by Calculated Risk on 7/20/2011 08:15:00 AM

Note: This index is a leading indicator for new Commercial Real Estate (CRE) investment.

From Reuters: U.S. architecture billings index falls in June

The Architecture Billings Index fell 0.9 point to 46.3 in June, according the American Institute of Architects (AIA).
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Demand is weakest in the institutional sector that includes government buildings, reflecting depressed government budgets, according to the monthly survey of architecture firms.

Click on graph for larger image in graph gallery.

This graph shows the Architecture Billings Index since 1996. The index decreased in June to 46.3 from 47.2 in May. Anything below 50 indicates a contraction in demand for architects' services.

Note: Nonresidential construction includes commercial and industrial facilities like hotels and office buildings, as well as schools, hospitals and other institutions. Note that the government sector is the weakest. The American Recovery and Reinvestment Act of 2009 is winding down, and state and local governments are still cutting back.

According to the AIA, there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction. So this suggests another dip in CRE investment in 2012.

by Calculated Risk on 7/20/2011 07:17:00 AM

The MBA reports: Refinance Applications Surge in Latest MBA Weekly Survey

The Refinance Index increased 23.1 percent from the previous week. The seasonally adjusted Purchase Index decreased 0.1 percent from one week earlier.
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"Ongoing turmoil in the financial markets primarily due to the sovereign debt crisis in Europe has brought mortgage rates back to their lowest levels of the year," said Michael Fratantoni, MBA's Vice President of Research and Economics. "Refinance applications have surged in response and the refinance index is at its second highest level of the year. One factor that may be contributing to this increase is that borrowers potentially impacted by impending decreases in the conforming loan limit may be opting to lock in fixed-rate financing now."
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The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.54 percent from 4.55 percent, with points decreasing to 0.98 from 0.99 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.

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

Click on graph for larger image in graph gallery.

The recent decline in mortgage rates hasn't boosted purchase applications; the four week average of the purchase index is still mostly moving sideways at about 1997 levels.

Of course this doesn't include the large number of cash buyers ... but this suggests purchase activity remains fairly weak.

by Calculated Risk on 7/19/2011 07:01:00 PM

As I mentioned earlier, the U.S. is on pace for a record low number of multifamily completions in 2011. That is just part of the story ... the U.S. is on pace for a record low number of total completions, and the fewest net housing units added to the housing stock, since the Census started tracking completions.

Here are some excerpts from Tom Lawler today:

The Commerce Department reported that US manufactured housing shipments ran at a seasonally adjusted annual rate of 48,000 in May, up slightly from April’s 46,000, but still an incredibly low pace by historical standards.
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Total housing production in 2011 should fall south of 600,000 units, compared to the 2.092 million housing units that came on line in 2006.

Sadly, there are no good, timely data on the likely number of housing units that will be lost to various factors (demolition, conversions, disaster, etc.). The Census 2010 data suggested that the annual “scrappage” rate was substantially lower than other Census data had suggested last decade, though that could well have been related to the housing boom years, with higher conversions or units added from non-residential use than various surveys (based on relatively small samples) suggested. Anecdotal evidence suggests that scrappage rates of late would not be that low, and a conservative estimate for 2011 would be in the 250,000 range – implying growth in the housing stock for the calendar year of under 350,000 units.

If those numbers are in the ballpark, then from April 1st of last year (the Census 2010 snapshot) to the end of 2011, the US housing stock will probably have grown by only about 706,000 units or so. Sadly, there are no good, reliable, and timely data on US household growth since April 1, 2010 (theme on government housing data!), making it tough to estimate household growth from 4/1/2010 to 12/31/2011. If annualized household growth over that 21-month period were, say, around 800,000 (below “trend”), then the “excess” supply of housing from April Fool’s Day 2010 to the end of 2011 would have shrunk by about 694,000.

I put the following table together for the last few years. For 2011 I used the first half pace (manufactured housing through May).

As I noted earlier, multi-family housing completions will fall even further and will probably be close to 100 thousand units this year. Also note that Lawler thinks scrappage is closer to 250,000 per year.

So this means there will be a record low number of housing units added to the housing stock this year (good news with all the excess inventory), and that the overhang of excess inventory should decline significantly in 2011.

Housing Units added to Stock (000s)
	2005	2006	2007	2008	2009	2010	2011 (1st Half pace)
1 to 4 Units	1,673.4	1,695.3	1,249.8	842.5	534.6	505.2	437.0
5+ Units	258.0	284.2	253.0	277.2	259.8	146.5	119.0
Manufactured Homes	146.8	117.3	95.7	81.9	49.8	50	46
Sub-Total	2,078.2	2,096.8	1,598.5	1,201.6	844.2	701.7	602.0
Scrappage	200	200	200	200	150	150	150
Total added to Stock	1,878.2	1,896.8	1,398.5	1,001.6	694.2	551.7	452.0

The key points are:
1) there will be record low number of completions this year, and
2) that means a record low number of housing units added to the stock, and
3) that means the excess vacant inventory is declining.

Earlier:
• Housing Starts increase in June
• Multi-family Starts and Completions

by Calculated Risk on 7/19/2011 02:58:00 PM

From DataQuick: Golden State Mortgage Defaults Drop to Four-Year Low

A total of 56,633 Notices of Default (NoDs) were recorded at county recorders offices during the April-to-June period. That was down 17.0 percent from 68,239 for the prior quarter, and down 19.2 percent from 70,051 in second-quarter 2010, according to San Diego-based DataQuick.

Last quarter's activity was the lowest for any quarter since 53,493 NoDs were recorded in the second quarter of 2007. It was well below half the record 135,431 default notices recorded in the first quarter of 2009.

"A lot of theories are being floated as to why the numbers are down. Bank policy changes. Legal challenges. Politics. Holding back temporarily so as not to flood the market. The fact of the matter is that no one really knows, outside of lending and servicing industry insiders. ..." said John Walsh, DataQuick president.
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Most of the loans going into default today are from the 2005-2007 period: the median origination quarter for defaulted loans is still third-quarter 2006. That has been the case for more than two years, indicating that weak underwriting standards peaked then.

And on completed foreclosures:

Trustees Deeds recorded (TDs), or the actual loss of a home to foreclosure, totaled 42,465 during the second quarter. That was down 1.4 percent from 43,052 for the prior quarter, and down 10.9 percent from 47,669 for second-quarter 2010. The all-time peak was 79,511 in third-quarter 2008.

Last quarter's trustees deeds total was the lowest since 35,431 were filed in fourth quarter 2010, and the second-lowest since fourth quarter 2007, when 31,676 were filed.

Click on graph for larger image in graph gallery.

This graph shows the annual Notices of Default (NODs) filed in California. The current year was estimated at the total for Q1 plus 3 times the Q2 rate.

California had a significant housing bust in the early '90s, with defaults peaking - and prices bottoming - in 1996. That bust was mild compared to the recent housing bust - and defaults are still way above the 1996 peak.

On the reasons for the decline: I think legal and political issues are more focused on the foreclosure process, and that the filing of default notices is probably still pretty routine - so even though the foreclosure pipeline is still pretty full, I think the decline in NODs actually suggests fewer defaults.

Earlier:
• Housing Starts increase in June
• Multi-family Starts and Completions

by Calculated Risk on 7/19/2011 01:48:00 PM

There was a report last week from Nick Timiraos at the WSJ: U.S. Tackles Housing Slump that "The Obama administration is ramping up talks on how to revive the housing market".

From Renae Merle at the WaPo: Obama administration not planning another big housing program

The Obama administration has no plans to introduce another large-scale program for relieving the troubled housing market, despite the president’s recent admission that his past efforts have not solved the problem, according to a senior administration official.
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“There is no money and, to some degree, we have run out of ideas. I have seen them all,” said Mark Zandi, chief economist of Moody’s Analytics. “I don’t think there is something grand that could make a big difference.”
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The biggest opportunity for wide-ranging change may be a settlement being negotiated between a coalition of state attorneys general and large banks related to flawed foreclosure practices, industry officials and consumer advocates say.

Unfortunately most of the programs so far have fallen short of expectations (HAMP) or were misdirected (Housing Tax Credit).

Some of the new policy ideas being discussed - like converting some delinquent homeowners to renters using a deed-in-lieu of foreclosure, then placing the property under the current REO Tenant-in-Place Rental Policy¹ - and finally selling the property to investors with tenant-in-place - had some merit. But it appears there will won't be any new programs, except maybe a little something from the servicer agreement.

¹ The current REO Tenant-in-Place policy is to protect tenants of foreclosed investor owned property.