by Mike Larson on July 2, 2009
in Economy
The June employment report was just released by the Labor Department. Here’s what the data showed:
* Total nonfarm payrolls fell by 467,000, That was much worse than the forecast for a reading of -367,000. Net revisions to the past couple of months lowered the job loss tally by 8,000. Still, job losses were widespread in June. Construction employment dropped 79,000, manufacturing employment fell 136,000, and service-sector employment fell by 244,000. Worth noting: Government employment is also fading fast. The sector fired 52,000 people, the worst showing since July 2007.
* The unemployment rate rose to 9.5% from 9.4% in May. That was slightly better than the average forecast for a reading of 9.6%, but still the worst reading going all the way back to August 1983 (a tie).
* Average hourly earnings were a disappointment. They were unchanged, against forecasts for a reading of +0.1% and a May reading of +0.2%. That was the worst number since February 2004. Average weekly hours worked dipped again to 33 from 33.1. That’s the lowest reading in the history of the data series, which goes back to 1964.
* In other employment data, initial jobless claims were right in line this week — 614,000 vs. a forecast for 615,000 and a previous reading of 630,000. Continuing claims dipped to 6.702 million from 6.755 million a week earlier. That as a big better than forecast.
Mortgage applications dropped sharply in the week of June 26. The Mortgage Bankers Association’s application index (chart above) plunged 18.9% to 444.8, the lowest level since late November. The refinance index tanked 30%, while the purchase index slipped 4.5%. This occurred despite the fact mortgage rates dropped for the third week (to 5.34% from a recent high of 5.57%).
This fits with what I’ve been telling various questioners: While 30-year rates in the mid-5s are low on a LONG-TERM historical basis, they’re not very low relative to the last five or six years. The average since mid-2003 (when we had the last mega-boom in refis) is 6%, according to Freddie Mac. So the universe of mortgages that can be refinanced on a “rate and term” basis isn’t very large in the mid-5s. And of course, the “cash out” refi business is dead in the water. That’s because A) falling home values have made it so fewer people have any equity to cash out and B) lenders are much tougher on LTV ratios in the cash out business these days.
We’re going to need to see rates head back into the 4s to get the mortgage train rolling again. That’s unlikely to happen unless the economy deteriorates sharply, nascent inflation concerns cool, and/or the government regains control of its out-of-control finances (something that would help attract investors to long-term bonds again). That’s a tall order, from where I sit.
The April S&P/Case-Shiller figures were released this morning. They showed home prices in 20 top metropolitan areas down 18.1% from a year earlier. That was better than the forecast for a reading of -18.6% and an improvement from the previous month’s -18.7% reading. Prices fell in all 20 cities tracked by the research organization, with Phoenix performing the worst (-35.3%) and Denver doing the best (-4.9%). The monthly decline came in at -0.6%, an improvement from -2.2% in March and the smallest drop since last June. Prices rose in 8 of 20 cities on a monthly basis.
Today, the Wall Street Journal elucidated a point I have made repeatedly in many venues. Heading off a potential foreclosure tied to the STRUCTURE of a mortgage is a lot easier than avoiding a foreclosure related to broader ECONOMIC trends (falling house prices, rising unemployment, etc.). This is one reason the foreclosure problem cannot be easily fixed, despite all the PR about modifications coming from the administration and the industry.
“Rising unemployment is complicating the Obama administration’s effort to reduce foreclosures and stabilize the housing market.
“The first wave of mortgage delinquencies was sparked by borrowers who took out subprime mortgages and other risky loans that became unaffordable, causing them to fall behind on their monthly payments. But the current wave is increasingly driven by unemployment or underemployment, economists and housing counselors say.
“The Obama foreclosure-prevention plan was “built around the subprime crisis model, not the unemployment crisis model,” said Michael van Zalingen, director of homeownership services for the nonprofit Neighborhood Housing Services of Chicago.
“The Obama program provides financial incentives to mortgage-servicing companies and investors to reduce mortgage-related payments to 31% of monthly income.
“But many borrowers don’t have sufficient income to qualify for a loan modification under the plan. Mr. van Zalingen said roughly 45% of the more than 900 borrowers who sought help at two recent counseling events would fall into that category even if their interest rate were dropped to 2% and their loan term were extended to 40 years.”
The Federal Open Market Committee left its interest rate target unchanged at 0% to 0.25%. Also, the Fed left its targets for purchases of Treasury debt, GSE debt, and mortgage backed securities unchanged. The complete statement is as follows:
“Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.
“The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.
“In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.
“Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.”
My take? The Fed essentially punted, striking out the middle ground. Policymakers said the economy is improving, but they gave no hint they would throttle back on monetary stimulus. They threw a bone to the inflationists with a comment about rising commodity prices, but then said those worrywarts should essentially be ignored. They referenced their extraordinary programs to purchase Treasuries, mortgage backed securities and agency debt, but provided no clarity or details about an exit strategy.
I can’t help but think of that old Magic 8-Ball response: “Reply hazy, try again.” The Fed isn’t offering much clarity about what it will do next because it doesn’t seem to know.
The market reaction: Long-term bonds are getting whacked, with the bond futures down about 15/32 at last count. The dollar index is at its high of the day, up 70 bps to 80.54. Stocks are giving up early gains, while gold is fading somewhat.
The 5-year Treasury Note auction (of $37 billion in securities) just wrapped up and it was pretty good. The notes sold at a yield of 2.7%, compared with pre-auction talk of 2.724%. Indirect bidding was strong at 62.8%, and the bid-to-cover ratio came in at 2.58. Those were the highest figures since December 2004 and October 2007, respectively. Still, those metrics were slightly worse than the 2-year auction. That fits with the pattern that the further out on the yield curve you go, the weaker the demand tends to get.
The new home sales figures for May were released this morning. Here’s a recap …
* New home sales dipped 0.6% to a seasonally adjusted annual rate of 342,000 from 344,000 in April. The numbers are a disappointment, considering economists were expecting sales of 360,000. Results for the past few months were also downwardly revised by 32,000 units.
* Regionally, sales jumped 28.6% in the Northeast and 18.6% in the Midwest. They inched up 1.3% in the west, but fell 8.5% in the South, the nation’s largest new home market (184,000 units sold at a seasonally adjusted annual rate vs. 80,000 in the West … 51,000 in the Midwest … and 27,000 in the Northeast).
* The raw number of homes for sale continued to decline, falling to 292,000 from 299,000 in April. That’s the lowest reading going back to March 2001. The months supply at current sales pace indicator of inventory dipped to 10.2 from 10.4.
* The median price of a new home rose 4.2% last month to $221,600 from $212,600 in April. On a year-over-year basis, prices were down 3.4%, the best YOY showing since December.
Digging into the May new home sales figures, you see that sales rose in three out of four regions of the country. But they declined sharply in the South, the country’s biggest new home market, so overall sales were a disappointment. On the other hand, for-sale inventory continues to decline — a definite plus. And the year-over-year rate of home price depreciation eased markedly.
Overall, the story remains the same: The housing market is gradually stabilizing, but showing no sign whatsoever of a vigorous rebound. The biggest issues going forward remain unemployment and interest rates. The supply of new homes for sale is back in line with the long-term historical average. But if potential buyers are losing their jobs, and financing costs are going up, builders are going to have a tough time moving product.
The existing home sales report for May just came out. Here’s what the figures showed …
* Existing home sales gained 2.4% to a seasonally adjusted annual rate of 4.77 million units from 4.66 million in April. That was slightly below forecasts for a reading of 4.82 million and down 3.6% from 4.95 million a year earlier.
* Single-family sales climbed 1.9%, while condo and cooperative sales rose 6.1%. Regionally, sales were mixed. They rose 3.9% in the Northeast and 9% in the Midwest. But transaction volume was unchanged in the South and down 0.9% in the West.
* The raw number of homes for sale fell 3.5% to 3.798 million units from 3.937 million in April. That was also down 15.3% from a year earlier. The months supply at current sales pace indicator of inventory dropped to 9.6 from 10.1, with single family inventory falling to 9 from 9.5 and condo inventory slipping to 15 from 15.4.
* The median price of an existing home rose 3.8% to $173,000 from $166,600 in April. That was down 16.8% from $207,900 in the year-ago period.
We saw another month of modest improvement in the housing sector in May. Existing home sales rose, led by the Midwest region. Sales were particularly strong in the condo sector, while the supply of homes on the market dipped. The biggest fly in the ointment continues to be pricing. It remains weak, with yet another double-digit decline from year-earlier levels showing up in the data.
Stepping back for a moment and looking at the big picture, it’s clear that the housing sector is no longer in freefall. But neither is it rebounding strongly. We’re seeing modest declines in inventory, modest improvement in sales, and some tentative signs of stabilization in pricing. But that’s it. And that should come as no surprise. We just experienced the longest, largest housing bubble in U.S. history. As a result, the recovery process will be a long, drawn-out affair.
Another thing to keep an eye on: Mortgage rates. They didn’t begin to rise significantly until late May. Since the existing home sales figures are based on contract closings, rather than contract signings, the impact of higher rates wasn’t captured in this report. We’ll likely see housing demand trail off as we head deeper into the summer unless financing costs ease back.
The Treasury Department just announced how much debt it’s going to sell next week. Get a load of these figures: $61 billion in T-bills. $40 billion of 2-year T-notes. $37 billion of 5-year Notes. And $27 billion of 7-year notes. That’s good for a record $165 billion of debt, the most sold in any week ever, driven by increased sales of five-year and seven-year debt. Long bond futures are off about 1 23/32 right now, with 10-year note yields up 11 basis points to 3.8%.
We just got the housing starts and permits figures for the month of May. Here’s what they showed …
* Total housing starts rose 17.2% to a seasonally adjusted annual rate of 532,000 from 454,000 in April. Building permits gained 4% to 518,000 from 498,000. Economists were expecting 485,000 starts and 508,000 permits.
* By property type, single family starts rose 7.5% to 401,000 units. Multifamily starts soared 61.7% to 131,000. Single family permits popped 7.9% to 408,000, while multifamily permits dipped 8.3% to 110,000.
* As far as the regional breakdown is concerned, starts gained across the board. They inched up by 2% in the Northeast, rose 11.1% in the Midwest, climbed 16.8% in the South, and surged 28.6% in the West. In the permits world, activity was up 2.3% in the South, up 3.8% in the West, up 5.7% in the Northeast, and up up 8.9% in the Midwest.
Housing starts continue to show extraordinary volatility, with large double-digit moves month in and month out becoming the norm. The biggest swings continue to be found in the multifamily market. If you can believe the data, MF starts plunged 49.4% two months ago only to soar 61.7% in May. Hmmm.
What I find more interesting is that we’ve had three straight months of gains in the less-volatile single-family arena. In fact, the 7.5% monthly increase in May was the biggest rise since January 2006. This adds to evidence that the housing market is no longer falling apart. Instead, much lower home prices are helping to stabilize demand and bring down inventories in some of the hardest-hit regions of the country. That, in turn, is bringing some builders out of the bunker.
Still, anyone expecting a rip-roaring rebound in the housing sector is going to be disappointed. Tighter lending standards, rising mortgage rates, and a dismal employment market will all combine to drag out the turnaround timeline, and ensure the recovery remains a muted one.
