by Calculated Risk on 5/04/2010 11:24:00 AM

A couple of comments from German officials via the Guardian: Greece's €110bn bailout gets lukewarm reception from financial markets (ht Jonathan)

German economy minister Rainer Brüderle added to the uncertainty by telling Reuters that the €110bn package was not intended to cover Greece's entire financial requirements for the next three years. Instead, Brüderle suggested, Greece will need to return to the financial markets in perhaps 18 months to satisfy its borrowing needs.
...
Finance minister Wolfgang Schäuble said that Greece would be plunged into insolvency if it failed to meet its promises to raise taxes across the economy, increase the retirement age to 65, and cut the size of its public sector.

"If there are any violations, payments will be stopped. Then Athens will once again be threatened with bankruptcy," Schäuble told the Rheinische Post newspaper.

The yield on the two year Greek government debt was up 4.2% to 14.5% this morning. Investors still have no confidence ...

And there are still worries of contagion, from Bloomberg:

Spanish Prime Minister Jose Luis Rodriguez Zapatero said speculation of a bailout for Spain is “complete madness” and the nation has “strong solvency.” His remarks came as Greece’s 110 billion-euro ($146 billion) rescue package fails to ease concern that swelling European sovereign debt will derail the economic recovery.

by Calculated Risk on 5/04/2010 10:00:00 AM

From the NAR: Pending Home Sales on an Upswing

The Pending Home Sales Index, a forward-looking indicator based on contracts signed in March, rose 5.3 percent to 102.9 from 97.7 in February, and is 21.1 percent above March 2009 when it was 85.0; this follows an 8.3 percent increase in February. The data reflects contracts and not closings, which usually occur with a lag time of one or two months.
...
"In the months immediately following the expiration of the tax credit, we expect measurably lower sales,” [Lawrence Yun, NAR chief economist] said.

This is no surprise - the tax credit has pulled demand forward, and existing home sales will decline after June (existing home sales are counted when the contract closes).

by Calculated Risk on 5/04/2010 08:34:00 AM

From Bloomberg:

Filings totaled almost 146,000 in April, according to data compiled by Automated Access to Court Electronic Records, a service of Oklahoma City-based Jupiter ESources LLC. March filings were about 158,000.

The April filing total represented a 15 percent increase from April 2009 total. This is the 2nd highest month since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was enacted.

Click on graph for larger image in new window.

This graph shows the non-business bankruptcy filings by quarter using monthly data from the ABI and previous quarterly data from USCourts.gov.

The American Bankruptcy Institute (ABI) is forecasting over 1.5 million filings in 2010. This is an increase from the just over 1.4 million filings in 2004. I think the ABI forecast is low ...

by Calculated Risk on 5/03/2010 11:24:00 PM

Just an overview ...

Light Vehicle Sales in April were at a 11.2 Million Seasonally Adjusted Annual Rate (SAAR). This was up 21.8% from April 2009 (when sales were at the lowest level in 30 years), and down 4.6% from the March 2010 sales rate.

Personal Income was up 0.3% in March, but spending increased 0.6%. The increases in spending are coming from less saving and transfer payments instead of income growth. This is a solid increase in personal consumption expenditures (PCE), but PCE growth is not sustainable without jobs and income growth.

The ISM Manufacturing Index showed solid growth in April. The employment index increased to 58.5 percent in April (suggesting growth in manufacturing employment).

Private construction spending declined in March for both residential and non-residential. Public construction spending increased. Perhaps the good news is investment in offices, malls and hotels is at or near record lows, and is probably nearing the bottom (although spending will probably decline most of this year). This suggests the job losses related to construction employment will slow.

The Federal Reserve released the April Senior Loan Officer survey. The survey showed that banks are keeping lending standards unchanged (no longer tightening), but the survey also showed that loan demand weakened further.

And some more excerpts from Fed transcripts in 2004 (just released). These transcripts show that Fed researchers were aware that the increase in house prices (by early 2004) could not be explained by fundamentals, and that a Fed President was concerned about rampant speculation and loose lending standards.

by Calculated Risk on 5/03/2010 08:12:00 PM

There has been widespread discussion of the March 2004 Fed comments and chart I posted on Saturday. To review: in March 2004, Fed associate research director Stephen Oliner presented a chart of rents-to-house prices and commented that "even after you account for the fundamentals, there’s a part of the increase [in house prices] that is hard to explain".

This should have set off alarms. Is there widespread speculation? Are lending standards too loose?

Here are some comments from Minneapolis Fed President Gary Stern at the November 10, 2004 FOMC meeting that answers those questions:

Stern: A little over a week ago, we hosted at the Bank a meeting on housing and residential construction activity. There were several reasons for this. One, of course, was the fact that we hear periodic discussions of a potential bubble in house prices. But second, I’ve been struck, as I’ve watched developments in the Twin Cities and as I’ve traveled around other cities in the last several years, by the absolutely high level of construction activity that seems to be occurring. It’s not only new building, but conversions of all sorts of warehouses, schools, and former office buildings to residential property. A change in mix seems to be occurring as well, with more of the construction and renovation yielding townhouses and condominiums rather than the standard single-family home.
...
Let me just note three specific issues that came up because I, at least, found them of interest. The first, which it won’t surprise this group to hear, is that they attributed a good deal of the strength in housing to very favorable financial conditions. In this regard they talked not only about low interest rates but also lower down-payment requirements. I might add that a couple of the lenders did say that they thought the credit pendulum had swung too far. They felt that credit conditions had become too easy, and they were anticipating some potential difficulties going forward—presumably in somebody else’s shop! [Laughter] Second, they reported that at least in some markets a significant percentage of the purchases of new units were by investors, where the term “investors” means people who don’t intend to occupy the property, at least not immediately. As best they could judge, in some markets investors were buying up to 30 percent of the new additions to supply. And finally, they noted that there seemed to be some acceleration of purchases by first-time homebuyers who were concerned that they were going to be priced out of the market if they waited longer. The implications of that, of course, are that at some point such sales will slow because people will have acted if they could.

CHAIRMAN GREENSPAN. Shall we take a coffee break and return in fifteen minutes, please.

Loose lending standards, widespread speculation, conversion of all kinds of buildings to residential - and this in flat land!

So in March 2004 a Fed researcher was expressing concern about house prices being out of line with fundamentals, and in November 2004 a Fed President is talking about widespread speculation ... and then there was no further discussion. The 2005 transcripts will be very interesting (to be released next year).

For more see:

Paul Krugman: Bubble Denial

Matthew Yglesias: Is Our Fed Governors Learning?

Annie Lowrey: The Fed Discussing and Dismissing the Housing Bubble in 2004

Ryan Grim at HuffingtonPost: Greenspan Wanted Housing-Bubble Dissent Kept Secret

by Calculated Risk on 5/03/2010 06:04:00 PM

From the Fed: The April 2010 Senior Loan Officer Opinion Survey on Bank Lending Practices

The April survey indicated that most banks kept their lending standards unchanged in the first quarter, but that moderate net fractions of banks further tightened many terms on loans to businesses and households. ... The survey also indicated that loan demand generally weakened further.
emphasis added

In general banks have stopped tightening lending standards, however demand continues to weaken. For commercial real estate, the banks are still tightening standards:

A significant number of domestic banks, on balance, continued to report having tightened standards on CRE loans. However, this net fraction was considerably smaller than in the January survey. As in the previous survey, domestic banks reported weaker demand for CRE loans, on net.

And on a special question regarding the the use of CRE loan extensions:

In response to a special question, sizable fractions of both domestic and foreign respondents reported having increased their use of CRE loan extensions over the previous six months.

This is similar to the last survey in January ... generally banks have ceased tightening lending standards (this is probably as tight as it gets for this cycle), but loan demand weakened further.

by Calculated Risk on 5/03/2010 03:28:00 PM

Based on an estimate from Autodata Corp, light vehicle sales were at a 11.21 million SAAR in April. This is up 21.8% from April 2009 (when sales were at the lowest level in 30 years), and down 4.6% from the March sales rate that was driven by incentives.

Click on graph for larger image in new window.

This graph shows the historical light vehicle sales (seasonally adjusted annual rate) from the BEA (blue) and an estimate for April (red, light vehicle sales of 11.21 million SAAR from Autodata Corp).

The second graph shows light vehicle sales since the BEA started keeping data in 1967.

Auto sales have recovered from the low levels of early 2009, but are still below the lowest point of the '90/'91 recession (even with a larger number of registered drivers).

This was slightly below most forecasts of around 11.5 million SAAR.

by Calculated Risk on 5/03/2010 01:30:00 PM

Here are graphs of office, mall and lodging investment through Q1 2010 based on the underlying detail data released by the BEA today ...

Click on graph for larger image in new window.

This graph shows investment in offices as a percent of GDP. Office investment as a percent of GDP peaked at 0.46% in Q3 2008 and has declined sharply to a new all time low (as a percent of GDP).

Reis reported that the office vacancy rate rose to the highest level since the early '90s in Q1 2010 at 17.2%, up from 17.0% in Q4 and 15.2% in Q1 2009. The peak vacancy rate following the 2001 recession was 16.9%. With the office vacancy rate still rising, office investment will probably decline further - although most of the decline in investment has already happened.

Office investment is usually the most overbuilt in a boom, but this time the office market struggled for a few years after the stock market bubble burst and there was comparatively more investment in malls and hotels.

The second graph is for investment in malls.

Investment in multimerchandise shopping structures (malls) peaked in 2007 and has fallen by over 50% (note that investment includes remodels, so this will not fall to zero). Mall investment is also at an all time low (as a percent of GDP) and will probably continue to decline through 2010.

Reis reported that the mall vacancy rate in Q1 2010 was the highest on record at 8.9% for regional malls, and the highest since 1991 for strip malls.

The third graph is for lodging (hotels).

The recent boom in lodging investment was stunning. Lodging investment peaked at 0.32% of GDP in Q2 2008 and has fallen by almost 2/3rds already..

I expect lodging investment to continue to decline through at least 2010.

As projects are completed there will be little new investment in these categories for some time. Notice that investment in all three categories typically falls for a year or two after the end of a recession, and then usually recovers very slowly. Something similar will probably happen again, and there will not be a recovery in these categories until the vacancy rates fall significantly.

by Calculated Risk on 5/03/2010 11:09:00 AM

From MarketWatch: GM April U.S. sales up 6.4% to 183,997 vehicles and from GM: Chevrolet-Buick-GMC-Cadillac Sales Increase 20 Percent in April

Note: GM discontinued several brands, so total vehicle sales were up 6.4%.

Update: From MarketWatch: Ford U.S. April sales jump 24.7% to 167,542 units

Update2: from MarketWatch: Chrysler U.S. April sales increase 25%

Update3: from MarketWatch: Toyota U.S. April sales up 24.4% to 157,439 units

This is based on a very easy comparison: in April 2009 U.S. light vehicle sales fell 36% to 9.2 million (SAAR) from 14.4 million (SAAR) in April 2008. The sharp decline last year was due to the financial crisis, the recession, and reports of the then impending bankruptcy of GM and Chrysler (Chrysler filed for bankruptcy at the end of April, 2009, GM filed for bankruptcy on June 1, 2009).

I'll add reports from the other major auto companies as updates to this post.

NOTE: Once all the reports are released, I'll post a graph of the estimated total April sales (SAAR: seasonally adjusted annual rate) - usually around 4 PM ET. Most estimates are for a slight decrease from the 11.75 million SAAR in March.

by Calculated Risk on 5/03/2010 10:28:00 AM

Overall construction spending increased in March, with a boost from public spending, however private construction spending - both residential and non-residential - declined in March. From the Census Bureau: March 2010 Construction at $847.3 Billion Annual Rate

The U.S. Census Bureau of the Department of Commerce announced today that construction spending during March 2010 was estimated at a seasonally adjusted annual rate of $847.3billion, 0.2 percent (±1.3%)* above the revised February estimate of $845.5 billion. ... Spending on private construction was at a seasonally adjusted annual rate of $550.8 billion, 0.9 percent (±1.4%)* below the revised February estimate of $555.7 billion.

Click on graph for larger image in new window.

The first graph shows private residential and nonresidential construction spending since 1993. Note: nominal dollars, not inflation adjusted.

Private residential construction spending appears to have bottomed in early 2009, but has been mostly moving sideways since then. Residential spending is now 62.8% below the peak of early 2006.

Private non-residential construction spending continues to decline as major projects are completed. Non-residential spending is now 29.9% below the peak of late 2008.

The second graph shows the year-over-year change for private residential and nonresidential construction spending.

Nonresidential spending is off 25.5% on a year-over-year (YoY) basis.

Residential construction spending is now up slightly from a year ago.

Private residential spending will probably exceed non-residential spending later this year - mostly because of continued declines in non-residential spending. Private consturction will be a weak sector for some time.

by Calculated Risk on 5/03/2010 10:00:00 AM

PMI at 60.4% in April, up from 59.6% in March. Any reading above 50 shows expansion.

From the Institute for Supply Management: April 2010 Manufacturing ISM Report On Business®

Economic activity in the manufacturing sector expanded in April for the ninth consecutive month, and the overall economy grew for the 12th consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business®.

The report was issued today by Norbert J. Ore, CPSM, C.P.M., chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. "The manufacturing sector grew for the ninth consecutive month during April. The rate of growth as indicated by the PMI is the fastest since June 2004 when the index hit 60.5 percent. Manufacturers continue to see extraordinary strength in new orders, as the New Orders Index has averaged 61.6 percent for the past 10 months. The signs for employment in the sector continue to improve as the Employment Index registered its fifth consecutive month of growth. Overall, the recovery in manufacturing continues quite strong, and the signs are positive for continued growth."
...
ISM's Employment Index registered 58.5 percent in April, which is 3.4 percentage points higher than the 55.1 percent reported in March. This is the fifth consecutive month of growth in manufacturing employment. An Employment Index above 49.8 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment.
emphasis added

This suggest the expansion in the manufacturing sector increased at a faster pace in April. Although slightly below expectations, this shows continued expansion in the manufacturing sector.

by Calculated Risk on 5/03/2010 08:33:00 AM

The BEA released Q1 data on Friday, and here is the March data from the BEA: Personal Income and Outlays, March 2010

Personal income increased $36.0 billion ... Personal consumption expenditures (PCE) increased $58.6 billion, or 0.6 percent.
...
Real PCE -- PCE adjusted to remove price changes -- increased 0.5 percent in March, the same increase as in February.
...
Personal saving -- DPI less personal outlays -- was $304.0 billion in March, compared with $332.2 billion in February. Personal saving as a percentage of disposable personal income was 2.7 percent in March, compared with 3.0 percent in February.

Once again spending increased much faster than income ... meaning the saving rate declined again.

Click on graph for large image.

This graph shows the saving rate starting in 1959 (using a three month trailing average for smoothing) through the March Personal Income report. The saving rate fell to 2.7% in March.

I still expect the saving rate to rise over the next couple of years slowing the growth in PCE.

The following graph shows real Personal Consumption Expenditures (PCE) through March (2005 dollars). Note that the y-axis doesn't start at zero to better show the change.

The quarterly change in PCE is based on the change from the average in one quarter, compared to the average of the preceding quarter.

The colored rectangles show the quarters, and the blue bars are the real monthly PCE.

The increase in PCE in March was strong and PCE increased 3.6% SAAR in Q1 2010. This increase in spending was driven by less saving and transfer payments.

The National Bureau of Economic Research (NBER) uses several measures to determine if the economy is in recession. One of the measures is real personal income less transfer payments (see NBER memo). This was flat in March at $9,039.4 billion (SAAR) compared to 9,037.5 billion in February, and is barely above the low of September 2009 ($9,000 billion).

This graph shows real personal income less transfer payments since 1969.

This measure of economic activity is moving sideways - similar to what happened following the 2001 recession.

This is a solid report for PCE, but PCE growth is not sustainable without jobs and income growth.

by Calculated Risk on 5/02/2010 09:45:00 PM

Note: here is the weekly summary and a look ahead.

The bailout is official ...

From Bloomberg: Greece Gets $146 Billion Rescue on EU, IMF Austerity Package

From the NY Times: Greece Takes Its Bailout, but Doubts for the Region Persist

The austerity program is intended to reduce the deficit from 13.6% of GDP to 3% of GDP by 2012. This will be especially difficult because Greece is expected to be in a recession for most of that time (so GDP is shrinking).

Can it be done? It has been done before ...

From the IMF: The State of Public Finances Cross-Country Fiscal Monitor: November 2009 (ht JA)

Click on table for larger image in new window.

The adjustment needed in many advanced economies will be difficult, but is not unprecedented. More than twenty advanced economies have achieved improvements in their structural primary balances of at least 5 percent of GDP at least once in the last four decades; ten of them have achieved improvements in excess of 10 percent of GDP in that period (Table 9). Of course, adjustment going forward will be more challenging than in some past episodes, because it will have to be undertaken in an environment of adverse demographics and potentially sluggish potential growth. Some past adjustment episodes in Europe also benefited from nominal exchange rate depreciation and the “carrot” of joining the euro, neither of which will apply in the future. The data also suggest that it has been hard for countries to maintain this adjustment: in most cases, the primary balance deteriorated in the period after consolidation ended. However, this may reflect in part the fact that as the debt ratio declines, smaller primary surpluses are required to stabilize it at its current level.

Greece has done it before (as have several other countries), but this time they have to do it with 1) a shrinking economy, 2) poor demographics (aging population), and 3) no exchange rate depreciation. This will be a huge challenge.

by Calculated Risk on 5/02/2010 06:00:00 PM

Last night I posted some excerpts from the just released 2004 FOMC transcripts showing there was some concern about a housing bubble in June 2004. A key graph, presented by Fed associate research director Stephen Oliner, showed the rent-to-price ratio through Q1 2004. Oliner used the OFHEO (now FHFA) house price index. Usually the invert is presented (price-to-rent).

Here is an update to that graph through Q4 2009.

Click on graph for larger image in new window.

The arrow shows the rent-to-price ratio when Oliner warned that "even after you account for the fundamentals, there’s a part of the increase [in house prices] that is hard to explain".

Clearly the ratio was even more out of line with fundamentals in 2005.

But the OFHEO (now FHFA) price index is GSE mortgages only, and by far the worst loans were part of the Wall Street originate-to-distribute machine. Using the OFHEO house prices missed the worst loans. However the Case-Shiller index included these non-GSE transactions, so I added the blue line showing the rent-to-price ratio using the quarterly Case-Shiller National House Price index.

If the Fed had been paying attention to all house prices, the graph presented at the 2004 meeting would have been even more alarming. It was scary enough ...

by Calculated Risk on 5/02/2010 12:35:00 PM

The key economic report for the week will be the April Employment Report to be released on Friday.

On Monday the Personal Income and Outlays report for March will be released at 8:30 AM ET. This will also include the underlying details for the Q1 GDP report. At 10 AM ET, the ISM Manufacturing index for April will be released (expectations are for an increase to 61 from 59.6 in March) and Construction Spending for March (consensus is for another decline in spending).

Also on Monday, the automakers will report vehicle sales for April. Expectations are for a slight increase from the 11.75 million SAAR for light vehicles in March. The American Bankruptcy Institute will probably report personal bankruptcy filings for April too. This will probably show another "surge" in filings.

On Tuesday, the Census Bureau will release factory orders for March, and the NAR will release March Pending Home Sales at 10 AM (expect a tax credit related increase).

On Wednesday, the ADP employment report will be released (consensus is for an increase of 28K private sector jobs). This will probably be the first increase in the ADP employment report since the recession started. Also on Wednesday, the ISM non-manufacturing report for April will be released. Consensus is for an increase in the service sector.

On Thursday, the closely watched initial weekly unemployment claims will be released. Consensus is for a decline to 440K from 448K last week. Also the Q1 Productivity and Costs report will be released at 8:30 AM.

Also on Thursday, Fed Chairman Ben Bernanke will speak at 9:30 AM at the Chicago Federal Reserve Bank 46th Annual Conference on Bank Structure. There are some interesting topics being covered at the conference, including a discussion of The Future of the Housing GSEs.

And on Friday, the BLS will release the April Employment report at 8:30 AM. The consensus is for a gain of 200K in payroll jobs in April (about 100K from temporary census hiring), and for the unemployment rate to decline slightly to 9.6%. It will be important to remove the Census hiring to try to determine the underlying trend.

Also on Friday the Federal Reserve will release consumer credit for March (expectations are for another decline in credit), and of course the FDIC will probably have another busy Friday afternoon ...

The NMHC Apartment Tightness index for Q1 might be released with week. This is a leading indicator for apartment rents.

And a summary of last week:

Q1 Real GDP: 3.2% annualized increase

From the BEA: Gross Domestic Product: First Quarter 2010. A couple of graphs ...

The first graph shows the rolling 4 quarter contribution to GDP from residential investment, equipment and software, and nonresidential structures. Red is residential, green is equipment and software, and blue is investment in non-residential structures. The usual pattern - both into and out of recessions is - red, green, blue.

Click on graph for larger image in new window.

The key leading sector - residential investment - is lagging the recovery because of the huge overhang of existing inventory. Usually RI is a strong contributor to GDP growth and employment in the early stages of a recovery, but not this time - and this is a key reason why the recovery has been sluggish so far.

The second graph shows real personal income less transfer payments as a percent of the previous peak.

Unlike the recovery in GDP, real personal income less transfer payments has barely increased and is still 6.6% below the pre-recession level.

The peak of the stimulus spending is in Q2 2010 (right now), and then the stimulus spending starts to taper off in the 2nd half of 2010. So underlying demand better increase soon - and that means jobs and incomes going forward.

First American CoreLogic: House Prices Decline 2.0% in February

The Fed's favorite house price indicator from First American CoreLogic’s LoanPerformance ...

This graph shows the national LoanPerformance data since 1976. January 2000 = 100.

The index is up 0.3% over the last year and off 30.6% from the peak.

House prices are off 4.9% from the recent peak in August 2009 (although some of the decline is seasonal).

Case-Shiller House Prices "mixed" in February

This graph shows the nominal not seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 30.0% from the peak, and up slightly in February (SA).

The Composite 20 index is off 29.3% from the peak, and down slightly in February (SA).

The next graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

Prices decreased (SA) in 15 of the 20 Case-Shiller cities in February.

Prices in Las Vegas are off 55.7% from the peak, and prices in Dallas only off 6.0% from the peak.

Q1 2010: Homeownership Rate Lowest Since Q1 2000

The Census Bureau reported the homeownership and vacancy rates for Q1 2010 this morning.

The homeownership rate declined to 67.1%. This is the lowest level since Q1 2000.

Note: graph starts at 60% to better show the change.

The homeownership rate increased in the '90s and early '00s because of changes in demographics and "innovations" in mortgage lending. The increase due to demographics (older population) will probably stick, so I've been expecting the rate to decline to the 66% to 67% range - and not all the way back to 64% to 65%.

Other Economic Stories ...

From MarketWatch: S&P cuts Greece ratings to junk status

From the LA Times: Reports of criminal probe send Goldman Sachs stock plunging

From the American Trucking Association: ATA Truck Tonnage Index Rose 0.4 Percent in March

CEO: Wal-Mart's Customers "still feel the pressure"

From the Chicago Fed: Index shows economic activity improved in March

From the National Restaurant Association (NRA): Restaurant Industry Outlook Continues to Improve as Restaurant Performance Index Tops 100 for the First Time in More Than Two Years

Unofficial Problem Bank List hits 722

Best wishes to all.

by Calculated Risk on 5/02/2010 09:01:00 AM

From the NY Times: Greece Reaches Agreement on Bailout

Prime Minister George Papandreou said Sunday that Greece had reached an agreement with the International Monetary Fund and European Union on a long-delayed rescue package that is expected to be as much as €120 billion.
...
Finance Minister George Papaconstantinou set out some of the details of the austerity measures that are required for the bailout package, which were expected to be revealed in Brussels later Sunday. He said that Greece would make budget cuts of €30 billion, or $40 billion, to reduce the budget deficit to below 3 per cent by 2014.
...
Indicating that the steps would undermine economic growth, Mr. Papaconstantinou forecast a deeper than expected recession of 4 per cent for 2010, and 2.6 percent in 2011, before the economy returned to growth of 1.1 percent in 2012.

“We will be in recession for the next few years which means that we have to run faster to reduce the deficit,” he said.

More details will be available later today. Greece might be in recession for several years ...

More details from Bloomberg: Greece Accepts Terms of EU-Led Bailout, ‘Savage’ Cuts

by Calculated Risk on 5/01/2010 08:53:00 PM

The Fed released the transcripts for the 2004 FOMC meeting this week. There definitely was some mention of a possible housing bubble, but little discussion.

From June 30, 2004:

Click on graph for larger image in new window.

This graph shows the Fed estimate of the rent-to-price ratio in June 2004. Usually this is drawn inverted (Price-to-rent). And this was after the Fed made some technical adjustments - otherwise, in the words of a Fed researcher, the graph would "have looked more alarming".

MR. FERGUSON [Roger Ferguson, Fed Vice Chairman in 2004]: The other question I have deals with chart 3, on housing prices. My question is about the footnote, which says that the rent–price ratio is adjusted for biases in the trends of both rents and prices. Is that where you pick up demographics and lifecycle factors? What are these biases in the trends, and how does one think about changing demographics and the relative attractiveness of owning a home versus renting? Give me some sense of whether or not the shape of the curve that you show here is likely to reverse, as you imply, or likely to stay relatively low.

MR. OLINER [Stephen Oliner, Fed associate research director]: The biases referred to in that footnote were really technical biases in the construction of the two measures shown here, the rent measure and the price measure. Had we not adjusted for them, the rent-to-price ratio would have been much lower at the end point. So it would have looked more alarming. In part we think the published data have some technical problems that need to be taken care of before this analysis can be done in a way that is meaningful. With regard to the question of owning versus renting, it depends to some extent on what is happening to interest rates because that changes that calculation at the margin. So it’s really important to plot any kind of valuation measure relative to an opportunity cost. Just showing the rent-to-price ratio I think would have been somewhat misleading; it’s really that gap that we think is the meaningful measure of valuation. And it looks somewhat rich, taking account of the fact that interest rates are relatively low and income growth has been relatively strong. I don’t want to leave the impression that we think there’s a huge housing bubble. We believe a lot of the rise in house prices is rooted in fundamentals. But even after you account for the fundamentals, there’s a part of the increase that is hard to explain.

And a couple of comments from the March 2004 meeting:

MR. GUYNN [Atlanta Fed President]: We keep looking to our directors and other contacts for indications of imbalances and pricing pressures that they might see developing, and we’ve begun to get hints of both. A number of folks are expressing growing concern about potential overbuilding and worrisome speculation in the real estate markets, especially in Florida. Entire condo projects and upscale residential lots are being pre-sold before any construction, with buyers freely admitting that they have no intention of occupying the units or building on the land but rather are counting on “flipping” the properties—selling them quickly at higher prices.
...
MR. KOHN [Fed Governor]: House prices are elevated relative to rents—and will look even more so when rates begin to rise—but are more likely to correct by rising less rapidly than by crashing. Eggs will get broken when rates begin to rise, but the capital in most intermediaries is high, and the system is resilient.

CR: Rampant speculation, an "alarming" price-to-rent chart, prices rising faster than explained by fundamentals, "eggs will be broken" - and this was in 2004. And Kohn was wrong - the system wasn't "resilient".

by Calculated Risk on 5/01/2010 03:57:00 PM

By request, the following graph is an update to: The Investment Slump in Q2 2009

The following graph shows the rolling 4 quarter contribution to GDP from residential investment, equipment and software, and nonresidential structures. This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy.

For the following graph, red is residential, green is equipment and software, and blue is investment in non-residential structures. The usual pattern - both into and out of recessions is - red, green, blue.

Click on graph for larger image in new window.

Residential Investment (RI) made a small positive contribution to GDP in the second half of 2009, but was a drag in Q1 2010. The rolling four quarter change is moving up, but as expected there has been no strong boost to GDP from RI.

Equipment and software investment has made a positive contribution to GDP for three straight quarters (it is coincident).

Nonresidential investment in structures continues to be a drag on the economy, and as usual the economy is recovering long before nonresidential investment in structures recovers.

The key leading sector - residential investment - is lagging the recovery because of the huge overhang of existing inventory. Usually RI is a strong contributor to GDP growth and employment in the early stages of a recovery, but not this time - and this is a key reason why the recovery has been sluggish so far.

by Calculated Risk on 5/01/2010 11:57:00 AM

Note: Freddie Mac reported the serious delinquency rate decreased in March from February, but that is only after the previous months were revised higher. Also there might be some distortion from the modification program - loans in trial mods were considered delinquent until the modifications were made permanent.

Click on graph for larger image in new window.

Freddie Mac reported that the rate of serious delinquencies - at least 90 days behind - for conventional loans in its single-family guarantee business decreased to 4.13% in March 2010, down from 4.20% in February - and up from 2.41% in March 2009.

"Single-family delinquencies are based on the number of mortgages 90 days or more delinquent or in foreclosure as of period end ..."

The data from Fannie Mae will be released next week ...

by Calculated Risk on 5/01/2010 08:42:00 AM

From Nick Timiraos at the WSJ: U.S. Role in Mortgage Market Grows Even Larger

Government-related entities backed 96.5% of all home loans during the first quarter, up from 90% in 2009, according to Inside Mortgage Finance.

The following graph from San Francisco Fed Senior Economist John Krainer puts this in perspective (from Oct 2009): Recent Developments in Mortgage Finance

As the U.S. housing market has moved from boom in the middle of the decade to bust over the past two years, the sources of mortgage funding have changed dramatically. The government-sponsored enterprises—Fannie Mae, Freddie Mac, and Ginnie Mae—now own or guarantee an overwhelming share of originations. At the same time, non-agency mortgage securitization and loans retained in lender portfolios have largely dried up.

Click on graph for slightly larger in new window.

This is figure 3 from the Economic Letter.

[T]he sources of mortgage finance have shifted as the housing market has gone from boom to bust. Figure 3 plots the evolution of these funding sources over the past decade. Fannie Mae and Freddie Mac combined have consistently been the largest players in the market, owning or guaranteeing about half or more of the mortgages in the sample at any given time. Non-agency securitization peaked in the first quarter of 2006, when it accounted for nearly 40% of new originations. Finally, the share of mortgages retained in the originating institution's portfolio averaged about 15% throughout the boom, but has fallen considerably since.
...
With the vast majority of current mortgage lending now intermediated in some form by the GSEs, it will be difficult for the housing market to return to normal.

Without the government backed entities there would be almost no mortgage market. We are a long way from normal ...