by Calculated Risk on 3/16/2014 10:26:00 AM

Fed Chair Janet Yellen will chair her first FOMC meeting this week on Tuesday and Wednesday, and hold her first post-FOMC press conference following the meeting. It appears the FOMC will reduce monthly asset purchases by another $10 billion per month, from $65 billion to $55 billion. The weaker than expected recent data will probably not derail another round of tapering, and the focus this month will be on the change to the forward guidance.

From Goldman Sachs economist Sven Jari Stehn: March FOMC Preview: All about Guidance

[W]ill the Committee’s forward guidance change? The January minutes revealed disagreement within the Committee about the future direction of its forward guidance, with “some” favoring additional quantitative guidance and “others” preferring a switch to qualitative form of guidance. Since then, however, both President Dudley and President Evans have argued in favor of qualitative guidance and we expect the Committee to move into this direction. We see two options for doing so.

The first would be to split the current guidance paragraph into two: one that reaffirms policy intentions above 6.5% and one that describes policy intentions below 6.5% in qualitative terms. For example, the Committee could state: “although the unemployment rate is approaching 6-1/2 percent, the Committee judges that employment remains well below its maximum sustainable level. Once the unemployment rate has declined below 6-1/2 percent, the Committee therefore intends to maintain the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent as long as employment or inflation remain well below their longer-run goals.” Once the unemployment rate has fallen below 6.5% they could simply delete the “6.5%” paragraph and be left with a qualitative description of their intentions. This approach would follow the Bank of England’s approach which simply added a paragraph to their guidance statement that describes policy intentions after the threshold (in their case 7%) has been reached, but kept the original threshold statement.

The second option would be for the Committee to switch entirely to qualitative guidance and drop the 6.5% threshold at next week’s meeting. For example, Fed officials could simply state that “the Committee intends to maintain the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent as long as employment or inflation remain well below their longer-run goals.” The FOMC could then follow the Bank of England in providing additional color on the Committee’s view on how far away the economy currently is from full employment and price stability. While the Bank of England published a separate document providing those details, Fed officials could include this information in Yellen’s prepared remarks at the start of the press conference.

Either option is possible in our view.

It will also be interesting to see if there are any changes to the FOMC projections. I expect any change to be minor.

For review, here are the previous projections.   Several FOMC members have blamed the recent weak economic data on the severe winter weather, so any downward revision to the 2014 GDP projections will probably be small.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in Real GDP1	2013	2014	2015	2016
Dec 2013 Meeting Projections	2.2 to 2.3	2.8 to 3.2	3.0 to 3.4	2.5 to 3.2
Sept 2013 Meeting Projections	2.0 to 2.3	2.9 to 3.1	3.0 to 3.5	2.5 to 3.3

¹ Projections of change in real GDP and inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

The unemployment rate was at 6.7% in February. 

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment Rate2	2013	2014	2015	2016
Dec 2013 Meeting Projections	7.0 to 7.1	6.3 to 6.6	5.8 to 6.1	5.3 to 5.8
Sept 2013 Meeting Projections	7.1 to 7.3	6.4 to 6.8	5.9 to 6.2	5.4 to 5.9

² Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

As of January, PCE inflation was up 1.2% from January 2012, and core inflation was up 1.1%.  The FOMC expects inflation to increase in 2014, but remain below their 2% target (Note: the FOMC target is symmetrical around 2%, so this is about the same miss as 2.9% inflation). 

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE Inflation1	2013	2014	2015	2016
Dec 2013 Meeting Projections	0.9 to 1.0	1.4 to 1.6	1.5 to 2.0	1.7 to 2.0
Sept 2013 Meeting Projections	1.1 to 1.2	1.3 to 1.8	1.6 to 2.0	1.7 to 2.0

Here are the FOMC's recent core inflation projections:

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core Inflation1	2013	2014	2015	2016
Dec 2013 Meeting Projections	1.1 to 1.2	1.4 to 1.6	1.6 to 2.0	1.8 to 2.0
Sept 2013 Meeting Projections	1.2 to 1.3	1.5 to 1.7	1.7 to 2.0	1.9 to 2.0

by Calculated Risk on 3/15/2014 01:11:00 PM

The key reports this week are February housing starts on Tuesday, and February existing home sales on Thursday.

For manufacturing, the February Industrial Production and Capacity Utilization report, and the March NY Fed (Empire State) and Philly Fed surveys, will be released this week. 

For prices, CPI will be released on Tuesday.

The FOMC meets on Tuesday and Wednesday, and the FOMC is expected to taper QE3 asset purchases another $10 billion per month at this meeting.

----- Monday, March 17th -----
8:30 AM ET: NY Fed Empire Manufacturing Survey for March. The consensus is for a reading of 6.5, up from 4.5 in February (above zero is expansion).

9:15 AM: The Fed will release Industrial Production and Capacity Utilization for February.

This graph shows industrial production since 1967.

The consensus is for a 0.3% increase in Industrial Production, and for Capacity Utilization to increase to 78.6%.

10:00 AM: The March NAHB homebuilder survey. The consensus is for a reading of 50, up from 46 in February.  Any number above 50 indicates that more builders view sales conditions as good than poor.

----- Tuesday, March 18th -----
8:30 AM: Consumer Price Index for February. The consensus is for a 0.1% increase in CPI in January and for core CPI to increase 0.1%.

8:30 AM: Housing Starts for February.

Total housing starts were at 880 thousand (SAAR) in January. Single family starts were at 573 thousand SAAR in January.

The consensus is for total housing starts to increase to 915 thousand (SAAR) in February.

----- Wednesday, March 19th -----
7:00 AM: 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 February (a leading indicator for commercial real estate).

2:00 PM: FOMC Meeting Announcement.  The FOMC is expected to reduce monthly QE3 asset purchases from $65 billion per month to $55 billion per month at this meeting.

2:00 PM: FOMC Forecasts This will include the Federal Open Market Committee (FOMC) participants' projections of the appropriate target federal funds rate along with the quarterly economic projections.

2:30 PM: Fed Chair Janet Yellen holds a press briefing following the FOMC announcement.

----- Thursday, March 20th -----
8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for claims to increase to 325 thousand from 315 thousand.

10:00 AM: the Philly Fed manufacturing survey for March. The consensus is for a reading of 4.0, up from -6.3 last month (above zero indicates expansion).

10:00 AM: Existing Home Sales for February from the National Association of Realtors (NAR).

The consensus is for sales of 4.64 million on seasonally adjusted annual rate (SAAR) basis. Sales in January were at a 4.62 million SAAR. Economist Tom Lawler estimates the NAR will report sales of 4.60 million SAAR.

As always, a key will be inventory of homes for sale.
----- Friday, March 21st -----
No economic releases scheduled.

by Calculated Risk on 3/15/2014 08:24:00 AM

This is an unofficial list of Problem Banks compiled only from public sources.

Here is the unofficial problem bank list for March 14, 2014.

Changes and comments from surferdude808:

For the week, there were five bank removals with assets of $2.1 billion from the Unofficial Problem Bank List. After removal, the list includes 559 institutions with assets of $178.0 billion. A year ago, the list held 801 institutions with assets of $295.6 billion.

Omnibank, National Association, Houston, TX ($285 million) found a merger partner in order to depart the list. Actions were terminated against FSGBank, National Association, Chattanooga, TN ($977 million Ticker: FSGI); Northside Community Bank, Gurnee, IL ($290 million); Landmark Bank, National Association, Fort Lauderdale, FL ($269 million); and Community Resource Bank, Northfield, MN ($237 million).

Next Friday, we anticipate the OCC will provide an update on its enforcement action activity.

by Calculated Risk on 3/14/2014 07:31:00 PM

CR Note: This is from Trulia chief economist Jed Kolko:

How well do leading indicators predict housing activity? In theory they should if housing construction and home purchases follow a logical sequence. When homes are sold, contracts are signed (as measured by NAR’s pending home sales index) before sales close (NAR existing home sales); also, many buyers apply for mortgages (MBA purchase applications index) before a sale closes. Also, when new homes are built, they get permits (Census new home permits) before construction begins (Census new home starts); and roughly two-thirds of new home sales happen when homes are under construction or completed, rather than before they’re started.

But lots of factors can erode the link between leading indicators and the activities they foreshadow. Some homes inevitably fail to follow the standard paths: some sales under contract may fail to close, some permitted units might not get built, and – especially now – homes can be purchased with cash and therefore skip the mortgage-application step altogether. Unanticipated events can break the link, too: bad weather or a sudden crisis that hurts confidence could delay construction on already-permitted units.

Simple correlations and time-series regressions show empirically how well leading indicators actually predict key housing measures. Because the relationships between indicators can change over time, it’s helpful to focus on the most recent years of data. (The real test is whether leading indicators predict month-over-month changes, not year-over-year changes, since eleven months of a year-over-year change are already known before each monthly release of a year-over-year number.)

Based on national housing measures from 2008 to the present, the leading-indicator crystal ball is generally pretty cloudy, though better for existing home sales than for new home starts or sales.

1. Existing home sales

Existing home sales , which are closings, tend to follow pending home sales by one or two months. Pending sales turn out to be a reasonably good leading indicator of existing sales. The correlation between the month-over-month change (m/m) in existing sales and the m/m change in pending sales from one month earlier is 0.45; the correlation with the pending sales from two months earlier is also 0.45. The correlation between existing sales m/m and the average of the one and two month lags of pending sales m/m is 0.70.

How strong is this relationship? That’s weaker than, say, the very tight relationship between the change in the 30-year fixed rate and the same-month change in the MBA refinance index (correlation = -0.84). But the pending-existing sales relationship is stronger than any of the construction-related measures, as we’ll see next.

Putting that into a simple time-series regression shows that the best predictor of the existing sales m/m change is the simple average of pending sales m/m changes from one and two months earlier. Including the m/m change in the MBA purchase-application index from one and two months earlier improves the prediction of existing sales only minimally. The m/m changes in pending home sales for December and January suggest a 3% m/m drop in existing home sales in February.

2. New home starts

Building permits are a weaker predictor of new-home starts than pending sales are of existing home sales. The correlation between the m/m change in starts and the previous month’s m/m change in permits is 0.45, but permits from more than one month back bear little relation to starts. Rather, the m/m change in starts is partly correlated with the same month’s change in permits. That means that changes in new home starts tend to run, on average, half a month behind changes in new home permits. Since permits data are released in the same monthly Census report as new home starts, the value of permits as a leading indicator is limited.

The historical data suggests that the best guess of this month’s m/m change in starts is 0.6 times last month’s m/m change in permits. Permits fell m/m in January by 5%, pointing to a 3% drop in starts in February. But the relationship isn’t very tight, so even that best guess will often be way off.

3. New home sales

It’s even harder to predict new home sales based on other indicators. The m/m change in new home sales is most strongly correlated with the same month change in new single-family permits . Since the Census releases new home sales data one week after the release of starts and permits data for the same month, this month’s change in permits gives a few-day-ahead hint at the same month’s change in new home sales, but only because of the reporting lag.

Overall, the leading indicators don’t get us that far. Changes in pending home sales predict changes in existing home sales reasonably well, when the changes from one and two months earlier are averaged. But lagged pending home sales probably don’t beat out aggregated data from local realtor/MLS reports (regularly posted here on Calculated Risk) as an early look at existing home sales. On the construction side, building permits are halfway between a leading indicator and a concurrent indicator of starts, and neither is a good leading indicator of changes in new home sales. The modest value of leading indicators means that every month there’s plenty of room for housing-data surprises.

by Calculated Risk on 3/14/2014 04:45:00 PM

An interesting article from John Gittelsohn and Heather Perlberg at Bloomberg: Blackstone’s Home Buying Binge Ends as Prices Surge: Mortgages (ht JR)

Blackstone’s acquisition pace has declined 70 percent from its peak last year, when the private equity firm was spending more than $100 million a week on properties, said Jonathan Gray, global head of real estate for the New York-based firm. After investing $8 billion since April 2012 to buy 43,000 homes in 14 cities, the company has narrowed most of its purchasing to Seattle, Atlanta, Miami, Orlando and Tampa.

“The institutional wave has passed,” Gray, who oversees almost $80 billion in property investments, said in a telephone interview. “It’s at a much lower level than it was 12 or 24 months ago.”
...
American Homes 4 Rent (AMH) has slowed its buying in some of its 42 markets, chief executive officer David Singelyn said at a March 5 investor conference in Florida. ... American Residential Properties Inc. (ARPI), a landlord with 6,000 homes, slowed acquisitions by almost half in its latest quarter ending Dec. 31

It appears investors are pulling back in a number of markets (this fits with the data I've been posting).

by Calculated Risk on 3/14/2014 02:02:00 PM

Here is a price index for commercial real estate that I follow. 

From CoStar: Commercial Real Estate Prices Remain on Upward Trajectory in January

CRE PRICES BROADLY ADVANCE IN JANUARY DESPITE SEASONAL VOLATILITY: In a pattern repeated over the last several years, the number of repeat property sales in January 2014 fell from the previous several months as trading activity predictably returned to a more normal level following the frenzied pace at year-end. This slowdown in investment activity has typically accompanied a pricing decline in the first quarter. And while the CCRSI Value-Weighted U.S. Composite Index slipped by a slight 0.6% in January 2014, reflecting the slowdown in sales activity among larger properties, the Equal-Weighted U.S. Composite Index, which is more heavily influenced by smaller transactions, remained on an upward trajectory, increasing by 1.0% in January 2014.
...
DISTRESS SALES FALLING RAPIDLY: Despite the slowdown in January 2014, the number of observed trades over the last 12 months increased by 14.3% over the prior 12-month period. Importantly for the pricing indices, the number of distressed sales has declined by 21.8% over that same period. As of January 2014, the percentage of total observed pair counts classified as distress sales fell below 10%, down sharply from a peak of 35% in October 2010. Rising occupancies have helped stabilize NOIs across a growing number of markets leading to a large net reduction in the number of forced sales. This trend has been a positive force for commercial real estate pricing.
emphasis added

Click on graph for larger image.

This graph from CoStar shows the Value-Weighted and Equal-Weighted indexes.  CoStar reported that the Value-Weighted index is up 52.2% from the bottom (showing the earlier demand for higher end properties) and up 10.6% year-over-year. However the Equal-Weighted index is only up 20.3% from the bottom, and up 12.2% year-over-year.

Note: These are repeat sales indexes - like Case-Shiller for residential - but this is based on far fewer pairs.

by Calculated Risk on 3/14/2014 11:05:00 AM

From HotelNewsNow.com: STR: US results for week ending 8 March

The U.S. hotel industry posted positive results in the three key performance measurements during the week of 2-8 March 2014, according to data from STR.

In year-over-year measurements, the industry’s occupancy increased 2.1 percent to 64.0 percent. Average daily rate rose 4.8 percent to finish the week at US$114.85. Revenue per available room for the week was up 7.1 percent to finish at US$73.52.
emphasis added

Note: ADR: Average Daily Rate, RevPAR: Revenue per Available Room.

During the same week in 2008, RevPAR was around $65. and ADR was at $108. In 2009, RevPAR and ADR declined sharply, but these metrics are now at new highs.

The 4-week average of the occupancy rate is close to normal levels.

The following graph shows the seasonal pattern for the hotel occupancy rate using the four week average.

Click on graph for larger image.

The red line is for 2014 and black is for 2009 - the worst year since the Great Depression for hotels.

Through March 8th, the 4-week average of the occupancy rate is tracking slightly higher than pre-recession levels.   

It looks like 2014 should be a solid year for hotels.

Data Source: Smith Travel Research, Courtesy of HotelNewsNow.com

by Calculated Risk on 3/14/2014 09:55:00 AM

Click on graph for larger image.

The preliminary Reuters / University of Michigan consumer sentiment index for March was at 79.9, down from 81.6 in February.

This was below the consensus forecast of 81.8. Sentiment has generally been improving following the recession - with plenty of ups and downs - and a big spike down when Congress threatened to "not pay the bills" in 2011, and another smaller spike down last October and November due to the government shutdown.

I expect to see sentiment at post-recession highs very soon.

by Calculated Risk on 3/13/2014 07:14:00 PM

An important development from the WSJ: Senators Strike Deal on Long-Term Jobless Benefits

Congress has been stalled since extended federal jobless benefits expired on Dec. 28, 2013, taking away financial support from an estimated two million people so far.
...
Under the agreement reached Thursday, those who had lost benefits in late December would receive retroactive payments.
...
To ensure that the roughly $9.7 billion bill doesn't add to the federal budget deficit, it includes measures designed to generate new revenue.

The deal's fate in the Republican-controlled House of Representatives wasn't immediately clear. House Speaker John Boehner (R., Ohio) had said earlier this year that he would consider renewing the long-term benefits if lawmakers could come up with a plan to offset the cost ...

The key points:
1) Not having extended benefits with so many suffering is unprecedented and bad policy.
2) The bill is retroactive.
3) The bill is paid for.
4) The bill is bipartisan.
5) But it still needs to pass the House.

Friday:
• At 8:30 AM ET, the Producer Price Index for February from the BLS. The consensus is for a 0.2% increase in prices.

• At 9:55 AM, the Reuter's/University of Michigan's Consumer sentiment index (preliminary for March). The consensus is for a reading of 81.8, up from 81.6 in February.

by Calculated Risk on 3/13/2014 03:04:00 PM

From FNC: FNC Index: Home Prices of Normal Sales Up 0.4% in January

The latest FNC Residential Price Index™ (RPI) shows U.S. home prices have gotten off to a positive start in 2014, rising a modest 0.4% in January. The index, constructed to gauge the price movement among normal home sales exclusive of distressed properties, indicates home prices of the underlying housing market continue to strengthen as market fundamentals and credit conditions continue to improve.

The index is up 9.0% from a year ago and continues to point to the fastest year-over-year growth to date since the recovery began. Home prices are expected to rise modestly in February as improving signs are emerging in the for-sale market: The for-sale market has strengthened in February and the average seller asking price discount dropped from 5.4% in January to 4.7% in February.
...
Based on recorded sales of non-distressed properties (existing and new homes) in the 100 largest metropolitan areas, the FNC national composite index shows that in January home prices rose at a seasonally unadjusted rate of 0.4%. The two narrower indices (30- and 10- MSA composites) show faster month-over-month price appreciation in the nation’s top housing markets, up 0.6% and 0.8%, respectively. The 30- and 10-MSA composites’ year-over-year trends also show more rapid growth rate in the double digits and, similar to the national index, the fastest year-over-year growth to date since the recovery began.
emphasis added

The 100-MSA composite was up 9.0% compared to January2013. The FNC index turned positive on a year-over-year basis in July, 2012.

Click on graph for larger image.

This graph shows the year-over-year change for the FNC Composite 10, 20, 30 and 100 indexes. 

Even with the recent increase, the FNC composite 100 index is still off 23.2% from the peak.

I'm expecting the year-over-year change in house prices to slow as more inventory comes on the market - but this index isn't showing a slowdown yet.