by Calculated Risk on 10/04/2012 02:10:00 PM

From the Fed: Minutes of the Federal Open Market Committee, September 12-13, 2012 . Excerpt:

Participants again exchanged views on the likely benefits and costs of a new large-scale asset purchase program. Many participants anticipated that such a program would provide support to the economic recovery by putting downward pressure on longer-term interest rates and promoting more accommodative financial conditions. A number of participants also indicated that it could lift consumer and business confidence by emphasizing the Committee's commitment to continued progress toward its dual mandate. In addition, it was noted that additional purchases could reinforce the Committee's forward guidance regarding the federal funds rate. Participants discussed the effectiveness of purchases of Treasury securities relative to purchases of agency MBS in easing financial conditions. Some participants suggested that, all else being equal, MBS purchases could be preferable because they would more directly support the housing sector, which remains weak but has shown some signs of improvement of late. One participant, however, objected that purchases of MBS, when compared to purchases of longer-term Treasury securities, would likely result in higher interest rates for many borrowers in other sectors. A number of participants highlighted the uncertainty about the overall effects of additional purchases on financial markets and the real economy. Some participants thought past purchases were useful because they were conducted during periods of market stress or heightened deflation risk and were less confident of the efficacy of additional purchases under present circumstances. A few expressed skepticism that additional policy accommodation could help spur an economy that they saw as held back by uncertainties and a range of structural issues. In discussing the costs and risks that such a program might entail, several participants reiterated their concern that additional purchases might complicate the Committee's efforts to withdraw monetary policy accommodation when it eventually became appropriate to do so, raising the risk of undesirably high inflation in the future and potentially unmooring inflation expectations. One participant noted that an extended period of accommodation resulting from additional asset purchases could lead to excessive risk-taking on the part of some investors and so undermine financial stability over time. The possible adverse effects of large purchases on market functioning were also noted. However, most participants thought these risks could be managed since the Committee could make adjustments to its purchases, as needed, in response to economic developments or to changes in its assessment of their efficacy and costs.

Participants also discussed issues related to the provision of forward guidance regarding the future path of the federal funds rate. It was noted that clear communication and credibility allow the central bank to help shape the public's expectations about policy, which is crucial to managing monetary policy when the federal funds rate is at its effective lower bound. A number of participants questioned the effectiveness of continuing to use a calendar date to provide forward guidance, noting that a change in the calendar date might be interpreted pessimistically as a downgrade of the Committee's economic outlook rather than as conveying the Committee's determination to support the economic recovery. If the public interpreted the statement pessimistically, consumer and business confidence could fall rather than rise. Many participants indicated a preference for replacing the calendar date with language describing the economic factors that the Committee would consider in deciding to raise its target for the federal funds rate. Participants discussed the benefits of such an approach, including the potential for enhanced effectiveness of policy through greater clarity regarding the Committee's future behavior. That approach could also bolster the stimulus provided by the System's holdings of longer-term securities. It was noted that forward guidance along these lines would allow market expectations regarding the federal funds rate to adjust automatically in response to incoming data on the economy. Many participants thought that more-effective forward guidance could be provided by specifying numerical thresholds for labor market and inflation indicators that would be consistent with maintaining the federal funds rate at exceptionally low levels. However, reaching agreement on specific thresholds could be challenging given the diversity of participants' views, and some were reluctant to specify explicit numerical thresholds out of concern that such thresholds would necessarily be too simple to fully capture the complexities of the economy and the policy process or could be incorrectly interpreted as triggers prompting an automatic policy response. In addition, numerical thresholds could be confused with the Committee's longer-term objectives, and so undermine the Committee's credibility. At the conclusion of the discussion, most participants agreed that the use of numerical thresholds could be useful to provide more clarity about the conditionality of the forward guidance but thought that further work would be needed to address the related communications challenges.

This suggests that the Fed will likely set QE3 targets for unemployment and inflation. As an example, Chicago Fed President Charles Evans has suggested that QE3 purchases should continue until the unemployment rate is below 7% or inflation at 3%.

by Calculated Risk on 10/04/2012 11:42:00 AM

Reis reported that the vacancy rate for regional malls declined to 8.7% in Q3 from 8.9% in Q2. This is down from a cycle peak of 9.4% in Q3 of last year.

For Neighborhood and Community malls (strip malls), the vacancy rate was unchanged at 10.8% in Q3. For strip malls, the vacancy rate peaked at 11.0% in Q2 of last year.

Comments from Reis Senior Economist Ryan Severino:

[Strip mall] Vacancy was unchanged during the third quarter. This is slightly worse than the second quarter when the vacancy rate declined by 10 basis points. On a year-over-year basis, the vacancy rate declined by a scant 20 bps. While demand slightly outpaced new construction during the quarter, it was insufficient to cause the vacancy rate to decline. With only 569,000 square feet delivered, any semblance of demand would have caused the vacancy rate to decline. The fact that it did not speaks volumes about the continued struggles that the retail sector must countenance.

Asking and effective rents both grew by 0.1% during the quarter. This represents a slowdown from the already paltry 0.2% growth in asking and effective rents during the second quarter. It was the fourth consecutive quarter that asking and effective rents have increased. Although positive, rent growth remains at dazzlingly low levels.
...
[New construction] With the ongoing weakness in the sector, new construction declined near record‐levels during the quarter. 569,000 square feet were delivered during the third quarter, versus 805,000 square feet during the second quarter. However, this is a slowdown compared to the 2.008 million square feet of retail space that were delivered during the third quarter of 2011. In fact, 569,000 square feet is the second‐lowest figure on record since Reis began tracking quarterly data in 1999, bested only by the minuscule 261,000 square feet that were delivered in the first quarter of 2011. With demand for space at depressed levels, there is little to no impetus to develop new projects.
...
[Regional] Malls continue to outperform their neighborhood and community shopping center brethren. The vacancy rate declined by another 20 basis points during the quarter. This is the fourth consecutive quarter with a vacancy decline. Asking rent growth was in line with last quarter, growing by another 0.3%. This was the sixth consecutive quarter of asking rent increases. Overall the improvement in the mall subsector is not accelerating, but it is not faltering either. However, underlying these trends there remains a strong diverge in the performance between dominant Class A malls, which typically boast luxury retailers and cater to affluent consumers, and inferior malls which sport more mainstream retailers and cater to more typical consumers.

Click on graph for larger image.

This graph shows the strip mall vacancy rate starting in 1980 (prior to 2000 the data is annual). The regional mall data starts in 2000. Back in the '80s, there was overbuilding in the mall sector even as the vacancy rate was rising. This was due to the very loose commercial lending that led to the S&L crisis.

In the mid-'00s, mall investment picked up as mall builders followed the "roof tops" of the residential boom (more loose lending). This led to the vacancy rate moving higher even before the recession started. Then there was a sharp increase in the vacancy rate during the recession and financial crisis.

The yellow line shows mall investment as a percent of GDP. This has been increasing a little recently because this includes renovations and improvements. New mall investment has essentially stopped.

The good news is, as Severino noted, new square footage is near a record low, and with very little new supply, the vacancy rate will probably continue to decline slowly.

Mall vacancy data courtesy of Reis.

by Calculated Risk on 10/04/2012 10:00:00 AM

Press Release: Asking Prices On Track To Rise 4 Percent Nationally in 2012

Trulia today released the latest findings from the Trulia Price Monitor and the Trulia Rent Monitor ... Based on the for-sale homes and rentals listed on Trulia, these monitors take into account changes in the mix of listed homes and reflect trends in prices and rents for similar homes in similar neighborhoods through September 30, 2012.
...
In September, asking prices on for-sale homes–which lead sales prices by approximately two or more months – increased 2.5 percent year over year (Y-o-Y). Excluding foreclosures, Y-o-Y asking prices rose 3.5 percent. Meanwhile, asking prices rose nationally 1.6 percent quarter over quarter (Q-o-Q), seasonally adjusted, and 0.5 percent month over month (M-o-M), seasonally adjusted.
...
Nationally, rent gains continue to outpace home price increases in September, rising by 4.8 percent Y-o-Y. Among the largest 25 rental markets, Y-o-Y rents rose the most in Houston and Miami, where they climbed more than 10 percent
...
”As asking prices continue to climb, 2012 will almost surely be the first year of rising home prices since 2006,” said Jed Kolko, Trulia’s Chief Economist. “Right now, prices are recovering across the country, with few local markets left behind. While some of these increases are a bounceback from the huge price declines during the recession, price gains are strongest where job growth has boosted housing demand and where declining inventories lead to tighter supply.”

These asking prices are SA (Seasonally Adjusted) - and adjusted for the mix of homes - and this suggests further house price increases over the next few months on a SA basis.

More from Jed Kolko, Trulia Chief Economist: Asking Prices Rise Year over Year in 6 out of 7 Election Swing States

by Calculated Risk on 10/04/2012 08:30:00 AM

The DOL reports:

In the week ending September 29, the advance figure for seasonally adjusted initial claims was 367,000, an increase of 4,000 from the previous week's revised figure of 363,000. The 4-week moving average was 375,000, unchanged from the previous week's revised average.

The previous week was revised up from 359,000.

The following graph shows the 4-week moving average of weekly claims since January 2000.



Click on graph for larger image.


The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims was unchanged at 375,000.

This was lower than the consensus forecast of 370,000.



And here is a long term graph of weekly claims:

Mostly moving sideways this year ...

All current Employment Graphs

by Calculated Risk on 10/03/2012 08:16:00 PM

There is a presidential debate tonight starting at 9 PM ET. The Wonkblog promises to "provide real time context for the many statistics and ideas".

There was a sharp decline in oil prices today, from Bloomberg: Oil Tumbles as [US} Crude Production Surges to 15-Year High

Oil fell to a two-month low in New York after the government reported that U.S. crude production climbed to the highest level in more than 15 years and fuel consumption decreased.

Futures dropped 4.1 percent after the Energy Department said crude output rose 11,000 barrels a day to 6.52 million last week, the most since December 1996. Total fuel demand fell 0.3 percent to 18.3 million barrels a day in the four weeks ended Sept. 28, the lowest level since April.

Brent oil for November settlement decreased $3.40, or 3 percent, to end the session at $108.17 a barrel on the London- based ICE Futures Europe exchange, the lowest close since Aug. 2.

On Thursday:
• Early: Reis will release the Q3 2012 Mall vacancy rates. Last quarter Reis reported a small decline in the vacancy rate for regional malls at 8.9%. For Neighborhood and Community malls (strip malls), the vacancy rate declined to 10.8% in Q2, from 10.9% in Q1.

• At 7:45 AM, the European Central Bank announcement with a press conference to follow.

• At 8:30 AM, the initial weekly unemployment claims report will be released. The consensus is for claims to increase to 370 thousand from 359 thousand.

• At 10:00 AM, the Manufacturers' Shipments, Inventories and Orders (Factory Orders) report for August will be released. The consensus is for a 6.0% decrease in orders..

• Also at 10:00 AM, the Trulia Price Rent Monitors for September will be released. This is the new index from Trulia that uses asking prices adjusted both for the mix of homes listed for sale and for seasonal factors.

• At 2:00 PM, the FOMC Minutes for Meeting of September 12-13, 2012 will be released. The minutes might provide additional information about the recent Fed decision.

by Calculated Risk on 10/03/2012 04:37:00 PM

From the National Center for Health Statistics: Births: Preliminary Data for 2011. The NCHS reports:

The 2011 preliminary number of US births was 3,953,593, 1 percent less (or 45,793 fewer) births than in 2010; the general fertility rate (63.2 per 1,000 women age 15-44 years) declined to the lowest rate ever reported for the United States.

The birth rate for teenagers 15-19 years fell 8 percent in 2011 (31.3 births per 1,000 teenagers 15-19 years), another record low ... The birth rates for women in their twenties declined as well, to a historic low for women aged 20-24 (85.3 births per 1,000). The birth rate for women in their early thirties was unchanged in 2011 but rose for women aged 35-39 and 40-44.

Here is a long term graph of annual U.S. births through 2010 ...

Click on graph for larger image in new window.

Births have declined for four consecutive years, and are now 8.4% below the peak in 2007 (births in 2007 were at the all time high - even higher than during the "baby boom"). I suspect certain segments of the population were under stress before the recession started - like construction workers - and even more families were in distress in 2008 through 2011. And this led to fewer babies.

As an example, it appears younger women have delayed having children, but the birth rate was unchanged for women in their early 30s - and rose for older women (the groups that can't wait much longer).

Notice that the number of births started declining a number of years before the Great Depression started. Many families in the 1920s were under severe stress long before the economy collapsed. By 1933 births were down by almost 23% from the early '20s levels.

Of course economic distress isn't the only reason births decline - look at the huge decline following the baby boom that was driven by demographics. But it is not surprising that the number of births slow or decline during tough economic times - and that appears to have happened once again.

I don't think the percentage decline in births will be anything like what happened during the Depression, but a 8.4% decline is pretty significant. My guess is births will increase in 2012 as confidence slowly improves.

by Calculated Risk on 10/03/2012 01:32:00 PM

LPS released their Mortgage Monitor report for August today. According to LPS, 6.87% of mortgages were delinquent in August, down from 7.03% in July, and down from 7.68%% in August 2011.

LPS reports that 4.04% of mortgages were in the foreclosure process, down slightly from 4.08% in July, and down from 4.12% in August 2011.

This gives a total of 10.91% delinquent or in foreclosure. It breaks down as:

• 1,910,000 properties that are 30 or more days, and less than 90 days past due, but not in foreclosure.
• 1,520,000 properties that are 90 or more days delinquent, but not in foreclosure.
• 2,020,000 loans in foreclosure process.

For a total of ​​5,450,000 loans delinquent or in foreclosure in August. This is down from 5,562,000 last month, and down from 6,080,000 in August 2011.

This following graph shows the total delinquent and in-foreclosure rates since 1995.

Click on graph for larger image.

The total delinquency rate has fallen to 6.87% from the peak in July 2010 of 10.57%. A normal rate is probably in the 4% to 5% range, so there is a long ways to go.

The in-foreclosure rate was at 4.04%. There are still a large number of loans in this category (about 2 million), but it appears this is starting to decline.

The second graph shows prepayment speeds vs. mortgage rates. CPR is conditional prepayment rate, a ratio of prepayments to outstandings.

From LPS:

[P]repayment rates in August rose above those seen in the “mini refinance waves” of both 2009 and 2010, hitting their highest levels since 2005. LPS Applied Analytics Senior Vice President Herb Blecher explains that the impact of this increase has been both pronounced and broad-based.

“Our analysis showed an increase in prepayment activity across the entire combined loan-to-value (CLTV) continuum,” Blecher said. “While those loans with equity, particularly 80 percent CLTV and below, have much higher prepayment speeds, the impact of the Obama Administration’s Home Affordable Refinance Program (HARP) was also clear. Loans with a CLTV of more than 120 percent saw the greatest uptick – a 65 percent increase for the year to date. However, it is also becoming evident that loans originated in 2007 and earlier have diminished prospects for conventional refinancing opportunities. Fewer than 30 percent of these vintages remain both active and current, and on average, they are marked by larger negative equity positions and lower credit scores. That said, HARP might yet represent a viable refi option for a good portion of this pool.”

by Calculated Risk on 10/03/2012 11:42:00 AM

Reis reported that the apartment vacancy rate (82 markets) fell slightly to 4.6% in Q3, down from 4.7% in Q1 2012. The vacancy rate was at 5.6% in Q3 2011 and peaked at 8.0% at the end of 2009.

Some data and comments from economist Dr. Victor Calanog at Reis:

3Q Vacancy Rate: 4.6%, down 10 bps from second quarter’s 4.7%

3Q Absorption: 22,615, down from the second quarter’s 31,014 and the first quarter’s 36,423

3Q Completions: 13,531 units (similar to the second quarter’s figure of 13,370 units

"The national vacancy rate barely fell, inching downward from 4.7% to 4.6%, during a quarter that usually exhibits seasonal strength. This is the slowest rate of improvement since the recovery began in early 2010. For perspective, note that vacancies declined by an average of 35 basis points per quarter in 2010 and 2011; this year, vacancies fell by 30 basis points in the first quarter, 20 basis points in the second quarter, and 10 basis points in the third.

Net absorption, or the net change in occupied stock, slowed accordingly. Only 22,615 units were leased up in the third quarter, a clear trend downwards from the second quarter’s figure of 31,014 and the first quarter’s figure of 36,423. This is the lowest rate of absorption since the first quarter of 2010, and represents less than half the quarterly average rate of about 50,000 units that the sector enjoyed in 2010 and 2011.

Inventory growth continued at about the same pace as the second quarter, with 13,531 units coming online. This is still a relatively restrained pace for new construction, and demand for apartments still clearly outstrips supply growth, with absorption figures higher than construction, and vacancies declining. Still, there is cause for concern in the near‐term that demand is abating for multifamily, just as a veritable avalanche of new projects begins to open their doors early next year.
...
There are two fundamental risks in the near future: first, that demand for apartments will not be as robust. Home prices have shown a clear upward trend in recent months, with data from multiple sources all consistently reporting higher home prices and stronger figures for net home orders; it is notoriously difficult to trace a direct correlation between single‐family home prices and demand for multifamily rentals, and linking individual decisions to either buy a single‐family home or rent a multifamily apartment is challenging. Low mortgage rates have not prompted many households to buy homes, given expectations that home prices will remain flat. But that trend might finally be shifting: as home prices rise, households may feel a greater impetus to consider buying homes while mortgage rates remain low, and before prices rise “too much.” This will tend to depress demand for apartment rentals.

The second risk for the apartment sector is the predictable spike in new construction, a big wave of which is expected to come online starting in 2013".

Click on graph for larger image.

This graph shows the apartment vacancy rate starting in 1980. (Annual rate before 1999, quarterly starting in 1999).

Reis is just for large cities. It appears that the declines in vacancy rates is slowing, and rent increases might slow too. Also, as Calanog notes, there will be a significant increase in new supply in 2013 (and in 2014).

by Calculated Risk on 10/03/2012 10:00:00 AM

The September ISM Non-manufacturing index was at 55.1%, up from 53.7% in August. The employment index decreased in September to 51.1%, down from 53.8% in August. Note: Above 50 indicates expansion, below 50 contraction.

From the Institute for Supply Management: September 2012 Non-Manufacturing ISM Report On Business®

Economic activity in the non-manufacturing sector grew in September for the 33rd consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.

The report was issued today by Anthony Nieves, C.P.M., CFPM, chair of the Institute for Supply Management™ Non-Manufacturing Business Survey Committee. "The NMI™ registered 55.1 percent in September, 1.4 percentage points higher than the 53.7 percent registered in August. This indicates continued growth this month at a faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 59.9 percent, which is 4.3 percentage points higher than the 55.6 percent reported in August, reflecting growth for the 38th consecutive month. The New Orders Index increased by 4 percentage points to 57.7 percent. The Employment Index decreased by 2.7 percentage points to 51.1 percent, indicating growth in employment for the second consecutive month but at a slower rate. The Prices Index increased 3.8 percentage points to 68.1 percent, indicating higher month-over-month prices when compared to August. According to the NMI™, 12 non-manufacturing industries reported growth in September. Respondents' comments continue to be mixed; however, the majority indicate a slightly more positive perspective on current business conditions."

Click on graph for larger image.

This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index.

This was above the consensus forecast of 53.5% and indicates faster expansion in September than in August. The internals were mixed with the employment index down, but new orders up.

by Calculated Risk on 10/03/2012 08:18:00 AM

ADP reports:

Employment in the U.S. nonfarm private business sector increased by 162,000 from August to September, on a seasonally adjusted basis. The estimated gains in previous months were revised lower: the July increase was reduced by 17,000 to an increase of 156,000, while the August increase was reduced by 12,000 to an increase of 189,000

Employment in the private, service-providing sector expanded 144,000 in September, down from 175,000 in August.

This was above the consensus forecast of an increase of 140,000 private sector jobs in September. The BLS reports on Friday, and the consensus is for an increase of 113,000 payroll jobs in September, on a seasonally adjusted (SA) basis.

ADP hasn't been very useful in predicting the BLS report, but this suggests a stronger than consensus report.