by Calculated Risk on 10/07/2009 04:02:00 PM

From the NAHB:

Extending the credit through Nov. 30, 2010 and making it available to all purchasers of a principal residence would result in an additional 383,000 home sales ...

The NAHB has also been arguing to expand the tax credit from $8,000 to $15,000. But using $8,000 per home buyer - and estimating 5 million home sales over the next year - the total cost of the tax credit would be $40 billion.

According to the NAHB this would result in 383,000 additional home sales. Dividing $40 billion by 383 thousand gives $104,400 per additional home sold!

That is higher than my original estimate that an extension of the tax credit would cost about $100 thousand per additional home sold.

Note: If the NAHB meant $15,000 per home buyer, the cost would be $75 billion - or $157 thousand per additional home sold.

And this doesn't included the costs of the unintended consequences.

The tax credit is simply motivating some renters to become homeowners (not reducing the overall number of excess housing units). This is pushing up the vacancy rent, pushing down rents and leading to more commercial real estate (CRE) defaults and foreclosures - and will lead to more losses for lenders. The additional defaults associated with lower rents will probably be higher than the cost of the tax credit. From the WSJ: Fed Frets About Commercial Real Estate

[Fed economist] Mr. Conway's presentation painted a bleak picture of the sliding real-estate values and enormous debt that will need to be refinanced in the next few years. Vacancy rates in the apartment, retail and warehouse sectors already have exceeded those seen during the real-estate collapse of the early 1990s, Mr. Conway noted. His report also predicted that commercial real-estate losses would reach roughly 45% next year. Valuing real estate has always been tricky for banks, and the problem is particularly acute now because sales activity is practically nonexistent.
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More than half of the $3.4 trillion in outstanding commercial real-estate debt is held by banks.

Motivating some renters to become homeowners has increased demand at the low end and pushed up house prices (more demand). However when the tax credit eventually ends (it will someday), the price-to-rent ratio will equalize, applying downward pressure on home prices.

Many of the additional sales in 2009 were to buyers who used the tax credit as their downpayment. These were marginal buyers who haven't proven the ability to manage their finances and save for a down payment. The default rates will probably be higher for these buyers than for other buyers.

The housing tax credit raises the risk of deflation. Falling rents will probably already push core CPI close to zero in 2010. An extension of the housing tax credit will probably push rents down further (as those 383,000 additional home buyers move from renting to owning), and that will probably mean core CPI will be negative in 2010. Not only will this impact any program adjusted by CPI (like Social Security), but this could lead to a deflationary mentality for consumers - with consumers holding off purchases waiting for lower prices.

Anyone analyzing the tax credit should call the economists at the BLS and ask about how falling rents will impact owners' equivalent rent and CPI. Then call the economists at the Federal Reserve and ask how CPI deflation will impact consumer behavior and monetary policy. Welcome to the Fed's nightmare.

by Calculated Risk on 10/07/2009 03:00:00 PM

From MarketWatch: U.S. consumer credit falls for 7th straight month

U.S. consumers reduced their debt for the seventh straight month in August, the Federal Reserve reported Wednesday. Total seasonally adjusted consumer debt fell $11.98 billion, or at a 5.8% annual rate ... In the subcategories, credit-card debt fell $9.91 billion, or 13.1%, to $899.41 billion. This is the record 11th straight monthly drop in credit card debt. Non-revolving credit, such as auto loans, personal loans and student loans fell $2.10 billion or 1.6% to $1.56 trillion.

Cash-for-clunkers probably kept non-revolving credit from falling further - just wait for the September numbers!

Click on graph for larger image in new window.

This graph shows the year-over-year (YoY) change in consumer credit. Consumer credit is off 4.4% over the last 12 months. The previous record YoY decline was 1.9% in 1991.

Here is the Fed report: Consumer Credit

Consumer credit decreased at an annual rate of 5-3/4 percent in August 2009. Revolving credit decreased at an annual rate of 13 percent, and nonrevolving credit decreased at an annual rate of 1-1/2 percent.

Note: The Fed reports a simple annual rate (multiplies change in month by 12) as opposed to a compounded annual rate. Consumer credit does not include real estate debt.

by Calculated Risk on 10/07/2009 11:52:00 AM

Hotel investment has always been boom and bust, but the most recent boom was off the charts ...

Click on graph for larger image in new window.

This graph shows lodging investment as a percent of GDP since 1959 through Q2 2009.

Lodging investment peaked in mid-2008, but because of the length of time for hotel construction, there are many new hotels still coming online - at just the wrong time.

From the LA Times: Hotel defaults, foreclosures rise in California (ht Ann)

... Statewide, more than 300 hotels were in foreclosure or default on their loans as of Sept. 30 -- a nearly fivefold increase since the start of the year, according to an industry report released Tuesday.
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Most struggling hotels remain open, but industry experts believe many properties are likely to be closed down in the months ahead, even if they are not in foreclosure, because they are losing so much money. ...

"I have never seen so many lenders contemplating mothballing properties," said Jim Butler, a hotel lawyer and chairman of the global hospitality group for Jeffer, Mangels, Butler & Marmaro. "It can and it will get worse for the hotel industry."
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Statewide, 260 hotels were in default on their loans and 47 had been taken over by their lenders in foreclosure, the Atlas report said.

... a leading hotel consulting firm, Smith Travel Research, recently issued a report that predicted no significant improvement for the hotel industry until 2011 at the earliest.

"It's going to be a lot worse than it is now," said Bobby Bowers, senior vice president of Smith Travel Research.

... an increasing number of hotels have so little revenue that they can't even afford to pay their operating bills and payroll, not to mention servicing debt.

Owners of such hotels are increasingly handing the keys back to the lenders, and the problem is likely to get worse: As many as 1 in 5 U.S. hotel loans may default through 2010, UC Berkeley economist Kenneth Rosen said.

In some cases the lenders are simply locking up the properties...
emphasis added

Not only is the recession impacting business and leisure travel, but there are just too many hotel rooms, and many more on the way.

by Calculated Risk on 10/07/2009 10:31:00 AM

Last night Reis reported that the U.S. office vacancy rate hits 16.5 percent in Q3. (See Reis: U.S. Office Vacancy Rate Hits 16.5% in Q3 for a graph).

Click on graph for larger image in new window.

This graph shows the office vacancy rate vs. the quarterly unemployment rate and recessions.

The unemployment rate and the office vacancy rate tend to move in the same direction - and the peaks and troughs mostly line up.

As the unemployment rate continues to rise over the next year or more, the office vacancy rate will probably rise too. Reis' forecast is for the office vacancy rate to peak at 18.2 percent in 2010, and for rents to continue to decline through 2011.

One of the questions is why - with a 9.8% unemployment rate in September - the office vacancy rate isn't even higher? This is probably because of less overbuilding, as compared to the S&L related overbuilding in the '80s, and the tech bubble overbuilding a few years ago. Also a number of non-office workers (construction and retail workers) have lost their jobs in the current employment recession.

The second graph shows office investment as a percent of GDP since 1959 through Q2 2009.

Office investment peaked in Q3 2008, and with the office vacancy rate rising sharply, office investment will probably decline at least through 2010.

Of course many existing office buildings were purchased in recent years at very low cap rates, with excessive leverage, and optimistic income projections. Now that prices have fallen sharply, many of these building owners are far underwater - and that will lead to more losses for lenders. See the WSJ: Fed Frets About Commercial Real Estate

by Calculated Risk on 10/07/2009 09:21:00 AM

From Catherine Rampell at the NY Times: Support Builds for Tax Credit to Help Hiring

... a tax credit for companies that create new jobs ... is gaining support among economists and Washington officials ...

Timothy J. Bartik, a senior economist at the Upjohn Institute for Employment Research who is working on the draft with John H. Bishop of Cornell, estimates that it would cost about $20,000 for each job created.
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Under the proposal from Mr. Bartik and Mr. Bishop, the credit in the first year would equal 15.3 percent of the cost of adding an employee. In the second year, it would fall to about 10.2 percent.
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The authors estimate their proposal could create more than two million jobs in the first year.
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Of course, even in recessionary times, some companies are hiring without tax breaks. So a subsidy could merely benefit those businesses that already would have added new workers.

An American Economic Review study has suggested that the 1970s policy was responsible for adding about 700,000 of the 2.1 million jobs that were awarded the credit.
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Advocates argue that such incentives would be more effective this time around not only because of design, but also because of timing. In 1977, hiring was already on the upswing, whereas economists expect today’s job market to decline a bit more and then stagnate for months.

The timing is probably better than in 1977 when employment was already recovering. If the 1970s estimate is accurate (about 2/3 of the jobs would have been created anyway), this proposal is already much better targeted than the housing tax credit, and better for the economy and the housing market too.

A key problem for housing and the economy is that there are too many housing units compared to the number of households. This proposal will indirectly stimulate more household formation - more jobs will create more households - and more households is the key to the housing market and the economy.