by Calculated Risk on 4/16/2014 12:20:00 PM

From Fed Chair Janet Yellen: Monetary Policy and the Economic Recovery. Excerpts:

Is there still significant slack in the labor market?
...
I will refer to the shortfall in employment relative to its mandate-consistent level as labor market slack, and there are a number of different indicators of this slack. Probably the best single indicator is the unemployment rate. At 6.7 percent, it is now slightly more than 1 percentage point above the 5.2 to 5.6 percent central tendency of the Committee's projections for the longer-run normal unemployment rate. This shortfall remains significant, and in our baseline outlook, it will take more than two years to close.

Other data suggest that there may be more slack in labor markets than indicated by the unemployment rate. For example, the share of the workforce that is working part time but would prefer to work full time remains quite high by historical standards. Similarly, while the share of workers in the labor force who are unemployed and have been looking for work for more than six months has fallen from its peak in 2010, it remains as high as any time prior to the Great Recession. ...

The low level of labor force participation may also signal additional slack that is not reflected in the headline unemployment rate. Participation would be expected to fall because of the aging of the population, but the decline steepened in the recovery. Although economists differ over what share of those currently outside the labor market might join or rejoin the labor force in a stronger economy, my own view is that some portion of the decline in participation likely represents labor market slack.

Lastly, economists also look to wage pressures to signal a tightening labor market. At present, wage gains continue to proceed at a historically slow pace in this recovery, with few signs of a broad-based acceleration.

Is inflation moving back toward 2 percent?
...
I will mention two considerations that will be important in assessing whether inflation is likely to move back to 2 percent as the economy recovers. First, we anticipate that, as labor market slack diminishes, it will exert less of a drag on inflation. However, during the recovery, very high levels of slack have seemingly not generated strong downward pressure on inflation. We must therefore watch carefully to see whether diminishing slack is helping return inflation to our objective.10 Second, our baseline projection rests on the view that inflation expectations will remain well anchored near 2 percent and provide a natural pull back to that level. But the strength of that pull in the unprecedented conditions we continue to face is something we must continue to assess.

Finally, the FOMC is well aware that inflation could also threaten to rise substantially above 2 percent. At present, I rate the chances of this happening as significantly below the chances of inflation persisting below 2 percent, but we must always be prepared to respond to such unexpected outcomes, which leads us to my third question.

What factors may push the recovery off track?

Myriad factors continuously buffet the economy, so the Committee must always be asking, "What factors may be pushing the recovery off track?" For example, over the nearly 5 years of the recovery, the economy has been affected by greater-than-expected fiscal drag in the United States and by spillovers from the sovereign debt and banking problems of some euro-area countries. Further, our baseline outlook has changed as we have learned about the degree of structural damage to the economy wrought by the crisis and the subsequent pace of healing.

Currently Yellen sees substantial slack in the labor market, and is more concerned about low inflation than high inflation. This suggests rate will be low for a long time.

by Calculated Risk on 4/16/2014 11:27:00 AM

There were 203 thousand total housing starts in Q1 this year (not seasonally adjusted, NSA), down 2% from the 208 thousand during Q1 of 2013.  Note: Permits were up 6% in Q1 2014 compared to Q1 2013 - still weak growth, but positive.

The weak start to 2014 was due to several factors: severe weather, higher mortgage rates, higher prices and probably supply constraints in some areas.

It is also important to note that Q1 was a difficult year-over-year comparison for housing starts.  There was a huge surge for housing starts in Q1 2013 (up 34% over Q1 2012).  Then starts softened a little over the next 7 months until November.

Click on graph for larger image.

This year, I expect starts to be stronger over the next couple of quarters - and more starts combined with an easier comparison means starts will be up solidly year-over-year.

 In 2013, the year-over-year comparisons ranged from a high of 42% to a low of just 2% - so there is quite a bit of variability.  Overall starts finished up a solid 18.5% last year compared to 2012, and I still expect solid growth this year.

Here is an update to the graph comparing multi-family starts and completions. Since it usually takes over a year on average to complete a multi-family project, there is a lag between multi-family starts and completions. Completions are important because that is new supply added to the market, and starts are important because that is future new supply (units under construction is also important for employment).

These graphs use a 12 month rolling total for NSA starts and completions.

The blue line is for multifamily starts and the red line is for multifamily completions.

The rolling 12 month total for starts (blue line) has been increasing steadily, and completions (red line) are lagging behind - but completions will continue to follow starts up (completions lag starts by about 12 months).

This means there will be an increase in multi-family completions in 2014, but probably still below the 1997 through 2007 level of multi-family completions.  Multi-family starts will probably move more sideways in 2014.

The second graph shows single family starts and completions. It usually only takes about 6 months between starting a single family home and completion - so the lines are much closer. The blue line is for single family starts and the red line is for single family completions.

Starts have been moving up, and completions have followed. 

Note the exceptionally low level of single family starts and completions.  The "wide bottom" was what I was forecasting several years ago, and now I expect several years of increasing single family starts and completions.

by Calculated Risk on 4/16/2014 09:15:00 AM

From the Fed: Industrial production and Capacity Utilization

Industrial production increased 0.7 percent in March after having advanced 1.2 percent in February. The rise in February was higher than previously reported primarily because of stronger gains for durable goods manufacturing and for mining. For the first quarter as a whole, industrial production moved up at an annual rate of 4.4 percent, just slightly slower than in the fourth quarter of 2013. In March, the output of manufacturing rose 0.5 percent, the output of utilities increased 1.0 percent, and the output of mines gained 1.5 percent. At 103.2 percent of its 2007 average, total industrial production in March was 3.8 percent above its level of a year earlier. Capacity utilization for total industry increased in March to 79.2 percent, a rate that is 0.9 percentage point below its long-run (1972–2013) average but 1.2 percentage points higher than a year prior.
emphasis added

Click on graph for larger image.

This graph shows Capacity Utilization. This series is up 12.3 percentage points from the record low set in June 2009 (the series starts in 1967).

Capacity utilization at 79.2% is still 0.9 percentage points below its average from 1972 to 2012 and below the pre-recession level of 80.8% in December 2007.

Note: y-axis doesn't start at zero to better show the change.

The second graph shows industrial production since 1967.

Industrial production increased 0.7% in March to 103.2. This is 23% above the recession low, and 2.5% above the pre-recession peak.

The monthly change for both Industrial Production and Capacity Utilization were above expectations.

by Calculated Risk on 4/16/2014 08:30:00 AM

From the Census Bureau: Permits, Starts and Completions

Housing Starts:
Privately-owned housing starts in March were at a seasonally adjusted annual rate of 946,000. This is 2.8 percent above the revised February estimate of 920,000, but is 5.9 percent below the March 2013 rate of 1,005,000.

Single-family housing starts in March were at a rate of 635,000; this is 6.0 percent above the revised February figure of 599,000. The March rate for units in buildings with five units or more was 292,000.
emphasis added

Building Permits:
Privately-owned housing units authorized by building permits in March were at a seasonally adjusted annual rate of 990,000. This is 2.4 percent below the revised February rate of 1,014,000, but is 11.2 percent above the March 2013 estimate of 890,000.

Single-family authorizations in March were at a rate of 592,000; this is 0.5 percent above the revised February figure of 589,000. Authorizations of units in buildings with five units or more were at a rate of 370,000 in March.

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 March (Multi-family is volatile month-to-month).

Single-family starts (blue) increased in March.

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

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

This was below expectations of 965 thousand starts in March.  Note: Starts for February were revised up to 920 thousand from 907 thousand. I'll have more later.

by Calculated Risk on 4/16/2014 07:01:00 AM

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

Mortgage applications increased 4.3 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending April 11, 2014. ...

The Refinance Index increased 7 percent from the previous week. The seasonally adjusted Purchase Index increased 1 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 4.47 percent from 4.56 percent, with points decreasing to 0.32 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 down 73% 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 18% 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 4/15/2014 08:04:00 PM

A reminder of a friendly bet I made with NDD on housing starts in 2014:

If starts or sales are up at least 20% YoY in any month in 2014, [NDD] will make a $100 donation to the charity of Bill's choice, which he has designated as the Memorial Fund in honor of his late co-blogger, Tanta. If housing permits or starts are down 100,000 YoY at least once in 2014, he make a $100 donation to the charity of my choice, which is the Alzheimer's Association.

Of course, with the terms of the bet, we could both "win" at some point during the year. (I expect to "win" in a few months, but not quite yet).

In March 2013, starts were at a 1.005 million seasonally adjusted annual rate (SAAR). For me to win, starts would have to be up 20% or at 1.206 million SAAR in March (not likely). For NDD to win, starts would have to fall to 905 thousand SAAR (possible). NDD could also "win" if permits fall to 790 thousand SAAR from 890 thousand SAAR in March 2013 (not likely).

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

• At 8:30 AM, Housing Starts for March. Total housing starts were at 907 thousand (SAAR) in February. Single family starts were at 583 thousand SAAR in February. The consensus is for total housing starts to increase to 965 thousand (SAAR) in March.

• At 9:15 AM, The Fed will release Industrial Production and Capacity Utilization for March. The consensus is for a 0.5% increase in Industrial Production, and for Capacity Utilization to increase to 78.8%.

• At 12:25 PM, Speech by Fed Chair Janet Yellen, Monetary Policy and the Economic Recovery, At the Economic Club of New York, New York, New York

• At 2:00 PM, the Federal Reserve Beige Book, an informal review by the Federal Reserve Banks of current economic conditions in their Districts.

by Calculated Risk on 4/15/2014 04:39:00 PM

From housing economist Tom Lawler:

Based on realtor association/board/MLS reports from across the country, I estimate that US existing home sales as measured by the National Association of Realtors ran at a seasonally adjusted annual rate of 4.64 million in March, up 0.9% from February’s preliminary pace, but down 6.5% from last March’s seasonally adjusted pace. If my estimate is correct, then first-quarter existing home sales this year would be down 6.3% from the comparable quarter of 2013. Depending on the area of the country, weather, lower distressed sales, lower investor purchases, and weak demand from primary-residence purchases (especially from first-time buyers), the latter partly reflecting lower inventories of affordably-priced homes (even though overall inventories of homes for sale were higher), contributed to the “surprisingly” weak pace of sales last quarter.

On the inventory front, I estimate (based on realtor/MLS reports, as well as reports from entities tracking listings) that the inventory of existing homes for sale as measured by the NAR increased by 4.0% from February to March to 2.080 million, which would be up 7.8% from last March’s level.

Finally, my “best guess” based on realtor reports is that the NAR’s estimate of the median existing SF home sales price in March will be up 8.7% from last March.

CR Note: The NAR is scheduled to report March existing home sales on Tuesday, April 22nd.   Based on Lawler's estimates, months-of-supply increased to around 5.4 months in March - the highest level since mid-2012.

by Calculated Risk on 4/15/2014 02:59:00 PM

From DataQuick: Southland Home Sales Stuck at 6-year Low; Median Price Rises to 6-Year High

Southern California home sales quickened last month compared with February, as they normally do, but remained far below average and at the lowest level for a March in six years. ... A total of 17,638 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month. That was up 25.7 percent from 14,027 sales in February, and down 14.3 percent from 20,581 sales in March last year, according to San Diego-based DataQuick.
...
Sales during the month of March have ranged from a low of 12,808 in 2008 to a high of 37,030 in 2004. Last month’s sales were 26.9 percent below the average number of sales – 24,115 – for March since 1988. Sales haven’t been above average for any month in more than seven years.

“Southland home buying got off to a very slow start this year, with last month’s sales coming in at the second-lowest level for a March in nearly two decades. We see multiple reasons for this: The inventory of homes for sale remains thin in many markets. Investor purchases have fallen. The jump in home prices and mortgage rates over the past year has priced some people out of the market, while other would-be buyers struggle with credit hurdles. Also, some potential move-up buyers are holding back while they weigh whether to abandon a phenomenally low interest rate on their current mortgage in order to buy a different home,” said DataQuick analyst Andrew LePage.

Foreclosure resales – homes foreclosed on in the prior 12 months – accounted for 6.4 percent of the Southland resale market in March. That was down from a revised 6.7 percent the prior month and down from 13.8 percent a year earlier. In recent months the foreclosure resale rate has been the lowest since early 2007. In the current cycle, foreclosure resales hit a high of 56.7 percent in February 2009.

Short sales – transactions where the sale price fell short of what was owed on the property – made up an estimated 7.7 percent of Southland resales last month. That was down from a revised 9.3 percent the prior month and down from 18.7 percent a year earlier.

Absentee buyers – mostly investors and some second-home purchasers – bought 27.4 percent of the homes sold last month, down from 28.9 percent in February and down from 31.2 percent a year earlier.
emphasis added

Generally both distressed sales and investor buying is declining - and this is dragging down overall sales (plus inventory is still very low).   And even though total sales are down year-over-year, normal equity transactions are up 9% year-over-year.

It is important to recognize that declining existing home sales is NOT a negative indicator for the housing recovery.  The reason for the decline in overall existing home sales is fewer distressed sales and less investor buying. Those are positive trends!

by Calculated Risk on 4/15/2014 11:15:00 AM

The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.6% annualized rate) in March. The 16% trimmed-mean Consumer Price Index also increased 0.2% (2.4% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics' (BLS) monthly CPI report.

Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers rose 0.2% (2.4% annualized rate) in March. The CPI less food and energy increased 0.2% (2.5% annualized rate) on a seasonally adjusted basis.

Note: The Cleveland Fed has the median CPI details for March here.

Click on graph for larger image.

This graph shows the year-over-year change for these four key measures of inflation. On a year-over-year basis, the median CPI rose 2.1%, the trimmed-mean CPI rose 1.7%, and the CPI less food and energy rose 1.7%. Core PCE is for February and increased just 1.1% year-over-year.

On a monthly basis, median CPI was at 2.6% annualized, trimmed-mean CPI was at 2.4% annualized, and core CPI increased 2.5% annualized.

These measures suggest inflation remains below the Fed's target.

by Calculated Risk on 4/15/2014 10:00:00 AM

The National Association of Home Builders (NAHB) reported the housing market index (HMI) was at 47 in April, up from 46 in March. Any number below 50 indicates that more builders view sales conditions as poor than good.

From the NAHB: Builder Confidence Holds Steady in April

Builder confidence in the market for newly built, single-family homes rose one point to 47 in April from a downwardly revised March reading of 46 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) released today.
...
“Job growth is proceeding at a solid pace, mortgage interest rates remain historically low and home prices are affordable,” said NAHB Chief Economist David Crowe. “While these factors point to a gradual improvement in housing demand, headwinds that are holding up a more robust recovery include ongoing tight credit conditions for home buyers and the fact that builders in many markets are facing a limited availability of lots and labor.”

Derived from a monthly survey that NAHB has been conducting for 30 years, the NAHB/Wells Fargo Housing Market Index gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.

The HMI index gauging current sales conditions in April held steady at 51 while the component gauging traffic of prospective buyers was also unchanged at 32. The component measuring expectations for future sales rose four points to 57.

The HMI three-month moving average was down in all four regions. The West fell nine points to 51 and the Midwest posted a four-point decline to 49 while the Northeast and South each dropped two points to 33 and 47, respectively.
emphasis added

Click on graph for larger image.

This graph show the NAHB index since Jan 1985.

This was the third  consecutive reading below 50.