by Calculated Risk on 7/30/2010 02:04:00 PM

In the previous post I confused annual rates and quarterly rates. Sorry.

Real PCE is 0.85% below the pre-recession peak, so PCE would have to grow at 3.4% in Q3 for the economy to be back to the pre-recession level.

Real GDP is 1.1% below the pre-recession peak, so GDP would have to grow at 4.3% in Q3 to be back to the pre-recession level.

With a 2nd half slowdown, I don't expect to reach those levels until the end of the year or in 2011.

Note: the graphs and quarterly data are all correct - just the annual comment that I added was in error (ht Tehan)

by Calculated Risk on 7/30/2010 11:32:00 AM

Error Correction: Sorry - I confused annual rates and quarterly rates.

Real GDP is 1.1% below the pre-recession peak, so if GDP would have to grow at 4.4% in Q3 the economy to be back to the pre-recession level.

Real PCE is 0.85% below the pre-recession peak, so PCE would have to grow at 3.4% in Q3 to be back to the pre-recession level.
________________________________________________________

These two graphs show the revisions for real GDP and PCE.

Click on graph for larger image in new window.

The recession was clearly worse than originally estimated (we suspected this already using Gross Domestic Income).

In fact real GDP in Q2 2010 was lower than originally reported for Q1 2010. And annualized real GDP is still 1.1% below the pre-recession peak. This means that real GDP would have to grow at a 4.3% rate over the next quarter to reach the recession peak.

This shows that St Louis Fed President Bullard was too optimistic in a speech last month. From Bullard in June: The Global Recovery and Monetary Policy

"As of the first quarter of 2010, real GDP stands just shy of the 2008 second quarter level, so that growth of about 1.25 percent would be sufficient to allow real GDP to surpass the previous peak. At that point, the U.S. economy would be fully "recovered" from the very sharp downturn of late 2008 and early 2009. To be clear, the 1.25 percent is a quarterly number, and would be 5.0 percent at an annual rate. Although I think that 5.0 percent at an annual rate is too much to expect for current quarter real GDP growth, it seems like a reasonable possibility over the next two quarters combined. Given these conditions, I expect the U.S. recovery in GDP to be complete in the third quarter of this year."

I disagreed with him, and pointed out that GDI suggested downward revisions.

Real PCE was revised down even more.

Annualized real PCE is now 0.85% below the pre-recession peak, and would have to grow 3.4% over the next quarter to reach the previous peak.

Cleveland Fed President Sandra Pianalto had it right in February: When the Small Stuff Is Anything But Small

[I]t may take years just to get back to the level of output we enjoyed in 2007, just before the economic crisis began.

If things go well, the economy will be back to pre-recession levels later this year or in 2011. No wonder there is so little investment. And no wonder there is so little hiring!

by Calculated Risk on 7/30/2010 09:45:00 AM

From the Institute for Supply Management – Chicago:

The Chicago Purchasing Managers reported the CHICAGO BUSINESS BAROMETER rebounded, marking a tenth month of growth.

The overall index increased to 62.3 from 59.1. Note: any number above 50 shows expansion.

Employment improved to 56.6 from 54.2 in June.

The new orders index increased to 64.6 from 59.1.

Overall this was a positive report. The national ISM manufacturing index will be released on Monday.

by Calculated Risk on 7/30/2010 08:30:00 AM

From the BEA:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.4 percent in the second quarter of 2010, (that is, from the first quarter to the second quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 3.7 percent.

A few key numbers:

"Real personal consumption expenditures increased 1.6 percent in the second quarter, compared with an increase of 1.9 percent in the first."

PCE is slowing.

Investment: Nonresidential structures increased 5.2 percent, in contrast to a decrease of 17.8 percent. Equipment and software increased 21.9 percent, compared with an increase of 20.4 percent. Real residential fixed investment increased 27.9 percent, in contrast to a decrease of 12.3 percent.

Residential investment was boosted by the tax credit and will decline in Q3.

"The change in real private inventories added 1.05 percentage points to the second-quarter changein real GDP after adding 2.64 percentage points to the first-quarter change."

That is probably the end of the inventory adjustment.

And here is a summary of the revisions:

Quarter	GDP	GDP Revised	Change
2007-I	1.2%	0.9%	-0.3%
2007-II	3.2%	3.2%	0.0%
2007-III	3.6%	2.3%	-1.3%
2007-IV	2.1%	2.9%	0.8%
2008-I	-0.7%	-0.7%	0.0%
2008-II	1.5%	0.6%	-0.9%
2008-III	-2.7%	-4.0%	-1.3%
2008-IV	-5.4%	-6.8%	-1.4%
2009-I	-6.4%	-4.9%	1.5%
2009-II	-0.7%	-0.7%	0.0%
2009-III	2.2%	1.6%	-0.6%
2009-IV	5.6%	5.0%	-0.6%
2010-I	2.7%	3.7%	1.0%
2010-II		2.4%

The recession was worse in 2008 than originally estimated.

Q1 2010 was revised up, but Q3 and Q4 2009 were revised down. So the recovery is a little weaker than originally estimated.

I'll have some graphs soon.

by Calculated Risk on 7/29/2010 11:14:00 PM

I don't follow house prices in Australia ... or Canada ... but I'm asked all the time (my answer is always: I don't know!)

But for those interested, here is an article from the Business Spectator: House prices fall 0.7% in June, flat in quarter (ht Mr Slippery)

After 17 consecutive months of solid growth, dwelling values across Australia’s capital cities recorded their first monthly decline of 0.7 per cent in June, according to the RP Data-Rismark Hedonic Home Value Index.

This was the largest monthly fall in home values since April 2008. "The June outcome follows on from a clear trend in the decline in monthly seasonally-adjusted growth rates in Australia’s capital cities," RP Data said.
...
"This represents a striking deceleration in the quarterly rate of increase in home values," RP Data said

by Calculated Risk on 7/29/2010 07:56:00 PM

From the American Trucking Association: ATA Truck Tonnage Index Fell 1.4 Percent in June

The American Trucking Associations’ advance seasonally adjusted (SA) For-Hire Truck Tonnage Index decreased 1.4 percent in June, although May’s reduction was revised from 0.6 percent to just 0.1 percent. May and June marked the first back-to-back contractions since March and April 2009. The latest reduction lowered the SA index from 110.1 (2000=100) in May to 108.5 in June.
...
Compared with June 2009, SA tonnage climbed 7.6 percent, which was just below May’s 7.7 percent increase and the seventh consecutive year-over-year gain. Year-to-date, tonnage is up 6.6 percent compared with the same period in 2009.

ATA Chief Economist Bob Costello said that the two sequential decreases reflect an economy that is slowing. Furthermore, growth in truck tonnage is likely to moderate in the months ahead as the economy decelerates and year-over-year comparisons become more difficult. Nevertheless, Costello believes that tonnage doesn’t have to grow very quickly at this point since industry capacity has declined so much. “Due to supply tightness in the market, any tonnage growth feels significantly better for fleets than one might expect.”

This graph from the ATA shows the Truck Tonnage Index since Jan 2006 (no larger image).

This index is at about the same level as in December 2009.

Rail traffic also weakened in June.

by Calculated Risk on 7/29/2010 04:40:00 PM

CR NOTE: There have been a couple of "stimulus" proposals making the rounds over the last couple days from major analysts. Housing economist Tom Lawler takes a look at one proposal from Morgan Stanley ... the following lengthy discussion is from Lawler:

“Slam-Dunk” Stimulus? MS = Missing Something!!!!

Early this week Morgan Stanley put out a piece entitled “Slam Dunk Stimulus,” in which MS analysts argue that changing mortgage refinance “requirements” (for GSE or government mortgages) would “inject a significant amount of stimulus into the US household sector,” have “zero impact on the budget deficit,” and would “not require an exit strategy” and would “not distort markets.”

Here is the gist of their argument:

“If it were possible to inject a significant amount of stimulus into the household sector of the US economy over the near term and this stimulus had zero impact on the budget deficit, did not require an exit strategy, did not distort the markets, and took effect almost immediately, wouldn’t it seem like a slam dunk? Such an option actually exists in the form of a change to mortgage refinancing requirements. The Fed – and market forces – have pushed mortgage rates to historic lows. However, many homeowners are unable to take advantage of the low rates because they are blocked from refinancing by a high loan-to-value ratio (LTV), appraisal problems, unemployment, and low credit score, etc. This problem could be addressed if the Government merely recognized the guarantee that already exists on the principal value of a very large portion of the mortgage market – specifically, the mortgages that are backed by Fannie, Freddie and Ginnie – and acted to streamline the refi process.”

The analysts note that with the “median” universe of outstanding 30-year fixed-rate mortgages being around 5.75%, and with current 30-year FRMs being around 4.50%, the potential rate reduction could average about 125 bp, which could translate into stimulus of around $46 billion a year.

The “logic” of the proposal is straightforward: if the GSEs, FHA, and VA already “own” the credit risk on the mortgages they own or guarantee, then allowing a more “streamlined” refi process “makes sense.” The authors note that “(t)he notion that the Federal government should recognize the mortgage guarantee that is already in place when establishing the qualifications for refinancing has been raised by others in the past.”

What the authors do NOT note, however – and this is truly shocking -- is that this “notion” was a major reason why the Administration/the GSEs rolled out the well-intentioned but poorly executed Home Affordable Refinance Program, or HARP!!!!! Recall that originally this program allowed GSE-owned refis up to a CLTV of 105% (the original reason for the restriction being that loans with higher CLTVs were NOT “TBA[to-be-announced]-eligible (which is NOT determined by the GSEs, by the way!!), though later this maximum CLTV was upped to 125%. In addition, FHFA “ruled” that loans with original LTVs at or below 80% that did not require mortgage insurance, but which today had current LTVs above 80%, did NOT require new mortgage insurance under the program despite wording in the GSEs charter suggesting otherwise – with the explicit rationale for the exemption being that the GSEs already “owned” the credit risk on the mortgages!!!!

How these analysts could roll out this “slam dunk” proposal without even MENTIONING the HARP is astounding! The analysts also don’t even MENTION the FHA’s streamlined refinance program!!!! (The underwriting requirements of which were tightened up a bit last September because of program “abuses.) This is an almost inconceivable miss on their part!!!!

The analysts also display a complete lack of understanding about the refinance process, transactions costs, and mortgage rates. E.g., the authors, presumably citing Freddie Mac’s Primary Mortgage Market Survey on average 30-year mortgage rates, note that current rates are about 4 ½%. However, that 4 ½ % “quote” (the latest survey showed 4.56%) includes a 0.7 point fee. More important, however, there are SIZABLE transactions costs associated with refinancing a mortgage.

As an example, I went to Chase Mortgage’s website this morning, trying to get a quote for a refinance of a $180,000 mortgage on a property currently valued at $200,000 in Virginia. I “clicked” that my credit was “very good” (one below “excellent,” which is actually closer to the truth!!!). The first quote was 4 ¾% with 1.125 “loan discount points.” Here was the associated closing cost information Chase’s website produced.

Closing Costs, $180,000 refinance, 30-year FRM, interest rate of 4.75%, Chase Mortgage
Title Insurance	$446.40
Courier/Messenger Fees	$35.00
Processing/Underwriting Fee	$595.00
City/County Tax/Stamps	$585.00
Application Fee	$395.00
Recording Fees	$46.00
Abstract Title Search	$180.00
Settlement/Closing Fee	$387.50
Tax Service Fee	$84.00
Loan Discount Points	$2,025.00
Total Closing Costs	$4,778.90
Prepaid Fees:
Harzard Insurance Premium	$450.00
Mortgage Insurance	$144.00
Per diem interest (18 days)	$374.72
Mortgage Insurance Premium	$0.00
Escrow Fees
Hazard Insurance Reserves	$75.00
Real Estate Tax Reserves	$500.00
Total Cash Needed at Closing	$6,322.62

The website also said that for a 5% rate my discount points would be reduced to 0.25, but my total closing costs would still be $3,203.90 (and total cash needed at closing would be $6,322.62).

Now if I were in a situation that I either couldn’t or didn’t want to pay any closing costs, I’m not sure what Chase’s quote would be for a no-closing-cost loan (they don’t show that option). But using a quick and dirty “yield per point” approach, I’d probably get a rate quote of around 5 ½% -- 100 basis points above the rate used by the hapless Morgan Stanley analysts in their “stimulus” piece!!! In the mortgage (and housing world) transactions costs are a BFD¹, and it’s pretty shocking the MS analysts don’t appear to know that!

What the analysts SHOULD have done, of course, was to focus on the HARP and the FHA streamlined refi programs, and suggest potential changes that might make the programs more successful.

Fannie Mae, by the way, earlier this week put out an updated “frequently asked questions” piece on the Home Affordable Refinance Program.

Here is a poorly written piece I wrote to someone else early this morning who asked what I thought of the Morgan Stanley piece. (I just don’t feel like rewriting/editing).

Actually, HARP attempted, badly, to "do" this (streamline the GSE refinance process for high LTV loans) by "allowing" qualified borrowers whose loans were owned/guaranteed by the GSEs to get refi loans with current LTVs up to 125%. Moreover, for loans with original LTVs of 80% or below that did not have private mortgage insurance, the requirement that the borrower get private mortgage insurance on the new loan if the current LTV were above 80% was waived. The logic was explicitly related to the fact that the GSEs already “owned” the credit risk. However, it's generated a surprisingly low level of activity, for a couple of reasons:

1. The GSEs have "loan level price adjustments" for high LTV/low credit score combos. E.g., in the Fannie refi plus program, the loan level price adjustment for borrowers with a LTV over 97% and a credit score under 640 is 2% (actually it shows a higher number, but the cumulative fees are capped. See here.) Thus the "savings" to some borrowers isn't as great as it first appears. Note that some of the loans eligible for refi had higher guaranty fees to begin with because they were "riskier².”

2. If the current loan has mortgage insurance, the new loan has to have mortgage insurance (with the same coverage) as well. Apparently this has been a troublesome process. The GSEs' reason is obvious: it had credit enhancement on the existing loan, so ... But, as I noted before, for loans that didn't originally have MI but whose current LTV exceeds 80%, the FHFA opined that new MI was "not needed" despite some folks' interpretation of the GSE charters, with the logic being that the GSEs already owned the credit risk.

3. There's no "cash out" option (except I think for a $250 de minimus). This makes sense as well.

4. Borrowers underwater or with very little equity in their homes are extremely averse to having to pay ANYTHING at closing on a refi (or to roll such costs into the loan balance, although the HARP does allow “typical” closing costs to be financed). As a result, to "make sense" most such borrowers would need to take out a "no closing cost" mortgage where the rate charged is higher but the originator recoups its costs/fees by packaging the loan into a "premium" (above par) MBS. As a result, such borrowers’ interest rate on a refi is materially above, say, the Freddie PMMS rate – by at least 50-75 bp.

5. Loans with LTVs above 105% are not eligible for inclusion in a "TBA-eligible" MBS/PC, but must be included in a separate type of pool with a separate prefix³. This can adversely impact pricing of the MBS, and as such on the loan.

6. The HARP is limited to borrowers who are current on their loans.

7. Many borrowers aren’t that aware of HARP, and don’t know if their loan is owned or guaranteed by Fannie or Freddie – though both entities have an easy to use website that borrowers can use to find out. When I’ve gone to online sites to get refi quotes, none of the lenders really mention the HARP on their refi quote page, though some mention it if you do a site search – and a few suggest that the HARP is only available to loans that they service, which if believed by the borrower enables lenders to be “less aggressive” on HARPs (and refis in general), offering not great rates and charging more fees than “needed.”

Obviously, the GSEs would not be and should not "refi" FHA/VA/other loans with high CLTVs, as they do not currently own the credit risk.

The FHA has had a streamlined refi process for quite a while. However, last year it "tightened up" some of the underwriting requirements because of some of abuses. See, Letter 09-23.

So...the HARP was sorta/kinda designed to make LTV less of an "issue" for borrowers with loans owned/guaranteed by the GSEs to refinance. However, for a number of reasons (including those shown above), the "effective" rate borrowers with not great credit scores AND with high LTVs are able to get on a refinance is a lot higher than many expect. And given the transactions costs involved in a refi, even very good credit borrowers cannot get a no-closing-cost rate anywhere close to 4 ½% on a 30-year FRM.

The "winners and losers" section of the “more streamlined refi ‘proposal’” -- including the losers, which would be holders of the "premium" MBS that are paid off -- misses a big point. MBS investors would "lose" the cash flow associated with holding the "premium" MBS that are paid off faster, and this loss would not be "ameliorated" by a resumption of MBS purchases by the Fed. In simple terms: If I'm getting a 6% MBS coupon and you are paying, say, 6.5% on your mortgage (with 25 bp going to servicing and 25 bp being a "guaranty fee"), and you are able to refi into a, say, 5% mortgage and I find my 6% MBS pay off and have to "reinvest" in a 4.5% MBS, you "save" 150 bp a year but I lose 150 bp a year. Now it is true that the Fed holds a lot of MBS (though not many with that high a coupon); the GSEs also hold a lot; and as a result "the government" would "lose" (resulting, of course, ultimately in higher future taxes), other losers would be banks/thrifts (and their owners/shareholders), pension funds, MBS funds, etc. In other words, some folks interest income would fall even as other folks mortgage interest expense would fall, and if the GSEs/FHA offered “more aggressive” streamlined refis the result would in part at least be a sorta/kinda transfer or wealth, and the net stimulus effect wouldn't be anywhere close to what Morgan Stanley analysts say.

So..."The notion that the Federal government should recognize the mortgage guarantee that is already in place when establishing the qualifications of refinancing" has not only "been recognized by others in the past" (page 4); that notion was explicitly behind the Home Affordable Refinance Program. There have been a number of technical issues and other impediments that have significantly limited the amount of refinancing done under the HARP (and the FHA streamlined refi program), and these programs can and probably should be “tweaked” (and quite frankly I think the GSE loan-level price adjustments should be lowered). However, in assessing the potential volume and the likely “savings,” analysts need to take into account the non-trivial costs associated with refinancing, How MS analysts could not take these into account, and not even MENTION the HARP and the FHA streamlined refi programs is something that is almost inconceivable.

Footnotes:
¹ BFD: Big Financial Deal
² Since Fannie Mae already has the risk on the existing mortgage loan, why are LLPAs required?
"LLPAs are required because Fannie Mae is putting a new loan on our books, which involves certain basic processing/administrative costs, accounting considerations, and the requirement for us to hold capital (based on the current risk) against every loan we acquire. Some Refi Plus loans may get better pricing than the borrower’s original loan did because risk characteristics may have changed."
³ Why are loans with LTVs above 105 percent not permitted to be commingled in standard Fannie Mae TBA-eligible MBS pools?
Permitting loans with LTVs greater than 105 percent in TBA (to-be-announced) securities would have tax reporting implications for investors that are subject to certain income and asset tests for federal income tax purposes (e.g., REITs must derive at least 75% of their income from real estate assets). Right now, 100 percent of Fannie Mae’s TBA MBS qualify as real estate assets, and thus there is no need for additional tax reporting. In addition, the introduction of LTVs in excess of 105 percent could create greater uncertainty around prepayment speeds for TBA pools since there is no significant track record of data on prepayment of loans with LTVs above 105 percent.

CR Note: This post was from Tom Lawler.

by Calculated Risk on 7/29/2010 02:26:00 PM

Home builder Ryland announced Q2 earnings today. From Briefing.com (ht Brian):

Ryland says that the big question from last quarter's conference call was what impact the expiration of the tax credit will have on the new home market. Says they found out the answer to that question in Q2, as sales slowed significantly. ... Says they knew there would be a slowdown in May once the event passed, but they didn't expect it to be as severe or prolonged as it's been...

by Calculated Risk on 7/29/2010 01:17:00 PM

Hotel occupancy is one of several industry specific indicators I follow ...

From HotelNewsNow.com: STR: Strong luxury results week ending 24 July

Overall [year over year], the industry’s occupancy increased 7.3 percent to 71.8 percent, ADR rose 1.3 percent to US$99.60, and RevPAR increased 8.6 percent to US$71.54.

The following graph shows the four week moving average for the occupancy rate by week for 2008, 2009 and 2010 (and a median for 2000 through 2007).

Click on graph for larger image in new window.

Notes: the scale doesn't start at zero to better show the change. The graph shows the 4-week average, not the weekly occupancy rate.

On a 4-week basis, occupancy is up 7.0% compared to last year (the worst year since the Great Depression) and 4.8% below the median for 2000 through 2007.

On a weekly basis this is the second week since summer 2008 with the occupancy rate above 70%. However last week was probably the peak for the occupancy rate for 2010 - although the 4-week average will move up over the next few weeks.

In 2009, the occupancy rate peaked at 67% in mid-July.

Data Source: Smith Travel Research, Courtesy of HotelNewsNow.com

by Calculated Risk on 7/29/2010 11:00:00 AM

Note: Usually I don't post all the regional manufacturing surveys, however with the inventory adjustment over, export growth appearing to slow, and domestic consumer demand sluggish, these surveys might provide a hint of weakness in the manufacturing sector.

From the Kansas City Fed: Tenth District manufacturing activity rebounded moderately in July

Tenth District manufacturing activity rebounded moderately in July, and expectations for future production remained positive. However, plans for future hiring and capital spending were essentially flat. Price indexes were mostly unchanged.

This was a little more positive than the other regional reports that are all showing a slowdown in growth:

From the July 15th Empire State Manufacturing Survey: "[T]he pace of growth in business activity slowed substantially over the month."

From the Philly Fed on July 15th: Firms See Slower Growth Rate

From the Dallas Fed on July 26th: Texas Manufacturing Activity Remains Sluggish

From the Richmond Fed on July 27th: Manufacturing Activity Moderates in July; Expectations Slip

It appears overall that growth in the manufacturing sector moderated in July, and some of the internals are even weaker.

Toss in the weaker tone of in the Fed's Beige Book (released yesterday), and this raises the question: Is Fed Chairman Bernanke and the FOMC behind the curve (again)? In his testimony last week, Bernanke said:

My colleagues on the Federal Open Market Committee (FOMC) and I expect continued moderate growth ... Most FOMC participants expect real GDP growth of 3 to 3-1/2 percent in 2010

That seems pretty optimistic.