by Calculated Risk on 11/12/2012 12:08:00 PM

From Chris Flanagan and Michelle Meyer at Merrill Lynch: Another upward revision to home prices

Back in March, we called the bottom in national home prices. It appears that while we are correct on the timing, we understated the magnitude of the turn. We revised up our forecast in August, but did not go far enough and hence are revising our trajectory again. We now look for S&P Case Shiller prices to be up 5.0% YoY this year (Q4/Q4), compared to our prior forecast of 2.0%. ... Taking a longer perspective, we look for average home price appreciation of 3.3% over the next ten years or a cumulative gain of about 36%. This will modestly outpace the rate of inflation.

Our forecast still assumes some slowing in home prices into the end of the year. We forecast S&P Case Shiller national prices to be up 5.6% q/q saar in Q3, following a 9.3% gain in Q2. We look for essentially flat prices in Q4 and a decline of 1.6% in Q1 before prices resume their upward trend. It is important to remember that the housing market is subject to volatility in the best of times; in this distorted market, we cannot expect a smooth pattern.

The key factor driving the increase in home prices is a better alignment of housing supply and demand. Inventory of homes for sale has declined markedly. On an absolute level, listed inventory is at the lowest since 1Q05. And even after accounting for the slow pace of sales, it only takes 5.9 months to clear inventory. Supply is even lower for new construction homes ...

While the initial turn higher in demand was driven by investors, it appears that more recent gains can be attributable to primary homebuyers. The latest results from the Campbell HousingPulse survey shows an increase in the share of sales to current homeowners and a decline in investor share over the past few months ...

And on the economic impact:

The gain in home prices will support economic growth. The traditional way we think about the link between home prices and the economy is through the "wealth effect." The wealth effect captures the amount of additional spending power created (lost) from an increase (decrease) in household wealth. The conventional wisdom is that the marginal propensity to consume out of housing wealth is about 3 to 5 cents per dollar over a three year period. This suggests that the gain in housing wealth will only be a gradual tailwind for the economy.

There is also another important link which can show up more quickly – consumer confidence. The turn in home prices, although modest at the start, will help to boost consumer confidence. Simply believing that prices have stopped falling should provide a sense of relief to households. It will also allow households to have greater mobility, generating a more efficient labor market and greater churn in the housing stock. We have already seen a turn higher in consumer sentiment, which is likely correlated with the gain in home prices.

CR Note: Merrill Lynch analysts are using the quarterly Case-Shiller National index (most reporting uses the monthly Case-Shiller Composite 20 index). The Case-Shiller National Index was up 1.1% in Q2 (compared to Q2 2011).   Looking at the recent monthly data, Merrill's forecast for 2012 appears about right.

Merrill analysts are expecting prices to increase 3% in 2013. My guess is most of the sharp decline in inventory is now behind us, and I think there are many potential sellers waiting for a better market, and slightly higher prices will probably mean a little more inventory keeping prices from rising quickly.

Note: I wrote about The economic impact of a slight increase in house prices back in August.

Also note the comment about more "primary homebuyers" - that is an important transition along with more conventional sales (as opposed to foreclosures and short sales).

by Calculated Risk on 11/12/2012 09:14:00 AM

D.R. Horton continues to see strong sales growth and expect sales to increase in 2013. Beazer is a laggard, but also expects sales to increase next year. I'll have more on the builders in a couple weeks.

From RTTNews.com: D.R. Horton Q4 Profit Climbs, Tops View

Homebuilder D.R. Horton Inc. Monday reported a sharp increase in fourth-quarter profit, that exceeded analysts' view, as the company benefited from continued improvement in housing market ...

Homebuilding revenues for the quarter climbed 21 percent to $1.3 billion, while analysts estimated $1.35 billion. The company closed 5,575 homes in the period, up 12 percent from a year earlier.

Net sales orders increased 24 percent and value of net sales orders were up 35 percent from the preceding year.

As at September 30, D.R. Horton sales order backlog of homes under contract jumped 49 percent to 7,240 homes and the value of the backlog increased 61 percent to $1.7 billion.

Quote from Donald R. Horton, Chairman of the Board:

“We are positioned for a strong start to fiscal 2013, with our highest year-end backlog since fiscal 2007. We have continued to see strong sales demand through October and into November. With 13,000 homes in inventory and 60,000 finished lots controlled, we have the home and lot position to continue to grow our market share and meet increasing customer demand. We look forward to continued improvement in our operating metrics and increased profitability in fiscal 2013.”

And from MarketWatch: Beazer Homes's loss widens, sales up double-digits

Beazer Homes fiscal fourth-quarter loss widened as the home builder recorded a large debt extinguishment loss that overshadowed a double-digit revenue rise.
...
Revenue rose 11% to $370.9 million as home construction and land sales climbed. Analysts polled by Thomson Reuters expected a loss of $1.22 a share on $335.1 million in revenue.

The builder's cancellation rate was down at 31.1% from 34.2%. Total home closings were up 17% to 1,608.

New orders rose 10% to 1,110 homes, a rate that is slower than many of the homebuilder's peers. Total backlog units rose 31% from the year-ago quarter.

by Calculated Risk on 11/11/2012 08:21:00 PM

Monday:
• Bond markets and banks will be closed in observance of Veterans Day. The stock market will be open.

• 4:00 AM ET: Eurozone Finance Ministers Meeting

On Greece, from the Financial Times: Greece battles to avert €5bn default

Greece is battling to raise funds to avoid defaulting on a €5bn debt repayment this week ...

The country’s debt management office has announced plans to cover the full amount through a treasury bill auction on Tuesday, but Greek banks expected to buy the issue can only raise about €3.5bn of collateral acceptable to the European Central Bank ...

Senior EU officials, however, said they remain doubtful a deal can be struck at Monday’s meeting of finance ministers in Brussels ...
excerpt with permission

From CNBC: Pre-Market Data and Bloomberg futures: the S&P futures are down 1 and DOW futures are slightly down.

Oil prices are down slightly with WTI futures at $85.96 per barrel and Brent at $109.03 per barrel. Gasoline prices have been falling.

Weekend:
• Summary for Week Ending Nov 9th
• Schedule for Week of Nov 11th

Two more questions this week for the November economic prediction contest (Note: You can now use Facebook, Twitter, or OpenID to log in).

by Calculated Risk on 11/11/2012 04:54:00 PM

From the Association of American Railroads (AAR): AAR Reports Mixed Rail Traffic for October

The Association of American Railroads (AAR) today reports U.S. rail traffic continues to show mixed results in monthly rail data, and that impacts from Hurricane Sandy can be seen in decreased traffic for week 44.

“The fundamentals of U.S. rail traffic remained roughly the same in October as in recent months: weakness in coal, remarkable growth in petroleum and petroleum products, a slight slowing of growth in intermodal and autos, and mixed results for everything else,” said AAR Senior Vice President John T. Gray.

Intermodal traffic in October saw an increase for the 35th straight month, totaling 1,233,475 containers and trailers, up 1.5 percent (18,710 units) compared with October of 2011. Carloads originated in October totaled 1,422,654 carloads, down 6.1 percent (92,601 carloads) compared with the same month last year. Carloads excluding coal were up 1.9 percent for the month, or 15,609 carloads, compared with the same month last year.

Click on graph for larger image.

This graph shows U.S. average weekly rail carloads (NSA).

Total U.S. rail carload traffic fell 6.1% (92,601 carloads) to 1,422,654 in October 2012 from October 2011 on a non-seasonally adjusted basis (see charts below). That’s the largest year-over-year carload percentage decline since November 2009.

As was the case last month too, coal alone more than accounted for the total carload decline in October. Coal carloads were down 16.0% (108,210 carloads) in October 2012 from October 2011.
...
Hurricane Sandy negatively affected rail traffic in the last week of October in the East. As is always the case when bad weather affects rail traffic, some of the lost traffic will be made up, some will not, and it is not possible to precisely determine how much falls into each category.

The second graph is for intermodal traffic (using intermodal or shipping containers):

Graphs reprinted with permission.

On Intermodal traffic:

U.S. rail intermodal traffic rose 1.5% (18,710 containers and trailers) in October 2012 over October 2011 to 1,233,475 units. That’s the 35th straight year-over-year monthly increase, though it was the smallest percentage gain in 14 months.

This is more evidence of sluggish growth.

Yesterday:
• Summary for Week Ending Nov 9th
• Schedule for Week of Nov 11th

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

Note: I've been following the Sacramento market to look for changes in the mix of house sales in a distressed area over time (conventional, REOs, and short sales). The Sacramento Association of REALTORS® started breaking out REOs in May 2008, and short sales in June 2009.

Recently there has been a dramatic shift from REO to short sales, and the percentage of distressed sales has been declining. This data would suggest some improvement in the Sacramento market.

In October 2012, 47.7% of all resales (single family homes and condos) were distressed sales. This was down from 50.8% last month, and down from 64.1% in October 2011. The is the lowest percentage of distressed sales - and therefore the highest percentage of conventional sales - since the association started tracking the data.

The percentage of REOs fell to 12.0%, the lowest since the Sacramento Realtors started tracking the data and the percentage of short sales increased to 35.7%, the highest percentage recorded.

Here are the statistics.

Click on graph for larger image.

This graph shows the percent of REO sales, short sales and conventional sales.

There has been an increase in conventional sales this year, and there were almost three times as many short sales as REO sales in October. The gap between short sales and REO sales is increasing.

Total sales were up 7% from October 2011, and conventional sales were up 55% compared to the same month last year. This is exactly what we expect to see in an improving distressed market - flat or even declining overall sales as distressed sales decline, but an increase in conventional sales.

Active Listing Inventory for single family homes declined 60.4% from last October, although listings were up 4% in October compared to the previous month.

Cash buyers accounted for 36.9% of all sales (frequently investors), and median prices were up 4.1% from last October.

This seems to be moving in the right direction, although the market is still in distress. We are seeing a similar pattern in other distressed areas to more conventional sales, and a shift from REO to short sales.

by Calculated Risk on 11/11/2012 09:09:00 AM

Here is another possible tool for predicting financial stress. From Scott Brave, senior business economist, and R. Andrew Butters, graduate student, Kellogg School of Management, Northwestern University: Detecting early signs of financial instability. A few excerpts:

Following the financial crisis, policymakers and researchers have sought to identify new indicators that may be useful in gauging the relationship between the financial and nonfinancial sectors of the economy in the hope of detecting early signs of financial instability. The ratio of private credit to gross domestic product (GDP) has received a lot of attention in this regard.1 This leverage ratio serves as an early warning indicator of financial instability, insofar as it captures instances where the nonfinancial sector’s financial obligations form an outsized share of the broader economy’s resources.

In this Chicago Fed Letter, we propose an alternative early warning indicator to the private-credit-to-GDP ratio. Our measure is constructed as a subindex made up of two nonfinancial leverage measures used in the Chicago Fed’s National Financial Conditions Index (NFCI). We show that this subindex has performed well as a leading indicator for historical periods of financial stress and their accompanying recessions in the United States; we also demonstrate that it has been more accurate than the private-credit-to-GDP ratio in predicting both at longer forecast horizons.

Click on graph for larger image.

The solid black line is the nonfinancial leverage subindex of the Chicago Fed’s National Financial Conditions Index, and the solid blue line is the ratio of private credit to gross domestic product (GDP) detrended as explained in note 4. For ease of comparison, both measures have been scaled to have a mean of zero and a standard deviation of one over the period 1973–2012.

The horizontal (time) axis is measured in weeks. We assign the quarterly private-credit-to-GDP ratio to the last week of each quarter to be able to plot it on the same figure panel as the weekly nonfinancial leverage subindex. The shaded regions in panel A correspond with historical periods of financial stress based on the analysis in Brave and Butters (2012).

The dashed black line is the two-year-ahead prediction threshold for a financial crisis (panel A) ... calculated for the nonfinancial leverage subindex, as explained in the text.

And their conclusion:

Our nonfinancial leverage indicator signals both the onset and duration of financial crises and their accompanying recessions more reliably at longer lead times than the private-credit-to-GDP ratio.

Beginning with the November 15, 2012, NFCI release, we will include the nonfinancial leverage subindex in the publicly available materials for the NFCI at www.chicagofed.org/nfci.

This might be useful some time in the future. The Chicago Fed will include this as part of the NFCI release.

by Calculated Risk on 11/10/2012 05:11:00 PM

CR Note: The first unofficial problem bank list was published in August 2009 with 389 institutions. The number of unofficial problem banks grew steadily and peaked at 1,002 institutions on June 10, 2011. The list has been declining recently.

This is an unofficial list of Problem Banks compiled only from public sources.

Here is the unofficial problem bank list for Nov 9, 2012. (table is sortable by assets, state, etc.)

Changes and comments from surferdude808:

Only one action termination this week for the Unofficial Problem Bank List. The Federal Reserve terminated the Written Agreement against Community First Bank, Boscobel, WI ($217 million). After the change, the list holds 860 institutions with assets of $328.2 billion. A year ago, the list held 981 institutions with assets of $405.9 billion.

Next week, activity should pick-up as the OCC will publish it actions through mid-October and perhaps the FDIC will execute a few closings to get ahead of the Thanksgiving Day holiday.

Earlier:
• Summary for Week Ending Nov 9th
• Schedule for Week of Nov 11th

by Calculated Risk on 11/10/2012 01:10:00 PM

Earlier:
• Summary for Week Ending Nov 9th

Several economic reports this week will be impacted by Hurricane Sandy including retail sales, weekly unemployment claims, and the regional NY and Philly Fed manufacturing surveys.

The key report for the week is retail sales for October. For manufacturing, the November NY Fed (Empire state) and Philly Fed surveys, and the October Industrial Production and Capacity Utilization report will all be released this week.

On prices, CPI for October will be released on Thursday.

Also Fed Chairman Ben Bernanke speaks Thursday on "Housing and Mortgage Markets".

----- Monday, Nov 12th----- Bond markets and banks will be closed in observance of Veterans Day. The stock market will be open.

4:00 AM ET: Eurozone Finance Ministers Meeting

----- Tuesday, Nov 13th ----- 7:30 AM ET: NFIB Small Business Optimism Index for October.

----- Wednesday, Nov 14th ----- 7:00 AM: The Mortgage Bankers Association (MBA) will release the mortgage purchase applications index.

8:30 AM: Producer Price Index for October. The consensus is for a 0.1% increase in producer prices (0.1% increase in core).

8:30 AM ET: Retail sales for October will be released.  Note: Retail sales (especially auto sales) were impacted by Hurricane Sandy.

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 24.6% from the bottom, and now 9.0% above the pre-recession peak (not inflation adjusted)

The consensus is for retail sales to decrease 0.2% in October, and for retail sales ex-autos to increase 0.1%.

10:00 AM: Manufacturing and Trade: Inventories and Sales for September (Business inventories). The consensus is for 0.6% increase in inventories.

2:00 PM: FOMC Minutes for Meeting of October 23-24, 2012.

----- Thursday, Nov 15th ----- 8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for claims to increase to 388 thousand from 355 thousand.  Note:  Claims are expected to increase following Hurricane Sandy.

8:30 AM: Consumer Price Index for October. The consensus is for CPI to increase 0.1% in October and for core CPI to increase 0.1%.

8:30 AM: NY Fed Empire Manufacturing Survey for November. The consensus is for a reading of minus 9, down from minus 6.2 in October (below zero is contraction).

10:00 AM: Philly Fed Survey for November. The consensus is for a reading of minus 1.0, down from 5.7 last month (above zero indicates expansion).

1:20 PM: Speech, Fed Chairman Ben Bernanke, Housing and Mortgage Markets, At the HOPE Global Financial Dignity Summit, Atlanta, Georgia

----- Friday, Nov 16th ----- 9:15 AM: The Fed will release Industrial Production and Capacity Utilization for October.

This shows industrial production since 1967.

The consensus is for no change in Industrial Production in October, and for Capacity Utilization to decrease to 78.2%.

by Calculated Risk on 11/10/2012 08:05:00 AM

The big event this week was the presidential election. For economic data, this was a pretty light week.

The key report was the trade deficit that showed exports increased more than imports in September, and the trade deficit declined.  Also Consumer sentiment has increased to pre-recession levels.

Other data was a little weak: The ISM service index declined in October, and job openings declined in September.

Next week will be busier.

Here is a summary of last week in graphs:

• Trade Deficit declined in September to $41.5 Billion

Click on graph for larger image.

The first graph shows the monthly U.S. exports and imports in dollars through September 2012.

Both exports and imports increased in September. Exports are at a new high. The trade deficit was smaller than the consensus forecast of $45.4 billion.

Exports are 13% above the pre-recession peak and up 3.5% compared to September 2011; imports are 1% below the pre-recession peak, and up about 1.5% compared to September 2011.

The second graph shows the U.S. trade deficit, with and without petroleum, through September.

The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.

Oil averaged $98.88 in September, up from $94.36 per barrel in August. The trade deficit with China increased to $29.1 billion in September, up from $28.0 billion in September 2011. Most of the trade deficit is due to oil and China.

This suggests a small upward revision to Q3 GDP.

• ISM Non-Manufacturing Index decreases in October

The October ISM Non-manufacturing index was at 54.2%, down from 55.1% in September. The employment index increased in October to 54.9%, up from 51.1% in September. Note: Above 50 indicates expansion, below 50 contraction.

This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index.

This was below the consensus forecast of 54.9% and indicates slower expansion in October than in September. The internals were mixed with the employment index up, but new orders down.

• BLS: Job Openings "essentially unchanged" in September, Up year-over-year

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

Notice that hires (dark blue) and total separations (red and light blue columns stacked) are pretty close each month. This is a measure of turnover.  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 decreased in September to 3.561 million, down slightly from 3.661 million in August. The number of job openings (yellow) has generally been trending up, and openings are only up about 2% year-over-year compared to September 2011.

Quits decreased in September, and quits are down slightly year-over-year. These are voluntary separations. (see light blue columns at bottom of graph for trend for "quits").

All current employment graphs
• Weekly Initial Unemployment Claims decline to 355,000

The DOL reported: "In the week ending November 3, the advance figure for seasonally adjusted initial claims was 355,000, a decrease of 8,000 from the previous week's unrevised figure of 363,000. The 4-week moving average was 370,500, an increase of 3,250 from the previous week's unrevised average of 367,250."

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 370,500. This is about 7,000 above the cycle low for the 4-week average of 363,000 in March.

Mostly moving sideways this year, but near the cycle bottom.

SPECIAL NOTE: Due to Hurricane Sandy, we will probably see an increase in initial unemployment claims over the next few weeks. The decline this week was probably because some people in a few states - like New York and New Jersey - were not able to file claims immediately.

• Fannie, Freddie, FHA REO inventory declined in Q3

This graph shows the REO inventory for Fannie, Freddie and the FHA (FHA for August). This was the seventh straight quarterly decline in the "F's" REO inventory, and total "F" REO was down 12% from a year ago.

This is only a portion of the total REO. There is also REO for private-label MBS, FDIC-insured institutions, VA and more. REO has been declining for those categories too.

The second graph shows the same data with Private Label Securities added.

From Tom Lawler:

Here is a chart showing some history of SF REO holdings of Fannie, Freddie, FHA, and private-label securities (from Barclays Capital). Note that FHA has not yet released its report to the FHA commissioner for September (everything there may be focused on the FY 2012 Actuarial Review due out next week, which could be a doozy!), and the number for the end of Q3/2012 (38,187) is actually the August inventory number.

More from CR: When the FDIC's Q3 quarterly 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.

• Preliminary November Consumer Sentiment increases to 84.9

The preliminary Reuters / University of Michigan consumer sentiment index for November increased to 84.9 from the October reading of 82.6. This was the highest level since July 2007 - before the recession started.

This was above the consensus forecast of 83.1. Overall sentiment is still somewhat weak - probably due to a combination of the high unemployment rate and the sluggish economy - but consumer sentiment has been improving recently.

However - remember - that sharp decline in sentiment in August 2011 was due to the threat of default and the debt ceiling debate. Hopefully we will not see that again early next year before the fiscal slope is resolved.

by Calculated Risk on 11/09/2012 06:02:00 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.

From the GLVAR: GLVAR reports increasing local home sales, as prices begin to level off heading into winter

GLVAR said the total number of local homes, condominiums and townhomes sold in October was 3,651. That’s up from 3,298 in September, but down from 3,881 total sales in October 2011.
...
The total number of homes listed for sale on GLVAR’s Multiple Listing Service bounced back in October, with a total of 16,778 single-family homes listed for sale at the end of the month. That’s up from 16,775 homes listed for sale at the end September, but down 21.9 percent from one year ago. ...

The number of available homes listed for sale without any sort of pending or contingent offer also increased from the previous month. By the end of October, GLVAR reported 4,079 single-family homes listed without any sort of offer. That’s up 3.4 percent from 3,943 such homes listed in September, but still down 60.6 percent from one year ago.
...
Meanwhile, 44.7 percent of all existing local homes sold during October were short sales. That’s down slightly from a record 44.8 percent in September, but still up dramatically from 25.4 percent one year ago. Continuing a trend of declining foreclosure sales in recent months, bank-owned homes accounted for 11.6 percent of all existing home sales in October, down from 13.6 percent in September.
...
"The biggest thing I noticed in this month’s report is that the inventory of homes available for sale went up. We sold fewer homes in October than we listed,” GLVAR President Kolleen Kelley explained. “As inventory goes up, you’re not going to see prices go up as much. It’s supply and demand.”

A few key points:
• Inventory increased slightly in September, and inventory is down 21.9% from October 2011. However, for single family homes without contingent offers, inventory is still down sharply from a year ago (down 60.6% year-over-year).

• Short sales are almost four times foreclosures now. The GLVAR reported 44.7% of sales were short sales, and only 11.6% foreclosures. We've seen a shift from foreclosures to short sales in most areas (not just in areas with new foreclosure laws).

• The percent distressed sales was extremely high at 56.3% in September (short sales and foreclosures), but down from 58.4% in September.

• There is a push to complete short sales, from the article:

Kelley said many homeowners have been rushing to short-sell their homes by the end of 2012, when the Mortgage Forgiveness Debt Relief Act is set to expire unless Congress acts to extend it. If Congress does not extend this law by Dec. 31, she said any amount of money a bank writes off in agreeing to sell a home as part of a short sale will become taxable when sellers file their income taxes.