by Calculated Risk on 1/19/2013 08:02:00 AM

Note: I'll post a summary for last week soon.

There are two key December housing reports that will be released this week, Existing home sales on Tuesday, and New Home sales on Friday.

For manufacturing, the January Richmond Fed and Kansas City Fed surveys will be released this week.

----- Monday, Jan 21st -----
All US markets will be closed in observance of the Martin Luther King, Jr. Day holiday.

----- Tuesday, Jan 22nd -----
8:30 AM ET: Chicago Fed National Activity Index for December. This is a composite index of other data.

10:00 AM: Existing Home Sales for December from the National Association of Realtors (NAR).

The consensus is for sales of 5.10 million on seasonally adjusted annual rate (SAAR) basis. Sales in November 2012 were 5.04 million SAAR.

Economist Tom Lawler estimates the NAR will report sales at 4.97 million SAAR.

A key will be inventory and months-of-supply.

10:00 AM: Richmond Fed Survey of Manufacturing Activity for January. The consensus is for a a reading of 5 for this survey, unchanged from December (Above zero is expansion).

----- Wednesday, Jan 23rd -----
7:00 AM: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

10:00 AM: FHFA House Price Index for November 2012. This was original a GSE only repeat sales, however there is also an expanded index that deserves more attention. The consensus is for a 0.7% increase in house prices.

During the day: The AIA's Architecture Billings Index for December (a leading indicator for commercial real estate).

----- Thursday, Jan 24th -----
8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for claims to increase to 360 thousand from 335 thousand last week.

9:00 AM: The Markit US PMI Manufacturing Index Flash. This release might provide hints about the ISM PMI for January.  This consensus is for a decrease to 54.0 from 54.2 in December.

10:00 AM: Conference Board Leading Indicators for December. The consensus is for a 0.4% increase in this index.

11:00 AM: Kansas City Fed regional Manufacturing Survey for January. The consensus is for a reading of 2, up from -2 in December (below zero is contraction).

----- Friday, Jan 25th -----
10:00 AM: New Home Sales for December from the Census Bureau.

This graph shows New Home Sales since 1963. The dashed line is the November sales rate.

The consensus is for an increase in sales to 388 thousand Seasonally Adjusted Annual Rate (SAAR) in December from 377 thousand in November.

by Calculated Risk on 1/18/2013 09:20:00 PM

All the king’s horses
Nor all of First Regent’s men
Can save it again
by Soylent Green is People
From the FDIC: First Minnesota Bank, Minnetonka, Minnesota, Assumes All of the Deposits of 1st Regents Bank, Andover, Minnesota

As of September 30, 2012, 1st Regents Bank had approximately $50.2 million in total assets and $49.1 million in total deposits. ... The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $10.5 million. ... 1st Regents Bank is the second FDIC-insured institution to fail in the nation this year, and the first in Minnesota.

A Friday tradition continues ...

by Calculated Risk on 1/18/2013 06:49:00 PM

From economist Tom Lawler:

Based on reports from various realtor associations/MLS across the country, I expect that existing home sales in December as measured by the National Association of Realtors will come in at a seasonally adjusted annual rate of 4.97 million in December, down 1.4% from November’s pace (which I think should be revised upward a bit), but up 13.5% from last December’s seasonally adjusted pace. Folks who track unadjusted data from local realtor reports but don’t take into account “calendar” effects would probably expect a lower number; after all, most (though not all) local realtor reports showed substantially lower YOY growth in December compared to November, and the number of local areas showing YOY sales declines was up in December compared to November. Indeed, national existing homes sales on an unadjusted basis, which showed YOY growth of 15.5% in November, are likely to show a YOY growth rate of less than half that amount in December. However, not only was there one fewer “business” day this December compared to last December, but both Christmas and New Years (this year) came on a Tuesday --- reducing the “effective” number of business days even further. As a result, this December’s seasonal factor will “gross up” the unadjusted sales figures by more than last Decembers.

On the inventory front, both local realtor reports and entities that track local real estate listings showed that in most (though not all) areas of the country the number of homes listed for sale at the end of December was down sharply from the end of the November – which is typical for most (though not quite all) parts of the country. Based on looking at various sources of data, my “best guess” is that the NAR’s estimate of the inventory of existing homes for sale at the end of December will be 1.87 million, down 7.9% from November and down 19.4% from last December.

Finally, local realtor/MLS data suggest that the NAR’s estimate of the median existing SF home sales price in December will show another double-digit YOY increase, probably of around 11.0%. This gain does not, of course, reflect the increase in “typical” home prices, but does reflect in part the sharply lower foreclosure sales share of home resales this December compared to last December.

CR Note: The NAR will report December existing home sales on Tuesday, Jan 22nd. The consensus is the NAR will report sales of 5.10 million.

Based on Lawler's estimates, the NAR will report inventory around 1.87 million units for December, and months-of-supply around 4.5 months (down from 4.8 months in November). This would be the lowest level of inventory in over 10 years, and the lowest months-of-supply since early 2005.

by Calculated Risk on 1/18/2013 03:19:00 PM

It looks like economic growth will pickup over the next few years. I've written about this before - a combination of growth in the key housing sector, a significant amount of household deleveraging behind us, the end of the drag from state and local government layoffs (four years of austerity nearing the end), some loosening of household credit, and the Fed staying accommodative (with a 7.8% unemployment rate and inflation below the Fed's target, the Fed will remain accommodative).

The key short term risk is too much additional deficit reduction too quickly. There is a strong argument that the "fiscal agreement" might be a little too much with the current unemployment rate - my initial estimate was that Federal government austerity would subtract about 1.5 percentage points from growth in 2013 (Merrill Lynch estimate up to 2.0 percentage points including an estimate for the coming sequester agreement).   This means another year of sluggish growth, even with an improved private sector (retail will be impacted by the payroll tax increase).  But ex-austerity, we'd probably be looking at a decent year.

Here are a few graphs:

Click on graph for larger image.

This graph shows total and single family housing starts. Even after the 28.1% in 2012, the 780 thousand housing starts in 2012 were the fourth lowest on an annual basis since the Census Bureau started tracking starts in 1959. Starts averaged 1.5 million per year from 1959 through 2000.  Demographics and household formation suggests starts will return to close to that level over the next few years. That means starts will come close to doubling from the 2012 level.

Residential investment and housing starts are usually the best leading indicator for economy, so this suggests the economy will continue to grow over the next couple of years.

The second graph shows total state and government payroll employment since January 2007. State and local governments lost 129,000 jobs in 2009, 262,000 in 2010, and 230,000 in 2011. In 2012, state and local government employment declined by 26,000 jobs.

Note: The dashed line shows an estimate including the benchmark revision.

It appears most of the state and local government layoffs are over. Some states like California are close to running a surplus, and, as the BLS reported this morning, even Nevada is seeing a sharp improvement in the unemployment rate.

And another key graph on the US deficit. As we've been discussing, the US deficit as a percent of GDP has been declining, and will probably decline to around 3% in fiscal 2015.

This graph shows the actual (purple) budget deficit each year as a percent of GDP, and an estimate for the next three years based on current policy (Jan Hatzius at Goldman Sachs estimates the deficit will 3% of GDP in 2015).  Note: With 7.8% unemployment, there is a strong argument for less deficit reduction in the short term, but that doesn't seem to be getting any traction.

Here are a couple of graph on household debt (and debt service):

This graph from the the NY Fed shows aggregate consumer debt decreased in Q3. This was mostly due to a decline in mortgage debt.

Household debt peaked in Q2 2008 and has been declining for over four years. There is probably more deleveraging ahead (mostly from foreclosures and distressed sales), but this suggests some improvement in household balance sheets.

The second graph is from the Fed's Household Debt Service and Financial Obligations Ratios. These ratios show the percent of disposable personal income (DPI) dedicated to debt service (DSR) and financial obligations (FOR) for households.

The graph shows the DSR for both renters and homeowners (red), and the homeowner financial obligations ratio for mortgages and consumer debt. The overall Debt Service Ratio has declined back to early 1980s levels, and is near the record low - thanks to very low interest rates. The homeowner's financial obligation ratio for consumer debt is at 1994 levels.

The blue line is the homeowner's financial obligation ratio for mortgages (blue). This ratio increased rapidly during the housing bubble, and continued to increase until 2008. Now, with falling interest rates, and less mortgage debt (mostly due to foreclosures), the ratio is back to 2001 levels. This will probably decline further, but for many homeowners, the obligation ratio is low.

There are several tailwinds for the economy, and the headwinds (like household deleveraging) are mostly subsiding.   Deficit reduction is on a reasonable path - we don't want to reduce the deficit much faster than this projection for the next few years, because that will be too much of a drag on the economy.

Overall it appears the economy is poised for more growth over the next few years.

What about the longer term?

There are a number of longer term challenges from rising health care expenditures, climate change, income and wealth inequality and more, but I remain very optimistic about the longer term too. There is a constant focus on the aging population, but by 2020, eight of the top ten largest cohorts (five year age groups) will be under 40, and by 2030 the top 11 cohorts are the youngest 11 cohorts. The renewing of America!  And these young people are smart (less exposure to lead is a significant story), and well educated too. I'll write more on the long term soon.

Last year, I said that looking forward I was the most optimistic since the '90s. And things are only getting better. The future's so bright, I gotta wear shades.

Yes, the song was about nuclear holocaust ... but it was originally intended the way I'm using it.

by Calculated Risk on 1/18/2013 01:48:00 PM

Here are the Fed transcripts for 2007.

From the WSJ: Fed's 2007 Transcripts Show Shift to Alarm

The Fed entered 2007 with interest-rate policies on hold and many officials comfortable about the economic outlook. By year-end, the U.S. was in recession ...

Fed Chairman Ben Bernanke ... was often behind the curve in his economic outlook. In January, for example, he projected that the "worst outcomes" for housing had become less likely. In May, he said he saw "good fundamental reasons to think that growth will be moderate."

He began to see after midyear that strains in financial markets threatened to move beyond housing to the broader economy and financial system. Mr. Bernanke himself slowly took on a more interventionist stance, but appears to have embraced that position reluctantly.
...
Meanwhile, Janet Yellen, then president of the Federal Reserve Bank of San Francisco and now the central bank's vice chairman, became increasingly alarmed about the growing risks to the economy as the year progressed.

"I still feel the presence of a 600-pound gorilla in the room, and that is the housing sector," she said in June 2007. "The risk for further significant deterioration in the housing market, with house prices falling and mortgage delinquencies rising further, causes me appreciable angst."

By December, she was pushing the Fed for aggressive responses to the crisis. "At the time of our last meeting, I held out hope that the financial turmoil would gradually ebb and the economy might escape without serious damage. Subsequent developments have severely shaken that belief," she said in December.

One of my ongoing criticisms of Bernanke was that he was "behind the curve".

And some excerpts from FT Alphaville: From subprime to crisis: the Fed’s 2007 transcripts and 2007 FOMC transcripts: a few more excerpts. Janet Yellen in September 2007:

"We see a large drop in house prices as quite likely to adversely affect consumption spending over time through a number of different channels, including wealth effects, collateral effects, and negative effects on spending through the interest rate resets. A big worry is that a significant drop in house prices might occur in the context of job losses, and this could lead to a vicious spiral of foreclosures, further weakness in housing markets, and further reductions in consumer spending. ... at this point I am concerned that the potential effects of the developing credit crunch could be substantial. I recognize that there’s a tremendous amount of uncertainty around any estimate. But I see the skew in the distribution to be primarily to the downside, reflecting possible adverse spillovers from housing to consumption and business investment."

And from the WaPo Wonkblog: The Fed’s 2007 crisis response: Twinkies, pessimism pills, and missed warnings.

by Calculated Risk on 1/18/2013 10:59:00 AM

From the BLS: Regional and State Employment and Unemployment Summary

Regional and state unemployment rates were generally little changed in December. Twenty-two states recorded unemployment rate decreases, 16 states and the District of Columbia posted increases, and 12 states had no change, the U.S. Bureau of Labor Statistics reported today. Forty-two states and the District of Columbia registered unemployment rate decreases from a year earlier, six states experienced increases, and two states had no change.
...
Nevada and Rhode Island recorded the highest unemployment rates among the states in December, 10.2 percent each. North Dakota again registered the lowest jobless rate, 3.2 percent.

Click on graph for larger image in graph gallery.

This graph shows the current unemployment rate for each state (red), and the max during the recession (blue). All states are below the maximum unemployment rate for the recession.

The size of the blue bar indicates the amount of improvement - Michigan, Ohio and Nevada have seen the largest declines - New Jersey is the laggard.

The states are ranked by the highest current unemployment rate. Only two states still have double digit unemployment rates: Nevada and Rhode Island. In early 2010, 18 states and D.C. had double digit unemployment rates.

I expect the unemployment rate in Nevada to fall below 10% very soon.

Even though Nevada still has the highest unemployment rate (tied with Rhode Island), the rate has declined in recent months, falling from 12.1% in August to 10.2% in December.

All current employment graphs

by Calculated Risk on 1/18/2013 09:55:00 AM

Click on graph for larger image.

The preliminary Reuters / University of Michigan consumer sentiment index for January declined to 71.3 from the December reading of 72.9.

This was below the consensus forecast of 75.0. There are a number of factors that can impact sentiment including unemployment, gasoline prices and other concerns - and, for January, the payroll tax increase and Congress' threat to not pay the bills.

Back in August 2011, sentiment declined sharply due to the threat of default and the debt ceiling debate. Unfortunately it appears Congress is negatively impacting sentiment once again.

by Calculated Risk on 1/17/2013 09:18:00 PM

First from Merrill Lynch on more mortgage credit: "Housing heats up"

[W]e believe recent developments on mortgage policy and mortgage servicing could lead to loosening of credit, providing further upside momentum for prices. We highlight three important steps forward the mortgage market has made.

One major development was the announcement of the final definition of a Qualified Mortgage (QM) by the Consumer Finance Protection Bureau (CFPB). The rule focuses on a borrower’s ability to repay, setting a 43% back-end debt-toincome ratio (DTI) as a clear upper boundary. By adhering to this guideline and avoiding risky loan features (such as IO, neg am, balloons, etc.) for prime quality borrowers, lenders can claim a “safe harbor” from future litigation from borrowers. ...
...
[R]elease of the QM definition is an important step forward that should enable lenders to increase their willingness to make residential mortgage loans.

Additionally, ten mortgage servicing companies ... reached an agreement in principle with regulators ... As a result of this agreement, the participating servicers would cease the Independent Foreclosure Review, which involved case-by-case reviews, and replace it with a broader framework allowing eligible borrowers to receive compensation significantly more quickly. We believe the end of this Review process should free up and create aggregate servicing capacity that could be used for other activities such as moving distressed loans through the pipeline more quickly and processing refinancing applications, suggesting higher voluntary and possibly involuntary prepayments in the future.

Furthermore, Fannie Mae announced a comprehensive resolution with Bank of America ... The resolution included Fannie Mae’s approval of Bank of America’s request to transfer the servicing rights of approximately 941,000 loans to specialty servicers. Bank of America also announced that it signed definitive agreements with two different counterparties to sell the servicing rights on certain residential mortgage loans serviced for Fannie Mae, Freddie Mac, Ginnie Mae, and private label securitizations, with an aggregate unpaid principal balance of approximately $306 billion. Our view is that these transfers effectively act as an injection of servicing capacity into the industry, which should allow for more refinancing activity, more loss mitigation activity and, ultimately, loosening of mortgage credit.

More credit availability is one reason Merrill Lynch increased their house price forecast for 2013 to 4.7% (up from 3.0%).

Friday economic releases:
• At 9:55 AM ET, Reuter's/University of Michigan's Consumer sentiment index (preliminary for January). The consensus is for a reading of 75.0, up from 72.9.

• At 10:00 AM, Regional and State Employment and Unemployment (Monthly) for November 2012

by Calculated Risk on 1/17/2013 05:20:00 PM

CR note: Economist Tom Lawler's forecasts for 2012 were very close (see: Lawler: Housing Forecast for 2012). Here is what Tom wrote on January 16, 2012:

“(T)here are pretty decent reasons to believe that 2012 will be a turnaround year for the housing sector, with (1) construction activity increasing; (2) overall vacancy rates falling, with especially low rental vacancy rates; (3) rents continuing to increase, and outpacing overall inflation; and (4) home prices hitting a bottom early in the year that is not much lower than the end of last year (2011).”

The following is from Tom Lawler: 2012 "Surprises" in Housing and 2013 Forecast

Here are a few observations on last year’s housing market, including some of the bigger “surprises.”

1. Home Prices: While it seemed reasonably to expect a modest YOY gain in home prices (as measured by repeat-transactions HPIs), it appears as if the “actual” gain will come in well above the most optimistic of forecasters. “Reasons” included but are not limited to (1) much larger than expected declines in inventories, (2) substantial increases in investor purchases of SF homes, and (3) continued actions by monetary policymakers to engage in fiscal policy by buying MBS to push mortgage rates lower and thus encourage credit flows into a specific sector of the economy (housing).

2. Inventories: While a continued reduction in homes listed for sale seemed exceedingly likely in 2012, the magnitude of the drop clearly exceeded “consensus.” “Reasons” included but were not limited to (1) strong investor buying of SF homes and turning them into rental properties; and 2) a slower than consensus pace of completed foreclosures which, combined with strong demand for REO properties, resulted in a sharp drop in the inventory of REO for sale;

3. Investor Buying of SF Homes as Rental Properties: While investor buying of SF homes as rental properties began increasing significantly several years ago, the entrance of and/or increased activity by “big-money” institutional investors resulted in a substantial increase in such investor buying. Such activity was barely contemplated by “consensus” forecasters.

3. Completed Foreclosures: In 2011 the “robo-signing” scandal led to a significant slowdown in completed foreclosures in the latter part of that year. Many analysts had expected that once the infamous mortgage “settlement” was signed (in March 2012) that banks/servicers would shortly thereafter accelerate completed foreclosures. That didn’t happen; instead servicers spent much of 2012 focusing on compliance (including ending dual tracking); there was a resurgence in modification activity; and foreclosure timelines continued to increase (and in several states legislation was passed that effectively lengthened timelines in those states). As a result, 2012 was another low “foreclosure resolution” year.

4: Rental Vacancy Rates and Rents: While the decline in rental vacancy rates and increase in rents last year was not as much of a surprise as the drop in homes listed for sale and the increase in home prices, the RVR fell by more, and rents increased by more, than “consensus.”

5. Homeownership Rates: While there are no good, timely data on the US homeownership rate (the widely tracked HVS overstates the homeownership rate), available data combined with analysis of the systematic undercount of renters in CPS-based surveys, suggests that the US homeownership rate declined again in 2012 – probably to around 63.7%, compared to the 65.2% on April 1, 2010 suggested by the decennial Census results. (HVS showed a first-half 2010 homeownership rate of 67.0%). Reasons included a shift by householders on the benefits vs. costs of homeownership; what appears to have been a rebound in household growth of “younger” adults; tight mortgage underwriting; and an increase in householders with “troubled” credit.

Looking into 2013, reduced inventory levels, firmer home prices and rental rates, and a likely acceleration in household growth suggest that housing production should increase again in 2013. Moreover, unlike in 2010 and 2011 (when inventories remained elevated), such an increase would be a welcome result.

My “best guess” for housing production this year is as follows:

	US Housing Starts (000's)			Mfg. Housing
	Total	Single Family	Multifamily (2+)	Shipments
2012	780	535.5	244.5	55
2013(F)	965	675	290	60
	US Housing Completions (000's)			Placements
2012	651.4	484.6	166.8	50
2013(F)	840	605	235	57

On the home-price front, I’m still trying to get a “handle” on 2012’s gain. In the December 2011 Zillow survey my Q4/Q4 forecast for the % increase in the SPCS “national” HPI was 2.5% for 2012 and 6.0% for 2013. But the “actual” for 2012 is likely to exceed 6%. – though the Q4/11 SPCS HPI appears to have been “hit” with some depressed “distressed” sales prices. Right now my best guess is for a Q4/Q4 YOY increase of about 3.0%.

I’ll have more details, and some thoughts on the risks to the forecast (NOT focusing on “macro” risks), either tomorrow or next week.

CR Note: This was from housing economist Tom Lawler. Here is a link to several other 2013 housing forecasts.

by Calculated Risk on 1/17/2013 03:31:00 PM

A few key points:

• Housing starts increased 28.1% in 2012 (initial estimate). This is a solid year-over-year increase, and residential investment is now making a positive contribution to GDP growth.

• Even after increasing 28% in 2012, the 780 thousand housing starts this year were the fourth lowest on an annual basis since the Census Bureau started tracking starts in 1959 (the three lowest years were 2009 through 2011).   This was also the fourth lowest year for single family starts since 1959.

• Starts averaged 1.5 million per year from 1959 through 2000.  Demographics and household formation suggests starts will return to close to that level over the next few years. That means starts will come close to doubling from the 2012 level.

• Residential investment and housing starts are usually the best leading indicator for economy. Note: Housing is usually a better leading indicator for the US economy than manufacturing, see: Josh Lehner's The Handoff – Manufacuturing to Housing. Nothing is foolproof as a leading indicator, but this suggests the economy will continue to grow over the next couple of years.

The following table shows annual starts (total and single family) since 2005:

Housing Starts (000s)
	Total	Change	Single Family	Change
2005	2,068.3	---	1,715.8	---
2006	1,800.9	-12.9%	1,465.4	-14.6%
2007	1,355.0	-24.8%	1,046.0	-28.6%
2008	905.5	-33.2%	622.0	-40.5%
2009	554.0	-38.8%	445.1	-28.4%
2010	586.9	5.9%	471.2	5.9%
2011	608.8	3.7%	430.6	-8.6%
2012	780.0	28.1%	535.5	24.4%

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 (completions lag starts by about 12 months).

This means there will be an increase in multi-family deliveries next year, but still well below the 1997 through 2007 level of multi-family completions.

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.  Usually single family starts bounce back quickly after a recession, but not this time because of the large overhang of existing housing units. 

Note the low level of single family starts and completions.  The "wide bottom" was what I was forecasting several years ago, and now I expect several years of increasing single family starts and completions.