by Calculated Risk on 4/11/2012 02:00:00 PM

Fed's Beige Book:

Reports from the twelve Federal Reserve Districts indicated that the economy continued to expand at a modest to moderate pace from mid-February through late March. Activity in the Boston, Atlanta, Chicago, Dallas, and San Francisco Districts grew at a moderate pace, while Cleveland and St. Louis cited modest growth. New York reported that economic growth picked up somewhat. Philadelphia and Richmond cited improving business conditions. The economy in Minneapolis grew at a solid pace and Kansas City's economy expanded at a faster pace.

And on real estate:

Residential real estate activity improved in most Districts, though Cleveland and San Francisco noted that activity remained lackluster or at low levels. The St. Louis and Minneapolis Districts reported increases in building permits. The construction of multi-family housing units, including apartments and senior housing, expanded in many Districts. Home prices continued to decline in Boston, New York, and Minneapolis, but were largely flat in San Francisco. Contacts in Boston, Philadelphia, and Kansas City indicated that mild weather had boosted real estate activity.

Non-residential construction activity improved in the Philadelphia, Cleveland, Richmond, Atlanta, Chicago, and St. Louis Districts, though many of these contacts characterized the improvement as slow. Boston, New York, and San Francisco characterized non-residential real estate activity as unchanged or steady. The energy and high-tech sectors were driving much of the demand in the Dallas District. San Francisco noted a rise in the demand for office space from the technology sector. Cleveland and Chicago saw a boost in healthcare-related construction. Projects related to the education sector are showing growth in Boston, Cleveland, Philadelphia, and Richmond. The outlook of builders is described as positive or slowly improving in the Philadelphia, Cleveland, Atlanta, and Kansas City Districts, and as cautiously optimistic in Boston.

Prepared by the Federal Reserve Bank of Cleveland based on information collected on or before April 2, 2012. Mostly sluggish growth, but some positive comments on residential real estate ...

by Calculated Risk on 4/11/2012 11:38:00 AM

BLS economist Mitra Toossi released some new projections for the participation rate as of January 2012: Labor force projections to 2020: a more slowly growing workforce. This post updates a couple of graphs with these projections.

A key issue is what will happen to the labor force participation rate as the economy slowly recovers. In 2010 I looked at some of the cyclical and long term trends for the participation rate: Labor Force Participation Rate: What will happen? I concluded that a majority of the recent decline in the participation rate is due to changes in demographics.

Changes in population and the participation rate can significantly impact the unemployment rate. If the Civilian noninstitutional population (over 16 years old) grows by about 2 million per year - and the participation rate stays flat - the economy will need to add about 94 thousand jobs per month to keep the unemployment rate steady at 8.2%.

However if the population grows faster (say 2.5 million per year), and/or the participation rate rises, it could take significantly more jobs per month to hold the unemployment rate steady. As an example, if the working age population grows 2.5 million per year and the participation rate rises to 65% (from 63.8%) over the next two years, the economy will need to add 227 thousand jobs per month to hold the unemployment rate steady.

A big difference!

Note: These calculations were done with the Atlanta Fed Jobs Calculator.

That is why forecasting the participation rate is important - and why reports of the number of jobs needed to hold the unemployment rate steady are all over the place and can be very confusing.

Here is an update to a couple of graphs based on Toossi's projections.

Click on graph for larger image.

Note that Toossi is expecting a couple of recent trends to continue: lower participation rates for people in the 16 to 24 year age group (I think this decline is mostly due to more people attending college), and an increase in the participation for older age groups (I think this increase is due to several factors including less physically strenuous jobs, and, unfortunately, financial need).

The second graph shows the actual annual participation rate and two forecasts based on changes in demographics. Now that the leading edge of the baby boom generation is starting to retire, the participation rate is declining and will probably continue to decline for the next 20 years.

This suggests that any bounceback in the participation rate as the economy recovers will probably be fairly small, and the number of jobs needed to hold the unemployment rate steady is probably closer to 100 thousand per month than the frequently report 150+ thousand per month.

Here is the paper with the longer term projection, from Austin State University Professor Robert Szafran in September 2002: Age-adjusted labor force participation rates, 1960–2045 (these projections were made before the recession).

by Calculated Risk on 4/11/2012 08:29:00 AM

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

The Refinance Index decreased 3.1 percent from the previous week. The seasonally adjusted Purchase Index decreased 0.5 percent from one week earlier. ... There was no adjustment made for Good Friday.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 4.10 percent from 4.16 percent, with points remaining unchanged at 0.43 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. This is the lowest 30-year fixed rate since March 9, 2012.

Yesterday, the FHFA acting director Ed DeMarco commented on HARP refinances:

"[M]any of the largest lenders are seeing tremendous homeowner interest [in HARP]. FHFA and the Enterprises expect the volume of HARP loans to increase in the very near future."

by Calculated Risk on 4/10/2012 07:29:00 PM

Here is a very good overview (and fairly short) of US mortgage and foreclosure law by Zachary Kimball and Paul Willen at The New Palgrave Dictionary of Economics.

This article discusses title and liens, the differences between judicial states and non-judicial states, judgments and recourse, the Mortgage Electronic Registration System (MERS) and much more.

Here is an excerpt:

Two types of foreclosure by sale emerged in US law. The first is foreclosure by judicial sale, in which the lender petitions the court and the court orders a foreclosure auction. Judicial sale is available in every jurisdiction. The alternative approach is that, when the mortgage is originated, the borrower gives the lender the right to carry out a foreclosure auction in the event of default, a right known as the ‘power of sale’ (Osborne, 1951, p. 992). Although rare in the early 19th century, power-of-sale foreclosure became more common in the USA over time (Osborne, 1951, p. 993).

Power-of-sale foreclosure is available in a majority of states. In general, states in the south and west of the country offer power of sale and states in the north and east are judicial; whether power-of-sale or judicial foreclosure is the preferred method aligns almost exactly with whether the state follows title or lien theory, respectively. Of the states with the most severe foreclosure problems in the current crisis, Arizona, California and Nevada all allow power-of-sale foreclosure, while Florida only allows judicial foreclosure. Other notable judicial states include Illinois, New York and New Jersey. For fuller discussion of judicial and power-of-sale foreclosure, see Gerardi et al. (2011) and National Consumer Law Center (2010).

by Calculated Risk on 4/10/2012 04:45:00 PM

This is a key distressed market to follow since Las Vegas has seen the largest price decline of any of the Case-Shiller composite 20 cities. Prices, as of the January report, were off 61.8% from the peak according to Case-Shiller, and off 9.1% over the last year.

Sales in 2011 were at record levels - even more than during the bubble - and it looks like 2012 will be an even stronger year, even with some new rules that slow the foreclosure process.

From the LVGAR: GLVAR reports local home prices, sales rising as inventory shrinks

According to GLVAR, the total number of local homes, condominiums and townhomes sold in March was 4,388. That’s up from 3,794 in February, and up from 4,316 total sales in March 2011.
...
Compared to one year ago, home sales were up 4.4 percent, while condo and townhome sales were down 8.4 percent.
...
The total number of homes listed for sale on GLVAR’s Multiple Listing Service again decreased from February to March, with a total of 18,200 single-family homes listed for sale at the end of the month. That’s down 3.6 percent from 18,870 single-family homes listed for sale at the end of February and down 18.0 percent from one year ago.
...
By the end of March, GLVAR reported 4,901 single-family homes listed without any sort of offer. That’s down 25.1 percent from 6,543 such homes listed in February and down 56.8 percent from one year ago.
...
“Our inventory is really dropping,” said GLVAR President Kolleen Kelley, a longtime local REALTOR®. “Based on current demand, we’re looking at a six-week supply of homes on the market. This is making new homes more attractive and creating a window of opportunity for home builders.”

Economist Tom Lawler sent me the following table for several distressed areas that have reported so far for March.

CR Note: This could be very useful data over the next several months (and years) as we try to track the impact of the mortgage servicer settlement and to see if the markets are improving. For all of the areas, the distressed share of sales is down from March 2011, the share of short sales has increased and the share of foreclosure sales are down - and down significantly in some areas.

Look at Phoenix: Short sales have increased from 19.1% to 25.7%, and foreclosures have declined from 46.2% to 21.1%.

Note: The table is a percentage of total sales.

	Short Sales Share		Foreclosure Sales Share		Total "Distressed" Share
	12-Mar	11-Mar	12-Mar	11-Mar	12-Mar	11-Mar
Las Vegas	26.6%	23.6%	40.7%	47.6%	67.3%	71.2%
Reno	34.0%	30.0%	32.0%	41.0%	66.0%	71.0%
Phoenix	25.7%	19.1%	21.1%	46.2%	46.7%	65.3%
Mid-Atlantic (MRIS)	13.2%	13.1%	14.7%	26.3%	27.9%	39.5%

by Calculated Risk on 4/10/2012 02:43:00 PM

From Andrew Ross at the San Francisco Chronicle: Hot 'spec' deal 1st in S.F. since recession began

It's not every day that a parking lot goes for $41 million. In cash.
...
Late last week, New York's Tishman Speyer Properties closed escrow on the space, which, by the end of next year will be transformed into a 10-story, 286,000-square-foot office building ...

Two distinguishing aspects of the deal: It's the first "spec development" (i.e. built from the ground up with no signed tenants) in the city since the onset of the recession in 2007, and no debt financing is involved. The land, architectural plans and construction costs - the latter estimated between $180 million and $185 million - is "funded with all equity," said [Allen Palmer, managing director at Tishman Speyer's San Francisco office].

Last week Reis reported that the office vacancy rate (major markets) declined slightly to 17.2% in Q1 from 17.3% in Q4 2011. Reis noted:

Weak supply growth remains a tailwind for improvement in the office sector. During the first quarter of 2012 only 1.917 million square feet of office space were completed [in the markets Reis tracks]. This represents the lowest quarterly level on record since Reis began tracking quarterly market data in 1999.

There has been some new construction here and there (like the PIMCO tower in Newport Beach), but very little spec building. And this building in San Francisco is being built with no financing.

by Calculated Risk on 4/10/2012 10:20:00 AM

From the BLS: Job Openings and Labor Turnover Summary

The number of job openings in February was 3.5 million, little changed from January. Although the number of job openings remained below the 4.3 million openings when the recession began in December 2007, the number of job openings has increased 46 percent since the end of the recession in June 2009.
...
In February, the hires rate was essentially unchanged at 3.3 percent
for total nonfarm. ... The quits rate can serve as a measure of workers’ willingness or ability to change jobs. In February, the quits rate was little changed for total nonfarm, total private, and government. The
number of quits rose to 2.1 million in February from 1.8 million at the end of the recession in June 2009, although it remained below the 2.9 million recorded when the recession began in December 2007.

The following graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.

This is a new series and only started in December 2000.

Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. This report is for February, the most recent employment report was for March.

Click on graph for larger image.

Notice that hires (dark blue) and total separations (red and light blue columns stacked) are pretty close each month. When the blue line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs.

Jobs openings increased slightly in February, and the number of job openings (yellow) has generally been trending up, and are up about 16% year-over-year compared to February 2011.

Quits increased in February, and quits are now up about 9% year-over-year and quits are now at the highest level since 2008. These are voluntary separations and more quits might indicate some improvement in the labor market. (see light blue columns at bottom of graph for trend for "quits").
All current employment graphs

by Calculated Risk on 4/10/2012 09:33:00 AM

UPDATE: Here are DeMarco's Remarks as Prepared for Delivery (with table and figures)
Some key comments on "strategic modifiers":

As I have noted the NPV results alone are not the sole basis for the decision on whether the Enterprises should pursue principal forgiveness. One factor that needs to be considered is the borrower incentive effects. That means, will some percentage of borrowers who are current on their loans, be encouraged to either claim a hardship or actually go delinquent to capture the benefits of principal forgiveness?

This is a particular concern for the Enterprises because unlike other mortgage market participants that can pick and choose where principal forgiveness makes sense, the Enterprises must develop the program to be implemented by more than one thousand seller/servicers. In addition, the Enterprises will have to publicly announce this program and borrower awareness of the possibility of receiving a principal reduction modification will be heightened among Enterprise borrowers. So as opposed to more targeted individual efforts, or the current opacity of the HAMP process, there is a greater possibility that borrower incentive effects would take place on an Enterprise-wide principal forgiveness program.

It is difficult to model these borrower incentive effects with any precision. What we can do is give a sense of how many current borrowers would have to become “strategic modifiers” for the NPV economic benefit provided by the HAMP triple PRA incentives to be eliminated. In this context, a “strategic modifier” would be a borrower that either claims a financial hardship or misses two consecutive mortgage payments in order to attempt to qualify for HAMP and a principal forgiveness modification.

Here is the webcast for the Speech by FHFA acting director Edward DeMarco: "Addressing the Weak Housing Market: Is Principal Reduction the Answer?" at the The Brookings Institution, 1775 Massachusetts Ave., NW Washington, DC.

Following the speech, there will be a discussion including
Moderator: Ted Gayer, Brookings Co-Director, Economic Studies

Mark Fleming, Chief Economist, CoreLogic

Paul Nikodem, Executive Director, Head of Mortgage Credit Research, Nomura Securities International

Anthony B. Sanders, Professor, George Mason University

Andrew Jakabovics, Senior Director, Policy Development and Research, Enterprise Community Partners, Inc.

by Calculated Risk on 4/10/2012 08:39:00 AM

From the National Federation of Independent Business (NFIB): After Six Months of Increases, Small-Business Optimism Drops For Main Street, No New Jobs in the Months to Come

After six months of gains, the Small-Business Optimism Index fell by almost 2 points in March, settling at 92.5. After a promising start to the year, nine of ten index components dropped last month, most notably hiring plans and expected real sales growth each taking a significant dive, in spite of owners reporting the largest increase in new jobs per firm in a year.
...
Job creation in March was the bright spot in this month’s Index; the net change in employment per firm seasonally adjusted was 0.22, far above January’s “0” reading.
...
A lack of sales remains a problem for owners with 22 percent reporting “poor sales” as their top business problem.

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

Click on graph for larger image.

This graph shows the small business optimism index since 1986. The index declined to 92.5 in March from 94.3 in February. This is slightly above the 91.9 reported in March 2011.

This index remains low - probably due to a combination of sluggish growth, and the high concentration of real estate related companies in the index. And the single most important problem remains "poor sales".

by Calculated Risk on 4/09/2012 07:40:00 PM

From Fed Chairman Ben Bernanke: Fostering Financial Stability. A few excerpts on shadow banking:

I've outlined a number of ongoing efforts, both domestic and international, to bring the shadow banking system into the sunlight, so to speak, and to impose tougher standards on systemically important financial firms. But even as we make progress on known vulnerabilities, we must be mindful that our financial system is constantly evolving, and that unanticipated risks to stability will develop over time. Indeed, an inevitable side effect of new regulations is that the system will adapt in ways that push risk-taking from more-regulated to less-regulated areas, increasing the need for careful monitoring and supervision of the system as a whole.
...
Unfortunately, data on the shadow banking sector, by its nature, can be more difficult to obtain. Thus, we have to be more creative to monitor risk in this important area. We look at broad indicators of risk to the financial system, such as measures of risk premiums, asset valuations, and market functioning. We try to gauge the risk of runs by looking at indicators of leverage (both on and off balance sheet) and tracking short-term wholesale funding markets, especially for evidence of maturity mismatches between assets and liabilities. We are also developing new sources of information to improve the monitoring of leverage. For example, in 2010, we began a quarterly survey on dealer financing (the Senior Credit Officer Opinion Survey on Dealer Financing Terms) that collects information on the leverage that dealers provide to financial market participants in the repo and over-the-counter derivatives markets. In addition, we are working with other agencies to create a comprehensive set of regulatory data on hedge funds and private equity firms.

And his conclusion:

In the decades prior to the financial crisis, financial stability policy tended to be overshadowed by monetary policy, which had come to be viewed as the principal function of central banks. In the aftermath of the crisis, however, financial stability policy has taken on greater prominence and is now generally considered to stand on an equal footing with monetary policy as a critical responsibility of central banks. We have spent decades building and refining the infrastructure for conducting monetary policy. And although we have done much in a short time to improve our understanding of systemic risk and to incorporate a macroprudential perspective into supervision, our framework for conducting financial stability policy is not yet at the same level. Continuing to develop an effective set of macroprudential policy indicators and tools, while pursuing essential reforms to the financial system, is critical to preserving financial stability and supporting the U.S. economy.

Before the crisis, oversight and financial stability were not emphasized. Now the regulators are paying attention; hopefully, even after financial conditions finally recovers, regulators will remain vigilant (but I expect they will become complacent again).