RSS Feed by Calculated Risk on 9/07/2010 06:17:00 PM
Tuesday, September 07, 2010
Housing Starts and Vacant Units
The following graph shows total housing starts and the percent vacant housing units (owner and rental) in the U.S.
Note: this is a combined vacancy rate based on the Census Bureau vacancy rates for owner occupied and rental housing through Q2 2010.
Click on graph for larger image in new window.
The vacancy rate continued to climb even after housing starts fell off a cliff. Initially this was because of a significant number of completions. Then some hidden inventory (like some 2nd homes) probably became available for sale or for rent, and also some households have doubled up because of tough economic times.
It appears the total vacancy rate might have peaked and started to decline. This suggests more households are now being formed than net housing units added to the housing stock. But there is still a long way to go.
I know I'm a broken record - but it is very unlikely that there will be a strong rebound in housing starts with a near record number of vacant housing units.
Reactions to Obama's Business Tax Break
by Calculated Risk on 9/07/2010 02:51:00 PM
The Obama administration is proposing that businesses be able to expense new investment in plants and equipment, through 2011, instead of writing off the investment over several years.
Catherine Rampell at the NY Times Economix provides a nice summary: Reactions to Obama’s Business Tax Write-Off Proposals
A few excerpts:
From Goldman Sachs on the "small effect":
To the extent it does have an effect, it is likely to pull forward demand into the quarter just before expiration (in this case Q4 2011) so the near-term effect should be even more modest ...From Professor Greg Mankiw:
"[T]he impact will be relatively modest. Notice that expensing merely accelerates deductions. Thus, the value to the firm depends on interest rates. With interest rates near zero, the impetus to investment is small. Put another way, this policy can be seen as giving firms a zero-interest loan if they invest in equipment. But with interest rates near zero anyway, the value of the loan is not that great.”This is basically a large sounding proposal ($200 billion) with little impact. With excess capacity in most sectors, why do we want to incentivize companies to invest anyway? And as Goldman notes, most of the modest impact will probably be in Q4 2011.
Housing Completions will set new record low in 2010
by Calculated Risk on 9/07/2010 12:04:00 PM
One of the key questions for housing, jobs, and the economy is: When will the excess housing supply be absorbed?
The answers depends on:
1) The current number of excess housing units,
2) how many net units are added to the housing stock, and
3) how many net households are being formed.
There is no timely data for net household formation, and estimates of the excess housing supply vary widely. So the answer involves some guesses (I'll get back to these questions).
The best data is for completions of housing units - although the number of demolitions is unclear. So the limited purpose of this post to to provide an estimate of the net units added to the housing stock in 2010.
Housing units include single family homes (included as 1 to 4 units), apartments (5+ units), and mobile homes. Demolitions are subtracted from the stock.
NOTE: Table is based on Completions. Housing units added to stock:
| 2009 | 20101 | |
|---|---|---|
| 1 to 4 units | 534.7 | 480 |
| 5+ units | 259.8 | 135 |
| Mobile Homes | 52.2 | 55 |
| Sub-Total | 846.7 | 670.0 |
| Demolitions2 | 200 | 200 |
| Total | 646.7 | 470.0 |
1 Estimates for 2010 based on completions through July.
2 estimated.
Notice for 2010 that the estimate is for 5+ unit completions to collapse. This is already in the works as shown in the following diagram:
Click on graph for larger image in new window.The blue line is for multifamily starts and the red line is for multifamily completions. Probably all the multifamily units that will be delivered in 2010 have already been started since, according to the Census Bureau, it takes on average over 1 year to complete these projects.
Since multifamily starts collapsed in 2009, completions will collapse in 2010. This finally showed up in the data for July as completions fell to 8.1 thousand from 17.1 thousand in June. Completions averaged over 14 thousand per month during the first 6 months of 2010, and will average close to 8 thousand per month during the 2nd half of 2010.
Note: this decline in completions will impact construction employment in the 2nd half.
Similar logic applies to single family units, although these only take around 7 months to complete. Almost all of the single family units that will be completed this year have already been started. There were 249.2 thousand completions during the first 6 months of the year, and completions will probably slow in the 2nd half.
The manufactured homes data is from the Census Bureau (and demolitions are estimated).
This means a record low number of housing units will be added to the housing stock in 2010. But unfortunately household formation is probably very low too - so the excess inventory might not be reduced substantially (I'll get back to this).
UPDATE: To be clear - the record low completions is bad news in the short term, especially for employment, but overall it is GOOD news for the economy and housing since it helps reduce the excess supply.
Special thanks to housing economist Tom Lawler who shared with me some of his thoughts on completions.
European Bond Spreads
by Calculated Risk on 9/07/2010 09:03:00 AM
After the WSJ story last night on the European stress tests, here is an update on a few European bond spreads:
Monday, September 06, 2010
European Stress Tests and more
by Calculated Risk on 9/06/2010 09:30:00 PM
From the WSJ tonight: Europe's Bank Stress Tests Minimized Debt Risk
We've discussed this several times - as an example, in Part 5D of the sovereign debt series, "some investor guy" wrote:
Q1. Was there much sovereign stress in the European bank stress tests?Note: Here are links for the entire sovereign debt series.
NO. The most glaring oversight, in the opinion of the author and many other analysts, is assuming there would be no sovereign defaults, and thus not showing any losses on the bank’s long term holdings (in the banking category vs the “trading book”). According to the Committee of European Banking Supervisors, the sovereign stress scenario results in “39 billion euro associated with valuation losses of sovereign exposures in the trading book “.
“The haircuts are applied to the trading book portfolios only, as no default assumption was considered, which would be required to apply haircuts to the held to maturity sovereign debt in the banking book.”
Reconciling the Household and Payroll Surveys of Employment
by Calculated Risk on 9/06/2010 04:10:00 PM
Every month the BLS puts out a report that discusses the difference between the household and establishment surveys: Employment from the BLS household and payroll surveys: summary of recent trends
The Unemployment Rate comes from the Current Population Survey (CPS: commonly called the household survey), a monthly survey of about 60,000 households.
The jobs number comes from Current Employment Statistics (CES: payroll survey), a sample of approximately 390,000 business establishments nationwide.
These are very different surveys: the CPS gives the total number of employed (and unemployed including the alternative measures), and the CES gives the total number of positions (excluding some categories like the self-employed, and a person working two jobs counts as two positions).
The linked monthly report from the BLS discusses the differences, and adjusts the household survey to "an employment concept more similar to the payroll survey’s". 
Click on graph for larger image in new window.
This graph from the BLS shows the household survey, the payroll survey and the adjusted household survey.
I was inspired to post this graph by Professor Nancy Folbre's post at Economix: Taking the ‘Un’ Out of Unemployment
A focus on employment, rather than unemployment, provides additional perspective. ...Little employment growth for a decade is quite a "hole".
The employment measure is unaffected by assumptions regarding the character, motives or incentives facing the unemployed.
And trends in this measure, as shown above, could discourage even the most optimistic among us, if they would just pay attention to it.
As Steven Hipple, a Bureau of Labor Statistics economist, puts it in a more detailed analysis of trends through the end of 2009, “Economic decision-makers might not understand the depth of the economic hole in the labor market.”
Note: Over the same decade, according to the Census Bureau, the U.S. population, has increased from around 285 million to 310 million.
Obama to Propose $50 Billion in Infrastructure Spending
by Calculated Risk on 9/06/2010 12:06:00 PM
From the NY Times: Obama to Call for $50 Billion Spending on Public Works
President Obama on Monday is to call for as much as $50 billion in government spending to start up a long-term public works plan emphasizing transportation projects – roads, rail and airport runways – over the next six years.Based on some media leaks, I'm not optimistic that the recovery package to be announced on Wednesday will help significantly with (un)employment. However this investment seems to make sense.
...
The spending is one part of a broader economic recovery package that Mr. Obama is to unveil during a speech in Cleveland on Wednesday.
...
While Mr. Obama’s plan would call for investment over six years, the White House says it would be front-loaded with an initial investment of $50 billion in taxpayer money, to help create jobs in the shorter term.
House Prices and Stress Tests
by Calculated Risk on 9/06/2010 09:15:00 AM
The following graph shows the two bank stress test scenarios compared to the Case-Shiller Composite 10 Index.
Click on graph for larger image in new window.
The heavy government support for house prices has kept prices well above the baseline scenario. But is this good news?
With prices higher than projected, banks have taken fewer write downs than originally expected - and many homeowners have been able to refinance into Fannie and Freddie (or FHA insured) loans putting the future risk on the taxpayer. This is good news for the banks.
However, since prices are still too high in many areas, the market has not cleared and there is still too much inventory. Until the excess inventory is absorbed, there will be little new construction and few construction related jobs - and the recovery will remain sluggish.
Sunday, September 05, 2010
Streitfeld: Grim Housing Choice
by Calculated Risk on 9/05/2010 07:18:00 PM
From David Streitfeld at the NY Times: Grim Housing Choice: Help Today’s Owners or Future Ones (ht Paul)
Over the last 18 months, the administration has rolled out just about every program it could think of to prop up the ailing housing market ... The goal was to stabilize the market until a resurgent economy created new households that demanded places to live.I wouldn't quite phrase it as "let the housing market crash" - instead I'd argue to stop trying to support house prices and think jobs, jobs, jobs. More jobs mean more households - and more households will absorb the excess supply of housing.
As the economy again sputters and potential buyers flee... Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash.
More from Streitfeld:
A small decline in home prices might not make too much of a difference to a slack economy. But an unchecked drop of 10 percent or more might prove entirely discouraging to the millions of owners who are just hanging on, especially those who bought in the last few years under the impression that a turnaround had already begun.I think prices are near the bottom in many areas - although I think prices are still too high in many mid-to-high priced bubble areas. This probably means further price declines on the repeat sales indices of 5% to 10% (Case-Shiller and CoreLogic).
But I also think many of the recent FHA buyers will be underwater for a few years and they will have difficulty selling - unless they bring cash to escrow.
Earlier:
Schedule for Week of September 5th
by Calculated Risk on 9/05/2010 04:45:00 PM
This will be a light week for economic data. The trade deficit for July on Thursday is probably the key release.
Here is the Summary for the week ending Sept 4th (a busy week with plenty of graphs!)
Labor Day Holiday
No releases scheduled.
7:00 AM ET: The Mortgage Bankers Association (MBA) will release the mortgage purchase applications index. This index has been fairly flat over the last couple of months suggesting reported existing home sales in August and September will not be much stronger than in July.
10:00 AM: Job Openings and Labor Turnover Survey for July from the BLS. This report has been showing very little turnover in the labor market and few job openings.
2:00 PM: Fed's Beige Book for August.
3:00 PM: Consumer Credit for July from the Federal Reserve. The consensus is for a $3.5 billion decline in consumer credit.
8:30 AM: Trade Balance report from the Census Bureau. The consensus is for the U.S. trade deficit to decrease to $47 billion (from $49.9 billion in June).
8:30 AM: The initial weekly unemployment claims report will be released. Consensus is for a slight decrease to 470K from 472K last week. openings.
10:00 AM: Wholesale Inventories for July.
After 4:00 PM: The FDIC will probably get busy again ...
Possibly on Friday: Ceridian-UCLA Pulse of Commerce Index™ This is the diesel fuel index for August (a measure of transportation).
