by Calculated Risk on 10/18/2012 03:18:00 PM

Freddie Mac reported earlier today: Mortgage Rates Near Record Lows As Home Construction Builds Up Steam

Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing fixed mortgage rates edging slightly lower with the 30-year fixed averaging 3.37 percent, just above its all-time record low of 3.36 percent, and the average 15-year fixed dipping to a new all-time record low at 2.66 percent.

And the MBA reported yesterday that refinance activity decreased last week, but is still near the highest level since early 2009.

Here is a graph comparing mortgage rates from the Freddie Mac Primary Mortgage Market Survey® (PMMS®) and the refinance index from the Mortgage Bankers Association (MBA).

UPDATE: left axis is MBA refinance index, 1990=100.

Click on graph for larger image.

It usually takes around a 50 bps decline from the previous mortgage rate low to get a huge refinance boom - and that is what we are seeing!

There has also been an increase in refinance activity from borrowers with negative equity and loans owned or guaranteed by Fannie or Freddie (see The HARP Refinance Boom Continued in August) .

The second graph shows the 15 and 30 year fixed rates from the Freddie Mac survey.

The Primary Mortgage Market Survey® started in 1971 (15 year in 1991). The 30 year rate is near a record low for the Freddie Mac survey, and rates for 15 year fixed loans is at a now low this week.

by Calculated Risk on 10/18/2012 12:12:00 PM

Occasionally, over the last several years, I've posted a list of downside risks to economic growth - and here is another one. Currently my forecast is still for sluggish and choppy growth, but I think there are reasons to expect US economic growth to pickup in the next year or two, perhaps to trend growth. As I noted last month in Two Reasons to expect Economic Growth to Increase, residential investment is now a tailwind for the economy, and the drag from state and local government cutbacks is mostly behind us.

There are always many downside risks (meteor strikes, major terrorist attack, war somewhere - possibly with Iran), but I think these are the most probable downside risks:

• The European financial crisis. The European crisis has been threatening to spill over into the US for several years. Looking back, I was writing about Greece, Ireland and Spain sovereign debt issues in 2009. This year the recession in Europe is hitting US exports, but so far there is little financial contagion.

The European situation could spin out of control at any time. Currently the unemployment rate is 25.1% in both Spain and Greece, and that is political unsustainable. There are decisions to made soon regarding Greece (another round of financial help) and Spain (when will they ask for a bailout?) - and also about fiscal union and easing back on austerity.

• The economic slowdown in China. The recession in Europe has spilled over into China, and has led to fears of a sharp slowdown. From the WSJ: China's Growth Continues to Slow

Growth in China's gross domestic product fell to 7.4% in the third quarter compared with a year earlier, China's National Bureau of Statistics said Thursday, down from 7.6% in the second quarter and the weakest since the beginning of 2009. The seventh consecutive deceleration reflected a combination of weak demand from abroad, flagging investment at home, and insufficient spending by China's households to pick up the slack.

Data for September showed some signs of stabilization. Industrial output growth rose to 9.2% year-over-year, from 8.9% in August. Exports also bounced back, up 9.9% year-over-year in September, after 2.7% in the previous month. And Chinese refineries processed a record high amount of crude oil, 7% more than a year earlier.

China reports GDP on a year-over-year basis (the US reports an annualized rate quarterly). A sharp slowdown in China might lead to a higher trade deficit with the US - and also might reveal some financial issues in China. As Warren Buffett said "It's only when the tide goes out that you learn who's been swimming naked."

Of course a slowdown in China might lead to lower commodity prices, and that would help many sectors in the US.

• The Fiscal Slope. This is commonly called the "fiscal cliff", but it is more of a slope. This refers to several federal tax increases and spending cuts that are scheduled to happen at the beginning of 2013. This includes ending the Bush-era tax cuts, ending the temporary payroll tax reduction, ending extended unemployment benefits, and some large budget cuts mostly for defense spending. No one expect this to be resolved before the election, but after the election this could become a significant issue. This doesn't have to be resolved immediately - policymakers could wait a few months - but this probably has to be resolved fairly early next year.

My assumption is that some sort of reasonable agreement will be reached and the fiscal slope will only have a minor impact on economic growth in 2012. My guess could be wrong, and policymakers might not be able to reach a deal.

Note: There is also the possibility of stronger than expected growth next year. This could lead to the Federal Reserve slowing or even stopping QE3 - but I think that would be considered a strong positive. Right now, sluggish growth with some pickup in 2013, seems most likely.

by Calculated Risk on 10/18/2012 10:00:00 AM

The Philly Fed manufacturing index showed expansion in October after five consecutive months of contraction. From the Philly Fed: October Manufacturing Survey

Firms responding to the October Business Outlook Survey reported a modest improvement in business activity this month. The survey’s indicators for general activity returned to positive territory, while new orders and shipments recorded levels near zero. But firms reported continuing declines in employment and hours worked. Indicators for the firms’ expectations over the next six months remained positive.

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased 8 points, to 5.7, marking the first positive reading since April.

Labor market conditions at the reporting firms remained weak this month. The current employment index dipped 3 points, to ‐10.7, its lowest reading since September 2009.
emphasis added

Earlier in the week, the NY Fed reported:

The October Empire State Manufacturing Survey indicates that conditions for New York manufacturers continued to decline for a third consecutive month. The general business conditions index increased four points but remained negative at -6.2.

Click on graph for larger image.

Here is a graph comparing the regional Fed surveys and the ISM manufacturing index. The dashed green line is an average of the NY Fed (Empire State) and Philly Fed surveys through October. The ISM and total Fed surveys are through September.

The average of the Empire State and Philly Fed surveys increased in October but was still slightly negative.  This suggests another weak reading for the ISM manufacturing index.

by Calculated Risk on 10/18/2012 08:30:00 AM

The DOL reports:

In the week ending October 13, the advance figure for seasonally adjusted initial claims was 388,000, an increase of 46,000 from the previous week's revised figure of 342,000. The 4-week moving average was 365,500, an increase of 750 from the previous week's revised average of 364,750.

The previous week was revised up from 339,000.

The following graph shows the 4-week moving average of weekly claims since January 2000.



Click on graph for larger image.


The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 365,500. This is just above the cycle low for the 4-week average of 363,000 in March.

Weekly claims were higher than the consensus forecast of 365,000.



And here is a long term graph of weekly claims:

Mostly moving sideways this year, but near the cycle bottom. The large swings over the last two weeks were related to timing and technical factors, and is a reason to use the 4-week average.

All current Employment Graphs

by Calculated Risk on 10/17/2012 08:24:00 PM

A couple of articles on housing:

An interesting comment via Nick Timiraos at the WSJ: Why Housing Construction Is Rebounding

Gains in construction should lift the economy. Glenn Kelman, chief executive of real-estate brokerage Redfin, writes in an op-ed at Quartz that builders have been completing “half-built projects” with “skeleton crews” for much of the past year. That hasn’t done too much for job growth. “It takes fewer cooks to prepare leftovers for dinner,” he writes.

This could be part of the reason that construction employment is lagging, but I also think we will see upward revisions (the preliminary benchmark revision indicated a fairly large upward revision for construction employment). The construction jobs are coming ...

And from Neil Irwin at the WaPo: September figures may provide signs of a housing recovery

First, it helps to understand how deep, and sustained, this housing depression has been. Residential investment — essentially, housing construction and sales activity — has been below 3 percent of gross domestic product every quarter since the fourth quarter of 2008, closing in on four years. Before this downturn, it had never fallen below 3 percent for even a single quarter (the data go back to 1947).
...
Here’s the thing, however: The overbuilding of houses during the boom years, while real, was not extraordinary by historical standards. The underbuilding of houses has been far greater than the excess housing construction during the boom relative to demographic trends.

... other factors are probably major culprits in the housing weakness of the past four years: A terrible job market that has made people unwilling or unable to get a mortgage, an overhang of foreclosures that has kept the market for houses from clearing and extreme caution by banks and other lenders that has made it hard to get mortgages.

Now each of those trends seems to be healing.

Here is a graph to go along with Irwin's article:

Click on graph for larger image.

Here is a graph of residential investment (RI) as a percent of GDP. Currently RI is 2.4% of GDP; just above the record low. I expect RI to recover back towards 4% of GDP over the next few years giving a boost to GDP and employment.

On Thursday:
• At 8:30 AM, the initial weekly unemployment claims report will be released. The consensus is for claims to increase to 365 thousand from 339 thousand. Look for a larger than normal upward revision to last week's report (apparently one large state was late with their quarterly filing).

• At 10:00 AM, the Philly Fed Survey for October will be released. The consensus is for a reading of 0.5, up from minus 1.9 last month (above zero indicates expansion).

• Also at 10:00 AM, the Conference Board Leading Indicators for September will be released. The consensus is for a 0.2% increase in this index.


Another question for the October economic prediction contest (Note: You can now use Facebook, Twitter, or OpenID to log in).