by Calculated Risk on 2/14/2012 07:25:00 PM

Back in January I listed several policies and agreements that were expected soon. Now it looks like the payroll tax cut and extended unemployment benefits will be extended through the end of the year.

From the LA Times: Lawmakers near deal to extend payroll tax break

One day after House GOP leaders announced they would abandon their insistence that a payroll tax break be paid for with spending cuts, negotiators are now close to a broader deal that would also extend unemployment benefits and ensure Medicare doctors don't see a pay cut, sources said.

... with Congress scheduled to adjourn Friday for a weeklong Presidents Day recess, all sides want to avoid the appearance of being on vacation while workers see a tax hike, jobless Americans go without benefits or doctors face a pay cut.

Under emerging contours of the deal, the payroll tax would not be offset, but budget cuts would be made to pay for the other two items: the costs of extending long-term unemployment benefits and ensuring doctors that provide Medicare services would not see a pay cut, the sources said.

by Calculated Risk on 2/14/2012 04:10:00 PM

From economist Tom Lawler:

FHA released the December Report to the FHA commissioner, and according to the report FHA’s SF REO inventory plunged to 32,170 at the end of December – the lowest REO property count since December 2007, and 47% lower than at the end of December 2010. Here is a table derived from the latest and past reports. I don’t rightly know what the “adjustments” category is, save that it is needed to make the report “stock/flow” consistent.

Monthly Report to FHA Commissioner
	SF REO Inventory (EOM)	Conveyances	Sales	Adjustments
Jun-10	44,850	8,487	8,893	41
Jul-10	44,944	8,341	8,508	261
Aug-10	47,007	9,810	7,686	-61
Sep-10	51,487	11,411	7,439	508
Oct-10	54,609	9,908	7,289	503
Nov-10	55,488	6,752	5,817	-56
Dec-10	60,739	7,728	2,749	272
Jan-11	65,639	7,709	2,632	-177
Feb-11	68,801	7,383	4,221	0
Mar-11	68,997	8,647	8,728	277
Apr-11	65,063	7,410	11,375	31
May-11	59,465	7,032	12,659	29
Jun-11	53,164	7,240	13,600	59
Jul-11	48,507	6,509	11,379	213
Aug-11	44,749	8,005	11,701	-62
Sep-11	40,719	6,567	10,554	-43
Oct-11	37,922	6,541	9,883	545
Nov-11	35,192	6,212	9,178	236
Dec-11	32,170	5,997	8,800	-219

The level of property conveyances is astonishingly low, especially given the rising level of seriously delinquent FHA-insured SF loans (711,082 at the end of December, up from 598,140 at the end of December 2010).

The report also showed a continuation of the recent downward trend in FHA loan modification activity.

It is not clear why both property conveyances AND loss mitigation activity slowed so dramatically in the latter part of last year, but the sharp slowdown in problem loan “resolutions” contributed to the significant rise in the number of seriously delinquent FHA-insured SF loans in the second half of last year.

FHA SF "Home Retention" Activity
	Forbearance Agreements	Loan Modifications	Partial Claims	Total "Loss Mitigation Activity"	SDQ Loans
Dec-09	1,840	8,514	968	11,322	549,667
Jan-10	1,766	9,319	986	12,071	576,691
Feb-10	1,618	11,359	846	13,823	570,799
Mar-10	1,686	14,604	1,158	17,448	553,650
Apr-10	1,228	11,525	1,603	14,356	544,464
May-10	1,189	12,034	1,621	14,844	548,193
Jun-10	1,074	17,072	1,479	19,625	551,330
Jul-10	1,212	19,002	1,421	21,635	559,620
Aug-10	1,152	16,090	1,676	18,918	558,316
Sep-10	1,070	15,634	1,520	18,224	563,513
Oct-10	2,361	12,667	1,194	16,222	532,938
Nov-10	1,720	14,830	1,631	18,181	588,947
Dec-10	3,301	18,000	2,328	23,629	598,140
Jan-11	2,905	12,075	2,352	17,332	612,443
Feb-11	2,628	10,412	1,991	15,031	619,712
Mar-11	3,562	12,752	2,714	19,028	553,650
Apr-11	2,503	13,564	2,366	18,433	575,950
May-11	2,211	11,945	3,377	17,533	578,933
Jun-11	2,655	13,368	3,082	19,105	584,822
Jul-11	2,259	8,075	1,629	11,963	598,921
Aug-11	2,068	9,950	1,815	13,833	611,822
Sep-11	1,581	7,346	1,501	10,428	635,096
Oct-11	2,109	7,183	1,426	10,718	661,554
Nov-11	1,995	7,540	2,487	12,022	689,346
Dec-11	2,537	5,560	976	9,073	711,082

Click on graph for larger image.

CR Note: This graph shows the REO inventory for the FHA through Q4 2011. There has been a sharp decline in REO inventory over the last year and FHA REO is at the lowest level since 2007.

Fannie and Freddie should report Q4 REO next week, and will probably report further declines in REO too.

by Calculated Risk on 2/14/2012 01:16:00 PM

From the Financial Times: Euro ministers cancel Greece meeting

“It has appeared that further technical work between Greece and the troika is needed in a number of areas, including the closure of the fiscal gap of €325m in 2012 and the debt sustainability analysis,” [Jean-Claude Juncker] said in a statement that followed a preparatory meeting for the event.

“Furthermore, I did not yet receive the required political assurances from the leaders of the Greek coalition parties on the implementation of the programme,” he said.

There will be conference call instead, and then the regular meeting next Monday.

The €200bn "Private Sector Involvement" restructuring needs to begin pretty soon to make the March deadline ...

by Calculated Risk on 2/14/2012 11:35:00 AM

This is the UCLA Anderson Forecast and Ceridian Corporation index using real-time diesel fuel consumption data: Pulse of Commerce Index Dropped 1.7 Percent in January; Compared with Prior Year, the PCI is Down 2.2 Percent

The Ceridian-UCLA Pulse of Commerce Index® (PCI®), issued today by the UCLA Anderson School of Management and Ceridian Corporation, fell 1.7 percent in January following the 0.4 percent decrease in December. January’s data places the PCI 2.2 percent below year-ago levels with essentially no growth in the year-and-a-half since the summer of 2010.

“It seems difficult to square the behavior of the PCI with the evident improvement in a number of economic indicators, most notably the increase in payroll jobs and the decrease in initial claims for unemployment,” said Ed Leamer, chief economist for the Ceridian-UCLA Pulse of Commerce Index and Director of the UCLA Anderson Forecast. “The PCI also seems out-of-sync with Industrial Production and with Real Retail Sales, which continue to grow in a healthy manner while the PCI is stalled out.”

The year-over-year changes in the PCI, however, make it look very accurate – the three-month moving average peaked at 8 percent in July 2010 and has fallen steadily to essentially zero percent in January. “The PCI year-over-year peak in 2010 and the deterioration throughout 2011 have correctly anticipated the same movement of Industrial Production, Total Business Real Inventories, and Real Retail Sales. The weakness in the PCI is suggesting either further weakness in these indicators or a big gain in trucking in February, March and April,” said Leamer.

Click on graph for larger image.

This graph shows the index since January 2000.

This index has been weaker than other measures of transportation such as the ATA trucking index or the AAR rail traffic report. In the full report, Dr. Leamer looks at several possible explanations for the divergence - a shift to rail traffic, the difference between diesel fuel transaction (up for the year) and gallons (down for the year), and possible efficiency due to the high price of diesel fuel. There isn't a clear explanation.

Note: This index does appear to track Industrial Production over time (with plenty of noise). From Ceridian: "Based on the latest PCI data, the forecast for January Industrial Production is a 0.44 percent decrease when the government estimate is released on February 15."

All current Transportation graphs

by Calculated Risk on 2/14/2012 08:46:00 AM

On a monthly basis, retail sales were up 0.4% from December to January (seasonally adjusted, after revisions), and sales were up 5.8% from January 2011. From the Census Bureau report:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for January, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $401.4 billion, an increase of 0.4 percent (±0.5%)* from the previous month and 5.8 percent (±0.7%) above January 2011. ... The November to December 2011 percent change was revised from 0.1 percent (±0.5)* to virtually unchanged (±0.3%)*.

Click on graph for larger image.

Sales for December were revised down from a 0.1% increase to "virtually unchanged".

This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline).

Retail sales are up 20.7% from the bottom, and now 6.1% above the pre-recession peak (not inflation adjusted)

The second graph shows the same data since 2006 (to show the recent changes). Excluding gasoline, retail sales are up 17.3% from the bottom, and now 5.6% above the pre-recession peak (not inflation adjusted).

The third graph shows the year-over-year change in retail sales and food service (ex-gasoline) since 1993.

Retail sales ex-gasoline increased by 5.6% on a YoY basis (5.8% for all retail sales). Retail sales ex-gasoline increased 0.3% in January.

This was below the consensus forecast for retail sales of a 0.7% increase in January, but above the consensus for a 0.5% increase ex-auto.



All current retail sales graphs

by Calculated Risk on 2/14/2012 08:00:00 AM

From the National Federation of Independent Business (NFIB): Small Business Confidence in a Lull

Rising just one tenth of one percent in January, the Small-Business Optimism Index settled at 93.9, a slight increase from the December 2011 reading, according to the National Federation of Independent Business (NFIB). While the increase marks five consecutive months of improvement, the readings from January and February 2011 were higher, indicated no net gain for the calendar year. Historically, optimism remains at recession levels. While owners appeared less pessimistic about the outlook for business conditions and real sales growth, that optimism did not materialize in hiring or increased inventories plans.

“The most positive statement that can be made about January’s reading is that the Index did not go down; a change of 0.1 points is essentially no change and it is hardly indicative of a surge in economic activity,” said NFIB Chief Economist Bill Dunkelberg.

Note: Small businesses have a larger percentage of real estate and retail related companies than the overall economy.

Click on graph for larger image.

The first graph shows the small business optimism index since 1986. The index increased to 93.9 in January from 93.8 in December. This is the fifth increase in a row after declining for six consecutive months.

The second graph shows the net hiring plans for the next three months.

Hiring plans declined slightly in January, but the trend is up.

According to NFIB: “Over the next three months, 13 percent plan to increase employment (up 4 points), and 7 percent plan to reduce their workforce (down 1 point), yielding a seasonally adjusted net 5 percent of owners planning to create new jobs, a 1 point decline from December. There is no surge in hiring indicated by these numbers..."

Twenty two percent of small business owners reported that weak sales continued to be their top business problem in January. Currently 18% are reporting taxes as the most important problem, and 20% are reporting regulations - just below the 23% reporting "poor sales".

In good times, small business owners usually report taxes and regulation as their biggest problems. This is another small sign of improvement for small businesses, but lack of demand is still the key problem.

The optimism index declined sharply in August due to the debt ceiling debate and has now rebounded to about the same level as early in 2011. This index is still low - probably due to a combination of sluggish growth, and the high concentration of real estate related companies in the index.

by Calculated Risk on 2/13/2012 10:37:00 PM

From San Francisco Fed President John Williams: The Federal Reserve’s Mandate and Best Practice Monetary Policy. Excerpt:

What does this tell us about where monetary policy should be now? Inflation in 2012 and 2013 is likely to come in around 1½ percent, below the FOMC’s 2 percent target. And clearly, with unemployment at 8.3 percent, we are very far from maximum employment. At the San Francisco Fed, our forecast is that the unemployment rate will remain well over 7 percent for several more years.

This is a situation in which there’s no conflict between maximum employment and price stability. With regard to both of the Fed’s mandates, it’s vital that we keep the monetary policy throttle wide open. This will help lower unemployment and raise inflation back toward levels consistent with our mandates. And we want to do so quickly to minimize total economic damage. The longer we miss our objectives, the larger the cumulative loss to the economy.

QE3 is coming.

Williams also provides an excellent discussion on "price stability":

What objective should we seek for the rate of increase of average prices? Should we strive for no change at all, that is, zero inflation? At first blush, that seems sensible. But, there are a number of reasons why aiming for zero inflation would be too low and inconsistent with our maximum employment mandate. Here I’ll mention two.

First, a small amount of inflation can help grease the wheels of the labor market. There is considerable evidence that nominal wages don’t easily fall even when demand is weak, something economists call downward wage rigidity. In other words, it’s unusual for workers to have the dollar value of their wages reduced. In this regard, wages are very different from, say, airline ticket prices, which are quickly discounted when seats can’t be filled. Weak labor demand may necessitate a reduction in real wages, that is, wages adjusted for inflation. Even if the nominal, or dollar value, of wages won’t budge, the real wage will fall as prices rise. As a result, a little bit of inflation can help the labor market adjust to negative shocks and, in this way, help keep employment closer to its maximum level.

Second, a small amount of inflation gives the Fed a little more maneuvering room to respond to negative shocks to the economy. The problem is that nominal interest rates can’t go below zero. Economists refer to that limit as the zero lower bound. Let me define terms. The nominal interest rate can be divided into its two components: the real, or inflation-adjusted, interest rate; and expected inflation. A little bit of inflation tends to raise nominal rates on average in order to provide a positive yield to investors. That gives the Fed more room to lower interest rates in a recession before hitting the zero lower bound.

by Calculated Risk on 2/13/2012 08:57:00 PM

From the NY Times: 6 European Nations Get Downgrades

Moody’s Investors Service cut the debt ratings on Monday of six European countries, including Italy, Spain and Portugal, and became the first big ratings agency to switch Britain’s outlook to negative.
...
Moody’s downgraded Spain to A3 from A1 with a negative outlook; Italy to A3 from A2 with a negative outlook; and Portugal to Ba3 from Ba2 with a negative outlook. The agency also lowered the ratings for Malta, Slovakia and Slovenia.

Moody’s revised to negative its outlook on Britain, France and Austria, which have the agency’s top Aaa rating.

Via the Financial Times Alphaville, here is the Moody's document: Moody's adjusts ratings of 9 European sovereigns to capture downside risks

From the Financial Times: EU tries to finalise €130bn Greek bail-out. The FT reports that if Germany is not convinced that Greece is taking action, then the bail-out might be given "conditional approval" and be reassessed at the next week.

In that case, ministers would only give the go-ahead for a critical part of the new bail-out, a €200bn restructuring of privately held debt which must begin in a matter of days ...
excerpt with permission

So the next key date is Wednesday (they are running out of time for the "Private Sector Involvement"), and then another key date next week if the approval is conditional.

by Calculated Risk on 2/13/2012 03:39:00 PM

CR Note: There are only a few areas where the MLS breaks down monthly sales by foreclosure, short sales and conventional (non-distressed) sale. I've been tracking the Sacramento market to watch for changes in the mix over time. (here was my post this morning: Distressed House Sales using Sacramento Data)

Economist Tom Lawler sent me the following table today for several other areas. For most of the areas (with the exception of Reno), the distressed share of sales is down from January 2011. The share of short sales has increased in most areas, while the share of foreclosure sales are down - and down significantly in some areas.

	Short Sales Share		Foreclosure Sales Share		Total "Distressed" Share
	11-Jan	12-Jan	11-Jan	12-Jan	11-Jan	12-Jan
Las Vegas	26.6%	28.1%	48.8%	45.5%	75.4%	73.6%
Reno	40.0%	37.0%	37.0%	40.0%	77.0%	77.0%
Phoenix	22.6%	29.8%	47.6%	27.9%	70.2%	57.7%
Sacramento	25.6%	32.1%	47.6%	34.5%	73.2%	66.6%
Minneapolis	15.6%	16.2%	45.3%	39.1%	60.9%	55.3%
Mid-Atlantic (MRIS)	14.7%	16.4%	26.7%	16.9%	41.4%	33.3%

Note: The table is a percentage of total sales.

The general trend is short sales are up, and foreclosure sales are down - and total distressed sales are down too, although this could be related to the foreclosure process issues.

by Calculated Risk on 2/13/2012 12:41:00 PM

The BuildFax Residential Remodeling Index was at 127.4 in December, down from 137.9 in November, but up 22.8% from December 2010. This is based on the number of properties pulling residential construction permits in a given month.

From BuildFax Remodeling Index

The Residential BuildFax Remodeling Index is up 22.8% year-over-year in December 2011 at 127.4 points. Residential remodels in December were down month-over-month 10.5 points (7.6%) from the November value of 137.9, and up year-over-year 23.6 points from the December 2010 value of 103.8.
...
“Remodeling activity slowed from November to December 2011 as it did in 2010 ─ an expected change seen in previous years around the holidays. The BuildFax Remodeling Index is still showing notable year-over-year growth,” said Joe Emison, Vice President of Research and Development at BuildFax.

Click on graph for larger image.

Although the index declined in December from November, this is the highest level for a December since the index started in 2004, even above the levels from 2004 through 2006 during the home equity ("home ATM") withdrawal boom.

Starting next month, BuildFax will release a seasonally adjusted index.

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 22.8% from December 2010. This is the 26th consecutive month with a year-over-year increase.

For residential investment, multi-family construction and home improvement have already picked up, and it appears single family construction will increase in 2012.

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