by Calculated Risk on 6/17/2013 08:38:00 AM

From the NY Fed: Empire State Manufacturing Survey

The June 2013 Empire State Manufacturing Survey indicates that conditions for New York manufacturers improved modestly. The general business conditions index—the most comprehensive of the survey’s measures—rose nine points to 7.8. Nevertheless, most other indicators in the survey fell. The new orders index slipped six points to -6.7, the shipments index fell twelve points to -11.8, and the unfilled orders index fell eight points to -14.5.
...
Labor market conditions worsened, with the index for number of employees dropping to zero and the average workweek index retreating ten points to -11.3.
emphasis added

This was above the consensus forecast of a reading of 0.0.

by Calculated Risk on 6/16/2013 09:00:00 PM

Another FOMC meeting preview from Jon Hilsenrath and Phil Izzo at the WSJ: Forget Fed-Speak, Look for the Latest Growth View

Weekend:
• Schedule for Week of June 16th

• FOMC Projections Preview: Disinflation Watch

• Mid-year Review: Ten Economic Questions for 2013

Monday economic releases:
• At 8:30 AM, the NY Fed Empire Manufacturing Survey for June will be released. The consensus is for a reading of 0.0, up from -1.4 in May (above zero is expansion).

• At 10:00 AM, the June NAHB homebuilder survey will be released. The consensus is for a reading of 45, up from 44 in May. This index increased sharply last year, but has moved sideways recently with some builders

Oil prices have moved up recently with WTI futures at $97.85 per barrel and Brent at $105.93 per barrel.

by Calculated Risk on 6/16/2013 05:22:00 PM

At the end of last year, I posted Ten Economic Questions for 2013. I followed up with a brief post on each question. The goal was to provide an overview of what I expected in 2013 (I don't have a crystal ball, but I think it helps to outline what I think will happen - and understand why I was wrong).

By request, here is a mid-year review (a little before mid-year).   I've linked to my posts from the beginning of the year, with a brief excerpt and a few comments:

10) Question #10 for 2013: Europe and the Euro

Even though I've been pessimistic on Europe (In 2011, I argued that the eurozone was heading into recession), I was less pessimistic than many others. Each of the last two years, I argued the eurozone would stay together ... My guess is the eurozone makes it through another year without losing any countries or a serious collapse. Obviously several countries are near the edge, and the key will be to return to expansion soon.

Note: unless the eurozone "implodes", I don't think Europe poses a large downside risk to the US. If there is a breakup of the euro (something I do not expect in 2013), then the impact on the US could be significant due to financial tightening.

Half way through the year, it looks like the Eurozone will stay together through 2013. Of course the news in Europe remains grim. However it is now obvious to everyone that "austerity" alone has failed, and I expect less fiscal tightening after German Chancellor Angela Merkel is reelected in a few months.

9) Question #9 for 2013: How much will Residential Investment increase?

New home sales will still be competing with distressed sales (short sales and foreclosures) in many areas in 2013 - and probably even more foreclosures in some judicial states. Also I've heard some builders might be land constrained in 2013 (not enough finished lots in the pipeline). Both of these factors could slow the growth of residential investment, but I expect another solid year of growth.

... I expect growth for new home sales and housing starts in the 20% to 25% range in 2013 compared to 2012.

We only have four months of data (starts for May will be released this week), but starts in the January through April 2013 period were up about 29% compared to the same period in 2012. New home sales are up 26% during the first four months of 2013 compared to the same period in 2012. So far so good ...

8) Question #8 for 2013: Will Housing inventory bottom in 2013?

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.

I track inventory weekly, and there is no question that the year-over-year rate of decline has slowed sharply. My mid-year guess is that inventory did bottom in January 2013 (this should be a huge focus right now, since rising inventory will slow price increases).

7) Question #7 for 2013: What will happen with house prices in 2013?

Calling the bottom for house prices in 2012 now appears correct.

[E]ven though I expect inventories to be low this year, I think we will see more inventory come on the market in 2013 than 2012, as sellers who were waiting for a better market list their homes, and as some "underwater" homeowner (those who owe more than their homes are worth) finally can sell without taking a loss.

Also I expect more foreclosure in some judicial states, and I think the price momentum in Phoenix and other "bounce back" areas will slow.

All of these factors suggest further prices increases in 2013, but at a slower rate than in 2012.

The Case-Shiller Comp 20 and National indexes both increased about 7% in 2012. We only have Q1 price data, but house prices increased about 3.5% in Q1. I expect price increases to slow, but my initial prediction for house prices this year might have been low.

6) Question #6 for 2013: What will happen with Monetary Policy and QE3?

I expect the FOMC will review their purchases at each meeting just like they used to review the Fed Funds rate. We might see some adjustments during the year, but currently I expect the Fed to purchase securities at about the same level all year.

There has been some discussion of "tapering" asset purchases later this year, but I still think the Fed will wait longer than many people expect to start tapering.

5) Question #5 for 2013: Will the inflation rate rise or fall in 2013?

I still expect inflation to be near the Fed's target. With high unemployment and low resource utilization, I don't see inflation as a threat in 2013.

Inflation has been falling and is now below the Fed's target. This is a significant issue for the Fed, and it appears my inflation forecast was a little high (at least mid-year).

4) Question #4 for 2013: What will the unemployment rate be in December 2013?

My guess is the participation rate will remain around 63.6% in 2013, and with sluggish employment growth, the unemployment rate will be in the mid-to-high 7% range in December 2013 (little changed from the current rate).

In May, the participation rate was at 63.4% (I still expect it to mostly move sideways this year), and the unemployment rate was at 7.6%. This forecast still seems about right.

3) Question #3 for 2013: How many payroll jobs will be added in 2013?

Both state and local government and construction hiring should improve in 2013. Unfortunately there are other employment categories that will be hit by the austerity (especially the increase in payroll taxes). I expect that will offset any gain from construction and local governments. So my forecast is close to the previous two years, a gain of about 150,000 to 200,000 payroll jobs per month in 2013.

Through the first five months of 2013, the economy has added an average of 189 thousand jobs per month - about as expected.

2) Question #2 for 2013: Will the U.S. economy grow in 2013?

[R]ight now it appears the drag from austerity will probably offset the pickup in the private sector - and we can expect another year of sluggish growth in 2013 probably in the 2% range again.

The economy grew at a 2.4% annualized real rate in Q1, and forecasts are for around 1.8% in Q2. About as expected so far, however there was more austerity than I expected - and I also expect some pickup later this year.

1) Question #1 for 2013: US Fiscal Policy

[T]the House will fold their losing hand [on the debt ceiling] soon. ...

Although the negotiations on the "sequester" will be tough, I suspect something will be worked out (remember the goal is to limit the amount of austerity in 2013). The issue that might blow up is the “continuing resolution", and that might mean a partial shut down of the government. This wouldn't be catastrophic (like the "debt ceiling"), but it would still cause problems for the economy and is a key downside risk.

And a final prediction: If we just stay on the current path - and the "debt ceiling" is raised, and a reasonable agreement is reached on the "sequester", and the “continuing resolution" is passed - I think the deficit will decline faster than most people expect over the next few years. Eventually the deficit will start to increase again due to rising health care costs (this needs further attention), but that isn't a short term emergency.

I wrote the post linked above just after the fiscal cliff agreement was reached. I was correct about the debt ceiling (the House folded - the debt ceiling is absurd). But unfortunately I was wrong about the sequester (bad policy).

Another point I was correct about was that the deficit is decreasing faster than most people expected - probably too fast. Fiscal policy (specifically the U.S. House) remains the key downside risk for the U.S. economy this year.

Overall 2013 is unfolding about as expected - at least so far. Longer term, the future's so bright ...

by Calculated Risk on 6/16/2013 10:56:00 AM

Historically lenders haven't pursued many previous homeowners for deficiencies after foreclosure because it wasn't worth their time. As the following article notes:

It’s unclear how many people walk away from homes when they can still afford to pay the mortgage. Likewise, there is little publicly available data on how many people pay off their deficiency judgments. A recent government audit found the recovery rate at one-fifth of 1 percent.
emphasis added

In judicial foreclosure states, the lender will frequently file for a deficiency judgment as part of the foreclosure case (they are in court anyway). Then the lender might sell the deficiency judgment to a debt collector for a pittance. Sometimes the debt collector will settle for pennies on the dollar (a nice return because they paid almost nothing) or the debt collector will force the former borrower into bankruptcy.

In non-judicial foreclosure states, the lenders rarely bothered to file for a deficiency judgment.  (Tanta and I wrote extensively about mortgage deficiency judgments several years ago).

Of course everything changes if the lender thinks the borrower has assets and "strategically defaulted".  In these cases the lender can recover some of their losses.

From Kimbriell Kelly at the WaPo: Lenders seek court actions against homeowners years after foreclosure

[Freddie Mac spokesman Brad German] said Freddie Mac is targeting “strategic defaulters,” which the agency defines as “someone who had the means but chose to go into default, that there were no extenuating circumstances that affected their ability to pay. If you’re choosing not to pay off your mortgage, but you’re paying other bills, we would consider that strategic default.”

In 2011, Fannie and Freddie flagged 12 percent of 298,327 properties they had foreclosed on — more than 35,000 — for deficiency judgments in an attempt to collect $2.1 billion in unpaid mortgage debt, according to an inspector general’s report released in October from the Federal Housing Finance Agency.

“Pursuing these collections against borrowers we believe have the ability to pay but who have decided not to helps us minimize our losses, which in turn helps minimize taxpayer losses,” said Malloy Evans, an attorney and Fannie Mae’s vice president for default management. “And we think it’s our responsibility to try to minimize those taxpayers’ losses as much as we can.”

There is much more in the article including a discussion of how long lenders can collect deficiency judgments (several decades in some states).

I think now would be a good time for a major overhaul of the foreclosure system. I think we could start with 1) a national system with a non-judicial option like California, 2) ban deficiency judgments on loans up to the amount of the original purchase loan (so the borrower can refinance without worrying about a deficiency judgment if they lose their home, but they will liable if they extract equity), 3) allow cram-downs in bankruptcy (this allows bankruptcy judges to reduce the amount of debt on a home in bankruptcy). 

by Calculated Risk on 6/15/2013 08:48:00 PM

The FOMC meets on Tuesday and Wednesday of the coming week.  I expect no policy change following the FOMC meeting with the Fed continuing to purchase $85 billion in longer-term Treasury and agency mortgage-backed securities per month. I also expect the forward guidance thresholds will remain unchanged.

In the press conference on Wednesday, I expect Fed Chairman Ben Bernanke to argue we still need to see "substantial improvement" in the labor market, and to note the downside risks to the economy, especially from current fiscal policy.  He will probably make it clear that the Fed will not raise rates for a "considerable" time after the end of QE, and it seems likely he will express some concern about the low level of inflation.

Looking at the May 1st FOMC statement, the sentence on inflation will probably be changed:

"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."

This will probably be changed to something like "Measures of underlying inflation have trended lower, and the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term". 

The first part of the sentence is from the November 2010 FOMC meeting; the last part of that sentence is from the FOMC's March 2009 statement.  Those were key meetings for the FOMC: In 2009, the FOMC expanded QE1, and in November 2010, the FOMC announced QE2.

On the projections, it looks like GDP will be downgraded again, and inflation projections will be reduced.  The projections for the unemployment rate will probably be unchanged.  Note: December 2012 projections included to show the trend, TBA - To be announced.

The central range for 2012 GDP will probably be closer to the lower end of the March projections.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in Real GDP1	2013	2014	2015
June 2013 Meeting Projections	TBA	TBA	TBA
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 7.6% in May and the June projections will probably be unchanged.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment Rate2	2013	2014	2015
June 2013 Meeting Projections	TBA	TBA	TBA
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.

Projections for inflation will probably be reduced.  Goldman Sachs believes the FOMC will lower the central projection for PCE inflation to 1.25% in 2013, and core PCE to 1.3%.  The current concern is that inflation is below the Fed's target.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE Inflation1	2013	2014	2015
June 2013 Meeting Projections	TBA	TBA	TBA
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
June 2013 Meeting Projections	TBA	TBA	TBA
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

Conclusion: I expect no change to policy at this meeting, but a slight downgrade to the economic projections - and some concern about inflation (but probably not enough to increase the size of QE3 purchases).

by Calculated Risk on 6/15/2013 12:30:00 PM

The key event this week will be the FOMC statement and press conference on Wednesday.  No changes in policy are expected, but Fed Chairman Ben Bernanke is expected to reiterate that rates will stay low for a long long time.

There are three key housing reports that will be released this week, housing starts on Tuesday, homebuilder confidence survey on Monday, and existing home sales on Thursday.

For manufacturing, the NY Fed (Empire State) and Philly Fed June surveys will be released this week.  For prices, CPI will be released on Tuesday.

----- Monday, June 17th -----
8:30 AM: NY Fed Empire Manufacturing Survey for June. The consensus is for a reading of 0.0, up from -1.4 in May (above zero is expansion).

10:00 AM ET: The June NAHB homebuilder survey. The consensus is for a reading of 45, up from 44 in May.   This index increased sharply last year, but has moved sideways recently with some builders complaining about higher costs and lack of buildable land.  Any number below 50 still indicates that more builders view sales conditions as poor than good.

----- Tuesday, June 18th -----
8:30 AM: Housing Starts for May.

Total housing starts were at 853 thousand (SAAR) in April, 16.5 percent below the revised March estimate of 1.021 million. Single family starts declined slightly to 610 thousand SAAR in April.

The consensus is for total housing starts to increase to 950 thousand (SAAR) in May.

8:30 AM: Consumer Price Index for May. The consensus is for a 0.2% decrease in CPI in May and for core CPI to increase 0.2%.

----- Wednesday, June 19th -----
7:00 AM: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

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

2:00 PM: FOMC Meeting Announcement.  No change to interest rates or QE purchases is expected at this meeting.

2:00 PM: FOMC Forecasts This will include the Federal Open Market Committee (FOMC) participants' projections of the appropriate target federal funds rate along with the quarterly economic projections.

2:30 PM: Fed Chairman Ben Bernanke holds a press briefing following the FOMC announcement.

----- Thursday, June 20th -----
8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for an increase to 340 thousand from 334 thousand last week.

9:00 AM: The Markit US PMI Manufacturing Index Flash for June. The index was at 52.3 in May.

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

The consensus is for sales of 5.00 million on seasonally adjusted annual rate (SAAR) basis. Sales in April were at a 4.97 million SAAR.   Economist Tom Lawler is estimating the NAR will report a May sales rate of 5.2 million.

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

10:00 AM: the Philly Fed manufacturing survey for June. The consensus is for a reading of -0.5, up from -5.2 last month (above zero indicates expansion).

----- Friday, June 21st -----
10:00 AM: Regional and State Employment and Unemployment (Monthly) for May 2013

by Calculated Risk on 6/15/2013 08:35:00 AM

This is an unofficial list of Problem Banks compiled only from public sources.

Here is the unofficial problem bank list (update: Link fixed - was linking to old list) for June 14, 2013.

Changes and comments from surferdude808:

As anticipated, it was quiet week for changes to the Unofficial Problem Bank List as the OCC will wait until next Friday to provide its enforcement actions through mid-May 2013. There were three removals, which leave the list holding 757 institutions with assets of $274.8 billion. Last year, the list held 919 institutions with assets of $354.0 billion.

The OCC terminated actions against Communityone Bank, National Association, Asheboro, NC ($1.4 billion Ticker: FNBN) and Metrobank, National Association, Houston, TX ($1.1 billion Ticker: MCBI). The other removal was an unassisted merger of The First National Bank of Grant Park, Grant Park, IL ($110 million) with Midland States Bank, Clayton, IL.

We continue to monitor the operating status of the banking subsidiaries of Capitol Bancorp, LTD, but there is nothing new to report since the closing of the North Las Vegas unit last week.

by Calculated Risk on 6/14/2013 10:21:00 PM

A short excerpt from a research note by Jan Hatzius and Sven Jari Stehn at Goldman Sachs: FOMC Preview: Calming the Market

The economic data have improved a bit since the last FOMC meeting ... But the improvement has been far from “substantial.” Growth remains in the sluggish 1-3% range ... and jobs gains remain moderate.

Inflation, meanwhile, has continued to fall further below the FOMC’s 2% PCE target. ...

Financial conditions have tightened since the last FOMC meeting, as bond yields have risen, mortgage and credit spreads have widened ... The tightening in financial conditions appears in large part driven by worries that Fed officials will soon tighten policy.

... While we do not expect the committee to deviate much from the existing message, we anticipate that Fed officials will, on the margin, try to calm markets at the June 18-19 FOMC meeting.

We therefore expect the FOMC statement to show only modest changes, mostly focused on acknowledging the lower inflation numbers. Moreover, the committee is likely to downgrade its 2013 growth and inflation numbers moderately. While Chairman Bernanke is likely to reiterate in the post-statement press conference that the QE tapering decision is data dependent, we expect him to dissuade markets from frontloading too much of the entire monetary tightening process—not just the end of QE but also the normalization of the funds rate—as soon as the committee takes the first step in that direction.

The FOMC meeting is on Tuesday and Wednesday, with the FOMC statement and projections scheduled for release at 2 PM ET on Wednesday. Fed Chairman Ben Bernanke will hold a press conference at 2:30 PM. I'll post a preview on Sunday, but I don't expect any changes to policy.

by Calculated Risk on 6/14/2013 03:51:00 PM

From housing economist Tom Lawler:

Based on local realtor/MLS reports I’ve seen so far across the country, I estimate that existing home sales as measured by the National Association of Realtors ran at a seasonally adjusted annual rate of about 5.2 million in May, up 4.6% from April’s pace and up 13.3% from last May’s pace.

On the inventory front, data from inventory trackers might suggest that the inventory of existing homes in May increased by 3 1/2 to 4%. As I’ve noted before, however, the NAR’s inventory estimates don’t always track “listings” month-to-month, with the NAR’s inventory estimate for April always showing an “out-sized” gain, and May showing a smaller increase/larger decline, relative to “listings trackers.” Based on limited historical data, I’d estimate that the NAR’s inventory estimate for May will be up 1.9% from April, which would result in a year-over-year decline of 10.9%.

CR Note: The NAR is scheduled to report May existing home sales next Thursday, June 20th, and the consensus is for sales of 5.0 million.

Based on Tom's estimates, this would put inventory at around 2.2 million for May, and months-of-supply around 5.1. This would still be a very low level of inventory - probably the lowest for May since 2001 or so - but this would be the smallest year-over-year decline in inventory since 2011 (when inventory started to decline sharply).

by Calculated Risk on 6/14/2013 02:00:00 PM

From Floyd Norris at the NY Times: Despite Recovery, Younger Households Are Slower to Make Gains

THE total wealth of American households has recovered from the financial crisis and Great Recession, according to the Federal Reserve Board. But ... many Americans, particularly younger adults who took on heavy debt to acquire homes before the housing bubble collapsed, are lagging.
...
During the housing boom, said William R. Emmons, the chief economist of the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis, “exactly the people you would think need to act conservatively were doing the opposite.” Homeownership rates, and mortgage debt levels, rose for younger households, as well as for less educated and minority ones. Those groups suffered more during the crisis, he said, and have been slower to recover.

Mr. Emmons compiled average wealth figures for different groups from the triennial surveys ... older households are down just 3 percent on average, while those headed by middle-age people are down about 10 percent. But the decline is nearly 40 percent for the younger group.

During the housing boom, households ended up with more of their wealth in real estate than before, and mortgage debt rose to record levels relative to the size of the economy. The proportion of wealth in homes is now back to close to the level of the 1990s, but the debt levels remain high by historical standards.
emphasis added

Click on graph for larger image.

This graph based on the Fed's Flow of Funds report shows household real estate assets and mortgage debt as a percent of GDP.  

As Norris noted, the bubble wealth is gone, but the debt remains (still high on a historical basis). This was especially hard on younger households since they bought during the housing bubble.