by Calculated Risk on 1/21/2013 07:08:00 PM

One of key questions for 2013 is Will Housing inventory bottom in this year?.

If inventory does bottom, we probably will not know for sure until late in the year. In normal times, there is a clear seasonal pattern for inventory, with the low point for inventory in late December or early January, and then peaking in mid-to-late summer.

The NAR data is monthly and released with a lag.  However Ben at Housing Tracker (Department of Numbers) kindly sent me some weekly inventory data for the last several years. This is displayed on the graph below as a percentage change from the first week of the year.

In 2010 (blue), inventory followed the normal seasonal pattern, however in 2011 and 2012, there was only a small increase in inventory early in the year, followed by a sharp decline for the rest of the year.

So far - and this is very early - it appears inventory is increasing at a more normal rate.

Click on graph for larger image.

Note: the data is a little weird for early 2011 (spikes down briefly).

The key will be to see how much inventory increasses over the next few months. In 2010, inventory was up 8% by early March, and up 15% by the end of March.

For 2011 and 2012, inventory only increased about 5% at the peak.

So far in 2013, inventory is up 2%, and the next several weeks will be very interesting for inventory!

by Calculated Risk on 1/21/2013 03:35:00 PM

As a follow up to the post on New Home sales ... On Tuesday, the NAR will release the Existing Home Sales report for December. It looks like sales will be up over 9% in 2012, and inventory will be off over 19%.

One of my 10 question for 2013 was: Question #8 for 2013: Will Housing inventory bottom in 2013?. Here was my conclusion:

If prices increase enough then some of the potential sellers will come off the fence, and some of these underwater homeowners will be able to sell. It might be enough for inventory to bottom in 2013.

Right now my guess is active inventory will bottom in 2013, probably in January. At the least, the rate of year-over-year inventory decline will slow sharply. It will be very interesting to see how much inventory comes on the market during the spring selling season!

I'm looking at some data for clues if inventory is now at or near the bottom (I'll have more later today or this week).

This table shows the annual sales rate, inventory, and months-of-supply for the last six years (2012 estimated). Note that inventory and months-of-supply are for December.

Existing Home Sales
	Annual Sales	Annual Change	Annual Inventory	Annual Change	Months-of-Supply
2007	5,040,000		3,520,000		8.9
2008	4,110,000	-18.5%	3,130,000	-11.1%	10.4
2009	4,340,000	5.6%	2,740,000	-12.5%	8.8
2010	4,190,000	-3.5%	3,020,000	10.2%	9.4
2011	4,260,000	1.7%	2,320,000	-23.2%	8.2
12012	4,660,000	9.4%	1,870,000	-19.4%	4.5
1 Estimates for 2012

Existing home sales did not collapse as far as new home sales because of all the distressed sales. As the number of distressed sales declines, new home sales will increase - and it is possible that total existing home sales will stay flat or even decline. That will not be bad news for the housing market - the key is that the number of conventional sales has been increasing.

by Calculated Risk on 1/21/2013 10:08:00 AM

On Friday, the Census Bureau will release the New Home Sales report for December. It looks like sales will be up close to 20% in 2012, the first year-over-year increase since 2005.

This table shows the annual sales rate for the last eight years (2012 estimated).

Annual New Home Sales
Year	Sales (000s)	Change in Sales
2005	1,283	6.7%
2006	1,051	-18.1%
2007	776	-26.2%
2008	485	-37.5%
2009	375	-22.7%
2010	323	-13.9%
2011	306	-5.3%
20121	367	19.9%
1 Estimate for 2012

Even with the sharp increase in sales, 2012 will still be the third lowest year for new home sales since the Census Bureau started tracking sales in 1963. The two lowest years were 2010 and 2011.

A key question looking forward is how much sales will increase over the next few years. My initial guess was sales would rise to around 800 thousand per year, but others think the peak may be closer to 700 thousand.

Note: For 2013, estimates are sales will increase to around 450 to 460 thousand, or another 22% to 25% on an annual basis.

For the period 1980 through 2000, new homes sales averaged 664 thousand per year, with peaks at 750 thousand in 1986 (annual) and over 800 thousand in the late '90s - and two deep "busts" in the early '80 and early '90s.

I think the demographics support close to 800 thousand per year, but even if sales only rise to the average of 664 thousand for the '80s and '90s, sales would still increase over 80% from the 2012 level. 

For now I'll stick with my guess that sales will more than double from the 2012 level in a few years - but even a lower level would be a significant contribution to GDP and employment growth over the next few years.

by Calculated Risk on 1/21/2013 08:22:00 AM

Note: Clerical workers at the ports of Long Beach and Los Angeles went on strike starting Nov 27th and ending Dec 5th. The strike impacted port traffic for November and early December, but traffic bounced back quickly following the strike.

I've been following port traffic for some time. Container traffic gives us an idea about the volume of goods being exported and imported - and possibly some hints about the trade report for December. LA area ports handle about 40% of the nation's container port traffic. Some of the LA traffic was routed to other ports in early December, so this data might not be as useful this month.

The following graphs are for inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container).

To remove the strong seasonal component for inbound traffic, the first graph shows the rolling 12 month average.

Click on graph for larger image.

On a rolling 12 month basis, inbound traffic was up slightly and outbound traffic down slightly compared to the rolling 12 months ending in November.

In general, inbound and outbound traffic has been mostly moving sideways recently.

The 2nd graph is the monthly data (with a strong seasonal pattern for imports).

Usually imports peak in the July to October period as retailers import goods for the Christmas holiday, and then decline sharply and bottom in February or March.

For the month of December, loaded outbound traffic was down 2% compared to December 2011, and loaded inbound traffic was down 5% compared to December 2011.

Maybe outbound traffic was impacted more by the strike than inbound, but it appears the strike had little impact on overall traffic in December.

by Calculated Risk on 1/20/2013 05:03:00 PM

Note: Tanta wrote the following post on May 8, 2007. Ownit had filed for bankruptcy a few months earlier, Countrywide was purchased by BofA in 2008, and Bear Stearns collapsed in March 2008 - both after Tanta wrote this post.

From Doris "Tanta" Dungey, May 2007:

CR used to like to quote this one every now and again, back in the days when this blog was just a little back-water hand-wringer in a sea of housing and mortgage bulls:

"A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him."

John Maynard Keynes, "Consequences to the Banks of a Collapse in Money Values", 1931

It's amazing how ever-fresh this particular avoidance of blame is. There's the CEO of Countrywide:

"I've been doing this for 54 years," Mozilo recently said during a speech in Beverly Hills, California. For many years, he said, "standards never changed: verification of employment, verification of deposit, credit report."

But then new players came in with aggressive lending policies. Names like Ameriquest, New Century, NovaStar Financial and Ownit Mortgage Solutions set a new, lowered standard, changing the rules of the game, Mozilo said.

"Traditional lenders such as ourselves looked around and said, 'Well, maybe there's a (new) paradigm here. Maybe we've just been wrong. Maybe you can originate these loans safely without verifications, without documentation,"' Mozilo said.

There's Tom Marano of Bear Stearns:

But Tom Marano, who heads the mortgage business at Bear Stearns, disputed the contention that Wall Street pressure led to the loosening of credit standards. Investment banks, he said, do not directly make many loans.

“If enough independent companies set standards, that becomes the market,” he said. “Wall Street’s role is largely one where we assess risk, we purchase loans.”

And there is our famous Bill Dallas of Ownit Mortgage:

Bill Dallas, chief executive of Ownit, the nation's 20th-largest subprime lender in 2006, said he saw the handwriting on the wall in April 2005 after he overheard a rival account executive tell a customer how to get a better rate by committing occupancy or income fraud.

"I just went, 'We are hosed as an industry,"' Dallas said. "I told our guys, 'We're the problem."

The structure of the industry was part of the problem, he said: "Our account reps are talking to the mortgage broker, the mortgage broker is talking to the borrower, and they're teaching them all the wrong things."

Sound bankers, to a man.

by Calculated Risk on 1/20/2013 01:48:00 PM

A few thoughts on the "next recession" ... Forecasters generally have a terrible record at predicting recessions. There are many reasons for this poor performance. In 1987, economist Victor Zarnowitz wrote in "The Record and Improvability of Economic Forecasting" that there was too much reliance on trends, and he also noted that predictive failure was also due to forecasters' incentives. Zarnowitz wrote: "predicting a general downturn is always unpopular and predicting it prematurely—ahead of others—may prove quite costly to the forecaster and his customers".

Incentives motivate Wall Street economic forecasters to always be optimistic about the future (just like stock analysts). Of course, for the media and bloggers, there is an incentive to always be bearish, because bad news drives traffic (hence the prevalence of yellow journalism).

In addition to paying attention to incentives, we also have to be careful not to rely "heavily on the persistence of trends". One of the reasons I focus on residential investment (especially housing starts and new home sales) is residential investment is very cyclical and is frequently the best leading indicator for the economy. UCLA's Ed Leamer went so far as to argue that: "Housing IS the Business Cycle". Usually residential investment leads the economy both into and out of recessions. The most recent recovery was an exception, but it was fairly easy to predict a sluggish recovery without a contribution from housing.

Since I started this blog in January 2005, I've been pretty lucky on calling the business cycle.  I argued no recession in 2005 and 2006, then at the beginning of 2007 I predicted a recession would start that year (made it by one month with the Great Recession starting in December 2007).  And in 2009, I argued the economy had bottomed and we'd see sluggish growth.

Finally, over the last 18 months, a number of forecasters (mostly online) have argued a recession was imminent.  I responded that I wasn't even on "recession watch", primarily because I thought residential investment was bottoming. 

Now one of my blogging goals is to see if I can get lucky again and call the next recession correctly.  Right now I'm pretty optimistic (see: The Future's so Bright ...) and I expect a pickup in growth over the next few years (2013 will be sluggish with all the austerity).

The next recession will probably be caused by one of the following (from least likely to most likely):

3) An exogenous event such as a pandemic, significant military conflict, disruption of energy supplies for any reason, a major natural disaster (meteor strike, super volcano, etc), and a number of other low probability reasons. All of these events are possible, but they are unpredictable, and the probabilities are low that they will happen in the next few years or even decades.

2) Significant policy error. This might involve premature or too rapid fiscal or monetary tightening (like the US in 1937 or eurozone in 2012).  Two examples: not reaching a fiscal agreement and going off the "fiscal cliff" probably would have led to a recession, and Congress refusing to "pay the bills" would have been a policy error that would have taken the economy into recession.  Both are off the table now, but there remains some risk of future policy errors. 

Note: Usually the optimal path for reducing the deficit means avoiding a recession since a recession pushes up the deficit as revenues decline and automatic spending (unemployment insurance, etc) increases.  So usually one of the goals for fiscal policymakers is to avoid taking the economy into recession. Too much austerity too quickly is self defeating.

1) Most of the post-WWII recessions were caused by the Fed tightening monetary policy to slow inflation. I think this is the most likely cause of the next recession. Usually, when inflation starts to become a concern, the Fed tries to engineer a "soft landing", and frequently the result is a recession. Since inflation is not an immediate concern, the Fed will probably stay accommodative for a few more years.

So right now I expect further growth for the next few years (all the austerity in 2013 concerns me, especially over the next couple of quarters as people adjust to higher payroll taxes, but I think we will avoid contraction). I think the most likely cause of the next recession will be Fed tightening to combat inflation sometime in the future - and residential investment (housing starts, new home sales) will probably turn down well in advance of the recession. In other words, I expect the next recession to be a more normal economic downturn - and I don't expect a recession for a few years.

by Calculated Risk on 1/20/2013 09:56:00 AM

From Ezra Klein: The case for deficit optimism Here’s a secret:

For all the sound and fury, Washington’s actually making real progress on debt.

... Start the clock — and the deficit projections — on Jan. 1, 2011. Congress cut expected spending by $585 billion during the 2011 appropriations process. It cut another $860 billion as part of the resolution to the 2011 debt-ceiling standoff. And it added another $1 trillion in spending cuts as part of the sequester. Then it raised $600 billion in taxes in the fiscal cliff deal.

Together, that’s slightly more than $3 trillion in deficit reduction. ... In fact, that’s about enough to stabilize the nation’s debt-to-GDP ratio over the next decade.

... Obama said ... we have “a health-care problem,” not a spending problem. This is, in general, a fairly uncontroversial point on the right ...

Back in December 2011, I asked Rep. Paul Ryan, budget guru to the House Republicans, for his favorite chart of the year ... He sent me one from the Bipartisan Policy Center showing four lines. One, labeled “discretionary spending,” was drifting down. Another, “mandatory spending,” was also falling. A third, denoting Social Security expenses, was rising a bit, but not by enough to worry anyone. The fourth, health-care spending, was shooting skyward. “Government spending drives the debt, and the growth of government health-care programs drives the spending,” Ryan explained.

So here’s the good news: The growth of health-care costs has slowed in recent years. Big time. From 2009 to 2011, which is the most recent data available, health-care costs have grown by less than four percentage points. That’s compared to typical growth of six or seven percentage points through most of the Aughts. ... The $64,000 question — actually, it’s worth trillions of dollars more — is whether this slowdown is a recession-induced blip or the product, at least in part, of cost controls that will persist long after the economy has returned to health.  At the moment, there’s evidence to support both views. ...

... the truth is that deficit reduction is going better than you’d think from listening to the sniping in Washington.

A few key points:
1) the deficit as a percent of GDP has been declining and will probably continue to decline over the next several years even without further deficit reduction measures (see the third chart here),

2) the debt to GDP ratio will probably stabilize and may even decline over the next decade,

3) the key long term budget issue is health care costs.

by Calculated Risk on 1/19/2013 09:34:00 PM

Alan Blinder lists 10 financial commandments to remember - and starts by reminding us that "people do learn. The problem is that they forget — sometimes amazingly quickly."

The old Wall Street saying is "there is no institutional memory". Each new generation of Wall Street wizards figures out a new way to turn lead into gold, and to become wealthy while damaging the financial system.   Some of these wizards are probably perfecting their financial alchemy right now.

Maybe next time people will remember Blinder's 10 step plan, but I doubt it: Financial Collapse: A 10-Step Recovery Plan

1. Remember That People Forget
...
2. Do Not Rely on Self-Regulation
...
3. Honor Thy Shareholders
...
4. Elevate Risk Management
...
5. Use Less Leverage
...
6. Keep It Simple, Stupid
...
7. Standardize Derivatives and Trade Them on Exchanges
...
8. Keep Things on the Balance Sheet
...
9. Fix Perverse Compensation
...
10. Watch Out for Consumers

Blinder concludes:

Mark Twain is said to have quipped that while history doesn’t repeat itself, it does rhyme. There will be financial crises in the future, and the next one won’t be a carbon copy of the last. Neither, however, will it be so different that these commandments won’t apply. Financial history does rhyme, but we’re already forgetting the meter.

All of these items are important, but I think the key is to watch for excessive speculation using leverage. One thing is certain, there will be another bubble ...

Earlier:
• Schedule for Week of Jan 20th
• Summary for Week Ending Jan 18th

by Calculated Risk on 1/19/2013 05:44:00 PM

Here is the unofficial problem bank list for Jan 18, 2012.

Changes and comments from surferdude808:

With the FDIC having a closing for the second consecutive week and the OCC releasing its actions through mid-December 2012, it was a busy week for the Unofficial Problem Bank List. In all, there were 10 removals and four additions, which leave the list holding 826 institutions with assets of $308.7 billion. A year ago the list held 963 institutions with assets of $389.2 billion.

First Federal Bank Texas, Tyler, TX ($192 million Ticker: FFBT) merged on an unassisted basis and Evergreen International Bank, Long Beach, CA ($28 million) closed via a voluntary liquidation. The involuntary liquidation or FDIC closing was 1st Regents Bank, Andover, MN ($50 million).

Actions were terminated against Southwest Securities, FSB, Dallas, TX ($1.3 billion Ticker: SWS); Bank of Blue Valley, Overland Park, KS ($662 million Ticker: BVBC); Mountain West Bank, National Association, Helena, MT ($633 million Ticker: MTWF); First Federal Bank, Harrison, AR ($544 million Ticker: FFBH); Tulsa National Bank, Tulsa, OK ($165 million); and RiverWood Bank, Baxter, MN ($157 million). Also, Triumph Savings Bank, SSB, Dallas, TX ($286 million) was removed based on media report provided by a reader. However, the FDIC has not recognized the action termination by press release or in its enforcement action database.

The following four banks joined the list this week -- Citizens Financial Bank, Munster, IN ($1.1 billion Ticker: CITZ); Fieldpoint Private Bank & Trust, Greenwich, CT ($682 million); Delanco Federal Savings Bank, Delanco, NJ ($133 million); and Ben Franklin Bank of Illinois, Arlington Heights, IL ($100 million Ticker: BFFI).

Next week, we anticipate the FDIC will release its actions for December 2012.

Earlier:
• Schedule for Week of Jan 20th
• Summary for Week Ending Jan 18th

by Calculated Risk on 1/19/2013 11:21:00 AM

Most of the data released last week was encouraging. Housing starts were up 28% annually in 2012 - a strong increase, and starts are still very low - and that suggests further increases for starts over the next few years and is good news for the economy. Note: There is a strong seasonal adjustment for housing starts in December (typically a slow month), so I'd use the monthly sales rate with caution - but the annual increase was solid.

There were other positive reports: retail sales in December were stronger than expected, industrial production increased, and weekly unemployment claims fell sharply (although there are strong seasonal adjustments in January).  Still, the 4-week average of initial weekly unemployment claims is near the post-recession low.

On the negative side, both the NY Fed (Empire State) and Philly Fed manufacturing indexes indicated contraction in January.  Even though housing is picking up, manufacturing remains weak.  Another negative was consumer sentiment - probably being impacted by Congress (maybe by the payroll tax increase too) - but it now appears that Congress will pay the bills, so sentiment will probably improve.

It appears that economic growth is picking up, although the fiscal agreement will mean a drag of 1.5 to 2.0 percentage points on GDP growth in 2013 - so we should expect another year of sluggish growth.

Finally, I heard one analyst on CNBC ask why the Fed is staying so accommodative even with a pickup in growth.  The answer is simple: the unemployment rate is 7.8% (very high), and inflation is below the Fed's target (see graph below). 

And here is a summary of last week in graphs:

• Housing Starts increase sharply to 954 thousand SAAR in December

Click on graph for larger image.

Total housing starts were at 954 thousand (SAAR) in December, up 12.1% from the revised November rate of 851 thousand (SAAR). This was well above expectations of 887 thousand starts in December.

Housing starts increased 28.1% in 2012 and even after the sharp increase, the 780 thousand housing starts last 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 annual level.

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

All Housing Investment and Construction Graphs
• Retail Sales increased 0.5% in December

On a monthly basis, retail sales increased 0.5% from November to December (seasonally adjusted), and sales were up 4.7% from December 2011.

Sales for November were revised up to a 0.4% gain.

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 25.4% from the bottom, and now 9.7% above the pre-recession peak (not inflation adjusted)

This was above the consensus forecast of a 0.3% increase, and suggests the initial "soft" reports for December were too pessimistic.

• Fed: Industrial Production increased 0.3% in December

This graph shows industrial production since 1967.

From the Fed: Industrial production and Capacity Utilization "Industrial production increased 0.3 percent in December after having risen 1.0 percent in November when production rebounded in the industries that had been negatively affected by Hurricane Sandy in late October. ... Capacity utilization for total industry moved up 0.1 percentage point to 78.8 percent, a rate 1.5 percentage points below its long-run (1972--2011) average."

This graph shows Capacity Utilization. This series is up 12 percentage points from the record low set in June 2009 (the series starts in 1967).

Capacity utilization at 78.8% is still 1.5 percentage points below its average from 1972 to 2010 and below the pre-recession level of 80.6% in December 2007.

Both Industrial Production and Capacity Utilization were slightly above expectations.

All current manufacturing graphs
• Philly Fed and NY Fed Manufacturing Surveys show contraction in January

From the Philly Fed: January Manufacturing Survey "Manufacturing activity declined moderately this month, according to firms responding to the January Business Outlook Survey. ... The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from a revised reading of 4.6 in December to ‐5.8 this month". Earlier this week, the Empire State manufacturing survey also indicated contraction in January.

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 January. The ISM and total Fed surveys are through December.

The average of the Empire State and Philly Fed surveys decreased in January, and is back below zero.   This suggests another weak reading for the ISM manufacturing index.

• Weekly Initial Unemployment Claims decline to 335,000

The DOL reported: "In the week ending January 12, the advance figure for seasonally adjusted initial claims was 335,000, a decrease of 37,000 from the previous week's revised figure of 372,000. The 4-week moving average was 359,250, a decrease of 6,750 from the previous week's revised average of 366,000."

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased to 359,250.

This was the lowest level for weekly claims since January 2008, and the 4-week average is near the low since early 2008.  Note: Data for January has large seasonal adjustments - and can be very volatile, but this is still good news.

All current Employment Graphs
• Key Measures show low inflation in December

This graph shows the year-over-year change for four key measures of inflation. On a year-over-year basis, the median CPI rose 2.2%, the trimmed-mean CPI rose 1.9%, the CPI rose 1.7%, and the CPI less food and energy rose 1.9%. Core PCE is for November and increased 1.5% year-over-year.

On a monthly basis, median CPI was at 1.9% annualized, trimmed-mean CPI was at 1.1% annualized, and core CPI increased 1.2% annualized. Also core PCE for November increased 1.6% annualized. These measures suggest inflation is below the Fed's target of 2% on a year-over-year basis.

With this low level of inflation and the current high level of unemployment, the Fed will keep the "pedal to the metal".

• CoreLogic: House Prices up 7.4% Year-over-year in November, Largest increase since 2006

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

The index was up 0.3% in November, and is up 7.4% over the last year.

The index is off 26.8% from the peak - and is up 9.6% from the post-bubble low set in February 2012 (the index is NSA, so some of the increase is seasonal).

The next graph is from CoreLogic.

The year-over-year comparison has been positive for nine consecutive months suggesting house prices bottomed early in 2012 on a national basis (the bump in 2010 was related to the tax credit).

This is the largest year-over-year increase since 2006.

Since this index is not seasonally adjusted, it was expected to decline on a month-to-month basis in November - instead the index increased, and, considering seasonal factors, this month-to-month increase was very strong.

• Preliminary January Consumer Sentiment declines to 71.3

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.