It's Supposed to Work, Dammit Part II: New Reports on Housing, Consumer Confidence, and Banking

From The Daily Capitalist

This was a big day for economic reports and the Case Shiller Q4 report, the Consumer Confidence Index, and the FDIC Q4 report came out with not-so-surprising results. Since I am occasionally accused of cherry-picking negative data, I wish to point out that the following is a report and analysis of the data as it is with hyperlinks to the sources if you wish to see the original data yourself and try to squeeze good news out of them.

Case Shiller Housing Report

Here are typical news reports on housing:

From the WSJ:

For the fourth quarter, the S&P Case-Shiller U.S. National Home Price Index posted a 2.5% decrease from a year earlier, a significant easing from the 19%, 15% and 8.7% declines in the rest of 2009. It fell 1.1% sequentially but rose 0.3% adjusting for seasonal factors.

From Bloomberg:

Home prices in 20 U.S. cities rose in December for a seventh consecutive month, indicating the industry at the heart of the worst recession since the 1930s is stabilizing.

The S&P/Case-Shiller home-price indexincreased 0.3 percent from the prior month on a seasonally adjusted basis, more than anticipated and matching the gain in November, figures from the group showed today in New York. The gauge was down 3.1 percent from December 2008, the smallest decline since May 2007. ...

“The rebound in the housing market since April seems to be related to” government efforts such as the homebuyer tax credit and the Fed’s purchase of mortgage-backed securities, Robert Shiller, who co-created the home-price index, said today in a Bloomberg Television interview. “A lot of people are coming in buying because they think the recession has just ended.”

Shiller's comment makes a lot of sense. This is an artificially stimulated market to a great extent. While I believe that the prime driver is lower prices, when the government shuts down the home buyer tax incentives in April, the market will pick up the down trend for a while.

I was intrigued by a report from my co-reporter, Tyler Durden at Zero Hedge, who brilliantly noted a flattening in the improving rate of decline of housing prices: September 146.7; October 146.59; November 146.25; December 145.90. Here's my chart on the trend from 2007 to the present. Note the slight rise begin to flatten and decline again in September (red line):

While small, the data fits in with the assumption that the incentives have run their course. According to the Report, only 4 of the 20 cities reported increases in December over November: Detroit, L.A., Las Vegas, and Phoenix -- where the deals are.

However, as they say, all real estate is local and much of the overall quarterly decline was due to Las Vegas, Phoenix, and the Miami-Tampa area. The Report noted:

The biggest [quarterly] month-to-month gain was in Los Angeles, where prices rose 1.4 percent. Home prices rose an adjusted 1.2 percent in Phoenix, 1.1 percent in San Diego, and 0.9 percent in both Boston and Las Vegas.

I see a lot of flippers back into the markets taking advantage of foreclosure and short sales which puts a floor under the market. L.A.'s growth is a direct result of this as buyers smell bargains. I think demand will remain as prices continue to decline, although at a slower pace. There are still too many potential foreclosures out there (3 million per RealtyTrac) to justify a resurgent market, but buyers find that attractive right now.

Consumer Confidence

The Conference Board's Consumer Confidence Index took a big hit as it fell 10 points, from 56.5 in January to 46.0 in February. The Journal's survey of forecasters predicted the Index to be 54.8, while Bloomberg's panel projected it to be 55. Some quotes from the news reports:

“Consumer spending is going to disappoint throughout most of the year,” said Steven Ricchiuto, chief economist at Mizuho Securities USA Inc. in New York. The economy “may not be out of the woods.”

An increase in initial jobless claims so far this year signals the labor market isn’t improving, said Ricchiuto. Claims rose to 473,000 in the week ended Feb. 13, compared with 432,000 at the end of 2009, the lowest since July 2008.

"Fewer consumers [are] anticipating an improvement in business conditions and the job market over the next six months," said Lynn Franco, director of the Conference Board Consumer Research Center. "Consumer also remain extremely pessimistic about their income prospects."

Now they tell us. I wonder what they would have said if the numbers were a bit better.

FIDC Q4 Quarterly Banking Profile

The big banks are doing much better but the data looks bleak for the rest of the banks. Here are the key points of the FDIC report. This is fascinating data and I am excerpting it in detail because of the significance:

• Total assets [i.e., loans] of insured institutions fell for a fourth consecutive quarter, declining by $137.2 billion (1.0 percent). During the year, total industry assets declined by a net $731.7 billion (5.3 percent), the largest percentage decline in a year since the inception of the FDIC [1942].
• The average return on assets (ROA) for all four of the asset size groups featured in the Quarterly Banking Profile was better than a year ago, although only the largest size group—institutions with more than  $10 billion in assets—had a positive average ROA for the quarter.
• More than one in four institutions (29.5 percent) reported  negative net income for the year, up from 24.8 percent in 2008. This is the highest proportion of unprofitable institutions in any year since at least 1984. The average ROA in 2009 was 0.09 percent, up from 0.03 percent in 2008.
• As was the case in 2008, full-year industry earnings for 2009 (which consist of calendar-year net income of 8,012 insured institutions filing December 31 financial reports) would have been significantly lower if losses experienced by institutions that failed during the year were reflected in year-end reporting.
• The annualized net charge-off rate (NCO) rose to 2.89 percent, up from 1.95 percent a year earlier and 2.72 percent in the third quarter of 2009. This is the highest quarterly NCO reported by the industry in the 26 years for which quarterly NCO data are available.
• NCOs in all major loan categories increased from a year ago. The largest increases occurred in residential mortgage loans, where NCOs rose by $3.3 billion (47.7 percent); credit cards (up by $2.7 billion, or 41.4 percent); loans to commercial and industrial (C&I) borrowers (up $2.3 billion, or 37.0 percent); home equity loans (up $1.9 billion, or 58.6 percent); and real estate loans secured by nonfarm nonresidential properties (up$1.9 billion, or 130.9 percent). This is the 12th consecutive quarter [third year] that NCOs have posted a year-over-year increase.
• The total amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) increased by $24.3 billion (6.6 percent) in the fourth quarter, to $391.3 billion, or 5.37 percent of all loans and leases at yearend. This is the highest level for the industry’s noncurrent rate in the 26 years that all insured institutions have reported noncurrent loan data.
• The average coverage ratio of reserves to noncurrent loans and leases fell from 60.1 percent to 58.1 percent, ending the year at the lowest level since midyear 1991.
• The industry’s ratio of reserves to total loans and leases rose from 2.97 percent to 3.12 percent during the quarter, and is now at its highest level since the creation of the FDIC.
• Bank equity increased by only $4.1 billion (0.3 percent), the smallest increase in the last four quarters.
• During the year, total industry assets declined by a net $731.7 billion (5.3 percent), the largest percentage decline in a year since the inception of the FDIC. Total loan and lease balances declined for the sixth quarter in a row, falling by $128.8 billion (1.7 percent).
• During the quarter, the percentage of industry assets funded by deposits rose from 68.7 percent to 70.4 percent, the highest level since March 31, 1996.
• For the full year, the number of reporting institutions fell from 8,305 to 8,012. Only 31 new charters were added in 2009, the smallest annual total since 1942. Mergers absorbed 179 institutions during the year, and 140 insured institutions failed. This is the largest number of bank failures in a year since 1992. The number of institutions on the FDIC’s “Problem List” rose to 702 at the end of 2009, from 552 at the end of the third quarter and 252 at the end of 2008. Both the number and assets of “problem” institutions are at the highest level since June 30, 1993.

Banks are in deep trouble and their bad debts increase their need to retain capital and restrict new lending. Note that lending posted its biggest decline since 1942! It appears they are in a bad cycle of falling asset values and the drive to meet regulatory requirements for sufficient Tier 1 capital and reserves. Also of note is the fact that deposits are increasing as consumers refrain from spending and increase their savings. What is significant is that many of these statistics are unprecedented or at historic levels.

Here is a representation of bank failures since the start of the crisis, from the Wall Street Journal.  Go see the original animated version here.

McKinsey Quarterly Survey

Here is their conclusion:

When asked about the likeliest description of the global economy over the next three months, 46 percent of executives pick “constrained global markets perpetuate imbalances”— far more than choose any other description. This view, along with a dip in the share of respondents who expect their national economies to be better in six months, implies a slight dampening of economic hopes since December. Low consumer demand is seen as the largest single threat to national economic recovery in developed economies.

Respondents in developing economies, however, see a bright picture for both their companies and national economies.

When China's real estate bubble bursts, will the developing economies be so optimistic?

Comments

[Anonymous]

I wish people would educate themselves before opening their moufs!
In Ca, Az and other NON-RECOURSE states the banks cant touch you after a foreclosure IF yours was a purchase money loan i.e. no refs. ALL they get is the house--NOT A DIME MORE. On a short sale (different than a foreclosure mind you) you need to make sure that you, with the help of a real estate attorney, negotiate away any future liability between what the balance of the home loan was and the price they sell it for.
On the Federal level--any disparity between the foreclosure or short sale price in terms of taxes owed to uncle slam has been forgiven thru 2012. Check w/ your state for applicable tax laws. In CA--as long as it is a purchase money loan, no taxes will be levied on the difference.
So for many people, the best thing to do is WALK AWAY!!!!!!
You can rent and you wont get a tax hit nor will you get hounded by creditors--it simply wont happen. If they hound you, report them and or sue them and make even more $$.
With the $1000-2000 more a month you will have in your pocket, along with the nest egg built by not paying for 6-12 months while the foreclosure process moves along, you wont need credit and can start rebuilding your balance sheet--just like the big boys are doing.
WAKE UP!!!!!!!!

[ATG]

DRV>11.37...

http://www.jubileeprosperity.com/

[Anonymous]

Problem is in states like Florida the banks are starting to garnish wages and the rest on people who walk away if they have a job no matter how underwater you are and the rest. This is just starting they are reporting and the people who dont appear to be good targets for garnishment the banks are turning over to collection agencies to file. I guess in some states banks can do this and in some they cant come after you for the difference from what they ultimately sell the property for.

[Ned Zeppelin]

Debtor's prison. The key is to understad whether in your state, by statute, foreclosing is the sole remedy, or can the bank pursue you for the difference between amount recovered and amount owed.  If you do a deed-in-lieu of foreclosure, for god's sake make sure the release document says you are released of any further obligation and I'd add a "covenant not to sue" to boot.

Free legal advice is worth what you pay.

[Anonymous]

The American people are complete and utter fools that deserve to loose their money by buying real eastate now or in the foreseeable future.

Face it America, house prices are totally unaffordable and have no where to go but drop and drop severly. Only a fool will believe what is printed in the press about a housing turn-around. Just look at who is giving out the information - various real-estate lobby/interest groups. They are really impartial - NOT!!!

Housing and the economy will never go back to what it was, so why spend your money on a dream that is really nothing short of a nightmare.

GO OUT AN BUY A HOUSE NOW. IT WILL BE WORTH A LOT LESS IN 2 MONTHS.

[Anonymous]

Any talk of a housing recovery or economic recovery is a lie. I was recently transferred (I am thankful for my job), but my house was not included in the package. We purchased the house in 2005 with 15% down. The house is located in a middle class neighborhood of a middle class suburb of Seattle. The house was intitally listed for 10k less than our purchase price. We have since dropped the price another 50k and still have no offers. At best I will do a short sale, at worst I will walk away. I have no apologies. I have to do what I can to protect my family. There is no bottom in sight.

[Vacca]

If you plan on walking away from your mortgage, you'd better check with an expert first, because in some states, the debt can follow you around for years afterwards. The banks sell your information to collection agencies and they can come after you years after the default, by garnishing your wages etc

[SWRichmond]

The social contract doesn't hold anymore.  Do what you must to protect yourself and your family.

[Anonymous]

"unstated intent to destroy"
+1 quadrillion
http://www.iamthewitness.com/books/Andrew.Carrington.Hitchcock/Synagogue...

[jc125d]

There are plenty of sources where those inclined to think for themselves can find unbiased information to help them manage their expectations. It would be good if the politicians and media would tell the truth, instead of playing the same golden oldies as they point us over the cliff. It would seem that there is an unstated intent to destroy, because it's hard to believe those achievers who clawed their way to positions of influence can indeed be that stupid.

[A tumor named Marla]

Politicians and media have no incentive to tell the truth.

Politicians would be voted out of a job, and Big Media is controlled by the multinationals and their advertisers, all of whom have vested interest in The Strong American Economy.  It may not be officially state-run like Pravda in the bad old Soviet days, but the effect is the same -- the proles get told whatever the Party thinks they need to be told.

NEVER underestimate Stupidity (in this case, short-sightedness/greed/lack of understanding of finance and econ).

[Anonymous]

Get ready..the Debtors revolution is just starting to unfold.

Someone better find a lot more lipstick for this piggy starting to unfold...

[Anonymous]

Get ready..the Debtors revolution is just starting to unfold.

Someone better find a lot more lipstick for this piggy starting to unfold...

[Anonymous]

Watch for debtors prisons first.

Someone has to win and it may as well be the rich.

[SWRichmond]

Debtors' prisons?  Already done.  Try not paying child support, even if you're unemployed and broke.

[Gordon_Gekko]

This is all fine and dandy, but WHEN THE HELL will all this crash the markets?

[Anonymous]

That sir, is THE question, is it not?

[Miyagi_san]

FDIC's numbers are suspect with all this "new normal" math. Ratio of Reserves to total loans increased to the highest level ever...........Low hanging fruit, pick your own

[Anonymous]

The statement about "buyers smelling deals" doesn't make any common sense. What is a deal if the house price will be lower in 6 months and decline or stay low for the next decade?

No one is using common sense and the house of cards can't stand any longer.

People need to understand we are never going back to the way things were and we should not attempt to make plans to act like we did back then. Fact is house prices are not affordable to the average family income and prices will definitely drop severely.

WAKE UP, ALL YOU STUPID AMERICANS!!!!!!!

[GoldSilverDoc]

The question is, how does one trade on the stupidity index?

[Dburn]

+1

We should let those prices drop . I say this from the standpoint of someone who is underwater but the payments are totally affordable.

"Cash flow is a operating term, Profits are an accounting concept" that now has gone from a concept to pure fairy tales with the blessing of the Federal Govt. People who own houses that have spent borrowed money they don't have on the beleif that they have wealth that isn't real are finally waking up from the drug of a debt stimulated economy. If housing falls , people will start to realize they aren't rich anymore and have no business running up tabs on credit cards or taking out Home equity loans for more home improvements to make their fairy tale more valuable or financing that ivy league education for the kids.

It's fairy tale Accounting which is then used as a basis for fairy tale economics which is then used for toxic policy that keeps digging a deeper and deeper hole.

Why do they bother with Sarbanes Oxley anymore? Is this just for ironic hysterics or do they think people actually think the net worth of business is accurate. As mark to myth gets out to the rest of the business world: "Yeah, lets take the high end of the quarter end inventory "estimate" and use that as a plug number for tomorrows earning release. That improves EPS by 21%. Blow-out numbers I tell you"

which translates into bs numbers about total wealth in the US from Business to Individuals. Which is why people still say we are the richest nation in the world and justify borrowing massive amounts of money to give to bankers who say "everything is just jake with us. Bonuses have never been better".

[hettygreen]

I think that report should have been edited to read "myopic buyers smelling deals" or "buyers who refuse to learn the lesson history has to offer, smelling deals," or "buyers who are totally bereft of any economic sense of smell, smelling deals."

[Cyan Lite]

TLC is doing re-runs of "Property Ladder" and "Flip This House" and updating the Copyright on the episodes to 2009 and 2010.  This gives folks the false impression that house flipping is still going on today and people are making 200% returns in three weeks.

[Anonymous]

Yeah, I've noticed that... pathetic... Why not just show some 'reality' and do episodes where the house flippers are stuck with investment property that they can't unload...? That would be entertaining... But no... can't show *that*...

[Anonymous]

"People need to understand we are never going back to the way things were"

Sadly, that is not what the MSM is telling people. Our leaders are playing "the crisis" as past tense, and enough people are buying the myth that we are digging yet a few more graves. The irresponsibility of accelerating as we approach the abyss is truly stunning and very sad.

[Ned Zeppelin]

How about today's WSJ headline: "Lending Falls at Epic Pace."  I see the prior episodes when it fell this precipitously were 1942 (worse), and 1991 (half as bad).  I understand what got us out of the first mess (WWII), and I think I understand that 1991 was fixable only because the debt balloon had only then begun to be inflated, and there was capacity on the Big Credit Card to amp up. 

Got deflation? Got Depression II? I don't like any of this and think I see a big cliff ahead. Housing is precarious, at best, and hanging on by a thread.

[GoldSilverDoc]

Ned, WWII didn't get us out of anything.  Blowing things up and killing people does not improve economic activity.

See "Broken Window Fallacy".