by Calculated Risk on 5/01/2008 09:59:00 AM

Spending declined in March for residential, but increased to for non-residential private construction. The increase in March - to a new record high for non-residential spending - followed three straight months of spending declines.

From the Census Bureau: March 2008 Construction Spending at $1,123.5 Billion Annual Rate

Spending on private construction was at a seasonally adjusted annual rate of $827.4 billion,1.7 percent below the revised February estimate of $842.0 billion.

Residential construction was at a seasonally adjusted annual rate of $445.0 billion in March, 4.6 percent below the revised February estimate of $466.7 billion.

Nonresidential construction was at a seasonally adjusted annual rate of $382.3 billion in March, 1.9 percent above the revised February estimate of $375.3 billion.

Click on graph for larger image.

The graph shows private residential and nonresidential construction spending since 1993.

Over the last couple of years, as residential spending has declined, nonresidential has been very strong. It appeared - over the last three months - that the expected slowdown in non-residential spending had arrived.

However, non-residential spending in March set a new nominal record (seasonally adjusted annual rate). This is a little surprising given tighter lending standards and reduced capital spending plans - and perhaps the numbers for March will be revised downwards in the next release.

by Calculated Risk on 5/01/2008 09:43:00 AM

Press Release: The Home Depot Updates Square Footage Growth Plans

The Company has determined that it will no longer pursue the opening of approximately 50 U.S. stores that have been in its new store pipeline ...

Aggregate new store capital spending will be reduced by approximately $1 billion over the next three years ...

The Company reiterated that its total capital spending for the current fiscal year is projected to be approximately $2.3 billion, down from $3.6 billion last year.

The Company also announced that [it] will close 15 underperforming U.S. stores that do not meet the Company's targeted returns.

Of course Home Depot is being hit hard by the slump in home improvement spending, but this is another company significantly reducing capital spending.

by Calculated Risk on 4/30/2008 07:02:00 PM

CNN Video via Yahoo: Angry owners vandalizing foreclosed homes in Las Vegas

Update: And here is a video from the O.C. Register of Riding with a sheriff’s deputy on eviction day.

by Calculated Risk on 4/30/2008 06:42:00 PM

From the WSJ: Starbucks to Cut U.S. Store Growth But Plans to Accelerate Overseas

Starbucks Corp. plans to drastically reduce the number of stores it builds in the U.S. over the next three years ...

Starbucks said Wednesday that this year, it plans to open 1,020 locations in the U.S., down from the 1,175 that it had planned for as of January. But over the next three years, Starbucks plans to cut that number by more than half, opening less than 400 net new locations per year in the U.S.

This is another company cutting investment plans related to non-residential structures.

by Calculated Risk on 4/30/2008 02:21:00 PM

Update: The Fed's "Pause" signal:

If you compare the current FOMC statement to the March 18th statement (previous meeting), it appears the Fed is signaling a pause.

On March 18th, from the FOMC statement (emphasis added):

"Today’s policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability."

The same paragraph of the statement today:

"The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability."

It appears the Fed believes the downside risks to growth have diminished and the inflation concerns remain about the same.

FOMC statement:

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 2 percent.

Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.

Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, who preferred no change in the target for the federal funds rate at this meeting.

by Calculated Risk on 4/30/2008 11:41:00 AM

After the Q4 GDP report was released, I wrote: Non-Residential Investment: The Key?

The good economic news in the Q4 GDP report was that non-residential investment was still positive. Investment in non-residential structures increased at a very robust 15.8% annualized real rate. And investment in equipment and software increased at a more modest 3.8% annualized real rate. This non-residential investment is probably the key (along with consumer spending) on how weak the economy will be in 2008.

As I highlighted this morning, the non-residential investment news has turned negative in Q1 2008. Investment in non-residential structures was off 6.2% at an annualized rate, and investment in equipment and software investment declined 0.7%.

This is the normal historical pattern: residential investment leads non-residential investment, and all signs point to a sharp investment slump in 2008, especially in non-residential structures.

This graph shows the YoY change in Residential Investment and investment in Non-residential Structures.

Note that residential investment (RI) is shifted 5 quarters into the future. The typical lag between RI and non-RI structures is 4 to 8 quarters.

Although the year-over-year change is still positive, this will probably turn negative in Q2 or Q3.

Since non-residential investment is highly correlated with recessions, this is a strong indicator that the U.S. economy is now in or near recession.

by Calculated Risk on 4/30/2008 08:51:00 AM

The Bureau of Economic Analysis reports that the U.S. economy grew at a 0.6% annual real rate in Q1 2006, mostly because of a buildup in inventories. Without the unwanted buildup in inventory, GDP would have been negative, suggesting the economy is in recession.

Consumer spending was up 1.0% at an annual rate, with services up 3.4% (the two month method predicted 1% PCE growth in Q1), and investment spending was off in all categories: residential investment off -26.7%, non-residential structures off -6.2%, and equipment and software investment off -0.7%.

Click on graph for larger image.

This graph shows residential investment (RI) as a percent of GDP since 1960. RI as a percent of GDP is now at 3.8%, still well above the investment lows in 1982 (3.15%) and 1991 (3.3%). RI will probably decline further over the next few quarters.

Perhaps more important for the economy is that investment in equipment and software, and investment in non-residential structures, both turned negative in Q1. This is important because business investment slumps are highly correlated with the beginning of a recession.

The second graph shows non-residential investment in structures as a percent of GDP since 1960.

Non-RI structure investment has finally turned negative, and will probably decline sharply during 2008. See CRE Bust: How Deep, How Fast?

More on investment later.

by Calculated Risk on 4/29/2008 10:07:00 PM

The WSJ reports: HBOS Sets $8 Billion Rights Issue

HBOS PLC announced a £4 billion, or roughly $8 billion, rights issue designed to bolster the bank against a worsening market and repair the lender's capital base following write-downs.

... The price is 45% below Monday's closing share price of 496 pence.

Ouch. A 45% discount!

And from MarketWatch: Citigroup to raise $3 billion selling new stock

Citigroup Inc. said late Tuesday that it is raising $3 billion selling new shares as the financial-services giant tries to rebuild capital after huge losses from the credit crunch

.

by Calculated Risk on 4/29/2008 07:50:00 PM

From Reuters: S&P cuts $41 bln of mostly higher-rated Alt-A deals

Standard & Poor's cut the ratings on about $41 billion of mostly higher-rated U.S. residential mortgage-backed securities backed by so-called Alt-A loans on Tuesday.

The rating agency's action affected 2,183 RMBS classes from 334 Alt-A deals originated during 2006.

And here is a key statement on foreclosures and REOs:

"Due to current market conditions, we are assuming that it will take approximately 15 months to liquidate loans in foreclosure and approximately eight months to liquidate loans categorized as real estate owned (REO)."

So homes going into foreclosure today - in S&P's view and on average - will be liquidated 15 months from now, or in the summer of '09. So much for the '09 spring selling season - it will be dominated by REOs from the record foreclosure activity today.

by Calculated Risk on 4/29/2008 06:04:00 PM

Yesterday the Census Bureau reported the homeownership and vacancy rates for Q1 2008. Here are a few graphs and some analysis ...

Click on graph for larger image.

The homeownership rate is now back to the levels of the summer of 2001. Note: graph starts at 60% to better show the change.

The declining homeownership rate shows the huge drag on the housing market of the shift - at the margin - of households moving from ownership to renting.

The homeownership vacancy rate increased to a record 2.9% (from 2.8% in Q3).

The second graph shows the homeowner vacancy rate since 1956. A normal rate for recent years appears to be about 1.7%. There is some noise in the series, quarter to quarter, so perhaps the vacancy rate has stabilized in the 2.7% to 2.9% range.

Still this leaves the homeowner vacancy rate almost 1.2% above normal, and with approximately 75 million homeowner occupied homes; this gives about 900 thousand excess vacant homes.

The rental vacancy rate increased to 10.1% in Q1 2008, from 9.6% in Q4. The rental vacancy rate had been trending down slightly for almost 3 years (with some noise).

It's hard to define a "normal" rental vacancy rate based on the historical series, but we can probably expect the rate to trend back towards 8%. According to the Census Bureau there are 35.7 million rental units in the U.S. If the rental vacancy rate declined from 10.1% to 8%, there would be 2.1% X 35.7 million units or about 750,000 units absorbed.

This would suggest there are about 750 thousand excess rental units in the U.S. that need to be absorbed.

There are also approximately 200 thousand to 250 thousand excess new homes above the normal inventory level (for home builders).

If we add this up, 750 thousand excess rental units, 900 thousand excess vacant homes, and 200 thousand excess new home inventory, this gives 1.85 million excess housing units in the U.S. that need to be absorbed over the next few years. (Note: this data is noisy, so it's hard to compare numbers quarter to quarter, but this is probably a reasonable approximation).

These excess units will keep pressure on housing starts and prices for some time.