by Calculated Risk on 1/09/2013 09:04:00 PM

A few articles on Jack Lew (Obama's pick for Treasury Secretary).

From the NY Times: Obama’s Pick for Treasury Is Said to Be His Chief of Staff

President Obama will announce on Thursday that he intends to elevate his chief of staff and former budget director, Jacob J. Lew, to be his next secretary of Treasury ...

While Mr. Lew has much less experience than Mr. Geithner in international economics and financial markets, he would come to the job with far more expertise in fiscal policy and in dealing with Congress than Mr. Geithner did when he became secretary at the start of Mr. Obama’s term. That shift in skills reflects the changed demands of the times, as emphasis has shifted from the global recession and financial crisis of the president’s first years to the continuing budget fights with Republicans in Congress ...

From the WSJ: Obama Aide Is Treasury Pick

President Barack Obama plans to nominate Jacob Lew to be the 76th U.S. Treasury secretary, putting the White House's chief budget expert in a top economic post as it enters a grueling year of fiscal battles with Congress.
...
Mr. Lew, 57 years old, is a veteran of numerous Washington budget battles, stretching back to his work as a senior congressional aide in the 1980s. He would likely draw on that experience during the looming fights over the debt ceiling, government spending levels and a possible overhaul of the tax code.

From the WSJ: Jacob Lew, in His Own Words

2010 – confirmation hearing before Senate Budget Committee

“Throughout my career, I have tried to work collaboratively across partisan and ideological divides to cut through gridlock and to help solve what seem like intractable problems. If confirmed as OMB Director, I will work in that bipartisan fashion again–with the members of this Committee, the leadership of both chambers, and with all those committed to taking constructive steps to rejuvenating our Nation’s economy and its fiscal standing.”

Thursday economic releases:
• At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for claims to decrease to 362 thousand from 372 thousand last week.

• At 10:00 AM, the Job Openings and Labor Turnover Survey for November will be released by the BLS. In general jobs openings have been trending up. Openings were up about 8% year-over-year in October.

• Also at 10:00 AM, the Monthly Wholesale Trade: Sales and Inventories report for November. The consensus is for a 0.3% increase in inventories.

by Calculated Risk on 1/09/2013 05:49:00 PM

Note: Near the beginning of the year, I find it useful to jot down a few thoughts on how I expect the economy to perform. This isn't to test my forecasting skills - some times I learn more when I miss a forecast (As an example, I've spent a significant amount of time looking at the participation rate and demographics since I've been overly pessimistic on the unemployment rate the last couple of years).

Some years I make some big calls. Not this year. Although I think parts of the economy are poised for more growth, I think austerity at the Federal level means another year of sluggish growth.  So my forecasts this year are mostly in line with the consensus (It is more fun being a contrarian - oh well).

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

3) Employment: How many payroll jobs will be added in 2013? Will we finally see some pickup over the approximately 2 million private sector job creation rate of 2011 and 2012?

I've been hammering on two key positive themes: 1) the pickup in residential investment (RI), and 2) the end of state and local government layoffs. Both of these will be positive for employment next year (there seems to be a lag between increases in RI and employment).

The following table shows the annual change in State and Local government since 2008. The four years of declining employment appears to be ending.  Note: This doesn't include the benchmark revision to be released in February.  The preliminary revision showed even more government job losses.

State and Local Government, Annual Change in Payroll (000s)
Year	State Government	Local Government	Total
2008	50	108	158
2009	-41	-88	-129
2010	-20	-242	-262
2011	-80	-150	-230
2012	24	-50	-26

The second table shows the change in construction payrolls starting in 2006.

	Construction Jobs (000s)
2006	152
2007	-195
2008	-785
2009	-1,051
2010	-177
2011	69
2012	18

For construction jobs, the preliminary benchmark revision showed an increase in jobs - so 2011 and 2012 will both probably be revised upwards. It is also important to note that construction includes residential, commercial and public. Although residential is picking up (usually the largest category), public construction spending is still declining, and commercial is mostly moving sideways (energy construction is up).

Both state and local government and construction hiring should improve in 2013. Unfortunately there are other employment categories that will be hit by the austerity (especially the increase in payroll taxes). I expect that will offset any gain from construction and local governments.  So my forecast is close to the previous two years, a gain of about 150,000 to 200,000 payroll jobs per month 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 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.