by Bill McBride on 12/11/2013 08:42:00 PM
Wednesday, December 11, 2013
Something to be aware of from Victoria McGrane And Jon Hilsenrath at the WSJ: Fed Moves Toward New Tool for Setting Rates
An experimental bond-trading program being run at the Federal Reserve Bank of New York could fundamentally change the way the central bank sets interest rates.Thursday:
Fed officials see the program, known as a "reverse repo" facility, as a potentially critical tool when they want to raise short-term rates in the future to fend off broader threats to the economy.
"The Federal Reserve has never tightened monetary policy, or even tried to maintain short-term interest rates significantly above zero, with such abundant amounts of liquidity in the financial system," according to a draft of a new research paper by Brian Sack, the former head of the New York Fed's markets group, and Joseph Gagnon, an economist at the Peterson Institute for International Economics and a former Fed economist.
When it does want to raise rates, the Fed under the repo program would use securities it accumulated through its bond-buying programs as collateral for loans from money-market mutual funds, banks, securities dealers, government-sponsored enterprises and others.
The rates it sets on these loans, in theory, could become a new benchmark for global credit markets.
• 8:30 AM ET, 8he initial weekly unemployment claims report will be released. The consensus is for claims to increase to 325 thousand from 298 thousand last week.
• Also at 8:30 AM, Retail sales for November will be released. The consensus is for retail sales to be 0.6% in November, and to increase 0.3% ex-autos.
• At 10:00 AM, Manufacturing and Trade: Inventories and Sales (business inventories) report for October. The consensus is for a 0.3% increase in inventories.
by Bill McBride on 12/11/2013 04:37:00 PM
Economist Tom Lawler writes:
A “FEDS Note” (by Fed economists Malloy and Zarutskie), available on the Federal Reserve’s website, Business Investor Activity in the Single-Family-Housing Market, is a brief note on purchases of SF homes by “business investors” over the past few years. The data are based on an analysis of CoreLogic real estate transactions by analysts at Amherst Holdings. While the note does not give details on how a “business investor” was determined, the note says that this determination was made by looking at the names of the buyers of record. A link to the chart says that “(b)usiness investors are defined as business entities identified as purchasing homes for primarily for the purpose of earning a financial return.”
Here is a chart from the report on the Business Investor share of national home purchases.
Click on graph for larger image.
As noted above, this chart only reflects the BUSINESS INVESTOR” share of home purchases, and does not include INDIVIDUAL investors. Back in 2004 and 2005 the investor share of mortgage-financed home purchases was extremely high, with such purchases mainly being by individuals (many of whom purchased multiple properties.)
At first glance this share increase, while noticeable, may not seem “large.” However, these shares suggest that business investor purchase of SF homes from 2010 to 2013 (using full-year estimates for 2013) totaled over 950,000, more than double the total number of business investor purchases over the previous SIX years (2004-2009). If the bulk of these business investor purchases were bought with the intent to rent the properties out for “several” years, then the sharp decline in the number of residential properties from 2010 to early 2013 seems a bit more “explainable.”
The note has a table showing the business-investor share of SF home purchases for selected metro areas.
CR Note: The metro areas with the largest share of investor buying in 2012 were Atlanta at 16.43%, Phoenix at 13.99% and Las Vegas at 10.97%.
by Bill McBride on 12/11/2013 11:54:00 AM
Note: This is not Mortgage Equity Withdrawal (MEW) data from the Fed. The last MEW data from Fed economist Dr. Kennedy was for Q4 2008.
The following data is calculated from the Fed's Flow of Funds data and the BEA supplement data on single family structure investment. This is an aggregate number, and is a combination of homeowners extracting equity - hence the name "MEW", but there is little MEW right now - and normal principal payments and debt cancellation.
For Q3 2013, the Net Equity Extraction was minus $24 billion, or a negative 0.8% of Disposable Personal Income (DPI). This is the smallest negative equity extraction since Q1 2008.
Click on graph for larger image.
This graph shows the net equity extraction, or mortgage equity withdrawal (MEW), results, using the Flow of Funds (and BEA data) compared to the Kennedy-Greenspan method.
There are smaller seasonal swings right now, perhaps because there is a little actual MEW (this is heavily impacted by debt cancellation right now).
The Fed's Flow of Funds report showed that the amount of mortgage debt outstanding increased by $10.0 billion in Q3. This was the first increase in mortgage debt since Q1 2008. Since some mortgage debt is related to new home purchases, net negative equity extraction was still slightly negative in Q3.
The Flow of Funds report also showed that Mortgage debt has declined by over $1.3 trillion since the peak. This decline is mostly because of debt cancellation per foreclosures and short sales, and some from modifications. There has also been some reduction in mortgage debt as homeowners paid down their mortgages so they could refinance. With residential investment increasing, and a slower rate of debt cancellation, it is possible that MEW will turn positive again soon.
Dr. James Kennedy also has a simple method for calculating equity extraction: "A Simple Method for Estimating Gross Equity Extracted from Housing Wealth". Here is a companion spread sheet (the above uses my simple method).
For those interested in the last Kennedy data included in the graph, the spreadsheet from the Fed is available here.
by Bill McBride on 12/11/2013 11:01:00 AM
Six weeks ago I wrote: Comment: Looking for Stronger Economic Growth in 2014. I listed several reasons for a positive outlook, and if anything, I'm a little more optimistic now. Here are a few reasons:
1) The apparent budget deal takes a key downside risk off the table, and reduces the impact of the sequester.
2) Household balance sheets are in much better shape - and it appears that in the aggregate, household deleveraging is over. The Fed just reported the first increase in total mortgage debt since Q1 2008. See: Fed's Q3 Flow of Funds: Household Mortgage Debt increased slightly, First Mortgage Debt increase since Q1 2008, NY Fed: Household Debt increased in Q3, Delinquency Rates Improve, and Fed: Household Debt Service Ratio near lowest level in 30+ years
3) State and local government austerity is over (in the aggregate).
4) The housing recovery should continue. Housing has slowed recently (new home sales, housing starts), but the overall level is still very low and I expect further growth in 2014.
5) Commercial real estate (CRE) investment will probably make a small positive contribution in 2014.
Eliminating drags is important. The drag from state and local governments is over. The drag from household deleveraging (in the aggregate) is ending. The threats of a government shutdown, not "paying the bills", and mindless austerity is over (assuming the budget deal is approved). And CRE investments are starting to appear.
All of these were impediments to growth over the last few years.
Yes, growth in the auto industry will slow in 2014, and housing has slowed recently (but I think we will see more growth in 2014). However, overall it appears 2014 will probably be the best growth year for the recovery (the best was 2012 with 2.8% real GDP growth), and possibly the best year since Clinton was President.
by Bill McBride on 12/11/2013 07:03:00 AM
From the MBA: Mortgage Applications Fall During Holiday-Shortened Week
Mortgage applications increased 1.0 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending December 6, 2013. The previous week’s results included an adjustment for the Thanksgiving holiday. ...Click on graph for larger image.
The Refinance Index increased 2 percent from the previous week and was 16 percent lower than the week prior to Thanksgiving. The seasonally adjusted Purchase Index increased 1 percent from one week earlier and was 3 percent lower than the week prior to Thanksgiving. ...
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to 4.61 percent, the highest rate since September, from 4.51 percent, with points decreasing to 0.26 from 0.38 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.
The first graph shows the refinance index.
The refinance index is down sharply - and down 68% from the levels in early May.
The second graph shows the MBA mortgage purchase index.
The 4-week average of the purchase index is now down about 8% from a year ago.
Note: It appears these small independent lenders (not included in the MBA survey) are focusing on the purchase market. A result of this change in market share is the Purchase Index is probably understating the increase in purchase activity.