by Calculated Risk on 3/03/2020 06:52:00 PM

From Matthew Graham at MortgageNewsDaily: Rates at All-Time Lows No Thanks to Fed's Emergency Cut

The Fed announced an emergency rate cut of 50bps today (0.50%). Great! So your mortgage rate could be 0.5% lower, right? Not exactly... Rates definitely moved lower today, and the Fed was definitely involved in that, but more so because their surprise rate cut proved to disillusion financial markets, thus setting off a wave of panic that benefited bonds. Excess demand for bonds means lower mortgage rates (all-time lows, by the end of the day). [Today's Most Prevalent Rates For Top Tier Scenarios 30YR FIXED - 3.0%]

Click on graph for larger image.

This graph from Mortgage News Daily shows mortgage rates since January 2011.

More than a 1/4 percentage point below the previous record low levels of late 2012.

This graph is interactive, and you could view mortgage rates back to the mid-1980s - click here for interactive graph.

by Calculated Risk on 3/03/2020 03:11:00 PM

This is an unusual situation, and this calls for targeted fiscal policy. Here is a proposal to enhance a key automatic stabilizer: unemployment insurance.

The idea is to increase the amount paid (based on various triggers) and to include parents with school closures (to help with child care).

First, based on certain triggers, the Federal Government would pay an additional 60% of whatever the state is paying for unemployment insurance (if the state is paying $300 per week, the Federal government would add $180 per week). (Note: The 60% is just an arbitrary number)

Triggers could be based on an increase in the 4-week average of unemployment claims above a certain threshold (like 250K), or industry triggers (workers in leisure industries such as airlines, hotels, etc. could qualify), or there could be geographical triggers based on a serious regional outbreak of the virus.

So this wouldn't go into effect until certain triggers happen.

Second, based on school closures, the Federal Government would pay a parent both the state share and the 60% extra.   School closures are easy to verify.   There should be a "reduction in hours" clause, so a person can keep working during a school closure, and still receive some benefits.

Third, there should be a provision to extend the benefits (entirely paid by the Federal government) if the crisis is still ongoing.

This type of program is targeted and builds confidence.   One of the concerns during a downturn is that people will slow their spending because they become worried about their financial situation if they lose their job.   This will alleviate that fear somewhat.

This kind of policy would be easy to enact, fairly easy to implement, and would receive bi-partisan support.

by Calculated Risk on 3/03/2020 11:54:00 AM

Back in 2013, I wrote "Predicting the Next Recession". Since then, I've updated that post several times, most recently last September.

In that post I noted that the next recession could be caused by ...

"An exogenous event such as a pandemic, significant military conflict, disruption of energy supplies for any reason, a major natural disaster (meteor strike, super volcano, etc), and a number of other low probability reasons. All of these events are possible, but they are unpredictable ..."
emphasis added

Now that a pandemic is here, the question is: Will the economy just slow down, or will there be a recession?

A recession or a slowdown depends on the severity of the pandemic and the actions of the Federal Government (both on coordinating the response and fiscal policy). The Federal Reserve cut rates 50 bps this morning, but they can only do so much.

The severity of the pandemic is unpredictable, although looking at China - and now South Korea - the economic disruptions could be huge.

The actions of the Chinese government, and the US actions to limit travel from China, bought policymakers in the US time to plan for the pandemic.   Unfortunately it appears US policymakers were caught flat-footed, apparently expecting containment would be successful (even though the experts were saying containment would most likely fail).

At this point, the Government should follow the advice of the medical experts - obviously increase testing dramatically and making testing free for every person in the US..

On fiscal policy, tax cuts would be pointless. I think even a payroll tax cut would have limited benefit. We need policies aimed directly at those impacted. For example, if schools close, how will parents handle child care? If a parent needs to stay at home to take care of their kids, what about their income?

My suggestion is to strengthen the automatically stabilizers (increase the amount of unemployment insurance for the next several months), and target fiscal policy directly at those impacted.   I offered some suggestions yesterday that were aimed at those impacted.

The actions of the Federal Government over the next few weeks, on coordinating the response and putting in place targeted policies, will be important in determining whether we see a slowdown or a recession.  The course of the pandemic is unpredictable - and we might get lucky (perhaps seasonality will play a role - but that is an unknown).

Fear and confidence are important factors too.  The Government needs to be honest and transparent about the extent of the pandemic, and provide accurate and timely updates on the situation.

In China, the epidemic brought the housing market to a stand still, and even with very low mortgage rates, that might happen in the US too (People might just stop looking).  If the housing market slows sharply for more than a few months, a recession will be very likely.

I will focus on high frequency indicators (like weekly unemployment claims) and provide updates on my outlook.

by Calculated Risk on 3/03/2020 10:35:00 AM

From the Federal Reserve: Federal Reserve issues FOMC statement

The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point, to 1 to 1‑1/4 percent. The Committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles.

by Calculated Risk on 3/03/2020 09:29:00 AM

Notes: This CoreLogic House Price Index report is for January. The recent Case-Shiller index release was for December. The CoreLogic HPI is a three month weighted average and is not seasonally adjusted (NSA).

From CoreLogic: CoreLogic Reports January Home Prices Increased by 4% Year Over Year

CoreLogic® ... today released the CoreLogic Home Price Index (HPI™) and HPI Forecast™ for January 2020, which shows home prices rose both year over year and month over month. Home prices increased nationally by 4% from January 2019. On a month-over-month basis, prices increased by 0.1% in January 2019. (December 2019 data was revised. Revisions with public records data are standard, and to ensure accuracy, CoreLogic incorporates the newly released public data to provide updated results each month.)

Home prices continue to increase on an annual basis with the CoreLogic HPI Forecast indicating annual price growth will be 5.4% from January 2020 to January 2021. On a month-over-month basis, the forecast calls for U.S. home prices to increase by 0.2% from January 2020 to February 2020. The CoreLogic HPI Forecast is a projection of home prices calculated using the CoreLogic HPI and other economic variables. Values are derived from state-level forecasts by weighting indices according to the number of owner-occupied households for each state.

“January marked the third consecutive month that annual home price growth accelerated in our national index, as low mortgage rates and rising income supported home sales,” said Dr. Frank Nothaft, chief economist at CoreLogic. “In February, mortgage rates fell to the lowest level in more than three years, which likely will spur additional home shopping activity and price appreciation.”
emphasis added

Click on graph for larger image in graph gallery.

This graph from CoreLogic shows the YoY change in the index.

CR Note: The YoY change in the CoreLogic index decreased over the last year, but lately the YoY change has been increasing.

by Calculated Risk on 3/02/2020 06:28:00 PM

From Matthew Graham at Mortgage News Daily: Mortgage Rates Hit All-Time Lows, Is It Time To Lock?

Mortgage rates officially hit all-time lows this morning. Even so, it continues to be the case that Treasury yields (often referred to as the basis for mortgage rates) are falling much faster. That's because Treasuries aren't actually the basis for mortgage rates. They're simply a very important source of guidance and momentum in the bigger picture for all kinds of rates. I've written on this extensively in recent days. [Most Prevalent Rates For Top Tier Scenarios 30YR FIXED - 3.125-3.25%]
emphasis added

Tuesday:
• All day, Light vehicle sales for February. The consensus is for light vehicle sales to be 16.8 million SAAR in February, unchanged from 16.8 million in January (Seasonally Adjusted Annual Rate).

• 10:00 AM ET, Corelogic House Price index for January.

by Calculated Risk on 3/02/2020 03:01:00 PM

Containment of COVID-19 has failed as was expected by most experts (but efforts delayed the onset). (examples: Washington, Oregon, California) I'll stay focused on the economic data, however, just as during the housing crisis, I will suggest some (non-medical) government policies that would probably help.

First and foremost, pay attention to the recommendations of the experts. Here is the CDC's Coronavirus Disease 2019 site. And here is the WHO's COVID-19 website.

Also pay attention to your state and local health officials.

Here is the CDC's site for Prevention & Treatment.

Note that flu activity is still high, but probably peaking. Getting a flu shot not only lowers a person's risk of getting the flu, but it lessens the burden on our healthcare professionals. There is still time to get a flu shot this year.

So what should the government do?

First, Let the experts brief the public, not politicians. In 1918, "happy talk" delayed action and cost lives. See: How the Horrific 1918 Flu Spread Across America

while influenza bled into American life, public health officials, determined to keep morale up, began to lie.

Early in September, a Navy ship from Boston carried influenza to Philadelphia, where the disease erupted in the Navy Yard. The city’s public health director, Wilmer Krusen, declared that he would “confine this disease to its present limits, and in this we are sure to be successful. No fatalities have been recorded. No concern whatever is felt.”

The next day two sailors died of influenza. Krusen stated they died of “old-fashioned influenza or grip,” not Spanish flu. Another health official declared, “From now on the disease will decrease.”

The next day 14 sailors died—and the first civilian. Each day the disease accelerated. Each day newspapers assured readers that influenza posed no danger. Krusen assured the city he would “nip the epidemic in the bud."

And from the SacBee on another health crisis: Long before coronavirus, bubonic plague panicked California. A cover-up toppled the governor

When the plague came to San Francisco, business and government leaders were afraid of undermining the city’s shipping trade with Asia. Gov. Henry Tifft Gage repeatedly tried to discredit the federal government scientist who was trying to curtail the pandemic — even accusing him of starting the crisis by planting plague bacteria on cadavers. At the same time, Gage helped suppress an independent medical report confirming that bubonic plague was present in San Francisco.

“It was pretty crazy. There was a widespread cover-up,” said Marilyn Chase, a UC Berkeley lecturer and author of “The Barbary Plague: The Black Death in Victorian San Francisco.”

In its official history of the case, the National Institutes of Health called it “one of the most infamous chapters in U.S. public health history.”

Second, the government should take the advice of the experts at the CDC and elsewhere and increase funding immediately as required by the health professionals.

Third, testing should be increased dramatically, and testing should be free for all in the US with any symptoms (or closely exposed to an infected person). It should be free for the uninsured, and for illegal immigrants (there should be no citizenship test). This is critical or people will not get the test.

Fourth, for those that test positive (but don't need hospitalization), the experts should determine how to isolate them. If their employers will not pay for their time off, then the government should pay. We don't want people avoiding tests because of the costs or the fear of lost income. This is a public health emergency and getting everyone to seek testing (with symptoms - or close contact with an infected person), is important. For those uninsured that need hospitalization, the government should also pay for their care (at negotiated rates - like Medicare). We don't want these people wandering around.

Fifth, the government should have a program of low interest rate (or no interest) loans for otherwise healthy companies impacted by the epidemic.

These are the kinds of programs that the government could put in place fairly quickly, in addition to what the healthcare experts suggest.  In addition to the usual safety nets, these policies - well publicized - would lower the transmission rate and provide the proper stimulus to the economy (directed at exactly the right people).

by Calculated Risk on 3/02/2020 12:08:00 PM

Here is another monthly update on framing lumber prices.   Lumber prices declined sharply from the record highs in early 2018, and have increased a little lately.

This graph shows two measures of lumber prices: 1) Framing Lumber from Random Lengths through Feb 28, 2020 (via NAHB), and 2) CME framing futures.

Click on graph for larger image in graph gallery.

Right now Random Lengths prices are up 15% from a year ago, and CME futures are up 4% year-over-year.

There is a seasonal pattern for lumber prices, and usually prices will increase in the Spring, and peak around May, and then bottom around October or November - although there is quite a bit of seasonal variability.

The trade war led to significant volatility in lumber prices in 2018.   Recently prices have been picking up, but the futures fell sharply last week - probably on concerns about the impact of COVID-19.

by Calculated Risk on 3/02/2020 10:20:00 AM

From the Census Bureau reported that overall construction spending increased in January:

Construction spending during January 2020 was estimated at a seasonally adjusted annual rate of $1,369.2 billion, 1.8 percent above the revised December estimate of $1,345.5 billion. The January figure is 6.8 percent above the January 2019 estimate of $1,282.5 billion.
emphasis added

Both private and public spending decreased:

Spending on private construction was at a seasonally adjusted annual rate of $1,022.7 billion, 1.5 percent above the revised December estimate of $1,007.6 billion. ...

In January, the estimated seasonally adjusted annual rate of public construction spending was $346.5 billion, 2.6 percent above the revised December estimate of $337.8 billion.

Click on graph for larger image.

This graph shows private residential and nonresidential construction spending, and public spending, since 1993. Note: nominal dollars, not inflation adjusted.

Private residential spending had been increasing - but turned down in the 2nd half of 2018.  Now it is increasing again, but is still 18% below the bubble peak.

Non-residential spending is 13% above the previous peak in January 2008 (nominal dollars).

Public construction spending is 6% above the previous peak in March 2009, and 32% above the austerity low in February 2014.

The second graph shows the year-over-year change in construction spending.

On a year-over-year basis, private residential construction spending is up 9.0%. Non-residential spending is up 0.5% year-over-year. Public spending is up 12.6% year-over-year.

This was well above consensus expectations of a 0.7% increase in spending, construction spending for November and December were revised up.

by Calculated Risk on 3/02/2020 10:04:00 AM

The ISM manufacturing index indicated slight expansion in February.  The PMI was at 50.1% in February, down from 50.9% in January. The employment index was at 46.9%, up from 46.6% last month, and the new orders index was at 49.8%, down from 52.0%.

From the Institute for Supply Management: February 2020 Manufacturing ISM® Report On Business®

Economic activity in the manufacturing sector grew in February, and the overall economy grew for the 130th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM® Report On Business®.

The report was issued today by Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management® (ISM®) Manufacturing Business Survey Committee: “The February PMI® registered 50.1 percent, down 0.8 percentage point from the January reading of 50.9 percent. The New Orders Index registered 49.8 percent, a decrease of 2.2 percentage points from the January reading of 52 percent. The Production Index registered 50.3 percent, down 4 percentage points compared to the January reading of 54.3 percent. The Backlog of Orders Index registered 50.3 percent, an increase of 4.6 percentage points compared to the January reading of 45.7 percent. The Employment Index registered 46.9 percent, an increase of 0.3 percentage point from the January reading of 46.6 percent. The Supplier Deliveries Index registered 57.3 percent, up 4.4 percentage points from the January reading of 52.9 percent. The Inventories Index registered 46.5 percent, 2.3 percentage points lower than the January reading of 48.8 percent. The Prices Index registered 45.9 percent, down 7.4 percentage points as compared to the January reading of 53.3 percent. The New Export Orders Index registered 51.2 percent, a decrease of 2.1 percentage points as compared to the January reading of 53.3 percent. The Imports Index registered 42.6 percent, an 8.7-percentage point decrease from the January reading of 51.3 percent.
emphasis added

This was below expectations of 50.4%, and suggests manufacturing expanded slightly in February.