by Calculated Risk on 12/21/2016 05:33:00 PM

From the Philly Fed:

The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for November 2016. In the past month, the indexes increased in 43 states, decreased in three, and remained stable in four, for a one-month diffusion index of 80. Over the past three months, the indexes increased in 43 states, decreased in five, and remained stable in two, for a three-month diffusion index of 76.

Note: These are coincident indexes constructed from state employment data. An explanation from the Philly Fed:

The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state’s index is set to the trend of its gross domestic product (GDP), so long-term growth in the state’s index matches long-term growth in its GDP.

Click on graph for larger image.

This is a graph is of the number of states with one month increasing activity according to the Philly Fed. This graph includes states with minor increases (the Philly Fed lists as unchanged).

In November 47 states had increasing activity (including minor increases).

The recent downturn in the number of states increasing was mostly related to the decline in oil prices. Now that oil prices have recovered somewhat, most states are increasing again.

Here is a map of the three month change in the Philly Fed state coincident indicators. This map was all red during the worst of the recession, and is mostly green now.

Source: Philly Fed. Note: For complaints about red / green issues, please contact the Philly Fed.

by Calculated Risk on 12/21/2016 02:00:00 PM

Earlier: Existing Home Sales increased in November to 5.61 million SAAR

Several key points:

1) The strong year-over-year increase was related to the implementation of the new TILA-RESPA Integrated Disclosure (TRID) in November 2015. Note: TILA: Truth in Lending Act, and RESPA: the Real Estate Settlement Procedures Act of 1974. The impact from TRID sorted out quickly (sales rebounded from 4.86 million SAAR in November 2015 to 5.45 million SAAR in December 2015) SAAR: Seasonally Adjusted Annual Rate.

2) These November existing home sales were mostly in escrow - with mortgage rates locked - before the recent increase in mortgage rates (rates started increasing after the election).

With the recent increase in rates, I'd expect some decline in sales volume as happened following the "taper tantrum" in 2013.   So we might see sales fall to 5 million SAAR or below over the next 6 months.  That would still be solid existing home sales.   We might also see a little more inventory in the coming months, and therefore less price appreciation.

Usually a change in interest rates impacts new home sales first, because new home sales are reported when the contract is signed, whereas existing home sales are reported when the contract closes.  So we might see some impact on new home sales for November or December.

3) As usual, housing economist Tom Lawler was much closer to the NAR reported sales than the consensus.  Lawler forecast 5.60 million SAAR, the NAR reported 5.61 million.  The consensus was 5.53 million.

4) On inventory, I expected some increase in inventory, but that didn't happened.  Inventory is still very low and falling year-over-year (down 9.3% year-over-year in November). More inventory would probably mean smaller price increases and slightly higher sales, and less inventory means lower sales and somewhat larger price increases.

Two of the key reasons inventory is low: 1) A large number of single family home and condos were converted to rental units. Last year, housing economist Tom Lawler estimated there were 17.5 million renter occupied single family homes in the U.S., up from 10.7 million in 2000. Many of these houses were purchased by investors, and rents have increased substantially, and the investors are not selling (even though prices have increased too). Most of these rental conversions were at the lower end, and that is limiting the supply for first time buyers. 2) Baby boomers are aging in place (people tend to downsize when they are 75 or 80, in another 10 to 20 years for the boomers). Instead we are seeing a surge in home improvement spending, and this is also limiting supply.

Of course low inventory keeps potential move-up buyers from selling too.  If someone looks around for another home, and inventory is lean, they may decide to just stay and upgrade.

I've heard reports of more inventory in some coastal areas of California, in New York city and for high rise condos in Miami.  But we haven't seen a change in trend for inventory yet.

The following graph shows existing home sales Not Seasonally Adjusted (NSA).

Click on graph for larger image.

Sales NSA in November (red column) were the highest for November since 2006 (NSA).

Note that sales NSA are in the slower Fall period, and will really slow seasonally in January and February.

Since sales rebounded in December 2015, following the implementation of TRID, I wouldn't be surprised if sales are down year-over-year in December 2016.

by Calculated Risk on 12/21/2016 12:01:00 PM

Note: This index is a leading indicator primarily for new Commercial Real Estate (CRE) investment.

From the AIA: Architecture Billings Index ekes out another small gain

Coming off a modest increase after two consecutive months of contraction, the Architecture Billings Index (ABI) recorded another small increase in demand for design services. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lead time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the November ABI score was 50.6, essentially unchanged from the mark of 50.8 in the previous month. This score reflects a slight increase in design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 59.5, up from a reading of 55.4 the previous month.

“Without many details of the policies proposed, it’s still too early to tell the likely impact of the programs of the new administration,” said AIA Chief Economist, Kermit Baker, Hon. AIA, PhD. “However, architects will be among the first to see what new construction projects materialize and what current ones get delayed or cancelled, so the coming months should tell us a lot about the future direction of the construction market.”
...
• Regional averages: South (51.3), Midwest (50.9), Northeast (50.8), West (48.6)

• Sector index breakdown: multi-family residential (51.7), mixed practice (51.3), commercial / industrial (50.4), institutional (49.5)
emphasis added

Click on graph for larger image.

This graph shows the Architecture Billings Index since 1996. The index was at 50.6 in November, down from 50.8 in October. Anything above 50 indicates expansion in demand for architects' services.

Note: This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions.

According to the AIA, there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction.  This index was positive in 9 of the last 12 months, suggesting a further increase in CRE investment through mid-2017.

by Calculated Risk on 12/21/2016 10:10:00 AM

From the NAR: Existing-Home Sales Forge Ahead in November

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 0.7 percent to a seasonally adjusted annual rate of 5.61 million in November from a downwardly revised 5.57 million in October. November's sales pace is now the highest since February 2007 (5.79 million) and is 15.4 percent higher than a year ago (4.86 million). ...

Total housing inventory at the end of November dropped 8.0 percent to 1.85 million existing homes available for sale, and is now 9.3 percent lower than a year ago (2.04 million) and has fallen year-over-year for 18 straight months. Unsold inventory is at a 4.0-month supply at the current sales pace, which is down from 4.3 months in October.

Click on graph for larger image.

This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.

Sales in November (5.61 million SAAR) were 0.7% higher than last month, and were 15.4% above the November 2015 rate.

Note: Sales in November 2015 were depressed for one month by a change in regulations, so the year-over-year gain was very strong.

The second graph shows nationwide inventory for existing homes.

According to the NAR, inventory decreased to 1.85 million in November from 2.01 million in October.   Headline inventory is not seasonally adjusted, and inventory usually decreases to the seasonal lows in December and January, and peaks in mid-to-late summer.

The third graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory.

Inventory decreased 9.3% year-over-year in November compared to November 2015.  

Months of supply was at 4.0 months in November.

This was above consensus expectations (at economist Tom Lawler's forecast). For existing home sales, a key number is inventory - and inventory is still low. I'll have more later ...

by Calculated Risk on 12/21/2016 07:00:00 AM

From the MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey

Mortgage applications increased 2.5 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending December 16, 2016.

... The Refinance Index increased 3 percent from the previous week. The seasonally adjusted Purchase Index increased 3 percent from one week earlier. The unadjusted Purchase Index decreased 0.1 percent compared with the previous week and was 1 percent higher than the same week one year ago.
...
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to its highest level since May 2014, 4.41 percent, from 4.28 percent, with points increasing to 0.38 from 0.36 (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 since 1990.

With the current level of mortgage rates, refinance activity will probably decline further.


The second graph shows the MBA mortgage purchase index.

The purchase index was "1 percent higher than the same week one year ago".

Even with the increase in mortgage rates, purchase activity is still holding up.  However refinance activity has declined significantly - and will probably decline further.

by Calculated Risk on 12/20/2016 06:26:00 PM

A little data tomorrow ...

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

• At 10:00 AM, Existing Home Sales for November from the National Association of Realtors (NAR). The consensus is for 5.53 million SAAR, down from 5.60 million in October. Housing economist Tom Lawler expects the NAR to report sales of 5.60 million SAAR in November, unchanged from October's preliminary pace.

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

by Calculated Risk on 12/20/2016 02:05:00 PM

Some credit statistics from CoreLogic: Housing Credit Index: Third Quarter 2016

Loans originated in Q3 2016 are among the highest-quality home loans originated since the year 2001, according to the latest CoreLogic Housing Credit Index (HCI) Report. Figure 1 shows the overall Housing Credit Index from Q1 2001 through the end of Q3 2016. Higher index values indicate a higher level of credit risk for new originations and lower index values indicate less credit risk present. Compared with other loans made since mid-2009, the starting point of the current economic expansion, Q3 2016 loans are among the loans originated with the lowest credit risk based on six important credit-risk attributes.

Click on graph for larger image.

The average credit score for homebuyers increased 5 points between the third quarter of 2015 and the third quarter of 2016, rising from 734 to 739.

The average DTI for homebuyers fell slightly comparing the third quarters of 2015 and 2016, falling from 35.7 percent to 35.4 percent.

The LTV for homebuyers decreased nearly 1 percentage point between the third quarter of 2015 and the third quarter of 2016, declining from 86.8 percent to 85.8 percent.

CR note: Recent mortgage loans - in general - have low credit risk.

by Calculated Risk on 12/20/2016 11:07:00 AM

Note: This appears to be a leading indicator for industrial production.

From the American Chemistry Council: Chemical Activity Barometer Ends Year on Strong Note; Suggests Expanded Business Growth in Early 2017

The Chemical Activity Barometer (CAB), a leading economic indicator created by the American Chemistry Council (ACC), ended the year on a strong note, posting a monthly gain of 0.3 percent and a year-over-year gain of 4.4 percent, a significant improvement over the first half of the year, and a pace not seen since September 2010. All data is measured on a three-month moving average (3MMA). On an unadjusted basis the CAB climbed 0.6 percent in December, and 4.8 percent for the year.
...
In December all of the four core categories for the CAB improved. Production-related indicators were positive, despite last week’s announcement that housing starts tumbled. “Housing starts were at a nine-year high,” noted ACC Chief Economist Kevin Swift. “The foundation remains strong. Overall trends in construction-related resins, pigments, and related performance chemistry were positive and suggest further gains in housing next year,” he added. Other indicators, including equity prices, product prices, and inventory were also positive.
...
Applying the CAB back to 1912, it has been shown to provide a lead of two to fourteen months, with an average lead of eight months at cycle peaks as determined by the National Bureau of Economic Research. The median lead was also eight months. At business cycle troughs, the CAB leads by one to seven months, with an average lead of four months. The median lead was three months. The CAB is rebased to the average lead (in months) of an average 100 in the base year (the year 2012 was used) of a reference time series. The latter is the Federal Reserve’s Industrial Production Index.
emphasis added

Click on graph for larger image.

This graph shows the year-over-year change in the 3-month moving average for the Chemical Activity Barometer compared to Industrial Production.  It does appear that CAB (red) generally leads Industrial Production (blue).

Currently CAB has increased solidly over the last several months, and this suggests an increase in Industrial Production over the next year.

by Calculated Risk on 12/20/2016 09:47:00 AM

A few excerpts from a piece by Professor Hamilton at Econbrowser: Back to normal?

A year ago, the Federal Reserve decided to raise its target for the fed funds rate by 25 basis points above the floor of 0-0.25% at which we’d been stuck for 7 years. FOMC members indicated at the time that they were expecting to end 2016 at 1.4%, or four rate hikes during the last year. We started this December at 0.41%, and the first hike of 2016 didn’t come until last week. Now FOMC members say they are expecting to end 2017 at 1.4%, or three more hikes from here during the next year. The January 2018 fed funds futures contract is currently priced at 1.23%, suggesting that the market is buying into two, not three hikes during 2017.
...
I like the visual device that Federal Reserve Bank of Chicago President Charles Evans proposed, which summarizes the Fed’s inflation and unemployment objectives in terms of a target with a bull’s-eye. I’ve centered the bull’s-eye below assuming a long-run inflation target of 2% and a natural unemployment rate of 4.8%. We’d like to be as close to the center of the target as possible. The U.S. has been moving steadily toward that objective since 2009, though up until the November employment report both the inflation and the unemployment data were arguing for more stimulus. This month for the first time the inflation number calls for more stimulus while the unemployment number suggests we may need less.

Horizontal axis: civilian unemployment rate. Vertical axis: inflation rate as measured by year-over-year percent change in implicit price deflator for personal consumption expenditures. 2017 entry represents FOMC projections. Crosses denote values for October unemployment and October year-over-year inflation for indicated year, with exception that 2016 unemployment number is for Nov 2016 and 2017 projection is for end of year. Adapted from Evans (2014).

If you took the bulls-eye literally, on net you’d still want to see some additional stimulus today, bringing unemployment even lower until inflation is closer to target. And in fact the Fed sees enough underlying strength in the economy that it thinks that, even with the rate hike last week and additional hikes planned for next year, on balance they’re still providing a modest stimulus and expect that by the end of 2017 we’ll end up very close to target ...

But the elephant in the room is of course the possibility that fiscal stimulus may soon be a factor pushing us in a northwest direction on that target. And that may soon come to play a bigger role in U.S. monetary policy determination.

by Calculated Risk on 12/19/2016 05:48:00 PM

From Matthew Graham at Mortgage News Daily: Rates Stay Near Highs Despite Market Improvement

Mortgage rates stayed close to the highest levels in more than 2 years today, even though underlying bond markets left plenty of room for improvement.  Typically, when bond markets improve as much as they did today, rates would be noticeably lower.  The inconsistency has to do with more conservative lender pricing strategies surrounding the holiday season.
...
  All this having been said, a few lenders did update rates this afternoon, offering slight improvements.  The average effective rate (which adjusts for closing costs) fell just slightly, but the average contract rate for a conventional 30yr fixed loan remained at 4.375% for a top tier scenario, with several lenders still up at 4.5%
emphasis added

CR Note: We should see a further drop in refinance activity, and I expect some slowdown in housing (still thinking about this).

Here is a table from Mortgage News Daily:

Home Loan Rates

View More Refinance Rates