by Calculated Risk on 8/09/2017 09:34:00 AM

A few brief excerpts from some analysis by Goldman Sachs economists:

The Treasury projects that the debt limit will need to be raised by September 29, and we expect Congress to take at least that long to raise it.
...
What happens if Congress does not raise it in time?

Scheduled federal payments would be delayed and financial markets would be disrupted. The primary consequence of a failure to raise the debt limit before October 2 would be a likely failure to make some payments on that day or soon thereafter. This could include, for example, the main monthly payment to Social Security beneficiaries, which occurs on the 3rd of every month. All told, the decline in federal payments that would be necessary to avoid breaching the debt limit would be roughly equal to the budget deficit, resulting in a temporary fiscal contraction of 3-4% of GDP for the period the debt limit is binding. A sharp decline like this would likely be disruptive to financial markets and could have consequences for the real economy, which is why Congress has managed to avoid such an outcome in the past.

CR note: I'll have much more on the "debt limit" as the deadline approaches. I've written about this nonsense before, from 2011:

Unfortunately "debt ceiling" sounds virtuous, but it isn't - it is actually a question of "paying the bills".

And here from 2014:

There are certain politicians who think it is OK to not pay the bills as long as the U.S. makes interest and principal payments on the debt.  That is crazy talk.  There is a name for people who don't pay their bills: deadbeats.  If politicians don't pay their personal bills, they are deadbeats.  But if they stop the government from paying the bills, we are all deadbeats.  And there will be serious economic consequences for not paying the bills on time.  The consequences will build over time, but in a few months, not "paying the bills" will ripple through the entire economy.
...
The only smart vote would be to eliminate the debt ceiling vote in the future, and let the annual budget process automatically set the debt limit. But then there wouldn't be as much camera time ...

by Calculated Risk on 8/09/2017 07:00:00 AM

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

Mortgage applications increased 3.0 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending August 4, 2017.

... The Refinance Index increased 5 percent from the previous week. The seasonally adjusted Purchase Index increased 1 percent from one week earlier. The unadjusted Purchase Index increased 0.3 percent compared with the previous week and was 7 percent higher than the same week one year ago. ...

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($424,100 or less) decreased to 4.14 percent from 4.17 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.

Refinance activity will not pick up significantly unless mortgage rates fall well below 4%.


The second graph shows the MBA mortgage purchase index.

According to the MBA, purchase activity is up 7% year-over-year.

by Calculated Risk on 8/08/2017 05:18:00 PM

Note: This index is possibly a leading indicator for new non-residential Commercial Real Estate (CRE) investment, except manufacturing.

From Dodge Data Analytics: Dodge Momentum Index Stumbles in July

The Dodge Momentum Index fell in July, dropping 3.3% to 135.0 (2000=100) from its revised June reading of 139.6. The Momentum Index is a monthly measure of the first (or initial) report for nonresidential building projects in planning, which have been shown to lead construction spending for nonresidential buildings by a full year. The move lower in July was due to a 6.6% decline in the institutional component of the Momentum Index, while the commercial component fell 1.1%.This month continues a recent trend of volatility in the Momentum Index where a string of gains is interrupted by a step backwards in planning intentions. Despite the decline from June to July, the Momentum Index is 6.9% higher than one year ago, which suggests further moderate gains in construction activity throughout the year. The commercial component of the Momentum Index is 8.0% higher than last year, while the Institutional component is 5.3% higher.
emphasis added

Click on graph for larger image.

This graph shows the Dodge Momentum Index since 2002. The index was at 135.0 in July, down from 139.6 in June.

The index is still up 6.9% year-over-year.

According to Dodge, this index leads "construction spending for nonresidential buildings by a full year". This suggests further increases in CRE spending over the next year.

by Calculated Risk on 8/08/2017 01:00:00 PM

From Corelogic: May 2017 Delinquency Rate Lowest in Nearly a Decade

CoreLogic® ... today released its monthly Loan Performance Insights Report which shows that, nationally, 4.5 percent of mortgages were in some stage of delinquency (30 days or more past due including those in foreclosure) in May 2017. This represents a 0.8 percentage point decline in the overall delinquency rate compared with May 2016 when it was 5.3 percent.

As of May 2017, the foreclosure inventory rate, which measures the share of mortgages in some stage of the foreclosure process, was 0.7 percent compared with 1 percent in May 2016. The serious delinquency rate, defined as 90 days or more past due including loans in foreclosure, was 2 percent, unchanged from April 2017 and down from 2.6 percent in May 2016. The 2 percent serious delinquency rate in April and May this year was the lowest since November 2007 when it was also 2 percent.

Measuring early-stage delinquency rates is important for analyzing the health of the mortgage market. To comprehensively monitor mortgage performance, CoreLogic examines all stages of delinquency as well as transition rates, which indicate the percentage of mortgages moving from one stage of delinquency to the next.

The rate for early-stage delinquencies, defined as 30-59 days past due, was 1.9 percent in May 2017, down from 2 percent in May 2016. The share of mortgages that were 60-89 days past due in May 2017 was 0.63 percent, down slightly from 0.66 percent in May 2016.

“Strong employment growth and home price increases have contributed to improved mortgage performance,” said Dr. Frank Nothaft, chief economist for CoreLogic. “Early-stage delinquencies are hovering around 17-year lows, and the current-to-30-day past due transition rate remained low at 0.8 percent. However, the same positive economic conditions helping performance have also contributed to a lack of affordable supply, creating challenges for homebuyers.”

Since early-stage delinquencies can be volatile, CoreLogic also analyzes transition rates. The share of mortgages that transitioned from current to 30-days past due was 0.8 percent in May 2017 compared with 0.9 percent in May 2016, a 0.1 percentage point decrease year over year. By comparison, in January 2007, just before the start of the financial crisis, the current-to-30-day transition rate was 1.2 percent and it peaked in November 2008 at 2 percent.

“A prolonged period of relatively tight underwriting criteria has driven delinquencies down to pre-crisis levels across many parts of the country,” said Frank Martell, president and CEO of CoreLogic. “As pressure to relax underwriting standards increases, the industry needs to proceed carefully and take progressive, sensible actions that protect hard-fought improvements in mortgage performance.”
emphasis added

Click on graph for larger image.

This graph from Corelogic compares the delinquency rate by bucket for May 2016 (red) and May 2017 (blue).

by Calculated Risk on 8/08/2017 10:07:00 AM

From the BLS: Job Openings and Labor Turnover Summary

The number of job openings increased to 6.2 million on the last business day of June, the U.S. Bureau of Labor Statistics reported today. Over the month, hires and separations were little changed at 5.4 million and 5.2 million, respectively. Within separations, the quits rate and the layoffs and discharges rate were little changed at 2.1 percent and 1.2 percent, respectively. ...

The number of quits was little changed at 3.1 million in June. The quits rate was 2.1 percent. The number of quits was little changed for total private and for government. Quits decreased in finance and insurance (-21,000).
emphasis added

The following graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.

This series started in December 2000.

Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. This report is for June, the most recent employment report was for July.

Click on graph for larger image.


Note that hires (dark blue) and total separations (red and light blue columns stacked) are pretty close each month. This is a measure of labor market turnover.  When the blue line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs.

Jobs openings increased in June to 6.163 million from 5.702 in May.  This is the highest number of job openings since this series started in December 2000.

The number of job openings (yellow) are up 11% year-over-year.

Quits are up 5% year-over-year. These are voluntary separations. (see light blue columns at bottom of graph for trend for "quits").

Job openings are mostly moving sideways at a high level, and quits are increasing.  This is another strong report.

by Calculated Risk on 8/08/2017 09:10:00 AM

This is a key distressed market to follow since Las Vegas saw the largest price decline, following the housing bubble, of any of the Case-Shiller composite 20 cities.

The Greater Las Vegas Association of Realtors reported Southern Nevada Housing Market Stays Hot as Home Sales, Prices Keep Rising, GLVAR Housing Statistics for July 2017

The Greater Las Vegas Association of REALTORS® (GLVAR) reported today that the increasingly hot local housing market showed no signs of cooling off in July, with home prices and sales continuing to rise while the housing supply keeps shrinking.
...
By the end of July, GLVAR reported 4,995 single-family homes listed for sale without any sort of offer. That’s down 31.9 percent from one year ago. For condos and townhomes, the 625 properties listed without offers in July represented a 48.4 percent drop from one year ago.

Meanwhile, local home sales continue to increase compared to the same time last year. The total number of existing local homes, condos and townhomes sold in July was 3,798, up from 3,447 in July 2016. Compared to one year ago, sales were up 10.8 percent for homes and up 7.5 percent for condos and townhomes.

According to GLVAR, total sales so far in 2017 continue to outpace 2016, when 41,720 total properties were sold in Southern Nevada.

“Home sales have been very strong this year,” Tina said. “In fact, at the rate we’re going, 2017 is on pace to be our best year for local home sales since at least 2012, and one our five best years ever.”
...
For several years, GLVAR has been reporting fewer distressed sales and more traditional home sales, where lenders are not controlling the transaction. That trend continued in July, when 3.0 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 compares to 5.7 percent of all sales in July 2016. Another 3.4 percent of all July sales were bank-owned, down from 5.9 percent one year ago.
emphasis added

1) Overall sales were up 10% year-over-year.

2) Active inventory (single-family and condos) is down sharply from a year ago (Almost 50% decline in condo inventory).

3) Fewer distressed sales.

by Calculated Risk on 8/08/2017 08:49:00 AM

From the National Federation of Independent Business (NFIB): July 2017 Report: Small Business Optimism Index

The Index of Small Business Optimism rose 1.6 points to 105.2, preserving the surge in optimism that started the day after the election. Seven of the 10 Index components posted a gain, two declined, and one was unchanged. Since the recession, the Index peaked at 105.9 in January, just 0.7 points above the July reading.
...
Small business owners reported an adjusted average employment change per firm of 0.21 workers per firm over the past few months, a solid performance. Thirteen percent (up 3 points) reported increasing employment an average of 4.5 workers per firm and 11 percent (unchanged) reported reducing employment an average of 1.6 workers per firm (seasonally adjusted). A seasonally adjusted net 19 percent plan to create new jobs, up 4 points, with higher levels not seen since December 1999.

Sixty percent reported hiring or trying to hire (up 6 points), but 52 percent (87 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill. Nineteen percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem (up 4 points), second only to taxes. This is a particularly severe problem in construction (28 percent) and manufacturing (21 percent) where labor shortages are the top problem, trumping taxes and regulatory costs. Thirty-five percent of all owners reported job openings they could not fill in the current period, up 5 points, the highest reading since November 2001.
emphasis added

Click on graph for larger image.

This graph shows the small business optimism index since 1986.

The index increased to 105.2 in July.

by Calculated Risk on 8/07/2017 08:21:00 PM

From Matthew Graham at Mortgage News Daily: Mortgage Rates Unchanged vs Last Week

Mortgage rates were generally unchanged today [30YR FIXED - 4.00%], compared to Friday afternoon's latest levels.  Only a handful of lenders responded to strength in bond markets this afternoon by offering rate sheet improvements.

Tuesday:
• At 6:00 AM ET, NFIB Small Business Optimism Index for July.

• At 10:00 AM, Job Openings and Labor Turnover Survey for June from the BLS.

by Calculated Risk on 8/07/2017 01:59:00 PM

The prime working age population peaked in 2007, and bottomed at the end of 2012. As of July 2017, according to the BLS, there were still fewer people in the 25 to 54 age group than in 2007.

At the beginning of this year - based on demographics - it looked like the prime working age (25 to 54) would probably hit a new peak in 2017. 

However, since the end of last year, the prime working age population has declined slightly.

Changes in demographics are an important determinant of economic growth, and although most people focus on the aging of the "baby boomer" generation, the movement of younger cohorts into the prime working age is another key story. Here is a graph of the prime working age population (25 to 54 years old) from 1948 through May 2017.

Note: This is population, not work force.

Click on graph for larger image.

There was a huge surge in the prime working age population in the '70s, '80s and '90s.

The prime working age labor force grew even quicker than the population in the '70s and '80s due to the increase in participation of women. In fact, the prime working age labor force was increasing 3%+ per year in the '80s!

So when we compare economic growth to the '70s, '80, or 90's we have to remember this difference in demographics (the '60s saw solid economic growth as near-prime age groups increased sharply).

The good news is the prime working age group should start growing at 0.5% per year - and this should boost economic activity.

by Calculated Risk on 8/07/2017 11:15:00 AM

The BEA has released the underlying details for the Q2 advance GDP report.

The BEA reported that investment in non-residential structures increased at a 5.2% annual pace in Q2.  This is a turnaround from early last year when non-residential investment declined due to less investment in petroleum exploration. Investment in petroleum and natural gas exploration increased substantially in Q2, from a $59 billion annual rate in Q4 2016 to a $97 billion annual rate in Q2 2017 - but is still down from a recent peak of $165 billion in Q4 2014.

Click on graph for larger image.

The first graph shows investment in offices, malls and lodging as a percent of GDP. Office, mall and lodging investment has increased a little recently, but from a very low level.

Investment in offices increased in Q2, and is up 13% year-over-year - and is now almost as high as the housing bubble years as a percent of GDP.

Investment in multimerchandise shopping structures (malls) peaked in 2007 and was up slightly year-over-year in Q2.   The vacancy rate for malls is still very high, so investment will probably stay low for some time.

Lodging investment decreased in Q2, however lodging investment is up 8% year-over-year.

My guess is office and hotel investment growth will slow (office vacancies are still high, although hotel occupancy is near record levels).  But investment growth is still very strong this year.

The second graph is for Residential investment components as a percent of GDP. According to the Bureau of Economic Analysis, RI includes new single family structures, multifamily structures, home improvement, Brokers’ commissions and other ownership transfer costs, and a few minor categories (dormitories, manufactured homes).

Home improvement was the top category for five consecutive years following the housing bust ... but now investment in single family structures has been back on top for three and a half years and will probably stay there for a long time.

However - even though investment in single family structures has increased from the bottom - single family investment is still very low, and still below the bottom for previous recessions as a percent of GDP. I expect further increases over the next few years.

Investment in single family structures was $261 billion (SAAR) (about 1.4% of GDP), and was up in Q2 compared to Q1.

Investment in home improvement was at a $230 billion Seasonally Adjusted Annual Rate (SAAR) in Q2 (about 1.2% of GDP).  Home improvement spending has been solid.