by Calculated Risk on 7/10/2013 08:14:00 AM

From the MBA: Mortgage Applications Decrease as Rates Reach Two-year High in Latest MBA Weekly Survey

The Refinance Index decreased 4 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 4.68 percent, the highest rate since July 2011, from 4.58 percent, with points increasing to 0.46 from0.43 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.
emphasis added

Note: This was for a holiday week with a large seasonal adjustment. I expect a large decline in refinance activity in the survey next week.

Click on graph for larger image.

The first graph shows the refinance index.

With 30 year mortgage rates above 4.5%, refinance activity has fallen sharply, decreasing in 8 of the last 9 weeks.

This index is down 50% over the last nine 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 even with the recent decline, the 4-week average of the purchase index is up almost 10% from a year ago.

by Calculated Risk on 7/09/2013 08:31:00 PM

Not a usual topic, but an interesting article from Nick Bilton at the NY Times: The Money Side of Driverless Cars

Washington, an average of six parking tickets are issued every minute of a normal workday. That is about 5,300 tickets on each of those days. Those slips of paper have added up to $80 million in parking fines a year, according to a report by AAA Mid-Atlantic.

As I noted in my Disruptions column this week, ”How Driverless Cars Could Reshape Cities,” the parking ticket could vanish from the future city as cars park themselves ...

According to the National Highway Traffic Safety Administration, 93 percent of all traffic accidents result from human error. If cars are smart enough to avoid accidents — and many researchers working on these cars believe they will be — the multibillion-dollar car insurance industry could completely change and be reimagined.

Smart cars will have a huge impact on some areas ... I hope this happens quickly!

Wednesday:
• At 7:00 AM ET, the Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index. Expect higher mortgage rates and a decline in refinance activity.

• At 10:00 AM, Monthly Wholesale Trade: Sales and Inventories for May. The consensus is for a 0.3% increase in inventories.

• At 2:00 PM, FOMC Minutes for Meeting of June 18-19, 2013 will be released. These will be scrutinized for timing of the tapering of QE3 asset purchases.

• At 4:10 PM, Fed Chairman Ben Bernanke will speak, A Century of U.S. Central Banking: Goals, Frameworks, Accountability, At the National Bureau of Economic Research Conference: The First 100 Years of the Federal Reserve: The Policy Record, Lessons Learned, and Prospects for the Future, Cambridge, Mass.

by Calculated Risk on 7/09/2013 06:24:00 PM

From San Francisco Fed President John Williams: A Defense of Moderation in Monetary Policy. From the abstract:

This paper examines the implications of uncertainty about the effects of monetary policy for optimal monetary policy with an application to the current situation. Using a stylized macroeconomic model, I derive optimal policies under uncertainty for both conventional and unconventional monetary policies. According to an estimated version of this model, the U.S. economy is currently suffering from a large and persistent adverse demand shock. Optimal monetary policy absent uncertainty would quickly restore real GDP close to its potential level and allow the inflation rate to rise temporarily above the longer-run target. By contrast, the optimal policy under uncertainty is more muted in its response. As a result, output and inflation return to target levels only gradually. This analysis highlights three important insights for monetary policy under uncertainty. First, even in the presence of considerable uncertainty about the effects of monetary policy, the optimal policy nevertheless responds strongly to shocks: uncertainty does not imply inaction. Second, one cannot simply look at point forecasts and judge whether policy is optimal. Indeed, once one recognizes uncertainty, some moderation in monetary policy may well be optimal. Third, in the context of multiple policy instruments, the optimal strategy is to rely on the instrument associated with the least uncertainty and use alternative, more uncertain instruments only when the least uncertain instrument is employed to its fullest extent possible.
emphasis added

Currently inflation is below the Fed's target (and is forecast to remain below the target), and unemployment is significantly above target (and forecast to remain above target). In general the current situation and forecasts would suggest more accommodation.

Williams argues because of uncertainty that current policy might be optimal. Note: Williams is an influential Fed president and has been supportive of QE.  Maybe ... but high unemployment is a serious problem now (and also keeps down wages for almost everyone), and I'd think monetary and fiscal policymakers would be discussing this daily.  With the current Congress, fiscal policy aimed at reducing unemployment is off the table, so all we have is monetary policy.   And now Williams is defending "moderation" ...

by Calculated Risk on 7/09/2013 03:54:00 PM

The Freddie Mac Weekly Primary Mortgage Market Survey® will be released on Thursday (the series I usually follow), but since everyone is curious about mortgage rates, here is a release from Zillow today: 30-Year Fixed Mortgage Rates Surge to Highest Level in 2 Years

Mortgage rates for 30-year fixed mortgages rose this week, with the current rate borrowers were quoted on Zillow Mortgage Marketplace at 4.41 percent, up from 4.17 percent at this same time last week.

The 30-year fixed mortgage rate hovered between 4.2 and 4.3 percent early last week and spiked at 4.6 percent on Friday before declining near the current rate early this week. The last time rates exceeded 4.4 percent was July 26, 2011.

“Rates surged on Friday after a stronger-than-expected jobs report and upward revisions to prior months’ unemployment levels,” said Erin Lantz, director of Zillow Mortgage Marketplace. “This week, rate movement will depend on whether Wednesday’s release of the Federal Open Market Committee meeting minutes and Fed Chairman Ben Bernanke’s speech reinforce or depress market expectations of a September start of easing federal stimulus.”

The ten year Treasury yield closed at 2.71% on Friday, but has fallen to 2.63% today.

by Calculated Risk on 7/09/2013 11:21:00 AM

From the BLS: Job Openings and Labor Turnover Summary

There were 3.8 million job openings on the last business day of May, little changed from April, the U.S. Bureau of Labor Statistics reported today. The hires rate (3.3 percent) and separations rate (3.2 percent) also were little changed in May. ...
...
Quits are generally voluntary separations initiated by the employee. Therefore, the quits rate can serve as a measure of workers’ willingness or ability to leave jobs. ...The number of quits (not seasonally adjusted) was little changed over the 12 months ending in May for total nonfarm, total private, government, and in all four regions.

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

This series started in December 2000.

Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. This report is for May, the most recent employment report was for June.

Click on graph for larger image.

Notice that hires (dark blue) and total separations (red and light blue columns stacked) are pretty close each month. This is a measure of turnover.  When the blue line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs.

Jobs openings increased in May to 3.828 million, up from 3.800 million in April. The number of job openings (yellow) has generally been trending up, but openings are only up 1% year-over-year compared to May 2012. 

Quits were up in May, and quits are up about 2% year-over-year. These are voluntary separations. (see light blue columns at bottom of graph for trend for "quits").

Not much changes month-to-month in this report - and the data is noisy month-to-month, but the general trend suggests a gradually improving labor market.

by Calculated Risk on 7/09/2013 09:50:00 AM

Reis reported that the apartment vacancy rate was unchanged in Q2. The vacancy rate was at 4.8% in Q2 2012 (a year ago) and peaked at 8.0% at the end of 2009.

Some data and comments from Reis Senior Economist Ryan Severino:

Vacancy was unchanged during first quarter at 4.3%. While the rate of vacancy compression has been slowing in recent quarters, this marks the first time that the quarterly vacancy rate has not fallen since the first quarter of 2010. Over the last four quarters national vacancies have declined by 50 basis points, a bit slower than last quarter's year‐over‐year decline in vacancy of 70 basis points. This dynamic is somewhat to be expected ‐ as the market gets tighter and tighter, it becomes increasingly difficult for vacancy to continue falling at a high rate as vacant units, or at least palatable vacant units, disappear from the market.

The aforementioned stalling in vacancy decline is more a function of increasingly supply than decreasing demand. On the demand side, the sector absorbed 31,973 units in the second quarter, about on par with absorption from one year ago during 2Q2012 and down slightly from the 39,319 units that were absorbed during the first quarter of 2013. Year‐to‐date, the sector has absorbed more units in 2013 than were absorbed through this point in 2012. However, new construction is finally starting to pick up a bit. Completions during the second quarter were 26,584 units, an increase relative to last quarter's 16,578 units and slightly below the 29,523 units that were delivered during the fourth quarter of 2012. This appears to be the front end of the relatively large wave of new supply that is estimated to come online over the next few years.

Asking and effective rents grew by 0.6% and 0.7%, respectively, during the second quarter. This is a slight increase relative to the first quarter when asking and effective rents grew by 0.5% and 0.6%, respectively. However, during the last few quarters rent growth has slowed relative to the mini‐spike that was observed during mid‐2012

Click on graph for larger image.

This graph shows the apartment vacancy rate starting in 1980. (Annual rate before 1999, quarterly starting in 1999). Note: Reis is just for large cities.

New supply is finally coming on the market and the vacancy rate has stopped falling (at least for one quarter).

Apartment vacancy data courtesy of Reis.

by Calculated Risk on 7/09/2013 08:19:00 AM

From the National Federation of Independent Business (NFIB): Small Business Optimism Drops in June, Ends 2 Months of Increases

Small-business optimism remained in tepid territory in June, as NFIB’s monthly economic Index dropped just under a point (0.9) and landed at 93.5 ...

Job creation plans rose 2 points to a net 7% planning to increase total employment, better, but still a weak reading.
...
Five percent of the owners reported that all their credit needs were not met, unchanged and the lowest reading since February 2008.

In a little sign of good news, only 18% of owners reported weak sales as the top problem (lack of demand).  During good times, small business owners usually complain about taxes and regulations - and those are now the top problems again.

Click on graph for larger image.

This graph shows the small business optimism index since 1986. The index decreased to 93.5 in June from 94.4 in May.   This is still low, but just below the post-recession high.

Note: Small businesses have a larger percentage of real estate and retail related companies than the overall economy. 

by Calculated Risk on 7/08/2013 08:57:00 PM

From Nick Timiraos at the WSJ: Why Home-Price Gains Will Slow Amid Higher Mortgage Rates. Timiraos suggests seven areas to watch, here are a few:

4. What does this mean for investors? If anyone gains, it could be investors that have been buying up cheap homes as rental properties. “I see investors licking their chops,” said Redfin’s Mr. Kelman. “Investors were really getting frustrated this spring trying to compete against all this funny money” from low rates. Also, to the extent that rising rates freeze would-be buyers out of the market, that should help increase rental demand.

There have been signs, however, that higher home prices have prompted investors to dial back their purchases because it’s become more difficult to dig up bargains, even before rates began to rise.

[CR: I disagree that this is good for investors. I think higher rates will slow investor buying because of competing returns on other investments.]

5. How fast will inventory rise? Even before rates increased, the number of homes offered for sale was rising at a slightly faster pace than it normally does during the spring, even though inventory in May was still around 10% below last year’s level. One sign that inventory has picked up is that competitive offer situations are dropping. The share of offers written by Redfin agents that faced a competing offer fell to 69.5% of offers in May, down from 73.3% in April. One year ago, some 69.3% of offers faced at least one competing bid.

Markets that have seen larger increases in listings have seen even bigger declines in multiple-bid situations. In Orange County, Calif., where the inventory of homes for sale is up by more than one third since March, some 84% of homes where Redfin agents wrote an offer in May had competing bids, compared to 94% in April. In San Diego, some 73% of offers in May had multiple offers, compared to 87% in April.

[CR: I think inventory is key]

6. Is this the end of the housing rebound? [CR short answer: no]

Tuesday:
• Early: Reis Q2 2013 Apartment Survey of rents and vacancy rates.

• At 7:30 AM ET, NFIB Small Business Optimism Index for June. The consensus is for an increase to 94.7 from 94.4 in May.

• At 10:00 AM, the Job Openings and Labor Turnover Survey for May from the BLS. The number of job openings has generally been trending up.

by Calculated Risk on 7/08/2013 06:24:00 PM

From Tim Duy at Economist's View: On That September Tapering. A few excerpts:

I think September is the date to begin tapering, and the data flow would need to turn notably downward to forestall a policy shift at that time. I think it is important to recognize that the Federal Reserve is treating quantitative easing and interest rates as two very separate policies, and each has its own relevant data. ...
...
[Q]uantitative easing has always been primarily about the job market and mitigating downside risks, essentially putting a floor under the economy.
...
More to the point, however, is that they are not entirely comfortable with quantitative easing and want to quickly bring the program to a conclusion. Hence the bar to ending quantitative easing is relative low now. They are more comfortable with zero interest rates, and thus have a relatively high bar for changing interest rates.

In short, to accept a September tapering as a data dependent decision, you need to accept that the data threshold is relatively low and differs from the threshold for interest rate policy. They are two separate policies. Consequently, we don't need to see substantially better data to forestall a September taper, but instead substantially worse data.
...
Bottom Line: The Federal Reserve is having a difficult time convincing market participants that quantitative easing and interest rates represent two separate policy tools. They want to severe the perception that the two are connected - a reduction in the pace of asset purchases thus does not signal a change in the expected lift-off from the zero bound. Understanding that the two policies are different is, I think, key to understanding why the Fed is heading toward a September tapering despite what many view as an overall subpar economic environment.

Duy makes a strong argument, and he is correct that market participants frequently seem to confuse the two Fed tools (it doesn't seem confusing to me).

However, Bernanke stated:

"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."

I guess it depends on what "broadly consistent" means. Clearly the economy is already under performing the Fed's forecast, and if "broadly consistent" means the lower bound of their forecasts, the economy would have to pickup significantly in July and August to taper in September. Of course "broadly consistent" could mean a fairly large miss ...

by Calculated Risk on 7/08/2013 02:10:00 PM

Weekly Update: One of key questions for 2013 is Will Housing inventory bottom this year?. Since this is a very important question, I'm tracking inventory weekly in 2013. 

There is a clear seasonal pattern for inventory, with the low point for inventory in late December or early January, and then peaking in mid-to-late summer.

The Realtor (NAR) data is monthly and released with a lag (the most recent data was for May).  However Ben at Housing Tracker (Department of Numbers) has provided me some weekly inventory data for the last several years. This is displayed on the graph below as a percentage change from the first week of the year (to normalize the data).

In 2010 (blue), inventory increased more than the normal seasonal pattern, and finished the year up 7%. However in 2011 and 2012, there was only a small increase in inventory early in the year, followed by a sharp decline for the rest of the year.

Click on graph for larger image.

Note: the data is a little weird for early 2011 (spikes down briefly).

So far in 2013, inventory is up 16.3%, and I expect some further increases over the next couple of months.

Inventory is well above the peak percentage increases for 2011 and 2012 and this suggests to me that inventory is near the bottom. It now seems likely - at least by this measure - that inventory bottomed early this year. 

It is important to remember that inventory is still very low, and is down 12.4% from the same week last year according to Housing Tracker.  Once inventory starts to increase (more than seasonal), I expect price increases to slow.