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Monday, November 29, 2010

Home Sales: Distressing Gap

by Calculated Risk on 11/29/2010 02:12:00 PM

Here is an update to a graph I've been posting for several years. This graph shows existing home sales (left axis) and new home sales (right axis) through October. This graph starts in 1994, but the relationship has been fairly steady back to the '60s. Then along came the housing bubble and bust, and the "distressing gap" appeared (due mostly to distressed sales).

Note: it is important to note that 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.

Distressing Gap Click on graph for larger image in new window.

Initially the gap was caused by the flood of distressed sales. This kept existing home sales elevated, and depressed new home sales since builders couldn't compete with the low prices of all the foreclosed properties.

The two spikes in existing home sales were due primarily to the homebuyer tax credits (the initial credit in 2009, followed by the 2nd credit in 2010). There were also two smaller bumps for new home sales related to the tax credits.

Now the gap is mostly because of the continuing flood of distressed sales (both foreclosures and short sales).

In a few years - when the excess housing inventory is absorbed and the number of distressed sales has declined significantly - I expect existing home-to-new home sales to return to this historical relationship.

We can guess at the levels: The median turnover for existing homes is just over 6% of all owner occupied homes per year, and with about 75 million owner occupied homes that would suggest close to 5 million sales per year (no one should expect existing home sales to be over 7 million units per year any time soon!). And that would suggest new home sales at just over 800 thousand per year when the market eventually recovers (not 1.2 or 1.3 million per year). This fits with this analysis: The Impact of the Declining Homeownership Rate.

Dallas Fed manufacturing survey shows activity increased in November

by Calculated Risk on 11/29/2010 10:30:00 AM

From the Dallas Fed: Texas Manufacturing Activity Strengthens Further

Texas factory activity increased in November, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, was positive for the third consecutive month and came in at a reading of 13, up from 7 in October.

All other manufacturing activity indicators also rose, posting their best month since May. The new orders and shipments indexes turned positive after five months of negative readings.
...
Labor market indicators picked up this month. The employment index rose from –4 to 6, reaching its highest level since May, and hours worked increased for the first time in four months.
The following graph compares the regional Fed surveys through November with the ISM manufacturing index through October. The ISM manufacturing index for November will be released on Wednesday, Dec 1st.

Fed Manufacturing Surveys and ISM PMI Click on graph for larger image in new window.

The New York and Philly Fed surveys are averaged together (dashed green, through November), and averaged five Fed surveys (blue, through November) including New York, Philly, Richmond, Dallas and Kansas City.

The Institute for Supply Management (ISM) PMI (red) is through October (right axis).

With the exception of the NY Fed survey (Empire state), all the regional surveys showed a pickup in manufacturing activity in November.

Europe Update

by Calculated Risk on 11/29/2010 08:58:00 AM

Weekly Posts:
Schedule for Week of Nov 28th
A Summary for Week ending November 27th

The European markets are off about 1% this morning.

The yield on the Ireland 10-year bond is up to 9.25%.

The yield on the Portugal 10-year bond is up to 7.02%.

The yield on the Spain 10-year bond is up to 5.36%.

Roubini suggests Portugal should seek a bailout: "Go now to the IMF to borrow money now" (in Portugese)

And from Reuters: Greece Gets Loan Repayment Extension to 2021

Greece will have until 2021 to repay its 110 billion euro ($145.7 billion) EU/IMF bailout loan, the country's finance minister said on Monday.

In return, Greece will have to pay a higher fixed interest rate of about 5.8 percent from 5.5 percent...
Update: from Paul Krugman: Not Waving But Drowning
It’s as if we’re having the following dialogue:

“Ireland really can’t afford to pay these debts.”

“Here’s a credit line!”

“No, really, we just can’t afford to pay.”

“Here’s a credit line!”

It really is like watching a car wreck.

Sunday Night Futures

by Calculated Risk on 11/29/2010 12:09:00 AM

Earlier the rescue package for Ireland was announced and preliminary agreement on a permanent resolution mechanism was reached (starting in 2013 - if the markets can wait that long).

Not much market reaction. The Asian markets are mixed tonight. And CNBC's Pre-Market Data shows the S&P 500 off about 8 points or less than 1%. Dow futures are off about 80 points.

The Euro is down slightly to 1.32 dollars

It will be interesting to see the reaction in the bond markets for Ireland, Spain and Portugal .

Best to all.

Sunday, November 28, 2010

The recent improvement in economic news

by Calculated Risk on 11/28/2010 07:27:00 PM

Earlier:
Schedule for Week of Nov 28th
A Summary for Week ending November 27th

It is worth noting the recent improvement in economic news:

• The October employment report showed a gain of 151,000 nonfarm payroll jobs, the most since April ex-Census. Expectations are for a similar gain in November, although probably not enough jobs added to push down the unemployment rate.

• The BEA estimated real GDP grew at a 2.5% annual rate in Q3. This is still sluggish, but an improvement from the 1.7% growth rate in Q2.

• The Personal Income and Outlays report for October indicated incomes grew at a 0.5% rate (month-to-month), and it appears PCE has grown at about a 3% annualized rate over the last three months. The personal saving rate was 5.7% in October, and although I expect the rate to increase a little more - it appears a majority of the adjustment is behind us (a rising saving rate is a drag on personal consumption).

• The 4-week average of initial weekly unemployment claims has declined to 436,000 last week from over 480,000 at the end of August. The weekly reading was 407,000 last week; the lowest since July 2008.

• Most regional manufacturing surveys, with the exception of the NY Fed survey (empire state), has shown a pickup in manufacturing. This suggests the manufacturing sector is still improving (the ISM manufacturing index for November will be released on Wednesday).

Trucking and rail traffic improved in October, although the Ceridian diesel fuel index was weak.

• The Architecture Billings Index (a leading indicator for commercial real estate) is near flat - suggesting investment in commercial structures such as hotels, offices and malls will stop contracting next year. (addition by subtraction!)

• Even small business optimism has improved slightly.

Most of the reasons for the recent slowdown are still with us - less stimulus spending, the end of the inventory adjustment, problems in Europe and a slowdown in China, and cutbacks at the state and local level - but it appears Residential investment (RI) has bottomed and will most likely add to GDP growth in 2011. I believe the RI drag is now behind us, and RI is usually the best leading indicator for the economy.

The data is still mixed and fits with my general view of a sluggish and choppy recovery (my view since the spring of 2009). Although I don't see a sharp increase in growth, I think the pace of recovery will probably pick up a little bit in 2011, and I'll take the over on the consensus view of 2.5% GDP growth in 2011. My guess is 3%+ GDP growth in 2011 - still not a strong recovery given the amount of slack in the economy, but an improvement over 2010.

Unfortunately there probably will not be enough growth to significantly reduce the unemployment rate in 2011.

Note: I'll add more before the end of the year, but I've been sharing my thoughts with a few analysts and economic commentators and I try to post my views whenever they change - even a little. Right now it looks like the "slowdown, but no double dip call" was correct (it is still early), and now I'm becoming a little more optimistic and taking the "over" on 2011 GDP growth (still no v-shape recovery though).

European Union approves €85 billion rescue of Ireland

by Calculated Risk on 11/28/2010 01:46:00 PM

Update: Here are the details: Announcement of joint EU - IMF Programme for Ireland

From the Irish Times: EU finance ministers agree deal on Irish rescue package

The Irish Times reports that the European Union has approved the €85 billion rescue package for Ireland with an estimated 5.8% average interest rate.

Also, the WSJ reports progress on the "permanent resolution mechanism" (aka default mechanism): EU Outlines Bond Restructuring Plan

Creditors of euro-zone countries that face insolvency after 2013 will see their bond holdings restructured ... [the proposal was] agreed earlier Sunday by German Chancellor Angela Merkel, French President Nicolas Sarkozy, EU President Herman Van Rompuy and European Central Bank chief Jean-Claude Trichet