Tuesday, November 25, 2014

Fed Details Approvals, Withdrawals of Applications

Seven percent of bank applications in the first half of 2014 — or 42 out of 630 — were withdrawn, according to the Federal Reserve’s first semiannual report on application results released yesterday. One application was denied. The percentage of withdrawals has fallen from 10% in the first half of 2013 and 17% in 2009.

Of the withdrawn applications, 12 were retracted after Fed staff indicated they were unlikely to be approved. Of these, four were withdrawn over Community Reinvestment Act concerns, three because of financial issues, two due to managerial issues and three because of a combination of managerial and legal issues.

Mergers and acquisitions represented 19% of all approved applications in the first half, up from 11% in the first half of 2013. The report showed that the median processing time rose to 30 days from 27 in the first half of 2013, which the Fed attributed to greater complexity in applications.

Read the Federal Reserve report.

Annual Home Price Continues Deceleration

The 20-City Case-Shiller Composite gained 4.9% year-over-year in September, compared with a 5.6% gain in August, as the Index continued its steady deceleration from the 13.7% gain in November 2013. The 10-City Composite gained 4.8% in September from the previous year, down from 5.5% in August. The National Index recorded a 4.8% gain on an annual basis.

On a monthly basis, both the 10-City and the 20-City Composites were slightly negative and the National Index posted a -0.1% change for September.

Nine cities of the 20-City Composite (five cities of the 10-City) reported monthly declines in September. Washington and Atlanta were the primary contributors to the decline, decreasing 0.4% and 0.3%, respectively, partially offset by a 0.6% increase in both Miami and Charlotte and a 0.4% increase in Las Vegas.

Year-over-year, Miami increased 10.3%, the highest of the 20 cities, followed by 9.1% growth in Las Vegas and 7.9% growth in San Francisco. Cleveland reported the slowest growth, increasing 0.8%, followed by a 2.1% increase in Washington and a 2.6% increase in Chicago.

Read the S&P release.

ABA Statement on FDIC’s Third Quarter Bank Earnings Report

ABA's Chief Economist, James Chessen commented on the FDIC's third quarter bank earnings report, which was released today.

"The banking industry posted another solid quarter with a broad-based expansion in lending and a further improvement in asset quality. Capital hit a record high as banks continue to aggressively reinforce the support backing every loan on their books.”

Consumer and Business Lending Shows Broad-Based Improvement

“We continue to see a broad-based growth in lending to both consumers and businesses. Loans to individuals are increasing, buoyed by a strong growth in automobile lending. Banks continue to increase lending to small businesses, and community banks are playing a critical role in meeting that need. The expansion in lending reflects a rising confidence among households and businesses that an improving economy will better enable them to meet their financial obligations.”

Mortgage Lending Continues to Suffer from Excessive Regulation

“It’s painfully clear that new regulatory requirements have restrained mortgage lending and have made it particularly difficult for first-time homebuyers. The complex and liability-laden maze of compliance has made originations very hard to make, especially to borrowers with little or weak credit history."

Earnings Remain Solid

“While net income remains near a record high, ever-increasing compliance and regulatory costs have cut sharply into earnings. Stronger lending trends are promising as controlling expenses can only be pushed so far. As the economy improves and loan volumes pick up, it’s prudent for banks to increase loan loss provisions. While this can be a drag on earnings, it ensures that banks are prepared for any economic circumstance that could arise.”

Interest Rate Risk Front and Center for Banks

“Interest rate risk is front and center for bankers as the Fed’s interest rate liftoff nears. This is one of many risks banks must manage, balancing customer demands for longer-term, low-interest loans against the negative impact of rising rates on funding costs.”

Asset Quality Continues to Improve

“Problem loans are back to levels we saw six years ago, and losses have returned to pre-crisis levels as banks continue to improve their portfolios. The level of non-performing loans is down more than 58 percent since its peak in the first quarter of 2010. While asset quality remains strong, we may have reached the bottom of the credit cycle as the process of purging bad loans nears the finish line.”

High-Quality Capital Continues to Grow

“Capital in the industry is at record levels, providing tremendous support in an expanding economy and a strong foundation to absorb losses in a downturn. Building high-quality capital has been a priority for banks, with the current level 33 percent higher than in 2008. Total industry capital is now over $1.7 trillion, and with reserves banks have set aside for possible loan losses, there is a total buffer protecting the industry of over $1.8 trillion.”

Third Quarter Growth Revised Up to 3.9%

Real GDP increased at an annual rate of 3.9% in the third quarter of 2014, up 0.4 percentage points from the Bureau of Economic Analysis’s preliminary estimate. The improvement from the first estimate was driven by better than expected consumption and nonresidential fixed investment, as well as a smaller drop in inventory investment. Third quarter growth, remains slightly below the strong 4.6% increase seen in the second quarter.

The deceleration in growth from the second quarter to the third was driven primarily by declining inventory investment, which contributed 1.4% to growth in the previous quarter. Inventories tend to fluctuate, as such this slowing was expected. Currently, the inventory to sales ratio remains near an all-time low, boding well for future growth.

Consumption remained the primary driver of growth, contributing 1.5 percent, down slightly from the 1.8 percent in the second quarter.

Fixed investment slowed somewhat in the second quarter, contributing 1.0% to growth. This was driven by a deceleration in both residential and non-residential investment.

Net exports contributed 0.8% to GDP. Exports increased 4.9% in the third quarter, compared with an increase of 11.1% in the second. Imports decreased 0.7%, in contrast to an increase of 11.3% the previous quarter.

Government expenditures, which contributed to 0.8% of GDP, increased 9.9% in the third quarter, compared with a 0.9% decrease in the previous quarter. Notably, defense spending increased 16.0% over the quarter.

Read the BEA report.

Thursday, November 20, 2014

First Year-Over-Year Rise in Existing Home Sales in a Year

Existing home sales rose 1.5% in October to a seasonally adjusted annual rate of 5.26 million. Sales are now above the year-over-year levels for the first time in a year, and have reached the highest annual pace since September 2013. Sales in September was upwardly revised to a seasonally adjusted annual rate 5.18 million.

The median existing-home price increased 5.5% year-over-year to $208,300 in October, marking the 32nd consecutive month of year-over-year price gains.

Total housing inventory fell 2.6% in October to 2.22 million homes available for sale, yet increased 5.2% from October 2013. There is currently a 5.1-month supply of total existing homes available for sale, the lowest since March.

NAR Chief Economist Lawrence Yun noted: “The growth in housing supply this year will likely prevent the drastic sales slowdown and coinciding spike in home prices we saw last winter due to low inventory. However, more housing starts are needed to increase supply, meet current demand and keep price growth in check.”

All-cash sales were 27% of transactions in October, a three-percentage point climb from September but four percentage points lower than October 2013.

First-time home buyers represent less than 30% of all buyers, the lowest level in nearly three decades. Earlier this month, Federal Housing Finance Agency Director Mel Watt offered details about several guidelines his agency intends to issue for loans with 3-5% down payments to be purchased by housing GSEs Fannie Mae and Freddie Mac. Speaking to a housing industry conference in New Orleans, Watt explained that the agency’s goal is to help address some of the headwinds to first-time homeownership. “We know that the size of a down payment — by itself — is not the most reliable indicator of whether a borrower will repay a loan,” he explained.

Regionally, existing home sales climbed 2.9% month-over-month in the Northeast, 5.1% in the Midwest and 2.8% in the South. However, sales in the West declined 5.0%.

Read the NAR report.

CPI Unchanged in October, Increased 1.7% Yearly

The Consumer Price Index was unchanged in October on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported. The index increased 1.7% in the past year, before seasonal adjustment.

The index for food prices increased 0.1% on a seasonally adjusted basis, the smallest increase since June. However, food prices increased 3.1% from October 2013, the largest unadjusted change since April 2012.

Energy prices declined 1.9% over the month, the fourth consecutive drop, led by a 3.0% fall in energy commodities (a 3.0% decline in gasoline and 4.0% in fuel oil). Energy services declined 0.2%, as a 2.7% reduction in utility gas service was partially offset by a 0.5% increase in electricity.

The index for all items less food and energy rose 0.2% in October after increasing 0.1% in September. The monthly increase was led by rising prices for new vehicles (0.2%), services less energy services (0.3%), shelter (0.2%), transportation services (0.8%) and medical care services (0.2%), partially offset by a decline of 0.9% in used cars and trucks and 0.2% in apparel.

On a yearly basis, the energy index has fallen 1.6%. The fuel oil index has declined 6.5% and the gasoline index has fallen 5.0%. However, the index for natural gas has increased 3.4% and the electricity index has advanced 3.1%.

Read the Bureau of Labor Statistics report.

Wednesday, November 19, 2014

Federal Funds Rate Likely to be Maintained for a “Considerable Time”

Some Federal Reserve board members opined that the language used in the statement, which indicates that the current target range for the federal funds rate would likely be maintained for a “considerable time” after the end of the asset purchase program, should be eliminated, the minutes of the Federal Open Market Committee meeting of October 28-29 revealed. Nonetheless, the phrase “considerable time” was used in the Committee’s press conference in October, as other Committee members thought the phrase was useful in communicating the Committee’s policy intentions. Committee members noted that the removal of this language might be seen as signaling a significant shift in the stance of policy, potentially resulting in an unintended tightening of financial conditions. The Committee agreed to maintain the target range for the federal funds rate at 0% to 0.25%.

In October, the FOMC concluded its open-ended bond buying program associated with QE3, completing the tapering of purchases that it began last December. All members but one supported the conclusion of the asset purchase program and maintaining and exiting policy of reinvesting principle payments from its holdings of agency debt and agency MBS.

With regard to the state of the economy, most of the FOMC meeting participants agreed that economic activity continued to expand at a moderate pace. Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate. Inflation, which participants expect may be held down in the near term by lower energy prices and other factors, is expected to move toward the Committee’s 2% goal in coming years. However, some Committee members expressed concern that inflation might persist below the Committee’s objective for quite some time.

Notably, FOMC staff revised down projections for real GDP growth a little over the medium term in response to a further rise in the foreign exchange value of the dollar, deterioration in global growth prospects and a decline in equity prices. But even with this forecast of slower expansion, real GDP is still expected to rise faster than potential output in 2015 and 2016.

Read the FOMC minutes.