by Calculated Risk on 4/06/2011 07:15:00 AM

The MBA reports: Applications Decrease in Latest MBA Weekly Survey

The Refinance Index decreased 6.2 percent to its lowest level since February 25, 2011, on a seasonally adjusted basis. The seasonally adjusted Purchase Index increased 6.7 percent to its highest level of the year
...
“Purchase application volume increased last week reaching the highest level of the year, but remains relatively low by historical standards, at levels last seen in 1997,” said Michael Fratantoni, MBA’s Vice President of Research and Economics. “The increase last week was due to a sharp increase in applications for government loans. Borrowers were likely motivated to apply before a scheduled increase in FHA insurance premiums that became effective last Friday.” Fratantoni continued, “Rates were flat last week, but refinance activity fell, as the pool of borrowers who have both the incentive and the ability to qualify for a refinance continues to shrink.”
...
The average contract interest rate for 30-year fixed-rate mortgages increased to 4.93 percent from 4.92 percent, with points decreasing to 0.70 from 0.83 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.

Click on graph for larger image in graph gallery.

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

As Fratantoni noted, this was the highest level of purchase activity this year - but activity is still at 1997 levels. It appears that the increase in purchase activity was related to the increase in FHA insurance premiums, and activity will probably decline this week.

by Calculated Risk on 4/05/2011 07:22:00 PM

Note: The Fed mentioned some downside risks today and it is possible there will be a 2nd half slowdown like in 2010:

... downside risks from the banking and fiscal strains in the European periphery, the continuing fiscal adjustments by U.S. state and local governments, and the ongoing weakness in the housing market. Several also noted the possibility of larger-than-anticipated near-term cuts in federal government spending. Moreover, the economic implications of the tragedy in Japan--for example, with respect to global supply chains--were not yet clear. ... Participants judged that the potential for more-widespread disruptions in oil production, and thus for a larger jump in energy prices, posed both downside risks to growth and upside risks to inflation.

I'll have some more thoughts on this possibility soon.

Some people point to the end of QE1 as the reason the stock market struggled mid-year 2010. Others point to the economic slowdown and concerns about a double dip recession. Remember this quote from Robert Shiller on July 27, 2010? "For me a double-dip is another recession before we've healed from this recession ... The probability of that kind of double-dip is more than 50 percent. I actually expect it." (via Reuters: Chance of Double-Dip US Recession is High: Shiller)

Here is a look at QE and the S&P 500:

Click on graph for larger image in new window.

Based on the FOMC minutes today, it is pretty clear that QE2 will end on June 30th with no tapering. Here is a look back at the QE announcements:

• November 25, 2008: $100 Billion GSE direct obligations, $500 billion in MBS

• December 16, 2008 FOMC Statement: Evaluating benefits of purchasing longer-term Treasury Securities

• January 28, 2009: FOMC Statement: FOMC Stands Ready to expand program.

• March 18, 2009: FOMC Statement: Expand MBS program to $1.25 trillion, buy up to $300 billion of longer-term Treasury securities

• March 31, 2010: QE1 purchases were completed at the end of Q1 2010.

• August 27, 2010: Fed Chairman Ben Bernanke hints at QE2: Analysis: Bernanke paves the way for QE2

• November 3, 2010: FOMC Statement: $600 Billion QE2 announced.

• June 30, 2011: QE2 expected to end.

Although I thought we'd avoid a double dip recession last year, I was forecasting a slowdown (here is a post from May 4, 2010: The 2nd Half Slowdown).

Right now I think Q1 2011 was sluggish (based on data so far), and Q2 will probably be a little better. But I'm not confident about the 2nd half of this year (although I'm not forecasting another slowdown yet).

This is NOT investment advice.

by Calculated Risk on 4/05/2011 03:27:00 PM

Earlier this morning Reis released their office vacancy rate report for Q1 2011. Reis reported that the vacancy rate declined slightly to 17.5% in Q1 from 17.6% in Q4 2010; the first decline since 2007.

So when will non-residential investment in office structures start to increase? Short answer: Probably not for a couple of years.

Click on graph for larger image in graph gallery.

This graph shows office investment in real dollars (left axis in blue) seasonally adjusted annual rate (SAAR), and the office vacancy rate from Reis (right axis in red).

The two arrows point at two previous periods when investment picked up as the vacancy rate declined. In the mid-'90s, it isn't clear if we should say investment picked up at the beginning of '95 or '96, but it was when the vacancy rate was around 13% or 14% and falling.

In the mid-'00s, real office investment picked up at the end of 2005 when the vacancy rate had declined to around 13%.

So investment will probably pick up when the office vacancy rate declines to 13% or 14% (from the current 17.5%). Based on the previous two episodes of high vacancy rates, it will probably take about 2 to 3 years until the vacancy rate falls that far.

On the plus side, the recent office investment bubble was nothing like the S&L driven bubble of the '80s or the stock market driven bubble of the late '90s. Also the level of current investment is at a historic low in real terms. And that would suggest the vacancy rate might fall faster this time.

Note: see this graph and this post for investment in offices, malls and hotels as a percent of GDP since 1959.

Unfortunately employment growth will probably remain choppy and sluggish until residential investment picks up (and that will not happen until the excess vacant supply is absorbed). Office space is absorbed as employment increases, and sluggish employment growth suggests it might take longer for the vacancy rate to fall.

So the low level of investment suggests the vacancy rate will fall faster than earlier periods - and sluggish employment growth suggests the vacancy rate will decline slower - so I'd say about two year until investment picks up (maybe more). Also, the decline in the vacancy rate suggests that office investment will stop declining soon - and declining office investment has been a drag on real GDP growth for eleven consecutive quarters.

by Calculated Risk on 4/05/2011 02:00:00 PM

From the March 15, 2011 FOMC meeting. On tapering purchases:

The Manager also discussed the possible benefits of gradually reducing the pace of the Federal Reserve's purchases of Treasury securities when the current asset purchase program nears completion. As its earlier program of agency MBS purchases drew to a close, the Federal Reserve tapered its purchases during the first quarter of 2010 in order to avoid disruptions in the market for those securities. However, the Manager indicated that the greater depth and liquidity of the Treasury securities market suggested that it would not be necessary to taper purchases in this market. The Manager noted that market participants appeared to have reached the same conclusion, as they generally did not seem to expect the Federal Reserve to taper its purchases of Treasury securities. In light of the Manager's report, almost all meeting participants indicated that they saw no need to taper the pace of the Committee's purchases of Treasury securities when its current program of asset purchases approaches its end.

And on the outlook:

Participants expected that the boost to headline inflation from recent increases in energy and other commodity prices would be transitory and that underlying inflation trends would be little affected as long as commodity prices did not continue to rise rapidly and longer-term inflation expectations remained stable.
...
Participants generally judged the risks to their forecasts of growth in economic activity to be roughly balanced. They continued to see some downside risks from the banking and fiscal strains in the European periphery, the continuing fiscal adjustments by U.S. state and local governments, and the ongoing weakness in the housing market. Several also noted the possibility of larger-than-anticipated near-term cuts in federal government spending. Moreover, the economic implications of the tragedy in Japan--for example, with respect to global supply chains--were not yet clear. On the upside, the improvement in labor market conditions in recent months raised the possibility that household spending--and subsequently business investment--might expand more rapidly than anticipated; if so, the recovery could be stronger than currently projected. Participants judged that the potential for more-widespread disruptions in oil production, and thus for a larger jump in energy prices, posed both downside risks to growth and upside risks to inflation.
...
A few participants indicated that economic conditions might warrant a move toward less-accommodative monetary policy this year; a few others noted that exceptional policy accommodation could be appropriate beyond 2011.

Nothing suggests QE2 will end early. Oil has emerged as a clear downside risk. The Fed will not taper the purchases of QE2 as they did for earlier programs. Oh - and inflation is "transitory" unless oil prices keep going up and up.

by Calculated Risk on 4/05/2011 10:00:00 AM

The March ISM Non-manufacturing index was at 57.3%, down from 59.7% in February. The employment index indicated slower expansion in March at 53.7%, down from 55.6% in February. Note: Above 50 indicates expansion, below 50 contraction.
Click on graph for larger image in graph gallery.

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

From the Institute for Supply Management: March 2011 Non-Manufacturing ISM Report On Business®

Economic activity in the non-manufacturing sector grew in March for the 16th 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 57.3 percent in March, 2.4 percentage points lower than the 59.7 percent registered in February, and indicating continued growth at a slower rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index decreased 7.2 percentage points to 59.7 percent, reflecting growth for the 20th consecutive month, but at a slower rate than in February. The New Orders Index decreased 0.3 percentage point to 64.1 percent, and the Employment Index decreased 1.9 percentage points to 53.7 percent, indicating growth in employment for the seventh consecutive month, but at a slower rate. The Prices Index decreased 1.2 percentage points to 72.1 percent, indicating that prices increased at a slightly slower rate in March. According to the NMI, 16 non-manufacturing industries reported growth in March. Respondents' comments reflect concern about the recent natural disasters in Japan and the associated supply chain ramifications. Additionally, there is concern over rising costs, most notably for fuel and fuel products. Overall, most respondents remain confident about the direction of the economy."
emphasis added

This was below expectations of 59.5%.

by Calculated Risk on 4/05/2011 08:30:00 AM

From Bloomberg: Office Market in U.S. Begins Recovery as Vacancy Rate Declines

Office vacancies in the U.S. dropped for the first time in more than three years in the most recent quarter and rents climbed ... The national vacancy rate fell to 17.5 percent in the first quarter from 17.6 percent in the previous three months, Reis Inc. said in a report today.

“This is the first quarter, at least on a national basis, where the change is strong enough to qualify it as the first quarter of a recovery,” Ryan Severino, an economist at Reis, said in an interview. ...

Click on graph for larger image in graph gallery.

This graph shows the office vacancy rate starting in 1991.

Reis is reporting the vacancy rate was at 17.5% in Q1 2011, down slightly from 17.6% in Q4 2010, and up from 17.3% in Q1 2010. This was a small decline in the vacancy rate - but it was the first decline since 2007.

Reis should release the Mall and Apartment vacancy rates over the next few days.