by Calculated Risk on 2/02/2010 10:00:00 AM

The Census Bureau reported the homeownership and vacancy rates for Q4 2009 this morning. Here are a few graphs ...

Click on graph for larger image in new window.

The homeownership rate declined to 67.2% and is now at the levels of early 2000.

Note: graph starts at 60% to better show the change.

The homeownership rate increased in the '90s and early '00s because of changes in demographics and "innovations" in mortgage lending. The increase due to demographics (older population) will probably stick, so I've been expecting the rate to decline to the 66% to 67% range - and not all the way back to 64% to 65%.

The homeowner vacancy rate was 2.7% in Q4 2009.

A normal rate for recent years appears to be about 1.7%.

This leaves the homeowner vacancy rate about 1.0% above normal, and with approximately 75 million homeowner occupied homes; this suggests there are close to 750 thousand excess vacant homes.

The rental vacancy rate was 10.7% in Q4 2009.

It's hard to define a "normal" rental vacancy rate based on the historical series, but we can probably expect the rate to trend back towards 8%. According to the Census Bureau there are close to 41 million rental units in the U.S. If the rental vacancy rate declined from 10.7% to 8%, there would be 2.7% X 41 million units or about 1.1 million units absorbed.

This suggests there are still over 1.8 million excess housing units, and these excess units will keep pressure on housing starts, rents and house prices for some time.

by Calculated Risk on 2/02/2010 08:36:00 AM

From Dina ElBoghdady and Dan Keating at the WaPo: Rising FHA default rate foreshadows a crush of foreclosures

The share of borrowers who are falling seriously behind on loans backed by the Federal Housing Administration jumped by more than a third in the past year ... About 9.1 percent of FHA borrowers had missed at least three payments as of December, up from 6.5 percent a year ago, the agency's figures show.

... The problems are rooted in FHA mortgages made in 2007 and 2008. Those loans are now maturing into their worst years because failures most often occur two to three years after a mortgage is made.

... the FHA projects that it will pay out claims to lenders on one out of every four loans made in 2007 -- the worst rate in at least three decades. The claim rate should be nearly the same on the vastly larger volume of loans made in 2008.

Ouch.

by Calculated Risk on 2/01/2010 10:58:00 PM

From the Las Vegas Sun: Short sales soar while foreclosure sales slacken (ht sportsfan)

Short sales averaged about 7 percent to 8 percent of total [Las Vegas] existing-home closings in early 2009, but averaged 22 percent of the market by the end of the year and in early January ...

“We have seen a decrease in foreclosure activity in Las Vegas, which was puzzling to us,” said Daren Bloomquist, marketing manager for California-based RealtyTrac, which monitors foreclosures in Nevada. “Maybe Las Vegas has become somewhat of a test ground for streamlining short sales. It sounds like it could have an impact in Las Vegas.”
...
Dennis Smith, president of Home Builders Research, said short sales will be the “story of the year” because of the effect they will have on the housing market.
...
John Mechem, a spokesman for the Mortgage Bankers Association, said what is happening in Las Vegas is occurring across the country. It is costly for lenders to go through the legal process of foreclosing, and he added that homes can be damaged over time. The return is better on short sale, he said.

As I've noted, I think short sales will be the story of 2010. It is probably the best solution for many homeowners and lenders.

As the story mentions, Treasury has started pushing Short Sale and Deed-in-Lieu of Foreclosure as an alternative to modifications.

The Treasury Department is offering incentives on short sales by providing a $2,500 subsidy, $1,000 to the servicer and $1,500 to the seller for moving expenses. In addition, investors can get $1,000 by allowing subordinate lenders to get $3,000 in proceeds from the sale. The program is effective April 5, but servicers can implement it earlier.

This is better than "walking away" for the lender - the losses are less than for a foreclosure. And this is better for the homeowner too because Treasury requires that "the borrower will be released from all liability for repayment of the first mortgage debt", although the borrower will still take a credit hit.

by Calculated Risk on 2/01/2010 07:40:00 PM

As part of the annual budget, the Obama Administration released the underlying economic assumptions too (see Page 13 of PDF)

For GDP, they are forecasting real GDP growth of 2.7% in 2010, followed by 3.8%, 4.3% and 4.2% in 2013.

For unemployment, the forecast is for an average of 10% in 2010, with a decline to 9.2% in 2011, 8.2% in 2012 and 7.3% in 2013 as shown on the following graph:

Click on graph for larger image in new window.

The blue line is the actual historical monthly unemployment rate. The red line is the Obama Administration annual forecast.

Based on this forecast, the current "human recession" will last for several years for many Americans.

by Calculated Risk on 2/01/2010 04:44:00 PM

More from the Q4 GDP underlying detail tables ...

Note: Residential investment (RI), according to the Bureau of Economic Analysis (BEA), includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories.

Back in Q4 2008 - for the first time ever - investment in home improvements exceeded investment in new single family structures. This has continued through Q4 2009.

Click on graph for larger image in new window.

This graph shows the various components of RI as a percent of GDP for the last 50 years. The most important components are investment in single family structures followed by home improvement.

Investment in home improvement was at a $153.3 billion Seasonally Adjusted Annual Rate (SAAR) in Q4, significantly above the level of investment in single family structures of $110.9 billion (SAAR).

Home improvement spending, as a percent of GDP, is close to the long term median. Brokers' commissions are above the median after being boosted by the homebuyer tax credit.

Of course investment in single family structures is still fairly close to the record low set in Q2 2009, and far below the normal level. Also far below normal is investment in multifamily structures. These two categories will not increase significantly until the number of excess housing units is reduced (I'll have more on the number of excess housing units tomorrow after the Census Bureau releases the Q4 Housing Vacancies and Homeownership report).

by Calculated Risk on 2/01/2010 02:00:00 PM

From the Fed: The January 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices

The January survey indicated that commercial banks generally ceased tightening standards on many loan types in the fourth quarter of last year but have yet to unwind the considerable tightening that has occurred over the past two years. The net percentages of banks reporting tighter loan terms continued to trend lower. Banks reported that loan demand from both businesses and households weakened further, on net, over the survey period.
emphasis added

In general banks have stopped tightening lending standards, however demand continues to weaken. For real estate - especially commercial real estate - the banks are still tightening standards:

Questions on residential real estate lending. Banks continued to tighten standards on residential real estate loans over the past three months. In line with recent patterns, a small net fraction of banks tightened standards on prime residential real estate loans over that period, and somewhat larger net fractions of banks tightened standards on nontraditional residential real estate loans. In addition, a moderate net fraction of banks reported weaker demand from prime borrowers for residential real estate loans.

Questions on commercial real estate lending. ... a substantial share of domestic banks, on net, reported having tightened standards on CRE loans and having experienced weaker demand for such loans again in the fourth quarter of 2009.

by Calculated Risk on 2/01/2010 12:43:00 PM

Here are graphs of office, mall and lodging investment through Q4 2009 based on the underlying detail data released by the BEA ...

Click on graph for larger image in new window.

This graph shows investment in offices as a percent of GDP. Office investment as a percent of GDP peaked at 0.46% in Q3 2008 and has declined sharply to a new all time low (as percent of GDP).

Reis reported that the office vacancy rate rose to a 15 year high in Q4 to 17.0%, from 16.5% in Q3 and from 15.9% in Q2. The peak vacancy rate following the 2001 recession was 16.9%. With the office vacancy rate rising, office investment will probably decline through 2010.

Office investment is usually the most overbuilt in a boom, but this time the office market struggled for a few years after the stock market bubble burst and there was comparatively more investment in malls and hotels.

The second graph is for investment in malls.

Investment in multimerchandise shopping structures (malls) peaked in 2007 and has fallen by 50% (note that investment includes remodels, so this will not fall to zero). Mall investment will probably continue to decline through 2010.

Reis reported that the mall vacancy rate in Q4 was the highest on record at 8.8% for regional malls, and 10.6% for strip malls. From Reis economist Ryan Severino:

"Our outlook for retail properties as a whole is bleak ... we do not foresee a recovery in the retail sector until late 2012 at the earliest."

The third graph is for lodging (hotels).

The recent boom in lodging investment was stunning. Lodging investment peaked at 0.32% of GDP in Q2 2008 and has declined rapidly to 0.16% in Q4 2009.

I expect lodging investment to continue to decline through at least 2010, to perhaps one-third of the peak or even lower (investment as percent of GDP).

As projects are completed there will be little new investment in these categories probably at least through 2010. This will be a steady drag on GDP (nothing like the decline in residential investment though), and a steady drag on construction employment.

Notice that investment in all three categories typically falls for a year or two after the end of a recession, and then usually recovers very slowly. Something similar will probably happen again, and there will not be a recovery in these categories until the vacancy rates fall significantly.

by Calculated Risk on 2/01/2010 10:21:00 AM

Residential construction spending was off slightly in December, and is now about 10% above the bottom in June 2009. I expect some growth in residential spending in 2010, but the increases will probably be sluggish until the large overhang of existing inventory is reduced.

Non-residential increased slightly in December, but the trend is clearly down. The collapse in non-residential construction spending continues ...

Click on graph for larger image in new window.

The first graph shows private residential and nonresidential construction spending since 1993. Note: nominal dollars, not inflation adjusted.

Residential construction spending decreased in December, and nonresidential spending increased slightly.

Private residential construction spending is now 61.5% below the peak of early 2006.

Private non-residential construction spending is 22.0% below the peak of October 2008.

The second graph shows the year-over-year change for private residential and nonresidential construction spending.

Nonresidential spending is off 17.7% on a year-over-year (YoY) basis.

Residential construction spending is down 10.3% from a year ago, and the negative YoY change is getting smaller.

Only over the last few months - for the first time since the housing bust started - has nonresidential spending been off more on a YoY basis than residential.

Here is the report from the Census Bureau: December 2009 Construction at $902.5 Billion Annual Rate

by Calculated Risk on 2/01/2010 10:00:00 AM

PMI at 58.4% in January, up sharply from 54.9% in December.

From the Institute for Supply Management: January 2009 Manufacturing ISM Report On Business®

Economic activity in the manufacturing sector expanded in January for the sixth consecutive month, and the overall economy grew for the ninth consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business®.

The report was issued today by Norbert J. Ore, CPSM, C.P.M., chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. "The manufacturing sector grew for the sixth consecutive month in January as the PMI rose to 58.4 percent, its highest reading since August 2004 when it registered 58.5 percent. This month's report provides significant assurance that the manufacturing sector is in recovery. Both the New Orders and Production Indexes are above 60 percent, indicating strong current and future performance for manufacturing. This month, 13 of 18 industries reported growth, up from nine industries last month, and this is a good indication that the impact of the recovery is expanding."
...
ISM's Employment Index registered 53.3 percent in January, which is 3.1 percentage points higher than the seasonally adjusted 50.2 percent reported in December. This is the second month of growth in manufacturing employment, and the highest reading since April 2006 (54.9 percent). An Employment Index above 49.8 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment.
emphasis added

As noted, any reading above 50 shows expansion.

by Calculated Risk on 2/01/2010 08:30:00 AM

From the BEA: Personal Income and Outlays, November 2009

Personal Personal income increased $44.5 billion, or 0.4 percent, and disposable personal income (DPI) increased $45.9 billion, or 0.4 percent, in December, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $22.6 billion, or 0.2 percent.
...
Real PCE -- PCE adjusted to remove price changes -- increased 0.1 percent in December, compared with an increase of 0.4 percent in November.
...
Personal saving -- DPI less personal outlays -- was $534.2 billion in December, compared with $506.3 billion in November. Personal saving as a percentage of disposable personal income was 4.8 percent in December, compared with 4.5 percent in November.

Click on graph for large image.

This graph shows the saving rate starting in 1959 (using a three month centered average for smoothing) through the December Personal Income report. The saving rate was 4.8% in December.

I expect the saving rate to continue to rise over the next couple of years - possibly to 8% or more - slowing the growth in PCE.

The following graph shows real Personal Consumption Expenditures (PCE) through December (2005 dollars). Note that the y-axis doesn't start at zero to better show the change.

The quarterly change in PCE is based on the change from the average in one quarter, compared to the average of the preceding quarter.

The colored rectangles show the quarters, and the blue bars are the real monthly PCE.

The question is what happens to PCE growth in 2010?