by Calculated Risk on 7/25/2013 08:34:00 AM

The DOL reports:

In the week ending July 20, the advance figure for seasonally adjusted initial claims was 343,000, an increase of 7,000 from the previous week's revised figure of 336,000. The 4-week moving average was 345,250, a decrease of 1,250 from the previous week's revised average of 346,500.

The previous week was revised up from 334,000.

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 decreased to 345,250.

The 4-week average has mostly moved sideways over the last few months.  Claims were close to the 341,000 consensus forecast.

by Calculated Risk on 7/24/2013 09:36:00 PM

All aboard the Janet Yellen express! There were several articles about Yellen (and Larry Summers) over the last couple of days, but what really stands out is Yellen's depth of knowledge on monetary policy and Federal Reserve regulatory issues. She has strong leadership skills, and is admired by just about everyone. She clearly follows the data, and was well ahead of most other FOMC members (and other candidates) on understanding the housing bust and possible consequences.

A few articles, from Cardiff Garcia at the Financial Times: Why Yellen should be the next Fed chair, from Professor Richard Green writing at Forbes: Janet Yellen Would Be A Better Pick For Fed Chair Than Larry Summers, Tim Duy Fed Watch: Shock and Awe(ful), Mike Konczal at Next New Deal: Yellen, Summers and Rebuilding After the Fire,  Felix Salmon at Reuters: Don’t send Summers to the Fed and Jon Hilsenrath at the WSJ: Fed Chief Choice Shapes Up as Race Between Summers, Yellen

And from former FDIC Chairwoman Sheila Bair writing at Fortune: Why Janet Yellen should succeed Ben Bernanke

[T]here is no better qualified candidate to fill Bernanke's shoes when he steps down in January. A noted economist, Yellen headed the Council of Economic Advisors for two years; led the San Francisco Federal Reserve Bank for six years; and has served ably as Bernanke's Vice Chairman since 2010. Unlike Larry Summers ... she was not part of the deregulatory cabal that got us into the 2008 financial crisis. In fact, she had a solid record as a bank regulator at the San Francisco Fed and was one of the few in the Fed system to sound the alarm on the risks of subprime mortgages in 2007.

If you read all those pieces - and ignore the criticism of Larry Summers - you'll understand why Janet Yellen is such an outstanding choice for Fed Chair. She has all the skills, leadership ability, communications skills (she won teaching accolades as a professor), and she pays attention to developing trends (data guys really respect Yellen).

None of the other candidates was paying attention in 2005 and 2006 like Yellen, as an example here is her '"ghost towns" of the West' comment in 2006:

According to some of our contacts elsewhere in this Federal Reserve District, data like these are actually "behind the curve," and they're willing to bet that things will get worse before they get better. For example, a major home builder has told me that the share of unsold homes has topped 80 percent in some of the new subdivisions around Phoenix and Las Vegas, which he labeled the new "ghost towns" of the West.

And Menzie Chinn points out a speech she gave in 2007 and writes:

Having coauthored an entire book on the financial crisis of 2008 (Lost Decades, with Jeffry Frieden) I think that one of the most important qualities for a policymaker is the ability to look forward, and assess potential dangers and understand why those dangers arise. ... Keeping in mind how carefully one must tread as a public official (as opposed to someone pontificating on a blog), [Yellen's] comments [in 2007] strike me as quite prescient, and with the benefit of hindsight, correct in diagnosis.

Yellen was correct, but she has no crystal ball - she just paid close attention to the data and drew the correct conclusions. Other candidates can only point to general warnings during that period.

The bottom line is on monetary policy experience, regulatory experience, leadership and communications skills, and the ability to analyze the data - and draw the correct conclusions - Yellen stands head and shoulders above all the other candidates.   She is the right person at the right time.

Thursday:
• At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for an increase to 341 thousand from 334 thousand last week.

• Also at 8:30 AM, the Durable Goods Orders for June from the Census Bureau. The consensus is for a 1.5% increase in durable goods orders.

• At 11:00 AM, the Kansas City Fed Survey of Manufacturing Activity for July. The consensus is for a reading of 0 for this survey, up from minus 5 in June (Above zero is expansion).

by Calculated Risk on 7/24/2013 04:03:00 PM

From the National Multi Housing Council (NMHC): Second Quarter Apartment Markets Mixed in Latest NMHC Survey

While demand for apartment homes remained strong, rising interest rates exerted negative pressure on the industry’s ability to secure debt financing according to the National Multi Housing Council’s (NMHC) July Quarterly Survey of Apartment Market Conditions. Only the Market Tightness Index (55) remained above the breakeven line of 50 this quarter. Sales Volume (46) and Equity Financing (49) dipped, with Debt Financing dropping sharply to 20.

“Debt costs for apartment firms have been rising. In addition to the 90 basis point increase in interest rates from the April survey, spreads over Treasuries have also gone up, likely dampening transactions somewhat. Rates are still low by historical standards, however, and at current levels should not put too big a crimp in apartment activity going forward,” said Mark Obrinsky, NMHC’s Senior Vice President for Research and Chief Economist. “Underlying demand trends remain strong, and we are approaching the cusp of a meaningful increase in supply that will hopefully be enough to meet the current need for apartment homes.”
...
Market Tightness Index edged up to 55 from 54. Just 14 percent noted looser conditions in the markets they were familiar with. This represents the 13th time in the last 14 quarters in which the index was over 50.
emphasis added

Click on graph for larger image.

This graph shows the quarterly Apartment Tightness Index. Any reading above 50 indicates tightening from the previous quarter. The quarterly increase was small, but indicates tighter market conditions.  

On supply: Even though multifamily starts have been increasing, completions lag starts by about a year - so the builders are still trying to catch up. There will be many more completions in 2013 and in 2014, than in 2012, increasing the supply.  As Obrinsky noted: "we are approaching the cusp of a meaningful increase in supply".

As I've mentioned before, this index helped me call the bottom for effective rents (and the top for the vacancy rate) early in 2010. This survey now suggests vacancy rates might be nearing a bottom, although apartment markets are still tight, so rents will probably continue to increase.

by Calculated Risk on 7/24/2013 01:38:00 PM

Note: This index is a leading indicator primarily for new Commercial Real Estate (CRE) investment.

From AIA: Architecture Billings Index Stays in Growth Mode

The Architecture Billings Index (ABI) remained positive again in June after the first decline in ten months in April. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the June ABI score was 51.6, down from a mark of 52.9 in May. This score reflects an increase in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 62.6, up sharply from the reading of 59.1 the previous month.

“With steady demand for design work in all major nonresidential building categories, the construction sector seems to be stabilizing,” said AIA Chief Economist, Kermit Baker, PhD, Hon. AIA. “Threats to a sustained recovery include construction costs and labor availability, inability to access financing for real estate projects, and possible adverse effects in the coming months from sequestration and the looming federal debt ceiling debate.”
emphasis added

Click on graph for larger image.

This graph shows the Architecture Billings Index since 1996. The index was at 51.6 in June, down from 52.9 in May. Anything above 50 indicates expansion in demand for architects' services.  This index has indicated expansion in 10 of the last 11 months.

Note: This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions.

According to the AIA, there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction.  The increases in this index over the past 11 months suggest some increase in CRE investment in the second half of 2013.

by Calculated Risk on 7/24/2013 11:28:00 AM

As I noted over the weekend, the key number in the existing home sales report is not sales, but inventory. It is mostly visible inventory that impacts prices. When we look at sales for existing homes, the focus should be on the composition between conventional and distressed, not total sales. So, for those who follow housing closely, the existing home sales report on Monday was solid even though sales were down.

However, for the new home sales report, the key number IS sales! An increase in sales adds to both GDP and employment (completed inventory is at record lows, so any increase in sales will translate to more single family starts). So sales in June at 497 thousand SAAR were very solid (the highest sales rate since May 2008).  The housing recovery is ongoing.

Earlier: New Home Sales at 497,000 Annual Rate in June

Looking at the first half of 2013, there has been a significant increase in sales this year.  The Census Bureau reported that there were 244 new homes sold in the first half of 2013, up 28.4% from the 190 thousand sold during the same period in 2012. This was the highest sales for the first half of the year since 2008.

And even though there has been a large increase in the sales rate, sales are just above the lows for previous recessions. This suggests significant upside over the next few years.  Based on estimates of household formation and demographics, I expect sales to increase to 750 to 800 thousand over the next several years - substantially higher than the current sales rate.

And an important point worth repeating every month: Housing is historically the best leading indicator for the economy, and this is one of the reasons I think The future's so bright, I gotta wear shades.

And here is another update to the "distressing gap" graph that I first started posting over four years ago to show the emerging gap caused by distressed sales.  Now I'm looking for the gap to close over the next few years.

Click on graph for larger image.

The "distressing gap" graph shows existing home sales (left axis) and new home sales (right axis) through June 2013. This graph starts in 1994, but the relationship has been fairly steady back to the '60s.

Following the housing bubble and bust, the "distressing gap" appeared mostly because of distressed sales. The flood of distressed sales kept existing home sales elevated, and depressed new home sales since builders weren't able to compete with the low prices of all the foreclosed properties.

I don't expect much of an increase in existing home sales (distressed sales will slowly decline and be offset by more conventional sales). But I do expect this gap to continue to close - mostly from an increase in new home sales.

Another way to look at this is a ratio of existing to new home sales.

This ratio was fairly stable from 1994 through 2006, and then the flood of distressed sales kept the number of existing home sales elevated and depressed new home sales. (Note: This ratio was fairly stable back to the early '70s, but I only have annual data for the earlier years).

In general the ratio has been trending down - and is currently at the lowest level since November 2008.  I expect this ratio to continue to trend down over the next several years as the number of distressed sales declines and new home sales increase. 

Note: Existing home sales are counted when transactions are closed, and new home sales are counted when contracts are signed. So the timing of sales is different.