by Calculated Risk on 1/08/2015 09:25:00 AM

From CoreLogic: CoreLogic Reports 273,000 Residential Properties Regained Equity in Q3 2014

CoreLogic ... today released new analysis showing nearly 273,000 U.S. homes returned to positive equity in the third quarter of 2014, bringing the total number of mortgaged residential properties with equity to approximately 44.6 million, or 90 percent of all mortgaged properties. Nationwide, borrower equity increased year over year by approximately $800 billion in Q3 2014. The CoreLogic analysis indicates that approximately 5.1 million homes, or 10.3 percent of all residential properties with a mortgage, were still in negative equity as of Q3 2014 compared to 5.4 million homes, or 10.9 percent, for Q2 2014. This compares to a negative equity share of 13.3 percent, or 6.5 million homes, in Q3 2013, representing a year-over-year decrease in the number of underwater homes by almost 1.5 million (1,433,296), or 3.0 percent.

... Of the 44.6 million residential properties with positive equity, approximately 9.4 million, or 19 percent, have less than 20-percent equity (referred to as “under-equitied”) and 1.3 million of those have less than 5-percent equity (referred to as near-negative equity). Borrowers who are “under-equitied” may have a more difficult time refinancing their existing homes or obtaining new financing to sell and buy another home due to underwriting constraints. Borrowers with near-negative equity are considered at risk of moving into negative equity if home prices fall. In contrast, if home prices rose by as little as 5 percent, an additional 1 million homeowners now in negative equity would regain equity. ...

“Nationally, the negative equity share is down over three percentage points over the past year. Declines were concentrated in a handful of states, such as Nevada, Georgia, Michigan and Florida,” said Sam Khater, deputy chief economist for CoreLogic. “Forecasted house price appreciation of about five percent over the next year suggests that negative equity should be at about 8 percent a year from now, still above average, but approaching the pre-crisis level.”
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 25.4 percent, followed by Florida (23.8 percent), Arizona (19 percent), Rhode Island (14.8 percent) and Illinois (14.1 percent). These top five states together account for 33.1 percent of negative equity in the United States."

Note: The share of negative equity is still very high in Nevada and Florida, but down from a year ago (Q3 2013) when the negative equity share in Nevada was at 32.2 percent, and at 28.8 percent in Florida.

The second graph shows the distribution of home equity in Q3 compared to Q2 2014. Close to 4% of residential properties have 25% or more negative equity, down from Q2.

In Q3 2013, there were 6.4 million properties with negative equity - now there are 5.1 million.  A significant change.

by Calculated Risk on 1/08/2015 08:33:00 AM

The DOL reported:

In the week ending January 3, the advance figure for seasonally adjusted initial claims was 294,000, a decrease of 4,000 from the previous week's unrevised level of 298,000. The 4-week moving average was 290,500, a decrease of 250 from the previous week's unrevised average of 290,750.

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

The previous week was unrevised.

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 increased slightly to 290,500.

This was lower than the consensus forecast of 300,000, and the level suggests few layoffs.

by Calculated Risk on 1/07/2015 07:25:00 PM

Interesting from Jon Hilsenrath And Brian Blackstone at the WSJ: Fed Backs More Overseas Stimulus

Fed officials rarely comment on the decisions taken by foreign central banks and have generally played down risks to domestic growth emanating from abroad. Yet minutes of the Fed’s Dec. 16-17 policy meeting included several references to the urgency U.S. officials and market participants are placing on new policy actions to counteract slow growth outside the U.S.
...
The minutes showed Fed officials “regarded the international situation as an important source of downside risks to domestic real activity and employment.” They added that the risks were particularly serious “if foreign policy responses were insufficient.”

In another place in the Fed minutes, officials warned that financial markets had been “importantly influenced by concerns about prospects for foreign economic growth and by associated expectations of monetary policy actions in Europe and Japan.”

Thursday:
• At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for claims to increase to 300 thousand from 298 thousand.

• Early, Trulia Price Rent Monitors for December. 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 3:00 PM, Consumer Credit for November from the Federal Reserve. The consensus is for credit to increase $15.0 billion.

by Calculated Risk on 1/07/2015 03:51:00 PM

Friday at 8:30 AM ET, the BLS will release the employment report for December. The consensus, according to Bloomberg, is for an increase of 245,000 non-farm payroll jobs in December (with a range of estimates between 202,000 and 305,000), and for the unemployment rate to decline to 5.7%.

The BLS reported 321,000 jobs added in November.

Here is a summary of recent data:

• The ADP employment report showed an increase of 241,000 private sector payroll jobs in November. This was above expectations of 223,000 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 above expectations.

• The ISM manufacturing employment index increased in December to 56.8%. 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 18,000 in December. The ADP report indicated a 26,000 increase for manufacturing jobs in December.

The ISM non-manufacturing employment index decreased in December to 56.0%. 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 234,000 in December.

Combined, the ISM indexes suggests employment gains of 252,000.  This suggests growth slightly above expectations.

• Initial weekly unemployment claims averaged close to 291,000 in December, down from 299,000 in November. For the BLS reference week (includes the 12th of the month), initial claims were at 289,000; this was down from 292,000 during the reference week in November.

Generally this suggests about the same low level of layoffs in December as for the previous three months (employment gains averaged 278,000 per month for September, October and November).

• The final December Reuters / University of Michigan consumer sentiment index increased to 93.6 from the November reading of 88.8. This was the highest level in nearly eight 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 December, the same strong level as in November.

• Trim Tabs reported that the U.S. economy added between 210,000 to 240,000 jobs in December. This is down sharply from their 306,000 estimate last month (that was pretty close). "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"  December is more challenging for TrimTabs due to year end bonuses - so they provided a range this month.

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

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

2) 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 245,000).

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	271	248	213	NA	281	10
Oct	243	214	230	340	284	15
Nov		321	208	260	292	30
Dec		Friday	241	252	289	30
1Lower is better for Unemployment Claims

by Calculated Risk on 1/07/2015 02:00:00 PM

Participants expressed more concern about low inflation and the FOMC might wait on rate hikes until they are "reasonably confident that inflation will move back toward 2 percent over time".

From the Fed: Minutes of the Federal Open Market Committee, December 16-17, 2014. Excerpts:

Participants generally anticipated that inflation was likely to decline further in the near term, reflecting the reduction in oil prices and the effects of the rise in the foreign exchange value of the dollar on import prices. Most participants saw these influences as temporary and thus continued to expect inflation to move back gradually to the Committee's 2 percent longer-run objective as the labor market improved further in an environment of well-anchored inflation expectations. Survey-based measures of longer-term inflation expectations remained stable, although market-based measures of inflation compensation over the next five years, as well as over the five-year period beginning five years ahead, moved down further over the intermeeting period. Participants discussed various explanations for the decline in market-based measures, including a fall in expected future inflation, reductions in inflation risk premiums, and higher liquidity and other premiums that might be influencing the prices of Treasury Inflation-Protected Securities and inflation derivatives. Model-based decompositions of inflation compensation seemed to support the message from surveys that longer-term inflation expectations had remained stable, although it was observed that these results were sensitive to the assumptions underlying the particular models used. It was noted that even if the declines in inflation compensation reflected lower inflation risk premiums rather than a reduction in expected inflation, policymakers might still want to take them into account because such changes could reflect increased concerns on the part of investors about adverse outcomes in which low inflation was accompanied by weak economic activity. In the end, participants generally agreed that it would take more time and analysis to draw definitive conclusions regarding the recent behavior of inflation compensation.
...
With regard to inflation, a number of participants saw a risk that it could run persistently below their 2 percent objective, with some expressing concern that such an outcome could undermine the credibility of the Committee's commitment to that objective.
...
With lower energy prices and the stronger dollar likely to keep inflation below target for some time, it was noted that the Committee might begin normalization at a time when core inflation was near current levels, although in that circumstance participants would want to be reasonably confident that inflation will move back toward 2 percent over time. emphasis added

by Calculated Risk on 1/07/2015 11:06:00 AM

Reis reported that the vacancy rate for regional malls was increased to 8.0% in Q4 2014 from 7.9% in Q3. This is down from a cycle peak of 9.4% in Q3 2011.

For Neighborhood and Community malls (strip malls), the vacancy rate decreased to 10.2% in Q4, from 10.1% in Q3. For strip malls, the vacancy rate peaked at 11.1% in Q3 2011.

Comments from Reis Senior Economist Ryan Severino:

[Strip Malls] The retail market recovery marched forward during the fourth quarter, but remained at a snail's pace. Net absorption once again exceeded the scant levels of construction in the market which pushed the vacancy rate for neighborhood and community centers down by 10 basis points to 10.2%. Asking and effective rent growth both accelerated slightly versus last quarter but the quarterly growth rates are so weak that any difference is marginal and insignificant. Vacancy remains far too elevated for rents to grow at a much faster pace than we have observed in recent quarters.

[Regional] During the fourth quarter, regional mall vacancy increased by 10 basis points to 8.0%. This is the first quarterly increase in the mall vacancy rate since the third quarter of 2011. For 2014, the mall vacancy rate was also up 10 basis points. Although the mall recovery cycle is fairly mature at this juncture, the primary culprit for the increase in the vacancy rate was the closing of a number of Sears stores during the fourth quarter. However, the market recovery had been losing steam before this with the national vacancy rate flat for most of 2014. While there is no new construction in the mall subsector, demand should increase along with the recovery in the economy and labor markets in 2014. Therefore, we do not believe that this quarter is a reversal in fortune for the mall sector. However, any improvement in demand will come from average‐caliber malls. Vacancy at high‐end malls has just about vanished, giving their landlords strong pricing power, but little ability to increase NOI due to occupancy change. Vacancy at average malls remains relatively high and still has significant room to compress over the next few years.

Click on graph for larger image.

This graph shows the strip mall vacancy rate starting in 1980 (prior to 2000 the data is annual). The regional mall data starts in 2000. Back in the '80s, there was overbuilding in the mall sector even as the vacancy rate was rising. This was due to the very loose commercial lending that led to the S&L crisis.

In the mid-'00s, mall investment picked up as mall builders followed the "roof tops" of the residential boom (more loose lending). This led to the vacancy rate moving higher even before the recession started. Then there was a sharp increase in the vacancy rate during the recession and financial crisis.

Mall vacancy data courtesy of Reis.

by Calculated Risk on 1/07/2015 08:54:00 AM

The Department of Commerce reported:

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that the goods and services deficit was $39.0 billion in November, down $3.2 billion from $42.2 billion in October, revised. November exports were $196.4 billion, $2.0 billion less than October exports. November imports were $235.4 billion, $5.2 billion less than October imports.

The trade deficit was smaller than the consensus forecast of $42.0 billion.

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

Click on graph for larger image.

Both imports and exports decreased in November.

Exports are 18% above the pre-recession peak and up 1% compared to November 2013; imports are 2% above the pre-recession peak, and up about 2% compared to November 2013. 

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

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 $82.95 in November, down from $88.47 in October, and down from $94.69 in November 2013.  The petroleum deficit has generally been declining and is the major reason the overall deficit has declined since early 2012.

Note: There is a lag due to shipping and long term contracts, but oil prices will really decline over the next several months - and the oil deficit will get much smaller.

The trade deficit with China increased to $29.9 billion in November, from $27.0 billion in November 2013.  The deficit with China is a large portion of the overall deficit.

by Calculated Risk on 1/07/2015 08:15:00 AM

From ADP:

Private sector employment increased by 241,000 jobs from November to December according to the December 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.
...
Goods-producing employment rose by 46,000 jobs in December, up from 40,000 jobs gained in November. The construction industry added 23,000 jobs, up from last month’s gain of 20,000. Meanwhile, manufacturing added 26,000 jobs in December, well above November’s 16,000 and the second highest monthly total of 2014 in that sector.

Service-providing employment rose by 194,000 jobs in December, up from 187,000 in November. ...

Mark Zandi, chief economist of Moody’s Analytics, said, “The job market continues to power forward. Businesses across all industries and sizes are adding to payrolls. At the current pace of job growth, the economy will be back to full employment by this time next year.”

This was above the consensus forecast for 223,000 private sector jobs added in the ADP report. 

The BLS report for December will be released on Friday and the consensus is for 240,000 non-farm payroll jobs added in December.

by Calculated Risk on 1/07/2015 07:01:00 AM

From the MBA: Mortgage Applications Decreased Over Two Week Period in Latest MBA Weekly Survey

Mortgage applications decreased 9.1 percent from two weeks earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending January 2, 2015. The most recent week’s results include an adjustment to account for the New Year’s Day holiday, while the previous week’s results were adjusted for the Christmas holiday....

The Refinance Index decreased 12 percent from two weeks ago. The seasonally adjusted Purchase Index decreased 5 percent from two weeks earlier ... The Purchase Index was 8 percent lower than the same week one year ago.
...
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.01 percent from 4.04 percent, with points decreasing to 0.28 from 0.35 (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.

2014 was probably the lowest year for refinance activity since year 2000 (haven't seen final stats yet).  Even with the sharp decline in rates this week, mortgage rates would have to decline further for there to be a large refinance boom - so I expect refinance activity to be low again in 2015.


The second graph shows the MBA mortgage purchase index.  

According to the MBA, the unadjusted purchase index is down 8% from a year ago.

by Calculated Risk on 1/06/2015 08:21:00 PM

For fun, here are Byron Wien's Ten Surprises for 2015. Here are a few:

1. The Federal Reserve finally raises short-term interest rates, well before the middle of the year, encouraged by the improving employment data and strong Gross Domestic Product growth. The timing proves faulty, however, as the momentum of the economy has begun to flag and a short-term slowdown has started. The end of monetary accommodation and rising rates precipitate a correction in equities. Long-term Treasury rates stay where they started and the yield curve flattens. [CR Note: I doubt the Fed will raise rates "well before the middle of the year"]

3. The year-end 2014 rally in United States equities continues as the market rises for a strong performance in 2015. A growing economy, fueled by housing and capital spending and favorable earnings, enables the Standard & Poor’s 500 to increase 15% during the year, outperforming equities in most major industrialized countries throughout the world.

4. Mario Draghi finally begins to expand the balance sheet of the European Central Bank aggressively by buying sovereign debt, mortgages and corporate bonds. In spite of this expansion, Europe falls back into a serious recession. Germany is particularly weak as reduced demand from various trading partners has a major impact on its exports. The European policy makers fail to embrace the one option, fiscal spending, that could turn the economy around, and European stocks decline. Politically, Europe moves dangerously toward the right. [CR Note: Unfortunately probably close.]

8. Brent slips into the $40s. The low price of crude oil, which continues throughout the first part of the year, has a major impact on Russia. A peace settlement with Ukraine is signed, giving Eastern Ukraine substantial autonomy but guaranteeing the sovereignty of the rest of the country. President Putin seems to be trying to win back the respect of the international community as the country reels from its economic problems, but the Russian citizenry finally turns on him. His approval rating plummets and he resigns by year-end. During the second half of the year, West Texas Intermediate and Brent crude are both above $70, as emerging market demand continues to increase. [CR Note: Brent into the $40s is already close. Brent closed at $51.10 today.]

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 December. This report is for private payrolls only (no government). The consensus is for 223,000 payroll jobs added in December, up from 207,000 in November.

• At 8:30 AM, the Trade Balance report for November from the Census Bureau. The consensus is for the U.S. trade deficit to be at $42.0 billion in November from $43.4 billion in October.

• Early, Reis Q4 2014 Mall Survey of rents and vacancy rates.

• At 2:00 PM, the FOMC Minutes for Meeting of December 16-17, 2014