Calculated Risk

Thursday, July 05, 2007

MarketWatch: Consumers are struggling

by Calculated Risk on 7/05/2007 05:45:00 PM

From Rex Nutting at MarketWatch: Consumers are struggling

Just when it appeared the U.S. economy would pick up steam after a year-long soft patch, the U.S. consumer is running out of gas.

The signs of stress are all around.

Prices are rising, but incomes and wealth aren't. With most households already overburdened with debt, consumers are being squeezed. There's only one thing to do, even though it goes against every fiber of their being: Cut back on expenses.

Kasriel: Housing Recession Starting to Strangle the Consumer

by Calculated Risk on 7/05/2007 04:13:00 PM

Northern Trust's Paul Kasriel writes: The Tentacles of the Housing Recession Are Beginning to Strangle the Consumer

Light motor vehicle sales in the U.S. dropped 3.4% month-to-month in June to a seasonally adjusted rate of 15.6 million units. Excluding the Katrina-depressed sales of September 2005, the June 2007 sales rate was the slowest since September 2002. Light motor vehicle sales have declined sequentially for six consecutive months. On a quarterly average basis, new light motor vehicle sales contracted at an annual rate of 12.7% in Q2 vs. a 6.2% increase in Q1. Although not all of the Q2 decrease will show up as a subtraction to consumer spending (some will subtract from business capex), there are other indications that consumer spending is flagging. As mentioned in our June 26 daily commentary, "So, the Housing Recession Is Contained?", a number of retailers in the discretionary consumer spending “space” have recently reported disappointing sales and have lowered sales guidance. Corroborating these individual retailers’ reports are the Johnson Redbook retail sales survey results for June ... retailing activity tailed off significantly in June. The April-May average of real personal consumption expenditures was up only 1.3% at an annual rate vs. its Q1 average. The June data on light motor vehicle sales and chain store sales are not pointing to an acceleration. The question the markets and the Fed will be wresting with over the remainder of summer is whether the sharp deceleration in Q2 real consumer spending is a one-off event or something with more longevity. My bet is the latter. The ongoing housing recession is sharply reducing one source of funding for household deficit spending – mortgage equity withdrawal (MEW). The continued decline in home prices and the tightening of mortgage underwriting standards will exacerbate the drying up of MEW. Job growth also is trending lower, which will restrain future consumer spending. Slowly but surely, the tentacles of the housing recession are strangling the consumer.

As I asked last week, is the Q2 consumer slowdown related to the housing slump? Kasriel believes it is.

The economy is somewhat schizophrenic right now. Just look at the positive growth stories I posted this AM on ISM services, office rents and employment. And last week, Dr. Altig highlighted the positive ISM manufacturing report and detailed the current fairly positive consensus economic view for the second half of '07.

My view is:

1) Housing appears to be taking another down turn right now, and I expect residential investment to continue to decline.

2) The pickup in manufacturing appears to be due somewhat to exports and mostly because of an inventory correction. The inventory correction appears to be mostly over, and I'd expect less growth from manufacturing going forward.

3) Non-residential structure investment has been very strong this year, but I believe it will slow down later this year.

4) I think it is very likely that Kasriel is correct, and that the Q2 consumption slowdown is related to the housing slump. Since the housing slump is ongoing, and MEW will continue to decline, I expect weak consumer spending in the second half of '07.

When I add it all up, it seems to spell the R-word (or at least very sluggish growth in H2 '07). Maybe non-residential structure investment will stay strong. Maybe consumer spending will rebound in Q3. Maybe ...

"Soaring" Office Rents

by Calculated Risk on 7/05/2007 02:06:00 PM

From the WSJ: Soaring Rents Pinch Businesses Across the U.S.

Nationwide, effective rents on office properties -- the amount tenants pay after concessions -- jumped an average of 3.1% during this year's second quarter, up from gains of 2.8% in the first quarter and 2.1% in the year-earlier period, according to a report scheduled for release today by real-estate research firm Reis Inc.

That was the sharpest quarterly increase since the third quarter of 2000 ...

Just a few months ago, CB Richard Ellis reported that vacancy rates were rising:

The U.S. office vacancy rate rose in the first quarter, according to CB Richard Ellis. ... The rate was 12.8 percent in the first quarter, up from 12.6 percent the previous quarter.

And, in April, the WSJ reported that office absorption was "sluggish". According to the WSJ, Q1 office space absorption rate was about 8 to 10 million square feet per quarter, but "... developers will open 76 million square feet of new office space by the end of this year."

But today's report suggests absorption picked up in Q2:

Meanwhile, demand for office space has been growing. Net absorption -- a measure of the space taken up by commercial tenants -- increased markedly during the latest quarter, a sign that the economy is producing more office jobs, says Sam Chandan, chief economist for Reis. Nationwide, the office-vacancy rate, at 12.7%, is the lowest since the third quarter of 2001.

One of the keys to economic growth in the second half of '07 is investment in non-residential structures. It is possible that the big investment slump in the early '00s has left many markets with too little supply of commercial and office buildings (and other non-residential structures). So, even though the typical pattern is for non-residential investment to follow residential investment by 5 or so quarters, it is possible that investment in non-residential structures will decouple (at least somewhat) from the typical pattern - and remain strong throughout '07.

ADP and Services

by Calculated Risk on 7/05/2007 12:30:00 PM

For what it's worth, ADP reports:

Nonfarm private employment grew 150,000 from May to June of 2007 on a seasonally adjusted basis

The BLS reports June employment numbers tomorrow.

And from MarketWatch: Services expanding at best pace in more than year

More nonmanufacturing companies in the United States were growing in June than at any time since last April, according to a survey of companies released Thursday by the Institute for Supply Management.

The ISM nonmanufacturing index rose to 60.7% from 59.7% in May.

Mortgage Fraud Watch List Wins Round 1

by Tanta on 7/05/2007 12:01:00 PM

An update to this post:

A Brevard County judge on Thursday refused to shut down a Palm Bay appraiser's Web site that contained comments critical of the California-based appraisal management company First American eAppraiseIT.

The company was seeking a temporary injunction to prevent appraiser Pamela Crowley from making any comments, or posting comments from others, about it on her Web site, www.mortgagefraudwatchlist.org.

Crowley's Web site serves as a discussion platform for issues in the appraising industry. It also is a place for appraisers to report lending and appraisal fraud, and questionable activities in the industry.

First American eAppraiseIt acts as a middle party, finding appraisers for clients such as banks and mortgage companies.

Circuit Court Judge John Dean Moxley Jr. dismissed eAppraiseIT's request, because the company had not proved defamation or any financial harm based on the postings.

"If it's not defamation at this point, there's no need for an injunction," Moxley said. "What you asked for is not permissible under the law in the state. Therefore, I deny it."

And a word of warning for firms considering SLAPP suits against websites:

So far, one of the best-read postings to the site, which requires a registration, has been about eAppraiseIt's efforts to silence Crowley, Potts said.

Number of Unsold Homes Increases

by Calculated Risk on 7/05/2007 02:45:00 AM

From the WSJ: Number of Unsold Homes Increases

The number of homes on the market in 18 major metropolitan areas continues to grow.

Total listings of homes in these metro areas at the end of June was up 2.5% from May, according to figures compiled by ZipRealty Inc.

If the NAR number follows Zip Realty for June, then the June existing home inventory levels will be over 4.5 million - another all time record - and total inventory, including new homes, will be over 5 million units.

Click on graph for larger image.

This graph is based on the Zip Realty estimate of the inventory increase for existing homes in June. Inventory usually increases in June, but the levels of inventory (already an all time record) are a reason for concern.

A 2.5% increase would put inventory at 4.54 million. A word of caution: we have seen the Zip Realty estimate vary significantly from the NAR estimate in the past, probably because the Zip Realty numbers are only a subset of the total NAR numbers.

The second graph shows the impact on the "months of supply" using the Zip Realty estimate for inventory, and the NAR estimate for pending home sales (down 3.5%).

This would put months of supply at about 9.4 months - very close to my estimate of the peak this summer of 9.5 months. Once again, this is just an estimate.

Hedgies: Another One Bites the Dust

by Calculated Risk on 7/05/2007 02:39:00 AM

From the WSJ: Funds Accelerate Subprime Exit Strategy

Investors received a letter earlier this week from Braddock Financial Corp. of Denver. It said it was closing its Galena Street Fund, which mainly invests in bonds backed by subprime mortgages extended to borrowers with poor credit, and suspending redemptions until it can sell assets in the roughly $300 million fund.