by Calculated Risk on 12/08/2011 11:51:00 PM

The ECB disappointed today, and the EU will probably under deliver again tomorrow.

The following is no surprise - no one expected all 27 countries to agree, just the 17 eurozone countries plus a few more ...

From CNBC: EU Fails to Agree on Treaty Change Among 27 States: Diplomats

The European Union failed to secure backing from all 27 countries to change the EU treaty at a summit on Friday, meaning any deal will now likely involve the 17 euro zone countries plus any others that want to join, three EU diplomats said.

From the NY Times: After Rate Cut, Gloom as Europe Leaders Meet

Late Thursday, European leaders here were circulating the draft of a new “fiscal compact” for the currency union, including tighter control of public finances. Disagreement persisted about whether any deal would cover all 27 European Union member states or just the 17-member euro zone, and about whether it would involve amendments to the euro treaty. Leaders were also discussing whether a permanent bailout fund, set to begin operation as early as July, should function as a licensed banker.

Earlier in the day in Washington, President Obama voiced frustration that Chancellor Angela Merkel of Germany and other European leaders were focusing on the wrong problem by negotiating long-term changes to the euro treaty, rather than reassuring the markets and staving off a recession by taking bold short-term action.
...
Adding to the anxiety, European regulators said on Thursday that many of the region’s biggest banks, including the German giants Deutsche Bank and Commerzbank, needed to raise more money as reserves against potential losses.

The amounts to be set aside are much higher than regulators had estimated as recently as October, and the inclusion of German banks in the roundup was a reminder that even the region’s richest nation was not immune from the debt crisis contagion.

President Nicolas Sarkozy of France, in Marseille on Thursday before heading here, said, “If we don’t have an agreement Friday, there won’t be a second chance.”

I'm sure there will be some sort of agreement, but it appears they will under deliver once again.

The Asian markets are all red tonight. The Nikkei is down about 1%, the Hang Seng is off 2.6%.

From CNBC: Pre-Market Data and Bloomberg futures: the S&P 500 futures are up slightly and the Dow futures are up 25.

by Calculated Risk on 12/08/2011 07:30:00 PM

I've been following the Sacramento market to look for changes in the mix of house sales in a distressed area over time (conventional, REOs, and short sales). The Sacramento Association of REALTORS® started breaking out REOs in May 2008, and short sales in June 2009.

This will be interesting once something changes - and not much has changed yet. At some point, the number and percent of distressed sales should start to decline (excluding seasonal factors and market distortions like the home buyer tax credit).

The percent of distressed sales in Sacramento was unchanged in November compared to October. In November 2011, 64.1% of all resales (single family homes and condos) were distressed sales. This was down slightly from 66.1% in November 2010.

Here are the statistics.

Click on graph for larger image.

This graph shows the percent of REO sales, short sales and conventional sales. There is a seasonal pattern for conventional sales (stronger in the spring and summer), and distressed sales happen all year - so the percentage of distressed sales decreases every summer and the increases in the fall and winter.

Total sales were up 14.6% compared to November 2010. Active Listing Inventory were down 38.1% from last November, although "short sale contingent" has increased. Cash buyers accounted for 27.4% of all sales (frequently investors), and median prices are off about 8% from last November.

This data might be helpful in determining when the market is improving. So far it looks like REO sales have declined (this is the lowest percentage of REO sales since Sacramento started breaking out REOs), offset by an increase in short sales, so overall there is no improvement.

by Calculated Risk on 12/08/2011 04:38:00 PM

On Sunday I posted Comments on the Employment-Population Ratio with a follow up yesterday: Labor Force Participation Rate by Age Group

Some people have wondered why the participation rate has been declining for the younger age groups.

First below is a repeat of the graph from yesterday showing the trends by age group since 1990.

Note: The participation rate is the percentage of the working age population in the labor force.

Click on graph for larger image.

Some of the recent decline in the participation rate for the '20 to 24' age group is probably related to the recession.

But probably the main reason for the decline in the participation rate for the younger age groups is that more people are pursuing higher education. (ht Rick Nevin) Nevin writes:

The decline in age-16-19 and age-20-24 labor force participation is the mirror image of the increase in school enrollment rates for those age groups. This trend is exactly what was anticipated by (promised by) research that supported the phase-out of lead in gasoline from the early-1970s through the mid-1980s, and subsequent lead paint hazard reduction requirements, including my 1999 Economic Analysis of HUD lead hazard reduction requirements.

Note: I do not know Rick Nevin, but I have read some research about the link between lead and crime (and IQ). As an example, from Professor Jessica Wolpaw Reyes: Environmental Policy as Social Policy? The Impact of Childhood Lead Exposure on Crime makes a strong argument that removing lead from gasoline from 1975 to 1985 led to lower crime rates.

More from Nevin:

The decline in labor force participation for ages 16-24 might be partly due to a short term “bad news” story about discouraged workers, but it is mainly due to a longer term “great news” story about ongoing gains in school enrollment and academic attainment.

This graph uses data from the BLS on participation rate, and the National Center for Education Statistics (NCES) on enrollment rates.

This graph shows the participation and enrollment rates for the 18 to 19 year old age group. These two lines are a "mirror image".

Note: I added the participation rate for men and women too. One of the key labor stories in the 2nd half of the 1900s was the surge in participation by women.

The third graph shows the participation and enrollment rates for the 20 to 24 year old age group.

Once again the participation rate is declining as the enrollment rate is increasing. The participation rate (all) was rising in the '70s and early '80s because of the increase in women entering the labor force.

In the long run, more education is a positive for the economy (although I am concerned about the surge in student loans). This increase in education enrollment suggests we should look at the prime working age (25 to 54) for changes in the participation rate and employment-population ratio due to the recent recession.

But mostly it suggests that the kids are alright!

by Calculated Risk on 12/08/2011 12:01:00 PM

The Federal Reserve released the Q3 2011 Flow of Funds report today: Flow of Funds.

The Fed estimated that household net worth declined $2.4 trillion in Q3. Household net worth peaked at $66.8 trillion in Q2 2007, and then net worth fell to $50.4 trillion in Q1 2009 (a loss of $16.4 trillion). Household net worth was at $57.4 trillion in Q3 2011 (up $7.0 trillion from the trough, but down $2.4 trillion in Q3).

The Fed estimated that the value of household real estate fell $98 billion to $16.1 trillion in Q3 2011. The value of household real estate has fallen $6.6 trillion from the peak - and is still falling in 2011.

Click on graph for larger image.

This is the Households and Nonprofit net worth as a percent of GDP.

This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages). Note that this does NOT include public debt obligations.

This ratio was relatively stable for almost 50 years, and then we saw the stock market and housing bubbles.

This graph shows homeowner percent equity since 1952.

Household percent equity (as measured by the Fed) collapsed when house prices fell sharply in 2007 and 2008.

In Q3 2011, household percent equity (of household real estate) was at 38.7% - about the same as in Q2.

Note: about 30.3% of owner occupied households have no mortgage debt as of April 2010. So the approximately 52+ million households with mortgages have far less than 38.7% equity - and, according to CoreLogic, about 10.7 million households have negative equity.

The third graph shows household real estate assets and mortgage debt as a percent of GDP.

Mortgage debt declined by $54 billion in Q3. Mortgage debt has now declined by $730 billion from the peak. Studies suggest most of the decline in debt has been because of foreclosures (or short sales), but some of the decline is from homeowners paying down debt (sometimes so they can refinance at better rates).

Assets prices, as a percent of GDP, have fallen significantly and are only slightly above historical levels. However household mortgage debt, as a percent of GDP, is still historically very high, suggesting more deleveraging ahead for households.

by Calculated Risk on 12/08/2011 10:05:00 AM

From Mario Draghi, President of the ECB: Introductory statement to the press conference

Based on its regular economic and monetary analyses, the Governing Council decided to lower the key ECB interest rates by 25 basis points, following the 25 basis point decrease on 3 November 2011. [this lowers the rate to 1.0%]
...
In its continued efforts to support the liquidity situation of euro area banks, and following the coordinated central bank action on 30 November 2011 to provide liquidity to the global financial system, the Governing Council today also decided to adopt further non-standard measures. These measures should ensure enhanced access of the banking sector to liquidity and facilitate the functioning of the euro area money market. They are expected to support the provision of credit to households and non-financial corporations. In this context, the Governing Council decided:

First, to conduct two longer-term refinancing operations (LTROs) with a maturity of 36 months and the option of early repayment after one year. The operations will be conducted as fixed rate tender procedures with full allotment. The rate in these operations will be fixed at the average rate of the main refinancing operations over the life of the respective operation. Interest will be paid when the respective operation matures. The first operation will be allotted on 21 December 2011 and will replace the 12-month LTRO announced on 6 October 2011.

Second, to increase collateral availability by reducing the rating threshold for certain asset-backed securities (ABS). In addition to the ABS that are already eligible for Eurosystem operations, ABS having a second best rating of at least “single A” in the Eurosystem harmonised credit scale at issuance, and at all times subsequently, and the underlying assets of which comprise residential mortgages and loans to small and medium-sized enterprises, will be eligible for use as collateral in Eurosystem credit operations. Moreover, national central banks will be allowed, as a temporary solution, to accept as collateral additional performing credit claims (namely bank loans) that satisfy specific eligibility criteria. The responsibility entailed in the acceptance of such credit claims will be borne by the national central bank authorising their use. These measures will take effect as soon as the relevant legal acts have been published.

Third, to reduce the reserve ratio, which is currently 2%, to 1%. This will free up collateral and support money market activity. As a consequence of the full allotment policy applied in the ECB’s main refinancing operations and the way banks are using this option, the system of reserve requirements is not needed to the same extent as under normal circumstances to steer money market conditions. This measure will take effect as of the maintenance period starting on 18 January 2012.

Fourth, to discontinue for the time being, as of the maintenance period starting on 14 December 2011, the fine-tuning operations carried out on the last day of each maintenance period. This is a technical measure to support money market activity.

From the Financial Times: ECB launches new support for banks

From the WSJ: Draghi Announces New ECB Crisis Moves

Also from the WSJ: EU Nearing IMF Loan Deal

The European Union is nearing a deal to lend €200 billion ($268.26 billion) to the International Monetary Fund—including €150 billion coming from the 17-nation euro zone—that the IMF could then use to shore up the troubled euro-zone sovereign debt market, euro-zone officials said Thursday.

Bond yields for Italy and Spain increased this morning. The Italian 2 year yield is up sharply to 5.98%, and the 10 year yield is up to 6.31%.

The Spanish 2 year yield is up to 4.62%, and the 10 year yield is up to 5.67%.

by Calculated Risk on 12/08/2011 08:30:00 AM

The DOL reports:

In the week ending December 3, the advance figure for seasonally adjusted initial claims was 381,000, a decrease of 23,000 from the previous week's revised figure of 404,000. The 4-week moving average was 393,250, a decrease of 3,000 from the previous week's revised average of 396,250.

The following graph shows the 4-week moving average of weekly claims since January 2000.

Click on graph for larger image.

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased this week to 393,250.

This is the fourth week in a row with the 4-week average below 400,000, and this is the lowest level for claims since February.

And here is a long term graph of weekly claims:





All current Employment Graphs

by Calculated Risk on 12/07/2011 06:09:00 PM

A few excerpts from a Financial Times editorial: We cannot afford another half-baked solution (ht Pat)

... there are but hours to save the euro ... The world cannot afford another half-baked solution. ... What [Merkel and Sarkozy] laid out was little more than a stability plan on steroids, based on a misdiagnosis of the crisis that divides the eurozone into nations that are fiscally virtuous and those deemed to be profligate “sinners”.

A politically sustainable plan needs ... the hope of rebalancing within the eurozone, not just an endless vista of austerity.

In the short run, some fiscal agreements combined with ECB intervention will help. And it looks like the ECB will take more action tomorrow, from Bloomberg: ECB to Consider More Measures to Stimulate Bank Lending

The European Central Bank may announce a range of measures tomorrow to stimulate bank lending ...

Options on the table include loosening collateral criteria so that institutions have more access to cheap ECB cash and offering them longer-term loans to grease the flow of credit to the economy ... an interest rate cut is likely ...

But that isn't enough. Some time soon, private investors will have to be enticed to buy sovereign bonds - and somehow the eurozone has to be rebalanced. "An endless vista of austerity" will not survive the polling booths for long.

by Calculated Risk on 12/07/2011 02:26:00 PM

As the economy slowly recovers, an important question is: What will happen to the participation rate over the next few years?

On Sunday I pointed out that demographers expected the participation rate to start declining even before the great recession started. The expected gradual decline was due to the aging of the overall population.

Note: The participation rate is the percentage of the working age population in the labor force.

One difficultly in projecting the participation rate is that the age group participation rates change over time. The participation rate for the '16 to 19' age group has been declining for some time, and the participation rate has been increasing for older age groups - perhaps because of necessity, perhaps because of fewer "back breaking" jobs.

Here is a graph showing the trends by age group since 1990.

Click on graph for larger image.

The participation rate is low for those in the '16 to 19' age group. The rate increases sharply for those in the '20 to 24' age group, and the rate is at its peak from 25 to 49 - and drops off a little for the '50 to 54' age group.

After 55 workers start leaving the labor force, and the participation rate falls off with age.

The participation rate has been declining for the younger age groups, although some of the recent decline for the '20 to 24' age group is probably related to the recession (perhaps more people staying in school).

Even though the participation rate is rising for the older age groups, the increase doesn't offset the aging of the population. As an example, when the current '55 to 59' age group moves into the '60 to 64' bracket, the participation rate for that cohort will decline from 73% to 55% or so. And with a fairly large cohort moving into the older age brackets, the overall participation rate will probably decline.

Forecasting the participation rate is important (along with population growth and other factors) in projecting how many jobs are needed to bring the economy back to full employment. So I'll be writing more about this ...

by Calculated Risk on 12/07/2011 11:28:00 AM

Not much news yet ... although the ECB is expected to cut interest rates ...

From the Financial Times: Germany insists on new treaty for Europe

Germany has thrown down the gauntlet to its European partners, insisting that they must agree on treaty change for the whole European Union, or at the least a binding new eurozone treaty, to bring lasting stability to the common currency, and reassure the financial markets.
Excerpt with permission

From the WSJ: Crisis Live Blog: Sarkozy, Merkel Issue Treaty Proposal

In an open letter to European Council President Herman Van Rompuy, Mr. Sarkozy and Ms. Merkel issued an ultimatum to the 27 EU governments, saying they must decide whether they will accept greater central control over their national budgets.

Should some countries decide not to participate, the 17 countries in the euro zone will press ahead with a more integrated union by signing a new agreement outside EU treaties, they said.

The Italian 2 year yield is up slightly to 5.6%, and the 10 year yield is up to 6.02%. Both were above 7% not long ago.

The Spanish 2 year yield is up sharply to 4.4%, and the 10 year yield is up to 5.44%. The ten year was at 6.7% on November 24th.

by Calculated Risk on 12/07/2011 08:52:00 AM

From the MBA: Mortgage Applications Increase in Latest MBA Weekly Survey

The Refinance Index increased 15.3 percent from the previous week. The seasonally adjusted Purchase Index increased 8.3 percent from one week earlier to its highest level since August 5, 2011.
...
"Coming out of the Thanksgiving holiday, applications increased significantly as mortgage rates dropped to their lowest levels in about two months," said Michael Fratantoni, MBA's Vice President of Research and Economics. "In particular, refinance applications increased sharply, with some lenders seeing refinance volume double. Despite this surge, aggregate refinance activity is still below levels reported two weeks ago. Some lenders indicated they are beginning to see an increase in HARP loans, but that increase is still a small portion of the move this week."
...
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 4.18 percent, the lowest rate since September 30, 2011 ...

The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,500)decreased to 4.52 percent, the lowest rate since September 30, 2011 ...

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

Click on graph for larger image.

Although the purchase index increased, the index has mostly been sideways for the last 2 years - and at about the same level as in 1997.

All current Existing Home Graphs