by Calculated Risk on 8/21/2012 10:17:00 AM

From the Philly Fed:

The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for July 2012. In the past month, the indexes increased in 22 states, decreased in 17, and remained stable in 11, for a one-month diffusion index of 10. Over the past three months, the indexes increased in 32 states, decreased in 14, and remained stable in four, for a three-month diffusion index of 36.

Note: These are coincident indexes constructed from state employment data. From the Philly Fed:

The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state’s index is set to the trend of its gross domestic product (GDP), so long-term growth in the state’s index matches long-term growth in its GDP.

Click on graph for larger image.

This is a graph is of the number of states with one month increasing activity according to the Philly Fed. This graph includes states with minor increases (the Philly Fed lists as unchanged).

In July, 30 states had increasing activity, down from 35 in June. The last three months have been weak following eight months of widespread growth geographically. The number of states with increasing activity is at the lowest level since January 2010.

Here is a map of the three month change in the Philly Fed state coincident indicators. This map was all red during the worst of the recession.

And the map was all green just just a few months ago.

Now there are a number of red states again.

by Calculated Risk on 8/21/2012 08:22:00 AM

From Bloomberg: Germany’s Barthle Says ‘Small Concessions’ Possible for Greece

“Small concessions are feasible provided they are strictly made within the framework of the second aid program,” [Norbert Barthle, the CDU budget spokesman in parliament] said. “For instance, the interest and maturity on loans could be adjusted, as in the case of the first aid package” for Greece. “What’s utterly important is the will of the Greeks to fulfil the terms of financial help. The ball is in the Greeks’ court.”

On Friday, Greek Prime Minister Samaras and German Chancellor Merkel will meet in Berlin with a press conference to follow. Europe is about to take center stage once again ...

by Calculated Risk on 8/20/2012 07:34:00 PM

Fed Working Paper by Paolo Gelain, Norges Bank, Kevin Lansing, Federal Reserve Bank of San Francisco and Norges Bank, and Caterina Mendicino, Bank of Portugal: House Prices, Credit Growth, and Excess Volatility: Implications for Monetary and Macroprudential Policy

The researchers looked at the house bubble and several possible policy responses. It appears the most effective policy - for limiting the bubble - would have been to require lenders to focus more on loan-to-income.

From the paper:

Our final policy experiment achieves a countercyclical loan-to-value ratio in a novel way by requiring lenders to place a substantial weight on the borrower’s wage income in the borrowing constraint. As the weight on the borrower’s wage income increases, the generalized borrowing constraint takes on more of the characteristics of a loan-to-income constraint. Intuitively, a loan-to-income constraint represents a more prudent lending criterion than a loan-to-value constraint because income, unlike asset value, is less subject to distortions from bubble-like movements in asset prices. Figure 4 [see below] shows that during the U.S. housing boom of the mid-2000s, loan-to-value measures did not signal any significant increase in household leverage because the value of housing assets rose together with liabilities. Only after the collapse of house prices did the loan-to-value measures provide an indication of excessive household leverage. But by then, the over-accumulation of household debt had already occurred. By contrast, the ratio of U.S. household debt to disposable personal income started to rise rapidly about five years earlier, providing regulators with a more timely warning of a potentially dangerous buildup of household leverage.

We show that the generalized borrowing constraint serves as an “automatic stabilizer” by inducing an endogenously countercyclical loan-to-value ratio. In our view, it is much easier and more realistic for regulators to simply mandate a substantial emphasis on the borrowers’ wage income in the lending decision than to expect regulators to frequently adjust the maximum loan-to-value ratio in a systematic way over the business cycle or the financial/credit cycle.
...
... the most successful stabilization policy in our model calls for lending behavior that is basically the opposite of what was observed during U.S. housing boom of the mid-2000s. As the boom progressed, U.S. lenders placed less emphasis on the borrower’s wage income and more emphasis on expected future house prices. So-called “no-doc” and “low-doc” loans became increasingly popular. Loans were approved that could only perform if house prices continued to rise, thereby allowing borrowers to refinance. It retrospect, it seems likely that stricter adherence to prudent loan-to-income guidelines would have forestalled much of the housing boom, such that the subsequent reversal and the resulting financial turmoil would have been less severe.

Click on graph for larger image.

From the paper:

Figure 4: During the U.S. housing boom of the mid-2000s, loan-to-value measures did not signal a significant increase in household leverage because the value of housing assets rose together with liabilities. In contrast, the debt-to-income ratio provided a much earlier warning signal of a potentially dangerous buildup of household leverage.

Something to remember when the next lending bubble comes along. Also note that debt-to-income is still very high and there is more deleveraging to come.

by Calculated Risk on 8/20/2012 04:55:00 PM

David Leonhardt writes at Economix: The 14 Potential Causes of the Income Slump

Why has median household income just endured its worst 12-year stretch since the Great Depression?

The immediate answer to that question is that economic growth has slowed and inequality has risen. The pie isn’t growing very quickly, and the few new slices are going to a disproportionately small portion of the population.

But that answer is really just an accounting answer. The more important questions are why economic growth has slowed and why inequality has risen – not just over the last 12 years but, less severely, since the early 1970s as well.

Leonhardt has a poll for readers to rank 14 potential causes on why American household income has stagnated including globalization, demographics, fiscal policy, innovation and much more. Leonhardt concludes:

In coming days, I’ll be writing posts about what economists see as the major causes.

Should be in interesting series.

by Calculated Risk on 8/20/2012 01:42:00 PM

In addition to Case-Shiller, CoreLogic, and LPS, I'm also watching the FNC, Zillow and other house price indexes.

FNC released their June index data today. FNC reported that their Residential Price Index™ (RPI) indicates that U.S. residential property values increased 1.1% in June (Composite 100 index). The other RPIs (10-MSA, 20-MSA, 30-MSA) increased between 1.1% and 1.3% in June. These indexes are not seasonally adjusted (NSA), and are for non-distressed home sales (excluding foreclosure auction sales, REO sales, and short sales).

The year-over-year trends continued to show improvement in June, with the 100-MSA composite down 0.2% compared to June 2011. This is the smallest year-over-year decline in the FNC index since year-over-year prices started declining in 2007 (five years ago).

Click on graph for larger image.

This graph is based on the FNC index (four composites) through June 2012. The FNC indexes are hedonic price indexes using a blend of sold homes and real-time appraisals.

Some of the month-to-month gain is seasonal since this index is NSA. The key is the indexes are showing less of a year-over-year decline in June. If house prices have bottomed, the year-over-year decline should turn positive soon.

The June Case-Shiller index will be released Tuesday, August 28th.