estate emotions
3. Case-Shiller.

Got Popcorn?
Neil

Map of Prime foreclosures

From the NYTimes, hattip Marin Real Esatate bubble:

To be clear, this is PRIME foreclosures.

California and Florida are obvious epicenters. But look at the Northeast corridor. The stupid expansion in Central California is obvious from the map too.

A new prediction: 20 months to go until the end of the darkest days of this housing downturn. Mind you, its going to be a roller coaster ride soon. Not yet... soon.

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Neil

Strong US productivity

Strong Productivity Defies Trend

This article is well worth the read. Why am I posting something bullish? 1. Its not going to be *that* bad and 2. this is one of the trends that will pull us out of the recession we're in... By say late 2010 or 2011.

The whole article is worth reading and there is a graph in there worthy of close examination. (Sorry, subscription required, but sometimes the links work without an account.)
The productivity growth in exports is well above the economywide average. In a paper last year, a group of economists found that manufacturing plants involved in producing exports had significantly higher labor productivity than those that weren't. The same holds for services.

The only way we're going to pull out of this is export oriented jobs. The obvious candidates would be banking (or other financial), manufacturing, or tourism. The other choice is high taxes that drive skilled workers to become expatriates who send back cash to their families (a la the illegal immigrant labor force that upholds Mexico's economy).

I personally believe we'll have a partial resurgence of manufacturing in the US. Yes... I understand there is a long term trend to higher "value added" jobs. But we went too far and did so too fast. Quite bluntly, we replaced manufacturing with unneeded sales jobs! Whiskey Tango Foxtrot? There is an internet out there to do much of that; I believe this recession will drive consumers to develop 'low purchase cost habits' that won't go away for a while. Well... not completely. The sheeple do have a way of proving that Ditech's ads really are nothing more that ironic poetry for profit.

We're approaching the October through February time frame. That will be a time of scary news. So in a way its time to pull back and realize that when J6P starts stampeding with his fellow lemmings towards the cliff... Then there is blood in the streets and its time to start buying. (Not this winter... NEXT winter. This winter is the warm up act.) 2009 will be the year of the greatest price drops of this downturn.

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Neil

Auto Sales Plunge

Edit: Auto Sales are at a meager 12.5M annualized rate! Normally, you would expect the drop to be from the 16.4 to 16.8million autos down to say 14 Million. This is BEFORE almost everyone exited the Lease market.

Any predictions for next month? How about September (by then there will be little auto leasing occurring)? The average American has been taking on loan terms for more than the new vehicles value (due to being 'underwater' on their trade ins). Now with fast depreciation and the sell off of the auto companies' own finance arms... I'm thinking we'll see a very unusual credit contraction for auto purchases too.

One of many links (CNN)

The traditional Big Three Detroit automakers saw their share of sales in their home market plunge to a record low of 43%, well behind the 49% share of Asian brands. But even the Asian automakers had trouble providing U.S. consumers with the fuel efficient vehicles there were looking for, as most of those overseas brands also saw sales drop from year-earlier levels.

A traditionally strong sales month... sucked.

Why didn't Honda's sales spike? Seriously, their drop was puny but when compared to an expected 13% pop, what's going on?

A few luxury brands, such as Mercedes and BMW, also weathered the storm to post modest gains. But sales fell for makers of low-priced cars, such as Mitsubishi and Hyundai.
I'm shocked. With so many poseurs making up their buying base, I'm surprised how the sub $100k luxury brands are holding up.

Oh, by plunge, look at the YOY numbers and annualized sales rates... Until new product lines can be developed, I expect people to just 'make do' with their current vehicle. The trend seems to be that people want either a vehicle that gets 2X their current vehicles fuel economy or 40+mpg. Why the later? I'm not yet seeing vehicles that get 60mpg (2X my vehicles gas mileage). ;)

Got Diesel? Seriously, I have a friend who is hanging on in Detroit only due to Diesel engine development (Toyota, GM, and possibly other clients). With China and India's freeway network expansion... that will mean less foreign oil for the US. I could only dream that the West Coast cities actually get mass transit NETWORKS!

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Neil

Another Bank Failure... Well its Friday!

Hattip Calculatedrisk

FDIC report

Note: Previous article is an update on Case-Shiller.

"First Priority Bank, Bradenton, Florida, was closed today by the Commissioner of the Florida Office of Financial Regulation, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with SunTrust Bank, Atlanta, Georgia, to assume the insured deposits of First Priority."

Anyone else notice a pattern in the receiving banks? They're never the one's the bloggers are wondering if they could survive through 2009.

Personal comment: Its going to be ho-hum until another midsize or larger institution fails. While its not yet COB here on the West Coast, I expect no more failures today (there are no indications of mass food orders for after hours work at the FDIC... that I saw blogged).

Conveniently, the FDIC has had banking law changed to make it easier to take over LARGE institutions: From the discussion thread on CR.
Sheila and Ben' Love Child writes:
commented out bank name is to big to fail until the removal of the Federal Reserve Act's Rule 10B requested from the FDIC presented in the Housing Bill.

"The exemption in the new law, which was requested by the FDIC without objection by the Fed's Board of Governors, was aimed at making clear that once banks are taken over by the FDIC, capital rules no longer apply because they are effectively owned, operated and in liquidation by the government."

NOTE: I do not expect a big bank failure in August. After that... almost certainly. Until then, its going to be a string of banks that you and I probably aren't that familiar with going by the wayside.

Got Popcorn?
Neil