by Calculated Risk on 6/12/2016 10:15:00 AM

Almost all analysts are expecting no change in Fed policy at the March FOMC meeting this week. As an example, from Goldman Sachs economists Jan Hatzius and Zach Pandl:

"The May employment report was weak enough to raise questions about momentum in the labor market and the economy more broadly. At this point the natural reaction from policymakers will likely be to wait for more information and keep options open—and this should be the message from Chair Yellen in her press conference.

... With the unemployment rate at 4.7%, wage growth clearly picking up, and financial conditions much easier, there is likely a limit to how long the Fed’s pause can last.

Currently the Fed Funds target rate is the range of "1/4 to 1/2 percent". The current effective rate is 0.37 percent, close to the middle of the current range.

The focus this month will be on the wording of the statement, any changes to the projections, and on the press conference.

Here are the March FOMC projections.  Since the release of those projections, Q1 GDP was reported at a 0.8% annual rate.

Currently GDP is tracking around 2.5% annualized in Q2.  The FOMC might revise down GDP for 2016 slightly.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in Real GDP1	2016	2017	2018
Mar 2016	2.1 to 2.3	2.0 to 2.3	1.8 to 2.1
Dec 2015	2.3 to 2.5	2.0 to 2.3	1.8 to 2.2

¹ Projections of change in real GDP and inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

The unemployment rate was at 4.7% in May, so the unemployment rate projection for Q4 2016 might be revised down.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment Rate2	2016	2017	2018
Mar 2016	4.6 to 4.8	4.5 to 4.7	4.5 to 5.0
Dec 2015	4.6 to 4.8	4.6 to 4.8	4.6 to 5.0

² Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

As of April, PCE inflation was up only 1.1% from April 2015.   With the recent increase in oil and gasoline prices, the range of PCE inflation projections might be narrowed, and the low end revised up for 2016.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE Inflation1	2016	2017	2018
Mar 2016	1.0 to 1.6	1.7 to 2.0	1.9 to 2.0
Dec 2015	1.2 to 1.7	1.8 to 2.0	1.9 to 2.0

PCE core inflation was up 1.6% in April year-over-year.  It appears core PCE inflation might be revised up slightly for 2016.

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core Inflation1	2016	2017	2018
Mar 2016	1.4 to 1.7	1.7 to 2.0	1.9 to 2.0
Dec 2015	1.5 to 1.7	1.7 to 2.0	1.9 to 2.0

Overall, it appears these indicators are close to expectations.   The FOMC will probably take no action at the meeting this week, and wait to see if employment picks up in June.

by Calculated Risk on 6/11/2016 08:09:00 AM

The key economic reports this week are May Retail Sales on Tuesday, the Consumer Price Index (CPI) on Thursday, and May housing starts on Friday.

For manufacturing, May Industrial Production, and the June New York and Philly Fed manufacturing surveys will be released this week.

The FOMC meets on Tuesday and Wednesday, and no change to policy is expected at this meeting.

----- Monday, June 13th -----
No economic releases are scheduled.

----- Tuesday, June 14th -----
9:00 AM ET: NFIB Small Business Optimism Index for May.

8:30 AM ET: Retail sales for May will be released.  The consensus is for retail sales to increase 0.3% in May.

This graph shows retail sales since 1992 through April 2016. On a monthly basis, retail sales were up 1.3% from March to April (seasonally adjusted), and sales were up 3.0% from April 2015.

10:00 AM: Manufacturing and Trade: Inventories and Sales (business inventories) report for April.  The consensus is for a 0.2% increase in inventories.

----- Wednesday, June 15th -----
7:00 AM ET: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

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

8:30 AM: the New York Fed Empire State manufacturing survey for June. The consensus is for a reading of -3.5, up from -9.0.

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

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 75.2%.

2:00 PM: FOMC Meeting Announcement.  No change to the Fed Funds rate is expected at this meeting.

2:00 PM: FOMC Forecasts This will include the Federal Open Market Committee (FOMC) participants' projections of the appropriate target federal funds rate along with the quarterly economic projections.

2:30 PM: Fed Chair Janet Yellen holds a press briefing following the FOMC announcement.

----- Thursday, June 16th -----
8:30 AM: The initial weekly unemployment claims report will be released.  The consensus is for 270 thousand initial claims, up from 264 thousand the previous week.

8:30 AM: The Consumer Price Index for May from the BLS. The consensus is for a 0.3% increase in CPI, and a 0.2% increase in core CPI.

8:30 AM: the Philly Fed manufacturing survey for June. The consensus is for a reading of 2.0, up from -1.8.

10:00 AM: The June NAHB homebuilder survey. The consensus is for a reading of  59, up from 58 in May.  Any number above 50 indicates that more builders view sales conditions as good than poor.

----- Friday, June 17th -----
8:30 AM: Housing Starts for May.

Total housing starts increased to 1.172 million (SAAR) in April. Single family starts increased to 778 thousand SAAR in April.

The consensus for 1.160 million, down from the April rate.

10:00 AM: Regional and State Employment and Unemployment for May 2016

by Calculated Risk on 6/10/2016 04:22:00 PM

On occupancy from HotelNewsNow.com: STR: US hotel results for week ending 4 June

The U.S. hotel industry reported mostly negative year-over-year results in the three key performance metrics during the week of 29 May through 4 June 2016, according to data from STR.

Affected significantly by a Memorial Day calendar shift, the industry’s occupancy decreased 6.8% to 64.6%. Average daily rate was flat at US$118.45. Revenue per available room dropped 6.8% to US$76.56.
emphasis added

The following graph shows the seasonal pattern for the hotel occupancy rate using the four week average.

The red line is for 2016, dashed orange is 2015, blue is the median, and black is for 2009 - the worst year since the Great Depression for hotels.

2015 was the best year on record for hotels.

So far 2016 is tracking just behind 2015, and well ahead of the median rate.

The occupancy rate should increase over the Summer travel period.

Data Source: Smith Travel Research, Courtesy of HotelNewsNow.com

by Calculated Risk on 6/10/2016 12:37:00 PM

Here is another update on framing lumber prices. Early in 2013 lumber prices came close to the housing bubble highs.

The price increases in early 2013 were due to a surge in demand (more housing starts) and supply constraints (framing lumber suppliers were working to bring more capacity online).

Prices didn't increase as much early in 2014 (more supply, smaller "surge" in demand).

In 2015, even with the pickup in U.S. housing starts, prices were down year-over-year.  Note: Multifamily starts do not use as much lumber as single family starts, and there was a surge in multi-family starts.  This decline in 2015 was also probably related to weakness in China.

Prices are now up year-over-year.

Click on graph for larger image in graph gallery.

This graph shows two measures of lumber prices: 1) Framing Lumber from Random Lengths through May 2016 (via NAHB), and 2) CME framing futures.

Right now Random Lengths prices are up about 15% from a year ago, and CME futures are up about 20% year-over-year.

by Calculated Risk on 6/10/2016 11:00:00 AM

Click on graph for larger image.

The University of Michigan consumer sentiment index for June was at 94.3, down from 94.7 in May:

"Consumers were a bit less optimistic in early June due to increased concerns about future economic prospects. The recent data magnified the growing gap between the most favorable assessments of Current Economic Conditions since July 2005, and renewed downward drift of the Expectations Index, which fell by a rather modest 8.6% from the January 2015 peak. The strength recorded in early June was in personal finances, and the weaknesses were in expectations for continued growth in the national economy. Consumers rated their current financial situation at the best levels since the 2007 cyclical peak largely due to wage gains. Prospects for gains in inflation-adjusted incomes in the year ahead were also the most favorable since the 2007 peak, enabled by record low inflation expectations. On the negative side of the ledger, consumers do not think the economy is as strong as it was last year nor do they anticipate the economy will enjoy the same financial health in the year ahead as they anticipated a year ago."
emphasis added

Read the highlighted sentences - consumers are very positive on current conditions, but they are concerned about the future.

by Calculated Risk on 6/10/2016 09:38:00 AM

With the ten year yield falling to 1.65%, there has been some discussion about whether mortgage rates will decline to new lows. Based on an historical relationship, 30-year rates should currently be around 3.55%.

As of yesterday, Mortgage News Daily reported: Mortgage Rates Even Closer to All-Time Lows

If rates are able to move any lower from here, that will put them in line with all-time lows. That would connote an average conventional 30yr fixed rate of 3.375%, which isn't too far away considering more than a few lenders are quoting 3.5% on top tier scenarios today. 3.625% remains slightly more prevalent.
emphasis added

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 1.65% and 30 year mortgage rates were at 3.60% according to the Freddie Mac survey last week.  The Freddie Mac survey will  probably show lower rates this week.

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

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

So I don't expect new lows on mortgage rates unless the Ten Year yield falls further - but rates are getting close.

by Calculated Risk on 6/09/2016 07:32:00 PM

A brief except from a research piece by Michelle Meyer at Merrill Lynch: The ding of the trolley

[R]ecent data smells of a slowdown in San Francisco. ... [D]ata suggest inventory remains limited [in San Francisco] so it is not a story of excess supply, but perhaps one of weakening demand given stretched affordability.
...
Despites weak signals, it is much too early to call the peak in the San Francisco housing market. We have seen these types of wiggles before in the data and this could just be a bump along the way. That said, we think it is prudent to keep a close eye on the upcoming data in the region. ... the trajectory in the housing market in San Francisco could give early indications of trends in other high-end metro areas, which have also shown some signs of weakening at the very high end.

CR note: Prices have increased sharply in many coastal communities along the West Coast. As Meyer notes, inventory is still limited, so this is probably softening demand (perhaps "stretched affordability"). If it is stretched affordability, prices will probably just flatten out. However if inventory starts to increase significantly, we could see some mild price declines (I don't expect this).

by Calculated Risk on 6/09/2016 04:34:00 PM

Note: This is not Mortgage Equity Withdrawal (MEW) data from the Fed. The last MEW data from Fed economist Dr. Kennedy was for Q4 2008.

The following data is calculated from the Fed's Flow of Funds data (released today) and the BEA supplement data on single family structure investment. This is an aggregate number, and is a combination of homeowners extracting equity - hence the name "MEW", but there is still little (but increasing) MEW right now - and normal principal payments and debt cancellation (modifications, short sales, and foreclosures).

For Q1 2016, the Net Equity Extraction was a negative $30 billion, or a negative 0.9% of Disposable Personal Income (DPI) .  MEW for Q2 and Q3 in 2015 was slightly positive - the first positive MEW since Q1 2008 - and MEW will probably be positive in Q2 and Q3 again this year too (there is a seasonal pattern for MEW).

Click on graph for larger image.

This graph shows the net equity extraction, or mortgage equity withdrawal (MEW), results, using the Flow of Funds (and BEA data) compared to the Kennedy-Greenspan method.

Note: This data is still heavily impacted by debt cancellation and foreclosures.

The Fed's Flow of Funds report showed that the amount of mortgage debt outstanding increased by $17 billion in Q1.

The Flow of Funds report also showed that Mortgage debt has declined by almost $1.3 trillion since the peak. This decline is mostly because of debt cancellation per foreclosures and short sales, and some from modifications. There has also been some reduction in mortgage debt as homeowners paid down their mortgages so they could refinance.

With residential investment increasing, and a slower rate of debt cancellation, MEW will likely turn positive.

For reference:

Dr. James Kennedy also has a simple method for calculating equity extraction: "A Simple Method for Estimating Gross Equity Extracted from Housing Wealth". Here is a companion spread sheet (the above uses my simple method).

For those interested in the last Kennedy data included in the graph, the spreadsheet from the Fed is available here.

by Calculated Risk on 6/09/2016 12:24:00 PM

The Federal Reserve released the Q1 2016 Flow of Funds report today: Flow of Funds.

According to the Fed, household net worth increased in Q1 compared to Q4:

The net worth of households and nonprofits rose to $88.1 trillion during the first quarter of 2016. The value of directly and indirectly held corporate equities decreased $160 billion and the value of real estate rose $498 billion.

Household net worth was at $88.1 trillion in Q1 2016, up from $87.2 trillion in Q4 2015.

The Fed estimated that the value of household real estate increased to $22.5 trillion in Q1. The value of household real estate is back to the bubble peak in early 2006 (not adjusted for inflation, and not including new construction).

Click on graph for larger image.

The first graph shows Households and Nonprofit net worth as a percent of GDP.  Household net worth, as a percent of GDP, is higher than the peak in 2006 (housing bubble), and above the stock bubble peak.

This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages). Note that this does NOT include public debt obligations.

This graph shows homeowner percent equity since 1952.

Household percent equity (as measured by the Fed) collapsed when house prices fell sharply in 2007 and 2008.

In Q1 2016, household percent equity (of household real estate) was at 57.8% - up from Q4, and the highest since Q1 2006. This was because of an increase in house prices in Q1 (the Fed uses CoreLogic).

Note: about 30.3% of owner occupied households had no mortgage debt as of April 2010. So the approximately 50+ million households with mortgages have far less than 57.8% equity - and several million still have negative equity.

The third graph shows household real estate assets and mortgage debt as a percent of GDP.

Mortgage debt increased by $17 billion in Q1.

Mortgage debt has declined by $1.27 trillion from the peak. Studies suggest most of the decline in debt has been because of foreclosures (or short sales), but some of the decline is from homeowners paying down debt (sometimes so they can refinance at better rates).

The value of real estate, as a percent of GDP, was up in Q1, and  is somewhat above the average of the last 30 years (excluding bubble).

by Calculated Risk on 6/09/2016 10:25:00 AM

From CoreLogic: CoreLogic Reports 268,000 US Homeowners Regained Equity in the First Quarter of 2016

CoreLogic ... today released a new analysis showing 268,000 homeowners regained equity in Q1 2016, bringing the total number of mortgaged residential properties with equity at the end of Q1 2016 to approximately 46.7 million, or 92 percent of all mortgaged properties. Nationwide, home equity increased year over year by $762 billion in Q1 2016.

The total number of mortgaged residential properties with negative equity stood at 4 million, or 8 percent of all homes with a mortgage, in Q1 2016. This is a decrease of 6.2 percent quarter over quarter from 4.3 million homes, or 8.5 percent, in Q4 2015 and a decrease of 21.5 percent year over year from 5.1 million homes, or 10.3 percent, compared with Q1 2015. ...

For the homes in negative equity status, the national aggregate value of negative equity was $299.5 billion at the end of Q1 2016, falling approximately $11.8 billion, or 3.8 percent, from $311.3 billion in Q4 2015. On a year-over-year basis, the value of negative equity declined overall from $340 billion in Q1 2015, representing a decrease of 11.8 percent in 12 months.
...
“In just the last four years, equity for homeowners with a mortgage has nearly doubled to $6.9 trillion,” said Frank Nothaft, chief economist for CoreLogic. “The rapid increase in home equity reflects the improvement in home prices, dwindling distressed borrowers and increased principal repayment. These are all positive factors that will provide support to both household balance sheets and the overall economy.”
emphasis added

On states:

Nevada had the highest percentage of homes in negative equity at 17.5 percent, followed by Florida (15 percent), Illinois (14.4 percent), Rhode Island (13.3 percent) and Maryland (12.9 percent). Combined, these top five states account for 30.2 percent of negative equity in the U.S., but only 16.5 percent of outstanding mortgages.