by Calculated Risk on 12/08/2010 08:54:00 PM

According to Reis, the office vacancy rate hit a 17 year high in Q3, but the rate of increase has slowed.

Today CB Richard Ellis released a forecast for the office market: U.S. Office Real Estate Vacancy Rate expected to decline modestly in 2011

CBRE-EA forecasts that the office vacancy rate will peak in 2Q2011 at 16.8%, up from the 16.6% level at 3Q2010. ... The U.S. office market vacancy rate is expected to slowly decline over the next two years, falling to 16.4% by the end of 2011 and to 15.3% by the end of 2012 ...

“The recent increase in leasing is a step in the right direction but activity is uneven across markets and generally tenant footprints are not increasing,” said Arthur Jones, Senior Economist, CBRE-EA. “Since office space is the "economy in a box", continued job growth is key to the market‟s ongoing recovery.”

... the recovery will take longer to gain traction in depressed housing markets such as California and Arizona ...

“While vacancy is starting to improve, the high levels indicate that the rent recovery will be measured in terms of years,” said Mr. Jones. “The process will take time and the outlook over the next year will remain subdued with little upward movement in rent.”

This forecast sounds about right. It appears leasing has started to increase a little, and investment in office structures is at a record low as percent of GDP - so the office vacancy rate will probably peak soon.

However, with the vacancy rate near 17%, it will be some time before there is an increase in new office investment (and the associated construction jobs).

by Calculated Risk on 12/08/2010 04:50:00 PM

Update: apparently this is settled and the trust fund will receive credits from the general fund - so there will no impact to Social Security.

There is no text for the plan available yet, and I've been trying to understand the accounting for the payroll tax cut and maybe this has already been settled ...

There are two obvious alternatives: 1) Social Security will receive something close to $120 billion less than currently estimated in 2011, and this will negatively impact the long term Social Security projections, and 2) the full amount of the payroll tax will still be credited to Social Security (as if there was no cut), and the 2% cut will come directly from the General Fund in 2011 - so this tax cut will have zero impact on long run Social Security projections.

Some people will say it doesn't matter - debt is debt - fine, if it doesn't matter, do it the 2nd way (debit the General Fund). I think it will matter for future debates.

by Calculated Risk on 12/08/2010 02:15:00 PM

Update: Graph is from CoStar. I think it ends in October (but it appears cut-off).

This is a new repeat sales index for commercial real estate. Previously I've only been using the Moodys/REAL Commercial Property Price Index (CPPI) for commercial real estate.

From CoStar: CoStar Commercial Repeat-Sale Indices

• CoStar’s National All Property Type Index declined 3.88% during October, giving back its positive 3.07% gain in September.

• Reversing two months of increasing prices, all three of CoStar’s “headline” Commercial Repeat-Sale Indices decreased in October, continuing the recent see-saw performance of commercial real estate pricing.

• CoStar’s National All Property Type Index, representing all commercial properties and the broadest industry measure of commercial real estate transaction pricing, slipped to its lowest point since the index peaked in February of 2008. While still decreasing, the rate decline has begun to slow considerably. Since June of 2009 the rate decline has been reduced by half.

• The high volatility apparent in the market on a monthly basis is indicative of two prominent trends. First, monthly swings in pricing, sales volumes and average transaction size are common in markets experiencing a turn. Second, it reflects the tension in a market characterized by the majority of sales occurring at two ends of the spectrum -- distress sales at the bottom end of prices, and keen investor appetite, especially among REITs, for higher quality properties in core markets at the top end of the market. We expect to begin to see the extremes in range of prices replaced with more modest and less volatile monthly price trends when the proportion of distress sales begins to slowly reduce.
emphasis added

Click on graph for larger image in new window.

This graph from CoStar shows the indexes for investment grade, general commercial and a composite index. All three indexes declined in October.

It is important to remember that there are very few CRE transactions (compared to residential), and that there is a high percentage of distressed sales, so prices are very volatile.

by Calculated Risk on 12/08/2010 11:40:00 AM

Earlier the MBA reported on the decrease in refinance activity:

The Refinance Index decreased 1.4 percent from the previous week. This is the fourth weekly decrease for the Refinance Index which reached its lowest level since June 2010.

Click on graph for larger image in graph gallery.

This graph shows the MBA's refinance index (monthly average) and the the 30 year fixed rate mortgage interest rate from the Freddie Mac Primary Mortgage Market Survey®.

December mortgage rates are estimated at 4.75% (the rates quoted by several sources yesterday).

Although mortgage rates haven't risen very far - and are still below 5% - it takes lower and lower rates to get people to refi (at least lower than recent purchase rates).

With 30 year mortgage rates now about 0.5% above the lows in October, this is the end of the recent surge in refinance activity - unless rates drop sharply again.

by Calculated Risk on 12/08/2010 08:01:00 AM

The MBA reports: Mortgage Applications Decrease in Latest MBA Weekly Survey

The Refinance Index decreased 1.4 percent from the previous week. This is the fourth weekly decrease for the Refinance Index which reached its lowest level since June 2010. The seasonally adjusted Purchase Index increased 1.8 percent from one week earlier. This is the third weekly increase for the Purchase Index which reached its highest level since early May 2010.
...
The average contract interest rate for 30-year fixed-rate mortgages increased to 4.66 percent from 4.56 percent, with points decreasing to 0.95 from 0.96 (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.

A few points:
• Mortgage rates were up even more yesterday.

• Refinance activity is falling quickly as mortgage rates rise.

• However purchase activity is picking up a little, possibly because some buyers are accelerating purchases because they are afraid of future rate increases.

Even with the increase in applications (seasonally adjusted), the four-week moving average of the purchase index is about 17% below the levels of April 2010 and suggests weak existing home sales through the end of the year and into January.

by Calculated Risk on 12/07/2010 11:50:00 PM

From David Leonhardt at the NY Times: For Obama, Tax Deal Is a Back-Door Stimulus Plan

Mr. Obama effectively traded tax cuts for the affluent, which Republicans were demanding, for a second stimulus bill that seemed improbable a few weeks ago. Mr. Obama yielded to Republicans on extending the high-end Bush tax cuts and on cutting the estate tax below its scheduled level. In exchange, Republicans agreed to extend unemployment benefits, cut payroll taxes and business taxes, and extend a grab bag of tax credits for college tuition and other items.

As a stimulus package, this is very poorly designed. It will help a little ... but at a very high cost.