by Calculated Risk on 12/04/2014 01:27:00 PM

A few months ago, there was some discussion of a possible "refi boom" due to falling mortgage rates. I argued then that that was unlikely.

Mortgage rates have fallen further, but rates are still far above the level required for a significant increase in refinance activity.

This morning Freddie Mac reported: Mortgage Rates Lower Across the Board

Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing average fixed mortgage rates down from the previous week. At 3.89 percent, the average 30-year fixed-rate mortgage is at its lowest level since the week of May 30, 2013.

Click on graph for larger image.

This graph shows the 30 year fixed rate mortgage interest rate from the Freddie Mac Primary Mortgage Market Survey® compared to the MBA refinance index. 

The refinance index dropped sharply last year when mortgage rates increased.  Historically refinance activity picks up significantly when mortgage rates fall about 50 bps from a recent level.

Many borrowers who took out mortgages last year can refinance now - but that is a small number of total borrowers.  For a significant increase in refinance activity, rates would have to fall below the late 2012 lows (on a monthly basis, 30 year mortgage rates were at 3.35% in the PMMS in November and December 2012.

Based on the relationship between the 30 year mortgage rate and 10-year Treasury yields, the 10-year Treasury yield would probably have to decline to 1.5% or lower for a significant refinance boom (in the near future). With the 10-year yield currently at 2.27%, I don't expect a significant increase in refinance activity any time soon.

by Calculated Risk on 12/04/2014 09:47:00 AM

Black Knight Financial Services (BKFS) released their Mortgage Monitor report for October today. According to BKFS, 5.44% of mortgages were delinquent in October, down from 5.67% in September. BKFS reported that 1.69% of mortgages were in the foreclosure process, down from 2.54% in October 2013.

This gives a total of 7.13% delinquent or in foreclosure. It breaks down as:

• 1,658,000 properties that are 30 or more days, and less than 90 days past due, but not in foreclosure.
• 1,101,000 properties that are 90 or more days delinquent, but not in foreclosure.
• 858,000 loans in foreclosure process.

For a total of ​​3,617,000 loans delinquent or in foreclosure in October. This is down from 4,427,000 in October 2013.

Click on graph for larger image.

This table from Black Knight is a comparison of 2005 to 2014 originations by Credit Score and LTV. Black Knight notes:

Borrowers with credit scores of 740 and up make up 55 percent of 2014 refinance originations, compared to just 29 percent in 2005

On the other hand, in 2005, 21 percent of refinance originations were to credit scores below 640; today that number is just 8 percent

Today’s purchase market is even more clearly separated; 56 percent of purchase originations were to credit scores of 740 and above, while just 2 percent went to borrowers with scores below 640

It is not surprising that the recent vintages of mortgage loan are the best performing ever!

This graph shows the percent of loans in negative equity grouped by CLTV.

From Black Knight:

Over the past two and a half years, there has been a sustained and continual improvement in negative equity, from 33.5 percent of borrowers being underwater in January 2012 to less than eight percent today

Only 1.2 percent of active mortgages have current CLTVs of 150 percent or higher, down from 9.5 percent in January of 2012 (the bottom of the market in terms of national home prices)

While the overall share of underwater mortgages continues to decline, delinquency rates are increasing among the remaining negative equity mortgages

For the severely underwater – 150 percent or higher current CLTVs – over three out of every four borrowers (77 percent) are delinquent

The good news is there are few borrowers with CLTV at or above 150%. The bad news is - for most of these borrowers - the only way out is foreclosure (or a short sale).

There is much more in the mortgage monitor.

by Calculated Risk on 12/04/2014 08:34:00 AM

The DOL reported:

In the week ending November 29, the advance figure for seasonally adjusted initial claims was 297,000, a decrease of 17,000 from the previous week's revised level. The previous week's level was revised up by 1,000 from 313,000 to 314,000. The 4-week moving average was 299,000, an increase of 4,750 from the previous week's revised average. The previous week's average was revised up by 250 from 294,000 to 294,250.

There were no special factors impacting this week's initial claims

The previous week was revised up to 314,000

The following graph shows the 4-week moving average of weekly claims since January 1971.

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 increased to 299,000.

This was close to the consensus forecast of 300,000, and the level suggests few layoffs.

by Calculated Risk on 12/03/2014 07:52:00 PM

From the WSJ: Saudi Arabia Sees Oil Prices Stabilizing Around $60 a Barrel

OPEC’s biggest oil producer, Saudi Arabia, now believes oil prices could stabilize at around $60 a barrel, a level both it and other Gulf producers believe they could withstand, according to people familiar with the situation.

The shift in Saudi thinking suggests the de facto leader of the Organization of the Petroleum Exporting Countries won’t push for supply cuts in the near-term, even if oil prices fall further. Brent crude dropped 62 cents a barrel to $69.92 on Wednesday.

Another $10 per barrel decline would be good for the economy!

Thursday:
• At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for claims to decrease to 300 thousand from 313 thousand.

by Calculated Risk on 12/03/2014 04:00:00 PM

Friday at 8:30 AM ET, the BLS will release the employment report for November. The consensus, according to Bloomberg, is for an increase of 230,000 non-farm payroll jobs in November (with a range of estimates between 140,000 and 275,000), and for the unemployment rate to be unchanged at 5.8%.

The BLS reported 214,000 jobs added in October.

Here is a summary of recent data:

• The ADP employment report showed an increase of 208,000 private sector payroll jobs in November. This was below expectations of 226,000 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 slightly below expectations.

• The ISM manufacturing employment index decreased in November to 54.9%. A historical correlation between the ISM manufacturing employment index and the BLS employment report for manufacturing, suggests that private sector BLS manufacturing payroll jobs increased about 7,000 in November. The ADP report indicated a 11,000 increase for manufacturing jobs in November.

The ISM non-manufacturing employment index decreased in November to 56.7%. A historical correlation (linear) between the ISM non-manufacturing employment index and the BLS employment report for non-manufacturing, suggests that private sector BLS non-manufacturing payroll jobs increased about 253,000 in November.

Combined, the ISM indexes suggests employment gains of 260,000.  This suggests growth above expectations.

• Initial weekly unemployment claims averaged close to 294,000 in November, up from 287,000 in October. For the BLS reference week (includes the 12th of the month), initial claims were at 292,000; this was up from 284,000 during the reference week in October.

Generally this suggests about the same low level of layoffs in November as in September and October.

• The final November Reuters / University of Michigan consumer sentiment index increased to 88.8 from the October reading of 86.9. This was the highest level in more than seven years. Sentiment is frequently coincident with changes in the labor market, but there are other factors too - like sharply lower gasoline prices.

• On small business hiring: The small business index from Intuit showed a 30,000 increase in small business employment in November (up from 15,000 in October):

Small business added 30,000 new people to its base of 20.5 million employees.

"Small businesses are not just hiring, they are also paying employees more and asking them to work longer hours. All of these figures are seasonally adjusted, so this is not influenced by just holiday activity," said Susan Woodward, the economist who works with Intuit to create the Small Business Employment and Revenue Indexes.

Hourly employees worked 20 minutes longer in November than they did in October, a sharp rise, and the fraction of hourly workers working full–time rose by 0.2 percent for the month. The hiring rate rose to 5.8 percent for the month, the highest since January 2009.

Compensation per employee, which includes business owners, rose $9 for the month, or 0.34 percent, to $33,305 per year.

• Trim Tabs reported:

TrimTabs Investment Research estimates that the U.S. economy added 306,000 jobs in November, little changed from 314,000 jobs in October.

“Hiring kicked into higher gear just in time for the holiday shopping season,” said David Santschi, Chief Executive Officer of TrimTabs. “Job growth in the past two months was the highest since May 2010, when census-related hiring skewed the data.” ... TrimTabs’ employment estimates are based on analysis of daily income tax deposits to the U.S. Treasury from the paychecks of the 141 million U.S. workers subject to withholding

• Conclusion: Below is a table showing several employment indicators and the initial BLS report (the first column is the revised employment). A few key points:

1) All but one of the revisions this year have been up (average about 22,000).

2) Unfortunately none of the indicators below is very good at predicting the initial BLS employment report.  

3) In general it looks like this should be another 200+ month (based on ADP, ISM, unemployment claims, and small business hiring).

There is always some randomness to the employment report.  The consensus forecast is pretty strong, but I'll take the over again (above 230,000).

Employment Indicators (000s)
	BLS Revised	BLS Initial	ADP Initial	ISM	Weekly Claims Reference Week1	Intuit Small Business
Jan	144	113	175	236	329	10
Feb	222	175	139	-6	334	0
Mar	203	192	191	153	323	0
Apr	304	288	220	NA	320	25
May	229	217	179	130	327	35
Jun	267	288	281	NA	314	20
Jul	243	209	218	NA	303	15
Aug	203	142	204	285	299	0
Sep	256	248	213	NA	281	10
Oct		214	230	340	284	15
Nov		Friday	208	260	282	30
1Lower is better for Unemployment Claims

by Calculated Risk on 12/03/2014 02:00:00 PM

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

Reports from the twelve Federal Reserve Districts suggest that national economic activity continued to expand in October and November. A number of Districts also noted that contacts remained optimistic about the outlook for future economic activity. Consumer spending continued to advance in most Districts, and reports on tourism were mostly positive. Employment gains were widespread across Districts, and Districts reporting on business spending generally noted some improvement. Demand for nonfinancial services generally increased. Manufacturing activity strengthened in most Districts. Construction and real estate activity expanded overall, but at a pace that varied by sector and by District.

And on real estate:

Construction and real estate activity expanded overall in October and November, but saw a fair amount of variation across sectors and regions. Residential construction increased on balance across the Districts and multifamily construction remained stronger than single-family construction in a number of Districts. Reports on residential real estate activity were mixed. About half of the Districts reported an increase in home sales. Many Districts indicated that sales in the multifamily sector were stronger than sales in the single-family sector. Home prices were little changed in most Districts, although prices increased in the Richmond, Atlanta, Dallas, and San Francisco Districts. Nonresidential construction rose in most Districts. Construction of office space was relatively strong in some large urban areas, such as New York City and Philadelphia. Industrial construction was particularly strong in the Cleveland, Chicago, and Dallas Districts. Commercial real estate activity also increased in many Districts, with declining vacancies and rising rents for office space; especially strong activity was noted in the central business districts of some large urban areas. Vacancies for commercial and industrial space also dropped in several Districts.
emphasis added

Residential real estate is "mixed', however nonresidential is picking up.  Overall fairly positive.

by Calculated Risk on 12/03/2014 10:00:00 AM

The November ISM Non-manufacturing index was at 59.3%, up from 57.1% in October. The employment index decreased in November to 56.7%, down from 59.6% in October. Note: Above 50 indicates expansion, below 50 contraction.

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

Economic activity in the non-manufacturing sector grew in November for the 58th 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 59.3 percent in November, 2.2 percentage points higher than the October reading of 57.1 percent. This represents continued growth in the non-manufacturing sector. The Non-Manufacturing Business Activity Index increased to 64.4 percent, which is 4.4 percentage points higher than the October reading of 60 percent, reflecting growth for the 64th consecutive month at a faster rate. The New Orders Index registered 61.4 percent, 2.3 percentage points higher than the reading of 59.1 percent registered in October. The Employment Index decreased 2.9 percentage points to 56.7 percent from the October reading of 59.6 percent and indicates growth for the ninth consecutive month. The Prices Index increased 2.3 percentage points from the October reading of 52.1 percent to 54.4 percent, indicating prices increased at a faster rate in November when compared to October. According to the NMI®, 14 non-manufacturing industries reported growth in November. Comments from the majority of respondents indicate that business conditions are on track for continued growth. The respondents have also stated that there is some strain on capacity due to the month-over-month increase in activity."
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 57.7% and suggests faster expansion in November than in October.  A solid report.

by Calculated Risk on 12/03/2014 08:15:00 AM

From ADP:

– Private sector employment increased by 208,000 jobs from October to November according to the November 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, “Steady as she goes in the job market. Monthly job gains remain consistently over 200,000. At this pace the unemployment rate will drop by half a percentage point per annum. The tightening in the job market will soon prompt acceleration in wage growth.”

This was below the consensus forecast for 226,000 private sector jobs added in the ADP report. 

The BLS report for November will be released on Friday.

by Calculated Risk on 12/03/2014 07:00:00 AM

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

Mortgage applications decreased 7.3 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending November 28, 2014. This week’s results included an adjustment for the Thanksgiving holiday. ...

The Refinance Index decreased 13 percent from the previous week. The seasonally adjusted Purchase Index increased 3 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 4.08 percent, the lowest level since May 2013, from 4.15 percent, with points increasing to 0.28 from 0.25 (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 75% from the levels in May 2013.

Even with a decline in mortgage rates, refinance activity is very low this year and 2014 will be the lowest since year 2000.  As I've noted before - rates would have to decline significantly for there to be a large refinance boom.


The second graph shows the MBA mortgage purchase index.  

According to the MBA, the unadjusted purchase index is down about 4% from a year ago.

by Calculated Risk on 12/02/2014 07:09:00 PM

Looking ahead to Friday, if net non-farm job growth (November plus revisions) is 222 thousand or more, than 2014 will be the best year for employment since the '90s.

For the private sector, the magic number is 176 thousand to pass 2011 and be the best year since the '90s (seems very likely).

Right now the consensus is for 235 thousand non-farm payroll jobs according to MarketWatch.

Get ready to party like it's 1999!

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

• At 8:15 AM, the ADP Employment Report for November. This report is for private payrolls only (no government). The consensus is for 226,000 payroll jobs added in November, down from 230,000 in October.

• At 10:00 AM, the ISM non-Manufacturing Index for November. The consensus is for a reading of 57.7, up from 57.1 in October. Note: Above 50 indicates expansion.

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