Tuesday, June 27, 2017

Wednesday: Pending Home Sales

by Bill McBride on 6/27/2017 08:27:00 PM

• At 7:00 AM ET, The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

• Early: Reis Q2 2017 Mall Survey of rents and vacancy rates.

• At 10:00 AM, Pending Home Sales Index for May. The consensus is for a 0.5% increase in the index.

Richmond Fed: "Manufacturers in the Fifth District Improved in June"

by Bill McBride on 6/27/2017 05:04:00 PM

From the Richmond Fed: Reports from Manufacturers in the Fifth District Improved in June

Reports from Fifth District manufacturers improved in June, according to the latest survey by the Federal Reserve Bank of Richmond. The composite manufacturing index rose from 1 in May to 7 in June, as the indexes for shipments and new orders increased. The employment index was relatively flat. Most firms continued to report steady or higher wages; although the index for wages did fall in June, it remained above 0. Meanwhile, more firms reported a decline in the average workweek than reported an increase.

Looking six months ahead, manufacturing executives were more optimistic in June than in May, although even the May readings were very positive.
emphasis added
This was the last of the regional Fed surveys for June.

Here is a graph comparing the regional Fed surveys and the ISM manufacturing index:

Fed Manufacturing Surveys and ISM PMI Click on graph for larger image.

The New York and Philly Fed surveys are averaged together (yellow, through June), and five Fed surveys are averaged (blue, through June) including New York, Philly, Richmond, Dallas and Kansas City. The Institute for Supply Management (ISM) PMI (red) is through April (right axis).

Based on these regional surveys, it seems likely the ISM manufacturing index will increase slightly in June compared to May (to be released this coming Monday, July 3rd).  The early consensus is for the ISM index to be unchanged in June.

Real House Prices and Price-to-Rent Ratio in April

by Bill McBride on 6/27/2017 02:03:00 PM

Here is the earlier post on Case-Shiller: Case-Shiller: National House Price Index increased 5.5% year-over-year in April

It has been more than ten years since the bubble peak. In the Case-Shiller release this morning, the seasonally adjusted National Index (SA), was reported as being 2.4% above the previous bubble peak. However, in real terms, the National index (SA) is still about 13.9% below the bubble peak.

The year-over-year increase in prices is mostly moving sideways now just over 5%. In April, the index was up 5.5% YoY.

In the earlier post, I graphed nominal house prices, but it is also important to look at prices in real terms (inflation adjusted).  Case-Shiller, CoreLogic and others report nominal house prices.  As an example, if a house price was $200,000 in January 2000, the price would be close to $278,000 today adjusted for inflation (39%).  That is why the second graph below is important - this shows "real" prices (adjusted for inflation).

Nominal House Prices

Nominal House PricesThe first graph shows the monthly Case-Shiller National Index SA, the monthly Case-Shiller Composite 20 SA, and the CoreLogic House Price Indexes (through April) in nominal terms as reported.

In nominal terms, the Case-Shiller National index (SA) is at a new peak, and the Case-Shiller Composite 20 Index (SA) is back to October 2005 levels, and the CoreLogic index (NSA) is back to December 2005.

Real House Prices

Real House PricesThe second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices.

In real terms, the National index is back to June 2004 levels, the Composite 20 index is back to March 2004, and the CoreLogic index back to April 2004.

In real terms, house prices are back to early 2004 levels.


In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

Price-to-Rent RatioHere is a similar graph using the Case-Shiller National, Composite 20 and CoreLogic House Price Indexes.

This graph shows the price to rent ratio (January 1998 = 1.0).

On a price-to-rent basis, the Case-Shiller National index is back to November 2003 levels, the Composite 20 index is back to August 2003 levels, and the CoreLogic index is back to September 2003.

In real terms, prices are back to early 2004 levels, and the price-to-rent ratio is back to 2003 - and the price-to-rent ratio maybe moving a little more sideways now.

Reis: Apartment Vacancy Rate increased in Q2 to 4.4%

by Bill McBride on 6/27/2017 11:13:00 AM

Reis reported that the apartment vacancy rate was at 4.4% in Q2 2017, up from 4.3% in Q1, and up from 4.2% in Q2 2016.  This is the highest vacancy rate since Q3 2013 (although the increase has been small).  The vacancy rate peaked at 8.0% at the end of 2009.

From Reis:

Shaking off a sluggish first quarter, the apartment market showed marked improvement in the second quarter as all but two of 79 metros saw effective rents increase or stay flat in the quarter. The average effective rent grew 1.1% in the quarter and 3.0% over the year. The vacancy rate increased from 4.3% to 4.4%

Vacancy increased in 27 Metros, but the increase exceeded 0.2% in only eight metros. The number of new completions was lower than had been expected as was net absorption.

The growth in effective rents suggests that landlords’ offers of free rent were less aggressive as the apartment market continued to benefit from stronger housing prices keeping more potential home buyers in rentals.

Total inventory is expected to increase significantly in 2017; however, construction in the second quarter was lower than expected in a quarter that tends to see the highest activity. New construction of 36,477 units was the lowest quarterly addition in more than two years. With less new supply coming online, landlords were able to curb their concessions.

At 4.4%, the national vacancy rate increased 10 basis points from 4.3% in the first quarter. One year ago, the vacancy rate was 4.2%. Occupancy growth, or net absorption, while low at 27,818 units, fell just shy of new supply pushing the vacancy rate up in the quarter.
emphasis added
Apartment Vacancy Rate Click on graph for larger image.

This graph shows the apartment vacancy rate starting in 1980. (Annual rate before 1999, quarterly starting in 1999). Note: Reis is just for large cities.

The vacancy rate had been mostly moving sideways for the last few years.  However it appears the vacancy rate has bottomed and is starting to increase.  With more supply coming on line later this year - and less favorable demographics - the vacancy rate will probably continue to increase slowly.

Apartment vacancy data courtesy of Reis.

Case-Shiller: National House Price Index increased 5.5% year-over-year in April

by Bill McBride on 6/27/2017 09:12:00 AM

S&P/Case-Shiller released the monthly Home Price Indices for April ("April" is a 3 month average of February, March and April prices).

This release includes prices for 20 individual cities, two composite indices (for 10 cities and 20 cities) and the monthly National index.

Note: Case-Shiller reports Not Seasonally Adjusted (NSA), I use the SA data for the graphs.

From S&P: The S&P Corelogic Case-Shiller National Home Price NSA Index Sets Record for Five Consecutive Months

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported a 5.5% annual gain in April, down from 5.6% last month. The 10-City Composite annual increase came in at 4.9%, down from 5.2% the previous month. The 20-City Composite posted a 5.7% year-over-year gain, down from 5.9% in March.

Seattle, Portland, and Dallas reported the highest year-over-year gains among the 20 cities. In April, Seattle led the way with a 12.9% year-over-year price increase, followed by Portland with 9.3%, and Dallas with an 8.4% increase. Seven cities reported greater price increases in the year ending April 2017 versus the year ending March 2017.
Before seasonal adjustment, the National Index posted a month-over-month gain of 0.9% in April. The 10-City Composite posted a 0.8% increase and the 20-City Composite reported a 0.9% increase in April. After seasonal adjustment, the National Index recorded a 0.2% month-over-month increase. The 10-City Composite posted a 0.2% month-over-month increase. The 20-City Composite posted a 0.3% month-over-month increase. Eighteen of 20 cities reported increases in April before seasonal adjustment; after seasonal adjustment, 13 cities saw prices rise.

“As home prices continue rising faster than inflation, two questions are being asked: why? And, could this be a bubble?” says David M. Blitzer Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “Since demand is exceeding supply and financing is available, there is nothing right now to keep prices from going up. The increase in real, or inflation-adjusted, home prices in the last three years shows that demand is rising. At the same time, the supply of homes for sale has barely kept pace with demand and the inventory of new or existing homes for sale shrunk down to only a four- month supply. Adding to price pressures, mortgage rates remain close to 4% and affordability is not a significant issue.

“The question is not if home prices can climb without any limit; they can’t. Rather, will home price gains gently slow or will they crash and take the economy down with them? For the moment, conditions appear favorable for avoiding a crash. Housing starts are trending higher and rising prices may encourage some homeowners to sell. Moreover, mortgage default rates are low and household debt levels are manageable. Total mortgage debt outstanding is $14.4 trillion, about $400 billion below the record set in 2008. Any increase in mortgage interest rates would dampen demand. Household finances should be able to weather a fairly large price drop.”
emphasis added
Case-Shiller House Prices Indices Click on graph for larger image.

The first graph shows the nominal seasonally adjusted Composite 10, Composite 20 and National indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 6.6% from the peak, and up 0.2% in April (SA).

The Composite 20 index is off 4.0% from the peak, and up 0.3% (SA) in April.

The National index is 2.4% above the bubble peak (SA), and up 0.2% (SA) in April.  The National index is up 38.4% from the post-bubble low set in December 2011 (SA).

Case-Shiller House Prices Indices The second graph shows the Year over year change in all three indices.

The Composite 10 SA is up 4.9% compared to April 2016.  The Composite 20 SA is up 5.6% year-over-year.

The National index SA is up 5.5% year-over-year.

Note: According to the data, prices increased in 15 of 20 cities month-over-month seasonally adjusted.

I'll have more later.

Monday, June 26, 2017

Tuesday: Case-Shiller House Prices

by Bill McBride on 6/26/2017 09:16:00 PM

• Early, Reis Q2 2017 Apartment Survey of rents and vacancy rates.

• At 9:00 AM ET, S&P/Case-Shiller House Price Index for April. The consensus is for a 5.9% year-over-year increase in the Comp 20 index for April.

• At 10:00 AM, Richmond Fed Survey of Manufacturing Activity for June.

Hotels: Hotel Occupancy down slightly Year-over-Year

by Bill McBride on 6/26/2017 04:11:00 PM

From HotelNewsNow.com: STR: US hotel results for week ending 17 June

The U.S. hotel industry reported mostly positive year-over-year results in the three key performance metrics during the week of 11-17 June 2017, according to data from STR.

In comparison with the week of 12-18 June 2016, the industry recorded the following:

Occupancy: -0.3% to 74.3%
• Average daily rate (ADR): +1.7% to US$129.32
• Revenue per available room (RevPAR): +1.4% to US$96.10
emphasis added
The following graph shows the seasonal pattern for the hotel occupancy rate using the four week average.

Hotel Occupancy RateThe red line is for 2017, dashed is 2015 (best year on record), blue is the median, and black is for 2009 (the worst year since the Great Depression for hotels).

Currently the occupancy rate is tracking close to last year, and just behind the record year in 2015.

For hotels, occupancy will increase further during the summer travel season.

Data Source: STR, Courtesy of HotelNewsNow.com

For Fun: Stock Market as Barometer of Policy Success

by Bill McBride on 6/26/2017 02:11:00 PM

There are a number of observers who think the stock market is the key barometer of policy success.  My view is there are many measures of success - and that the economy needs to work well for a majority of the people - not just stock investors.

However, for example, Treasury Secretary Steven Mnuchin was on CNBC on Feb 22, 2017, and was asked if the stock market rally was a vote of confidence in the new administration, he replied: "Absolutely, this is a mark-to-market business, and you see what the market thinks."

And Larry Kudlow wrote in 2007: A Stock Market Vote of Confidence for Bush: "I have long believed that stock markets are the best barometer of the health, wealth and security of a nation. And today's stock market message is an unmistakable vote of confidence for the president."

Note: Kudlow's comments were made a few months before the market started selling off in the Great Recession. For more on Kudlow, see: Larry Kudlow is usually wrong

For fun, here is a graph comparing S&P500 returns (ex-dividends) under Presidents Trump and Obama:

Stock Market Performance Click on graph for larger image.

Blue is for Mr. Obama, Orange is for Mr. Trump.

At this point, the S&P500 is up 7.5% under Mr. Trump compared to up 11.9% under Mr. Obama for the same number of market days.

Freddie Mac: Mortgage Serious Delinquency rate declined in May, Lowest since May 2008

by Bill McBride on 6/26/2017 11:13:00 AM

Freddie Mac reported that the Single-Family serious delinquency rate in May was at 0.87%, down from 0.92% in April.  Freddie's rate is down from 1.11% in May 2016.

Freddie's serious delinquency rate peaked in February 2010 at 4.20%.

This is the lowest serious delinquency rate since May 2008.

These are mortgage loans that are "three monthly payments or more past due or in foreclosure". 

Fannie Freddie Seriously Delinquent RateClick on graph for larger image

Although the rate is still declining, the rate of decline has slowed.

Maybe the rate will decline another 0.2 to 0.3 percentage points or so to a cycle bottom, but this is pretty close to normal.

Note: Fannie Mae will report for May soon.

Dallas Fed: "Texas Manufacturing Continues to Expand but at a Slower Pace" in June

by Bill McBride on 6/26/2017 10:39:00 AM

From the Dallas Fed: Texas Manufacturing Continues to Expand but at a Slower Pace

Texas factory activity increased in June, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, fell 11 points to 12.3, indicating output grew but at a slower pace than in May.

Other measures of current manufacturing activity also indicated that growth moderated. The new orders and growth rate of orders indexes fell several points each, coming in at 9.6 and 4.7, respectively. The capacity utilization index moved down to 12.3, and the shipments index retreated to 8.5 after surging last month.

Perceptions of broader business conditions improved in June, although the indexes were less positive than in May. The general business activity index edged down to 15.0. The company outlook index posted a 10th consecutive positive reading but fell nine points to 10.8.

Labor market measures indicated continued employment gains and longer workweeks this month. The employment index posted a sixth consecutive positive reading and edged up to 9.6. Nineteen percent of firms noted net hiring, compared with 10 percent noting net layoffs. The hours worked index dropped to 8.9, down seven points from a six-year high last month.
emphasis added
CR note: This suggests solid growth, although at a slower pace than in May. The recent decline in oil prices might impact the Dallas surveys in coming months.