by Calculated Risk on 7/10/2014 10:07:00 AM

From Trulia chief economist Jed Kolko: Despite Home Price Slowdown, Wages Can’t Keep Up With Prices

In June 2014, prices were up 8.1% year-over-year and 2.6% quarter-over-quarter, compared with 9.5% and 3.1%, respectively, in June 2013. ... But despite this national slowdown in price gains, price increases continue to be widespread, with 97 of 100 metros posting year-over-year price gains – the most since the recovery began. Furthermore, asking prices in June rose at their highest month-over-month rate (1.2%) in sixteen months.

The price slowdown has been particularly sharp in the boom-and-bust markets of California and the Southwest, where the recession was severe, the recovery was dramatic, and the slowdown is now most pronounced. In Phoenix, Las Vegas, Sacramento, and Orange County, price gains have skidded to a stop or gone into reverse in the past quarter after posting gains of more than 20% year-over-year in June 2013. Although these four housing markets all still have average or above-average year-over-year price increases in June 2014, their slowdowns or reversals in the most recent quarter foreshadow a continued deceleration in year-over-year gains ...
...
Rental Affordability Worsens as Rents Rise 5.5% Year-over-Year
Rent increases outpaced wage increases in all of the 25 largest Rents rose more than 10% year-over-year in Miami, Oakland, San Francisco, San Diego, and Denver. Among these five markets with the largest rent increases, all but Denver are among the nation’s least affordable rental markets.
emphasis added

Asking prices had been slowing down, although there was a slight increase in year-over-year prices in June ... in November 2013, year-over-year asking prices were up 12.2%, in December, the year-over-year increase slowed slightly to 11.9%. In January 11.4%, in February 10.4%, in March 10.0%, April 9.0%, May 8.0%, but now 8.1% in June.


Note: These asking prices are SA (Seasonally Adjusted) - and adjusted for the mix of homes - and this suggests further house price increases, but probably at a slower rate, over the next few months on a seasonally adjusted basis.

by Calculated Risk on 7/10/2014 08:34:00 AM

The DOL reports:

In the week ending July 5, the advance figure for seasonally adjusted initial claims was 304,000, a decrease of 11,000 from the previous week's unrevised level of 315,000. The 4-week moving average was 311,500, a decrease of 3,500 from the previous week's unrevised average of 315,000.

There were no special factors impacting this week's initial claims.

The previous week was unrevised at 315,000.

The following graph shows the 4-week moving average of weekly claims since January 1971.

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 311,400.

This was lower than the consensus forecast of 316,000.  The 4-week average is now at normal levels for an expansion.

by Calculated Risk on 7/09/2014 08:17:00 PM

Here is an updated housing and mortgage forecast from Goldman Sachs economist Hui Shan: Housing at half time: activity picks up while prices slow down

There are clear signs of house price growth deceleration. Across various indices, year over year appreciation rate has declined from double digits to high single digits. ... We update our bottom-up house price forecast model. At the national level, we expect house price growth to fall from 9.0% during the past year to 4.7% in the coming year and 3.0% in the year thereafter.
...
We now expect mortgage rate to rise to 4.5% by year-end.
...
the underlying housing recovery continues. ... Although we see housing activity improving further in the second half of 2014, we expect the pace of the recovery to be moderate.
emphasis added

CR Note: I also expect house price increases to slow, and for activity to pickup going forward. At the end of 2013, mortgage rates were around 4.62%, so Goldman is forecasting rates will down year-over-year (rates are currently down about 45 bps compared to a year ago according to Mortgage News Daily).

Thursday:
• Early: Trulia Price Rent Monitors for June. This is the index from Trulia that uses asking house prices adjusted both for the mix of homes listed for sale and for seasonal factors.

• At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for claims to increase to 316 thousand from 315 thousand.

• At 10:00 AM, the Monthly Wholesale Trade: Sales and Inventories report for May. The consensus is for a 0.6% increase in inventories.

• At 4:30 PM, Speech by Fed Vice Chairman Stanley Fischer, Financial Sector Reform, At the Martin Feldstein Lecture, hosted by the National Bureau of Economic Research, Cambridge, Massachusetts

by Calculated Risk on 7/09/2014 04:49:00 PM

This is a key distressed market to follow since Phoenix saw a large bubble / bust followed by strong investor buying.

The Arizona Regional Multiple Listing Service (ARMLS) reports (table below):

1) Overall sales in June were down 11% year-over-year and at the lowest for June since 2008.

2) Cash Sales (frequently investors) were down about 40%, so investor buying appears to be declining. Non-cash sales were up about 6% year-over-year.

3) Active inventory is now increasing rapidly and is up 43% year-over-year - and at the highest level for June since 2011.

Inventory has clearly bottomed in Phoenix (A major theme for housing in 2013).   And more inventory (a theme this year) - and less investor buying - suggests price increases should slow sharply in 2014.

According to Case-Shiller, Phoenix house prices bottomed in August 2011 (mostly flat for all of 2011), and then increased 23% in 2012, and another 15% in 2013.  Those large increases were probably due to investor buying, low inventory and some bounce back from the steep price declines in 2007 through 2010.  Now, with more inventory, price increases should flatten out in 2014.

We only have Case-Shiller through April, but the Zillow index shows Phoenix prices up slightly year-to-date through May.

June Residential Sales and Inventory, Greater Phoenix Area, ARMLS
	Sales	YoY Change Sales	Cash Sales	Percent Cash	Active Inventory	YoY Change Inventory
June 2008	5,748	---	1,093	19.0%	53,8262	---
June 2009	9,325	62.2%	3,443	36.9%	38,358	---2
June 2010	9,278	-0.5%	3,498	37.7%	41,869	9.2%
June 2011	11,134	20.0%	5,001	44.9%	29,203	-30.3%
June 2012	9,133	-18.0%	4,272	46.8%	19,857	-32.0%
June 2013	8,150	-10.8%	3,055	37.5%	19,541	-1.6%
June 2014	7,239	-11.2%	1,854	25.6%	27,954	43.1%
1 June 2008 does not include manufactured homes, ~100 more 2 June 2008 Inventory includes pending

by Calculated Risk on 7/09/2014 02:00:00 PM

From the Fed: Minutes of the Federal Open Market Committee, June 17-18, 2014. Excerpt:

Some committee members had been asked by members of the public whether, if tapering in the pace of purchases continues as expected, the final reduction would come in a single $15 billion per month reduction or in a $10 billion reduction followed by a $5 billion reduction. Most participants viewed this as a technical issue with no substantive macroeconomic consequences and no consequences for the eventual decision about the timing of the first increase in the federal funds rate--a decision that will depend on the Committee's evolving assessments of actual and expected progress toward its objectives. In light of these considerations, participants generally agreed that if incoming information continued to support its expectation of improvement in labor market conditions and a return of inflation toward its longer-run objective, it would be appropriate to complete asset purchases with a $15 billion reduction in the pace of purchases in order to avoid having the small, remaining level of purchases receive undue focus among investors. If the economy progresses about as the Committee expects, warranting reductions in the pace of purchases at each upcoming meeting, this final reduction would occur following the October meeting.
emphasis added

And more on Monetary Policy Normalization:

Meeting participants continued their discussion of issues associated with the eventual normalization of the stance and conduct of monetary policy. The Committee's consideration of this topic was undertaken as part of prudent planning and did not imply that normalization would necessarily begin sometime soon. A staff presentation included some possible strategies for implementing and communicating monetary policy during a period when the Federal Reserve will have a very large balance sheet. In addition, the presentation outlined design features of a potential ON RRP facility and discussed options for the Committee's policy of rolling over maturing Treasury securities at auction and reinvesting principal payments on all agency debt and agency mortgage-backed securities (MBS) in agency MBS.

Most participants agreed that adjustments in the rate of interest on excess reserves (IOER) should play a central role during the normalization process. It was generally agreed that an ON RRP facility with an interest rate set below the IOER rate could play a useful supporting role by helping to firm the floor under money market interest rates. One participant thought that the ON RRP rate would be the more effective policy tool during normalization in light of the wider variety of counterparties eligible to participate in ON RRP operations. The appropriate size of the spread between the IOER and ON RRP rates was discussed, with many participants judging that a relatively wide spread--perhaps near or above the current level of 20 basis points--would support trading in the federal funds market and provide adequate control over market interest rates. Several participants noted that the spread might be adjusted during the normalization process. A couple of participants suggested that adequate control of short-term rates might be accomplished with a very wide spread or even without an ON RRP facility. A few participants commented that the Committee should also be prepared to use its other policy tools, including term deposits and term reverse repurchase agreements, if necessary. Most participants thought that the federal funds rate should continue to play a role in the Committee's operating framework and communications during normalization, with many of them indicating a preference for continuing to announce a target range. However, a few participants thought that, given the degree of uncertainty about the effects of the Committee's tools on market rates, it might be preferable to focus on an administered rate in communicating the stance of policy during the normalization period. In addition, participants examined possibilities for changing the calculation of the effective federal funds rate in order to obtain a more robust measure of overnight bank funding rates and to apply lessons from international efforts to develop improved standards for benchmark interest rates.

While generally agreeing that an ON RRP facility could play an important role in the policy normalization process, participants discussed several potential unintended consequences of using such a facility and design features that could help to mitigate these consequences. Most participants expressed concerns that in times of financial stress, the facility's counterparties could shift investments toward the facility and away from financial and nonfinancial corporations, possibly causing disruptions in funding that could magnify the stress. In addition, a number of participants noted that a relatively large ON RRP facility had the potential to expand the Federal Reserve's role in financial intermediation and reshape the financial industry in ways that were difficult to anticipate. Participants discussed design features that could address these concerns, including constraints on usage either in the aggregate or by counterparty and a relatively wide spread between the ON RRP rate and the IOER rate that would help limit the facility's size. Several participants emphasized that, although the ON RRP rate would be useful in controlling short-term interest rates during normalization, they did not anticipate that such a facility would be a permanent part of the Committee's longer-run operating framework. Finally, a number of participants expressed concern about conducting monetary policy operations with nontraditional counterparties.

Participants also discussed the appropriate time for making a change to the Committee's policy of rolling over maturing Treasury securities at auction and reinvesting principal payments on all agency debt and agency MBS in agency MBS. It was noted that, in the staff's models, making a change to the Committee's reinvestment policy prior to the liftoff of the federal funds rate, at the time of liftoff, or sometime thereafter would be expected to have only limited implications for macroeconomic outcomes, the Committee's statutory objectives, or remittances to the Treasury. Many participants agreed that ending reinvestments at or after the time of liftoff would be best, with most of these participants preferring to end them after liftoff. These participants thought that an earlier change to the reinvestment policy would involve risks to the economic outlook if it was seen as suggesting that the Committee was likely to tighten policy more rapidly than currently anticipated or if it had unexpectedly large effects in MBS markets; moreover, an early change could add complexity to the Committee's communications at a time when it would be clearer to signal changes in policy through interest rates alone. However, some participants favored ending reinvestments prior to the first firming in policy interest rates, as stated in the Committee's exit strategy principles announced in June 2011. Those participants thought that such an approach would avoid weakening the credibility of the Committee's communications regarding normalization, would act to modestly reduce the size of the Federal Reserve's balance sheet, or would help prepare the public for the eventual rise in short-term interest rates. Regardless of whether they preferred to introduce a change to the Committee's reinvestment policy before or after the initial tightening in short-term interest rates, a number of participants thought that it might be best to follow a graduated approach with respect to winding down reinvestments or to manage reinvestments in a manner that would smooth the decline in the balance sheet. Some stressed that the details should depend on financial and economic conditions.

Overall, participants generally expressed a preference for a simple and clear approach to normalization that would facilitate communication to the public and enhance the credibility of monetary policy. It was observed that it would be useful for the Committee to develop and communicate its plans to the public later this year, well before the first steps in normalizing policy become appropriate. Most participants indicated that they expected to learn more about the effects of the Committee's various policy tools as normalization proceeds, and many favored maintaining flexibility about the evolution of the normalization process as well as the Committee's longer-run operating framework. Participants requested additional analysis from the staff on issues related to normalization and agreed that it would be helpful to continue to review these issues at upcoming meetings.