Thursday, September 19, 2019

Revisiting: Has Housing Market Activity Peaked?

by Calculated Risk on 9/19/2019 04:11:00 PM

I wrote this in July 2018 (see: Has Housing Market Activity Peaked? and Has the Housing Market Peaked? (Part 2)

First, I think it is likely that existing home sales will move more sideways going forward. However it is important to remember that new home sales are more important for jobs and the economy than existing home sales. Since existing sales are existing stock, the only direct contribution to GDP is the broker's commission. There is usually some additional spending with an existing home purchase - new furniture, etc. - but overall the economic impact is small compared to a new home sale.

Also I think the growth in multi-family starts is behind us, and that multi-family starts peaked in June 2015. See: Comments on June Housing Starts

For the economy, what we should be focused on are single family starts and new home sales. As I noted in Investment and Recessions "New Home Sales appears to be an excellent leading indicator, and currently new home sales (and housing starts) are up solidly year-over-year, and this suggests there is no recession in sight."

If new home sales and single family starts have peaked that would be a significant warning sign.   Although housing is under pressure from policy (negative impact from tax, immigration and trade policies), I do not think housing has peaked, and I think new home sales and single family starts will increase further over the next couple of years.
Since that post, existing home sales have mostly moved sideways, and both new home sales and single family starts have hit new cycle highs.

Here is the graph I like to use to track tops and bottoms for housing activity. This is a graph of Single family housing starts, New Home Sales, and  Residential Investment (RI) as a percent of GDP.

Starts, new home sales, residential Investment Click on graph for larger image.

The arrows point to some of the earlier peaks and troughs for these three measures.

The purpose of this graph is to show that these three indicators generally reach peaks and troughs together. Note that Residential Investment is quarterly and single-family starts and new home sales are monthly.

RI as a percent of GDP has been sluggish recently, mostly due to softness in multi-family residential.   However, both single family starts and new home sales have set new cycle highs this year.

Also, look at the relatively low level of RI as a percent of GDP, new home sales and single family starts compared to previous peaks.   To have a significant downturn from these levels would be surprising.

Comments on August Existing Home Sales

by Calculated Risk on 9/19/2019 11:55:00 AM

Earlier: NAR: Existing-Home Sales Increased to 5.49 million in August

A few key points:

1) Existing home sales were up 2.6% year-over-year (YoY) in August.  This was the second consecutive YoY increase - following 16 consecutive months with a YoY decrease in sales.

2) Inventory is still low, and was down 2.6% year-over-year (YoY) in August.

3) As usual, housing economist Tom Lawler's forecast was closer to the NAR report than the consensus. See: Lawler: Early Read on Existing Home Sales in August.   The consensus was for sales of 5.38 million SAAR.  Lawler estimated the NAR would report 5.42 million SAAR in July, and the NAR actually reported 5.49 million SAAR.

Existing Home Sales YoY Click on graph for larger image.

4) Year-to-date sales are down about 2.6% compared to the same period in 2018.   On an annual basis, that would put sales around 5.20 million in 2019.  Sales slumped at the end of 2018 and in January 2019 due to higher mortgage rates, the stock market selloff, and fears of an economic slowdown.

The comparisons will be easier towards the end of this year, and with lower mortgage rates, sales might even finish the year unchanged or even up from 2018.

Existing Home Sales NSAThe second graph shows existing home sales Not Seasonally Adjusted (NSA).

Sales NSA in August (534,000, red column) were below sales in August 2018 (539,000, NSA). There were fewer selling days in August 2019 than in 2018.

Overall this was a solid report.

NAR: Existing-Home Sales Increased to 5.49 million in August

by Calculated Risk on 9/19/2019 10:09:00 AM

From the NAR: Existing-Home Sales Increase 1.3% in August

Existing-home sales inched up in August, marking two consecutive months of growth, according to the National Association of Realtors®. Three of the four major regions reported a rise in sales, while the West recorded a decline last month.

Total existing-home sales, completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 1.3% from July to a seasonally adjusted annual rate of 5.49 million in August. Overall sales are up 2.6% from a year ago (5.35 million in August 2018).
...
Total housing inventory at the end of August decreased to 1.86 million, down from 1.90 million existing-homes available for sale in July, and marking a 2.6% decrease from 1.91 million one year ago. Unsold inventory is at a 4.1-month supply at the current sales pace, down from 4.2 months in July and from the 4.3-month figure recorded in August 2018.
emphasis added
Existing Home SalesClick on graph for larger image.

This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.

Sales in August (5.49 million SAAR) were up 1.3% from last month, and were 2.6% above the August 2018 sales rate.

The second graph shows nationwide inventory for existing homes.

Existing Home Inventory According to the NAR, inventory decreased to 1.86 million in August from 1.90 million in July.   Headline inventory is not seasonally adjusted, and inventory usually decreases to the seasonal lows in December and January, and peaks in mid-to-late summer.

The last graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory.

Year-over-year Inventory Inventory was down 2.6% year-over-year in August compared to August 2018.

Months of supply decreased to 4.1 months in August.

This was above the consensus forecast.  For existing home sales, a key number is inventory - and inventory is still low. I'll have more later …

Philly Fed Manufacturing shows Continued Expansion in September, At Slower Pace

by Calculated Risk on 9/19/2019 09:39:00 AM

From the Philly Fed: August 2019 Manufacturing Business Outlook Survey

Manufacturing activity in the region continued to expand this month, according to results from the September Manufacturing Business Outlook Survey. The survey's broad indicators remained positive, although their movements were mixed: The indexes for general activity and new orders fell, while the indexes for shipments and employment increased. The survey’s price indexes increased notably this month. The survey’s future general activity index moderated but continues to suggest growth over the next six months.

The diffusion index for current general activity fell 5 points this month to 12.0.
emphasis added
This was at the consensus forecast. 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 September), and five Fed surveys are averaged (blue, through August) including New York, Philly, Richmond, Dallas and Kansas City. The Institute for Supply Management (ISM) PMI (red) is through August (right axis).

These early reports suggest the ISM manufacturing index will probably be weak again in September.

Weekly Initial Unemployment Claims increased to 208,000

by Calculated Risk on 9/19/2019 08:37:00 AM

The DOL reported:

In the week ending September 14, the advance figure for seasonally adjusted initial claims was 208,000, an increase of 2,000 from the previous week's revised level. The previous week's level was revised up by 2,000 from 204,000 to 206,000. The 4-week moving average was 212,250, a decrease of 750 from the previous week's revised average. The previous week's average was revised up by 500 from 212,500 to 213,000.
emphasis added
The previous week was revised up.

The following graph shows the 4-week moving average of weekly claims since 1971.

Click on graph for larger image.

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased to 212,250.

This was lower than the consensus forecast.

Wednesday, September 18, 2019

Thursday: Existing Home Sales, Unemployment Claims, Philly Fed Mfg

by Calculated Risk on 9/18/2019 07:49:00 PM

Thursday:
• At 8:30 AM, The initial weekly unemployment claims report will be released. The consensus is for 214 thousand initial claims, up from 204 thousand the previous week.

• At 8:30 AM, the Philly Fed manufacturing survey for September. The consensus is for a reading of 11.3, down from 16.8.

• At 10:00 AM, Existing Home Sales for August from the National Association of Realtors (NAR). The consensus is for 5.38 million SAAR, down from 5.42 million in July. Housing economist Tom Lawler expects the NAR to report 5.42 million SAAR for August.

FOMC Projections and Press Conference

by Calculated Risk on 9/18/2019 02:12:00 PM

Statement here.

Fed Chair Powell press conference video here starting at 2:30 PM ET.

On the projections, growth was revised up slightly, and other projections were mostly unchanged.

Q1 real GDP growth was at 3.1% annualized, and Q2 at 2.0%.   Currently most analysts are projecting around 1.5% to 2% in Q3. So the GDP projections for 2019 were revised up slightly.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in
Real GDP1
201920202021
Sept 20192.1 to 2.31.8 to 2.11.8 to 2.0
Jun 20192.0 to 2.21.8 to 2.21.8 to 2.0
Mar 20191.9 to 2.21.8 to 2.01.7 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 3.7% in August.  So the unemployment rate projection for 2019 was unchanged.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment
Rate2
201920202021
Sept 20193.6 to 3.73.6 to 3.83.6 to 3.9
Jun 20193.6 to 3.73.5 to 3.93.6 to 4.0
Mar 20193.6 to 3.83.5 to 3.93.6 to 4.0
2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

As of July 2019, PCE inflation was up 1.4% from July 2018 So PCE inflation projections were unchanged.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE
Inflation1
201920202021
Sept 20191.5 to 1.61.9 to 2.02.0 
Jun 20191.5 to 1.61.9 to 2.02.0 to 2.1
Mar 20191.8 to 1.92.0 to 2.12.0 to 2.1

PCE core inflation was up 1.6% in July year-over-year. So Core PCE inflation was unchanged.

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core
Inflation1
201920202021
Sept 20191.7 to 1.81.9 to 2.02.0
Jun 20191.7 to 1.81.9 to 2.02.0 to 2.1
Mar 20191.9 to 2.02.0 to 2.12.0 to 2.1

FOMC Statement: 25bp Decrease

by Calculated Risk on 9/18/2019 02:01:00 PM

FOMC Statement:

Information received since the Federal Open Market Committee met in July indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports have weakened. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 1-3/4 to 2 percent. This action supports the Committee's view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain. As the Committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair, John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Charles L. Evans; and Randal K. Quarles. Voting against the action were James Bullard, who preferred at this meeting to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent; and Esther L. George and Eric S. Rosengren, who preferred to maintain the target range at 2 percent to 2-1/4 percent.
emphasis added

AIA: "Substantial Decline in Architecture Billings"

by Calculated Risk on 9/18/2019 12:45:00 PM

Note: This index is a leading indicator primarily for new Commercial Real Estate (CRE) investment.

From the AIA: Substantial Decline in Architecture Billings

Demand for design services in August took a markedly downward swing compared to July’s already soft score, according to a new report released today from The American Institute of Architects (AIA).

AIA’s Architecture Billings Index (ABI) score of 47.2 in August showed a significant drop in architecture firm billings compared to the July score of 50.1. Any score below 50 indicates a decrease in billings. The design contracts score also declined to 47.9 in August, representing a rare dip for this indicator. Billings in the West stayed modestly positive while all other regions remained in negative territory.

“The sizeable drop in both design billings and new project activity, coming on the heels of six months of disappointing growth in billings, suggests that the design expansion that began in mid-2012 is beginning to face headwinds,” said AIA Chief Economist Kermit Baker, PhD, Hon. AIA. “Currently, the weakness is centered at firms specializing in commercial/industrial facilities as well as those located in the Midwest. However, there are fewer pockets of strength in design activity now, either by building sector or region than there have been in recent years.”
...
• Regional averages: West (51.2); Northeast (49.1); South (48.2); Midwest (46.4)

• Sector index breakdown: institutional (50.6); multi-family residential (50.5); commercial/industrial (46.9); mixed practice (46.3)
emphasis added
AIA Architecture Billing Index Click on graph for larger image.

This graph shows the Architecture Billings Index since 1996. The index was at 47.2 in August, down from 50.1 in July. Anything below 50 indicates contraction in demand for architects' services.

Note: This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions.

According to the AIA, there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction.  This index has been positive for 9 of the previous 12 months, suggesting some further increase in CRE investment in 2019 - but this is the weakest six month stretch since 2012, and might suggest some decline in CRE investment in 2020.

Comments on August Housing Starts

by Calculated Risk on 9/18/2019 10:37:00 AM

Earlier: Housing Starts increase to 1.364 Million Annual Rate in August, Highest in 12 Years

Total housing starts in August were above expectations, and starts for June and July were revised up combined.  This was the highest level of starts in 12 years.

The housing starts report showed starts were up 12.3% in August compared to July, and starts were up 6.6% year-over-year compared to August 2018.

Single family starts were up 3.4% year-over-year, and multi-family starts were up 13.7% YoY.   Much of the strength this month was in the volatile multi-family sector, still - overall - this was a strong report.

This first graph shows the month to month comparison for total starts between 2018 (blue) and 2019 (red).

Starts Housing 2018 and 2019Click on graph for larger image.

Starts were up 6.6% in August compared to August 2018.

Year-to-date, starts are down 1.8% compared to the same period in 2018.

Last year, in 2018, starts were strong early in the year, and then fell off in the 2nd half - so the early comparisons this year were the most difficult.

My guess was starts would be down slightly year-over-year in 2019 compared to 2018, but nothing like the YoY declines we saw in February and March. Now it seems likely starts will be up in 2019 compared to 2018.

Below is an update to the graph comparing multi-family starts and completions. Since it usually takes over a year on average to complete a multi-family project, there is a lag between multi-family starts and completions. Completions are important because that is new supply added to the market, and starts are important because that is future new supply (units under construction is also important for employment).

These graphs use a 12 month rolling total for NSA starts and completions.

Multifamily Starts and completionsThe blue line is for multifamily starts and the red line is for multifamily completions.

The rolling 12 month total for starts (blue line) increased steadily for several years following the great recession - but turned down, and has moved sideways recently.  Completions (red line) had lagged behind - then completions caught up with starts.

As I've been noting for several years, the significant growth in multi-family starts is behind us - multi-family starts peaked in June 2015 (at 510 thousand SAAR).

Single family Starts and completionsThe second graph shows single family starts and completions. It usually only takes about 6 months between starting a single family home and completion - so the lines are much closer. The blue line is for single family starts and the red line is for single family completions.

Note the relatively low level of single family starts and completions.  The "wide bottom" was what I was forecasting following the recession, and now I expect some further increases in single family starts and completions.