by Calculated Risk on 7/29/2015 11:49:00 AM

Just wondering ...

No one expects a rate hike from the FOMC today. And most of the focus has been on WHEN the first rate hike will happen - and also how quickly the Fed will subsequently raise rates. Note: Most analysts expect the first rate hike in either September or December - and some think the Fed will wait until 2016.

But how large will the first rate hike be? Most analysts seem to expect a 25 bps increase - but what does that mean?

In December 2008, the Fed lowered the Fed Funds rate from 1.0% to a range of 0.0% to 0.25%. From December 2008:

"The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent."

So is a 25 bps increase from zero to 0.25%?  Or is it from the top of the range to 0.5%?  

It seems unlikely the FOMC will increase the range to 0.25% to 0.5%.

Currently the effective Fed Funds rate is at 0.14%.   This bounces around every day, but it has been close to 1/8 percent on average.

So it is possible the FOMC will raise rates 25 bps to 3/8 percent (0.375%).

by Calculated Risk on 7/29/2015 10:02:00 AM

From the NAR: Pending Home Sales Dip in June

After five consecutive months of increases, pending home sales slipped in June but remained near May's level, which was the highest in over nine years, according to the National Association of Realtors®. Modest gains in the Northeast and West were offset by larger declines in the Midwest and South.

The Pending Home Sales Index, a forward-looking indicator based on contract signings, fell 1.8 percent to 110.3 in June but is still 8.2 percent above June 2014 (101.9). Despite last month's decline, the index is the third highest reading of 2015 and has now increased year-over-year for ten consecutive months.

This was below expectations of a 1.0% increase.

Note: Contract signings usually lead sales by about 45 to 60 days, so this would usually be for closed sales in July and August.

by Calculated Risk on 7/29/2015 07:00:00 AM

From the MBA: Refinance Applications Increase in Latest MBA Weekly Survey

Mortgage applications increased 0.8 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending July 24, 2015. ...

The Refinance Index increased 2 percent from the previous week. The seasonally adjusted Purchase Index decreased 0.1 percent from one week earlier. The unadjusted Purchase Index increased 0.2 percent compared with the previous week and was 18 percent higher than the same week one year ago.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.17 percent, the lowest level since June 2015, from 4.23 percent, with points increasing to 0.36 from 0.34 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.
emphasis added

Click on graph for larger image.


The first graph shows the refinance index.

With higher rates, refinance activity is very low.

2014 was the lowest year for refinance activity since year 2000, and refinance activity will probably stay low for the rest of 2015.


The second graph shows the MBA mortgage purchase index.  

According to the MBA, the unadjusted purchase index is 18% higher than a year ago.

by Calculated Risk on 7/28/2015 07:25:00 PM

A few excerpts from an FOMC preview by Goldman Sachs economist Zach Pandl:

The July 28-29 FOMC meeting is shaping up to be the calm before the storm. Short-term interest rate markets imply a zero probability that the committee will raise policy rates next week, but show a high likelihood of at least one hike before the end of the year. Thus, although changes to the stance of policy look very unlikely, the upcoming statement will be closely watched for any clues on the precise timing of liftoff (we continue to see December as most likely). We will be focused on three main items:
...
• First, the description of economic conditions will likely acknowledge the decline in the unemployment rate. We expect the statement to drop its prior reference to stable oil prices, but to leave other comments about inflation unchanged.

• Second, we do not expect additional language intended to prepare for rate hikes in the statement. In 2004 the FOMC used the “measured” phrase for this purpose, but Fed Chair Yellen downplayed the need for new guidance at the June press conference. A change along these lines is a risk for next week, however.

• Third, we do not expect dissents, but see them as a risk from President Evans (dovish) and President Lacker (hawkish).

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

• At 10:00 AM, Pending Home Sales Index for June. The consensus is for a 1.0% increase in the index.

• Also at 2:00 PM, FOMC Meeting Announcement. No change is expected to policy.

by Calculated Risk on 7/28/2015 01:11:00 PM

A great discussion from Nick Timiraos at the WSJ: Are Home Prices Again Breaking Records? Not Really

The National Association of Realtors‘ monthly home sales report made a big splash last week with news that median home prices in June had broken the record set in 2006 at the peak of the housing bubble, reaching a nominal high of $236,400.

Does this mean we have another problem on our hands? Not really.
...[see data and graphs]
...
There may be other reasons to worry about housing affordability by comparing prices with incomes or prices with rents for a given market. But crude comparisons of nominal home prices with their 2006 and 2007 levels shouldn’t be used to make cavalier claims about a new bubble.

The price-to-rent does seem a little high (last graph below), but the speculation associated with a bubble isn't present. No worries.

The year-over-year increase in prices is mostly moving sideways now at a little over 4%. In October 2013, the National index was up 10.9% year-over-year (YoY). In May 2015, the index was up 4.4% YoY.

Here is the YoY change since last May for the National Index:

Month	YoY Change
May-14	7.1%
Jun-14	6.3%
Jul-14	5.6%
Aug-14	5.1%
Sep-14	4.8%
Oct-14	4.7%
Nov-14	4.6%
Dec-14	4.6%
Jan-15	4.4%
Feb-15	4.3%
Mar-15	4.2%
Apr-15	4.3%
May-15	4.4%

Most of the slowdown on a YoY basis is now behind us (I don't expect price to go negative this year). This slowdown in price increases was expected by several key analysts, and I think it was good news for housing and the economy.

In the earlier post, I graphed nominal house prices, but it is also important to look at prices in real terms (inflation adjusted).  Case-Shiller, CoreLogic and others report nominal house prices.  As an example, if a house price was $200,000 in January 2000, the price would be close to $276,000 today adjusted for inflation (38%).  That is why the second graph below is important - this shows "real" prices (adjusted for inflation).

It has been almost ten years since the bubble peak.  In the Case-Shiller release this morning, the National Index was reported as being 7.6% below the bubble peak.   However, in real terms, the National index is still about 21% below the bubble peak.

Nominal House Prices

The first graph shows the monthly Case-Shiller National Index SA, the monthly Case-Shiller Composite 20 SA, and the CoreLogic House Price Indexes (through March) in nominal terms as reported.

In nominal terms, the Case-Shiller National index (SA) is back to June 2005 levels, and the Case-Shiller Composite 20 Index (SA) is back to February 2005 levels, and the CoreLogic index (NSA) is back to April 2005.

Real House Prices

The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices.

In real terms, the National index is back to June 2003 levels, the Composite 20 index is back to May 2003, and the CoreLogic index back to October 2003.

In real terms, house prices are back to 2003 levels.

Note: CPI less Shelter is down 1.6% year-over-year, so this is pushing up real prices.

Price-to-Rent

In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

Here is a similar graph using the Case-Shiller National, Composite 20 and CoreLogic House Price Indexes.

This graph shows the price to rent ratio (January 1998 = 1.0).

On a price-to-rent basis, the Case-Shiller National index is back to March 2003 levels, the Composite 20 index is back to March 2003 levels, and the CoreLogic index is back to August 2003.

In real terms, and as a price-to-rent ratio, prices are mostly back to 2003 levels - and the price-to-rent ratio maybe moving a little sideways now.