by Calculated Risk on 6/21/2006 11:53:00 AM

UCLA Anderson Forecast Calls for Real Estate Slowdown in California; No Statewide or National Recession Seen

In its second quarterly report of 2006, the UCLA Anderson Forecast anticipates a slowdown in real estate across the United States and in California. But absent other factors that historically precede recessionary conditions nationally and in the state, no recession is foreseen.


The national forecast

In the latest report, released to the public today, UCLA Anderson Forecast Director Edward Leamer frames his forecast in an essential question: "(Will) housing difficulties be amplified by problems elsewhere in the economy, producing a nasty recession, or will the pathology be mostly contained in the real estate sector (including construction, real estate brokers and mortgage brokers)?"

He concludes that the problems will likely be confined to the real estate sector and will not produce a national recession.

Leamer, who does not expect real estate prices to fall significantly, notes that sales volume is what typically drops, and drops more precipitously than prices, as the price cycle lags behind the volume cycle. The number of homes sold will drop as owners decline to sell in a weak housing market. Prices, however, should hold. The real decline in the housing market, Leamer says, will come in "residential investment," which includes construction of new homes, repair and remodeling, and brokerage commissions on the sale of new and existing homes.

But according to Leamer, the decline in residential investment and the associated decline in construction employment will not be matched by a decline in manufacturing employment, as the latter has not yet recovered from the recession of 2001. Unless there is a decline in manufacturing employment, the national economy will avoid recession in what Leamer calls "a close call."

The California forecast

The California forecast, by economist Ryan Ratcliff, takes note of the state's slowing real estate markets. Ratcliff concludes that the real estate slowdown will lead to a flat housing market and a slower economy.

"We do not predict a recession, nor do we predict a substantial decline in average nominal home prices," Ratcliff says. "This forecast it based on two arguments. There is not enough vulnerability in the usual sources of employment loss to create a recession, and the historical record suggests that average home prices do not usually fall without this kind of job loss."

As in the national forecast, Ratcliff is acknowledging declines in real estate and associated job losses in real estate-sensitive sectors. But absent job losses in manufacturing or other sectors, there will be no recession, he says.

Ratcliff does note the possibility of some downside risk to the forecast, however, due to the potential impact of exotic real estate financing and uncertainties about the effects of home prices on consumption.

About the UCLA Anderson Forecast

The UCLA Anderson Forecast is one of the most widely watched and often-cited economic outlooks for California and the nation, and was unique in predicting both the seriousness of the early-1990s downturn in California, and the strength of the state's rebound since 1993. Most recently, the forecast is credited as the first major U.S. economic forecasting group to declare the recession of 2001.

by Calculated Risk on 6/21/2006 10:17:00 AM

The Mortgage Bankers Association (MBA) reports: Mortgage Rates Increase, Application Volume Steady


Click on graph for larger image.

The Market Composite Index, a measure of mortgage loan application volume, was 567.6, a decrease of 0.8 percent on a seasonally adjusted basis from 571.9 one week earlier. On an unadjusted basis, the Index decreased 1.6 percent compared with the previous week and was down 26.8 percent compared with the same week one year earlier.

The seasonally-adjusted Purchase Index increased by 0.1 percent to 414.8 from 414.6 the previous week and the Refinance Index decreased by 2.2 percent to 1466.1 from 1499.4 one week earlier.

Mortgage rates increased:

The average contract interest rate for 30-year fixed-rate mortgages increased to 6.73 percent from 6.61 percent ...

The average contract interest rate for one-year ARMs increased to 6.22 percent from 6.09 percent ...

Change in mortgage applications from one year ago (from Dow Jones):

Total	-26.8%
Purchase	-13.2%
Refi	-43.1%
Fixed-Rate	-25.6%
ARM	-29.5%

Although mortgage activity is above its recent lows, purchase activity remains significantly below 2005 levels.

by Calculated Risk on 6/20/2006 03:22:00 PM

DataQuick reports: Southland home sales slow to 1999 pace, prices leveling off

Home sales in Southern California slowed for the sixth month in a row, making last month the slowest May since 1999. Homes are appreciating in value at their slowest pace in almost six years ...
...
While last month was the slowest May since 1999 when 25,404 homes were sold, sales were still above the May "average" May of 24,857 (going back to 1988). The strongest May was in 2002 when 32,391 homes were sold, the slowest was in 1993 when 15,001 were sold.

According to DataQuick, prices for Southern California remained unchanged from last month, and up 6.4% from May 2005.

UPDATE: LA Times on DataQuick report: SoCal Home Sales Decline

by Calculated Risk on 6/19/2006 04:42:00 PM

I just added a post to Angry Bear: Budget Metrics and the Cheating Clotheshorse

The bottom line: Bush has made no progress on the budget deficit.

by Calculated Risk on 6/19/2006 01:27:00 PM

The National Association of Home Builders (NAHB) reports: Builder Confidence Declines In June (update: add graph)
Click on graph for larger image.

The [Housing Market Index] HMI declined four points from an upwardly revised reading in the previous month to hit 42 for the latest report, its lowest mark since April 1995.

"Based on historical experience, particularly the 1994-95 episode, the pronounced pattern of movement in the HMI is not inconsistent with the reasonably orderly cooling-down process we’re projecting for home sales and single-family housing starts in 2006,” said NAHB Chief Economist David Seiders. “We now expect new-home sales to be off by 13 percent from the record posted in 2005. Single-family starts, supported by large builder backlogs of unfilled orders and some continuing reconstruction in the wake of last year’s hurricanes, should be down by about 9 percent from the 2005 record."

"These forecasts naturally are subject to a considerable degree of risk," added Seiders. "The downside risks include the potential for large numbers of sales cancellations and re-sales by the investor/speculator group as well as more aggressive tightening of monetary policy than we’re assuming in our baseline forecast."
...
All three component indexes declined in June, falling to their lowest levels since early 1995. The index gauging current sales was down three points to 47, while the index gauging sales expectations for the next six months fell five points to 50 and the index gauging traffic of prospective buyers declined four points, to 29.

The decline in builder confidence was broad-based and registered in every region this month. The HMI fell seven points to 40 in the Northeast, four points to 25 in the Midwest, two points to 49 in the South and one point to 61 in the West. These regional indexes are all down by similar amounts from their 1995 highs, and the relatively low levels for the Midwest and Northeast reflect relatively weak economic conditions in those parts of the country.

by Calculated Risk on 6/18/2006 10:38:00 PM

The Arizona Republic reports: How low will it go?

Greed drove metropolitan Phoenix's home prices and sales to new records in 2005. Fear is driving the market this year.
...
"There's a psychological umbrella of fear in Phoenix's housing market now," said Tim Sullivan, a national housing analyst with San Diego-based Sullivan Group. "Buyers are uncertain."
...
With the housing industry accounting for at least one of every three dollars generated in the Valley's economy, any slowdown will hurt. Consumers will be particularly vulnerable: Analysts say the demand for Valley homes and housing prices both were hyperinflated by 25 to 30 percent last year, mostly because of investors.

An excellent article.

"My sense is the worst is behind us, and the housing market will have stabilized with smaller jumps in listings and more steady sales by October," said John Foltz, president of Realty Executives.

Maybe. But I think this is just the beginning ...

by Calculated Risk on 6/16/2006 01:30:00 PM

Paul Krugman writes: The Phantom Menace (NYTimes pay)

"It would be an exaggeration to say that there's no inflation threat at all. I can think of ways in which inflation could become a problem. But it's much easier to think of ways in which the Federal Reserve, wrongly focused on the phantom menace of a new wage-price spiral, could be slow to respond to bigger threats, like a rapidly deflating housing bubble."

So far the housing bubble is not deflating rapidly. But I do think a housing slowdown is a greater threat to the economy than inflation.

Krugman writes:

So I don't fear inflation nearly as much as I fear the fear of inflation. And I wish the Fed would lighten up on the subject.

But by talking about inflation, perhaps the Fed can lessen the fear of inflation. So I think the Fed is correct to talk openly about inflation concerns.

For excerpts of Dr. Krugman's column, see Economist's View.

by Calculated Risk on 6/15/2006 06:29:00 PM

Harvard's Joint Center for Housing Studies last week released a new report on housing: State of the Nation's Housing 2006. The report suggests that a "soft landing" is likely for housing, mostly because other factors are not present (loss of employment and overbuilding).

... when and if house prices do fall, the so-called bubble is more likely to deflate slowly rather than burst suddenly. History suggests that appreciation eases for a year or two before prices come down in nominal terms. While dips of a few percentage points are common, nominal house prices rarely drop by 10 percent or more.

Still, over the past 30 years, nominal house prices have in fact fallen by five percent or more at least once in about half of the nation’s 75 largest metros. In most cases, it takes significant job losses—or a combination of overbuilding, modest job losses and population outflows—to drive house prices down substantially. In terms of magnitude, price declines associated with episodes of major job losses alone average 4.5 percent, while those occurring in and around periods of overbuilding alone average 8.3 percent (Figure 11).
emphasis added

Click on graph for larger image.

Figure 11 shows historical price drops associated with minor and major job loss and overbuilding,

However, one of the co-authors of the Harvard study, Rachel Drew, was quoted in Business Week: A Soft Landing for Housing?

Drew notes that the Harvard study was based on the state of the market at the end of 2005 and admits her optimism has been tempered a bit by the slowdown that's occurred so far this year. "The first-quarter numbers showed the housing market slowing a little faster than we expected," she readily admits. But for the most part, she stands by the conclusions of the report.

Overall I think the Harvard study is reasonable, however I think the price declines will be more significant than JCHS expects. There are several reasons for my pessimism: 1) Housing is now a larger portion of the US economy than in previous periods. So a housing slowdown will have a larger ripple effect on the overall economy. 2) As noted in the report, homeowners have been extracting equity from their homes to maintain their lifestyles. As housing prices flatten out and start to decline, this mortgage equity withdrawal will slow, impacting consumer spending. and 3) there has been significant speculation and the use of leverage to purchase homes in recent years (the exotic or nontraditional loans). This will probably lead to more foreclosures and lower prices.

As Harvard noted: "[historically] appreciation eases for a year or two before prices come down in nominal terms". What Harvard didn't add is the nominal declines are historically slow and steady over a multi-year period.

“Actually, what we are seeing is a very typical slowdown in the market so far—there is nothing particularly soft about it (the landing in bubble markets). The claim is that because unit sales are falling but prices are still going up, that this is an unusual slowing. The fact is that most breaking markets start with activity, and it takes three to four quarters for that to take all the wind out of price appreciation. How hard it will be, remains to be seen.”

UCLA's Dr. Christopher Thornberg (from Smart money is leaving the real estate market)

by Calculated Risk on 6/15/2006 12:10:00 PM

For Fed Watchers, the question is now what happens in August?





Images from the Cleveland Fed.

by Calculated Risk on 6/14/2006 02:14:00 PM

From the Fed's Beige Book Summary:

Residential real estate markets continued to cool across much of the country--with most Districts reporting slower homebuilding and sales of existing homes. In contrast, commercial real estate activity continued to strengthen in most Districts. A few reports noted concern about too much building.

Some softening of the market for existing homes was reported by ten Districts--Chicago, Cleveland, Dallas, Kansas City, Philadelphia, Minneapolis, New York, Richmond, St. Louis, and San Francisco. Dallas and Richmond noted that activity remained quite strong, and Chicago reported slowing from high levels. San Francisco reports hot housing markets in Utah and parts of the Pacific Northwest. Several Districts said sales had weakened for some of the most expensive homes, except in the Dallas District where demand for lower-priced homes "had dipped noticeably." Atlanta reported that residential sales were near year-ago levels in most parts of the District, but that sales weakened and inventories increased in Florida. The Philadelphia District said sales of homes in resort areas have declined sharply. The New York District reports a sharp deceleration in prices in the suburbs around New York City, but a tightening of the Manhattan rental markets.

Homebuilding slowed in most Districts--Chicago, Cleveland, Dallas, Kansas City, New York, Philadelphia, St. Louis, and San Francisco. The New York District reported that some homebuilders in New Jersey are withdrawing from the authorization process and allowing their options to build to expire, noting that increases in fuel and materials costs are pinching profits. Homebuilders in the Atlanta District reported that single-family home construction was near year-ago levels in most parts of the District, except in Florida, where sales slowed. The Atlanta District also reported that Florida condominium sales continued to weaken and several projects were cancelled.