MBA Mortgage Delinquencies Chart

Link to the MBA Mortgage Delinquencies Press Release.

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FFIEC Mortgage Delinquencies Chart

Link to the FFIEC data via the Federal Reserve..

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An overview of the housing crisis

Zero Hedge has a presentation from T2 Partners on where we are at in the housing crisis.  It is packed full of great charts.

Here are a few of my favorites:

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Earnings Season

Earnings season is upon us once again.  According to Marketwatch:  "Analysts surveyed by FactSet Research on average expect earnings at S&P 500 companies to be down 35.9% from the year-earlier quarter. Those surveyed by Thomson Financial expect earnings to be down 36.6% from the year earlier." 

In the fourth quarter of 2008, earnings were negative as a whole for the first time for the S&P 500.  On a bottom up basis, analysts are projecting that continuing earnings for Q1 2009 will come in at $13.00 a share up from -$0.11 in Q4 2008.  They are projecting as reported earnings to rebound to $8.75 up sharply from the stunning loss of -$23.16 for Q4.

Analysts missed the impact the recession would have on stocks.  Just 6 months ago, they forecast that Q4 continuing earnings for 2008 would be close to the all time record reached in Q3 lf 2007.  They forecast that Q1 2009 would break the record. 

A year ago, they also forecast a quick recovery from the drop in continuing earnings in Q4 2007.

Analysts are pricing in that the bottom is in for the recession.

Here is an update on Robert Shiller's S&P 500 graph.  Going back to 1881, the average P/E ratio using the trailing 10 years of real earnings has been 16.34. As of today, the current P/E ratio is 14.82.  Using the historical average, stocks are slightly undervalued.  However, the stock market has traded at much lower levels in the past.  In 1982 it reached 6.82 times 10 years earnings.  In the Great Depression it reached 5.56 and it reached 4.78 in 1920.

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New Home Sales Rise in February

New home sales data showed signs of settling down.  Permits rose 3% in February compared to January 2009.  Year over year permits were down 44%.  Starts in February were up 22% compared to the previous month and were down 47% year over year.  Completions in February were up 2% compared to January and were down 37% compared to a year ago. 

The bad news is this is increasing the supply of new homes.  There are already 13.3 months supply of homes.  Months supply has risen every month for the last 4 months now.  There will continue to be downward pressure on new home prices.

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New home construction at record low pace

The U.S. Census Bureau and the HUD Department announced the new homes construction stats for December 2008 today. Total building permits were at a seasonally adjusted annual rate of 549,000 which was 10.7% below November 2008 and was down 50.6% from a year ago. 1 unit permits were at a seasonally adjusted annual rate of 363,000 which was down 12.3% from the previous month and down 49.2% from a year ago. This is the lowest rate on record going back to 1960.  If adjusted for population growth, today's figures would be much lower. Total housing starts were at a seasonally adjusted annual rate of 550,000 which was down 15.5% from the previous month, and down 45.0% below December 2007. Economists had forecast starts to be at a 605,000 annual pace.  1 unit starts were at 398,000 which is down 13.5.0% from November 2008 and down 48.9% from a year ago. Housing completions were at a seasonally adjusted annual rate of 1,015,000 (1 units were at 668,000) which was 5.2% above the previous month, and 23.6% below December 2007.

There is an oversupply of housing so these large drops in construction are actually a good thing.  Even though construction of new homes has dropped quickly, sales have dropped just as fast.  Soon months supply will start to inch down, but we are still far away from supply and demand being balanced. New homes are also adversely affected by the large surplus of existing homes.

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New home starts down sharply; supply is still rising

The U.S. Census Bureau and the HUD Department announced the new homes construction stats for September 2008 today. Total building permits were at a seasonally adjusted annual rate of 786,000 which was 8.3% below August 2008 and was down 38.4% from a year ago. 1 unit permits were at a seasonally adjusted annual rate of 532,000 which was down 3.8% from the previous month and down 38.9% from a year ago. 1 unit permits are at their lowest annual rate since August 1982. Total housing starts were at a seasonally adjusted annual rate of 817,000 which was down 6.3% from the previous month, and down 31.1% below September 2007. 1 unit starts were at 544,000 which is down 12.0% from August 2008 and down 41.9% from a year ago. Housing completions were at a seasonally adjusted annual rate of 1,097,000 (1 units were at 806,000) which was 11.7% above the previous month, and 20.4% below September 2007.

Permits and starts of new homes are starting to be less than demand. Completions are still higher than the current level of sales.  Soon months supply will start to inch down, but we are still far away from supply and demand being balanced.  New homes are also adversely affected by the large surplus of existing homes. 

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A look at historical values on S&P 500 Earnings and Home Prices

Throughout the housing bubble, Robert Shiller's book, “Irrational Exuberance”, has served as my compass. In particular, his graph of U.S. home prices adjusted for inflation going back to 1890 was etched in my mind.

In his book, he talked about a home price index that was constructed in Amsterdam with over 300 years of data from 1628 to 1973. He writes “Real home prices did roughly double, but took nearly 350 years to do so…the annual real price increase was only 0.2%.” He released a graph , combining the Amsterdam data with data from Norway and the U.S., in a paper he published later.

Every month I update the S&P Case-Shiller Home Price Index and include what the CME Futures market is pricing in for prices in the near future. Here is a link to my most recent post on the Indexes.

Robert Shiller also had graphs of the S&P 500 going back to 1871. His website at http://www.irrationalexuberance.com/ has spreadsheets that get updated every so often. Here are two of his graphs that I updated with data through today's close.

Going back to 1881, the average P/E ratio using the trailing 10 years of real earnings has been 16.34. As of today, the current P/E ratio is 16.98. Whether or not the stock market is fairly valued right now is in great debate (as shown by the huge gyrations of the stock market in recent weeks). It really depends on what you think will happen to earnings and how severe the slowdown will become. Here is a graph showing the earnings for the S&P 500 going back 20 years.

The analysts have been caught off guard by the severity of the credit crunch. Back in April, analysts thought that 2008 Q2 earnings would be higher than the peak in 2007 Q3. Here is a graph from my April 2008 post. 2008 Q1 and Q2 earnings were substantially lower than forecasted. For the last year, analysts have constantly been surprised by earnings and have consistently overestimated earnings for the last 12 months. Last week's plunge was in part due to the fact the market was realizing that there will be a slowdown in earnings due to the credit crunch. The million dollar question is how much and how long the slowdown will be.

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New housing construction continues to slow; inventory is getting smaller

The U.S. Census Bureau and the HUD Department announced the new homes construction stats for August 2008 today. Total building permits were at a seasonally adjusted annual rate of 854,000 which was 8.9% below June 2008 and was down 36.4% from a year ago. 1 unit permits were at a seasonally adjusted annual rate of 554,000 which was down 8.9% from the previous month and down 36.4% from a year ago. 1 unit permits are at their lowest annual rate since August 1982. Total housing starts were at a seasonally adjusted annual rate of 895,000 which was down 6.2% from the previous month, and down 33.1% below August 2007. 1 unit starts were at 630,000 which is down 1.9% from July 2008 and down 34.9% from a year ago. Housing completions were at a seasonally adjusted annual rate of 961,000 (1 units were at 676,000) which was 9.8% below the previous month, and 35.8% below June 2007.

The amount of new homes being built is starting to be less than demand. This is a good thing as inventory is starting to be reduced. However, there is still a long way to go for demand to be in balance with supply.

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New Home Permits at lowest level since 1982

The U.S. Census Bureau and the HUD Department announced the new homes construction stats for July 2008 today. Total building permits were at a seasonally adjusted annual rate of 937,000 which was 17.7% below June 2008 and was down 32.4% from a year ago.  Most of the dropoff from the previous month was due to the new construction code in New York City that went into effect on July 1.  1 unit permits were at a seasonally adjusted annual rate of 584,000 which was down 5.2% from last month and down 41.4% from a year ago. 1 unit permits are at their lowest annual rate since August 1982.

Total housing starts were at a seasonally adjusted annual rate of 965,000 which was down 11.0% from the previous month, and down 29.6% below July 2007.  1 unit starts were at 641,000 which is down 2.9% from June 2008 and down 39.2% from a year ago. Housing completions were at a seasonally adjusted annual rate of 1,035,000 (1 units were at 791,000) which was 8.7% below the previous month, and 31.7% below June 2007.  The amount of new homes being built is starting to equal demand.  However, there still remains a large amount of inventory.

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New home permits and starts surge higher due to NYC building code changes

The U.S. Census Bureau and the HUD Department announced the new homes construction stats for June 2008 today. Total building permits were at a seasonally adjusted annual rate of 1,091 and was 11.5% higher than May 2008 but was down 23.9% from a year ago.  Per the U.S. Commerce Department, "A new construction code that took effect in New York City on July 1 prompted builders to start construction on, and seek permits for, condos and apartments a month earlier."  1 unit permits were at a seasonally adjusted annual rate of 613,000 which was down 3.5% from last month and down 39.7% from a year ago.  1 unit permits are at their lowest annual rate since January 1991.

Total housing starts were at a seasonally adjusted annual rate of 1,066,000 which was up 9.1% over the previous month, but 26.9% below April 2007.  Again the increase was due to the NYC building code changes.  1 unit starts were at 683,000 which is down 5.3% from May 2008 and down 43.0% from a year ago.  Housing completions were at a seasonally adjusted annual rate of 1,167,000 (1 units were at 859,000) which was 1.2% higher than the previous month, and 21.7% below June 2007.

Excluding the New York City market, home builders are continuing to pare down their construction in order to shrink supply to meet the low demand.

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A wild week for Fannie and Freddie

Freddie Mac and Fannie Mae saw their shares get cut almost in half last week.  Freddie Mac's stock tumbled from a close of $14.50 on July 3rd to trading as low as $3.89 last Friday before recovering to $7.75. Fannie Mae went from $18.78 on July 3rd to as low as $6.68 last Friday before closing at $10.10. The freefall was kickstarted on Monday when Lehman Brothers analysts wrote a note to clients:

The new FAS 140 rule that seeks to stop companies keeping assets in off-balance sheet entities may force Fannie Mae and Freddie Mac to bring mortgages back onto their books, requiring them to put up capital, Lehman analysts led by Bruce Harting wrote in a note to clients today. Fannie Mae would need to add $46 billion of capital and Freddie Mac would need about $29 billion, the Lehman analysts wrote. The companies will probably get an exemption from the rule because it would be ``very difficult'' for them to raise that amount of capital, the analysts said.

Fannie Mae and Freddie Mac shares rebounded on Tuesday possibly in part because the market realized that the analyst also said that the companies would probably get an exemption from the rule. James Lockhart, the director of the Office of Federal Housing Enterprise Oversight, also said on Tuesday that "Fannie and Freddie are adequately capitalized at this point."

On Wednesday Fannie Mae paid a record yield of 74 basis points over the U.S. Treasuries. This was triple what they paid in June 2006. Credit-default swaps tied to their AAA rated debt were trading at levels implying their debt should be rated A2 instead. Also on Wednesday, William Poole, former St. Louis Federal Reserve President said that:

Freddie Mac is technically insolvent under fair value accounting, which measures a company's net worth if it had to liquidate all its assets to repay liabilities. Fannie Mae may become insolvent this quarter, Poole said, increasing pressure on the government to instigate a rescue. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules. The fair value of Fannie Mae's assets tumbled 66 percent to $12.2 billion and may be negative next quarter, Poole said.

On Sunday, the U.S. Treasury announced a plan making the implicit guarantee explicit.  Here is Treasury Secretary Henry Paulson's statement:

Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. Their support for the housing market is particularly important as we work through the current housing correction. GSE debt is held by financial institutions around the world. Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets. Therefore we must take steps to address the current situation as we move to a stronger regulatory structure. In recent days, I have consulted with the Federal Reserve, OFHEO, the SEC, Congressional leaders of both parties and with the two companies to develop a three-part plan for immediate action. The President has asked me to work with Congress to act on this plan immediately. First, as a liquidity backstop, the plan includes a temporary increase in the line of credit the GSEs have with Treasury. Treasury would determine the terms and conditions for accessing the line of credit and the amount to be drawn. Second, to ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed. Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer. Third, to protect the financial system from systemic risk going forward, the plan strengthens the GSE regulatory reform legislation currently moving through Congress by giving the Federal Reserve a consultative role in the new GSE regulator's process for setting capital requirements and other prudential standards. I look forward to working closely with the Congressional leaders to enact this legislation as soon as possible, as one complete package.

Fannie and Freddie were brought to their knees by declining home values.  The decline in home prices may be half way done.  If that is the case, it is hard to value how large this assistance to the GSEs will become.  However, with the GSEs holding or guaranteeing $5 trillion in mortgages, the number could be staggering.

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The State of the Nation's Housing 2008

The Joint Center for Housing Studies of Harvard University released their annual report on housing: "The State of the Nation's Housing 2008." The 44 page report gives a detailed look at the forces currently causing the housing crisis. There is a wealth of information and graphs in the report. Here are a few excerpts:

Assuming the vacancy rate prevailing in 1999–2001 was close to equilibrium, the oversupply of vacant for-sale units at the end of last year was around 800,000 units, or 1.0 percent of the owner stock.

In addition, the number of vacant homes held off the market other than for seasonal or occasional use surged from 5.7 million units in 2005 to 6.2 million in 2007.

Despite production cuts rivaling those in the 1978–1982 downturn, the number of vacant for-sale homes on the market did not shrink in the first quarter of 2008. The weak economy, tight credit, and concerns over whether house prices had bottomed out continued to suppress demand and delay the absorption of excess units. Until this oversupply is reduced, housing markets will not mend.

At last measure in 2006, 39 million households were at least moderately cost burdened (paying more than 30 percent of income on housing) and nearly 18 million were severely cost burdened (paying more than 50 percent). From 2001 to 2006, the number of severely burdened households alone surged by almost four million. Because of the unprecedented run-up in house prices and lack of real income growth, over half of this increase was among homeowners.

Housing permits fell 24 percent nationwide in 2007, with single family permits down 29 percent and multifamily permits down 9 percent for the year. This brings the total decline from the 2005 peak to 35 percent, including a 42 percent reduction in single-family permits. The downturn has been widespread, with permits declining in 94 of the 100 largest metropolitan areas over the two-year period. Smaller metropolitan areas have also been affected by the construction pullback, with 214 of 263 posting reductions in permits.

To wipe out past appreciation, home prices have to retreat the most in once-hot markets and the least in cold markets. For example, the 6.7 percent drop in the median house price in Indianapolis from the third-quarter 2005 peak to the fourth quarter of 2007 was enough to cancel out appreciation all the way back to 2000. In Sacramento, by contrast, the larger 21.8 percent drop in the median house price from its peak in the fourth quarter of 2005 to the end of 2007 only erased gains made since 2003.

The report chronicles how housing starts plunge before and at the start of a recession and recover either right before the end of the recession or shortly after. Currently our downturn is being led by housing. It will be interesting to see if the housing crisis extends the length of the downturn, or if the economy recovers first.

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Option ARMs: The Next Real Estate Crisis

Business Week calls Option ARMs The Next Real Estate Crisis. The article opens with this analogy:

The American homeowner must feel like one of those characters in an old cartoon who has just been hit by a falling piano. After dusting himself off and touching the large bump on his head, he probably doesn't expect another piano to be dangling overhead. But he'd be wrong.

The piano is the impending crisis caused by Option ARMs resetting to higher payments. These previous posts of mine took a look at Option ARMs: original post and an update.

The Business Week article gives us an update on some key statistics:

According to Credit Suisse (CS), monthly option recasts are expected to accelerate starting in April, 2009, from $5 billion to a peak of about $10 billion in January, 2010. Some of these loans have already started to recast. About 13% of option ARMs that were issued in 2006 were delinquent by 60 days by the time they were 18 months old, Credit Suisse said.

About a million borrowers have option ARMs, but only a fraction have already fallen due. [NOTE: should read "only a fraction have already recast."]

Among the states expected to be worst-hit is already battered California. Today, outstanding option ARM loans in the U.S. total about $500 billion, about 60% of which were sold to California homeowners, according to Credit Suisse.

Previously I had posted Credit Suisse's chart on resetting ARMs. This chart did not account for the payments recasting when the balance had grown larger than the recast amount of 110%, 115% or 125%.

The Business Week article now has Credit Suisse's updated chart accounting for recasts. According to the chart, the amount of Option ARMs recasting will rise from the current pace of about $2 billion a month to about $4 billion a month by the end of this year to about $10 billion a month by the end of next year. This is roughly $120 billion resetting in 2008 and 2009 with another $80 billion in 2010.

I posted this chart from IndyMac in my original Option ARM post. To update the status of the top 6: Washington Mutual stripped their CEO of the chairman title, Countrywide is being bailed out by Bank of America, American Home Mortgage went bankrupt, Wachovia fired their CEO, IndyMac is struggling to survive, and Capital One shut down their mortgage division. The others on the list are feeling the pain as well.

The mortgages that are resetting now have huge payment shocks. In an example I used in this post, a borrower with a first payment due in January 2005 had a beginning payment of $574.06 a month. The loan in that example reset in February 2008 to a payment of $1,468.43. That is a huge difference. Especially if the borrower could only afford the teaser payments. Many borrowers that took out these type of loans expected real estate prices to rise faster than their negative amortization. Instead, their loans are hitting 110% or 115% of their original balance causing resets and real estate prices instead of going up faster, have declined.

Wall Street is starting to address the potential problems involving Option ARMs. The recent surge in delinquencies is helping draw attention to this sector of loans.

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New home construction for April is down over 30% from last year

The U.S. Census Bureau and the HUD Department announced the new homes construction stats for April 2008 today. Building permits were at a seasonally adjusted annual rate of 978,000 (1 units were at 646,000) which was 4.9% over the previous month, but 34.3% below April 2007. Housing starts were at a seasonally adjusted annual rate of 1,032,000 (1 units were at 692,000) which was 8.2% over the previous month, but 30.6% below April 2007. However, single-family starts were down 1.7% from the previous month. Housing completions were at a seasonally adjusted annual rate of 1,000,000 (1 units were at 792,000) which was 16.0% below the previous month, and 34.9% below April 2007.

Rather than focus on the if construction is up or down, the focus should be on if there is a healthy amount of new construction. Before this current housing slowdown, about 98.1% of permits turned into starts (from 1997-2006), and 94.6% of permits were completed. Currently about 73% of new home construction is built for sale. The other homes are being built to be rented out or for owner use. In March 2008, 1 unit homes were selling at an annual pace of 526,000. Assuming typical completion and built for sale percentages, the permits issued will result in 80,000 less homes built than are currently being sold a year. The number of starts would result in 39,000 less homes built than are being sold. The number of completions are 52,000 more than are being sold a year. There is currently 11.0 months supply of new homes. Over 6 months supply indicates oversupply. As mentioned in this post, there are currently about 2 million excess homes in America. New home construction is now inline with sales, however this is not helping to reduce the oversupply of homes.

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