by Calculated Risk on 11/18/2009 08:30:00 PM

Another busy day and I skipped the MBA market index earlier ... note: The MBA Q3 delinquency report will be released tomorrow.

The MBA reports: Mortgage Applications Decrease in Latest MBA Weekly Survey

The Market Composite Index, a measure of mortgage loan application volume decreased 2.5 percent on a seasonally adjusted basis from one week earlier. ...

The Refinance Index decreased 1.4 percent from the previous week and the seasonally adjusted Purchase Index decreased 4.7 percent from one week earlier. The seasonally adjusted Purchase Index has declined for six consecutive weeks and is at its lowest level since November 1997.
...
The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.83 percent from 4.90 percent, with points increasing to 1.17 from 1.03 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. This is the lowest contract rate observed by the survey since mid-May of this year.

It appears the post home buyer tax credit slump is in full swing. The tax credit was extended and the eligibility expanded, but interest will probably wane (you can only pull so much demand forward).

Click on graph for larger image in new window.

This graph shows the MBA Purchase Index and four week moving average since 2002.

Note: The increase in 2007 was due to the method used to construct the index: a combination of lender failures, and borrowers filing multiple applications pushed up the index in 2007, even though activity was actually declining.

by Calculated Risk on 11/18/2009 05:42:00 PM

"It's déjà vu all over again".
Yogi Berra
From the NY Times (edit): Jobless Benefits Set to Expire Unless Congress Acts

About one million laid-off workers will see their unemployment benefits end in January ...

The [recently] added federal benefits were built on a series of previous extensions that are slated to end on Dec. 31 ...

According to projections released Wednesday by the National Employment Law Project, an advocacy group that worked with state officials to develop the numbers, 474,111 unemployed workers will exhaust their state benefits during January ... An additional 581,000 workers will see their federal benefits end in January, according to the study.

Note: I'm surprised that any lawmakers were "surprised". The expiration date was in the recent bill, and I mentioned that another extension would be coming soon.

by Calculated Risk on 11/18/2009 03:30:00 PM

After reading some of the commentary regarding the housing starts report this morning, it might be useful to reiterate these three points:

Residential investment is the best leading indicator for the economy.

Residential investment will not recover rapidly because of the large overhang of existing vacant housing units.

Existing home sales are largely irrelevant for the economy.

Residential investment is reported quarterly by the Bureau of Economic Analysis (BEA) as part of the GDP report. We can also use monthly housing starts and new home sales as indicators of residential investment. I've written extensively about how residential investment is an excellent leading indicator for the economy (also see Dr. Leamer's paper: Housing and the Business Cycle)

This morning several commentators suggested that housing starts were depressed in October because of the expiration of the tax credit (new home buyers had to close by Nov 30th to get the tax credit), and also because of the weather. Probably. But the key point is that housing starts will not increase rapidly because of the large overhang of existing vacant housing units (see 2nd graph here). And that suggests that the economy will not recover quickly either.

Another key point is that existing home sales are largely irrelevant for the economy. This is an important point to remember next week when the NAR announces that existing home sales surged to 5.8 million units or so in October (seasonally adjusted annual rate). Some reporters and analysts will jump on the existing home sales report as evidence of a housing recovery. Others will point to it as showing that the first-time home buyer tax credit is helping the economy.

Both points are wrong.

The only contribution from existing home sales to the economy are some commissions and fees. That is good news for real estate agents and mortgage brokers, but not for the overall economy.

The good news is the level of inventory for new and existing homes is declining. The bad news is the inventory of rental units is at record levels - as is the combined inventory of vacant single family homes and rental units. Residential investment will not increase significantly until this overhang is reduced.

The key to reducing the overall inventory is new household formation (encouraging renters to become owners accomplishes nothing in reducing the overall housing inventory). And the key to new household formation is jobs. And usually the best leading indicator for jobs is residential investment. Somewhat of a circular trap.

And that suggests the recovery will be sluggish and unemployment will stay high for some time.

by Calculated Risk on 11/18/2009 01:56:00 PM

The Census Bureau has released the "Quarterly Starts and Completions by Purpose and Design" report for Q3 2009.

Monthly housing starts (even 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" to New Home sales on a quarterly basis. The quarterly report shows that there were 93,000 single family starts, built for sale, in Q3 2009, and that is less than the 105,000 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). This is not perfect because homebuilders were stuck with “unintentional spec homes” during the housing bust because of the high cancellation rates, but cancellation rates are now much closer to normal.

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 two years starts have been below sales – and new home inventories have been falling.

The second graph shows the NSA quarterly starts intent for four categories since 1975: single family built for sale, owner built (includes contractor built for owner), starts built for rent, and condos built for sale.

Condo starts in Q3 tied the all time record low for Condos built for sale set in Q1 and Q2 of this year (5,000); the previous record was 8,000 set in Q1 1991 (data started in 1975).

Owner built units are above the record low set in Q1 (42,000 units compared to 24,000 units in Q1 2009), however the pickup in owner built starts was probably mostly seasonal (this is NSA data).

Units built for rent were near the record low (23,000 units in Q3 2009 compared to the all time record low of 21,000 units). With the vacancy rate at a record high, the demand for new rental units will stay low for some time.

by Calculated Risk on 11/18/2009 11:25:00 AM

From the BLS report on the Consumer Price Index this morning:

The rent index decreased 0.1 percent, the index for owners' equivalent rent [OER] was unchanged ...

The rent index decreased at a -1.3% annualized rate, and OER declined in three of four ranges (only the Northeast Urban Region saw an increase - see Cleveland Fed).

The rent index and OER will probably continue to fall for some time, keeping CPI and core CPI low.

Most of the reports of falling rents are focused on the coasts, but here is a report from MN Reader in Minneapolis:

The Minneapolis rental market was OK through the end of July. It has deteriorated sharply since then. Internal apartment industry figures show an 8.0% physical vacancy rate as of 8/31/09. The economic vacancy rate, which includes free rent offers, etc, was 11.8% as of that same date. Both figures have gone up significantly since then. All landlords in the market are fighting desperately for residents. Effective asking rents are dropping rapidly.

The vacancy losses seem to be caused by (1) home buying using the $8,000 tax credit; (2) job losses/cutbacks among existing residents; and (3) lack of new jobs for residents who would have rented. Unlike the coasts, there is only a small pool of permanent renters in Minneapolis. Most residents will eventually buy — it is only a question of the rate at which they depart. That rate has definitely picked up this year. [A large part] of the rental market is recent college graduates who rent an apartment after they get their first career job. That hiring and renting has not happened this year.

One difference between Minneapolis and warmer climates is that the rental market is extremely seasonal here. There is very little rental traffic during the winter months. Typically, our movements in and out follow a bell-shaped curve, peaking in the summer months. While in-bound traffic drops in the cold months, the out-bound traffic also typically drops as well. The drop off in out-bound traffic did not occur this year. Resident move-outs stayed very high all fall, as people rushed to beat the 11/30th tax credit deadline. The timing of the scheduled end of the credit could not have been worse for us. The extension until the end of April/June means that the bleeding will go on all winter.