by Calculated Risk on 8/22/2014 10:00:00 AM

From Fed Chair Janet Yellen at Jackson Hole Economic Symposium: Labor Market Dynamics and Monetary Policy. Excerpts:

One convenient way to summarize the information contained in a large number of indicators is through the use of so-called factor models. Following this methodology, Federal Reserve Board staff developed a labor market conditions index from 19 labor market indicators, including four I just discussed. This broadly based metric supports the conclusion that the labor market has improved significantly over the past year, but it also suggests that the decline in the unemployment rate over this period somewhat overstates the improvement in overall labor market conditions.
emphasis added

More excerpts:

[W]ith the economy getting closer to our objectives, the FOMC's emphasis is naturally shifting to questions about the degree of remaining slack, how quickly that slack is likely to be taken up, and thereby to the question of under what conditions we should begin dialing back our extraordinary accommodation. As should be evident from my remarks so far, I believe that our assessments of the degree of slack must be based on a wide range of variables and will require difficult judgments about the cyclical and structural influences in the labor market. While these assessments have always been imprecise and subject to revision, the task has become especially challenging in the aftermath of the Great Recession, which brought nearly unprecedented cyclical dislocations and may have been associated with similarly unprecedented structural changes in the labor market--changes that have yet to be fully understood.

So, what is a monetary policymaker to do? Some have argued that, in light of the uncertainties associated with estimating labor market slack, policymakers should focus mainly on inflation developments in determining appropriate policy. To take an extreme case, if labor market slack was the dominant and predictable driver of inflation, we could largely ignore labor market indicators and look instead at the behavior of inflation to determine the extent of slack in the labor market. In present circumstances, with inflation still running below the FOMC's 2 percent objective, such an approach would suggest that we could maintain policy accommodation until inflation is clearly moving back toward 2 percent, at which point we could also be confident that slack had diminished.

Of course, our task is not nearly so straightforward. Historically, slack has accounted for only a small portion of the fluctuations in inflation. Indeed, unusual aspects of the current recovery may have shifted the lead-lag relationship between a tightening labor market and rising inflation pressures in either direction. For example, as I discussed earlier, if downward nominal wage rigidities created a stock of pent-up wage deflation during the economic downturn, observed wage and price pressures associated with a given amount of slack or pace of reduction in slack might be unusually low for a time. If so, the first clear signs of inflation pressure could come later than usual in the progression toward maximum employment. As a result, maintaining a high degree of monetary policy accommodation until inflation pressures emerge could, in this case, unduly delay the removal of accommodation, necessitating an abrupt and potentially disruptive tightening of policy later on.

Conversely, profound dislocations in the labor market in recent years--such as depressed participation associated with worker discouragement and a still-substantial level of long-term unemployment--may cause inflation pressures to arise earlier than usual as the degree of slack in the labor market declines. However, some of the resulting wage and price pressures could subsequently ease as higher real wages draw workers back into the labor force and lower long-term unemployment. As a consequence, tightening monetary policy as soon as inflation moves back toward 2 percent might, in this case, prevent labor markets from recovering fully and so would not be consistent with the dual mandate.

by Calculated Risk on 8/21/2014 07:59:00 PM

From housing economist Tom Lawler:

The Fannie Mae Economic & Strategic Research Group released the results of a recent survey of senior mortgage executives designed to see how mortgage lenders had and/or would “adapt” to the new Ability-To-Repay (ATR) and Qualified Mortgage (QM) standards that become effective January 10, 2014. A total of 201 executives representing 186 institutions completed the survey between May 28 – June 8,2014.

Here are the results for a subset of the questions.

Impact of ATR/QM Rules (% of Respondents)
	Ease	Basically Unchanged	Tighten
Credit Standards	6%	58%	36%
	Increase	Remain About the Same	Decrease
Operational Costs	74%	19%	7%
Strategy on Non-QM Mortgage Loans
	Actively Pursue	Wait and See	Do NOT Plan to Pursue
Non-QM Loans	19%	46%	34%

A presentation on the survey results is available at Impact of Qualified Mortgage Rules and Quality Control Review

by Calculated Risk on 8/21/2014 03:31:00 PM

The most important number in the NAR report each month is inventory.   This morning the NAR reported that inventory was up 5.8% year-over-year in July.   It is important to note that the NAR inventory data is "noisy" and difficult to forecast based on other data. 

The headline NAR inventory number is not seasonally adjusted, even though there is a clear seasonal pattern. Trulia chief economist Jed Kolko has sent me the seasonally adjusted inventory. NOTE: The NAR does provide a seasonally adjusted months-of-supply, although that is in the supplemental data.

Click on graph for larger image.

This shows that inventory bottomed in January 2013 (on a seasonally adjusted basis), and inventory is now up about 10.7% from the bottom. On a seasonally adjusted basis, inventory was only up 0.2% in July compared to June.

Important: The NAR reports active listings, and although there is some variability across the country in what is considered active, many "contingent short sales" are not included. "Contingent short sales" are strange listings since the listings were frequently NEVER on the market (they were listed as contingent), and they hang around for a long time - they are probably more closely related to shadow inventory than active inventory. However when we compare inventory to 2005, we need to remember there were no "short sale contingent" listings in 2005. In the areas I track, the number of "short sale contingent" listings is also down sharply year-over-year.

Another key point: The NAR reported total sales were down 4.3% from July 2013, but normal equity sales were probably up from July 2013, and distressed sales down sharply.  The NAR reported that 9% of sales were distressed in July (from a survey that is far from perfect):

Distressed homes – foreclosures and short sales – accounted for 9 percent of July sales, down from 15 percent a year ago and the first time they were in the single-digits since NAR started tracking the category in October 2008. Six percent of July sales were foreclosures and 3 percent were short sales.

Last year in July the NAR reported that 15% of sales were distressed sales.

A rough estimate: Sales in July 2013 were reported at 5.38 million SAAR with 15% distressed.  That gives 807 thousand distressed (annual rate), and 4.57 million equity / non-distressed.  In July 2014, sales were 5.15 million SAAR, with 9% distressed.  That gives 464 thousand distressed - a decline of over 40% from July 2013 - and 4.69 million equity.  Although this survey isn't perfect, this suggests distressed sales were down sharply - and normal sales up slightly (even with less investor buying). 

The following graph shows existing home sales Not Seasonally Adjusted (NSA).

Click on graph for larger image.

Sales NSA in July (red column) were below the level of sales in July 2013, and above sales for 2008 through 2012. 

Overall this was a solid report.

Earlier:
• Existing Home Sales in July: 5.15 million SAAR, Inventory up 5.8% Year-over-year

by Calculated Risk on 8/21/2014 12:45:00 PM

Earlier from the Philly Fed: August Manufacturing Survey

The diffusion index of current general activity increased from a reading of 23.9 in July to 28.0 this month. The index has increased for three consecutive months and is at its highest reading since March 2011 The new orders and shipments indexes remained positive but fell to near their levels in June. The new orders index decreased 20 points [to 14.7], while the shipments index decreased 18 points.
...
The current indicators for labor market conditions suggested continued modest expansion in employment. The employment index remained positive for the 14th consecutive month but declined 3 points from its reading in July [to 9.1] ...

Most of the survey’s broad indicators of future growth showed improvement this month. The future general activity index increased 8 points and is at its highest reading since June 1992 emphasis added

This was above the consensus forecast of a reading of 15.5 for July.

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 August. The ISM and total Fed surveys are through July.

The average of the Empire State and Philly Fed surveys was solid in August, and this suggests another strong ISM report for August.

by Calculated Risk on 8/21/2014 10:00:00 AM

The NAR reports: Existing-Home Sales Continue to Climb in July

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 2.4 percent to a seasonally adjusted annual rate of 5.15 million in July from a slight downwardly-revised 5.03 million in June. Sales are at the highest pace of 2014 and have risen four consecutive months, but remain 4.3 percent below the 5.38 million-unit level from last July, which was the peak of 2013. ...

Total housing inventory at the end of July rose 3.5 percent to 2.37 million existing homes available for sale, which represents a 5.5-month supply at the current sales pace. Unsold inventory is 5.8 percent higher than a year ago, when there were 2.24 million existing homes available for sale.

Click on graph for larger image.

This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.

Sales in July (5.15 million SAAR) were 2.4% higher than last month, but were 4.3% below the July 2013 rate.

The second graph shows nationwide inventory for existing homes.

According to the NAR, inventory increased to 2.37 million in July from 2.29 million in June.   Headline inventory is not seasonally adjusted, and inventory usually increases from the seasonal lows in December and January, and peaks in mid-to-late summer.

The third graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory.

Inventory increased 5.8% year-over-year in July compared to July 2013.  

Months of supply was at 5.5 months in July.

This was above expectations of sales of 5.00 million.  For existing home sales, the key number is inventory - and inventory is still low, but up solidly year-over-year.    I'll have more later ...