by Calculated Risk on 6/05/2014 06:55:00 PM

Note: This is not Mortgage Equity Withdrawal (MEW) data from the Fed. The last MEW data from Fed economist Dr. Kennedy was for Q4 2008.

The following data is calculated from the Fed's Flow of Funds data (released this morning) and the BEA supplement data on single family structure investment. This is an aggregate number, and is a combination of homeowners extracting equity - hence the name "MEW", but there is little MEW right now - and normal principal payments and debt cancellation.

For Q1 2014, the Net Equity Extraction was minus $74 billion, or a negative 2.3% of Disposable Personal Income (DPI). 

Click on graph for larger image.

This graph shows the net equity extraction, or mortgage equity withdrawal (MEW), results, using the Flow of Funds (and BEA data) compared to the Kennedy-Greenspan method.

There are smaller seasonal swings right now, perhaps because there is a little actual MEW (this is heavily impacted by debt cancellation right now).

The Fed's Flow of Funds report showed that the amount of mortgage debt outstanding decreased by $37 billion in Q1. Compared to recent years, this was a small decrease in mortgage debt.

The Flow of Funds report also showed that Mortgage debt has declined by almost $1.3 trillion since the peak. This decline is mostly because of debt cancellation per foreclosures and short sales, and some from modifications. There has also been some reduction in mortgage debt as homeowners paid down their mortgages so they could refinance. With residential investment increasing, and a slower rate of debt cancellation, it is possible that MEW will turn positive again soon.

For reference:

Dr. James Kennedy also has a simple method for calculating equity extraction: "A Simple Method for Estimating Gross Equity Extracted from Housing Wealth". Here is a companion spread sheet (the above uses my simple method).

For those interested in the last Kennedy data included in the graph, the spreadsheet from the Fed is available here.

by Calculated Risk on 6/05/2014 03:17:00 PM

Friday at 8:30 AM ET, the BLS will release the employment report for May. The consensus, according to Bloomberg, is for an increase of 213,000 non-farm payroll jobs in May (range of estimates between 110,000 and 240,000), and for the unemployment rate to increase to 6.4% (a slight bounce back following the sharp decline in April).

Note: The BLS reported 288,000 payroll jobs added in April with the unemployment rate at 6.3%.

Here is a summary of recent data:

• The ADP employment report showed an increase of 179,000 private sector payroll jobs in May. This was below expectations of 210,000 private sector payroll jobs added. The ADP report hasn't been very useful in predicting the BLS report for any one month, but in general, this suggests employment growth below expectations.

• The ISM manufacturing employment index decreased in May to 52.8%. A historical correlation between the ISM manufacturing employment index and the BLS employment report for manufacturing, suggests that private sector BLS manufacturing payroll jobs decreased about 5,000 in May. The ADP report indicated a 10,000 increase for manufacturing jobs in May.

The ISM non-manufacturing employment index increased in May to 52.4%. A historical correlation between the ISM non-manufacturing employment index and the BLS employment report for non-manufacturing, suggests that private sector BLS non-manufacturing payroll jobs increased about 135,000 in May.

Combined, the ISM surveys suggest about 130,000 payroll jobs added in May (note that the ISM diffusion indexes are based on number of firms, not employees - and the timing is different).

• Initial weekly unemployment claims averaged close to 310,000 in May, the lowest level since 2007. However for the BLS reference week (includes the 12th of the month), initial claims were at 327,000; this was up from 305,000 during the reference week in April.

The higher reference week reading suggests some downside to the consensus forecast.

• The final May Reuters / University of Michigan consumer sentiment index decreased to 81.9 from the March reading of 84.1. This is frequently coincident with changes in the labor market, but there are other factors too.

• On small business hiring: The small business index from Intuit showed a 35,000 increase in small business employment in May - the largest gain in more than a year. From Intuit:

"This month's employment increase is the largest we've seen in more than a year. In addition to the impressive increase of jobs this month, the hiring rate is also at the highest level we've seen since early 2009," said Susan Woodward, the economist who works with Intuit to create the indexes.

And from NFIB: NFIB Jobs Statement: Employment Improves a Bit, Raises New Hopes?

“NFIB owners increased employment by an average of 0.11 workers per firm in May (seasonally adjusted), the eighth positive month in a row and the best string of gains since 2006. ... Job creation plans continued to strengthen ..."

• Conclusion: Most of the data was on the downside with the exception of small business hiring. The ADP report was lower in May than in April, and below forecasts.  Weekly unemployment claims were higher during the reference period, and the ISM indexes suggest lower hiring. However the Intuit small business index showed the most hiring in a year.

Also - any bounce back from the severe winter weather probably happened in March and April.

There is always some randomness to the employment report, but the I'll take the under on the consensus forecast of 213,000 nonfarm payrolls jobs added in May.

Final note: A key number will be 113,000 jobs added (including all revisions).  This will put employment above the pre-recession peak.

by Calculated Risk on 6/05/2014 01:31:00 PM

From Trulia chief economist Jed Kolko: Home Price Gains Finally More Balanced, Sustainable, and Widespread

Asking home prices rose at their slowest rate in 13 months, rising just 8.0% year-over-year (7.2% excluding foreclosures). Although this year-over-year increase is slower than in previous months, an 8.0% increase is still far above the long-term historical norm for home-price appreciation. Furthermore, prices continue to climb in the most recent quarter: the 2.4% quarter-over-quarter increase in May 2014 is equivalent to 9.9% on an annualized basis. Finally, price gains continue to be widespread, with 93 of the 100 largest metros clocking quarter-over-quarter price increases, seasonally adjusted.

Nationally, asking home prices are rising slower than in previous months, but the real change has been the price slowdown in the hyper-rebounding markets of the West. In May 2014, none of the 100 largest metros had a year-over-year price gain of more than 20%; the steepest increase was 18.8%, in Riverside-San Bernardino. Among the markets with the biggest price gains today, three – Las Vegas, Sacramento, and Oakland – have had significant slowdowns in year-over-year gains, from around 30% in May 2013 to around 15% in May 2014. In contrast, price gains accelerated dramatically in Chicago, up 13.5% year-over-year in May 2014 versus just 3.6% in May 2013. Overall, half of the top 10 markets with the largest price gains are outside the West, another big change from last year when almost all of the biggest price increases were in the West.
...
Rents are up 5.1% year-over-year nationally, with apartment rents up 5.8% and single-family rents up 2.1%.
emphasis added

Here is the slowdown: In November 2013, year-over-year asking prices were up 12.2%. In December, the year-over-year increase slowed slightly to 11.9%. In January 11.4%, in February 10.4%, in March 10.0%, April 9.0% and now in May 8.0%.

This suggests prices are still increasing, but at a slower pace.

Note: These asking prices are SA (Seasonally Adjusted) - and adjusted for the mix of homes - and this suggests further house price increases, but at a slower rate, over the next few months on a seasonally adjusted basis.

by Calculated Risk on 6/05/2014 12:00:00 PM

The Federal Reserve released the Q1 2014 Flow of Funds report today: Flow of Funds.

According to the Fed, household net worth increased in Q1 compared to Q4, and is at a new record high. Net worth peaked at $68.9 trillion in Q2 2007, and then net worth fell to $55.6 trillion in Q1 2009 (a loss of $13.3 trillion). Household net worth was at $81.8 trillion in Q1 2014 (up $26.2 trillion from the trough in Q1 2009).

The Fed estimated that the value of household real estate increased to $20.2 trillion in Q1 2014. The value of household real estate is still $2.5 trillion below the peak in early 2006.

Click on graph for larger image.

The first graph shows Households and Nonprofit net worth as a percent of GDP.  Although household net worth is at a record high, as a percent of GDP it is still slightly below the peak in 2006 (housing bubble), but above the stock bubble peak.

This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages). Note that this does NOT include public debt obligations.

This ratio was increasing gradually since the mid-70s, and then we saw the stock market and housing bubbles. The ratio has been trending up and increased again in Q1 with both stock and real estate prices increasing.

This graph shows homeowner percent equity since 1952.

Household percent equity (as measured by the Fed) collapsed when house prices fell sharply in 2007 and 2008.

In Q1 2014, household percent equity (of household real estate) was at 53.6% - up from Q4, and the highest since Q1 2007. This was because of both an increase in house prices in Q1 (the Fed uses CoreLogic) and a reduction in mortgage debt.

Note: about 30.3% of owner occupied households had no mortgage debt as of April 2010. So the approximately 50+ million households with mortgages have far less than 50.7% equity - and millions have negative equity.

The third graph shows household real estate assets and mortgage debt as a percent of GDP.

Mortgage debt decreased by $37 billion in Q1.  

Mortgage debt has now declined by $1.28 trillion from the peak. Studies suggest most of the decline in debt has been because of foreclosures (or short sales), but some of the decline is from homeowners paying down debt (sometimes so they can refinance at better rates).

The value of real estate, as a percent of GDP, was up in Q1 (as house prices increased), and somewhat above the average of the last 30 years (excluding bubble). However household mortgage debt, as a percent of GDP, is still historically high, suggesting still a little more deleveraging ahead for certain households.

by Calculated Risk on 6/05/2014 09:22:00 AM

From CoreLogic: CoreLogic Reports 312,000 Residential Properties Regained Equity in Q1 2014

CoreLogic ... today released new analysis showing more than 300,000 homes returned to positive equity in the first quarter of 2014, bringing the total number of mortgaged residential properties with equity to more than 43 million. The CoreLogic analysis indicates that approximately 6.3 million homes, or 12.7 percent of all residential properties with a mortgage, were still in negative equity as of Q1 2014 compared to 6.6 million homes, or 13.4 percent for Q4 2013. As a year-over-year comparison, the negative equity share was 20.2 percent, or 9.8 million homes, in Q1 2013.

... Of the 43 million residential properties with equity, approximately 10 million have less than 20-percent equity. Borrowers with less than 20-percent equity, referred to as “under-equitied,” may have a more difficult time refinancing their existing home or obtaining new financing to sell and buy another home due to underwriting constraints. Under-equitied mortgages accounted for 20.6 percent of all residential properties with a mortgage nationwide in Q1 2014, with more than 1.5 million residential properties at less than 5-percent equity, referred to as near-negative equity. Properties that are near-negative equity are considered at risk if home prices fall. ...

Despite the massive improvement in prices and reduction in negative equity over the last few years, many borrowers still lack sufficient equity to move and purchase a home,” said Sam Khater, deputy chief economist for CoreLogic. “One in five borrowers have less than 10 percent equity in their property, which is not enough to cover the down payment and additional costs associated with a conventional mortgage.”
emphasis added

Click on graph for larger image.

This graph shows the break down of negative equity by state. Note: Data not available for some states. From CoreLogic:

"Nevada had the highest percentage of mortgaged properties in negative equity at 29.4 percent, followed by Florida (26.9 percent), Mississippi (20.1 percent), Arizona (20.1 percent) and Illinois (19.7 percent). These top five states combined account for 31.1 percent of negative equity in the United States. "

Note: The share of negative equity is still very high in Nevada and Florida, but down significantly from a year ago (Q1 2013) when the negative equity share in Nevada was at 45.4 percent, and at 38.1 percent in Florida.

The second graph shows the distribution of home equity in Q1 compared to Q4 2013. Close to 5% of residential properties have 25% or more negative equity, down slightly from Q4.

In Q1 2013, there were 9.8 million properties with negative equity - now there are 6.3 million.  A significant change.

by Calculated Risk on 6/05/2014 08:30:00 AM

The DOL reports:

In the week ending May 31, the advance figure for seasonally adjusted initial claims was 312,000, an increase of 8,000 from the previous week's revised level. The previous week's level was revised up by 4,000 from 300,000 to 304,000. The 4-week moving average was 310,250, a decrease of 2,250 from the previous week's revised average. This is the lowest level for this average since June 2, 2007 when it was 307,500. The previous week's average was revised up by 1,000 from 311,500 to 312,500.

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

The previous week was revised up from 300,000.

The following graph shows the 4-week moving average of weekly claims since January 1971.

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 310,250.

This was close to the consensus forecast of 310,000.  The 4-week average is at the lowest level since June 2007 and is at normal levels for an expansion.

by Calculated Risk on 6/04/2014 07:05:00 PM

A few analyst views on the ECB decision tomorrow via the WSJ: The Market Says the ECB Will Act. What to Expect Next. As an example from Credit Agricole economists:

“We do not believe the ECB can afford to do nothing this week after having intentionally raised hopes of further monetary easing. While the maximum impact from an ECB rate cut would come with a negative deposit rate and liquidity-boosting measures, […] there is no guarantee that negative rates alone would boost bank lending. However, credit easing measures are becoming increasingly likely, either indirectly, via LTRO, or directly, via private quantitative easing. Communication will be an important part of the June ‘package’. We expect ECB President Mario Draghi to leave the door open to unconventional action in case inflation fails to pick up by year-end.”

Should be interesting!

Wednesday:
• 7:45 AM ET (1:45 PM CET) the ECB meets in Frankfurt. From Nomura:

We expect the ECB to deliver a package of measures on 5 June to ease monetary policy. We expect a 10bp cut to all key interest rates, taking the refi rate down to 0.15%, the deposit rate negative for the first time to -0.10% and the marginal lending facility rate down to 0.65%. We also expect an extension of the forward guidance on liquidity provisions, with the fixed-rate full-allotment procedure extended by a further 12 months to at least the end of June 2016. We also expect the ECB to launch a targeted LTRO programme in June (60% probability), to address credit weakness and risks to the recovery from this channel.

• Early: the Trulia Price Rent Monitors for May. This is the index from Trulia that uses asking house prices adjusted both for the mix of homes listed for sale and for seasonal factors.

• At 8:30 AM, the initial weekly unemployment claims report will be released. The consensus is for claims to increase to 310 thousand from 300 thousand.

• At 12:00 PM, the Q1 Flow of Funds Accounts of the United States from the Federal Reserve.

by Calculated Risk on 6/04/2014 02:07:00 PM

Fed's Beige Book "Prepared at the Federal Reserve Bank of New York and based on information collected on or before May 23, 2014."

All twelve Federal Reserve Districts report that economic activity expanded during the current reporting period. The pace of growth was characterized as moderate in the Boston, New York, Richmond, Chicago, Minneapolis, Dallas, and San Francisco Districts, and modest in the remaining regions. Compared with the previous report, the pace of growth picked up in the Cleveland and St. Louis Districts but slowed slightly in the Kansas City District.

And on real estate:

Residential real estate activity has been mixed since the last report, with a lack of inventory at times cited as a constraining factor. Boston, New York, and Kansas City indicated that existing home sales were being held back due to low or dwindling inventories. Sales rose modestly in the Cleveland, Richmond, Atlanta, Chicago, and Dallas Districts, with inventories described as low in Richmond and Chicago and declining in Cleveland. Sales activity, however, softened in the Philadelphia, St. Louis, Minneapolis, and San Francisco Districts, though Philadelphia did note some signs of improvement in May. San Francisco attributed some of the weakness to severe weather. Home prices continued to increase across most of the Districts; Boston reported some pullback in prices of single-family homes, though condo prices in that District, as well as in New York, rose. New York, Chicago, and Dallas reported strengthening demand for apartment rentals, whereas Boston noted some slackening in demand.

Homebuilders gave mixed reports on new home sales and construction in recent weeks: Residential construction strengthened, to varying degrees in the New York, Richmond, Atlanta, Chicago, Kansas City, and Dallas Districts. However, Philadelphia, St. Louis, and Minneapolis indicated some weakening in new home sales and construction. Overall residential construction activity was mixed across the San Francisco District, though contacts there expect activity will increase over the next year. Both Boston and New York reported a good deal of recent multi-family development at the high end of the market, while Cleveland, Richmond, Atlanta, Chicago, and Dallas noted strength in multi-family construction more generally.

Non-residential construction activity was steady to stronger in most Districts over the latest reporting period, with strengthening reported in the Boston, St. Louis, and Kansas City Districts. Cleveland described pipeline activity as strong, and San Francisco noted that a number of public and commercial high rise projects have been announced or are underway. In contrast, Minneapolis reported a decline in non-residential construction activity, and Philadelphia characterized it as steady at a low level; Chicago described activity as mixed--with office construction weak but industrial and some segments of retail fairly strong. The commercial real estate market was mostly stronger since the last report. Leasing activity and vacancy rates improved in the Richmond, Atlanta, Chicago, Minneapolis, Kansas City, Dallas, and San Francisco Districts, and were generally steady in the Boston, New York, Philadelphia, and St. Louis Districts. Dallas described market conditions as robust.
emphasis added

Some more positive comments on commercial real estate.  Residential is mixed.

by Calculated Risk on 6/04/2014 10:00:00 AM

The May ISM Non-manufacturing index was at 56.3%, up from 55.5% in April. The employment index increased in May to 52.4%, up from 51.3% in April. Note: Above 50 indicates expansion, below 50 contraction.

From the Institute for Supply Management: May 2014 Non-Manufacturing ISM Report On Business®

Economic activity in the non-manufacturing sector grew in May for the 52nd consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM® Report On Business®.

The report was issued today by Anthony Nieves, CPSM, C.P.M., CFPM, chair of the Institute for Supply Management® (ISM®) Non-Manufacturing Business Survey Committee. "The NMI® registered 56.3 percent in May, 1.1 percentage points higher than April are reading of 55.2 percent. This represents continued growth at a faster rate in the Non-Manufacturing sector and is the highest reading for the index since August 2013, when the index registered 57.9 percent. The Non-Manufacturing Business Activity Index increased to 62.1 percent, which is 1.2 percentage points higher than the April reading of 60.9 percent, reflecting growth for the 58th consecutive month at a faster rate. The New Orders Index registered 60.5 percent, 2.3 percentage points higher than the reading of 58.2 percent registered in April. The Employment Index increased 1.1 percentage points to 52.4 percent from the April reading of 51.3 percent and indicates growth for the third consecutive month and at a faster rate. The Prices Index increased 0.6 percentage point from the April reading of 60.8 percent to 61.4 percent, indicating prices increased at a faster rate in May when compared to April. According to the NMI®, 17 non-manufacturing industries reported growth in May. The majority of respondents' comments indicate that that there is steady incremental growth and project a positive outlook on business conditions."
emphasis added

Click on graph for larger image.

This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index.

This was above the consensus forecast of 55.3% and suggests faster expansion in May than in April.

by Calculated Risk on 6/04/2014 08:30:00 AM

The Department of Commerce reported this morning:

[T]otal April exports of $193.3 billion and imports of $240.6 billion resulted in a goods and services deficit of $47.2 billion, up from $44.2 billion in March, revised. April exports were $0.3 billion less than March exports of $193.7 billion. April imports were $2.7 billion more than March imports of $237.8 billion.

The trade deficit was much larger than the consensus forecast of $41.0 billion.

The first graph shows the monthly U.S. exports and imports in dollars through April 2014.

Click on graph for larger image.

Both imports and exports increased in April.  

Exports are 17% above the pre-recession peak and up 3% compared to April 2013; imports are about 4% above the pre-recession peak, and up about 5% compared to April 2013. 

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

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 imports averaged $95.48 in April, up from $93.91 in March, and down from $97.74 in April 2013.  The petroleum deficit has generally been declining and is the major reason the overall deficit has declined since early 2012.

The trade deficit with China increased to $27.3 billion in April, from $24.2 billion in April 2013.  More than half of the trade deficit is related to China.

Overall it appears trade is picking up slightly.