From a small northwestern observatory…

Finance and economics generally focused on real estate

Posts Tagged ‘investment banking

12th Fed District issues 3q report

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Greenfield is a global firm (albeit mostly in the U.S.), and even though we’re headquartered in Seattle, we try to focus our attention broadly rather than locally.  That said, the 12th Federal Reserve District just released First Glance 12L (3Q15) which takes an early cut at the data from the nine western states.   It’s very telling data — the “left coast” as I like to call it tends to suffer worse when times are bad and boom better when times are good.  Thus, there are some interesting facts and figures to be gleaned from this well-written report.

Naturally, the report is focused on the health of the member banks in the region, but the macro-econ factors driving that health are of much broader importance.  Nationally, unemployment stood at 5.1% at the end of the 3rd quarter.  Western states tended to be a bit worse off, with 3 states (Idaho, Utah, and Hawaii) recording lower unemployment rates and the rest showing higher numbers, ranging from Washington’s 5.2% up to Nevada’s 6.7%.  California, always the thousand pound gorilla in the room, came in at 5.9%.

However, job growth in the western states is well above the national average — 3% annually for the region versus 2% for the U.S. as a whole.  However, the west is digging out of a deeper hole — while job growth nationally hit a trough of -4.9% at the peak of the recession, it bottomed out at -6.7% in the west.  Generally, job growth in the west over the past 20 years had held steady at about one percentage point above the national trend during “boom” years.

Housing starts in the west are well below the pre-recession peaks.  As of September, 2015, the seasonally adjusted annual rate (SAAR) of housing starts stood at 161,000, with 107,000 of that in 2+ family units.  This compares with a peak of 449,000 SAAR in the 2005-2006 period, at a time when 2+ unit housing only made up 85,000 of the starts.  Arguably, the market in the west is still absorbing the huge shadow inventory built up during the boom days.

Commercial vacancy rates in the west have been drifting down for the past few years in the office, industrial, and retail sectors.   Apartments, however, seem to have plateaued around 4.3% at the end of the 3rd quarter, and are forecast to rise a bit to 4.7% a year from now.  I might posit that historically, profit-maximizing apartment vacancy rates have been found to be somewhat higher than these numbers, so apartment managers and owners may have some lee-way to continue building.

The 5 western maritime states are very export-driven, and the strength of the U.S. dollar (up about 18% against major currencies since 2014) has been rough news for those markets.   While western state exports rebounded nicely from the trough of the recession (up about 17% from 2009 to 2010), export growth has flat-lined since 2012.   Regionally, exports declined about 2.5% since last year, with positive growth reported in only four states (Arizona, Hawaii, Nevada, and Utah).  Bellweather California saw exports decline 3.6%.  Note that in Washington, my semi-home state, exports make up 21.2% of the gross state product.  (We export things like big trucks, big airplanes, software, and agricultural products.)  Hence, this is critically important stuff.

The remainder of the report focuses on the health of the regions banks.  I’ll leave that up to the reader if you care to download your own copy.  Short answer, though, is that the region has seen loan growth accelerate even while the nation as a whole has flattened.  Further, the regions banks tend to be a bit more efficient in terms of expenses and staff, both compared to the nation as a whole and compared to the “boom days” pre-recession.  Both small and large commercial borrowers generally reported tightening credit standards at the end of the 3rd quarter, which is a change from previous reports.  However, consumer borrowers (residential mortgage, credit cards, and auto loans) generally reported easier standards.  The bulk of loan growth for small banks (under $10B) came from non-farm non-residential, while for large banks the biggest growth sector was in consumer lending.  The percentage non-performing assets (the “Texas Ratio”) in the region, which peaked at 38.9% in 2009, is now down to 5.4%, although still higher than in the 2004-2007 period.  By comparison, the national peak hit in 2010 at 19%, and is now standing at 7%, also higher than pre-recession levels.


Home-ownership vacancy rates

Regular readers will recall that we’ve linked continuous decline in home ownership rates to price instability. In short, prices won’t start rising again until home ownership rates stabilize. (They’re down from about a recent peak of 69.5% to about 66%, and we believe they will continue to fall to about 64%). One MORE piece of important data just hit our desks, in the form of the Census Bureau’s 1st quarter home ownership survey.

The report is full of useful data. For one, the number of owner-occupied units in the U.S. actually fell from 1st quarter 2010 to 1st quarter 2011 (as we would expect), while rental occupancies continue to increase. Rental market supply (in essence, construction of new apartments) is keeping pace with demand, and rental vacancy is just below 10%, slightly lower than the 10% -11% range we’ve seen in the past few years, but not so low as to put inflationary pressure on rental rates. (Of course, this varies from one part of the country to another.)

Among “owner-occupied” homes, though, the vacancy rate continues to rise. See the chart below for a vivid explanation —

If this was a classroom exercise, I’d ask the students to identify the pre-recession equilibrium level, which appears to be about 1.6% to 1.8%. We can then identify the point-of-inflection signalling the impending disequilibrium in the housing market (when vacancy rates increased significantly — 2005). This inflection point, of course, signaled a great time to start shorting mortgage-backed securities, since it signaled the beginning of an increase in default rates. Of course, once can point at this and say “hindsight is 20-20”, but we know that the folks inside many of the banks, who were hawking mortgage-backed securities to their customers, were reading those very tea leaves back mid-decade, and shorting the very same securities they were promoting as safe investments.

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