by Calculated Risk on 9/21/2011 02:22:00 PM

From the Federal Reserve:

Information received since the Federal Open Market Committee met in August indicates that economic growth remains slow. Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has been increasing at only a modest pace in recent months despite some recovery in sales of motor vehicles as supply-chain disruptions eased. Investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect some pickup in the pace of recovery over coming quarters but anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Committee will maintain its existing policy of rolling over maturing Treasury securities at auction.

The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action were Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who did not support additional policy accommodation at this time.

UPDATE: Statement from NY Fed: Statement Regarding Maturity Extension Program and Agency Security Reinvestments (includes details).

Earlier:
• Existing Home Sales in August: 5.0 million SAAR, 8.5 months of supply
• Existing Home Sales: Comments and NSA Graph
• Existing Home Sales graphs

by Calculated Risk on 9/21/2011 11:59:00 AM

A few comments and a graph (of course):

• The NAR reported that inventory decreased in August from July, and that inventory is off 13.1% from August 2010. Other data sources suggest that the NAR is overstating inventory (inventory will be part of the coming revisions). Also it appears inventory has continued to decline (year-over-year) in September.

This year-over-year decline in inventory is one of the most important stories of the year for the existing home market, and is hardly being mentioned. I suspect many homeowners are "waiting for a better market", but less inventory will put less downward pressure on prices. Of course REO activity is picking up again and distressed sales will put more downward pressure on prices - but this decline in inventory is still important.

• The NAR provided an update on the timing of the "benchmark revisions":

Update on Benchmark Revisions: ... Preliminary data based on the new benchmark is undergoing review by professional economists. This process is expected to take some time before finalized revisions can be published to address any issues that may surface in the review process and to update monthly seasonal adjustment factors; NAR is committed to providing accurate, reliable data. Publication of the revisions is expected in several months, and we will provide a notice several weeks in advance of the publication date.

This revision is expected to show significantly fewer homes sold over the last few years (perhaps 10% to 15% fewer homes in 2010 than originally reported), and also fewer homes for sale.

• The following graph shows existing home sales Not Seasonally Adjusted (NSA).

Click on graph for larger image in graph gallery.

The red columns are for 2011.

Sales NSA are above last August - of course sales declined sharply last year following the expiration of the tax credit in June 2010 - but sales are also above August 2008 and 2009 (pre-revision).

The level of sales is still elevated due to investor buying. The NAR noted:

All-cash sales accounted for 29 percent of transactions in August, unchanged from July; they were 28 percent in August 2010; investors account for the bulk of cash purchases.

Investors accounted for 22 percent of purchase activity in August, up from 18 percent in July and 21 percent in August 2010. First-time buyers purchased 32 percent of homes in August, unchanged from July; they were 31 percent in August 2010.

Earlier:
• Existing Home Sales in August: 5.0 million SAAR, 8.5 months of supply
• Existing Home Sales graphs

by Calculated Risk on 9/21/2011 10:00:00 AM

The NAR reports: August Existing-Home Sales Rise Despite Headwinds, Up Strongly from a Year Ago

Total existing-home sales1, which are completed transactions that include single-family, townhomes, condominiums and co-ops, rose 7.7 percent to a seasonally adjusted annual rate of 5.03 million in August from an upwardly revised 4.67 million in July, and are 18.6 percent higher than the 4.24 million unit level in August 2010.
...
Total housing inventory at the end of August fell 3.0 percent to 3.58 million existing homes available for sale, which represents an 8.5-month supply4 at the current sales pace, down from a 9.5-month supply in July

Click on graph for larger image in graph gallery.

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

Sales in August 2011 (5.03 million SAAR) were 7.7% higher than last month, and were 18.6% above the August 2010 rate (depressed in Aug 2010 following expiration of tax credit).

The second graph shows nationwide inventory for existing homes.

According to the NAR, inventory decreased to 3.58 million in August from 3.69 million in July.

The last graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, so it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory.

Inventory decreased 13.1% year-over-year in August from August 2010. This is the seventh consecutive month with a YoY decrease in inventory.

Months of supply decreased to 8.5 months in August, down from 9.5 months in July. This is much higher than normal. These sales numbers were well above the consensus, but just slightly above Lawler's forecast using the NAR method.

I'll have more soon ...

by Calculated Risk on 9/21/2011 08:12:00 AM

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

From AIA: Architecture Billings Index Turns Positive after Four Straight Monthly Declines

On the heels of a period of weakness in design activity, the Architecture Billings Index (ABI) took a sudden upturn in August. ... The American Institute of Architects (AIA) reported the August ABI score was 51.4, following a very weak score of 45.1 in July. This score reflects an increase in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 56.9, up sharply from a reading of 53.7 the previous month.

“Based on the poor economic conditions over the last several months, this turnaround in demand for design services is a surprise,” said AIA Chief Economist, Kermit Baker, PhD, Hon. AIA. “Many firms are still struggling, and continue to report that clients are having difficulty getting financing for viable projects, but it’s possible we’ve reached the bottom of the down cycle.”

Click on graph for larger image in graph gallery.

This graph shows the Architecture Billings Index since 1996. The index increased to 51.4 in August from 45.1 in July. Anything above 50 indicates expansion in demand for architects' services.

Note: This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, 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 the recent contraction suggests further declines in CRE investment in early 2012, but possibly flattening out in 9 to 12 months (just one month's data).

by Calculated Risk on 9/21/2011 07:24:00 AM

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

The Refinance Index increased 2.2 percent from the previous week. The seasonally adjusted Purchase Index decreased 4.7 percent from one week earlier.
...
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) remained unchanged at 4.29 percent, with points increasing to 0.41 from 0.38 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.

The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (> $417,500) decreased to 4.55 percent from 4.57 percent, with points increasing to 0.46 from 0.42 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.

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

Click on graph for larger image in graph gallery.

August was an especially weak month for this index. This increase was pretty small, and although this doesn't include the large number of cash buyers, this suggests fairly weak home sales in September and October.

Note from the MBA:

This week's results are based on an enhanced sample which captures more than 75% of all retail and consumer direct channel mortgage applications, compared to 50% previously. This expansion in survey coverage will benefit all users of the survey as it will increase the representativeness of the data.

Changes to the Weekly Application Survey include:

• The survey captures more than 75% of all U.S. retail and consumer direct mortgage applications, compared to 50% previously.
• MBA has tracked the old sample together with the new sample since January 14, 2011 to ensure that the new information is comparable with historical data.
• Due to the high correlation between the old sample and the new sample, no restatement of the historical data appears necessary.
• The release now includes additional information regarding mortgage rates, including reporting on 5/1 ARM rates and 30-year fixed rates for jumbo loans.

Note: Existing home sales will probably increase to around 4.92 million SAAR in August (Lawler's estimate) - above the consensus forecast of 4.75 million SAAR - but this index suggests another decline in September and October.

by Calculated Risk on 9/20/2011 08:16:00 PM

From the Financial Times: Troika makes ‘good progress’ on Greek deal

The European Commission said “good progress” was made in a teleconference between Athens and negotiators ... The full mission is expected to come back to Athens early next week to resume the review ...
excerpt with permission

There will be more details tomorrow, but it sounds like the next installment will happen in early October. This probably means a large number of public sector layoffs will be announced very soon.

Earlier:
• Housing Starts decline in August
• Philly Fed State Coincident Indexes Decline in August
• Multi-family Starts and Completions, Starts and the Unemployment Rate

by Calculated Risk on 9/20/2011 04:48:00 PM

From Bloomberg: Greece Loan Talks Resume After ‘Productive’ First Meeting

Greek Prime Minister George Papandreou’s government held a second round of talks with its main creditors today ... call started at 9 p.m. Greek time [2 PM ET].

Papandreou will chair a Cabinet meeting at 11:30 a.m. Athens time tomorrow to discuss the content of the talks with the so-called troika team, which comprises the European Union, European Central Bank and International Monetary Fund.

There should be an announcement later tonight or tomorrow morning.

The Greek 2 year yield was up to 64.2%. The Greek 1 year yield is at 130%.

The Portuguese 2 year yield is up to 17.3% and the Irish 2 year yield was down to 9.3%.

The Italian 10 year yield was up to 5.7% following the downgrade.

Here are the links for bond yields for several countries (source: Bloomberg):

Greece	2 Year	5 Year	10 Year
Portugal	2 Year	5 Year	10 Year
Ireland	2 Year	5 Year	10 Year
Spain	2 Year	5 Year	10 Year
Italy	2 Year	5 Year	10 Year
Belgium	2 Year	5 Year	10 Year
France	2 Year	5 Year	10 Year
Germany	2 Year	5 Year	10 Year

by Calculated Risk on 9/20/2011 01:41:00 PM

Since it takes over a year on average to complete multi-family projects - and multi-family starts were at a record low last year - it makes sense that there will be a record low, or near 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 total.

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.

Click on graph for larger image in graph gallery.

The rolling 12 month total for starts (blue line) is now above the rolling 12 month for completions (red line), and they are heading in opposite directions (although completions ticked up a little in August).

It is important to note that even with a strong increase in multi-family construction, it is 1) from a very low level, and 2) multi-family is a small part of residential investment (RI). Still this is bright spot for construction.

Housing Starts and the Unemployment Rate

The following graph shows single family housing starts (through August) and the unemployment rate (inverted) through August. Note: there are many other factors impacting unemployment, but housing is a key sector.

You can see both the correlation and the lag. The lag is usually about 12 to 18 months, with peak correlation at a lag of 16 months for single unit starts. The 2001 recession was a business investment led recession, and the pattern didn't hold.

Housing starts have moved sideways for the last two and a half years and this is one of the reasons the unemployment rate has stayed elevated.

With the huge overhang of existing housing units, this key sector hasn't been participating in the recovery. This is what I expected when I first posted the above graph over two years ago!

The good news is residential investment in multi-family and home improvement is increasing modestly, but construction job growth will remain sluggish until the excess housing supply is absorbed.

Earlier:
• Housing Starts decline in August

by Calculated Risk on 9/20/2011 11:15:00 AM

From the Philly Fed:

The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for August 2011. In the past month, the indexes increased in 26 states, decreased in 17, and remained unchanged in seven for a one-month diffusion index of 18. Over the past three months, the indexes increased in 33 states, decreased in 16, and remained unchanged in one (Maryland) for a three-month diffusion index of 34.

Note: These are coincident indexes constructed from state employment data. 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 August, 30 states had increasing activity, the lowest number since January 2010. Looking back at previous recessions, the current level is close to when the U.S. entered recession - however it is important to remember that August was an especially weak month due to the debt ceiling debate.

In February, 47 states showed increasing activity.

Here is a map of the three month change in the Philly Fed state coincident indicators. Several states have turned red again. This map was all red during the worst of the recession, and all green not long ago.

Earlier:
• Housing Starts decline in August

by Calculated Risk on 9/20/2011 08:30:00 AM

From the Census Bureau: Permits, Starts and Completions

Housing Starts:
Privately-owned housing starts in August were at a seasonally adjusted annual rate of 571,000. This is 5.0 percent (±10 6%)* below the revised July estimate of 601,000 and is 5.8 percent (±12.0%)* below the August 2010 rate of 606,000.

Single-family housing starts in August were at a rate of 417,000; this is 1.4 percent (±10.3%)* below the revised July figure of 423,000. The August rate for units in buildings with five units or more was 148,000.

Building Permits:
Privately-owned housing units authorized by building permits in August were at a seasonally adjusted annual rate of 620,000. This is 3.2 percent (±1.0%) above the revised July rate of 601,000 and is 7.8 percent (±1.4%) above the August 2010 estimate of 575,000.

Single-family authorizations in August were at a rate of 413,000; this is 2.5 percent (±0.9%) above the revised July figure of 403,000. Authorizations of units in buildings with five units or more were at a rate of 178,000 in August.

Click on graph for larger image in graph gallery.

Total housing starts were at 571 thousand (SAAR) in August, down 5.0% from the revised July rate of 601 thousand (revised from 604).

Single-family starts declined 1.4% to 417 thousand in August.

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 been mostly moving sideways for about two years and a half years - with slight ups and downs due to the home buyer tax credit.

Multi-family starts are increasing in 2011 - although from a very low level. This was below expectations of 592 thousand starts in August, but permits increased in August suggesting a slight increase for starts in September.

Still "moving sideways".