by Calculated Risk on 7/18/2009 10:10:00 PM

From Roger Vincent at the LA Times: Commercial brokers are swimming in empty space

Nearly 16% of office space in Los Angeles County is sitting vacant as tenants close up shop or move out of expensive properties. Nearly a third of the space around up-market Playa Vista sits empty; office buildings in the Inland Empire and parts of Orange County are completely vacant.

It all adds up to less work for brokers like [Carl] Muhlstein, who make their living facilitating the sale and leasing of these properties.

And some recent national CRE data:

Strip Mall Vacancy Rate Hits 10%, Highest Since 1992

U.S. Office Vacancy Rate Hits 15.9% in Q2

Hotel Occupancy Off 19% Compared to 2007

Apartment Vacancy Rate at 22 Year High

by Calculated Risk on 7/18/2009 05:29:00 PM

For the last few years, whenever housing starts increased, I wrote that was bad news because there was already too much inventory.

Now, even though there is still too much existing home inventory, and too much new home inventory in some areas, it appears that new home sales have stabilized. Since single family housing starts (built for sale) have been below new home sales for six consecutive quarters (through Q1), this suggests single family housing starts should also bottom soon. There is a good chance that has already happened.

Why is that good if there is still too much housing inventory overall?

This increase in starts means that the drag from Residential Investment will slow or stop, and also that residential construction employment is close to the bottom. Residential investment has been a drag on the economy for 14 straight quarters, and just removing that drag will seem like a positive.

And residential construction has lost jobs for several years, and even though construction employment will probably not increase significantly, not losing jobs will also seem like a positive.

This removes drags from the economy - and that is the little bit of good news.

To be clear, this is not great news for the homebuilders. It will take some time to work off all the excess inventory, so new home sales and single family housing starts will probably stay low for some time. And it is possible that new home sales and housing starts could still fall further.

Are new home sales actually below single family starts (built for sale)?

Monthly housing starts (single family starts) cannot be compared directly to new home sales, because the monthly housing starts report from the Census Bureau includes apartments, owner built units and condos that are not included in the new home sales report.

However it is possible to compare "Single Family Starts, Built for Sale", from the Census Bureau's "Quarterly Starts and Completions by Purpose and Design" to New Home sales on a quarterly basis.

The quarterly report shows that there were 52,000 single family starts, built for sale, in Q1 2009 and that is less than the 87,000 new homes sold for the same period. This data is Not Seasonally Adjusted (NSA). This suggests homebuilders are selling more homes than they are starting.

Note: new home sales are reported when contracts are signed, so it is appropriate to compare sales to starts (as opposed to completions), although this is not perfect because homebuilders have recently been stuck with “unintentional spec homes” because of the high cancellation rates. However cancellation rates for most homebuilders have fallen sharply recently.

Click on graph for larger image in new window.

This graph provides a quarterly comparison of housing starts and new home sales. In 2005, and most of 2006, starts were higher than sales, and inventories of new homes rose sharply. For the last six quarters, starts have been below sales – and new home inventories have been falling.

What is Residential Investment?

Residential investment is a major investment category reported by the Bureau of Economic Analysis (BEA) as part of the GDP report.

Residential investment, according to the BEA, includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories.

This graph shows the various components of RI as a percent of GDP for the last 50 years. The most important components are investment in single family structures and home improvement.

Investment in home improvement was at a $162.3 billion Seasonally Adjusted Annual Rate (SAAR) in Q1, significantly above investment in single family structures of $113.7 billion (SAAR).

Let's take a closer look at investment in single family structures (usually the largest category):

As everyone knows, investment in single family structures has fallen off a cliff. This is the component of RI that gets all the media attention - although usually from stories about single family starts and new home sales.

In Q1, investment in single family structures was at 0.8% of GDP, significantly below the average of the last 50 years of 2.35% - and also below the previous record low in 1982 of 1.20%.

Based on the housing starts report, investment in single family structures will probably increase in Q2 for the first time since Q1 2006. This doesn't guarantee that residential investment increased in Q2, because home improvement and the other categories might offset the gains in single family structure investment, but most of the drag on GDP should be gone.

by Calculated Risk on 7/18/2009 03:19:00 PM

I'm working on a housing start post, but first ...

Barry Ritholtz presents the following graph and asks:

"I cannot figure out why people continue to call for a bottom in Real Estate — as if there is going to be this snap back any day now."

Well I'm one of the people who wrote yesterday that a bottom for single family housing starts might have happened:

It now appears that single family starts might have bottomed in January.

A few quick points:

If single family housing starts bottomed in January, on a seasonally adjusted annual rate (SAAR) basis, the 12 month moving average of unadjusted data won't bottom until October or so (depending on the shape of the recovery). Using this method adds a lag to the analysis.

Barry also conflates calling a bottom in housing starts with: 1) "a bottom in Real Estate" and 2) "a snap back".

First, there will probably be two bottoms for Residential Real Estate. The first will be for new home sales, housing starts and residential investment. The second bottom will be for prices. For more on this, see: More on Housing Bottoms

Most people think prices when they hear the word "bottom", and the bottom for prices usually trails the bottom for housing starts - sometimes the two bottoms can happen years apart!

Second, looking for a bottom in housing starts doesn't imply "a snap back" in activity. As I noted yesterday, "I expect starts to remain at fairly low levels for some time as the excess inventory is worked off."

I'll have more on why the housing start report is somewhat good news soon.

by Calculated Risk on 7/18/2009 10:53:00 AM

Here is a graph from Jan Hatzius at Goldman Sachs (no link):

Click on graph for larger image in new window.

The graph shows the end of cliff diving for retail sales, auto sales, home sales, and capital goods orders - but so far no recovery.

But GDP can still turn slightly positive.

Here is a speech from San Francisco Fed President Janet Yellen in March: The Uncertain Economic Outlook and the Policy Responses.

[I]t takes less than many people think for real GDP growth rates to turn positive. Just the elimination of drags on growth can do it. For example, residential construction has been declining for several years, subtracting about 1 percentage point from real GDP growth. Even if this spending were only to stabilize at today’s very low levels—not a robust performance at all—a 1 percentage point subtraction from growth would convert into a zero, boosting overall growth by 1 percentage point. A decline in the pace of inventory liquidation is another factor that could contribute to a pickup in growth. Inventory liquidation over the last few months has been unusually severe, especially in motor vehicles—a typical recession pattern. All it would take is a reduction in the pace of liquidation—not outright inventory building—to raise the GDP growth rate.
emphasis added

This is a very important point for forecasters - to distinguish between growth rates and levels. Even if the economy has bottomed, it is at a very low level compared to the last few years, and the recovery will probably be very sluggish.

by Calculated Risk on 7/18/2009 08:38:00 AM

Jim the Realtor takes us on a tour of the 679-unit Vantage Point complex in downtown San Diego. "They had been taking $25,000 deposits since 2004, but could only generate around 200 sales - not enough to qualify for Fannie/Freddie financing (need 70% pre-sold)."

Jim says the developer has returned the deposits, converted a part of the building to apartments - and is now to trying to sell again at a lower price - that Jim thinks is still too high.

Note: these new high rise condos aren't included as inventory by either the Census Bureau (new homes) or the NAR (existng homes).

Here is some info on the condo lending rules from the WSJ on June 22nd: Changes Urged to Rules on Condo Loans

In March, Fannie Mae said it would no longer guarantee mortgages on condos in buildings where fewer than 70% of the units have been sold, up from 51%. Fannie Mae also won't purchase mortgages in buildings where 15% of owners are delinquent on condo association dues or where one owner has more than 10% of units, which the firm sees as signals that a building could run into financial trouble. Freddie Mac will implement similar policies next month.
...
Fannie Mae officials say the new rules haven't been as taxing as some claim. The mortgage company said the 70% rule doesn't apply to loan applications submitted through an underwriting program used by major lenders, and that hundreds of projects submitted through that program since March 1 have been approved even though their sales levels are below 70%. Developers are also able to apply for exemptions to the new policies for loans that are manually underwritten.
...
Fannie and Freddie have also boosted fees on mortgages for condos. Buyers without a minimum 25% down payment have to pay closing-cost fees equal to 0.75% of their loan, regardless of their credit score, under new rules that took effect in April. Fannie has said it will drop that fee in August for cooperative apartments and detached condos.