by Calculated Risk on 5/09/2012 08:06:00 PM

The next election in Greece will be on June 17th. The outcome is unpredictable and could determine if Greece will leave the euro. The anti-incumbent vote is very strong, and the new government might reject the entire bailout agreement. However a very large percentage (about 35%) of registered voters didn't participate in the recent election - much higher than normal - and it is possible the turnout will be much higher in June, but no one can predict what a higher turnout would mean.

Here is an excellent review from Marcus Walker at the WSJ: How a Radical Greek Rescue Plan Fell Short

Two years after Europe bailed Greece out to protect the euro, the rescue has become a debacle that threatens to unravel the common currency.

After Greece's May 6 elections left pro-bailout parties too weakened to govern the country, more elections are likely in June, with no guarantee a stable government will emerge. By next month, Athens must identify €11.5 billion, or $15 billion, in fresh spending cuts or face suspension of the international loans it needs to pay pensions and run schools. If it doesn't get the money, it would eventually have to print its own.

Greece's growing turmoil is the culmination of a radical austerity experiment and botched economic overhaul that have pushed the nation to the brink of social and political breakdown. The story of the ill-fated bailout suggests that forcing deep austerity on individual member states won't save the euro and may worsen its crisis.

What Walker doesn't point out is that many economists correctly predicted this approach would fail.

Another excerpt:

Greece's bailout by the EU and International Monetary Fund is the costliest financial rescue of a nation in history, with paid or pledged loans totaling €245 billion. It has already involved the biggest-ever sovereign-debt default, a debt restructuring that wiped out more than €100 billion of Greek bond debt.

Yet the restructuring left Greece with two mountains to climb: curbing a still-rising debt more than 1.5 times the size of its economy, while forcing down wages and prices to make the country competitive.
...
Greece's economy has already shrunk by 14% in the past three years, and IMF officials privately expect a further 6.5% contraction this year. Something has to give, and it could be the boundaries of the euro.

Forcing down wages and prices on a piecemeal basis is very difficult. Nominal wages tend to be sticky downwards, and the adjustment can take years - and the voters will eventually rebel. Another alternative, one that is not currently available to Greece, is to devalue the currency. Matthew Yglesias discussed these two approaches last year:

[L]et's talk about Spain. For a while, a lot of capital was flowing into Spain from abroad. A very large share of that capital went to finance house-building rather than productivity-enhancing factories or infrastructure. But it employed a lot of people in the construction sector and related fields, which pushed tax and spending levels up and also led to rising wages. Then the housing boom ends, the capital flows end, and suddenly Spain has to adjust to a new equilibrium in which most people are a bit poorer than they were before. The most natural way to do this would be through a bit of currency depreciation. Everyone's real wages and pension payouts and local debts to one another are reduced. It's a bummer. But everyone goes on doing the best they can to make a living, and people who are underpaid in the new equilibrium set about to bargain for raises. Depreciation makes vacations in Spain cheap, it makes Spanish exports cheap, and it makes it attractive for rich foreigners to actually go buy up excess Spanish housing stock to use as vacation homes and such. Everyone's taken a hit, but they're back on the path to growth.

The other alternative -- the road we're actually traveling down -- is one in which all of these adjustments need to happen piecemeal. To make the same adjustment happen, every single contract in the country needs to be piecemeal renegotiated. That's every town budget, every cell phone plan, every commercial lease, every salary, etc. It's not "impossible" but it's a logistical and political nightmare. And it takes time. During that time instead of everyone working harder because they're poorer and more indebted than they realized and need to raise their incomes what happens is that 10-20 percent of the population does nothing because they can't find jobs. It's a nightmare and no economy is flexible enough to make it work. You wouldn't just need to repeal the basics of human psychology, you'd need to live in a world where there are no transaction costs and no fixed contracts. Imagine if your boss cut your salary 3 percent and then you set about to try to negotiate a 3 percent discount from your landlord, the electric company, your car insurance, your cable provider, your cell phone carrier, your health insurance plan, and everyone else you owe money to. By contrast, if the trade-weighted value of the dollar were to fall three percent then you have a nice, simple, logistically feasible adjustment that improves the cost structure of U.S.-based exporters and export-competing firms.

Milton Friedman had a similar discussion back in the 1950s, "The case for flexible exchange rates”:

The argument for flexible exchange rates is, strange to say, very nearly identical with the argument for daylight saving time. Isn't it absurd to change the clock in summer when exactly the same result could be achieved by having each individual change his habits?

All that is required is that everyone decide to come to his office an hour earlier, have lunch an hour earlier, etc. But obviously it is much simpler to change the clock that guides all than to have individual separately change his pattern of reaction to the clock, even though all to do so.

The situation is exactly the same in the exchange market. It is far simpler to allow one price to change, than to rely upon changes in the multitude of prices that together constitute the internal price structure.

Obviously - as we've been discussing - austerity (that includes the piecemeal approach to wage and price adjustments) - will eventually fail at the ballot box.

There is another method of allowing nominal wages and prices to remain steady, and for real wages and prices to fall - with inflation. It might be possible for the ECB to target the inflation rate in the peripheral countries, and ignore inflation in German. Right now the ECB targets inflation in the eurozone, and that means close to deflation in the peripheral countries. But that is a broad brush (they can't just raise inflation in Greece), and this is also currently unacceptable to the Germans.

So, with no way to ease the suffering (no exchange rate mechanism, no higher inflation), that only leaves more years of suffering or exiting the euro. The Greeks may decide on June 17th.

by Calculated Risk on 5/09/2012 02:55:00 PM

CR Note: Earlier I posted a graph of REO inventory (lender Real Estate Owned) for the Fs (Fannie, Freddie and the FHA). Economist Tom Lawler has added estimates for PLS (private label securities).

From Tom Lawler:

Below is a chart showing SF REO inventories of Fannie, Freddie, private-label ABS, and FHA. The March FHA number is estimated, as for some reason FHA has not yet released the March report to the FHA commissioner. FHA’s SF REO inventory as shown in this monthly report declined to 30,005 at the end of February from 32,170 at the end of December. Data in the FHA Outlook report, however, suggested that SF property conveyances, which had been running extremely low (relative to the number of SDQ loans), spiked up sharply in March, and probably significantly exceeded sales, As a result, I’m assuming March’s FHA SF REO inventory is about the same as December’s.

Click on graph for larger image in new window.

More from CR: When the FDIC's Q1 quaterly banking profile is released in a couple of weeks, I'm sure Tom will add an estimate for REO at FDIC-insured institutions. This is not all REO: In addition to the FDIC-insured institution REO, this excludes non-FHA government REO (VA, USDA, etc.), credit unions, finance companies, non-FDIC-insured banks and thrifts, and a few other categories.

REO inventories have declined over the last year. This was a combination of more sales and fewer acquisitions due to the slowdown in the foreclosure process.

The FHA is seeing an increase in delinquencies (Fannie and Freddie are seeing a decrease), and this will probably mean more FHA REO. And this is grim, from Bloomberg: FHA New Foreclosures Jump as Modified Loans Default (ht Mike In Long Island, Brian)

The number of Federal Housing Administration-insured home loans entering foreclosure jumped in March after half the mortgages it modified to ease repayment terms were in default again a year or more later.

by Calculated Risk on 5/09/2012 10:47:00 AM

This morning Fannie Mae reported results for Q1 2012.

Fannie Mae (FNMA/OTC) today reported net income of $2.7 billion in the first quarter of 2012, compared to a net loss of $6.5 billion in the first quarter of 2011 and a net loss of $2.4 billion in the fourth quarter of 2011. The significant improvement in the company’s financial results in the first quarter of 2012 was due primarily to lower credit-related expenses, resulting from a less significant decline in home prices, a decline in the company’s inventory of single-family realestate owned (“REO”) properties coupled with improved REO sales prices, and lower single-family serious delinquency rates. Fannie Mae does not require funding from Treasury for the first quarter of 2012.

Fannie reported that they acquired 47,700 REO in Q1 (Real Estate Owned via foreclosure or deed-in-lieu) and disposed of 52,071 REO. Fannie has sold more REO than they acquired for six consecutive quarters (acquisitions slowed because of the process issues, but dispositions picked up sharply in 2011).

This has been true for most lenders - they have been selling more REO than they have been acquiring - and the overall REO inventory has been falling.

The following graph shows Fannie REO inventory, acquisitions and dispositions over the last several years.

Click on graph for larger image.

When the red line is above the blue line, dispositions are higher than acquisitions, and REO inventory declines. REO inventory declined by 25% from Q1 2011, and is down 3.7% from last quarter.

A few comments from Fannie:

The ongoing weak economy, as well as high unemployment rates, continues to result in a high level of mortgage loans that transition from delinquent to REO status, either through foreclosure or deed-in-lieu of foreclosure. Our foreclosure rates remain high; however, foreclosure levels were lower than they would have been during the first quarter of 2012 due to delays in the processing of foreclosures caused by continuing foreclosure process issues encountered by our servicers and changing legislative, regulatory and judicial requirements. The delay in foreclosures, as well as an increase in the number of dispositions of REO properties, has resulted in a decrease in the inventory of foreclosed properties since December 31, 2010.

The second graph shows the combined REO inventory for Fannie, Freddie and the FHA (FHA through Feb 2012).

The combined REO inventory is down to 203 thousand in Q1 2012, down about 18% from Q1 2011.

The pace of REO aquisitions will probably increase following the mortgage servicer settlement (signed off on April 5th); and dispositions will probably increase too.

by Calculated Risk on 5/09/2012 08:35:00 AM

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

Increases to the seasonally adjusted Market Composite and Purchase indices were driven by increases in their Conventional components. Application activity within the Government market decreased for both of these measures from last week. Likewise, the Refinance Index increased 1.3 percent from the previous week, driven by a 1.8 percent increase to the Conventional Refinance Index, while the Government Refinance Index decreased 2.3 percent. The seasonally adjusted Purchase Index increased 3.4 percent from one week earlier, spurred by a 5.4 percent increase in the seasonally adjusted Conventional Purchase Index.
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The refinance share of mortgage activity decreased to 72.1 percent of total applications from 72.6 percent the previous week. This is the lowest refinance share since April 6, 2012. The government purchase share decreased over the week from 37.0 percent to 35.8 percent of all purchase applications. This is the lowest government purchase share since March 27, 2009.
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The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 4.01 percent from 4.05 percent,with points decreasing to 0.41 from 0.44 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. This is the lowest 30-year fixed interest rate recorded in the history of the survey
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The average contract interest rate for 15-year fixed-rate mortgages decreased to 3.29 percent from 3.31 percent, with points decreasing to 0.32 from 0.41 (including the origination fee) for 80 percent LTV loans. This is the lowest 15-year fixed interest rate recorded in the history of the survey.

by Calculated Risk on 5/08/2012 09:45:00 PM

There are two minor economic indicators scheduled for release tomorrow.

• The Mortgage Bankers Association (MBA) will release the mortgage aplications index.

• At 10:00 AM, Monthly Wholesale Trade: Sales and Inventories for March will be released.

Last Friday I discussed the significant decline in government jobs over the last few years, and posted a graph comparing public sector job gains (and losses) for President George W. Bush's first term (following the stock market bust), and for President Obama's current term (following the housing bust and financial crisis). The Bush term was added for comparison purposes only, and there are many differences between the two periods.

A big difference between Mr. Bush's first term and Mr. Obama's presidency has been public sector employment. The public sector grew during Mr. Bush's term (up 900,000 jobs), but the public sector has declined since Obama took office (down 607,000 jobs). These job losses are at the state and local level, although the Federal government has been losing jobs over the last year. These job losses have been a significant drag on overall employment.

It appears the state and local public sector job losses are slowing, and it is likely that the decline in state and local public payrolls will end mid-year 2012. However the Federal government jobs losses will probably continue.

Here are two interesting posts on government workers:

• From the FT Alphaville: Fact of the day, US government workers edition

Government workers account for 9.1% of the working age population, equaling the lowest share on record. When this government employment share of the population was last witnessed in 1984, it was alleviated in part by a massive surge in government spending, with yearly real federal spending topping out at 10.6% in 1985. Yet such an offset seems unlikely in the quarters ahead, as major government spending increases in the current political climate are verboten.

That’s via Moody’s Analytics, and this is mostly a state and local government story, with federal government jobs staying roughly flat since the end of the recession when excluding temporary census hiring.

The only silver lining is that the decline might have bottomed ...

• From the WSJ: Unemployment Rate Without Government Cuts: 7.1%

The unemployment rate would be far lower if it hadn’t been for those [government] cuts: If there were as many people working in government as there were in December 2008, the unemployment rate in April would have been 7.1%, not 8.1%.

For the monthly economic question contest, here are two question for later this week (Thursday and Friday):

by Calculated Risk on 5/08/2012 06:55:00 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 February Case-Shiller report, were off 61.7% from the peak according, and off 8.6% 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 GLVAR: GLVAR reports local home prices increased for third straight month, as supply of homes for sale continues to shrink

Even with fewer homes to sell,[ GLVAR President Kolleen] Kelley said existing home sales remain ahead of the record pace set in 2011, when GLVAR reported that 48,186 existing properties were sold in Southern Nevada.
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According to GLVAR, the total number of local homes, condominiums and townhomes sold in April was 3,924. That’s down from 4,388 in March, but still up from 3,902 total sales in April 2011.
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The local housing inventory, which was already tightening throughout 2011, began to contract more rapidly after Oct. 1, 2011, when a new state law known as AB284 took effect, requiring lenders to prove they have all the necessary documents in place before proceeding with a foreclosure. Since Oct. 1, Kelley said there has been a dramatic drop in the notices of default lenders file to begin the foreclosure process and in the number of bank-owned homes put on the market in Southern Nevada.
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The total number of homes listed for sale on GLVAR’s Multiple Listing Service again decreased from March to April, with a total of 17,884 single-family homes listed for sale at the end of the month. That’s down 1.7 percent from 18,200 single-family homes listed for sale at the end of March and down 20.3 percent from one year ago ... GLVAR reported a total of 3,836 condos and townhomes listed for sale on its MLS at the end of April. That’s down 1.7 percent from 3,901 condos and townhomes listed at the end of March, and down 27.8 percent from one year ago. As in past months, the number of available homes listed for sale without any sort of pending or contingent offer also dropped sharply compared to the previous month and year. By the end of April, GLVAR reported 4,162 single-family homes listed without any sort of offer. That’s down 15.1 percent from 4,901 such homes listed in March and down 63.4 percent from one year ago.

Some of the decline in inventory is related to the new rules, but the decline in active listing (not pending or contingent) is down 63.4% year-over-year for single family homes!

by Calculated Risk on 5/08/2012 03:47:00 PM

It appears no party will be able to form a coalition government, so there will be another election in June. A record large number of registered voters didn't vote in the recent election, and the outcome next month probably depends on if these people participate in June. The odds of Greece exiting the euro zone in the near term (and the euro) have clearly increased.

From the WSJ: New Election in Greece Looks Likely

Greece's political turmoil showed no signs of abating Tuesday as hopes faded that leading political parties can form a coalition government after Sunday's splintered election result, increasing the possibility that Greeks will be called back to the polls as early as next month.
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At stake is Greece's ability to implement next month agreed budget cuts and overhauls it must take in order to secure continued financing from its European partners and the International Monetary Fund. Failure to do so could delay—and potentially imperil—further aid promised to Greece as part of a €130 billion ($170 billion) bailout agreed only in March, rendering the country unable to meet its obligations.

From the NY Times: Greek Leftists Rule Out Coalition With Incumbents

Greece’s post-election political and economic chaos deepened on Tuesday, when the leader of a leftist anti-austerity party that gained in the balloting ruled out a coalition with the two formerly dominant parties that had backed hugely unpopular budget cuts.

The announcement raised further doubts about the country’s future in the euro zone, as well as fears about the stability of the common currency itself.

From the Athens News: Elections 2012: Live news blog, May 8

6.24pm An article making the rounds about the Eurozone surviving without Greece can be read here. Over the past couple of days, articles such as this one have been flooding media outlets. While it is nothing that we haven't read before, it makes you wonder if we're finally reaching the point when the Eurozone will find a formula and cut their losses.

From the Athens News: Eurozone can survive without Greece

Voters' rejection of pro-bailout political parties in Sunday's election has raised the chances of Greece leaving the euro, but this unprecedented step is seen as manageable rather than catastrophic for the currency bloc.

Some banks have raised estimates of the likelihood of Greece quitting the euro. But after a year of investors shedding bonds issued by highly indebted euro zone countries and big injections of central bank cash, they said the damage could be contained.

by Calculated Risk on 5/08/2012 12:54:00 PM

First a bit of an apology: Back in February, when I wrote “The Housing Bottom is Here”, I received a number of positive emails (even from people who disagreed with me), and many more negative emails. One person wrote: “No credible informed analyst would call the housing bottom now. You are doing a disservice to your readers.” I’d like to think I’m impervious to criticism, but I admit that comment bothered me.

That is why I posted the list yesterday of “informed” analysts who now believe we are at or near the bottom for house prices. Of course we could all be wrong – these are just forecasts – and house prices don’t care who calls the bottom. But I’d only be doing a disservice to my readers if I didn’t write what I believe – and I do think there is a good chance nominal house prices have bottomed on a national basis.

Just to be clear: there are also informed and credible analysts who think house prices will fall further.

But if I’m correct about house prices – and the CoreLogic report released this morning is another indicator that prices may be stabilizing - I think we should start asking what the economic impact of stabilizing house prices will be.

Prices don’t have to start increasing to have a positive impact on the economy; just stop falling. As an example, Freddie Mac just noted that “stabilizing home prices in certain geographical areas with significant REO activity” led to lower REO expenses in Q1.

We are probably already seeing the impact of stabilizing prices on housing inventory. If potential sellers think prices will fall further, then they will rush to sell and list their homes right away. But if potential sellers think prices are stabilizing, and may even increase, they are more willing to wait for a better market or to sell when it is most convenient. I think we are seeing that right now.

More importantly, I think stabilizing prices will give hope to some “underwater” homeowners and we will probably see mortgage default rates fall quicker. And over time, buyers will gain confidence that prices have stopped falling, and I expect demand to increase – and also for more private lenders to reenter the mortgage market and help support that demand (here is an example).

And this demand will also boost homebuilding and new home sales – since homebuilders will have a better idea of the pricing needed to compete in a market (falling prices makes it hard to plan).

These are just some preliminary thoughts ...

by Calculated Risk on 5/08/2012 10:37:00 AM

From the BLS: Job Openings and Labor Turnover Summary

There were 3.7 million job openings on the last business day of March, little changed from February but up significantly from a year earlier, the U.S. Bureau of Labor Statistics reported today.
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The number of total nonfarm job openings has increased by 1.3 million since the end of the recession in June 2009.
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The quits rate can serve as a measure of workers’ willingness or ability to change jobs. In March, the quits rate was unchanged for total nonfarm, total private, and government. The number of quits was 2.1 million in March 2012, up from 1.8 million at the end of the recession in June 2009.

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 March, the most recent employment report was for April.

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 in March to 3.737 million, up from 3.565 million in February. The number of job openings (yellow) has generally been trending up, and openings are up about 17% year-over-year compared to March 2011. This is the highest level for job openings since July 2008.

Quits increased in March, and quits are now up about 8.5% 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 5/08/2012 09:04:00 AM

Notes: This CoreLogic House Price Index report is for March. The Case-Shiller index released two weeks ago was for February. Case-Shiller is currently the most followed house price index, however CoreLogic is used by the Federal Reserve and is followed by many analysts. The CoreLogic HPI is a three month weighted average and is not seasonally adjusted (NSA).

From CoreLogic: CoreLogic® March Home Price Index Shows Slight Year-Over-Year Decrease of Less Than One Percent

[CoreLogic March Home Price Index (HPI®) report] shows that nationally home prices, including distressed sales, declined on a year-over-year basis by 0.6 percent in March 2012 compared to March 2011. On a month-over-month basis, home prices, including distressed sales, increased by 0.6 percent in March 2012 compared to February 2012, the first month-over-month increase since July 2011.

Excluding distressed sales, month-over-month prices increased for the third month in a row. The CoreLogic HPI also shows that year-over-year prices, excluding distressed sales, rose by 0.9 percent in March 2012 compared to March 2011. Distressed sales include short sales and real estate owned (REO) transactions.

“This spring the housing market is responding to an improving balance between real estate supply and demand which is causing stabilization in house prices,” said Mark Fleming, chief economist for CoreLogic. “Although this has been the case in each of the last two years, the difference this year is that stabilization is occurring without the support of tax credits and in spite of a declining share of REO sales.”

“While housing prices remain flat nationally, in many markets tighter inventories are beginning to lift home prices,” said Anand Nallathambi, president and chief executive officer of CoreLogic.

Click on graph for larger image.

This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100.

The index was up 0.6% in March, and is down 0.6% over the last year.

The index is off 34% from the peak - and is just above the post-bubble low set last month.

The second graph is from CoreLogic. The year-over-year declines are getting smaller - this is the smallest year-over-year decline since 2010 when prices were impacted by the housing tax credit.

The year-over-year change will probably turn positive in April or May. The "stabilization" of house prices is a significant story.