by Calculated Risk on 4/27/2011 06:04:00 PM

First, there were no surprises.

• Here is the video of the press conference (about 57 minutes).

• Bernanke commented that "extended period" probably implies that the Fed would not raise rates for a "couple of meetings" after the "extended period" language is removed from the FOMC statement. Back in 2003/2004, the Fed raised rates in June 2004, about six months after the last appearance of the "considerable period" language in December 2003.

• Bernanke discussed the "stock" versus "flow" view of the QE2 purchases, and he said the Fed does not expect any significant impact on markets when QE2 ends in June (we already knew this was the Fed's view). Bernanke also said the program would not be tapered off, but would just end.

• When asked if the Fed could do more about unemployment, Bernanke responded: "Going forward we'll have to continue to make judgments about whether additional steps are warranted. But as we do so, we have to keep in mind that we do have a dual mandate, that we do have to worry about both the rate of growth but also the inflation rate. And, as I was indicating earlier, I think that even purely from an employment perspective that if inflation were to become unmoored - inflation expectations were to rise significantly - that the cost of that in terms of employment loss in the future if we had to respond to that would be quite significant." This sounds like QE3 is unlikely unless the economy slows sharply (or inflation falls).

• Bernanke noted that an early exit step would be to stop reinvesting maturing securities. This suggests that the Fed will continue to reinvest maturing securities after QE2 ends in June. This is exactly what I've been expecting (from FOMC preview):

This suggests a timeline for the earliest Fed funds rate increase:
• End of QE2 in June.
• End of reinvestment 2+ months later.
• Drop extended period language a couple months later
• Raise rates in early to mid-2012.

That is probably the earliest the Fed would raise rates - and it could be much later.

• And here are the updated forecasts. The GDP forecast is lower, inflation is higher and the unemployment rate lower:

April 2011 Economic projections of Federal Reserve Governors and Reserve Bank presidents
	2011	2012	2013
Change in Real GDP	3.1 to 3.3	3.5 to 4.2	3.5 to 4.3
Previous Projection (Jan 2011)	3.4 to 3.9	3.5 to 4.4	3.7 to 4.6
Unemployment Rate	8.4 to 8.7	7.6 to 7.9	6.8 to 7.2
Previous Projection (Jan 2011)	8.8 to 9.0	7.6 to 8.1	6.8 to 7.2
PCE Inflaton	2.1 to 2.8	1.2 to 2.0	1.4 to 2.0
Previous Projection (Jan 2011)	1.3 to 1.7	1.0 to 1.9	1.2 to 2.0
Core PCE Inflation	1.3 to 1.6	1.3 to 1.8	1.4 to 2.0
Previous Projection (Jan 2011)	1.0 to 1.3	1.0 to 1.5	1.2 to 2.0

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.

Earlier:
• Q1 2011: Homeownership Rate at 1998 Levels

by Calculated Risk on 4/27/2011 02:01:00 PM

Forecast added below (GDP down, inflation up, unemployment rate down):

April 2011 Economic projections of Federal Reserve Governors and Reserve Bank presidents
	2011	2012	2013
Change in Real GDP	3.1 to 3.3	3.5 to 4.2	3.5 to 4.3
Previous Projection (Jan 2011)	3.4 to 3.9	3.5 to 4.4	3.7 to 4.6
Unemployment Rate	8.4 to 8.7	7.6 to 7.9	6.8 to 7.2
Previous Projection (Jan 2011)	8.8 to 9.0	7.6 to 8.1	6.8 to 7.2
PCE Inflaton	2.1 to 2.8	1.2 to 2.0	1.4 to 2.0
Previous Projection (Jan 2011)	1.3 to 1.7	1.0 to 1.9	1.2 to 2.0
Core PCE Inflation	1.3 to 1.6	1.3 to 1.8	1.4 to 2.0
Previous Projection (Jan 2011)	1.0 to 1.3	1.0 to 1.5	1.2 to 2.0

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.

by Calculated Risk on 4/27/2011 12:32:00 PM

A little weaker on economy ("firmer footing" last statement - the Fed's forecast will be released at the press briefing). A little more on inflation, but still "transitory".

From the Federal Reserve:

Information received since the Federal Open Market Committee met in March indicates that the economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Commodity prices have risen significantly since last summer, and concerns about global supplies of crude oil have contributed to a further increase in oil prices since the Committee met in March. Inflation has picked up in recent months, but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Increases in the prices of energy and other commodities have pushed up inflation in recent months. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations. The Committee continues to anticipate a gradual return to higher levels of resource utilization in a context of price stability.

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and will complete purchases of $600 billion of longer-term Treasury securities by the end of the current quarter. The Committee will regularly review the size and composition of its securities holdings in light of incoming information and is prepared to adjust those holdings as needed to best foster maximum employment and price stability.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.

Earlier:
• Q1 2011: Homeownership Rate at 1998 Levels

by Calculated Risk on 4/27/2011 10:00:00 AM

The Census Bureau reported the homeownership and vacancy rates for Q1 2011 this morning.

Click on graph for larger image in graph gallery.

The homeownership rate declined to 66.4%, down from 66.5% in Q4 2010. This is the same as in 1998.

Note: graph starts at 60% to better show the change.

The homeownership rate increased in the '90s and early '00s because of changes in demographics and "innovations" in mortgage lending. Some of the increase due to demographics (older population) will probably stick, so I've been expecting the rate to decline to around 66%, and probably not all the way back to 64%.

The homeowner vacancy rate decreased to 2.6% in Q1 2011, down from 2.7% in Q4 2010. This has been bouncing around in the 2.5% to 2.7% range for two years, and is slightly below the peak of 2.9% in 2008.

A normal rate for recent years appears to be about 1.7%.

This leaves the homeowner vacancy rate about 0.9 percentage points above normal. This data is not perfect, but based on the approximately 75 million homeowner occupied homes, we can estimate that there are close to 675 thousand excess vacant homes.

The rental vacancy rate increased to 9.7% in Q1 2011 from 9.4% in Q4 2010.

This increase doesn't fit with the Reis apartment vacancy data and the NMHC apartment survey. However this report is nationwide and includes homes for rent.

It's hard to define a "normal" rental vacancy rate based on the historical series, but we can probably expect the rate to trend back towards 8%. According to the Census Bureau there are close to 42 million rental units in the U.S. If the rental vacancy rate declined from 9.7% to 8%, then 1.7% X 42 million units or about 700 thousand excess units would have to be absorbed.

This suggests there are still close to 1.4 million excess housing units.

Note: Some analysts also add in the increase in "held off market, other" units to track the excess housing units - and that has increased from 2.6 million units at the end of 2005 to 3.861 million units in Q1 2011 - or another 1.26 million excess units. That would suggest over 2.6 million excess units. Either way, this survey suggests there is still a large number of excess units.

by Calculated Risk on 4/27/2011 07:19:00 AM

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

The Refinance Index decreased 0.6 percent from the previous week. The seasonally adjusted Purchase Index decreased 13.6 percent to its lowest level since February 25, 2011, driven by a 26.6 percent decrease in government purchase applications.
...
"Purchase applications fell last week, driven primarily by a sharp decrease in government purchase applications as new, higher FHA premiums went into effect," said Michael Fratantoni, MBA’s Vice President of Research and Economics. “This decrease reverses a 20 percent increase in government purchase applications over a four week period, which was likely driven by borrowers attempting to beat this deadline.”
...
The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.80 percent from 4.83 percent, with points decreasing to 1.01 from 1.06 (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.

With the higher FHA premiums, the purchase index fell last week to the lowest level since February.

The four week average is at about 1997 levels, although - as far as sales - this doesn't include the very high percentage of cash buyers. From the NAR: "All-cash sales were at a record market share of 35 percent in March, up from 33 percent in February; they were 27 percent in March 2010."

by Calculated Risk on 4/26/2011 11:05:00 PM

From Michael Derby at the WSJ: Bernanke's Code: a Guide to Fed Chairman's First Q&A Derby discusses "inflation expectations", TIPS, the "extended period" language, commodity prices, the Fed's balance sheet, the dollar and "jobs, jobs, jobs". A good preview.

Here was my earlier preview of the FOMC meeting. Note that the FOMC statement will be released earlier than usual at 12:30 PM ET, and the Bernanke press briefing will be at 2:15 PM (and Bernanke will release the Fed's updated forecast).

Also tomorrow:
7:00 AM: The Mortgage Bankers Association (MBA) will release the mortgage purchase applications index.

8:30 AM: Durable Goods Orders for March from the Census Bureau. The consensus is for a 2.0% increase in durable goods orders after decreasing 0.9% in February.

10:00 AM: Q1 Housing Vacancies and Homeownership report from the Census Bureau.

On House Prices earlier:
• Case Shiller: Home Prices near post-bubble lows in February
• Real House Prices and Price-to-Rent
• House Price Graphs

by Calculated Risk on 4/26/2011 05:22:00 PM

• From the Associated Estates Realty Corp (AEC) conference call, an apartment REIT in IN, OH, MI and PA (ht Brian):

Looking at certain performance metrics throughout our portfolio, we continue to see residents staying longer - on average, 18 months. Also, it has been well publicized, households have a greater propensity to rent versus own as renting allow for increased financial flexibility and physical mobility. To this point our annual resident turnover is down 10 basis points year-over-year and buying home as a reason for moveout is just over 14%, down from better than 25% just a few years ago. These trends are contributing to increased occupancy, increased rents, and improved same community NOI as a result of the lower turnover costs.

Other apartment owners have also told me that the number of renters "moving out to buy a home" is way down.

• Although LPS has not released their mortgage metrics for March yet, I've heard that the "foreclosure in process" category is at a record high (no surprise) while the overall delinquencies declined sharply (a seasonal decline is normal for March). Also Freddie Mac released the monthly volume report for March, and they showed 90+ day delinquencies down to 3.63% - a high level, but the lowest since September 2009. I'll have graphs for both reports in the next few days.

• Earlier I posted the ATA press release showing the trucking index was up 1.7% in March.

Click on graph for larger image in graph gallery.

Here is a long term graph that shows ATA's Fore-Hire Truck Tonnage index.

On House Prices earlier:
• Case Shiller: Home Prices near post-bubble lows in February
• Real House Prices and Price-to-Rent
• House Price Graphs

by Calculated Risk on 4/26/2011 02:15:00 PM

• From the Richmond Fed: Manufacturing Growth Moderates in April

In April, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — fell ten points to 10 from March's reading of 20.
...
Hiring conditions at Fifth District plants changed little in April from their March pace. The manufacturing employment index slipped two points to end at 14 and the average workweek measure eased three points to 7. In contrast, wage growth added three points to 22.

Also the Richmond Fed service survey showed improvement: Service Sector Activity Strengthens: Retail Revenues Rise; Services Firms Make Gains (This is new and not closely followed, but this showing a strong pickup in the service sector with little increase in prices).

• From ATA Trucking: ATA Truck Tonnage Index Rose 1.7 Percent in March

The American Trucking Associations’ advance seasonally adjusted (SA) For-Hire Truck Tonnage Index increased 1.7 percent in March after falling a revised 2.7 percent in February 2011.
...
Compared with March 2010, SA tonnage climbed 6.3 percent, which was higher than February’s 4.4 percent year-over-year gain, but below the 7.6 percent jump in January. For the first quarter of 2011, tonnage increased 3.8 percent from the previous quarter and 6.1 percent from the first quarter 2010.

“Despite my concern that higher energy costs are going to begin cutting into consumer spending, tonnage levels were pretty good in March and the first quarter of the year,” said ATA Chief Economist and Vice President Bob Costello. Looking ahead, Costello said, “While I still think the industry will continue to grow and recover from the weak freight environment we've seen in recent years, the rapid spike in fuel prices will slow that growth.”
...
Trucking serves as a barometer of the U.S. economy, representing 68 percent of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods.

• From CNBC: Consumer Confidence Index rises in April

The Conference Board said Tuesday the index rose to 65.4 from a revised 63.8 in March.

Expectations were for an increase to 64.4.

On House Prices:
• Case Shiller: Home Prices near post-bubble lows in February
• Real House Prices and Price-to-Rent
• House Price Graphs

by Calculated Risk on 4/26/2011 11:08:00 AM

First, here is a graph showing nominal house prices for three indexes:

Nominal House Prices

Click on graph for larger image in graph gallery.

The first graph shows the quarterly Case-Shiller National Index (through Q4 2010), and the monthly Case-Shiller Composite 20 and CoreLogic House Price Indexes (both through February release) in nominal terms (as reported).

In nominal terms, the National index is back to Q1 2003 levels, the Composite 20 index is 0.4% above the May 2009 low, and the CoreLogic index is back to January 2003 levels.

Once the Case-Shiller Composite 20 falls below the May 2009 low, the index will be back to early 2003 levels.

Nominal prices will probably fall some more, and my forecast is for a decline of 5% to 10% from the October 2010 levels for the national price indexes.

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 Q1 2000 levels, the Composite 20 index is back to November 2000, and the CoreLogic index back to January 2000.

A few key points:
• In real terms, all appreciation in the last decade is gone.

• I don't expect national real prices to fall to '98 levels. In many areas - if the population is increasing - house prices increase slightly faster than inflation over time, so there is an upward slope for real prices.

• Real prices are still too high, but they are much closer to the eventual bottom than the top in 2005. This isn't like in 2005 when prices were way out of the normal range.

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 through January 2011 using the Case-Shiller Composite 20 and CoreLogic House Price Index.

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

On a price-to-rent basis, the Composite 20 index is just above the May 2009 levels, and the CoreLogic index is back to January 2000.

An interesting point: the measure of Owners' Equivalent Rent (OER) is at about the same level as two years ago - so the price-to-rent ratio has mostly followed changes in nominal house prices since then. Rents are starting to increase again, and OER will probably increase in 2011 - lowering the price-to-rent ratio.

This ratio could decline another 10%, and possibly more if prices overshoot to the downside. The decline in the ratio will probably be a combination of falling house prices and increasing rents.

Earlier:
• Case Shiller: Home Prices near post-bubble lows in February

by Calculated Risk on 4/26/2011 09:00:00 AM

S&P/Case-Shiller released the monthly Home Price Indices for February (actually a 3 month average of December, January and February).

This includes prices for 20 individual cities and and two composite indices (for 10 cities and 20 cities).

Note: Case-Shiller reports NSA, I use the SA data.

From S&P:Home Prices Edge Closer to 2009 Lows

Data through February 2011, released today by S&P Indices for its S&P/Case-Shiller Home Price Indices ... show prices for the 10- and 20-city composites are lower than a year ago but still slightly above their April 2009 bottom. The 10- City Composite fell 2.6% and the 20-City Composite was down 3.3% from February 2010 levels.

Washington D.C. was the only market to post a year-over-year gain with an annual growth rate of +2.7%. Ten of the 11 cities that made new lows in January 2011 saw new lows again in February 2011. Detroit avoided another new low, managing a +1.0% increase in February over January, the only city with a positive monthly change. With an index level of 139.27, the 20-City Composite is virtually back to its April 2009 trough value (139.26); the 10-City Composite is 1.5% above its low.

Click on graph for larger image in graph gallery.

The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 31.7% from the peak, and down 0.2% in February (SA). The Composite 10 is still 1.8% above the May 2009 post-bubble bottom.

The Composite 20 index is also off 31.4% from the peak, and down 0.2% in February (SA). The Composite 20 is only 0.4% above the May 2009 post-bubble bottom and will probably be at a new post-bubble low soon.

The second graph shows the Year over year change in both indices.

The Composite 10 SA is down 2.6% compared to February 2010.

The Composite 20 SA is down 3.3% compared to February 2010.

The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

Prices increased (SA) in 6 of the 20 Case-Shiller cities in February seasonally adjusted. Prices in Las Vegas are off 58% from the peak, and prices in Dallas only off 6.8% from the peak.

From S&P (NSA):

“There is very little, if any, good news about housing. Prices continue to weaken, trends in sales and construction are disappointing.” says David M. Blitzer, Chairman of the Index Committee at S&P Indices. “Ten of the 11 MSAs that recorded index lows in January fell further in February. The one exception, Detroit, is 30% below its 2000 price level. The 20-City Composite is within a hair’s breadth of a double dip. Fourteen MSAs and both Composites have continued to decline month-over-month for more than six consecutive months as of February."

“Atlanta, Cleveland and Las Vegas join Detroit as cities with home prices below their 2000 levels; and Phoenix is barely above its January 2000 level after a new index low. The one positive is Washington D.C. with a positive annual growth rate, +2.7%, and home prices more than 80% over its January 2000 level. Other cities holding on to large gains from 11 years ago include Los Angeles (68.25%), New York (65.19%) and San Diego (55.05%)”

Both composite indices are still slightly above the post-bubble low (SA), but the indexes will probably be at new lows in the next few months.