by Calculated Risk on 3/20/2013 04:44:00 PM

From Catherine Rampell at the NY Times: Surprise Demand for Housing Catches Industry Off-Guard. A few excerpts:

In 2005 [Beutler Corporation, an air-conditioning and plumbing company] employed 2,100 workers, but by 2009 Beutler had only 270 employees. [Rick Wylie, president of the Beutler Corporation], who currently employs about 550, is now having trouble luring back many workers he let go.

“I don’t mean to complain,” he said. “This is a good problem to have, a world-class problem, to not be able to find workers to do all the work you’re getting.”

The shortages aren’t limited to the workers toiling in the hot sun, either.

“You walk into the permit office, and it’s like a ghost town in there,” said Michael Haemmig, president of Haemmig Construction in Nevada City, Calif., about an hour north of Sacramento. He says local governments were caught off-guard by the suddenly renewed interest in building and do not have enough people in place to handle all the paperwork. ...

For builders still hesitant to dive into the market too deeply, such delays may actually be welcome, since they help buy more time for prices to rise further.

“If we could build 500 houses right now, could we sell them?” asked Harry Elliott III, president of Elliott Homes, a century-old company that built 250 homes last year and plans 350 this year, compared to a high of 1,400 in 2006. “Possibly, but I don’t want to sell all my lots that I’ve held onto forever and have to give them away at these prices.”

It is likely that homebuilding growth this year will be limited more by supply constraints than demand. Quite a change ...

by Calculated Risk on 3/20/2013 02:19:00 PM

Bernanke press conference here or watch below.



Free desktop streaming application by Ustream

On the projections, GDP was revised down slightly, the unemployment rate was revised down, and inflation was revised down slightly.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in Real GDP1	2013	2014	2015
Mar 2013 Meeting Projections	2.3 to 2.8	2.9 to 3.4	2.9 to 3.7
Dec 2012 Meeting Projections	2.3 to 3.0	3.0 to 3.5	3.0 to 3.7

¹ Projections of change in real GDP and in inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

The unemployment rate was at 7.7% in February. 

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment Rate2	2013	2014	2015
Mar 2013 Meeting Projections	7.3 to 7.5	6.7 to 7.0	6.0 to 6.5
Dec 2012 Meeting Projections	7.4 to 7.7	6.8 to 7.3	6.0 to 6.6

² Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

The FOMC believes inflation will stay below target.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE Inflation1	2013	2014	2015
Mar 2013 Meeting Projections	1.3 to 1.7	1.5 to 2.0	1.7 to 2.0
Dec 2012 Meeting Projections	1.3 to 2.0	1.5 to 2.0	1.7 to 2.0

Here is core inflation:

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core Inflation1	2013	2014	2015
Mar 2013 Meeting Projections	1.5 to 1.6	1.7 to 2.0	1.8 to 2.0
Dec 2012 Meeting Projections	1.6 to 1.9	1.6 to 2.0	1.8 to 2.1

by Calculated Risk on 3/20/2013 02:06:00 PM

Slight upgrade. Economic projections here. GDP for 2013 revised down slightly, and the unemployment rate projections revised down.  Inflation revised down.

FOMC Statement:

Information received since the Federal Open Market Committee met in January suggests a return to moderate economic growth following a pause late last year. Labor market conditions have shown signs of improvement in recent months but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy has become somewhat more restrictive. Inflation has been running somewhat below the Committee's longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee continues to see downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.

by Calculated Risk on 3/20/2013 09:39:00 AM

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

From AIA: Architecture Billings Index Continues to Improve at a Healthy Pace

With increasing demand for design services, the Architecture Billings Index (ABI) is continuing to strengthen. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the February ABI score was 54.9, up slightly from a mark of 54.2 in January. This score reflects a strong increase in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 64.8, higher than the reading of 63.2 the previous month – and its highest mark since January 2007.

“Conditions have been strengthening in all regions and construction sectors for the last several months,” said AIA Chief Economist, Kermit Baker, PhD, Hon. AIA. “Still, we also continue to hear a mix of business conditions in the marketplace as this hesitant recovery continues to unfold.”

• Regional averages: Northeast (56.7), Midwest (54.7), West (54.7), South (52.7)

• Sector index breakdown: multi-family residential (60.9), mixed practice (56.9), commercial / industrial (53.3), institutional (50.7)
emphasis added

Click on graph for larger image.

This graph shows the Architecture Billings Index since 1996. The index was at 54.9 in February, up from 54.2 in January. Anything above 50 indicates expansion in demand for architects' services.

Every building sector is now expanding and new project inquiries are strongly positive (highest since January 2007). Note: This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions.

According to the AIA, there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction.  This index has been positive for seven consecutive months and suggests some increase in CRE investment in the second half of 2013.

by Calculated Risk on 3/20/2013 08:07:00 AM

From the MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey

The Refinance Index decreased 8 percent from the previous week. The seasonally adjusted Purchase Index decreased 4 percent from one week earlier.
...
The refinance share of mortgage activity decreased to 75 percent of total applications from 76 percent the previous week.The refinance share has decreased for ten straight weeks and is at its lowest level since early May 2012. ... The HARP share of refinance applications increased to 31 percent from 30 percent the prior week.
...
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 3.82 percent from 3.81 percent, with points decreasing to 0.38 from 0.39 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.
emphasis added

Click on graph for larger image.

The first graph shows the refinance index.

There has been a sustained refinance boom for over a year, but activity has been declining over the last few months.

Refinance activity will probably slow in 2013.

The second graph shows the MBA mortgage purchase index.  The 4-week average of the purchase index has generally been trending up (slowly) over the last year.

by Calculated Risk on 3/19/2013 08:23:00 PM

I'm sure Bernanke will be asked about Cyprus in his press conference tomorrow. Also, in January, the FOMC statement contained the sentence: "Although strains in global financial markets have eased somewhat, the Committee continues to see downside risks to the economic outlook." That might be reworked a little ...

Note: Over the weekend, as a preview to the FOMC meeting: FOMC Projections Preview

Wednesday economic releases:
• At 7:00 AM ET, the Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

• Morning, the AIA's Architecture Billings Index for February (a leading indicator for commercial real estate). This has been showing a pickup in billings recently.

• At 2:00 PM, the FOMC Meeting Announcement will be released. No change to interest rates or QE purchases is expected at this meeting.

• Also at 2:00 PM, the FOMC projections will be released. This will include the Federal Open Market Committee (FOMC) participants' quarterly economic projections.

• At 2:30 PM. Fed Chairman Ben Bernanke will hold a press conference.

by Calculated Risk on 3/19/2013 05:03:00 PM

This is a minor indicator that I follow.

From ATA: ATA Truck Tonnage Index Edged Higher In February

The American Trucking Associations’ advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index rose 0.6% in February after increasing 1% in January. (The 1% gain in January was revised down from a 2.4% increase ATA reported on February 19, 2013.) Tonnage has now increased for four straight months, which hasn’t happened since late 2011. Over the last four months, tonnage gained a total of 7.7%. In February, the SA index equaled 123.6 (2000=100) versus 123.0 in January. The highest level on record was December 2011 at 124.3. Compared with February 2012, the SA index was up a solid 4.2%, just below January’s 4.6% year-over-year gain. Year-to-date, compared with the same period in 2012, the tonnage index is up 4.4%. In 2012, tonnage increased 2.3% from 2011.

“Fitting with several other key economic indicators, truck tonnage is up earlier than we anticipated this year,” ATA Chief Economist Bob Costello said. “While I think this is a good sign for the industry and the economy, I’m still concerned that freight tonnage will slow in the months ahead as the federal government sequester continues and households finish spending their tax returns. A little longer term, I think the economy and the industry are poised for a more robust recovery.”
emphasis added

Note from ATA:

Trucking serves as a barometer of the U.S. economy, representing 67% of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods. Trucks hauled 9.2 billion tons of freight in 2011. Motor carriers collected $603.9 billion, or 80.9% of total revenue earned by all transport modes.

Click on graph for larger image.

Here is a long term graph that shows ATA's For-Hire Truck Tonnage index.

The dashed line is the current level of the index.

The index is fairly noisy, but is up solidly year-over-year.

by Calculated Risk on 3/19/2013 02:28:00 PM

From Business Insider: CYPRUS VOTES AGAINST CONTROVERSIAL BANK BAILOUT DEAL

The Cypriot parliament has voted against the bank bailout deal, with 36 votes against, reports Bloomberg.

19 abstained from voting.

The vote was held in a show of hands.

Back to the drawing board.

by Calculated Risk on 3/19/2013 12:15:00 PM

A few comments:

• Total housing starts in February were up 27.7% from the February 2012 pace. Single family starts were up 31.4%. This is a very strong year-over-year increase.

• Even with this significant increase, housing starts are still very low. Starts averaged 1.5 million per year from 1959 through 2000, and demographics and household formation suggests starts will return to close to that level over the next few years. That means starts will probably increase more than 60% from the current level (917 thousand SAAR in February).

• Residential investment and housing starts are usually the best leading indicator for economy.  Nothing is foolproof as a leading indicator, but this suggests the economy will continue to grow over the next couple of years.

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 this 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 and completions are following.  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.

by Calculated Risk on 3/19/2013 09:57:00 AM

From CoreLogic: CoreLogic reports 200,000 More Residential Properties Return to Positive Equity in Fourth Quarter of 2012

CoreLogic ... today released new analysis showing approximately 200,000 more residential properties returned to a state of positive equity during the fourth quarter of 2012. This brings the total number of properties that moved from negative to positive equity in 2012 to 1.7 million and the number of mortgaged residential properties with equity to 38.1 million. The analysis also shows that 10.4 million, or 21.5 percent of all residential properties with a mortgage, were still in negative equity at the end of the fourth quarter of 2012. This figure is down from 10.6 million properties, or 22 percent, at the end of the third quarter of 2012.

... At the end of the fourth quarter, 2.3 million residential properties had less than 5 percent equity, referred to as near-negative equity. Properties that are near negative equity are at risk should home prices fall. ...

“In the fourth quarter we again saw an improvement in the equity position of households,” said Dr. Mark Fleming, chief economist for CoreLogic. “Housing market improvements, particularly in the hardest hit states, are the catalyst for households to regain equity and become participants in 2013’s housing market.”
emphasis added

Click on graph for larger image.

This graph shows the break down of negative equity by state. Note: Data not available for some states. From CoreLogic:

"Nevada had the highest percentage of mortgaged properties in negative equity at 52.4 percent, followed by Florida (40.2 percent), Arizona (34.9 percent), Georgia (33.8 percent) and Michigan (31.9 percent). These top five states combined account for 32.7 percent of negative equity in the U.S."

The second graph shows the distribution of home equity. Just under 10% of residential properties have 25% or more negative equity - it will be long time before those borrowers have positive equity. But other borrowers are close.

More from CoreLogic: "Of the properties in negative equity, 1.8 million, or 3.7 percent of all residential properties with a mortgage, had current estimated loan-to-value (LTV) ratios between 100 and 105, referred to as near-equity. If home prices were to rise another 5 percent, these properties would move into a positive equity position."

According to CoreLogic, 1.7 million borrowers returned to positive equity from negative equity in 2012. I expect a similar number will return to positive equity in 2013.