by Calculated Risk on 6/13/2016 10:56:00 AM

I don't have an answer right now, but I'll be watching inventory for clues.

The Houston Association of Realtors (HAR) hasn't released data for May yet.

However, in April, active listing were up 17% year-over-year compared to April 2015.   The current level isn't unusually high for the Houston market (inventory was over 50,000 in 2010), but inventory has increased significantly since oil prices started falling.

Click on graph for larger image in graph gallery.

This graph shows the number of active listings in Houston since January 2013.

Note: inventory in late 2014 was at historic lows in Houston - it is the trend that is concerning, not the current level.

If inventory stops increasing (year-over-year), then the housing market will probably be OK (and the rebound in oil prices would be a factor).

Right now it is too early to tell.

by Calculated Risk on 6/13/2016 08:11:00 AM

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 May, total sales were up 3.5% from May 2015, and conventional equity sales were up 4.9% compared to the same month last year.

In May, 7.0% of all resales were distressed sales. This was up from 6.5% last month, and down from 9.7% in May 2015.

The percentage of REOs was at 3.3% in May, and the percentage of short sales was 3.7%.

Here are the statistics.

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 17.8% year-over-year (YoY) in May.  This was the thirteenth consecutive monthly YoY decrease in inventory in Sacramento.

Cash buyers accounted for 14.7% 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 6/12/2016 08:54:00 PM

From Tim Duy: Janet Yellen's Inflation Problem

Federal Reserve Chair Janet Yellen has been vexed by an inflation problem. Now she is also vexed by an inflation expectations problem. ...

[M]y expectation is that the Fed does not change its inflation expectations language in this week's FOMC statement. If they do, they have to understand that they market participants will price out rate hikes until 2017. I don't think they want this; I think instead the Fed will be working to keep July in play (a tall order in my opinion).

Weekend:
• Schedule for Week of June 12, 2016

• FOMC Preview and Review of Projections

From CNBC: Pre-Market Data and Bloomberg futures: S&P are down 5 and DOW futures are down 20 (fair value).

Oil prices were mixed over the last week with WTI futures at $48.66 per barrel and Brent at $50.27 per barrel.  A year ago, WTI was at $60, and Brent was at $63 - so prices are down almost 20% year-over-year.

Here is a graph from Gasbuddy.com for nationwide gasoline prices. Nationally prices are at $2.38 per gallon (down about $0.40 per gallon from a year ago).

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).