by Calculated Risk on 10/08/2012 04:49:00 PM

From economist Tom Lawler:

The Arizona Regional MLS reported that residential home sales by realtors in the Greater Phoenix, Arizona area totaled 6,478 in September, down 17.9% from last September’s pace. REO properties were just 12.9% (835) of last month’s sales, down from 37.1% (2,931) last September, while last month’s short-sales share was 27.0%, unchanged from a year ago. Active listings in September totaled 22,862, up 9.2% from August but down 15.2% from a year ago. The median home sales price last month was $150,000, up 30.5% from last September. Citing data from the Cromford Report, the ARMLS also reported that foreclosures pending in Maricopa County totaled 14,584 in September, down 38.1% from a year ago.

Click on graph for larger image.

Here is a chart showing active listings in the Greater Phoenix area (from ARMLS) from January 2002 through September 2012 (note: the ARMLS reports available to the public only show active listings “rightly defined” back to April 2005. The data from January 2002 through March 2005 in the chart below were derived from a chart from a realtor with direct access to ARMLS data).

One thing worth watching is the recent uptick in listings over the past few months – listings increased by 2.7% in both July and August, and jumped up by 9.2% last month. Over the past few years investor buying of residential properties on a low to no leverage basis with the intent to rent the properties out has been quite substantial.

In the middle of last decade, in contrast, Phoenix saw a surge in highly-leveraged real estate investment purchases by folks looking to make a “quick” flip – see 2nd graph.

However, over the past year home prices in Phoenix have rebounded sharply. The very recent jump up in listings may reflect some investors’ desire to “cash out” of their real estate investments, especially given the recent (though late in the cycle) increase in the number of “big-money” investors looking for SF rental properties.

CR Note: the increase in inventory hasn't been huge, and it could be sellers "waiting for a better market". More listings seems like a normal response to a sharp increase in prices.

by Calculated Risk on 10/08/2012 01:52:00 PM

I've been writing about the expected decline in the labor force participation rate for years. On Sunday, I posted another update: Employment: A decline in the participation rate was expected due to the aging population

I made a couple of key points on Sunday:
1) A decline in the participation rate was expected.
2) Although some of the recent decline in the participation rate has been to due to cyclical issues (severe recession), MOST of the decline in the overall participation rate has been due to changing demographics.

This morning Mish disagreed with me. His conclusion was: "While the Participation Rate trend is certainly down, and down was expected, most of the decline in participation rate since the start of the recession is due to economic weakness, not demographics."

I consider this progress! It wasn't long ago that I was still arguing with people that we should expect a decline in the participation rate. Now the question has shifted to what portion of the decline is cyclical (due to the recession) and what portion is due to demographics.

Mish looked at a paper I linked to on Sunday, written in 2002 by Austin State University Professor Robert Szafran, and Mish used Szafran's projection for the participation rate in 2015. However, as Szafran noted in his paper, for simplification purposes he assumed that the "age-specific participation rates do not change" after 2000.  However if we look at the 16-to-19 age group, the participation rate declined from 51% in 2000 to 42% in 2007 - before the recession started. Although Szafran's paper is very useful, the actual numbers (because of the simplifying assumptions) are clearly too high.

First, what are we talking about? The headline participation rate is the percentage of people 16 years old and over who are in the labor force. Here is a graph of the headline participation rate:

Click on graph for larger image.

The decline in the overall participation rate, especially since 2008, has been a cause of concern. But the headline number can be impacted by demographic changes (that is why Professor Szafran was estimating an "age adjusted" participation rate - his paper was titled: Age-adjusted labor force participation rates, 1960–2045).

Changing demographics makes projecting the overall participation rate very difficult. We do know that a fairly low percentage of people in the 16-to-19 age group participate in the labor force, this percentage increases for the 20-to-24 age group, and then remains high until people reach 55 or so. To project the overall rate, we need to know the trends for each age group, and we need to estimate how many people will be in each age group each year (this depends on mortality rates and immigration - and those change over time too).

Here is a graph based on BLS economist Mitra Toossi's projections (another paper I linked to on Sunday).

Note that Toossi is expecting a couple of recent trends to continue: lower participation rates for people in the 16 to 24 year age group (I think this decline is mostly due to more people attending college), and an increase in the participation for older age groups (I think this increase is due to several factors including less physically strenuous jobs, and, unfortunately, financial need).

An increase in the participation rate for an age group (like the 60 to 64 group) is just one part of the equation. We also have to recognize that a large cohort is moving from the 55 to 59 age category into the 60 to 64 age group, and the participation rate for that cohort is falling.

This graphic is from the Census Bureau and shows the number of people by age and sex in the US based on the 2000 and 2010 Census. See: Age and Sex Composition: 2010

The baby boom generation is obvious. This graph is from two years ago, and shows that a large number of people are moving into the 55-to-65 age group now. Even though the participation rate is rising for the age group, it is lower than for the 45-to-55 age groups - so that pushes down the overall participation rate.

There are changes for other groups too. A fairly large group just moved into the 20-to-24 age group, and they will be moving into higher participation age groups soon (it isn't all bad news).

Here is the trend for men in the 16-to-19 age group. As I noted before, for his purposes, Szafran assumed this would stay at the 2000 rate. Instead the rate declined sharply from 2000 through 2007 - before the recession started.

How can we tell if the decline since 2008 was just a continuation of the trend, or if it was because of the severe recession? It is very difficult.

One idea is to look at a very narrow group (men in the 35-to-44 age group) and look for the impact of the recession.

These people aren't going back to school in large numbers, and they are not retiring early in large numbers.

What do we see? A long term down trend from about 97% participation in 1968 to about 91% participation now. If we look at a short term trend - from 1995 through 2007 - it appears there is about a 1% decline in the participation rate due to the recession (from 92% to 91%). But if we look at a long term trend, it appears the participation rate is about what we'd expect.

Other groups were probably impacted more by the recession than 35-to-44 year old males (younger groups tend to be impacted more), but I don't think there is evidence of a huge cyclical decline in the overall participation rate. I've looked at many age groups, and although I think some of the decline in the overall participation rate is due to the recession, it appears most of the recent decline in the participation rate is due to changing demographics.

by Calculated Risk on 10/08/2012 11:22:00 AM

Note: This is not Mortgage Equity Withdrawal (MEW) data from the Fed. The last MEW data from Fed economist Dr. Kennedy was for Q4 2008.

The following data is calculated from the Fed's Flow of Funds data and the BEA supplement data on single family structure investment. This is an aggregate number, and is a combination of homeowners extracting equity - hence the name "MEW", but there is little MEW right now - and normal principal payments and debt cancellation.

For Q2 2012, the Net Equity Extraction was minus $75 billion, or a negative 2.5% of Disposable Personal Income (DPI). This is not seasonally adjusted.

Click on graph for larger image in new window.

This graph shows the net equity extraction, or mortgage equity withdrawal (MEW), results, using the Flow of Funds (and BEA data) compared to the Kennedy-Greenspan method.

There are smaller seasonal swings right now, perhaps because there is a little actual MEW (this is heavily impacted by debt cancellation right now).

The Fed's Flow of Funds report showed that the amount of mortgage debt outstanding declined sharply in Q2. Mortgage debt has declined by $1.05 trillion since the peak. This decline is mostly because of debt cancellation per foreclosures and short sales, and some from modifications. There has also been some reduction in mortgage debt as homeowners paid down their mortgages so they could refinance.

For reference:

Dr. James Kennedy also has a new method for calculating equity extraction: "A Simple Method for Estimating Gross Equity Extracted from Housing Wealth". Here is a companion spread sheet (the above uses my simple method).

For those interested in the last Kennedy data included in the graph, the spreadsheet from the Fed is available here.

by Calculated Risk on 10/08/2012 09:13:00 AM

From the WSJ: Greece, Troika to Resume Talks This Week

Talks between Greece and a visiting troika of international inspectors made progress ... but no deal has yet been reached and the negotiations will resume next week.

The inspectors, from the European Commission, the International Monetary Fund and the European Central Bank, will depart Athens ... to attend a meeting of euro-zone finance ministers in Luxembourg Monday, the officials said.

"There has been progress on all fronts, fiscal and structural," one official, speaking to reporters after more than three hours of talks in the Greek capital, said. "The work will continue next week." ...
[As the talks drag on, overshooting their early October deadline, hopes of securing that aid by an Oct. 18 European summit--when European leaders were expected to sign off on Greece's latest aid tranche--now look dim.

And from the Athens News: Police announce ban on rallies during Merkel visit

The police on Monday announced that all open-air gatherings and rallies will be banned in large sections of central Athens between 9am and 10pm on Tuesday, as a security precaution to "preserve the peace" during a visit by German Chancellor Angela Merkel.

by Calculated Risk on 10/07/2012 09:44:00 PM

It appears gasoline prices in California have peaked following several refinery problems, see Jim Hamilton's California gas price spike. These refinery issues happened at a terrible time - just as the refineries were about to change to the winter blend.

From the LA Times: Gov. Brown takes emergency action to try to reduce gas prices

Gov. Jerry Brown took “emergency steps” Sunday to try to bring down record gas prices in the state.

He directed the California Air Resources Board to increase the fuel supply by allowing the immediate sale and import of cheaper and more available winter-blend gasoline.

The move would reduce the price of gas in California by 15 to 20 cents per gallon, probably within a few days, said energy expert Chris Faulkner of Dallas-based Breitling Oil and Gas.

The week will start with a focus on Europe. On Monday:
• Columbus Day Holiday: Banks will be closed in observance of Columbus Day. The stock market will be open.

• At 6:00 AM ET, Europe's European Stability Mechanism (ESM) will become active.

• Also at 6:00 AM, the "Troika" Report On Greece will be released.

• At 12:00 PM, the EU Finance Minsters meet in Luxembourg.

The Asian markets are mostly red tonight, with the Hang Seng down 0.3% and the Shanghai down 0.1%.

From CNBC: Pre-Market Data and Bloomberg futures: the S&P futures are down 2, and the DOW futures are down 17.

Oil prices are down with WTI futures down to $89.88 and Brent down at $111.69 per barrel.

Yesterday:
• Summary for Week Ending Oct 5th
• Schedule for Week of Oct 7th

Two more questions this week for the October economic prediction contest (Note: You can now use Facebook, Twitter, or OpenID to log in).