by Calculated Risk on 12/12/2014 02:10:00 PM

From Lewis Alexander et al at Nomura:

We expect the December FOMC meeting to give us additional insight into the future path of monetary policy. We will receive another round of FOMC forecasts for the first time since September, which will incorporate significant new data. The drop in energy prices will likely lead the FOMC to lower its inflation forecasts, and the Committee will likely have to lower its unemployment rate forecasts, due to the faster-than-expected declines in the unemployment rate.

Moreover, we expect the FOMC to make changes to its forward guidance. Given recent Fed speak and improvement in US economic momentum, we now think it is more likely than not that the FOMC will drop the “considerable time” language in its December policy statement. However, we expect them to replace this with some statement that suggests that rate hikes are not imminent.

From Michael Hanson at Merrill Lynch:

Next week’s FOMC meeting will feature updated forecasts (including the dot plot) and a press conference from Fed Chair Janet Yellen. But most market discussion of late has focused on the “considerable time” phrase: will it stay or will it go? Our base case is that the Fed will replace it with language emphasizing patience, but it is a close call versus keeping the current text. Whether or not that language is changed, we expect Chair Janet Yellen to signal a patient and gradual evolution of policy in a data-dependent context in her post-meeting press conference. The Fed likely wants to gradually guide the markets toward liftoff, not shock them.
...
What is almost certain is that the Fed will not simply drop “considerable time” without any substitute. ... as New York Fed President Bill Dudley reiterated this past week, to be a bit too late than to be too early. Additional reasons for patience include the limited set of policy options should the Fed have to ease further, as well as the hit to credibility of having to soon reverse a hiking cycle. We expect patience will be a main message in the December FOMC meeting and in Yellen’s post-meeting remarks.

Here are the most recent FOMC projections.  It looks like GDP will be revised up for 2014 (and possibly for 2015).

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in Real GDP1	2014	2015	2016	2017
Sept 2014 Meeting Projections	2.0 to 2.2	2.6 to 3.0	2.6 to 2.9	2.3 to 2.5
June 2014 Meeting Projections	2.1 to 2.3	3.0 to 3.2	2.5 to 3.0	n.a.

¹ Projections of change in real GDP and inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

The unemployment rate was at 5.8% in both October and November, so the unemployment rate projection for Q4 2014 will be lowered again.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment Rate2	2014	2015	2016	2017
Sept 2014 Meeting Projections	5.9 to 6.0	5.4 to 5.6	5.1 to 5.4	4.9 to 5.3
June 2014 Meeting Projections	6.0 to 6.1	5.4 to 5.7	5.1 to 5.5	n.a.

² Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

As of October, PCE inflation was up 1.4% from October 2013, and core inflation was up 1.6%.  Headline inflation will be even lower in November and December with the decline in oil prices.  It seems likely the FOMC will lower their inflation projections (or move to the lower end of the September range).  The key will be the inflation projections for next year.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE Inflation1	2014	2015	2016	2017
Sept 2014 Meeting Projections	1.5 to 1.7	1.6 to 1.9	1.7 to 2.0	1.9 to 2.0
June 2014 Meeting Projections	1.5 to 1.7	1.5 to 2.0	1.6 to 2.0	n.a.

Here are the FOMC's recent core inflation projections:

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core Inflation1	2014	2015	2016	2017
Sept 2014 Meeting Projections	1.5 to 1.6	1.6 to 1.9	1.8 to 2.0	1.9 to 2.0
June 2014 Meeting Projections	1.5 to 1.6	1.6 to 2.0	1.7 to 2.0	n.a.

by Calculated Risk on 12/12/2014 09:55:00 AM

Click on graph for larger image.

The preliminary Reuters / University of Michigan consumer sentiment index for December was at 93.8, up from 88.8 in November.

This was above the consensus forecast of 89.5 and is at the highest level since before the recession. Lower gasoline prices and a stronger economy are probably the reasons for the sharp increase.

by Calculated Risk on 12/12/2014 08:06:00 AM

During the recession, I started following the Sacramento market to look for changes in the mix of houses sold (equity, REOs, and short sales). For some time, not much changed. But over the last 2+ years we've seen some significant changes with a dramatic shift from foreclosures (REO: lender Real Estate Owned) to short sales, and the percentage of total distressed sales declining sharply.

This data suggests healing in the Sacramento market and other distressed markets are showing similar improvement.  Note: The Sacramento Association of REALTORS® started breaking out REOs in May 2008, and short sales in June 2009.

In November 2014, 11.5% of all resales were distressed sales. This was down from 12.1% last month, and down from 15.5% in November 2013.

The percentage of REOs was at 5.3%, and the percentage of short sales was 6.2%.

Here are the statistics for November.

Click on graph for larger image.

This graph shows the percent of REO sales, short sales and conventional sales.

There has been a sharp increase in conventional (equity) sales that started in 2012 (blue) as the percentage of distressed sales declined sharply.

Active Listing Inventory for single family homes increased 36.6% year-over-year (YoY) in November.  In general the YoY increases have been trending down after peaking at close to 100%, however this was a larger YoY increase than in October.

Cash buyers accounted for 16.9% of all sales, down from 25.0% in November 2013 (frequently investors).  This has been trending down, and it appears investors are becoming much less of a factor in Sacramento.

Total sales were down 6.1% from November 2013, and conventional equity sales were down 1.6% compared to the same month last year.

Summary: Distressed sales down sharply, cash buyers are down significantly, and inventory up significantly (but increases slowing).   This is what we'd expect to see in a healing market.  As I've noted before, we are seeing a similar pattern in other distressed areas.

by Calculated Risk on 12/11/2014 07:11:00 PM

Would you make an unsecured personal loan to an individual so they can pay off $14,000 in credit card debt? If so, at what interest rate (the credit card debt is at 17%). The person has a 15 year credit history, a FICO score of 699, an annual income of $73,000 and a DTI of 17% (excluding mortgage debt).

Maybe for a close friend or family member, I'd consider helping - if I knew all the circumstances.  However, for everyone else, my answer isn't no, it is Hell No!

The first guideline of personal finance is to pay off your credit card balance every month (with exceptions for extraordinary events). This person has a 15 year credit history - is probably in their 30s - and still can't pay off their credit card balance every month?

Maybe there was an extraordinary event - medical bills for a family member or maybe the borrower lost their job for some time.  That would make a difference.   But for most borrowers, I suspect they have just lived a little beyond their means.

If so, imagine what will happen after they pay off their credit card. In a year or two, it seems likely they will have run up their credit card debt again.

As long as the economy is expanding, and the person keeps their job - they will probably pay this personal loan.   So, with no recession on the horizon, a 3 year loan right now will probably perform well.  But what happens during the next recession?

This is the average Lending Club borrower (that they call "quality").    Yes - an individual lender can diversify among a number of borrowers of the same credit quality (that is less risky than lending to one person), but this isn't for me.

Friday:
• At 8:30 AM ET, the Producer Price Index for November from the BLS. The consensus is for a 0.1% decrease in prices, and a 0.1% increase in core PPI.

• At 9:55 AM, Reuter's/University of Michigan's Consumer sentiment index (preliminary for December). The consensus is for a reading of 89.5, up from 88.8 in November.

by Calculated Risk on 12/11/2014 04:37:00 PM

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 (released this morning) 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 still little (but increasing) MEW right now - and normal principal payments and debt cancellation.

For Q3 2014, the Net Equity Extraction was minus $26 billion, or a negative 0.8% of Disposable Personal Income (DPI). 

Click on graph for larger image.

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 increased by $12 billion in Q3. This was only the second quarterly increase in mortgage debt since Q1 2008.

The Flow of Funds report also showed that Mortgage debt has declined by almost $1.3 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. With residential investment increasing, and a slower rate of debt cancellation, it is possible that MEW will turn positive again soon.

For reference:

Dr. James Kennedy also has a simple 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.