by Calculated Risk on 6/17/2005 09:04:00 PM

Financial Times: EU crisis as Britain rejects deal on budget

Excerpt:

The European Union was plunged into political crisis on Friday night after Britain led the way in blocking a proposed deal on the new seven-year budget.

Tony Blair, the UK prime minister, was one of a minority of leaders who refused to accept a compromise package, as the Brussels summit collapsed in acrimony shortly before midnight. The failure of the talks means the transfer of billions of euros of aid to former communist countries in eastern Europe, due to start on January 1 2007, may be delayed.

The political ramifications of the breakdown, coming after French and Dutch voters rejected the EU constitution, could be severe.

This is another serious setback for the EU and is not good for America. A European Union in disarray and possibly entering recession will likely exacerbate the global imbalances and probably lead to larger US trade and current account deficits.

See Dr. Serser's 6.4% of GDP current account deficit in q1

General Glut's 6.4% AND GROWING

See Dr. Altig's The EU Divide and more.

by Calculated Risk on 6/16/2005 06:04:00 PM

Last month I started building a simple model to help forecast the monthly trade deficit. A review of the partial forecast showed some promise.

So here we go for May starting with oil. Using the same model (described here) the ERPP trade numbers for May are forecast to be:

IMPORTS: Energy Related Petroleum Products.
Barrels Crude: 337.9 million barrels.
Barrels Other ERPP: 85.0 million barrels.
DOE Price per barrel (Crude): $43.90
DOE Price per barrel (Other): $50.48

Preliminary - Total NSA ERRP Imports: $19.1 Billion

NOTE: The BLS reports petroleum import prices fell 6.5% in May from April. The above model used DOE prices. After reviewing the prior prices and comparing the DOE and BLS approaches, the DOE has been slightly more accurate. However, I think it might be even better to try to split the difference. The BLS approach would predict P(crude) = $41.85. DOE P(crude) = $43.90. So the modified forecast for Imports NSA is:

BLS/DOE Price per barrel (Crude): $42.88
BLS/DOE Price per barrel (Other): $49.31
Forecast: Total NSA ERRP Imports: $18.7 Billion

Total ERPP FORECAST:
Imports SA: $17.4 Billion (seasonal factor estimated at 0.93 for May)
Exports SA: $1.9 Billion
Balance ERPP: $15.5 Billion

by Calculated Risk on 6/16/2005 02:57:00 AM

UPDATE: I've been notified that "Housing Links" will not be continued. He recommends these two sites:

Patrick's Housing Links

RGEMonitor Housing Market Bubble?


I've been directed to a new housing resource: Housing Links. This site is a running compendium of stories, commentary and analysis on all aspects of the housing market. Here are some recent examples:

UPDATE2: In the comments, Stephane Grenier directs us to his interesting article "Is There Really a Real Estate Bubble?". He references me!

UPDATE: Two new stories in The Economist about the perils of the housing boom / pending bust: In come the waves (Great Graphs) and After the fall.

The Trillion-Dollar Bet - The NY Times looks at the widespread use of Adjustable Rate Mortgages:

This year, only about $80 billion, or 1 percent, of mortgage debt will switch to an adjustable rate based largely on prevailing interest rates, according to an analysis by Deutsche Bank in New York. Next year, some $300 billion of mortgage debt will be similarly adjusted.

But in 2007, the portion will soar, with $1 trillion of the nation's mortgage debt - or about 12 percent of it - switching to adjustable payments, according to the analysis.

The Mortgage Trap - BusinessWeek "Lenders are cranking out an ever-growing array of financing schemes and lowering standards to keep the housing boom going":

All those innovative mortgage products are a sure sign that lenders are doing everything they can to keep the housing boom going and to capitalize on yet another round of falling interest rates that no one expected. There are plenty of other signs of frenzy as well. Home appraisers complain that mortgage originators are demanding the optimistic appraisals needed to close on loans. "They started warning me to 'be a team player' and to 'hit the number' they needed to seal the deal," says Robert Burnitt, an appraiser in Midlothian, Tex.

And some positive stories:

Purchase Activity at Record High; Refinance Volume Jumps In Latest Application Survey - The Mortgage Bankers Association reports their "seasonally-adjusted Purchase Index increased by 10.4 percent to 529.3, a record high":

"This week there was a combination of record-setting purchase activity as well as a substantial pickup in refinance applications, with the refinance index at its highest level since April 2004," said Michael Fratantoni, senior director of single-family research and economics.

Builder Confidence Hits New High For 2005 - According to a survey by the National Association of Home Builders and Wells Fargo, "single-family home builders are more confident this June than they’ve been all year".

The most optimistic builders are in the West, where an HMI reading of 88 far outpaces that of builders in all other regions. Moreover, the 88 reading reflected a solid four-point gain from last month. Southern builders were also a bit more confident this time around, posting a one-point gain in their regional confidence gauge to 76 in June. Builders in the Northeast maintained a healthy, 70-point reading on the confidence scale, while builders in the Midwest registered a two-point confidence boost, to 52.

Check it out. Enjoy!

by Calculated Risk on 6/15/2005 06:35:00 PM

In a well coordinated attack, the Empire today unleashed a barrage of statistics and comments from in-house economists to poke holes in the silly notion of a "housing bubble". First up was Carl Steidtmann, chief economist of Deloitte Research:

"There has been much discussion recently about a housing bubble, but the truth is that home price appreciation has slowed considerably in the past three months. The time to talk about a bubble was last December," says Carl Steidtmann, chief economist of Deloitte Research and author of the monthly index.

"Consumer spending growth in the summer months will be largely dependent on the direction of home prices and job growth," continued Steidtmann. "As job growth continues to accelerate, we should see a corresponding pickup in real wage growth."

By this logic you should have worried about the Nasdaq bubble in the late '90s, but in March of 2000 everything was fine. Not the best investment strategy. And "job growth continues to accelerate"? The 3 month moving average of payroll growth (Seasonally adjusted from the BLS) shows job growth is at best flat after peaking in the Spring of 2004.

But that was just the beginning. The ubiquitous David Lereah responded to Fed Chairman Greenspan's recent remarks:

"Yes, there is froth in the markets, but froth can be healthy," said David Lereah, chief economist for the National Association of Realtors. "It's not a bad word."

Froth for a foamy latte or cappuccino might be good; froth in the housing market, especially when you are a new home buyer, is decidedly not good.

Economists representing members of the Washington, D.C.-based Homeownership Alliance, which includes a coalition of about 15 housing-related organizations, fired another salvo: See Housing boom won't let up.

Frank E. Nothaft, chief economist for mortgage industry giant Freddie Mac said "there are signs of 'suds' around the country" (good in your beer) but he is not worried:

"I think we'll see some gradual moderation in house-price valuation over the next couple of years," with about a one-in-three chance of a region in the country seeing stagnant or declining home values over the next couple of years, linked to regional economic weakness.

Paul Merski, chief economist for the Independent Community Bankers of America added:

"Bankers are being very diligent now about their lending practices," and the FDIC is "closely monitoring bankers' lending practices right now due to the long run in the housing boom."

"(The notion) of exotic products out there that are extremely dangerous is well overblown."

Since bankers are being very "diligent", I wonder why the Office of the Comptroller of the Currency, the FED, the FDIC and other agencies took the highly unusual step of issuing new credit risk management guidance for home equity lending in May.

Merski also addressed the issue of home-price "froth." He said, "Economists have a saying that unsustainable trends will not be sustained," and that may hold true for some markets that have rapid, double-digit price appreciation. He forecast a "reasonable cooling off in certain markets in the prices but certainly no crashes in these markets because of the strong demand." Even so, the overall housing market should be strong for the rest of the year and going into 2006, he added.

No crashes. What a relief!

And finally, David W. Berson, chief economist for Fannie Mae added:

"There are no signs of any slowing in the housing market at all. You need a pretty good decline for the second half of the year not to set a record this year."

Those final comments are true; the housing market is still HOT.

For some reason I'm having the same reaction to all of these industry economists' comments as I do when the oil industry scientists assure me that global warming is not a problem. Maybe I need some suds!

by Calculated Risk on 6/15/2005 03:22:00 PM

The Mortgage Bankers Association (MBA) released their weekly report today showing record purchase activity.

The seasonally-adjusted Purchase Index increased by 10.4 percent to 529.3, a record high, from 479.3 the previous week whereas the seasonally-adjusted Refinance Index increased by 25.6 percent to 2967.4 from 2362.1 one week earlier.

"This week there was a combination of record-setting purchase activity as well as a substantial pickup in refinance applications, with the refinance index at its highest level since April 2004," said Michael Fratantoni, senior director of single-family research and economics.

The use of ARMs decreased:

The adjustable-rate mortgage (ARM) share of activity decreased to 30.9 percent of total applications from 31.7 percent the previous week.

Also, the National Association of Home Builders and Wells Fargo reported that home builders were optimistic:

"single-family home builders are more confident this June than they’ve been all year".

The most optimistic builders are in the West, where an HMI reading of 88 far outpaces that of builders in all other regions. Moreover, the 88 reading reflected a solid four-point gain from last month. Southern builders were also a bit more confident this time around, posting a one-point gain in their regional confidence gauge to 76 in June. Builders in the Northeast maintained a healthy, 70-point reading on the confidence scale, while builders in the Midwest registered a two-point confidence boost, to 52.

Meanwhile, DataQuick reported:

The sales pace of homes in Southern California eased back a notch in May as prices continued to climb to record levels, the result of steady demand and affordable mortgage financing, a real estate information service reported.

Although appreciation has slowed in some of the hot markets like San Diego, overall the housing market is still HOT!