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Notes On February Data: Housing, Credit, and Inflation
From The Daily Capitalist
One could easily be confused by seemingly conflicting data that we're bombarded with daily. There are some signs of improvement, but most of these are related to cyclical factors or the remnants of fiscal stimulus.
The most threatening problem is the continuing credit freeze. Large banks have ceased tightening lending standards, but the smaller banks which do most of the small business loans in America are still tightening. Further, businesses aren't taking on the risk of borrowing more money. They prefer to remain lean.
The other issue is commercial real estate. Nothing has changed here. It's still a big threat to most small banks. In a footnote to Bernanke's House testimony on Thursday, in the discussion about the Fed's exit strategy and the end of the TALF program, the "extend and pretend" rules under TALF for CMBS have been extended for another three months. That won't help the recovery.
Cyclical factors indicate that unemployment is starting to soften. Firms can only fire so many people at this stage of the cycle and stay in business. Durable goods orders firmed up and that appears to be a response to retailers' orders for consumer goods as the orgy of inventory depletion has run its course. Also, manufacturers are getting great deals on software, computers, and machinery. I don't expect economic activity to improve substantially. Look for further deterioration starting sometime in Q3 or Q4.
Here's my analysis of the significant data:
Cash For Homes Has Played Out
Home sales and home prices continue to decline. The National Association of Realtors announced that existing home sales declined 0.6% in February on a seasonally adjusted basis. This is the third straight decline after the tax credit steroid induced bump last Fall. The median home price declined to $165,100, a 1.8% decline. The credit will expire next month and it seems as if all the sales the tax credit induced has been squeezed out of the market.
[T]he Commerce Department said sales of new, single-family homes fell 2.2% in February from January to a seasonally adjusted annual rate of 308,000—the lowest level since records began in 1963.
More troubling is that the supply of homes for sale have risen to 8.6 month from January's 7.8% supply. Inventory is rising and we still have a looming shadow market. Estimates are that more than 1 out of 4 homeowners is underwater:
First American CoreLogic reported ... that more than 11.3 million, or 24 percent of all residential properties with mortgages, were in negative equity at the end of the fourth quarter of 2009, up from 10.7 million and 23 percent at the end of the third quarter of 2009. An additional 2.3 million mortgages were approaching negative equity at the end of last year, meaning they had less than five per cent equity. Together, negative equity and near negative equity mortgages accounted for nearly 29 percent of all residential properties with a mortgage nationwide.
What is really interesting is that in my state, California, median home price rose 11.2% in February YoY, according to MDA DataQuick: $249,000 from $224,000 2009. But ... the rate of foreclosed home sales fell to 44.3% from 58.8% YoY. But foreclosure sales were up from 43.8% in January 2010.
[T]he Commerce Department said sales of new, single-family homes fell 2.2% in February from January to a seasonally adjusted annual rate of 308,000—the lowest level since records began in 1963.
What is happening in California is basically a land rush. People have been incentivized by foreclosure sales and tax credits. As prices rise, the market will cool off further. The market for foreclosure properties is getting crowded if one can judge from all the foreclosure seminars being offered. As First American CoreLogic points out, the majority of underwater homes are located in Arizona, Michigan, Florida, Nevada, and California.
I don't put much faith in the government's HAMP program which designed to reduce foreclosures. All it does is reduce monthly payments; it doesn't relieve the problem of being underwater. "The share of borrowers with modified loans who again defaulted remained high but showed signs of improvement." Don't hold your breath. A new HAFA program designed to streamline short sales goes into effect on April 5 but it will have a very limited reach. If 51% of homes with first mortgages have second mortgages or home equity liens, then it is unlikely HAFA will work. See this excellent article from HousingWire.
Inflation
Consumer prices were unchanged in February, the first time they didn’t increase since March 2009, Labor Department figures showed today in Washington. The index of leading indicators rose 0.1 percent last month, the 11th straight gain, according to the Conference Board, a New York research group. ...
Excluding food and energy costs, the so-called core index increased 0.1 percent, in line with forecasts, capping a 1.3 percent year-over-year gain that was the smallest since 2004. ...
Some restraints on the cost of living are not likely to reverse soon. Rents, which make up almost 40 percent of the core CPI, were little changed last month.
Owners-equivalent rent, one of the categories used to track rental prices, declined 0.3 percent over the past 12 months, the worst performance since records began in 1982.
Everything ties together. More foreclosures means more rentals which drives down rents. This is deflation at work. This really is upsetting to Bernanke, Summers, Geithner, and Romer because they want inflation. They figure that rising prices will spur consumption, credit, and liquidity. It's not working very well for them.
Unemployment
Some good news here:
The Labor Department said in its weekly report Thursday that initial claims for jobless benefits fell by 14,000 to 442,000 in the week ended Mar. 20. The previous week's level was revised to 456,000 from 457,000.
Total claims lasting more than one week, meanwhile, fell by 54,000 to their lowest level since Dec. 20, 2008. ...
While the latest decrease in claims proves to be a good sign for the labor market, the fact they still remain so high is worrisome to many economists. Since the start of the year, claims have been stuck at levels ranging in the mid to high 400's, and the country's current unemployment rate still stands at an inflated 9.7%. ...
In the Labor Department's Thursday report, the number of continuing claims -- those drawn by workers for more than one week in the week ended Mar. 13 -- fell by 54,000 to 4,648,000 from the preceding week's revised level of 4,702,000.
The unemployment rate for workers with unemployment insurance for the week ended Mar. 13 was 3.6% -- unchanged from the prior week's revised rate of 3.6%. ...
But, nonfarm payrolls declined by 36,000 in February. Much of the gain came from temporary help services (+48,000 jobs). The construction sector keeps tanking--lost 64,000 jobs. U-6 (total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force), the broadest measure was at 17.9% in February (vs. 18.0% in January).
There is some leveling off of unemployment, but the 9.7% unemployment rate is unchanged. We are a long way away from creating enough jobs to stop the 400,000+ monthly job losses.
Conference Board Leading Indicators
The index of U.S. leading indicators rose 0.1 percent in February, the smallest gain in almost a year, pointing to an economy that may expand at a slower pace in the second half of 2010.
The increase in the New York-based Conference Board’s measure of the outlook for three to six months matched expectations and followed a 0.3 percent rise in January. Some of the indicators may have been depressed by snowstorms in parts of the country. ...
U.S. factory workers’ hours fell to 39.5 in February, the lowest level since October, from 39.9 in January, according to data from the U.S. Labor Department.
Blame it on the weather?
Capital Goods Orders
A key barometer of business investment—orders for nondefense capital goods, excluding aircraft—rose 1.1% last month, erasing part of a sharp drop in January, the Commerce Department said Wednesday. ...
Overall orders for durable goods—long-lasting items ranging from semiconductor chips to semi-trailer trucks—rose 0.5% to a seasonally adjusted $178.12 billion. ...
In the fourth quarter of 2009, spending on equipment and software was still 17.6% below its 2007 peak. Overall, net private investment—capital spending on everything from houses to factories, minus depreciation—stood at only 1.3% of economic output, compared with a 20-year average of about 5.7%.
Credit Conditions
The latest Fed survey of banks says:
The January survey indicated that [large] commercial banks generally ceased tightening standards on many loan types in the fourth quarter of last year but have yet to unwind the considerable tightening that has occurred over the past two years. The net percentages of banks reporting tighter loan terms continued to trend lower. Banks reported that loan demand from both businesses and households weakened further, on net, over the survey period. ...
Demand from both businesses and households for all major categories of loans weakened further, on net, over the past three months. The net fractions of banks that reported weaker demand for business loans continued to decline, while changes in the comparable readings on demand for loans to households were mixed. ...
In contrast [to large banks], moderate net percentages of smaller domestic bank respondents (those with total assets below $20 billion) continued to tighten terms on loans to firms of all sizes. ...
In contrast to C&I lending, a substantial share of domestic banks, on net, reported having tightened standards on CRE loans and having experienced weaker demand for such loans again in the fourth quarter of 2009.
Here's a chart showing percentage changes in lending YoY:
An interesting article in Forbes noted that customers just aren't borrowing:
Bank of America is in its strongest capital position ever (thanks in part to timely assistance from the U.S. Treasury and the Fed's interest-lowering activities), but customers in its commercial lending division aren't biting. Loans outstanding dropped steadily all year while commercial deposits rose 24% to $133 billion, says Laura Whitley, the executive in charge of lending to businesses under $5 billion in sales. "As they cut their expenses, they've gotten more profitable, and they're using that cash first, instead of borrowing," Whitley says. ...
The biggest pool of untapped money may be at the nation's 5,000 small banks ($2 million to $15 billion in assets), many of which are well capitalized and have money to lend. James MacPhee is the president of the Independent Community Bankers of America, as well as chief executive of tiny Kalamazoo County State Bank in Schoolcraft, Mich. Kalamazoo has a 14% capital ratio and 39% of its assets in cash and securities. "We have significant capacity to loan, but there's nowhere to put it," MacPhee says.
There is no let-up of the credit crunch.
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New homes as a business unit is still struggling here in suburban Philadelphia. Most who have not gone beneath the waves are treading water and have the ability to do so because of other business lines, such as apartments, which are steady. Land prices are softening up, and the New Normal is much lower average prices for the outsales, although it will take years for this to show up since it takes 3-4 years or longer to get project approvals. New expensive regulations have shown up, more expensive stormwater regulations and a new requirement to sprinkler residential development (which sounds good but adds a big expense) which will further weigh upon new homes.
As for loans, the banks are still not lending - you can forget any real estate projects, and it is sort of irrelevant as we do not want to borrow. I feel like there is a big sinkhole in the road ahead.
What I cannot understand is the rush to REITs' that are paying dividends as 90% script, (i.e. bogus), where is the return on capital here, especially as down the road these entities are likely to go bankrupt eg MAC & DDR.
Pure spec RE play. If you wanted to invest in CRE and you see REITs in the tank, it's a good bet. You get generally high quality properties (yes, there is a lot of junk out there) at half off. But that was done and I think they are fully valued at this point. There is a ton of money out there waiting for CRE to crash further and then pick up the choice pieces. REITs are just one leg of that play.
optionrat,
I don't think it's a run for safety driving the REITs higher, but just that REITs are a tried and true place to go for an easy profit by squeezing short sellers.
The volatility in these same spaces attract traders, thus supporting the price higher than the fundamentals warrant.
anyway, that's one theory
Inflation-Housing is tanking, but oil is at $80. If the leading indicators in the CPI (CPI is a joke btw) are showing a minimal rise in inflation, and energy is skyrocketing, inflation is big! Like double digit big.
Unemployment-Congress failed to extend unemployment. This made the stats look better. Also, U-3 is a joke, and U-6 is not even that accurate. Unemployment is destroying America. This was done on purpose by GHWB ("It is the economy stupid"). He threw that election in '92 so that NAFTA would be rammed through by Billy C. Only a Democrat....
This is my first comment on 0/H.
Anyone that thinks home construction and CRE will pick up needs to view it from my perspective ie; RE sales and investments, construction and land development since 1964.
While new construction, CRE and residential, dropped to the ground our wonderful "bureaucracy in charge" took the opportunity to increase fees, requirements and codes. So, all new constrution will now cost more then before.
With this "green" crap backed by "0", I see even more cost with no benefits.
As far as CRE in Florida, better get out of the way or it will crush you as it falls.
I do have one question, I see the market running to REITs for "safety" What the "H" is that all about? With in the next 12 to 18 months they will all be at new 52 week lows. I don't understand why they are up to new 52 wk highs. Their holding are worth about 50% of book. Please explain.
There are a couple explanations to movement of REIT stocks...
Traditionally, they have been viewed as relatively safe (compared to other equities) sources of predictable income. (The last 2 years dispelled that notion) As yields on other income investments have gone to zero, people have stretched the risk spectrum to maintain income and piled into REITS. They yields are 4 - 7%-ish.
REITS have become trading vehicles. They have mostly small market caps and small floats so they can be very volatile. The advent of REIT ETFs seems to have made them even more volatile.
Book values for REITS are highly subjective right now, be careful looking at that matric. So few properties are trading and the ones that are may be distressed.
Lastly, REITS are highly correlated to inflation so their run up might be viewed as a play on inflation expectations. It is interesting that the REITs that have done the best, Hotels, are the ones that re-price rental rates daily - recouping inflation erosion of income the most rapidly.
Massive and immediate tax relief is the only possible salvation at this point. Otherwise, incomes (and the money supply) basically go to zero, all the rents collapse, and its game over hyper-deflation (or hyper-inflation, whatever you want to call it).
The USG is putting ankle weights on people who are tired - and barely treading water - miles from shore.
A moratorium on income taxes for three years would do it I bet.
ditto on that.
Further though, about the softening job losses. I speculate, and it is speculation, that many small companies battened down the hatches when this started and managed to retain a decent portion of their workforce under the guise of "V shaped recovery". Since that recovery has not appeared those companies, finally having to acknowledge the situation, will now be forced to eliminate more employees.
It's just a theory but I think there's an element of truth to it..we'll see. I believe we could see a pickup in the unemployment situation again, despite what the pundits may say.
I agree with ya, we are still in this all they did was to paper over the problem for awhile.