Tag Archives: Housing

New home sales

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Weak winter sales, but the absolute number of homes in inventory did go down again and is well off the highs.

A modest pickup in the sales rate will now translate into a larger drop in the number of months of inventory.

The median price is more a function of which category of houses are selling.

The first quarter is looking weak domestically. Whether GDP goes negative or not will be a function of export strength.

New Home Sales Take Biggest Fall in Nearly 13 Years

(Reuters) New U.S. single-family home sales fell 2.8 percent in January to the lowest rate in nearly 13 years while the median sales price slipped and the housing overstock shrank, according to a government report on Wednesday that delivered more grim news for the ailing housing sector.

AP
New home sales fell to an annual rate of 588,000 from an upwardly revised rate of 605,000 in December, the Commerce Department said.

Economists polled by Reuters were expecting January sales to fall to an annual rate of 600,000 from the December previously reported rate of 604,000.

In January, the median sales price for a new home fell 15.1 percent $216,000 from $254,400 a year ago.

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The full employment recession is spreading

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Looks like the US full-employment recession is spreading:

UK jobless rate falls to 5.2 percent in latest quarter

The unemployment rate in the United Kingdom in the last quarter of 2007 fell to 5.2 percent, down from 5.4 percent in the previous quarter, the government said Wednesday.

Average earnings, including bonuses, rose 3.7 percent in the fourth quarter compared with a year earlier, the Office for National Statistics said.

Yes, unemployment is a lagging indicator, but the subprime housing collapse is well over a year old. And the 4.9% rate in the US is, even by Yellen’s standards, ‘very close’ to full-employment.

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Valance Weekly Economic Reports: Global News Highlights

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Same twin themes taking hold – weakness and inflation.

Highlights:
US Mixed data
EU Softening data could change ECB’s inflation rhetoric
JN CPI Higher on food, energy prices; Mixed data continues
UK Housing Market Continued To Show Weakness
AU Businesses Less Confident About Q1 economic outlook

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U.K. mortgage approvals drop to least since 1999

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U.K. Mortgage Approvals Drop to Least Since 1999

By Jennifer Ryan

(Bloomberg) U.K. mortgage approvals dropped in December to the lowest in at least nine years, and consumer credit fell, threatening the outlook for economic growth.

Lenders granted 73,000 loans for house purchase, down from 81,000 in November and the least since records began in January 1999, the Bank of England said in London today. The median forecast in a Bloomberg News survey of 24 economists was 79,000. Lending on personal loans and overdrafts fell to 265 million pounds ($530 million), the least in 15 years.

Banks are tightening credit standards after contagion from the U.S. subprime mortgage market collapse, the Financial Services Authority said yesterday. Less access to credit for Britons with record debt may further slow consumer spending and a weakening housing market, adding to the case for an interest rate reduction by the Bank of England as soon as next week.

“The household sector was clearly under some kind of pressure at the end of 2007,” James Shugg, an economist at Westpac Banking Corp. in London, said in an interview on Bloomberg Television. “The U.K. housing market is embarking on a much slower growth period.” He predicted further interest rate reductions after a quarter-point cut last month.

In a separate statement, Prime Minister Gordon Brown reappointed central bank Governor Mervyn King to serve another five-year term. King accepted the position, saying in a statement that he looks “forward to working hard with my bank and MPC colleagues on the economic and financial challenges that face us all.”

Consumer Credit
The central bank’s report today showed consumers borrowed less on unsecured credit as they faced repaying a record 1.4 trillion pounds in debt and banks curbed lending to them. Net consumer credit fell to 557 million pounds in December, less than half the previous month’s total.

“A significant minority of consumers could experience financial problems because of their high levels of borrowing,” the FSA, the U.K.’s financial regulator, said in its risk outlook report yesterday. “A growing number of consumers are likely to experience debt repayment problems in 2008.”

The average cost for a fixed-rate mortgage maturing in the next 12 months and switching to a variable rate will rise by about 210 pounds per month, creating a “serious impact on the affordability of the loan,” the FSA said. The increase will affect about 1.4 million home loans.

Subprime Losses
Britons face higher home loan costs after banks around the world posted at least $133 billion in losses from the collapse of the U.S. subprime mortgage market.

The average rate offered by lenders on a mortgage for 95 percent of the price of a property, fixed for 24 months, rose to 6.53 percent in December from 6.44 percent, the central bank said Jan. 10. The central bank’s credit conditions survey showed banks plan to limit access to all debt in the first quarter.

“There is a risk that some consumers could find it difficult to meet their credit commitments due to tighter lending standards for both secured and unsecured credit,” the FSA said.

All 30 economists in a Bloomberg News survey forecast the Bank of England will cut interest rates a quarter point to 5.25 percent on Feb. 7 as growth slows and the housing market stalls.

U.K. retail sales rose at the slowest pace in 14 months in January, the Confederation of British Industry said yesterday.

House prices fell for a fourth month in January, Hometrack Ltd. said Jan. 28. U.K. real estate professionals said December was the worst month for the housing market since the aftermath of Britain’s last recession in 1992, according to a Jan. 16. report by the Royal Institution of Chartered Surveyors.

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2008-01-25 Balance of Risks Update

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Mainstream economics would put it this way:

  • Inflation risk to long term growth vs short term growth risks

So on the inflation side:

  • CPI year over year up to 4.1%
  • Core CPI 2.4% year over year, 2.9% month over month (2.5% high end of Fed’s comfort zone)
  • Headline PCE deflator 3.6% year over year, core PCE 2.2% (1.9% upper band of their target forecast)
  • PPI up 6.3% year over year, core up 2.0% year over year
  • Crude back to $91 after a brief hiatus (‘high eighties’- relax, only attempt at a pun)
  • CRB testing new highs
  • Grains near the highs
  • Import prices up 10.9% year over year, ex petro up 2.9%, reversing years of pre 2003 declines
  • Export prices up 6.0% year over year
  • Prices paid/received remain on the rise in the various surveys
  • $US index reasonably flat, but other currencies experience domestic inflation
  • Not that anyone cares, but gold is at $913
  • 5 year, 5 years forward implied CPI at 2.51%, vs 2.43% at December 18 meeting

And on the growth side:

  • Housing reports remain weak through the winter months – permits still falling
  • November construction spending up 0.1%
  • Mortgage applications moving higher, 4 week moving average down 2.7% year over year, up 8.5% from November 2006 lows
  • November income and spending (1.1%) came out strong, Oct revised up (0.2% to 0.4%), after December 18 meeting
  • November durable goods on the weak side; December out on Tuesday
  • ADP up 40,000, payrolls up 18,000, unemployment up to 5% from 4.7%
  • Initial claims since meeting: 357K, 334K, 322K, 302K, 301K. Possible seasonal issues but no obvious weakness
  • Continuing claims since meeting: 2,754,000; 2,688,000; 2,747,000; 2,672,000. Still a bit higher than before, but not moving up.. yet
  • November trade gap out to 63.1 billion. December numbers released February 14
  • Fiscal balance: Receipts up 5.7%, spending up 8.8% (with labor day distortion) fiscal year over year
  • December vehicle sales 16.3 million, flat since August
  • December retail sales down 0.4%, core up 0.1% month over month, year over year up 3.2%, core up 3.0%
  • December industrial production flat, up 1.5% year over year
  • GDP and ADP at the meeting, payroll forecast up 65,000 on Friday
  • Fed cut 0.75% coincident with the Soc Gen liquidation related equity weakness
  • February Fed Funds futures now at 3.09%, not fully discounting a 50 cut. Got all the way to 3.15 before stocks sold off.

Market functioning:

  • LIBOR vs Fed Funds under control, 3 month LIBOR down 160 bp since December 18 meeting, TAF functioning well
  • Mortgage spreads still historically wide, but trading, and absolute yields also down since Dec 18 meeting
  • Mtg refi’s way up

Fiscal package is on its way!

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2008-01-21 Update

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Major themes intact:

  • weak economy
  • higher prices

Weakness:

US demand soft but supported by exports.

US export strength resulting from non resident ‘desires’ to reduce the rate of accumulation of $US net financial assets. This driving force is ideologically entrenched and not likely to reverse in the next several months.

In previous posts, I suggested the world is ‘leveraged’ to the US demand for $700 billion per year in net imports, as determined by the non resident desire to accumulate 700 billion in $US net financial assets.

US net imports were something over 2% of rest of world GDP, and the investment to support that demand as it grew was probably worth another 1% or more of world GDP.

The shift from an increasing to decreasing US trade deficit is a negative demand shock to rest of world economies.

This comes at a time when most nations have decreasing government budget deficits as a percent of their GDP, also reducing demand.

The shift away from the rest of world accumulation of $US financial assets should continue. Much of it came from foreign CB’s. And now, with Tsy Sec Paulson threatening to call any CB that buys $US a ‘currency manipulator’, it is unlikely the desire to accumulate $US financial assets will reverse sufficiently to stop the increase in US exports. I’m sure, for example, Japan would already have bought $US in substantial size if not for the US ‘weak dollar’ policy.

All else equal, increasing exports is a decrease in the standard of living (exports are a real cost, imports a benefit), so Americans will be continuing to work but consuming less, as higher prices slow incomes, and output goes to non residents.

I also expect a quick fiscal package that will add about 1% to US GDP for a few quarters, further supporting a ‘muddling through’ of US GDP.

Additional fiscal proposals will be coming forward and likely to be passed by Congress. It’s an election year and Congress doesn’t connect fiscal policy with inflation, and the Fed probably doesn’t either, as they consider it strictly a monetary phenomena as a point of rhetoric.

Higher Prices:

Higher prices world wide are coming from both increased competition for resources and imperfect competition in the production and distribution of crude oil. In particular, the Saudis, and maybe the Russians as well, are acting as swing producer. They simply set price and let output adjust to demand conditions.

So the question is how high they will set price. President Bush recently visited the Saudis asking for lower prices, and perhaps the recent drop in prices can be attributed to those meetings. But the current dip in prices may also be speculators reducing positions, which creates short term dips in price, which the Saudis slowly follow down with their posted prices to disguise the fact they are price setters, before resuming their price hikes.

At current prices, Saudi production has actually been slowly increasing, indicating demand is firm at current prices and the Saudis are free to continue raising them as long as desired.

The current US fiscal proposals are designed to help people pay the higher energy prices, further supporting demand for Saudi oil.

They may also be realizing that if they spend their increased income on US goods and services, US GDP is sustained and real terms of trade shift towards the oil producers.

Conclusion:

  • The real economy muddling through
  • Inflation pressures continuing

A word on the financial sector’s continuing interruptions:

With floating exchange rates and countercyclical tax structures we won’t see the old fixed exchange rate types of real sector collapses.

The Eurozone banking sector is the exception, and remains vulnerable to systemic failure, as they don’t have credible deposit insurance in place, and, in fact, the one institution that can readily ‘write the check’ (the ECB) is specifically prohibited by treaty from doing so.

Today, in most major economies, fiscal balances move to substantial, demand supporting deficits with an increase in unemployment of only a few percentage points. Note the US is already proactively adding 1% to the budget deficit with unemployment rising only 0.3% at the last initial observation in December. In fact, fiscal relaxation is being undertaken to relieve financial sector stress, and not stress in the real economy.

Food and energy have had near triple digit increases over the last year or so. Even if they level off, or fall modestly, the cost pressures will continue to move through the economy for several quarters, and can keep core inflation prices above Fed comfort zones for a considerable period of time.

Fiscal measures to support GDP will add to the perception of inflationary pressures.

The popular press is starting to discuss how inflation is hurting working people. For example, I just saw Glen Beck note that with inflation at 4.1% for 07 real wages fell for the first time in a long time, and he proclaimed inflation the bigger fundamental threat than the weakening economy.

I also discussed the mortgage market with a small but national mortgage banker. He’s down 50% year over year, but said the absolute declines leveled off in October, including California. He also pointed out one of my old trade ideas is back – when discounts on pools become excessive to current market rates, buy discounted pools of mortgages and then pay mortgage bankers enough of that discount to be able refinance the individual loans at below market rates.

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Mortgage applications soar

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Home loan demand surges to near four-year high

By Julie Haviv

(Reuters) U.S. mortgage applications surged last week, with demand hitting its highest in nearly four years as interest rates plunged, an industry group said on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended January 11 surged 28.4 percent to 906.4, its highest since the week ended April 2, 2004.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 5.62 percent, down 0.11 percentage point from the previous week, and its lowest since the week ended July 1, 2005, when they stood at 5.58 percent.

Interest rates were below year-ago levels at 6.19 percent.

Douglas Duncan, chief economist at the MBA, said the robust data offers a glimmer of hope for housing.

“When consumers see an opportunity, no matter how pessimistic they might be, they take it,” he said. “It will improve the underlying state of the industry and the longer rates stay down, the more people will take advantage of the opportunity, so that is a good thing.”

Mortgage rates have fallen along with U.S. Treasury yields. The benchmark 10-year U.S. Treasury note yield fell below 3.68 percent on Tuesday, its lowest since July 2003 as stocks plunged and expectations of aggressive interest rate cuts from the Federal Reserve rose. Yields move inversely to price.

Overall mortgage applications last week were 35.9 percent above their year-ago level. The four-week moving average of mortgage applications, which smoothes the volatile weekly figures, was up 10.1 percent to 687.5.

Fixed 15-year mortgage rates averaged 5.07 percent, down from 5.21 percent the previous week. Rates on one-year adjustable-rate mortgages (ARMs) decreased to 5.77 percent from 6.04 percent.

Demand Surges

The MBA’s seasonally adjusted purchase index, widely considered a timely gauge of new home sales, jumped 11.4 percent to 461.2, its highest since the week ended December 7, 2007. The index came in above its year-earlier level of 439.7, a rise of 4.9 percent.

Demand for home loan refinancing surged last week as the group’s seasonally adjusted index of refinancing applications skyrocketed 43.4 percent to 3,575.5, its highest since the week ended April 2, 2004. The index was up 74.8 percent from its year-ago level of 2,045.8.

The refinance share of applications increased to 62.7 percent from 57.7 percent the previous week. The ARM share of activity edged down to 9.2 percent from 9.3 percent.

“This time of the year you always have to be careful about weather patterns and other factors,” Duncan said. “I really think this is, at least in some instances, evidence that with mortgage rates dropping and house prices having leveled off or fallen in some places, there is an improvement in affordability underway.”

This week ushers in other key data gauging the state of the hard-hit U.S. housing market.

The National Association of Home Builders will release its January NAHB/Wells Fargo Housing Market Index on Wednesday and the Commerce Department will release data on December housing starts on Thursday.

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Fed’s Lockhart: economic outlook

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He is currently leaning towards cuts, but watching carefully for signs of improvements in market functioning and output, and aware of the risks of his inflation forecast being wrong.

Fed’s Lockhart: Economic Outlook

From Atlanta Fed President Dennis P. Lockhart: The Economy in 2008

Looking to 2008, I believe the pivotal question—the central uncertainty—is the extent of current and future spillover from housing and financial markets to the general economy. The dynamics I’m watching—stated simplistically—are the following. First, there’s the effect of dropping house prices on the consumer and in turn on retail sales and other personal expenditures. And second, I’m watching the effect of financial market distress on credit availability and, in turn, on business investment, general business activity, and employment.

Yes, we are all watching that carefully. So far so good, but consumer spending is always subject to change.
I’m watching credit availability, but seems the supply side of credit is never the issue. The price changes some, but quantity is always there at ‘market’ prices that provide desired returns on equity.

Business investment seems to hold up nicely as well, probably due to most investment being for cost cutting rather than expanding output. This makes investment a type of profit center.

Employment is still increasing, more in some fields than others.

And, of course, overall, from the mainstream’s view, demand is more than enough to be driving reasonably high inflation prints.

My base case outlook sees a weak first half of 2008—but one of modest growth—with gradual improvement beginning in the year’s second half and continuing into 2009. This outcome assumes the housing situation doesn’t deteriorate more than expected

Meaning it’s expected to deteriorate some. I’m inclined to think it’s bottomed.

and financial markets stabilize.

They are assuming this and it already seems to have happened. FF/LIBOR is ‘under control.’

A sober assessment of risks must take account of the possibility of protracted financial market instability together with weakening housing prices, volatile and high energy prices, continued dollar depreciation, and elevated inflation measures following from the recent upticks we have seen.

That statement includes both deflationary and inflationary influences – not sure what to make of it.

But he will vote for 50 bp cut in January.

Maybe if the meeting were today, but much can change between now and then.

I’m troubled by the elevated level of inflation. Currently I expect that inflation will moderate in 2008 as projected declines in energy costs have their effect. But the recent upward rebound of oil prices—and the reality that they are set in an unpredictable geopolitical context—may mean my outlook is too optimistic. Nonetheless, I’m basing my working forecast on the view that inflation pressures will abate.

Doesn’t say what the Fed might do, if anything, if inflation doesn’t abate.

To a large extent, my outlook for this year’s economic performance hinges on how financial markets deal with their problems.

He believes the performance of the real economy is a function of the health of financial markets.

I’m not sure that is turning out to be the case.

The coming weeks could be telling. (What does he know). Modern financial markets are an intricate global network of informed trust. Stabilization will proceed from clearing up the information deficit and restoring well-informed trust in counterparties and confidence in the system overall.

To restore market confidence, leading financial firms, I believe, must recognize and disclose losses based on unimpeachable valuation calculations,

Maybe they already have. The penalties for not being ‘honest’ are severe, and it’s hard to see how any public company would try to cover anything like that up.

restore capital and liquidity ratios, and urgently execute the strenuous task of updating risk assessments of scores of counterparties. The good news is that markets can return to orderly functioning and financial institutions can be rehabilitated quickly. With healthy disclosure, facing up to losses, recapitalization, and the resulting clarity, I believe there is hope for this outcome.

May already be happening.

So far only about $50 billion of announced bank losses. Q4 reports will add some to that, when the majority of the remaining losses will be disclosed.

In Aug 1998 $100 billion was lost all at once with no recovery prospects, back when that was a lot of money.

So far this crisis has been mild by historical standards.

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Re: liquidity or insolvency–does it matter?

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(email with Randall Wray)

On Dec 15, 2007 9:05 PM, Wray, Randall wrote:
> By ________
>
> This time the magic isn’t working.
>
> Why not? Because the problem with the markets isn’t just a lack of liquidity – there’s also a fundamental problem of solvency.
>
> Let me explain the difference with a hypothetical example.
>
> Suppose that there’s a nasty rumor about the First Bank of Pottersville: people say that the bank made a huge loan to the president’s brother-in-law, who squandered the money on a failed business venture.
>
> Even if the rumor is false, it can break the bank. If everyone, believing that the bank is about to go bust, demands their money out at the same time, the bank would have to raise cash by selling off assets at fire-sale prices – and it may indeed go bust even though it didn’t really make that bum loan.
>
> And because loss of confidence can be a self-fulfilling prophecy, even depositors who don’t believe the rumor would join in the bank run, trying to get their money out while they can.

If there wasn’t credible deposit insurance.

>
> But the Fed can come to the rescue. If the rumor is false, the bank has enough assets to cover its debts; all it lacks is liquidity – the ability to raise cash on short notice. And the Fed can solve that problem by giving the bank a temporary loan, tiding it over until things calm down.

Yes.

> Matters are very different, however, if the rumor is true: the bank really did make a big bad loan. Then the problem isn’t how to restore confidence; it’s how to deal with the fact that the bank is really, truly insolvent, that is, busted.

Fed closes the bank, declares it insolvent, ‘sells’ the assets, and transfers the liabilities to another bank, sometimes along with a check if shareholder’s equity wasn’t enough to cover the losses, and life goes on. Just like the S and L crisis.

>
> My story about a basically sound bank beset by a crisis of confidence, which can be rescued with a temporary loan from the Fed, is more or less what happened to the financial system as a whole in 1998. Russia’s default led to the collapse of the giant hedge fund Long Term Capital Management, and for a few weeks there was panic in the markets.
>
> But when all was said and done, not that much money had been lost; a temporary expansion of credit by the Fed gave everyone time to regain their nerve, and the crisis soon passed.

More was lost then than now, at least so far. 100 billion was lost immediately due to the Russian default and more subsequently. So far announced losses have been less than that, and ‘inflation adjusted’ losses would have to be at least 200 billion to begin to match the first day of the 1998 crisis (August 17).

>
> In August, the Fed tried again to do what it did in 1998, and at first it seemed to work. But then the crisis of confidence came back, worse than ever. And the reason is that this time the financial system – both banks and, probably even more important, nonbank financial institutions – made a lot of loans that are likely to go very, very bad.

Same in 1998. It ended only when it was announced Deutsche Bank was buying Banker’s Trust and seemed the next day it all started ‘flowing’ again.

>
> It’s easy to get lost in the details of subprime mortgages, resets, collateralized debt obligations, and so on. But there are two important facts that may give you a sense of just how big the problem is.
>
> First, we had an enormous housing bubble in the middle of this decade. To restore a historically normal ratio of housing prices to rents or incomes, average home prices would have to fall about 30 percent from their current levels.

Incomes are sufficient to support the current prices. That’s why they haven’t gone down that much yet and are still up year over year. Earnings from export industries are helping a lot so far.

>
> Second, there was a tremendous amount of borrowing into the bubble, as new home buyers purchased houses with little or no money down, and as people who already owned houses refinanced their mortgages as a way of converting rising home prices into cash.

Yes, there was a large drop in aggregate demand when borrowers could no longer buy homes, and that was over a year ago. That was a real effect, and if exports had not stepped in to carry the ball, GDP would not have been sustained at current levels.

>
> As home prices come back down to earth, many of these borrowers will find themselves with negative equity – owing more than their houses are worth. Negative equity, in turn, often leads to foreclosures and big losses for lenders.

‘Often’? There will be some losses, but so far they have not been sufficient to somehow reduce aggregate demand more than exports are adding to demand. Yes, that may change, but it hasn’t yet. Q4 GDP forecasts were just revised up 2% for example.

>
> And the numbers are huge. The financial blog Calculated Risk, using data from First American CoreLogic, estimates that if home prices fall 20 percent there will be 13.7 million homeowners with negative equity. If prices fall 30 percent, that number would rise to more than 20 million.

Not likely if income holds up. That’s why the fed said it was watching labor markets closely.

And government tax receipts seem OK through November, which is a pretty good coincident indicator incomes are holding up.

>
> That translates into a lot of losses, and explains why liquidity has dried up. What’s going on in the markets isn’t an irrational panic. It’s a wholly rational panic, because there’s a lot of bad debt out there, and you don’t know how much of that bad debt is held by the guy who wants to borrow your money.

Enough money funds in particular have decided to not get involved in anyting but treasury securities, driving those rates down. That will sort itself out as investors in those funds put their money directly in banks ans other investments paing more than the funds are now earning, but that will take a while.

>
> How will it all end?

This goes on forever – I’ve been watching it for 35 years – no end in sight!

> Markets won’t start functioning normally until investors are
> reasonably sure that they know where the bodies – I mean, the bad
> debts – are buried. And that probably won’t happen until house prices
> have finished falling and financial institutions have come clean about
> all their losses.

And by then it’s too late to invest and all assets prices returned to ‘normal’ – that’s how markets seem to work.

> All of this will probably take years.
>
> Meanwhile, anyone who expects the Fed or anyone else to come up with a plan that makes this financial crisis just go away will be sorely disappointed.

Right, only a fiscal response can restore aggregate demand, and no one is in favor of that at the moment. A baby step will be repealing the AMT and not ‘paying for it’ which may happen.

Meanwhile, given the inflationary bias due to food, crude, and import and export prices in genera, a fiscal boost will be higly controversial as well.

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