by Calculated Risk on 7/20/2011 02:14:00 PM

From Bloomberg: U.S. Commercial Property Prices Increased 6.3% in May, Moody’s Says

The Moody’s/REAL Commercial Property Price Index rose 6.3 percent from April ... It’s down 11 percent from a year earlier and 46 percent below the peak of October 2007

“A number of transactions that were recorded in May had their most recent prior sales in 2009 as the market was beginning to bottom and subsequently traded for substantial returns,” Tad Philipp, director of commercial real estate research at Moody’s, said in a separate statement.

Below is a comparison of the Moodys/REAL Commercial Property Price Index (CPPI) and the Case-Shiller composite 20 index. Beware of the "Real" in the title - this index is not inflation adjusted.

Click on graph for larger image in graph gallery.

CRE prices only go back to December 2000. The Case-Shiller Composite 20 residential index is in blue (with Dec 2000 set to 1.0 to line up the indexes).

According to Moody's, CRE prices are down 11% from a year ago and down about 46% from the peak in 2007. Prices fell sharply over the previous six months, and this increase only erases part of that decline.

Note: There are few commercial real estate transactions compared to residential, so this index is very volatile.

by Calculated Risk on 7/20/2011 11:41:00 AM

A few comments and a graph (of course):

• The NAR reported that inventory increased in June from May (the normal seasonal pattern), and that inventory is off 3.1% from June 2010. Other data sources suggest that the NAR is overstating inventory (inventory will be part of the coming revisions). Inventory is probably down more year-over-year (YoY) than the NAR reported.

• The NAR provided an update on the timing of the "benchmark revisions". The release will be in the fall, and the revisions will be down (no surprise):

Update on Benchmark Revisions: ... NAR began its normal process for benchmarking sales at the beginning of this year in consultation with government agencies, outside housing economists and academic experts; there will be no change to median prices. Although there will be a downward revision to sales volumes, there will be no notable change to previous characterizations of the market in terms of sales trends, monthly percentage changes, etc.

... so we’ve had to develop a new approach with an independent source to improve methodology and to permit more frequent revisions.

Preliminary data based on the new benchmark is expected to be available for review in August. ... Publication of the revisions is not likely before this fall, but we expect to provide a notice one month in advance of the publication date.

This revision is expected to show significantly fewer homes sold over the last few years (perhaps 10% to 15% fewer homes in 2010 than originally reported), and also fewer homes for sale.

Hopefully the NAR will provide 1) the revised data for the last decade and 2) a description of the new methodology (as part of this revision, the NAR is expected to change their method for estimating sales and inventory).

• The following graph shows existing home sales Not Seasonally Adjusted (NSA).

Click on graph for larger image in graph gallery.

The red columns are for 2011.

Sales NSA are below the tax credit boosted level of sales in June 2010 and June 2009, but slightly above the level of June sales in 2008.

Last year sales collapsed in July (orange column - after the expiration of the tax credit), so expect a report of a large YoY increase in sales announced next month.

The level of sales is still elevated due to investor buying. The NAR noted:

All-cash transactions accounted for 29 percent of sales in June; they were 30 percent in May and 24 percent in June 2010; investors account for the bulk of cash purchases.

First-time buyers purchased 31 percent of homes in June, down from 36 percent in May; they were 43 percent in June 2010 when the tax credit was in place. Investors accounted for 19 percent of purchase activity in June, unchanged from May; they were 13 percent in June 2010.

• As Tom Lawler noted yesterday, the Pending Home Sales Index will probably show an increase in June - and reported sales in July will probably be higher than in June. The Pending Home Sales Index will be released on Thursday July 28th.

Earlier:
• Existing Home Sales in June: 4.77 million SAAR, 9.5 months of supply
• Existing Home Sales graphs

by Calculated Risk on 7/20/2011 10:00:00 AM

The NAR reports: June Existing-Home Sales Slip on Contract Cancellations

Total existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, declined 0.8 percent to a seasonally adjusted annual rate of 4.77 million in June from 4.81 million in May, and remain 8.8 percent below the 5.23 million unit level in June 2010, which was the scheduled closing deadline for the home buyer tax credit.
...
Total housing inventory at the end of June rose 3.3 percent to 3.77 million existing homes available for sale, which represents a 9.5-month supply at the current sales pace, up from a 9.1-month supply in May.

Click on graph for larger image in graph gallery.

This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.

Sales in June 2011 (4.77 million SAAR) were 0.8% lower than last month, and were 8.8% lower than in June 2010.

The second graph shows nationwide inventory for existing homes.

According to the NAR, inventory increased to 3.77 million in June from 3.65 million in May.

The last graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, so it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory.

Inventory decreased 3.1% year-over-year in June from June 2010. This is the fifth consecutive month with a YoY decrease in inventory.

Inventory should increase next month (the normal seasonal pattern), and the YoY change is something to watch closely this year.

Months of supply increased to 9.5 months in June, up from 9.1 months in May. This is much higher than normal. These sales numbers were below the consensus, but close to Lawler's forecast was 4.71 million using the NAR method.

Note: The NAR provided an update on the coming revisions:

[T]here will be a downward revision to sales volumes ... Preliminary data based on the new benchmark is expected to be available for review in August. ... Publication of the revisions is not likely before this fall, but we expect to provide a notice one month in advance of the publication date.

by Calculated Risk on 7/20/2011 08:15:00 AM

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

From Reuters: U.S. architecture billings index falls in June

The Architecture Billings Index fell 0.9 point to 46.3 in June, according the American Institute of Architects (AIA).
...
Demand is weakest in the institutional sector that includes government buildings, reflecting depressed government budgets, according to the monthly survey of architecture firms.

Click on graph for larger image in graph gallery.

This graph shows the Architecture Billings Index since 1996. The index decreased in June to 46.3 from 47.2 in May. Anything below 50 indicates a contraction in demand for architects' services.

Note: Nonresidential construction includes commercial and industrial facilities like hotels and office buildings, as well as schools, hospitals and other institutions. Note that the government sector is the weakest. The American Recovery and Reinvestment Act of 2009 is winding down, and state and local governments are still cutting back.

According to the AIA, there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction. So this suggests another dip in CRE investment in 2012.

by Calculated Risk on 7/20/2011 07:17:00 AM

The MBA reports: Refinance Applications Surge in Latest MBA Weekly Survey

The Refinance Index increased 23.1 percent from the previous week. The seasonally adjusted Purchase Index decreased 0.1 percent from one week earlier.
...
"Ongoing turmoil in the financial markets primarily due to the sovereign debt crisis in Europe has brought mortgage rates back to their lowest levels of the year," said Michael Fratantoni, MBA's Vice President of Research and Economics. "Refinance applications have surged in response and the refinance index is at its second highest level of the year. One factor that may be contributing to this increase is that borrowers potentially impacted by impending decreases in the conforming loan limit may be opting to lock in fixed-rate financing now."
...
The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.54 percent from 4.55 percent, with points decreasing to 0.98 from 0.99 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.

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

Click on graph for larger image in graph gallery.

The recent decline in mortgage rates hasn't boosted purchase applications; the four week average of the purchase index is still mostly moving sideways at about 1997 levels.

Of course this doesn't include the large number of cash buyers ... but this suggests purchase activity remains fairly weak.

by Calculated Risk on 7/19/2011 07:01:00 PM

As I mentioned earlier, the U.S. is on pace for a record low number of multifamily completions in 2011. That is just part of the story ... the U.S. is on pace for a record low number of total completions, and the fewest net housing units added to the housing stock, since the Census started tracking completions.

Here are some excerpts from Tom Lawler today:

The Commerce Department reported that US manufactured housing shipments ran at a seasonally adjusted annual rate of 48,000 in May, up slightly from April’s 46,000, but still an incredibly low pace by historical standards.
...
Total housing production in 2011 should fall south of 600,000 units, compared to the 2.092 million housing units that came on line in 2006.

Sadly, there are no good, timely data on the likely number of housing units that will be lost to various factors (demolition, conversions, disaster, etc.). The Census 2010 data suggested that the annual “scrappage” rate was substantially lower than other Census data had suggested last decade, though that could well have been related to the housing boom years, with higher conversions or units added from non-residential use than various surveys (based on relatively small samples) suggested. Anecdotal evidence suggests that scrappage rates of late would not be that low, and a conservative estimate for 2011 would be in the 250,000 range – implying growth in the housing stock for the calendar year of under 350,000 units.

If those numbers are in the ballpark, then from April 1st of last year (the Census 2010 snapshot) to the end of 2011, the US housing stock will probably have grown by only about 706,000 units or so. Sadly, there are no good, reliable, and timely data on US household growth since April 1, 2010 (theme on government housing data!), making it tough to estimate household growth from 4/1/2010 to 12/31/2011. If annualized household growth over that 21-month period were, say, around 800,000 (below “trend”), then the “excess” supply of housing from April Fool’s Day 2010 to the end of 2011 would have shrunk by about 694,000.

I put the following table together for the last few years. For 2011 I used the first half pace (manufactured housing through May).

As I noted earlier, multi-family housing completions will fall even further and will probably be close to 100 thousand units this year. Also note that Lawler thinks scrappage is closer to 250,000 per year.

So this means there will be a record low number of housing units added to the housing stock this year (good news with all the excess inventory), and that the overhang of excess inventory should decline significantly in 2011.

Housing Units added to Stock (000s)
	2005	2006	2007	2008	2009	2010	2011 (1st Half pace)
1 to 4 Units	1,673.4	1,695.3	1,249.8	842.5	534.6	505.2	437.0
5+ Units	258.0	284.2	253.0	277.2	259.8	146.5	119.0
Manufactured Homes	146.8	117.3	95.7	81.9	49.8	50	46
Sub-Total	2,078.2	2,096.8	1,598.5	1,201.6	844.2	701.7	602.0
Scrappage	200	200	200	200	150	150	150
Total added to Stock	1,878.2	1,896.8	1,398.5	1,001.6	694.2	551.7	452.0

The key points are:
1) there will be record low number of completions this year, and
2) that means a record low number of housing units added to the stock, and
3) that means the excess vacant inventory is declining.

Earlier:
• Housing Starts increase in June
• Multi-family Starts and Completions

by Calculated Risk on 7/19/2011 02:58:00 PM

From DataQuick: Golden State Mortgage Defaults Drop to Four-Year Low

A total of 56,633 Notices of Default (NoDs) were recorded at county recorders offices during the April-to-June period. That was down 17.0 percent from 68,239 for the prior quarter, and down 19.2 percent from 70,051 in second-quarter 2010, according to San Diego-based DataQuick.

Last quarter's activity was the lowest for any quarter since 53,493 NoDs were recorded in the second quarter of 2007. It was well below half the record 135,431 default notices recorded in the first quarter of 2009.

"A lot of theories are being floated as to why the numbers are down. Bank policy changes. Legal challenges. Politics. Holding back temporarily so as not to flood the market. The fact of the matter is that no one really knows, outside of lending and servicing industry insiders. ..." said John Walsh, DataQuick president.
...
Most of the loans going into default today are from the 2005-2007 period: the median origination quarter for defaulted loans is still third-quarter 2006. That has been the case for more than two years, indicating that weak underwriting standards peaked then.

And on completed foreclosures:

Trustees Deeds recorded (TDs), or the actual loss of a home to foreclosure, totaled 42,465 during the second quarter. That was down 1.4 percent from 43,052 for the prior quarter, and down 10.9 percent from 47,669 for second-quarter 2010. The all-time peak was 79,511 in third-quarter 2008.

Last quarter's trustees deeds total was the lowest since 35,431 were filed in fourth quarter 2010, and the second-lowest since fourth quarter 2007, when 31,676 were filed.

Click on graph for larger image in graph gallery.

This graph shows the annual Notices of Default (NODs) filed in California. The current year was estimated at the total for Q1 plus 3 times the Q2 rate.

California had a significant housing bust in the early '90s, with defaults peaking - and prices bottoming - in 1996. That bust was mild compared to the recent housing bust - and defaults are still way above the 1996 peak.

On the reasons for the decline: I think legal and political issues are more focused on the foreclosure process, and that the filing of default notices is probably still pretty routine - so even though the foreclosure pipeline is still pretty full, I think the decline in NODs actually suggests fewer defaults.

Earlier:
• Housing Starts increase in June
• Multi-family Starts and Completions

by Calculated Risk on 7/19/2011 01:48:00 PM

There was a report last week from Nick Timiraos at the WSJ: U.S. Tackles Housing Slump that "The Obama administration is ramping up talks on how to revive the housing market".

From Renae Merle at the WaPo: Obama administration not planning another big housing program

The Obama administration has no plans to introduce another large-scale program for relieving the troubled housing market, despite the president’s recent admission that his past efforts have not solved the problem, according to a senior administration official.
...
“There is no money and, to some degree, we have run out of ideas. I have seen them all,” said Mark Zandi, chief economist of Moody’s Analytics. “I don’t think there is something grand that could make a big difference.”
...
The biggest opportunity for wide-ranging change may be a settlement being negotiated between a coalition of state attorneys general and large banks related to flawed foreclosure practices, industry officials and consumer advocates say.

Unfortunately most of the programs so far have fallen short of expectations (HAMP) or were misdirected (Housing Tax Credit).

Some of the new policy ideas being discussed - like converting some delinquent homeowners to renters using a deed-in-lieu of foreclosure, then placing the property under the current REO Tenant-in-Place Rental Policy¹ - and finally selling the property to investors with tenant-in-place - had some merit. But it appears there will won't be any new programs, except maybe a little something from the servicer agreement.

¹ The current REO Tenant-in-Place policy is to protect tenants of foreclosed investor owned property.

by Calculated Risk on 7/19/2011 10:28:00 AM

Earlier:
• Housing Starts increase in June

Although the number of multi-family starts can vary significantly from month to month, apartment owners have been seeing falling vacancy rates, and some have started to plan for 2012 and 2013 and have been breaking ground this year. So I've been forecasting a pickup in multi-family starts.

However, since it takes over a year on average to complete multi-family projects - and multi-family starts were at a record low last year - there will be a record low, or near record low, number of multi-family completions this year.

The following graph shows the lag between multi-family starts and completions using a 12 month rolling average.

Click on graph for larger image in graph gallery.

The blue line is for multifamily starts and the red line is for multifamily completions. Since multifamily starts collapsed in 2009, completions collapsed in 2010.

The rolling 12 month total for starts (blue line) is now above the rolling 12 month for completions (red line), and they are heading in opposite directions. Starts are picking up and completions are declining.

To summarize:
• Multi-family starts will be up strong this year, but
• Multi-family completions will be at a record low.

It is important to note that even with a strong increase in multi-family construction, it is 1) from a very low level, and 2) multi-family is a small part of residential investment (RI). Still this is bright spot for construction.

by Calculated Risk on 7/19/2011 08:45:00 AM

From the Census Bureau: Permits, Starts and Completions

Housing Starts:
Privately-owned housing starts in June were at a seasonally adjusted annual rate of 629,000. This is 14.6 percent (±10 9%) above the revised May estimate of 549,000 and is 16.7 percent (±11.8%) above the June 2010 rate of 539,000.

Single-family housing starts in June were at a rate of 453,000; this is 9.4 percent (±11.1%)* above the revised May figure of 414,000. The June rate for units in buildings with five units or more was 170,000.

Building Permits:
Privately-owned housing units authorized by building permits in June were at a seasonally adjusted annual rate of 624,000. This is 2.5 percent (±1.3%) above the revised May rate of 609,000 and is 6.7 percent (±2.0%) above the June 2010 estimate of 585,000.

Single-family authorizations in June were at a rate of 407,000; this is 0.2 percent (±1.0%)* above the revised May figure of 406,000. Authorizations of units in buildings with five units or more were at a rate of 198,000 in June.

Click on graph for larger image in graph gallery.

Total housing starts were at 629 thousand (SAAR) in June, up 14.6% from the revised May rate of 549 thousand.

Single-family starts increased 9.4% to 453 thousand in June.

The second graph shows total and single unit starts since 1968.

This shows the huge collapse following the housing bubble, and that housing starts have mostly been moving sideways for over two years - with slight ups and downs due to the home buyer tax credit.

This was above expectations of 575 thousand starts in June. Multi-family starts are increasing in 2011 - although from a very low level. This is one of the bright spots for construction and the economy this year.

I'll have more on housing starts later.