by Calculated Risk on 12/20/2011 10:37:00 AM

Since it usually takes over a year on average to complete multi-family projects - and multi-family starts were at a record low last year - builders are on track to complete a record low, or near record low, number of multi-family units this year.

The following graph shows the lag between multi-family starts and completions using a 12 month rolling total.

The blue line is for multifamily starts and the red line is for multifamily completions. Since multifamily starts collapsed in 2009, completions collapsed in 2010.

Click on graph for larger image.

The rolling 12 month total for starts (blue line) has been increasing all year. It now appears multi-family starts will be around 170 thousand units in 2011, up from 104 thousand units in 2010. That is a 60%+ increase in multi-family starts - but from a very low level.

Completions (red line) appear to have bottomed. This is probably because builders have rushed some projects to completion because of the strong demand for rental units.

It is important to emphasize that even with a strong increase in multi-family construction, it is 1) from a very low level, and 2) multi-family is a small part of residential investment (RI). But this is a very bright spot for construction.

The previous record low for multi-family completions was 127.1 thousand in 1993. It will be close this year, however total completions will be at a record low - and the U.S. will add the fewest net housing units to the housing stock since the Census Bureau started tracking completions in the '60s.

Below is a table of net housing units added to the housing stock since 1990. Note: Demolitions / scrappage estimated.

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 probably declined significantly this year.

Housing Units added to Stock (000s)
	1 to 4 Units	5+ Units	Manufactured Homes	Sub-Total	Demolitions / Scrappage	Total added to Stock
1990	1010.8	297.3	188.3	1496.4	200	1296.4
1991	874.4	216.6	170.9	1261.9	200	1061.9
1992	999.7	158	210.5	1368.2	200	1168.2
1993	1065.7	127.1	254.3	1447.1	200	1247.1
1994	1192.1	154.9	303.9	1650.9	200	1450.9
1995	1100.2	212.4	339.9	1652.5	200	1452.5
1996	1161.6	251.3	363.3	1776.2	200	1576.2
1997	1153.4	247.1	353.7	1754.2	200	1554.2
1998	1200.3	273.9	373.1	1847.3	200	1647.3
1999	1305.6	299.3	348.1	1953	200	1753
2000	1269.1	304.7	250.4	1824.2	200	1624.2
2001	1289.8	281	193.1	1763.9	200	1563.9
2002	1360.1	288.2	168.5	1816.8	200	1616.8
2003	1417.8	260.8	130.8	1809.4	200	1609.4
2004	1555	286.9	130.7	1972.6	200	1772.6
2005	1673.4	258	146.8	2078.2	200	1878.2
2006	1695.3	284.2	117.3	2096.8	200	1896.8
2007	1249.8	253	95.7	1598.5	200	1398.5
2008	842.5	277.2	81.9	1201.6	200	1001.6
2009	534.6	259.8	49.8	844.2	150	694.2
2010	505.2	146.5	50	701.7	150	551.7
2011 (est)	430	126	46	602	150	452

Earlier:
• Housing Starts increase in November

by Calculated Risk on 12/20/2011 08:30:00 AM

From the Census Bureau: Permits, Starts and Completions

Housing Starts:
Privately-owned housing starts in November were at a seasonally adjusted annual rate of 685,000. This is 9.3 percent (±13 1%)* above the revised October estimate of 627,000 and is 24.3 percent (±20.1%) above the November 2010 rate of 551,000.

Single-family housing starts in November were at a rate of 447,000; this is 2.3 percent (±8.0%)* above the revised October figure of 437,000. The November rate for units in buildings with five units or more was 230,000.

Building Permits:
Privately-owned housing units authorized by building permits in November were at a seasonally adjusted annual rate of 681,000. This is 5.7 percent (±1.6%) above the revised October rate of 644,000 and is 20.7 percent (±1.8%) above the November 2010 estimate of 564,000.

Single-family authorizations in November were at a rate of 435,000; this is 1.6 percent (±1.6%) above the revised October figure of 428,000. Authorizations of units in buildings with five units or more were at a rate of 224,000 in November.

Click on graph for larger image.

Total housing starts were at 685 thousand (SAAR) in November, up 9.3% from the revised October rate of 627 thousand (SAAR). Most of the increase this year has been for multi-family starts, but single family starts are increasing a little recently too.

Single-family starts increased 2.3% to 447 thousand in November.

The second graph shows total and single unit starts since 1968.

This shows the huge collapse following the housing bubble, and that housing starts have been mostly moving sideways for about two years and a half years - with slight ups and downs due to the home buyer tax credit.

Multi-family starts are increasing in 2011 - although from a very low level. This was well above expectations of 630 thousand starts in November.

Single family starts are still mostly "moving sideways".
All Housing Investment and Construction Graphs

by Calculated Risk on 12/19/2011 07:40:00 PM

There are several possible channels of contagion from the European financial crisis.

The most obvious is the trade channel. A recession in Europe will negatively impact U.S. exports. Although Europe is a major U.S. trading partner, exports only make up a small portion of U.S. GDP. Also some of the impact from trade would probably be offset by lower oil prices – and of course lower interest rates as investors seek safety (the European crisis is a key reason the U.S. 10 year bond yield is at 1.81%).

A more significant channel would be tightening of U.S. credit conditions in response to the European crisis. That is why I looked so closely at the Fed’s October Senior Loan Officer Opinion Survey on Bank Lending Practices that was released in November. The survey showed “considerable” tightening on lending to European banks, and some tightening to European firms, but the survey showed no tightening in the U.S. (although lending standards are already pretty tight).

There are other possible channels of contagion, such as less European lending to emerging markets and a slowdown in those economies – and then fewer exports from the U.S. to those emerging markets. But the most significant channel will probably be credit stress. Here are a few indicators of credit stress:

• The three month LIBOR has increased:

Data from the British Bankers' Association showed the three-month dollar London Interbank Offered Rate, or Libor, was higher at 0.56695% from 0.56315% Friday. ... The spread between the three-month dollar Libor and overnight index swaps, a barometer of market stress, widened to 48.1 basis points from 47.5 basis points Friday.

The three-month LIBOR rate peaked during the crisis at 4.81875% on Oct 10, 2008. This is rising again, but still low.

• The TED spread is at 0.57, and has been rising recently. the TED spread is the difference between the three month T-bill and the LIBOR interest rate. The 5 year graph shows that recent increase in comparison to the U.S. financial crisis in 2008.

Here is a screen shot of the TED spread from Bloomberg.

Click on graph for larger image.

The peak was 4.63 on Oct 10th. A normal spread is around 0.5.

• The A2P2 spread as at 0.47. This spread has increased recently, but is far below the peak of the financial crisis of 5.86.

This is the spread between high and low quality 30 day nonfinancial commercial paper. Right now high quality 30 day nonfinancial paper is yielding close to zero.

• The two year swap spread screen shot from Bloomberg. This spread is just under 50.

This spread peaked at near 165 in early October 2008.

As the ECB noted today, there are signs of severe credit stress in Europe, but there hasn't been much spillover to the U.S. yet.

by Calculated Risk on 12/19/2011 03:47:00 PM

From the NY Times: E.C.B. Warns of Dangers Ahead for Euro Zone Economy

The European Central Bank warned Monday of a perilous year ahead as the sovereign debt crisis collides with slower economic growth and a dearth of market financing for banks.
...
By some measures, the stresses on the European financial system are approaching or even exceeding levels last seen after the bankruptcy of Lehman Brothers in September 2008.
...
A teleconference among E.U. finance ministers ended Monday with an agreement by euro zone nations to contribute around €150 billion, or $195 billion, through the I.M.F. European leaders had committed to contribute “up to €200 billion” at a summit in Brussels on Dec. 9.

From the Financial Times: ECB warns of global contagion risks

The comments hinted at ECB concern over politicians’ failure to bring the crisis under control, and at the danger of countries’ fiscal austerity plans being derailed by domestic politics.
excerpt with permission

This is very depressing. Europe is probably already in a recession, and the ECB and other European policymakers still think that fiscal deficits are the cause of the problem. What Europe needs is growth and re-balancing - and some fiscal adjustments. The ECB is also concerned that austerity will be "derailed by domestic politics". That should not be a surprise. The results of austerity alone - a deeper recession - will not survive the ballot booth.

by Calculated Risk on 12/19/2011 12:59:00 PM

Special Note: Dr. James Kennedy has a new method for calculating equity extraction: "A Simple Method for Estimating Gross Equity Extracted from Housing Wealth". I still haven't evaluated his method yet (here is a companion spread sheet), so the following is using my old "simple" method.

Note 2: This is not Mortgage Equity Withdrawal (MEW) data from the Fed. The last MEW data from Fed economist Dr. Kennedy was for Q4 2008.

The following data is calculated from the Fed's Flow of Funds data and the BEA supplement data on single family structure investment. This is an aggregate number, and is a combination of homeowners extracting equity (hence the name "MEW", but there is little MEW right now!), normal principal payments and debt cancellation.

Click on graph for larger image in new window.

For Q3 2011, the Net Equity Extraction was minus $75 billion, or a negative 2.6% of Disposable Personal Income (DPI). This is not seasonally adjusted.

This graph shows the net equity extraction, or mortgage equity withdrawal (MEW), results, using the Flow of Funds (and BEA data) compared to the Kennedy-Greenspan method.

The Fed's Flow of Funds report showed that the amount of mortgage debt outstanding declined sharply in Q3. Mortgage debt has declined by $730 billion over the last fourteen quarters. This decline is mostly because of debt cancellation per foreclosures and short sales, and some from modifications. There has also been some reduction in mortgage debt as homeowners paid down their mortgages so they could refinance. Note: most homeowners pay down their principal a little each month unless they have an IO or Neg AM loan, so with no new borrowing, equity extraction would always be slightly negative.