by Calculated Risk on 10/02/2012 12:23:00 PM

I've been writing about real estate for years, and I've received several emails over the years saying "Sam Zell disagrees with you, and he knows!". Hmmm ... well, one of us has been wrong.

Sam Zell was on CNBC today arguing the US economy is heading back into recession:

"Nobody wants to make commitments beyond tomorrow," Zell said during a"Squawk Box" interview. "One of these (recession) triggers is when enterprise projects start getting delayed. We're heading for a recession and that's exactly what you're looking at now. You're looking at capital expenditures across the board being deferred for a reason: There's no confidence."

Actually a recession is unlikely right now. Of course Zell's economic forecasting track record is very poor. A few examples ...

Sam Zell in April 2005 at the Milken Institute Global Conference:

"The housing bubble has been created more by the business press than reality," said Sam Zell, chairman of Equity Office Properties Trust and Equity Group Investments LLC. "You can't have a crash without oversupply."

According to Sam Zell there was no housing bubble, and there would be no crash.  How did that work out?

And from my notes at the April 2008 Milken conference:

Commercial [real estate] will be fine in his view (not my view). Also Zell thinks losses are overstated for investment banks and CDOs.

Actually losses for investment banks were understated (ask Lehman) and commercial real estate was about to be hit hard (look at the office vacancy rate released this morning).

And here is Sam Zell calling the price bottom for houses in 2009:

[T]he residential real estate market has reached an equilibrium where prices will stop falling, said Sam Zell, founder and chairman of Equity Group Investments.

According to Case-Shiller house prices declined another 5% in nominal terms and about 11% adjusted for inflation.

Obviously Zell was a very successful commercial real estate investor, but I rarely agree with him on the economy.

by Calculated Risk on 10/02/2012 09:58:00 AM

Notes: This CoreLogic House Price Index report is for August. The Case-Shiller index released last week was for July. Case-Shiller is currently the most followed house price index, however CoreLogic is used by the Federal Reserve and is followed by many analysts. The CoreLogic HPI is a three month weighted average and is not seasonally adjusted (NSA).

From CoreLogic: CoreLogic® August Home Price Index Rises 4.6 Percent Year-Over-Year

Home prices nationwide, including distressed sales, increased on a year-over-year basis by 4.6 percent in August 2012 compared to August 2011. This change represents the biggest year-over-year increase since July 2006. On a month-over-month basis, including distressed sales, home prices increased by 0.3 percent in August 2012 compared to July 2012. The August 2012 figures mark the sixth consecutive increase in home prices nationally on both a year-over-year and month-over-month basis. The HPI analysis from CoreLogic shows that all but six states are experiencing price gains.

Excluding distressed sales, home prices nationwide increased on a year-over-year basis by 4.9 percent in August 2012 compared to August 2011. On a month-over-month basis excluding distressed sales, home prices increased 1 percent in August 2012 compared to July 2012, also the sixth consecutive month-over-month increase. Distressed sales include short sales and real estate owned (REO) transactions.

The CoreLogic Pending HPI indicates that September 2012 home prices, including distressed sales, are expected to rise by 5 percent on a year-over-year basis from September 2011 and fall by 0.3 percent on a month-over-month basis from August 2012 as the summer buying season closes out. Excluding distressed sales, September 2012 house prices are poised to rise 6.3 percent year-over-year from September 2011 and by 0.6 percent month-over-month from August 2012

“Again this month prices rose on a year-over-year basis and our expectation is for that to continue in September based on our pending HPI forecast,” said Mark Fleming, chief economist for CoreLogic. “The housing markets gains are increasingly geographically diverse with only six states continuing to show declining prices.”

Click on graph for larger image.

This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100.

The index was up 0.3% in August, and is up 4.6% over the last year.

The index is off 26.7% from the peak - and is up 10.1% from the post-bubble low set in February (the index is NSA, so some of the increase is seasonal).

The second graph is from CoreLogic. The year-over-year comparison has been positive for six consecutive months suggesting house prices bottomed earlier this year on a national basis.

Excluding the tax credit bump in 2010, these are the first year-over-year increases since 2006 - and this is the largest year-over-year increase since 2006.

On a month-to-month basis, this index will probably turn negative in September (normal seasonal decline); the key will be the year-over-year change.

by Calculated Risk on 10/02/2012 08:36:00 AM

From Reuters: U.S. office market barely gains in third quarter

[T]he vacancy rate dipped in the third quarter by a scant 0.1 percentage point to 17.2 percent from the second quarter. The vacancy rate declined by just 0.30 percentage points compared with a year earlier.
...
[T]he average asking rent for U.S. office space rose only 1.4 percent over the past 12 months and just 0.2 percent to $28.23 per square foot from the second quarter.

Effective rent, which takes into account months of free rent and other perks landlords offer to lure or keep tenants, rose 0.3 percent to $22.78 per square foot.
...
"We're stuck," said Ryan Severino, senior economist for Reis Inc, which released its third-quarter office report on Tuesday.

Reis also sees no significant improvement for the rest of the year.

"The office market is not going to move in the right direction until the labor market starts to move in the right direction," Severino said. "Nobody is going to lease space until they're hiring, and nobody is going to hire until they feel more confident about the direction of the economy."

Click on graph for larger image.

This graph shows the office vacancy rate starting in 1980 (prior to 1999 the data is annual).

Reis is reporting the vacancy rate declined in Q3 to 17.1%, down slightly from 17.2% in Q2, and down from 17.4% in Q3 2011. The vacancy rate peaked in this cycle at 17.6% in Q3 and Q4 2010.

This is a sluggish recovery for office space.

by Calculated Risk on 10/01/2012 07:38:00 PM

First, from Reuters: JPMorgan Sued for Fraud by NY Attorney General

New York Attorney General Eric Schneiderman on Monday filed a lawsuit against JPMorgan Chase for fraud over faulty mortgage-backed securities packaged and sold by the former Bear Stearns.

The Residential Mortgage-Backed Securities Working Group was formed to probe the pooling and sale of risky mortgages in the run-up to the 2008 financial crisis.

Some of those Bear Stearns deals were really ugly. I remember an Ambac presentation about a Bear Stearns deal in 2008 with "100 people in the round ... 82 have walked out and not paid you a whole lot back". Ouch.  It probably ended up with close to 100 out of 100 walking ...

On Tuesday:
• Early: Reis Q3 2012 Office vacancy rates. Last quarter Reis reported that the office vacancy rate was unchanged at 17.2%.

• All day: Light vehicle sales for September. The consensus is for light vehicle sales to be unchanged at 14.5 million SAAR in September (Seasonally Adjusted Annual Rate).


A question for the October economic prediction contest (Note: You can now use Facebook, Twitter, or OpenID to log in).

by Calculated Risk on 10/01/2012 02:54:00 PM

From economist Tom Lawler:

Below is a table showing reported net home orders for the quarter ended August 31st, 2012 from the third, fifth, and seventh largest US home builders in 2012. Hovnanian Enterprises, of course, reported operating results for the quarter ended July 31st, 2012, but in its quarterly presentation it included net order results for August, 2012 as well.

Net Home Orders, Quarter Ended:
	8/31/2012	8/31/2011
Lennar Corporation	4,198	2,914
Hovnanian	1,419	1,180
KB Home	1,900	1,838
Total of above	7,517	5,932
% Chg	26.7%

For the quarter ended June 30th, 2012, nine publicly traded home builders reported combined net home orders of 20,375, up 27.3% from the comparable quarter of 2011.

Here are some excerpts from Lennar’s press release.

“Stuart Miller, Chief Executive Officer of Lennar Corporation, said, "The housing market has stabilized and the recovery is well underway."

“While materials and labor costs are moving higher, sales price increases and incentive reductions should continue to offset the impact of increasing costs. “The average sales price of homes delivered increased to $258,000 in the third quarter of 2012 from $247,000 in the same period last year. Sales incentives offered to homebuyers were $26,100 per home delivered in the third quarter of 2012, or 9.2% as a percentage of home sales revenue, compared to $33,600 per home delivered in the same period last year, or 12.0% as a percentage of home sales revenue, and $29,800 per home delivered in the second quarter of 2012, or 10.7% as a percentage of home sales revenue.”

And here are some excerpts from KB Home’s press release.

"We are pleased to report a profit for the third quarter," said Jeffrey Mezger, president and chief executive officer. "During the quarter, we continued to generate improvement in several key financial and operating metrics. The favorable year-over-year performance in our deliveries; revenues; operating income; net orders; and backlog were particularly encouraging as we operated with fewer communities. These trends illustrate that the strategic repositioning of our operations to restore profitability is starting to yield tangible results, as we also saw significant increases in our overall average selling price and gross profit margin, and substantial improvement in our selling, general and administrative expense ratio. At the same time, it is clear that the recovery in housing is gaining momentum across the country as inventory levels are declining and home prices are on the rise. In particular, we are seeing dramatic improvement in California, where we are the state's largest homebuilder, as the continued strengthening in the coastal markets is now spreading inland to Sacramento, the Central Valley and the Inland Empire."

Finally, here is an excerpt from Hovnanian’s press release (from early last month).

“Unlike the past few years, the market for new homes has been resilient through both the spring selling season and throughout the summer months this year. We believe the housing market's recent overall strength and our significantly improved sales pace this year indicates that the market for new homes has bounced off the bottom and is already in a period of gradual recovery.”

The “verbiage” from publicly-traded home builders was in general significant more upbeat in their latest quarterly releases than was the case last year and earlier this year. Moreover, several builders have recently raised capital for “general corporate purposes,” mainly because of the improved outlook. This suggests to me that the pace of SF home building is likely to pick up both during the remainder of this and into 2013.