by Calculated Risk on 4/11/2016 06:05:00 PM

From Matthew Graham at Mortgage News Daily: Mortgage Rates Holding Near 3-Year Lows

Mortgage rates were little changed today, keeping them in line with the lowest levels in nearly 3 years. Specifically, there have only been 2-3 days with better rates since May 2013, depending on the lender. That puts the average lender at 3.625% in terms of conventional 30yr fixed rate quotes for top tier scenarios. Some of the more aggressive lenders continue to offer 3.5%. These rates are a mere quarter point higher than the all-time lows seen from late 2011 through early 2013.
emphasis added

Here is a table from Mortgage News Daily:

Home Loan Rates

View More Refinance Rates

by Calculated Risk on 4/11/2016 02:59:00 PM

In November 2012, I was interviewed by Joe Weisenthal at Business Insider (now at Bloomberg). One of my comments during our discussion on state and local governments was:

I wouldn’t be surprised if we see all of a sudden a report come out, “Hey, we’ve got a balanced budget in California.”

At the time that was way out of the consensus view. And a couple of months later California announced a balanced budget, see The California Budget Surplus

The situation has improved significantly since then. Here is the most recent update from California State Controller Betty Yee: CA Controller’s March Cash Report Shows Higher-Than-Expected Revenues

March state revenues surpassed estimates in Gov. Jerry Brown’s proposed 2016-17 budget by $218.6 million, with both the corporation tax and the retail sales and use tax beating expectations, State Controller Betty T. Yee reported today.

Overall, total revenues of $7.40 billion outstripped projections in the proposed budget released in January by 3 percent. Corporation tax revenues of $1.71 billion were $47.5 million, or 2.9 percent, higher than expected. Sales tax revenues of $1.79 billion beat expectations by $36.0 million, or 2.0 percent. Only the personal income tax, which has normally surpassed projections in the past few years, came up short. Revenues of $3.49 billion were $31.2 million, or 0.9 percent, less than expected.
...
Compared to projections when this year’s budget was signed last summer, revenues for the first nine months of the fiscal year are $2.26 billion higher than expected, with both the corporation tax and the personal income tax exceeding estimates. Compared to the prior fiscal year, revenues to date are higher by $5.20 billion, or 7.1 percent.
emphasis added

California is doing much better.

by Calculated Risk on 4/11/2016 11:28:00 AM

With the ten year yield falling to 1.73%, there has been some discussion about whether mortgage rates will fall to new lows. Based on an historical relationship, 30-year rates should currently be around 3.7%.

As of Friday, Mortgage News Daily reported: "the average lender continuing to quote conventional 30yr fixed rates of 3.625% on top tier scenarios." Pretty close to expected.

The graph shows the relationship between the monthly 10 year Treasury Yield and 30 year mortgage rates from the Freddie Mac survey.

Currently the 10 year Treasury yield is at 1.73% and 30 year mortgage rates were at 3.59% according to the Freddie Mac survey last week.

To reach new lows (on the Freddie Mac survey), mortgage rates would have to fall below the 3.35% lows in 2012.

For that to happen, based on the historical relationship, the Ten Year yield would have fall to under 1.5%.

So I don't expect new lows on mortgage rates unless the Ten Year yield falls further.

by Calculated Risk on 4/11/2016 09:13:00 AM

From CBRE: U.S. Office Vacancy Inches Up Slightly in Q1 2016

Vacancy in the U.S. office market inched up by 10 basis points (bps) during the first quarter of 2016 (Q1 2016), rising to 13.2%, according to the latest analysis from CBRE Group, Inc. Even with the increase, the national office vacancy rate remains at the lowest level since 2008.

Despite the slight increase, vacancy continued to improve in the majority of U.S. markets, with rates falling in 33 markets, rising in 25, and remaining unchanged in five. Suburban vacancy remained at 14.7% while downtown vacancy increased by 10 bps, to 10.4%. The overall national office vacancy rate has fallen 70 bps over the past four quarters.
...
The slight rise in the national vacancy rate was fueled by significant new supply coming to certain markets including Boston, Washington D.C., Dallas and Orange County. Compounding that issue, Washington had negative absorption and Dallas only modest absorption, trailing this new supply. ...

“We expect the U.S. office market to improve in 2016 as the U.S. economy continues to expand, moving closer to full employment and driving demand for office space,” noted Mr. Havsy. “Office demand is expected to outpace new supply in the next two years, further tightening the vacancy rate and keeping rent growth above inflation in a majority of the U.S. office markets.”

CR note: This is another measure of the office vacancy rate (in addition to Reis) that I follow. In general, the office vacancy rate has been declining slowly - and will probably decline further in 2016.

by Calculated Risk on 4/10/2016 07:17:00 PM

From Professor Jim Hamilton at Econbrowser: Why no economic boost from lower oil prices?

Many analysts had anticipated that a dramatic drop in oil prices such as we’ve seen since the summer of 2014 could provide a big stimulus to the economy of a net oil importer like the United States. That doesn’t seem to be what we’ve observed in the data.

There is no question that lower oil prices have been a big windfall for consumers. Americans today are spending $180 B less each year on energy goods and services than we were in July of 2014, which corresponds to about 1% of GDP. A year and a half ago, energy expenses constituted 5.4% of total consumer spending. Today that share is down to 3.7%.

But we’re not seeing much evidence that consumers are spending those gains on other goods or services. ...
...
For a net oil importer like the United States, the direct dollar gains to consumers exceed the dollar losses to domestic producers. Even so, multiplier effects from displaced workers and capital in the oil sector could end up eating away at some of those net gains. When oil prices collapsed in 1986 we saw no boom in the national U.S. economy, and in fact Texas and other oil-producing states experienced their own recession.

On the other hand, when oil prices spike up rapidly the result is unemployed labor and capital in sectors like autos and their suppliers. Furthermore, in the days before fracking there was a much longer lead time between an increase in oil prices and an increase in spending by oil producers. The result was an unambiguous net negative shock to GDP from a big upward spike in oil prices. The oil price shocks of 1973, 1979, 1980, 1990, and 2007 were all followed by economic recessions. In a recent paper I surveyed a number of academic studies that concluded that while a sharp increase in oil prices can reduce U.S. GDP growth, it’s harder to see evidence of significant net gains for U.S. GDP from a sharp decline in oil prices.

It looks like we’ve just added some more data to support that conclusion.

Weekend:
• Schedule for Week of April 10, 2016

• Energy expenditures as a percentage of PCE at All Time Low

Monday:
• No economic releases scheduled.

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

Oil prices were up over the last week with WTI futures at $40.08 per barrel and Brent at $41.94 per barrel.  A year ago, WTI was at $52, and Brent was at $56 - so prices are down about 25% year-over-year.

Here is a graph from Gasbuddy.com for nationwide gasoline prices. Nationally prices are at $2.04 per gallon (down about $0.35 per gallon from a year ago).

by Calculated Risk on 4/10/2016 11:37:00 AM

Here is a graph of expenditures on energy goods and services as a percent of total personal consumption expenditures through February 2016.

This is one of the measures that Professor Hamilton at Econbrowser looks at to evaluate any drag on GDP from energy prices.


Click on graph for larger image.

Data source: BEA Table 2.3.5U.

The huge spikes in energy prices during the oil crisis of 1973 and 1979 are obvious. As is the increase in energy prices during the 2001 through 2008 period.

In February 2016, with WTI oil prices averaging $30.32 per barrel, energy expenditures as a percent of PCE declined to an all time low of just under 3.7%.  

by Calculated Risk on 4/09/2016 08:12:00 AM

The key economic report this week is March retail sales on Wednesday.

For prices, PPI and CPI will be released this week.

For manufacturing, March Industrial Production and the April NY Fed manufacturing survey will be released this week.

----- Monday, April 11th -----
No economic releases scheduled.

----- Tuesday, April 12th -----
9:00 AM ET: NFIB Small Business Optimism Index for March.

2:00 PM: The Monthly Treasury Budget Statement for March.

----- Wednesday, April 13th -----
7:00 AM ET: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

8:30 AM ET: Retail sales for March will be released.  The consensus is for retail sales to increase 0.1% in March.

This graph shows retail sales since 1992 through February 2016. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline). On a monthly basis, retail sales were down 0.1% from January to February (seasonally adjusted), and sales were up 3.1% from February 2015.

8:30 AM: The Producer Price Index for March from the BLS. The consensus is for a 0.3% increase in prices, and a 0.2% increase in core PPI.

10:00 AM: Manufacturing and Trade: Inventories and Sales (business inventories) report for February.  The consensus is for a 0.1% decrease in inventories.

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

----- Thursday, April 14th -----
8:30 AM: The initial weekly unemployment claims report will be released.  The consensus is for 270 thousand initial claims, up from 267 thousand the previous week.

8:30 AM: The Consumer Price Index for March from the BLS. The consensus is for a 0.2% increase in CPI, and a 0.2% increase in core CPI.

----- Friday, April 15th -----
8:30 AM: NY Fed Empire State Manufacturing Survey for April. The consensus is for a reading of 3.0, up from 0.6.

9:15 AM: The Fed will release Industrial Production and Capacity Utilization for March.

This graph shows industrial production since 1967.

The consensus is for a 0.1% decrease in Industrial Production, and for Capacity Utilization to decrease to 75.4%.

10:00 AM: University of Michigan's Consumer sentiment index (preliminary for April). The consensus is for a reading of 91.8, up from 91.0 in March.

10:00 AM ET: Regional and State Employment and Unemployment (Monthly) for March 2016 from BLS.

by Calculated Risk on 4/08/2016 08:00:00 PM

During the recession, I started following the Sacramento market to look for changes in the mix of houses sold (equity, REOs, and short sales). For a few years, not much changed. But in 2012 and 2013, we saw some significant changes with a dramatic shift from distressed sales to more normal equity sales.

This data suggests healing in the Sacramento market and other distressed markets are showing similar improvement.  Note: The Sacramento Association of REALTORS® started breaking out REOs in May 2008, and short sales in June 2009.

In March, total sales were up 4.7% from March 2015, and conventional equity sales were up 6.0% compared to the same month last year.

In March, 10.1% of all resales were distressed sales. This was up from 9.7% last month, and down from 12.4% in March 2015.

The percentage of REOs was at 5.8% in March, and the percentage of short sales was 4.3%.

Here are the statistics.

Press Release: Sales volume jumps 33%, days on market decreases further

Sales volume jumped 33.1% from 1,082 to 1,440 for March. This current number is up 4.7% from March last year (1,376 sales).
...
Although the total Active Listing Inventory increased 12.4% from 1,755 to 1,973, the Months of Inventory decreased from 1.6 months to 1.4 months.

Click on graph for larger image.

This graph shows the percent of REO sales, short sales and conventional sales.

There has been a sharp increase in conventional (equity) sales that started in 2012 (blue) as the percentage of distressed sales declined sharply.

Active Listing Inventory for single family homes decreased 17.3% year-over-year (YoY) in March.  This was the elventh consecutive monthly YoY decrease in inventory in Sacramento.

Cash buyers accounted for 15.3% of all sales (frequently investors).

Summary: This data suggests a more normal market with fewer distressed sales, more equity sales, and less investor buying - but limited inventory.

by Calculated Risk on 4/08/2016 04:19:00 PM

A decade ago I was arguing one of the tragedies of the housing bubble was that many first time buyers would sour on homeownership for a long time, if not forever. Unfortunately that has happened.

From Chris Kirkham at the WSJ: Housing Bust Lingers for Generation X

The group of Americans known as Generation X has suffered more than any other age cohort from the housing bust, according to an analysis of federal data, suggesting homeownership rates for that group could remain depressed for years to come.
...
There are now three million more renters in their 30s and 40s today than 10 years ago, even though the number of households in that age bracket declined, according to data from the Harvard Joint Center.
...
Many people who lost homes to foreclosures or short sales face long waits before lenders will consider them again—up to seven years for foreclosures and up to three years for a short sale. A study last year by the National Association of Realtors estimated that about a third of the 9 million buyers who went through distressed sales or foreclosures between 2006 and 2014 will never return to homeownership.

by Calculated Risk on 4/08/2016 11:59:00 AM

At the end of last year, I posted Ten Economic Questions for 2016. I followed up with a brief post on each question. The goal was to provide an overview of what I expected in 2016 (I don't have a crystal ball, but I think it helps to outline what I think will happen - and understand - and change my mind, when the outlook is wrong).

By request, here is a quick Q1 review (it is very early in the year). I've linked to my posts from the beginning of the year, with a brief excerpt and a few comments:

10) Question #10 for 2016: How much will housing inventory increase in 2016?

Right now my guess is active inventory will increase in 2016 (inventory will decline seasonally in December and January, but I expect to see inventory up again year-over-year in 2016). I don't expect a double digit surge in inventory, but maybe a mid-single digit increase year-over-year.  If correct, this will keep house price increases down in  2015 (probably lower than the 5% or so gains in 2014 and 2015).

According to the February NAR report on existing home sales, inventory was down 1.1% year-over-year in February, and the months-of-supply was at 4.4 months.  I still expect inventory to increase in 2016.

9) Question #9 for 2016: What will happen with house prices in 2016?

Low inventories, and a decent economy suggests further price increases in 2016. However I expect we will see prices up less in 2016, than in 2015, as measured by these house price indexes - mostly because I expect more inventory.

If is very early, but the CoreLogic data released this week showed prices up 6.8% year-over-year in February.  The CoreLogic year-over-year increase is higher than last year so far.

8) Question #8 for 2016: How much will Residential Investment increase?

My guess is growth of around 4% to 8% in 2016 for new home sales, and about the same percentage growth for housing starts. Also I think the mix between multi-family and single family starts will shift a little more towards single family in 2016.

Through February, starts were up 15% year-over-year compared to the same period in 2015 (easy comparison).  New home sales were down 4% year-over-year (more difficult comparison).

7) Question #7 for 2016: What about oil prices in 2016?

It is impossible to predict an international supply disruption, however if a significant disruption happens, then prices will move higher. Continued weakness in Europe and China seems likely, however sluggish demand will be somewhat offset by less tight oil production. It seems like the key oil producers (Saudi, etc) will continue production at current levels. This suggests in the short run (2016) that prices will stay low, but probably move up a little in 2016. I'll guess WTI will be up from the current price [WTI at $38 per barrel] by December 2016 (but still under $50 per barrel).

As of this morning, WTI futures are just over $39 per barrel.

6) Question #6 for 2016: Will real wages increase in 2016?

For this post the key point is that nominal wages have been only increasing about 2% per year with some pickup in 2015. As the labor market continues to tighten, we should start see more wage pressure as companies have to compete more for employees. I expect to see some further increase in nominal wage increases in 2016 (perhaps over 3% later in the year). The year-over-year change in real wages will depend on inflation, and I expect headline CPI to pickup some this year as the impact on headline inflation of declining oil prices fades.

Through March 2016, nominal hourly wages were up 2.3% year-over-year. This is a pickup from last year, and so far it appears wages will increase at a faster rate in 2016.

5) Question #5 for 2016: Will the Fed raise rates in 2016, and if so, by how much?

I've seen several people arguing the Fed will be cutting rates by the end of 2016 - I think that is unlikely. Instead I think the Fed will be cautious - and they will not want to reverse course. Right now I think something around three rate hikes in 2016 is likely.

So far zero is correct, but I still expect the FOMC to raise rates a little this year.

4) Question #4 for 2016: Will the core inflation rate rise in 2016? Will too much inflation be a concern in 2016?

Due to some remaining slack in the labor market (example: elevated level of part time workers for economic reasons), I expect these measures of inflation will be close to the Fed's target in 2016.

So currently I think core inflation (year-over-year) will increase further in 2016, but too much inflation will not be a serious concern in 2016.

It is early, but inflation has moved up close to the Fed target through February.

3) Question #3 for 2016: What will the unemployment rate be in December 2016?

Depending on the estimate for the participation rate and job growth (next question), it appears the unemployment rate will decline to around 4.5% by December 2016. My guess is based on the participation rate declining slightly in 2016 and for decent job growth in 2016 (however less in 2016 than in 2015).

The participation rate increased from 62.7% in December to 63.0% in March, and the unemployment rate was 5.0% in March, unchanged from 5.0% in December.  I don't expect the surge in the participation rate to continue, and I still expect the unemployment rate to decline into the mid-4s.

2) Question #2 for 2016: How many payroll jobs will be added in 2016?

Energy related construction hiring will decline in 2016, but I expect other areas of construction to be solid. For manufacturing, growth in the auto sector will probably slow this year, but the drag on manufacturing employment from the strong dollar should be less in 2016.

As I mentioned above, in addition to layoffs in the energy sector, exporters will have a difficult year - but probably not the severe contraction as in 2015, and more companies will have difficulty finding qualified candidates. Even with some boost from lower oil prices - and some additional public hiring, I expect total jobs added to be lower in 2016 than in 2015.

So my forecast is for gains of around 200,000 payroll jobs per month in 2015. Lower than in 2015, but another solid year for employment gains given current demographics.

Through March 2016, the economy has added 628,000 thousand jobs; 209,000 per month.  I still expect employment gains to average around 200,000 per month in 2016 (lower than in 2014 and 2015, but still solid).

1) Question #1 for 2016: How much will the economy grow in 2016?

In addition, the sharp decline in oil prices should be a net positive for the US economy in 2016. And, hopefully, the negative impact from the strong dollar will fade in 2016. The most likely growth rate is in the mid-2% range again ...

Once again, GDP will be sluggish in Q1 (near zero growth).

It is very early in the year.  Currently it looks like 2016 is unfolding somewhat as expected - although I'd revise down my forecast for FOMC rate hikes from 3 to 2.  As far as the economic data, it is about as expected.