by Calculated Risk on 7/31/2013 07:01:00 AM

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

Mortgage applications decreased 3.7 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending July 26, 2013. ...

The Refinance Index decreased 4 percent from the previous week. The seasonally adjusted Purchase Index decreased 3 percent from one week earlier.
...
“Mortgage rates were little changed last week, but remain roughly one percentage point higher than they were three months ago,” said Mike Fratantoni, MBA’s Vice President of Research and Economics. “Refinance application volume continues to decline, with the refinance index now more than 55 percent lower than its recent peak, reaching the lowest level in over two years. Applications for home purchases dropped for the fourth time in five weeks, but purchase volume is running about 5 percent higher than last year at this time.”
...
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) was unchanged at 4.58 percent, with points decreasing to 0.38 from 0.40 (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.

With 30 year mortgage rates up over the last 3 months, refinance activity has fallen sharply, decreasing in 11 of the last 12 weeks.

This index is down 57% over the last twelve 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 (but down over the last several weeks), and the 4-week average of the purchase index is up about 5% from a year ago.

by Calculated Risk on 7/30/2013 09:06:00 PM

Here are two excellent articles. Really long term readers (back in 2005 and 2006) will remember my posts about contacting regulators about housing, and discussions of the Non-traditional Mortgage Guidance (when it was finally released). The first article mentions Janet Yellen's reaction to the guidance.  Yellen had the same reaction as Tanta to the guidance (my former co-blogger). The second article discusses when Yellen was more hawkish than Greenspan in the '90s.

From Cardiff Garica at FT Alphaville: Already-strong case for Yellen strengthens further, and a word about the inanity of “market” preferences

Alan Blinder:

Fast forward to her days leading the San Francisco Fed, where she warned, as early as 2005, that the titanic real-estate market was heading for an iceberg. Ms. Yellen was frustrated that the Fed’s Board of Governors would not even issue regulatory guidance to curb disgraceful lending practices like piggyback loans that exceeded 100% of the house’s value, or loans with little or no documentation. When the board finally did so, she was dismayed at how weak the guidance was. She later told the Financial Crisis Inquiry Committee: “You could take it out and rip it up and throw it in the garbage can.” The guidance, she added, “wasn’t of any use” to the San Francisco Fed.

And from Neil Irwin at the WaPo: Why we shouldn’t think of central bankers as hawks and doves

For example, Janet Yellen, the current Fed vice-chair, is viewed in markets as an uber-dove because she has been a strong advocate of the Fed’s unconventional monetary easing to try to help the job market. But it wasn’t always so. Larry Meyer served as a Fed governor with Yellen in the 1990s. In 1996, the two of them had concluded that the Fed needed to raise interest rates to fight the threat of inflation. They went to Alan Greenspan and told him of their concerns, threatening to dissent at a future meeting unless there was a rate increase. They lost the argument, but it is a sign that while Yellen may be a dove right now, the same would not be true in all states of the world.

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

• At 8:15 AM, the ADP Employment Report for July. This report is for private payrolls only (no government). The consensus is for 179,000 payroll jobs added in July, down from 188,000 in June.

• At 8:30 AM, the BEA will release the advance estimate of Q2 GDP. The consensus is that real GDP increased 1.1% annualized in Q2. This report will includes a Comprehensive Revision from 1929 through 1st quarter 2013.

• At 9:45 AM, the Chicago Purchasing Managers Index (PMI) for July. The consensus is for an increase to 54.0, up from 51.6 in June.

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

Earlier on House Prices:
• Case-Shiller: Comp 20 House Prices increased 12.2% year-over-year in May
• Comment on House Prices: Real Prices, Price-to-Rent Ratio, Cities

by Calculated Risk on 7/30/2013 06:06:00 PM

The Case-Shiller house price indexes for May were released this morning. Zillow has started forecasting Case-Shiller a month early - and I like to check the Zillow forecasts since they have been pretty close. Note: Zillow makes a strong argument that the Case-Shiller index is currently overstating national house price appreciation.

Zillow Predicts Another 12% Annual Increase in Case-Shiller Indices for June

The Case-Shiller data for May came out this morning and, based on this information and the June 2013 Zillow Home Value Index (released last week), we predict that next month’s Case-Shiller data (June 2013) will show that the 20-City Composite Home Price Index (non-seasonally adjusted [NSA]) increased 12.1 percent on a year-over-year basis, while the 10-City Composite Home Price Index (NSA) increased 12 percent on a year-over-year basis. The seasonally adjusted (SA) month-over-month change from May to June will be 1.1 percent for the 20-City Composite and 1.2 percent for the 10-City Composite Home Price Indices (SA). All forecasts are shown in the table below. Officially, the Case-Shiller Composite Home Price Indices for June will not be released until Tuesday, Aug. 27.
...
The Case-Shiller indices are giving an inflated sense of national home value appreciation because they are biased toward the large, coastal metros currently seeing such enormous home value gains, and because they include foreclosure resales. The inclusion of foreclosure resales disproportionately boosts the index when these properties sell again for much higher prices — not just because of market improvements, but also because the sales are no longer distressed. We are seeing this issue especially in regions where home graphvalues fell drastically, producing a large number of foreclosures, which are now selling as normal sales after REOs (foreclosure resales) amidst extremely high home value appreciation. These areas include parts of California, Phoenix and Las Vegas. In contrast, the ZHVI does not include foreclosure resales and shows home values for June 2013 up 5.8 percent from year-ago levels. We expect home value appreciation to continue to moderate a bit in 2013, rising 5 percent between June 2013 and June 2014. Further details on our forecast of home values can be found here, and more on Zillow’s full June 2013 report can be found here.
...
To forecast the Case-Shiller indices, we use the May Case-Shiller index level, as well as the June Zillow Home Value Index (ZHVI), which is available more than a month in advance of the Case-Shiller index, paired with June foreclosure resale numbers, which Zillow also publishes more than a month prior to the release of the Case-Shiller index. Together, these data points enable us to reliably forecast the Case-Shiller 10-City and 20-City Composite indices.

The following table shows the Zillow forecast for the June Case-Shiller index.

Zillow June Forecast for Case-Shiller Index
		Case Shiller Composite 10		Case Shiller Composite 20
		NSA	SA	NSA	SA
Case Shiller (year ago)	June 2012	154.94	154.07	142.37	141.37
Case-Shiller (last month)	May 2013	169.69	170.62	156.14	157.01
Zillow Forecast	YoY	12.0%	12.0%	12.1%	12.1%
	MoM	2.2%	1.2%	2.3%	1.1%
Zillow Forecasts1		173.5	172.6	159.7	158.6
Current Post Bubble Low		146.46	149.61	134.07	136.85
Date of Post Bubble Low		Mar-12	Jan-12	Mar-12	Jan-12
Above Post Bubble Low		18.4%	15.4%	19.1%	15.9%
1Estimate based on Year-over-year and Month-over-month Zillow forecasts

by Calculated Risk on 7/30/2013 03:40:00 PM

Some interesting comments on inventory in an article by Nick Timiraos at the WSJ: Home Prices Jump, but Headwinds Build

For now, inventories remain extremely tight in a majority of the nation's major housing markets. The Wall Street Journal's survey of quarterly housing-market conditions in 28 metro areas found that Phoenix, Seattle, Denver, and Sacramento, Calif., had less than a 2.5-month supply of homes for sale at the current sales pace. Dallas, Los Angeles, San Diego, Washington, D.C., and Orlando, Fla., had less than three months of supply, according to data compiled by John Burns Real Estate Consulting in Irvine, Calif.
...
There are signs inventory declines will ease as price gains increase. In Sacramento, Calif., the number of homes for sale in June stood 7.5% above the level of a year ago, while inventories in Atlanta rose 9.7%. ...

In Orange County, Calif., inventories have increased 68% since March, standing roughly unchanged from year-ago levels at the end of June and reversing what had been a large year-over-year drop. Steven Thomas, a local housing analyst, says buyers are growing frustrated because sellers are getting greedy. "There is a drought of properly priced homes," he wrote in a recent report. Reports of rising home prices "have enticed a herd of homeowners to come on the market who all have thrown discretion out the door."

Angela Creech, a real-estate agent with Redfin in Irvine, Calif., says she's refused more listings in the past month because sellers are asking for too much money. "There are more really unrealistic sellers," she said.

I think we've seen the bottom for inventories in many areas, but many of the new listings are overpriced (no offer in the first 30 to 60 days suggests the property is overpriced).

by Calculated Risk on 7/30/2013 12:45:00 PM

The Census Bureau released the Housing Vacancies and Homeownership report for Q2 2013 this morning.

This report is frequently mentioned by analysts and the media to track the homeownership rate, and the homeowner and rental vacancy rates.  However, there are serious questions about the accuracy of this survey.

This survey might show the trend, but I wouldn't rely on the absolute numbers.  The Census Bureau is investigating the differences between the HVS, ACS and decennial Census, and analysts probably shouldn't use the HVS to estimate the excess vacant supply, or rely on the homeownership rate, except as a guide to the trend.

Click on graph for larger image.

The Red dots are the decennial Census homeownership rates for April 1st 1990, 2000 and 2010. The HVS homeownership rate was unchanged at 65.0% in Q2.

I'd put more weight on the decennial Census numbers and that suggests the actual homeownership rate is probably in the 64% to 65% range - and given changing demographics, the homeownership rate is probably close to a bottom.

The HVS homeowner vacancy rate decreased to 1.9% in Q2 from 2.1% in Q1. 

It isn't really clear what this means. Are these homes becoming rentals?

Once again - this probably shows that the trend is down, but I wouldn't rely on the absolute numbers.

The rental vacancy rate declined in Q2 to 8.2%, from 8.6% in Q1.

I think the Reis quarterly survey (large apartment owners only in selected cities) is a much better measure of the rental vacancy rate - and Reis reported that the rental vacancy rate is at the lowest level since 2001.

The quarterly HVS is the most timely survey on households, but there are many questions about the accuracy of this survey. Unfortunately many analysts still use this survey to estimate the excess vacant supply. However this does suggest that most of the bubble excess is behind us.

Earlier on House Prices:
• Case-Shiller: Comp 20 House Prices increased 12.2% year-over-year in May
• Comment on House Prices: Real Prices, Price-to-Rent Ratio, Cities

by Calculated Risk on 7/30/2013 10:59:00 AM

First a comment from Zillow Economist Dr. Svenja Gudell:

“Three straight months of national home value appreciation above 10 percent is not normal, not sustainable and, frankly, not very believable. As the overall housing market continues to improve, the impact of foreclosure re-sales on the Case-Shiller indices continues to be pronounced, as homes previously sold under duress trade again under more normal circumstances, leading to inflated and misleading markups in price,” said Zillow Senior Economist Svenja Gudell. “It’s increasingly critical that the average American homeowner not read numbers like today’s Case-Shiller results and assume their homes must also have appreciated at these levels over the past year, or will continue to appreciate at these levels going forward. In reality, typical home values have appreciated at roughly half this pace for the past several months, which is still very robust. Looking ahead, a combination of rising mortgage interest rates, flagging investor demand and more inventory entering the market will all help to moderate the pace of home value appreciation and stabilize the market.”
emphasis added

I agree with Gudell on these two key points: 1) I also think right now the Case-Shiller index is overstating price increases for most homeowners (both because of the handling of distressed sales and weighting of some coastal areas), and 2) I also think price appreciation will slow going forward.

I also think it is important to look at prices in real terms (inflation adjusted).  Case-Shiller, CoreLogic and others report nominal house prices.  As an example, if a house price was $200,000 in January 2000, the price would be close to $275,000 today adjusted for inflation. 

Earlier: Case-Shiller: Case-Shiller: Comp 20 House Prices increased 12.2% year-over-year in May

Nominal House Prices

The first graph shows the quarterly Case-Shiller National Index SA (through Q1 2013), and the monthly Case-Shiller Composite 20 SA and CoreLogic House Price Indexes (through May) in nominal terms as reported.

In nominal terms, the Case-Shiller National index (SA) is back to Q3 2003 levels (and also back up to Q4 2008), and the Case-Shiller Composite 20 Index (SA) is back to March 2004 levels, and the CoreLogic index (NSA) is back to May 2004.

Real House Prices

The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices.

In real terms, the National index is back to Q2 2000 levels, the Composite 20 index is back to October 2001, and the CoreLogic index back to February 2002.

In real terms, house prices are back to early '00s levels.

Price-to-Rent

In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

Here is a similar graph using the Case-Shiller National, Composite 20 and CoreLogic House Price Indexes.

This graph shows the price to rent ratio (January 1998 = 1.0).

On a price-to-rent basis, the Case-Shiller National index is back to Q2 2000 levels, the Composite 20 index is back to April 2002 levels, and the CoreLogic index is back to June 2002.

In real terms - and as a price-to-rent ratio - prices are mostly back to early 2000 levels.

Nominal Prices: Cities relative to Jan 2000


The last graph shows the bubble peak, the post bubble minimum, and current nominal prices relative to January 2000 prices for all the Case-Shiller cities in nominal terms.

As an example, at the peak, prices in Phoenix were 127% above the January 2000 level. Then prices in Phoenix fell slightly below the January 2000 level, and are now up 35% above January 2000.  Two cities - Denver and Dallas - are at new highs (no other Case-Shiller Comp 20 city is close).  Detroit prices are still below the January 2000 level.

by Calculated Risk on 7/30/2013 09:00:00 AM

S&P/Case-Shiller released the monthly Home Price Indices for May ("May" is a 3 month average of March, April and May prices).

This release includes prices for 20 individual cities, two composite indices (for 10 cities and 20 cities).

Note: Case-Shiller reports Not Seasonally Adjusted (NSA), I use the SA data for the graphs.

From S&P: Home Prices Continue to Increase in May 2013 According to the S&P/Case-Shiller Home Price Indices

Data through May 2013, released today by S&P Dow Jones Indices for its S&P/Case-Shiller Home Price Indices ... showed increases of 2.5% and 2.4% for the 10- and 20-City Composites in May versus April. Dallas and Denver reached record levels surpassing their pre-financial crisis peaks set in June 2007 and August 2006. ...

The 10- and 20-City Composites annual returns rose slightly from April to May as they posted the best year-over-year gains since March 2006. All 20 cities increased from May 2012 to May 2013 and from April 2013 to May 2013. ...

“Home prices continue to strengthen,” says David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices. “Two cities set new highs, surpassing their pre-crisis levels and five cities – Atlanta, Chicago, San Diego, San Francisco and Seattle – posted monthly gains of over three percent, also a first time event. ... “The overall report points to some shifts among various markets: Washington DC is no longer the standout leader and the eastern Sunbelt cities, Miami and Tampa, are lagging behind their western counterparts.”

All 20 cities showed positive monthly returns for May. Ten cities – Chicago, Denver, Detroit, Las Vegas, Miami, New York, Phoenix, Portland, Seattle and Tampa – showed acceleration. Chicago posted an impressive monthly rate of 3.7% in May; it was higher than in April by one percentage point. Miami and Seattle had their largest monthly gains since August 2005 and April 1990, respectively.

Click on graph for larger image.

The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 24.8% from the peak, and up 1.1% in May (SA). The Composite 10 is up 14.0% from the post bubble low set in Jan 2012 (SA).

The Composite 20 index is off 24.0% from the peak, and up 1.0% (SA) in May. The Composite 20 is up 14.7% from the post-bubble low set in Jan 2012 (SA).

The second graph shows the Year over year change in both indices.

The Composite 10 SA is up 11.8% compared to May 2012.

The Composite 20 SA is up 12.2% compared to May 2012. This was the twelfth consecutive month with a year-over-year gain and this was the largest year-over-year gain for the Composite 20 index since 2006. 

Prices increased (SA) in 18 of the 20 Case-Shiller cities in May seasonally adjusted. Prices in Las Vegas are off 51.4% from the peak, and prices in Denver and Dallas are at new highs.

This was close to the consensus forecast for a 12.3% YoY increase. I'll have more on prices later.

by Calculated Risk on 7/29/2013 09:48:00 PM

Some horrible reporting on the next Fed Chair decision, first from he usually excellent Binyamin Appelbaum and Annie Lowrey at the NY Times who wrote:

Richard W. Fisher, president of the Federal Reserve Bank of Dallas, said this year that if the president chose Ms. Yellen, the decision would be “driven by gender.”

What Fisher actually said (NY Times correction):

“It’s a presidential decision, and we’ll see if it is driven by gender or other considerations and so on. Janet is extremely capable. There are other capable people.”

And from the WSJ:

Nancy Pelosi has bellowed her support [for Yellen]

What Pelosi actually said:

I want to see whomever the President appoints.  Let me say that I think it would be great to have a woman, first woman chairman of the Fed. No question about it. Yellen would be, is extremely talented, it is not just that she is a woman. Larry Summers has been a patriotic leader in our country, working hard. ... Either one would make an excellent Chairman I'm sure.

Pretty poor reporting ...

Tuesday:
• At 9:00 AM ET, S&P/Case-Shiller House Price Index for May. Although this is the May report, it is really a 3 month average of March, April and May. The consensus is for a 12.3% year-over-year increase in the Composite 20 index (NSA) for May. The Zillow forecast is for the Composite 20 to increase 12.1% year-over-year, and for prices to increase 1.3% month-to-month seasonally adjusted.

• At 10:00 AM, the Conference Board's consumer confidence index for July. The consensus is for the index to decrease to 81.0 from 81.4.

• Also at 10:00 AM, the Q2 Housing Vacancies and Homeownership report from the Census Bureau. This report is frequently mentioned by analysts and the media to report on the homeownership rate, and the homeowner and rental vacancy rates. However, this report doesn't track with other measures (like the decennial Census and the ACS) and this survey probably shouldn't be used to estimate the excess vacant housing supply.

by Calculated Risk on 7/29/2013 04:50:00 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 June).  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 17.6%, and I expect some further increases over the next month or two.

It now seems likely that inventory bottomed early this year. 

It is important to remember that inventory is still very low, and is down 11% from the same week last year according to Housing Tracker.  Once inventory starts to increase (more than seasonal), I expect price increases to slow.

by Calculated Risk on 7/29/2013 02:41:00 PM

Jon Hilsenrath and Kristina Peterson write about a "WSJ analysis of more than 700 economic predictions between 2009 and 2012 by Fed policymakers shows ... Janet Yellen ... the most prescient": Federal Reserve 'Doves' Beat 'Hawks' in Economic Prognosticating

As the U.S. emerged from recession in the summer of 2009, Janet Yellen, then president of the Federal Reserve Bank of San Francisco, took a grim view of the economy's prospects.

"I expect the pace of the recovery will be frustratingly slow," she said in a San Francisco speech. A month later, addressing fears that money flooding into the economy from the Federal Reserve would stoke inflation, Ms. Yellen said not to worry in a speech to Idaho bankers: High unemployment and the weak economy would tamp wages and prices.

Others at the Fed spoke forcefully in the other direction. Unless the central bank reversed the easy money course, Philadelphia Fed President Charles Plosser warned in December 2009, "the inflation rate is likely to rise to levels that most would consider unacceptable."

Ms. Yellen was proved right.

A few comments:

1) The title of the article is about 'Doves' beating 'Hawks'. A good Fed Chair would be hawkish (raise rates) or dovish (lower rates) at the correct times. Over the period in question, 'dove' was synonymous with 'correct'. But no one should think Yellen is a perma-dove. As Professor Hamilton noted this weekend (He knows Yellen), she will certainly change her mind as circumstances change.

2)  It is important to remember that Yellen was ahead of most other Fed presidents in the period between 2005 and 2008 (before this WSJ analysis).  In 2005 Yellen was expressing concerns about housing, "analyses do indicate that house prices are abnormally high—that there is a "bubble" element, even accounting for factors that would support high house prices", and 'ghost towns' of the West in 2006. In 2007 she gave a speech correctly identifying some of the spillover effects from subprime.

3) This doesn't mean Yellen has a "crystal ball".  She doesn't.  Instead this means she has a strong understanding of macroeconomics and paid close attention to the data. A key for any successful manager is to be able to use a wide-angle lens (see the big picture) and also to be able to zoom in on the details (data driven) when necessary. Yellen's track record suggests to me that she excels at both.