by Calculated Risk on 2/11/2013 01:21:00 PM

From Fed Vice Chair Janet Yellen: A Painfully Slow Recovery for America's Workers: Causes, Implications, and the Federal Reserve's Response. Some excerpts on the slow recovery:

In trying to account for why this recovery has been so weak, it is helpful to first consider several important factors that have in the past supported most economic recoveries. By this I don't mean everything that contributes to economic growth, but rather those things that typically play a key role when the U.S. economy is recovering from recession. Think of these as the tailwinds that usually promote a recovery.

The first tailwind I'll mention is fiscal policy. History shows that fiscal policy often helps to support an economic recovery. Some of this fiscal stimulus is automatic, and intended to be. The income loss that individuals and businesses suffer in a recession is partly offset when their tax bills fall as well. Government spending on unemployment benefits and other safety-net programs rises in recessions, helping individuals hurt by the downturn and also supporting consumer spending and the broader economy by replacing lost income. These automatic declines in tax collections and increases in government spending are often supplemented with discretionary fiscal action--tax rate cuts, spending on infrastructure and other goods and services, and extended unemployment benefits. These discretionary fiscal policy actions are typically a plus for growth in the years just after a recession. For example, following the severe 1981-82 recession, discretionary fiscal policy contributed an average of about 1 percentage point per year to real GDP growth over the subsequent three years.

However, discretionary fiscal policy hasn't been much of a tailwind during this recovery. In the year following the end of the recession, discretionary fiscal policy at the federal, state, and local levels boosted growth at roughly the same pace as in past recoveries, as exhibit 3 indicates. But instead of contributing to growth thereafter, discretionary fiscal policy this time has actually acted to restrain the recovery. State and local governments were cutting spending and, in some cases, raising taxes for much of this period to deal with revenue shortfalls. At the federal level, policymakers have reduced purchases of goods and services, allowed stimulus-related spending to decline, and have put in place further policy actions to reduce deficits. ...

A second tailwind in most recoveries is housing. Residential investment creates jobs in construction and related industries. Before the Great Recession, housing investment added an average of 1/2 percentage point to real GDP growth in the two years after each of the previous four recessions, considerably more than its contribution to growth at other times.

During this recovery, in contrast, residential investment, on net, has contributed very little to growth since the recession ended. The reasons are easy to understand, given the central role that housing played in the Great Recession. Following an extended boom in construction driven in large part by overly loose mortgage lending standards and unrealistic expectations for future home price increases, the housing market collapsed--sales and prices plunged and mortgage credit was sharply curtailed. Tight mortgage credit conditions are continuing to make it difficult for many families to buy homes, despite record-low mortgage interest rates that have helped make housing very affordable. I'm encouraged by recent improvement in the residential sector, but the contribution of housing investment to overall economic activity remains considerably below the average seen in past recoveries, as exhibit 4 shows.

Beyond the direct effects on residential investment, the extraordinary collapse in house prices resulted in a huge loss of household wealth--at last count, net home equity is still down 40 percent, or about $5 trillion, from 2005. ...

Another important tailwind in most economic recoveries is one that tends to be taken for granted--the faith most of us have, based on history and personal experience, that recessions are temporary and that the economy will soon get back to normal. Even during recessions, households' expectations for income growth tend to be reasonably stable, which provides support for overall spending. In the most recent recession, however, surveys suggest that consumers sharply revised down their prospects for future income growth and have only partially adjusted up their expectations since then (exhibit 5).

The recovery has also encountered some unusual headwinds. The fiscal and financial crisis in Europe has resulted in a euro-area recession and contributed to slower global growth. Europe's difficulties have blunted what had been strong growth in U.S. exports earlier in the recovery by sapping demand worldwide.

CR Note: The first missing tailwind is fiscal policy. Even as the Federal government provided some stimulus, state and local governments cut back significant for four consecutive years. And for the last couple of years, we've also seen austerity at the Federal level - and that will probably continue. The good news is the cutbacks at the state and local level are probably mostly over.

The next missing tailwind has been a focus of this blog: Residential investment (RI). RI has finally turned the corner and has started to contribute to the economy. Looking forward, I expect growth to improve over the next few years, although growth will be slowed by the fiscal agreement and other Federal austerity in 2013.

by Calculated Risk on 2/11/2013 09:27:00 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.

Over the last two years there was a dramatic shift from REO to short sales, and the percentage of distressed sales declined.

Note: The percent of short sales declined in January because some sellers pushed to close in 2012 before the "Mortgage Debt Relief Act of 2007" expired. The Act was extended for one year as part of the fiscal agreement. (Usually cancelled debt is considered income, but some mortgage debt was exlcuded as part of the Act).

This data suggests continued improvement in the Sacramento market.

In January 2013, 44.5% of all resales (single family homes and condos) were distressed sales. This was down from 51.5% last month, and down from 66.6% in January 2012. This 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 stayed increased to 14.2%, and the percentage of short sales decreased to 30.3%.

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 recently, and there were twice as many short sales as REO sales in January. 

Total sales were down from January 2012, but conventional sales were up 51% 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, and conventional sales increase.

Active Listing Inventory for single family homes declined 61.1% from last January.

Cash buyers accounted for 37.4% of all sales (frequently investors), and median prices were up sharply year-over-year (the mix has changed).

This continues to move in the right direction, although the market is still in distress. A "normal" market would be mostly blue on the graph, and this market is a long way from "normal". We are seeing a similar pattern in other distressed areas, with a move to more conventional sales, and a shift from REO to short sales. This is a sign of a recovering market.

by Calculated Risk on 2/11/2013 09:02:00 AM

Reader Mike kindly sent me all of the links to Tanta's posts in 2007 and 2008, and I'd like to share the updated list.

Note: Tanta was very knowledgeable about the mortgage industry - and many other topics - and she was my blogging partner in 2007 and 2008.

Here is the updated list: Compendium of Tanta's Posts

And other reading:

The Compleat UberNerd

CR writes: Sad News: Tanta Passes Away

NY Times: Doris Dungey, Prescient Finance Blogger, Dies at 47

WaPo: Doris J. Dungey; Blogger Chronicled Mortgage Crisis

Tanta: In Memoriam

by Calculated Risk on 2/10/2013 09:39:00 PM

On oil prices from Jim Hamilton: Dude, where's my cheap gas?

Those who have been told that oil production is booming may be wondering why the prices of oil and gasoline are climbing again.

...[Several graphs]

It's obvious from the above price charts that it makes no economic sense to add gallons of ethane or propane to gallons of crude oil to try to summarize global oil supply. But growth of natural gas liquids has been a key factor in the reported increases in "world oil supply" over the last few years and is also a key component of recent optimistic assessments of future oil production by Leonardo Maugeri and the IEA.

There is no question that the boom in production of natural gas liquids is providing a great benefit to industrial users of ethylene. But if you're waiting for it to lower the price you pay for gasoline at the pump, you may have to wait a while longer.

Monday:
• At 1:00 PM ET: Speech by Fed Vice Chair Janet Yellen, "A Painfully Slow Recovery for America's Workers: Causes, Implications, and the Federal Reserve's Response"

Weekend:
• Summary for Week Ending Feb 8th
• Schedule for Week of Feb 10th

The Nikkei is closed for National Foundation Day, and the Hang Seng and Shanghai are closed for New Year.

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

Oil prices have been mixed recently with WTI futures down to $95.76 per barrel and Brent up to $118.88 per barrel. Gasoline prices are up almost 30 cents over the last few weeks.

by Calculated Risk on 2/10/2013 06:29:00 PM

This is excellent article on the FHA from Nick Timiraos at the WSJ: FHA Gets Scrutiny as It Looks for a Hand

The Federal Housing Administration, a significant backer of new mortgage lending over the past five years, is facing billions of dollars in potential losses, as many loans that it guaranteed during the recession have soured. The agency's independent audit last fall showed that at its current pace, the FHA would exhaust its reserves and need $16 billion from the U.S. government to cover projected losses.

That would be a blow because since its creation in 1934, the agency has never required Treasury assistance. The FHA doesn't issue mortgages. Instead, it insures lenders against losses on loans that meet its standards. ...

... the FHA never relaxed its standards during the boom and didn't insure the toxic mortgages that inflated the housing bubble.

Before the bubble burst, lenders considered the FHA's standards too stringent, and in 2006 the agency's share of the home-purchase market fell below 5%. The FHA requires borrowers to prove they earn enough to make their monthly mortgage payment—thereby ruling out "liar loans." It backs mostly fixed-rate loans—meaning no teaser rates.
...
The most problematic loans are those insured from 2007-09, particularly from a program that allowed home sellers to make "gifts" of down payments to buyers through nonprofit groups. FHA officials belatedly prevailed on Congress to pull the plug on those risky lending programs in 2008.

The last two sentences refer to the owner financed "DAPs" or "downpayment assistance programs". I wrote extensively about DAPs during the bubble - were the owner "donated" the downpayment to the buyer through a third party "charity". The FHA tried to eliminate insuring those loans, the IRS called the programs a "scam", but Congress kept the program in place until 2008. Many of those loans went bad, significantly hurting the FHA's (and eventually taxpayers) finances. Of course the FHA also insured loans while house prices declined, and a large number of those loans defaulted too.

Some of my posts on DAPs: from 2006: Housing: IRS Raps DAPs, 2007: FHA to Ban DAPs and 2008: Ding-Dong! The DAP Is Dead. And from Tanta in 2007: DAP for UberNerds. Tanta concluded:

Supporting DAPs means supporting property sellers--particularly but not limited to builders and developers--and the "entrepreneurs" who form "nonprofits" to extract fees from naive homebuyers, not to mention loan originators who pocket higher commissions, with the risk being carried by government insurance. It is, precisely, the kind of sleazy, conflict-ridden, self-serving "initiative," overtly "faith-based" or its sort-of secular equivalent "dream-based," that thrives in an environment where regulation is dismantled or unenforced and "government" is bashed with one hand and milked with the other. It is an "innovation" just like plainer, older-fashioned forms of money-laundering are "innovations." It takes a profound ideological blindness to march behind the DAP banner in the name of "helping first time homebuyers."

And now we are seeing the consequences of that bad policy.  DAPs aren't the only reason the FHA is facing a shortfall, but they played a key role in damaging the FHA's finances.

by Calculated Risk on 2/10/2013 02:43:00 PM

The roller coaster ride for gasoline prices continues ...

From the Daily Democrat: Gas prices hit $4 in California

Gas prices are above or near an average of $4 a gallon statewide, and are already well over that dreaded mark in Southern California. GasBuddy.com showed gas selling for $4.01 on Thursday, while the AAA listed the state average at $3.99 -- a jump of three cents from Wednesday, 22 cents from a week ago and 37 cents from last month.

... the record of $4.67 was reached on Oct. 9 [2012] ...

The skyrocketing prices could level off in a week or so, then ease for a few months before beginning their usual climb before Memorial Day.

"My forecast is for gasoline prices in California to level off, then go back down before Valentine's Day to an average of $3.90 per gallon," analyst Bob van der Valk said. "The good news is refineries are going to get back online in the next six weeks and gasoline prices will level off and perhaps go back down below $4 per gallon."

Below is a graph from Gasbuddy.com for nationwide gasoline prices. Nationally prices are up over 30 cents per gallon from the low in January, and up sharply over the last two weeks.

If you click on "show crude oil prices", the graph displays oil prices for WTI, not Brent; gasoline prices in most of the U.S. are impacted more by Brent prices.

Orange County Historical Gas Price Charts Provided by GasBuddy.com

by Calculated Risk on 2/10/2013 10:29:00 AM

A key policy goal right now is to minimize short term austerity since the deficit as a percent of GDP is already shrinking quickly, and the deficit should continue to shrink over the next few years. So my view has been that something would be worked out on the "sequester" that would minimize immediate spending cuts.

It appears I may be wrong, and the "sequester" cuts might happen on March 1st.

From the LA Times: Automatic budget cuts are almost certain

In less than a month, a budget ax is set to fall on the federal government, indiscriminately chopping funding for the military and slicing money for various programs, including preschools and national parks.

The $85 billion in cuts that would take effect from March 1 through September — the first installment of $1.2 trillion in reductions over the next decade — would strike just about every agency and service in an attempt to ease the budget deficit.

The slashing, part of an automatic process known as sequestration, would affect the economy, government workers and average Americans in ways big and small.
...
Economists project the budget cuts would reduce the nation's total economic output by about 0.6 percentage points this year, a significant hit when growth remains sluggish.

This is a significant amount of short term drag, especially combined with the increase in payroll taxes (part of "fiscal agreement").

Brad Plumer at the WaPo describes how the sequester cuts would work:

The sequester, recall, will cut $85.3 billion from the federal budget in 2013 and affect everything except Social Security, Medicaid, a few targeted anti-poverty programs, and the ongoing wars. The Pentagon budget would face an immediate 7.3 percent cut and domestic discretionary programs would be cut by more than 5 percent. The key feature of the cuts is that they would affect all agencies and programs equally ...

Here is the White House fact sheet on some of the cuts.

This is obviously bad policy.  First, the US doesn't need immediate spending cuts (if anything, with a 7.9% unemployment rate, we need additional short term spending), and second, we don't need indiscriminate cuts. No one supports these specific cuts, but they might happen anyway ...

by Calculated Risk on 2/09/2013 04:55:00 PM

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 since then.

Here is the unofficial problem bank list for Feb 8, 2013.

Changes and comments from surferdude808:

Two publicly traded organizations announced this week the termination of enforcement actions issued by the FDIC. The removals leave the Unofficial Problem Bank list at 820 institutions with assets of $305.0 billion. A year ago, the list held 958 institutions with assets of $ 389.6 billion.

The removals were The Home Savings and Loan Company, Youngstown, OH ($1.8 billion Ticker: UCFC) and The Palmetto Bank, Greenville, SC ($1.1 billion Ticker: PLMT).

On Thursday, SNL securities published an interesting article “Private capital investments in failed banks rare, but cheaper for FDIC” that found private capital investors acquired 40 failed banks from the FDIC since it issued a policy statement on private capital acquiring failed banks on August 26, 2009. While private capital deals only cost the FDIC a median 25 cents on the dollar compared to 27 cents with existing bank buyers, private investor only acquired 11 percent of the 361 failures since the policy statement issuance. Thus, private capital has not been that successful in acquiring many failed banks from the FDIC.

Next week, we anticipate for the OCC to release its enforcement action activity through mid-January 2013.

CR Note: The FDIC's official problem bank list is comprised of banks with a CAMELS rating of 4 or 5, and the list is not made public. (CAMELS is the FDIC rating system, and stands for Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk. The scale is from 1 to 5, with 1 being the strongest.)

As a substitute for the CAMELS ratings, surferdude808 is using publicly announced formal enforcement actions, and also media reports and company announcements that suggest to us an enforcement action is likely, to compile a list of possible problem banks in the public interest.

When the list was increasing, the official and "unofficial" counts were about the same. Now with the number of problem banks declining, the unofficial list is lagging the official list. This probably means regulators are changing the CAMELS rating on some banks before terminating the formal enforcement actions.

Earlier:
• Summary for Week Ending Feb 8th
• Schedule for Week of Feb 10th

by Calculated Risk on 2/09/2013 01:11:00 PM

Earlier:
• Summary for Week Ending Feb 8th

The key reports for this week will be the January retail sales report on Wednesday, and January Industrial Production on Friday.

Also for manufacturing, the February NY Fed (Empire state) survey will be released on Friday.

----- Monday, Feb 11th -----
1:00 PM ET: Speech by Fed Vice Chair Janet Yellen, "A Painfully Slow Recovery for America's Workers: Causes, Implications, and the Federal Reserve's Response"

----- Tuesday, Feb 12th -----
7:30 AM ET: NFIB Small Business Optimism Index for January. The consensus is for an increase to 89.5 from 88.0 in December.

10:00 AM: Job Openings and Labor Turnover Survey for December from the BLS.

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

Jobs openings increased slightly in November to 3.676 million, up from 3.665 million in October. The number of job openings (yellow) has generally been trending up, and openings are up about 12% year-over-year compared to November 2011.

----- Wednesday, Feb 13th -----
7:00 AM: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

8:30 AM ET: Retail sales for January will be released.

This graph shows monthly retail sales and food service, seasonally adjusted (total and ex-gasoline) through December. Retail sales are up 25.4% from the bottom, and now 9.7% above the pre-recession peak (not inflation adjusted)

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

10:00 AM: Manufacturing and Trade: Inventories and Sales (business inventories) report for December.  The consensus is for a 0.3% increase in inventories.

----- Thursday, Feb 14th -----
8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for claims to decrease to 360 thousand from 366 thousand last week.

----- Friday, Feb 15th -----
8:30 AM: NY Fed Empire Manufacturing Survey for February. The consensus is for a reading of minus 2.0, up from minus 7.8 in January (below zero is contraction).

9:15 AM: The Fed will release Industrial Production and Capacity Utilization for January.

This shows industrial production since 1967 through December.

The consensus is for a 0.3% increase in Industrial Production in January, and for Capacity Utilization to increase to 78.9%.

9:55 AM: Reuter's/University of Michigan's Consumer sentiment index (preliminary for February). The consensus is for a reading of 75.0, up from 73.8.

by Calculated Risk on 2/09/2013 08:01:00 AM

This was a light week for economic data. The key release was the December trade report showing a smaller than expected trade deficit, and suggesting upwards revisions to the Q4 GDP report. From Brad Plumer at the WaPo: Good news! The economy probably didn’t shrink last quarter, after all

[N]ew trade data released Friday suggests that the U.S. economy actually grew between October and December.

When the Bureau of Economic Analysis initially calculated fourth-quarter GDP, it assumed that the U.S. trade deficit had actually widened ... As a result, many analysts expect the government to show positive growth when the BEA revises its numbers next month. Capital Economics projects that the U.S. economy actually grew at a 0.2 percent annualized pace in the fourth quarter of 2012, while Macroeconomic Advisers is expecting 0.5 percent growth.

Not a big change, but probably a change in the sign! (minus to positive)

Other data was also positive: the 4-week average of initial weekly unemployment claims dropped to the lowest level in almost five years, and the ISM service survey showed expansion.

Not much data, but mostly positive.

And here is a summary of last week in graphs:

• Trade Deficit declined in December to $38.5 Billion

The Department of Commerce reported:

[T]otal December exports of $186.4 billion and imports of $224.9 billion resulted in a goods and services deficit of $38.5 billion, down from $48.6 billion in November, revised. December exports were $3.9 billion more than November exports of $182.5 billion. December imports were $6.2 billion less than November imports of $231.1 billion.

The trade deficit was much smaller than the consensus forecast of $46.0 billion.

This graph shows the U.S. trade deficit, with and without petroleum, through December.

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.

The decrease in the trade deficit in December was due to both a decline in petroleum and non-petroleum products.

Oil averaged $95.16 in December, down from $97.45 per barrel in November. But most of the decline in the value of petroleum imports was due to a sharp decline in the volume of imports.

Notes: The trade deficit might have been skewed by the LA port strike that started in late November and ended in early December. This does suggest an upward revision to Q4 GDP.

• ISM Non-Manufacturing Index indicates expansion in January

From the Institute for Supply Management: January 2013 Non-Manufacturing ISM Report On Business®

The January ISM Non-manufacturing index was at 55.2%, down from 55.7% in December. The employment index increased in January to 57.5%, up from 55.3% in December. 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 slightly above the consensus forecast of 55.0% and indicates slightly slower expansion in January than in December. 

• Weekly Initial Unemployment Claims at 366,000

The DOL reported:

In the week ending February 2, the advance figure for seasonally adjusted initial claims was 366,000, a decrease of 5,000 from the previous week's revised figure of 371,000. The 4-week moving average was 350,500, a decrease of 2,250 from the previous week's revised average of 352,750.

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased to 350,500.

Weekly claims were above the 360,000 consensus forecast, however the 4-week average is at the lowest level since early 2008.