by Calculated Risk on 5/06/2014 08:44:00 PM

From Business Insider, here are some housing graphs: Here's Jeff Gundlach's Big Presentation On Why Homeownership Is Overrated And Why He's Short The Homebuilders. Gundlach is arguing the homebuilders are overvalued (I have no comment), and I'm not sure if he made any macro predictions.

This is a weird time because housing is improving, but most housing statistics are ugly. As an example, if I hadn't been paying attention - and someone told me the level of mortgage delinquencies and foreclosures - I'd guess the US was in a deep recession. But the trend for delinquencies tells a very different story.

If Gundlach made some macro predictions, please send them along and maybe I'll comment  ...

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

• At 10:00 AM, Testimony by Fed Chair Janet Yellen, The Economic Outlook, Before the Joint Economic Committee, U.S. Congress

• At 3:00 PM, Consumer Credit for March from the Federal Reserve. The consensus is for credit to increase $15.1 billion.

by Calculated Risk on 5/06/2014 03:37:00 PM

There have been quite a few hand-wringing articles lately discussing the problems with housing. Most articles point to some of these suspects:

1) Existing home sales were down 7.5% year-over-year in March.
2) New home sales were down 13% year-over-year in March and down slightly Q1 over Q1.
3) Housing starts were down 5.9% year-over-year in March, and down 2% Q1 compared to Q1 2013.
4) The 4-week average of the Mortgage Bankers Association (MBA) mortgage purchase index is down 19% compared to the same week last year.
5) Mortgage credit is still tight.
6) Mortgage rates are up significantly from last year.
7) The homeownership rate is still falling.
8) Younger people prefer renting and more ...

Oh my, the sky is falling!

Well, maybe not.

The first mistake these writers make is they are asking the wrong question. Of course housing is lagging the recovery because of the residual effects of the housing bust and financial crisis (this lag was predicted on this blog and elsewhere for years - it should not be a surprise). 

The correct question is: What's right with housing?  And there is plenty.

1) Existing home sales were down 7.5% year-over-year in March.  Wait, isn't that bad news?  Nope - not if the decline is related to fewer distressed sales - and it is.  (fewer foreclosures and short sales).

2) Mortgage delinquencies are down sharply.  See: Fannie Mae and Freddie Mac: Mortgage Serious Delinquency rate declined in March and Mortgage Monitor: Mortgage delinquency rate in March lowest since October 2007, "Only One in 10 American Borrowers Underwater"

3) Mortgage credit is tight. Hey, isn't that bad news? Nope.  There is only one way to go ...

Click on graph for larger image.

4) New home sales are up significantly from the bottom, but are still historically very low.

There really is no where to go but up.  A growing population will require more new homes.  (I'll post again on household formation in the future).  The graph for housing starts looks similar.

5) The percent of borrowers with negative equity is declining sharply.  See: CoreLogic: 4 Million Residential Properties Returned to Positive Equity in 2013 and Zillow: Negative Equity declines further in Q4 2013

6)  The impact from rising mortgage rates is mostly behind us.  Economists at Goldman Sachs have found "the effect of monetary policy shocks on [building] permits persists for 3-4 quarters".  Rates increased from around 3.5% in May 2013 to 4.4% in July 2013.  Since then rates have moved sideways or down a little - and the "3-4 quarters" is almost over.

7) Existing home inventory is increasing, and house price increases are slowing. Sometimes rising inventory is a sign of trouble (I was pointing to this in 2005), but now inventory is so low that it is a positive that inventory is increasing. This will also slow house price increases (I think that will be a positive for housing too - a more normal market).

8) The MBA purchase index is skewed by large lenders. Over the last few years, small lenders (many not included in the MBA survey) have focused on purchase applications (they market through real estate channels and charge lower fees than the large lenders). Other data suggests mortgage applications are mostly flat year-over-year.  UPDATE: The MBA told me they have expanded coverage of the index to include many smaller purchase focused lenders.  The MBA doesn't believe their data is "skewed" by the large lenders.

9) Investor buying is declining.

Housing is a slow moving market - and the recovery will not be smooth or fast with all the residual problems.  But overall housing is clearly improving and the outlook remains positive for the next few years.

by Calculated Risk on 5/06/2014 11:23:00 AM

The Case-Shiller house price indexes for February were released last week (CoreLogic this morning). Zillow has started forecasting Case-Shiller a month early - and I like to check the Zillow forecasts since they have been pretty close.  

It looks like the year-over-year change for Case-Shiller will continue to slow. From Zillow: Finally…We’re Seeing More of the Slowdown

The Case-Shiller data for February 2014 came out [last week], and based on this information and the March 2014 Zillow Home Value Index (ZHVI, released April 21), we predict that next month’s Case-Shiller data (March 2014) will show that the non-seasonally adjusted (NSA) 20-City Composite Home Price Index and the NSA 10-City Composite Home Price Index increased 11.9 and 12.1 percent on a year-over-year basis, respectively. The seasonally adjusted (SA) month-over-month change from February to March will be 0.8 percent for the 20-City Composite Index and 0.7 percent for the 10-City Composite Home Price Index (SA). All forecasts are shown in the table below. Officially, the Case-Shiller Composite Home Price Indices for March will not be released until Tuesday, May 27.

The Case-Shiller Comp 20 was up 13.7% year-over-year (YoY) in November, up 13.4% YoY in December, 13.2% in January, and up 12.9% YoY in February - and will probably be around 11.9% YoY in March - so the index appears to be slowing down.

Zillow March 2014 Forecast for Case-Shiller Index
		Case Shiller Composite 10		Case Shiller Composite 20
		NSA	SA	NSA	SA
Case Shiller (year ago)	Mar 2013	161.13	165.55	148.44	152.58
Case-Shiller (last month)	Feb 2014	179.96	184.04	165.35	169.21
Zillow Forecast	YoY	12.1%	12.1%	11.9%	11.9%
	MoM	0.4%	0.7%	0.5%	0.8%
Zillow Forecasts1		180.7	185.5	166.1	170.7
Current Post Bubble Low		146.45	149.81	134.07	137.10
Date of Post Bubble Low		Mar-12	Feb-12	Mar-12	Jan-12
Above Post Bubble Low		23.4%	23.8%	23.9%	24.5%
1Estimate based on Year-over-year and Month-over-month Zillow forecasts

by Calculated Risk on 5/06/2014 09:32:00 AM

Notes: This CoreLogic House Price Index report is for March. The recent Case-Shiller index release was for February. The CoreLogic HPI is a three month weighted average and is not seasonally adjusted (NSA).

From CoreLogic: CoreLogic Reports Home Prices Rise by 11.1 Percent Year Over Year in March

Home prices nationwide, including distressed sales, increased 11.1 percent in March 2014 compared to March 2013. This change represents 25 months of consecutive year-over-year increases in home prices nationally. On a month-over-month basis, home prices nationwide, including distressed sales, increased 1.4 percent in March 2014 compared to February 2014.

Excluding distressed sales, home prices nationally increased 9.5 percent in March 2014 compared to March 2013 and 0.9 percent month over month compared to February 2014. Distressed sales include short sales and real estate owned (REO) transactions.

“March data on new and existing home sales was weaker than expected and is a cause for concern as we enter the spring buying season,” said Dr. Mark Fleming, chief economist for CoreLogic. “Interest rate-disenfranchised potential sellers are adding to the existing shadow inventory, while buyers who can't find what they want to buy are on the sidelines creating a new kind of 'shadow demand.' This supply and demand imbalance continues to drive home prices higher, even though transaction volumes are lower than expected.”

Click on graph for larger image.

This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100.

The index was up 1.4% in March, and is up 11.1% over the last year.  This index is not seasonally adjusted, so this was a strong month-to-month gain during the "weak" season.



The second graph is from CoreLogic. The year-over-year comparison has been positive for twenty five consecutive months suggesting house prices bottomed early in 2012 on a national basis (the bump in 2010 was related to the tax credit).

I expect the year-over-year increases to continue to slow.

by Calculated Risk on 5/06/2014 08:44:00 AM

The Department of Commerce reported this morning:

[T]otal March exports of $193.9 billion and imports of $234.3 billion resulted in a goods and services deficit of $40.4 billion, down from $41.9 billion in February, revised. March exports were $3.9 billion more than February exports of $190.0 billion. March imports were $2.5 billion more than February imports of $231.8 billion.

The trade deficit was close to the consensus forecast of $40.2 billion.

The first graph shows the monthly U.S. exports and imports in dollars through March 2014.

Click on graph for larger image.

Both imports and exports increased in March.  

Exports are 17% above the pre-recession peak and up 5% compared to March 2013; imports are about 1% above the pre-recession peak, and up about 5% compared to March 2013. 

The second graph shows the U.S. trade deficit, with and without petroleum, through March.

The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.

Oil imports averaged $93.91 in March, up from $90.21 in February, and down from $96.95 in March 2013.  The petroleum deficit has generally been declining and is the major reason the overall deficit has declined since early 2012.

The trade deficit with China increased to $20.4 billion in March, from $17.9 billion in March 2013.  About half of the trade deficit is related to China.

Overall it appears trade is picking up slightly.

by Calculated Risk on 5/05/2014 08:26:00 PM

Tuesday:
• At 8:30 AM ET, Trade Balance report for March from the Census Bureau. The consensus is for the U.S. trade deficit to be at $40.2 billion in March from $42.3 billion in February.

The BEA released the underlying details for the Q1 advance GDP report.

The first graph is for Residential investment (RI) components as a percent of GDP. According to the Bureau of Economic Analysis, RI includes new single family structures, multifamily structures, home improvement, Brokers’ commissions and other ownership transfer costs, and a few minor categories (dormitories, manufactured homes).

A few key points:
1) Investment in single family structures is now back to being the top category for the first time in 22 quarters.  Home improvement was the top category for twenty one consecutive quarters following the housing bust ... but now investment in single family structures is the top category once again.

2) Even though investment in single family structures has increased significantly from the bottom, single family investment is still very low - and still below the bottom for previous recessions. I expect further increases over the next few years.

3) Look at the contribution from Brokers’ commissions and other ownership transfer costs. This is the category mostly related to existing home sales (this is the contribution to GDP from existing home sales). If existing home sales decline due to fewer foreclosures, this will have little impact on total residential investment.

Click on graph for larger image.

Investment in home improvement was at a $179 billion Seasonally Adjusted Annual Rate (SAAR) in Q1 (just over 1.0% of GDP).   Investment in single family structures was $184 billion (SAAR) (almost 1.1% of GDP). 

The second graph shows investment in offices, malls and lodging as a percent of GDP. Office, mall and lodging investment has increased recently, but from a very low level.

Investment in offices is down about 49% from the recent peak (as a percent of GDP) and increasing slowly.   The office vacancy rate is still very high, so any increase in investment will probably be small.

Investment in multimerchandise shopping structures (malls) peaked in 2007 and is down about 57% from the peak (note that investment includes remodels, so this will not fall to zero).   The vacancy rate for malls is still very high, so investment will probably stay low for some time.

Lodging investment peaked at 0.31% of GDP in Q3 2008 and is down about 60%.   With the hotel occupancy rate close to normal, it is likely that hotel investment will probably continue to increase.

These graphs show there is currently very little investment in offices, malls and lodging - but that investment is starting to increase. And residential investment is generally increasing, but from a very low level.

by Calculated Risk on 5/05/2014 04:38:00 PM

Here is another weekly update on housing inventory ...

There is a clear seasonal pattern for inventory, with the low point for inventory in late December or early January, and then usually peaking in mid-to-late summer.

The Realtor (NAR) data is monthly and released with a lag (the most recent data was for March).  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.

In 2013 (Blue), inventory increased for most of the year before declining seasonally during the holidays.  Inventory in 2013 finished up 2.7% YoY compared to 2012.

Inventory in 2014 (Red) is now 8.6% above the same week in 2013.

Inventory is still very low - still below the level in 2012 (yellow) when prices started increasing - 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 5/05/2014 01:19:00 PM

Here is an excerpt from a post I wrote in 2012: Where are the construction jobs?

Back in 2006, I predicted we'd see construction job losses in the seven figures. All through 2006 and into 2007, I was constantly asked: "Where are the construction job losses you predicted?"

And then it started ... and the BLS reported construction employment fell 2.27 million from peak to trough. No one asks that question any more.

There were several reasons why construction jobs didn't decline at the same time as housing starts. First, construction includes residential, commercial and other construction (like roads). Even after housing starts began to collapse, commercial real estate was still booming and workers shifted from residential to commercial (many commercial projects have long time frames - and many developers remained in denial). Also some construction workers are paid in cash (illegal immigrants), and these workers weren't counted on the BLS payrolls.

Now people are asking "Where are the construction jobs?"

Oh, Grasshopper ... the construction jobs are coming.

And from Michelle Meyer last year on the lag between activity and construction employment: Construction Coming Back and other researchers More Research on Construction Employment

Now is appears the pace of hiring is starting to pickup:

Annual Change in Construction Payroll jobs (000s)
Year	Total Construction Jobs
2002	-85
2003	127
2004	290
2005	416
2006	152
2007	-195
2008	-789
2009	-1,047
2010	-192
2011	144
2012	114
2013	156
20141	124
1Change through April, 372 thousand annualized rate

This graph shows total construction employment as reported by the BLS (not just residential).

Since construction employment bottomed in January 2011, construction payrolls have increased by 568 thousand.

Historically there is a lag between an increase in activity and more hiring - and it appears hiring should pickup significant in 2014.

by Calculated Risk on 5/05/2014 10:00:00 AM

The April ISM Non-manufacturing index was at 55.2%, up from 53.1% in March. The employment index decreased in April to 51.3%, down from 53.6% in March. Note: Above 50 indicates expansion, below 50 contraction.

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

Economic activity in the non-manufacturing sector grew in April for the 51st 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 55.2 percent in April, 2.1 percentage points higher than March's reading of 53.1 percent. The Non-Manufacturing Business Activity Index increased substantially to 60.9 percent, which is 7.5 percentage points higher than the March reading of 53.4 percent, reflecting growth for the 57th consecutive month at a much faster rate. The New Orders Index registered 58.2 percent, 4.8 percentage points higher than the reading of 53.4 percent registered in March. The Employment Index decreased 2.3 percentage points to 51.3 percent from the March reading of 53.6 percent and indicates growth for the second consecutive month, but at a slower rate. The Prices Index increased 2.5 percentage points from the March reading of 58.3 percent to 60.8 percent, indicating prices increased at a faster rate in April when compared to March. According to the NMI®, 14 non-manufacturing industries reported growth in April. The majority of survey respondents' comments indicate that both business conditions and the economy are improving."
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 above the consensus forecast of 54.0% and suggests faster expansion in April than in March.

by Calculated Risk on 5/05/2014 09:14:00 AM

Black Knight Financial Services (BKFS, formerly the LPS Data & Analytics division) released their Mortgage Monitor report for March today. According to BKFS, 5.52% of mortgages were delinquent in March, down from 5.97% in February. BKFS reports that 2.13% of mortgages were in the foreclosure process, down from 3.38% in March 2013.

This gives a total of 7.65% delinquent or in foreclosure. It breaks down as:

• 1,571,000 properties that are 30 or more days, and less than 90 days past due, but not in foreclosure.
• 1,199,000 properties that are 90 or more days delinquent, but not in foreclosure.
• 1,070,000 loans in foreclosure process.

For a total of ​​3,840,000 loans delinquent or in foreclosure in March. This is down from 4,997,000 in March 2013.

Click on graph for larger image.

This graph from BKFS shows percent of loans delinquent and in the foreclosure process over time.

Delinquencies and foreclosures are moving down - and might be back to normal levels in a couple of years. 

The second graph from BKFS shows the percent of borrowers with negative equity.  From Black Knight:

The data showed that, as home prices have risen over the past two years and many distressed loans have worked their way through the system, the percentage of Americans in negative equity positions on their mortgage has declined considerably. Meanwhile, those loans already in the foreclosure process have been aging substantially. According to Kostya Gradushy, Black Knight’s manager of Loan Data and Customer Analytics, both data trends point to a healthier housing market.

“Two years of relatively consecutive home price increases and a general decline in the number of distressed loans have contributed to a decreasing number of underwater borrowers,” said Gradushy. “Looking at current combined loan-to-value (CLTV), we see that while four years ago 34 percent of borrowers were in negative equity positions, today that number has dropped to just about 10 percent of active mortgage loans. While negative equity levels have declined for both judicial vs. non-judicial foreclosure states from the peak of the crisis, non-judicial states are now at just under eight percent, as compared to 13.4 percent in their judicial counterparts. Overall, nearly half of all borrowers today are both in positive equity positions and of strong credit quality – credit scores of 700 or above. Four years ago, that category of borrowers represented over a third of active mortgages.
emphasis added

There is much more in the mortgage monitor.