by Calculated Risk on 6/06/2012 08:00:00 PM

From Vice Chair Janet Yellen: Perspectives on Monetary Policy. Excerpt:

Recent labor market reports and financial developments serve as a reminder that the economy remains vulnerable to setbacks. Indeed, the simulations I described above did not take into account this new information. In our policy deliberations at the upcoming FOMC meeting we will assess the effects of these developments on the economic forecast. If the Committee were to judge that the recovery is unlikely to proceed at a satisfactory pace (for example, that the forecast entails little or no improvement in the labor market over the next few years), or that the downside risks to the outlook had become sufficiently great, or that inflation appeared to be in danger of declining notably below its 2 percent objective, I am convinced that scope remains for the FOMC to provide further policy accommodation either through its forward guidance or through additional balance-sheet actions.

Clearly Yellen is considering QE3.

by Calculated Risk on 6/06/2012 03:30:00 PM

Yesterday I asked "Dude, Where's my inventory?"

In the comments, 'TJ and The Bear' wrote: "My take is that when there's an expectation of rising prices buyers are motivated but sellers are not."

Exactly! This is something I mentioned earlier this year. And it doesn't even take rising prices to change the dynamics.

When the expectation is that prices will fall further, marginal sellers will try to sell their homes immediately. And marginal buyers will decide to wait for a lower price. This leads to more inventory on the market.

But when the expectation is that prices are stabilizing (the current situation), sellers will wait until it is convenient to sell. And buyers will start feeling a little more confident. Also, as prices stabilize, private lenders will start thinking about entering the mortgage market (something we are starting to see).

So expectations matter. And so do price fundamentals. Since we are close to normal prices, based on real prices (inflation adjusted) and the price-to-rent ratio, I think expectations of price stabilization have now taken over, and buyers, sellers and lenders are acting accordingly - and that is a key reason inventory has fallen sharply.

There are other reasons for the decline in inventory, but price expectations are probably a key factor.

by Calculated Risk on 6/06/2012 02:00:00 PM

Fed's Beige Book:

Reports from the twelve Federal Reserve Districts suggest overall economic activity expanded at a moderate pace during the reporting period from early April to late May.

This is a slight upgrade from the previous beige book that reported "modest to moderate" growth.

And on real estate:

Activity in residential real estate markets improved in most Districts since the previous report. Several Districts noted consistent indications of recovery in the single-family housing market, although the recovery was characterized as fragile. The apartment market continued to improve, and multifamily construction increased in several Districts.

Home sales were above year-ago levels in most areas of the country and several Districts noted sales had improved since the previous report, although some noted that the pace was well below the historical average. In particular, the New York, Cleveland, and Richmond Districts noted a pickup in the pace of distressed sales. Residential brokers and some builders in the Philadelphia, Atlanta, and Dallas Districts said home sales were exceeding expectations. Contacts in the Richmond District said homes were being snapped up as investors become more confident in the housing recovery, and the Atlanta report noted stronger sales to cash buyers and investors in Florida. Chicago said more sales had multiple offers. Apartment rental markets improved in the New York, Atlanta, and Dallas Districts. One contact from the New York District noted rising apartment rents have made buying more attractive, contributing to a slight uptick in sales.

Most Districts reported that home inventories decreased. Overall, home prices remained unchanged in many Districts, although reports were mixed. There were a few reports that sellers were lowering asking prices, leading to downward pressure on housing prices.

New home construction increased in a number of Districts, including Cleveland, Atlanta, Chicago, St. Louis, Minneapolis, and San Francisco. Contacts in the Philadelphia District said demand for new home construction eased slightly. Builders in Kansas City noted housing starts were down, but they expected an increase in the next three months. The Boston, Atlanta, and Chicago Districts reported an increase in multifamily construction, and the Minneapolis District noted numerous multifamily projects were in the pipeline.

Commercial real estate conditions improved in most Districts, and there were some reports that commercial construction picked up.

Prepared at the Federal Reserve Bank of Dallas and based on information collected on or before May 25, 2012.

More sluggish growth - but not a slow down. And a few positive comments on residential real estate ...

by Calculated Risk on 6/06/2012 10:58:00 AM

From the WSJ: Draghi Sees Increased Risks to Economy

European Central Bank President Mario Draghi said the euro-zone economy faces "increased downside risks" and that inflation will fall below 2% early next year.
...
"Growth remains weak with heightened risks," the ECB chief said in his opening statement to the monthly news conference following the governing council's meeting.
...
Mr. Draghi noted that growth was flat in the first three months of the year and that so far indicators point to it weakening in the second quarter. However, he said the bank was sticking to its view that the economy would recover gradually in the course of the year.

"Heightened risks"? Hoocoodanode? I doubt that the Eurozone economy will gradually recover in the 2nd half ... more likely the recession will get worse.

Meanwhile in Greece: Greece Warns of Going Broke as Tax Proceeds Dry Up

Government coffers could be empty as soon as July, shortly after this month’s pivotal elections. ...

Officials, scrambling for solutions, have considered dipping into funds that are supposed to be for Greece’s troubled banks. Some are even suggesting doling out i.o.u.’s.

Greek leaders said that despite their latest bailout of 130 billion euros, or $161.7 billion, they face a shortfall of 1.7 billion euros because tax revenue and other sources of potential income are drying up. A wrenching recession and harsh budget cuts have left businesses and individuals with less and less to give for taxes — and growing incentive to avoid paying what they owe.

by Calculated Risk on 6/06/2012 07:00:00 AM

From the MBA: Mortgage Applications Increase in Latest MBA Weekly Survey

The Refinance Index increased 2 percent from the previous week to its highest level since February 10, 2012. The seasonally adjusted Purchase Index decreased slightly from one week earlier to its lowest level since April 13, 2012.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 3.87 percent, the lowest rate in the history of the survey, from 3.91 percent, with points remaining unchanged at 0.46 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.

Click on graph for larger image.

The purchase index is still very weak. The purchase index has mostly moved sideways for the last two years.

Refinance activity continues to increase as mortgage rates fell to another record low last week.