by Calculated Risk on 1/02/2011 08:55:00 AM

Note: here is the economic Schedule for Week of January 2, 2011.

Below is a summary of the previous week, mostly in graphs.

• Case-Shiller: Home Prices Weaken Further in October

S&P/Case-Shiller released the monthly Home Price Indices for October last week (actually a 3 month average of August, September and October).

Click on graph for larger image in graph gallery.

The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 30.7% from the peak, and down 0.9% in October(SA).

The Composite 20 index is off 30.5% from the peak, and down 1.0% in October (SA).

The next graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

Prices increased in only 2 of the 20 Case-Shiller cities in October seasonally adjusted (SA); only Denver and Wash, D.C. saw small price increases (SA). Prices fell in all cities NSA.

Prices in Las Vegas are off 57.8% from the peak, and prices in Dallas only off 8.6% from the peak.

Prices are now falling - and falling just about everywhere. As S&P noted "six markets – Atlanta, Charlotte, Miami, Portland (OR), Seattle and Tampa – hit their lowest levels since home prices started to fall in 2006 and 2007". More cities will join them soon.

This graph shows existing home months-of-supply (left axis), and the annualized change in the Case-Shiller composite 20 house price index (right axis, inverted).

House prices are through October using the composite 20 index. Months-of-supply is through November.

We need to watch inventory and months-of-supply closely for hints about house prices. The recent surge in existing home inventory - and increase in the months-of-supply - is one of the reasons I expect house prices to fall another 5% to 10%.

• Weekly Initial Unemployment Claims below 400,000, Lowest since July 2008

From the DOL: "In the week ending Dec. 25, the advance figure for seasonally adjusted initial claims was 388,000, a decrease of 34,000 from the previous week's revised figure of 422,000."

This graph shows the 4-week moving average of weekly claims since January 2000.

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased this week by 12,500 to 414,000.

In general the four-week moving average has been declining and that is good news.

• Regional Fed surveys suggest increasing manufacturing activity

Three regional surveys were released last week:
1) From the Dallas Fed: Texas Manufacturing Activity Continues to Grow
2) From Kansas City Fed: Manufacturing activity "continued at a solid pace" in December
3) From the Richmond Fed: Manufacturing Activity Expanded at a Solid Pace in December

This graph compares the regional Fed surveys and the ISM manufacturing index.

The New York and Philly Fed surveys are averaged together (dashed green, through December), and averaged five Fed surveys (blue, through December) including New York, Philly, Richmond, Dallas and Kansas City. The Institute for Supply Management (ISM) PMI (red) is through November (right axis).

The regional surveys suggest an increase in manufacturing activity in December.

The ISM manufacturing index will released on Monday, Jan 3, 2011.

• Other Economic Stories ...
• From the NAR: Pending Home Sales Continue Recovery
• Unofficial Problem Bank list increases to 935 Institutions

Best wishes to all!

by Calculated Risk on 1/01/2011 07:28:00 PM

There was a nice mention of Calculated Risk this week by Alen Mattich in the WSJ: The Best Economics Blogs. Thank you - I sincerely appreciate the mention!

The first sentence caught my eye:

Only a few years ago, blogs were too outlandish for the mainstream media even to acknowledge, never mind to mention or, shock horror, to quote.

Not all blogs were "outlandish", but they were definitely all considered outlandish! Back before 2007 the MSM would quote econ professors, but not "unknown" bloggers.

My co-blogger Doris "Tanta" Dungey broke down that barrier in March 2007 with her brilliant piece: Media Inquiries Policy. The entire piece is worth reading (I've heard that it is assigned reading in some college journalism courses). An excerpt:

Dear reporters, we quote your stuff periodically, giving credit both to the reporter and the publication, under fair use terms. We have no objection to your returning the favor. If you have an editor who will not allow that, and you think that the problem can be solved by getting one of us to drop our online personas, give you our real names, and say the same thing to you over the phone, so that you can get your editor to accept it as something other than just blogging, which everybody knows is untrustworthy ranting by anonymous nuts, you are making a faulty assumption about the relationship among us, our birthdays, and yesterday. Neither CR nor Tanta wishes to play into a set of assumptions that render what we say on the blog as unworthy of coverage by the Big Media, but what we might say on the phone to Intrepid Reporter as good dirt and straight skinny.

Within a week, Calculated Risk was mentioned in several major publications including the WSJ for the first time. Now econ bloggers are routinely mentioned, and we all should remember to thank Tanta!

by Calculated Risk on 1/01/2011 02:15:00 PM

I've seen versions of the following chart being used to warn about Option ARM defaults in 2011. This chart is from the IMF in early 2007: Assessing Risks to Global Financial Stability

Warning: Out of date!
This chart from Credit Suisse, via the IMF, showed the substantial subprime resets in 2007 and 2008, and it showed the potential reset/recast problems with Alt-A and Option ARM loans in 2010 through 2012.

There were many subprime defaults in 2007 and 2008, and many people have been worried about a "2nd wave" of Option ARM and Alt-A defaults.

Here is an updated chart from Zach Fox at SNL Financial as of February 2010: Credit Suisse: $1 trillion worth of ARMs still face resets

Most of the resets are expected to occur through 2012. Between 2010 and 2012, the chart indicates that $253.25 billion of option ARMs will adjust, while Alt-A loans totaling $163.71 billion will reset over that time. Altogether, $1.010 trillion worth of ARMs will reset or recast during the three-year period.
excerpts with permission

Click on graph for larger image in new window.

Source: SNL Financial.

The chart is labeled "resets" with a comment on "recasts" at the bottom. Resets are not a problem right now with low interest rates.

From Tanta on resets and recasts:

"Reset" refers to a rate change. "Recast" refers to a payment change. ... "Recast" is really just a shorter word for "reamortize": you take the new interest rate, the current balance, and the remaining term of the loan, and recalculate a new payment that will fully amortize the loan over the remaining term.

Looking at the 2nd chart, it appears there is another wave coming in 2011 and 2012 - but probably not a large wave for several reasons.

First, many of the loans have already defaulted. There is a difference between the original recast date, and the actual recast date - because negatively amortizing loans hit the recast ceiling earlier than the original forecast - and those loans have already defaulted (or have been modified).

Second, some of these loans were modified (Option ARMs and Alt-A loans were targeted by the banks for internal modification programs), and some of these borrowers have probably refinanced - the few that had some equity.

Also some of the loans (mostly Wells Fargo with 10 year recast) will probably recast later than the Credit Suisse chart.

There was a peak on the 2nd chart in 2010, and so far there hasn't been a huge surge in Option ARM and Alt-A defaults (they were already defaulting in large numbers). Here are a couple of graph from LPS Applied Analytics' November Mortgage Performance data.

Click on graph for larger image in graph gallery.

This graph provided by LPS Applied Analytics shows the percent delinquent by product type. As the graph shows, the Option ARM and Alt-A loans have already been defaulting in large numbers.

The Option ARM defaults did increase in 2010 but nothing like what the Credit Suisse chart seemed to suggest.

We also need to include the loans in the foreclosure process. The percent in the foreclosure process is trending up recently because of the foreclosure moratoriums.

But what these graphs don't show is a huge spike in Option ARM and Alt-A loans delinquent or in the foreclosure process. Although there will probably be more delinquent Option ARM and Alt-A loans next year, I'm more concerned about falling house prices and negative equity than a huge wave of Option ARM and Alt-A defaults.

by Calculated Risk on 1/01/2011 08:30:00 AM

Happy New Year!

The key report for this week will be the December employment report to be released on Friday, Jan 7th. Other key reports include the ISM manufacturing index on Monday, vehicle sales on Tuesday, and the ISM non-manufacturing (service) index on Wednesday.

----- Monday, Jan 3rd -----
10:00 AM: ISM Manufacturing Index for December. The consensus is for an increase to 57.2 from 56.6 in November.

10:00 AM: Construction Spending for November. The consensus is for a 0.2% increase in construction spending.

----- Tuesday, Jan 4th -----
10:00 AM: Manufacturers' Shipments, Inventories and Orders for November. The consensus is for a 0.2% decrease in orders.

2:00 PM: FOMC Minutes, Meeting of December 14, 2010.

All day: Light vehicle sales for December. Light vehicle sales are expected to increase slightly to 12.3 million (Seasonally Adjusted Annual Rate), from 12.2 million in November.

Click on graph for larger image in graph gallery.

If correct, this will be the highest sales rate since September 2008, excluding Cash-for-clunkers in August 2009.

This graph shows light vehicle sales since the BEA started keeping data in 1967. The dashed line is the November sales rate.

Edmunds is forecasting:

Edmunds.com analysts predict that December's Seasonally Adjusted Annualized Rate (SAAR) will be the year’s highest, 12.34 million, up from 12.21 in November 2010.

----- Wednesday, Jan 5th -----
7:00 AM: The Mortgage Bankers Association (MBA) will release the mortgage purchase applications index for the last two weeks. This index has only recovered slightly over the last few months - suggesting reported home sales through early 2011 will be weak. Also refinance activity has collapsed over the last few weeks as mortgage rates have increased.

8:15 AM: The ADP Employment Report for December. This report is for private payrolls only (no government). The consensus is for +100,000 payroll jobs in December, up from the +93,000 jobs reported in November.

10:00 AM: ISM non-Manufacturing Index for December. The consensus is for a slight increase to 55.5 from 55.0 in November.

----- Thursday, Jan 6th -----
8:30 AM: The initial weekly unemployment claims report will be released. The number of initial claims has been trending down over the last couple of months. The consensus is for an increase to 400,000 from 388,000 last week.

----- Friday, Jan 7th -----
8:30 AM: Employment Report for December.

The consensus is for an increase of 140,000 non-farm payroll jobs in December, after the disappointing 39,000 jobs added in November.

This graph shows the net payroll jobs per month (excluding temporary Census jobs) since the beginning of the recession. The estimate for December is in blue.

The consensus is for the unemployment rate to decline to 9.7% from 9.8% in November.

9:30 AM: Fed Chairman Ben S. Bernanke, Testimony before the Committee on the Budget, U.S. Senate, Washington, D.C. "The Economic Outlook and Monetary and Fiscal Policy"

3:00 PM: Consumer Credit for November. The consensus is for consumer credit to be unchanged.

After 4:00 PM: The FDIC will probably have another busy Friday afternoon ...

----- Saturday, Jan 8th -----
4:30 PM: Panel Discussion, Fed Vice Chair Janet L. Yellen, "The Federal Reserve's Asset Purchase Program", Denver, Colorado

----- Likely, but not scheduled -----
December Personal Bankruptcy Filings

Reis is expected to release their Q4 Office, Mall and Apartment vacancy rate reports.

by Calculated Risk on 12/31/2010 11:45:00 PM

A cartoon from Eric G. Lewis Click on cartoon for larger image in new window. My New Year's resolution: Get lost in the Sierra for a week this summer. Happy New Year to all!

by Calculated Risk on 12/31/2010 08:24:00 PM

• From the WSJ: Euro-Zone Bonds to Start New Year With Old Problems

Portugal is the biggest question mark right now, and its borrowing costs have been soaring. Yields on its 10-year bonds jumped to 6.682% at the end of 2010, from 4.065% at the end of 2009.

• From Reuters: Estonia joins crisis-hit euro club, others wary. Good luck to Estonia!

• From Catherine Rampell at the NY Times: Career Shift Often Means Drop in Living Standards (ht Ann)

A new study of American workers displaced by the recession sheds light on the sacrifices a large number have made to find work. Many, it turns out, had to switch careers and significantly reduce their living standards.

• From Doug Short: Current Market Snapshot: S&P 500 Up 12.78% for the Year

The S&P 500 closed the day down 0.02%, the week up 0.07%, the month up 6.53%, and the year up an impressive 12.78%.

The index is 85.9% above the March 9 2009 closing low, which puts it 19.6% below the nominal all-time high of October 2007.

And a couple previous posts:
• Question #1 for 2011: House Prices

• A Summary of 2010 in Graphs