Thursday, December 28, 2006

Were Housing's Troubles Just the Market Taking a Breather?

It appears the U.S. housing market is stabilizing and may have already bottomed? Are we going to follow our UK bretheren and rebound after a 12-15 month breather (See previous months posts)? Time will tell...........

End of Housing SlumpSeems to Be Drawing Near

WASHINGTON -- Recent firmness in mortgage applications and an increase in new-home sales suggest the housing slump may be nearly over, limiting the risk of wider damage to the overall economy.....

....The four-week moving average for the MBA's purchase index, which offers a less-volatile picture of the trend, has risen 12% since August, while the four-week average for the group's refinancing index has soared more than 41% since July....

....A recent pickup in new-home sales also points to stabilizing demand. The Commerce Department said yesterday that new-home sales rose 3.4% in November to an annual rate of 1.05 million units. While that pace is down more than 15% from a year earlier, it has risen since July and has held fairly steady in recent months.....

..."The net of all the numbers we've gotten is that it looks like the housing market and home sales appear to have stabilized, at least temporarily, in the latter part of the year," said Thomas Lawler, a former economist for Fannie Mae who now runs a consulting firm in Vienna, Va.

...Last month, there were 545,000 new homes on the market, or the equivalent of a 6.3-month supply at current sales rates, according to the Commerce data, down from a recent high mark of a 7.2-month supply in July.....

Christopher Conkey - WSJ

Home on the Range

AS I have been saying for awhile now, the housing market may have bottomed

From The Wall Street Journal....

WASHINGTON -- Demand for used homes rose a second straight month in November, a sign the housing slump might have hit bottom, while new data suggest growth on the manufacturing side of the economy....

...Existing-home sales increased by 0.6% to a 6.28 million annual rate, after rising 0.5% in October, the National Association of Realtors said. The back-to-back increases were the first since March and April 2005.

"As the housing market recovers from its correction, existing-home sales should be rising gradually during 2007 -- it looks like we may have reached a low point for the current cycle in September," NAR chief economist David Lereah said....

...The unexpected increase in resales followed a report this week of a pickup in November sales of new homes. Both sets of data showed home inventories declining.

....."We've entered a more sustainable period of home sales now, and we expect greater support for prices over time as inventory levels are eventually drawn down," Mr. Lereah said.....

.."Price drop is necessary to stir sales," Mr. Lereah said. "It is working. Sales are up. It appears we hit bottom."

Excerpts from Jeff Bater - WSJ Dec 28, 2006

Saturday, December 23, 2006

Silicon Valley Job Market, Hot, Hot, Hot

Valley Hiring Gains Steam


Silicon Valley's job market, which had posted slow, steady improvement, heated up in November, registering the strongest growth in 5 1/2 years.

The strong gains showed up in many industries as cautious employers, who had been holding back on hiring despite an improving economy, finally felt comfortable enough to loosen their belts a notch.

Employers in Santa Clara and San Benito counties added 13,900 jobs over the past 12 months, bringing local employment to 894,800 positions, the state's Employment Development Department said Friday. The November-to-November increase of 1.6 percent was the strongest the valley has experienced since April 2001 and even outpaced California's November employment growth of 1.1 percent, said Gary Schlossberg, a senior economist at Wells Capital Management.

The jobs report came amid other signs of economic vigor. The Nasdaq is up 8.9 percent so far this year, tech company profits are holding up and recent local surveys of consumer and executive confidence have been relatively strong.

Employers added 1,900 jobs in November compared with the month before, an increase that was more than double the average October-to-November gain since 1990.

Spectrum Economics Chairman Richard Carlson, who has been studying the valley's job market since 1975, said this is the ``first time I've been able to smile in a long time looking at these numbers.''
He said if Silicon Valley's job growth simply matched that of the state, local employment would have increased by only 8,000 jobs over the past 12 months.

``We are finally growing faster than the state,'' Carlson said. ``This is the first time this has happened in a very long while. It used to happen all the time.''

The valley's job growth outshined the state's last month in part because, as the housing market slowed down nationwide, the valley didn't take the hit in construction jobs that other parts of the state suffered. That is in part because construction ``never really boomed the way it did in the rest of the state,'' Schlossberg said. ``So you haven't seen things begin to unravel quite as rapidly in Santa Clara'' County.

Experts were pleased to see most sectors bucking up compared with a year ago, ranging from computer systems design and related services adding 1,400 jobs, to leisure and hospitality creating 2,600 more positions, primarily in eating and drinking establishments.......

By Nicole C. Wong
Mercury News

Wednesday, December 20, 2006

Nothing to See Here...and.......Why this is a Good Thing

Many economic pessimists took the opportunity to jump on the inflation band wagon based on the headline producer price index jumping 2% during the month of November. Trust me when I say there is nothing to see here, this is a blip due to some sort of data discrepencancy. Inflation is not a threat, the PPI is only up .9% on an annual basis, absolutely nothing to worry about.....

From the WSJ

"The Labor Department's producer-price index jumped 2%, its biggest advance since 1974, as prices for gasoline and light trucks soared during November. The core PPI, which strips out food and energy costs, advanced 1.3% in its biggest surge since 1980. The reading stands in contrast to last week's flat performance by the parallel consumer-price index; but as hair-raising as the numbers appear, economists said the data didn't scan. "Even if there once was a stable empirical relationship between wholesale and retail prices, that relationship is not reliable today," Stephen Stanley, chief economist at RBS Greenwich Capital, wrote in a note. "The gyrations in autos are the most extreme example, but by no means the only one." On an annual basis, wholesale inflation looked restrained. Core prices were higher by just 1.8%, and overall PPI was up just 0.9%."

And good news on housing. What most casual observers don't seem to understand is that housing starts down 30% year over year is great news. This is strictly a speculative inventory correction we are experiencing and the lower the starts the sooner we will reach equilibrium (we may be close), price stabilization, then gradual apprecation. So every time you see starts are down, rejoice, builders are bringing inventory in line with short term demand flux until the sheep get back in.

"In other economic reports today, new residential construction rebounded during November from a 13.7% plunge a month earlier, climbing 6.7% to a seasonally adjusted 1.588 million annual rate. A deeper look at the report showed that the housing sector remains far from turning around, however. Starts are now 29.4% lower than they were at the beginning of this year, according to Steven Wood of Insight Economics. Furthermore, building permits fell for the 10th month in a row, dropping by 3% to an annual rate of 1.506 million."

Monday, December 18, 2006

Time to Get Back into Real Estate?

Housing Market Update from CNBC (Updated 12/19/06)

Homebuilders believe the worst of the housing slump has passed and that the market will rebound in the coming year, according to a December survey by the National Association of Homebuilders.

The NAHB/Wells Fargo Housing Market index fell one point to 32 but held above the 15-year low of 30 reached in September. Lower mortgage rates and cheaper new-home prices buoyed buyer demand, the group said.

“This was the third consecutive month in which builder expectations for sales over the upcoming six-month period have improved, and it’s a good sign of things to come in the new year,” said NAHB President David Pressley.

“Other recent indicators confirm that buying conditions have improved and that demand is stabilizing - including improvements in measures of housing affordability, strengthening consumer assessments of home buying conditions and an upswing in applications for mortgages to buy homes,” added NAHB Chief Economist Dave Seiders.

That could bode well for housing starts, which the Commerce Department releases Tuesday and which many hope will remain low as builders get rid of inventory.

CNBC Video Link Ara Hovnanian (Here)

CNBC Video Link From 12/18/06 (Here)

Inflation still not a threat

I've repeatedly posted on this blog that inflation is a non issue in the U.S. economy. A lot of the headline numbers in the summer and early fall were lagging indicators and reflected some temporary higher energy fears. With the more recent inflation there is most definitely room for the Federal Reserve to cut rates in Q1-07 if they please. The non inflationary steady growth the economy is currently experiencing will be key for a continuance of the current expansion.

"WASHINGTON (AP) - Consumer inflation was a no-show in November as Americans enjoyed a third straight month of price relief led by big declines in energy costs. Meanwhile, industrial production staged a rebound led by rising output at auto factories.

The Labor Department reported yesterday that consumer prices were unchanged last month, even better than the small 0.2 percent analysts had been expecting. Prices had actually fallen by 0.5 percent in both September and October. The good news in all three months came from tumbling gasoline and other energy costs, which are retreating after a big run-up earlier in the year.....

....Core inflation, which excludes food and energy, was also unchanged in November, the best showing since June. That was likely to boost spirits at the Federal Reserve, which is working to keep inflation in check.

With one month left in 2006, overall inflation is rising at an annual rate of 2.2 percent, down from last year's 3.4 percent increase. Core inflation, excluding energy and food, has been rising at an annual rate of 2.6 percent this year, an acceleration from the 2.2 percent gain turned in last year.

The Fed's comfort zone for core inflation is between 1 percent and 2 percent. It has been working to slow the economy enough through higher borrowing costs to reduce core inflation.At their last meeting of the year on Tuesday, Fed policy makers opted to leave rates unchanged after engineering 17 consecutive rate hikes from June 2004 through June of this year.

Many economists believe the central bank is on the verge of achieving its hoped-for soft landing and will probably leave rates unchanged until May or June of next year, when the next move is expected to be a rate cut to counter unemployment, which is expected to rise in response to the slowing economy.

For November, overall energy costs were down 0.2 percent following even bigger declines of 7.2 percent in September and 7 percent in October. U.S. prices have retreated after global crude oil prices began falling this summer...."

Associated Press - Dec 16, 2006

Wednesday, December 13, 2006

Happy Holiday Retail Sales

As noted in my earlier posts this month (Here) ( And Here), despite the doom and gloom this holiday season was shaping up to be, well, very merry. And now, it's beginning to feel a lot like Christmas........

Outlook for Holiday Shopping Improves With Big November Retail Gains

"WASHINGTON (AP) -- The holiday shopping season may not be so bad after all. Consumers came surging back into stores in November, revving retail sales at the fastest pace in four months. The 1 percent increase reported by the Commerce Department on Wednesday was far above the 0.1 percent rise that many analysts had expected.

In another encouraging sign, the government revised the October sales performance to show a 0.1 percent decline rather than the 0.4 percent drop originally reported.

The November rebound was surprising given anecdotal evidence from retailers that sales had tapered off following a strong weekend after Thanksgiving.

"No matter what the retailers may be saying, it appears that consumers have taken out their wallets so far this holiday season," said Joel Naroff, chief economist at Naroff Economic Advisors, a private consulting firm.

The November gains were widespread, led by a 4.6 percent surge at electronics and appliance stores. That increase is attributed in part to the introduction of sought-after video game consoles such as Sony's Playstation 3 and Nintendo's Wii.

"Once again, the reports of the death of the U.S. consumer have been greatly exaggerated. This holiday season might be decent after all," said Michael Gregory, an economist at BMO Capital Markets............"

By Martin Crutsinger, AP Economics Writer

Mortgage Defaults Less in California Than Rest of U.S

So much for the wrath of defaults allegedly flooding California. Another urban legend. California borrowers are some of the most sound in the U.S. ............

"A rising number of Americans fell behind on mortgage payments during the third quarter of 2006, but California homeowners continued to fare better than most of the nation, the Mortgage Bankers Association reported Wednesday.

The MBA reported that 2.68 percent of California's 5.5 million mortgage holders were at least 30 days late on their house payments during July, August and September.
That compared to a national delinquency rate of 4.67 percent among 42.6 million home loan borrowers.

Just seven states - Washington, Oregon, Hawaii, Wyoming, Montana, North Dakota and South Dakota - had lower delinquency rates for all loans than California, according to the MBA's quarterly survey of delinquencies."

By Jim Wasserman - Sac Bee Staff Writer

Fed Stays Tight

The Fed kept rates tight at 5.25% despite the bond market demanding otherwise. I still side with many economists that believe they will continue to talk tough but cut rates in the first half of next year. This would allow the soft landing scenario and stronger growth in 2007 and 2008 and a prolonged expansion. We Shall see.......

Fed Keeps Focus on InflationEven as 'Growth Has Slowed'

Markets Discount ChanceOf Interest-Rate BoostsDespite Bank's Position

"WASHINGTON -- The Federal Reserve signaled that while the economy looks a bit weaker than a month ago, its forecast and concerns about inflation are unchanged, and thus interest rates are still more likely to rise than fall.

The Fed yesterday left its short-term interest rate at 5.25%, where it has stood since late June. In the statement accompanying its decisions, the Fed downgraded its assessment of the housing market and acknowledged "mixed" signals on growth. But its forecast of moderate growth is unchanged. Inflation remains its principal focus, and it still says its choice is whether to raise rates -- not to lower them.

Bond yields declined and stocks retraced most of their early losses as investors interpreted the statement as a concession by the Fed to markets' gloomier forecast of growth and more sanguine outlook on inflation. (See related article.) That, however, might turn out to be an overreaction. Fed Chairman Ben Bernanke has emphasized that rate actions depend on where the Fed thinks the economy and inflation will be in the future, not where they are today. And that hasn't changed.

The Fed said that "growth has slowed... partly reflecting a substantial cooling of the housing market." Its last statement, in October, didn't include the word "substantial." "Although recent indicators have been mixed, the economy seems likely to expand at a moderate pace on balance over coming quarters," it said. Inflation remains "elevated," and though expected to moderate, "inflation risks remain." Whether rates rise again will depend on new data, it said, in words identical to those used in October....

....The Fed and the markets have starkly different views of the path of interest rates, with the former maintaining a bias to raise them and the latter anticipating cuts of half to three-quarters of a percentage point in the coming year. Yesterday's statement did little to close the divide. Indeed, investors raised the probability of rate cuts a bit......

....Laurence Meyer, vice chairman of Macroeconomic Advisers, says the divide between the markets and the Fed is likely to be resolved one month at a time. If the data continue to support the Fed's stance, the Fed's language will remain the same, and markets will adjust their expectations as each Fed meeting approaches.

Richard DeKaser, chief economist at National City Corp. in Cleveland, predicted the Fed would stay on hold through all of next year. He attributed recent weakness in manufacturing to firms reacting to a buildup of inventories. Businesses are "not hunkering down and playing defense," he said, adding that his bank continues to see healthy loan demand from businesses.

But economists at UBS AG predicted rates will be cut a full percentage point next year as growth remains subpar, unemployment rises, and inflation edges down. Mr. Bernanke will be "somewhat more sensitive to growth versus inflation risks," they argued.

By Greg Ip - WSJ

Sunday, December 10, 2006

Should the Fed look at Cutting Rates?

Has the Fed achieved the balance of growth and inflation allowing the U.S. economy to have a short term mid cycle slowdown? Or is it relying too much on lagging indicators, leaving rates too high ,and inverting the yield curve longer than necessary? This Wall Street Journal article compares the current economic cycle and Fed Policy with 2000-2001.

Fed Is HamperedBy Past in Effort To Sound Warning

"WASHINGTON -- Federal Reserve officials -- unlike bond investors -- think the economy is a lot sounder today than at the end of 2000 and in early 2001, when the Fed abruptly reversed course and began a string of interest-rate cuts.

Yet Fed Chairman Ben Bernanke's effort to convey the message that today's conditions are different is hampered by the Fed's lack of candor back in 2000.

Fed officials, who have universally voiced concerns about inflation, are expected to keep short-term interest rates steady at 5.25% at their policy meeting next Tuesday. But bond markets have priced in a small chance of a rate cut next week and three one-quarter percentage-point cuts over the next 12 months.
Markets anticipate those cuts in part because they see parallels to 2000. A technology-stock and investment bust began to unfold in the summer of that year, yet in November the Fed still said its principal concern was inflation, not economic growth. Seven weeks later, with stock prices tumbling and businesses canceling investment plans, the Fed made the first of 13 interest-rate cuts....
.....Fed officials thus appear content with a forecast of moderate growth over the next few quarters, then a rebound in mid-2007. "I don't think that the data we have seen are out of line" with that forecast, Federal Reserve Bank of Chicago President Michael Moskow said Monday on
Skeptics think that is bluster. "They're paid to worry about inflation, which means that until the slowdown is obvious and undeniable, they will stick to their forecasts," Ian Shepherdson, chief U.S. economist at High Frequency Economics, said in a report last week, citing the similarity to late 2000....
....Transcripts of the Fed's November 2000 meeting offer grist for the skeptics. Fed officials at the time saw ample reason to shift from their assessment that higher inflation represented a greater risk to the economy than did weaker growth, to a view that the two risks were balanced. "The balance of risks has shifted quite noticeably," then-Vice Chairman Roger Ferguson said..."

Tuesday, December 05, 2006

Room for the Fed to Duck and Cover

Two key pieces of data were released this morning that will give the Fed room to lower interest rates in the first quarter of 2007. Productivity was better than expected for the last two quarters and unit labor costs were lower. This is exactly what we are looking for in a soft landing scenario that will allow the Fed to lower rates before they choke off economic expansion.

Productivity Grows 0.2%
As Labor Costs Revised Lower

"WASHINGTON -- U.S. productivity growth was mildly stronger during the summer than first thought, while unit labor costs were revised sharply lower for two quarters in a favorable sign for inflation.
Nonfarm business sector productivity increased 0.2% during July through September, the Labor Department said Tuesday. Originally, Labor said productivity was unchanged during the third quarter.

Wall Street expected an upward revision in productivity for the third quarter -- but a bigger one. The median estimate of 23 economists surveyed by Dow Jones Newswires was productivity rising at a 0.5% annual rate.
There was an unrevised 1.2% increase in second-quarter productivity, which is output divided by hours worked.

Third-quarter unit labor costs -- a gauge of inflationary pressures -- rose by 2.3%. Economists expected a 3.2% advance. Labor originally estimated a 3.8% increase for the third quarter. Unit labor costs in the second quarter decreased, falling 2.4%; originally, Labor reported a 5.4% surge.

Compared to a year earlier, unit labor costs were 2.9% higher; in Labor's last productivity report, it estimated the year-over-year climb at 5.3%. Unit labor costs are the compensation paid to labor for one unit of output. Labor is considered the most important input cost to production. Higher labor costs must be either passed through by a company in the form of higher prices to its customers or absorbed in the firm's profit margins.

The Federal Reserve watches unit labor costs to weigh inflationary pressures within the economy. At their last meeting, bankers held the target for the federal funds rate at 5.25%. Economic growth has been cooling. Whether the Fed might lower rates to compensate for slowing growth hinges on their outlook for inflation."

December 5, 2006 9:00 a.m.

Sunday, December 03, 2006

UK Home Prices Still Hot

Those of you familiar with this blog have read recently posted articles that state the correlation of home price appreciation in the UK and California is 99% since 1980. That is too much of a correlation to ignore. After taking the year off in 2005 the UK housing market unexpectedly came roaring back in 2006. Could it portend a bottoming in our market and a spring fling for 2007?

U.K. house prices climb 1.4% in November: survey

LONDON (MarketWatch) -- U.K. house prices rose 1.4% in November from October, the Nationwide Building Society said Thursday. On an annual basis, house prices are up 9.6%, the highest annual rate rise since February 2005. "Some cooling seemed to be in prospect when the growth of buyer enquiries fell quite sharply in September, but this pause in demand was short-lived. At the same time, stocks of properties for sale are at a two-year low leaving buyers chasing relatively few properties. With instructions still falling, there is no immediate improvement in supply conditions in sight," the lender said.