by Calculated Risk on 1/20/2015 07:38:00 PM

From Mortgage News Daily: Mortgage Rates Mixed to Begin Volatile Week

Mortgage rates were truly mixed today, with some lenders improving while others moved higher. More than a few were unchanged or close to it. All this despite the fact that broader interest rate benchmarks like 10yr US Treasuries were unequivocally in stronger territory.
...
The net effect of this mixed underperformance is that the most prevalent conforming, 30yr fixed rate quote remains 3.625%.

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 December. Total housing starts were at 1.028 million (SAAR) in November. Single family starts were at 677 thousand SAAR in November. The consensus is for total housing starts to increase to 1.040 million (SAAR) in December.

• During the day: The AIA's Architecture Billings Index for December (a leading indicator for commercial real estate).

by Calculated Risk on 1/20/2015 02:57:00 PM

With lower gasoline prices, vehicle miles driven might reach a new peak in 2015.

The Department of Transportation (DOT) reported:

◦Travel on all roads and streets changed by 1.1% (2.5 billion vehicle miles) for November 2014 as compared with November 2013.

◦Travel for the month is estimated to be 241.0 billion vehicle miles.

◦Cumulative Travel for 2014 changed by 1.4% (38.2 billion vehicle miles).

The following graph shows the rolling 12 month total vehicle miles driven.

The rolling 12 month total is slowly moving up, after moving sideways for a few years.


Click on graph for larger image.

In the early '80s, miles driven (rolling 12 months) stayed below the previous peak for 39 months.

Currently miles driven has been below the previous peak for 84 months - 7 years - and still counting.  Currently miles driven (rolling 12 months) are about 1.2% below the previous peak.

The second graph shows the year-over-year change from the same month in the previous year.

 In November 2014, gasoline averaged of $3.00 per gallon according to the EIA.  That was down from November 2013 when prices averaged $3.32 per gallon.

Prices will really be down year-over-year in December and January!.

As we've discussed, gasoline prices are just part of the story.  The lack of growth in miles driven over the last 7 years is probably also due to the lingering effects of the great recession (lack of wage growth), the aging of the overall population (over 55 drivers drive fewer miles) and changing driving habits of young drivers.

Even with all these factors, it is now possible that a new peak in miles driven could happen in 2015.

by Calculated Risk on 1/20/2015 12:15:00 PM

Here is an indicator that I follow on trucking, from the ATA: ATA Truck Tonnage Index Unchanged in December, Up 3.5% for 2014

American Trucking Associations’ advanced seasonally adjusted For-Hire Truck Tonnage Index was unchanged in December, following a jump of 3.5% during the previous month. In December, the index equaled 136.8 (2000=100), which tied November as the all-time high.

Compared with December 2013, the SA index increased 5.2%, which was the largest year-over-year gain in 2014. For the entire year, tonnage was up 3.5%. ...

“Economic data was mixed in December, with retail sales down 0.9% and factory output up 0.3%, so tonnage was in-between those two readings, which are two large drivers of truck freight,” said ATA Chief Economist Bob Costello. “Overall, 2014 was a good year for truck tonnage with significant gains throughout the year after falling 4.5% in January alone.”

Costello said that in December, tonnage was 10.2% above January.

“Freight volumes look good going into 2015,” Costello said. “Expect an acceleration in consumer spending and factory output to offset the weakness in hydraulic fracking this year.”

Trucking serves as a barometer of the U.S. economy, representing 69.1% of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods. Trucks hauled 9.7 billion tons of freight in 2013. Motor carriers collected $681.7 billion, or 81.2% of total revenue earned by all transport modes.
emphasis added

Click on graph for larger image.

Here is a long term graph that shows ATA's For-Hire Truck Tonnage index.

The dashed line is the current level of the index.

The index is now up 5.2% year-over-year and finished the year strong.

by Calculated Risk on 1/20/2015 10:00:00 AM

The National Association of Home Builders (NAHB) reported the housing market index (HMI) was at 57 in January, down from an upwardly revised 58 in December (revised up from 57). Any number above 50 indicates that more builders view sales conditions as good than poor.

From Reuters: U.S. homebuilder sentiment edges lower in January -NAHB

The NAHB/Wells Fargo Housing Market index fell to 57 from a revised 58 in December, the group said in a statement. ... The index has not been below 50 since June 2014.

"After seven months above the key 50 benchmark, builder sentiment is reflecting the gradual improvement that is occurring in many markets throughout the nation," said NAHB Chairman Kevin Kelly, a home builder and developer from Wilmington, Del.

The single-family home sales component was flat at 62. The gauge of single-family sales expectations for the next six months fell to 60 from 64, while the index of prospective buyer traffic fell to 44 from 46.
emphasis added

Click on graph for larger image.

This graph show the NAHB index since Jan 1985.

This was below the consensus forecast of 58.

by Calculated Risk on 1/19/2015 07:08:00 PM

Here is a big convention in Las Vegas, from the WSJ: Larger Home-Builders Show Reflects Industry Optimism

The National Association of Home Builders’ International Builders Show, combined with the Kitchen & Bath Industry Show, is expected to attract 125,000 attendees and occupy 750,000 square feet of meeting and showroom space at the sprawling Las Vegas Convention Center.

It is the largest edition of the trade show in many years, due partly to its consolidation with other shows and partly to the gradual recovery of the home-building market. It brings with it mildly upbeat outlooks for a return of momentum in the spring season, which unofficially begins after the Super Bowl and typically hits its stride in March.

For a chuckle, here are the NAR's forecast for 2015:

The National Association of Realtors Chief Economist Lawrence Yun estimates that new-home sales will increase by 41% to 624,000 this year from 2014 and that construction starts for single-family homes will rise by nearly 32% to 840,000.

No way!

Tuesday:
• At 10:00 AM ET, the January NAHB homebuilder survey. The consensus is for a reading of 58, up from 57 in December. Any number above 50 indicates that more builders view sales conditions as good than poor.

Weekend:
• Schedule for Week of January 18, 2015

• Update: Predicting the Next Recession

From CNBC: Pre-Market Data and Bloomberg futures: currently S&P futures are down 4 and DOW futures are down 45 (fair value).

Oil prices were down over the last week with WTI futures at $47.51 per barrel and Brent at $48.84 per barrel.  A year ago, WTI was at $93, and Brent was at $107 - so prices are down 49% and 55% year-over-year respectively.

Below is a graph from Gasbuddy.com for nationwide gasoline prices. Nationally prices are around $2.04 per gallon (down about $1.25 per gallon from a year ago).  If you click on "show crude oil prices", the graph displays oil prices for WTI, not Brent; gasoline prices in most of the U.S. are impacted more by Brent prices.

Orange County Historical Gas Price Charts Provided by GasBuddy.com

by Calculated Risk on 1/19/2015 01:38:00 PM

Just an update ... during the recession, I wrote about the troubles in Las Vegas and included a chart of visitor and convention attendance: Lost Vegas.

Since then Las Vegas visitor traffic recovered to a new record high in 2012, although visitor traffic was down slightly in 2013.

We only have data through November, but visitor traffic almost certainly set a new record in 2014.

However convention attendance is only returning slowly. Here is the data from the Las Vegas Convention and Visitors Authority.  

Click on graph for larger image.

The blue bars are annual visitor traffic (left scale), and the red line is convention attendance (right scale). 

Through November, visitor traffic in 2014 is running 3.5% above 2013.

Convention traffic is up about 1% from last year, and is still way below the pre-recession peak.  In general, the gamblers are back - and the conventions are slowly returning.

Note: I wonder if the previous convention peak in 2005 and 2006 was related to housing related meetings, like "How to Flip a House", "How to Buy with no money down", and "how to build a real estate empire by borrowing against your home and buying Las Vegas houses" type conventions!

by Calculated Risk on 1/19/2015 10:14:00 AM

This is worth a mention - the drought in California is a "growing" concern ...

From the San Jose Mercury News: California drought: What happened to the rain?

An unusually wet December has given way to a hot, totally dry January. And it's creating angst among drought-weary residents ...

Weather experts, however, say not to panic. They emphasize that it's too soon to say that California is headed into its fourth straight year of drought. And they point out that a dry January is not out of the ordinary in a typical Northern California winter.

"A midwinter dry spell occurs almost every winter, and it averages 19 days," said meteorologist Jan Null, owner of Golden Gate Weather Services in Saratoga. "Now if it persists on to February and March, then we're getting out of the normal realm."

This is the fourth year in a row with little rain or snow in the mountains (the statewide snowpack is about 36% of normal for this date). California is the largest agricultural state, and an ongoing drought could have an impact on food prices - and on the economy.

by Calculated Risk on 1/18/2015 11:12:00 PM

Another excellent piece from Tim Duy: Will The Fed Take a Dovish Turn Next Week?

As it stands now, we are heading into the next FOMC meeting with the growing expectation that the Fed will take a dovish turn. Is it not obvious that global economic turmoil, collapsing oil prices, weak inflation, and a stronger dollar are clearly pointing to rapidly rising downside risks to the US economy? For financial market participants, they answer is a clear "yes." Expectations of the first rate hike have been pushed out to the end of this year, seemingly in complete defiance of Fed plans for policy normalization. The Fed may get there as well and abandon their carefully crafted mid-year plan, but I suspect they will not move quite as rapidly as financial market participants desire.

As a general rule, the Fed tends to act in a more deliberate fashion....

Bottom Line: I reiterate my view that despite the generally positive data flow, and the upward boost from oil, I don't see how they can justify raising rates without some reasonable acceleration in wage growth. ... my broader point is this: During normal times the Fed moves methodically if not ponderously. The current state of the economy gives them room to move as such. So I would not be surpised to see a fairly steady hand revealed in the next FOMC statement.

by Calculated Risk on 1/18/2015 09:37:00 AM

Recently there has been some discussion of a recession in 2015. That seems very unlikely to me - I'm not even on "recession watch".    I decided to repeat a post I wrote in January 2013. (two years ago).  This still seems correct - and I've added a few updates in italics.

A few thoughts on the "next recession" ... Forecasters generally have a terrible record at predicting recessions. There are many reasons for this poor performance. In 1987, economist Victor Zarnowitz wrote in "The Record and Improvability of Economic Forecasting" that there was too much reliance on trends, and he also noted that predictive failure was also due to forecasters' incentives. Zarnowitz wrote: "predicting a general downturn is always unpopular and predicting it prematurely—ahead of others—may prove quite costly to the forecaster and his customers".

Incentives motivate Wall Street economic forecasters to always be optimistic about the future (just like stock analysts). Of course, for the media and bloggers, there is an incentive to always be bearish, because bad news drives traffic (hence the prevalence of yellow journalism).

In addition to paying attention to incentives, we also have to be careful not to rely "heavily on the persistence of trends". One of the reasons I focus on residential investment (especially housing starts and new home sales) is residential investment is very cyclical and is frequently the best leading indicator for the economy. UCLA's Ed Leamer went so far as to argue that: "Housing IS the Business Cycle". Usually residential investment leads the economy both into and out of recessions. The most recent recovery was an exception, but it was fairly easy to predict a sluggish recovery without a contribution from housing.

Since I started this blog in January 2005, I've been pretty lucky on calling the business cycle.  I argued no recession in 2005 and 2006, then at the beginning of 2007 I predicted a recession would start that year (made it by one month with the Great Recession starting in December 2007).  And in 2009, I argued the economy had bottomed and we'd see sluggish growth.

Finally, over the last 18 months, a number of forecasters (mostly online) have argued a recession was imminent.  I responded that I wasn't even on "recession watch", primarily because I thought residential investment was bottoming.

[CR Update: this was written two years ago - I'm not sure if those calling for a recession then have acknowledged their incorrect forecasts and / or changed theirs views (like ECRI and various bloggers). Clearly they were wrong.]

Now one of my blogging goals is to see if I can get lucky again and call the next recession correctly.  Right now I'm pretty optimistic (see: The Future's so Bright ...) and I expect a pickup in growth over the next few years (2013 will be sluggish with all the austerity).

[CR Update: 2013 was a little better than I expected, but still sluggish. And 2014 had a weak start, but the last three quarters were solid.]

The next recession will probably be caused by one of the following (from least likely to most likely):

3) An exogenous event such as a pandemic, significant military conflict, disruption of energy supplies for any reason, a major natural disaster (meteor strike, super volcano, etc), and a number of other low probability reasons. All of these events are possible, but they are unpredictable, and the probabilities are low that they will happen in the next few years or even decades.

2) Significant policy error. This might involve premature or too rapid fiscal or monetary tightening (like the US in 1937 or eurozone in 2012).  Two examples: not reaching a fiscal agreement and going off the "fiscal cliff" probably would have led to a recession, and Congress refusing to "pay the bills" would have been a policy error that would have taken the economy into recession.  Both are off the table now, but there remains some risk of future policy errors. 

Note: Usually the optimal path for reducing the deficit means avoiding a recession since a recession pushes up the deficit as revenues decline and automatic spending (unemployment insurance, etc) increases.  So usually one of the goals for fiscal policymakers is to avoid taking the economy into recession. Too much austerity too quickly is self defeating.

[CR Update: Most of the poor policy choices in the U.S. are behind us. Austerity hurt the recovery, but austerity appears over at the state and local level and diminished at the Federal level.]

1) Most of the post-WWII recessions were caused by the Fed tightening monetary policy to slow inflation. I think this is the most likely cause of the next recession. Usually, when inflation starts to become a concern, the Fed tries to engineer a "soft landing", and frequently the result is a recession. Since inflation is not an immediate concern, the Fed will probably stay accommodative for a few more years.

So right now I expect further growth for the next few years (all the austerity in 2013 concerns me, especially over the next couple of quarters as people adjust to higher payroll taxes, but I think we will avoid contraction). [CR Update: We avoided contraction in 2013!] I think the most likely cause of the next recession will be Fed tightening to combat inflation sometime in the future - and residential investment (housing starts, new home sales) will probably turn down well in advance of the recession. In other words, I expect the next recession to be a more normal economic downturn - and I don't expect a recession for a few years.

[CR Update: This still seems correct - no recession this year.]

by Calculated Risk on 1/17/2015 06:38:00 PM

On Friday I posted an article from housing economist Tom Lawler: Lawler: “Surprise” Warnings on Margins/Effective Prices Whacks Home Builder Stocks

A few people took this as Lawler being "surprised". Nothing could be further from reality!

First, from the piece from Lawler:

"While most competent housing analysts had expected diminished price increases and increased sales incentives at most home builders in 2014 and 2015 following the surprising sharp price increases in 2013, the majority of housing analysts and investors had no such expectation."

That was Lawler making fun of the people who got it wrong!

Lawler started 2014 warning about incentives and reduced margins - and he warned about them all year.  As an example, Lawler wrote in May:

"it seems highly likely that the “pricing power” builders had in 2013 will not be evident in 2014, and in fact “effective” home prices may ease a bit as builders significantly increase their use of sales incentives from 2013’s unusually low level."

Many people were "surprised" by the builder announcements, but not Lawler!