by Calculated Risk on 7/08/2013 08:57:00 PM

From Nick Timiraos at the WSJ: Why Home-Price Gains Will Slow Amid Higher Mortgage Rates. Timiraos suggests seven areas to watch, here are a few:

4. What does this mean for investors? If anyone gains, it could be investors that have been buying up cheap homes as rental properties. “I see investors licking their chops,” said Redfin’s Mr. Kelman. “Investors were really getting frustrated this spring trying to compete against all this funny money” from low rates. Also, to the extent that rising rates freeze would-be buyers out of the market, that should help increase rental demand.

There have been signs, however, that higher home prices have prompted investors to dial back their purchases because it’s become more difficult to dig up bargains, even before rates began to rise.

[CR: I disagree that this is good for investors. I think higher rates will slow investor buying because of competing returns on other investments.]

5. How fast will inventory rise? Even before rates increased, the number of homes offered for sale was rising at a slightly faster pace than it normally does during the spring, even though inventory in May was still around 10% below last year’s level. One sign that inventory has picked up is that competitive offer situations are dropping. The share of offers written by Redfin agents that faced a competing offer fell to 69.5% of offers in May, down from 73.3% in April. One year ago, some 69.3% of offers faced at least one competing bid.

Markets that have seen larger increases in listings have seen even bigger declines in multiple-bid situations. In Orange County, Calif., where the inventory of homes for sale is up by more than one third since March, some 84% of homes where Redfin agents wrote an offer in May had competing bids, compared to 94% in April. In San Diego, some 73% of offers in May had multiple offers, compared to 87% in April.

[CR: I think inventory is key]

6. Is this the end of the housing rebound? [CR short answer: no]

Tuesday:
• Early: Reis Q2 2013 Apartment Survey of rents and vacancy rates.

• At 7:30 AM ET, NFIB Small Business Optimism Index for June. The consensus is for an increase to 94.7 from 94.4 in May.

• At 10:00 AM, the Job Openings and Labor Turnover Survey for May from the BLS. The number of job openings has generally been trending up.

by Calculated Risk on 7/08/2013 06:24:00 PM

From Tim Duy at Economist's View: On That September Tapering. A few excerpts:

I think September is the date to begin tapering, and the data flow would need to turn notably downward to forestall a policy shift at that time. I think it is important to recognize that the Federal Reserve is treating quantitative easing and interest rates as two very separate policies, and each has its own relevant data. ...
...
[Q]uantitative easing has always been primarily about the job market and mitigating downside risks, essentially putting a floor under the economy.
...
More to the point, however, is that they are not entirely comfortable with quantitative easing and want to quickly bring the program to a conclusion. Hence the bar to ending quantitative easing is relative low now. They are more comfortable with zero interest rates, and thus have a relatively high bar for changing interest rates.

In short, to accept a September tapering as a data dependent decision, you need to accept that the data threshold is relatively low and differs from the threshold for interest rate policy. They are two separate policies. Consequently, we don't need to see substantially better data to forestall a September taper, but instead substantially worse data.
...
Bottom Line: The Federal Reserve is having a difficult time convincing market participants that quantitative easing and interest rates represent two separate policy tools. They want to severe the perception that the two are connected - a reduction in the pace of asset purchases thus does not signal a change in the expected lift-off from the zero bound. Understanding that the two policies are different is, I think, key to understanding why the Fed is heading toward a September tapering despite what many view as an overall subpar economic environment.

Duy makes a strong argument, and he is correct that market participants frequently seem to confuse the two Fed tools (it doesn't seem confusing to me).

However, Bernanke stated:

"If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year."

I guess it depends on what "broadly consistent" means. Clearly the economy is already under performing the Fed's forecast, and if "broadly consistent" means the lower bound of their forecasts, the economy would have to pickup significantly in July and August to taper in September. Of course "broadly consistent" could mean a fairly large miss ...

by Calculated Risk on 7/08/2013 02:10:00 PM

Weekly Update: One of key questions for 2013 is Will Housing inventory bottom this year?. Since this is a very important question, I'm tracking inventory weekly in 2013. 

There is a clear seasonal pattern for inventory, with the low point for inventory in late December or early January, and then peaking in mid-to-late summer.

The Realtor (NAR) data is monthly and released with a lag (the most recent data was for May).  However Ben at Housing Tracker (Department of Numbers) has provided me some weekly inventory data for the last several years. This is displayed on the graph below as a percentage change from the first week of the year (to normalize the data).

In 2010 (blue), inventory increased more than the normal seasonal pattern, and finished the year up 7%. However in 2011 and 2012, there was only a small increase in inventory early in the year, followed by a sharp decline for the rest of the year.

Click on graph for larger image.

Note: the data is a little weird for early 2011 (spikes down briefly).

So far in 2013, inventory is up 16.3%, and I expect some further increases over the next couple of months.

Inventory is well above the peak percentage increases for 2011 and 2012 and this suggests to me that inventory is near the bottom. It now seems likely - at least by this measure - that inventory bottomed early this year. 

It is important to remember that inventory is still very low, and is down 12.4% from the same week last year according to Housing Tracker.  Once inventory starts to increase (more than seasonal), I expect price increases to slow.

by Calculated Risk on 7/08/2013 11:03:00 AM

Reis released their Q2 2013 Office Vacancy survey this morning. Reis reported that the office vacancy rate was unchanged at 17.0% in Q2.

From Reis Senior Economist Ryan Severino:

Vacancy was unchanged during the second quarter at 17.0%. This is a nominal slowdown from the prior quarter's 10 basis point decline in vacancy. However, the reality of the situation is that the decline in vacancy on a quarterly basis since the market began to recover in mid‐2011 has been unable to exceed just 10 basis points. So calling this quarter a slowdown, while technically true, is a bit hyperbolic. On a year‐over‐year basis, the vacancy rate fell by a scant 30 basis points. With the labor market unable to generate significant office‐using employment, demand for space remains enervated. Without even modest demand, the decline in the national vacancy rate will not accelerate. National vacancies remain elevated at 450 basis points above the sector's cyclical low, recorded in the third quarter of 2007 before the recession began that December.
emphasis added

On new construction:

Occupied stock increased by 7.230 million SF in the second quarter. While this is technically an increase versus last quarter's 3.933 million SF of net absorption, it originates from the 7.594 million SF that were completed during the quarter. Sans this construction‐related absorption, there is little to no demand for space in existing buildings in the market. Clearly, the market is favoring new space at the expense of old space at this juncture. Nonetheless, it is somewhat heartening to see a bit of an increase in new construction activity. The market has not delivered as much new space since the second quarter of 2010 when many projects were completed only because they had been started before anyone fully grasped the magnitude of the Great Recession. Auspiciously, this quarter's mini‐spike in construction activity comes hot on the heels of last quarter's scant 2.191 million SF of new office space, the lowest quarterly figure for new completions since Reis began publishing quarterly data in 1999.

On rents:

Asking and effective rents both grew by 0.4% during the second quarter. This is now the second quarter in a row that both asking and effective rent growth have slowed. 0.4% for both metrics is about on par with the quarterly average growth rate since rents began rising consistently in the fourth quarter of 2010. Asking and effective rents have now risen for eleven consecutive quarters. Yet, the cumulative growth in asking and effective rents during this 11‐quarter recovery period is only 4.7% and 5.4%, respectively. For comparison's sake, the office market is able to produce that kind of rent growth in typical calendar‐year periods. Rents remain below peak levels set in 2008. Without stronger demand, it will take years to return to those levels.

Click on graph for larger image.

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

Reis reported the vacancy rate was unchanged in Q2 at 17.0%, and down from 17.3% in Q2 2012. The vacancy rate peaked in this cycle at 17.6% in Q3 and Q4 2010, and Q1 2011.

As Severino noted, construction picked up in Q2 (more office space was delivered) and this kept the vacancy rate from falling.

Office vacancy data courtesy of Reis.

by Calculated Risk on 7/08/2013 08:35:00 AM

LPS released their Mortgage Monitor report for May today. According to LPS, 6.08% of mortgages were delinquent in May, down from 6.21% in April.

LPS reports that 3.05% of mortgages were in the foreclosure process, down from 4.12% in May 2012.

This gives a total of 9.13% delinquent or in foreclosure. It breaks down as:

• 1,708,000 properties that are 30 or more days, and less than 90 days past due, but not in foreclosure.
• 1,335,000 properties that are 90 or more days delinquent, but not in foreclosure.
• 1,525,000 loans in foreclosure process.

For a total of ​​4,469,000 loans delinquent or in foreclosure in May. This is down from 5,605,000 in May 2012.

Click on graph for larger image.

The first graph from LPS shows percent of loans delinquent and in the foreclosure process over time.

From LPS:

The May Mortgage Monitor report released by Lender Processing Services found that the national delinquency rate continued to fall in May, marking the largest year-to-date drop since 2002. Delinquencies are down more than 15 percent since the end of December 2012, coming in at 6.08 percent for the month. As LPS Applied Analytics Senior Vice President Herb Blecher explained, much of this improvement is supported by the fact that new problem loan rates are approaching the pre-crisis average.

“Though they are still approximately 1.4 times what they were, on average, during the 1995 to 2005 period, delinquencies have come down significantly from their January 2010 peak,” Blecher said. “In large part, this is due to the continuing decline in new problem loans -- as fewer problem loans are coming into the system, the existing inventories are working their way through the pipeline. New problem loan rates are now at just 0.73 percent, which is right about on par with the annual averages during 2005 and 2006, and extremely close to the 0.55 percent average for the 2000-2004 period preceding.

The second graph shows the percent of loans with negative equity. From LPS:

“As we’ve noted before,” Blecher continued, “negative equity appears to still be one of the strongest drivers of new problem loans, and -- primarily buoyed by home price increases nationwide -- that situation also continues to improve. We looked once again at the number of ‘underwater’ loans in the U.S., and found that the total share of mortgages with LTVs of greater than 100 percent had declined to just 7.3 million loans as of the end of the first quarter of 2013. This accounts for less than 15 percent of all currently active loans and represents a nearly 50 percent year-over-year decline.”

There is much more in the mortgage monitor.