by Calculated Risk on 11/07/2013 04:33:00 PM

From economist Tom Lawler:

Fannie Q3 Highlights: GAAP Net Income $8.7 Billion; Dividend Payment to Treasury in December $8.6 Billion, Bringing Cumulative Payments to $113.9 Billion; SF REO Inventory Up on Slower Dispositions Due to “Overall Market Conditions”

Fannie Mae reported that its GAAP net income in the quarter ended September 30, 2013 was $8.7 billion, and that its “GAAP” net worth at the end of September was $11.6 billion, which under the term of the “revised” senior preferred dividend agreement means that Fannie will make a $8.6 billion dividend payment to the Treasury in December. That payment will make cumulative dividend payments to the Treasury of bout $113.9 billion. The Treasury’s senior preferred stock amount will remain at $117.1 billion. Fannie’s cumulative cash Treasury draws totaled $116.1 billion.

On the SF REO front, here are some summary stats on Fannie’s activity.

Fannie SF REO Activity
	Acquisitions	Dispositions	Inventory
Q3/09	40,959	31,299	72,275
Q4/09	47,189	33,309	86,155
Q1/10	61,929	38,095	109,989
Q2/10	68,838	49,517	129,310
Q3/10	85,349	47,872	166,787
Q4/10	45,962	50,260	162,489
Q1/11	53,549	62,814	153,224
Q2/11	53,697	71,202	135,719
Q3/11	45,194	58,297	122,616
Q4/11	47,256	51,344	118,528
Q1/12	47,700	52,071	114,157
Q2/12	43,783	48,674	109,266
Q3/12	41,884	43,925	107,225
Q4/12	41,112	42,671	105,666
Q1/13	38,717	42,934	101,449
Q2/13	36,106	40,635	96,920
Q3/13	37,353	33,332	100,941

Fannie’s SF REO inventory increased from the end of June to the end of September, mainly as a result of a “surprisingly” large slowdown in REO dispositions. Fannie attributed the sharp drop in the sale of REO properties to “overall market conditions.”

Fannie Mae also reported that its internal “national” home price index, which is a repeat-sales index that (1) includes both Fannie-Freddie acquisitions and available public deed data; (2) excludes foreclosure transactions; and (3) in housing-unit weighted, was up by 9.4% over the 12 months ending in September.

Click on graph for larger image.

CR Note: Here is a graph of Fannie and Freddie REO. This was the first quarterly increase since 2010.

From Lawler: Freddie Q3 Highlights: GAAP Net Income $30.5 Billion, $23.9 Billion of Which Reflects Release of Valuation Allowance Against Net Deferred Tax Asset; Dividend Payment To Treasury in December $30.4 Billion

Freddie Mac reported that its GAAP net income in the quarter ended September 30, 2013 was $30.5 billion, $23.9 billion of which was related to a release of the company’s valuation allowing against its net deferred tax asset. This release, in turn, reflected the company’s massively improved earnings outlook. Freddie’s GAAP net worth at the end of September was $33.4 billion, which under the term of the “revised” senior preferred dividend agreement means that Freddie will make a $30.4 billion dividend payment to the Treasury in December. That payment will make cumulative dividend payments to the Treasury of about $71.345 billion, versus cumulative previous cash draws from Treasury of $71.336 billion. The Treasury’s senior preferred stock amount will remain at $72.3 billion.

On the SF REO front, here are some summary stats on Freddie’s activity.

Freddie SF REO Activity
	Acquisitions	Dispositions	Inventory
Q3/09	24,373	17,939	41,133
Q4/09	24,749	20,835	45,047
Q1/10	29,412	20,628	53,831
Q2/10	34,662	26,315	62,178
Q3/10	39,053	26,334	74,897
Q4/10	23,771	26,589	72,079
Q1/11	24,707	31,627	65,159
Q2/11	24,788	29,348	60,599
Q3/11	24,378	25,381	59,596
Q4/11	24,758	23,819	60,535
Q1/12	23,805	25,033	59,307
Q2/12	20,033	26,069	53,271
Q3/12	20,302	22,660	50,913
Q4/12	18,672	20,514	49,071
Q1/13	17,881	18,984	47,968
Q2/13	16,418	19,763	44,623
Q3/13	19,441	16,945	47,119

Freddie’s SF REO inventory increased last quarter, “as foreclosure activity increased in judicial foreclosure states and disposition activity moderated.”

Freddie also showed that its “national” home-price index, a repeat-transactions index that (1) uses only Fannie/Freddie transactions; (2) uses repeat purchase transactions and some refinance transactions; and (3) is value weighted with state weights based on the share of Freddie’s SF mortgage portfolio, increased by 10.8% over the 12 months ending in September.

by Calculated Risk on 11/07/2013 12:48:00 PM

This is a quarterly index from the the National Association of Home Builders (NAHB) and is similar to the overall housing market index (HMI). The NAHB started this index in Q4 2008, so the readings have been very low.

From the NAHB: Builder Confidence in the 55+ Housing Market Continues to Improve in Third Quarter

Builder confidence in the 55+ housing market showed continued improvement in the third quarter of 2013 compared to the same period a year ago, according to the National Association of Home Builders’ (NAHB) latest 55+ Housing Market Index (HMI) released today. All segments of the market—single-family homes, condominiums and multifamily rental—registered strong increases. The single-family index increased 14 points to a level of 50, which is the highest third-quarter number since the inception of the index in 2008 and the eighth consecutive quarter of year over year improvements. [CR Note: NAHB is reporting the year-over-year increase]
...
All of the components of the 55+ single-family HMI showed considerable growth from a year ago: present sales climbed 16 points to 52, expected sales for the next six months rose 11 points to 53 and traffic of prospective buyers increased 10 points to 43.
...
“Right now the positive year over year increase in confidence by builders for the 55+ market is tracking right along with other segments of the home building industry,” said NAHB Chief Economist David Crowe. “And like other segments of the industry, the 55+ market is improving in part because consumers are more likely to be able to sell their current homes, which allows them to buy a new home or move into an apartment that suits their specific needs.”
emphasis added

Click on graph for larger image.

This graph shows the NAHB 55+ HMI through Q3 2013.  The index declined in Q3 to 50 from 53 in Q2 - however the index is up solidly year-over-year.  This indicates that about the same numbers builders view conditions as good than as  poor.

This is going to be a key demographic for household formation over the next couple of decades, but only if the baby boomers can sell their current homes.

There are two key drivers: 1) there is a large cohort moving into the 55+ group, and 2) the homeownership rate typically increases for people in the 55 to 70 year old age group. So demographics should be favorable for the 55+ market.

by Calculated Risk on 11/07/2013 10:00:00 AM

From the MBA: Delinquency and Foreclosure Rates Continue to Plummet, Improve to Best in More than Five Years

The delinquency rate for mortgage loans on one-to-four-unit residential properties decreased to a seasonally adjusted rate of 6.41 percent of all loans outstanding at the end of the third quarter of 2013, the lowest level since the second quarter of 2008. The delinquency rate dropped 55 basis points from the previous quarter, and 99 basis points from one year ago, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey.

The delinquency rate includes loans that are at least one payment past due but does not include loans in the process of foreclosure. The percentage of loans in the foreclosure process at the end of the third quarter was 3.08 percent down 25 basis points from the second quarter and 99 basis points lower than one year ago. This was the lowest foreclosure inventory rate seen since 2008.

“The degree to which the mortgage delinquency and foreclosure problem has changed over the last five years is perhaps best illustrated by the fact that last quarter New Jersey led the nation in the increase in the percentage of foreclosure actions filed, followed by Delaware, Maryland and Indiana. While Florida still leads the nation in the percentage of loans in foreclosure, that percentage is falling. In contrast, New York and New Jersey were the only two states that saw an increase in the percentages of loans in foreclosure,” said Jay Brinkmann, MBA’s Chief Economist and SVP of Research and Education.

“States with judicial foreclosure systems still account for most of the loans in foreclosure. While the percentages of loans in foreclosure dropped in both judicial and nonjudicial states, the average rate for judicial states was 5.28 percent, more than triple the average rate of 1.66 percent for nonjudicial states.
...
“[M]any mortgage servicers are already reducing their staffs that handled delinquent loans and foreclosures and we expect that trend to continue as the numbers continue to fall."
emphasis added

Click on graph for larger image.

This graph shows the percent of loans delinquent by days past due.

Loans 30 days delinquent decreased to 2.79% from 3.19% in Q2. This is close to the long term average.

Delinquent loans in the 60 day bucket decreased to 1.07% in Q3, from 1.12% in Q2. This is still slightly elevated.

The 90 day bucket decreased to 2.56% from 2.65%. This is still way above normal (around 0.8% would be normal according to the MBA).

The percent of loans in the foreclosure process decreased to 3.08% from 3.33% and is now at the lowest level since 2008.

by Calculated Risk on 11/07/2013 09:18:00 AM

The advance Q3 GDP report, with 2.8% annualized growth, was above expectations.  However some of the details were weak. Personal consumption expenditures (PCE) increased at a 1.5% annualized rate - the slowest rate since Q2 2011.

"Change in private inventories" added 0.83 percentage points to GDP in Q3.  This was above expectations of a 2.0% growth rate, but mostly because of inventories.

It appears that the drag from state and local governments has ended, although the drag from Federal government spending is ongoing.  The Federal government subtracted 0.13 percentage points in Q3, whereas state and local governments added 0.17 percentage points.

Residential investment (RI) remains a bright spot (increasing at a 14.6% annualized rate), and RI as a percent of GDP is still very low - and I expect RI to continue to increase over the next few years.

The first graph shows the contribution to percent change in GDP for residential investment and state and local governments since 2005.

Click on graph for larger image.

The blue bars are for residential investment (RI), and RI was a significant drag on GDP for several years. Now RI has added to GDP growth for the last 12 quarters (through Q3 2013).

And the drag from state and local governments appears to have ended after an unprecedented period of state and local austerity (not seen since the Depression).  State and local governments have added to GDP for two quarters now.

I expect state and local governments to continue to make small positive contributions to GDP going forward.

Residential Investment as a percent of GDP is up from the record lows during the housing bust. Usually RI bounces back quickly following a recession, but this time there is a wide bottom because of the excess supply of existing vacant housing units.   Clearly RI has bottomed, but it still below the levels of previous recessions.

I'll break down Residential Investment (RI) into components after the GDP details are released this coming week. Note: Residential investment (RI) includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories.

The third graph shows non-residential investment in structures, equipment and "intellectual property products".

I'll add details for investment in offices, malls and hotels next week.

The key story is that residential investment is continuing to increase, and I expect this to continue. Since RI is the best leading indicator for the economy, this suggests no recession in the near future (with the usual caveats about Congress).

Finally, real GDP has increased only 1.6% over the last year (Q3 2012 to Q3 2013). Because GDP growth was very weak in Q4 2012, it will only take 1.5% annualized growth in Q4 to reach the lower end of the Fed's GDP target.

by Calculated Risk on 11/07/2013 08:36:00 AM

From the BEA: Gross Domestic Product, 3rd quarter 2013 (advance estimate)

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.8 percent in the third quarter of 2013 (that is, from the second quarter to the third quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 2.5 percent.

I'll have more on GDP later, but this was better than expected.

The DOL reports:

In the week ending November 2, the advance figure for seasonally adjusted initial claims was 336,000, a decrease of 9,000 from the previous week's revised figure of 345,000. The 4-week moving average was 348,250, a decrease of 9,250 from the previous week's revised average of 357,500.

The previous week was up from 340,000.

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 348,250.

Some of the recent increase was due to processing problems in California (now resolved) and the four-week average will probably decline again next week.

by Calculated Risk on 11/06/2013 07:48:00 PM

From Tim Duy: On Lowering the Unemployment Target. Professor Duy's conclusion:

Policymakers would like to normalize policy by moving away from asset purchases to interest rates. Emphasizing forward guidance is part of that process. Incoming research suggests not only that threshold based forward guidance is effective, but has room to be even more effective. That should be a comfort to policymakers who worry that ending asset purchases will excessively tighten financial conditions; they have a tool to change the mix of policy while leaving the level of accommodation unchanged. Whether they use it or not is another question. There has clearly been some discomfort among policymakers regarding changing the unemployment threshold. This suggests it would not necessarily be an immediate replacement for ending asset purchases. That said, it is difficult to see how the current threshold is meaningful at all if the Fed is still purchasing assets when the threshold is breached. Indeed, the current low level of unemployment relative to the threshold, combined with clear indications that the Fed has no intention of raising rates anytime soon, argues by itself that a change in the thresholds is a likely scenario in the months ahead.

Thursday:
• At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for claims to decrease to 335 thousand from 340 thousand last week.

• Also at 8:30 AM, the advance estimate for Q3 GDP from the BEA. The consensus is that real GDP increased 2.0% annualized in Q3.

• At 10:00 AM, the Mortgage Bankers Association (MBA) Q3 2013 National Delinquency Survey (NDS).

Click on graph for larger image.

This graph shows the percent of loans delinquent by days past due through Q2 2013.

Loans 30 days delinquent decreased to 3.19% from 3.21% in Q1. This was just above the long term average. Delinquent loans in the 60 day bucket decrease to 1.12% in Q2, from 1.17% in Q1.

The 90 day bucket decreased to 2.65% from 2.88%. This is still way above normal (around 0.8% would be normal according to the MBA). The percent of loans in the foreclosure process decreased to 3.33% in Q2 from 3.55% in Q1 and was at the lowest level since 2008.

• At 3:00 PM, Consumer Credit for September from the Federal Reserve. The consensus is for credit to increase $12.0 billion in September.

by Calculated Risk on 11/06/2013 04:38:00 PM

From the LA Times: Officials unaware of benefits foul-up for 2 weeks

[Following the Labor Day launch] It took two weeks for officials at California's Employment Development Department to realize there were problems with their software upgrade, according to testimony at the oversight hearing Wednesday.

Here is a table of weekly claims (seasonally adjusted) from the beginning of August.

Week Ending	Weekly Claims, SA
8/3/13	335000
8/10/13	322000
8/17/13	337000
8/24/13	333000
8/31/13	323000
9/7/13	294000***
9/14/13	311000
9/21/13	307000
9/28/13	308000
10/5/13	373000
10/12/13	362000
10/19/13	350000
10/26/13	340000
*** California Computer Upgrade

Claims averaged 330 thousand for the five weeks prior to the computer upgrade in California. Then claims dropped sharply to 294,000 and stayed low for four week. Then claims moved sharply higher as the problems in California were resolved.

Over the last eight weeks, claims have 330 thousand - the same as in August.  My guess is we should just average the last eight weeks - and basically claims have been moving sideways for the last several months.  In the employment preview for October, I suggested the increase in claims in October was probably not useful information this month because of the computer problems in California.

by Calculated Risk on 11/06/2013 02:12:00 PM

From Cleveland Fed President Sandra Pianalto: Housing in the National Economy: A Look Back, a Look Forward

A major reason why the economic recovery has been so slow and has required so much policy support has been the performance of the housing market. Ordinarily, deep recessions are followed by strong economic snap-backs. But an economist at my Bank and his co-author found two exceptions to that rule: the Great Depression and the recent recession. [see: Deep Recessions, Fast Recoveries, and Financial Crises: Evidence from the American Record]. In this last episode, the evidence points to the collapse of the housing market as the key explanation for the slow recovery. Most of the time, home construction and spending on household goods can be counted on to provide a big push to the recovery. Historically, residential investment has contributed about half a percentage point to GDP growth in each quarter during the two-year period immediately following a recession. During the first two years of this recent recovery, however, the contribution from residential investment to GDP growth was basically zero. Because the recent recession was caused in part by a housing crisis, the housing market was too damaged to provide its customary lift to GDP growth.
...
So that is where we have been--a housing bust followed by a recession and sluggish economic recovery that was made all the more sluggish because of the weakened housing market. Looking ahead, tight conditions in mortgage credit markets will continue to hold the housing sector and broader economy from getting back to full strength more quickly.

Let me elaborate on that point. In a recent Federal Reserve survey of senior loan officers, bankers reported that credit standards for all categories of home mortgage loans have remained tighter than the standards that have prevailed on average since 2005. Financing companies no longer assume that houses will provide adequate collateral for borrowers with fragile credit histories. In addition, financial market regulators are standing vigilant to ensure there is no recurrence of the housing bubble that almost brought the financial system and global economy to its knees.

Moreover, access to mortgage credit has become far more restrictive. To get a mortgage today, it helps to have a very high credit score. Lenders are more likely to extend mortgage credit to consumers they perceive as very low risk. As a result, the pool of potential mortgage borrowers has shrunk. Households with low credit scores that were able to get credit before the crisis now are the least able to refinance their homes, or to obtain new mortgage loans. These are also the households who seem to be especially cautious in their spending these days. For these households, the days of extracting "free cash" from their homes are over. It is now mostly households with ample savings that spend and save as they normally would.

Another development that could lead to tighter credit conditions in the future involves the secondary mortgage market. The outlook for the government-sponsored enterprises Fannie Mae and Freddie Mac is uncertain. The GSEs, as they are known, had to be rescued after the financial crisis and Congress is weighing reforms that might greatly reduce the government's large position in housing finance. The housing market today is being heavily supported by Fannie and Freddie. Without the government guarantees on mortgage-backed securities, the amount of credit available for mortgage originations would be substantially smaller today.

To sum up my remarks, it was the housing bust that got us into this situation. And the lasting consequences of the bust continue to hold back the housing market and broader economy. The big picture is that many households are still adjusting to the large shock to their net worth that occurred during the financial crisis and are dealing with uncertainty over their future earnings prospects. For these reasons, consumer spending will likely continue at a moderate pace. But over time, I expect these effects to fade and credit conditions to improve.
emphasis added

Lenders are still very cautious, however lending standards are loosening - just very slowly. No one wants to go back to the almost non-existent standards of the early-to-mid 00s. I expect credit to slowly become more available, but please no NINJA loans (no income, jobs, or assets) and please no Alt-A (stated income, self-underwritten) loans.

by Calculated Risk on 11/06/2013 11:59:00 AM

Here is another graph on framing lumber prices (as an indicator of building activity). Early this year I mentioned that lumber prices were nearing the housing bubble highs. Then prices started to decline sharply, with prices off over 25% from the highs by June.

The price increases early this year were due to demand (more housing starts) and supply constraints (framing lumber suppliers were working to bring more capacity online).

Prices have been increasing again since June (there is some seasonality to prices).

Currently prices are up about 15% year-over-year.

Click on graph for larger image in graph gallery.

This graph shows two measures of lumber prices: 1) Framing Lumber from Random Lengths through last week (via NAHB), and 2) CME framing futures.

We will probably see another surge in prices early next year.

by Calculated Risk on 11/06/2013 08:39:00 AM

From Jeff Cox at CNBC yesterday: Fed could be about to make a major policy change

Separate papers that will be presented formally this week at an International Monetary Fund meeting suggest that the U.S. central bank should lower its target for the jobless rate before it hikes rates.

Note: The Fed has made it clear that these are "thresholds", not "targets". More from Cox:

Under current Fed thinking, the unemployment rate would have to drop to just 6.5 percent—with the inflation rate rising to 2.5 percent—before making changes in the present structure, which has the policy target rate near zero.

But the research from a half-dozen Fed economists maintains the unemployment objective actually should be lowered to 6.0 percent or even 5.5 percent before it makes any moves.
...
According to an analysis from Jan Hatzius, chief economist at Goldman Sachs, the two Fed papers actually would imply an earlier reduction of QE than planned—perhaps as soon as December—while the zero-bound interest rates could remain in place until 2017 and kept below normal into "the early 2020s."

"The studies suggest that some of the most senior Fed staffers see strong arguments for a significantly greater amount of monetary stimulus than implied by either a Taylor rule or the current 6.5 percent/2.5 percent threshold guidance," Hatzius wrote. "Given the structure of the Federal Reserve Board, we believe it is likely that the most senior officials—in particular, Ben Bernanke and (Chair-elect) Janet Yellen—agree with the basic thrust of the analysis."

Here is more from Goldman's Hatzius:

It is hard to overstate the importance of two new Fed staff studies that will be presented at the IMF's annual research conference on November 7-8. The lead author for the first study is William English, who is the director of the Monetary Affairs division and the Secretary and Economist of the FOMC. The lead author for the second study is David Wilcox, who is the director of the Research and Statistics division and the Economist of the FOMC. The fact that the two most senior Board staffers in the areas of monetary policy analysis and domestic macroeconomics have simultaneously published detailed research papers on central issues of the economic and monetary policy outlook is highly unusual and noteworthy in its own right. But the content and implications of these papers are even more striking.

...[O]ur initial assessment is that they considerably increase the probability that the FOMC will reduce its 6.5% unemployment threshold for the first hike in the federal funds rate, either coincident with the first tapering of its QE program or before.
...
[O]ur central case is now that the FOMC will reduce the threshold from 6.5% to 6% at the March 2014 FOMC meeting, alongside the first tapering of QE; however, a move as early as the December 2013 meeting is possible, and if so, this might also increase the probability of an earlier tapering of QE.

CR Note: Changing the thresholds (basically saying the FOMC will keep the Fed Funds rate exceptionally low for a longer period) could offset any negative impact from starting to taper QE3. I wouldn't be surprised if tapering - and lowering the unemployment rate threshold - happen at the same meeting.  This could happen as soon as the December meeting (depending on incoming data as I noted this weekend) or sometime in 2014.