by Calculated Risk on 2/24/2010 02:24:00 PM

Historically the best leading indicator for the economy (and employment) has been housing. I've been writing about this for years. For a great summary paper, see Professor Leamer's presentation from the 2007 Jackson Hole Symposium: Housing and the Business Cycle

For housing as a leading indicator, I use Residential Investment (quarterly from the BEA's GDP report), and monthly data on Housing Starts and New Home sales from the Census Bureau, and builder confidence from the NAHB.

Two key points:

Existing home sales is not a leading indicator (sales of existing homes does not add to the housing stock).

This time could be different - the recovery could be led by exports and technology - but I'll stick with housing.

So here is a review of the three monthly leading indicators:

Housing Starts

Click on graph for larger image in new window.

Total housing starts were at 591 thousand (SAAR) in January, up 2.8% from the revised December rate, and up 24% from the all time record low in April 2009 of 479 thousand (the lowest level since the Census Bureau began tracking housing starts in 1959). Total starts had rebounded to 590 thousand in June, and have moved mostly sideways for eight months.

Single-family starts were at 484 thousand (SAAR) in January, up 1.5% from the revised December rate, and 36% above the record low in January and February 2009 (357 thousand). Just like for total starts, single-family starts have been at about this level for eight months.

Housing starts are moving sideways ...

Builder Confidence

This graph shows the builder confidence index from the National Association of Home Builders (NAHB).

The housing market index (HMI) was at 17 in February. This is an increase from 15 in January.

The record low was 8 set in January 2009. This is still very low - and this is what I've expected - a long period of builder depression. The HMI has been in the 15 to 19 range since May 2009.

More moving sideways ...

Note: any number under 50 indicates that more builders view sales conditions as poor than good.

New Home Sales

The Census Bureau reports This graph shows New Home Sales vs. recessions for the last 45 years.

New Home Sales in January were at a seasonally adjusted annual rate (SAAR) of 309 thousand. This is a record low and a sharp decrease from the 348 thousand rate in December.

And it would be generous to even call this "moving sideways".

So these leading indicators suggest any growth will be sluggish and choppy.

Now some people might argue that housing starts and new home sales are about to increase sharply. Based on what? That seems unlikely with the large number of excess housing units (new and existing homes and rental units). See: Housing Stock and Flow

As I noted above, it might be different this time with exports and technology leading the way, but I'll stick with housing as a business cycle indicator.

by Calculated Risk on 2/24/2010 11:55:00 AM

"We start 2010 with some early signs of stabilization in the housing market, with house prices and home sales likely nearing the bottom sometime in 2010. We expect that low mortgage rates, relatively high affordability and the homebuyer tax credit will help continue to fuel the recovery. Still, the housing recovery remains fragile, with significant downside risk posed by high unemployment and a potential large wave of foreclosures."
Freddie Mac Chief Executive Officer Charles E. Haldeman, Jr.

The quote is from the Freddie Mac Q4 earnings release:

Freddie Mac Releases Fourth Quarter and Full-Year 2009 Financial Results Fourth quarter 2009 net loss was $6.5 billion. After the dividend payment of $1.3 billion to the U.S. Department of the Treasury (Treasury) on the senior preferred stock, net loss attributable to common stockholders was $7.8 billion ... for the fourth quarter of 2009.
...
Full-year 2009 net loss was $21.6 billion. After dividend payments of $4.1 billion during the year to Treasury on the senior preferred stock, net loss attributable to common stockholders was $25.7 billion ... for the full-year 2009.

Another $7.8 billion in losses ...

by Calculated Risk on 2/24/2010 10:15:00 AM

Note: See previous post for video and discussion of Bernanke's testimony.

The Census Bureau reports New Home Sales in January were at a seasonally adjusted annual rate (SAAR) of 309 thousand. This is a record low and a sharp decrease from the revised rate of 348 thousand in December.

Click on graph for larger image in new window.

The first graph shows monthly new home sales (NSA - Not Seasonally Adjusted).

Note the Red column for 2010. In January 2010, 21 thousand new homes were sold (NSA).

This is below the previous record low of 24 thousand in January 2009.

The second graph shows New Home Sales vs. recessions for the last 45 years. New Home sales fell off a cliff, but after increasing slightly, are now 6% below the previous record low in January 2009.

Sales of new single-family houses in January 2010 were at a seasonally adjusted annual rate of 309,000 ... This is 11.2 percent (±14.0%)* below the revised December rate of 348,000 and is 6.1 percent (±15.1%)* below the January 2009 estimate of 329,000.

And another long term graph - this one for New Home Months of Supply.

There were 9.1 months of supply in January. Rising, but still significantly below the all time record of 12.4 months of supply set in January 2009.

The seasonally adjusted estimate of new houses for sale at the end of January was 234,000. This represents a supply of 9.1 months at the current sales rate.

The final graph shows new home inventory.

Note that new home inventory does not include many condos (especially high rise condos), and areas with significant condo construction will have much higher inventory levels.

Months-of-supply and inventory have both peaked for this cycle, but sales have set a new record low. New home sales are far more important for the economy than existing home sales, and new home sales will remain under pressure until the overhang of excess housing inventory declines much further.

Obviously this is another extremely weak report.

by Calculated Risk on 2/24/2010 09:50:00 AM

Federal Reserve Chairman Ben Bernanke is scheduled to provide the Semiannual Monetary Policy Report to the Congress before the House Committee on Financial Services at 10 AM ET.

I'll add a link to the prepared testimony, and I'll be posting the New Home sales numbers shortly after 10 AM. Commenters: Hopefully we can discuss Bernanke's testimony (especially the Q&A) on this thread, and New Home sales on the following thread).

Here is the CNBC feed.

Here is the C-Span Link

Prepared Testimony: Semiannual Monetary Policy Report to the Congress

by Calculated Risk on 2/24/2010 08:12:00 AM

The MBA reports: Mortgage Applications Decrease in Latest MBA Weekly Survey

The Market Composite Index ... decreased 8.5 percent on a seasonally adjusted basis from one week earlier. ...

“As many East Coast markets were digging out from the blizzard last week, purchase applications fell, another indication that housing demand remains relatively weak,” said Michael Fratantoni, MBA's Vice President of Research and Economics. “With home prices continuing to drift amid an abundant inventory of homes on the market, potential homebuyers do not see any urgency to lock in purchases.”

The Refinance Index decreased 8.9 percent from the previous week. The seasonally adjusted Purchase Index decreased 7.3 percent from one week earlier, putting the index at its lowest level since May 1997. ...

The refinance share of mortgage activity decreased to 68.1 percent of total applications from 69.3 percent the previous week. ...

The average contract interest rate for 30-year fixed-rate mortgages increased to 5.03 percent from 4.94 percent, with points increasing to 1.34 from 1.09 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.

Click on graph for larger image in new window.

This graph shows the MBA Purchase Index and four week moving average since 1990.

Once again, the decline in purchase applications since October appears significant.

Also, with mortgage rates back above 5% again, refinance activity declined too.

by Calculated Risk on 2/24/2010 01:13:00 AM

Note: This index is a leading indicator for Commercial Real Estate (CRE) investment.

Reuters reports that the American Institute of Architects’ Architecture Billings Index decreased to 42.5 in January from 43.4 in December. Any reading below 50 indicates contraction.

The index has remained below 50, indicating contraction in demand for design services, since January 2008. Its lowest recent reading was in January 2009, when it reached a revised 33.9 level.

The ABI press release is not online yet.

Click on graph for larger image in new window.

This graph shows the Architecture Billings Index since 1996. The index has remained below 50, indicating falling demand, since January 2008.

Historically there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction. This suggests further significant declines in CRE investment through this year, and probably longer.

Note: Nonresidential construction includes commercial and industrial facilities like hotels and office buildings, as well as schools, hospitals and other institutions.

by Calculated Risk on 2/23/2010 08:27:00 PM

In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

Here is a similar graph through December 2009 using the two Case-Shiller Home Price Composite Indices:

Click on graph for larger image in new window.

This graph shows the price to rent ratio (January 2000 = 1.0).

This suggests that house prices are still a little too high on a national basis. But it does appear that prices are much closer to the bottom than the top.

Also, OER declined again in January, and with rents still falling, the OER index will probably continue to decline - pushing up the price-to-rent ratio.

by Calculated Risk on 2/23/2010 05:27:00 PM

First American CoreLogic released the Q4 negative equity report today.

First American CoreLogic reported today that more than 11.3 million, or 24 percent, of all residential properties with mortgages, were in negative equity at the end of the fourth quarter of 2009, up from 10.7 million and 23 percent at the end of the third quarter of 2009. An additional 2.3 million mortgages were approaching negative equity at the end of last year, meaning they had less than five percent equity. Together, negative equity and near‐negative equity mortgages accounted for nearly 29 percent of all residential properties with a mortgage nationwide.

From the report:

Negative equity continues to be concentrated in five states: Nevada, which had the highest percentage negative equity with 70 percent of all of its mortgaged properties underwater, followed by Arizona (51 percent), Florida (48 percent), Michigan (39 percent) and California (35 percent). Among the top five states, the average negative equity share was 42 percent, compared to 15 percent for the remaining 45 states. In numerical terms, California (2.4 million) and Florida (2.2 million) had the largest number of negative equity mortgages accounting for 4.6million, or 41 percent, of all negative equity loans.

Click on image for larger graph in new window.

This graph shows the negative equity and near negative equity by state.

Although the five states mentioned above have the largest percentgage of homeowners underwater, 10 percent or more of homeowners have negative equity in 33 states, and over 20% have negative equity or near negative equity in 23 states. This is a widespread problem.

Note: Louisiana, Maine, Mississippi, South Dakota, Vermont, West Virginia and Wyoming are NA in the graph above.

The second graph shows homeowners with severe negative equity for five states.

These homeowners are far more likely to default.

The rise in negative equity is closely tied to increases in pre‐foreclosure activity and is a major factor in changing homeowners’ default behavior. Once negative equity exceeds 25 percent, or the mortgage balance is $70,000 higher than the current property values, owners begin to default with the same propensity as investors.

Here is figure 4 from the report.

The default rate increases sharply for homeowners with more than 20% negative equity.

This graph fits with figure 2 above and suggests a large number of future defaults in Nevada, Arizona, Florida and California.

The aggregate dollar value of negative equity was $801 billion, up $55 billion from $746 billion in Q3 2009. The average negative equity for an underwater borrower in Q4 was ‐$70,700, up from ‐$69,700 in Q3 2009. The segment of borrowers that are 25 percent or more in negative equity account for over $660 billion in aggregate negative equity.

Most homeowners with negative equity will probably not default, but this does suggest there are many more foreclosures coming - and more losses.

by Calculated Risk on 2/23/2010 02:42:00 PM

Finally. The S&P website has been down all morning.

S&P/Case-Shiller released the monthly Home Price Indices for December (actually a 3 month average).

The monthly data includes prices for 20 individual cities, and two composite indices (10 cities and 20 cities). This is the Seasonally Adjusted monthly data - some sites report the NSA data.

Click on graph for larger image in new window.

The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 30.3% from the peak, and up about 0.3% in December.

The Composite 20 index is off 29.4% from the peak, and up 0.3% in December.

The impact of the massive government effort to support house prices is obvious on the Composite graph. The question is what happens to prices as these programs end over the next few months?

The second graph shows the Year over year change in both indices.

The Composite 10 is off 2.4% from December 2008.

The Composite 20 is off 3.1% from December 2008.

The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

Prices decreased (SA) in 6 of the 20 Case-Shiller cities in December.

In Las Vegas, house prices have declined 55.9% from the peak. At the other end of the spectrum, prices in Dallas are only off about 3.1% from the peak. Several cities are showing price increases in 2009 - San Diego, San Francisco, Boston, Washington D.C., Denver and Dallas.

by Calculated Risk on 2/23/2010 12:57:00 PM

Here is an audio interview from Jon Lansner: Scott Monroe of South Coast Apartment Association visits Jon Lansner of the OC Register

"Rents are down and vacancies are up. Demand is off, and we attribute really to to the fact that here has been a pretty significant erosion of jobs in the Orange County markets. And it is having a trickle down effect. In addition to that, our members are saying that they are competing quite a bit with what historically has not been a competitor for us - that's the gray market or the shadow market - which are condominium rentals and single family home rentals and things of that nature. There is just a lot of product on the market."
Scott Monroe, Pres. of South Coast Apartment Association

Monroe says they are seeing much more multi-generational housing, and he expects "doubling up" to last for another 12 months or so.

And this brings up a key point - the supply of rental units has been surging:

Click on graph for larger image in new window.

This graph shows the number of occupied (blue) and vacant (red) rental units in the U.S. (Source: 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 over 4.7 million units added to the rental inventory.

Note: please see caution on using this data - this number might be a little too high, but the concepts are the same even with a lower increase.

This increase in units has more than offset the recent strong migration from ownership to renting, so the rental vacancy rate is now at 10.7% and the apartment vacancy rate is at a record high.

Where did these approximately 4.7 million rental units come from?

The Census Bureau's Housing Units Completed, by Intent and Design shows 1.1 million units completed as 'built for rent' since Q2 2004. This means that another 3.6 million or so rental units came mostly from conversions from ownership to rentals.

These could be investors buying REOs for cash flow, 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.

As Scott Monroe noted, this huge surge in rental supply - what he calls the "gray or shadow market" - has pushed down rents, and pushed the rental vacancy rate to record levels. Yes, people are doubling up with friends and family during the recession, and some renters are now buying again, but the main reason for the record vacancy rate is the surge in supply. Eventually many of these "gray market" rentals will be sold as homes again - keeping the existing home supply elevated for years.