by Calculated Risk on 6/20/2013 11:49:00 AM

The key number in the existing home sales report is inventory (not sales), and the NAR reported that inventory increased 3.3% in May from April, and is only down 10.1% from May 2012.  This fits with the weekly data I've been posting.

This is the lowest level of inventory for the month of May since 2002, 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 year-over-year 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 12.9% from May 2012, but conventional sales are probably up over 20% from May 2012, and distressed sales down.  The NAR reported (from a survey):

Distressed homes – foreclosures and short sales – accounted for 18 percent of May sales, unchanged from April, but matching the lowest share since monthly tracking began in October 2008; they were 25 percent in May 2012.

Although this survey isn't perfect, if total sales were up 12.9% from May 2012, and distressed sales declined from 25% of total sales (25% of 5.18 million) to 18% (18% of 4.59 million in May 2012), 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 33 percent of transactions in May, up from 32 percent in April and 28 percent in May 2012. Individual investors, who account for many cash sales, purchased 18 percent of homes in May; they were 19 percent in April and 17 percent in May 2012.

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

Click on graph for larger image.

Sales NSA in May (red column) are above the sales for 2007 through 2012, however 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 May: 5.18 million SAAR, 5.1 months of supply

by Calculated Risk on 6/20/2013 10:00:00 AM

The NAR reports: Existing-Home Sales Rise in May with Strong Price Increases

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 4.2 percent to a seasonally adjusted annual rate of 5.18 million in May from 4.97 million in April, and is 12.9 percent above the 4.59 million-unit pace in May 2012.

Total housing inventory at the end of May rose 3.3 percent to 2.22 million existing homes available for sale, which represents a 5.1-month supply at the current sales pace, down from 5.2 months in April. Listed inventory is 10.1 percent below a year ago, when there was a 6.5-month supply.

Click on graph for larger image.

This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.

Sales in May 2013 (5.18 million SAAR) were 4.2% higher than last month, and were 12.9% above the May 2012 rate. This is the highest sales rate since November 2009 (housing tax credit).

The second graph shows nationwide inventory for existing homes.

According to the NAR, inventory increased to 2.22 million in May up from 2.15 million in April.   Inventory is not seasonally adjusted, and inventory usually increases from the seasonal lows in December and January, and peaks in mid-to-late summer.

The last graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory.

Inventory decreased 10.1% year-over-year in May compared to May 2012. This is the 27th consecutive month with a YoY decrease in inventory, and the smallest YoY decrease since 2011 (I expect the YoY decrease to get smaller all year).

Months of supply decreased to 5.1 months in May.

This was  just above expectations of sales of 5.0 million.  For existing home sales, the key number is inventory - and inventory is still down year-over-year, although the declines are slowing.   This was another solid report.  I'll have more later ...

by Calculated Risk on 6/20/2013 08:35:00 AM

The DOL reports:

In the week ending June 15, the advance figure for seasonally adjusted initial claims was 354,000, an increase of 18,000 from the previous week's revised figure of 336,000. The 4-week moving average was 348,250, an increase of 2,500 from the previous week's revised average of 345,750.

The previous week was revised up from 334,000.

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 348,250.

The 4-week average has mostly moved sideways over the last few months.  Claims were above the 340,000 consensus forecast.

by Calculated Risk on 6/19/2013 07:57:00 PM

Another take on the FOMC statement and Bernanke press conference from Goldman Sachs' economists Jan Hatzius and Sven Jari Stehn:

The FOMC was more hawkish than we had expected. First, Chairman Bernanke suggested that tapering would start “later” this year and might conclude in mid-2014 assuming a 7% unemployment rate at that point. Second, the committee moved down its unemployment rate forecasts by about 0.2 percentage points throughout the forecast horizon. Third, the committee noted that downside risks had “diminished” since last fall ... Fourth, although inflation projections moved down, the chairman was somewhat dismissive of the recent inflation drop, attributing much of it to special factors. Fifth, the chairman was a bit more reluctant to push back on the increase in short-term rate expectations than we had expected, although he did state explicitly that the 6.5% unemployment threshold might eventually move down.

Our takeaway is that the risk to our forecast of QE tapering starting in December has increased. However, our own GDP forecast for the second half of 2013 is more than ½ percentage point below the committee’s, and our labor market forecasts are also less optimistic.

Thursday economic releases:
• At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for an increase to 340 thousand from 334 thousand last week.

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

• At 10:00 AM, the Existing Home Sales report 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 (especially the year-over-year change) and the months-of-supply.

• Also at 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).

by Calculated Risk on 6/19/2013 06:19:00 PM

Last month there were quite a few analysts predicting the Fed would start tapering off QE purchases in June. My response was Three words: Will Not Happen.

Now we are seeing a flurry of articles with headlines suggesting reducing the monthly purchases of assets is "close" or "near". It depends on the definition of "close" or "near", but it is clear tapering will not happen until later this year at the earliest. Here is the key quote from Bernanke:

"If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year. And if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear. In this scenario, when asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7%, with solid economic growth supporting further job gains, a substantial improvement from the 8.1% unemployment rate that prevailed when the committee announced this program."

What does "consistent with this forecast" mean? (see projections here)

• First, year-over-year GDP growth would have to be in the 2.3% to 2.6% range in Q4 2013. The first half of 2013 will probably be just over 2% - so this suggests 2nd half GDP growth in the 2.5% to 3.2% range. If the FOMC decides to taper in September, growth would have to seem fairly strong in Q3.  By December, the FOMC will have Q3 data and a sense of growth in Q4 - and the impact of fiscal policy (the key downside risk to the U.S. economy is excessive fiscal tightening).  So even if the economic data is consistent with the FOMC forecasts, it seems tapering in December is more likely than September. NOTE: Economic growth for 2013 was revised down slightly in the projections released today - several articles have incorrectly stated that growth was revised up.

• Second, the unemployment rate will have to be on track to be in the 7.2% to 7.3% range in December.   Since December 2012, the unemployment rate has fallen from 7.8% to 7.6%, but much of that improvement was due to a decline in the participation rate from 63.6% to 63.4%.  If the participation rate stays flat for the remainder of 2013 (about what I currently expect), then job growth would have to increase to reach the Fed's projections.

• Third, inflation would have to be increasing.  Over the first four months of 2013, the PCE price index increased at a 0.3% annualized rate (core PCE increased at a 1.0% annualized rate).  This is significantly below the Fed's target.  The FOMC members believe this low inflation is partially due to transitory factors, but I expect the Fed will want to see some increase in inflation before reducing the pace of asset purchases.

Although I think the future is bright - and the Fed's projections are possible, I don't think the Fed will have enough positive economic data to "moderate the monthly pace of purchases" by September. Right now it seems likely they will start tapering in December or in early 2014.  So little has changed on timing - even with the somewhat more positive tone of the FOMC statement, especially that "downside risks have diminished".

Tapering is coming, but can December be described as "near" or "close"? If so, I haven't even started my Christmas shopping yet ...

And more from Tim Duy: FOMC Statement: Second Reaction

Of course, Bernanke did not say September. But I think he made clear that assuming the Fed's forecasts hold, they see that asset purchases will be gradually reduced beginning later this year with the expectation that the Fed will QE draw to a close by the middle of next year. He confirmed my suspicion that although the Fed sees the fiscal sector as a drag on overall growth, they do not believe it has harmed the underlying momentum of the economy. I would even say that he sounded relatively optimistic. Thus, downside risks have diminished and it is appropriate to begin reducing accommodation.

Interesting, he seemed to set a trigger, not a threshold, for ending QE - the program should be concluded when unemployment hits 7%. I am surprised that he set a number, although it is consistent with the idea that the Fed wants to end QE well ahead of the 6.5% threshold for unemployment. Watching the unemployment rate just became even more important, as a faster than expected move to 7% will be associated with a faster end to QE.

by Calculated Risk on 6/19/2013 02:15:00 PM

Just a couple of months ago, several analysts argued that the Fed would start to taper QE purchases in June.  That was NEVER in the cards.  September is possible, but I still expect they will wait until December or early 2014 to start to taper.

The Fed is clearly missing on the low side of their inflation target.  If that continues, the next move will be to increase purchases!  James Bullard even argued "the Committee should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings".

Bernanke press conference here or watch below. 



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On the projections, GDP was revised down slightly, the unemployment rate was revised down, and inflation was revised down sharply for 2013. 

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in Real GDP1	2013	2014	2015
June 2013 Meeting Projections	2.3 to 2.6	3.0 to 3.5	2.9 to 3.6
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. 

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment Rate2	2013	2014	2015
June 2013 Meeting Projections	7.2 to 7.3	6.5 to 6.8	5.8 to 6.2
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 significantly below target.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE Inflation1	2013	2014	2015
June 2013 Meeting Projections	0.8 to 1.2	1.4 to 2.0	1.6 to 2.0
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	1.2 to 1.3	1.5 to 1.8	1.7 to 2.0
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 6/19/2013 02:00:00 PM

FOMC Statement:

Information received since the Federal Open Market Committee met in May suggests that economic activity has been expanding at a moderate pace. Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth. Partly reflecting transitory influences, inflation has been running below the Committee's longer-run objective, but 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 sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall. 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. The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. 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; 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 James Bullard, who believed that the Committee should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings, and 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 6/19/2013 09:52:00 AM

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

From AIA: Strong Rebound for Architecture Billings Index

Following the first reversal into negative territory in ten months in April, the Architecture Billings Index has bounced back in May. 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 May ABI score was 52.9, up dramatically from a mark of 48.6 in April. This score reflects an increase in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 59.1, up slightly from the reading of 58.5 the previous month.

“This rebound is a good sign for the design and construction industry and hopefully means that April’s negative dip was a blip rather than a sign of challenging times to come,” said AIA Chief Economist, Kermit Baker, PhD, Hon. AIA. “But there is a resounding sense of uncertainty in the marketplace – from clients to investors and an overall lack of confidence in the general economy – that is continuing to act as a governor on the business development engine for architecture firms.”
emphasis added

Click on graph for larger image.

This graph shows the Architecture Billings Index since 1996. The index was at 52.9 in May, up from 48.6 in April. Anything above 50 indicates expansion in demand for architects' services.  This index has indicated expansion in 9 of the last 10 months.

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.  The increases in this index over the past 10 months suggest some increase in CRE investment in the second half of 2013.

by Calculated Risk on 6/19/2013 08:55:00 AM

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

The Refinance Index decreased 3 percent from the previous week. The seasonally adjusted Purchase Index decreased 3 percent from one week earlier.
...
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 4.17 percent, the highest rate since March 2012, from 4.15 percent, with points decreasing to 0.41 from 0.48 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. This is the sixth straight weekly increase for this rate.
...
The average contract interest rate for 15-year fixed-rate mortgages decreased to 3.30 percent from 3.32 percent, with points increasing to 0.39 from 0.38 (including the origination fee) for 80 percent LTV loans.
emphasis added

Click on graph for larger image.

The first graph shows the refinance index.

With 30 year mortgage rates above 4%, refinance activity has fallen sharply, decreasing in 5 of the last 6 weeks.

This index is down 38% over the last six weeks.

The second graph shows the MBA mortgage purchase index.  The 4-week average of the purchase index has generally been trending up over the last year, and the 4-week average of the purchase index is up almost 10% from a year ago.

by Calculated Risk on 6/18/2013 09:35:00 PM

More support for Dr. Janet Yellen to replace Fed Chairman Ben Bernanke next January. I supported Yellen in 2009, and I think she would be an excellent choice.

Wednesday economic releases:
• At 7:00 AM ET, 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 will be released (a leading indicator for commercial real estate).

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

• Also at 2:00 PM, the FOMC economic projections will be released. Here is a projections preview including a table of previous projections.

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