by Calculated Risk on 9/08/2010 07:32:00 AM

The MBA reports: Mortgage Purchase Applications Up, Refinance Applications Fall Slightly in Latest MBA Weekly Survey

The Refinance Index decreased 3.1 percent from the previous week. The seasonally adjusted Purchase Index increased 6.3 percent from one week earlier.
...
“Purchase applications increased last week, reaching the highest level since the end of May. However, purchase activity remains well below levels seen prior to the expiration of the homebuyer tax credit, and is almost 40 percent below the level recorded one year ago,” said Michael Fratantoni, MBA’s Vice President of Research and Economics. “On the other hand, refinance volume dropped last week for the first time in six weeks, but the level of applications to refinance remains close to recent highs, as historically low mortgage rates continue to draw borrowers into the market.”
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The average contract interest rate for 30-year fixed-rate mortgages increased to 4.50 percent from 4.43 percent, with points decreasing to 0.96 from 1.34 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.

Click on graph for larger image in new window.

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

As the MBA's Fratantoni noted, "purchase activity remains well below levels seen prior to the expiration of the homebuyer tax credit" and this suggests existing home sales in August, September and even October, will only be slightly higher than in July.

by Calculated Risk on 9/07/2010 10:21:00 PM

David Leonhardt writes at the NY Times Economix: Mortgage Rates and Home Prices

Interest rates are historically low right now. They will surely rise at some point. All else equal, higher rates should push home prices down.
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[see graph]
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It’s not easy to see much of a relationship.
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My best guess for why the two don’t correlate more closely is the role that psychology plays in housing markets. Prices just don’t move as quickly as economic theory suggests they should.

Nope.

I've tried to explain this several times in several different ways. Price is what you pay for something. Interest rates are related to how the item is financed. Some people pay cash for a house. Would they pay more because interest rates are low? Nope.

Imagine just one buyer gets a special interest rate. Would that lucky buyer be willing to pay more than all other buyers for the same property? Nope.

It is true that low rates make buying more attractive as compared to renting. And that can increase the demand for buying - and more demand might mean slightly higher prices. But if rates are low, a rational buyer will expect mortgages rates to rise when they sell the property, and under the theory that mortgage rates impact price, the price will then fall in the future. That makes the property less attractive, and the buyer in the low interest rate environment will not want to overpay for the house.

So the buyer needs to consider both current interest rates and future interest rates, and by the time they are done doing all the calculations, you get the graph that Leonhardt shows. And that is exactly what I'd expect - there is little relationship between house prices and mortgage rates. That doesn't surprise me at all.

Note: When I wrote about this in 2005, I used a car example. Would people pay more for a car if interests rates are low?

by Calculated Risk on 9/07/2010 06:17:00 PM

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.

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.

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.

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:

The 10-year Ireland-to-Germany bond spread has risen to 376 bps. This spread is larger than during the financial crisis in May when the spread peaked at 306 bps.

The 10-year Greece-to-Germany bond spread is now 946 bps, just below the peak level of 963 bps in May.

The 10-year Portugal-to-Germany bond spread is now 351 bps, just above the peak in May of 349 bps.