by Calculated Risk on 2/23/2011 03:13:00 PM

Back in 2009, when the house price bottom callers were out in force, I pointed out that real house prices usually bottom after the unemployment rate peaks - and sometimes several years after the peak (like in the '90s).

Below is a comparison of real house prices and the unemployment rate using the Corelogic house price index (starts in 1976) and the Case-Shiller Composite 10 index (starts in 1987). Both indexes are adjusted by CPI less shelter.

Click on image for larger graph in graph gallery.

The two previous national declines in real house prices are evident on the graph (early '80s and early '90s). The dashed green lines are drawn at the peak of the unemployment rate following the peak in house prices.

In the early '80s, real house prices declined until the unemployment rate peaked, and then increased sluggishly for a few years. Following the late 1980s housing bubble, real house prices declined for several years after the unemployment rate peaked.

Although there are periods when there is no relationship between the unemployment rate and house prices - like during the bursting of the stock market bubble - this graph suggests that house prices do not bottom in real terms until the unemployment rate has peaked - and probably not until a few years later (the recent housing bubble dwarfed the previous housing bubbles, and the bust will probably take some time).

Clearly this analysis was correct since real house prices are now at post-bubble lows! I'd expect real prices (inflation adjusted) to fall for another 2 or 3 years, even if nominal prices bottom in 2011.

by Calculated Risk on 2/23/2011 02:02:00 PM

From Kansas City Fed President Thomas Hoenig: Financial Reform: Post Crisis?

Fifteen years ago, I gave a speech entitled “Rethinking Financial Regulation,” which summarized the major threats facing our financial system. My suggestion then was to take steps to reduce interdependencies among large institutions and to limit them to relatively safe activities if they chose to provide essential banking and payments services and be protected by the federal safety net. I also argued that safety net protection and public assistance should not be extended to large organizations extensively engaged in nontraditional and high-risk activities. A final point of those remarks was that central banks must pursue policies that preserve financial stability. I am going to repeat those suggestions today, and as often as the opportunity allows. History is on my side.

Today, I am convinced that the existence of too big to fail financial institutions poses the greatest risk to the U.S. economy. The incentives for risk-taking have not changed post-crisis and the regulatory factors that helped create the crisis remain in place. We must make the largest institutions more manageable, more competitive, and more accountable. We must break up the largest banks, and could do so by expanding the Volcker Rule and significantly narrowing the scope of institutions that are now more powerful and more of a threat to our capitalistic system than prior to the crisis.

I don't always agree with Hoenig, but I think he is correct about the large banks.

Earlier posts on existing home sales and home prices:
• January Existing Home Sales: 5.36 million SAAR, 7.6 months of supply
• Existing Home Inventory increases 3.1% Year over Year
• Real House Prices fall to 2000 Levels, Update on NAR Overstating Sales
• Case-Shiller: National Home Prices Are Close to the 2009Q1 Trough
• House Prices: Price-to-rent, Price-to-median Household Income

by Calculated Risk on 2/23/2011 11:30:00 AM

Earlier the NAR released the existing home sales data for January; here are a couple more graphs ...

The first graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Inventory is not seasonally adjusted, so it really helps to look at the YoY change.

IMPORTANT: On a seasonal basis, inventory usually bottoms in December and January, and then will start increasing again in February and March. Since the NAR "months-of-supply" metric uses Seasonally Adjusted (SA) sales, but Not Seasonally Adjusted (NSA) inventory, this seasonal decline in inventory leads to a lower "months-of-supply" in December and January.

The key is to recognize the seasonal pattern, and watch the YoY change in inventory.

Click on graph for larger image in graph gallery.

Although inventory decreased from December to January, inventory increased 3.1% YoY in January. This is the sixth consecutive month of year-over-year increases in inventory, although the increase in January was lower than the previous months. But any increase is bad news with the high level of inventory.

Inventory should increase in February and March, and this is something to watch closely over the next few months.

By request - the second graph shows existing home sales Not Seasonally Adjusted (NSA).

The red column in January is for 2011.

Sales NSA were about the same level as the last three years. January is usually the weakest month of the year for existing home sales (followed by February). The real key is what happens in the spring and summer.

The bottom line: Sales increased slightly in January (using the old method to estimate sales), apparently due to an increase in investor purchases of distressed properties at the low end. The NAR noted "Investors accounted for 23 percent of purchases in January, up from 20 percent in December and 17 percent in January 2010 ... Distressed homes edged up to a 37 percent market share in January from 36 percent in December"

Inventory remains very high, and the year-over-year increase in inventory is very concerning.

by Calculated Risk on 2/23/2011 10:00:00 AM

The NAR reports: January Existing-Home Sales

Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, increased 2.7 percent to a seasonally adjusted annual rate of 5.36 million in January from a downwardly revised 5.22 million in December, and are 5.3 percent above the 5.09 million level in January 2010.
...
Total housing inventory at the end of January fell 5.1 percent to 3.38 million existing homes available for sale, which represents a 7.6-month supply at the current sales pace, down from an 8.2-month supply in December. The inventory supply is at the lowest level since December 2009 when there was a 7.3-month supply.

Click on graph for larger image in new window.

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

Sales in January 2010 (5.36 million SAAR) were 2.7% higher than last month, and were 5.3% higher than January 2010.

The second graph shows nationwide inventory for existing homes.

According to the NAR, inventory decreased to 3.38 million in January from 3.56 million in December.

Inventory is not seasonally adjusted and there is a clear seasonal pattern with inventory peaking in the summer and declining in the fall - and then really declining during the holidays. So this decline was expected. Inventory should start to increase again in February.

The last graph shows the 'months of supply' metric.

Months of supply decreased to 7.6 months in January from 8.2 months in December. The months of supply will probably increase over the next few months as sales slow a little, and inventory increases. This is still higher than normal.

These sales numbers were above the consensus of 5.2 million SAAR, and are above what I expected (Lawler's forecast was 5.17 million). I'll have more later.

Special Note: Back in January, I noted that it appeared the NAR had overestimated sales by 5% or so in 2007, and that the errors had increased since then (perhaps 10% or 15% or more in 2009 and 2010). I reported in January that the NAR was working on benchmarking existing home sales for earlier years with other industry data, and I expected "this effort will lead to significant downward revisions to previously reported sales". The numbers reported today were estimated using the old method and will probably be revised down significantly, but they are still useful on a month-to-month basis.

by Calculated Risk on 2/23/2011 07:50:00 AM

The MBA reports: Mortgage Applications Increase in Latest MBA Weekly Survey

The Refinance Index increased 17.8 percent from the previous week. The seasonally adjusted Purchase Index increased 5.1 percent from one week earlier.
...
“Ongoing turmoil in the Middle East brought interest rates lower last week. Borrowers took advantage of these lower rates, bringing application activity back near levels from two weeks ago, following sharp declines last week,” said Michael Fratantoni, MBA’s Vice President of Research and Economics.
...
The average contract interest rate for 30-year fixed-rate mortgages decreased to 5.00 percent from 5.12 percent, with points increasing to 0.97 from 0.85 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.

Click on graph for larger image in graph gallery.

This graph shows the MBA Purchase Index and four week moving average since 1990.

Even with the slight increase in activity last week, the four-week moving average of the purchase index is still at 1997 levels - suggesting weak home sales through the first few months of 2011.

by Calculated Risk on 2/23/2011 12:01:00 AM

Note: This index is a leading indicator for new Commercial Real Estate (CRE) investment.

From the American Institute of Architects: Billings at Architecture Firms Hold Steady in January

Following a healthy upturn in the fourth quarter, design billings at U.S. architecture firms remained flat in January. The national reading for the AIA’s Architecture Billings Index (ABI) was 50.0, meaning that on average billings in January exactly matched December levels.

Click on graph for larger image in graph gallery.

This graph shows the Architecture Billings Index since 1996. The index showed billings were at the same level in January as in December (at 50).

Note: Nonresidential construction includes commercial and industrial facilities like hotels and office buildings, as well as schools, hospitals and other institutions.

According to the AIA, there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction. So this indicator suggests the drag from CRE investment will end mid-year 2011 or so.