by Calculated Risk on 7/11/2012 08:48:00 PM

Thursday will be another light day for economic data, but there will be plenty of discussion about the possibility of QE3. A few key dates for the Fed:

On Friday, Atlanta Fed President Dennis Lockhart, a voting member of the FOMC and someone in the "middle", will speak on the economic outlook. Next week, on July 17th, Fed Chairman Ben Bernanke will testify before the Senate Banking Committee, and on July 18th he will testify House Financial Services Committee.

The next FOMC meeting is on July 31st and August 1st, and the key piece of economic data to be released before the meeting is the Q2 advance GDP report on Friday, July 27th. Also there will be more data on inflation (especially CPI on July 17th, and Q2 / June PCE price index).

On the FOMC minutes from Tim Duy: FOMC Minutes Not a Smoking Gun

The minutes of the June FOMC meeting are out, and they did not deliver the much-anticipated smoking gun that would indicate QE3 was on its way. In fact, I think the minutes raise questions about another round of QE3 at all. The minutes hold many hints that policymakers are struggling to find a new direction for policy, one not necessarily dependent on balance sheet expansion.
...
Bottom Line: The minutes leaves me with the sense that it isn't so much the outlook that is holding back the Fed from further stimulus, but a lack of faith in the beneficial effects of further quantitative easing. That lack of faith may be why the bar to QE3 seems so high. So high that Fed officials are searching for other tools as the next step. Until I see more specific suggestions of other tools, I would continue to expect QE as the tool of choice. Given concerns about the functioning of the Treasuries market, MBS would seem a suitable alternative. But a building desire to explore new tools could mean a delay in any additional action. Hopefully Fed officials will give us more guidance on specific alternatives in the weeks ahead.

And from Binyamin Appelbaum at the NY Times: Fed Is Torn on Tipping Point for Action

Paul Ashworth, chief United States economist at Capital Economics, was among the analysts who chose a position in the middle, writing to clients that “officials are edging closer to launching a third round of large-scale asset purchases, but it won’t become a reality unless the recovery loses even more momentum.”

• At 8:30 AM, the initial weekly unemployment claims report will be released. The consensus is for claims to increase slightly to 375 thousand.

• Also at 8:30 AM, Import and Export Prices for May will be released. The consensus is a for a 1.9% decrease in import prices.

by Calculated Risk on 7/11/2012 03:32:00 PM

CR Note: Yesterday I posted some distressed sales data for Sacramento. I'm following the Sacramento market to see the change in mix over time (short sales, foreclosure, conventional). There has been a clear shift to fewer distressed sales in Sacramento.

Economist Tom Lawler has been digging up similar data, and he sent me the following table yesterday for several more distressed areas (I added Sacramento). For all of these areas the share of distressed sales is down from June 2011 - and for the areas that break out short sales, the share of short sales has increased (Mid-Atlantic only increased slightly) and the share of foreclosure sales are down - and down significantly.

Previous comments from Lawler:

Note that the distressed sales shares in the below table are based on MLS data, and often based on certain “fields” or comments in the MLS files, and some have questioned the accuracy of the data. Some MLS/associations only report on overall “distressed” sales.

The most striking shift from a year ago, of course, is the sharp drop in the foreclosure share of home sales ...

CR Note: So far there is no evidence of an increase in distressed sales this summer following the mortgage settlement.

	Short Sales Share		Foreclosure Sales Share		Total "Distressed" Share
	12-June	11-June	12-June	11-June	12-June	11-June
Las Vegas	34.2%	21.6%	27.8%	47.2%	62.0%	68.8%
Reno	37.0%	25.0%	21.0%	41.0%	58.0%	66.0%
Phoenix	32.8%	27.0%	14.1%	40.8%	46.8%	67.8%
Sacramento	31.0%	22.2%	23.2%	43.0%	54.2%	65.2%
Mid-Atlantic (MRIS)	10.2%	10.0%	8.7%	14.9%	18.9%	24.9%
Charlotte					14.2%	30.6%

by Calculated Risk on 7/11/2012 02:00:00 PM

From the Fed: Minutes of the Federal Open Market Committee, June 19-20, 2012 . Excerpt:

Several participants commented that it would be desirable to explore the possibility of developing new tools to promote more-accommodative financial conditions and thereby support a stronger economic recovery.
...
A few members expressed the view that further policy stimulus likely would be necessary to promote satisfactory growth in employment and to ensure that the inflation rate would be at the Committee's goal. Several others noted that additional policy action could be warranted if the economic recovery were to lose momentum, if the downside risks to the forecast became sufficiently pronounced, or if inflation seemed likely to run persistently below the Committee's longer-run objective. The Committee agreed that it was prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability. A few members observed that it would be helpful to have a better understanding of how large the Federal Reserve's asset purchases would have to be to cause a meaningful deterioration in securities market functioning, and of the potential costs of such deterioration for the economy as a whole.

This seems to suggest that a "few" members were already prepared to vote for QE3, and "several" were willing to support QE3 if the economy loses momentum or downside risks increase or inflation is "persistently below the Committee's longer-run objective".

by Calculated Risk on 7/11/2012 12:24:00 PM

Something I've been saying for months, from the WSJ: The U.S. Housing Bust Is Over

Builders began work on 26% more single-family homes in May 2012 than the depressed levels of May 2011. The stock of unsold newly built homes is back to 2005 levels. In each of the past four quarters, housing construction has added to economic growth. In the first quarter, it accounted for 0.4 percentage points of the meager 1.9% growth rate.

"Even with the overall economy slowing," Wells Fargo Securities economists said, cautiously, in a note to clients, "the budding recovery in the housing market appears to be gradually gaining momentum."
...
Housing is still far from healthy ... Still, the upturn in housing is a milestone, a particularly welcome one amid a distressing dearth of jobs. For some time, housing has been one of the biggest causes of economic weakness. It has now—barely—moved to the plus side. "A little tail wind is a lot better than a headwind," says economist Chip Case, the "Case" in Case-Shiller.

"Manufacturing had led growth and construction had lagged," JPMorgan Chase economists said last week."Now the roles are reversed: Manufacturing growth has slowed as private construction comes to life."

For the housing industry, the recovery has started. As I've noted before, the debate is now about the strength of the recovery, not whether there is a recovery. The question about house prices is not as clear, although I think prices have bottomed for the national repeat sales indexes.

by Calculated Risk on 7/11/2012 08:30:00 AM

The Department of Commerce reported:

[T]otal May exports of $183.1 billion and imports of $231.8 billion resulted in a goods and services deficit of $48.7 billion, down from $50.6 billion in April, revised. May exports were $0.4 billion more than April exports of $182.7 billion. May imports were $1.6 billion less than April imports of $233.3 billion.

The trade deficit was at the consensus forecast of $48.7 billion.

The first graph shows the monthly U.S. exports and imports in dollars through May 2012.

Click on graph for larger image.

Exports increased in May and imports decreased. Exports are 10% above the pre-recession peak and up 4% compared to May 2011; imports are at the pre-recession peak, and up about 4% compared to May 2011.

The second graph shows the U.S. trade deficit, with and without petroleum, through May.

The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.

Oil averaged $107.91 per barrel in May, down from $109.94 per barrel in April. This will decline further in June. The trade deficit with China increased to $26 billion in May, up from $24.9 billion in May 2011. Once again most of the trade deficit is due to oil and China.

Exports to the euro area were $17 billion in May, up from $16.4 billion in May 2011; so the euro area recession didn't lead to less US exports to the euro area in May.

by Calculated Risk on 7/11/2012 07:42:00 AM

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

The Refinance Index decreased 3 percent from the previous week. The seasonally adjusted Purchase Index increased 3 percent from one week earlier. ... This week’s results include an adjustment for the Fourth of July holiday.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 3.79 percent, the lowest rate in the history of the survey, from 3.86 percent, with points decreasing to 0.36 from 0.41 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.

Click on graph for larger image.

The decline in refinance activity was from a very high level.

The purchase index has increased for two consecutive weeks, but is mostly moving sideways.

by Calculated Risk on 7/10/2012 09:31:00 PM

On Wednesday the focus will be on the May trade balance report and the minutes of the June FOMC meeting:

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

• At 8:30 AM, the Trade Balance report for May is scheduled to be released by the Census Bureau. The consensus is for the U.S. trade deficit to decrease to $48.7 billion in May, down from from $50.1 billion in April. Export activity to Europe will be closely watched due to economic weakness. Also oil prices started to decline in April, and that will probably reduce the value of oil imports in May.

• At 10:00 AM, the Monthly Wholesale Trade: Sales and Inventories report for May will be released. The consensus is for a 0.3% increase in inventories.

• At 2:00 PM, the FOMC Minutes for the Meeting of June 19-20 will be released.


A question for the July economic contest:

by Calculated Risk on 7/10/2012 07:05:00 PM

Note: A couple of years ago I started watching several distressed markets very closely for a shift in the mix. We are now seeing a shift, although it is still early in the process ...

I've been following the Sacramento market to look for changes in the mix of house sales in a distressed area over time (conventional, REOs, and short sales). The Sacramento Association of REALTORS® started breaking out REOs in May 2008, and short sales in June 2009.

So far there has been a shift from REO to short sales, and the percentage of distressed sales has been declining year-over-year. This data would suggest some improvement although there are still more distressed sales to come.

In June 2012, 54.2% of all resales (single family homes and condos) were distressed sales. This was down from 58.3% last month, and down from 65.2% in June 2011. This is lowest level since the Sacramento Realtors started tracking distressed sales, but 54% distressed is still extremely high!

Here are the statistics.

Click on graph for larger image.

This graph shows the percent of REO sales, short sales and conventional sales. There is a seasonal pattern for conventional sales (stronger in the spring and summer), and distressed sales happen all year - so the percentage of distressed sales decreases every summer and the increases in the fall and winter.

There has been a sharp increase in conventional sales, and there were more short sales than REO sales in June for the third consecutive month.

Total sales were down 0.8% compared to June 2011, but conventional sales were up 30% year-over-year. Active Listing Inventory for single family homes declined 65.5% from last June, and total inventory, including "short sale contingent", was off 39% year-over-year.

Cash buyers accounted for 33.4% of all sales (frequently investors), and median prices were up 3.2% from last June.

This appears to be a little more progress, although the market is still in distress - and the full impact of the mortgage settlement is still unknown.

We are seeing similar patterns in other distressed areas.

by Calculated Risk on 7/10/2012 05:01:00 PM

First a few excerpts from this article by Diana Olick at CNBC: When Foreclosure Supplies Fall, the Bottom Falls Out of Housing

While foreclosures brought home prices down initially, they are now driving them up because there is so much demand from investors and first time buyers, looking for bargains. Supplies of these cheap homes are also dwindling, because banks are still working to modify many troubled loans, and states that require a judge in the foreclosure process are still facing a huge backlog.
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This new lack of distressed supply may lead to what housing analyst Mark Hanson calls, “an investor gut check.” He sees early results that sales volume in many of the markets that were deemed to be “recovering” are actually falling.

“First is the artificial lack of distressed supply, which is the market in all of the miracle 'recovery' regions. As I have pounded the table over for years ... 'investors and first timers are thin and volatile cohorts that have been known to up and leave markets in a matter of a month or two leading to a demand collapse'. But equally responsible are Zombie Homeowners; those without enough equity to pay a Realtor 6 percent and put 20 percent down on a new house and/or good enough credit or strong enough income to secure a new mortgage loan,” writes Hanson.

Hanson calls the lack of distressed supply “artificial” because he believes banks are holding back some distressed inventory and/or that many of the loan modifications being worked out will inevitably fail. He points out that distressed supply is vital to a market like Phoenix, because 66 percent of its current borrowers owe more on their mortgages than their homes are currently worth, and are therefore stuck in place, unable to buy or sell.

“Without repeat buyers in the market leaving a unit of supply when they move up, laterally or down (in the case of empty nesters), supply is simply removed from the market and not replaced,” notes Hanson.

Look at the headline "When Foreclosure Supplies Fall, the Bottom Falls Out of Housing". Really? I think we need to define "housing" and what a "housing recovery" looks like.

When I think of "housing", I think of 1) residential investment, especially housing starts and new home sales, and 2) house prices for existing homes. When the supply falls - especially foreclosure supply - I'd expect there to be less downward pressure on house prices, and also more opportunity for new home sales. That is what we are seeing.

So what does the headline mean? A decline in existing home sales? Yes, sales have declined year-over-year in some distressed markets (like Phoenix and Las Vegas), but that is not bad news. As I've pointed out before, those looking at the number of existing home sales to judge a "housing recovery" are looking in the wrong place.

Mark Hanson makes some interesting points, and this raises the question again of why supply has fallen so sharply. There are probably several reasons for the decline in supply: 1) negative equity keeps people from selling (and buying as Hanson notes), 2) banks aren't foreclosing quickly and are focusing more on modifications and short sales, 3) cash-flow investors have purchased a substantial number of houses, especially at the low end, and they will not be sellers for some time, and 4) seller price expectations (when sellers expect prices to stabilize, they no longer rush to sell).

For these reasons (and probably others), there is less supply. And this in turn might lead to fewer sales since investors and first time buyers are focused on the low end of the market (I also expect sales to decline from record levels in areas like Las Vegas). But lower existing home sales doesn't mean the "bottom falls out of housing". Actually it could mean the housing market is improving!

To look for a "housing recovery", we need to focus on residential investment (new home sales and housing starts) and existing home prices. Lower supply is a positive for both.

by Calculated Risk on 7/10/2012 12:37:00 PM

This is a key distressed market to follow since Las Vegas has seen the largest price decline of any of the Case-Shiller composite 20 cities. Prices, as of the March Case-Shiller report, were off 61.1% from the peak, and off 5.8% over the last year.

Sales in 2011 were at record levels - even more than during the bubble - and it looks like 2012 might be an even stronger year, even with some new rules that slow the foreclosure process.

From the GLVAR: GLVAR reports local home prices up for fifth straight month, while local housing supply continues to shrink

According to GLVAR, the total number of local homes, condominiums and townhomes sold in June was 3,945. That’s down from 4,134 in May and down from 4,540 total sales in June 2011.

Even with fewer sales last month and fewer homes listed for sale each month this year, [GLVAR President Kolleen] Kelley said existing home sales are ahead of the record pace set in 2011, when GLVAR reported 48,186 existing properties were sold in Southern Nevada.

The total number of homes listed for sale on GLVAR’s Multiple Listing Service again decreased from May to June, with a total of 16,930 single-family homes listed for sale at the end of the month. That’s down 2.4 percent from 17,346 single-family homes listed for sale at the end of May and down 25.4 percent from one year ago. GLVAR reported a total of 3,713 condos and townhomes listed for sale on its MLS at the end of June. That’s down 0.4 percent from 3,728 condos and townhomes listed for sale on its MLS at the end of May, and down 29.2 percent from one year ago.
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By the end of June, GLVAR reported 3,690 single-family homes listed without any sort of offer. That’s down 2.9 percent from 3,800 such homes listed in May and down 67.5 percent from one year ago. For condos and townhomes, the 1,083 properties listed without offers in June represented a 2.4 percent increase from 1,058 such properties listed without offers in May and a decrease of 59.2 percent from one year ago. ...
34.2 percent of all existing local homes sold during June were short sales, which occur when a lender agrees to sell a home for less than what the borrower owes on the mortgage.

Bank-owned homes accounted for 27.8 percent of all existing home sales in June, down from 32.6 percent in May.

“Since banks have been encouraging short sales and doing fewer foreclosures, short sales have finally surpassed (the sale of) foreclosures,” Kelley said.

Inventory continues to decline (down 67.5% year-over-year for single family homes) and sales are slowing, but still on pace for a record year.

The percent distressed sales was extremely high at 62% in June (short sales and foreclosures), but that was down from 67.3% in May. Some of this decline was due to the new foreclosure rules in Nevada.

It is important to understand that sales in these highly distressed markets will probably decline as the percent of distressed sales declined (sales are at record levels in Las Vegas - even above the bubble pace!). The key is to watch inventory (listed inventory is down 25.4% from a year ago, and non-contingent inventory is down 67.5%) and to watch the number of conventional sales.