by Calculated Risk on 8/10/2012 03:22:00 PM

In the previous post, I noted that I think the housing recovery will continue to be sluggish relative to previous housing recoveries. There are several reasons for this.

First, the causes of this downturn were different than in most cycles. Usually housing down cycles are related to the Fed fighting inflation, and then housing comes back strongly when the Fed starts to ease again. But in this cycle, the housing downturn was the result of the bursting of the housing bubble and the financial crisis.

As everyone now knows (or should know by now), recoveries following a financial crisis are sluggish. This is especially true for housing as all the excesses have to be worked down before the recovery will become robust. In some areas of the country, housing is starting to recover, and in other areas there are still a large number of excess vacant houses (although the number is being reduced just about everywhere).

There are also a large number of houses in the foreclosure process, especially in certain states with a judicial foreclosure process (like New Jersey). This means there will be competition for homebuilders from foreclosures for an extended period in these areas.

Contrast this to a typical recovery were most areas recover at the same time.

There are other factors too. Employment gains are sluggish following a financial crisis, there is still quite a bit of consumer deleveraging ongoing, and lending standards are still tight (in a typical recovery, lending standards are loosened pretty quickly).

For a great piece today on mortgage lending standards, see from Cardiff Garcia at FT Alphaville: Still waiting on looser lending standards (for mortgages)

Click on graph for larger image.

This graph compares the current housing recovery (single family starts) to previous recoveries. The bottom is set to 100 for each housing cycle.

Note: This doesn't even consider the depth of the current cycle (the deepest decline in housing starts since the Census Bureau started collecting data).

The only comparable sluggish recovery (first year) was the one that started in 1981, and that was sluggish because mortgage rates were around 17%. When mortgage rates fell to only 13%, housing took off.

With excess inventory, more foreclosures (especially in certain states), more consumer deleveraging, and tight lending standards, I expect this recovery to remains sluggish. The good news is - barring a significant policy mistake - this housing recovery will probably continue for several years (last for more years than usual).

by Calculated Risk on 8/10/2012 11:55:00 AM

Early this year when I wrote The Housing Bottom is Here and Housing: The Two Bottoms, I pointed out there are usually two bottoms for housing: the first for new home sales, housing starts and residential investment, and the second bottom is for house prices.

For the bottom in activity, I presented a graph of Single family housing starts, New Home Sales, and Residential Investment (RI) as a percent of GDP.

When I posted that graph, the bottom wasn't obvious to everyone. Now it should be, so here is an update to that graph.

Click on graph for larger image.

The arrows point to some of the earlier peaks and troughs for these three measures.

The purpose of this graph is to show that these three indicators generally reach peaks and troughs together. Note that Residential Investment is quarterly and single-family starts and new home sales are monthly.

For the current housing bust, the bottom was spread over a few years from 2009 into 2011. This was a long flat bottom - something a number of us predicted given the overhang of existing vacant housing units.

Now the question is: How strong will the recovery be? (I think it will be somewhat sluggish compared to previous recoveries).

Housing plays a key role for employment too. Here is an update to a graph I've been posting for a few years. This graph shows single family housing starts (through June) and the unemployment rate (inverted) also through July. Note: there are many other factors impacting unemployment, but housing is a key sector.

You can see both the correlation and the lag. The lag is usually about 12 to 18 months, with peak correlation at a lag of 16 months for single unit starts. The 2001 recession was a business investment led recession, and the pattern didn't hold.

Housing starts (blue) increased a little in 2009 with the homebuyer tax credit - and then declined again - but mostly starts moved sideways for two and a half years and only started increasing last year. This was one of the reasons the unemployment rate has remained elevated.

Usually near the end of a recession, residential investment (RI) picks up as the Fed lowers interest rates. This leads to job creation and also additional household formation - and that leads to even more demand for housing units - and more jobs, and more households - a virtuous cycle that usually helps the economy recover.

However, following the recent recession with the huge overhang of existing housing units, this key sector didn't participate. Going forward I expect housing activity to increase and help push down the unemployment rate. Unfortunately I expect the housing recovery to be somewhat sluggish.

by Calculated Risk on 8/10/2012 09:13:00 AM

I rarely mention import prices, but this suggests less price pressure ... from the BLS: U.S. Import and Export Price Indexes - July 2012

U.S. import prices declined 0.6 percent in July, the U.S. Bureau of Labor Statistics reported today, after decreasing 2.4 percent in June and 1.5 percent in May. In each of the past three months, falling prices for both fuel and nonfuel imports contributed to the overall drop. In contrast, U.S. export prices rose 0.5 percent in July following a 1.7 percent decline the previous month. ... Prices of U.S. imports fell 0.6 percent in July, the fourth consecutive monthly decline for the index following a 1.4 percent increase in March. Import prices also fell over the past 12 months, declining 3.2 percent after increasing 13.7 percent between July 2010 and July 2011. ... The price index for import fuel decreased 1.2 percent in July following declines of 8.8 percent, 5.6 percent, and 0.9 percent, respectively, in the previous three months.

It wasn't just energy. On non-fuel prices:

Nonfuel prices also fell in July, declining 0.4 percent following a 0.3 percent decrease in June and a 0.1 percent drop in May. The July decline was the largest monthly drop since a 0.4 percent decrease in June 2010, and was driven by lower prices for nonfuel industrial supplies and materials and foods, feeds, and beverages. Despite the decline over the past three months, nonfuel import prices were unchanged for the year ended in July ...

There will be more on prices next week with the PPI for July released on Tuesday and the CPI on Wednesday.

by Calculated Risk on 8/09/2012 09:24:00 PM

This is a quarterly index from the the National Association of Home Builders (NAHB) and is similar to the overall housing market index (HMI). The NAHB started this index in Q4 2008, so all readings are very low. This is expected to be key a demographic over the next couple of decades - if the baby boomers can sell their current homes.

From the NAHB: Builder Confidence in the 55+ Housing Market Shows Improvement in the Second Quarter

Builder confidence in the 55+ housing market for single-family homes showed improvement in the second quarter of 2012 compared to the same period a year ago, according to the National Association of Home Builders’ (NAHB) latest 55+ Housing Market Index (HMI) released today. The index more than doubled year over year from a level of 13 to 29, which is the highest second-quarter reading since the inception of the index in 2008.

The 55+ single-family HMI measures builder sentiment based on a survey that asks if current sales, prospective buyer traffic and anticipated six-month sales for that market are good, fair or poor (high, average or low for traffic). An index number below 50 indicates that more builders view conditions as poor than good. Although all index components remain below 50, they increased considerably from a year ago: Present sales more than doubled (from 12 to 30), while expected sales for the next six months increased 17 points to 35 and traffic of prospective buyers rose nine points to 22.
...
“We are seeing buyers slowly return to the 55+ housing market as home prices begin to improve” said NAHB Chief Economist David Crowe. “This helps unlock some of the pent-up demand from 55+ consumers who have been sitting on the sidelines until they are able to sell their current homes at a reasonable price.”

Click on graph for larger image.

This graph shows the NAHB 55+ HMI through Q2 2012. All of the readings are very low for this index, but there has been a fairly sharp increase over the last three quarters.

by Calculated Risk on 8/09/2012 04:15:00 PM

LPS released their Mortgage Monitor report for June today. According to LPS, 7.14% of mortgages were delinquent in June, up from 6.91% in May, and down from 7.71%% in June 2011.

LPS reports that 4.09% of mortgages were in the foreclosure process, down slightly from 4.17% in May, and down slightly from 4.13% in June 2011.

This gives a total of 11.23% delinquent or in foreclosure. It breaks down as:

• 2,012,000 loans less than 90 days delinquent.
• 1,590,000 loans 90+ days delinquent.
• 2,061,000 loans in foreclosure process.

For a total of 5,663,000 loans delinquent or in foreclosure in June. This is down from 6,114,000 in June 2011.

This following graph shows the total delinquent and in-foreclosure rates since 1995.

Click on graph for larger image.

The total delinquency rate has fallen to 7.14% from the peak in January 2010 of 10.97%. A normal rate is probably in the 4% to 5% range, so there is a long ways to go.

The in-foreclosure rate was at 4.09%. There are still a large number of loans in this category (about 2.06 million).

The second graph shows percent of loans in the foreclosure process by process (Judicial vs. non-judicial).

Foreclosure inventory in judicial states is 6.42%, far above the level in non-judicial states (2.41%). The national average is 4.09%. A key change is that foreclosure inventory is now declining in judicial states too. Foreclosure inventory in non-judicial states has been falling since late 2010.

The third graph shows GSE prepayment speed by current LTV.

From LPS:

The June Mortgage Monitor report ... shows that while overall mortgage prepayment activity remains stable, despite historically low rates, the federal government’s Home Affordable Refinance Program (HARP) has seen considerable activity since the beginning of 2012.

“For this month’s Mortgage Monitor, we looked at Fannie Mae and Freddie Mac [GSE] 30-year fixed-rate loans across a variety of loan-to-value ratios,” explained Herb Blecher, senior vice president, LPS Applied Analytics. “Since the beginning of this year, high loan-to-value refinances have increased significantly. As an example, 2006 vintage GSE loans with six percent interest rates and LTV ratios between 100 and 125 percent increased from a 10 percent annualized prepayment rate at the end of 2011 to more than 40 percent in June 2012. Our data also shows that this rise in loan activity extends beyond that subsection – the same type of increase holds true across other vintages with the same characteristics.”