by Calculated Risk on 10/03/2012 11:42:00 AM

Reis reported that the apartment vacancy rate (82 markets) fell slightly to 4.6% in Q3, down from 4.7% in Q1 2012. The vacancy rate was at 5.6% in Q3 2011 and peaked at 8.0% at the end of 2009.

Some data and comments from economist Dr. Victor Calanog at Reis:

3Q Vacancy Rate: 4.6%, down 10 bps from second quarter’s 4.7%

3Q Absorption: 22,615, down from the second quarter’s 31,014 and the first quarter’s 36,423

3Q Completions: 13,531 units (similar to the second quarter’s figure of 13,370 units

"The national vacancy rate barely fell, inching downward from 4.7% to 4.6%, during a quarter that usually exhibits seasonal strength. This is the slowest rate of improvement since the recovery began in early 2010. For perspective, note that vacancies declined by an average of 35 basis points per quarter in 2010 and 2011; this year, vacancies fell by 30 basis points in the first quarter, 20 basis points in the second quarter, and 10 basis points in the third.

Net absorption, or the net change in occupied stock, slowed accordingly. Only 22,615 units were leased up in the third quarter, a clear trend downwards from the second quarter’s figure of 31,014 and the first quarter’s figure of 36,423. This is the lowest rate of absorption since the first quarter of 2010, and represents less than half the quarterly average rate of about 50,000 units that the sector enjoyed in 2010 and 2011.

Inventory growth continued at about the same pace as the second quarter, with 13,531 units coming online. This is still a relatively restrained pace for new construction, and demand for apartments still clearly outstrips supply growth, with absorption figures higher than construction, and vacancies declining. Still, there is cause for concern in the near‐term that demand is abating for multifamily, just as a veritable avalanche of new projects begins to open their doors early next year.
...
There are two fundamental risks in the near future: first, that demand for apartments will not be as robust. Home prices have shown a clear upward trend in recent months, with data from multiple sources all consistently reporting higher home prices and stronger figures for net home orders; it is notoriously difficult to trace a direct correlation between single‐family home prices and demand for multifamily rentals, and linking individual decisions to either buy a single‐family home or rent a multifamily apartment is challenging. Low mortgage rates have not prompted many households to buy homes, given expectations that home prices will remain flat. But that trend might finally be shifting: as home prices rise, households may feel a greater impetus to consider buying homes while mortgage rates remain low, and before prices rise “too much.” This will tend to depress demand for apartment rentals.

The second risk for the apartment sector is the predictable spike in new construction, a big wave of which is expected to come online starting in 2013".

Click on graph for larger image.

This graph shows the apartment vacancy rate starting in 1980. (Annual rate before 1999, quarterly starting in 1999).

Reis is just for large cities. It appears that the declines in vacancy rates is slowing, and rent increases might slow too. Also, as Calanog notes, there will be a significant increase in new supply in 2013 (and in 2014).

by Calculated Risk on 10/03/2012 10:00:00 AM

The September ISM Non-manufacturing index was at 55.1%, up from 53.7% in August. The employment index decreased in September to 51.1%, down from 53.8% in August. Note: Above 50 indicates expansion, below 50 contraction.

From the Institute for Supply Management: September 2012 Non-Manufacturing ISM Report On Business®

Economic activity in the non-manufacturing sector grew in September for the 33rd consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.

The report was issued today by Anthony Nieves, C.P.M., CFPM, chair of the Institute for Supply Management™ Non-Manufacturing Business Survey Committee. "The NMI™ registered 55.1 percent in September, 1.4 percentage points higher than the 53.7 percent registered in August. This indicates continued growth this month at a faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 59.9 percent, which is 4.3 percentage points higher than the 55.6 percent reported in August, reflecting growth for the 38th consecutive month. The New Orders Index increased by 4 percentage points to 57.7 percent. The Employment Index decreased by 2.7 percentage points to 51.1 percent, indicating growth in employment for the second consecutive month but at a slower rate. The Prices Index increased 3.8 percentage points to 68.1 percent, indicating higher month-over-month prices when compared to August. According to the NMI™, 12 non-manufacturing industries reported growth in September. Respondents' comments continue to be mixed; however, the majority indicate a slightly more positive perspective on current business conditions."

Click on graph for larger image.

This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index.

This was above the consensus forecast of 53.5% and indicates faster expansion in September than in August. The internals were mixed with the employment index down, but new orders up.

by Calculated Risk on 10/03/2012 08:18:00 AM

ADP reports:

Employment in the U.S. nonfarm private business sector increased by 162,000 from August to September, on a seasonally adjusted basis. The estimated gains in previous months were revised lower: the July increase was reduced by 17,000 to an increase of 156,000, while the August increase was reduced by 12,000 to an increase of 189,000

Employment in the private, service-providing sector expanded 144,000 in September, down from 175,000 in August.

This was above the consensus forecast of an increase of 140,000 private sector jobs in September. The BLS reports on Friday, and the consensus is for an increase of 113,000 payroll jobs in September, on a seasonally adjusted (SA) basis.

ADP hasn't been very useful in predicting the BLS report, but this suggests a stronger than consensus report.

by Calculated Risk on 10/03/2012 07:01:00 AM

From the MBA: Mortgage Refinance Applications Highest Since 2009 as Rates Reach Record Lows in Latest MBA Weekly Survey

The Refinance Index increased 20 percent from the previous week. This was the highest Refinance Index recorded in the survey since April of 2009. The seasonally adjusted Purchase Index increased 4 percent from one week earlier.

“Refinance application volume jumped to the highest level in more than three years last week as each of the five mortgage rates in MBA's survey dropped to new record lows in the survey,” said Mike Fratantoni, MBA’s Vice President of Research and Economics. “Financial markets continue to adjust to QE3, as the ongoing presence of the Federal Reserve as a significant buyer of mortgage-backed securities applies downward pressure on rates."

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 3.53 percent from 3.63 percent, with points decreasing to 0.35 from 0.41 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.

Click on graph for larger image.

The first graph shows the refinance index.

The refinance activity is at the highest level since 2009. Refinance activity has been generally moving up over the last year, and really took off last week.

The second graph shows the MBA mortgage purchase index. The purchase index is up 5% over the last two weeks.

However the purchase index has been mostly moving sideways over the last two years.

by Calculated Risk on 10/02/2012 09:16:00 PM

Goldman Sachs released a research note today on house prices: "House Price News Continues to Be Good". In the note, economists Hui Shan and Sven Jari Stehn provide some projections:

[W]e provide an upside and a downside scenario for house prices in addition to our baseline projection. ... We construct the upside and downside cases by incorporating both economic scenarios and modeling uncertainties. ... Although our methodology does not allow us to precisely estimate the probability of each constructed scenario, one can roughly consider the upside and downside as the one standard deviation above and below the baseline.

[Our] model now projects house price gains of 2.0% from mid-2012 to mid-2013, and 2.8% in the year thereafter (Exhibit 1). This baseline forecast is broadly in line with the latest consensus forecast. Exhibit 1 also shows our scenario analysis, pointing to house price appreciation of 9.1% (4.1% for 2012Q2-2013Q2 and 5.0% for 2013Q2-2014Q2) and -0.4% (-0.2% for 2012Q2-2013Q2 and -0.2% for 2013Q2-2014Q2) over the next two years, respectively, for the upside and downside alternative scenarios.

Click on graph for larger image.

Here is exhibit 1 from the research note showing Goldman's baseline forecast, and upside and downside scenarios.

On Wednesday:
• Early: Reis will release the Q3 2012 Apartment vacancy rates. Last quarter Reis reported that the apartment vacancy rate declined to 4.7% in Q2 from 4.9% in Q1 2012. This was the lowest vacancy rate since Q4 2001.

• At 7:00 AM, The Mortgage Bankers Association (MBA) will release the mortgage purchase applications index. Excerpt a surge in refinance activity with low mortgage rates.

• At 8:15 AM, the ADP Employment Report for September will be released. This report is for private payrolls only (no government). The consensus is for 140,000 payroll jobs added in August, down from the 201,000 reported last month.

• At 10:00 AM, the ISM non-Manufacturing Index for September will be released. The consensus is for a decrease to 53.5 from 53.7 in August. Note: Above 50 indicates expansion, below 50 contraction.


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