by Calculated Risk on 9/19/2013 02:27:00 PM

First, the higher than consensus headline sales number was not surprising, although this was even above Lawler's estimate (see Lawler: Early Look at Existing Home Sales in August).

Second, the strong sales rate in August is not a sign that higher mortgage rates have had no impact on sales.  The NAR reports CLOSED sales, and the usual escrow period is 45 to 60 days.  Mortgage rates didn't start increasing until the 2nd half of May, and were still below 4% in mid-June (see Freddie Mac Weekly Primary Mortgage Market Survey®), so buyers could have locked in rates in early June - and pushed to close in August.

I expect sales to decline in September, and a further decline in a couple of months. From CNBC:

"We are getting early signals from lock boxes that show a significant change in direction in August," said Lawrence Yun, chief economist for the National Association of Realtors, referring to the small key boxes that hang on the doors of for-sale homes. The number of times they were opened in August dropped dramatically, signaling a big drop in potential buyer traffic.

But that doesn't mean the housing recovery is over. What matters for jobs and the economy are new home sales, not existing home sales.  And I expect the housing recovery to continue.

The key number in the existing home sales report is inventory (not sales), and the NAR reported that inventory increased slightly in August from July, and is only down 6.3% from August 2012.  This is the smallest year-over-year decline since March 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.

When will the NAR report a year-over-year increase in inventory?   Soon.  Inventory usually declines seasonally in September from August, but I think the decline will be less than usual this year.   Last year, the NAR reported September inventory at 2.17 million.  For August 2013, the NAR reported  2.25 million.  So inventory could decline a little in September and still be up year-over-year.  I'm guessing inventory will be up year-over-year in the September report (or maybe October).

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 13.2% from August 2012, but conventional sales are probably up close to 30% from August 2012, and distressed sales down.  The NAR reported (from a survey):

Distressed homes – foreclosures and short sales – accounted for 12 percent of August sales, down from 15 percent in July, and is the lowest share since monthly tracking began in October 2008; they were 23 percent in August 2012.

Although this survey isn't perfect, if total sales were up 13.2% from August 2012, and distressed sales declined to 12% of total sales (12% of 5.48 million) from 23% (23% of 4.84 million in August 2012), this suggests conventional sales were up sharply year-over-year - a good sign. 

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

Click on graph for larger image.

Sales NSA in August (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, but it is still too early to tell about the impact of higher mortgage rates on sales.  Inventory is still low, but the year-over-year decline in inventory is decreasing - and will turn positive soon (indicating inventory bottomed earlier this year).

Earlier:
• Existing Home Sales in August: 5.48 million SAAR, 4.9 months of supply

by Calculated Risk on 9/19/2013 12:05:00 PM

Note: I'll have more on existing home sales later. This was released earlier this morning ...

From the Philly Fed: September Manufacturing Survey

Manufacturing activity picked up in September, according to firms responding to this month’s Business Outlook Survey. The survey’s broadest indicators for general activity, new orders, shipments, and employment were all positive and higher than in August. The survey's indicators of future activity were significantly higher, suggesting improved optimism about growth over the next six months.

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from 9.3 in August to 22.3 this month. The index has now been positive for four consecutive months and is at its highest reading since March 2011. ... The demand for manufactured goods, as measured by the current new orders index, increased 16 points, to 21.2.

Labor market indicators showed improvement this month. The current employment index increased 7 points, to 10.3, its highest reading since April of last year.
emphasis added

This was above the consensus forecast of a reading of 10.0 for September.
Click on graph for larger image.

Here is a graph comparing the regional Fed surveys and the ISM manufacturing index. The dashed green line is an average of the NY Fed (Empire State) and Philly Fed surveys through September. The ISM and total Fed surveys are through August.

The average of the Empire State and Philly Fed surveys has been positive for four consecutive months and near the high for the last 2+ years.  This suggests further solid expansion in the ISM report for September.

by Calculated Risk on 9/19/2013 10:00:00 AM

The NAR reports: August Existing-Home Sales Rise, Limited Inventory Continues to Push Prices

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 1.7 percent to a seasonally adjusted annual rate of 5.48 million in August from 5.39 million in July, and are 13.2 percent higher than the 4.84 million-unit level in August 2012.

Total housing inventory at the end of August increased 0.4 percent to 2.25 million existing homes available for sale, which represents a 4.9-month supply at the current sales pace, down from a 5.0-month supply in July. Unsold inventory is 6.3 percent below a year ago, when there was a 6.0-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 August 2013 (5.48 million SAAR) were 1.7% higher than last month, and were 13.2% above the August 2012 rate.

The second graph shows nationwide inventory for existing homes.

According to the NAR, inventory increased to 2.25 million in August up from 2.24 million in July.   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 third 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 6.25% year-over-year in August compared to August 2012. This is the 30th consecutive month with a YoY decrease in inventory, and the smallest YoY decrease since early 2011 (I expect the YoY change in inventory to turn positive soon).

Months of supply was at 4.9 months in August.

This was above expectations of sales of 5.25 million (economist Tom Lawler's forecast was closer than the consensus).  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 9/19/2013 08:30:00 AM

The DOL reports:

In the week ending September 14, the advance figure for seasonally adjusted initial claims was 309,000, an increase of 15,000 from the previous week's revised figure of 294,000. The 4-week moving average was 314,750, a decrease of 7,000 from the previous week's revised average of 321,750.

The previous week was revised up from 292,000.

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 decreased to 314,750.

The 4-week average is at the lowest level since October 2007 (before the recession started).  Claims were below the 341,000 consensus forecast.

Here is a long term graph of the 4-week average of weekly unemployment claims back to 1971.

by Calculated Risk on 9/18/2013 08:29:00 PM

From Mark Thoma at Economist'sView: Why Didn't the Fed Begin Tapering?

Here's why I think they delayed: ... 1. Fiscal policy. ... 2. Inflation and unemployment. ... 3. The Fed is gun shy. ...4. Capital flight from developing markets.

From Tim Duy at Economist'sView: No Taper - Yet

Two significant factors that held the FOMC in check were fiscal policy and higher interest rates.

And from Binyamin Appelbaum at the NY Times: In Surprise, Fed Decides Not to Curtail Stimulus Effort

[T]he Fed said Wednesday that it would postpone any retreat from its monetary stimulus campaign for at least another month and quite possibly until next year. The Fed’s chairman, Ben S. Bernanke, emphasized that economic conditions were improving. But he said the Fed still feared a turn for the worse.

He noted that Congressional Republicans and the White House were hurtling toward an impasse over government spending.  ... And the Fed undermined its own efforts when it declared in June that it intended to begin a retreat by the end of the year, causing investors to begin immediately demanding higher interest rates on mortgage loans and other financial products, a trend that the Fed said Wednesday was threatening to slow the economy.

The fiscal policy deadlines will have passed - and the issues probably resolved - by the time the Fed meets in late October.

Thursday:
• 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for claims to increase to 341 thousand from 292 thousand last week.

• At 10:00 AM, Existing Home Sales for August from the National Association of Realtors (NAR). The consensus is for sales of 5.25 million on seasonally adjusted annual rate (SAAR) basis. Economist Tom Lawler estimates the NAR will report sales at a 5.35 million annual rate (SAAR).

• Also at 10:00 AM, the Philly Fed manufacturing survey for September will be released. The consensus is for a reading of 10.0, up from 9.3 last month (above zero indicates expansion).

by Calculated Risk on 9/18/2013 03:49:00 PM

• At the June FOMC press conference, Fed Chairman Ben Bernanke said (emphasis added):

"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."

• At the press conference today, Bernanke said the data was "close" to being consistent with their forecasts, but that the committee would like further confirmation before starting to reduce asset purchases. Bernanke said it is still “possible” to start reducing asset purchase this year, but that “there is no fixed calendar schedule". This seems a little less certain of starting to taper this year than Bernanke's comments in June.

• Bernanke made it clear that the committee considers all FOMC meetings important, not just meetings with a scheduled press conference. He said a conference call (or briefing) could be arranged if the press needed to ask questions following a meeting with no scheduled press briefing. Bernanke said: "We certainly could arrange a public, on-the-record conference call or some other way of answering the media's questions." This suggests that the FOMC could start to taper at the October meeting even though there is no scheduled press conference (Oct 29th and 30th), or wait until December - or even next year - depending on the incoming data.

• It seems one of the reasons the Fed didn't taper was because they wanted to see the results of the current budget negotiations. It is possible that Congress will shut down the government (not catastrophic if it lasts a few days). However, as Bernanke noted, "failing to pay the bills" could have "very serious consequences". Both of these fiscal issues should be resolved prior to the October FOMC meeting. Note: I'm not concerned about Congress not "paying the bills" (aka Debt Ceiling), because failure to pay the bills would be the end of the Republican party - so it won't happen (several leaders in the GOP have acknowledged this). However there is some possibility of shutting down the government (probably just a threat, but not impossible).

• Inflation below target remains a key issue, and it is possible the Fed will wait on tapering if inflation doesn't move up a little.

• Bernanke hopes to comment on his future soon. I expect Fed Vice Chair Janet Yellen to be nominated by President Obama for Fed Chair next week (asking Bernanke to stay is a remote possibility).

by Calculated Risk on 9/18/2013 02:13:00 PM

The key sentence in the announcement was: "the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases".

With the downgrade to GDP and inflation (for 2014), it makes sense that the Fed decided to wait for more data.

As far as the "Appropriate timing of policy firming", the participants moved out a little with two participants now seeing the first increase in 2016.

Bernanke press conference here or watch below. 



Free desktop streaming application by Ustream

On the projections, GDP was revised down for 2013 and 2014, the unemployment rate was revised down slightly, and inflation was revised down for 2014. 

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in Real GDP1	2013	2014	2015	2016
Sept 2013 Meeting Projections	2.0 to 2.3	2.9 to 3.1	3.0 to 3.5	2.5 to 3.3
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

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 7.3% in August. 

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment Rate2	2013	2014	2015	2016
Sept 2013 Meeting Projections	7.1 to 7.3	6.4 to 6.8	5.9 to 6.2	5.4 to 5.9
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

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	2016
Sept 2013 Meeting Projections	1.1. to 1.2	1.3 to 1.8	1.6 to 2.0	1.7 to 2.0
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

Here is core inflation:

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core Inflation1	2013	2014	2015	2016
Sept 2013 Meeting Projections	1.2 to 1.3	1.5 to 1.7	1.7 to 2.0	1.9 to 2.0
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

by Calculated Risk on 9/18/2013 02:00:00 PM

FOMC Statement:

Information received since the Federal Open Market Committee met in July suggests that economic activity has been expanding at a moderate pace. Some indicators of labor market conditions have shown further improvement in recent months, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen further and fiscal policy is restraining economic growth. Apart from fluctuations due to changes in energy prices, 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 pick up from its recent 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, on net, since last fall, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.

Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, 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, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.

The Committee will closely monitor incoming information on economic and financial developments in coming months and 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. In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective. Asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's economic outlook as well as its assessment of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view 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; James Bullard; Charles L. Evans; Jerome H. Powell; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was 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.
emphasis added

by Calculated Risk on 9/18/2013 10:19:00 AM

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

From AIA: Strong Conditions Revealed in Architecture Billings Index

The Architecture Billings Index (ABI) showed more acceleration in the growth of design activity nationally. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lead time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the August ABI score was 53.8, up from a mark of 52.7 in July. 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 63.0, down from the reading of 66.4 the previous month.

“As business conditions at architecture firms have improved eleven out of the past twelve months, it is fair to say that the design professions are in a recovery mode,” said AIA Chief Economist, Kermit Baker, PhD, Hon. AIA. “This upturn signals an impending turnaround in nonresidential construction activity, but a key component to maintaining this momentum is the ability of businesses to obtain financing for real estate projects, and for a resolution to the federal government budget and debt ceiling impasse.”
emphasis added

Click on graph for larger image.

This graph shows the Architecture Billings Index since 1996. The index was at 53.8 in August, up from 52.7 in July. Anything above 50 indicates expansion in demand for architects' services.  This index has indicated expansion in 11 of the last 12 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.  This index is not as strong as during the '90s - or during the bubble years of 2004 through 2006 - but the increases in this index over the past year suggest some increase in CRE investment in the second half of 2013.

by Calculated Risk on 9/18/2013 08:41:00 AM

From the Census Bureau: Permits, Starts and Completions

Housing Starts:
Privately-owned housing starts in August were at a seasonally adjusted annual rate of 891,000. This is 0.9 percent above the revised July estimate of 883,000 and is 19.0 percent above the August 2012 rate of 749,000.

Single-family housing starts in August were at a rate of 628,000; this is 7.0 percent above the revised July figure of 587,000. The August rate for units in buildings with five units or more was 252,000.

Building Permits:
Privately-owned housing units authorized by building permits in August were at a seasonally adjusted annual rate of 918,000. This is 3.8 percent below the revised July rate of 954,000, but is 11.0 percent above the August 2012 estimate of 827,000.

Single-family authorizations in August were at a rate of 627,000; this is 3.0 percent above the revised July figure of 609,000. Authorizations of units in buildings with five units or more were at a rate of 268,000 in August.

Click on graph for larger image.

The first graph shows single and multi-family housing starts for the last several years.

Multi-family starts (red, 2+ units) decreased in August (Multi-family is volatile month-to-month).

Single-family starts (blue) increased to 628,000 SAAR in August (Note: July was revised down from 591 thousand to 587 thousand).

The second graph shows total and single unit starts since 1968.

This shows the huge collapse following the housing bubble, and that housing starts have been generally increasing after moving sideways for about two years and a half years.

This was below expectations of 915 thousand starts in August.  I'll have more later ...