by Calculated Risk on 7/28/2011 02:44:00 PM

From San Francisco Fed President John Williams: The Outlook for the Economy and Monetary Policy

Some excerpts on housing:

One of the most important currents holding back recovery has been housing. The collapse of the housing market touched off the financial crisis and recession. In most recessions, housing construction falls sharply, but then leads the economy back when growth resumes. As you well know, that snapback hasn’t occurred this time. Before the crisis, residential investment as a share of the economy was at its highest level since the Korean War. Today, housing construction remains moribund and residential investment as a share of the economy has fallen to its lowest level since World War II.

On one level, that’s not surprising. We simply built too many—in fact, millions too many—houses during the boom and we are still feeling the effects of this overhang. Consider housing prices. From their peak in 2006 until early 2009, home prices nationwide fell by nearly a third. When you exclude distressed sales, prices appeared to bottom out in 2009 and early 2010. New housing starts also appeared to stabilize in 2009, after plummeting some 75 percent during the housing crash. ...

The $64,000 question is when will the housing market finally recover? One daunting challenge for such a recovery is the huge number of homes in foreclosure. Almost 7 million homes have entered into foreclosure since the first quarter of 2008 and some 2 million are still in the foreclosure process. In addition, there is a shadow inventory of homes currently owned by delinquent borrowers. When you add up unsold new houses left over from the boom, homes for sale by owners, foreclosed residences for sale by lenders, and the shadow inventory of houses at risk of distressed sale, you come up with a massive supply overhang.

Over time, more reasonable prices and an improving economy ought to bring buyers off the sidelines and set the stage for recovery. But high unemployment and anemic wage gains are leaving people worried about their income prospects and cautious about buying homes. Also, the dramatic plunge in home valuations since 2006 has made some first-time homebuyers wary about entering the market because of worries that prices might fall further.

These are key points: Usually housing is a key engine of recovery, but not this time because of the massive supply overhang. And looking forward:

It’s only a matter of time before we work off the inventory overhang and construction picks up. How much time it takes will depend in part on what happens with foreclosed properties. If we begin making progress on working down the foreclosure inventory, then single-family housing starts could plausibly rise from their current level of about 400,000 per year to an average level of perhaps 1.1 million per year in three or four years, according to research at the San Francisco Fed.⁴ To put this in perspective, such an increase would boost real gross domestic product, or GDP, by at least 1 percent.

⁴ By contrast, if we can't work down the foreclosure inventory, then a return to normal construction levels could be delayed several more years. See Hedberg and Krainer (2011).

This is why I continue to focus on the excess supply. This is a key number for housing and the U.S. economy. See The “Excess Supply of Housing” War

by Calculated Risk on 7/28/2011 11:00:00 AM

From the Kansas City Fed: Manufacturing Sector Slows After Solid Rebound in June

The Federal Reserve Bank of Kansas City released the July Manufacturing Survey today. According to Chad Wilkerson, vice president and economist at the Federal Reserve Bank of Kansas City, the survey revealed that growth in Tenth District manufacturing slowed in July after a solid rebound in June, but producers remain generally upbeat about future activity.

“Factory activity in our region grew at a slower pace in July after rebounding solidly in June,” said Wilkerson. “Several firms blamed the slowdown on customers being cautious until the national debt ceiling debate is resolved. However, expectations for orders, hiring and capital spending, later in the year, generally remained as solid as in recent months.”
...
The month-over-month composite index was 3 in July, down from 14 in June but up from 1 in May. ... Most month-over-month indexes fell in July. The production index plunged from 25 to 0, and the shipments, new orders, and order backlog indexes also decreased. The employment index dropped from 17 to 4, and the new orders for exports index posted a negative reading for the first time since mid-2009.

This is the last of the regional Fed surveys for July. The regional surveys provide a hint about the ISM manufacturing index - and the regional surveys were fairly weak again this month, although slightly stronger than in June (in aggregate).

Click on graph for larger image in graph gallery.

The New York and Philly Fed surveys are averaged together (dashed green, through July), and five Fed surveys are averaged (blue, through July) including New York, Philly, Richmond, Dallas and Kansas City. The Institute for Supply Management (ISM) PMI (red) is through June (right axis).

The regional surveys were slightly better in July than in June. The ISM index for July will be released Monday, August 1st.

by Calculated Risk on 7/28/2011 10:00:00 AM

From the NAR: Pending Home Sales Rise in June

The Pending Home Sales Index,* a forward-looking indicator based on contract signings, rose 2.4 percent to 90.9 in June from 88.8 in May and is 19.8 percent above the 75.9 reading in June 2010, which was the low point immediately following expiration of the home buyer tax credit. The data reflects contracts but not closings.
...
The PHSI in the Northeast slipped 0.4 percent to 68.9 in June but is 19.4 percent higher than June 2010. In the Midwest the index fell 3.7 percent to 79.7 in June but is 26.4 percent above a year ago. Pending home sales in the South increased 4.4 percent to an index of 99.2 and are 19.1 percent higher than June 2010. In the West the index rose 6.4 percent to 107.0 in June and is 16.4 percent above a year ago.

This was very close to Tom Lawler's forecast of a 2.6% increase. This suggests an increase in reported existing home sales in July and August (depending on the number of cancellations).

by Calculated Risk on 7/28/2011 08:42:00 AM

The DOL reports:

In the week ending July 23, the advance figure for seasonally adjusted initial claims was 398,000, a decrease of 24,000 from the previous week's revised figure of 422,000. The 4-week moving average was 413,750, a decrease of 8,500 from the previous week's revised average of 422,250.

This is the first week with initial claims below 400,000 since early April.

The following graph shows the 4-week moving average of weekly claims since January 2000 (longer term graph in graph gallery).

Click on graph for larger image in graph gallery.

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased this week to 413,750.

by Calculated Risk on 7/27/2011 08:29:00 PM

Last month, Tom Lawler posted on how the NAR estimates existing home inventory. The NAR does NOT aggregate data from the local boards (see Tom's post for how the NAR estimates inventory). Sometime this fall, the NAR will revise down their estimates of inventory and sales for the last few years. Also the NAR methodology for estimating sales and inventory will likely (hopefully) be changed.

While we wait for the NAR revisions, I think the HousingTracker / DeptofNumbers data that Tom mentioned might be a better estimate of changes in inventory (and always more timely). Ben at deptofnumbers.com is tracking the aggregate monthly inventory for 54 metro areas.

Click on graph for larger image in graph gallery.

This graph shows the NAR estimate of existing home inventory through June (left axis) and the HousingTracker data for the 54 metro areas through July. The HousingTracker data shows a steeper decline in inventory over the last few years (as mentioned above, the NAR will probably revise down their inventory estimates this fall).

Lawler wrote today:

The area covered by DON/HT does not necessarily track the nation as a whole. However, it’s listings have shown significantly larger YOY declines than has the NAR in its estimate of US existing homes for sale. Moreover, when I include areas I track that are not covered by DON/HT, I find that listings in June were down significantly more than the NAR shows. This may indicate that home sales this June were down more from a year ago than the NAR estimates suggest.

The second graph shows the year-over-year change in inventory for both the NAR and HousingTracker.

HousingTracker reported that the July listings - for the 54 metro areas - declined 11.1% from last year.

Of course there is a large percentage of distressed inventory, and various categories of "shadow inventory" too. But the decline in listed inventory will put less downward pressure on house prices and is something to watch carefully all year.

Here are the posts this month on June Home Sales and Prices:
• New Home Sales in June at 312,000 Annual Rate
• Existing Home Sales in June: 4.77 million SAAR, 9.5 months of supply
• Home Sales: Distressing Gap
• Graph Galleries: New Home Sales and Existing Home Sales

On House Prices:
• Case Shiller: Home Prices increase in May
• Real House Prices and Price-to-Rent
• Graph Galleries: Home Prices