by Calculated Risk on 10/08/2015 02:05:00 PM

From the Fed: Minutes of the Federal Open Market Committee, September 16-17, 2015 . Excerpts:

In assessing whether economic conditions had improved sufficiently to initiate a firming in the stance of policy, many members said that the improvement in labor market conditions met or would soon meet one of the Committee's criteria for beginning policy normalization. But some indicated that their confidence that inflation would gradually return to the Committee's 2 percent objective over the medium term had not increased, in large part because recent global economic and financial developments had imparted some restraint to the economic outlook and placed further downward pressure on inflation in the near term. Most members agreed that their confidence that inflation would move to the Committee's inflation objective would increase if, as expected, economic activity continued to expand at a moderate rate and labor market conditions improved further. Many expected those conditions to be met later this year, although several members were concerned about downside risks to the outlook for real activity and inflation.

Other factors important to the Committee's assessment of the inflation outlook were the expectation that the influences of lower energy and commodity prices on headline inflation would abate, as had occurred in previous episodes, and that inflation expectations would remain stable. With energy and commodity prices expected to stabilize, members' projections of inflation incorporated a step-up in headline inflation next year. However, several members saw a risk that the additional downward pressure on inflation from lower oil prices and a higher foreign exchange value of the dollar could persist and, as a result, delay or diminish the expected upturn in inflation. And, while survey measures of longer-run inflation expectations remained stable, a couple of members expressed unease with the decline in market-based measures of inflation compensation over the intermeeting period.

After assessing the outlook for economic activity, the labor market, and inflation and weighing the uncertainties associated with the outlook, all but one member concluded that, although the U.S. economy had strengthened and labor underutilization had diminished, economic conditions did not warrant an increase in the target range for the federal funds rate at this meeting. They agreed that developments over the intermeeting period had not materially altered the Committee's economic outlook. Nevertheless, in part because of the risks to the outlook for economic activity and inflation, the Committee decided that it was prudent to wait for additional information confirming that the economic outlook had not deteriorated and bolstering members' confidence that inflation would gradually move up toward 2 percent over the medium term. One member, however, preferred to raise the target range for the federal funds rate at this meeting, indicating that the current low level of real interest rates was not appropriate in the context of current economic conditions.
emphasis added

by Calculated Risk on 10/08/2015 10:52:00 AM

This is a key distressed market to follow since Las Vegas has seen the largest price decline of any of the Case-Shiller composite 20 cities.

The Greater Las Vegas Association of Realtors reported GLVAR Report on Local Housing Market Suggests Predictable Can Be Positive

Local home prices remained remarkably stable in September, according to a report released Thursday by the Greater Las Vegas Association of REALTORS® (GLVAR). GLVAR President Keith Lynam ... said the 2015 trend toward increasingly stable home prices and gradually increasing home sales is a healthy one for homeowners.
...
According to GLVAR, the total number of existing local homes, condominiums and townhomes sold in September was 3,285, up from 2,982 one year ago. Compared to September 2014, 14.3 percent more homes, but 6.3 percent fewer condos and townhomes, sold this September. So far in 2015, Lynam said local home sales remain ahead of last year’s sales pace.

For more than two years, GLVAR has been reporting fewer distressed sales and more traditional home sales, where lenders are not controlling the transaction. In September, 6.8 percent of all local sales were short sales – which occur when lenders allow borrowers to sell a home for less than what they owe on the mortgage. That’s down from 10.4 percent one year ago. Another 7.1 percent of September sales were bank-owned, down from 8.8 percent one year ago.
...
By the end of September, GLVAR reported 8,134 single-family homes listed without any sort of offer. That’s down 0.8 percent from one year ago. For condos and townhomes, the 2,311 properties listed without offers in September represented a 4.3 percent decrease from one year ago.
emphasis added

There are several key trends that we've been following:

1) Overall sales were up 10.2% year-over-year.

2) Conventional (equity, not distressed) sales were up 17% year-over-year.  In Sept 2014, 80.8% of all sales were conventional equity.  In Sept 2015, 86.1% were standard equity sales.

3) The percent of cash sales has declined year-over-year from 34.3% in Sept 2014 to 26.8% in Sept 2015. (investor buying appears to be declining).

4) Non-contingent inventory is down 0.8% year-over-year. This was the first YoY decline in inventory since 2013.  The table below shows the year-over-year change for non-contingent inventory in Las Vegas. Inventory declined sharply through early 2013, and then inventory started increasing sharply year-over-year. It appears the inventory build might be over.

Las Vegas: Year-over-year Change in Non-contingent Inventory
Month	YoY
Jan-13	-58.3%
Feb-13	-53.4%
Mar-13	-42.1%
Apr-13	-24.1%
May-13	-13.2%
Jun-13	3.7%
Jul-13	9.0%
Aug-13	41.1%
Sep-13	60.5%
Oct-13	73.4%
Nov-13	77.4%
Dec-13	78.6%
Jan-14	96.2%
Feb-14	107.3%
Mar-14	127.9%
Apr-14	103.1%
May-14	100.6%
Jun-14	86.2%
Jul-14	55.2%
Aug-14	38.8%
Sep-14	29.5%
Oct-14	25.6%
Nov-14	20.0%
Dec-14	18.0%
Jan-15	12.9%
Feb-15	15.8%
Mar-15	12.2%
Apr-15	7.6%
May-15	7.8%
Jun-15	4.3%
Jul-15	5.1%
Aug-15	3.5%
Sep-15	-0.8%

by Calculated Risk on 10/08/2015 08:35:00 AM

The DOL reported:

In the week ending October 3, the advance figure for seasonally adjusted initial claims was 263,000, a decrease of 13,000 from the previous week's revised level. The previous week's level was revised down by 1,000 from 277,000 to 276,000. The 4-week moving average was 267,500, a decrease of 3,000 from the previous week's revised average. The previous week's average was revised down by 250 from 270,750 to 270,500.

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

The previous week was revised down to 276,000.

The following graph shows the 4-week moving average of weekly claims since 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 decreased to 267,500.

This was below the consensus forecast of 271,000, and the low level of the 4-week average suggests few layoffs.

by Calculated Risk on 10/07/2015 08:16:00 PM

Some excerpts on the stock market from Aleksandar Timcenko and Noah Weisberger at Goldman Sachs (this is their view):

After hitting an all-time high in late July, the S&P 500 subsequently declined more than 12% over the following month. This type of price action qualifies as a ‘drawdown’, using the definition developed in this piece. We examine recent global equity price action in the context of past drawdowns, and look at why they occur and what accounts for their severity. Lastly, we discuss the post-drawdown environment.
...
We find that the size and speed of the recent equity drawdowns are within historical norms; that they are more likely to occur (and more likely to be large) when economic growth is deteriorating, when multiples have increased and when returns have climbed above trend; and that markets tend to revert to their previous trends.

This suggests that, if – as we expect – the macroeconomic picture stabilises, recent equity downturns will slowly and steadily reverse course.

Thursday:
• At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for 271 thousand initial claims, down from 275 thousand the previous week.

• At 2:00 PM, the Fed will release the FOMC Minutes for the Meeting of September 16-17, 2015

by Calculated Risk on 10/07/2015 05:01:00 PM

A personal comment ...

Over the last several years, I noted on several occasions that Congress has been a disaster.  They've opposed economic policies normally supported by both parties - and by Milton Friedman and Ronald Reagan - and this has hurt the economy.  Former Fed Chairman Ben Bernanke noted in his book: “I also felt frustrated that fiscal policy makers, far from helping the economy, appeared to be actively working to hinder it.”
emphasis added

I agree with Bernanke.

This seems to part of a defeatists theme of the current Congress - an overwhelming pessimism about several policies -"Nothing can be done" could be their slogan (or worse when they "actively work to hinder" the economy).

Former Fed Chairman Ben Bernanke also wrote in this book that he “lost patience with Republicans’ susceptibility to the know-nothing-ism of the far right." He went on to write: “I often said that monetary policy was not a panacea — we needed Congress to do its part. After the crisis calmed, that help was not forthcoming.”
emphasis added

And here is another excerpt from Bernanke's book via the WSJ, Bernanke on Congress:

"They blamed the crisis on the Fed and on Fannie (Mae) and Freddie (Mac), with little regard for the manifest failings of the private sector, other regulators, or, most especially, Congress itself. They condemned bailouts as giveaways of taxpayer money without considering the broader economic consequences of the collapse of systemically important firms. They saw inflation where it did not exist and, when the official data did not bear out their predictions, invoked conspiracy theories. They denied that monetary or fiscal policy could support job growth, while still working to direct federal spending to their own districts. They advocated discredited monetary systems, like the gold standards.

This defeatist view - and pessimistic outlook - applies to other policies too. As an example, during the recent debate, GOP presidential hopefuls Marco Rubio and Carly Fiorina acknowledged the dangers of climate change (a positive step compared to the deniers), but both said Nothing Can be Done. How sadly pessimistic and contrary to the optimism of Presidents Kennedy and Reagan.

I believe steps can be taken to address climate change with minimal impact on the economy - people are resourceful.  In the '70s, when it was discovered that chlorofluorocarbons were damaging the ozone, the "do nothing" crowd claimed action would damage the economy, and cars would no longer have air conditioning. Action was taken, and the economy was fine (and the AC in my car still works).

On a personal note, one of my college professors, Sherwood Rowland, won the Nobel prize for discovering the role of chlorofluorocarbons in ozone depletion. I chatted with Professor Rowland in 2008, and we discussed the science of climate change (My undergraduate degree is in Chemistry). Dr. Rowland was extremely concerned about the impacts of climate change, and clearly frustrated with the politics of the deniers.

And we also hear "nothing can be done" about the ongoing mass shooting in the U.S., even though most Americans support stricter background checks, longer waiting periods, and restricting certain types of weapons.  Reagan supported gun control, but not this Congress.  Something can be done - and will be done eventually.  Hopefully "Before some ol' fool come around here, Wanna shoot either you or me".

I'm optimistic about the future and I share Bernanke's view that"the United States [is] one of the most attractive places to live, work and invest over the next few decades".  But we need better policymakers in Congress.

by Calculated Risk on 10/07/2015 02:02:00 PM

This is a key distressed market to follow since Phoenix saw a large bubble / bust followed by strong investor buying.

For the tenth consecutive month, inventory was down year-over-year in Phoenix. This is a significant change from last year.

The Arizona Regional Multiple Listing Service (ARMLS) reports (table below):

1) Overall sales in September were up 11.6% year-over-year.

2) Cash Sales (frequently investors) were down to 22.6% of total sales.

3) Active inventory is now down 11.7% year-over-year.  

More inventory (a theme in 2014) - and less investor buying - suggested price increases would slow sharply in 2014.  And prices increases did slow in 2014, only increasing 2.4% according to Case-Shiller.

Now, with falling inventory, prices are increasing a little faster in 2015 (something to watch if inventory continues to decline).   Prices are already up 3.0% through July (prices increased more in 7 months in 2015, than all of 2014).

September Residential Sales and Inventory, Greater Phoenix Area, ARMLS
	Sales	YoY Change Sales	Cash Sales	Percent Cash	Active Inventory	YoY Change Inventory
Sept-08	6,179	---	1,041	16.8%	54,4271	---
Sept-09	7,907	28.0%	2,776	35.1%	38,340	-29.6%
Sept-10	6,762	-14.5%	2,904	42.9%	45,202	17.9%
Sept-11	7,892	16.7%	3,470	44.0%	26,950	-40.4%
Sept-12	6,478	-17.9%	2,849	44.0%	21,703	-19.5%
Sept-13	6,313	-2.5%	2,106	33.4%	23,405	7.8%
Sept-14	6,252	-1.0%	1,609	25.7%	26,492	13.2%
Sept-15	6,980	11.6%	1,573	22.5%	23,396	-11.7%
1 September 2008 probably includes pending listings

by Calculated Risk on 10/07/2015 10:43:00 AM

From Adam Ozimek at Moody's Analytics: Labor Market Gains Not Sparking a Single-Family Housing Recovery

The unemployment rate is marching ever lower, and the economy is approaching full employment, but still single-family housing is lagging. This is prompting some to wonder, what will it take to turn things around?

One suggestion is that once unemployment falls low enough we’ll see the long-awaited single-family housing recovery. If this were true, one would expect that metro areas with already-lower unemployment would be seeing a single-family turnaround.

To test this theory, metro areas were ranked by their August unemployment rate compared with their historical average. Around 43% of metro areas have an unemployment rate lower than the 2000 to 2004 average. The 25 that are doing the best are concentrated in Texas, California, and states in the Northwest. Austin TX has the lowest relative unemployment rate. In August, the unemployment rate there reached 3%, which is 62.3% of the 2000 to 2004 average of 4.8%.

The average unemployment rate in these 25 metro areas is 3.9%, compared with 5.6% for these same areas in 2000 to 2004, and 5.1% for the total U.S. today. In other words, employment is looking healthy in these metro areas compared with historical averages and the U.S. overall.
...
However, even in these 25 metro areas, single-family housing permits remain significantly below historical levels. This suggests that even where unemployment has fallen to historically low levels, it has not been enough to boost single-family permits.

CR Note: I think single family is lagging for several reasons:

1) the builders had limited entitled land following the bust, so they built fewer but higher priced homes. The data on New Home prices supports this.

2) in some areas, there is still competition from foreclosures (Judicial foreclosure areas like Florida).  However Ozimek focused on areas that have recovered, so this doesn't explain his findings.

3) and there used to be quite a bit of financing available for first time homebuyers - many of these programs are gone.

There is much more in Ozimek's article.

by Calculated Risk on 10/07/2015 07:04:00 AM

From the MBA: Mortgage Applications Up Sharply in Latest MBA Weekly Survey

Mortgage applications increased 25.5 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending October 2, 2015.
...
The Refinance Index increased 24 percent from the previous week. The seasonally adjusted Purchase Index increased 27 percent from one week earlier. The unadjusted Purchase Index increased 27 percent compared with the previous week and was 49 percent higher than the same week one year ago.

“The number of applications for purchase and refinance mortgages soared last week due both to renewed rate volatility and as many applications were filed prior to the TILA-RESPA regulatory change. The average loan size of applications in the weekly survey increased by 6.9 percent, driven by a 12.1 percent increase in the average size of refinances,” said Lynn Fisher, MBA’s Vice President of Research and Economics.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 3.99 percent, the lowest level since May 2015, from 4.08 percent, with points increasing to 0.46 from 0.45 (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.

Refinance activity remains low.

2014 was the lowest year for refinance activity since year 2000, and refinance activity will probably stay low for the rest of 2015 (after the increase earlier this year).


The second graph shows the MBA mortgage purchase index.  

According to the MBA, the unadjusted purchase index is 49% higher than a year ago.

This surge was partially related to applications being filed before the TILA-RESPA regulatory change, so I expect applications to decline significant in the next survey.

by Calculated Risk on 10/06/2015 07:35:00 PM

From Matthew Graham at Mortgage News Daily: Mortgage Rates Hold Sideways to Slightly Higher

Most lenders are right in line with yesterday's latest levels though there are a few who marginally increased costs. That means that borrowers would still likely be seeing the same note rates as yesterday, with Conventional 30yr fixed loans being quoted in a range from 3.75 - 3.875%.

To reiterate a point made yesterday, with the exception of last Friday, rates are as low as they've been since late April. Rates spent plenty of time dipping their toes in the water of "high 3's" over the past few months, but this is the best sustained run we've had with 3.75% being available at more than a few lenders. And again, keep in mind that almost any rate that's available at one lender would be available at other lenders as well, but the costs to obtain that rate could vary greatly between lenders on opposite ends of the spectrum.

Here is a table from Mortgage News Daily:

Home Loan Rates

View More Refinance Rates

by Calculated Risk on 10/06/2015 02:48:00 PM

The Fed's Household Debt Service ratio through Q2 2015 was released yesterday: Household Debt Service and Financial Obligations Ratios. I used to track this quarterly back in 2005 and 2006 to point out that households were taking on excessive financial obligations.

These ratios show the percent of disposable personal income (DPI) dedicated to debt service (DSR) and financial obligations (FOR) for households. Note: The Fed changed the release in Q3 2013.

The household Debt Service Ratio (DSR) is the ratio of total required household debt payments to total disposable income.

The DSR is divided into two parts. The Mortgage DSR is total quarterly required mortgage payments divided by total quarterly disposable personal income. The Consumer DSR is total quarterly scheduled consumer debt payments divided by total quarterly disposable personal income. The Mortgage DSR and the Consumer DSR sum to the DSR.

This data has limited value in terms of absolute numbers, but is useful in looking at trends. Here is a discussion from the Fed:

The limitations of current sources of data make the calculation of the ratio especially difficult. The ideal data set for such a calculation would have the required payments on every loan held by every household in the United States. Such a data set is not available, and thus the calculated series is only an approximation of the debt service ratio faced by households. Nonetheless, this approximation is useful to the extent that, by using the same method and data series over time, it generates a time series that captures the important changes in the household debt service burden.

Click on graph for larger image.

The graph shows the Total Debt Service Ratio (DSR), and the DSR for mortgages (blue) and consumer debt (yellow).

The overall Debt Service Ratio increased in Q2 has been moving sideways and is near a record low.  Note: The financial obligation ratio (FOR) is also near a record low  (not shown)

The DSR for mortgages (blue) are near the low for the last 35 years.  This ratio increased rapidly during the housing bubble, and continued to increase until 2007. With falling interest rates, and less mortgage debt (mostly due to foreclosures), the mortgage ratio has declined significantly.

The consumer debt DSR (yellow) has been increasing for the last two years.

This data suggests aggregate household cash flow has improved.