by Calculated Risk on 1/09/2007 02:14:00 PM

From LA Bizjournals: Foreclosures increase 51 percent nationwide

Foreclosures increased 94 percent last year to 157,417 homes in California, as homeowners struggle with fast-rising home payments and a slow-selling market, according to ... ForeclosureS.com.

Nationwide, almost 971,000 foreclosure filings were reported last year, 51 percent more than the 641,000 in 2005, according to the annual report.

by Calculated Risk on 1/08/2007 03:46:00 PM

From Federal Reserve Vice Chairman Donald L. Kohn: The Economic Outlook. Excerpts on housing:

Uncertainty about where we stand in the housing cycle remains considerable. In part, that is because this housing downturn has differed from some of those in the past in important ways. It was not triggered by a restrictive monetary policy and high interest rates; indeed, relatively low intermediate and long-term interest rates are helping to support the stabilization of this sector. But the current contraction in housing did follow an unusually large run-up in sales and construction and, even more so, in prices relative to the returns on other financial and real assets. Our uncertainty about what pushed home prices and sales to those elevated levels raises questions about how the market will adjust now that expectations of the rate of house price appreciation are being trimmed. And changes in the organization of the construction industry, with activity more concentrated in the hands of large, publicly traded corporations, may also affect the dynamics of prices and activity in response to the inventory overhang.

In my own judgment, housing starts may be not very far from their trough, but the risks around this outlook still are largely to the downside. Although house prices nationally have decelerated noticeably and appear to have fallen in some markets, they are still high relative to rents and interest rates. Building permits decreased substantially again in November, and inventories of unsold homes have only started to edge lower. We also do not know whether the possible stabilization that seems to be taking hold would be immune to a rise in longer-term interest rates should term premiums increase or the federal funds rate fail to follow the downward path currently built into market expectations. Even if starts stabilize at close to current levels, those levels are sufficiently low that overall construction activity would remain a negative for the growth of economic activity in the first half of this year.

by Calculated Risk on 1/08/2007 01:27:00 PM

Caroline Baum writes for Bloomberg: Housing Data Yield a False Sense of Complacency. Some excerpts on non-residential construction:

The increase in non-residential construction has helped to offset the decline in housing... Typically commercial activity lags residential -- and the economic cycle. And it makes intuitive sense.

``Once a new subdivision is built and people move in, they look for places to work, shop, eat and have their dry-cleaning done,'' said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York. ``That's when the new strip malls, schools, churches and office parks start to appear.''

The lag between turning points in residential and non- residential construction is variable, Shepherdson said, but one follows the other as night follows day.

``The plunge in housing construction promises tough times ahead, sooner or later, for the non-residential construction business,'' he said.

by Calculated Risk on 1/08/2007 12:20:00 PM

The ADP report has taken quite a beating over the last few days. David Gaffen wrote at the WSJ blog on Friday: ADP in ICU, part II

... anyone who traded on the ADP numbers ahead of today’s report lost money. “There isn’t any hiding from that,” said ... Joel Prakken chairman of Macroeconomic Advisers, the economic consulting firm that partners with Automatic Data Processing to produce the private sector monthly jobs report.

And Professor Duy comments on ADP in another great Fed Watch (Recommended reading!): Like a Broken Record

"I do not pay special attention to the ADP report. I simply don’t trust that it provides any useful information above that offered by a host of Wall Street economists. Moreover, when it misses, it misses big."

On a slightly different note, Professor Hamilton discusses why he blends the ADP report with the BLS reports.

As I noted last week, I just ignore the ADP report. But I thought I'd take another look.

First, it's important to note that the ADP report is for private sector jobs only, and the headline BLS number includes government jobs. So, to compare the ADP report to the BLS payroll report, government jobs should be excluded from the BLS report.

Click on graph for larger image.

This graph shows total private sector BLS payroll jobs vs. ADP jobs. Special thanks to Paul Kasriel of Northern Trust.

Note that the scale starts at 105 million to show the differences between the reports.

In recent months, the ADP report showed a total of almost 500K more jobs than the BLS report. After the weak December ADP report (showing a monthly decline of 40K jobs) and the strong BLS report (an increase of 150K private sector jobs, 167K including government jobs), the ADP report is showing about 300K more jobs than the BLS report.

This difference led me (and others) to discount the ADP report.

But maybe the ADP report has some merit. In October the BLS announced the preliminary estimate for the 2006 revision to the establishment survey - and the revision appears to be a "larger-than-normal" increase in jobs - perhaps an upwards revision of 800K jobs. So it is very possible, once the actual BLS revision is announced in February that the ADP report was actually pretty close earlier this year.

For now it's probably best to continue to ignore the ADP report (or use Hamilton's 10% suggestion), but I'll take another look at the January numbers.

by Calculated Risk on 1/05/2007 04:35:00 PM

This research from Professor Case shows just how sticky prices are right now.

From the Boston Herald: Buyers vs. homesellers: Standoff could lead to recession

... Wellesley College housing guru Karl Case will release the results of a five-month groundbreaking survey of the housing market in Boston’s suburbs.

And it’s not happy reading.

After tracking 628 homes on the market from July through November, Case found that fewer than a third actually sold.

It paints a picture of a market nearing a standstill, in which would-be sellers are opting to take their homes off the market rather than accept big markdowns.

Over such a lengthy period, even in a slow market, one could expect 70 percent of these homes to have sold, Case estimates.

But Case’s study found only 30 percent moved.
...
Despite the big drop in sales activity, there was no price implosion.

Instead, average selling prices fell just 6.3 percent.

After seeing the value of their homes soar during days of the real estate bubble, home owners are reluctant to give ground on price. Or, as Case puts it, it’s a case of “sticky” prices common to past market downturns.

...the drop in home sales activity could be a more serious economic threat, Case believes.

I suspect a 6.3% price decline in Boston felt like a "price implosion" to some sellers!

This research shows the impact of sticky house prices. In a classic housing bust, real estate prices display strong persistence and are sticky downward. Therefore housing price "bubbles" typically do not implode, rather prices deflate slowly in real terms, over several years. As Dr. Case notes, this typically leads to a drop in transactions and can negatively impact the economy.

Let's consider Case's research, and the projections of NAR's Lereah and Fannie Mae's Berson:

NAR Economist David Lereah recently said:

“We’ve entered a more sustainable period of home sales now, and we expect greater support for prices over time as inventory levels are eventually drawn down.”

and

“Although some monthly declines are possible, when we look at the forecast for existing-home sales in 2007 on a quarterly basis, we see gradual improvement over the course of the year.”

However I believe it is much more likely that sales of existing homes will decline again in 2007. Fannie Mae economist David Berson is forecasting existing home sales to decline to 5.925 million units in '07 (from 6.425 million in '06), and new home sales to 0.975 million units (from 1.05 million).

Partially because of the impact of sticky prices, I think Berson's 2007 estimate will be closer than Lereah's projection. In fact, I think Berson might be a little too optimistic.