by Calculated Risk on 1/06/2015 08:21:00 PM

For fun, here are Byron Wien's Ten Surprises for 2015. Here are a few:

1. The Federal Reserve finally raises short-term interest rates, well before the middle of the year, encouraged by the improving employment data and strong Gross Domestic Product growth. The timing proves faulty, however, as the momentum of the economy has begun to flag and a short-term slowdown has started. The end of monetary accommodation and rising rates precipitate a correction in equities. Long-term Treasury rates stay where they started and the yield curve flattens. [CR Note: I doubt the Fed will raise rates "well before the middle of the year"]

3. The year-end 2014 rally in United States equities continues as the market rises for a strong performance in 2015. A growing economy, fueled by housing and capital spending and favorable earnings, enables the Standard & Poor’s 500 to increase 15% during the year, outperforming equities in most major industrialized countries throughout the world.

4. Mario Draghi finally begins to expand the balance sheet of the European Central Bank aggressively by buying sovereign debt, mortgages and corporate bonds. In spite of this expansion, Europe falls back into a serious recession. Germany is particularly weak as reduced demand from various trading partners has a major impact on its exports. The European policy makers fail to embrace the one option, fiscal spending, that could turn the economy around, and European stocks decline. Politically, Europe moves dangerously toward the right. [CR Note: Unfortunately probably close.]

8. Brent slips into the $40s. The low price of crude oil, which continues throughout the first part of the year, has a major impact on Russia. A peace settlement with Ukraine is signed, giving Eastern Ukraine substantial autonomy but guaranteeing the sovereignty of the rest of the country. President Putin seems to be trying to win back the respect of the international community as the country reels from its economic problems, but the Russian citizenry finally turns on him. His approval rating plummets and he resigns by year-end. During the second half of the year, West Texas Intermediate and Brent crude are both above $70, as emerging market demand continues to increase. [CR Note: Brent into the $40s is already close. Brent closed at $51.10 today.]

Wednesday:
• At 7:00 AM ET, the Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

• At 8:15 AM, the ADP Employment Report for December. This report is for private payrolls only (no government). The consensus is for 223,000 payroll jobs added in December, up from 207,000 in November.

• At 8:30 AM, the Trade Balance report for November from the Census Bureau. The consensus is for the U.S. trade deficit to be at $42.0 billion in November from $43.4 billion in October.

• Early, Reis Q4 2014 Mall Survey of rents and vacancy rates.

• At 2:00 PM, the FOMC Minutes for Meeting of December 16-17, 2014

by Calculated Risk on 1/06/2015 04:09:00 PM

With the rally in the Ten Year today - yields declined to 1.89% mid-day and closed at 1.96% - the 30 year mortgage rate also declined, and is now down almost 100bps from a year ago.

From Matthew Graham at Mortgage News Daily: Opportunity Knocks as Mortgage Rates Surge Lower

Mortgage rates are on an absolute tear. In the past 2 days, they've rocketed a full eighth of a point lower. They're a full quarter point lower than the average rates available in 2nd half of December and .375% lower than December's highest rates. For anyone feeling like they missed out in May 2013 as the taper tantrum began, here's your opportunity. Today is officially the first day we can say that rate sheets are at least as good as May 21st, 2013, the day before Bernanke's congressional testimony unofficially kicked off the taper tantrum and sent mortgage rates quickly higher.

At that time, the abrupt rise meant a move up to 3.75% from 3.625%. Today's gains restore 3.625% as the lowest widely-available rate for the best borrowers.

Note: rates are still above the level required for a significant increase in refinance activity. Historically refinance activity picks up significantly when mortgage rates fall about 50 bps from a recent level.

Many borrowers who took out mortgages over the last 18 months can refinance now - but that is a small number of total borrowers. For a significant increase in refinance activity, rates would have to fall below the late 2012 lows (on a monthly basis, 30 year mortgage rates were at 3.35% in the PMMS in November and December 2012).

Based on the relationship between the 30 year mortgage rate and 10-year Treasury yields, the 10-year Treasury yield would probably have to decline to 1.5% or lower for a significant refinance boom (in the near future). With the 10-year yield currently at 1.96%, I don't expect a significant increase in refinance activity.

Here is a table from Mortgage News Daily:

Home Loan Rates

View More Refinance Rates

by Calculated Risk on 1/06/2015 01:47:00 PM

Yesterday I noted that Reis reported the office vacancy rate declined to 16.7% in Q4 from 16.8% in Q3.

A key question is when will new office investment increase significantly. Investment has been increasing - and adding to GDP - but investment is still very low. The following graph shows the office vacancy rate and office investment as a percent of GDP. Note: Office investment also includes improvements.

Here is Reis Senior Economist Ryan Severino's office forecast for 2015:

"2014 ended with lots of good news and optimistic data, for both the macroeconomy and the office market. GDP growth, labor market growth, net absorption, and vacancy are all trending in the right direction and at a faster pace over time. Barring some idiosyncratic shock, there is no reason to believe that these trends will not persist in 2015 while construction should remain in check due to relatively weak fundamentals in many markets, even as speculative development slowly returns to the market in stronger metro areas. Therefore, we are not only forecasting stronger rent growth for 2015 than 2014, but vacancy compression should slowly begin to accelerate and the potential exists for the market to outperform our expectations if the economy is even stronger than currently forecast. This is the most sanguine that we have been about the economy and the office market since before the recession."

Click on graph for larger image.

This graph shows the office vacancy rate starting in 1980 (prior to 1999 the data is annual). Back in the early '80s, there was overbuilding in the office sector even as the vacancy rate was rising. This was due to the very loose lending that led to the S&L crisis.

In the '90s, office investment picked up as the vacancy rate fell. Following the bursting of the stock bubble, the vacancy rate increased sharply and office investment declined.

During the housing bubble, office investment started to increase even before the vacancy rate had fallen below 14%. This was due to loose lending - again. Investment essentially stopped following the financial crisis.

Even with the recent increases, office investment is below the levels of previous slow periods - and the vacancy rate is still very high.  Like Reis, I expect the office vacancy rate to continue to decline, and for office investment to slowly recover.

Office vacancy data courtesy of Reis.

by Calculated Risk on 1/06/2015 10:06:00 AM

The December ISM Non-manufacturing index was at 56.2%, down from 59.3% in November. The employment index decreased in December to 56.0%, down from 56.7% in November. Note: Above 50 indicates expansion, below 50 contraction.

From the Institute for Supply Management: December 2014 Non-Manufacturing ISM Report On Business®

Economic activity in the non-manufacturing sector grew in December for the 59th consecutive month, say the nation’s purchasing and supply executives in the latest Non-Manufacturing ISM® Report On Business®.

The report was issued today by Anthony Nieves, CPSM, C.P.M., CFPM, chair of the Institute for Supply Management® (ISM®) Non-Manufacturing Business Survey Committee. "The NMI® registered 56.2 percent in December, 3.1 percentage points lower than the November reading of 59.3 percent. This represents continued growth in the non-manufacturing sector. The Non-Manufacturing Business Activity Index decreased to 57.2 percent, which is 7.2 percentage points lower than the November reading of 64.4 percent, reflecting growth for the 65th consecutive month at a slower rate. The New Orders Index registered 58.9 percent, 2.5 percentage points lower than the reading of 61.4 percent registered in November. The Employment Index decreased 0.7 percentage point to 56 percent from the November reading of 56.7 percent and indicates growth for the tenth consecutive month. The Prices Index decreased 4.9 percentage points from the November reading of 54.4 percent to 49.5 percent, indicating prices contracted in December when compared to November. According to the NMI®, 12 non-manufacturing industries reported growth in December. Comments from respondents are mostly positive about business conditions and the overall economy for year-end.""
emphasis added

Click on graph for larger image.

This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index.

This was below the consensus forecast of 58.2% and suggests slower expansion in December than in November.  Still a decent report.

by Calculated Risk on 1/06/2015 09:03:00 AM

Notes: This CoreLogic House Price Index report is for November. The recent Case-Shiller index release was for October. The CoreLogic HPI is a three month weighted average and is not seasonally adjusted (NSA).

From CoreLogic: CoreLogic Reports Home Prices Rose by 5.5 Percent Year Over Year in November 2014

Home prices nationwide, including distressed sales, increased 5.5 percent in November 2014 compared to November 2013. This change represents 33 months of consecutive year-over-year increases in home prices nationally. On a month-over-month basis, home prices nationwide, including distressed sales, rose by 0.1 percent in November 2014 compared to October 2014.
...
Excluding distressed sales, home prices nationally increased 5.3 percent in November 2014 compared to November 2013 and 0.3 percent month over month compared to October 2014. Also excluding distressed sales, all states and the District of Columbia showed year-over-year home price appreciation in November. Distressed sales include short sales and real estate owned (REO) transactions. ...

“After decelerating for most of the year, home price growth has been holding firm between a 5-percent and 6-percent growth rate for the last four months,” said Sam Khater, deputy chief economist at CoreLogic. “However, pockets of weakness are clear in Baltimore and Washington D.C., and three of the top four states with the highest price appreciation are energy intensive and had been benefitting from the energy boom which is currently receding as oil prices trend downward. These states—Texas, Colorado and North Dakota, may see some downward pressure on prices in 2015.”
emphasis added

Click on graph for larger image.

This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100.

The index was up 0.1% in November, and is up 5.5% over the last year.

This index is not seasonally adjusted, and this small - but positive - month-to-month increase was during the seasonally weak period.


The second graph is from CoreLogic. The year-over-year comparison has been positive for thirty three consecutive months suggesting house prices bottomed early in 2012 on a national basis (the bump in 2010 was related to the tax credit).

The YoY increases had been slowing, but has moved sideways over the last few months.