by Calculated Risk on 6/16/2005 06:04:00 PM

Last month I started building a simple model to help forecast the monthly trade deficit. A review of the partial forecast showed some promise.

So here we go for May starting with oil. Using the same model (described here) the ERPP trade numbers for May are forecast to be:

IMPORTS: Energy Related Petroleum Products.
Barrels Crude: 337.9 million barrels.
Barrels Other ERPP: 85.0 million barrels.
DOE Price per barrel (Crude): $43.90
DOE Price per barrel (Other): $50.48

Preliminary - Total NSA ERRP Imports: $19.1 Billion

NOTE: The BLS reports petroleum import prices fell 6.5% in May from April. The above model used DOE prices. After reviewing the prior prices and comparing the DOE and BLS approaches, the DOE has been slightly more accurate. However, I think it might be even better to try to split the difference. The BLS approach would predict P(crude) = $41.85. DOE P(crude) = $43.90. So the modified forecast for Imports NSA is:

BLS/DOE Price per barrel (Crude): $42.88
BLS/DOE Price per barrel (Other): $49.31
Forecast: Total NSA ERRP Imports: $18.7 Billion

Total ERPP FORECAST:
Imports SA: $17.4 Billion (seasonal factor estimated at 0.93 for May)
Exports SA: $1.9 Billion
Balance ERPP: $15.5 Billion

by Calculated Risk on 6/16/2005 02:57:00 AM

UPDATE: I've been notified that "Housing Links" will not be continued. He recommends these two sites:

Patrick's Housing Links

RGEMonitor Housing Market Bubble?


I've been directed to a new housing resource: Housing Links. This site is a running compendium of stories, commentary and analysis on all aspects of the housing market. Here are some recent examples:

UPDATE2: In the comments, Stephane Grenier directs us to his interesting article "Is There Really a Real Estate Bubble?". He references me!

UPDATE: Two new stories in The Economist about the perils of the housing boom / pending bust: In come the waves (Great Graphs) and After the fall.

The Trillion-Dollar Bet - The NY Times looks at the widespread use of Adjustable Rate Mortgages:

This year, only about $80 billion, or 1 percent, of mortgage debt will switch to an adjustable rate based largely on prevailing interest rates, according to an analysis by Deutsche Bank in New York. Next year, some $300 billion of mortgage debt will be similarly adjusted.

But in 2007, the portion will soar, with $1 trillion of the nation's mortgage debt - or about 12 percent of it - switching to adjustable payments, according to the analysis.

The Mortgage Trap - BusinessWeek "Lenders are cranking out an ever-growing array of financing schemes and lowering standards to keep the housing boom going":

All those innovative mortgage products are a sure sign that lenders are doing everything they can to keep the housing boom going and to capitalize on yet another round of falling interest rates that no one expected. There are plenty of other signs of frenzy as well. Home appraisers complain that mortgage originators are demanding the optimistic appraisals needed to close on loans. "They started warning me to 'be a team player' and to 'hit the number' they needed to seal the deal," says Robert Burnitt, an appraiser in Midlothian, Tex.

And some positive stories:

Purchase Activity at Record High; Refinance Volume Jumps In Latest Application Survey - The Mortgage Bankers Association reports their "seasonally-adjusted Purchase Index increased by 10.4 percent to 529.3, a record high":

"This week there was a combination of record-setting purchase activity as well as a substantial pickup in refinance applications, with the refinance index at its highest level since April 2004," said Michael Fratantoni, senior director of single-family research and economics.

Builder Confidence Hits New High For 2005 - According to a survey by the National Association of Home Builders and Wells Fargo, "single-family home builders are more confident this June than they’ve been all year".

The most optimistic builders are in the West, where an HMI reading of 88 far outpaces that of builders in all other regions. Moreover, the 88 reading reflected a solid four-point gain from last month. Southern builders were also a bit more confident this time around, posting a one-point gain in their regional confidence gauge to 76 in June. Builders in the Northeast maintained a healthy, 70-point reading on the confidence scale, while builders in the Midwest registered a two-point confidence boost, to 52.

Check it out. Enjoy!

by Calculated Risk on 6/15/2005 06:35:00 PM

In a well coordinated attack, the Empire today unleashed a barrage of statistics and comments from in-house economists to poke holes in the silly notion of a "housing bubble". First up was Carl Steidtmann, chief economist of Deloitte Research:

"There has been much discussion recently about a housing bubble, but the truth is that home price appreciation has slowed considerably in the past three months. The time to talk about a bubble was last December," says Carl Steidtmann, chief economist of Deloitte Research and author of the monthly index.

"Consumer spending growth in the summer months will be largely dependent on the direction of home prices and job growth," continued Steidtmann. "As job growth continues to accelerate, we should see a corresponding pickup in real wage growth."

By this logic you should have worried about the Nasdaq bubble in the late '90s, but in March of 2000 everything was fine. Not the best investment strategy. And "job growth continues to accelerate"? The 3 month moving average of payroll growth (Seasonally adjusted from the BLS) shows job growth is at best flat after peaking in the Spring of 2004.

But that was just the beginning. The ubiquitous David Lereah responded to Fed Chairman Greenspan's recent remarks:

"Yes, there is froth in the markets, but froth can be healthy," said David Lereah, chief economist for the National Association of Realtors. "It's not a bad word."

Froth for a foamy latte or cappuccino might be good; froth in the housing market, especially when you are a new home buyer, is decidedly not good.

Economists representing members of the Washington, D.C.-based Homeownership Alliance, which includes a coalition of about 15 housing-related organizations, fired another salvo: See Housing boom won't let up.

Frank E. Nothaft, chief economist for mortgage industry giant Freddie Mac said "there are signs of 'suds' around the country" (good in your beer) but he is not worried:

"I think we'll see some gradual moderation in house-price valuation over the next couple of years," with about a one-in-three chance of a region in the country seeing stagnant or declining home values over the next couple of years, linked to regional economic weakness.

Paul Merski, chief economist for the Independent Community Bankers of America added:

"Bankers are being very diligent now about their lending practices," and the FDIC is "closely monitoring bankers' lending practices right now due to the long run in the housing boom."

"(The notion) of exotic products out there that are extremely dangerous is well overblown."

Since bankers are being very "diligent", I wonder why the Office of the Comptroller of the Currency, the FED, the FDIC and other agencies took the highly unusual step of issuing new credit risk management guidance for home equity lending in May.

Merski also addressed the issue of home-price "froth." He said, "Economists have a saying that unsustainable trends will not be sustained," and that may hold true for some markets that have rapid, double-digit price appreciation. He forecast a "reasonable cooling off in certain markets in the prices but certainly no crashes in these markets because of the strong demand." Even so, the overall housing market should be strong for the rest of the year and going into 2006, he added.

No crashes. What a relief!

And finally, David W. Berson, chief economist for Fannie Mae added:

"There are no signs of any slowing in the housing market at all. You need a pretty good decline for the second half of the year not to set a record this year."

Those final comments are true; the housing market is still HOT.

For some reason I'm having the same reaction to all of these industry economists' comments as I do when the oil industry scientists assure me that global warming is not a problem. Maybe I need some suds!

by Calculated Risk on 6/15/2005 03:22:00 PM

The Mortgage Bankers Association (MBA) released their weekly report today showing record purchase activity.

The seasonally-adjusted Purchase Index increased by 10.4 percent to 529.3, a record high, from 479.3 the previous week whereas the seasonally-adjusted Refinance Index increased by 25.6 percent to 2967.4 from 2362.1 one week earlier.

"This week there was a combination of record-setting purchase activity as well as a substantial pickup in refinance applications, with the refinance index at its highest level since April 2004," said Michael Fratantoni, senior director of single-family research and economics.

The use of ARMs decreased:

The adjustable-rate mortgage (ARM) share of activity decreased to 30.9 percent of total applications from 31.7 percent the previous week.

Also, the National Association of Home Builders and Wells Fargo reported that home builders were optimistic:

"single-family home builders are more confident this June than they’ve been all year".

The most optimistic builders are in the West, where an HMI reading of 88 far outpaces that of builders in all other regions. Moreover, the 88 reading reflected a solid four-point gain from last month. Southern builders were also a bit more confident this time around, posting a one-point gain in their regional confidence gauge to 76 in June. Builders in the Northeast maintained a healthy, 70-point reading on the confidence scale, while builders in the Midwest registered a two-point confidence boost, to 52.

Meanwhile, DataQuick reported:

The sales pace of homes in Southern California eased back a notch in May as prices continued to climb to record levels, the result of steady demand and affordable mortgage financing, a real estate information service reported.

Although appreciation has slowed in some of the hot markets like San Diego, overall the housing market is still HOT!

by Calculated Risk on 6/15/2005 02:02:00 AM

Import traffic at the Port of Long Beach rose 6% over April, almost to the highs of last fall's heavy shipping season. The Port of Los Angeles will report in the next couple of days.

For Long Beach, the number of loaded inbound containers for MAY April was 288 thousand, up 6% from April and up 19% from May 2004. Outbound traffic was off 1% at 106 thousand containers, just below April's record.

And in a related story, the Port of Long Beach hosted the "Peak Season Forecast Conference" on Tuesday.

At the Pulse of the Ports conference, the experts forecast 2005 cargo gains of 10 to 15 percent. In preparation for this year's increase, they said they have added workers and equipment, and cargo has been moving smoothly.

"We may see two-to-three-day delays," during the peak season, said Frank Baragona of CMA CGM.

"We had one-week delays last year and that's not going to happen this year," said Doug Tilden of Marine Terminals.

This shipping data probably indicates near record imports from China. My very preliminary guess is that US imports from China will be over $19 Billion NSA for May compared to $18.12B for April 2005.

by Calculated Risk on 6/14/2005 06:40:00 PM

Dr. Thoma (Economist's View) and Barry Ritholtz (The Big Picture) discuss the Fed's path in the WSJ free feature "Where Will Rates Go From Here?"

Check it out!

by Calculated Risk on 6/14/2005 11:51:00 AM

Federal Reserve Governor Susan Schmidt Bies spoke on "Current Regulatory Issues" today in South Carolina. She touched on the housing market and credit risk issues in her speech to the North Carolina Bankers Association.

In particular, in the commercial and residential real estate sectors, we worry that borrowers could become increasingly speculative, buying beyond their means and hoping for asset price appreciation--whether they are buying for their own use or strictly for the sake of investment. We worry that competitive pressures could drive banks to lower their underwriting standards, implicitly encouraging such speculation. And we worry that, in the inevitable downturn, credit quality could deteriorate to the extent that some banks could experience significant losses.

The residential real estate sector has been experiencing a remarkable bull market, with home prices rising 11.2 percent last year--the fastest rate in more than a quarter-century. Along with the high home prices, we see indications that underwriting standards are beginning to weaken. For example, "affordability products"--such as interest-only loans, negative amortizations, and second mortgages with high loan-to-value ratios--are becoming more popular; subprime lending is growing faster than prime lending; adjustable-rate mortgages, or ARMs, have grown substantially and now account for more than a third of all mortgage originations, the highest level since 1994. Industry experts are increasingly concerned about the quality of collateral valuations relied upon in home equity lending and residential refinancing activities. More homes are being purchased not as primary dwellings, but as vacation homes or pure investments, in which case anticipated price appreciation may be a large factor influencing purchase decisions. According to the National Association of Realtors, purchases of second homes and purchases of residential real estate for investment purposes together accounted for almost 40 percent of all home purchases last year.

Given the vast growth in residential housing markets and the apparent slippage in underwriting standards in certain sectors, it is entirely appropriate for banking supervisors to seek to ensure that banks are employing proper risk-management practices. Last month, the federal banking agencies released guidance on credit-risk management for financial institutions' home equity lines of credit (HELOCs). The recent growth in HELOCs has been remarkable; at the end of 2004, outstanding drawn HELOCs at all insured commercial banks totaled $398 billion, a 40 percent increase over 2003. Meanwhile, the agencies have observed some easing of underwriting standards, with lenders competing to attract home equity lending business. Lenders are sometimes offering interest-only loans and are sometimes requiring very small down payments and limited documentation of a borrower's assets and income. They are also relying more on automated-valuation models and entering into more transactions with loan brokers and other third parties. Given this easing of standards, there is concern that portions of banks' home equity loan portfolios may be vulnerable to a rise in interest rates and a decline in home values. In other words, there is concern that not all banks fully recognize the embedded risks in some of their portfolios.

Also, Gavin sent me this commentary from Australia: Beware the bang if the property bubble bursts. It is possible that both the UK and Australia are leading indicators for the US housing market.

by Calculated Risk on 6/14/2005 01:08:00 AM

From the Telegraph: A Royal Institute of Chartered Surveyors report on Tuesday sparks fears of a housing crash.

Almost half the country's chartered surveyors reported that house prices were falling in May, the highest total since the recession of 1992.

The Royal Institute of Chartered Surveyors will say today that the number of its members reporting price falls has grown sharply - from 37pc in March to 40pc in April to 49pc last month.

The news will spark fears of a house price crash. In the early 1990s, RICS was the first housing market surveyor to predict the market's collapse.

In the latest report, the institute says new buyer inquiries had slipped and the number of completed sales had fallen by 29pc since last May.

The UK bears watching as a possible early indicator for the US market. The UK started raising rates about 8 months before the US: See my Angry Bear post.

by Calculated Risk on 6/13/2005 07:17:00 PM

Harvard's Joint Center for Housing Studies released a new report: "State of the Nation's Housing 2005". From a story in the Union Tribune:

"Desperation is driving people," said Nicolas Retsinas, director of Harvard's Joint Center for Housing Studies. "They think, 'If I don't get it now, I will never get it.' People are not looking at what they are going to have to pay over the long term. They are asking what is the lowest possible payment I have to make over the next 12 months so I can get in."

In high-cost markets such as San Diego County, most purchases are made with adjustable-interest-rate loans, he noted. The greater buying power such "creative" loans offer is offset by the increased risk of default.

In the priciest metropolitan real estate markets, assuming greater risk is becoming the norm, Retsinas said.

"Although interest-only and adjustable loans can initially save a typical home buyer hundreds of dollars in monthly payments, these loans also leave borrowers vulnerable to sharply higher payments when interest rates adjust or principal payments start to become due."

Click on chart for larger image.

One of the startling statistics is that homebuyers' costs have soared in recent years, despite the record low interest rates and use of Interest Only ARMs.

From a SmartMoney.com review: Get Ready for a Housing Slowdown:

"We want to be sure people are aware that, notwithstanding these past few years, buying a house is not a risk-less investment...this is clearly near the apex of the cycle," says Nicolas Retsinas, director of Harvard's Joint Center for Housing Studies.

To be clear, Retsinas isn't predicting a nationwide housing crisis. Indeed, 77 of the 110 largest metro areas show no affordability troubles and would likely be untouched if the housing bubble popped in the hottest markets, says Retsinas.

And a less optimistic view:

Mark Weisbrot, co-director of the Center for Economic and Policy Research, a Washington, D.C.-based think tank, says there's clearly a bubble in the housing market, and that when it bursts it will likely cause a national recession worse than the one following the stock market bubble. In 2001, the strong housing market tempered the downturn. This time, he says, it's difficult to imagine anything that could ease the pain.

Even those markets that didn't experience the huge run-up could be affected. Weisbrot says home prices in those areas won't fall drastically, but the local economies will suffer, as was the case when the stock market popped. And this will eventually dampen demand for housing.

As for first-time home buyers, Weisbrot sees no reason why they should jump in now — particularly with rentals so affordable by comparison. The risks, he says, are so high that he can't understand why anyone would take the gamble.

"Buying a home now in any of the bubble areas is very much like what it was like buying into the Nasdaq," he says. "You could get lucky and it could keep growing [for a little longer], but you are also taking a big risk."

by Calculated Risk on 6/13/2005 12:04:00 AM

In today's post on Angry Bear, I looked at the impact of the strong Euro on the US trade deficit with the European Union: "The Euro and the Trade Deficit".

Also, Greg Ip has an excellent article on housing in the WSJ today: "What Happens If Real Estate Goes Bust". A couple of excerpts:

If housing prices do fall, what would it mean for the economy? "A housing bust would be worse [than the stock bust]," says Kenneth Rogoff, an economics professor at Harvard University and former chief economist at the International Monetary Fund.

And these interesting statistics:

Homes are collateral for about $7.7 trillion in mortgage and home-equity debt, whereas total margin debt in investors' stock brokerage accounts is only $194 billion. For the same reason, a decline in housing prices would put more bank loans at risk; mortgages make up 40% of the assets of U.S. commercial banks, mortgage-backed securities another 16% and stocks less than 1%.

UPDATE: Oops, I forgot the "more" in the title. That can wait for another post!

Best to all!