by Calculated Risk on 1/11/2017 02:31:00 PM

This is a key housing market to follow since Phoenix saw a large bubble and bust, followed by strong investor buying.

The Arizona Regional Multiple Listing Service (ARMLS) reports (table below):

1) Overall sales in December were up 5.9% year-over-year.

2) Cash Sales (frequently investors) were down to 23.1% of total sales.

3) Active inventory is now down 2.9% year-over-year.  

More inventory (a theme in most of 2014) - and less investor buying - suggested price increases would slow sharply in 2014.  And prices increases did slow in 2014, only increasing 2.4% according to Case-Shiller.

In 2015, with falling inventory, prices increased a little faster -  Prices were up 6.3% in 2015 according to Case-Shiller.

This is the second consecutive month with a YoY decrease in inventory following eight months with YoY increases.  This might be a change in trend - something to watch.

December Residential Sales and Inventory, Greater Phoenix Area, ARMLS
	Sales	YoY Change Sales	Cash Sales	Percent Cash	Active Inventory	YoY Change Inventory
Dec-08	5,524	---	1,665	30.1%	53,7921	---
Dec-09	7,661	38.7%	3,008	39.3%	39,709	-26.2%1
Dec-10	8,401	9.7%	3,939	46.9%	42,463	6.9%
Dec-11	7,843	-6.6%	3,635	46.3%	24,712	-41.8%
Dec-12	7,071	-9.8%	3,211	45.4%	21,095	-14.6%
Dec-13	5,930	-16.1%	2,053	34.6%	25,511	20.9%
Dec-14	6,475	9.2%	1,893	29.2%	25,052	-1.8%
Dec-15	6,756	4.3%	1,617	23.9%	23,053	-8.0%
Dec-16	7,154	5.9%	1,655	23.1%	22,388	-2.9%
1 December 2008 probably includes pending listings

by Calculated Risk on 1/11/2017 10:27:00 AM

Late last year I posted some questions for 2017: Ten Economic Questions for 2017. I'll try to add some thoughts, and maybe some predictions for each question.

3) Employment: Through November¹, the economy has added almost 2,000,000 jobs this year, or 180,000 per month. As expected, this was down from the 230 thousand per month in 2015. Will job creation in 2017 be as strong as in 2016? Or will job creation be even stronger, like in 2014 or 2015? Or will job creation slow further in 2017?

¹Note: The December jobs report was released after I wrote this question. For 2017, the economy added 2.157 million jobs, or 180,000 per month.

For review, here is a table of the annual change in total nonfarm, private and public sector payrolls jobs since 1997.  For total and private employment gains, 2014 and 2015 were the best years since the '90s, however it appears job growth peaked in 2014.

Change in Payroll Jobs per Year (000s)
	Total, Nonfarm	Private	Public
1997	3,407	3,212	195
1998	3,047	2,734	313
1999	3,179	2,718	461
2000	1,951	1,687	264
2001	-1,726	-2,277	551
2002	-500	-733	233
2003	113	155	-42
2004	2,042	1,895	147
2005	2,514	2,328	186
2006	2,092	1,883	209
2007	1,147	859	288
2008	-3,569	-3,749	180
2009	-5,070	-4,996	-74
2010	1,066	1,282	-216
2011	2,087	2,399	-312
2012	2,149	2,219	-70
2013	2,311	2,378	-67
2014	3,015	2,885	130
2015	2,744	2,651	93
2016	2,157	1,974	183

The good news is the economy still has solid momentum heading into the new year.

The bad news - for job growth - is that a combination of demographics and a labor market nearing full employment suggests fewer jobs will be added in 2017.  Of course that should be good news for wages.

Note: Too many people compare to the '80s and '90s, without thinking about changing demographics. The prime working age population (25 to 54 years old) was growing 2.2% per year in the '80s, and 1.3% per year in the '90s. The prime working age population has actually declined slightly this decade. Note: The prime working age population is now growing slowly again, and growth will pick up the '20s.

In 2016, public employment added to total employment for the third consecutive year, but still at a fairly low level. Public hiring in 2017 will probably be similar to 2016.

The second table shows the change in construction and manufacturing payrolls starting in 2006.

	Construction Jobs (000s)	Manufacturing (000s)
2006	152	-178
2007	-195	-269
2008	-789	-896
2009	-1,047	-1,375
2010	-187	120
2011	144	207
2012	117	158
2013	211	126
2014	362	208
2015	296	26
2016	102	-45

Energy related construction hiring declined in 2016, but will probably rebound a little in 2017 since oil prices have increased.  For manufacturing, there will probably be little or no growth in the auto sector in 2017, and there will be an additional drag on manufacturing employment from the strong dollar.

So my forecast is for gains of 125,000 to 150,000 payroll jobs per month in 2017.  Lower than in 2016, but another solid year for employment gains given current demographics.

Here are the Ten Economic Questions for 2017 and a few predictions:

• Question #1 for 2017: What about fiscal and regulatory policy in 2017?
• Question #2 for 2017: How much will the economy grow in 2017?
• Question #3 for 2017: Will job creation slow further in 2017?
• Question #4 for 2017: What will the unemployment rate be in December 2017?
• Question #5 for 2017: Will the core inflation rate rise in 2017? Will too much inflation be a concern in 2017?
• Question #6 for 2017: Will the Fed raise rates in 2017, and if so, by how much?
• Question #7 for 2017: How much will wages increase in 2017?
• Question #8 for 2017: How much will Residential Investment increase?
• Question #9 for 2017: What will happen with house prices in 2017?
• Question #10 for 2017: Will housing inventory increase or decrease in 2017?

by Calculated Risk on 1/11/2017 07:00:00 AM

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

Mortgage applications increased 5.8 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending January 6, 2017. The most recent week’s results include an adjustment to account for the New Year’s Day holiday, while the previous week’s results were adjusted for the Christmas holiday.

... The Refinance Index increased 4 percent from the previous week. The seasonally adjusted Purchase Index increased 6 percent from one week earlier. The unadjusted Purchase Index increased 45 percent compared with the previous week and was 18 percent lower than the same week one year ago.
...
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.32 percent from 4.39 percent, with points decreasing to 0.41 from 0.43 (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 since 1990.

It would take a substantial increase in mortgage rates to see a significant increase in refinance activity - although we might see more cash-out refis.


The second graph shows the MBA mortgage purchase index.

Even with the increase in mortgage rates, purchase activity is still holding up.  However refinance activity has declined significantly.

by Calculated Risk on 1/10/2017 05:31:00 PM

An excellent overview from Professor Mark Thoma: Here's what really caused the housing crisis. Excerpt:

As the author of the research, Antoinette Schoar, explained in an interview:

“A lot of the narrative of the financial crisis has been that this [loan] origination process was broken, and therefore a lot of marginal and unsustainable borrowers got access to funding. In our opinion, the facts don’t line up with this narrative. … Calling this crisis a subprime crisis is a misnomer. In fact, it was a prime crisis.”

When analysts were calling it a "subprime crisis", my former co-blogger Tanta wrote "We are all subprime now!"  Subprime was just the first area of stress - this was a widespread crisis.

From Thoma:

As noted in a study by McClatchy from 2008, “Federal Reserve Board data show that more than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions;” “private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year;” and “only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that’s being lambasted by conservative critics.”

Those who blame the CRA or Fannie and Freddie don't understand what happened.

There were many causes to the crisis, but I believe the three keys were:

1) the change in lending practices and standards for private sector lending. As an example, the lenders used to use the three Cs: Credit, Capacity, and Collateral. At Tanta explained:

Does the borrower’s history establish creditworthiness, or the willingness to repay debt? Does the borrower’s current income and expense situation (and likely future prospects) establish the capacity or ability to repay the debt? Does the house itself, the collateral for the loan, have sufficient value and marketability to protect the lender in the event that the debt is not repaid?

Instead of using the three Cs, the private lenders innovated and just used FICO scores, and then eventually little or nothing to underwrite the loan.  There were other innovative changes in lending practices that didn't work out very well.

2) The rating agencies models were based on prior lending methods, and weren't adjusted sufficiently to account for the new (non-existent) underwriting standards.  This meant the private label MBS was rated to highly.

3) The regulators turned a blind eye to the loose lending and excessive concentrations.  I was talking with field regulators in 2005 and 2006, and they were all terrified.  I was told the appointees at the top of the agencies were blocking any effort to tighten standards.

There were many causes to the crisis, and Mark Thoma does a good job of debunking a few false narratives.

by Calculated Risk on 1/10/2017 02:47:00 PM

Late last year I posted some questions for 2017: Ten Economic Questions for 2017. I'll try to add some thoughts, and maybe some predictions for each question.

4) Unemployment Rate: The unemployment rate was at 4.6% in November, down 0.4 percentage points year-over-year.  Currently the FOMC is forecasting the unemployment rate will be in the 4.5% to 4.6% range in Q4 2017.  What will the unemployment rate be in December 2017?

Note: The unemployment rate was 4.7% in December 2016.

Forecasting the unemployment rate includes forecasts for economic and payroll growth, and also for changes in the participation rate. Note: The participation rate is the percent of the working age population (16 and over) that is in the labor force.

On participation: We can be pretty certain that the participation rate will decline over the next couple of decades based on demographic trends.   However, over the last several years, the participation rate has been fairly steady as the stronger labor market offset the long term trend.

Here is a table of the participation rate and unemployment rate since 2008.

Unemployment and Participation Rate for December each Year
December of	Participation Rate	Change in Participation Rate (percentage points)	Unemployment Rate
2008	65.8%		7.3%
2009	64.6%	-1.2	9.9%
2010	64.3%	-0.3	9.3%
2011	64.0%	-0.3	8.5%
2012	63.7%	-0.3	7.9%
2013	62.9%	-0.8	6.7%
2014	62.7%	-0.2	5.6%
2015	62.7%	0.0	5.0%
2016	62.7%	0.0	4.7%

Depending on the estimate for the participation rate and job growth (next question), it appears the unemployment rate will declining slightly by December 2017 from the current 4.7%.   My guess is based on the participation rate declining slightly in 2017 - as the long term trends continue - and for decent job growth in 2017, but less than in 2016.

Here are the Ten Economic Questions for 2017 and a few predictions:

• Question #1 for 2017: What about fiscal and regulatory policy in 2017?
• Question #2 for 2017: How much will the economy grow in 2017?
• Question #3 for 2017: Will job creation slow further in 2017?
• Question #4 for 2017: What will the unemployment rate be in December 2017?
• Question #5 for 2017: Will the core inflation rate rise in 2017? Will too much inflation be a concern in 2017?
• Question #6 for 2017: Will the Fed raise rates in 2017, and if so, by how much?
• Question #7 for 2017: How much will wages increase in 2017?
• Question #8 for 2017: How much will Residential Investment increase?
• Question #9 for 2017: What will happen with house prices in 2017?
• Question #10 for 2017: Will housing inventory increase or decrease in 2017?

by Calculated Risk on 1/10/2017 12:10:00 PM

Earlier from the National Federation of Independent Business (NFIB): Small Business Optimism Skyrocketed in December

Small business optimism rocketed to its highest level since 2004, with a stratospheric 38-point jump in the number of owners who expect better business conditions, according to the monthly National Federation of Independent Business (NFIB) Index of Small Business Optimism, released today.
...
The Index reached 105.8, an increase of 7.4 points. Leading the charge was “Expect Better Business Conditions,” which shot up from a net 12 percent in November to a net 50 percent last month.
...
Despite sharply higher optimism, hiring activity remained flat in December. Job creation increased by 0.01 workers per firm and job openings dropped two points. According to the NFIB Jobs report, released last week, finding qualified workers remains a persistent problem for small business owners.
emphasis added

Click on graph for larger image.

This graph shows the small business optimism index since 1986.

The index increased to 105.8 in December.

This is the highest level since 2004.

by Calculated Risk on 1/10/2017 10:07:00 AM

From the BLS: Job Openings and Labor Turnover Summary

The number of job openings was little changed at 5.5 million on the last business day of November, the U.S. Bureau of Labor Statistics reported today. Over the month, hires and separations were also little changed at 5.2 million and 5.0 million, respectively.....
...
The number of quits was little changed in November at 3.1 million. The quits rate was 2.1 percent. Over the month, the number of quits was little changed for total private and for government.
emphasis added

The following graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.

This series started in December 2000.

Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. This report is for November, the most recent employment report was for December.

Click on graph for larger image.


Note that hires (dark blue) and total separations (red and light blue columns stacked) are pretty close each month. This is a measure of labor market turnover.  When the blue line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs.

Jobs openings increased in November to 5.522 million from 5.451 million in October.  Job openings are mostly moving sideways at a high level.

The number of job openings (yellow) are up 6% year-over-year.

Quits are up 7% year-over-year. These are voluntary separations. (see light blue columns at bottom of graph for trend for "quits").

This is another solid report.

by Calculated Risk on 1/09/2017 07:44:00 PM

From Matthew Graham at Mortgage News Daily: Mortgage Rates Recover Most of Friday's Losses

Mortgage rates recovered much of Friday's losses today, moving back near the lowest levels in more than a month. To be fair, that's a claim they could have made on Friday, which was still the 2nd best day in a month despite the deterioration vs Thursday. 2017 has consequently been "so far, so good" for rates. When combined with the 2nd half of December, rates are a quarter of a point lower on average, and as much as a half point lower at certain lenders.

The most prevalent conventional 30yr fixed rate remains 4.125% on top tier scenarios.
emphasis added

Tuesday:
• At 6:00 AM, NFIB Small Business Optimism Index for December.

• At 10:00 AM, Job Openings and Labor Turnover Survey for November from the BLS. Jobs openings decreased in October to 5.534 million from 5.631 million in September.

by Calculated Risk on 1/09/2017 01:44:00 PM

California has been enduring a five year drought, but it is raining in SoCal and snowing in the mountains this year.

Here are a few resources to track the rain and snow.

These tables show the snowpack in the North, Central and South Sierra. Currently the snowpack is about 101% of normal for this date in the North, 118% of normal in the Central Sierra, and 167% of normal in the Southern Sierra.  A great start to the season.

And here are some plots comparing the current and previous years to the average, a very dry year ('14-'15) and a wet year ('82-'83). This winter is above normal so far.

And for Los Angeles, here is a historical table of annual rainfall. After five years of significantly below average rainfall, this year is above normal (and the rain is still falling).

It is too early to declare the five-year drought over, but this is good news for the state and the state economy. It will be interesting to see how much the reservoirs fill up in the Spring.

For Pacific Crest Trail and John Muir Trail hikers, I recommend using the Upper Tyndall Creek sensor to track the snow conditions. This graph shows the snow water content for Upper Tyndall Creek for the last 40 years. Note: I hiked the trail in September 1998 - a very wet year - and there was snow all year on Mt. Whitney.

There were four very dry years in a row, and then last winter was a little better - but still below normal.

There is already as much snow this year as last year.

by Calculated Risk on 1/09/2017 10:45:00 AM

Late last year I posted some questions for 2017: Ten Economic Questions for 2017. I'll try to add some thoughts, and maybe some predictions for each question.

5) Inflation: The inflation rate has increased a little recently, and some key measures are now close to the the Fed's 2% target. Will core inflation rate rise in 2017? Will too much inflation be a concern in 2017?

Although there are different measure for inflation (including some private measures) they all show that inflation is now close to the Fed's 2% inflation target - except Core PCE.

Note:  I follow several measures of inflation, median CPI and trimmed-mean CPI from the Cleveland Fed.  Core PCE prices (monthly from the BEA) and core CPI (from the BLS).

Click on graph for larger image.

On a year-over-year basis in November, the median CPI rose 2.5%, the trimmed-mean CPI rose 2.1%, and the CPI less food and energy rose 2.1%. Core PCE is for October and increased 1.7% year-over-year.

On a monthly basis, median CPI was at 2.2% annualized, trimmed-mean CPI was at 1.9% annualized, and core CPI was at 1.8% annualized.

These measures have been trending up slowly.

The Fed is projecting core PCE inflation will increase to 1.8% to 1.9% by Q4 2017.  However there are risks for higher inflation.  The labor market is approaching full employment, and the new administration is proposing some fiscal stimulus (tax cuts, possible infrastructure spending), so it is possible - as a result - that inflation will increase more than expected in 2017 and 2018.

Currently I think PCE core inflation (year-over-year) will increase further and be close to 2% in 2017, but too much inflation will still not be a serious concern in 2017.

Here are the Ten Economic Questions for 2017 and a few predictions:

• Question #1 for 2017: What about fiscal and regulatory policy in 2017?
• Question #2 for 2017: How much will the economy grow in 2017?
• Question #3 for 2017: Will job creation slow further in 2017?
• Question #4 for 2017: What will the unemployment rate be in December 2017?
• Question #5 for 2017: Will the core inflation rate rise in 2017? Will too much inflation be a concern in 2017?
• Question #6 for 2017: Will the Fed raise rates in 2017, and if so, by how much?
• Question #7 for 2017: How much will wages increase in 2017?
• Question #8 for 2017: How much will Residential Investment increase?
• Question #9 for 2017: What will happen with house prices in 2017?
• Question #10 for 2017: Will housing inventory increase or decrease in 2017?