Today, the Data and Analytics division of Black Knight Financial Services released its latest Home Price Index (HPI) report, based on June 2014 residential real estate transactions. The Black Knight HPI combines the company’s extensive property and loan-level databases to produce a repeat sales analysis of home prices as of their transaction dates every month for each of more than 18,500 U.S. ZIP codes. The Black Knight HPI represents the price of non-distressed sales by taking into account price discounts for REO and short sales.
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- Yearly increases in home appreciation continue to slow
- All 20 largest states and 40 largest metros again show month-over-month growth
- Nevada shows largest monthly gain among states, while Colorado and Texas continue to hit new highs
- Reno, Nev. home prices rise nearly 2 percent-- the most of any metropolitan area; Las Vegas still 42 percent off peak
| Month | YoY House Price Increase |
|---|---|
| Jan-13 | 6.7% |
| Feb-13 | 7.3% |
| Mar-13 | 7.6% |
| Apr-13 | 8.1% |
| May-13 | 7.9% |
| Jun-13 | 8.4% |
| Jul-13 | 8.7% |
| Aug-13 | 9.0% |
| Sep-13 | 9.0% |
| Oct-13 | 8.8% |
| Nov-13 | 8.5% |
| Dec-13 | 8.4% |
| Jan-14 | 8.0% |
| Feb-14 | 7.6% |
| Mar-14 | 7.0% |
| Apr-14 | 6.4% |
| May-14 | 5.9% |
| June-14 | 5.5% |
No one in society remains untouched by a situation of high unemployment. For the unemployed themselves, it is often a tragedy which has lasting effects on their lifetime income. For those in work, it raises job insecurity and undermines social cohesion. For governments, it weighs on public finances and harms election prospects. And unemployment is at the heart of the macro dynamics that shape short- and medium-term inflation, meaning it also affects central banks. Indeed, even when there are no risks to price stability, but unemployment is high and social cohesion at threat, pressure on the central bank to respond invariably increases.
1. The causes of unemployment in the euro area
The key issue, however, is how much we can really sustainably affect unemployment, which in turn is a question – as has been much discussed at this conference – of whether the drivers are predominantly cyclical or structural. As we are an 18 country monetary union this is necessarily a complex question in the euro area, but let me nonetheless give a brief overview of how the ECB currently assesses the situation.Figure 1: Change in the unemployment rate since 2008 – the euro area and the US
The long recession in the euro area
The first point to make is that the euro area has suffered a large and particularly sustained negative shock to GDP, with serious consequences for employment. This is visible in Figure 1, which shows the evolution of unemployment in the euro area and the US since 2008. Whereas the US experienced a sharp and immediate rise in unemployment in the aftermath of the Great Recession, the euro area has endured two rises in unemployment associated with two sequential recessions.
From the start of 2008 to early 2011 the picture in both regions is similar: unemployment rates increase steeply, level off and then begin to gradually fall. This reflects the common sources of the shock: the synchronisation of the financial cycle across advanced economies, the contraction in global trade following the Lehman failure, coupled with a strong correction of asset prices – notably houses – in certain jurisdictions.
From 2011 onwards, however, developments in the two regions diverge. Unemployment in the US continues to fall at more or less the same rate. In the euro area, on the other hand, it begins a second rise that does not peak until April 2013. This divergence reflects a second, euro area-specific shock emanating from the sovereign debt crisis, which resulted in a six quarter recession for the euro area economy. Unlike the post-Lehman shock, however, which affected all euro area economies, virtually all of the job losses observed in this second period were concentrated in countries that were adversely affected by government bond market tensions.
Turning to fiscal policy, since 2010 the euro area has suffered from fiscal policy being less available and effective, especially compared with other large advanced economies. This is not so much a consequence of high initial debt ratios – public debt is in aggregate not higher in the euro area than in the US or Japan. It reflects the fact that the central bank in those countries could act and has acted as a backstop for government funding. This is an important reason why markets spared their fiscal authorities the loss of confidence that constrained many euro area governments’ market access. This has in turn allowed fiscal consolidation in the US and Japan to be more backloaded.
Thus, it would be helpful for the overall stance of policy if fiscal policy could play a greater role alongside monetary policy, and I believe there is scope for this, while taking into account our specific initial conditions and legal constraints. These initial conditions include levels of government expenditure and taxation in the euro area that are, in relation to GDP, already among the highest in the world. And we are operating within a set of fiscal rules – the Stability and Growth Pact – which acts as an anchor for confidence and that would be self-defeating to break.
Unemployment in the euro area is a complex phenomenon, but the solution is not overly complicated to understand. A coherent strategy to reduce unemployment has to involve both demand and supply side policies, at both the euro area and the national levels. And only if the strategy is truly coherent can it be successful.
Without higher aggregate demand, we risk higher structural unemployment, and governments that introduce structural reforms could end up running just to stand still. But without determined structural reforms, aggregate demand measures will quickly run out of steam and may ultimately become less effective. The way back to higher employment, in other words, is a policy mix that combines monetary, fiscal and structural measures at the union level and at the national level. This will allow each member of our union to achieve a sustainably high level of employment.
We should not forget that the stakes for our monetary union are high. It is not unusual to have regional disparities in unemployment within countries, but the euro area is not a formal political union and hence does not have permanent mechanisms to share risk, namely through fiscal transfers. [19] Cross-country migration flows are relatively small and are unlikely to ever become a key driver of labour market adjustment after large shocks.
Thus, the long-term cohesion of the euro area depends on each country in the union achieving a sustainably high level of employment. And given the very high costs if the cohesion of the union is threatened, all countries should have an interest in achieving this.
One convenient way to summarize the information contained in a large number of indicators is through the use of so-called factor models. Following this methodology, Federal Reserve Board staff developed a labor market conditions index from 19 labor market indicators, including four I just discussed. This broadly based metric supports the conclusion that the labor market has improved significantly over the past year, but it also suggests that the decline in the unemployment rate over this period somewhat overstates the improvement in overall labor market conditions.
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[W]ith the economy getting closer to our objectives, the FOMC's emphasis is naturally shifting to questions about the degree of remaining slack, how quickly that slack is likely to be taken up, and thereby to the question of under what conditions we should begin dialing back our extraordinary accommodation. As should be evident from my remarks so far, I believe that our assessments of the degree of slack must be based on a wide range of variables and will require difficult judgments about the cyclical and structural influences in the labor market. While these assessments have always been imprecise and subject to revision, the task has become especially challenging in the aftermath of the Great Recession, which brought nearly unprecedented cyclical dislocations and may have been associated with similarly unprecedented structural changes in the labor market--changes that have yet to be fully understood.
So, what is a monetary policymaker to do? Some have argued that, in light of the uncertainties associated with estimating labor market slack, policymakers should focus mainly on inflation developments in determining appropriate policy. To take an extreme case, if labor market slack was the dominant and predictable driver of inflation, we could largely ignore labor market indicators and look instead at the behavior of inflation to determine the extent of slack in the labor market. In present circumstances, with inflation still running below the FOMC's 2 percent objective, such an approach would suggest that we could maintain policy accommodation until inflation is clearly moving back toward 2 percent, at which point we could also be confident that slack had diminished.
Of course, our task is not nearly so straightforward. Historically, slack has accounted for only a small portion of the fluctuations in inflation. Indeed, unusual aspects of the current recovery may have shifted the lead-lag relationship between a tightening labor market and rising inflation pressures in either direction. For example, as I discussed earlier, if downward nominal wage rigidities created a stock of pent-up wage deflation during the economic downturn, observed wage and price pressures associated with a given amount of slack or pace of reduction in slack might be unusually low for a time. If so, the first clear signs of inflation pressure could come later than usual in the progression toward maximum employment. As a result, maintaining a high degree of monetary policy accommodation until inflation pressures emerge could, in this case, unduly delay the removal of accommodation, necessitating an abrupt and potentially disruptive tightening of policy later on.
Conversely, profound dislocations in the labor market in recent years--such as depressed participation associated with worker discouragement and a still-substantial level of long-term unemployment--may cause inflation pressures to arise earlier than usual as the degree of slack in the labor market declines. However, some of the resulting wage and price pressures could subsequently ease as higher real wages draw workers back into the labor force and lower long-term unemployment. As a consequence, tightening monetary policy as soon as inflation moves back toward 2 percent might, in this case, prevent labor markets from recovering fully and so would not be consistent with the dual mandate.
Among the cities most battered by the 2006 bust, Phoenix was the first to snap back in 2011. Prices, off by 56% from peak, then rebounded sharply, trimming that drop by a third. The number of homes in some stage of foreclosure has fallen to about 4,300 homes today from more than 50,000 four years ago.
Now, prices and sales are cooling off. Inventories of homes listed for sale have climbed to their highest level in three years while the number of houses sold in June fell 12% from a year earlier. ...
As the foreclosure boom that fueled much of the recovery fades, income and population growth are reasserting themselves as drivers of the housing market in places such as Phoenix. Meanwhile, lingering scars from the bust are playing out as some of the country's hottest housing markets struggle to pass the baton from bargain-hunting investors, who typically pay cash, to traditional buyers with mortgages.
Builder confidence in the market for newly built, single-family homes rose two points to 55 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for August, released today. This third consecutive monthly gain brings the index to its highest level since January.
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Derived from a monthly survey that NAHB has been conducting for 30 years, the NAHB/Wells Fargo Housing Market Index gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores from each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.
All three HMI components posted gains in August. The indices gauging current sales conditions and expectations for future sales each rose two points to 58 and 65, respectively. The index gauging traffic of prospective buyers increased three points to 42.
“Each of the three components of the HMI registered consecutive gains for the past three months, which is a positive sign that builder confidence appears to be firming following an uneven spring,” said NAHB Chief Economist David Crowe. “Factors contributing to this rise include sustained job growth, historically low mortgage rates and affordable home prices, which are helping to unleash pent-up demand.”
Every region saw a gain in its three-month moving average HMI score in August. The Midwest posted a seven-point increase to 55 and the West registered a four-point gain to 56. The Northeast posted a two-point gain to 38 and the South was up one point to 52.
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The rules, expected to be somewhat tougher than those proposed more than three years ago, will take additional steps to ensure that the firms' interest in winning business doesn't affect ratings analysis, said the people familiar with the process.
Credit raters have been lambasted by critics and lawmakers over their actions in the run-up to the 2008 financial crisis. A 2011 U.S. congressional report cited widespread and sudden downgrades of mortgage-related bonds as being perhaps "more than any other single event ... the immediate trigger for the financial crisis." The bonds had previously been given top-notch ratings by the firms.
• Fannie Mae reported net income of $3.7 billion and comprehensive income of $3.7 billion for the second quarter of 2014.
• Fannie Mae expects to pay Treasury $3.7 billion in dividends in September 2014. With the expected September dividend payment, Fannie Mae will have paid a total of $130.5 billion in dividends to Treasury in comparison to $116.1 billion in draw requests since 2008. Dividend payments do not offset prior Treasury draws.
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Foreclosed property income decreased in the second quarter and first half of 2014 compared with the second quarter and first half of 2013 due to a decrease in gains recognized on dispositions of our REO properties. During the second quarter and first half of 2014, we experienced a modest increase in REO prices compared with a significant increase in REO prices in the second quarter and first half of 2013.
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• Net income was $1.4 billion – the company’s eleventh consecutive quarter of positive earnings, compared to $4.0 billion in first quarter of 2014
• Based on June 30, 2014 net worth of $4.3 billion, the company’s September 2014 dividend obligation will be $1.9 billion, bringing total cash dividends paid to Treasury to $88.2 billion.
The month-over-month increase in asking home prices of 0.8% was in line with the average monthly gain over the past year, settling back down after a 1.2% month-over-month in June. ... Although prices aren’t rising as fast as they did in spring 2013, price increases continue to be widespread, with 97 of 100 metros posting year-over-year price gains, and 94 posting quarter-over-quarter gains.
As the rebound effect diminishes, local housing markets need to depend more on job growth, which is a more sustainable driver of housing demand. So are they? We compared year-over-year asking price gains in July 2014 with year-over-year job gains in December 2013, from the Bureau of Labor Statistics’ Quarterly Census of Employment and Wages (QCEW) in the 100 largest U.S. metros. Clearly, housing markets with higher asking-price gains have faster job growth ... A year ago, the pattern was different: in July 2013, home price changes were more highly correlated with the peak-to-trough price decline than with job growth (year-over-year in December 2012). Over the past year, therefore, the rebound effect has weakened, and as prices continue to return to long-term normal levels the rebound effect will continue to fade. Local housing markets will rely more on jobs and wages to support housing demand and home prices – which is another step on the road to recovery.
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Job Growth Boosts Rents in Largest U.S. Rental Markets
Rents rose more than 10% year-over-year in five large rental markets – San Francisco, Sacramento, Oakland, Denver, and Miami. These five markets all had job growth ranging from solid to stellar.Overall, rents rose 6.1% nationally, with rents increasing more in markets with faster job growth.
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How much leeway does Fed Chair Janet Yellen have in her campaign to hold interest rates low for a considerable period after asset purchases end later this year? If you listen to Fed hawks, you would believe that she is quickly running out of room. ...
... At the moment, we are focused on wages as the missing part of the higher rate equation. But that is too narrow of an analysis. Also on Yellen's side is low actual inflation and anchored inflation expectations. To be sure, the Fed will be under increasing pressure to begin normalizing policy if unemployment drops below 6%. At that point the Fed will be sufficiently close to their objectives that they will believe the odds of falling behind the curve will rise in the absence of movement toward policy normalization. But without a more pressing threat to inflation expectations from a combination of actual inflation in excess of the Fed's target and wage growth to support that inflation, Yellen has room to normalize policy at a gradual pace. For now, the data is still on her side and the hawks will remain frustrated, much as they have for the past several years.
This month’s housing data showed weakness in both price and activity measures. On the price side, market consensus expected 0.3% month-over-month growth in the S&P Case-Shiller 20-City Composite. The actual print was -0.3%, the first decline since January 2012 when house prices bottomed. ...
In our previous research, we showed that seasonal adjustments have become a tricky business for housing owing to heightened distressed sales over the past few years (see “Enough about the weather: Let’s talk seasonal adjustments”, Mortgage Analyst, February 28, 2014). In the US housing market, more people buy and sell homes in the summer than in the winter because of the school calendar. A thinner market in the winter implies that sellers typically accept lower prices to close transactions. As a result, seasonal factors would nudge prices up in the winter and down in the summer to arrive at the seasonally adjusted series. Normally, such adjustments are within the range of plus/minus one percentage point.
The recent housing downturn is the most severe in US history since the Great Depression, featuring a wave of distressed sales. According to the National Association of Realtors, at the worst of the crisis, nearly half of home sales were distressed. Because distressed sales take place throughout the year while non-distressed sales are more concentrated in the summer, distressed sales account for a larger share of total sales in the winter than in the summer. Also, because distressed properties tend to transact at a significant discount relative to non-distressed properties, they drag down observed transaction prices and the effect is more pronounced in the winter (when the distressed share is high) than in the summer (when the distressed share is low). This amplifies the normal seasonal pattern. In recent years, seasonal adjustments have expanded from the normal “plus/minus one percentage point” to “plus/minus three percentage points”.
As the housing market recovers and the share of distressed sales drops, the true underlying seasonal pattern is normalizing. However, seasonal factors are usually derived using data from the past 5-7 years. In other words, we are using the amplified seasonal factors to adjust more muted seasonal patterns, meaning pushing up house prices too much in the winter and also pushing down house prices too much in the summer. This is consistent with what we have seen over the past year: the S&P Case-Shiller house price index beat consensus expectations at the beginning of the year and it was surprisingly weak for the May reading. This seasonal adjustment problem is likely to persist in coming months, causing the next few months’ house price prints to appear softer than they really are.
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