by Calculated Risk on 3/06/2014 12:00:00 PM

The Federal Reserve released the Q4 2013 Flow of Funds report today: Flow of Funds.

According to the Fed, household net worth increased in Q4 compared to Q3, and is at a new record high. Net worth peaked at $68.8 trillion in Q2 2007, and then net worth fell to $55.6 trillion in Q1 2009 (a loss of $13.2 trillion). Household net worth was at $80.7 trillion in Q4 2013 (up $25.1 trillion from the trough in Q1 2009).

The Fed estimated that the value of household real estate increased to $19.4 trillion in Q4 2013. The value of household real estate is still $3.2 trillion below the peak in early 2006.

Click on graph for larger image.

This is the Households and Nonprofit net worth as a percent of GDP.  Although household net worth is at a record high, as a percent of GDP it is still below the peak in 2006 (housing bubble), but above the stock bubble peak.

This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages). Note that this does NOT include public debt obligations.

This ratio was increasing gradually since the mid-70s, and then we saw the stock market and housing bubbles. The ratio has been trending up and increased again in Q4 with both stock and real estate prices increasing.

This graph shows homeowner percent equity since 1952.

Household percent equity (as measured by the Fed) collapsed when house prices fell sharply in 2007 and 2008.

In Q4 2013, household percent equity (of household real estate) was at 51.7% - up from Q3, and the highest since Q2 2007. This was because of both an increase in house prices in Q4 (the Fed uses CoreLogic) and a reduction in mortgage debt.

Note: about 30.3% of owner occupied households had no mortgage debt as of April 2010. So the approximately 52+ million households with mortgages have far less than 50.7% equity - and millions have negative equity.

The third graph shows household real estate assets and mortgage debt as a percent of GDP.

Mortgage debt decreased by $11 billion in Q4, after increasing slightly in Q3.  

Mortgage debt has now declined by $1.32 trillion from the peak. Studies suggest most of the decline in debt has been because of foreclosures (or short sales), but some of the decline is from homeowners paying down debt (sometimes so they can refinance at better rates).

The value of real estate, as a percent of GDP, was up in Q4 (as house prices increased), but still close to the average of the last 30 years (excluding bubble). However household mortgage debt, as a percent of GDP, is still historically high, suggesting a little more deleveraging ahead for certain households.

by Calculated Risk on 3/06/2014 09:51:00 AM

From CoreLogic: CoreLogic reports 4 Million Residential Properties Returned to Positive Equity in 2013

CoreLogic ... today released new analysis showing 4 million homes returned to positive equity in 2013, bringing the total number of mortgaged residential properties with equity to 42.7 million. The CoreLogic analysis indicates that nearly 6.5 million homes, or 13.3 percent of all residential properties with a mortgage, were still in negative equity at the end of 2013. Due to a small slowdown in the quarterly growth rate of the Home Price Index, the negative equity share was virtually unchanged from the end of the third quarter of 2013.

... Of the 42.7 million residential properties with positive equity, 10 million have less than 20-percent equity. Borrowers with less than 20-percent equity, referred to as “under-equitied,” may have a more difficult time obtaining new financing for their homes due to underwriting constraints. Under-equitied mortgages accounted for 21.1 percent of all residential properties with a mortgage nationwide in 2013, with more than 1.6 million residential properties at less than 5-percent equity, referred to as near-negative equity. Properties that are near-negative equity are considered at risk if home prices fall. ...

“The plight of the underwater borrower has improved dramatically since negative equity peaked in December 2009 when more than 12 million mortgaged homeowners were underwater,” said Mark Fleming, chief economist for CoreLogic. “Over the past four years, more than 5.5 million homeowners have regained equity, reducing their risk of foreclosure and unlocking pent-up supply in the housing market.”
emphasis added

Click on graph for larger image.

This graph shows the break down of negative equity by state. Note: Data not available for some states. From CoreLogic:

"Nevada had the highest percentage of mortgaged properties in negative equity at 30.4 percent, followed by Florida (28.1 percent), Arizona (21.5 percent), Ohio (19.0 percent) and Illinois (18.7 percent). These top five states combined account for 36.9 percent of negative equity in the United States."

Note: The share of negative equity is still very high in Nevada and Florida, but down significantly from a year ago (Q4 2012) when the negative equity share in Nevada was at 52.4 percent, and at 40.2 percent in Florida.

The second graph shows the distribution of home equity in Q4 compared to Q3. Close to 5% of residential properties have 25% or more negative equity, down slightly from Q3, and down from around 6% in Q2 and 8% in Q1.

In Q4 2012, there were 10.4 million properties with negative equity - now there are 6.5 million.  A significant change.

by Calculated Risk on 3/06/2014 08:35:00 AM

The DOL reports:

In the week ending March 1, the advance figure for seasonally adjusted initial claims was 323,000, a decrease of 26,000 from the previous week's revised figure of 349,000. The 4-week moving average was 336,500, a decrease of 2,000 from the previous week's revised average of 338,500.

The previous week was revised up from 348,000.

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 declined to 336,500.

This was below the consensus forecast of 338,000.  The 4-week average is mostly moving sideways ...

by Calculated Risk on 3/05/2014 08:04:00 PM

From Tim Duy Fed Watch: A Lackluster Start to the New Year

Incoming data has tended to disappoint. While weather impacts are taking part of the blame, I tend to think that part of the blame should fall on overly optimistic interpretations of data patterns at the end of 2013. ...

Bottom Line: Data disappointment in part is driven by excessive optimism. In any event, data are not sufficiently disappointing to derail the Fed's tapering plans. Unless activity lurches sharply downward, I think the tapering process is pretty much on autopilot. It is now all about interest rates.

CR Note: I think Duy is correct that tapering will continue "unless activity lurches sharply downward", but I remain fairly optimistic about 2014. We will see ...

Thursday:
• Early, Trulia Price Rent Monitors for February. This is the index from Trulia that uses asking house prices adjusted both for the mix of homes listed for sale and for seasonal factors.

• At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for claims to decrease to 338 thousand from 348 thousand.

• At 10:00 AM, the Manufacturers' Shipments, Inventories and Orders (Factory Orders) for January. The consensus is for a 0.5% decrease in January orders.

• At 12:00 PM, the Q4 Flow of Funds Accounts of the United States from the Federal Reserve.

by Calculated Risk on 3/05/2014 03:41:00 PM

Friday at 8:30 AM ET, the BLS will release the employment report for February. The consensus is for an increase of 150,000 non-farm payroll jobs in February, and for the unemployment rate to be unchanged at 6.6%.

Note: This was an unusually harsh winter, and the weather apparently impacted hiring in December, January and in February too. The Fed's beige book today mentioned weather 119 times (including all the District reports). In the January beige book, weather was only mentioned 21 times. In the March 2013 beige book, weather was mentioned 18 times. So weather could be a significant factor in the February report.

Here is a summary of recent data:

• The ADP employment report showed an increase of 139,000 private sector payroll jobs in February. This was below expectations of 158,000 private sector payroll jobs added. The ADP report hasn't been very useful in predicting the BLS report for any one month. But in general, this suggests employment growth below expectations.

• The ISM manufacturing employment index was unchanged in February at 52.3%. A historical correlation between the ISM manufacturing employment index and the BLS employment report for manufacturing, suggests that private sector BLS manufacturing payroll jobs decreased about 7,000 in February. The ADP report indicated a 1,000 increase for manufacturing jobs in February.

The ISM non-manufacturing employment index decreased in February to 47.5% from 56.4% in January. A historical correlation between the ISM non-manufacturing index and the BLS employment report for non-manufacturing, suggests that private sector BLS reported payroll jobs for non-manufacturing were unchanged in February.

Taken together, these surveys suggest around 6,000 fewer jobs in February - far below the consensus forecast.

• Initial weekly unemployment claims averaged close to 338,000 in February. This was up from an average of 333,000 in January.   For the BLS reference week (includes the 12th of the month), initial claims were at 334,000; this was up slightly from 329,000 during the reference week in January.

This suggests mostly layoffs in line with the consensus forecast.

• The final February Reuters / University of Michigan consumer sentiment index increased to 81.6 from the January reading of 81.2. This is frequently coincident with changes in the labor market, but there are other factors too.

• The small business index from Intuit showed no change in small business employment in February.

• Conclusion: Usually the data is mixed, but the data this month was fairly weak across the board. The ADP report was lower in February compared to the initial January report (January was revised down in the report today), the Intuit small business index showed no hiring, and the ISM surveys suggest essentially no change in payrolls in February

There is always some randomness to the employment report - and the timing and survey methods are different than for some other reports - but my guess is the BLS report will be under the consensus forecast of 150,000 nonfarm payrolls jobs added in February.

by Calculated Risk on 3/05/2014 02:00:00 PM

Fed's Beige Book "Prepared at the Federal Reserve Bank of Atlanta and based on information collected before February 24, 2014."

Reports from most of the twelve Federal Reserve Districts indicated that economic conditions continued to expand from January to early February. Eight Districts reported improved levels of activity, but in most cases the increases were characterized as modest to moderate. New York and Philadelphia experienced a slight decline in activity, which was mostly attributed to the unusually severe weather experienced in those regions. Growth slowed in Chicago, and Kansas City reported that conditions remained stable during the reporting period. The outlook among most Districts remained optimistic.

And on real estate:

Reports on residential housing markets were somewhat mixed. Many Districts continued to report improving conditions but noted that growth had slowed. Most of the Districts indicating otherwise attributed the slowing pace of improvement to unusually severe winter weather conditions. Home sales increased in Richmond, Atlanta, Chicago, St. Louis, and Dallas, while sales were down in Philadelphia, Cleveland, Minneapolis, and Kansas City. Boston and New York reported that the trend in sales for their Districts was mixed. New home construction increased in Richmond, Atlanta, Chicago, St. Louis, and Minneapolis, and remained flat in Kansas City, and was down slightly from the previous period in Philadelphia. Most Districts reported low levels of home inventories and indicated that home prices continued to appreciate. The outlook for sales and residential construction was positive in Boston, Philadelphia, Cleveland, Atlanta, and San Francisco.

Strong multifamily construction was cited in New York, Cleveland, Richmond, Atlanta, and Dallas, while Boston indicated that its pipeline of multifamily construction was declining. Dallas experienced rent growth above its historical average, while New York reported mixed trends in rent growth. Cleveland noted that it expects healthy growth in rents this year.

Many Districts, including New York, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, and San Francisco, indicated that commercial real estate activity had increased and that conditions continued to improve since the previous report. Philadelphia noted that there was very little activity to report in construction or leasing due to severe winter weather. The outlook for nonresidential construction was fairly optimistic in Boston, Philadelphia, Cleveland, Atlanta, Minneapolis, Kansas City, Dallas, and San Francisco.
emphasis added

Some pretty positive comments on commercial real estate.  This is a downgrade to the previous beige book, but might be weather related.

by Calculated Risk on 3/05/2014 11:02:00 AM

From housing economist Tom Lawler:

Hovnanian Enterprises, the nation’s sixth largest home builder in 2012, reported that net home orders (including unconsolidated joint ventures) in the quarter ended January 31, 2014 totaled 1,202, down 10.6% from the comparable quarter of 2013. The company’s sales cancellation rate, expressed as a % of gross orders, was 18% last quarter, up from 17% a year ago. Home deliveries last quarter totaled 1,138, down 4.2% from the comparable quarter of 2013, at an average sales price of $351,279, up 6.1% from a year ago. The company’s order backlog at the end of January was 2,438, up 6.0% from last January, at an average order price of $368,243, up 4.3% from a year ago.

Hovnanian’s net orders in California plunged by 43.4% compared to a year ago. Hovnanian’s average net order price in California last quarter was $653,366, up 46.8% from a year ago and up 83.2% from two years ago. Net orders in the Southwest were down 10.0% YOY.

Here is an excerpt from the company’s press release.

"While our first quarter is always the slowest seasonal period for net contracts, the strong recovery trajectory from the spring selling season of 2013 has softened on a year-over-year basis. Net contracts in the months of December, January and February have not met our expectations. In addition to the lull in sales momentum, both sales and deliveries were impacted by poor weather conditions and deliveries were further impacted by shortages in labor and certain materials in some markets that have extended cycle times," stated Ara K. Hovnanian, Chairman of the Board, President and Chief Executive Officer.

"We are encouraged by the fact that we have a higher contract backlog, gross margin and community count than we did at the same point in time last year. Furthermore, we have taken steps to spur additional sales in the spring selling season, including the launch of Big Deal Days, a national sales campaign during the month of March. Our first quarter has always been the slowest seasonal period and we expect to report stronger results as the year progresses. We believe this is a temporary pause in the industry's recovery, and based on the level of housing starts across the country, we continue to believe the homebuilding industry is still in the early stages of recovery," concluded Mr. Hovnanian.
emphasis added

The company reported that it owned or controlled 34,763 lots at the end of January, up 17.0% from last January.

by Calculated Risk on 3/05/2014 10:05:00 AM

The February ISM Non-manufacturing index was at 51.6%, down from 54.0% in January. The employment index decreased sharply in February to 47.5%, down from 56.4% in January. Note: Above 50 indicates expansion, below 50 contraction.

From the Institute for Supply Management: February 2014 Non-Manufacturing ISM Report On Business®

Economic activity in the non-manufacturing sector grew in February for the 49th consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM® Report On Business®.

The report was issued today by Anthony Nieves, CPSM, C.P.M., CFPM, chair of the Institute for Supply Management® (ISM®) Non-Manufacturing Business Survey Committee. "The NMI® registered 51.6 percent in February, 2.4 percentage points lower than January's reading of 54 percent. The Non-Manufacturing Business Activity Index decreased to 54.6 percent, which is 1.7 percentage points lower than the reading of 56.3 percent reported in January, reflecting growth for the 55th consecutive month and at a slower rate. The New Orders Index registered 51.3 percent, 0.4 percentage point higher than the reading of 50.9 percent registered in January. The Employment Index decreased 8.9 percentage points to 47.5 percent from the January reading of 56.4 percent and indicates contraction in employment for the first time after 25 consecutive months of growth. The Prices Index decreased 3.4 percentage points from the January reading of 57.1 percent to 53.7 percent, indicating prices increased at a slower rate in February when compared to January. According to the NMI®, ten non-manufacturing industries reported growth in February. The majority of respondents' comments indicate a slowing in the rate of growth month over month of business activity. Some of the respondents attribute this to weather conditions. Overall respondents' comments reflect cautiousness regarding business conditions and the economy."
emphasis added

Click on graph for larger image.

This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index.

This was well below the consensus forecast of 53.6% and indicates slower expansion in February than in January.

 

by Calculated Risk on 3/05/2014 08:23:00 AM

From ADP:

Private sector employment increased by 139,000 jobs from January to February according to the February ADP National Employment Report®. ... The report, which is derived from ADP’s actual payroll data, measures the change in total nonfarm private employment each month on a seasonally-adjusted basis.
...
Mark Zandi, chief economist of Moody’s Analytics, said, "February was another soft month for the job market. Employment was weak across a number of industries. Bad winter weather, especially in mid-month, weighed on payrolls. Job growth is expected to improve with warmer temperatures.”

This was below the consensus forecast for 158,000 private sector jobs added in the ADP report. 

Note: ADP hasn't been very useful in directly predicting the BLS report on a monthly basis, but it might provide a hint. The BLS report for February will be released on Friday.

by Calculated Risk on 3/05/2014 07:01:00 AM

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

Mortgage applications increased 9.4 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending February 28, 2014. ...

The Refinance Index increased 10 percent from the previous week. The seasonally adjusted Purchase Index increased 9 percent from one week earlier. ...

The seasonally adjusted Purchase Index was 6 percent higher than its level two weeks earlier, but was still 19 percent lower than the same week one year ago. Despite the increase observed this week, the Refinance Index is still 3 percent lower than it was two weeks ago.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.47 percent from 4.53 percent, with points decreasing to 0.28 from 0.31 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.

The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,000) decreased to 4.37 percent from 4.47 percent, with points increasing to 0.20 from 0.13 (including the origination fee) for 80 percent LTV loans.
emphasis added

Click on graph for larger image.


The first graph shows the refinance index.

The refinance index is down 69% from the levels in May 2013.

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 17% 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 - but this is still very weak.

Note: Jumbo rates are still below conforming rates.