by Calculated Risk on 7/19/2012 01:42:00 PM

Earlier ...

• From the Philly Fed: July 2012 Business Outlook Survey

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from a reading of −16.6 in June to −12.9. This marks the third consecutive negative reading for the index ...
...
Labor market conditions at the reporting firms deteriorated this month. The current employment index decreased 10 points, to −8.4, its second negative reading in three months. ... Firms also indicated fewer hours worked this month: The average workweek index increased 2 points but posted its fourth consecutive negative reading.

Click on graph for larger image.

Here is a graph comparing the regional Fed surveys and the ISM manufacturing index. The dashed green line is an average of the NY Fed (Empire State) and Philly Fed surveys through July. The ISM and total Fed surveys are through June.

The average of the Empire State and Philly Fed surveys increased in July, but the average is still negative (contraction).

• The Conference Board leading indicators declined 0.3% in June:

The Conference Board Leading Economic Index® (LEI) for the U.S. declined 0.3 percent in June to 95.6 (2004 = 100), following a 0.4 percent increase in May, and a 0.1 percent decline in April.

Says Ataman Ozyildirim, economist at The Conference Board: “The U.S. LEI declined in two of the last six months, and its six-month growth rate has eased in the last three months. The strengths among the leading indicators have become less widespread as consumer expectations and manufacturing new orders offset gains in the financial, labor, and construction-related components. Meanwhile, the coincident economic index, a measure of current economic conditions, has risen slowly but steadily in the last three months.”

Says Ken Goldstein, economist at The Conference Board: “The U.S. economy is growing very slowly. The CEI basically reflects this steady but soft pace of overall economic activity. The LEI is pointing to no strengthening over the next few months, as the economy continues to sail through strong headwinds domestically and internationally.”

by Calculated Risk on 7/19/2012 11:47:00 AM

I can't emphasize enough - what matters the most in the NAR's existing home sales report is inventory; what matters the most in the new home sales report next week is sales. It is active inventory that impacts prices (although the "shadow" inventory will keep prices from rising). Those looking at the number of existing home sales for a recovery in housing are looking at the wrong number. For existing home sales, look at inventory first.

Although there are always questions about the NAR data, the report this morning was another positive housing report.

The NAR reported inventory decreased to 2.39 million units in June, down 3.2% from the downwardly revised 2.47 million in May (revised down from 2.49 million). This is down 24.4% from June 2011, and down 10.8% from the inventory level in June 2005 (mid-2005 was when inventory started increasing sharply). This is the lowest level for a June since 2002.

Clearly inventory will be below the comparable month in 2005 for the rest of the year and will probably track close to the level in 2004. It is also possible that inventory has peaked for 2012 (or is at least very close to the peak).

Important: The NAR reports active listings, and although there is some variability across the country in what is considered active, most "contingent short sales" are not included. "Contingent short sales" are strange listings since the listings were frequently NEVER on the market (they were listed as contingent), and they hang around for a long time - they are probably more closely related to shadow inventory than active inventory. However when we compare inventory to 2005, we need to remember there were no "short sale contingent" listings in 2005. In the areas I track, the number of "short sale contingent" listings is also down sharply year-over-year.

The following graph shows inventory by month since 2004. In 2005 (dark blue columns), inventory kept rising all year - and that was a clear sign that the housing bubble was ending.

Click on graph for larger image.

This year (dark red for 2012) inventory is at the lowest level for the month of June since 2002, and inventory is below the level in June 2005 (not counting contingent sales). However inventory is still elevated using months-of-supply, but I expect months-of-supply to be below 6 later this year.

The following graph shows existing home sales Not Seasonally Adjusted (NSA).

Sales NSA (red column) are above the sales for the 2009 and 2011 (2010 was higher because of the tax credit). Sales are well below the bubble years of 2005 and 2006.

On distressed sales from the NAR:

Distressed homes - foreclosures and short sales sold at deep discounts - accounted for 25 percent of June sales (13 percent were foreclosures and 12 percent were short sales), unchanged from May but down from 30 percent in June 2011.

However other data suggest distressed sales were down in June, and that is a positive sign for the housing market.

Earlier:
• Existing Home Sales in June: 4.37 million SAAR, 6.6 months of supply
• Existing Home Sales graphs

by Calculated Risk on 7/19/2012 10:00:00 AM

The NAR reports: June Existing-Home Prices Rise Again, Sales Down with Constrained Supply

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, declined 5.4 percent to a seasonally adjusted annual rate of 4.37 million in June from an upwardly revised 4.62 million in May, but are 4.5 percent higher than the 4.18 million-unit level in June 2011.
...
Total housing inventory at the end June fell another 3.2 percent to 2.39 million existing homes available for sale, which represents a 6.6-month supply at the current sales pace, up from a 6.4-month supply in May. Listed inventory is 24.4 percent below a year ago when there was a 9.1-month supply.

Click on graph for larger image.

This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.

Sales in June 2012 (4.37 million SAAR) were 5.4% lower than last month, and were 4.5% above the June 2011 rate.

The second graph shows nationwide inventory for existing homes.

According to the NAR, inventory declined to 2.39 million in June from the downwardly revised 2.47 million in May (revised down from 2.49 million). Inventory is not seasonally adjusted, and usually inventory increases from the seasonal lows in December and January to the seasonal high in mid-summer.

The last graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory.

Inventory decreased 24.4% year-over-year in June from June 2011. This is the sixteenth consecutive month with a YoY decrease in inventory, and the largest year-over-year decline reported.

Months of supply increased to 6.6 months in June.

This was below expectations of sales of 4.65 million. However, as I've noted before, those focusing on sales of existing homes, looking for a recovery for housing, are looking at the wrong number. For existing home sales, the key number is inventory - and the sharp year-over-year decline in inventory is a positive for housing. I'll have more later ...


All current Existing Home Sales graphs

by Calculated Risk on 7/19/2012 08:37:00 AM

The DOL reports:

In the week ending July 14, the advance figure for seasonally adjusted initial claims was 386,000, an increase of 34,000 from the previous week's revised figure of 352,000. The 4-week moving average was 375,500, a decrease of 1,500 from the previous week's revised average of 377,000.

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 declined to 375,500.

The sharp decline last week due to onetime factors, and some increase was expected.

And here is a long term graph of weekly claims:

This was well above the consensus forecast of 365,000 and suggests ongoing weakness in the labor market.


All current Employment Graphs

by Calculated Risk on 7/18/2012 09:31:00 PM

Existing home sales for June is the key release on Thursday. Most of the focus will be on sales, but the key numbers are inventory and months-of-supply.

• At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for claims to increase to 365 thousand.

• At 10:00 AM, Existing Home Sales for June from the National Association of Realtors (NAR). The consensus is for sales of 4.65 million on seasonally adjusted annual rate (SAAR) basis, up from 4.55 million in May.


• Also at 10:00 AM, Philly Fed Survey for July will be released. This survey really surprised to the downside in June, and the consensus is for a reading of -8.0, up from -16.6 last month (below zero indicates contraction).

• Also at 10:00 AM, the Conference Board Leading Indicators for June will be released. The consensus is for a 0.1% decrease in this index.

Earlier:
• Housing Starts increased to 760 thousand in June, Highest since October 2008
• Starts and Completions: Multi-family and Single Family
• August 1st QE3 Departure Date?

by Calculated Risk on 7/18/2012 05:12:00 PM

Halfway through 2012, single family starts are on pace for over 500 thousand this year, and total starts are on pace for about 730 thousand. That is above the forecasts for most analysts (however Lawler and the NAHB were close).

Here is an update to the graph comparing multi-family starts and completions. Since it usually takes over a year on average to complete a multi-family project, there is a lag between multi-family starts and completions. Completions are important because that is new supply added to the market, and starts are important because that is future new supply (units under construction is also important for employment).

These graphs use a 12 month rolling total for NSA starts and completions.

Click on graph for larger image.

The blue line is for multifamily starts and the red line is for multifamily completions.

The rolling 12 month total for starts (blue line) has been increasing steadily, and completions (red line) is lagging behind - but completions will follow starts up over the course of the year (completions lag starts by about 12 months).

This means there will be an increase in multi-family deliveries next year.

The second graph shows single family starts and completions. It usually only takes about 6 months between starting a single family home and completion - so the lines are much closer. The blue line is for single family starts and the red line is for single family completions.

For the fifth consecutive month, the rolling 12 month total for starts has been above completions - that usually only happens after housing has bottomed.

Earlier on housing starts:
• Housing Starts increased to 760 thousand in June, Highest since October 2008

by Calculated Risk on 7/18/2012 02:00:00 PM

Fed's Beige Book:

Reports from most of the twelve Federal Reserve Districts indicated that overall economic activity continued to expand at a modest to moderate pace in June and early July.

This is a downgrade from the previous beige book that reported "moderate" growth.

And on real estate:

Reports on residential housing markets remained largely positive. Sales were characterized as improving in Philadelphia, New York, Richmond, Chicago, St. Louis, and Minneapolis, while home sales increased in Boston, Cleveland, Atlanta, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.
...
Most Districts reported declines in home inventories. Homes prices have begun to stabilize in some markets and price increases were noted in select markets. Boston and Atlanta noted that appraisals were coming in below market prices.
...
Rental markets continued to strengthen by most accounts.
...
Recent activity in commercial real estate markets has been mixed. Modest improvements were noted in Boston, Atlanta, and St. Louis and demand strengthened in the San Francisco District. Softer conditions were reported in the New York and Richmond Districts, while demand held steady in the Philadelphia and Dallas Districts. Nonresidential construction activity varied as well.

"Prepared at the Federal Reserve Bank of Atlanta and based on information collected before July 9, 2012."

More sluggish growth, but still "modest to moderate". And a few positive comments on residential real estate ...

by Calculated Risk on 7/18/2012 11:47:00 AM

There is quite a bit of discussion on when (not if) the Fed will embark on QE3. As an example, from Goldman Sachs yesterday:

While we think that a modest easing step is a strong possibility at the August or September meeting, we suspect that a large move is more likely to come after the election or in early 2013, barring rapid further deterioration in the already-cautious near term Fed economic outlook.

And from Merrill Lynch this morning:

We expect that, as the data continue to soften, the Fed will undershoot its own forecasts and thus respond with further easing. We expect the Fed to push out its forward guidance until at least mid-2015, perhaps at the August 1 FOMC meeting, and to launch a $500bn QE3 asset purchase plan by the September 13 meeting.

Although the date is uncertain, I think there is a strong possibility that the Fed will launch QE3 on August 1st.

First, I think Bernanke paved the way for QE3 at the press conference on June 20th. Before embarking on previous rounds of QE, Bernanke always outlined the reasons - and I thought he made it clear that if the economy didn't improve, more accommodation was coming. And, if anything, the data has been worse since the last meeting. However there has only been a limited amount of data (Q2 GDP will be released next week), and some participants might argue they need additional data before supporting QE3.

Second, two of the key undecided voting members of the FOMC are clearly moving closer to supporting QE3. Last week Atlanta Fed President Dennis Lockhart came close to advocating QE3. Although Lockhart weighed both sides of each issue in his speech, he concluded: 1) the risks of QE3 are "manageable", 2) QE3 will be modestly effective, and 3) his earlier forecast is becoming "untenable" and that means he will support more accommodation if the recent weak data continues.

And yesterday, Cleveland Fed President Sandra Pianalto said more easing could be warranted.

My outlook calls for the pace of growth to pick up over the course of this year and into 2013 as the headwinds holding back the recovery gradually abate. I also expect inflation to remain close to 2 percent. If the expansion were to continue to lose momentum, and inflation threatened to run persistently below 2 percent, additional policy action could be warranted.

I expect Pianalto will revise down her outlook over the next couple of weeks.

Third, it appears some key members of the FOMC (Yellen, Dudley, Williams) are all pushing harder for QE now. San Francisco Fed President John Williams is definitely being more aggressive, from July 9th:

We are falling short on both our employment and price stability mandates, and I expect that we will make only very limited progress toward these goals over the next year. ... If further action is called for, the most effective tool would be additional purchases of longer-maturity securities, including agency mortgage-backed securities. ... At the Fed, we take our dual mandate with the utmost seriousness. ... We stand ready to do what is necessary to attain our goals of maximum employment and price stability.

By my count, if Bernanke decides that QE3 is appropriate, he will have 10 or 11 votes on August 1st. Maybe the FOMC will wait for more data, but I think QE3 is likely very soon.

by Calculated Risk on 7/18/2012 10:41:00 AM

Note: This index is a leading indicator primarily for new Commercial Real Estate (CRE) investment.

From AIA: Weak Market Conditions Persist According to Architecture Billings Index

The Architecture Billings Index (ABI) saw more poor conditions last month, indicating a drop in design activity at U.S. architecture firms, and suggesting upcoming weakness in spending on nonresidential construction projects. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the June ABI score was 45.9, nearly identical to the mark of 45.8 in May. This score reflects a decrease in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 54.4, up slightly from mark of 54.0 the previous month.

“The downturn in design activity that began in April and accelerated in May has continued into June, likely extending the weak market conditions we’ve seen in nonresidential building activity ,” said AIA Chief Economist, Kermit Baker, PhD, Hon. AIA. “While not all firms are experiencing negative conditions, a large share is still coping with a sluggish and erratic marketplace.”

Click on graph for larger image.

This graph shows the Architecture Billings Index since 1996. The index was at 45.9 in June, up slightly from May. Anything below 50 indicates contraction in demand for architects' services.

Note: This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions.

According to the AIA, there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction. This suggests further weakness in CRE investment later this year and into next year (it will be some time before investment in offices and malls increases).
All current Commercial Real Estate graphs

by Calculated Risk on 7/18/2012 08:30:00 AM

From the Census Bureau: Permits, Starts and Completions

Housing Starts:
Privately-owned housing starts in June were at a seasonally adjusted annual rate of 760,000. This is 6.9 percent above the revised May estimate of 711,000 and is 23.6 percent above the June 2011 rate of 615,000.

Single-family housing starts in June were at a rate of 539,000; this is 4.7 percent above the revised May figure of 515,000. The June rate for units in buildings with five units or more was 213,000.

Building Permits:
Privately-owned housing units authorized by building permits in June were at a seasonally adjusted annual rate of 755,000. This is 3.7 percent below the revised May rate of 784,000, but is 19.3 percent above the June 2011 estimate of 633,000.

Single-family authorizations in June were at a rate of 493,000; this is 0.6 percent above the revised May figure of 490,000. Authorizations of units in buildings with five units or more were at a rate of 241,000 in June.

Click on graph for larger image.

Total housing starts were at 760 thousand (SAAR) in June, up 6.9% from the revised May rate of 711 thousand (SAAR). Note that May was revised up from 708 thousand. April was revised up slightly too.

Single-family starts increased 4.7% to 539 thousand in June.

The second graph shows total and single unit starts since 1968.

This shows the huge collapse following the housing bubble, and that total housing starts have been increasing lately after moving sideways for about two years and a half years.

Total starts are up 59% from the bottom start rate, and single family starts are up 53% from the low.

This was above expectations of 745 thousand starts in June. This is another fairly strong housing report.

All Housing Investment and Construction Graphs