by Calculated Risk on 4/01/2015 08:59:00 AM

Reis released their Q1 2015 Office Vacancy survey this morning. Reis reported that the office vacancy rate declined in Q1 to 16.6% from 16.7% in Q4 2014. This is down from 16.9% in Q1 2014, and down from the cycle peak of 17.6%.

From Reis:

The national vacancy rate declined by 10 basis points during the quarter to 16.6%, its lowest level since the third quarter of 2009. Although the vacancy decline was just 10 basis points, this is the third consecutive quarter with a vacancy decline, another sign of more consistent improvement from the office market.
...
With net absorption continuing to outpace construction by a wide enough margin, vacancy rate declines are now becoming more consistent, emblematic of a strengthening office market. As office leases that were signed at the bottom of the market expire over the next couple of years, many tenants will find their current space insufficient and will sign larger leases.
...
Asking and effective rents grew by 0.9% and 1.0%, respectively, during the first quarter, marking the eighteenth consecutive quarter of asking and effective rent growth. Superficially, this is a slight decrease from last quarter when both metrics increased by 1.1%. However, this is still strong performance from a market still grappling with a high vacancy rate.
...
[W]e continue to expect that the national vacancy rate will fall by roughly 50 basis points in 2015 while effective rents grow by approximately 3.6%. That would be a solid showing for an office market that is still in recovery mode.

Click on graph for larger image.

This graph shows the office vacancy rate starting in 1980 (prior to 1999 the data is annual).

Reis reported the vacancy rate was at 16.6% in Q1.

Net absorption is picking up, but there will not be a significant pickup in new construction until the vacancy rate falls much further.

Office vacancy data courtesy of Reis.

by Calculated Risk on 4/01/2015 08:21:00 AM

From ADP:

Private sector employment increased by 189,000 jobs from February to March according to the March ADP National Employment Report®. ... The report, which is derived from ADP’s actual payroll data, measures the change in total nonfarm private employment each month on a seasonally-adjusted basis.
...
Goods-producing employment rose by only 5,000 jobs in March, down from 22,000 jobs gained in February. The construction industry added 17,000 jobs, down from 28,000 last month. Meanwhile, manufacturing lost 1,000 jobs in March, after adding 2,000 in February.

Service-providing employment rose by 184,000 jobs in March, down from 192,000 in February. ...

Mark Zandi, chief economist of Moody’s Analytics, said, “Job growth took a step back in March. The fallout from the collapse in oil prices and surge in value of the dollar is hitting the job market. Despite the slowdown, underlying job growth remains strong enough to reduce labor market slack.”

This was below the consensus forecast for 225,000 private sector jobs added in the ADP report. 

The BLS report for March will be released on Friday and the consensus is for 247,000 non-farm payroll jobs added in March.

by Calculated Risk on 4/01/2015 07:00:00 AM

From the MBA: Mortgage Applications Increase in Latest MBA Weekly Survey

Mortgage applications increased 4.6 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending March 27, 2015. ...

The Refinance Index increased 4 percent from the previous week. The seasonally adjusted Purchase Index increased 6 percent from one week earlier. ... The unadjusted Purchase Index ... was 8 percent higher than the same week one year ago.
...
“There was a broad based increase in mortgage applications last week relative to the week prior. The increase in purchase volume was led by a nearly 6 percent increase in both conventional and government markets, perhaps signaling that households are finally ready to begin the home-buying season,” said Lynn Fisher, MBA’s Vice President of Research and Economics.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 3.89 percent from 3.90 percent, with points decreasing to 0.36 from 0.37 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.
emphasis added

Click on graph for larger image.


The first graph shows the refinance index.

2014 was the lowest year for refinance activity since year 2000.

2015 will probably see a little more refinance activity than in 2014, but not a large refinance boom.

The second graph shows the MBA mortgage purchase index.  

According to the MBA, the unadjusted purchase index is 8% higher than a year ago.

by Calculated Risk on 3/31/2015 07:17:00 PM

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

• At 8:15 AM, the ADP Employment Report for March. This report is for private payrolls only (no government). The consensus is for 225,000 payroll jobs added in March, up from 212,000 in February.

• At 10:00 AM, the ISM Manufacturing Index for March. The consensus is for a decrease to 52.5 from 52.9 in February. The ISM manufacturing index indicated expansion in February at 52.9%. The employment index was at 51.4%, and the new orders index was at 52.5%.

• At 10:00 AM, Construction Spending for February. The consensus is for a 0.2% increase in construction spending.

• Early: Reis Q1 2015 Office Survey of rents and vacancy rates.

• All day: Light vehicle sales for March. The consensus is for light vehicle sales to increase to 16.8 million SAAR in March from 16.2 million in February (Seasonally Adjusted Annual Rate).

by Calculated Risk on 3/31/2015 04:36:00 PM

Fannie Mae reported today that the Single-Family Serious Delinquency rate declined slightly in February to 1.83% from 1.86% in January. The serious delinquency rate is down from 2.27% in February 2014, and this is the lowest level since September 2008.

The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%.

Last week, Freddie Mac reported that the Single-Family serious delinquency rate was declined in February to 1.81%. Freddie's rate is down from 2.29% in February 2014, and is at the lowest level since December 2008. Freddie's serious delinquency rate peaked in February 2010 at 4.20%.

Note: These are mortgage loans that are "three monthly payments or more past due or in foreclosure".

Click on graph for larger image

The Fannie Mae serious delinquency rate has fallen 0.44 percentage points over the last year - the pace of improvement has slowed - and at that pace the serious delinquency rate will be close to 1% in late 2016.

The "normal" serious delinquency rate is under 1%, so maybe serious delinquencies will be close to normal at the end of 2016.  This elevated delinquency rate is mostly related to older loans - the lenders are still working through the backlog, especially in judicial foreclosure states like Florida.

by Calculated Risk on 3/31/2015 02:18:00 PM

Here is a minor indicator I follow from the National Restaurant Association: Softer sales offset by stronger optimism in February's RPI

Despite dampened sales and customer traffic levels as a result of extreme weather in parts of the country, the National Restaurant Association’s Restaurant Performance Index (RPI) held relatively steady in February. The RPI stood at 102.6 in February, down slightly from a level of 102.7 in January.

In addition, February marked the 24th consecutive month in which the RPI stood above 100, which signifies expansion in the index of key industry indicators.

“With same-store sales and customer traffic levels being impacted by challenging weather conditions in parts of the country, the Current Situation component of the RPI declined in February,” said Hudson Riehle, senior vice president of the Research and Knowledge Group for the Association. “However, this was offset by a solid improvement in the Expectations component of the index, as restaurant operators are increasingly optimistic about business conditions in the months ahead. As a result, the overall RPI held relatively steady in February.”
emphasis added

Click on graph for larger image.

The index decreased to 102.6 in February, down from 102.7 in January. (above 100 indicates expansion).

Restaurant spending is discretionary, so even though this is "D-list" data, I like to check it every month. This is another solid reading - and it is likely restaurants are benefiting from lower gasoline prices and are having to raise wages - a little - to attract and retain workers.

by Calculated Risk on 3/31/2015 11:19:00 AM

The expected slowdown in year-over-year price increases has occurred. In October 2013, the National index was up 10.9% year-over-year (YoY). In January 2015, the index was up 4.5% YoY.  However the YoY change has only declined slightly over the last five months.

Looking forward, I expect the YoY increases for the indexes to move more sideways (as opposed to down).   Two points: 1) I don't expect (as some) for the indexes to turn negative YoY (in 2015) , and 2) I think most of the slowdown on a YoY basis is now behind us. This slowdown in price increases was expected by several key analysts, and I think it was good news for housing and the economy.

In the earlier post, I graphed nominal house prices, but it is also important to look at prices in real terms (inflation adjusted).  Case-Shiller, CoreLogic and others report nominal house prices.  As an example, if a house price was $200,000 in January 2000, the price would be close to $275,000 today adjusted for inflation (38%).  That is why the second graph below is important - this shows "real" prices (adjusted for inflation).

It has been almost ten years since the bubble peak.  In the Case-Shiller release this morning, the National Index was reported as being 7.9% below the bubble peak.   However, in real terms, the National index is still about 21% below the bubble peak.

Nominal House Prices

The first graph shows the monthly Case-Shiller National Index SA, the monthly Case-Shiller Composite 20 SA, and the CoreLogic House Price Indexes (through January) in nominal terms as reported.

In nominal terms, the Case-Shiller National index (SA) is back to May 2005 levels, and the Case-Shiller Composite 20 Index (SA) is back to December 2004 levels, and the CoreLogic index (NSA) is back to February 2005.

Real House Prices

The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices.

In real terms, the National index is back to June 2003 levels, the Composite 20 index is back to March 2003, and the CoreLogic index back to April 2003.

In real terms, house prices are back to 2003 levels.

Price-to-Rent

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

Here is a similar graph using the Case-Shiller National, Composite 20 and CoreLogic House Price Indexes.

This graph shows the price to rent ratio (January 1998 = 1.0).

On a price-to-rent basis, the Case-Shiller National index is back to May 2003 levels, the Composite 20 index is back to December 2002 levels, and the CoreLogic index is back to March 2003.

In real terms, and as a price-to-rent ratio, prices are mostly back to 2003 levels - and maybe moving a little sideways now.

by Calculated Risk on 3/31/2015 09:15:00 AM

S&P/Case-Shiller released the monthly Home Price Indices for January ("January" is a 3 month average of November, December and January prices).

This release includes prices for 20 individual cities, two composite indices (for 10 cities and 20 cities) and the monthly National index.

Note: Case-Shiller reports Not Seasonally Adjusted (NSA), I use the SA data for the graphs.

From S&P: Rise in Home Prices Paced by Denver, Miami, and Dallas According to the S&P/Case-Shiller Home Price Indices

Data released today for January 2015 show that home prices continued their rise across the country over the last 12 months. However, monthly data reveal slowing increases and seasonal weakness. ... Both the 10-City and 20-City Composites saw year-over-year increases in January compared to December. The 10-City Composite gained 4.4% year-over-year, up from 4.3% in December. The 20-City Composite gained 4.6% year-over-year, compared to a 4.4% increase in December. The S&P/Case-Shiller U.S. National Home Price Index, which covers all nine U.S. census divisions, recorded a 4.5% annual gain in January 2015 versus a 4.6% increase in December 2014.
...
The National index declined for the fifth consecutive month in January, reporting a -0.1% change for the month. Both the 10- and 20-City Composites reported virtually flat month-over-month changes. Of the nine cities that reported increases, Charlotte, Miami, and San Diego led all cities in January with increases of 0.7%. San Francisco reported the largest decrease of all 20 cities, with a month over-month decrease of -0.9%. Seattle and Washington D.C. reported decreases of -0.5%. U
...
“The combination of low interest rates and strong consumer confidence based on solid job growth, cheap oil and low inflation continue to support further increases in home prices” says David M. Blitzer, Managing Director and Chairman of the Index Committee for S&P Dow Jones Indices. “Regional patterns in recent months continue: strength in the west and southwest paced by Denver and Dallas with results ahead of the national index in the California cities, the Pacific Northwest and Las Vegas. The northeast and Midwest are mostly weaker than the national index.

Click on graph for larger image.

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

The Composite 10 index is off 15.9% from the peak, and up 0.9% in January (SA).

The Composite 20 index is off 14.9% from the peak, and up 0.9% (SA) in January.

The National index is off 7.9% from the peak, and up 0.5% (SA) in January.  The National index is up 24.3% from the post-bubble low set in Dec 2011 (SA).

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

The Composite 10 SA is up 4.4% compared to January 2014.

The Composite 20 SA is up 4.6% year-over-year..

The National index SA is up 4.5% year-over-year.

Prices increased (SA) in all 20 of the 20 Case-Shiller cities in January seasonally adjusted.  (Prices increased in 9 of the 20 cities NSA)  Prices in Las Vegas are off 41.4% from the peak, and prices in Denver and Dallas are at new highs (SA).

This was close to the consensus forecast for a 4.6% YoY increase for the National index. I'll have more on house prices later.

by Calculated Risk on 3/30/2015 07:51:00 PM

From the WSJ: Fed’s Fischer Floats Ideas for Regulating Shadow Banks

The Federal Reserve’s No. 2 official floated a series of ideas for regulating nonbank financial companies, the latest indication that top U.S. policy makers are focusing on risks in the so-called shadow banking sector.

“While there has been progress on the financial reform front, we should not be complacent about the stability of the financial system,” said Fed Vice Chairman Stanley Fischer in remarks prepared for a conference here hosted by the Federal Reserve Bank of Atlanta. He noted existing rules create an incentive for risky activities to move into less-regulated financial firms and said “we should expect that further reforms will certainly be needed down the road.”

Tuesday:
• 9:00 AM ET, the S&P/Case-Shiller House Price Index for January. Although this is the January report, it is really a 3 month average of November, December and January prices. The consensus is for a 4.6% year-over-year increase in the National Index for January. The Zillow forecast is for the National Index to increase 4.6% year-over-year in January, and for prices to increase 0.5% month-to-month seasonally adjusted.

• At 9:45 AM, the Chicago Purchasing Managers Index for March. The consensus is for a reading of 50.2, up from 45.8 in February.

by Calculated Risk on 3/30/2015 03:08:00 PM

Note: This is a repeat of a post I wrote early this year.  Based on some recent comments I've seen, I think this is worth repeating.

For amusement, I checked out the WSJ opinion page comments on the Q4 GDP report. As usual, the WSJ opinion is pure politics - but it does bring up an excellent point (that the WSJ conveniently ignores).

First, from the WSJ opinion page:

The fourth quarter report means that growth for all of 2014 clocked in at 2.4%, which is the best since 2.5% in 2010. It also means another year, an astonishing ninth in a row, in which the economy did not grow by 3%.

This period of low growth isn't "astonishing". First, usually following a recession, there is a brief period of above average growth - but not this time due to the financial crisis and need for households to deleverage. So we didn't see a strong bounce back (sluggish growth was predicted on the blog for the first years of the recovery).

And overall, we should have been expecting slower growth this decade due to demographics - even without the housing bubble-bust and financial crisis (that the WSJ opinion page missed).

One simple way to look at the change in GDP is as the change in the labor force, times the change in productivity. If the labor force is growing quickly, GDP will be higher with the same gains in productivity. And the opposite is true.

So here is a graph of the year-over-year change in the labor force since 1950 (data from the BLS).

Click on graph for larger image

The data is noisy - because of changes in population controls and the business cycle - but the pattern is clear as indicated by the dashed red trend line. The labor force has been growing slowly recently after declining for some time.

We could also look at just the prime working age population - I've pointed out before the that prime working age population has just started growing again after declining for a few years (see Prime Working-Age Population Growing Again)

Now here is a look at GDP for the same period.

The GDP data (year-over-year quarterly) is also noisy, and the dashed blue line shows the trend.

GDP was high in the early 50s - and early-to-mid 60s because of government spending (Korean and Vietnam wars).  As in example, in 1951, national defense added added 6.5 percentage points to GDP.  Of course we don't want another war ...

Now lets put the two graphs together.

It isn't a surprise. Other than the early period with a boost from government spending, the growth in GDP has been tracking the growth in the labor force pretty well.  The difference in growth between the dashed blue and red lines is due to gains in productivity.

The good news is that will change going forward (prime working age population will grow faster next decade).  The bad news is the political hacks will continue to ignore demographics.

Right now, due to demographics, 2% GDP growth is the new 4%.