by Calculated Risk on 1/09/2009 02:47:00 PM

Yesterday I linked to an article in the Los Angeles Times about declining residential rents: Housing downturn hits L.A.-area rents

There are several different factors impacting rental supply and demand - and therefore rents - for residential properties.

First, there has been a significant shift away from homeownership:

Click on graph for larger image in new window.

The homeownership rate decreased slightly to 67.9% in Q3 2008 (most recent data) and is now back to the levels of the summer of 2001. Note: graph starts at 60% to better show the change.

This would suggest a rising demand for rental properties.

Second, a large number of homes are now sitting vacant:

This graph shows the homeowner vacancy rate. A normal rate for recent years appears to be about 1.7%.

The recent surge in homeowner vacancy rates is probably due to foreclosures and other distressed properties. Many REOs (lender Real Estate Owned) are left vacant until sold, and this has taken a number of housing units off the market.

Note that Fannie and Freddie have proposed a new program to keep tenants in foreclosed properties, but so far the standard lender practice is to evict tenants after foreclosure and let the house sit vacant.

So the first two graphs might suggest rising rents. Demand was rising as households moved from homeownership to renting, and the overall available supply of housing units was declining as many REOs were left vacant. And in fact, rents have been rising in many areas until now, from the LA Times story:

Nationwide, apartment rents eased 0.1% in the fourth quarter, the first drop since 2002, according to the analysis by research firm Reis Inc. ... according to [REIS] apartment rents fell in 54 out of 79 U.S. metropolitan areas in the fourth quarter of 2008.

However the supply of rental units has been surging:

This graph shows the number of occupied (blue) and vacant (red) rental units in the U.S. (all data from the Census Bureau).

The total number of rental units (red and blue) bottomed in Q2 2004, and started climbing again. Since Q2 2004, there have been almost 3.5 million units added to the rental inventory. This increase in units almost offset the recent strong migration from ownership to renting, so the rental vacancy rate has only declined slightly (from a peak of 10.4% in 2004 to 9.9% in the most recent quarter).

Where did these 3.5 rental units come from?

The Census Bureau's Housing Units Completed, by Intent and Design shows 1.05 million units completed as 'built for rent' since Q2 2004. This means that another 2.5 million rental units came from conversions from ownership to rentals.

These could be investors buying REOs for cash flow, older out-of-service units being brought back to the rental market, condo "reconversions", builders changing the intent of new construction (started as condos but became rentals), flippers becoming landlords, or homeowners renting their previous homes instead of selling.

Note: it is also common in a recession for apartment vacancies to rise as households double up by moving in with a friends or family members.

Although there are several factors increasing the supply, I believe the surge in REO sales to cash flow investors is having a significant impact on rents. Many of those vacant homeowner units are being converted to rental properties - although this isn't showing up in the Census Bureau data yet (something to watch for).

And falling or flat rents will lead to lower house prices too. Here is a graph of the price-to-rent ratio using the Case-Shiller house price index through Q3 2008 and the Owners' Equivalent Rent (OER) from the BLS.

Looking at the price-to-rent ratio based on the Case-Shiller index, the adjustment in the price-to-rent ratio is probably 60% to 70% complete as of Q3 2008 on a national basis.

However flat or falling rents would suggest even larger future house price declines to return to normal (as opposed to rising rents).

by Calculated Risk on 1/09/2009 01:52:00 PM

From Bloomberg: Boeing Cuts 4,500 Commercial Jobs as Economy Weakens

Boeing Co., the world’s second-largest commercial-plane maker, plans to cut about 4,500 jobs this year to reduce costs as the global economy weakens, hurting demand for new aircraft.
...
The company yesterday said it had net orders for 662 planes in 2008, down from 1,413 one year earlier.

The bad employment news just keeps coming.

by Calculated Risk on 1/09/2009 09:01:00 AM

From the BLS report:

In December, the number of persons who worked part time for economic reasons (some-times referred to as involuntary part-time workers) continued to increase, reaching 8.0 million. The number of such workers rose by 3.4 million over the past 12 months. This category includes persons who would like to work full time but were working part time because their hours had been cut back or because they were unable to find full-time jobs.

Click on graph for larger image.

Not only has the unemployment rate risen sharply to 7.2%, but the number of workers only able to find part time jobs (or have had their hours cut for economic reasons) is now over 8 million.

Of course the U.S. population is significantly larger today (about 305 million) than in the early '80s (about 228 million) when the number of part time workers almost reached 7 million, but the rapid increase in part time workers is pretty stunning.

by Calculated Risk on 1/09/2009 08:30:00 AM

From the BLS:

Nonfarm payroll employment declined sharply in December, and the unemployment rate rose from 6.8 to 7.2 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Payroll employment fell by 524,000 over the month and by 1.9 million over the last 4 months of 2008. In December, job losses were large and widespread across most major industry sectors.

Click on graph for larger image.

This graph shows the unemployment rate and the year over year change in employment vs. recessions.

Nonfarm payrolls decreased by 524,00 in December, and November payrolls were revised down to a loss of 584,000 jobs. The economy has lost over 1.5 million jobs over the last 3 months alone!

The unemployment rate rose to 7.2 percent; the highest level since January 1993.

Year over year employment is now strongly negative (there were 2.6 million fewer Americans employed in Dec 2008 than in Dec 2007). This is another extremely weak employment report ...

by Calculated Risk on 1/09/2009 12:17:00 AM

First, a few articles:

From the Seattle Times: Downtown office markets may soon see vacancy rates in the teens

Vacancy rates in the two downtowns will climb well into the teens this year as companies downsize and new office buildings — some still lacking even a single signed tenant — come on line, according to new reports from brokerages Cushman & Wakefield and Grubb & Ellis.

From the IndyStar.com: Indy office vacancy rate is highest since '04

The office vacancy rate in the Indianapolis area hit 19.5 percent at year end, a fraction of a percent higher than in the third quarter.

The vacancy rate is the highest since at least 2004, says CB Richard Ellis commercial realty in its year-end report.

Six multi-tenant office buildings opened in the metro area last year, which helped boost the overall vacancy rate.

From the Austin Business Journal: Austin office vacancy hits 19%

Austin’s overall office vacancy rose to 19 percent in 2008, compared with a 14 percent overall vacancy rate in 2007, according to a report released today by Oxford Commercial. ...

An increase in inventory--Austin now has a total of more than 42 million square feet of office space as of the end of 2008, 3.6 million of that delivered in the past 12 months--contributed to the increase in vacancy rates, said Vic Russo, a senior vice president in the Austin brokerage firm’s office division.

Supply is increasing as more office space is being delivered, more companies are subleasing space, and companies are downsizing. Demand is falling (actually negative) as the economy weakens. The following graph is from CoStar Commercial Real Esate The State of the Commercial Real Estate Industry: 2008 Review/2009 Outlook (no link)


Click on graph for larger image in new window.

For the next two years, CoStar is projecting about 110 million square feet of new office space will be delivered per year (over 150 million in 2009!), and they are also projecting negative absorption of about 230 million square feet per year.

This suggests rents will fall sharply for the next couple of years, delinquencies will rise, and new office construction will come to a halt. Although deliveries will be strong in 2009 (with all the projects currently under construction), CoStar projects new office deliveries in 2010 will the lowest since 1996, and deliveries in 2011 will be the lowest in over 50 years.

Definition of Negative Absorption: The absorption rate is the net amount of square feet leased each year. A negative absorption rate means that more companies are downsizing or subleasing space than companies expanding and adding space.

"Negative absorption" are two words no developer ever wants to hear.

by Calculated Risk on 1/08/2009 08:04:00 PM

The Federal Reserve released the Factors Affecting Reserve Balances today. Total assets declined $125 billion to $2.14 trillion. This is a little improvement ...


Click on graph for larger image in new window.

The Federal Reserve assets decreased to $2.14 trillion this week from a high of $2.31 trillion the week of Dec 18th.

Note: the graph shows Total Factors Supplying Federal Reserve Funds and is an available series that is close to assets.

Just highlighting something a little positive among all the grim news.

I suspect doom and gloom returns tomorrow morning with the jobs report!

by Calculated Risk on 1/08/2009 04:30:00 PM

From Rex Nutting at MarketWatch: Roubini forecasts recession will last 2 years

The U.S. recession will last two full years, with gross domestic product falling a cumulative 5%, said Nouriel Roubini, ... For 2009, Roubini predicts GDP will fall 3.4%, with declines in every quarter of the year. The unemployment rate should peak at about 9% in early 2010 ...

Roubini is forecasting a pretty serious recession, but far short of a "depression" which is usually defined as a 10% decline in real GDP.

The concensus (and the Fed forecast) is that the economy will bottom in Q2 2009 with a sluggish recovery in the 2nd half of this year.

by Calculated Risk on 1/08/2009 03:51:00 PM

From CNBC: Citi Supports Plan to Adjust Mortgages in Bankruptcy

Citigroup has agreed to a plan that would let bankruptcy judges alter mortgages in an effort to prevent more housing foreclosures.

Until now, the banking industry has been ardently opposed to the proposal, which key Democratic lawmakers aim to attach to President-elect Barack Obama's economic stimulus legislation.
...
The National Association of Home Builders has dropped its opposition to the plan and the National Association of Realtors is debating whether to end its opposition.

Cram-downs makes sense. For a discussion of the cram-down issue, see Tanta's: Just Say Yes To Cram Downs Oct, 2007

by Calculated Risk on 1/08/2009 03:02:00 PM

From the National Retail Federation (NRF): 2008 Retail Container Traffic Marks Lowest Level in Four Years (note: December is estimated)

Click on image for larger graph in new window.

Year-over-year cargo volume at the nation’s major retail container ports fell for the 17th straight month in December, completing the slowest year since 2004 as the U.S. economic downturn continued, according to the monthly Port Tracker report released today by the National Retail Federation and IHS Global Insight.

Volume for the year was estimated at 15.3 million Twenty-Foot-Equivalent Units, compared with 16.5 million TEU in 2007. That would be a decline of 7.1 percent and the lowest total since 2004, when 14 million TEU moved through the ports. One TEU is one 20-foot container or its equivalent.

“2008 was a slow year for the ports for the simple reason that it was a slow year for retail sales,” NRF Vice President for Supply Chain and Customs Policy Jonathan Gold said. “We don’t expect a significant increase in traffic at the ports until retail sales return to normal levels, and even then retailers will be careful not to over-stock.”

U.S. ports surveyed handled 1.23 million TEU in November, the last month for which actual numbers are available. That was down 10.3 percent from the 2008 peak of 1.37 million TEU set in October and down 11.8 percent from November 2007.

December was estimated at 1.2 million TEU, down 6.4 percent from December 2007. ...

“Between the economy and the customary winter impact of the slow season, port traffic is very weak,” IHS Global Insight Economist Paul Bingham said. “Port traffic is projected to continue to be very slow due to the underlying weakness in demand.”

All U.S. ports covered by Port Tracker – Los Angeles/Long Beach, Oakland, Seattle and Tacoma on the West Coast; New York/New Jersey, Hampton Roads, Charleston and Savannah on the East Coast, and Houston on the Gulf Coast – are rated “low” for congestion, the same as last month.

by Calculated Risk on 1/08/2009 02:07:00 PM

With investors buying low priced homes to rent (see previous post) and the economy in recession, guess what happens? More rental supply, less demand and falling rents ...

From the LA Times: Housing downturn hits L.A.-area rents (hat tip Charlie)

After rising for several years, rents in the Los Angeles area are declining because of the economic recession and depressed home prices, researchers, real estate agents and property managers say.

The lower local rents match a national trend, according to a report released Wednesday showing apartment rents fell in 54 out of 79 U.S. metropolitan areas in the fourth quarter of 2008. Softening rents add another obstacle to a housing market recovery, economists say, because tenants with low rent payments feel less urgency to buy a home.


Nationwide, apartment rents eased 0.1% in the fourth quarter, the first drop since 2002, according to the analysis by research firm Reis Inc.