by Calculated Risk on 1/09/2013 03:13:00 PM

Earlier I posted some questions for this year: Ten Economic Questions for 2013. I'll try to add some thoughts, and maybe some predictions for each question.

Note: Here is a review of my 2012 Forecasts

4) Unemployment Rate: The unemployment rate is still elevated at 7.7% in November [7.8% in the December report]. For the last two years I've been too pessimistic on the unemployment rate because I was expecting some minor bounce back in the participation rate. Instead the participation rate continued to decline.

Maybe 2013 will be the year the participation rate increases a little, or at least stabilizes. Economists at the SF Fed wrote about this last [month]: Will the Jobless Rate Drop Take a Break?

The recent recession was unusual in its depth and its duration. Labor market conditions have remained difficult for a long time. As a result, large numbers of discouraged workers have stopped looking for jobs. A big unknown is whether these workers will stay out of the labor force permanently or enter as the economy recovers. If these workers join the labor force, increasing participation could have a major impact on the unemployment rate in the coming years.

What will the unemployment rate be in December 2013?

Forecasting the unemployment rate includes forecasts for economic and payroll growth, and also for changes in the participation rate. Note: The participation rate is the percent of the working age population (16 and over) that is in the labor force.

We can be pretty certain that the participation rate will decline over the next couple of decades based on demographic trends, but it is unclear what will happen in 2013. The participation rate could bounce back (increase), as the Fed paper excerpted above suggests. Or the participation rate could decline further as has happened over the last few years

Here is a table showing the participation and unemployment rates for December since 2008.

Unemployment and Participation Rate for December each Year
December of	Participation Rate	Unemployment Rate	Using December 2010 participation rate1
2008	65.8%	7.3%
2009	64.6%	9.9%
2010	64.3%	9.3%
2011	64.0%	8.5%	8.9%
2012	63.6%	7.8%	8.8%
1This is the estimated unemployment rate assuming the participation rate had stayed at the December 2010 level of 64.3%, and all of the additional participants were unemployed (same employment growth).

The last column shows what would have happened to the unemployment rate if the participation rate had held steady for the last two years. Clearly the declining participation rate played a key role in the decline in the unemployment rate.

I could make an argument for some bounce back in the participation rate (see Fed paper above), and then, with sluggish growth, we'd probably see an increase in the unemployment rate in 2013 to over 8%. However - as we've seen over the last couple of years - sluggish growth probably isn't sufficient to draw many people back into the labor force, and I could make an argument for another decrease in the participation rate.

My guess is the participation rate will remain around 63.6% in 2013, and with sluggish employment growth, the unemployment rate will be in the mid-to-high 7% range in December 2013 (little changed from the current rate).

Here are the ten questions for 2013 and a few predictions:
• Question #1 for 2013: US Fiscal Policy
• Question #2 for 2013: Will the U.S. economy grow in 2013?
• Question #3 for 2013: How many payroll jobs will be added in 2013?
• Question #4 for 2013: What will the unemployment rate be in December 2013?
• Question #5 for 2013: Will the inflation rate rise or fall in 2013?
• Question #6 for 2013: What will happen with Monetary Policy and QE3?
• Question #7 for 2013: What will happen with house prices in 2013?
• Question #8 for 2013: Will Housing inventory bottom in 2013?
• Question #9 for 2013: How much will Residential Investment increase?
• Question #10 for 2013: Europe and the Euro

by Calculated Risk on 1/09/2013 12:42:00 PM

Earlier I posted some questions for this year: Ten Economic Questions for 2013. I'll try to add some thoughts, and maybe some predictions for each question.

Note: Here is a review of my 2012 Forecasts

5) Inflation: The Fed has made it clear they will tolerate a little more inflation, but currently the inflation rate is running below the Fed's 2% target. Will the inflation rate rise or fall in 2013?

Here is a look at four key measures of inflation: core CPI (consumer price index), core PCE prices (Personal Consumption Expenditures), median CPI and the trimmed-mean CPI through November 2012.

Click on graph for larger image.

On a year-over-year basis, the median CPI rose 2.2%, the trimmed-mean CPI rose 1.9%, the CPI rose 1.8%, and the CPI less food and energy rose 1.9%. Core PCE is for October and increased 1.7% year-over-year. These measures suggest inflation is mostly below the Fed's target of 2% on a year-over-year basis.

Here is what I wrote last year on inflation:

There are some people who have been predicting an imminent rapid increase in inflation for almost 3 years - in their view, a sharp increase in inflation is always just around the corner. That view has consistently been wrong, although some people also claim the government measures are not correct and that inflation is much higher than reported.

However private measures show similar results as BEA and BLS measures (see The Billion Prices Project). ...

The bottom line is the inflation rate will probably stay low in 2012 with high unemployment and low resource utilization. I expect QE3 to be announced before mid-year, and that will probably keep the inflation rate near the Fed's target (as opposed to falling further). But I don't see inflation as a significant threat in 2012.

I could just repeat that post with a few of minor changes. The first change is QE3 has already been announced. A second change is that now some people who have been predicting an imminent rapid increase in inflation for almost 4 years! Always wrong, but never in doubt.

A third possible change is related to the recent FOMC statement that indicated the Fed will tolerate an inflation outlook "between one and two years ahead" of 2 1/2 percent. Given the Fed's tolerance for a little more inflation, we might see a little more inflation in 2013 than in 2012 - but I still expect inflation to be near the Fed's target. With high unemployment and low resource utilization, I don't see inflation as a threat in 2013.

Here are the ten questions for 2013 and a few predictions:
• Question #1 for 2013: US Fiscal Policy
• Question #2 for 2013: Will the U.S. economy grow in 2013?
• Question #3 for 2013: How many payroll jobs will be added in 2013?
• Question #4 for 2013: What will the unemployment rate be in December 2013?
• Question #5 for 2013: Will the inflation rate rise or fall in 2013?
• Question #6 for 2013: What will happen with Monetary Policy and QE3?
• Question #7 for 2013: What will happen with house prices in 2013?
• Question #8 for 2013: Will Housing inventory bottom in 2013?
• Question #9 for 2013: How much will Residential Investment increase?
• Question #10 for 2013: Europe and the Euro

by Calculated Risk on 1/09/2013 09:19:00 AM

Reis reported that the vacancy rate for regional malls declined to 8.6% in Q4 from 8.7% in Q3. This is down from a cycle peak of 9.4% in Q3 2011.

For Neighborhood and Community malls (strip malls), the vacancy rate declined to 10.7% in Q4, down from 10.8% in Q3. For strip malls, the vacancy rate peaked at 11.1% in Q3 2011.

Comments from Reis Senior Economist Ryan Severino:

[Strip mall] Vacancy declined by only 10 bps during the fourth quarter. This was an improvement versus the third quarter when the vacancy rate was unchanged. On a year‐over‐year basis, the vacancy rate declined by only 30 bps. During the quarter absorption exceeded construction by a sufficient enough margin to lower the vacancy rate, but only marginally. With only 915,000 square feet delivered, more robust demand would cause vacancy to compress expeditiously. But even with so few completions occurring, the economy is not generating enough demand for space.
...
Asking and effective rents grew by 0.2% and 0.1%, respectively, during the quarter. This was only a negligible increase versus the third quarter when both metrics increased by just 0.1%. It was the fifth consecutive quarter that asking and effective rents have increased.
...
[New construction] With tepid retail sales and scant demand for space, new construction remained near record‐low levels during the quarter. 915,000 square feet were delivered during the fourth quarter, versus 723,000 square feet during the third quarter. However, this is a slowdown compared to the 2.951 million square feet of retail space that were delivered during the fourth quarter of 2011. In fact, 915,000 square feet is the fifth‐lowest figure on record since Reis began tracking quarterly data in 1999.
...
[Regional] Malls continue to outperform their neighborhood and community shopping center comrades. The vacancy rate declined by another 10 basis points during the quarter. This is the fifth consecutive quarter with a vacancy decline. Asking rent growth declined slightly versus last quarter, growing by another 0.2%. This was the seventh consecutive quarter of asking rent increases. The improvement in mall subsector remains consistent if not exhilarating.

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 through Q3. This has increased from the bottom 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 1/08/2013 09:10:00 PM

Over there ... from the NY Times: Unemployment Rises to New High in Euro Zone

The euro zone jobless rate rose to 11.8 percent in November from 11.7 percent in October, according to Eurostat, the statistical agency of the European Union. Eurostat estimated that 18.8 million people in the euro zone were unemployed in November, two million more than a year earlier.

... on Tuesday, the Federal Statistics Office in Berlin said that German exports declined 3.4 percent while imports slid 3.7 percent in November from a month earlier. The weakness narrowed Germany’s trade surplus to €14.6 billion ...

Austerity at work. The beatings will continue until morale improves.

Wednesday economic releases:
• Early: Reis Q4 2012 Mall survey of rents and vacancy rates. In Q3 Reis reported the regional mall vacancy rate declined to 8.7%, from 8.9% in Q2. The vacancy rate peaked at 9.4% in Q3 2011. 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 2011.

• At 7:00 AM ET, the Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

by Calculated Risk on 1/08/2013 04:27:00 PM

This is a key distressed market to follow since Las Vegas has seen the largest price decline of any of the Case-Shiller composite 20 cities.

From the GLVAR: GLVAR reports home prices increased 24 percent in 2012,ranking as third best sales year ever

GLVAR said the total number of local homes, condominiums and townhomes sold in December was 3,624. That’s up from 3,293 in November, but down from 4,250 total sales in December 2011. Compared to November, single-family home sales during December increased by 10.4 percent, while sales of condos and townhomes increased by 8.5 percent. Compared to one year ago, home sales were down 14.3 percent, while condo and townhome sales were down 16.5 percent.
...
The total number of homes listed for sale on GLVAR’s Multiple Listing Service declined in December, with a total of 14,601 single-family homes listed for sale at the end of the month. That’s down 6.6 percent from 15,637 homes listed for sale at the end of November and down 24.1 percent from one year ago. ...

[T]he number of available homes listed for sale without any sort of pending or contingent offer by the end of December, GLVAR reported 3,688 single-family homes listed without any sort of offer. That’s down 4.2 percent from 3,849 such homes listed in November and down 58.2 percent from one year ago.
...
GLVAR’s statistics through December 2012 show a dramatic transition from foreclosures to short sales – which occur when a lender agrees to sell a home for less than what the borrower owes on the mortgage. The percentage of existing homes sold as part of a short sale set a new record in December, accounting for 45.8 percent of all sales. Foreclosures, which made up more than half of all sales a few years ago, accounted for only 9.5 percent of all sales in December 2012.

A few key points:
• Inventory decreased in December, and inventory is down 24.1% from Decmeber 2011.  For single family homes without contingent offers, inventory is down sharply from a year ago (down 58.2% year-over-year).

• Short sales are more than four times foreclosures now. The GLVAR reported a record 45.8% of sales were short sales in December, and only 9.5% foreclosures. We've seen a shift from foreclosures to short sales in most areas (not just in areas with new foreclosure laws).  Note: Some of the surge in short sales might have been to beat the expiration of the Mortgage Debt Relief Act of 2007.  The Act  was extended as part of the fiscal deal, so the number of short sales should remain high in 2013.

• The decline in overall sales is because of fewer foreclosure sales (Las Vegas had a record number of real estate sales in 2011, even higher than at the peak of the bubble in 2005, because of all the distressed sales!). As the market slowly recovers, the number of distressed sales should fall and the number of conventional sales should rise. This has been happening in Las Vegas, although distressed sales were up some in December compared to November due to seasonal factors.

Overall this is a slowly improving distressed market. Note: I ignore the median price because that is impacted by the mix.

by Calculated Risk on 1/08/2013 01:35:00 PM

Earlier I posted some questions for this year: Ten Economic Questions for 2013. I'll try to add some thoughts, and maybe some predictions for each question.

Note: Here is a review of my 2012 Forecasts

6) Monetary Policy: Currently the Fed is planning to buy $85 billion in Treasury and agency mortgage-backed securities per month as part of the open-ended QE3. Will the Fed continue all year at this pace? Or will the Fed increase their purchase rate? Or will the Fed decrease their purchase rate, stop these purchases, or even sell some securities?

First - I wrote this question before the recent FOMC minutes were released. The minutes revealed that several FOMC members expect QE3 to end in 2013. Of course the level of QE3 purchases in 2013 will be data dependent - if the economy remains sluggish, the unemployment rate remains high,  and inflation expectations remain stable, the FOMC will continue to purchase $85 billion per month all year. If the economy picks up, or inflation expectations increase - the FOMC will probably slow or stop their purchases.

It is important to note that slowing or stopping the purchases doesn't mean the Fed is tightening. Policy will remain accomodative all year (I doubt the Fed will purchase securities and reduce their balance sheet in 2013, and it is very doubtful they will raise the Fed Funds rate this year).

Last year I wrote for 2012:

• I expect the Fed will change their communication strategy and add a likely future path of the Fed Funds rate to the quarterly economic forecasts.

• I think QE3 is likely, but more towards mid-year - and [timing] is data dependent.

The Fed introduced the new communication strategy, and then changed it again based on "thresholds" near the end of 2012.  On QE3, they waited a little longer than I expected, and the FOMC announced QE3 in September.

This year I don't think we will see as many monetary changes.

I expect the FOMC will review their purchases at each meeting just like they used to review the Fed Funds rate.  We might see some adjustments during the year, but currently I expect the Fed to purchase securities at about the same level all year.

Here are the ten questions for 2013 and a few predictions:
• Question #1 for 2013: US Fiscal Policy
• Question #2 for 2013: Will the U.S. economy grow in 2013?
• Question #3 for 2013: How many payroll jobs will be added in 2013?
• Question #4 for 2013: What will the unemployment rate be in December 2013?
• Question #5 for 2013: Will the inflation rate rise or fall in 2013?
• Question #6 for 2013: What will happen with Monetary Policy and QE3?
• Question #7 for 2013: What will happen with house prices in 2013?
• Question #8 for 2013: Will Housing inventory bottom in 2013?
• Question #9 for 2013: How much will Residential Investment increase?
• Question #10 for 2013: Europe and the Euro

by Calculated Risk on 1/08/2013 10:55:00 AM

Earlier I posted some questions for this year: Ten Economic Questions for 2013. I'll try to add some thoughts, and maybe some predictions for each question.

Note: Here is a review of my 2012 Forecasts

7) House Prices: It now appears house prices, as measured by the national repeat sales indexes, bottomed in early 2012? What will happen with house prices in 2013?

Calling the bottom for house prices in 2012 now appears correct.

Click on graph for larger image.

This graph shows the year-over-year change in the Case-Shiller Composite 10 and Composite 20 indexes.

The Composite 10 SA was up 3.4% YoY in October, and the Composite 20 SA was up 4.3% year-over-year. Other house price indexes have indicated similar gains. Right now it looks like the Case-Shiller Composite 20 index will finish the year up about 6%.

Note: the year-over-year gain in 2010 was related to the homebuyer tax credit.  However, in 2010, prices were still too high based on fundamentals.   However, when prices started increasing in 2012, prices were more in line with fundamentals based on price-to-income, price-to-rent and real house prices.

Some of the key factors in 2012 were limited inventory, fewer foreclosures, investor buying in certain areas, and a change in psychology as buyers and sellers started believing house prices had bottomed. In some areas, like Phoenix, there appeared to be a bounce off the bottom.

In 2013, inventories will probably remain low - suggesting more house price increases - and there also tends to be significant momentum in house prices (also suggesting more increases in 2013).

However, even though I expect inventories to be low this year, I think we will see more inventory come on the market in 2013 than 2012, as sellers who were waiting for a better market list their homes, and as some "underwater" homeowner (those who owe more than their homes are worth) finally can sell without taking a loss.

Also I expect more foreclosure in some judicial states, and I think the price momentum in Phoenix and other "bounce back" areas will slow.

All of these factors suggest further prices increases in 2013, but at a slower rate than in 2012.   Here are some other house prices forecasts ranging from 1.4% to 4.8% increases in 2013.  It looks like I'm in the consensus this year (I was out of the consensus in 2012).

Here are the ten questions for 2013 and a few predictions:
• Question #1 for 2013: US Fiscal Policy
• Question #2 for 2013: Will the U.S. economy grow in 2013?
• Question #3 for 2013: How many payroll jobs will be added in 2013?
• Question #4 for 2013: What will the unemployment rate be in December 2013?
• Question #5 for 2013: Will the inflation rate rise or fall in 2013?
• Question #6 for 2013: What will happen with Monetary Policy and QE3?
• Question #7 for 2013: What will happen with house prices in 2013?
• Question #8 for 2013: Will Housing inventory bottom in 2013?
• Question #9 for 2013: How much will Residential Investment increase?
• Question #10 for 2013: Europe and the Euro

by Calculated Risk on 1/08/2013 08:25:00 AM

Reis reported that the apartment vacancy rate fell to 4.5% in Q4, down from 4.7% in Q3 2012. The vacancy rate was at 5.2% in Q4 2011 and peaked at 8.0% at the end of 2009.

Some data and comments from Reis Senior Economist Ryan Severino:

Vacancy declined by another 20 bps during the fourth quarter to 4.5%. This exceeded performance during the third quarter when vacancy declined by 10 bps. On a year-over-year basis, the vacancy rate declined by 70 bps.

There was a bit of a resurgence in demand for apartment units during the fourth quarter when 45,162 units were absorbed. This represents an increase versus the 24,951 units that were absorbed during the third quarter but a slight decrease versus the 47,396 units that were absorbed during the fourth quarter of 2011. Net absorption has been consistently positive since the second quarter of 2009. For the calendar year 2012, 138,155 units were absorbed. This is a decline from the 172,707 units that were absorbed during calendar year 2011.This decline is not surprising. The market has tightened considerably over the last few years and at this point in the cycle a slight slowing should be anticipated.

New construction also increased during the quarter. 24,614 units were delivered during the fourth quarter, versus 17,378 units during the third quarter. This is also an increase compared to the 10,145 units that were delivered during the fourth quarter of 2011. This is the third consecutive quarter of construction increases and the highest level of quarterly completions since the second quarter of 2010. For calendar year 2012, 66,846 units were completed. This is an increase versus the 42,290 that were completed during 2011.

Asking and effective rents both grew by 0.6% during the fourth quarter. This was below the third quarter performance when asking and effective rents grew by 0.8% and 0.9%, respectively. Both asking and effective rents have consistently increased since the first quarter of 2010. However, this was the weakest performance since the fourth quarter of 2011. Nonetheless, taking a longer‐term view, on a year‐over‐year basis rent growth continues to accelerate. Nationally, asking and effective rents hit another all‐time high during the fourth quarter, propelled by strong demand, limited new supply growth, and a still weak for‐sale housing market.
...
The outlook for 2013 remains stout. Although new completions are expected to accelerate substantially during 2013, demand should remain tight. With demand outpacing new completions, vacancy is expected to continue to decrease, but the rate of decline will slow as the market digests all of the new units coming online. However, given that tightness in the market will persist, rent growth will continue to accelerate – having shorn concessions landlords now feel empowered to raise face‐level asking rents in a more pronounced fashion. The majority of the market will continue to perform well in 2013 as their tenants will have no choice but to continue paying record‐level rents. The greatest risk likely resides in the highest‐quality properties with the most expensive rents, typically class A and above properties. Rents in these high‐quality properties are prohibitively expensive and tenants have already countenanced large annual rent increases. With housing prices remaining relatively low and mortgage rates hovering near record‐low levels, an increasing number of these class A/A+ tenants, who boast high incomes, ample savings, and good credit ratings, will do the math and decide that it is finally time to purchase a home.

Click on graph for larger image.

This graph shows the apartment vacancy rate starting in 1980. (Annual rate before 1999, quarterly starting in 1999). Note: Reis is just for large cities.

This was another strong quarter for apartments with the vacancy rate falling and rents rising. With more supply coming online in 2013, the decline in the vacancy rate should slow - but the market is still tight, and Reis expects rents to continue to increase.

by Calculated Risk on 1/07/2013 09:06:00 PM

From Alan Zibel and Nick Timiraos at the WSJ: Watchdog to Set Loan Rules

This week, the Consumer Financial Protection Bureau will define standards that all mortgage lenders are likely to follow when originating home loans. ...

The rules don't specify a minimum down payment and instead focus on ensuring that banks document borrowers' ability to make their monthly loan payments. Loans in which borrowers make only interest payments for a set period and those in which the principal balance can increase are excluded by law from being "qualified" mortgages. ...

CFPB is likely to offer two ways in which lenders can meet the regulator's standard ... Under the first approach, the regulator will consider as qualified mortgages all loans that receive an approval after being run through the automated underwriting engines maintained by [Fannie, Freddie, FHA], even if they aren't ultimately sold to or insured by those institutions.

Under the second approach, loans would be deemed qualified mortgages if borrowers are spending no more than 43% of their pretax income on monthly debt payments.

In the long run this is an important step. This will insure that most loans are made to a somewhat reasonable standard (43% of pretax income is pretty high) - and no stated income or Alt-A loans will meet these standards (Great news!).

Tuesday economic release:
• Early: Reis Q4 2012 Apartment survey of rents and vacancy rates. In Q3 Reis reported the apartment vacancy rate declined to 4.6%, from 4.7% in Q2. The vacancy rate peaked at 8.0% in Q4 2008 and Q1 2009. With a combination of more supply coming online, and the probable bottom for house prices (motivating some renters to buy), most of the decline in the vacancy rate is probably behind us.

• At 7:30 AM ET, the NFIB Small Business Optimism Index for December will be released. The consensus is for an increase to 87.9 from 87.5 in November.

• At 3:00 PM, Consumer Credit for November from the Federal Reserve. The consensus is for credit to increase $13.2 billion in November.

by Calculated Risk on 1/07/2013 06:57:00 PM

Inventory declines every year in December and January as potential sellers take their homes off the market for the holidays. That is why it helps to look at the year-over-year change in inventory.

According to the deptofnumbers.com for (54 metro areas), overall inventory is down 23.9% year-over-year in early January, and probably at the lowest level since the early '00s.

This graph shows the NAR estimate of existing home inventory through November (left axis) and the HousingTracker data for the 54 metro areas through early January.


Click on graph for larger image.

Since the NAR released their revisions for sales and inventory in 2011, the NAR and HousingTracker inventory numbers have tracked pretty well.

On a seasonal basis, housing inventory usually bottoms during the holidays and then starts increasing in February - and peaks in mid-summer.  So inventory is probably near the seasonal bottom right now and should start increasing again soon.

The second graph shows the year-over-year change in inventory for both the NAR and HousingTracker.

HousingTracker reported that the early January listings, for the 54 metro areas, declined 23.9% from the same period last year.

The year-over-year declines will probably start to get smaller since inventory is already very low. It seems very unlikely we will see 20%+ year-over-year declines this summer, and I think overall inventory might be bottoming right now.