by Calculated Risk on 1/09/2009 08:30:00 AM

From the BLS:

Nonfarm payroll employment declined sharply in December, and the unemployment rate rose from 6.8 to 7.2 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Payroll employment fell by 524,000 over the month and by 1.9 million over the last 4 months of 2008. In December, job losses were large and widespread across most major industry sectors.

Click on graph for larger image.

This graph shows the unemployment rate and the year over year change in employment vs. recessions.

Nonfarm payrolls decreased by 524,00 in December, and November payrolls were revised down to a loss of 584,000 jobs. The economy has lost over 1.5 million jobs over the last 3 months alone!

The unemployment rate rose to 7.2 percent; the highest level since January 1993.

Year over year employment is now strongly negative (there were 2.6 million fewer Americans employed in Dec 2008 than in Dec 2007). This is another extremely weak employment report ...

by Calculated Risk on 1/09/2009 12:17:00 AM

First, a few articles:

From the Seattle Times: Downtown office markets may soon see vacancy rates in the teens

Vacancy rates in the two downtowns will climb well into the teens this year as companies downsize and new office buildings — some still lacking even a single signed tenant — come on line, according to new reports from brokerages Cushman & Wakefield and Grubb & Ellis.

From the IndyStar.com: Indy office vacancy rate is highest since '04

The office vacancy rate in the Indianapolis area hit 19.5 percent at year end, a fraction of a percent higher than in the third quarter.

The vacancy rate is the highest since at least 2004, says CB Richard Ellis commercial realty in its year-end report.

Six multi-tenant office buildings opened in the metro area last year, which helped boost the overall vacancy rate.

From the Austin Business Journal: Austin office vacancy hits 19%

Austin’s overall office vacancy rose to 19 percent in 2008, compared with a 14 percent overall vacancy rate in 2007, according to a report released today by Oxford Commercial. ...

An increase in inventory--Austin now has a total of more than 42 million square feet of office space as of the end of 2008, 3.6 million of that delivered in the past 12 months--contributed to the increase in vacancy rates, said Vic Russo, a senior vice president in the Austin brokerage firm’s office division.

Supply is increasing as more office space is being delivered, more companies are subleasing space, and companies are downsizing. Demand is falling (actually negative) as the economy weakens. The following graph is from CoStar Commercial Real Esate The State of the Commercial Real Estate Industry: 2008 Review/2009 Outlook (no link)


Click on graph for larger image in new window.

For the next two years, CoStar is projecting about 110 million square feet of new office space will be delivered per year (over 150 million in 2009!), and they are also projecting negative absorption of about 230 million square feet per year.

This suggests rents will fall sharply for the next couple of years, delinquencies will rise, and new office construction will come to a halt. Although deliveries will be strong in 2009 (with all the projects currently under construction), CoStar projects new office deliveries in 2010 will the lowest since 1996, and deliveries in 2011 will be the lowest in over 50 years.

Definition of Negative Absorption: The absorption rate is the net amount of square feet leased each year. A negative absorption rate means that more companies are downsizing or subleasing space than companies expanding and adding space.

"Negative absorption" are two words no developer ever wants to hear.

by Calculated Risk on 1/08/2009 08:04:00 PM

The Federal Reserve released the Factors Affecting Reserve Balances today. Total assets declined $125 billion to $2.14 trillion. This is a little improvement ...


Click on graph for larger image in new window.

The Federal Reserve assets decreased to $2.14 trillion this week from a high of $2.31 trillion the week of Dec 18th.

Note: the graph shows Total Factors Supplying Federal Reserve Funds and is an available series that is close to assets.

Just highlighting something a little positive among all the grim news.

I suspect doom and gloom returns tomorrow morning with the jobs report!

by Calculated Risk on 1/08/2009 04:30:00 PM

From Rex Nutting at MarketWatch: Roubini forecasts recession will last 2 years

The U.S. recession will last two full years, with gross domestic product falling a cumulative 5%, said Nouriel Roubini, ... For 2009, Roubini predicts GDP will fall 3.4%, with declines in every quarter of the year. The unemployment rate should peak at about 9% in early 2010 ...

Roubini is forecasting a pretty serious recession, but far short of a "depression" which is usually defined as a 10% decline in real GDP.

The concensus (and the Fed forecast) is that the economy will bottom in Q2 2009 with a sluggish recovery in the 2nd half of this year.

by Calculated Risk on 1/08/2009 03:51:00 PM

From CNBC: Citi Supports Plan to Adjust Mortgages in Bankruptcy

Citigroup has agreed to a plan that would let bankruptcy judges alter mortgages in an effort to prevent more housing foreclosures.

Until now, the banking industry has been ardently opposed to the proposal, which key Democratic lawmakers aim to attach to President-elect Barack Obama's economic stimulus legislation.
...
The National Association of Home Builders has dropped its opposition to the plan and the National Association of Realtors is debating whether to end its opposition.

Cram-downs makes sense. For a discussion of the cram-down issue, see Tanta's: Just Say Yes To Cram Downs Oct, 2007

by Calculated Risk on 1/08/2009 03:02:00 PM

From the National Retail Federation (NRF): 2008 Retail Container Traffic Marks Lowest Level in Four Years (note: December is estimated)

Click on image for larger graph in new window.

Year-over-year cargo volume at the nation’s major retail container ports fell for the 17th straight month in December, completing the slowest year since 2004 as the U.S. economic downturn continued, according to the monthly Port Tracker report released today by the National Retail Federation and IHS Global Insight.

Volume for the year was estimated at 15.3 million Twenty-Foot-Equivalent Units, compared with 16.5 million TEU in 2007. That would be a decline of 7.1 percent and the lowest total since 2004, when 14 million TEU moved through the ports. One TEU is one 20-foot container or its equivalent.

“2008 was a slow year for the ports for the simple reason that it was a slow year for retail sales,” NRF Vice President for Supply Chain and Customs Policy Jonathan Gold said. “We don’t expect a significant increase in traffic at the ports until retail sales return to normal levels, and even then retailers will be careful not to over-stock.”

U.S. ports surveyed handled 1.23 million TEU in November, the last month for which actual numbers are available. That was down 10.3 percent from the 2008 peak of 1.37 million TEU set in October and down 11.8 percent from November 2007.

December was estimated at 1.2 million TEU, down 6.4 percent from December 2007. ...

“Between the economy and the customary winter impact of the slow season, port traffic is very weak,” IHS Global Insight Economist Paul Bingham said. “Port traffic is projected to continue to be very slow due to the underlying weakness in demand.”

All U.S. ports covered by Port Tracker – Los Angeles/Long Beach, Oakland, Seattle and Tacoma on the West Coast; New York/New Jersey, Hampton Roads, Charleston and Savannah on the East Coast, and Houston on the Gulf Coast – are rated “low” for congestion, the same as last month.

by Calculated Risk on 1/08/2009 02:07:00 PM

With investors buying low priced homes to rent (see previous post) and the economy in recession, guess what happens? More rental supply, less demand and falling rents ...

From the LA Times: Housing downturn hits L.A.-area rents (hat tip Charlie)

After rising for several years, rents in the Los Angeles area are declining because of the economic recession and depressed home prices, researchers, real estate agents and property managers say.

The lower local rents match a national trend, according to a report released Wednesday showing apartment rents fell in 54 out of 79 U.S. metropolitan areas in the fourth quarter of 2008. Softening rents add another obstacle to a housing market recovery, economists say, because tenants with low rent payments feel less urgency to buy a home.


Nationwide, apartment rents eased 0.1% in the fourth quarter, the first drop since 2002, according to the analysis by research firm Reis Inc.

by Calculated Risk on 1/08/2009 11:14:00 AM

From Bloomberg: No Recovery for Real Estate as Speculators Dominate Sales (hat tip James)

As the U.S. housing recession enters its fourth year, there’s no sign of a recovery because speculators account for most of the rise in sales.
...
While the purchases are trimming the inventory of unsold properties, most of those bought by speculators will likely return to the market when prices rise again, hampering any recovery, said Nobel laureate economist Joseph Stiglitz and Yale University Professor Robert Shiller in interviews.

“We’re creating a shadow inventory of homes that will be right back on the market as soon as the economy and the housing market begin to improve,” said Stiglitz, a Columbia University professor of economics. “We could see a double-dip in the housing recession if that happens.”
...
“You don’t have it in strong hands, you have flippers,” said Shiller, who helped create the S&P/Case Shiller real estate price indexes. “These speculators are preventing the market from crashing now, and when they get out it could fall again.”

Uh, no. In this case I believe Shiller is wrong.

First, we have to distinguish between speculators and investors. My view is speculators buy with the intention of flipping or re-selling as soon as possible. Investors buy for cash flow. The Bloomberg article offers this example:

Robert Arnold, a real estate investor who rents out a dozen homes near Orlando, Florida ... bought an Orlando foreclosure in June for $60,000, about a third of its appraised value, and spent $20,000 repairing it. Four months ago he rented it for $950 a month....

“Most of the houses I buy are junkers, but with a little work they become cash cows,” Arnold said.

Arnold is not a flipper, and according to the real estate agents I've spoken with recently, most of the recent non-owner occupied buyers are buying for cash flow just like Arnold.

Yes, these investors will probably keep price appreciation down in the future, but I'd argue a cash flow investor is a "strong hand" and I think they will hold the property longer than Shiller expects.

by Calculated Risk on 1/08/2009 09:25:00 AM

From the WSJ: U.S. Retailers Post Weak Same-Store Sales

Wal-Mart reported its U.S. same-store-sales, excluding gasoline, grew 1.7% amid a 1.9% increase at its namesake chain and 0.1% rise at Sam's Club.

Vice Chairman Eduardo Castro-Wright said the company, which last month projected growth at the higher end of the quarter's predicted 1% to 3% advance, said Thursday the holidays were more challenging than expected for retailers because of the economy and "severe winter weather" in some parts of the country."

Wal-Mart sales had held up pretty well as consumers switched to inferior goods, but now it appears December was especially weak. This is more evidence of a sharp slow down last month.

by Calculated Risk on 1/07/2009 09:51:00 PM

From the WSJ: Commercial Property Loses Shelter

Delinquencies on mortgages for hotels, shopping malls and office buildings were sharply higher in the fourth quarter ... New data from Deutsche Bank show that delinquencies on commercial mortgages packaged and sold as bonds, which represent nearly a third of the commercial real-estate debt market, nearly doubled during the past three months, to about 1.2%. ...

The delinquency rate will likely hit 3% by the end of 2009, its highest point in more than a decade, says Richard Parkus Deutsche Bank's head of research on such bonds, known as commercial-mortgage-backed securities, or CMBS.

This is not only a problem for CMBS, but many banks and thrifts have excessive exposure to CRE loans:

According to research firm Foresight Analytics, soured commercial mortgages on banks' books jumped to 2.2% as of the third quarter of last year, from 1.5% at the end of 2007. The research firm estimates that the rate could rise to 2.6% in the fourth quarter of 2008.
...
Banks and thrifts would suffer in a commercial-real-estate downturn because they own nearly 50% of all commercial mortgages outstanding. ... According to Foresight Analytics, as of Sept. 30, 2008, some 1,400 commercial banks and savings institutions had more than 300% of their Tier 1 capital in commercial mortgages.

Here are some comments from Fed Vice Chairman Donald L. Kohn back in April 2008:

Setting aside the 100 largest banks, the share of commercial real estate loans in bank loan portfolios nearly doubled over the past 10 years and is approaching 50 percent. The portfolio share at these banks of residential mortgage and other consumer loans, which are more readily securitized, fell by 20 percentage points over the same period.

This is a key point that we've been discussing for a few years - most small to mid-sized institutions were not overexposed to the housing bubble because those loans were mostly securitized. Therefore the housing bust led directly to relatively few bank failures over the last couple of years (although some larger banks like WaMu, Wachovia and National City were heavily exposed to residential loans).

However, many small to mid-sized banks have a heavy concentration in commercial real estate (CRE) loans, and also in construction & development (C&D) loans. Now that CRE is weakening - and the C&D loans are coming due - there will probably be a sharp increase in bank failures over the next couple of years.

Concentration risk is another familiar risk that is appearing in a new form. Banks have always had to worry about lending too much to one borrower, one industry, or one geographic region. But as smaller banks hold more of their balance sheet in types of loans that are difficult to securitize, concentration risks can develop. Concentrations of commercial real estate exposures are currently quite high at some smaller banks. This has the potential to make the banking sector much more sensitive to a downturn in the commercial real estate market.

I expect 100s of small bank failures over the next couple of years due to excessive CRE loan concentrations. I predict Bank Failure Fridays will be even busier in 2009 than 2008.