Calculated Risk

Update: The Two Bottoms for Housing

2013-05-24T13:13:00.002-04:00

By request, I've updated the graphs in this post with the most recent data. Last year when I wrote The Housing Bottom is Here and Housing: The Two Bottoms, I pointed out there are usually two bottoms for housing: the first for new home sales, housing starts and residential investment, and the second bottom is for house prices.

For the bottom in activity, I presented a graph of Single family housing starts, New Home Sales, and Residential Investment (RI) as a percent of GDP.

When I posted that graph, the bottom wasn't obvious to everyone. Now it is, and here is another update to that graph.

Click on graph for larger image.

The arrows point to some of the earlier peaks and troughs for these three measures.

The purpose of this graph is to show that these three indicators generally reach peaks and troughs together. Note that Residential Investment is quarterly and single-family starts and new home sales are monthly.

For the recent housing bust, the bottom was spread over a few years from 2009 into 2011. This was a long flat bottom - something a number of us predicted given the overhang of existing vacant housing units.

We could use any of these three measures to determine the first bottom, and then use the other two to confirm the bottom. These measure are very important and are probably the best leading indicators for the economy. But this says nothing about house prices.

The second graph compares RI as a percent of GDP with the real (adjusted for inflation) CoreLogic house price index through February.

Although the CoreLogic data only goes back to 1976, look at what happened following the early '90s housing bust. RI as a percent of GDP bottomed in Q1 1991, but real house prices didn't bottom until Q4 1996 (real prices were mostly flat for several years). Something similar happened in the early 1980s - first activity bottomed, and then real prices - although the two bottoms were closer in the '80s.

Now it appears activity bottomed in 2009 through 2011 (depending on the measure) and real house prices bottomed in early 2012.

Merrill Lynch on Labor Force Participation Rate

2013-05-24T10:29:00.001-04:00

Last week I summarized some recent research on the labor force participation rate. The following piece from Michelle Meyer at Merrill Lynch argues the LFPR will likely move sideways over the next few years. Changes in the participation rate have important implications for the number of jobs needed to lower the unemployment rate.

An excerpt from Michelle Meyer's piece:

The future trajectory of the labor force participation rate (LFPR) is very important in gauging the trend in the unemployment rate and risks to wage inflation. In order to forecast the labor force participation rate, we must understand the drivers behind its recent sharp movements – to what extent is a long-term trend related to demographics (aging population) versus secular or cyclical dynamics?

We can isolate the effect of demographics on the LFPR by looking at the participation rates by age cohort. The aggregate LFPR is equal to the summation of each individual age cohort's LFPR weighted by its share of the population. ... This suggests that half of the 2.7pp decline in the LFPR since the onset of the recession can be explained simply from the aging population. In other words, holding all else equal – meaning no business cycle dynamics – the LFPR would be at 64.6% today compared to the actual rate of 63.3%. The remaining 1.4pp drop is due to some combination of secular and short-term cyclical factors.

The two primary secular trends are the decline in the LFPR among the youth population and the rise among 55+. The LFPR for 16 to 19 year olds plunged to 34.3% last year from 52% in 2000. While this may have been accelerated by the past two recessions, we believe this is a permanent trend. On the other end, the LFPR of the older population has increased, likely reflecting higher life expectancy, less confidence in social benefit programs and loss of wealth from the Great Recession.

... we still believe that there are some cyclical components. One way to gauge the cyclicality of the LFPR is to observe state-level variation in the relationship between the LFPR and the health of the economy. Based on work from a recent San Francisco Fed paper, we compare the percentage decline in state payrolls to the decline in the LFPR during the recession, both weighted by the relative size of its labor force. We find a positive relationship where larger declines in employment are associated with bigger drops in the LFPR. The paper does the same exercise for prior recessions and finds a positive relationship existed in each, with the exception of the 2000 cycle.

If the relationship holds on the downside, do we also observe it during the recovery? There is little evidence of such correlation in this recovery, but it does exist for prior cycles. In prior cycles, the positive correlation did not become apparent until the economy had exceeded the previous employment peak by a significant amount. This suggests that the cyclical pressure in the LFPR may not be observed until 2015, at the earliest.

We can simulate a future path for the LFPR based on our assessment of the drivers of the downturn in the LFPR. The first step is to account for the continued aging of the population using the Census Bureau's projections by age cohort. If we keep the LFPR by age group constant at 2007 levels and only allow for demographic adjustments, we find that the LFPR will fall by another 3.3pp by 2025 and then slip to 59.2% in 2050. ...

We also assume that the secular trends exhibited during the last decade persist, but at a slower pace, implying a modest downturn in the LFPR among the youth and an upward trajectory for the 55+ age group. ... Based on these rough assumptions, we forecast the LFPR will slip slightly this year, but with a stronger recovery under way next year, the LFPR should start to level off some and potentially increase beginning in 2015 (Chart 4).

The cyclical dynamics, in our view, are not strong enough to generate a pop higher in the LFPR given the downward pull from demographics. But at a minimum, we expect these dynamics can counter the downside pressure and allow the LFPR to move sideways once the recovery builds momentum.

Durable Goods Orders increased 3.3% in April

2013-05-24T09:06:00.003-04:00

From the Department of Commerce: Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders April 2013

New orders for manufactured durable goods in April increased $7.2 billion or 3.3 percent to $222.6 billion, the U.S. Census Bureau announced today. This increase, up two of the last three months, followed a 5.9 percent March decrease. Excluding transportation, new orders increased 1.3 percent. Excluding defense, new orders increased 2.1 percent.

This was above expectations of a 1.1% increase. This report is difficult to predict and very noisy month-to-month.

Friday: Durable Goods (and a comment on housing driving the recovery)

2013-05-23T20:32:00.000-04:00

Several people have asked me about this article at CNBC by Jeff Cox: Why Housing Won't Drive the Recovery

Despite data points that in some cases are at multiyear highs, Robert Shiller, Karl Case and David Blitzer believe there are multiple headwinds that will keep a lid on housing gains.

Among the obstacles are a low level of new housing starts, an unexpectedly slow migration of so-called shadow inventory onto the market, and continued difficulty for buyers to secure financing.

"You've got a lot of breathless commentary in the media," said Shiller, a Yale University economist. "All this talk that we're in this great recovery—we probably are in the short run, the longer run doesn't look so terrific to me."

First, housing (technically residential investment) will be a key driver for the economy. Period.

It is important to understand that "residential investment" is mostly new homes and home improvement. For existing home sales, only the broker's commission is included in residential investment (nothing is added to the housing stock). Those looking at the level of existing home sales are looking at the wrong number, as are those focused only on house prices.

Look at "headwinds" that are mentioned in the article:
1) "a low level of new housing starts". That is a headwind? To me, the low level of starts means there is more upside based on demographics. The homeownership rate peaks for those in the 55 to 75 age group, so the boomers will not negatively impact homeownership for a decade or more.

2) "an unexpectedly slow migration of so-called shadow inventory onto the market". Do they expect the pace of foreclosures to increase? I don't. The process is very long in most judicial states, and I don't expect another wave of foreclosures hitting the market - but I do think we will see distressed sales for years.

3) "continued difficulty for buyers to secure financing". OK, but this has been a headwind for the last couple of years. Looking forward, I expect some loosening in lending standards. So this is really a potential tailwind.

Nothing in this article changes my view.

Friday economic release:
• At 8:30 AM ET, Durable Goods Orders for April from the Census Bureau. The consensus is for a 1.1% increase in durable goods orders.

Note: The bond market will close early Friday at 2PM ET. The stock market will close at the normal time. All markets are closed on Monday in observance of Memorial Day.

The Calculated Risk blog is always open!

Freddie Mac: "Mortgage Rates Continue Upward Trend"

2013-05-23T15:33:00.002-04:00

From Freddie Mac today: Mortgage Rates Continue Upward Trend

Freddie Mac (OTCQB: FMCC) today released the results of its Primary Mortgage Market Survey(R) (PMMS®), showing fixed mortgage rates trending higher for the third consecutive week and putting pressure on refinance momentum. ...

30-year fixed-rate mortgage (FRM) averaged 3.59 percent with an average 0.7 point for the week ending May 23, 2013, up from last week when it averaged 3.51 percent. Last year at this time, the 30-year FRM averaged 3.78 percent.

15-year FRM this week averaged 2.77 percent with an average 0.7 point, up from last week when it averaged 2.69 percent. A year ago at this time, the 15-year FRM averaged 3.04 percent.

Click on graph for larger image.

This graph shows the the 30 year and 15 year fixed rate mortgage interest rates from the Freddie Mac Primary Mortgage Market Survey®. Not much of an increase recently ... but it will slow refinance activity.

The Freddie Mac survey started in 1971 and 30 year mortgage rates are still near the record low set last November.

A few comments on New Home Sales

2013-05-23T12:47:00.000-04:00

Obviously the new home sales report this morning was solid with sales above expectations and significant upward revisions to prior months. I try not to react too much to the month to month ups and downs; the key points right now are that sales are increasing and will probably continue to increase for some time.

Now that we have four months of data for 2013, one way to look at the growth rate is to use the "not seasonally adjusted" (NSA) year-to-date data.

According to the Census Bureau, there were 153 thousand new homes sold in 2013 through April, up about 26.4% from the 121 thousand sold during the same period in 2012. That is a very solid increase in sales, and this was the highest sales for these months since 2008.

Note: For 2013, estimates are sales will increase to around 450 to 460 thousand, or an increase of around 22% to 25% on an annual basis from the 369 thousand in 2012.

Although there has been a large increase in the sales rate, sales are just above the lows for previous recessions. This suggests significant upside over the next few years. Based on estimates of household formation and demographics, I expect sales to increase to 750 to 800 thousand over the next several years - substantially higher than the current sales rate.

And an important point worth repeating: Housing is historically the best leading indicator for the economy, and this is one of the reasons I think The future's so bright, I gotta wear shades.

And here is another update to the "distressing gap" graph that I first started posting over four years ago to show the emerging gap caused by distressed sales. Now I'm looking for the gap to start to close over the next few years.

Click on graph for larger image.

The "distressing gap" graph shows existing home sales (left axis) and new home sales (right axis) through April 2013. This graph starts in 1994, but the relationship has been fairly steady back to the '60s.

Following the housing bubble and bust, the "distressing gap" appeared mostly because of distressed sales. The flood of distressed sales kept existing home sales elevated, and depressed new home sales since builders weren't able to compete with the low prices of all the foreclosed properties.

I don't expect much of an increase in existing home sales (distressed sales will slowly decline and be offset by more conventional sales). But I do expect this gap to continue to close - mostly from an increase in new home sales.

Another way to look at this is a ratio of existing to new home sales.

This ratio was fairly stable from 1994 through 2006, and then the flood of distressed sales kept the number of existing home sales elevated and depressed new home sales. (Note: This ratio was fairly stable back to the early '70s, but I only have annual data for the earlier years).

In general the ratio has been trending down, and I expect this ratio to trend down over the next several years as the number of distressed sales declines and new home sales increase.

Note: Existing home sales are counted when transactions are closed, and new home sales are counted when contracts are signed. So the timing of sales is different.

Kansas City Fed: Regional Manufacturing expanded in May

2013-05-23T11:47:00.002-04:00

From the Kansas City Fed: Tenth District Manufacturing Survey Improved Somewhat

The Federal Reserve Bank of Kansas City released the May Manufacturing Survey today. According to Chad Wilkerson, vice president and economist at the Federal Reserve Bank of Kansas City, the survey revealed that Tenth District manufacturing activity improved somewhat, rising above zero for the first time in seven months, and producers’ expectations for future activity also increased.

“It was good to finally see a positive number after seven months of modest declines, and for optimism about future activity to return after dropping last month,” said Wilkerson. “Still, activity remains at only about year-ago levels and firms are having difficulty passing cost increases through.”

The month-over-month composite index was 2 in May, up from -5 in both April and March. ... Other month-over-month indexes were mixed. The production index edged up from 1 to 5, and the shipments, new orders, and new orders for export indexes also rose. In contrast, the employment index fell from -3 to -7, while the order backlog index was unchanged.

The last regional surveys for May will be released next Tuesday (Dallas and Richmond), and the ISM index for May will be released on Monday, June 1st. Based on the regional surveys released so far, and the Markit Flash PMI released this morning, I expect a fairly weak reading for the ISM index (perhaps at or below 50).

New Home Sales at 454,000 SAAR in April

2013-05-23T10:00:00.000-04:00

The Census Bureau reports New Home Sales in April were at a seasonally adjusted annual rate (SAAR) of 454 thousand. This was up from 444 thousand SAAR in March (March sales were revised up from 417 thousand).

January sales were revised up from 445 thousand to 458 thousand, and February sales were revised up from 411 thousand to 429 thousand. Very strong upward revisions.

The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate.

"Sales of new single-family houses in April 2013 were at a seasonally adjusted annual rate of 454,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 2.3 percent above the revised March rate of 444,000 and is 29.0 percent above the April 2012 estimate of 352,000."

Click on graph for larger image in graph gallery.

The second graph shows New Home Months of Supply.

The months of supply was unchanged in April at 4.1 months.

The all time record was 12.1 months of supply in January 2009.

This is now in the normal range (less than 6 months supply is normal).

"The seasonally adjusted estimate of new houses for sale at the end of April was 156,000. This represents a supply of 4.1 months at the current sales rate."

On inventory, according to the Census Bureau:

"A house is considered for sale when a permit to build has been issued in permit-issuing places or work has begun on the footings or foundation in nonpermit areas and a sales contract has not been signed nor a deposit accepted."

Starting in 1973 the Census Bureau broke this down into three categories: Not Started, Under Construction, and Completed.

This graph shows the three categories of inventory starting in 1973.

The inventory of completed homes for sale is at a record low. The combined total of completed and under construction is also just above the record low.

The last graph shows sales NSA (monthly sales, not seasonally adjusted annual rate).

In April 2013 (red column), 45 thousand new homes were sold (NSA). Last year 34 thousand homes were sold in April. The high for April was 116 thousand in 2005, and the low for April was 30 thousand in 2011.

This was well above expectations of 425,000 sales in April, and a solid report, especially with all the upward revision to previous months. I'll have more soon ...

Weekly Initial Unemployment Claims decline to 340,000

2013-05-23T08:51:00.000-04:00

The DOL reports:

In the week ending May 18, the advance figure for seasonally adjusted initial claims was 340,000, a decrease of 23,000 from the previous week's revised figure of 363,000. The 4-week moving average was 339,500, a decrease of 500 from the previous week's revised average of 340,000.

The previous week was revised up from 360,000.

The following graph shows the 4-week moving average of weekly claims since January 2000.

Click on graph for larger image.

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 339,500.

Claims were slightly below the 345,000 consensus forecast.

Thursday: New Home Sales, Weekly Unemployment Claims

2013-05-22T20:50:00.000-04:00

Most of the coverage of the FOMC minutes today focused on this sentence:

"A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth; however, views differed about what evidence would be necessary and the likelihood of that outcome."
emphasis added

Three words: Will Not Happen. Not in June. Probably not this year (although tapering could start late this year).

The real Fed story today was that Fed Chairman Ben Bernanke scolded Congress. In his speech he said:

"Notably, over the past four years, state and local governments have cut civilian government employment by roughly 700,000 jobs, and total government employment has fallen by more than 800,000 jobs over the same period. For comparison, over the four years following the trough of the 2001 recession, total government employment rose by more than 500,000 jobs.

Most recently, the strengthening economy has improved the budgetary outlooks of most state and local governments, leading them to reduce their pace of fiscal tightening. At the same time, though, fiscal policy at the federal level has become significantly more restrictive. In particular, the expiration of the payroll tax cut, the enactment of tax increases, the effects of the budget caps on discretionary spending, the onset of the sequestration, and the declines in defense spending for overseas military operations are expected, collectively, to exert a substantial drag on the economy this year."

And in the Q&A, Bernanke added:

“I fully realize the importance of budgetary responsibility, but I would argue that it’s not responsible to focus all of the restraint on the very near term and do nothing about the long term, which is where most of the problem exists. I do think that we would all be better off, with no loss to fiscal sustainability or market confidence, if we had somewhat less restraint in the very near term – this year and next year, say – and more aggressive action to address these very real long-term issues, which threaten within a decade or so to begin to put our fiscal budget on an unsustainable path.”

Current policy is "not responsible". Unfortunately most members of Congress weren't even aware that Bernanke was giving them a failing grade! Most of the media reports ignored the reprimand too. Even the FOMC statement mentioned fiscal restraint several times. Oh well ...

Thursday economic releases:
• At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for claims to decrease to 345 thousand from 360 thousand last week.

• At 9:00 AM, FHFA House Price Index for March 2013. This was original a GSE only repeat sales, however there is also an expanded index that deserves more attention. The consensus is for a 0.9% increase.

• Also at 9:00 AM, The Markit US PMI Manufacturing Index Flash for May. The consensus is for a decrease to 50.8 from 52.0 in April.

• At 10:00 AM, New Home Sales for April from the Census Bureau. The consensus is for an increase in sales to 425 thousand Seasonally Adjusted Annual Rate (SAAR) in April from 417 thousand in March.

• At 11:00 AM, Kansas City Fed regional Manufacturing Survey for May. The consensus is for a reading of minus 2, up from minus 5 in April (below zero is contraction).

Existing Home Sales: A few comments

2013-05-22T16:52:00.000-04:00

The most important number in the existing home sales report was inventory, and the NAR reported that inventory increased 11.9% in April from March, and is only down 13.6% from April 2012. This fits with the weekly data I've been posting.

This is the lowest level of inventory for the month of April since 2001, but this is also the smallest year-over-year decline since July 2011. The key points are: 1) inventory is very low, but 2) the inventory decline will probably end soon. With the low level of inventory, there is still upward pressure on prices - but as inventory starts to increase, buyer urgency will wane, and price increases will slow.

Important: The NAR reports active listings, and although there is some variability across the country in what is considered active, most "contingent short sales" are not included. "Contingent short sales" are strange listings since the listings were frequently NEVER on the market (they were listed as contingent), and they hang around for a long time - they are probably more closely related to shadow inventory than active inventory. However when we compare inventory to 2005, we need to remember there were no "short sale contingent" listings in 2005. In the areas I track, the number of "short sale contingent" listings is also down sharply year-over-year.

Another key point: The NAR reported total sales were up 9.7% from April 2012, but conventional sales are probably up close to 25% from April 2012, and distressed sales down. The NAR reported (from a survey):

Distressed homes – foreclosures and short sales – accounted for 18 percent of April sales, down from 21 percent in March and 28 percent in April 2012.

Although this survey isn't perfect, if total sales were up 9.7% from April 2012, and distressed sales declined from 28% of total sales to 18%, this suggests conventional sales were up sharply year-over-year - a good sign. However some of this increase is investor buying; the NAR is reporting:

All-cash sales were at 32 percent of transactions in April, up from 30 percent in March; they were 29 percent in April 2012. Individual investors, who account for most cash sales, purchased 19 percent of homes in April, unchanged from March; they were 20 percent in April 2012.

The following graph shows existing home sales Not Seasonally Adjusted (NSA).

Click on graph for larger image.

Sales NSA in April (red column) are above the sales for for 2008 through 2012, and close to the level in 2007. Sales are well below the bubble years of 2005 and 2006.

The bottom line is this was a solid report. Conventional sales have increased sharply, although some of this is investor buying. And inventory is low, but the year-over-year decline in inventory is decreasing.

Earlier:
• Existing Home Sales in April: 4.97 million SAAR, 5.2 months of supply

FOMC Minutes: Exit Strategy Discussion

2013-05-22T14:00:00.000-04:00

Note: I'll have more on existing home sales and Bernanke's testimony later today.

From the Fed: Minutes of the Federal Open Market Committee, April 30-May 1, 2013. A few excerpts on the exit strategy:

After the policy vote, participants began a review of the exit strategy principles that were published in the minutes of the Committee's June 2011 meeting. Those principles, which the Committee issued to clarify how it intended to normalize the stance and conduct of monetary policy when doing so eventually became appropriate, included broad principles along with some details about the timing and sequence of specific steps the Committee expected to take. The participants' discussion touched on various aspects of the exit strategy principles and policy normalization more generally, including the size and composition of the SOMA portfolio in the longer run, the use of a range of reserve-draining tools, the approach to sales of securities, the eventual framework for policy implementation, and the relationship between the principles and the economic thresholds in the Committee's forward guidance on the federal funds rate. The broad principles adopted almost two years ago appeared generally still valid, but developments since then--including the change in the size and composition of SOMA asset holdings--suggested a need for greater flexibility regarding the details of implementing policy normalization, particularly because those details would appropriately depend at least in part upon future economic and financial developments. Also, because normalization still appeared to be well in the future, the Committee might wish to wait and acquire additional experience to inform its plans. In particular, the process of normalizing policy could yield information about the most effective framework for implementing monetary policy in the longer run, and thus about the appropriate size of the SOMA portfolio and level of reserve balances. In addition, several participants raised the possibility that the federal funds rate might not, in the future, be the best indicator of the general level of short-term interest rates, and supported further staff study of potential alternative approaches to implementing monetary policy in the longer term and of possible new tools to improve control over short-term interest rates.

Views differed regarding whether the best course at this point would be to simply acknowledge that certain components of the June 2011 principles had been overtaken by events or rather to formally revise the principles. Acknowledging that the principles need to be updated would help avoid possible confusion regarding the Committee's intentions; waiting to update the principles would allow the Committee to obtain additional information before revising them. It was also mentioned that the public's understanding of the likely exit process might not be improved if the Committee issued only a set of broad principles without providing detailed information on the steps anticipated for normalization. However, issuing revised principles relatively soon could give the public additional confidence that the Committee had the tools and a plan for eventually normalizing the conduct of policy. Moreover, one participant stressed that the Committee's ability to provide forward guidance about the normalization process was a key monetary policy tool, and revised principles would permit use of that tool to help adjust the stance of policy. Participants emphasized that their review of the June 2011 exit strategy principles did not suggest any change in their views about the economic conditions that would eventually warrant beginning the process of normalizing the stance of monetary policy. At the conclusion of the discussion, the Chairman directed the staff to undertake additional preparatory work on this issue for Committee consideration in the future.
emphasis added

Based on comments by Bernanke today, and NY Fed President Dudley yesterday, it sounds likely the Fed will allow the MBS to run off (a change from their previous thinking).

AIA: Architecture Billings Index indicates decreased demand for design services in April

2013-05-22T11:59:00.000-04:00

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

From AIA: Architecture Billings Index Reverts into Negative Territory for First Time in Nine Months

After indicating increasing demand for design services for the better part of a year, the Architecture Billings Index has reversed course in April. 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 April ABI score was 48.6, down from a mark of 51.9 in March. This score reflects a decrease in demand for design services (any score above 50 indicates an increase in billings) and is the lowest mark since July 2012. The new projects inquiry index was 58.5, down from the reading of 60.1 the previous month.

“Project approval delays are having an adverse effect on the design and construction industry, but again and again we are hearing that it is extremely difficult to obtain financing to move forward on real estate projects,” said AIA Chief Economist, Kermit Baker, PhD, Hon. AIA. “There are other challenges that have prevented a broader recovery that we will examine in the coming months if this negative trajectory continues. However, given that inquiries for new projects continue to be strong, we’re hopeful that this is just a short-term dip.”
emphasis added

Click on graph for larger image.

This graph shows the Architecture Billings Index since 1996. The index was at 48.6 in April, down from 51.9 in March. Anything below 50 indicates contraction in demand for architects' services. This decline followed eight consecutive months of expansion.

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 previous increases in this index suggest some increase in CRE investment in the second half of 2013.

Existing Home Sales in April: 4.97 million SAAR, 5.2 months of supply

2013-05-22T10:00:00.000-04:00

NOTE: Federal Reserve Chairman Ben Bernanke testimony Testimony by Chairman Bernanke on the economic outlook

The NAR reports: April Existing-Home Sales Up but Constrained

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 0.6 percent to a seasonally adjusted annual rate of 4.97 million in April from an upwardly revised 4.94 million in March. Resale activity is 9.7 percent above the 4.53 million-unit level in April 2012.

Total housing inventory at the end of April rose 11.9 percent, a seasonal increase to 2.16 million existing homes available for sale, which represents a 5.2-month supply at the current sales pace, compared with 4.7 months in March. Listed inventory is 13.6 percent below a year ago, when there was a 6.6-month supply, with current availability tighter in the lower price ranges.

Click on graph for larger image.

This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.

Sales in April 2013 (4.97 million SAAR) were 0.6% higher than last month, and were 9.7% above the April 2012 rate.

The second graph shows nationwide inventory for existing homes.

According to the NAR, inventory increased to 2.16 million in April up from 1.93 million in March. Inventory is not seasonally adjusted, and inventory usually increases from the seasonal lows in December and January, and peaks in mid-to-late summer (so some of this increase was seasonal).

The last graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory.

Inventory decreased 13.6% year-over-year in April compared to April 2012. This is the 26th consecutive month with a YoY decrease in inventory, but the smallest YoY decrease since 2011 (I expect the YoY decrease to get smaller all year).

Months of supply increased to 5.2 months in April.

This was just below expectations of sales of 5.0 million. For existing home sales, the key number is inventory - and inventory is still down sharply year-over-year, although the declines are slowing. This was a solid report. I'll have more later ...

LPS: Mortgage Delinquency Rate falls below 6.5% in April, Lowest since July 2008

2013-05-22T08:30:00.000-04:00

According to the First Look report for April to be released today by Lender Processing Services (LPS), the percent of loans delinquent decreased in April compared to March, and declined about 10% year-over-year. Also the percent of loans in the foreclosure process declined further in April and were down almost 25% over the last year.

LPS reported the U.S. mortgage delinquency rate (loans 30 or more days past due, but not in foreclosure) decreased to 6.21% from 6.59% in March. Note: the normal rate for delinquencies is around 4.5% to 5%.

The percent of loans in the foreclosure process declined to 3.17% in April from 3.37% in March.

The number of delinquent properties, but not in foreclosure, is down about 11% year-over-year (375,000 fewer properties delinquent), and the number of properties in the foreclosure process is down 25% or 543,000 properties year-over-year.

The percent (and number) of loans 90+ days delinquent and in the foreclosure process is still very high, but declining fairly quickly.

LPS will release the complete mortgage monitor for April in early June.

LPS: Percent Loans Delinquent and in Foreclosure Process
	Apr 2013	Mar 2013	Apr 2012
Delinquent	6.21%	6.59%	6.87%
In Foreclosure	3.17%	3.37%	4.20%
Number of properties:
Number of properties that are 30 or more, and less than 90 days past due, but not in foreclosure:	1,717,000	1,842,000	1,890,000
Number of properties that are 90 or more days delinquent, but not in foreclosure:	1,394,000	1,466,000	1,596,000
Number of properties in foreclosure pre-sale inventory:	1,588,000	1,689,000	2,131,000
Total Properties	4,699,000	4,997,000	5,617,000

MBA: Mortgage Applications Decrease in Weekly Survey

2013-05-22T07:01:00.000-04:00

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

The Refinance Index decreased 12 percent from the previous week. The seasonally adjusted Purchase Index decreased 3 percent from one week earlier.
...
“Mortgage rates increased to their highest level since March last week, leading to the largest single week drop in refinance applications this year,” said Mike Fratantoni, MBA’s Vice President of Research and Economics. “The refinance index has fallen almost 19 percent over the past two weeks and is back to its lowest level since late March. Purchase activity declined over the week but is still running about 10 percent above last year’s pace at this time.”

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 3.78 percent from 3.67 percent, with points decreasing to 0.39 from 0.41 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.
emphasis added

Click on graph for larger image.

The first graph shows the refinance index.

There has been a sustained refinance boom for over a year.

However the index is down almost 20% over the last two weeks, and this is the lowest level since March.

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 about 10% from a year ago.

Wednesday: Existing Home Sales, Bernanke Testimony and more

2013-05-21T20:37:00.001-04:00

From Tim Duy at Economist'sView: Fed Watch: And Then There is Bernanke. Duy discusses the various Fed speeches this week and concludes:

So many voices, so many views. Looking through the noise, I think there is strong interest in tapering QE now that we have a string of job reports pointing to substantial and sustainable improvement in labor markets, but, given the fiscal contraction, little willingness to pull the trigger on tapering until we see another two or three similar reports. On net, I think disinflation concerns will move to the back-burner as long as inflation expectations are stable.

Still, at the same time, the Fed wants to keep its options open, as they are very much cognizant that past efforts to pull back on easing have been premature. Hence the talk that future moves could be up or down, which is really just plain confusing because why would the Fed even begin tapering if they thought there was a reasonable chance of having to reverse course the next month? It is even more confusing given that some officials seem to care about inflation, but others labor markets. The former says more purchases, arguably the latter says less. And I am not sure they have a consensus view of what would be the pace of tapering even if they all could agree on the forecast and relevant indicators. No wonder communications is a problem. Back to Dudley:

An important challenge for us will be to think carefully about what combination of actions and communications will best ensure that when we do eventually judge that it is appropriate to begin normalizing policy, the initial tightening of financial market conditions is commensurate to what we desire. There is a risk is that market participants could overreact to any move in the process of normalization.
It seems that lacking a more clear, consistent framework for the exit from quantitative easing, the risk of miscommunication is high. Hence, we are all looking toward tomorrow's speech by Federal Reserve Chairman Ben Bernanke to provide the clarity that appears very much needed.

Wednesday economic releases:
• At 9:55 AM ET, the Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

• At 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 March were at a 4.92 million SAAR. Economist Tom Lawler is estimating the NAR will report a April sales rate of 5.03 million.

• Also at 10:00 AM, Testimony by Fed Chairman Ben Bernanke, Economic Outlook, Before the Joint Economic Committee, U.S. Congress

• At 2:00 PM, the FOMC Minutes for Meeting of April 30-May 1, 2013 will be released.

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

Fed's Dudley: "Lessons at the Zero Bound: The Japanese and U.S. Experience"

2013-05-21T15:25:00.001-04:00

As president of the NY Fed, William Dudley is a key member of the FOMC. He clearly supports QE ...

From NY Fed President William Dudley: Lessons at the Zero Bound: The Japanese and U.S. Experience. A few excerpts:

In terms of our asset purchase program, I believe we should be prepared to adjust the total amount of purchases to that needed to deliver a substantial improvement in the labor market outlook in the context of price stability. In doing this, we might adjust the pace of purchases up or down as the labor market and inflation outlook changes in a material way. For me, the base case forecast is not the sole consideration—how confident we are about that outcome is also important.

Because the outlook is uncertain, I cannot be sure which way—up or down—the next change will be. But at some point, I expect to see sufficient evidence to make me more confident about the prospect for substantial improvement in the labor market outlook. At that time, in my view, it will be appropriate to reduce the pace at which we are adding accommodation through asset purchases. Over the coming months, how well the economy fights its way through the significant fiscal drag currently in force will be an important aspect of this judgment.

This is a reminder that the next change in asset purchases could be either to buy more or less per month depending on the economy. Note: Earlier in this speech Dudley noted that "complementary fiscal" policy is important, but of course fiscal policy is currently not "complementary" - and is a significant drag.

And on the eventual exit strategy:

We are also learning about how best to prepare for the eventual normalization of monetary policy. For example, we may need to update our thinking with respect to the so-called exit principles that we published in June 2011 in order to bring them up to date with developments since then, and ensure they do not unnecessarily constrain our ability to conduct policy in the most effective way today.

Those exit principles stated that we would first stop reinvesting, then raise short-term interest rates, and finally sell agency mortgage backed securities over a three-to-five year period. This seems stale in several respects. In particular, how does one time the end of reinvestment given that we now have economic thresholds that govern the timing of liftoff? Also, the thresholds are thresholds, not triggers. Thus it is hard to link the timing of the end of reinvestment to the unknown liftoff date for short-term rates.

More broadly, it may be desirable to update our thinking around the path and composition of the balance sheet over time, in light of our capacity to shape this path in a way that mitigates potential costs and risks. For example, the agency MBS portfolio is substantially larger today than it was when the original exit principles were devised. To the extent that the Committee wants to reduce the risk of disrupting market functioning during normalization, it could decide to indicate that it will avoid selling the MBS portfolio during the early stages of the normalization process. Moreover, to the extent that the Committee wants to mitigate the risk of a sharp increase in long-term rates, it could judge that it would prefer not to commit to agency MBS sales. Expectations about future MBS sales or actual sales have the potential to generate or amplify such an upward spike in long-term rates. If the Committee believes that it could be costly in terms of credibility to incur a period of no remittances to Treasury—a notion I am personally somewhat skeptical about—avoiding MBS sales would also reduce this risk. Indeed, the Committee might conclude that it was better on all three counts to allow the agency MBS securities to run off passively over time.

Allowing the MBS to run off would be a significant change to the exit strategy.

ATA Trucking Index decreases slightly in April

2013-05-21T12:39:00.000-04:00

This is a minor indicator that I follow.

From ATA: ATA Truck Tonnage Index Fell 0.2% in April

The American Trucking Associations’ advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index fell 0.2% in April after rising 0.9% in March. (The 0.9% gain in March was unchanged from what ATA reported on April 23, 2013.) In April, the SA index equaled 123.2 (2000=100) versus 123.5 in March. The highest level on record was December 2011 at 124.3. Compared with April 2012, the SA index was up 4.3%, which is the largest year-over-year gain since January of this year (4.7%). Year-to-date, compared with the same period in 2012, the tonnage index is up 4%.

“The slight drop in tonnage during April fit with trends from other industries that drive a significant amount of truck freight, such as manufacturing and housing,” ATA Chief Economist Bob Costello said, noting that in April, compared with the previous month, factory output slipped 0.4% while housing starts plunged 16.5%.

“After rising significantly late last year and in January of this year, truck tonnage has been bouncing around a narrow, but elevated band over the last three months.” he said. “It is also worth noting that the year-over-year comparisons are much better than expected just a few months ago and I’m hearing good comments about freight so far in May.”
emphasis added

Note from ATA:

Trucking serves as a barometer of the U.S. economy, representing 67% of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods. Trucks hauled 9.2 billion tons of freight in 2011. Motor carriers collected $603.9 billion, or 80.9% of total revenue earned by all transport modes.

Click on graph for larger image.

Here is a long term graph that shows ATA's For-Hire Truck Tonnage index.

The dashed line is the current level of the index.

The index is fairly noisy, but is up solidly year-over-year.

Philly Fed: State Coincident Indexes increased in 45 States in April

2013-05-21T11:06:00.000-04:00

From the Philly Fed:

The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for April 2013. In the past month, the indexes increased in 45 states, decreased in four states, and remained stable in one (Minnesota), for a one-month diffusion index of 82. Over the past three months, the indexes increased in 47 states, decreased in two (Wisconsin and Wyoming), and remained stable in one (Alaska), for a three-month diffusion index of 90.

Note: These are coincident indexes constructed from state employment data. From the Philly Fed:

The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state’s index is set to the trend of its gross domestic product (GDP), so long-term growth in the state’s index matches long-term growth in its GDP.

Click on graph for larger image.

This is a graph is of the number of states with one month increasing activity according to the Philly Fed. This graph includes states with minor increases (the Philly Fed lists as unchanged).

In April, 46 states had increasing activity, the ninth consecutive month with 45 or more states showing increases.

Here is a map of the three month change in the Philly Fed state coincident indicators. This map was all red during the worst of the recession.

The map is mostly green again and suggests that the recovery is geographically widespread.

Zillow: House Prices up over 5% year-over-year in March, Case-Shiller expected to show 9.8% YoY increase

2013-05-21T08:58:00.000-04:00

From Zillow: Annual U.S. Home Value Appreciation Exceeds 5 Percent for Sixth Straight Month in April

U.S. home values continued to climb in April, increasing 0.5 percent from March to $158,300, according to the April Zillow Real Estate Market Reports. Home values were up 5.2 percent year-over-year, marking the sixth consecutive month of annual home value appreciation at or above 5 percent. The last time national home values were at this level was in June 2004.

A majority (55 percent) of the 365 metros covered saw home values climb in April from March. Of the 30 largest metro areas covered, Sacramento experienced the largest monthly increase, with home values rising 3.4 percent. Other large metro areas with notable monthly increases include Las Vegas (3 percent) and San Francisco (2.8 percent).

“April marks the sixth straight month of annual home value appreciation of 5 percent or above, the longest such streak since the height of the bubble in 2006. In the short term, this has been welcome news for homeowners. But in the long term, this cannot be sustained, and consumers entering the market today should not expect this kind of appreciation to last,” said Zillow Chief Economist Dr. Stan Humphries. “Overall, we expect home value appreciation to moderate as more supply comes on line over the next year, but in some areas, runaway home value appreciation, combined with expected interest rate hikes in coming years, runs a real risk of pricing out many potential buyers. Home values in these areas will have to flatten or even fall to come back in line.”

The Zillow Home Value Forecast calls for 4 percent appreciation nationally from April 2013 to April 2014.

The Case-Shiller house price indexes for March will be released Tuesday, May 28th. Zillow has started forecasting the Case-Shiller a month early - and I like to check the Zillow forecasts since they have been pretty close.

Zillow: March Case-Shiller Composites To Show Annual Appreciation Above 9%

[W]e predict that ... Case-Shiller data (March 2013) will show that the 20-City Composite Home Price Index (non-seasonally adjusted [NSA]) increased 9.8 percent on a year-over-year basis, while the 10-City Composite Home Price Index (NSA) increased 9.3 percent on a year-over-year basis. The seasonally adjusted (SA) month-over-month change from February to March will be 0.9 percent for both the 20-City Composite and the 10-City Composite Home Price Indices (SA). All forecasts are shown in the table below. Officially, the Case-Shiller Composite Home Price Indices for March will not be released until Tuesday, May 28.
...
To forecast the Case-Shiller indices we use past data from Case-Shiller, as well as the Zillow Home Value Index (ZHVI), which is available more than a month in advance of Case-Shiller numbers, paired with foreclosure resale numbers, which we also have available more than a month prior to Case-Shiller numbers. ...

The ZHVI does not include foreclosure resales and shows home values for March 2013 up 5.1 percent from year-ago levels. ... Further details on our forecast can be found here ...

The following table shows the Zillow forecast for March.

Zillow March Forecast for Case-Shiller Index
		Case Shiller Composite 10		Case Shiller Composite 20
		NSA	SA	NSA	SA
Case Shiller (year ago)	Mar 2012	146.46	150.36	134.07	140.12
Case-Shiller (last month)	Feb 2013	159.24	162.37	146.57	149.80
Zillow Forecast	YoY	9.3%	9.3%	9.8%	9.8%
Zillow Forecast	MoM	0.5%	0.9%	0.5%	0.9%
Zillow Forecasts¹		160.1	164.1	147.3	151.0
Current Post Bubble Low		146.46	149.45	134.07	136.86
Date of Post Bubble Low		Mar-12	Feb-12	Mar-12	Jan-12
Above Post Bubble Low		9.3%	9.8%	9.8%	10.3%
¹Estimate based on Year-over-year and Month-over-month Zillow forecasts

Discussion on Inequality and Economic Growth

2013-05-20T17:47:00.000-04:00

From 6:30 to 8:00 PM ET, the will be a live stream of professors Tony Atkinson and Paul Krugman discussing inequality and growth at CUNY. The dialogue will be moderated by Chrystia Freeland.

As we endure the slow, uneven recovery from the “Great Recession,” there is no more critical or timely question than that of the relationship between economic growth and inequality. Join two preeminent economists as they assess the connection between prosperity for some and poverty for others. Paul Krugman is professor of economics at Princeton University, a Nobel laureate, and a New York Times columnist. He is the author of numerous books, including the recently published End This Depression Now! Sir Tony Atkinson, professor of economics at Oxford's Nuffield College, is one of the world’s foremost scholars of inequality and author or editor of more than thirty books on inequality and related topics. He recently coedited Top Incomes: A Global Perspective, a volume that analyses high-end income inequality around the world.

Chrystia Freeland will be taking questions at #GCinequality

This is a very interesting topic. Intuitively it seems higher inequality should lead to slower growth (I think it would at the extreme!), but I'm not sure the relationship between inequality and growth is clear.

UPDATE: Here is a replay video (starts around 55 minutes into video):

Existing Home Inventory is up 17.7% year-to-date on May 20th

2013-05-20T15:37:00.001-04:00

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 March). 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 17.7%. This is well above the peak percentage increases for 2011 and 2012 and 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 15.1% from the same week last year according to Housing Tracker. Once inventory starts to increase (more than seasonal), buyer urgency will wane, and I expect price increases to slow.

Lumber Prices decline Sharply over last month

2013-05-20T13:12:00.001-04:00

Just over a month ago I mentioned that lumber prices were nearing the housing bubble highs. Since then prices have declined sharply, with prices off about 20% from the recent highs.

Some of the decline could be related to additional supply coming on the market, and some due to less buying from China (several sources are reporting that China has pulled back significantly on buying North American lumber).

On additional supply, two months ago the WSJ had an article about some producers increasing supply:

Georgia-Pacific, the largest U.S. producer of plywood ... plans to invest about $400 million over the next three years to boost softwood plywood and lumber capacity by 20%.

Click on graph for larger image in graph gallery.

This graph shows two measures of lumber prices (not plywood): 1) Framing Lumber from Random Lengths through last week (via NAHB), and 2) CME framing futures.

Lumber prices are now 20% off the recent highs.

DOT: Vehicle Miles Driven decreased 1.5% in March

2013-05-20T10:37:00.000-04:00

The Department of Transportation (DOT) reported:

Travel on all roads and streets changed by -1.5% (-3.7 billion vehicle miles) for March 2013 as compared with March 2012. Travel for the month is estimated to be 248.8 billion vehicle miles.

The following graph shows the rolling 12 month total vehicle miles driven.

The rolling 12 month total is still mostly moving sideways.

Click on graph for larger image.

In the early '80s, miles driven (rolling 12 months) stayed below the previous peak for 39 months.

Currently miles driven has been below the previous peak for 64 months - over 5 years - and still counting.

The second graph shows the year-over-year change from the same month in the previous year.

Gasoline prices were down in March compared to March 2012. In March 2013, gasoline averaged of $3.78 per gallon according to the EIA. In 2012, prices in March averaged $3.91 per gallon. But even with the year-over-year decline in gasoline prices, miles driven decreased.

This is because gasoline prices are just part of the story. The lack of growth in miles driven over the last 5 years is probably also due to the lingering effects of the great recession (high unemployment rate and lack of wage growth), the aging of the overall population (over 55 drivers drive fewer miles) and changing driving habits of young drivers.

With all these factors, it might take several more years before we see a new peak in miles driven.