by Calculated Risk on 12/11/2007 05:29:00 PM

From Forbes: Weak Construction Blasts NCI (hat tip Michael)

NCI [Building Systems] which is headquartered in Houston, makes metal building materials used in non-residential construction. Its products include roofs and roll-up doors.

A slowdown in non-residential construction pressured NCI's fourth-quarter results. According to McGraw Hill, low-rise nonresidential construction fell by 4.4% during NCI's fiscal 2007.
...
NCI's fourth-quarter earnings miss shows trouble brewing in the non-residential construction market.

NCI Building Systems is the largest maker of metal building components in North America. They are focused on Commercial Real Estate (CRE) construction, and this is another sign of an impending slowdown in nonresidential structure investment.

by Calculated Risk on 12/11/2007 03:47:00 PM

Renting is a substitute for owning, and to understand the current excess housing inventory, we also need to consider rental units.

Click on graph for larger image.

This graph shows the number of occupied (blue) and vacant (red) rental units in the U.S. (all data from the Census Bureau).

In an earlier post, Home Builders and Homeownership Rates, I discussed the decade long decline in the total number of rental units - from 1995 to 2004 - and how that related to the rising homeownership rate.

The builders didn't stop building apartment units in 1995, instead the decline in the total units came from rental to owner conversions, and units being demolished (a fairly large number of housing units are demolished every year).

And even though the total number of rental units was declining, this didn't completely offset the number of renters moving to homeownership, so the rental vacancy rate started moving up - from about 8% in 1995 to over 10% in 2004.

The total number of rental units (red and blue) bottomed in Q2 2004, and started climbing again. Since Q2 2004, there have been 2.6 million units added to the rental inventory. This increase in units almost offset the recent strong migration from ownership to renting, so the rental vacancy rate has only declined slightly (from a peak of 10.4% in 2004 to 9.8% in the most recent quarter).

Where did these 2.6 rental units come from?

The Census Bureau's Housing Units Completed, by Intent and Design shows 773K units completed as 'built for rent' since Q2 2004. This means that another 1.8+ million rental units came from conversions from ownership to rental.

These could be older out-of-service units being brought back to the rental market, condo "reconversions", flippers becoming landlords, or homeowners renting their previous homes instead of selling. But this shows the substantial excess inventory in 2004 and 2005 that didn't show up in the new home or existing home inventory numbers at the time.

Back in 2006, I estimated the excess housing inventory at 1.1 million to 1.4 million units. The number is higher now since the home builders have continued to build too many homes. Note: of course price is a factor. With the rental vacancy still above the normal range, there are probably 700 thousand excess rental units in the U.S. (assuming the vacancy rate falls back to 8%).

Here is a rough estimate of the excess inventory:

Source	Units
Rental Units	700,000(1)
Vacant Homeowner Units	750,000(2)
Excess Builder Inventory	250,000(3)
Total	1,700,000

(1) calculated based a decline in the rental vacancy rate from 9.8% to 8%.

(2) based on the homeowner vacancy rate declining from 2.7% to 1.7% on 75 million units.

(3) Based on a return to 5 months of hard inventory (completed or in process). This includes an extra 100,000 units based on rising cancellation rates.

Note: this is another step towards my housing forecast for 2008.

by Calculated Risk on 12/11/2007 02:03:00 PM

Statement:

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/4 percent.

Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time.

Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; and Kevin M. Warsh. Voting against was Eric S. Rosengren, who preferred to lower the target for the federal funds rate by 50 basis points at this meeting.

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 4-3/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, and St. Louis.

by Calculated Risk on 12/11/2007 12:35:00 PM

From Bloomberg: Freddie Expects 4th-Quarter Loss, Record Default Rate

Freddie Mac ... said default rates on mortgages it owns or guarantees are rising to a record, likely leading to a fourth-quarter loss similar to its largest-ever loss last quarter.

``Our fourth-quarter results are not going to be effectively better than they were in the third quarter,'' Chief Executive Officer Richard Syron told investors today at a conference in New York sponsored by Goldman Sachs Group Inc. ``We are not promising a silver bullet, a short-term quick fix.''

Freddie Mac expects a 3 percent to 3.5 percent default rate, exceeding the record 2.4 percent rate on its books in 1991, the company said, according to a slide presentation. Credit losses on the current book of business will be $10 billion to $12 billion, Syron reiterated today. Almost half the impairments were reflected in third-quarter results reported on Nov. 20, the company said.

The decline in housing ``will get tougher before it gets better,'' Syron said.

by Calculated Risk on 12/11/2007 11:34:00 AM

Jon Lansner at the O.C. Register writes: Home-sale commissions off $13 billion from ‘05 peak

Want to see more housing pain? Real estate agent commissions nationwide will tumble $10 billion to $55 billion this year, says figures from ForSaleByOwner.com.

By this Web site’s math, commissions nationwide peaked at $68 billion in 2005, and dipped to $65 billion last year. Now, $55 billion isn’t bad, by this math. The last time agents’ total take was lower was 2003 ($51 billion) — and in 2000, for example, it was just $36 billion.

This data is apparently a subset of the total brokers' commissions on sale of residential structures.

According to the BEA, total residential broker's commissions peaked at $109.9 billion in 2005 ($116.5 billion in Q3 2005 at a seasonally adjusted annual rate) and have declined to $81.1 billion (SAAR) in Q3 2007. Commissions have declined by $35 billion (SAAR) from the peak in Q3 2005.

Here is the BEA and NAR data for the last 3 years, and Q3 2007:

	2004	2005	2006	Q3 2007 (SAAR)
BEA Broker's Commissions (millions)	$96,077	$109,855	$101,518	$81,081
NAR Existing Home Sales	6,778,000	7,076,000	6,478,000	5,420,000
NAR Average Sale Price	$244,400	$266,600	$268,200	$267,500
Commission Percentage (calculated)	5.80%	5.82%	5.84%	5.59%

Click on graph for larger image.

This graph shows real broker's commissions (adjusted by PCE deflator), compared to existing home sales since 1969. Obviously commissions have tracked sales pretty well, although there was a strong growth in real commissions, since the late '90s, as house prices surged.

As sales and prices continue to fall in 2008, commissions will probably decline significantly.