by Calculated Risk on 10/18/2011 01:15:00 PM

From Fed Chairman Ben Bernanke: Effects of the Great Recession on Central Bank Doctrine and PracticeA few excerpts:

My guess is that the current framework for monetary policy--with innovations, no doubt, to further improve the ability of central banks to communicate with the public--will remain the standard approach, as its benefits in terms of macroeconomic stabilization have been demonstrated. However, central banks are also heeding the broader lesson, that the maintenance of financial stability is an equally critical responsibility. Central banks certainly did not ignore issues of financial stability in the decades before the recent crisis, but financial stability policy was often viewed as the junior partner to monetary policy. One of the most important legacies of the crisis will be the restoration of financial stability policy to co-equal status with monetary policy.

In other words, the Fed did not pay enough attention to regulation, and allowed the banks to engage in risky practices with far too much leverage.

The financial crisis of 2008 and 2009 will leave a lasting imprint on the theory and practice of central banking. With respect to monetary policy, the basic principles of flexible inflation targeting--the commitment to a medium-term inflation objective, the flexibility to address deviations from full employment, and an emphasis on communication and transparency--seem destined to survive. However, following a much older tradition of central banking, the crisis has forcefully reminded us that the responsibility of central banks to protect financial stability is at least as important as the responsibility to use monetary policy effectively in the pursuit of macroeconomic objectives.

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

The National Association of Home Builders (NAHB) reports the housing market index (HMI) increased in October to 18 from 14 in September. Any number under 50 indicates that more builders view sales conditions as poor than good.

From the NAHB: Home Builder Confidence Rises Four Points in October

Builder confidence in the market for newly built, single-family homes rose four points to 18 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for October, which was released today. This is the largest one-month gain the index has seen since the home buyer tax credit program helped spur the market in April of 2010.

"Builder confidence regained some ground in October due to modest improvements in buyer interest in select markets where economic recovery is starting to take hold and where foreclosure activity has remained comparatively subdued," said NAHB Chairman Bob Nielsen, a home builder from Reno, Nev.
...
"This latest boost in builder confidence is a good sign that some pockets of recovery are starting to emerge across the country as extremely favorable interest rates and prices catch consumers' attention," said NAHB Chief Economist David Crowe. "However, it's worth noting that while some builders have shifted their assessment of market conditions from 'poor' to 'fair,' relatively few have shifted their assessments from 'fair' to 'good.' One reason is that builders are facing downward pricing pressures from foreclosed homes at the same time that building materials costs are rising, and this is further squeezing already tight margins."
...
Each of the HMI's three component indexes recorded substantial gains in October. The component gauging current sales conditions rose four points to 18, the component gauging sales expectations in the next six months rose seven points to 24, and the component gauging traffic of prospective buyers rose three points to 14.

Regionally, the West led all other areas of the country with its nine-point gain to 21 – the highest HMI score for that region since August of 2007. The Midwest and South each recorded four-point gains, to 15 and 19, respectively, while the Northeast held unchanged at 15.

Click on graph for larger image in new window.

This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the October release for the HMI and the August data for starts (September housing starts will be released tomorrow).

Both confidence and housing starts have been moving sideways at a very depressed level for several years. This is still very low, but this is the highest level since early 2010 - and that boost was due to the housing tax credit.

by Calculated Risk on 10/18/2011 08:48:00 AM

From Bloomberg: Home Short Sales Rise in ‘Dramatic Shift’ That May Boost U.S. House Prices (ht Mike in Long Island)

There has been a “dramatic shift” in banks’ willingness sell a property for less than the mortgage balance to avoid foreclosing ... short sales, typically change hands at a discount of about 20 percent to homes not in financial distress, compared with a 40 percent price cut for bank-owned homes, according to RealtyTrac Inc. Short sales jumped 19 percent in the second quarter from the prior three months while foreclosure sales were flat, the data seller said.

... Banks are starting to “get their act together” with short sales, said Cameron Novak, a broker with The Homefinding Center in Corona, California. The company handles about 15 of the transactions a month, he said.

“There’s been improvement in the last few months, and response times are getting to be a little quicker,” Cameron said in a telephone interview. “It’s about time.”

The main concern for the lenders about short sales is short sale fraud (under-the-table payments, sales to related parties, etc). In general a short sales is much better than foreclosure for all parties - especially if the seller can clear all deficiencies.

by Calculated Risk on 10/18/2011 12:04:00 AM

The following report suggests that a refinance plan for borrowers with negative equity might be part of any mortgage settlement. This would only apply to mortgages owned by the banks - and for borrowers who are current.

From the WSJ: New Mortgage Plan Floated

The plan under consideration would make refinancing available to some borrowers whose houses are worth less than their loans, so long as they are current on mortgage payments ... Such borrowers typically aren't able to refinance because they lack equity in their homes. The plan would apply only to mortgages owned by the banks. ... Around 20% of all U.S. mortgages are owned by U.S.-chartered commercial banks ...

by Calculated Risk on 10/17/2011 08:38:00 PM

From Chicago Fed President Charles Evans: The Fed’s Dual Mandate Responsibilities: Maintaining Credibility during a Time of Immense Economic Challenges. In his speech, Evans notes two significant Fed policy errors - one in the 1970s that led to inflation, and one in the 1930s that led to deflation. He argues the current situation is more like the 1930s. Here is an excerpt on a proposed policy, from Charles Evans:

I believe that we can substantially ease the public’s concern that monetary policy will become restrictive in the near to medium term and, hence, reduce the restraint in expanding economic activity. This can be done by clearly spelling out in our policy statements the conditionality of our dual mandate responsibilities. What should such a statement look like? I think we should consider committing to keep short-term rates at zero until either the unemployment rate goes below 7 percent or the outlook for inflation over the medium term goes above 3 percent. Such policies should enable us to make progress toward our mandated goals. But if this progress is too slow, then we should move forward with increased purchases of longer-term securities. We might even consider a regime in which we reevaluate our progress toward our policy goals and the rate of purchase of such assets at every FOMC meeting.

Let me note several aspects to this policy conditionality. As I just said, I subscribe to a 2 percent target for inflation over the long run. However, given how badly we are doing on our employment mandate, we need to be willing to take a risk on inflation going modestly higher in the short run if that is a consequence of polices aimed at lowering unemployment. With regard to the inflation marker, we have already experienced unduly low inflation of 1 percent; so against an objective of 2 percent, 3 percent inflation would be an equivalent policy loss to what we have already experienced. On the unemployment marker, a decline to 7 percent would be quite helpful. However, weighed against a conservative estimate for the natural rate of unemployment of 6 percent, it still represents a substantial policy loss. Indeed, weighed against a less conservative long-run estimate of the natural rate, it is a larger policy loss than that from 3 percent inflation. Accordingly, these triggers remain quite conservatively tilted in favor of disciplined inflation performance over enhanced growth and employment, and it would not be unreasonable to consider an even lower unemployment threshold before starting policy tightening.

I would also highlight that while I believe that optimal policy would be consistent with inflation running above our 2 percent target for some time, this policy does not abandon the 2 percent target for long-run inflation. Indeed, I would support combining this policy with a formal statement of 2 percent as our longer-run inflation target in conjunction with reaffirming our commitment to flexible inflation-targeting. Furthermore, I see a 3 percent inflation threshold as a safeguard against inflation running too high for too long and thus unhinging longer-run inflation expectations. It also is a safeguard against the kinds of policy errors we made in the 1970s. If potential output is indeed lower and the natural rate of unemployment higher than I currently think, then resource pressures would emerge and actual inflation and the outlook for inflation over the medium term would rise faster than expected. If this outlook for inflation hit 3 percent before the unemployment rate falls to 7 percent, then we would begin to tighten policy.

I understand that some may find such a policy proposal to be hard to understand, or even risky. But these are not ordinary times — we are in the aftermath of a financial crisis with massive output gaps, with stubborn debt overhangs and high degrees of household and business caution that are weighing on economic activity. As Ken Rogoff wrote in a recent piece in the Financial Times, “Any inflation above 2 percent may seem anathema to those who still remember the anti-inflation wars of the 1970s and 1980s, but a once-in-75-year crisis calls for outside-the-box measures.”9 The Fed has done a good deal of thinking out of the box over the past four years. I think it is time to do some more.

Bernanke suggested something similar back in 1999 with regards to Japan: Japanese Monetary Policy: A Case of Self-Induced Paralysis?* "[A] target in the 3-4% range for inflation, to be maintained for a number of years, would confirm not only that the BOJ is intent on moving safely away from a deflationary regime ..."

by Calculated Risk on 10/17/2011 05:37:00 PM

From Roger Vincent at the LA Times: Southland office rents, occupancy rates stay low

Overall, Los Angeles County office vacancy rose slightly to 19% from 18.5% in the third quarter last year, according to brokerage Cushman & Wakefield. The average rent landlords asked for was $2.47 a square foot per month, down from $2.56.

This was the first quarter with positive absorption since 2007 in LA. (More tenants moved in than moved out).

This is similar to the Reis report for Q3 that showed the office vacancy rate is mostly moving sideways at a very high level. New office construction has slowed sharply, but the vacancy rate will not decline significantly until employment pick ups.

Earlier:
• The Empire State Manufacturing Survey indicates that conditions for New York manufacturers continued to deteriorate in October.
• Industrial Production increased 0.2% in September, Capacity Utilization increased slightly
• Residential Remodeling Index at new high in August

by Calculated Risk on 10/17/2011 02:38:00 PM

From the WSJ: Merkel, Schäuble Temper Expectations for Summit

German Chancellor Angela Merkel expects a package of measures towards solving the euro-zone debt crisis to be agreed on Oct. 23, but warned against hoping that all of Europe's debt woes would be resolved ...

Spokesman Steffen Seibert said a "package" of measures would be agreed upon at the European Union summit in Brussels this coming Sunday, but "the chancellor reminds [everyone] that the dreams that are emerging again, that on Monday everything will be resolved and everything will be over, will again not be fulfilled," Mr. Seibert said.

From Bloomberg: Germany Shoots Down ‘Dreams’ of Swift Fix

On the summit agenda is how any recapitalization of Europe’s banks “might be carried out in a coordinated way” and how to make the European Financial Stability Facility, the EU’s rescue fund for indebted states, as effective as possible, Seibert said. The leaders will also discuss aid for Greece and ways to tighten economic and financial policy, [Steffen Seibert, Merkel’s chief spokesman] said.

Officials have been trying to lower expectations for a few days. There are several stumbling blocks - especially the size of the Greek debt "haircuts" and how to recapitalize the banks.

by Calculated Risk on 10/17/2011 11:21:00 AM

The BuildFax Residential Remodeling Index was at 138.6 in August, up from 130.4 in July. This is based on the number of properties pulling residential construction permits in a given month.

From BuildFax:

The Residential BuildFax Remodeling Index rose 29% year-over-year--and for the twenty-second straight month--in August to 138.6. Residential remodels in August were significantly up month-over-month over 8 points (6.3%) from the July value of 130.4, and up year-over-year 31.2 points (29%) from the August 2010 value of 107.4.
...
In August, the West (11.9 points; 9.3%), Midwest (11.4 points; 10.8%), and South (1 point; 1%) all had month-over-month gains, while the Northeast (-.6 points; -.8%) saw a decline.
...
"As mortgage rates hit record lows, it is apparent that millions of Americans are refinancing their homes and using some of their new monthly savings to reinvest in their homes with remodeling projects," said Joe Emison, Vice President of Research and Development at BuildFax. "With remodeling activity growing at an estimated 9.5 percent in 2011 compared to 2010, this is one segment of the economy that is showing continued strength, even as other sectors struggle."

Click on graph for larger image in graph gallery.

This is the highest level for the index (started in 2004) - even above the levels from 2004 through 2006 during the home equity ("home ATM") withdrawal boom.

Note: Permits are not adjusted by value, so this doesn't mean there is more money being spent, just more permit activity. Also some smaller remodeling projects are done without permits and the index will miss that activity.

Since there is a strong seasonal pattern for remodeling, the second graph shows the year-over-year change from the same month of the previous year.

The remodeling index is up 29% from August 2010. This is the highest year-over-year increase in activity since the index started.

Even though new home construction is still moving sideways, it appears that two other components of residential investment will increase in 2011: multi-family construction and home improvement.

Data Source: BuildFax, Courtesy of Index.BuildFax.com

Weekend:
• Summary for Week Ending Oct 14th
• Lawler: Early Read on Existing Home Sales in September
• Schedule for Week of Oct 16th

by Calculated Risk on 10/17/2011 09:15:00 AM

From the Fed: Industrial production and Capacity Utilization

Industrial production increased 0.2 percent in September after having been unchanged in August. Previously, industrial production was reported to have stepped up 0.2 percent in August. For the third quarter as a whole, industrial production rose at an annual rate of 5.1 percent. Manufacturing output moved up 0.4 percent in September after having gained 0.3 percent in August. Production at mines advanced 0.8 percent in September, while the output of utilities decreased 1.8 percent. At 94.2 percent of its 2007 average, total industrial production for September was 3.2 percent above its year-earlier level. Capacity utilization for total industry edged up to 77.4 percent, a rate 1.7 percentage points above its level from a year earlier but 3.0 percentage points below its long-run (1972--2010) average

Click on graph for larger image in graph gallery.

This graph shows Capacity Utilization. This series is up 10.1 percentage points from the record low set in June 2009 (the series starts in 1967).

Capacity utilization at 77.4% is still 3.0 percentage points below its average from 1972 to 2010 and below the pre-recession levels of 81.3% in December 2007.

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

The second graph shows industrial production since 1967.

Industrial production increased in September to 94.2. July was revised up, so there was no increase in August.

After the fairly rapid increase last year, increases in industrial production and capacity utilization have slowed recently.

The consensus was for a 0.2% increase in Industrial Production in September, and an increase to 77.5% for Capacity Utilization.

by Calculated Risk on 10/17/2011 08:30:00 AM

From the NY Fed: Empire State Manufacturing Survey

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers continued to deteriorate in October. The general business conditions index remained negative and, at -8.5, was little changed. The new orders index hovered around zero, indicating that orders were flat, while the shipments index rose above zero to 5.3.
...
The index for number of employees rose several points but was at a relatively low level of 3.4, while the average workweek index was negative for a fifth consecutive month.

This is the first regional manufacturing survey released for October. Expectations were for some improvement in this index.

Weekend:
• Summary for Week Ending Oct 14th
• Lawler: Early Read on Existing Home Sales in September
• Schedule for Week of Oct 16th