by Calculated Risk on 5/18/2011 02:00:00 PM

The Bernanke press conference after the FOMC meeting covered some of discussion in the statement.

From the April 27, 2011 FOMC meeting. There is a lengthy discussion on the eventual exit strategy, although it clearly will not happen soon.

Meeting participants agreed on several principles that would guide the Committee's strategy for normalizing monetary policy. First, with regard to the normalization of the stance of monetary policy, the pace and sequencing of the policy steps would be driven by the Committee's monetary policy objectives for maximum employment and price stability. Participants noted that the Committee's decision to discuss the appropriate strategy for normalizing the stance of policy at the current meeting did not mean that the move toward such normalization would necessarily begin soon. Second, to normalize the conduct of monetary policy, it was agreed that the size of the SOMA's securities portfolio would be reduced over the intermediate term to a level consistent with the implementation of monetary policy through the management of the federal funds rate rather than through variation in the size or composition of the Federal Reserve's balance sheet. Third, over the intermediate term, the exit strategy would involve returning the SOMA to holding essentially only Treasury securities in order to minimize the extent to which the Federal Reserve portfolio might affect the allocation of credit across sectors of the economy. Such a shift was seen as requiring sales of agency securities at some point. And fourth, asset sales would be implemented within a framework that had been communicated to the public in advance, and at a pace that potentially could be adjusted in response to changes in economic or financial conditions.

In addition, nearly all participants indicated that the first step toward normalization should be ceasing to reinvest payments of principal on agency securities and, simultaneously or soon after, ceasing to reinvest principal payments on Treasury securities. Most participants viewed halting reinvestments as a way to begin to gradually reduce the size of the balance sheet. It was noted, however, that ending reinvestments would constitute a modest step toward policy tightening, implying that that decision should be made in the context of the economic outlook and the Committee's policy objectives. In addition, changes in the statement language regarding forward policy guidance would need to accompany the normalization process.

The sequence will probably be: 1) End of QE2 at the end of June, 2) stop reinvestment some time later this year, 3) remove the "exceptionally low levels for the federal funds rate for an extended period" late this year or in 2012, 4) and then start raising rates / selling assets in 2012 or even 2013. Anyone expecting the Fed to raise rates this year is probably overlooking some of these steps.

And here were the forecasts as of April 27th (GDP was revised down, inflation up, unemployment rate down - Bernanke released this earlier):

April 2011 Economic projections of Federal Reserve Governors and Reserve Bank presidents
	2011	2012	2013
Change in Real GDP	3.1 to 3.3	3.5 to 4.2	3.5 to 4.3
Previous Projection (Jan 2011)	3.4 to 3.9	3.5 to 4.4	3.7 to 4.6
Unemployment Rate	8.4 to 8.7	7.6 to 7.9	6.8 to 7.2
Previous Projection (Jan 2011)	8.8 to 9.0	7.6 to 8.1	6.8 to 7.2
PCE Inflaton	2.1 to 2.8	1.2 to 2.0	1.4 to 2.0
Previous Projection (Jan 2011)	1.3 to 1.7	1.0 to 1.9	1.2 to 2.0
Core PCE Inflation	1.3 to 1.6	1.3 to 1.8	1.4 to 2.0
Previous Projection (Jan 2011)	1.0 to 1.3	1.0 to 1.5	1.2 to 2.0

FOMC definitions:
¹ Projections of change in real GDP and in inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.
² Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

by Calculated Risk on 5/18/2011 10:50:00 AM

Reader "Soylent Green is People" asks if Retirement Equity Withdrawal is replacing Mortgage Equity Withdrawal (MEW) for those in need?

Borrowing from retirement accounts has definitely increased. From CNBC two weeks ago: More Americans Raiding Retirement Funds Early

... 19 percent of Americans — including 17 percent of full-time workers — have been compelled to take money from their retirement savings in the last year to cover urgent financial needs, the Financial Security Index found.

And from a new study by Aon Hewitt: Leakage of Participants’ DC Assets: How Loans, Withdrawals, and Cashouts Are Eroding Retirement Income Note: "DC" is Defined Contribution - like a 401(k) plan.

As of year-end 2010, nearly 28% of active participants had a loan outstanding, which is a record high. Nearly 14% of participants initiated new loans during 2010, slightly higher than previous years. The average balance of the outstanding amount was $7,860, which represented 21% of these participants’ total plan assets.

Hmmm ... $7,860 is 21% of total assets? That means the average total balance is less than $40,000 for participants who borrow from a DC plan.

Also - check out page 4 of the Aon Hewitt study. The 2nd graph shows that 32.8% of participants in the 40 to 49 age cohort have DC loans, and 29.0% in the 50 to 59 age cohort have loans. These people have next to nothing in their retirement plans and most will probably have to rely on Social Security if they ever retire.

Note: Politicians are trying to limit this borrowing, from Bloomberg: Senate Bill Would Limit Using 401(k)s as Rainy-Day Funds

My feeling is REW isn't really the new MEW. The size is much smaller, and this borrowing is much more need related as opposed to buying bigger toys, or being used for home improvement. But as "Soylent Green is People" suggested in his email to me, this reliance on REW is "an indicator of financial peril".

by Calculated Risk on 5/18/2011 07:52:00 AM

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

Refinance Index increased 13.2 percent from the previous week and is at its highest level since the week ending December 10, 2010. The seasonally adjusted Purchase Index decreased 3.2 percent from one week earlier.
...
“The 30-year fixed mortgage rate is now 53 basis points below its 2011 peak, and has decreased for five straight weeks,” said Michael Fratantoni, MBA’s Vice President of Research. “Over this five week span, the refinance index has increased by about 33 percent. Refinance application volumes remain about 50 percent below the most recent peak last October. ”
...
The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.60 percent from 4.67 percent, with points decreasing to 0.94 from 1.10 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. This is the lowest 30-year rate recorded in the survey since the end of November 2010.

Click on graph for larger image in graph gallery.

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

Refinance activity increased as mortgage rates fell to the lowest level since November 2010.

The four week average of purchase activity is at about 1997 levels, although this doesn't include the very high percentage of cash buyers. This suggests weak existing home sales through June (not counting cash buyers).

by Calculated Risk on 5/18/2011 12:05:00 AM

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

From Reuters: US architecture billings index falls in April-AIA

The architecture billings index fell almost 3 points last month to 47.6, a level that indicates declining demand for architecture services, according to the American Institute of Architects (AIA).
...
"The majority of firms are reporting at least one stalled project in-house because of the continued difficulty in obtaining financing," said AIA Chief Economist Kermit Baker. "That issue continues to be the main roadblock to recovery, and is unlikely to be resolved in the immediate future."

Click on graph for larger image in graph gallery.

This graph shows the Architecture Billings Index since 1996. The index showed billings decreased in April (index at 47.6, anything below 50 indicates a decrease in billings).

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.

by Calculated Risk on 5/17/2011 10:07:00 PM

A couple of stories:

• From LPS "first look" report: April Month-End Data Shows an Increase in Delinquency Rate and Drop in Foreclosure Inventories. After the sharp drop in delinquencies in March, the delinquency rate edged up in April.

The delinquency rate increased to 7.97% from 7.78% in March. There were an additional 4.14% of mortgage in the foreclosure process, down from 4.21% in March.

A total of 6.39 million loans were delinquent, up slightly from 6.33 million. The full report will be released on May 26th. Note: The Q1 delinquency report from the MBA will be released this Thursday and will probably show a sharp decline in delinquencies.

• From FNC: March Home Prices Show Improving Trends - Rising 0.1% from February. This is one of several house price indexes I'm following in addition to Case-Shiller and CoreLogic. This is non-distressed sales.

FNC announced Wednesday that U.S. home prices in March continue to show signs of stabilization following rather mild declines in February, making March the second consecutive month with better-than-expected price momentum.

Based on the latest data on non-distressed home sales (existing and new homes), FNC’s Residential Price Index™ 1 (RPI) indicated that single-family home prices in March trended slightly upward since February at a seasonally unadjusted rate of 0.1%, consistent with rising home sales during the month. Despite continued downward price pressure from a relatively high volume of foreclosure sales, March marks the first month that home prices have shown a modest one-month gain since the April 2010 expiration of the homebuyer tax credits.

Note: This is a hedonic price index using both sales and real-time appraisals. In general it has tracked pretty well with Case-Shiller and CoreLogic.

FNC has data online for 30 MSAs here.

Earlier:
• Housing Starts decline in April
• Industrial Production unchanged in April, Capacity Utilization declines slightly
• Multi-family Starts and Completions, and Quarterly Starts by Intent

by Calculated Risk on 5/17/2011 07:37:00 PM

From Motoko Rich and Stephanie Clifford at the NY Times: In Consumer Behavior, Signs of Gas Price Pinch

“Our customers are consolidating trips due to higher gas prices,” said Bill Simon, who oversees the [WalMart] United States business.
...
“Rising gas and energy prices are cited by homeowners as the top factor affecting future spending plans, followed by the state of the overall economy and inflation in general,” said Lowe’s chief executive, Robert A. Niblock, explaining earnings that missed analyst expectations in a call with investors.

MasterCard Advisors SpendingPulse, which researches consumer spending, reported on Tuesday that the gallons of gas pumped nationwide in the last month fell by 1 percent from the same period a year ago.

And a similar article from Miguel Bustillo at the WSJ: Fewer Trips to Stores Hurt Wal-Mart, Lowe's

The price of gas has remained close to $4 a gallon in May. The national average was $3.94 Tuesday morning, according to the automotive group AAA, up substantially from $2.87 a year ago.

These reports from Home Depot, Lowe's and WalMart were all for Q1, and oil prices averaged close to $95 per barrel (WTI) in Q1, and even with the recent decline - that is below the current price of $98 per barrel. So April and May (so far) were probably worse for these retailers since gasoline prices were even higher than in Q1.

by Calculated Risk on 5/17/2011 03:45:00 PM

CR Note: A key piece of data for the housing market - and the U.S. economy - is the current number of excess vacant housing units.

Unfortunately it is very difficult to get a good handle on this excess supply (it is large, but how large?). Both Tom Lawler and I are hopeful that we can arrive at a more accurate estimate using the Census 2010 data to be released this month (the estimate will be as of April 1, 2010).

Please excuse Tom's punctuation - but he has been arguing for better housing data for years - and he is clearly frustrated!

By Tom Lawler: The “Excess Supply of Housing” War: Is the 3.5 Million Estimate “Gold” (Man, No!); or Can You Take the 1.2 Million Estimate to the (Deutsche) Bank?

A few weeks ago Goldman Sachs’ analysts made headlines by arguing that the “excess” supply of housing, or actually the number of US housing units sitting vacant “above and beyond normal seasonal and frictional vacancies,” was “about” 3.5 million. This week Deutsche Bank analysts estimated that at the end of 2010 there were about 1.2 million “excess” vacant housing units in the US. Both sets of analysts relied heavily on data “provided” by the US Bureau of the Census in deriving their “estimates.” And, to the best of my knowledge, neither set of analysts was comprised of imbeciles. Yet jiminy cricket, those are pretty huge differences with massively different implications about the prospects for the housing markets and home prices over the next few years!!!!! And the major reasons for these differences? You guessed it, massively disparate sets of data from different areas of the Census Bureau on US housing!!!!

As readers probably guessed, Goldman analysts’ estimates are based on what are almost certainly flawed and biased estimates of the occupied and vacant housing units from Census’ quarterly “Residential Vacancies and Homeownership” Reports, commonly referred to as the Housing Vacancy Survey (HVS). While there had already been strong evidence that the HVS dramatically overstated both homeownership rates and vacancy rates prior to the decennial Census 2010 (from the ACS), the incoming data from Census 2010 pretty much confirm that the HVS data has serious biases, probably related to serious sampling issues.

The Deutsche Bank analysts’ estimates are based on the Census 2010 gross vacancy rate versus a weighted average of the Census 1990 gross vacancy rate (weighted 75% for pretty flimsy reasons) and the Census 2000 gross vacancy rates (weighted, of course, 25%). (DB analysts “walk forward” the April 1 Census 2010 estimates to the end of 2010 using what I believe are “questionable” assumptions about household formations and net demolitions). Census 2010 has not yet released national data on vacant units by status (for rent, for sale, etc., and it was sorta weird that DB analysts didn’t just wait a few weeks to do a more “rigorous’ estimate based on more complete Census 2010 data.

DB’s piece includes a decently long and not “too” bad discussion (though with many errors and/or omissions) of the multiple and disparate sets of data on the US housing stock derived from various surveys done by different areas in the Census Bureau.

What is disturbing, of course, is not necessarily that different sets of analysts can come to different sets of conclusions when analyzing US housing data. Rather, it is that there are multiple and conflicting “official” sets of government-produced data on the US housing stock, with little or no discussion from government officials/analysts are which – if any – dataset should be used by analysts to estimate the “excess” supply of housing in the United States

Earlier:
• Housing Starts decline in April
• Industrial Production unchanged in April, Capacity Utilization declines slightly
• Multi-family Starts and Completions, and Quarterly Starts by Intent

by Calculated Risk on 5/17/2011 12:20:00 PM

Also from the Housing Starts report this morning ...

Although the number of multi-family starts can vary significantly month to month, apartment owners are seeing falling vacancy rates, and some have started to plan for 2012 and will be breaking ground this year. So we should see a pickup in multi-family starts in 2011.

However, since it takes over a year on average to complete multi-family projects - and multi-family starts were at a record low last year - there will be a record low number of multi-family completions this year.

The following graph shows the lag between multi-family starts and completions using a 12 month rolling average.

Click on graph for larger image in graph gallery.

The blue line is for multifamily starts and the red line is for multifamily completions. Since multifamily starts collapsed in 2009, completions collapsed in 2010.

For 2011, we should expect multi-family completions to be at or near a record low, and an increase in multi-family starts. It appears that the rolling 12 month starts (blue line) will be above completions (red line) next month.

Also today, the Census Bureau released the "Quarterly Starts and Completions by Purpose and Design" report for Q1 2011. Although this data is Not Seasonally Adjusted (NSA), it shows the trends for several key housing categories.

This graph shows the NSA quarterly intent for four start categories since 1975: single family built for sale, owner built (includes contractor built for owner), starts built for rent, and condos built for sale.

Single family starts built for sale were up slightly from Q4, but still near a record low. Owner built starts were at a record low, and condos built for sale are scrapping along the bottom.

Only the 'units built for rent' is showing any significant pickup.

The largest category - starts of single family units, built for sale - is moving sideways, and will remain weak until more of the excess vacant housing units are absorbed.

by Calculated Risk on 5/17/2011 09:30:00 AM

From the Fed: Industrial production and Capacity Utilization

Industrial production was unchanged in April after having increased 0.7 percent in March. Output in February is now estimated to have declined 0.3 percent; previously it was reported to have edged up 0.1 percent. In April, manufacturing production fell 0.4 percent after rising for nine consecutive months. Total motor vehicle assemblies dropped from an annual rate of 9.0 million units in March to 7.9 million units in April, mainly because of parts shortages that resulted from the earthquake in Japan. Excluding motor vehicles and parts, factory production rose 0.2 percent in April. The output of mines advanced 0.8 percent, while the output of utilities increased 1.7 percent. At 93.1 percent of its 2007 average, total industrial production was 5.0 percent above its year-earlier level. The rate of capacity utilization for total industry edged down 0.1 percentage point to 76.9 percent, a rate 3.5 percentage points below its average from 1972 to 2010.

Click on graph for larger image in graph gallery.

This graph shows Capacity Utilization. This series is up 9.6 percentage points from the record low set in June 2009 (the series starts in 1967).

Capacity utilization at 76.9% is still "3.5 percentage points below its average from 1972 to 2010" - and below the pre-recession levels of 81.2% in November 2007.

Note: y-axis doesn't start at zero to better show the change.

The second graph shows industrial production since 1967.

Edit: typo on graph, it should read 2007 = 100.

Industrial production was unchanged in April at 93.1; previous months were revised down, so this is a decline from the previously reported level in March.

Production is still 7.6% below the pre-recession levels at the end of 2007.

The consensus was for a 0.4% increase in Industrial Production in April, and an increase to 77.6% for Capacity Utilization. So this was well below expectations - partly because of the earthquake in Japan.

by Calculated Risk on 5/17/2011 08:30:00 AM

Click on graph for larger image in graph gallery.

Total housing starts were at 523 thousand (SAAR) in April, down 10.6% from the revised March rate of 585 thousand.

Single-family starts decreased 5.1% to 394 thousand in April.

The second graph shows total and single unit starts since 1968. This shows the huge collapse following the housing bubble, and that housing starts have mostly been moving sideways for over two years - with slight ups and downs due to the home buyer tax credit.

Here is the Census Bureau report on housing Permits, Starts and Completions.

Housing Starts:
Privately-owned housing starts in April were at a seasonally adjusted annual rate of 523,000. This is 10.6 percent (±13.0%)* below the revised March estimate of 585 000 and is 23 9 percent (±7 0%) below the revised April 2010 rate of 687 000.

Single-family housing starts in April were at a rate of 394,000; this is 5.1 percent (±10.2%)* below the revised March figure of 415,000. The April rate for units in buildings with five units or more was 114,000.

Building Permits:
Privately-owned housing units authorized by building permits in April were at a seasonally adjusted annual rate of 551,000. This is 4.0 percent (±1.1%) below the revised March rate of 574,000 and is 12.8 percent (±1.2%)below the revised April 2010 estimate of 632,000.

Single-family authorizations in April were at a rate of 385,000; this is 1.8 percent (±1.0%) below the revised March figure of 392,000. Authorizations of units in buildings with five units or more were at a rate of 143,000 in April.

This was well below expectations of 570 thousand starts in April. I'll have more on starts later ... I expect starts to stay low until more of the excess inventory of existing homes is absorbed.