by Calculated Risk on 10/24/2014 08:01:00 AM

According to Black Knight's First Look report for September, the percent of loans delinquent decreased in September compared to August, and declined by 12% year-over-year.

Also the percent of loans in the foreclosure process declined further in September and were down 33% over the last year.  Foreclosure inventory was at the lowest level since February 2008.

Black Knight reported the U.S. mortgage delinquency rate (loans 30 or more days past due, but not in foreclosure) was 5.67% in September, down from 5.90% in August. The normal rate for delinquencies is around 4.5% to 5%.

The percent of loans in the foreclosure process declined to 1.76% in September from 1.80% in August.  

The number of delinquent properties, but not in foreclosure, is down 388,000 properties year-over-year, and the number of properties in the foreclosure process is down 435,000 properties year-over-year.

Black Knight will release the complete mortgage monitor for September in early November.

Black Knight: Percent Loans Delinquent and in Foreclosure Process
	Sept 2014	Aug 2014	Sept 2013	Sept 2012
Delinquent	5.67%	5.90%	6.46%	7.40%
In Foreclosure	1.76%	1.80%	2.63%	3.87%
Number of properties:
Number of properties that are 30 or more, and less than 90 days past due, but not in foreclosure:	1,760,000	1,852,000	1,935,000	2,170,000
Number of properties that are 90 or more days delinquent, but not in foreclosure:	1,118,000	1,143,000	1,331,000	1,530,000
Number of properties in foreclosure pre-sale inventory:	893,000	913,000	1,328,000	1,940,000
Total Properties	3,771,000	3,908,000	4,593,000	5,640,000

by Calculated Risk on 10/23/2014 09:01:00 PM

The Inland Empire comes full circle ... from the Chris Kirkham at the LA Times: Strong growth is forecast for Inland Empire

[T]he Inland Empire is now the fastest-growing region in Southern California — a trend predicted to continue over the next five years, according to an economic forecast released Thursday.

The availability of land for development, combined with proximity to ports and major transportation corridors, has given Riverside and San Bernardino counties a growth advantage over more built-out coastal areas over the last two years. Unlike the housing bubble of the mid-2000s — when much of the Inland Empire's job growth was tied to construction and real estate — the economic recovery has been spread across a wider range of industries, such as professional services and goods distribution.
emphasis added

I was very bearish on the Inland Empire during the housing bubble. Here is what I wrote in 2006: Housing: Inverted Reasoning?

As the housing bubble unwinds, housing related employment will fall; and fall dramatically in areas like the Inland Empire. The more an area is dependent on housing, the larger the negative impact on the local economy will be.

So I think some pundits have it backwards: Instead of a strong local economy keeping housing afloat, I think the bursting housing bubble will significantly impact housing dependent local economies.

This time construction is only a small part of the recovery in the Inland Empire - and that is good news!

Friday:
• Early, the Black Knight Financial Services' "First Look" at September Mortgage Data.

• At 10:00 AM ET, New Home Sales for September from the Census Bureau. The consensus is for a decrease in sales to 460 thousand Seasonally Adjusted Annual Rate (SAAR) in September from 504 thousand in August.

by Calculated Risk on 10/23/2014 06:00:00 PM

From the FDIC: FDIC Releases Economic Scenarios for 2015 Stress Testing

The Federal Deposit Insurance Corporation (FDIC) today released the economic scenarios that will be used by certain financial institutions with total consolidated assets of more than $10 billion for stress tests required under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

The baseline, adverse, and severely adverse scenarios include key variables that reflect economic activity, including unemployment, exchange rates, prices, income, interest rates, and other salient aspects of the economy and financial markets.

The baseline scenario represents expectations of private sector economic forecasters. The adverse and severely adverse scenarios are not forecasts, rather, they are hypothetical scenarios designed to assess the strength and resilience of financial institutions and their ability to continue to meet the credit needs of households and businesses under stressed economic conditions.

Here is an excel spreadsheet with the scenarios.

Note: I'm not even on "recession watch", and I think the baseline is the most likely scenario for the next couple of years.  However I think these regular stress tests are very helpful for regulators.

The first table is a summary of the baseline scenario (basically in line with most economic forecasts for GDP and unemployment).

Stress Test Baseline Scenario
	GDP1	Unemployment2	DOW3	House Prices3
2014	2.2%	5.9%	6.5%	4.1%
2015	2.9%	5.4%	5.1%	2.5%
2016	2.9%	5.3%	5.3%	3.0%
2017	2.7%	5.3%	5.3%	3.0%

¹ GDP is the average quarterly real change in real GDP.
² Unemployment is for Q4 of each year.
³ The change in the DOW and House Prices is from Q4 of the preceding year to Q4.

The second table is the adverse scenario. This is moderate recession, but a slow recovery. Under the adverse scenario, unemployment peaks at 8% in 2017. The DOW declines about 28% from peak to trough, and house prices fall 13%.

Stress Test Adverse Scenario
	GDP1	Unemployment2	DOW3	House Prices3
2014	1.3%	6.4%	0.0%	2.6%
2015	-0.3%	7.6%	-16.3%	-7.7%
2016	1.4%	8.0%	-7.8%	-5.6%
2017	2.0%	8.0%	0.1%	0.9%

The third table is the severely adverse scenario. This is a severe recession, but a fairly quick recovery. Under the severely adverse scenario, unemployment peaks at 10.1% in 2016. The DOW declines about 58% and house prices fall 25%.

Stress Test Severely Adverse Scenario
	GDP1	Unemployment2	DOW3	House Prices3
2014	0.4%	6.9%	-11.7%	1.9%
2015	-3.7%	9.9%	-49.8%	-14.9%
2016	2.1%	9.9%	33.9%	-11.0%
2017	3.9%	9.1%	43.1%	2.0%

by Calculated Risk on 10/23/2014 01:54:00 PM

A few comments on QE:

• The FOMC is expected to announce the end of QE3 on Wednesday October 29th, following the FOMC meeting next week.

• Most research shows that the primary impact of QE on interest rates is from the size of the Fed balance sheet ("stock") as opposed to the impact on supply and demand ("flow"). This means that interest rates will not spike when QE ends (something I've noted at the conclusion of previous QE purchases).

• The positive impact of QE on the economy was probably modest and was the result of lower interest rates. QE probably lowered interest rates 50 bps (maybe more or less).  However monetary policy has been the only game in town since fiscal policy has had a negative impact on the economy over the last 4 years (my view is the pivot to austerity was a mistake, and the actions of Congress for the last 3+ years have been negative for the economy).

• The possible negative impacts of QE (such as inflation, weak dollar) never materialized.  Inflation remains below the Fed's target, and the U.S. dollar has strengthened recently.   As I noted yesterday, without the recent increases in shelter (rent and OER), inflation would be close to 1% year-over-year.  Without QE, inflation might be dangerously low!

• At the end of the previous rounds of QE, the economy was still struggling from the effects of the housing bust and financial crisis. Households were still deleveraging in the aggregate. Now the economy is in much better shape, and the effects of the crisis are diminishing. Therefore I do not expect another round of QE during this recovery (although I think the first rate hike might be later than most people expect).

• On inflation: Some people are warning that inflation will pick up as the economy gains traction (because of the size of the Fed's balance sheet). That is possible, but I don't expect a rapid increase in inflation. Many of the factors that led to sharply rising inflation in the '70s are not currently present (like wages and contracts tied to CPI and different demographics).

• My view is QE was not a panacea, but overall QE was a success.  I was a frequent critic of the Fed prior to the financial crisis - I think the Fed was almost anti-regulation during the housing bubble, and initially the Fed was behind the curve when the crisis was looming - however once Bernanke became aware of the severity of the crisis, the Fed was aggressive and effective. Perhaps they were a little slow in implementing QE3 - and with low inflation an argument could be made now to extend QE - but overall I think QE was a success.

by Calculated Risk on 10/23/2014 12:13:00 PM

From the Philly Fed:

The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for September 2014. In the past month, the indexes increased in 43 states, decreased in four, and remained stable in three, for a one-month diffusion index of 78. Over the past three months, the indexes increased in 44 states, decreased in five, and remained stable in one, for a three-month diffusion index of 78

Note: These are coincident indexes constructed from state employment data. An explanation 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 September, 45 states had increasing activity (including minor increases). This measure declined sharply during the winter, but is close to normal for a recovery.


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, and is mostly green again.