by Calculated Risk on 2/23/2011 02:02:00 PM

From Kansas City Fed President Thomas Hoenig: Financial Reform: Post Crisis?

Fifteen years ago, I gave a speech entitled “Rethinking Financial Regulation,” which summarized the major threats facing our financial system. My suggestion then was to take steps to reduce interdependencies among large institutions and to limit them to relatively safe activities if they chose to provide essential banking and payments services and be protected by the federal safety net. I also argued that safety net protection and public assistance should not be extended to large organizations extensively engaged in nontraditional and high-risk activities. A final point of those remarks was that central banks must pursue policies that preserve financial stability. I am going to repeat those suggestions today, and as often as the opportunity allows. History is on my side.

Today, I am convinced that the existence of too big to fail financial institutions poses the greatest risk to the U.S. economy. The incentives for risk-taking have not changed post-crisis and the regulatory factors that helped create the crisis remain in place. We must make the largest institutions more manageable, more competitive, and more accountable. We must break up the largest banks, and could do so by expanding the Volcker Rule and significantly narrowing the scope of institutions that are now more powerful and more of a threat to our capitalistic system than prior to the crisis.

I don't always agree with Hoenig, but I think he is correct about the large banks.

Earlier posts on existing home sales and home prices:
• January Existing Home Sales: 5.36 million SAAR, 7.6 months of supply
• Existing Home Inventory increases 3.1% Year over Year
• Real House Prices fall to 2000 Levels, Update on NAR Overstating Sales
• Case-Shiller: National Home Prices Are Close to the 2009Q1 Trough
• House Prices: Price-to-rent, Price-to-median Household Income

by Calculated Risk on 2/23/2011 11:30:00 AM

Earlier the NAR released the existing home sales data for January; here are a couple more graphs ...

The first graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Inventory is not seasonally adjusted, so it really helps to look at the YoY change.

IMPORTANT: On a seasonal basis, inventory usually bottoms in December and January, and then will start increasing again in February and March. Since the NAR "months-of-supply" metric uses Seasonally Adjusted (SA) sales, but Not Seasonally Adjusted (NSA) inventory, this seasonal decline in inventory leads to a lower "months-of-supply" in December and January.

The key is to recognize the seasonal pattern, and watch the YoY change in inventory.

Click on graph for larger image in graph gallery.

Although inventory decreased from December to January, inventory increased 3.1% YoY in January. This is the sixth consecutive month of year-over-year increases in inventory, although the increase in January was lower than the previous months. But any increase is bad news with the high level of inventory.

Inventory should increase in February and March, and this is something to watch closely over the next few months.

By request - the second graph shows existing home sales Not Seasonally Adjusted (NSA).

The red column in January is for 2011.

Sales NSA were about the same level as the last three years. January is usually the weakest month of the year for existing home sales (followed by February). The real key is what happens in the spring and summer.

The bottom line: Sales increased slightly in January (using the old method to estimate sales), apparently due to an increase in investor purchases of distressed properties at the low end. The NAR noted "Investors accounted for 23 percent of purchases in January, up from 20 percent in December and 17 percent in January 2010 ... Distressed homes edged up to a 37 percent market share in January from 36 percent in December"

Inventory remains very high, and the year-over-year increase in inventory is very concerning.

by Calculated Risk on 2/23/2011 10:00:00 AM

The NAR reports: January Existing-Home Sales

Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, increased 2.7 percent to a seasonally adjusted annual rate of 5.36 million in January from a downwardly revised 5.22 million in December, and are 5.3 percent above the 5.09 million level in January 2010.
...
Total housing inventory at the end of January fell 5.1 percent to 3.38 million existing homes available for sale, which represents a 7.6-month supply at the current sales pace, down from an 8.2-month supply in December. The inventory supply is at the lowest level since December 2009 when there was a 7.3-month supply.

Click on graph for larger image in new window.

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

Sales in January 2010 (5.36 million SAAR) were 2.7% higher than last month, and were 5.3% higher than January 2010.

The second graph shows nationwide inventory for existing homes.

According to the NAR, inventory decreased to 3.38 million in January from 3.56 million in December.

Inventory is not seasonally adjusted and there is a clear seasonal pattern with inventory peaking in the summer and declining in the fall - and then really declining during the holidays. So this decline was expected. Inventory should start to increase again in February.

The last graph shows the 'months of supply' metric.

Months of supply decreased to 7.6 months in January from 8.2 months in December. The months of supply will probably increase over the next few months as sales slow a little, and inventory increases. This is still higher than normal.

These sales numbers were above the consensus of 5.2 million SAAR, and are above what I expected (Lawler's forecast was 5.17 million). I'll have more later.

Special Note: Back in January, I noted that it appeared the NAR had overestimated sales by 5% or so in 2007, and that the errors had increased since then (perhaps 10% or 15% or more in 2009 and 2010). I reported in January that the NAR was working on benchmarking existing home sales for earlier years with other industry data, and I expected "this effort will lead to significant downward revisions to previously reported sales". The numbers reported today were estimated using the old method and will probably be revised down significantly, but they are still useful on a month-to-month basis.

by Calculated Risk on 2/23/2011 07:50:00 AM

The MBA reports: Mortgage Applications Increase in Latest MBA Weekly Survey

The Refinance Index increased 17.8 percent from the previous week. The seasonally adjusted Purchase Index increased 5.1 percent from one week earlier.
...
“Ongoing turmoil in the Middle East brought interest rates lower last week. Borrowers took advantage of these lower rates, bringing application activity back near levels from two weeks ago, following sharp declines last week,” said Michael Fratantoni, MBA’s Vice President of Research and Economics.
...
The average contract interest rate for 30-year fixed-rate mortgages decreased to 5.00 percent from 5.12 percent, with points increasing to 0.97 from 0.85 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.

Click on graph for larger image in graph gallery.

This graph shows the MBA Purchase Index and four week moving average since 1990.

Even with the slight increase in activity last week, the four-week moving average of the purchase index is still at 1997 levels - suggesting weak home sales through the first few months of 2011.

by Calculated Risk on 2/23/2011 12:01:00 AM

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

From the American Institute of Architects: Billings at Architecture Firms Hold Steady in January

Following a healthy upturn in the fourth quarter, design billings at U.S. architecture firms remained flat in January. The national reading for the AIA’s Architecture Billings Index (ABI) was 50.0, meaning that on average billings in January exactly matched December levels.

Click on graph for larger image in graph gallery.

This graph shows the Architecture Billings Index since 1996. The index showed billings were at the same level in January as in December (at 50).

Note: Nonresidential construction includes commercial and industrial facilities like hotels and office buildings, 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. So this indicator suggests the drag from CRE investment will end mid-year 2011 or so.

by Calculated Risk on 2/22/2011 08:35:00 PM

There is no perfect gauge of "normal" house prices. Changes in house prices depend on local supply and demand. However I've found the three most useful measures of house prices are 1) real house prices, 2) the house price-to-rent ratio, and 3) the house price-to-median household income ratio. These are just general guides, but they are still useful (these are national numbers, and it is better to use local numbers when possible).

Price-to-Rent

In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

Click on graph for larger image in graph gallery.

Here is a similar graph through December 2010 using the Case-Shiller Composite 20 and CoreLogic House Price Index.

This graph shows the price to rent ratio (January 1998 = 1.0).

This ratio could decline another 10% to 15%, and possibly more if prices overshoot to the downside. The decline in the ratio will probably be a combination of house prices and increasing rents (recent reports suggest rents are now increasing).

Price to Household Income

The second graph shows the Case Shiller National price index through Q4 2010 and the median household income (from the Census Bureau, Table H-8, 2010 estimated as increasing 0.5%).

This ratio is still a little high, and could decline another 5% to 10% (and more if prices overshoot). The decline in the ratio could be a combination of falling house prices and an increase in the median household income.

Real House Prices

Earlier I posted real house prices using the Case-Shiller National Index, the Case-Shiller Composite 20 index, and the CoreLogic House Price Index in real terms (adjusted for inflation using CPI less shelter). Note: some people use other inflation measures to adjust for real prices. Here is a repeat of that graph:

In real terms, the National index is back to Q1 2000 levels, the Composite 20 index is back to January 2001, and the CoreLogic index back to October 2000.

It looks like real prices could fall another 5% to 10% (more with overshoot). However what everyone wants to know is the change in nominal prices (not inflation adjusted). If real prices eventually fall 10%, that doesn't mean nominal prices will fall that far (it depends on inflation).

My guess: Although Professor Shiller was quoted today saying house prices could fall another 15% to 25%, I'm sticking with my forecast that nominal national house prices - as measured by these repeat sales indexes - will decline another 5% to 10% from the October levels.

Earlier on house prices:
• Real House Prices fall to 2000 Levels, Update on NAR Overstating Sales
• Case-Shiller: National Home Prices Are Close to the 2009Q1 Trough

by Calculated Risk on 2/22/2011 05:25:00 PM

The FHA released the December Monthly Report today. The report shows the FHA REO inventory was at 60,739 at the end of December, up 9.5% from 55,488 in November, and up 47.5% from December 2009.

The combined REO inventory for the "Fs" (Fannie, Freddie and FHA) was at a record 293,171 at the end of Q3 2010. Fannie and Freddie will report for Q4 soon, and based on the increase at the FHA, REO inventory will be well over 300,000 at year end.

Here is the graph of Fannie, Freddie and FHA inventory over the last three years through Q3 2010.

Earlier on house prices:
• Real House Prices fall to 2000 Levels, Update on NAR Overstating Sales
• Case-Shiller: National Home Prices Are Close to the 2009Q1 Trough

by Calculated Risk on 2/22/2011 01:45:00 PM

House prices:
• From David Streitfeld at the NY Times: Home Prices Slid in December in Most U.S. Cities, Index Shows

Mr. Shiller, noting the unrest in the Middle East, a large backlog of foreclosed houses, the uncertain future of the mortgage holding companies Fannie Mae and Freddie Mac, and proposals to reduce the mortgage tax deduction, saw “a substantial risk” of declines of “15 percent, 20 percent, 25 percent.”

• Real House Prices fall to 2000 Levels, Update on NAR Overstating Sales
• Case-Shiller: National Home Prices Are Close to the 2009Q1 Trough

Other U.S. economic news:
• From the Richmond Fed: Manufacturing Activity Advanced at a Healthy Pace in February

In February, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — rose seven points to 25 from January's reading of 18. ... The manufacturing employment index added two points to end at 16, and the average workweek measure moved up three points to 20. Moreover, wage growth gained five points to 18. ... District manufacturers reported that raw materials prices increased at an average annual rate of 4.72 percent

All good news except prices.
• From MarketWatch: Consumer confidence jumps in February

The gauge for consumer confidence rose to 70.4 in February from 64.8 in January.

Libya updates:
• From the NY Times: Chaos Grows in Libya as Strife in Tripoli Intensifies

Libya appeared to slip further into chaos on Tuesday, as Col. Muammar el-Qaddafi vowed “to fight to the last drop of blood” and clashes intensified between rebels and his loyalists in the capital, Tripoli. ... Witnesses described the streets of Tripoli as a war zone.

• The Telegraph blog that is updated frequently: Libya protests: live

• From al Jazeera: Libya Live Blog

by Calculated Risk on 2/22/2011 11:11:00 AM

First, the WSJ has a followup on the story I broke on the NAR overstating sales in the 2006 through 2010 period (My January posts are here, here and here). From Nick Timiraos: Home Sales Data Doubted

Several economists approached NAR late last year with questions about its modeling. NAR economists promised to study the issue during a December conference call that included economists from the Mortgage Bankers Association, Fannie Mae, Freddie Mac, the Federal Reserve, the Federal Housing Finance Agency and CoreLogic.

... Even assuming a high share of all-cash sales, purchase-loan application data suggests that home sales have been overstated by 10% to 15%, said Jay Brinkmann, the MBA's chief economist.

"If they are off by this much, this consistently, it would be sending the wrong signal to the market," said Mr. Brinkmann.

The real key is the level of inventory and months-of-supply. Prices were boosted in 2009 and early 2010 by a combination of policies, including the housing tax credits, foreclosure moratoriums (reducing supply), and low mortgage rates. Prices are now falling again, and if the months-of-supply is substantially higher than originally thought (the NAR reported 8.1 months in December), then prices will probably fall further than many analysts expect.

This morning S&P/Case-Shiller released the monthly Home Price indexes for December (a three month average) and the Q4 National quarterly index.

The following graph shows the Case-Shiller National Index, the Case-Shiller Composite 20 index, and the CoreLogic House Price Index in real terms (adjusted for inflation using CPI less shelter). Note: some people use other inflation measures to adjust for real prices.

Click on graph for larger image in graph gallery.

In real terms, the National index is back to Q1 2000 levels, the Composite 20 index is back to January 2001, and the CoreLogic index back to October 2000.

A few key points:
• The real price indexes are at post-bubble lows. The National index is at a post-bubble low in nominal terms too (not inflation adjusted), and is now back to Q1 2003 prices. Those who argued prices bottomed some time ago are already wrong - and prices are still falling.

• I don't expect real prices to fall to '98 levels. In many areas - if the population is increasing - house prices increase slightly faster than inflation over time, so there is an upward slope in real prices.

• Real prices are still too high, but they are much closer to the eventual bottom than the top in 2005. This isn't like in 2005 when prices were way out of the normal range.

• Prices will probably fall some more and my forecast is for a decline of 5% to 10% from the October 2010 levels for the national price indexes. However we need to watch inventory (and months-of-supply) closely over the next few months - and it doesn't help that the NAR data is questionable.

by Calculated Risk on 2/22/2011 09:00:00 AM

S&P/Case-Shiller released the monthly Home Price Indices for December (actually a 3 month average of October, November and December).

This includes prices for 20 individual cities and and two composite indices (for 10 cities and 20 cities), plus the Q4 quarterly national house price index.

Note: Case-Shiller reports NSA, I use the SA data.

From S&P: National Home Prices Are Close to the 2009Q1 Trough

Data through December 2010, released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices ... show that the U.S. National Home Price Index declined by 3.9% during the fourth quarter of 2010. The National Index is down 4.1% versus the fourth quarter of 2009, which is the lowest annual growth rate since the third quarter of 2009, when prices were falling at an 8.6% annual rate. As of December 2010, 18 of the 20 MSAs covered by S&P/Case-Shiller Home Price Indices and both monthly composites were down compared to December 2009.

Click on graph for larger image in graph gallery.

The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 31.2% from the peak, and down 0.4% in December(SA). The Composite 10 is still 2.4% above the May 2009 post-bubble bottom.

The Composite 20 index is also off 31.2% from the peak, and down 0.4% in December (SA). The Composite 20 is only 0.8% above the May 2009 post-bubble bottom and will probably be at a new post-bubble low in January.

The second graph shows the Year over year change in both indices.

The Composite 10 SA is down 1.2% compared to December 2009.

The Composite 20 SA is down 2.4% compared to December 2009.

The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

Prices increased (SA) in only 7 of the 20 Case-Shiller cities in December seasonally adjusted.

Prices in Las Vegas are off 58% from the peak, and prices in Dallas only off 8% from the peak.

From S&P:

Eleven MSAs posted new index level lows in December 2010, since their 2006/2007 peaks. These cities are Atlanta, Charlotte, Chicago, Detroit, Las Vegas, Miami, New York, Phoenix, Portland (OR), Seattle and Tampa. Nine of these cities had also posted lows with November’s report as well. New York and Phoenix are the new entrants to this group with December’s data.

Prices are now falling just about everywhere, and more cities are hitting new post-bubble lows. Both composite indices are still slightly above the post-bubble low, but the indexes will probably be at new lows in early 2011.