by Calculated Risk on 1/22/2015 12:58:00 PM

I think this is the quote of the day via The Daily Telegraph: ECB unveils €1.1 trillion QE program

Mr Draghi rejected any criticism that the vast expansion of the ECB's easy-money policies would stoke inflation down the road, noting that inflation has stayed very low even after several interest rate cuts and abundant ECB loans to banks.

"There must be a statute of limitations for those who say there will be inflation," Mr Draghi said.

Some policymakers have been wrong for years, both on monetary and fiscal policy ("austerity über alles").

And on the ECB's QE, from the WSJ: ECB Unveils Stimulus to Boost Economy

ECB President Mario Draghi said the ECB will buy a total of €60 billion a month in assets including government bonds, debt securities issued by European institutions and private-sector bonds. The purchases of government bonds and those issued by European institutions will start in March and are intended to run through to September 2016, Mr. Draghi said. The risks associated with the bonds of EU institutions will be shared among eurozone central banks, but purchases of other government bonds won’t be subject to loss sharing, he said.

Mr. Draghi said bond purchases might continue beyond September 2016, and until there are clear signs that the annual rate of inflation is rising toward the central bank’s target of just below 2%.

And from the Financial Times: European Central Bank unleashes quantitative easing

Mr Draghi said the bond-buying scheme will commence in March and last until the end of September 2016, or “until we see a sustained adjustment in the path of inflation”. The €60bn monthly asset purchases include government debt, asset-backed securities and covered bonds but not corporate bonds.

This buys more time for policymakers in Germany to change their approach (I doubt they will, there is no "statute of limitations" for bad ideas).

by Calculated Risk on 1/22/2015 11:00:00 AM

From the Kansas City Fed: Tenth District Manufacturing Activity Expanded at a Slower Pace

Tenth District manufacturing activity expanded at a slower pace in January, but producers’ expectations for future activity remained at solid levels. Most price indexes were lower than last month, especially for finished goods prices.

The month-over-month composite index was 3 in January, down from 8 in December and 6 in November. The composite index is an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes. The overall slower growth was mostly attributable to declines in some types of durable goods production, particularly electronics, machinery, and metal products, some of which is likely due to lower energy activity. Looking across District states, the weakest activity was in energy-dependent Oklahoma. ... the employment index posted a five-month low.
...
“We saw weaker activity in some energy sector-related manufacturing in January, and that pulled the overall index down somewhat”, said [Chad Wilkerson, vice president and economist at the Federal Reserve Bank of Kansas City]. “But firms still reported modest overall growth in regional factory activity".

Future factory indexes continued to remain stable at mostly solid levels. The future composite index was unchanged at 19 ...
emphasis added

Two more regional Fed manufacturing surveys for January will be released this month (the Dallas and Richmond Fed surveys). It appears we are starting to see some impact from lower oil prices.

The over all impact from the decline in oil prices will be positive for the US economy, but as Tim Duy noted a couple of weeks ago about oil prices:

the negative impacts will be fairly concentrated and easy for the media to sensationalize, while the positive impacts will be fairly dispersed. We all know what is going to happen to rig counts, high-yield energy debt, and the economies of North Dakota and at least parts of Texas. "Kablooey," I think, is the technical term. Easy media fodder. Much more difficult to see the positive impact spread across the real incomes of millions of households, with particularly solid gains at the lower ends of the income distribution. This will be most likely revealed in the aggregate data and be much less newsworthy.
emphasis added

by Calculated Risk on 1/22/2015 08:30:00 AM

The DOL reported:

In the week ending January 17, the advance figure for seasonally adjusted initial claims was 307,000, a decrease of 10,000 from the previous week's revised level. The previous week's level was revised up by 1,000 from 316,000 to 317,000. The 4-week moving average was 306,500, an increase of 6,500 from the previous week's revised average. The previous week's average was revised up by 2,000 from 298,000 to 300,000.

There were no special factors impacting this week's initial claims.

The previous week was revised up to 317,000.

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 increased to 306,500.

This was higher than the consensus forecast of 300,000, and the 4-week average has moved up lately, but the low level still suggests few layoffs.  Note: We might start seeing an increase in unemployment claims due to layoffs in oil producing states.

by Calculated Risk on 1/21/2015 07:10:00 PM

Thursday:
• At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for claims to decrease to 300 thousand from 316 thousand.

• At 9:00 AM, FHFA House Price Index for November 2014. This was originally a GSE only repeat sales, however there is also an expanded index. The consensus is for a 0.3% increase.

• At 11:00 AM, the Kansas City Fed manufacturing survey for January.

And here is a repeat of a post I wrote last year: Housing: Demographics for Renting and Buying

It was over four years ago that we started discussing the turnaround for apartments. Then, in January 2011, I attended the NMHC Apartment Strategies Conference in Palm Springs, and the atmosphere was very positive. (note: the beginning of this post is from an earlier post on apartment supply and demand).

The drivers were 1) very low new supply, and 2) strong demand (favorable demographics, and people moving from owning to renting).

The demographics are still favorable for apartments, since  a large cohort is still moving into the 20 to 34 year old age group (a key age group for renters). Also, in 2015, based on Census Bureau projections, the two largest 5 year cohorts will be 20 to 24 years old, and 25 to 29 years old (the largest cohorts will no longer be the "boomers").  Note: Household formation would be a better measure than population, but reliable data for households is released with a long lag.

Click on graph for larger image.

This graph shows the population in the 20 to 34 year age group has been increasing.  This is actual data from the Census Bureau for 1985 through 2010, and current projections from the Census Bureau from 2015 through 2035.

The circled area shows the recent and projected increase for this group.

From 2020 to 2030, the population for this key rental age group is expected to remain mostly unchanged.

This favorable demographic is a key reason I've been positive on the apartment sector for the last several years - and I expect new apartment construction to stay strong for several more years.

The second graph shows the longer term trend for several key age groups: 20 to 29, 25 to 34, and 30 to 39 (the groups overlap).

This graph is from 1990 to 2060 (all data from BLS: 1990 to 2013 is actual, 2014 to 2060 is projected).

We can see the surge in the 20 to 29 age group (red).  Once this group exceeded the peak in earlier periods, there was an increase in apartment construction.  This age group will peak in 2018 (until the 2030s), and the 25 to 34 age group (orange, dashed) will peak in 2023.  This suggests demand for apartments will soften starting around 2020 +/-.

For buying, the 30 to 39 age group (blue) is important (note: see Demographics and Behavior for some reasons for changing behavior).  The population in this age group is increasing, and will increase significantly over the next 10+ years.  

This demographics is positive for home buying, and this is a key reason I expect single family housing starts to continue to increase in coming years.

by Calculated Risk on 1/21/2015 04:06:00 PM

Note: LA area ports were impacted by a trucker strike in November, and there are ongoing labor negotiations (and some slowdown).

Container traffic gives us an idea about the volume of goods being exported and imported - and possibly some hints about the trade report for December since LA area ports handle about 40% of the nation's container port traffic.

The following graphs are for inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container).

To remove the strong seasonal component for inbound traffic, the first graph shows the rolling 12 month average.

Click on graph for larger image.

On a rolling 12 month basis, inbound traffic was unchanged compared to the rolling 12 months ending in November.   Outbound traffic was down 1.0% compared to 12 months ending in November.

Inbound traffic has been increasing, and outbound traffic has been mostly moving sideways (down a little recently).

The 2nd graph is the monthly data (with a strong seasonal pattern for imports).

Usually imports peak in the July to October period as retailers import goods for the Christmas holiday, and then decline sharply and bottom in February or March (depending on the timing of the Chinese New Year).

Imports were unchanged year-over-year in December, exports were down 11% year-over-year.

Exports suggest a slowdown in Asia, but import traffic was decent considering the ongoing labor negotiations.  Hopefully the negotiations will be settled soon.

by Calculated Risk on 1/21/2015 12:44:00 PM

Just over a year ago, in November 2013, housing starts were at a 1.091 million pace on a seasonally adjusted annual rate (SAAR) basis. (Since revised to 1.105 million).

That end of the year surge in 2013 led many analysts to push up their forecast for 2014 (see blue column for November 2013 in the first graph below).

It ends up not one month in 2014 was above November 2013 (as revised).  This is a reminder not to be influenced too much by one month of data.

That brings us to this morning: the Census Bureau reported that single family starts were at 728 thousand in December, the highest level since early 2008.  If single family starts just hold that level in 2015, annual single family starts would be up about 12% over 2014.  With more growth, 20% would seem possible.  However I think 20% is too optimistic (based on lots and pricing), and just like in 2013, we shouldn't let one month of data influence us too much.

Click on graph for larger image.

This graph shows the month to month comparison between 2013 (blue) and 2014 (red).

There were 1.006 million total housing starts during 2014, up 8.7% from the 925 thousand in 2013.  Single family starts were up 4.9%, and multifamily starts up 17.1%.

The following table shows the annual housing starts since 2005, and the percent change from the previous year. The housing recovery slowed in 2014, especially for single family starts.  However I expect further growth in starts over the next several years.

Housing Starts (000s) and Annual Change
	Total	Total % Change	Single	Single % Change
2005	2,068.3	5.8%	1,715.8	6.5%
2006	1,800.9	-12.9%	1,465.4	-14.6%
2007	1,355.0	-24.8%	1,046.0	-28.6%
2008	905.5	-33.2%	622.0	-40.5%
2009	554.0	-38.8%	445.1	-28.4%
2010	586.9	5.9%	471.2	5.9%
2011	608.8	3.7%	430.6	-8.6%
2012	780.6	28.2%	535.3	24.3%
2013	924.9	18.5%	617.6	15.4%
2014	1,005.8	8.7%	648.0	4.9%

Below is an update to the graph comparing multi-family starts and completions. Since it usually takes over a year on average to complete a multi-family project, there is a lag between multi-family starts and completions. Completions are important because that is new supply added to the market, and starts are important because that is future new supply (units under construction is also important for employment).

These graphs use a 12 month rolling total for NSA starts and completions.

The blue line is for multifamily starts and the red line is for multifamily completions.

The rolling 12 month total for starts (blue line) increased steadily over the last few years, and completions (red line) have lagged behind - but completions have been catching up (more deliveries), and will continue to follow starts up (completions lag starts by about 12 months).

Note that the blue line (multi-family starts) might be starting to move more sideways.

I think most of the growth in multi-family starts is probably behind us - although I expect solid multi-family starts for a few more years (based on demographics).

The second graph shows single family starts and completions. It usually only takes about 6 months between starting a single family home and completion - so the lines are much closer. The blue line is for single family starts and the red line is for single family completions.

Note the exceptionally low level of single family starts and completions.  The "wide bottom" was what I was forecasting several years ago, and now I expect several years of increasing single family starts and completions.

by Calculated Risk on 1/21/2015 10:32:00 AM

Note: This index is a leading indicator primarily for new Commercial Real Estate (CRE) investment.

From Reuters: U.S. architecture billings index rises in December

The index rose to 52.2 in December from 50.9 in November, making it ten months that the index had risen in 2014.

A reading above 50 indicates an increase in billings.

"Particularly encouraging is the continued solid upturn in design activity at institutional firms, since public sector facilities were the last nonresidential building project type to recover from the downturn," AIA Chief Economist Kermit Baker said.
emphasis added

Click on graph for larger image.

This graph shows the Architecture Billings Index since 1996. The index was at 52.2 in December, up from 50.9 in November. Anything above 50 indicates expansion in demand for architects' services.

Note: This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions.

According to the AIA, there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction.  This index has indicated expansion for eight consecutive months, and those positive readings suggest an increase in CRE investment in 2015.

by Calculated Risk on 1/21/2015 08:30:00 AM

From the Census Bureau: Permits, Starts and Completions

Housing Starts:
Privately-owned housing starts in December were at a seasonally adjusted annual rate of 1,089,000. This is 4.4 percent above the revised November estimate of 1,043,000 and is 5.3 percent above the December 2013 rate of 1,034,000.

Single-family housing starts in December were at a rate of 728,000; this is 7.2 percent above the revised November figure of 679,000. The December rate for units in buildings with five units or more was 339,000.

An estimated 1,005,800 housing units were started in 2014. This is 8.8 percent above the 2013 figure of 924,900.
emphasis added

Building Permits:
Privately-owned housing units authorized by building permits in December were at a seasonally adjusted annual rate of 1,032,000. This is 1.9 percent below the revised November rate of 1,052,000, but is 1.0 percent above the December 2013 estimate of [1,022,000].

Single-family authorizations in December were at a rate of 667,000; this is 4.5 percent above the revised November figure of 638,000. Authorizations of units in buildings with five units or more were at a rate of 338,000 in December.

Click on graph for larger image.

The first graph shows single and multi-family housing starts for the last several years.

Multi-family starts (red, 2+ units) decreased slightly in December.  Multi-family starts are up 5% year-over-year.

Single-family starts (blue) increased in  December and are at the highest level since March 2008.

The second graph shows total and single unit starts since 1968.

 The second graph shows the huge collapse following the housing bubble, and - after moving sideways for about two years and a half years - housing is now recovering (but still historically low),

This was above expectations of 1.040 million starts in December, and starts in October and November were revised up, so this was a solid report.  I'll have more later ...

by Calculated Risk on 1/21/2015 07:00:00 AM

From the MBA: Mortgage Applications Increase in Latest MBA Weekly Survey

Mortgage applications increased 14.2 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending January 16, 2015. ...

The Refinance Index increased 22 percent from the previous week. The seasonally adjusted Purchase Index decreased 3 percent from one week earlier.
...
“Mortgage application volume increased last week to its highest level since June 2013, led by a 22 percent increase in refinance application volume. This increase was largely due to mortgage rates dropping to their lowest level since May 2013. However, the recent reduction in FHA mortgage insurance premiums also played a role: FHA refinance applications increased 57 percent last week. Even with this increase, refinances made up only 48 percent of FHA volume, compared to 73 percent for VA, and 77 percent for conventional loans,” said Mike Fratantoni, MBA’s Chief Economist.

“Conventional purchase applications were down about 3 percent for the week on a seasonally adjusted basis, but up 5 percent relative to last year at this time. FHA purchase applications were down 1 percent for the week on a seasonally adjusted basis.”

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 3.80 percent, the lowest level since May 2013, from 3.89 percent, with points increasing to 0.29 from 0.23 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.
emphasis added

Click on graph for larger image.


The first graph shows the refinance index.

2014 was the lowest year for refinance activity since year 2000.

It looks like 2015 will see more refinance activity than in 2014, especially from FHA loans!

The second graph shows the MBA mortgage purchase index.  

According to the MBA, the purchase index is up 5% from a year ago.

by Calculated Risk on 1/20/2015 07:38:00 PM

From Mortgage News Daily: Mortgage Rates Mixed to Begin Volatile Week

Mortgage rates were truly mixed today, with some lenders improving while others moved higher. More than a few were unchanged or close to it. All this despite the fact that broader interest rate benchmarks like 10yr US Treasuries were unequivocally in stronger territory.
...
The net effect of this mixed underperformance is that the most prevalent conforming, 30yr fixed rate quote remains 3.625%.

Wednesday:
• At 7:00 AM ET, the Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

• At 8:30 AM, Housing Starts for December. Total housing starts were at 1.028 million (SAAR) in November. Single family starts were at 677 thousand SAAR in November. The consensus is for total housing starts to increase to 1.040 million (SAAR) in December.

• During the day: The AIA's Architecture Billings Index for December (a leading indicator for commercial real estate).