by Calculated Risk on 1/18/2013 09:55:00 AM

Click on graph for larger image.

The preliminary Reuters / University of Michigan consumer sentiment index for January declined to 71.3 from the December reading of 72.9.

This was below the consensus forecast of 75.0. There are a number of factors that can impact sentiment including unemployment, gasoline prices and other concerns - and, for January, the payroll tax increase and Congress' threat to not pay the bills.

Back in August 2011, sentiment declined sharply due to the threat of default and the debt ceiling debate. Unfortunately it appears Congress is negatively impacting sentiment once again.

by Calculated Risk on 1/17/2013 09:18:00 PM

First from Merrill Lynch on more mortgage credit: "Housing heats up"

[W]e believe recent developments on mortgage policy and mortgage servicing could lead to loosening of credit, providing further upside momentum for prices. We highlight three important steps forward the mortgage market has made.

One major development was the announcement of the final definition of a Qualified Mortgage (QM) by the Consumer Finance Protection Bureau (CFPB). The rule focuses on a borrower’s ability to repay, setting a 43% back-end debt-toincome ratio (DTI) as a clear upper boundary. By adhering to this guideline and avoiding risky loan features (such as IO, neg am, balloons, etc.) for prime quality borrowers, lenders can claim a “safe harbor” from future litigation from borrowers. ...
...
[R]elease of the QM definition is an important step forward that should enable lenders to increase their willingness to make residential mortgage loans.

Additionally, ten mortgage servicing companies ... reached an agreement in principle with regulators ... As a result of this agreement, the participating servicers would cease the Independent Foreclosure Review, which involved case-by-case reviews, and replace it with a broader framework allowing eligible borrowers to receive compensation significantly more quickly. We believe the end of this Review process should free up and create aggregate servicing capacity that could be used for other activities such as moving distressed loans through the pipeline more quickly and processing refinancing applications, suggesting higher voluntary and possibly involuntary prepayments in the future.

Furthermore, Fannie Mae announced a comprehensive resolution with Bank of America ... The resolution included Fannie Mae’s approval of Bank of America’s request to transfer the servicing rights of approximately 941,000 loans to specialty servicers. Bank of America also announced that it signed definitive agreements with two different counterparties to sell the servicing rights on certain residential mortgage loans serviced for Fannie Mae, Freddie Mac, Ginnie Mae, and private label securitizations, with an aggregate unpaid principal balance of approximately $306 billion. Our view is that these transfers effectively act as an injection of servicing capacity into the industry, which should allow for more refinancing activity, more loss mitigation activity and, ultimately, loosening of mortgage credit.

More credit availability is one reason Merrill Lynch increased their house price forecast for 2013 to 4.7% (up from 3.0%).

Friday economic releases:
• At 9:55 AM ET, Reuter's/University of Michigan's Consumer sentiment index (preliminary for January). The consensus is for a reading of 75.0, up from 72.9.

• At 10:00 AM, Regional and State Employment and Unemployment (Monthly) for November 2012

by Calculated Risk on 1/17/2013 05:20:00 PM

CR note: Economist Tom Lawler's forecasts for 2012 were very close (see: Lawler: Housing Forecast for 2012). Here is what Tom wrote on January 16, 2012:

“(T)here are pretty decent reasons to believe that 2012 will be a turnaround year for the housing sector, with (1) construction activity increasing; (2) overall vacancy rates falling, with especially low rental vacancy rates; (3) rents continuing to increase, and outpacing overall inflation; and (4) home prices hitting a bottom early in the year that is not much lower than the end of last year (2011).”

The following is from Tom Lawler: 2012 "Surprises" in Housing and 2013 Forecast

Here are a few observations on last year’s housing market, including some of the bigger “surprises.”

1. Home Prices: While it seemed reasonably to expect a modest YOY gain in home prices (as measured by repeat-transactions HPIs), it appears as if the “actual” gain will come in well above the most optimistic of forecasters. “Reasons” included but are not limited to (1) much larger than expected declines in inventories, (2) substantial increases in investor purchases of SF homes, and (3) continued actions by monetary policymakers to engage in fiscal policy by buying MBS to push mortgage rates lower and thus encourage credit flows into a specific sector of the economy (housing).

2. Inventories: While a continued reduction in homes listed for sale seemed exceedingly likely in 2012, the magnitude of the drop clearly exceeded “consensus.” “Reasons” included but were not limited to (1) strong investor buying of SF homes and turning them into rental properties; and 2) a slower than consensus pace of completed foreclosures which, combined with strong demand for REO properties, resulted in a sharp drop in the inventory of REO for sale;

3. Investor Buying of SF Homes as Rental Properties: While investor buying of SF homes as rental properties began increasing significantly several years ago, the entrance of and/or increased activity by “big-money” institutional investors resulted in a substantial increase in such investor buying. Such activity was barely contemplated by “consensus” forecasters.

3. Completed Foreclosures: In 2011 the “robo-signing” scandal led to a significant slowdown in completed foreclosures in the latter part of that year. Many analysts had expected that once the infamous mortgage “settlement” was signed (in March 2012) that banks/servicers would shortly thereafter accelerate completed foreclosures. That didn’t happen; instead servicers spent much of 2012 focusing on compliance (including ending dual tracking); there was a resurgence in modification activity; and foreclosure timelines continued to increase (and in several states legislation was passed that effectively lengthened timelines in those states). As a result, 2012 was another low “foreclosure resolution” year.

4: Rental Vacancy Rates and Rents: While the decline in rental vacancy rates and increase in rents last year was not as much of a surprise as the drop in homes listed for sale and the increase in home prices, the RVR fell by more, and rents increased by more, than “consensus.”

5. Homeownership Rates: While there are no good, timely data on the US homeownership rate (the widely tracked HVS overstates the homeownership rate), available data combined with analysis of the systematic undercount of renters in CPS-based surveys, suggests that the US homeownership rate declined again in 2012 – probably to around 63.7%, compared to the 65.2% on April 1, 2010 suggested by the decennial Census results. (HVS showed a first-half 2010 homeownership rate of 67.0%). Reasons included a shift by householders on the benefits vs. costs of homeownership; what appears to have been a rebound in household growth of “younger” adults; tight mortgage underwriting; and an increase in householders with “troubled” credit.

Looking into 2013, reduced inventory levels, firmer home prices and rental rates, and a likely acceleration in household growth suggest that housing production should increase again in 2013. Moreover, unlike in 2010 and 2011 (when inventories remained elevated), such an increase would be a welcome result.

My “best guess” for housing production this year is as follows:

	US Housing Starts (000's)			Mfg. Housing
	Total	Single Family	Multifamily (2+)	Shipments
2012	780	535.5	244.5	55
2013(F)	965	675	290	60
	US Housing Completions (000's)			Placements
2012	651.4	484.6	166.8	50
2013(F)	840	605	235	57

On the home-price front, I’m still trying to get a “handle” on 2012’s gain. In the December 2011 Zillow survey my Q4/Q4 forecast for the % increase in the SPCS “national” HPI was 2.5% for 2012 and 6.0% for 2013. But the “actual” for 2012 is likely to exceed 6%. – though the Q4/11 SPCS HPI appears to have been “hit” with some depressed “distressed” sales prices. Right now my best guess is for a Q4/Q4 YOY increase of about 3.0%.

I’ll have more details, and some thoughts on the risks to the forecast (NOT focusing on “macro” risks), either tomorrow or next week.

CR Note: This was from housing economist Tom Lawler. Here is a link to several other 2013 housing forecasts.

by Calculated Risk on 1/17/2013 03:31:00 PM

A few key points:

• Housing starts increased 28.1% in 2012 (initial estimate). This is a solid year-over-year increase, and residential investment is now making a positive contribution to GDP growth.

• Even after increasing 28% in 2012, the 780 thousand housing starts this year were the fourth lowest on an annual basis since the Census Bureau started tracking starts in 1959 (the three lowest years were 2009 through 2011).   This was also the fourth lowest year for single family starts since 1959.

• Starts averaged 1.5 million per year from 1959 through 2000.  Demographics and household formation suggests starts will return to close to that level over the next few years. That means starts will come close to doubling from the 2012 level.

• Residential investment and housing starts are usually the best leading indicator for economy. Note: Housing is usually a better leading indicator for the US economy than manufacturing, see: Josh Lehner's The Handoff – Manufacuturing to Housing. Nothing is foolproof as a leading indicator, but this suggests the economy will continue to grow over the next couple of years.

The following table shows annual starts (total and single family) since 2005:

Housing Starts (000s)
	Total	Change	Single Family	Change
2005	2,068.3	---	1,715.8	---
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	780.0	28.1%	535.5	24.4%

Here 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.

Click on graph for larger image.

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

The rolling 12 month total for starts (blue line) has been increasing steadily, and completions (red line) is lagging behind - but completions will follow starts up (completions lag starts by about 12 months).

This means there will be an increase in multi-family deliveries next year, but still well below the 1997 through 2007 level of multi-family completions.

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.

Starts are moving up, but the increase in completions has just started.  Usually single family starts bounce back quickly after a recession, but not this time because of the large overhang of existing housing units. 

Note the 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 1/17/2013 01:44:00 PM

Catching up ... earlier from the Philly Fed: January Manufacturing Survey

Manufacturing activity declined moderately this month, according to firms responding to the January Business Outlook Survey. ... The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from a revised reading of 4.6 in December to ‐5.8 this month.

Labor market conditions at reporting firms deteriorated this month. The employment index, at ‐5.2, fell from ‐0.2 in December. ...

The survey’s future indicators suggest that firms expect recent declines to be temporary. The future general activity index increased from a revised reading of 23.7 to 29.2, its second consecutive monthly increase.
emphasis added

Earlier this week, the Empire State manufacturing survey also indicated contraction in January.

Click on graph for larger image.

Here is a graph comparing the regional Fed surveys and the ISM manufacturing index. The dashed green line is an average of the NY Fed (Empire State) and Philly Fed surveys through January. The ISM and total Fed surveys are through December.

The average of the Empire State and Philly Fed surveys decreased in January, and is back below zero.   This suggests another weak reading for the ISM manufacturing index.