Tuesday, March 20, 2018

Mortgage Equity Withdrawal slightly positive in Q4

by Bill McBride on 3/20/2018 02:28:00 PM

Note: This is not Mortgage Equity Withdrawal (MEW) data from the Fed. The last MEW data from Fed economist Dr. Kennedy was for Q4 2008.

The following data is calculated from the Fed's Flow of Funds data (released yesterday) and the BEA supplement data on single family structure investment. This is an aggregate number, and is a combination of homeowners extracting equity - hence the name "MEW" - and normal principal payments and debt cancellation (modifications, short sales, and foreclosures).

For Q4 2017, the Net Equity Extraction was a positive $13 billion, or a positive 0.4% of Disposable Personal Income (DPI) .

Mortgage Equity Withdrawal Click on graph for larger image.

This graph shows the net equity extraction, or mortgage equity withdrawal (MEW), results, using the Flow of Funds (and BEA data) compared to the Kennedy-Greenspan method.

Note: This data is impacted by debt cancellation and foreclosures, but much less than a few years ago.

MEW has been positive for 7 consecutive quarters, and 9 of the last 10 quarters.  With a slower rate of debt cancellation, MEW will likely be mostly positive going forward.

The Fed's Flow of Funds report showed that the amount of mortgage debt outstanding increased by $68 billion in Q4.

The Flow of Funds report also showed that Mortgage debt has declined by $0.6 trillion since the peak. This decline is mostly because of debt cancellation per foreclosures and short sales, and some from modifications. There has also been some reduction in mortgage debt as homeowners paid down their mortgages so they could refinance.

For reference:

Dr. James Kennedy also has a simple method for calculating equity extraction: "A Simple Method for Estimating Gross Equity Extracted from Housing Wealth". Here is a companion spread sheet (the above uses my simple method).

For those interested in the last Kennedy data included in the graph, the spreadsheet from the Fed is available here.

Chemical Activity Barometer Increased in March

by Bill McBride on 3/20/2018 12:06:00 PM

Note: This appears to be a leading indicator for industrial production.

From the American Chemistry Council: In Like a Lion: Leading Economic Indicator Logs Strong Year Over Year Growth; Marks Sixth Consecutive Gain

The Chemical Activity Barometer (CAB), a leading economic indicator created by the American Chemistry Council (ACC), expanded 0.2 percent in March on a three-month moving average (3MMA) basis, its sixth consecutive gain following the 2017 hurricanes. The barometer remains up 3.8 percent on a 3MMA compared to a year earlier.
Applying the CAB back to 1912, it has been shown to provide a lead of two to fourteen months, with an average lead of eight months at cycle peaks as determined by the National Bureau of Economic Research. The median lead was also eight months. At business cycle troughs, the CAB leads by one to seven months, with an average lead of four months. The median lead was three months. The CAB is rebased to the average lead (in months) of an average 100 in the base year (the year 2012 was used) of a reference time series. The latter is the Federal Reserve’s Industrial Production Index.
emphasis added
Chemical Activity Barometer Click on graph for larger image.

This graph shows the year-over-year change in the 3-month moving average for the Chemical Activity Barometer compared to Industrial Production.  It does appear that CAB (red) generally leads Industrial Production (blue).

The year-over-year increase in the CAB has been solid over the last year, suggesting further gains in industrial production in 2018.

Demographics: Renting vs. Owning

by Bill McBride on 3/20/2018 10:15:00 AM

Note; This is an update to a post I wrote in 2015.

It was almost 9 years ago that we started discussing the turnaround for apartments. Then, in January 2011, I attended the NMHC Apartment Strategies Conference in Palm Springs, and the atmosphere was very positive.

The drivers in 2011 were 1) very low new supply for apartments, and 2) strong demand (both favorable demographics, and people moving from owning to renting).

The move "from owning to renting" is over, and demographics for apartments are much less favorable than 7 years ago.  Also much more supply has come online.  Slowing demand and more supply for apartments is why multi-family starts have slowed recently (multi-family starts probably peaked in 2015).

Multi-family Starts by Year
Year5+ Units (000s)

On demographics, a large cohort had been moving into the 20 to 29 year old age group (a key age group for renters).  Going forward, a large cohort will be moving into the 30 to 39 age group (a key for ownership).

Note: Household formation would be a better measure than population, but reliable data for households is released with a long lag.

NOTE: This graph is updated using the Vintage 2017 estimates.

Population 20 to 34 years oldClick on graph for larger image.

This graph shows the longer term trend for three key age groups: 20 to 29, 25 to 34, and 30 to 39 (the groups overlap).

This graph is from 1990 to 2060 (all data from BLS: current to 2060 is projected).

We can see the surge in the 20 to 29 age group (red).  Once this group exceeded the peak in earlier periods, there was an increase in apartment construction.  This age group will peak in 2018 (until the 2030s), and the 25 to 34 age group (orange, dashed) will peak in 2023.  This suggests demand for apartments is probably softening.

For buying, the 30 to 39 age group (blue) is important (note: see Demographics and Behavior for some reasons for changing behavior).  The population in this age group is increasing, and will increase significantly over the next 6+ years.  

This demographics is now positive for home buying, and this is a key reason I expect single family housing starts to continue to increase.

Monday, March 19, 2018

"Mortgage Rates Maintain Flat Trajectory Ahead of Fed"

by Bill McBride on 3/19/2018 06:26:00 PM

From Matthew Graham at Mortgage News Daily: Mortgage Rates Maintain Flat Trajectory Ahead of Fed

Mortgage rates have been on a tear recently, moving sideways with reckless abandon. Since the middle of February, the "effective rate" (based on actual rate sheet offerings and upfront costs) has held inside a narrow range of 4.52% and 4.58%. This lies in stark contrast to the persistent move higher during the first month and a half of 2018 which saw the same effective rate rise from roughly 4.0% into the 4.5% range.

When rates are as flat as they are on the approach to a key market event like this Wednesday's Fed announcement. We often see a break in that narrow range after the key event. [30YR FIXED - 4.5-4.625%]
emphasis added
Here is a table from Mortgage News Daily:

Lawler: Early Read on Existing Home Sales in February

by Bill McBride on 3/19/2018 03:19:00 PM

From housing economist Tom Lawler: Early Read on Existing Home Sales in February

Based on publicly-available local realtor/MLS reports from across the country released through today, I project that existing home sales as estimated by the National Association of Realtors ran at a seasonally adjusted annual rate of 5.44 million in February, up 1.1% from January’s preliminary pace and down 0.5% from last February’s seasonally adjusted pace.

On the inventory front, realtor/MLS data suggest that home listings showed a similar YOY decline last month compared to January, and my “best guess” is that the NAR’s estimate of the inventory of existing homes for sale in January will be 1.57 million, up 3.3% from January’s preliminary estimate and down 9.2% from last February.

Finally, local realtor/MLS data would be consistent with a YOY increase in the NAR’s estimate of the median existing SF home sales price of about 7.5%. I should note that lately the NAR’s estimated YOY gain in median existing SF home sale prices has been south of what local realtor data would have suggested, though I do not know why.

CR Note: Existing home sales for February are scheduled to be released by the NAR on Wednesday.  The consensus is for 5.42 million SAAR, up from 5.38 million in January.

Q1 GDP Forecasts

by Bill McBride on 3/19/2018 11:35:00 AM

Here are few Q1 GDP forecast.

From Merrill Lynch:

We continue to track 1.7% qoq saar for 1Q GDP [March 19 estimate].
And from the Altanta Fed: GDPNow
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2018 is 1.8 percent on March 16, down from 1.9 percent on March 14.
From the NY Fed Nowcasting Report
The New York Fed Staff Nowcast stands at 2.7% for 2018:Q1 and 2.8% for 2018:Q2. [March 16 estimate]
CR Note: It looks like another weak Q1, and there might still be some residual seasonality in the first quarter.

FOMC Preview

by Bill McBride on 3/19/2018 08:31:00 AM

The consensus is that the Fed will increase the Fed Funds Rate 25bps at the meeting this week, and the tone might be a bit more "hawkish".

Assuming the expected happens, the focus will be on the wording of the statement, the projections, and Fed Chair Jerome Powell's first press conference to try to determine how many rate hikes to expect in 2018 and in 2019.

Here are the December FOMC projections.

Current projections for Q1 GDP range from 1.8% to 2.7%.   There is probably some residual seasonality in the Q1 GDP numbers (pulling down GDP).  So it is too early to revise down 2018 GDP.

At this point, as far as the impact of fiscal stimulus, the Fed has probably incorporated the estimated impact of the tax cuts in their projections for 2018 and beyond.  So the FOMC might increase their projections a little.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in
Real GDP1
Dec 2017 2.2 to 2.61.9 to 2.31.7 to 2.0
Sept 2017 2.0 to 2.3 1.7 to 2.11.6 to 2.0
1 Projections of change in real GDP and inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

The unemployment rate was at 4.1% again in February. So the unemployment rate for 2018 will probably be unchanged.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Dec 2017 3.7 to 4.03.6 to 4.03.6 to 4.2
Sept 2017 4.0 to 4.23.9 to 4.44.0 to 4.5
2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

As of January, PCE inflation was up 1.65% from January 2017.  Based on recent PCE readings, PCE inflation might be revised up slightly for 2018.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Dec 2017 1.7 to to 2.1
Sept 2017 1.8 to to 2.1

PCE core inflation was up 1.5% in January year-over-year. Core PCE inflation might be revised up slightly for 2018.

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Dec 2017 1.7 to to 2.1
Sept 2017 1.8 to to 2.1

In general the data has been consistent with the FOMC's December projections, so any revision will probably be related to the FOMC's view of the impact of policy.

Sunday, March 18, 2018

Sunday Night Futures

by Bill McBride on 3/18/2018 07:37:00 PM

Schedule for Week of Mar 18, 2018

Goldman: FOMC Preview

• No major economic releases scheduled.

From CNBC: Pre-Market Data and Bloomberg futures: S&P 500 are down 2, and DOW futures are down 20 (fair value).

Oil prices were mixed over the last week with WTI futures at $62.16 per barrel and Brent at $66.02 per barrel.  A year ago, WTI was at $48, and Brent was at $51 - so oil prices are up solidly year-over-year.

Here is a graph from Gasbuddy.com for nationwide gasoline prices. Nationally prices are at $2.54 per gallon. A year ago prices were at $2.29 per gallon - so gasoline prices are up 25 cents per gallon year-over-year.

Goldman: FOMC Preview

by Bill McBride on 3/18/2018 11:59:00 AM

A few brief excerpts from a note by Goldman Sachs economists Jan Hatzius and Spencer Hill: FOMC Preview: A Fast Start for the Powell Fed

The FOMC looks very likely to raise rates at next week’s meeting, the first with Chairman Powell at the helm ... we expect a slightly hawkish tone to next week’s meeting.
[We] expect the post-meeting statement to retain January’s upbeat tone ... but we expect the Committee’s optimism to come across more clearly in the SEP and the dots ... we do think the statement will acknowledge recent housing weakness.
The SEP is likely to show higher GDP growth projections for 2018, 2019, and longer-run, as well as a lower unemployment path and a modest inflation overshoot in 2020.
Public remarks by Fed officials suggest a broad shift in the committee’s outlook towards a potentially faster pace of tightening, and we expect the median dot to show four hikes in 2018, up from three at the December meeting.

Hotels: Occupancy Rate Up Year-over-Year

by Bill McBride on 3/18/2018 08:41:00 AM

From HotelNewsNow.com: STR: US hotel results for week ending 10 March

The U.S. hotel industry reported positive year-over-year results in the three key performance metrics during the week of 4-10 March 2018, according to data from STR.

In comparison with the week of 5-11 March 2017, the industry recorded the following:

Occupancy: +1.1 at 68.1%
• Average daily rate (ADR): +2.0% to US$131.46
• Revenue per available room (RevPAR): +3.1% to US$89.53
emphasis added
The following graph shows the seasonal pattern for the hotel occupancy rate using the four week average.

Hotel Occupancy RateClick on graph for larger image.

The red line is for 2018, dash light blue is 2017 (record year due to hurricanes), blue is the median, and black is for 2009 (the worst year since the Great Depression for hotels).

Currently the occupancy rate, to date, is fifth overall - and slightly ahead of the record year in 2017 (2017 finished strong due to the impact of the hurricanes).

Data Source: STR, Courtesy of HotelNewsNow.com