by Calculated Risk on 8/17/2011 12:42:00 PM

This morning the MBA reported that there was a sharp increase in mortgage refinance activity.

“Refinance application volume increased substantially for the week, although there was substantial variation across the market. In September MBA’s Weekly Applications Survey will transition to an expanded sample that covers 75% of the retail market rather than the current sample that covers roughly 50% of the retail market. That expanded sample showed a significantly larger increase in refinance applications than the current sample, with some lenders reporting increases in refinance applications in excess of 50 percent for the week. The big differences in refinance volumes were likely driven by the decisions of some lenders not to drop rates last week, largely due to the need to manage their pipelines.” [said Mike Fratantoni, MBA’s Vice President of Research and Economics

First, the increase in the sample size is good news. There have been times when the mortgage purchase activity index wasn't very useful because so many mortgage lenders were going out of business.

Also it is interesting that some lenders haven't lowered their rates (probably many of the biggest mortgage lenders).

Here is a graph of the MBA refinance index compared to the ten year treasury yield.

Click on graph for larger image in graph gallery.

Although refinance activity has picked up, it is still well below the level of the huge refinance boom of 2002/2003, and below the smaller refinance peaks in 2008, 2009 and last year.

It takes lower and lower rates to get people to refi (at least lower than recent purchase rates). However if interest rates fall much further there will probably be another large increase in refinance activity.

by Calculated Risk on 8/17/2011 09:44:00 AM

Note: This index is a leading indicator for new Commercial Real Estate (CRE) investment.

From AIA: Architecture Billings Index Drops for Fifth Straight Month

The American Institute of Architects (AIA) reported the July ABI score was 45.1 – the steepest decline in billings since February 2010 – after a reading of 46.3 the previous month. This score reflects a continued decrease in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 53.7, a considerable slowdown from a reading of 58.1in June.

“Business conditions for architecture firms have turned down sharply,” said AIA Chief Economist, Kermit Baker, PhD, Hon. AIA. “Late last year and in the first couple of months of this year there was a sense that we were slowly pulling out of the downturn, but now the concern is that we haven’t yet reached the bottom of the cycle. Current high levels of uncertainly in the economy don’t point to an immediate turnaround.”

Click on graph for larger image in graph gallery.

This graph shows the Architecture Billings Index since 1996. The index decreased in in July to 45.1 from 46.3 in June. Anything below 50 indicates a contraction in demand for architects' services.

Note: Nonresidential construction includes commercial and industrial facilities like hotels and office buildings, as well as schools, hospitals and other institutions. Note that the government sector is the weakest. The American Recovery and Reinvestment Act of 2009 is winding down, and state and local governments are still cutting back.

According to the AIA, there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction. So this suggests further declines in CRE investment in 2012.

by Calculated Risk on 8/17/2011 08:03:00 AM

The MBA reports: Refinance Applications Increase in Latest MBA Weekly Survey

The Refinance Index increased 8.0 percent from the previous week, but was 16.3 percent lower than the same week last year. The seasonally adjusted Purchase Index decreased 9.1 percent from one week earlier.
...
"Unprecedented volatility in the stock market last week amid additional signs that the economy has slowed led to further drops in mortgage rates, with the 15-year rate reaching a new low for the MBA survey," said Mike Fratantoni, MBA's Vice President of Research and Economics. "Purchase application activity fell sharply over the previous week, likely the result of potential homebuyers hesitant to purchase in this highly volatile and uncertain environment."

Fratantoni continued, "Refinance application volume increased substantially for the week, although there was substantial variation across the market. In September MBA's Weekly Applications Survey will transition to an expanded sample that covers 75% of the retail market rather than the current sample that covers roughly 50% of the retail market. That expanded sample showed a significantly larger increase in refinance applications than the current sample, with some lenders reporting increases in refinance applications in excess of 50 percent for the week. The big differences in refinance volumes were likely driven by the decisions of some lenders not to drop rates last week, largely due to the need to manage their pipelines."
...
The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.32 percent from 4.37 percent, with points decreasing to 0.87 from 1.07 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.

The following graph shows the MBA Purchase Index and four week moving average since 1990.

Click on graph for larger image in graph gallery.

The four week average of the purchase index has been moving down recently and is at about 1997 levels. Of course this doesn't include the large number of cash buyers ... but purchase application activity was especially weak last week.

by Calculated Risk on 8/16/2011 08:11:00 PM

Just an update on the Merkel / Sarkozy meeting earlier today. As expected there was no annoucement of a "eurobond" and no expansion of the EFSF.

Merkel and Sarkozy proposed closer coordination of economic policy in the eurozone. The fear in Germany is that closer coordination means a step towards a fiscal union - and to many Germans that means a transfer union ... here are a few stories:

From the NY Times: Sarkozy and Merkel Call for More Fiscal Unity in Europe

France and Germany also proposed the creation of what Mr. Sarkozy called “a true economic government for the euro zone” that would be made up of heads of state of all of the 17 nations that share the European currency. This council, he said, would meet at least twice a year and would be led by a president who would serve for a term of two and a half years. He said he and Mrs. Merkel would jointly propose that Herman van Rompuy, a Belgian and the current president of the European Union, be the first to take on this role.
...
“What we are proposing here is the means with which we can solve the crisis right now and win back trust, step by step,” Mrs. Merkel said. “I do not think euro bonds will help us in this.”
...
“Euro bonds can be imagined one day, but at the end of the European integration process not at the beginning,” Mr. Sarkozy said.

From the WSJ: Fresh Plan for Europe Crisis

From the Financial Times: Merkel and Sarkozy pledge to defend euro

Here are the bond yields as of Tuesday. Here is a graph of the 10 year spread (Italy to Germany) from Bloomberg. And for Spain to Germany. The Italian spread is at 267, down from 389 on Aug 4th, and the Spanish spread is at 266, down from 398 on Aug 4th. The yield on the Spanish Ten and Italian 10 year bonds are under 5%.

Also the Irish 2 year yield is down sharply to 8.9%. And the French 10 year is under 3%.

Here are the links for bond yields for several countries (source: Bloomberg):

Greece	2 Year	5 Year	10 Year
Portugal	2 Year	5 Year	10 Year
Ireland	2 Year	5 Year	10 Year
Spain	2 Year	5 Year	10 Year
Italy	2 Year	5 Year	10 Year
Belgium	2 Year	5 Year	10 Year
France	2 Year	5 Year	10 Year
Germany	2 Year	5 Year	10 Year

Earlier:
• Housing Starts decline slightly in July
• Industrial Production increased 0.9% in July, Capacity Utilization increases
• Multi-family Starts and Completions, and Quarterly Starts by Intent
• Lawler: Early Read on Existing Home Sales in July

by Calculated Risk on 8/16/2011 03:24:00 PM

From economist Tom Lawler (this is an update to the short note yesterday):

While national existing home sales last month were clearly up from last July’s post-tax-credit cycle low (on a seasonally adjusted basis), it appears as if national closed sales last month did not rebound on a seasonally adjusted basis from June’s level – despite the increase in May and June pending sales. Indeed, based on my regional tracking (though I’m missing a lot of areas), and taking into account the lower business-day count this July than last July (which lower [the July 2011] seasonal factor relative to [July 2010]), I estimate that US existing home sales as measured by the National Association of Realtors may have actually declined slightly on a seasonally adjusted basis in July from June. This surprises me, given the rebound in pending sales in May and June. However, in quite a few areas of the country closed sales fell considerably short of what one would have expected given contract signings over the previous several months, either reflecting increased cancellations or closing delays. And in other areas, including some Florida markets, continued delays in the foreclosure process resulting in sizable declines in foreclosure sales.

To be sure, for areas with associations/MLS that have reported July stats, the degree to which sales last month rebounded from last July’s really low levels has varied massively, even for areas relatively close to one another (and some areas saw no rebound at all).

Just to remind folks, here are the NAR’s estimates of existing home sales (SF plus condo/coop) on both an unadjusted and a seasonally adjusted basis ...

Click on graph for larger image in graph gallery.

Note: CR graphs added.

Last July existing home sales on a seasonally adjusted basis plunged by 26.2% from June’s pace, and were down 25.2% from July 2009’s pace. Unadjusted sales were down 26.5% from July 2009.

[The following graph shows existing home sales Not Seasonally Adjusted (NSA).]

If existing home sales this July were to be flat on a seasonally adjusted basis to [June], they would have to be up 23.6% from last July’s pace. Given the calendar/lower business day count this July vs. [July 2010], I estimate that unadjusted sales this July would have to be up by around 20% from a year ago, and my regional tracking just doesn’t get that large an increase.

To be sure, there are many areas with YOY gains well above 20%, especially in the Midwest (where sales declined the sharpest last July). However, there are several large markets were this July’s sales were either little changed from last July (including the whole state of California and Northern Virginia) or even down from a year ago (including several Florida markets), and several more with only modest YOY gains (including Maryland, DC, South Carolina, Charlotte, Vegas, Long Island, and Albuquerque). Taken all the information I’ve seen so far, my “best” estimate (with a larger than normal forecast error) is that existing home sales (as measured by the NAR) ran at a SAAR of about 4.69 million in July, down 1.7% from June’s pace.

CR: This was from Tom Lawler. The NAR reported existing home sales at 4.77 million in June, and the consensus (from Bloomberg) is for sales of 4.92 million at a Seasonally Adjusted Annual Rate (SAAR) in July (the NAR will report on Thursday - take the under!).