by Calculated Risk on 5/24/2013 09:06:00 AM

From the Department of Commerce: Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders April 2013

New orders for manufactured durable goods in April increased $7.2 billion or 3.3 percent to $222.6 billion, the U.S. Census Bureau announced today. This increase, up two of the last three months, followed a 5.9 percent March decrease. Excluding transportation, new orders increased 1.3 percent. Excluding defense, new orders increased 2.1 percent.

This was above expectations of a 1.1% increase. This report is difficult to predict and very noisy month-to-month.

by Calculated Risk on 5/23/2013 08:32:00 PM

Several people have asked me about this article at CNBC by Jeff Cox: Why Housing Won't Drive the Recovery

Despite data points that in some cases are at multiyear highs, Robert Shiller, Karl Case and David Blitzer believe there are multiple headwinds that will keep a lid on housing gains.

Among the obstacles are a low level of new housing starts, an unexpectedly slow migration of so-called shadow inventory onto the market, and continued difficulty for buyers to secure financing.

"You've got a lot of breathless commentary in the media," said Shiller, a Yale University economist. "All this talk that we're in this great recovery—we probably are in the short run, the longer run doesn't look so terrific to me."

First, housing (technically residential investment) will be a key driver for the economy. Period. 

It is important to understand that "residential investment" is mostly new homes and home improvement. For existing home sales, only the broker's commission is included in residential investment (nothing is added to the housing stock).  Those looking at the level of existing home sales are looking at the wrong number, as are those focused only on house prices.

Look at "headwinds" that are mentioned in the article:
1) "a low level of new housing starts".  That is a headwind?  To me, the low level of starts means there is more upside based on demographics.  The homeownership rate peaks for those in the 55 to 75 age group, so the boomers will not negatively impact homeownership for a decade or more.

2) "an unexpectedly slow migration of so-called shadow inventory onto the market".  Do they expect the pace of foreclosures to increase?  I don't.  The process is very long in most judicial states, and I don't expect another wave of foreclosures hitting the market - but I do think we will see distressed sales for years.

3) "continued difficulty for buyers to secure financing".  OK, but this has been a headwind for the last couple of years.  Looking forward, I expect some loosening in lending standards.  So this is really a potential tailwind.

Nothing in this article changes my view.

Friday economic release:
• At 8:30 AM ET, Durable Goods Orders for April from the Census Bureau. The consensus is for a 1.1% increase in durable goods orders.

Note: The bond market will close early Friday at 2PM ET. The stock market will close at the normal time. All markets are closed on Monday in observance of Memorial Day.

The Calculated Risk blog is always open!

by Calculated Risk on 5/23/2013 03:33:00 PM

From Freddie Mac today: Mortgage Rates Continue Upward Trend

Freddie Mac (OTCQB: FMCC) today released the results of its Primary Mortgage Market Survey(R) (PMMS®), showing fixed mortgage rates trending higher for the third consecutive week and putting pressure on refinance momentum. ...

30-year fixed-rate mortgage (FRM) averaged 3.59 percent with an average 0.7 point for the week ending May 23, 2013, up from last week when it averaged 3.51 percent. Last year at this time, the 30-year FRM averaged 3.78 percent.

15-year FRM this week averaged 2.77 percent with an average 0.7 point, up from last week when it averaged 2.69 percent. A year ago at this time, the 15-year FRM averaged 3.04 percent.

Click on graph for larger image.

This graph shows the the 30 year and 15 year fixed rate mortgage interest rates from the Freddie Mac Primary Mortgage Market Survey®.   Not much of an increase recently ... but it will slow refinance activity.

The Freddie Mac survey started in 1971 and 30 year mortgage rates are still near the record low set last November.

by Calculated Risk on 5/23/2013 12:47:00 PM

Obviously the new home sales report this morning was solid with sales above expectations and significant upward revisions to prior months. I try not to react too much to the month to month ups and downs; the key points right now are that sales are increasing and will probably continue to increase for some time.

Now that we have four months of data for 2013, one way to look at the growth rate is to use the "not seasonally adjusted" (NSA) year-to-date data.

According to the Census Bureau, there were 153 thousand new homes sold in 2013 through April, up about 26.4% from the 121 thousand sold during the same period in 2012. That is a very solid increase in sales, and this was the highest sales for these months since 2008.

Note: For 2013, estimates are sales will increase to around 450 to 460 thousand, or an increase of around 22% to 25% on an annual basis from the 369 thousand in 2012. 

Although there has been a large increase in the sales rate, sales are just above the lows for previous recessions. This suggests significant upside over the next few years.  Based on estimates of household formation and demographics, I expect sales to increase to 750 to 800 thousand over the next several years - substantially higher than the current sales rate.

And an important point worth repeating: Housing is historically the best leading indicator for the economy, and this is one of the reasons I think The future's so bright, I gotta wear shades.

And here is another update to the "distressing gap" graph that I first started posting over four years ago to show the emerging gap caused by distressed sales.  Now I'm looking for the gap to start to close over the next few years.

Click on graph for larger image.

The "distressing gap" graph shows existing home sales (left axis) and new home sales (right axis) through April 2013. This graph starts in 1994, but the relationship has been fairly steady back to the '60s.

Following the housing bubble and bust, the "distressing gap" appeared mostly because of distressed sales. The flood of distressed sales kept existing home sales elevated, and depressed new home sales since builders weren't able to compete with the low prices of all the foreclosed properties.

I don't expect much of an increase in existing home sales (distressed sales will slowly decline and be offset by more conventional sales). But I do expect this gap to continue to close - mostly from an increase in new home sales.

Another way to look at this is a ratio of existing to new home sales.

This ratio was fairly stable from 1994 through 2006, and then the flood of distressed sales kept the number of existing home sales elevated and depressed new home sales. (Note: This ratio was fairly stable back to the early '70s, but I only have annual data for the earlier years).

In general the ratio has been trending down, and I expect this ratio to trend down over the next several years as the number of distressed sales declines and new home sales increase.

Note: Existing home sales are counted when transactions are closed, and new home sales are counted when contracts are signed. So the timing of sales is different.

by Calculated Risk on 5/23/2013 11:47:00 AM

From the Kansas City Fed: Tenth District Manufacturing Survey Improved Somewhat

The Federal Reserve Bank of Kansas City released the May Manufacturing Survey today. According to Chad Wilkerson, vice president and economist at the Federal Reserve Bank of Kansas City, the survey revealed that Tenth District manufacturing activity improved somewhat, rising above zero for the first time in seven months, and producers’ expectations for future activity also increased.

“It was good to finally see a positive number after seven months of modest declines, and for optimism about future activity to return after dropping last month,” said Wilkerson. “Still, activity remains at only about year-ago levels and firms are having difficulty passing cost increases through.”

The month-over-month composite index was 2 in May, up from -5 in both April and March. ... Other month-over-month indexes were mixed. The production index edged up from 1 to 5, and the shipments, new orders, and new orders for export indexes also rose. In contrast, the employment index fell from -3 to -7, while the order backlog index was unchanged.

The last regional surveys for May will be released next Tuesday (Dallas and Richmond), and the ISM index for May will be released on Monday, June 1st. Based on the regional surveys released so far, and the Markit Flash PMI released this morning, I expect a fairly weak reading for the ISM index (perhaps at or below 50).

by Calculated Risk on 5/23/2013 10:00:00 AM

The Census Bureau reports New Home Sales in April were at a seasonally adjusted annual rate (SAAR) of 454 thousand. This was up from 444 thousand SAAR in March (March sales were revised up from 417 thousand).

January sales were revised up from 445 thousand to 458 thousand, and February sales were revised up from 411 thousand to 429 thousand. Very strong upward revisions.

The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate.

"Sales of new single-family houses in April 2013 were at a seasonally adjusted annual rate of 454,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 2.3 percent above the revised March rate of 444,000 and is 29.0 percent above the April 2012 estimate of 352,000."

Click on graph for larger image in graph gallery.

The second graph shows New Home Months of Supply.

The months of supply was unchanged in April at 4.1 months.

The all time record was 12.1 months of supply in January 2009.

This is now in the normal range (less than 6 months supply is normal).

"The seasonally adjusted estimate of new houses for sale at the end of April was 156,000. This represents a supply of 4.1 months at the current sales rate."

On inventory, according to the Census Bureau:

"A house is considered for sale when a permit to build has been issued in permit-issuing places or work has begun on the footings or foundation in nonpermit areas and a sales contract has not been signed nor a deposit accepted."

Starting in 1973 the Census Bureau broke this down into three categories: Not Started, Under Construction, and Completed.

This graph shows the three categories of inventory starting in 1973.

The inventory of completed homes for sale is at a record low. The combined total of completed and under construction is also just above the record low.

The last graph shows sales NSA (monthly sales, not seasonally adjusted annual rate).

In April 2013 (red column), 45 thousand new homes were sold (NSA). Last year 34 thousand homes were sold in April. The high for April was 116 thousand in 2005, and the low for April was 30 thousand in 2011.



This was well above expectations of 425,000 sales in April, and a solid report, especially with all the upward revision to previous months.  I'll have more soon ...

by Calculated Risk on 5/23/2013 08:51:00 AM

The DOL reports:

In the week ending May 18, the advance figure for seasonally adjusted initial claims was 340,000, a decrease of 23,000 from the previous week's revised figure of 363,000. The 4-week moving average was 339,500, a decrease of 500 from the previous week's revised average of 340,000.

The previous week was revised up from 360,000.

The following graph shows the 4-week moving average of weekly claims since January 2000.

Click on graph for larger image.


The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 339,500.

Claims were slightly below the 345,000 consensus forecast.

by Calculated Risk on 5/22/2013 08:50:00 PM

Most of the coverage of the FOMC minutes today focused on this sentence:

"A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth; however, views differed about what evidence would be necessary and the likelihood of that outcome."
emphasis added

Three words: Will Not Happen. Not in June. Probably not this year (although tapering could start late this year).

The real Fed story today was that Fed Chairman Ben Bernanke scolded Congress. In his speech he said:

"Notably, over the past four years, state and local governments have cut civilian government employment by roughly 700,000 jobs, and total government employment has fallen by more than 800,000 jobs over the same period. For comparison, over the four years following the trough of the 2001 recession, total government employment rose by more than 500,000 jobs.

Most recently, the strengthening economy has improved the budgetary outlooks of most state and local governments, leading them to reduce their pace of fiscal tightening. At the same time, though, fiscal policy at the federal level has become significantly more restrictive. In particular, the expiration of the payroll tax cut, the enactment of tax increases, the effects of the budget caps on discretionary spending, the onset of the sequestration, and the declines in defense spending for overseas military operations are expected, collectively, to exert a substantial drag on the economy this year."

And in the Q&A, Bernanke added:

“I fully realize the importance of budgetary responsibility, but I would argue that it’s not responsible to focus all of the restraint on the very near term and do nothing about the long term, which is where most of the problem exists. I do think that we would all be better off, with no loss to fiscal sustainability or market confidence, if we had somewhat less restraint in the very near term – this year and next year, say – and more aggressive action to address these very real long-term issues, which threaten within a decade or so to begin to put our fiscal budget on an unsustainable path.”

Current policy is "not responsible".  Unfortunately most members of Congress weren't even aware that Bernanke was giving them a failing grade!  Most of the media reports ignored the reprimand too.  Even the FOMC statement mentioned fiscal restraint several times.  Oh well ...

Thursday economic releases:
• At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for claims to decrease to 345 thousand from 360 thousand last week.

• At 9:00 AM, FHFA House Price Index for March 2013. This was original a GSE only repeat sales, however there is also an expanded index that deserves more attention. The consensus is for a 0.9% increase.

• Also at 9:00 AM, The Markit US PMI Manufacturing Index Flash for May. The consensus is for a decrease to 50.8 from 52.0 in April.

• At 10:00 AM, New Home Sales for April from the Census Bureau. The consensus is for an increase in sales to 425 thousand Seasonally Adjusted Annual Rate (SAAR) in April from 417 thousand in March.

• At 11:00 AM, Kansas City Fed regional Manufacturing Survey for May. The consensus is for a reading of minus 2, up from minus 5 in April (below zero is contraction).

by Calculated Risk on 5/22/2013 04:52:00 PM

The most important number in the existing home sales report was inventory, and the NAR reported that inventory increased 11.9% in April from March, and is only down 13.6% from April 2012.  This fits with the weekly data I've been posting.

This is the lowest level of inventory for the month of April since 2001, but this is also the smallest year-over-year decline since July 2011. The key points are: 1) inventory is very low, but 2) the inventory decline will probably end soon. With the low level of inventory, there is still upward pressure on prices - but as inventory starts to increase, buyer urgency will wane, and price increases will slow.

Important: The NAR reports active listings, and although there is some variability across the country in what is considered active, most "contingent short sales" are not included. "Contingent short sales" are strange listings since the listings were frequently NEVER on the market (they were listed as contingent), and they hang around for a long time - they are probably more closely related to shadow inventory than active inventory. However when we compare inventory to 2005, we need to remember there were no "short sale contingent" listings in 2005. In the areas I track, the number of "short sale contingent" listings is also down sharply year-over-year.

Another key point: The NAR reported total sales were up 9.7% from April 2012, but conventional sales are probably up close to 25% from April 2012, and distressed sales down.  The NAR reported (from a survey):

Distressed homes – foreclosures and short sales – accounted for 18 percent of April sales, down from 21 percent in March and 28 percent in April 2012.

Although this survey isn't perfect, if total sales were up 9.7% from April 2012, and distressed sales declined from 28% of total sales to 18%, this suggests conventional sales were up sharply year-over-year - a good sign. However some of this increase is investor buying; the NAR is reporting:

All-cash sales were at 32 percent of transactions in April, up from 30 percent in March; they were 29 percent in April 2012. Individual investors, who account for most cash sales, purchased 19 percent of homes in April, unchanged from March; they were 20 percent in April 2012.

The following graph shows existing home sales Not Seasonally Adjusted (NSA).

Click on graph for larger image.

Sales NSA in April (red column) are  above the sales for for 2008 through 2012, and close to the level in 2007.  Sales are well below the bubble years of 2005 and 2006. 

The bottom line is this was a solid report. Conventional sales have increased sharply, although some of this is investor buying. And inventory is low, but the year-over-year decline in inventory is decreasing.

Earlier:
• Existing Home Sales in April: 4.97 million SAAR, 5.2 months of supply

by Calculated Risk on 5/22/2013 02:00:00 PM

Note: I'll have more on existing home sales and Bernanke's testimony later today.

From the Fed: Minutes of the Federal Open Market Committee, April 30-May 1, 2013. A few excerpts on the exit strategy:

After the policy vote, participants began a review of the exit strategy principles that were published in the minutes of the Committee's June 2011 meeting. Those principles, which the Committee issued to clarify how it intended to normalize the stance and conduct of monetary policy when doing so eventually became appropriate, included broad principles along with some details about the timing and sequence of specific steps the Committee expected to take. The participants' discussion touched on various aspects of the exit strategy principles and policy normalization more generally, including the size and composition of the SOMA portfolio in the longer run, the use of a range of reserve-draining tools, the approach to sales of securities, the eventual framework for policy implementation, and the relationship between the principles and the economic thresholds in the Committee's forward guidance on the federal funds rate. The broad principles adopted almost two years ago appeared generally still valid, but developments since then--including the change in the size and composition of SOMA asset holdings--suggested a need for greater flexibility regarding the details of implementing policy normalization, particularly because those details would appropriately depend at least in part upon future economic and financial developments. Also, because normalization still appeared to be well in the future, the Committee might wish to wait and acquire additional experience to inform its plans. In particular, the process of normalizing policy could yield information about the most effective framework for implementing monetary policy in the longer run, and thus about the appropriate size of the SOMA portfolio and level of reserve balances. In addition, several participants raised the possibility that the federal funds rate might not, in the future, be the best indicator of the general level of short-term interest rates, and supported further staff study of potential alternative approaches to implementing monetary policy in the longer term and of possible new tools to improve control over short-term interest rates.

Views differed regarding whether the best course at this point would be to simply acknowledge that certain components of the June 2011 principles had been overtaken by events or rather to formally revise the principles. Acknowledging that the principles need to be updated would help avoid possible confusion regarding the Committee's intentions; waiting to update the principles would allow the Committee to obtain additional information before revising them. It was also mentioned that the public's understanding of the likely exit process might not be improved if the Committee issued only a set of broad principles without providing detailed information on the steps anticipated for normalization. However, issuing revised principles relatively soon could give the public additional confidence that the Committee had the tools and a plan for eventually normalizing the conduct of policy. Moreover, one participant stressed that the Committee's ability to provide forward guidance about the normalization process was a key monetary policy tool, and revised principles would permit use of that tool to help adjust the stance of policy. Participants emphasized that their review of the June 2011 exit strategy principles did not suggest any change in their views about the economic conditions that would eventually warrant beginning the process of normalizing the stance of monetary policy. At the conclusion of the discussion, the Chairman directed the staff to undertake additional preparatory work on this issue for Committee consideration in the future.
emphasis added

Based on comments by Bernanke today, and NY Fed President Dudley yesterday, it sounds likely the Fed will allow the MBS to run off (a change from their previous thinking).