by Calculated Risk on 2/03/2010 03:20:00 PM

Yesterday I posted some data from the Census Bureau that suggests there are about 1.8 million excess vacant housing units in the U.S. (above the normal levels).

IMPORTANT: The housing stock includes both owner occupied and rental units. I suspect many of the excess units absorbed will be by renters.

This raises a key question for the economy and jobs: How much longer until these excess housing units will be absorbed?

The answer depends on 1) how many net units are added to the housing stock, and 2) how many net households are formed. The table below shows about 650 thousand net housing units added to the stock in 2009.

Housing units include single family homes (included as 1 to 4 units), apartments (5+ units), and mobile homes. Demolitions are subtracted from the stock (note: demolitions are the hardest to estimate).

In 2009, because of the recession, fewer than normal net households were formed (probably around 650 thousand), so the excess inventory was not reduced.

NOTE: Table is based on Completions. Housing units added to stock:

	2009	20101
1 to 4 units	535.4	500
5+ units	260	125
Mobile Homes2	53	60
Sub-Total	848.4	755.0
Demolitions3	200	200
Total	648.4	485.0

¹ Preliminary estimates for 2010.
² Actual rate through November, December estimated.
³ estimated.

Notice for 2010 that the estimate is for 5+ unit completions to collapse. This is already in the works as shown in the following diagram:

Click on graph for larger image in new window.

The blue line is for multifamily starts and the red line is for multifamily completions. For the most part, all the multifamily units that will be delivered in 2010 have already been started since, according to the Census Bureau, it takes on average over 1 year to complete these projects.

Since multifamily starts collapsed in 2009, completions will collapse in 2010.

Similar logic applies to single family units, although these only take around 7 months to complete. Since there have been an average (SAAR) of 485 thousand units started over the last 6 months, completions will probably average under 500 thousand in the first half of the year. I was generous and added a little pickup later in the year, but it could easily be less. The D.R. Horton CEO said yesterday:

We expect our September quarter will be the most challenging as the tax credit for home sales will have expired. As we move past the selling season, we'll be able to get a better read on core demand and we'll adjust our business accordingly.

The manufactured homes data is from the Census Bureau (and demolitions are estimated).

The good news is the population is growing at around 2.6 million people per year. And based on normal household formation to population ratios, this would usually mean 1.1 million or more net new households formed in 2010. Unfortunately job growth will probably be weak in 2010 and hold down household formation, but this suggests the number of excess units should finally start declining in 2010 - perhaps by more than 600 thousand units, perhaps even cut in half. (note: this doesn't include 2nd home buying that might also reduce the number of excess units).

Those expecting a sharp increase in residential construction this year will probably be disappointed since there are still a large number of excess vacant housng units - and, as I've noted many times, residential investment is usually one of the engines of recovery (both for GDP and jobs) - so I expect those looking for a "V-shaped" recovery will be disappointed too.

We are still a long way from significant job growth in residential construction, but we might actually see progress in reducing the excess inventory this year.

Special thanks to housing economist Tom Lawler who shared with me some of his thoughts on completions.

by Calculated Risk on 2/03/2010 12:15:00 PM

From earlier this morning ... the MBA reports: Mortgage Applications Increase in Latest MBA Weekly Survey

The Market Composite Index, a measure of mortgage loan application volume, increased of 21.0 percent on a seasonally adjusted basis from one week earlier. ...

"Mortgage application volume rebounded last week, returning the purchase and refinance indexes to levels from mid-December," said Michael Fratantoni, MBA's Vice President of Research and Economics. "Rates continue to hover around 5 percent, quite low by historical standards, but are well above the record lows seen in 2009, and hence are not generating substantial refi volume. We expect that rates will rise over the next few months as the Federal Reserve winds down its MBS purchase program, and this will likely lead to a decline in refinance volume."

The Refinance Index increased 26.3 percent from the previous week and the seasonally adjusted Purchase Index increased 10.3 percent from one week earlier.
...
The average contract interest rate for 30-year fixed-rate mortgages decreased to 5.01 percent from 5.02 percent, with points increasing to 1.04 from 1.00 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.

Click on graph for larger image in new window.

This graph shows the MBA Purchase Index and four week moving average since 1990.

The four week moving average has declined sharply since October, and is at about the same level as November 1997. The increase this week was just a rebound from the decline last week.

The decline in mortgage applications since October appears significant, and even with the increase in refinance applications last week, it also appears the refinance boom is ending.

The second graph shows the weekly MBA refinance activity, and the Ten Year Treasury yield.

Every time the 10 year yield drops sharply, refinance activity picks up. But notice what happened at the end of 1995. The Ten Year yield dropped, but the increase in refinance activity was muted. This was because mortgage rates didn't fall below the rates of a couple years earlier - and many people had already refinanced at those lower rates. The same thing will happen this year and next - there will only be a surge in refinance activity if rates fall below the rates of 2009.

by Calculated Risk on 2/03/2010 10:00:00 AM

This is another weak service report. According to this survey, the service sector barely expanded in January, and employment also contracted in the non-manufacturing sector "for the 25th consecutive month".

From the Institute for Supply Management: January 2010 Non-Manufacturing ISM Report On Business®

In January, the NMI registered 50.5 percent, indicating growth in the non-manufacturing sector after two months of contraction. A reading above 50 percent indicates the non-manufacturing sector economy is generally expanding; below 50 percent indicates the non-manufacturing sector is generally contracting.
...
"The NMI (Non-Manufacturing Index) registered 50.5 percent in January, 0.7 percentage point higher than the seasonally adjusted 49.8 percent registered in December, indicating growth in the non-manufacturing sector. The Non-Manufacturing Business Activity Index decreased 1 percentage point to 52.2 percent, reflecting growth for the second consecutive month. The New Orders Index increased 2.7 percentage points to 54.7 percent, and the Employment Index increased 1 percentage point to 44.6 percent.
...
Employment activity in the non-manufacturing sector contracted in January for the 25th consecutive month. ISM's Non-Manufacturing Employment Index for January registered 44.6 percent.
emphasis added

by Calculated Risk on 2/03/2010 08:32:00 AM

ADP reports:

Nonfarm private employment decreased 22,000 from December 2009 to January 2010 on a seasonally adjusted basis, according to the ADP National Employment Report®. The estimated change of employment from November to December 2009 was revised by 23,000, from a decline of 84,000 to a decline of 61,000.

The January employment decline was the smallest since employment began falling in February of 2008.

Note: ADP is private nonfarm employment only (no government jobs).

On the Challenger job-cut report from MarketWatch: Planned layoffs rise for first time since July: Challenger Gray

Planned layoff announcements at major U.S. corporations increased 59% in January, reaching 71,482 from a nine-year low of 45,094 seen in December, according to the latest job-cut tally by Challenger Gray & Christmas.

It was the first month-to-month increase since July, the outplacement firm reported Wednesday.

Layoff plans ran 70% lower than the 241,749 announced in January 2009, which was a seven-year high..

The BLS reports on Friday, and the consensus is for a small net gain in payroll jobs in January, on a seasonally adjusted (SA) basis, and the unemployment rate flat at 10.0%.

The relatively strong ISM manufacturing and ADP reports suggest a positive BLS number on Friday.

by Calculated Risk on 2/03/2010 01:12:00 AM

Note from NMHC: "Market Tightness Index reading above 50 indicates that, on balance, apartment markets around the country are getting tighter; a reading below 50 indicates that market conditions are getting looser; and a reading of 50 indicates that market conditions are unchanged."

So the increase in the index to 38 implies lower occupancy rates and lower rents - "looser" apartment conditions - but at a slower pace of contraction than the previous quarter.

From the National Multi Housing Council (NMHC): Apartment Market Conditions Steady; Sales Volume and Equity Financing Improve, According to NMHC Quarterly Survey

The Market Tightness Index’s sub-50 reading of 38 indicates that vacancy and/or rent conditions deteriorated over the last quarter. Thirty percent of respondents said markets were looser, meaning higher vacancies and/or lower rents; only seven percent reported that markets were tighter.
...
“This quarter saw a continued uptick in sales volume and equity financing, which represent another step, albeit a small one, toward a more normal transactions market, after 2009 recorded the lowest number of transactions of the decade,” said NMHC Chief Economist Mark Obrinsky.

“The weakest performing index is the Market Tightness Index,” said Obrinsky, “underscoring the fact that full recovery of occupancy and rents will require job growth to return to the economy. When that happens, and as a large wave of Echo Boomers begins to enter a supply-constrained market, we should see above average rent growth.”
emphasis added

Click on graph for larger image in new window.

This graph shows the quarterly Apartment Tightness Index.

A reading below 50 suggests vacancies are rising. Based on limited historical data, I think this index will lead reported apartment rents by 6 months to 1 year. Or stated another way, rents will probably fall for 6 months to 1 year after this index reaches 50. Right now I expect rents to continue to decline through most of 2010.

This data is for apartment buildings. The data released yesterday from the Census Bureau - showing a 10.7% rental vacancy rate - includes all rental units.