Calculated Risk

AIA: "Strong Rebound for Architecture Billings Index" in May

2013-06-19T09:52:00.000-04:00

Note: This index is a leading indicator primarily for new Commercial Real Estate (CRE) investment.

From AIA: Strong Rebound for Architecture Billings Index

Following the first reversal into negative territory in ten months in April, the Architecture Billings Index has bounced back in May. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the May ABI score was 52.9, up dramatically from a mark of 48.6 in April. This score reflects an increase in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 59.1, up slightly from the reading of 58.5 the previous month.

“This rebound is a good sign for the design and construction industry and hopefully means that April’s negative dip was a blip rather than a sign of challenging times to come,” said AIA Chief Economist, Kermit Baker, PhD, Hon. AIA. “But there is a resounding sense of uncertainty in the marketplace – from clients to investors and an overall lack of confidence in the general economy – that is continuing to act as a governor on the business development engine for architecture firms.”
emphasis added

Click on graph for larger image.

This graph shows the Architecture Billings Index since 1996. The index was at 52.9 in May, up from 48.6 in April. Anything above 50 indicates expansion in demand for architects' services. This index has indicated expansion in 9 of the last 10 months.

Note: This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions.

According to the AIA, there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction. The increases in this index over the past 10 months suggest some increase in CRE investment in the second half of 2013.

MBA: Mortgage Applications Decrease, Mortgage Rates Increase

2013-06-19T08:55:00.003-04:00

From the MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey

The Refinance Index decreased 3 percent from the previous week. The seasonally adjusted Purchase Index decreased 3 percent from one week earlier.
...
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 4.17 percent, the highest rate since March 2012, from 4.15 percent, with points decreasing to 0.41 from 0.48 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. This is the sixth straight weekly increase for this rate.
...
The average contract interest rate for 15-year fixed-rate mortgages decreased to 3.30 percent from 3.32 percent, with points increasing to 0.39 from 0.38 (including the origination fee) for 80 percent LTV loans.
emphasis added

Click on graph for larger image.

The first graph shows the refinance index.

With 30 year mortgage rates above 4%, refinance activity has fallen sharply, decreasing in 5 of the last 6 weeks.

This index is down 38% over the last six weeks.

The second graph shows the MBA mortgage purchase index. The 4-week average of the purchase index has generally been trending up over the last year, and the 4-week average of the purchase index is up almost 10% from a year ago.

Wednesday: Fed Day

2013-06-18T21:35:00.001-04:00

More support for Dr. Janet Yellen to replace Fed Chairman Ben Bernanke next January. I supported Yellen in 2009, and I think she would be an excellent choice.

Wednesday economic releases:
• At 7:00 AM ET, The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

• During the day, the AIA's Architecture Billings Index for May will be released (a leading indicator for commercial real estate).

• At 2:00 PM, the FOMC statement will be released. No change to interest rates or QE purchases is expected at this meeting.

• Also at 2:00 PM, the FOMC economic projections will be released. Here is a projections preview including a table of previous projections.

• At 2:30 PM, Fed Chairman Ben Bernanke holds a press briefing following the FOMC announcement.

Lawler: Updated Table of Distressed Sales and Cash buyers for Selected Cities in May

2013-06-18T17:26:00.000-04:00

Economist Tom Lawler sent me the updated table below of short sales, foreclosures and cash buyers for several selected cities in May.

Look at the two columns in the table for Total "Distressed" Share. In almost every area that has reported distressed sales so far, the share of distressed sales is down year-over-year - and down significantly in many areas.

Also there has been a decline in foreclosure sales in all of these cities. Also there has been a shift from foreclosures to short sales. In all of these areas - except Minneapolis, and the California Bay Area - short sales now out number foreclosures.

	Short Sales Share		Foreclosure Sales Share		Total "Distressed" Share		All Cash Share
	May-13	May-12	May-13	May-12	May-13	May-12	Apr-13	Apr-12
Las Vegas	31.8%	32.6%	10.3%	34.7%	42.1%	67.3%	57.9%	54.4%
Reno	27.0%	39.0%	7.0%	22.0%	34.0%	61.0%
Phoenix	12.3%	26.6%	9.7%	16.9%	22.0%	43.4%	38.9%	46.3%
Sacramento	22.5%	30.1%	7.5%	28.1%	30.0%	58.2%	33.6%	31.5%
Minneapolis	6.8%	10.6%	20.1%	28.8%	26.9%	39.4%	18.7%	20.1%
Mid-Atlantic (MRIS)	8.2%	11.8%	7.2%	10.2%	15.5%	22.1%	16.7%	17.2%
Orlando	21.7%	27.6%	18.9%	25.0%	40.6%	52.6%	53.5%	51.6%
California (DQ)*	17.7%	23.7%	11.4%	28.5%	29.1%	52.2%
Bay Area CA (DQ)*	7.3%	21.4%	13.9%	21.2%	21.2%	42.6%	27.6%	28.3%
So. California (DQ)*	17.7%	24.3%	10.8%	26.9%	28.5%	51.2%	31.9%	32.1%
Hampton Roads					26.3%	26.3%
Northeast Florida					36.6%	42.9%
Chicago					33.0%	36.0%
Houston			9.4%	17.8%
Memphis*			21.5%	30.5%
Birmingham AL			21.0%	27.3%
*share of existing home sales, based on property records

Housing Starts: A few comments

2013-06-18T14:11:00.000-04:00

A few comments:

• Overall the housing starts report was a little disappointing with total starts at a 914 thousand rate on a seasonally adjusted annual rate basis (SAAR) in May. This was below the consensus forecast of 950 thousand SAAR.

• However starts are up significantly from the same period last year. Over the first five months of 2013, multi-family starts are up close to 40% from the same period in 2012, and single family starts are up 24%. Those are significant increases in activity. Based on permits and the June homebuilder confidence survey, I expect starts will increase further in June.

• Even with this significant year-over-year increase, housing starts are still very low. Starts averaged 1.5 million per year from 1959 through 2000, and demographics and household formation suggests starts will return to close to that level over the next few years. This suggests significantly more growth in housing starts over the next few years.

Here is an update to the graph comparing multi-family starts and completions. Since it usually takes over a year on average to complete a multi-family project, there is a lag between multi-family starts and completions. Completions are important because that is new supply added to the market, and starts are important because that is future new supply (units under construction is also important for employment).

These graphs use a 12 month rolling total for NSA starts and completions.

Click on graph for larger image.

The blue line is for multifamily starts and the red line is for multifamily completions.

The rolling 12 month total for starts (blue line) has been increasing steadily, and completions (red line) are lagging behind. It is interesting that completions have lagged so far behind starts, and this suggests completions will increase significantly later this year (completions lag starts by about 12 months).

There will be a significant increase in multi-family deliveries this year. However the level of multi-family starts over the last 12 months - almost to the level in late '90s and early 00's - suggests that future growth in starts will mostly come from single family starts.

The second graph shows single family starts and completions. It usually only takes about 6 months between starting a single family home and completion - so the lines are much closer. The blue line is for single family starts and the red line is for single family completions.

Starts are moving up and completions are following. Usually single family starts bounce back quickly after a recession, but not this time because of the large overhang of existing housing units.

Note the low level of single family starts and completions. The "wide bottom" was what I was forecasting several years ago, and now I expect several years of increasing single family starts and completions.

Key Measures show low and falling inflation in May

2013-06-18T11:53:00.000-04:00

The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.0% annualized rate) in May. The 16% trimmed-mean Consumer Price Index increased 0.1% (1.6% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics' (BLS) monthly CPI report.

Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers rose 0.1% (1.8% annualized rate) in May. The CPI less food and energy increased 0.2% (2.0% annualized rate) on a seasonally adjusted basis.

Note: The Cleveland Fed has the median CPI details for May here. Fuel oil declined at a 28% annualized rate in May.

Click on graph for larger image.

This graph shows the year-over-year change for these four key measures of inflation. On a year-over-year basis, the median CPI rose 2.1%, the trimmed-mean CPI rose 1.7%, and the CPI less food and energy rose 1.7%. Core PCE is for April and increased just over 1.0% year-over-year.

On a monthly basis, median CPI was at 2.0% annualized, trimmed-mean CPI was at 1.6% annualized, and core CPI increased 2.0% annualized. Also core PCE for April increased 0.1% annualized.

This below target level of inflation will be a key topic at the FOMC meeting today and tomorrow.

Fed: Household Debt Service Ratio near lowest level in 30+ years

2013-06-18T10:31:00.000-04:00

The Federal Reserve released the Q1 2013 Household Debt Service and Financial Obligations Ratios yesterday. I used to track this quarterly back in 2005 and 2006 to point out that households were taking on excessive financial obligations.

These ratios show the percent of disposable personal income (DPI) dedicated to debt service (DSR) and financial obligations (FOR) for households.

The household debt service ratio (DSR) is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt.

The financial obligations ratio (FOR) adds automobile lease payments, rental payments on tenant-occupied property, homeowners' insurance, and property tax payments to the debt service ratio.
...
The homeowner mortgage FOR includes payments on mortgage debt, homeowners' insurance, and property taxes, while the homeowner consumer FOR includes payments on consumer debt and automobile leases

This data has limited value in terms of absolute numbers, but is useful in looking at trends. Here is a discussion from the Fed:

The limitations of current sources of data make the calculation of the ratio especially difficult. The ideal data set for such a calculation would have the required payments on every loan held by every household in the United States. Such a data set is not available, and thus the calculated series is only a rough approximation of the current debt service ratio faced by households. Nonetheless, this rough approximation may be useful if, by using the same method and data series over time, it generates a time series that captures the important changes in household debt service payments.

Click on graph for larger image.

The graph shows the DSR for both renters and homeowners (red), and the homeowner financial obligations ratio for mortgages (blue) and consumer debt (yellow).

The overall Debt Service Ratio increased slightly in Q1, and is just above the record low set last quarter thanks to very low interest rates. The homeowner's financial obligation ratio for consumer debt also increased slightly in Q1, and is back to levels last seen in early 1995.

Even the homeowner's financial obligation ratio for mortgages (blue) is down to 1990s levels. This ratio increased rapidly during the housing bubble, and continued to increase until 2008. With falling interest rates, and less mortgage debt (mostly due to foreclosures), the mortgage ratio has declined to 1998 (and 1981) levels.

Housing Starts increase in May to 914,000 SAAR

2013-06-18T08:30:00.000-04:00

From the Census Bureau: Permits, Starts and Completions

Housing Starts:
Privately-owned housing starts in May were at a seasonally adjusted annual rate of 914,000. This is 6.8 percent above the revised April estimate of 856,000 and is 28.6 percent above the May 2012 rate of 711,000.

Single-family housing starts in May were at a rate of 599,000; this is 0.3 percent above the revised April figure of 597,000. The May rate for units in buildings with five units or more was 306,000.

Building Permits:
Privately-owned housing units authorized by building permits in May were at a seasonally adjusted annual rate of 974,000. This is 3.1 percent below the revised April rate of 1,005,000, but is 20.8 percent above the May 2012 estimate of 806,000.

Single-family authorizations in May were at a rate of 622,000; this is 1.3 percent above the revised April figure of 614,000. Authorizations of units in buildings with five units or more were at a rate of 374,000 in April.

Click on graph for larger image.

The first graph shows single and multi-family housing starts for the last several years.

Multi-family starts (red, 2+ units) increased in May following the sharp decrease in April (Multi-family is volatile month-to-month).

Single-family starts (blue) increased slightly to 599,000 SAAR in May (Note: April was revised down from 610 thousand to 597 thousand).

The second graph shows total and single unit starts since 1968.

This shows the huge collapse following the housing bubble, and that housing starts have been generally increasing after moving sideways for about two years and a half years.

This was below expectations of 950 thousand starts in May. Total starts in May were up 28.6% from May 2012; however single family starts were only up 16.3% year-over-year. I'll have more later ...

Tuesday: Housing Starts, CPI

2013-06-17T21:22:00.000-04:00

Earlier today, Robin Harding at the Financial Times released a market moving story of the Fed: Fed likely to signal tapering move is close

Ben Bernanke is likely to signal that the US Federal Reserve is close to tapering down its $85bn-a-month in asset purchases when he holds a press conference on Wednesday, but balance that by saying subsequent moves depend on what happens to the economy.
excerpt with permission

This depends on the definition of "close". I think it is very unlikely the Fed will start to taper before September, and based on my expectations of only a slow improvement in the unemployment rate and continued low inflation, I think they will wait even longer.

Tuesday economic releases:
• At 8:30 AM, Housing Starts for May. The consensus is for total housing starts to increase to 950 thousand (SAAR) in May.

• Also at 8:30 AM, the Consumer Price Index for May will be released. The consensus is for a 0.2% decrease in CPI in May and for core CPI to increase 0.2%.

FNC: House prices increased 4.6% year-over-year in April

2013-06-17T17:56:00.000-04:00

In addition to Case-Shiller, CoreLogic, FHFA and LPS, I'm also watching the FNC, Zillow and several other house price indexes.

From FNC: FNC Index: Rise in Home Prices Picks up in April

The latest FNC Residential Price Index™ (RPI) shows that U.S. home prices continue to rise in April, up 0.7% from the previous month. April’s gain marks the largest price acceleration since June 2012, caused in part by rising seasonal demand entering spring and summer.

... Based on recorded sales of non-distressed properties (existing and new homes) in the 100 largest metropolitan areas, the FNC 100-MSA composite index shows that April home prices rose much faster than in the previous months. The two narrower indices (30-MSA and 10-MSA composites) similarly recoded a nearly 1.0% increase. On a year-over-year basis, home prices were up 4.6% from a year ago. The indices have been revised downward for the prior months, resulting in more moderate annual price accelerations.

Note: This increase is partially seasonal. This year prices were up 0.7% in April (from March). Last year, in April 2012, prices were up 1.0% in April - so this is slower seasonal price appreciation.

The year-over-year change slowed in April, with the 100-MSA composite up 4.6% compared to April 2012. The FNC index turned positive on a year-over-year basis in July, 2012.

Click on graph for larger image.

This graph shows the year-over-year change for the FNC Composite 10, 20, 30 and 100 indexes. Note: The FNC indexes are hedonic price indexes using a blend of sold homes and real-time appraisals.

Even with the recent increase, the FNC composite 100 index is still off 28.6% from the peak.

Existing Home Inventory is up 14.9% year-to-date on June 17th

2013-06-17T14:10:00.001-04:00

Weekly Update: One of key questions for 2013 is Will Housing inventory bottom this year?. Since this is a very important question, I'm tracking inventory weekly in 2013.

There is a clear seasonal pattern for inventory, with the low point for inventory in late December or early January, and then peaking in mid-to-late summer.

The Realtor (NAR) data is monthly and released with a lag (the most recent data was for April). However Ben at Housing Tracker (Department of Numbers) has provided me some weekly inventory data for the last several years. This is displayed on the graph below as a percentage change from the first week of the year (to normalize the data).

In 2010 (blue), inventory increased more than the normal seasonal pattern, and finished the year up 7%. However in 2011 and 2012, there was only a small increase in inventory early in the year, followed by a sharp decline for the rest of the year.

Click on graph for larger image.

Note: the data is a little weird for early 2011 (spikes down briefly).

So far in 2013, inventory is up 14.9%, however inventory is down over the last few weeks. I expect further increases over the next few months.

Inventory is well above the peak percentage increases for 2011 and 2012 and this suggests to me that inventory is near the bottom. It now seems likely - at least by this measure - that inventory bottomed early this year (it could still happen early next year).

It is important to remember that inventory is still very low, and is down 15.8% from the same week last year according to Housing Tracker. Once inventory starts to increase (more than seasonal), I expect price increases to slow.

Redfin: "Here Comes the Inventory"

2013-06-17T12:47:00.000-04:00

The bottom for inventory is a key topic for 2013 ...

From Tim Ellis at Redfin: Here Comes the Inventory

Increasing home prices are giving more sellers sufficient equity to sell, and sellers who already had equity are being lured into the market after seeing their neighbor’s homes sell in record time and in fierce bidding wars.

More inventory begets more inventory, too. “I have several clients who are ready to take the plunge and list their homes—they’ve even decluttered and we have the listing ready to hit the MLS,” explained Redfin listing specialist Paul Stone. “The sellers are just waiting to get under contract on a home to buy, at which point we’ll pull the trigger and list their current home.”

Here’s what the inventory recovery looks like so far, along with a forecast for the rest of the year, should the trend hold:

Total active listings are still down 22% from a year ago as of May, but even that is an improvement compared to the 32% year-over-year drop we experienced in January.

New listings have turned around completely in just four months, from a 10% year-over-year decline in January to a 15% year-over-year increase in May.
...
As supply and demand are brought back into balance bidding wars will ease and price gains will moderate.

CR Notes: I've been tracking inventory very closely this year. Ellis thinks (first graph) that inventory in the areas Redfin tracks will continue to build until September or October, and only decline slightly at the end of the year. He thinks inventory will be up year-over-year towards the end of this year. (that is pretty close to my current outlook for inventory).

As more inventory comes on the market, buyer urgency will wane and price increases will slow and even decline seasonally in many areas this winter. IMO this will be another step towards a more normal housing market.

NAHB: Builder Confidence increases in June, Over 50 for first time since April 2006

2013-06-17T10:05:00.001-04:00

The National Association of Home Builders (NAHB) reported the housing market index (HMI) increased 8 points in June to 52. Any number above 50 indicates that more builders view sales conditions as good than poor.

From the NAHB: Builder Confidence Hits Major Milestone in June

Builder confidence in the market for newly-built single-family homes hit a significant milestone in June, surging eight points to a reading of 52 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) released today. Any reading over 50 indicates that more builders view sales conditions as good than poor.

“This is the first time the HMI has been above 50 since April 2006, and surpassing this important benchmark reflects the fact that builders are seeing better market conditions as demand for new homes increases,” said NAHB Chairman Rick Judson, a home builder and developer from Charlotte, N.C. “With the low inventory of existing homes, an increasing number of buyers are gravitating toward new homes.”
...
All three HMI components posted gains in June. The index gauging current sales conditions increased eight points to 56, while the index measuring expectations for future sales rose nine points to 61 – its highest level since March 2006. The index gauging traffic of prospective buyers rose seven points to 40.

The HMI three-month moving average was up in three of the four regions, with the Northeast and Midwest posting a one-point and three-point gain to 37 and 47, respectively. The South registered a four point gain to 46 while the West fell one point to 48.
emphasis added

Click on graph for larger image.

This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the June release for the HMI and the April data for starts (May housing starts will be released tomorrow). This was well above the consensus estimate of a reading of 45.

NY Fed: Empire State Manufacturing index increases in June

2013-06-17T08:38:00.001-04:00

From the NY Fed: Empire State Manufacturing Survey

The June 2013 Empire State Manufacturing Survey indicates that conditions for New York manufacturers improved modestly. The general business conditions index—the most comprehensive of the survey’s measures—rose nine points to 7.8. Nevertheless, most other indicators in the survey fell. The new orders index slipped six points to -6.7, the shipments index fell twelve points to -11.8, and the unfilled orders index fell eight points to -14.5.
...
Labor market conditions worsened, with the index for number of employees dropping to zero and the average workweek index retreating ten points to -11.3.
emphasis added

This was above the consensus forecast of a reading of 0.0.

Monday: Empire State Manufacturing, NAHB Homebuilder Confidence

2013-06-16T21:00:00.000-04:00

Another FOMC meeting preview from Jon Hilsenrath and Phil Izzo at the WSJ: Forget Fed-Speak, Look for the Latest Growth View

Weekend:
• Schedule for Week of June 16th

• FOMC Projections Preview: Disinflation Watch

• Mid-year Review: Ten Economic Questions for 2013

Monday economic releases:
• At 8:30 AM, the NY Fed Empire Manufacturing Survey for June will be released. The consensus is for a reading of 0.0, up from -1.4 in May (above zero is expansion).

• At 10:00 AM, the June NAHB homebuilder survey will be released. The consensus is for a reading of 45, up from 44 in May. This index increased sharply last year, but has moved sideways recently with some builders

Oil prices have moved up recently with WTI futures at $97.85 per barrel and Brent at $105.93 per barrel.

Mid-year Review: Ten Economic Questions for 2013

2013-06-16T17:22:00.000-04:00

At the end of last year, I posted Ten Economic Questions for 2013. I followed up with a brief post on each question. The goal was to provide an overview of what I expected in 2013 (I don't have a crystal ball, but I think it helps to outline what I think will happen - and understand why I was wrong).

By request, here is a mid-year review (a little before mid-year). I've linked to my posts from the beginning of the year, with a brief excerpt and a few comments:

10) Question #10 for 2013: Europe and the Euro

Even though I've been pessimistic on Europe (In 2011, I argued that the eurozone was heading into recession), I was less pessimistic than many others. Each of the last two years, I argued the eurozone would stay together ... My guess is the eurozone makes it through another year without losing any countries or a serious collapse. Obviously several countries are near the edge, and the key will be to return to expansion soon.

Note: unless the eurozone "implodes", I don't think Europe poses a large downside risk to the US. If there is a breakup of the euro (something I do not expect in 2013), then the impact on the US could be significant due to financial tightening.

Half way through the year, it looks like the Eurozone will stay together through 2013. Of course the news in Europe remains grim. However it is now obvious to everyone that "austerity" alone has failed, and I expect less fiscal tightening after German Chancellor Angela Merkel is reelected in a few months.

9) Question #9 for 2013: How much will Residential Investment increase?

New home sales will still be competing with distressed sales (short sales and foreclosures) in many areas in 2013 - and probably even more foreclosures in some judicial states. Also I've heard some builders might be land constrained in 2013 (not enough finished lots in the pipeline). Both of these factors could slow the growth of residential investment, but I expect another solid year of growth.

... I expect growth for new home sales and housing starts in the 20% to 25% range in 2013 compared to 2012.

We only have four months of data (starts for May will be released this week), but starts in the January through April 2013 period were up about 29% compared to the same period in 2012. New home sales are up 26% during the first four months of 2013 compared to the same period in 2012. So far so good ...

8) Question #8 for 2013: Will Housing inventory bottom in 2013?

If prices increase enough then some of the potential sellers will come off the fence, and some of these underwater homeowners will be able to sell. It might be enough for inventory to bottom in 2013.

Right now my guess is active inventory will bottom in 2013, probably in January. At the least, the rate of year-over-year inventory decline will slow sharply.

I track inventory weekly, and there is no question that the year-over-year rate of decline has slowed sharply. My mid-year guess is that inventory did bottom in January 2013 (this should be a huge focus right now, since rising inventory will slow price increases).

7) Question #7 for 2013: What will happen with house prices in 2013?

Calling the bottom for house prices in 2012 now appears correct.

[E]ven though I expect inventories to be low this year, I think we will see more inventory come on the market in 2013 than 2012, as sellers who were waiting for a better market list their homes, and as some "underwater" homeowner (those who owe more than their homes are worth) finally can sell without taking a loss.

Also I expect more foreclosure in some judicial states, and I think the price momentum in Phoenix and other "bounce back" areas will slow.

All of these factors suggest further prices increases in 2013, but at a slower rate than in 2012.

The Case-Shiller Comp 20 and National indexes both increased about 7% in 2012. We only have Q1 price data, but house prices increased about 3.5% in Q1. I expect price increases to slow, but my initial prediction for house prices this year might have been low.

6) Question #6 for 2013: What will happen with Monetary Policy and QE3?

I expect the FOMC will review their purchases at each meeting just like they used to review the Fed Funds rate. We might see some adjustments during the year, but currently I expect the Fed to purchase securities at about the same level all year.

There has been some discussion of "tapering" asset purchases later this year, but I still think the Fed will wait longer than many people expect to start tapering.

5) Question #5 for 2013: Will the inflation rate rise or fall in 2013?

I still expect inflation to be near the Fed's target. With high unemployment and low resource utilization, I don't see inflation as a threat in 2013.

Inflation has been falling and is now below the Fed's target. This is a significant issue for the Fed, and it appears my inflation forecast was a little high (at least mid-year).

4) Question #4 for 2013: What will the unemployment rate be in December 2013?

My guess is the participation rate will remain around 63.6% in 2013, and with sluggish employment growth, the unemployment rate will be in the mid-to-high 7% range in December 2013 (little changed from the current rate).

In May, the participation rate was at 63.4% (I still expect it to mostly move sideways this year), and the unemployment rate was at 7.6%. This forecast still seems about right.

3) Question #3 for 2013: How many payroll jobs will be added in 2013?

Both state and local government and construction hiring should improve in 2013. Unfortunately there are other employment categories that will be hit by the austerity (especially the increase in payroll taxes). I expect that will offset any gain from construction and local governments. So my forecast is close to the previous two years, a gain of about 150,000 to 200,000 payroll jobs per month in 2013.

Through the first five months of 2013, the economy has added an average of 189 thousand jobs per month - about as expected.

2) Question #2 for 2013: Will the U.S. economy grow in 2013?

[R]ight now it appears the drag from austerity will probably offset the pickup in the private sector - and we can expect another year of sluggish growth in 2013 probably in the 2% range again.

The economy grew at a 2.4% annualized real rate in Q1, and forecasts are for around 1.8% in Q2. About as expected so far, however there was more austerity than I expected - and I also expect some pickup later this year.

1) Question #1 for 2013: US Fiscal Policy

[T]the House will fold their losing hand [on the debt ceiling] soon. ...

Although the negotiations on the "sequester" will be tough, I suspect something will be worked out (remember the goal is to limit the amount of austerity in 2013). The issue that might blow up is the “continuing resolution", and that might mean a partial shut down of the government. This wouldn't be catastrophic (like the "debt ceiling"), but it would still cause problems for the economy and is a key downside risk.

And a final prediction: If we just stay on the current path - and the "debt ceiling" is raised, and a reasonable agreement is reached on the "sequester", and the “continuing resolution" is passed - I think the deficit will decline faster than most people expect over the next few years. Eventually the deficit will start to increase again due to rising health care costs (this needs further attention), but that isn't a short term emergency.

I wrote the post linked above just after the fiscal cliff agreement was reached. I was correct about the debt ceiling (the House folded - the debt ceiling is absurd). But unfortunately I was wrong about the sequester (bad policy).

Another point I was correct about was that the deficit is decreasing faster than most people expected - probably too fast. Fiscal policy (specifically the U.S. House) remains the key downside risk for the U.S. economy this year.

Overall 2013 is unfolding about as expected - at least so far. Longer term, the future's so bright ...

WaPo on Deficiency Judgments

2013-06-16T10:56:00.000-04:00

Historically lenders haven't pursued many previous homeowners for deficiencies after foreclosure because it wasn't worth their time. As the following article notes:

It’s unclear how many people walk away from homes when they can still afford to pay the mortgage. Likewise, there is little publicly available data on how many people pay off their deficiency judgments. A recent government audit found the recovery rate at one-fifth of 1 percent.
emphasis added

In judicial foreclosure states, the lender will frequently file for a deficiency judgment as part of the foreclosure case (they are in court anyway). Then the lender might sell the deficiency judgment to a debt collector for a pittance. Sometimes the debt collector will settle for pennies on the dollar (a nice return because they paid almost nothing) or the debt collector will force the former borrower into bankruptcy.

In non-judicial foreclosure states, the lenders rarely bothered to file for a deficiency judgment. (Tanta and I wrote extensively about mortgage deficiency judgments several years ago).

Of course everything changes if the lender thinks the borrower has assets and "strategically defaulted". In these cases the lender can recover some of their losses.

From Kimbriell Kelly at the WaPo: Lenders seek court actions against homeowners years after foreclosure

[Freddie Mac spokesman Brad German] said Freddie Mac is targeting “strategic defaulters,” which the agency defines as “someone who had the means but chose to go into default, that there were no extenuating circumstances that affected their ability to pay. If you’re choosing not to pay off your mortgage, but you’re paying other bills, we would consider that strategic default.”

In 2011, Fannie and Freddie flagged 12 percent of 298,327 properties they had foreclosed on — more than 35,000 — for deficiency judgments in an attempt to collect $2.1 billion in unpaid mortgage debt, according to an inspector general’s report released in October from the Federal Housing Finance Agency.

“Pursuing these collections against borrowers we believe have the ability to pay but who have decided not to helps us minimize our losses, which in turn helps minimize taxpayer losses,” said Malloy Evans, an attorney and Fannie Mae’s vice president for default management. “And we think it’s our responsibility to try to minimize those taxpayers’ losses as much as we can.”

There is much more in the article including a discussion of how long lenders can collect deficiency judgments (several decades in some states).

I think now would be a good time for a major overhaul of the foreclosure system. I think we could start with 1) a national system with a non-judicial option like California, 2) ban deficiency judgments on loans up to the amount of the original purchase loan (so the borrower can refinance without worrying about a deficiency judgment if they lose their home, but they will liable if they extract equity), 3) allow cram-downs in bankruptcy (this allows bankruptcy judges to reduce the amount of debt on a home in bankruptcy).

FOMC Projections Preview: Disinflation Watch

2013-06-15T20:48:00.002-04:00

The FOMC meets on Tuesday and Wednesday of the coming week. I expect no policy change following the FOMC meeting with the Fed continuing to purchase $85 billion in longer-term Treasury and agency mortgage-backed securities per month. I also expect the forward guidance thresholds will remain unchanged.

In the press conference on Wednesday, I expect Fed Chairman Ben Bernanke to argue we still need to see "substantial improvement" in the labor market, and to note the downside risks to the economy, especially from current fiscal policy. He will probably make it clear that the Fed will not raise rates for a "considerable" time after the end of QE, and it seems likely he will express some concern about the low level of inflation.

Looking at the May 1st FOMC statement, the sentence on inflation will probably be changed:

"Inflation has been running somewhat below the Committee's longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable."

This will probably be changed to something like "Measures of underlying inflation have trended lower, and the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term".

The first part of the sentence is from the November 2010 FOMC meeting; the last part of that sentence is from the FOMC's March 2009 statement. Those were key meetings for the FOMC: In 2009, the FOMC expanded QE1, and in November 2010, the FOMC announced QE2.

On the projections, it looks like GDP will be downgraded again, and inflation projections will be reduced. The projections for the unemployment rate will probably be unchanged. Note: December 2012 projections included to show the trend, TBA - To be announced.

The central range for 2012 GDP will probably be closer to the lower end of the March projections.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in Real GDP¹	2013	2014	2015
June 2013 Meeting Projections	TBA	TBA	TBA
Mar 2013 Meeting Projections	2.3 to 2.8	2.9 to 3.4	2.9 to 3.7
Dec 2012 Meeting Projections	2.3 to 3.0	3.0 to 3.5	3.0 to 3.7

¹ Projections of change in real GDP and in inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

The unemployment rate was at 7.6% in May and the June projections will probably be unchanged.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment Rate²	2013	2014	2015
June 2013 Meeting Projections	TBA	TBA	TBA
Mar 2013 Meeting Projections	7.3 to 7.5	6.7 to 7.0	6.0 to 6.5
Dec 2012 Meeting Projections	7.4 to 7.7	6.8 to 7.3	6.0 to 6.6

² Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

Projections for inflation will probably be reduced. Goldman Sachs believes the FOMC will lower the central projection for PCE inflation to 1.25% in 2013, and core PCE to 1.3%. The current concern is that inflation is below the Fed's target.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE Inflation¹	2013	2014	2015
June 2013 Meeting Projections	TBA	TBA	TBA
Mar 2013 Meeting Projections	1.3 to 1.7	1.5 to 2.0	1.7 to 2.0
Dec 2012 Meeting Projections	1.3 to 2.0	1.5 to 2.0	1.7 to 2.0

Here is core inflation:

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core Inflation¹	2013	2014	2015
June 2013 Meeting Projections	TBA	TBA	TBA
Mar 2013 Meeting Projections	1.5 to 1.6	1.7 to 2.0	1.8 to 2.0
Dec 2012 Meeting Projections	1.6 to 1.9	1.6 to 2.0	1.8 to 2.1

Conclusion: I expect no change to policy at this meeting, but a slight downgrade to the economic projections - and some concern about inflation (but probably not enough to increase the size of QE3 purchases).

Schedule for Week of June 16th

2013-06-15T12:30:00.000-04:00

The key event this week will be the FOMC statement and press conference on Wednesday. No changes in policy are expected, but Fed Chairman Ben Bernanke is expected to reiterate that rates will stay low for a long long time.

There are three key housing reports that will be released this week, housing starts on Tuesday, homebuilder confidence survey on Monday, and existing home sales on Thursday.

For manufacturing, the NY Fed (Empire State) and Philly Fed June surveys will be released this week. For prices, CPI will be released on Tuesday.

----- Monday, June 17th -----
8:30 AM: NY Fed Empire Manufacturing Survey for June. The consensus is for a reading of 0.0, up from -1.4 in May (above zero is expansion).

10:00 AM ET: The June NAHB homebuilder survey. The consensus is for a reading of 45, up from 44 in May.   This index increased sharply last year, but has moved sideways recently with some builders complaining about higher costs and lack of buildable land. Any number below 50 still indicates that more builders view sales conditions as poor than good.

----- Tuesday, June 18th -----
8:30 AM: Housing Starts for May.

Total housing starts were at 853 thousand (SAAR) in April, 16.5 percent below the revised March estimate of 1.021 million. Single family starts declined slightly to 610 thousand SAAR in April.

The consensus is for total housing starts to increase to 950 thousand (SAAR) in May.

8:30 AM: Consumer Price Index for May. The consensus is for a 0.2% decrease in CPI in May and for core CPI to increase 0.2%.

----- Wednesday, June 19th -----
7:00 AM: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

During the day: The AIA's Architecture Billings Index for May (a leading indicator for commercial real estate).

2:00 PM: FOMC Meeting Announcement.  No change to interest rates or QE purchases is expected at this meeting.

2:00 PM: FOMC Forecasts This will include the Federal Open Market Committee (FOMC) participants' projections of the appropriate target federal funds rate along with the quarterly economic projections.

2:30 PM: Fed Chairman Ben Bernanke holds a press briefing following the FOMC announcement.

----- Thursday, June 20th -----
8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for an increase to 340 thousand from 334 thousand last week.

9:00 AM: The Markit US PMI Manufacturing Index Flash for June. The index was at 52.3 in May.

10:00 AM: Existing Home Sales for April from the National Association of Realtors (NAR).

The consensus is for sales of 5.00 million on seasonally adjusted annual rate (SAAR) basis. Sales in April were at a 4.97 million SAAR.   Economist Tom Lawler is estimating the NAR will report a May sales rate of 5.2 million.

A key will be inventory and months-of-supply.

10:00 AM: the Philly Fed manufacturing survey for June. The consensus is for a reading of -0.5, up from -5.2 last month (above zero indicates expansion).

----- Friday, June 21st -----
10:00 AM: Regional and State Employment and Unemployment (Monthly) for May 2013

Unofficial Problem Bank list declines to 757 Institutions

2013-06-15T08:35:00.001-04:00

This is an unofficial list of Problem Banks compiled only from public sources.

Here is the unofficial problem bank list (update: Link fixed - was linking to old list) for June 14, 2013.

Changes and comments from surferdude808:

As anticipated, it was quiet week for changes to the Unofficial Problem Bank List as the OCC will wait until next Friday to provide its enforcement actions through mid-May 2013. There were three removals, which leave the list holding 757 institutions with assets of $274.8 billion. Last year, the list held 919 institutions with assets of $354.0 billion.

The OCC terminated actions against Communityone Bank, National Association, Asheboro, NC ($1.4 billion Ticker: FNBN) and Metrobank, National Association, Houston, TX ($1.1 billion Ticker: MCBI). The other removal was an unassisted merger of The First National Bank of Grant Park, Grant Park, IL ($110 million) with Midland States Bank, Clayton, IL.

We continue to monitor the operating status of the banking subsidiaries of Capitol Bancorp, LTD, but there is nothing new to report since the closing of the North Las Vegas unit last week.

Goldman FOMC Preview: "Calming the Market"

2013-06-14T22:21:00.000-04:00

A short excerpt from a research note by Jan Hatzius and Sven Jari Stehn at Goldman Sachs: FOMC Preview: Calming the Market

The economic data have improved a bit since the last FOMC meeting ... But the improvement has been far from “substantial.” Growth remains in the sluggish 1-3% range ... and jobs gains remain moderate.

Inflation, meanwhile, has continued to fall further below the FOMC’s 2% PCE target. ...

Financial conditions have tightened since the last FOMC meeting, as bond yields have risen, mortgage and credit spreads have widened ... The tightening in financial conditions appears in large part driven by worries that Fed officials will soon tighten policy.

... While we do not expect the committee to deviate much from the existing message, we anticipate that Fed officials will, on the margin, try to calm markets at the June 18-19 FOMC meeting.

We therefore expect the FOMC statement to show only modest changes, mostly focused on acknowledging the lower inflation numbers. Moreover, the committee is likely to downgrade its 2013 growth and inflation numbers moderately. While Chairman Bernanke is likely to reiterate in the post-statement press conference that the QE tapering decision is data dependent, we expect him to dissuade markets from frontloading too much of the entire monetary tightening process—not just the end of QE but also the normalization of the funds rate—as soon as the committee takes the first step in that direction.

The FOMC meeting is on Tuesday and Wednesday, with the FOMC statement and projections scheduled for release at 2 PM ET on Wednesday. Fed Chairman Ben Bernanke will hold a press conference at 2:30 PM. I'll post a preview on Sunday, but I don't expect any changes to policy.

Lawler: Early Look at Existing Home Sales in May

2013-06-14T15:51:00.001-04:00

From housing economist Tom Lawler:

Based on local realtor/MLS reports I’ve seen so far across the country, I estimate that existing home sales as measured by the National Association of Realtors ran at a seasonally adjusted annual rate of about 5.2 million in May, up 4.6% from April’s pace and up 13.3% from last May’s pace.

On the inventory front, data from inventory trackers might suggest that the inventory of existing homes in May increased by 3 1/2 to 4%. As I’ve noted before, however, the NAR’s inventory estimates don’t always track “listings” month-to-month, with the NAR’s inventory estimate for April always showing an “out-sized” gain, and May showing a smaller increase/larger decline, relative to “listings trackers.” Based on limited historical data, I’d estimate that the NAR’s inventory estimate for May will be up 1.9% from April, which would result in a year-over-year decline of 10.9%.

CR Note: The NAR is scheduled to report May existing home sales next Thursday, June 20th, and the consensus is for sales of 5.0 million.

Based on Tom's estimates, this would put inventory at around 2.2 million for May, and months-of-supply around 5.1. This would still be a very low level of inventory - probably the lowest for May since 2001 or so - but this would be the smallest year-over-year decline in inventory since 2011 (when inventory started to decline sharply).

Housing bubble: The "Wealth" is Gone, but the Debt Remains

2013-06-14T14:00:00.000-04:00

From Floyd Norris at the NY Times: Despite Recovery, Younger Households Are Slower to Make Gains

THE total wealth of American households has recovered from the financial crisis and Great Recession, according to the Federal Reserve Board. But ... many Americans, particularly younger adults who took on heavy debt to acquire homes before the housing bubble collapsed, are lagging.
...
During the housing boom, said William R. Emmons, the chief economist of the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis, “exactly the people you would think need to act conservatively were doing the opposite.” Homeownership rates, and mortgage debt levels, rose for younger households, as well as for less educated and minority ones. Those groups suffered more during the crisis, he said, and have been slower to recover.

Mr. Emmons compiled average wealth figures for different groups from the triennial surveys ... older households are down just 3 percent on average, while those headed by middle-age people are down about 10 percent. But the decline is nearly 40 percent for the younger group.

During the housing boom, households ended up with more of their wealth in real estate than before, and mortgage debt rose to record levels relative to the size of the economy. The proportion of wealth in homes is now back to close to the level of the 1990s, but the debt levels remain high by historical standards.
emphasis added

Click on graph for larger image.

This graph based on the Fed's Flow of Funds report shows household real estate assets and mortgage debt as a percent of GDP.

As Norris noted, the bubble wealth is gone, but the debt remains (still high on a historical basis). This was especially hard on younger households since they bought during the housing bubble.

Preliminary June Consumer Sentiment decreases to 82.7

2013-06-14T09:55:00.000-04:00

Click on graph for larger image.

The preliminary Reuters / University of Michigan consumer sentiment index for June decreased to 82.7 from the May reading of 84.5.

This was below the consensus forecast of 84.5 and reverses some of the large increase last month. Sentiment has generally been improving following the recession - with plenty of ups and downs - and one big spike down when Congress threatened to "not pay the bills" in 2011.

Fed: Industrial Production unchanged in May

2013-06-14T09:15:00.000-04:00

From the Fed: Industrial production and Capacity Utilization

Industrial production was unchanged in May after having decreased 0.4 percent in April. In May, manufacturing production rose 0.1 percent after falling in each of the previous two months, and the output at mines increased 0.7 percent. The gains in manufacturing and mining were offset by a decrease of 1.8 percent in the output of utilities. At 98.7 percent of its 2007 average, total industrial production in May was 1.6 percent above its year-earlier level. The rate of capacity utilization for total industry edged down 0.1 percentage point to 77.6 percent, a rate 0.2 percentage point below its level of a year earlier and 2.6 percentage points below its long-run (1972–2012) average.
emphasis added

Click on graph for larger image.

This graph shows Capacity Utilization. This series is up 10.7 percentage points from the record low set in June 2009 (the series starts in 1967).

Capacity utilization at 77.6% is still 2.6 percentage points below its average from 1972 to 2010 and below the pre-recession level of 80.8% in December 2007.

Note: y-axis doesn't start at zero to better show the change.

The second graph shows industrial production since 1967.

Industrial production was essentially unchanged in May at 98.7 . This is 17.8% above the recession low, but still 2.1% below the pre-recession peak.

The monthly change for both Industrial Production and Capacity Utilization were below expectations. The consensus was for a 0.2% increase in Industrial Production in April, and for Capacity Utilization to increases to 77.9%. Most of the weakness in industrial production was due to a sharp decline in the output of utilities.