by Calculated Risk on 2/14/2011 05:36:00 PM

I've been following the Sacramento market to see the change in mix (conventional, REOs, short sales) in a distressed area. The Sacramento Association of REALTORS® started breaking out REOs in May 2008, and short sales in June 2009. Here are the statistics.

Click on graph for larger image in graph gallery.

This graph shows the percent of REO, short sales and conventional sales. There is a seasonal pattern for conventional sales (strong in the spring and summer), and distressed sales happen all year - so the percentage of distressed sales increases every winter. The tax credits might have also boosted conventional sales in 2009 and early 2010.

Note: Prior to June 2009, it is unclear if short sales were included as REO or as "conventional" - or some of both.

In January 2011, 73.1% of all resales (single family homes and condos) were distressed sales. This is the highest level of distressed sales since Sacramento started breaking out short sales, and might be the highest since February 2009.

And a high level of distressed sales suggests falling prices. And this isn't just happening in Sacramento. Housing economist Tom Lawler noted today:

"January is seasonally the weakest month for home sales (closings); distressed share of sales went up in many areas last month, suggesting that repeat transactions HPIs in early 2011 will show weakness."

My guess is both the Case-Shiller and CoreLogic repeat sales indexes will fall to post-bubble lows once the January data is released.

by Calculated Risk on 2/14/2011 01:52:00 PM

An economic letter from Justin Weidner and John Williams at the SF Fed: What Is the New Normal Unemployment Rate?

In the past, the U.S. labor market has proven to be very flexible and recessions have not usually been followed by long-lasting increases in the unemployment rate. But, in the wake of the most recent recession, many economists are concerned that developments such as mismatches in the skills of workers and jobs, extended unemployment benefits, and a rise in long-term joblessness may have raised the “normal” or “natural” rate of unemployment above the 5% level that was thought to be typical before the downturn. Indeed, a few economists have gone so far as to argue that the rise in the unemployment rate to its current level of 9% primarily reflects an increase in the natural rate, implying there is little slack in labor markets and therefore little downward pressure on inflation.
...
[see paper for estimates of “natural” rate of unemployment]
...
Economists have cited a number of possible reasons why the natural rate of unemployment may have risen in recent years. In early 2009, eligibility for unemployment benefits was extended from 26 weeks to as much as 99 weeks. Extended benefits reduce the hardship on unemployed workers and their families during this severe downturn. However, they may also reduce the incentive of the unemployed to seek and accept less desirable jobs, which in turn may raise the measured unemployment rate.
...
A second explanation is that the degree of mismatch between job seekers and potential employers has increased. The construction, finance, and real estate sectors have shrunk after the bursting of the housing bubble and the subsequent financial crisis. The skills of workers who used to be employed in those sectors may not be easily transferable to growing sectors such as education and health care (see Rissman 2009 and Barnichon et al. 2010). Similarly, the housing bust has left millions of homeowners underwater on their mortgages, which locks them into their homes and may make it more difficult for them to move to higher growth areas. These sectoral and geographic mismatches between workers and job openings may be making it harder for employers to fill vacancies.
...
A third explanation involves the sizable increase in long-term unemployment over the past few years. Workers out of jobs for extended periods may experience higher rates of unemployment owing to deterioration of skills and weakening labor market attachment.
...
Mounting evidence suggests that structural factors may have increased the “normal” rate of unemployment to about 6.7%. Much of this increase is likely to be temporary. In particular, the extension of unemployment benefits probably accounts for about half of the increase. But, even with a 6.7% natural rate, current and forecasted levels of unemployment imply that significant labor market slack will persist for several years. It is important to stress that each of the methods used to estimate the natural rate is subject to considerable error, especially given the limited experience of very high unemployment in the post-World War II U.S. economy.

The key is most of the increase in the unemployment rate is cyclical.

by Calculated Risk on 2/14/2011 10:00:00 AM

From the NY Fed: New York Fed also releases Q4 2010 Quarterly Household Debt and Credit Report, which reveals lower debt levels in region

Here is the Q4 report: Quarterly Report on Household Debt and Credit. Here are a couple of graphs:

Click on graph for larger image in new window.

The first graph shows aggregate consumer debt is still declining. Debt is now down over $1 trillion from the peak in 2008. Note: This is a combination of writing down debt and consumers paying down debt.

From the NY Fed:

Aggregate consumer debt continued to decline in the fourth quarter, continuing its trend of the previous two years. As of December 31, 2010, total consumer indebtedness was $11.4 trillion, a reduction of $1.08 trillion (8.6%) from its peak level at the close of 2008Q3, and $155 billion (1.3%) below its September 30, 2010 level. Household mortgage indebtedness has declined 9.1%, and home equity lines of credit (HELOCs) have fallen 6.5% since their respective peaks in 2008Q3 and 2009Q1. For the first time since 2008Q4, consumer indebtedness excluding mortgage and HELOC balances did not fall, but rose slightly ($7.3 billion or 0.3%) in the quarter.

The second graph shows the percent of debt in delinquency. What stands out is that the percent of delinquent debt is declining, but the percent of severely derogatory debt is remaining the same.

From the NY Fed:

Total household delinquency rates declined for the fourth consecutive quarter in 2010Q4. As of December 31, 10.8% of outstanding debt was in some stage of delinquency, compared to 11.1% on September 30, and 12.0% a year ago. Currently about $1.2 trillion of consumer debt is delinquent and $902 billion is seriously delinquent (at least 90 days late or “severely derogatory”). Compared to a year ago, delinquent balances are down 13.9%, and serious delinquencies have fallen 12.1%.

Still a long ways to go. There are a number of credit graphs at the NY Fed site.

by Calculated Risk on 2/14/2011 09:03:00 AM

From David Leonhardt at the NY Times Economix: Seattle’s Foreseeable Housing Bust. This is a follow-up to David Streitfeld article: Housing Crash Is Hitting Cities Thought to Be Stable

Leonhardt writes:

When we last listed the price-to-rent ratios in major metropolitan areas, Seattle’s was near the top of the list. Only in the Bay Area of Northern California and in Honolulu were house prices higher, relative to rents.

A sky-high price-to-rent ratio is perhaps the single best sign that an area is in a housing bubble. Real-estate agents, homeowners and even home buyers can tell a lot of stories to justify the bubble — stories about central cities or good school districts being immune to bubbles — but eventually people will realize that renting is a much better deal and more will do so.

There is no such thing as a market price that cannot fall.

I agree completely with that last sentence - no place is immune.

Price-to-rent is a great indicator, but some areas have high price-to-rent ratios because of the mix of housing units (rentals units are not perfect substitutes for buying). I prefer tracking price-to-rent over time for a particular city (as opposed to comparing cities), but a high price-to-rent ratio is definitely a warning flag.

by Calculated Risk on 2/13/2011 07:13:00 PM

From David Streitfeld at the NY Times: Housing Crash Is Hitting Cities Thought to Be Stable. A few excerpts:

In the last year, Seattle homeowners experienced a bigger price decline than in Las Vegas. Minneapolis dropped more than Miami, and Atlanta fared worse than Phoenix.

The bubble markets, where builders, buyers and banks ran wild, began falling first, economists say, so they are close to the end of the cycle and in some cases on their way back up. Nearly everyone else still has another season of pain.

The amount of pain will depend on the local level of inventory - including the "shadow inventory".

And the following excerpt hits on two topics we've discussed ad nauseam over the last 5 year: 1) sellers chasing the market down, and 2) accidental landlords waiting for a "better market" to sell (part of the shadow inventory):

Megan and Ryan Dortch tried to sell their one-bedroom Eastlake condo for $325,000 two years ago. They rejected an offer of $295,000 as inadequate. A year later, they relisted it for $289,000, then $279,000, which was less than they paid. ... They are now renting out their old apartment at a small loss every month ...

[W]henever the market finally does pick up, all those accidental landlords will want to unload, putting another burden on the market. “So many sellers are waiting in the shadows,” said Redfin’s chief executive, Glenn Kelman. “The inventory is going to expand and expand and expand. I don’t see any basis for significant price increases.”

Watching existing home inventory will be very important this year. Areas with high levels of inventory will probably see more price declines. It is hard to tell about inventory right now - usually inventory is pretty low in December and January, and then increases sharply from February into the early summer - so we will know more about inventory soon.

Earlier:
• The busy economic schedule for the coming week.
• Summary for Week ending February 12th

by Calculated Risk on 2/13/2011 02:30:00 PM

Earlier:
• The busy economic schedule for the coming week.
• Summary for Week ending February 12th

The minutes for the January FOMC meeting will be released on Wednesday. I'll be looking for any discussion of disagreement on QE2, any discussion of "tapering" off the QE2 purchases (something I think is likely), and also at the updated economic forecasts for GDP, unemployment and inflation.

I expect the FOMC to have revised up their GDP forecast for 2011, revise down their forecast for the Q4 2011 unemployment rate, and perhaps a small upward revision to their inflation forecast. The following table shows the November forecasts:

November Economic projections of Federal Reserve Governors and Reserve Bank presidents
	2010 Actual	2011	2012	2013
Change in Real GDP	2.8%1	3.0 to 3.6%	3.6 to 4.5%	3.5 to 4.6%
June projections	...	3.5% to 4.2%	3.5% to 4.5%	n.a.
Unemployment Rate	9.6%2	8.9 to 9.1%	7.7 to 8.2%	6.9 to 7.4%
June projections	...	8.3% to 8.7%	7.1% to 7.5%	n.a.
PCE Inflation	1.2%1	1.1 to 1.7%	1.1 to 1.8%	1.2 to 2.0%
June projections	...	1.1% to 1.6%	1.0% to 1.7%	n.a.
Core PCE Inflation	0.8%1	0.9 to 1.6%	1.0 to 1.6%	1.1 to 2.0%
June projections	...	0.9 to 1.3%	1.0 to 1.5%	n.a.

FOMC definitions:
¹ Projections of change in real GDP and in inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.
² Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

The table also includes the actual numbers for 2010. We can compare this to the January 2010 FOMC forecasts (not included in table).

• Real GDP: Actual was 2.8%, and the January 2010 forecast range was for 2.8% to 3.5% - so this was at the low end of the range (thanks to a fairly strong Q4).

• Unemployment: Actual in Q4 was 9.6%, and the January 2010 forecast range was for 9.5% to 9.7% - so this was right on.

• PCE Inflation: Actual was 1.2%, and the January 2010 forecast range was for 1.4 to 1.7% - so this forecast was too high.

• Core PCE Inflation: Actual was 0.8%, and the January 2010 forecast range was for 1.1 to 1.7% - so this forecast was also too high.

Overall the FOMC forecasts from January 2010 were pretty close.