by Calculated Risk on 3/14/2006 10:29:00 AM

The OC Register reports: O.C. home prices rebound

Orange County home prices rebounded in February, as the median sales price reached $617,000 – tying the second highest on record.

DataQuick reported early Tuesday that February's price was $35,000 higher than January's $582,000 – and 11.2 percent above year-ago prices. The record of $621,000 was set last December.

All told, 2,672 homes sold last month, down 7.5 percent from a year ago.

For more details, see Jonathan Lansner's real estate blog.

by Calculated Risk on 3/13/2006 02:02:00 PM

The National Association of Realtors reports: Housing Market Readjusting to Normal Balance.

A lower level of home sales expected this year will create a more level playing field for buyers and sellers on the heels of a five-year sellers’ market, according to the National Association of Realtors®.

David Lereah, NAR’s chief economist, said the number of homes on the market has been improving nicely. "The cooling from overheated sales conditions in recent months is helping to bring inventory levels up to the point where buyers have more choices than they’ve seen in the last five years," Lereah said. "Annual price appreciation is still running at double-digit rates, but the cause of those sharp increases is going away. As the market readjusts, price appreciation should return to more normal rates of growth this year."

The national median existing-home price for all housing types is projected to rise 5.8 percent in 2006 to $220,300. The median new-home price should increase 5.4 percent this year to $250,200.

Existing-home sales are expected to fall 5.7 percent to 6.67 million in 2006 from the record 7.08 million last year. At the same time, new-home sales are forecast to decline 7.7 percent to 1.18 million from a record 1.28 million in 2005 – each sector would be at the third highest year following the tallies for 2005 and 2004. Housing starts are likely to total 1.98 million this year, down 4.3 percent from 2.06 million in 2005.

NAR President Thomas M. Stevens from Vienna, Va., said some home buyers and sellers have unrealistic expectations. "Some sellers in markets that have had rapid appreciation are listing the price of their home too high, but those homes are just languishing on the market," said Stevens, senior vice president of NRT Inc. "At the same time, some buyers who have believed hype about a housing bubble are hoping prices will drop, but that’s not happening either."
...
The 30-year fixed-rate mortgage should increase gradually to 6.9 percent in the fourth quarter.

by Calculated Risk on 3/10/2006 09:18:00 PM

"Interestingly, the change in U.S. home mortgage debt over the past half-century correlates significantly with our current account deficit. To be sure, correlation is not causation, and there have been many influences on both mortgage debt and the current account."

Alan Greenspan, Current account, Feb 4, 2005

Click on graph for larger image.

With the release of the Fed's Flow of Funds report, we can look at the relationship between the annual increase in household mortgage debt and the trade deficit.

Note: I'm using the trade deficit instead of the current account deficit, since the current account for '05 has not been released yet.

I expect the annual increase in mortgage debt to decline in 2006. This is because I expect new and existing home purchases to decline, and homeowners to extract less equity from their homes in 2006.

The drop in mortgage activity is is one of the reasons I expect the trade deficit to stabilize in 2006. From my 2006 predictions:

Trade Deficit / Current Account Deficit: I could be wildly wrong here too, but I think the trade deficit will stabilize or even decline slightly next year. As the economy slows, I think imports will slow.

I should have been more clear. There is no way the trade deficit will decline on an annual basis in 2006, but I was expecting the deficit to stabilize or decline from the September to December level of $66 Billion per month.

The record January deficit of $68.5 Billion was a little disheartening, but mortgage extraction has just begun to slow. So far I've been wrong - but its early.

Drs. Brad Setser and Menzie Chinn are more pessimistic ...
Brad Setser: January trade data
Menzie Chinn: The downward march of the trade balance

by Calculated Risk on 3/09/2006 04:27:00 PM

New York Fed President Timothy Geithner spoke today on U.S. Monetary Policy in the Global Financial Environment

I will focus on two features of what is happening in the world economy and financial markets today ... These are, first, the behavior of forward interest rates in financial markets, and, second, the pattern of external imbalances.

These features are interesting, in part, because they seem somewhat anomalous, or inconsistent with what the past has led us to expect. They seem likely to be related to each other and both are a feature of the changes underway in global financial integration. Understanding the forces behind these phenomena or anomalies is important to thinking through what they mean for policy.

After discussing the possible causes for these two features, Giethner turns to the implications for policy:

What might this mean for the conduct of monetary policy? To the extent that these forces act to put downward pressure on interest rates and upward pressure on other asset prices, they would contribute to more expansionary financial conditions than would otherwise be the case. And, if all else were equal, which of course is unlikely ever to be the case, monetary policy in the affected countries would have to adjust in response; policy would have to act to offset these effects in order to achieve the same impact on the future path of demand and inflation. To do otherwise would run the risk that monetary policy would be too accommodative, pulling resources from the future in a way that would alter the trajectory for the growth of the capital stock, perhaps amplifying the imbalances, and compromising the price stability.
...
Let me conclude by observing that a constellation of factors has aligned to produce the current combination of low world interest rates, low risk premia and large global imbalances. Most of these factors are outside the control of U.S. monetary policy, and we do not fully understand their implications for our economy and for policy. The process of global economic integration makes it ever more important that we work to improve our understanding of how this complex of global monetary arrangements affects our objectives.

I suggest reading the entire speech.

by Calculated Risk on 3/09/2006 02:02:00 PM

The FED Flow of Funds report was released today. It shows that household mortgage debt increased at a record pace in 2005.

On a dollar basis, household mortgage debt increased by a near record $290.6 Billion in the 4th quarter. The last 8 quarters (billions increase in household mortgages, Includes loans made under home equity lines of credit):

q1 2004: $190.4
q2 2004: $211.1
q3 2004: $277.1
q4 2004: $232.9
q1 2005: $184.5
q2 2005: $277.9
q3 2005: $314.1
q4 2005: $290.6

From Rex Nutting of CBS MarketWatch: U.S. household debt up most in 20 years

U.S. households took on debt at the fastest pace in 20 years in 2005, fueled by a housing boom that boosted their net worth to a record $52.1 trillion, the Federal Reserve said Thursday.

The Fed's quarterly flow of funds report shows the explosion of debt in the U.S. economy continued in 2005, with net savings in the economy falling below 1% of gross domestic product for the first time on record.

Led by a surge in mortgage borrowing, U.S. households' debt increased 11.7% to record $11.5 trillion in 2005, the fastest growth since 1985, the Fed said.

And for the fourth quarter:

In the fourth quarter, total debt in the economy grew at an annual rate of 9.5%, down from 9.6% in the third quarter.

Household debt increased at an 11% pace, down from 12.4% in the third quarter. Mortgage debt increased 13.2%, down from 14.9% in the third quarter. Credit card debt fell 0.7% in the fourth quarter.