by Calculated Risk on 1/22/2014 07:02:00 AM

From the MBA: Refinance Mortgage Applications Increase in Latest MBA Weekly Survey

Mortgage applications increased 4.7 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending January 17, 2014. ...

The Refinance Index increased 10 percent from the previous week. The seasonally adjusted Purchase Index decreased 4 percent from one week earlier. ...
...
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.57 percent, the lowest level since November 2013, from 4.66 percent, with points increasing to 0.36 from 0.33 (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.

The refinance index is up a little over the last two week, but down 67% from the levels in early May.

With the mortgage rate increases, refinance activity will be significantly lower in 2014 than in 2013.


The second graph shows the MBA mortgage purchase index.  

The 4-week average of the purchase index is now down about 9% from a year ago.

The purchase index is probably understating purchase activity because small lenders tend to focus on purchases, and those small lenders are underrepresented in the purchase index.

by Calculated Risk on 1/21/2014 07:26:00 PM

I try to avoid being a "media critic" because it would be a full-time job (my former co-blogger Tanta pointed out numerous errors by reporters). However this Yahoo article bothered me enough today to comment: To get ahead, more Americans must do this one thing.

The article started "Economists have been puzzled about why the latest recession produced such a feeble recovery ...". Really? Most of the economists I respect forecast a sluggish recovery for several key reasons: 1) recoveries from financial crisis tend to be slow, 2) household balance sheets had to be repaired, 3) housing (usually the best leading sector) was going to languish due to excess supply of vacant homes and a high number of distressed properties, 4) state and local governments were cutting back significantly (the "50 little Hoovers"), 5) the stimulus package was too small and ended too soon - and the Federal government pivoted to austerity (deficit reduction) too soon.

I could list a few more reasons, but the sluggish recovery was not a puzzle - and was predicted by me (in 2009) and many others. 

The article focuses on mobility (an interesting topic). Of course I was writing about how the housing bust would probably impact labor mobility in 2008. So this isn't exactly new ground, and I don't think mobility was a leading reason for the sluggish recovery.

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

• During the day: The AIA's Architecture Billings Index for December (a leading indicator for commercial real estate).

by Calculated Risk on 1/21/2014 02:08:00 PM

From DataQuick: California Foreclosure Starts Dip to Eight-Year Low

The number of California homeowners pulled into the formal foreclosure process dropped to an eight-year low last quarter, the result of an improving economy, foreclosure prevention efforts and higher home prices, a real estate information service reported.

A total of 18,120 Notices of Default (NoDs) were recorded by lenders and their servicers on California owners of houses and condos during the October-through-December period. That was down 10.8 percent from 20,314 for the prior quarter, and down 52.6 percent from 38,212 in fourth-quarter 2012. Last quarter's tally was the lowest since 15,337 NoDs were recorded during fourth-quarter 2005. NoDs peaked in first-quarter 2009 at 135,431. DataQuick's NoD statistics go back to 1992.

"Some of this decline in foreclosure starts stems from the use of various foreclosure prevention efforts - short sales, loan modifications and the ability of some underwater homeowners to refinance. But most of the drop is because of the improving economy and the increase in home values. Fewer people are behind on their mortgage payments. And of those who do get into trouble, many, if not most, can sell and pay off what they owe. Also, those who are underwater and close to slipping into foreclosure are far less likely to give up their homes now that appreciation has returned to the housing market. There's a strong incentive to hang on," said John Walsh, DataQuick president.
...
Most of the loans going into default are still from the 2005-2007 period. The median origination quarter for defaulted loans is still third-quarter 2006. That has been the case for more than four years, indicating that weak underwriting standards peaked then.
emphasis added

Click on graph for larger image.

This graph shows the number of Notices of Default (NoD) filed in California each year.   2013 is in red.

This was the lowest year for foreclosure starts since 2005, and also below the levels in 1997 through 2000 when prices were rising following the much smaller late '80s housing bubble / early '90s bust in California.

Some of the decline in foreclosure starts is related to the "Homeowner Bill of Rights" that slowed foreclosures, some to higher house prices and a better economy - but overall foreclosure starts are close to a normal level (foreclosure starts were over 50,000 in 2004 and 2005 when prices were rising quickly).

Note: Foreclosures are still higher than normal in states with a judicial foreclosure process.

by Calculated Risk on 1/21/2014 11:47:00 AM

The following is an update to a few graphs and analysis that I started posting in 2005.  In 2005 I was bearish on residential investment, and I used these graphs to argue that the then coming housing bust would lead the economy into a recession. Now this analysis is suggesting more growth ... (note: Some of this discussion is updated from previous posts).

Discussions of the business cycle frequently focus on consumer spending (PCE: Personal consumption expenditures), but the key is to watch private domestic investment, especially residential investment. Even though private investment usually only accounts for around 15% of GDP, the swings for private investment are significantly larger than for PCE during the business cycle, so private investment has an outsized impact on GDP at transitions in the business cycle.

The first graph shows the real annualized change in GDP and private investment since 1960 (this is a 3 quarter centered average to smooth the graph).

GDP has fairly small annualized changes compared to the huge swings in investment, especially during and just following a recession. This is why investment is one of the keys to the business cycle.

Click on graph for larger image.

Note that during the recent recession, the largest decline for GDP was in Q4 2008 (a 8.3% annualized rate of decline).  On a three quarter center averaged basis (as presented on graph), the largest decline was 5.2% annualized.

However the largest decline for private investment was a 39% annualized rate!  On a three quarter average basis (on graph), private investment declined at a 31% annualized rate.

The second graph shows the contribution to GDP from the five categories of private investment: residential investment, equipment and software, nonresidential structures, intellectual property and "Change in private inventories". Note: this is a 3 quarter centered average of the contribution to GDP.

This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment lags the business cycle. Red is residential, green is equipment and software, and blue is investment in non-residential structures. The usual pattern - both into and out of recessions is - red, green, and blue.

The dashed purple line is the "Change in private inventories". This category has significant ups and downs, but is always negative during a recession, and provides a boost to GDP just after a recession. 

The key leading sector - residential investment - lagged the recent recovery because of the huge overhang of existing inventory. Usually residential investment is a strong contributor to GDP growth and employment in the early stages of a recovery, but not this time - and that weakness was a key reason why the recovery was sluggish.

Residential investment turned positive in 2011, and made a positive contribution to GDP in 2012 and 2013.

What does this mean for the business cycle? Usually residential investment would turn down before a recession, and that isn't happening right now. Instead residential investment is starting to increase.

The third graph shows residential investment as a percent of GDP. Residential investment as a percent of GDP is just above the record low, and it seems likely that residential investment as a percent of GDP will increase further in 2014 and 2015.

Nothing is perfect, but residential investment suggests further growth. Add in the improvement in household balance sheets, some contribution from state and local governments, and even some increase in non-residential structures in 2014 - and the economy should continue to grow - and probably at a somewhat faster pace.

For more on why I'm positive on 2014, see the Ten Questions: Question #1 for 2014: How much will the economy grow in 2014? and The Future's so Bright ...

by Calculated Risk on 1/21/2014 10:01:00 AM

By request, here is an update to a graph that I've been posting for several years.  This shows single family housing starts (through December 2013) and the unemployment rate (inverted) through December. Note: there are many other factors impacting unemployment, but housing is a key sector.


You can see both the correlation and the lag. The lag is usually about 12 to 18 months, with peak correlation at a lag of 16 months for single unit starts. The 2001 recession was a business investment led recession, and the pattern didn't hold.

Housing starts (blue) increased a little in 2009 with the homebuyer tax credit - and then declined again - but mostly starts moved sideways for two and a half years and only started increasing steadily near the end of 2011. This was one of the reasons the unemployment rate remained elevated.

Click on graph for larger image.

Usually near the end of a recession, residential investment (RI) picks up as the Fed lowers interest rates. This leads to job creation and also additional household formation - and that leads to even more demand for housing units - and more jobs, and more households - a virtuous cycle that usually helps the economy recover.  However this time, with the huge overhang of existing housing units, this key sector didn't participate for an extended period. 

The good news is single family starts have been increasing steadily for the last 2+ years, and I expect starts to continue to increase over the next few years. And I also expect the unemployment rate to continue to decline.

by Calculated Risk on 1/20/2014 08:00:00 PM

From Jon Hilsenrath at the WSJ: Next Cut in Fed Bond Buys Looms

The Federal Reserve is on track to trim its bond-buying program for the second time in six weeks as a lackluster December jobs report failed to diminish the central bank's expectations for solid U.S. economic growth this year, according to interviews with officials and their public comments.

A reduction in the program to $65 billion a month from the current $75 billion could be announced at the end of the Jan. 28-29 meeting

I think the Fed will continue reducing their asset purchases at each meeting, unless there is a significant change in the data (one weak job report will not change their views).

by Calculated Risk on 1/20/2014 01:17:00 PM

Here is another weekly update on housing inventory ... for the fourteenth consecutive week housing inventory is up year-over-year.  This suggests inventory bottomed early 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 November).  However Ben at Housing Tracker (Department of Numbers) has provided me some weekly inventory data for the last several years.

Click on graph for larger image.

This graph shows the Housing Tracker reported weekly inventory for the 54 metro areas for 2010, 2011, 2012, 2013 and 2014.

In 2011 and 2012, inventory only increased slightly early in the year and then declined significantly through the end of each year.

Inventory in 2014 is now 2.6% above the same week in 2013 (red is 2014, blue is 2013).

Inventory is still very low - and barely up year-over-year - but this increase in inventory should slow house price increases. 

Note: One of the key questions for 2014 will be: How much will inventory increase?  My guess is inventory will be up 10% to 15% year-over-year by the end of 2014 (inventory would still be below normal).

by Calculated Risk on 1/20/2014 11:09:00 AM

Here is some research from Laurie Goodman, Ellen Seidman, and Jun Zhu at the Urban Institute: FHA Loan Limits—What Areas Are the Most Affected?. Some excerpts:

FHA loan limits are set at the county level, and there are 3,234 counties in the United States. Loan limits will not change for 2014 in 2,493 counties, most of which remain at the loan limit floor of $271,050. However, 652 counties will have lower limits and 89 will have higher limits. The Mortgage Bankers' Association has calculated that 92 percent of the counties located in non-metropolitan areas are unaffected. The situation is very different in metropolitan areas. While limits are unchanged in 50.7 percent of the counties located in Metropolitan Statistical Areas (MSAs), they will decline in 44.4 percent while increasing in 4.9 percent of the areas. The changes in some markets are larger than would be predicted by either the drop in the ceiling from $729,750 to $625,500 (a 14.3 percent decline), or the change in the median home price multiplier from 125 percent to 115 percent (an 8 percent decline). This has two primary causes: a change in the base year for determining median house price and a revision of MSA boundaries.
...
While the impact of the change in the FHA loan limits is very modest overall, some communities will be very adversely affected. These are communities where the drop in the limits is large and FHA guarantees a high percentage of mortgages.

There is much more in the research note including a list of the impacted communities. As the authors note, the overall impact will be modest, but some communities will be impacted.

by Calculated Risk on 1/20/2014 09:36:00 AM

Container traffic gives us an idea about the volume of goods being exported and imported - and possibly some hints about the trade report for December since LA area ports handle about 40% of the nation's container port traffic.

The following graphs are for inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container).

To remove the strong seasonal component for inbound traffic, the first graph shows the rolling 12 month average.

Click on graph for larger image.

On a rolling 12 month basis, inbound traffic was up 0.3% compared to the rolling 12 months ending in November.   Outbound traffic increased 1.0% compared to 12 months ending in November.

Inbound traffic has been increasing and now it appears outbound traffic is also starting to increase.

The 2nd graph is the monthly data (with a strong seasonal pattern for imports).

Usually imports peak in the July to October period as retailers import goods for the Christmas holiday, and then decline sharply and bottom in February or March (depending on the timing of the Chinese New Year).

Inbound traffic was up 9% compared to December 2012 and outbound traffic was up 13%.

This suggests a pickup in trade in December. 

by Calculated Risk on 1/19/2014 08:18:00 PM

This is worth a mention - the drought in California is a "growing" concern ...

From the San Francisco Chronicle: California drought: Farmers, ranchers face uncertain future

On Friday, amid California's driest year on record, Gov. Jerry Brown declared a drought emergency in the state. As days pass without snow or rain, dairymen, farmers and other livestock producers are finding themselves in the same predicament as Imhof. Without water to irrigate, produce growers fear they will have to leave some fields fallow.

Ranchers and farmers say that as long as the drought continues, the nation's largest agricultural state will remain in turmoil, with repercussions stretching to consumer pocketbooks in the form of higher prices for such basic staples as meat, milk, fruit and vegetables.

This is the second year in a row with little rain or snow in the mountains (the Central Sierra snowpack is about 16% of normal). California is the largest agricultural state, and an ongoing drought could have an impact on food prices - and on the economy.