Standard & Poor’s

U.S. Real Estate Delinquencies Top 10% for First Time, Morgan Stanley Says, By Sarah Mulholland , Bloomberg.com

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Delinquencies on commercial mortgages packaged and sold as bonds surpassed 10 percent for the first time last month, according to Morgan Stanley.

Payments more than 30 days late jumped 26 basis points to 10.15 percent in April, Morgan Stanley analysts said in a report yesterday. While the pace of increase has slowed since the middle of last year, that’s partly because delinquencies are being offset as troubled loans are resolved. The rate of borrowers missing payments for the first time has been constant for the past four months, the analysts wrote.

“The bottom line is that loan performance is not yet exhibiting significant improvement,” according to the analysts led by Richard Parkus in New York. “Many market participants have come to believe that credit deterioration is more or less over, and were caught off guard by April’s rise.”

Delinquency rates for loans bundled into securities during the bubble years, when property values peaked amid lax underwriting, have reached 10.37 percent for 2006 deals and 13.26 percent for those in 2007, according to Morgan Stanley.

Borrowers with maturing debt taken out during the boom are still struggling to retire loans, according to the report. About 63 percent of commercial mortgages in bonds scheduled to mature in April paid off on time. That rate dropped to 33 percent for loans taken out from 2005 through 2008, the analysts said.

Sales of commercial-mortgage backed securities are rising after plummeting to $3.4 billion in 2009 from a record $234 billion in 2007, according to data compiled by Bloomberg. Wall Streethas sold $8.6 billion of the debt in 2011, compared with $11.5 billion in all of last year, the data show. Sales may reach $35 billion this year, according to Standard and Poor’s.

Property Values Down

New bond offerings provide financing to borrowers with maturing loans. Still, property values are down 44.6 percent from October 2007, according to Moody’s Investors Service, making it difficult for property owners to come up with the difference when repaying the debt.

“Loans originated after 2005 had weaker loan characteristics,” Parkus said in a telephone interview. “On top of that, they were done at the peak of the cycle so they didn’t benefit from any price appreciation prior to the crisis.”

To contact the reporter on this story: Sarah Mulholland in New York atsmulholland3@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

Pending Sales of U.S. Existing Homes Rose 3.5% in November, by Bob Willis, Bloomberg.com

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The number of contracts to buy previously owned homes rose more than forecast in November, a sign sales are recovering following a post-tax credit plunge.

The index of pending resales increased 3.5 percent after jumping a record 10 percent in October, the National Association of Realtors said today in Washington. The median forecast in a Bloomberg News survey called for a 0.8 percent rise in November, and the gain was the fourth in five months. The group’s data go back to 2001.

Home demand is stabilizing after sales collapsed to a record low in July, as the effects of a tax incentive worth as much as $8,000 waned. A jobless rate hovering near 10 percent means foreclosures will remain elevated and any recovery in housing, the industry that precipitated the worst recession since the 1930s, will take time to develop.

The figures are “in line with an ongoing gradual pickup in existing-home sales in December,” Yelena Shulyatyeva, an economist at BNP Paribas in New York, said in an e-mail to clients. “Housing demand should continue its uneven recovery entering 2011 as housing oversupply should keep pushing housing prices down.”

A report today from the Labor Department showed claims for jobless benefits fell last week to the lowest level since July 2008, showing the labor market is improving heading into 2011. Filings decreased by 34,000 to 388,000 in the week ended Dec. 25, fewer than the lowest estimate of economists surveyed.

Business Barometer

Other figures showed the economy accelerated at the end of the year. The Institute for Supply Management-Chicago Inc.’sbusiness barometer jumped to 68.6 in December from 62.5 in the prior month. Readings greater than 50 signal expansion and the level was the highest since July 1988.

Stocks fluctuated between gains and losses after the reports. The Standard & Poor’s 500 Indexfell 0.1 percent to 1,258.23 at 11:17 a.m. in New York. The benchmark 10-year Treasury note declined, pushing up the yield to 3.39 percent from 3.35 percent late yesterday.

The projected increase in pending home sales was based on the median of 24 forecasts in the Bloomberg survey. Estimates ranged from a drop of 5 percent to a gain of 5 percent.

Two of four regions saw an increase, today’s report showed, led by an 18 percent jump in the West. Pending sales rose 1.8 percent in the Northeast. They fell 4.2 percent in the Midwest and 1.8 percent in the South.

November 2009

Compared with November 2009, pending sales in the U.S. were down 2.4 percent.

Even as the labor market is improving and manufacturing is growing, housing remains a weak link. NAR chief economist Lawrence Yun last week estimated there were about 4.5 million distressed properties that could potentially reach the market in coming months.

Average home prices as measured by the S&P/Case-Shiller indexes have begun dropping again after rising when the tax incentive was in effect. The group’s 20-city index fell 0.8 percent in October from a year earlier, the biggest year-on-year decline since December. It fell 1 percent from the prior month, and is down 30 percent from its July 2006 peak.

Reports earlier this month showed the housing market is stuck near recession levels. Housing permits fell in November to the third-lowest level on record, while starts rose for the first time in three months, the Commerce Department reported Dec. 16.

Home Sales

Sales of new and existing homes last month rose less than projected by the median forecast of economists surveyed by Bloomberg, reports from the Commerce Department and the National Association of Realtors showed last week. Existing home sales represent closings on the contracts captured by the pending sales gauge.

Hovnanian Enterprises Inc., the largest homebuilder in New Jersey, on Dec. 22 reported a fourth-quarter loss bigger than analysts expected as revenue fell 19 percent.

“The year can generally be described as one where we and the industry were bouncing along the bottom,” Chief Executive Officer Ara Hovnanian said on a conference call.

Even so, economists in the past two weeks have boosted projections for fourth-quarter growth, reflecting a pickup in consumer spending and passage of an $858 billion bill extending all Bush-era tax cuts for two years.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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    Inside Lending Newsletter From Geoffrey Boyd, Prime Lending

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    Ben Bernanke (lower-right), Chairman of the Fe...

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    INFO THAT HITS US WHERE WE LIVE  Last week’s housing market data centered on Standard & Poor’s S&P/Case-Shiller Home Price Index. This showed home prices UP in July for the fourth month in a row, but the pace of their gain had slowed from prior months. With the expiration of the government’s home buyer tax incentives, some observers wonder if the S&P/Case-Shiller will keep moving up. The composite 20-city index, a broad measure of U.S. home prices, showed a 3.2% increase year over year, the sixth month in a row it posted an annual gain.

    Nonetheless, home price gains did slow in the waning days of the tax credits. In July, only 12 of the 20 cities surveyed showed price gains, compared to 17 cities reporting rising prices in June. Analysts pointed out that these results underscore the fact that the spring/early summer months are the best for home sales. Most experts feel the next few months should give us a better idea of the true strength of the housing market.

    >> Review of Last Week

    A BIT OF A BREATHER… Investors on Wall Street took a rest last week from bidding stock prices up the way they had earlier in the month. Performance of the major market indexes was uninspiring, though slippages were all less than a half a percent. But performance for the month was impressive. The broad-based S&P 500 index, favored by professional investors, shot up 8.8% for September, its best monthly gain since April 2009 and its best September reading in over 70 years.

    Perhaps investors took the week off because they remain cautious about the near-term economic recovery. Consumers seem to agree, as the week began with a surprise drop in September’s Consumer Confidence Index, which hit a seven-month low, falling far short of consensus expectations. The ISM Manufacturing Index also slid a bit from August to September, missing estimates, but remaining in expansion territory.

    Upside economic data included better than forecast weekly initial jobless claims, although 453,000 is still not a good number. Continuing claims dropped by 83,000 for the week, but that number remains well above 4 million. Personal income and spending (PCE) for August were up better than expected and Core PCE was up just 0.1%, so inflation is still in check.

    For the week, the Dow ended down 0.3%, to 10829.68; the S&P 500 was down 0.2%, to 1146.24; and the Nasdaq was off 0.4%, to 2370.75.

    The bond market ended the week with investor interest helping prices in some areas. One was the FNMA 30-year 4.0% bond we watch, which ended UP 10 basis points for the week, closing at $102.27. According to Freddie Mac‘s weekly survey, national average mortgage rates for fixed-rate mortgages dropped a tad, remaining at historically low levels.

    >> This Week’s Forecast

    WHERE WE’RE GOING WITH HOMES AND JOBS… The week begins with August Pending Home Sales, which count signed contracts and therefore tell us what will be happening with closings a few months out. Unfortunately, the consensus expects the August reading to be down a bit from July. But September ISM Services is expected to show the non-manufacturing sector still indicating expansion, with a reading just over 50.

    The week ends with the September Employment Report and the forecast is for no increase in payrolls overall, although 70,000 jobs are expected to be added to the private sector. However, population growth outpaces this rate of job creation, so unemployment is predicted to tick up to 9.7%.

    >> The Week’s Economic Indicator Calendar

    Weaker than expected economic data tends to send bond prices up and interest rates down, while positive data points to lower bond prices and rising loan rates.

    Economic Calendar for the Week of October 4 – October 8

    Date Time (ET) Release For Consensus Prior Impact
    M
    Oct 4    		 10:00 Pending Home Sales Aug 1.0% 5.2% Moderate
    Tu
    Oct 5    		 10:00 ISM Services Sep 51.8 51.5 Moderate
    W
    Oct 6    		 10:30 Crude Inventories 10/2 NA –0.475M Moderate
    Th
    Oct 7    		 08:30 Initial Unemployment Claims 10/2 455K 453K Moderate
    Th
    Oct 7    		 08:30 Continuing Unemployment Claims 9/25 4.450M 4.457M Moderate
    F
    Oct 8    		 08:30 Average Workweek Sep 34.2 34.2 HIGH
    F
    Oct 8    		 08:30 Hourly Earnings Sep 0.1% 0.3% HIGH
    F
    Oct 8    		 08:30 Nonfarm Payrolls Sep 0K –54K HIGH
    F
    Oct 8    		 08:30 Nonfarm Private Payrolls Sep 70K 67K HIGH
    F
    Oct 8    		 08:30 Unemployment Rate Sep 9.7% 9.6% HIGH

    >> Federal Reserve Watch

    Forecasting Federal Reserve policy changes in coming months  There’s been a lot of talk about the Fed’s readiness to provide a second round of quantitative easing (QE-2) if needed. This has led economists to believe that the Fed Funds Rate will remain at its rock bottom levels for quite some time. Note: In the lower chart, a 1% probability of change is a 99% certainty the rate will stay the same.

    Current Fed Funds Rate: 0%–0.25%

    After FOMC meeting on: Consensus
    Nov 3 0%–0.25%
    Dec 14 0%–0.25%
    Jan 26 0%–0.25%

    Probability of change from current policy:

    After FOMC meeting on: Consensus
    Nov 3 <1%
    Dec 14 <1%
    Jan 26 <1%
    Geoffrey Boyd
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