by Calculated Risk on 5/25/2012 08:45:00 AM

From Tim Duy at Economist's View Fed Watch: Is QE3 Just Around the Corner?

[T]oday's comments from New York Federal Reserve President William Dudley [are interesting]. From the Wall Street Journal:

Expectations for U.S. economic growth, while “pretty disappointing” at around 2.4%, is sufficient to keep the central bank from easing monetary policy, Federal Reserve Bank of New York President William Dudley said.

“My view is that, if we continue to see improvement in the economy, in terms of using up the slack in available resources, then I think it’s hard to argue that we absolutely must do something more in terms of the monetary policy front,” Dudley said in an interview with CNBC, aired Thursday.

Dudley is considered part of the inner circle; if he doesn't think the Fed needs to do something more, the baseline scenario should be that QE3 is not on the table.

At least for the moment. Simply put, I think market participants are getting ahead of the Fed. My suspicion is that the Fed will need to see a weaker data flow in the months ahead to justify getting back into the game. ...
...
Overall, it seems unlikely that the data flow as a whole will turn fast enough to prompt the Fed into easing next month. Only the next employment report stands out as a potential deal breaker. In general, though, I would think you need at a minimum the Q2 GDP report to justify additional easing - which pushes us out to the July/August meeting at least.

So if we take the US data off the table, then we are looking for financial disruption, which is obviously a possibility given the current unpleasantness in Europe. Indeed, we should not be surprised if the Fed needs to further improve dollar liquidity abroad (an action that is sure to be taken as a sign that QE3 is imminent; expect Fed speakers to deny a policy shift is afoot). And note that the next FOMC meeting is just 2 days after the June 17 Greek vote - and that could be the vote heard round the financial world that prompts the Fed to act.
...
[F]inancial conditions will need to deteriorate dramatically to prompt action in June. So if you are looking for the Fed to ease in just four weeks, you are looking for financial markets to turn very, very ugly. Lehman ugly. And I wish that I could say that it won't happen, but European policymakers are hell-bent to push their economies to the wall while worshipping at the alter of moral hazard.

CR Note: The Fed's program to extend the average maturity of its holdings (aka "Operation Twist") ends in June, and the Fed might consider QE3 some time after that program ends. But as Tim Duy notes - based on Dudley's comments and unless Europe implodes after the Greek election - it is too soon to be looking for QE3 right now.

by Calculated Risk on 5/24/2012 10:28:00 PM

First a little European gloom ... Note: US markets will be closed on Monday in observance of the Memorial Day, but the European markets will be open.

From the NY Times: European Economic Outlook Dims Amid Leaders’ Impasse

A Markit Economics index that tracks the European services and manufacturing sectors fell in May to 45.9 from 46.7, worse than economists surveyed by Reuters and Bloomberg had expected. An index reading below 50 suggests the economy is contracting. ...

Perhaps even more worryingly, German data released Thursday showed signs of a slowdown in an economy that until now had been a bright spot for the Continent. A Markit index based on surveys of purchasing managers of German manufacturing companies fell to 45.0 in May from 46.2 in April.

A separate report from the Ifo Institute, based on surveys of German companies, showed “greater pessimism about their business outlook,” and noted that the “recent surge in uncertainty in the euro zone is impacting the German economy.”

And from the NY Times: British Recession Is Worse Than Thought, Data Says

The Office for National Statistics revised the decline in gross domestic product in the first three months of this year to 0.3 percent, from the 0.2 percent it estimated last month, because of a deeper slump in the construction industry. Construction output dropped 4.8 percent from a year earlier, the agency said, not 3 percent, as it had estimated earlier.

The revised figures were “bad news for U.K. policy makers as it shows the economy faring even more badly than initially thought,” said Scott Corfe, senior economist at the Center for Economics and Business Research in London. “Indeed, the latest data show the U.K. economy performing worse than the euro zone economy, which saw zero growth at the start of the year — meaning the U.K.’s woes cannot even be fully attributable to the debt crisis embroiling the Continent.”

• Friday at 9:55 AM ET the final May Reuter's/University of Michigan's Consumer sentiment index will be released. The consensus is for no change from the preliminary reading of 77.8. The recent decline in gasoline prices might boost sentiment, although that might be offset by weaker job growth and European concerns. From MarketWatch: Gasoline prices add to the holiday cheer

The average price for a gallon of regular gas has fallen each day since May 16 and stood at $3.676 on Thursday, according to AAA data. That is down 17 cents from a month ago.

by Calculated Risk on 5/24/2012 08:37:00 PM

Below is a graph comparing mortgage rates from the Freddie Mac Primary Mortgage Market Survey® (PMMS®) and the refinance index from the Mortgage Bankers Association (MBA).

Freddie Mac reported earlier today that 30 year mortgage rates had fallen to a record 3.78% in the PMMS®.

And the MBA reported yesterday that refinance activity has been increasing again.

Earlier from Freddie Mac: Historic Lows for Fixed Mortgage Rates Hold Steady

30-year fixed-rate mortgage (FRM) averaged 3.78 percent with an average 0.8 point for the week ending May 24, 2012, down from last week when it averaged 3.79 percent. Last year at this time, the 30-year FRM averaged 4.60 percent.

Click on graph for larger image.

This graph shows the MBA's refinance index (monthly average) and the the 30 year fixed rate mortgage interest rate from the Freddie Mac Primary Mortgage Market Survey®.

The Freddie Mac survey started in 1971 and mortgage rates are currently at the record low for the last 40 years.

It usually takes around a 50 bps decline from the previous mortgage rate low to get a huge refinance boom - and rates are getting close! The 30 year conforming mortgage rates were at 4.23% in October 2010, so a 50 bps drop would be 3.73% - just below the current rate.

There has also been an increase in refinance activity from borrowers with negative equity and loans owned or guaranteed by Fannie or Freddie. As the MBA noted, the HARP share of refinance applications was 28 percent last week.

by Calculated Risk on 5/24/2012 04:39:00 PM

From economist Tom Lawler:

Post-Census Study of Census 2010: Population, Household Count Extremely Close; Vacant Housing Unit Count Too Low

Census yesterday released some of the results from its “Census Coverage Measurement” (CCM) program for Census 2010, which is a post-enumeration exercise to assess the “accuracy” of the decennial Census numbers. While there’s a lot of “stuff” in the two CCM memoranda released yesterday, here are a couple of “highlights.”

1. The CCM (similar to the 2000 A.C.E. Revision II and the 1990 P.E.S) for the US household population (excluding remote Alaska areas) suggests that the 2010 Census had a de minimus net “over-count” of just 36,000, or 0.01%. Studies mentioned above suggested that Census 2000 had a net over-count of 0.49%, and Census 1990 had a net under-count of 1.61%. While net over/under-counts for specific race/ethnic groups or age groups were in many cases “significantly different from zero,” on balance Census 2010 seems to have been the “best” ever. (see http://2010.census.gov/news/pdf/g-01.pdf)

2. The CCM designed to provide estimates of housing unit net coverage suggest that Census 2010 under-counted the number of US housing units by 0.60%, similar to Census 2000’s estimated 0.61% under-count. The 2010 estimated under-count for occupied units was an insignificant 0.03%, below Census 2000’s 0.33%, while the estimated under-count for vacant units was 4.80%, higher than Census 2000’s 3.37%.

As with other post-Census studies, the CCM for 2010 shows “Census 2010” numbers that don’t quite jive with the previously-released Census 2010 number for total, occupied, and vacant units, which I think is because they reported Census 2010 results adjusted for “reinstated units.” (don’t ask!). However, as best as I can tell here is a table showing “official” Census housing units counts and “post-Census-study” estimates of housing units counts for Census 2010 and Census 2000.

	"Official" Census Housing Unit Counts (000's)
	2010	2000	Change
Total	131,705	115,905	15,800
Occupied	116,716	105,480	11,236
Vacant	14,988	10,425	4,563
Gross Vacancy Rate	11.38%	8.99%	2.39%
	"Adjusted" Census Housing Unit Counts (000's)
	2010	2000	Change
Total	132,466	116,586	15,880
Occupied	116,735	105,809	10,926
Vacant	15,732	10,778	4,954
Gross Vacancy Rate	11.88%	9.24%	2.63%

Based on the CCM results, Census 2010 understated the gross vacancy rate by about 0.5 percentage points. The CCM’s gross vacancy rate was higher than the Census 2010 GVR in all states save Alaska.

The CCM results also suggest that the US homeownership rate on April 1, 2010 was 65.2%, just a tad above the “official” estimate of 65.1%.

There’s a lot more in the report, available at http://2010.census.gov/news/pdf/g-05.pdf.

There are a couple of things worth noting. First, the higher estimate for 2010 housing units, combined with the 2000 HUCS results, suggest that the US housing stock from 4/1/2000 to 4/1/2010 increased by 15.880 million units. Other Census estimates (from surveys) suggest that housing completions plus manufactured housing put in place from April 2000 to March 2010 totaled about 16.734 million. That implies that the net loss in the housing stock to demolition, net conversions, and “other stuff” over that 10-year period by just 854,000, or 85,400 a year – an incredibly low number. I hope someone at Census plans to look at that.

Second, of course, the CCM suggests that official Census 2010 results understated gross vacancy rates, which suggests that estimates of the “excess” supply of housing on April 1, 2010 based on decennial Census results are “too low” – though, of course, adjusted estimates are still way below estimates using the obviously biased CPS/HVS data.

	Adjusted Decennial Census Measures
	1990	2000	2010
Gross Vacancy Rate	10.50%	9.20%	11.90%
Homeownership Rate	64.20%	66.10%	65.20%
	CPS/HVS Measures (first half average)
	1990	2000	2010
Gross Vacancy Rate	11.40%	11.70%	14.50%
Homeownership Rate	63.90%	67.20%	67.00%

CR Note: The calculated number of demolitions per year seems very low. As Lawler notes, I hope someone at the Census Bureau is looking into this. Also - this review suggests that estimates of excess vacant housing units as of April 1, 2010 were low.

by Calculated Risk on 5/24/2012 12:32:00 PM

• From the Kansas City Fed: Growth in Tenth District Manufacturing Eased Further but Activity Remained Expansionary

Growth in Tenth District manufacturing activity rebounded in May, and producers were more optimistic than in previous months. The majority of producers reported stable or increasing capital spending plans in the next six to twelve months, with very few anticipating a decrease. Most price indexes moderated, although more producers than in April plan to raise selling prices in future months.

The month-over-month composite index was 9 in May, up from 3 in April and equal to 9 in March ... In contrast, the employment index eased slightly from 12 to 8.

The regional manufacturing surveys have been mixed in May. The NY (Empire State) and Kansas City Fed surveys showed faster expansion, but the Richmond Fed showed slower expansion. And the Philly Fed survey showed contraction.

• Also for manufacturing, the new Markit Flash PMI showed slower expansion. From Markit: PMI falls to three-month low, signalling slower rate of manufacturing expansion

The May Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) indicated a solid improvement in U.S. manufacturing sector business conditions, according to the preliminary ‘flash’ reading which is based on around 85% of usual monthly replies. However, with the seasonally adjusted PMI falling from 56.0 in April to 53.9, the headline PMI nonetheless signalled the weakest expansion in three months.

This is the first release of the Flash PMI, and it has no track record of predicting the ISM number (the May report will be released June 1st).

• From Freddie Mac: Historic Lows for Fixed Mortgage Rates Hold Steady

Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing the record lows for average fixed mortgage rates holding steady for the week. The 30-year fixed-rate mortgage ticked slightly down to 3.78 percent and 15-year fixed-rate mortgages remained unchanged from last week at 3.04 percent.

30-year fixed-rate mortgage (FRM) averaged 3.78 percent with an average 0.8 point for the week ending May 24, 2012, down from last week when it averaged 3.79 percent. Last year at this time, the 30-year FRM averaged 4.60 percent.

by Calculated Risk on 5/24/2012 10:45:00 AM

The FDIC released the Quarterly Banking Profile today for Q1 2012.

Here is the press released from the FDIC: FDIC - Insured Institutions Earned $35.3 Billion in the First Quarter of 2012

Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported an aggregate profit of $35.3 billion in the first quarter of 2012, a $6.6 billion improvement from the $28.8 billion in net income the industry reported in the first quarter of 2011. This is the 11th consecutive quarter that earnings have registered a year-over-year increase. However, loan balances declined by $56.3 billion (0.8 percent) after three consecutive quarterly increases.

FDIC Acting Chairman Martin J. Gruenberg said, "The condition of the industry continues to gradually improve. Insured institutions have made steady progress in shedding bad loans, bolstering net worth, and increasing profitability." He also noted, "The overall decline in loan balances is disappointing after we saw three quarters of growth last year. But we should be cautious in drawing conclusions from just one quarter."
...
The number of "problem" institutions fell for the fourth quarter in a row. The number of "problem" institutions declined from 813 to 772. This is the smallest number of "problem" banks since year-end 2009. Total assets of "problem" institutions declined from $319 billion to $292 billion. Sixteen insured institutions failed during the first quarter. This is the smallest number of failures in a quarter since the fourth quarter of 2008, when there were 12.

The Deposit Insurance Fund (DIF) balance continued to increase. The DIF balance — the net worth of the fund — rose to $15.3 billion at March 31 from $11.8 billion at the end of 2011. Assessment revenue and fewer bank failures continued to drive growth in the fund balance.

On 1-4 family Real Estate Owned (REO), the report showed that REO by FDIC insured institutions declined to $11.08 billion in Q1, from $11.64 billion in Q4 2011. FDIC insured institutions REO peaked at $14.8 billion in Q3 2010.

Unfortunately the FDIC does not collect data on the number of properties held by FDIC-insured institutions, instead they aggregate the carrying value of 1-4 family residential REO on FDIC-insured institutions’ balance sheets.

Click on graph for larger image in new window.

Here is a graph of the 1-4 family REO carrying value for FDIC insured institutions since Q1 2003.

Note: FDIC insured institutions have other REO and this is just the 1-4 family residential REO (other REO includes Construction & Development, Multi-family, Commercial, Farm Land).

Of course this is just a small portion of the total 1-4 family REO. The FHA, Fannie and Freddie have already reported that REO declined in Q1. I'll have more on REO soon.

by Calculated Risk on 5/24/2012 08:30:00 AM

The DOL reports:

In the week ending May 19, the advance figure for seasonally adjusted initial claims was 370,000, a decrease of 2,000 from the previous week's revised figure of 372,000. The 4-week moving average was 370,000, a decrease of 5,500 from the previous week's revised average of 375,500.

The previous week was revised up from 370,000 to 372,000.

The following graph shows the 4-week moving average of weekly claims since January 2000.

Click on graph for larger image.

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased to 370,000.

The 4-week average has declined for three consecutive weeks. The average has been between 363,000 and 384,000 all year.

And here is a long term graph of weekly claims:


This was close the consensus forecast of 371,000.

All current Employment Graphs

by Calculated Risk on 5/23/2012 09:01:00 PM

The Greek election is June 17th, and Greece will be funded through the election. But the contingency planning has started ... from the WSJ: Europe Plans for Greece Exit

Finance-ministry officials from the 17 countries that use the euro agreed earlier this week on the need to develop national contingency plans in case Greece drops out of the common currency, euro-zone officials said. The plans would seek to address what would be an unprecedented event in the modern financial system: how to buffer government bond markets, the banking sector and other financial markets in the event of a Greek exit.
...
Europe's leaders emphasize they want to avoid a Greek exit and warn of turmoil in Greece and beyond if the country leaves.

From the Athens News: Euro exit fears hinder tax collecting efforts

Two tax officials who declined to be named told Reuters that May revenues fell by 15-30 percent in tax offices away from the major cities and relative wealth centres of Athens and Thessaloniki.

"People are suspending some payments because we are in a pre-election period and also because of uncertainty stemming from a potential Greek euro exit," said the finance ministry official

And on Thursday:

• At 8:30 AM ET, the Census Bureau is scheduled to release the Durable Goods report for April. The consensus is for a 0.5% increase in durable goods orders.

• At 8:30 AM, the Department of Labor will release the Unemployment Insurance Weekly Claims report. The consensus is for claims to be essentially unchanged at 371 thousand compared to 370 thousand last week.

• Also the Kansas City Fed regional Manufacturing Survey for May will be released at 11:00 AM, and NY Fed Predisent William Dudley speaks at 10:30 AM.

Earlier on new home sales:
• New Home Sales increase in April to 343,000 Annual Rate • New Home Sales Comments
• New Home Sales graphs

by Calculated Risk on 5/23/2012 05:16:00 PM

CR Note: This is from Trulia chief economist Jed Kolko:

Dissecting the House Price Indices

Each month, several data releases track house price changes. Case-Shiller, CoreLogic, the Federal Housing Finance Agency (FHFA), the National Association of Realtors (NAR) and others report monthly sales-price trends, and the Trulia Price Monitor reports trends in asking prices, a leading indicator of sales prices. These indices often show different trends even for the same time period. Some of the differences among these indices are well-known, such as the fact that FHFA’s traditional index is based on transactions involving conforming, conventional Fannie Mae & Freddie Mac mortgages, while other indices (including the newer FHFA expanded-data index) cover a broader set of homes. But other, more technical differences help account for why some indices go up while others go down, including how they handle:

• The mix of homes listed and sold.
• Seasonal patterns in home prices.
• Weighting of homes and metros.

How much do these issues really matter for price trends? A lot, it turns out. In constructing the Trulia Price Monitor, we (1) adjust for the mix of homes listed, (2) adjust for seasonality, and (3) “weight” homes equally so that our national trend best represents what’s going on with the typical home in the largest 100 metros. Using this approach, we found that asking prices nationally rose 0.2% year-over-year and 1.9% quarter-over-quarter in April. Other price indices take different approaches, and mix-adjustment, seasonal adjustment, and value-weighting all have pros and cons. To see how much these issues matter, we used our data to see what the price trends would look like using different technical approaches.

Mix of homes listed and sold.

The price of a home depends on its size, location, and many other factors. For example, if larger homes or homes in more expensive neighborhoods happen to be listed or sold, the average (or median) listing or sales price will rise. That doesn’t mean that the typical home has increased in value – which is what most owners, buyers, sellers, and investors really care about. To know how the typical home’s value has changed, most price indices adjust for the mix of homes that are listed or sold, either by factoring in specific attributes of the home like its size and location (hedonic models, which the Trulia Price Monitor and FNC use) or by looking only at how prices have changed for the same home over time (repeat-sales models, which Case-Shiller, FHFA, and CoreLogic use). How much does the changing the mix of homes matter? The Trulia Price Monitor for April 2012 showed that prices nationally increased 0.2% year-over-year; this adjusts for the mix of homes. But without adjusting for home size, neighborhood, and other factors, the median listing price increased by 8.1% year-over-year. That’s a huge difference and that can partly be attributed to the fact that homes listed today are, on average, 6.2% larger than a year ago. They also tend to be located in slightly more expensive neighborhoods.

The shift toward larger homes on the market means that price indices that don’t adjust for the mix of homes are showing much larger price increases than what the typical home is experiencing. So why look at any price trends that don’t adjust for the mix of homes? Unadjusted price trends do reflect how typical transaction amounts are changing, which affects real estate commissions and the health of the real estate industry.

Seasonal patterns in home prices.

Home prices – both asking and sales – follow predictable seasonal patterns, dipping in winter and rising in spring and summer. (Other housing activities, like sales volume and construction starts, swing even more with the seasons than prices do.) Comparing home prices at the same time of the year takes out any seasonal effect, but quarter-over-quarter or month-over-month changes can be strongly affected by seasonal patterns.

The Trulia Price Monitor for April 2012 showed that prices increased nationally quarter-over-quarter by 1.9%, seasonally adjusted, but by 4.8% without adjusting for seasonality since the adjustment removes the regular springtime price jump.

Seasonal adjustment has its challenges. If the seasonal pattern changes over time – like if winters get warmer and cause housing activity to drop off less in winter – seasonal adjustment methods need to reflect those changes. Not-seasonally-adjusted trends are still useful because they show what buyers and sellers are actually experiencing in the market right now and can help them time when in the year to buy or sell. But to detect if and when housing prices are finally reaching a sustained turnaround, seasonal adjustment is needed to distinguish the underlying trend from regular seasonal patterns.

The Trulia Price Monitor, Case-Shiller and FHFA report seasonally adjusted price changes, even though Case-Shiller emphasizes the non-seasonally-adjusted trends. Most other indices only report non-seasonally-adjusted trends.

Weighting of homes and metros.

In the Case-Shiller and CoreLogic indices, higher-priced homes count more – they are “value-weighted”; in contrast, the Trulia Price Monitor, the FHFA index, and most other indices don’t put extra weight on higher-priced homes. Why give more weight to pricier homes? Higher-priced homes should get more weight if the purpose of an index is to assess movements in the value of a real-estate portfolio. If, for instance, a $1,000,000 real estate portfolio consists of two homes, one initially worth $900,000 and one initially worth $100,000, the change in the overall value of the portfolio depends a lot more on the percentage change in the value of the $900,000 house than the $100,000 house. In other words, weighting by home price yields an index that shows how the value of a dollar invested in real estate changes. The Trulia Price Monitor weights homes equally, regardless of price, in order to show how the value of a typical home is changing – rather than the value of a dollar invested in real estate. (FHFA doesn’t use value-weighting, either.)

Value-weighting potentially matters a lot for price trends if high-priced and low-priced homes in a market are trending differently. We tested the potential impact of value-weighting by comparing the year-over-year price change in several metro areas from the Trulia Price Monitor with the price change we would have reported for those same metros over the same time period but with value-weighting. The Trulia Price Monitor for April 2012 showed that prices in New York decreased 2.6% year-over-year, but with value-weighting prices decreased just 0.3%. In Los Angeles, the Trulia Price Monitor showed that prices decreased 2.8% without value-weighting but increased 0.7% value-weighted. In Phoenix, the Trulia Price Monitor showed that prices increased 15.8% without value-weighting, but increased only 11.1% value-weighted. In short, value-weighting can change the price trend either up or down by several percentage points – a big difference for what sounds like an obscure technical issue.

Finally, value-weighting can lead to expensive metro areas counting heavily in a broad home price index. The New York and Los Angeles metros together account for 48% of the Case-Shiller Composite 10 index and 35% of the Composite 20 index (based on weights in the published methodology) -- not only because those metros are large but also because they are expensive. At the same time, Houston and Philadelphia, which are among the ten largest metros in the US, are not included in the Case-Shiller Composite 20 – even though much smaller metros, like Charlotte, NC, and Portland, OR, are.

To sum up: home-price indices can disagree with each other by several percentage points depending on whether they adjust for the mix of homes, whether they adjust for seasonal patterns, and how they weight homes and local markets in the index. These technical issues help explain why different indices looking at the same market at the same time can tell very different stories.

by Calculated Risk on 5/23/2012 01:55:00 PM

The Federal Housing Finance Agency (FHFA) releases several house prices indexes. The most followed are the Purchase Only repeat sales index, both monthly and quarterly, based on Fannie and Freddie loans only, and the quarterly "expanded data series" that includes data from FHA endorsed mortgages and county recorder data licensed from DataQuick.

Here are the key results released today:
1) The quarterly Q1 seasonally adjusted purchase-only house price index showed the first year-over-year (YoY) increase since 2007.

2) The monthly (March) purchase only house price index showed a larger YoY increase of 2.7% in March compared to a 0.3% YoY increase in February. This is the largest YoY increase since 2006.

3) The expanded data series showed a smaller YoY decline of 1.3% in Q1 (smaller than the 3.0% YoY decline in Q4).

From the FHFA: HPI Shows Quarterly Increase and First Annual Increase Since 2007

U.S. house prices rose modestly in the first quarter of 2012 according to the Federal Housing Finance Agency’s (FHFA) seasonally adjusted purchase-only house price index (HPI). The FHFA HPI was up 0.6 percent on a seasonally adjusted basis since the fourth quarter of 2011. The HPI is calculated using home sales price information from Fannie Mae and Freddie Mac mortgages. ... FHFA’s seasonally adjusted monthly index for March was up 1.8 percent from February.

FHFA’s expanded-data house price index, a metric introduced in August 2011 that adds transactions information from county recorder offices and the Federal Housing Administration to the HPI data sample, rose 0.2 percent over the latest quarter. Over the latest four quarters, the index is down 1.3 percent.