by Calculated Risk on 9/21/2012 08:46:00 AM

A plan for Spain will probably be announced next Thursday, and Greece will need additional aid by November.

From the Financial Times: EU in talks over Spanish rescue plan

EU authorities are working behind the scenes to pave the way for a new Spanish rescue programme and unlimited bond buying by the European Central Bank, by helping Madrid craft an economic reform programme ...
...
The plan, due to be unveiled next Thursday, will focus on structural reforms to the Spanish economy long requested by Brussels, rather than new taxes and spending cuts.
Excerpt with permission.

From the WSJ: Fight Looms on Greek Bailout

A report by international inspectors, due in October, will state how big the funding shortfall is in Greece's bailout program, but European officials say the deficit is far too big for Greece to close on its own.

That means the International Monetary Fund, the European Central Bank, and euro-zone governments such as Germany will have to negotiate over which of them will make painful concessions to ease Greece's debt-service burden.
...
The trio must agree to a plan by November at the latest, when the government in Athens—already in financial arrears—could run out of money altogether.
...
The €173 billion ($226 billion) bailout plan agreed with Athens in March this year—Greece's second bailout since 2010—is already badly off track, euro-zone officials admit.

by Calculated Risk on 9/20/2012 09:01:00 PM

First, from Freddie Mac: Mortgage Rates Back To Record Lows

Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing fixed mortgage rates at or near their all-time record lows helping to keep homebuyer affordability high. The average 30-year fixed rate mortgage matched its all-time record low at 3.49 percent, and the average 15-year fixed fell to a new all-time record low at 2.77 percent.

And from David Wessel at the WSJ: Depression Lessons: Should Fed Stand Down to Compel Congressional Action?

As [economist James] Tobin put it in the American Economic Review in June 1965: “The monetary authorities should have tried harder to promote expansion in 1933-36 and 1937-40 — nothing would have been lost and something might have been gained. Throughout the period the authorities were too little concerned with deflationary risks immediately at hand and too much concerned to forestall the hypothetical future dangers of excess liquidity.”

... Friedman and co-author Anna Schwartz quote at length from a December 1935 technical memo from Fed files that made the case for tightening the credit spigot. ... The subsequent tightening by the Fed was, Friedman and Schwartz concluded, a mistake followed by “a failure to recognize that the action had misfired.”

Friday:
• At 10:00 AM ET, the BLS will release the Regional and State Employment and Unemployment (Monthly) report for August 2012.

Earlier: The Trillion Dollar Bear

by Calculated Risk on 9/20/2012 05:49:00 PM

CR Note: This is a fairly long technical piece. These are just excerpts. The complete article is here.

From housing economist Tom Lawler: ACS 2011: Big Shift to Rental Market; Gross Vacancy Rate Virtually Unchanged Despite Drop in Vacant Homes for Rent and For Sale; Household “Estimate” Shockingly Low

The Census Bureau released it ACS 2011 one-year estimates, and for housing folks the data were in some cases interesting and in other cases quite puzzling. ...

A few things jump out: first, the ACS estimate for occupied housing units increased by just 424,306 in 2011, and at 114.992 million was 1.724 million lower than the “official” Census household count on April 1, 2010. Second, the ACS’ estimate of the gross vacancy rate in 2011 was virtually unchanged from 2010, despite a decline in the number of homes for rent or for sale. The reason was an increase in both housing units for seasonal/recreational/occasional use (up 181,000) and an increase in “other” – homes vacant and held of the market for unknown reasons (in the above I included “usual residence elsewhere” and migrant workers” in “other” to be consistent with the other measures.)

Third, the ACS homeownership rate fell from 65.4% in 2010 to 64.6% in 2011, which is a full 1.5 percentage points lower than the HVS.

In terms of the jump in the ACS’ estimate of the number of renters in 2011 vs. 2010, almost half of the 1.033 million increase reflected a jump in the number of householders renting SF detached homes. The ACS estimate of the percent of the occupied SF detached home market that was occupied by renters for 2011 was 15.7%, up from 15.1% in 2010 and 13.1% in 2006. The renter-share of the occupied SF detached housing market increased by over three percentage points from 2006 to 2011 in eleven states plus DC, with the biggest increases coming in Nevada, Arizona, Oregon, and California. (The full list is Arizona, California, Colorado, DC, Florida, Georgia, Michigan, Nevada, Ohio, Oregon, Utah, and Washington.)
...
what is a reasonable assumption to make about the increase in US households in 2011, much less so far in 2012? HVS and ACS data suggest very slow growth in 2011, but neither has been consistent with decennial Census results, and HVS data suggest only a modest pickup in 2012. CPS/ASEC data, in contrast, suggest much faster growth in households since early 2010, but CPS/ASEC data are not consistent with decennial Census data either!

Gosh, it’s no wonder there’s so much confusion on the US housing outlook!

CR Note: This was an excerpt from an article by Tom Lawler.

by Calculated Risk on 9/20/2012 03:10:00 PM

Memories ... some new readers might not realize that once upon a time I was one of the most bearish analysts around.

The Flow of Funds report today showed that household mortgage debt has declined by more than $1 trillion following the housing bust (see previous post). Most of that decline is due to defaults (as opposed to homeowners paying down debt). And that reminds me of a post I wrote almost 5 years ago.

From the WSJ in December 2007: How High Will Subprime Losses Go?

The global race is on to find the best phrase to describe the housing and credit mess. The U.K.’s Telegraph quotes an economist who says it “could make 1929 look like a walk in the park” if central banks don’t solve the crisis in a matter of weeks.

The report cites the recent prediction from Barclays Capital that losses from the subprime-mortgage meltdown could hit $700 billion. That would top Merrill Lynch’s recent estimate of $500 billion. The Australian newspaper notes that a $700 billion “bloodbath” — potentially leading the U.S. economy into “the blackest year since the Great Depression” — would top the GDPs of all but 15 nations.

Back in the U.S., the Calculated Risk blog sidestepped the colorful language and went straight for the big number: “The losses for the lenders and investors might well be over $1 trillion.”

Many people thought I was crazy.

And if you look at the post the WSJ referenced, the first paragraph starts: "Within the next couple of years, probably somewhere between 10 million and 20 million U.S. homeowners will owe more on their homes, than their homes are worth."

I was a grizzly bear!

by Calculated Risk on 9/20/2012 12:00:00 PM

The Federal Reserve released the Q2 2012 Flow of Funds report today: Flow of Funds.

According to the Fed, household net worth declined slightly in Q2 compared to Q1 2011. Net worth peaked at $67.4 trillion in Q3 2007, and then net worth fell to $51.2 trillion in Q1 2009 (a loss of $16.2 trillion). Household net worth was at $62.7 trillion in Q2 2012 (up $11.5 trillion from the trough, but still down $4.7 trillion from the peak).

The Fed estimated that the value of household real estate increased $353 billion to $16.9 trillion in Q2 2012. The value of household real estate is still $5.9 trillion below the peak.

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. The ratio decreased a little in Q2.

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 Q2 2012, household percent equity (of household real estate) was at 43.1% - up from Q1, and the highest since Q2 2008. This was because of a small increase in house prices in Q2 (the Fed uses CoreLogic) and a reduction in mortgage debt.

Note: about 30.3% of owner occupied households had no mortgage debt as of April 2010. So the approximately 52+ million households with mortgages have far less than 43.1% equity - and over 10 million have negative equity.

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

Mortgage debt declined by $51 billion in Q2. Mortgage debt has now declined by $1.05 trillion 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).

The value of real estate, as a percent of GDP, was up slightly in Q2 (as house prices increased), but is still near the lows of the last 30 years. However household mortgage debt, as a percent of GDP, is still historically very high, suggesting more deleveraging ahead for households.

by Calculated Risk on 9/20/2012 10:00:00 AM

The Philly Fed manufacturing index showed slight contraction in September. From the Philly Fed: September Manufacturing Survey

Firms responding to the September Business Outlook Survey reported nearly flat business activity this month. The survey’s indicators for general activity and new orders both improved from last month but recorded levels near zero. Firms reported continuing declines in shipments, employment, and hours worked. Indicators for the firms’ expectations over the next six months, however, improved notably this month, although the same firms forecast continued deceleration in production growth in the fourth quarter.

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased 5 points, to a reading of ‐1.9. Although this marks the fifth consecutive negative reading for the index, the index has been edging nearer to zero over the last three months.

Labor market conditions at the reporting firms remained weak this month. The current employment index, at ‐7.3, was little changed from its reading in July and August.

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 September. The ISM and total Fed surveys are through August.

The average of the Empire State and Philly Fed surveys increased slightly in September, and has remained negative for four consecutive months. This suggests another weak reading for the ISM manufacturing index.

by Calculated Risk on 9/20/2012 08:30:00 AM

The DOL reports:

In the week ending September 15, the advance figure for seasonally adjusted initial claims was 382,000, a decrease of 3,000 from the previous week's revised figure of 385,000. The 4-week moving average was 377,750, an increase of 2,000 from the previous week's revised average of 375,750.

The previous week was revised up from 382,000.

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 increased to 377,750.

This was above the consensus forecast of 373,000.



And here is a long term graph of weekly claims:

Mostly moving sideways this year, but moving up recently.

All current Employment Graphs

by Calculated Risk on 9/19/2012 08:46:00 PM

From Jim Hamilton at Econbrowser: Thresholds in the economic effects of oil prices

As U.S. retail gasoline prices once again near $4.00 a gallon, does this pose a threat to the economy and President Obama's prospects for re-election? My answer is no.
...
This is now the fourth time we've been near the $4 threshold. It first happened in June 2008, again in May 2011, and again in April of this year. In fact, on each of those previous 3 occasions the average U.S. retail price of gasoline was higher than it is today.
...
There is quite a bit of empirical support for the claim that the second or third time oil prices move back near a previous high, the economic disruption is significantly less than the first time; see for example the evidence and literature reviewed in my 2003 Journal of Econometrics paper (ungated version here) and two recent surveys [1], [2].

$4/gallon? Been there, done that.

See Professor Hamilton's piece for supporting data and graphs.

The good news is oil prices have fallen sharply over the last few days, with Brent down to $108.96 per barrel. Brent closed at $117.48 last Friday. The peak for the year was $128.14 back in March, and the closing low was $88.69 in June.

Thursday:
• At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for claims to decrease to 373 thousand from 382 thousand.

• At 9:00 AM, the Markit US PMI Manufacturing Index Flash will be released. This is a new release and might provide hints about the ISM PMI for September. The consensus is for a reading of 51.5, down from 51.9 in August.

• At 10:00 AM, the Philly Fed Manufacturing Survey for September will be released. The consensus is for a reading of minus 4.0, up from minus 7.1 last month (below zero indicates contraction).

• Also at 10:00 AM, the Conference Board Leading Indicators for September. The consensus is for no change in this index.

• At 12:00 PM, the Q2 Flow of Funds Accounts from the Federal Reserve will be released.

• Note: On Thursday, the Census Bureau will release the 2011 American Community Survey estimates.

One more question for the September economic prediction contest (Note: You can now use Facebook, Twitter, or OpenID to log in).

by Calculated Risk on 9/19/2012 06:02:00 PM

Two-thirds of the way through 2012, single family starts are on pace for 515 thousand this year, and total starts are on pace for about 740 thousand. That is an increase of about 20% from 2011, and is above the forecasts for most analysts (however Lawler was very 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. Starts are moving up, but the increase in completions has just started (wait a few months!).

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

Earlier:
• Housing Starts increased to 750 thousand in August
• Existing Home Sales in August: 4.82 million SAAR, 6.1 months of supply
• Existing Home Sales: Inventory and NSA Sales Graph
• Existing Home Sales graphs

by Calculated Risk on 9/19/2012 02:54:00 PM

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

From AIA: Architecture Billings Index Inches Back into Positive Territory

On the heels of a nearly three-point increase, the Architecture Billings Index (ABI) climbed into positive terrain for the first time in five months. 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 August ABI score was 50.2, up from the mark of 48.7 in July. This score reflects an increase in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 57.2, up from mark of 56.3 the previous month.

“Until the economy is on firmer ground, there aren’t likely to be strong increases in demand for design services,” said AIA Chief Economist, Kermit Baker, PhD, Hon. AIA. “In the meantime, we can expect to see design activity alternate between modest growth and modest decline.”

Click on graph for larger image.

This graph shows the Architecture Billings Index since 1996. The index was at 50.2 in August, up from 48.7 in July. Anything above 50 indicates expansion 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).

Earlier:
• Housing Starts increased to 750 thousand in August
• Existing Home Sales in August: 4.82 million SAAR, 6.1 months of supply
• Existing Home Sales: Inventory and NSA Sales Graph
• Existing Home Sales graphs