by Calculated Risk on 11/20/2014 08:43:00 PM

A few excerpts from a research piece on wages by economist Nathan Harris at Merrill Lynch:

After the deep freeze last winter, the labor market has steadily recovered over the last 10 months. Payrolls have averaged about 240,000 and the unemployment rate has dropped mainly for “good reasons”—because of solid jobs rather than falling participation. While it is very hard to pin down the inflation neutral (NAIRU) unemployment rate in real time, we seem to be in the neighborhood of NAIRU. At 5.8%, the official U-3 measure has dipped below its 30-year average of 6.1% and is approaching estimates of NAIRU from the FOMC (5.2 to 5.5%) and the Congressional Budget Office (5.5%). We like to focus on the broader U-6 measure. If the rate of decline over the last year continues, it will hit its historical average by next year and its pre-crisis average by early 2016.

What is missing from this labor lullaby is some sign of normal wage growth. There have been a number of head fakes—jumps in erratic second-tier indicators and pockets of pressure that never expanded. However, the two best gauges of pressure, total average hourly earnings (AHE) and the employment cost index (ECI) have shown few signs of life.

The good news is that while AHE are still stuck at 2%, there are now early hints of a pick-up in the ECI. After a very weak 1Q reading the index was solid in both 2Q and 3Q. Moreover, the pick-up is broad-based, including both wages and benefits and increases for most occupational groups and industries. Finally, just maybe, labor compensation is starting to pick up.

Before we get too excited about improved income or inflation, keep in mind that the recovery in both wage and price inflation is likely to be very slow.
...
At this stage, it is not clear whether the long-awaited rise in labor costs has arrived or will start sometime next year. Two things are clear. First, the rise is likely to be very slow. Second, the Fed’s initial response will be to breathe a sigh of relief and they will only view it as a threat to the inflation target if it gets above its historic norm of 3.5%.

Friday:
• Early, the Black Knight Financial Services’ “First Look” at October 2014 Mortgage Data.

• At 10:00 AM ET, the Regional and State Employment and Unemployment (Monthly) report for October 2014.

• At 11:00 AM, the Kansas City Fed manufacturing survey for November.

by Calculated Risk on 11/20/2014 05:55:00 PM

In addition to housing starts for October, the Census Bureau also released the Q3 "Started and Completed by Purpose of Construction" report yesterday.

It is important to remember that we can't directly compare single family housing starts to new home sales. For starts of single family structures, the Census Bureau includes owner built units and units built for rent that are not included in the new home sales report. For an explanation, see from the Census Bureau: Comparing New Home Sales and New Residential Construction

We are often asked why the numbers of new single-family housing units started and completed each month are larger than the number of new homes sold. This is because all new single-family houses are measured as part of the New Residential Construction series (starts and completions), but only those that are built for sale are included in the New Residential Sales series.

However it is possible to compare "Single Family Starts, Built for Sale" to New Home sales on a quarterly basis.

The quarterly report released yesterday showed there were 125,000 single family starts, built for sale, in Q3 2014, and that was above the 111,000 new homes sold for the same quarter, so inventory increased in Q3 (Using Not Seasonally Adjusted data for both starts and sales).

The first graph shows quarterly single family starts, built for sale and new home sales (NSA).

Click on graph for larger image.

In 2005, and most of 2006, starts were higher than sales, and inventories of new homes increased. The difference on this graph is pretty small, but the builders were starting about 30,000 more homes per quarter than they were selling (speculative building), and the inventory of new homes soared to record levels. Inventory of under construction and completed new home sales peaked at 477,000 in Q3 2006.

In 2008 and 2009, the home builders started far fewer homes than they sold as they worked off the excess inventory that they had built up in 2005 and 2006.

Now it looks like builders are generally starting about the same number of homes that they are selling (although they started more in Q3 than they sold), and the inventory of under construction and completed new home sales is still very low.  

Note: new home sales are reported when contracts are signed, so it is appropriate to compare sales to starts (as opposed to completions). This is not perfect because of the handling of cancellations, but it does suggest the builders are keeping inventories under control.

The second graph shows the NSA quarterly intent for four start categories since 1975: single family built for sale, owner built (includes contractor built for owner), starts built for rent, and condos built for sale.

Single family starts built for sale were up about 4% compared to Q3 2013.

Owner built starts were up 20% year-over-year. And condos built for sale are just above the record low.

The 'units built for rent' has increased significantly and is at the highest level since the mid-80s.

by Calculated Risk on 11/20/2014 01:43:00 PM

• Once again housing economist Tom Lawler's forecast of 5.31 million SAAR was closer than the consensus (5.15 million) to the NAR reported sales (5.26 million).

• The most important number in the NAR report each month is inventory.   This morning the NAR reported that inventory was up 5.2% year-over-year in October.   It is important to note that the NAR inventory data is "noisy" and difficult to forecast based on other data.  However this increase in inventory has slowed price increases.

The headline NAR inventory number is not seasonally adjusted, even though there is a clear seasonal pattern. Trulia chief economist Jed Kolko has sent me the seasonally adjusted inventory. NOTE: The NAR does provide a seasonally adjusted months-of-supply, although that is in the supplemental data.

Click on graph for larger image.

This shows that inventory bottomed in January 2013 (on a seasonally adjusted basis), and inventory is now up about 11.7% from the bottom. On a seasonally adjusted basis, inventory was up 0.1% in October compared to September.

Important: The NAR reports active listings, and although there is some variability across the country in what is considered active, many "contingent short sales" are not included. "Contingent short sales" are strange listings since the listings were frequently NEVER on the market (they were listed as contingent), and they hang around for a long time - they are probably more closely related to shadow inventory than active inventory. However when we compare inventory to 2005, we need to remember there were no "short sale contingent" listings in 2005. In the areas I track, the number of "short sale contingent" listings is also down sharply year-over-year.

And another key point: The NAR reported total sales were up 2.5% from October 2013, however normal equity sales were even more, and distressed sales down sharply.  From the NAR (from a survey that is far from perfect):

Distressed homes – foreclosures and short sales – increased slightly in September to 10 percent from 8 percent in August, but are down from 14 percent a year ago. Seven percent of September sales were foreclosures and 3 percent were short sales.

Last year in October the NAR reported that 14% of sales were distressed sales.

A rough estimate: Sales in October 2013 were reported at 5.13 million SAAR with 14% distressed.  That gives 718 thousand distressed (annual rate), and 4.41 million equity / non-distressed.  In October 2014, sales were 5.26 million SAAR, with 10% distressed.  That gives 526 thousand distressed - a decline of about 27% from October 2013 - and 4.73 million equity.  Although this survey isn't perfect, this suggests distressed sales were down sharply - and normal sales up around 7%.. 

The following graph shows existing home sales Not Seasonally Adjusted (NSA).

Click on graph for larger image.

Sales NSA in October (red column) were at the highest level for October since 2006.

This was another solid report.

Earlier:
• Existing Home Sales in October: 5.26 million SAAR, Inventory up 5.2% Year-over-year

by Calculated Risk on 11/20/2014 11:57:00 AM

The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.6% annualized rate) in October. The 16% trimmed-mean Consumer Price Index rose 0.1% (1.8% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics' (BLS) monthly CPI report.

Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers did not change (0.0% annualized rate) in October. The CPI less food and energy rose 0.2% (2.5% annualized rate) on a seasonally adjusted basis.

Note: The Cleveland Fed has the median CPI details for October here. Motor fuel declined at a 31% annualized rate in October!

Click on graph for larger image.

This graph shows the year-over-year change for these four key measures of inflation. On a year-over-year basis, the median CPI rose 2.3%, the trimmed-mean CPI rose 1.9%, and the CPI less food and energy rose 1.8%. Core PCE is for September and increased just 1.5% year-over-year.

On a monthly basis, median CPI was at 2.6% annualized, trimmed-mean CPI was at 1.8% annualized, and core CPI increased 2.5% annualized.

On a year-over-year basis these measures suggest inflation remains at or below the Fed's target of 2%.

by Calculated Risk on 11/20/2014 10:11:00 AM

The NAR reports: Existing-Home Sales Rise in October, First Year-Over-Year Increase since October 2013

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 1.5 percent to a seasonally adjusted annual rate of 5.26 million in October from an upwardly-revised 5.18 million in September. Sales are at their highest annual pace since September 2013 (also 5.26 million) and are now above year-over-year levels (2.5 percent from last October) for the first time since last October. ...

Total housing inventory at the end of October fell 2.6 percent to 2.22 million existing homes available for sale, which represents a 5.1-month supply at the current sales pace – the lowest since March (also 5.1 months). Unsold inventory is now 5.2 percent higher than a year ago, when there were 2.11 million existing homes available for sale.

Click on graph for larger image.

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

Sales in October (5.26 million SAAR) were 1.5% higher than last month, and were 2.5% above the October 2013 rate.

The second graph shows nationwide inventory for existing homes.

According to the NAR, inventory decreased to 2.22 million in October from 2.28 million in September.   Headline inventory is not seasonally adjusted, and inventory usually increases from the seasonal lows in December and January, and peaks in mid-to-late summer.

The third 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.

Inventory increased 5.2% year-over-year in October compared to October 2013.  

Months of supply was at 5.1 months in October.

This was above expectations of sales of 5.15 million.  For existing home sales, the key number is inventory - and inventory is still low, but up year-over-year.    I'll have more later ...

by Calculated Risk on 11/20/2014 08:36:00 AM

From the Bureau of Labor Statistics (BLS): Consumer Price Index - October 2014

The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in October on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.7 percent before seasonal adjustment.
...
The index for all items less food and energy increased 0.2 percent in October.
emphasis added

I'll post a graph later today after the Cleveland Fed releases the median and trimmed-mean CPI.

On weekly unemployment claims, the DOL reported:

In the week ending November 15, the advance figure for seasonally adjusted initial claims was 291,000, a decrease of 2,000 from the previous week's revised level. The previous week's level was revised up by 3,000 from 290,000 to 293,000. The 4-week moving average was 287,500, an increase of 1,750 from the previous week's revised average. The previous week's average was revised up by 750 from 285,000 to 285,750.

There were no special factors impacting this week's initial claims.

The previous week was up to 293,000.

The following graph shows the 4-week moving average of weekly claims since January 2000.

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 increased to 287,500.

This was higher than the consensus forecast, but the level suggests few layoffs.

by Calculated Risk on 11/19/2014 09:00:00 PM

Goldman Sachs has a model that divides the business cycle into four stages: early-cycle, mid-cycle, late-cycle and recession.  According to Goldman economist Kris Dawsey, the economy appears to be transitioning from early to mid-cycle (but not late-cycle or worse):

The likelihood of the economy showing late-cycle behavior or being in recession by the middle of 2015 is very low, according to the model. However, we expect a transition from early- to mid-cycle over the next half year. ... since early 2010 the model has characterized the economy as "early-cycle." This reflects the high degree of slack, a solid growth rate of activity, subdued inflationary pressure, and financial market outcomes consistent with an easy stance of monetary policy. ... Over the past year, the signal strength has declined considerably, showing that the choice between early- and mid-cycle has become more difficult. While mid-cycle behavior is qualitatively similar in many ways to early-cycle behavior, key differences include (1) smaller output and employment gaps, (2) slightly firmer inflation outcomes, (3) a trough in credit spreads and stock market volatility, and (4) a higher fed funds rate and related flattening in the yield curve led by the front end.
emphasis added

Thursday:
• At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for claims to decrease to 281 thousand from 290 thousand.

• Also at 8:30 AM, the Consumer Price Index for October. The consensus is for a 0.1% decrease in CPI in October, and for core CPI to increase 0.1%.

• At 10:00 AM, Existing Home Sales for October from the National Association of Realtors (NAR). The consensus is for sales of 5.15 million on seasonally adjusted annual rate (SAAR) basis. Sales in September were at a 5.17 million SAAR. Economist Tom Lawler estimates the NAR will report sales of 5.31 million SAAR.

• Also at 10:00 AM, the Philly Fed manufacturing survey for November. The consensus is for a reading of 18.5, down from 20.7 last month (above zero indicates expansion).

by Calculated Risk on 11/19/2014 06:15:00 PM

From housing economist Tom Lawler:

Based on state and local realtor/MLS reports released through today, I have increased my estimate of October existing home sales as measured by the National Association of Realtors to a seasonally adjusted annual rate of 5.31 million (my estimate in last Friday’s report was 5.28 million). I also now “guesstimate” that the NAR’s existing home inventory number for October will be down 3.5% from September, and up 5.2% from last October. Finally, I project that the NAR’s median existing SF home sales price for October will be about 4% higher than last October.

CR Note: Existing home sales will be released tomorrow, and the consensus has moved up since Friday, and is now at 5.15 million.

Lawler also sent me the updated table below of short sales, foreclosures and cash buyers for selected cities in October.

On distressed: Total "distressed" share is down in these markets mostly due to a decline in short sales.

Short sales are down significantly in these areas.

Foreclosures are up in several of these areas.

The All Cash Share (last two columns) is mostly declining year-over-year. As investors pull back, the share of all cash buyers will probably continue to decline.

	Short Sales Share		Foreclosure Sales Share		Total "Distressed" Share		All Cash Share
	Oct-14	Oct-13	Oct-14	Oct-13	Oct-14	Oct-13	Oct-14	Oct-13
Las Vegas	10.6%	21.0%	8.9%	6.0%	19.5%	27.0%	35.1%	44.9%
Reno**	6.0%	16.0%	4.0%	4.0%	10.0%	20.0%
Phoenix	3.7%	8.4%	6.2%	6.9%	9.9%	15.3%	27.7%	31.6%
Sacramento	6.1%	13.7%	6.3%	5.9%	12.4%	19.6%	20.6%	23.9%
Minneapolis	2.7%	5.1%	9.8%	16.4%	12.5%	21.5%
Mid-Atlantic	4.8%	8.2%	10.0%	7.9%	14.9%	16.1%	19.2%	19.9%
Orlando	5.2%	15.5%	26.7%	20.7%	31.8%	36.2%	41.8%	47.8%
California *	6.1%	10.3%	5.3%	6.7%	11.4%	17.0%
Bay Area CA*	3.5%	7.3%	2.7%	3.7%	6.2%	11.0%
So. California*	5.9%	10.8%	4.8%	6.3%	10.7%	17.1%
Miami MSA SF	8.3%	16.3%	19.5%	15.1%	27.8%	31.4%	39.3%	46.4%
Miami MSA C/TH	4.9%	11.3%	23.4%	18.3%	28.3%	29.6%	69.3%	73.1%
Tucson							26.8%	32.1%
Toledo							38.2%	37.1%
Wichita							28.9%	30.5%
Des Moines							18.8%	20.2%
Peoria							22.8%	21.1%
Georgia***							27.8%	N/A
Omaha							18.5%	20.0%
Pensacola							33.5%	33.7%
Knoxville							24.7%	26.5%
Memphis*			13.3%	19.8%
Birmingham AL			15.2%	21.0%
Springfield IL**			8.3%	15.3%
*share of existing home sales, based on property records **Single Family Only ***GAMLS

by Calculated Risk on 11/19/2014 03:58:00 PM

A few key points:
• Housing permits in October were at the highest level since 2008. Last year, in 2013, there was a surge in multi-family permits in October - and that was followed by an increase for starts in November. It looks like that might happen again this year.

• Multi-family completions have increased sharply (2nd graph below). Completions are what matter for apartment market supply, and with more completions it appears that the apartment vacancy rate has reached bottom and even increased a little (but still low). More apartments on the market will probably mean higher vacancy rates and less upward pressure on rents.

• Single family starts are increasing, but are still extremely low (last graph below). As we've been discussing for several years, demographics have been very favorable for apartments (and the housing bust boosted apartments too).  However, looking forward, the demographics will become more favorable for home ownership. This is a positive for single family housing and for the overall economy.

On starts: There were 848 thousand total housing starts during the first ten months of 2014 (not seasonally adjusted, NSA), up 9.6% from the 774 thousand during the same period of 2013.  Single family starts are up 5%, and multifamily starts up 20%.  The key weakness has been in single family starts.

The following table shows the annual housing starts since 2005, and the percent change from the previous year (estimates for 2014). The housing recovery has slowed in 2014, especially for single family starts.  However I expect further growth in starts over the next several years.

Housing Starts (000s) and Annual Change
	Total	Total % Change	Single	Single % Change
2005	2,068.3	5.8%	1,715.8	6.5%
2006	1,800.9	-12.9%	1,465.4	-14.6%
2007	1,355.0	-24.8%	1,046.0	-28.6%
2008	905.5	-33.2%	622.0	-40.5%
2009	554.0	-38.8%	445.1	-28.4%
2010	586.9	5.9%	471.2	5.9%
2011	608.8	3.7%	430.6	-8.6%
2012	780.6	28.2%	535.3	24.3%
2013	924.9	18.5%	617.6	15.4%
20141	999.0	8.0%	645.0	4.5%
1Estimate for 2014

This graph shows the month to month comparison between 2013 (blue) and 2014 (red).  Starts in 2014 have been above the same month in 2013 for seven consecutive months.

Click on graph for larger image.

The year-over-year growth will slow in November and December because the comparisons will be more difficult.  However it does appear (based on permits) that starts will finish the year strong (like in 2013).

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.

The 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 over the last few years, and completions (red line) have lagged behind - but completions have been catching up (more deliveries), and will continue to follow starts up (completions lag starts by about 12 months).

Multifamily completions were up more than 50% year-over-year in October, but multi-family starts were down slightly year-over-year (starts are volatile month-to-month).

The 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.

Single family starts are moving up again on a rolling 12 months basis. 

Note the exceptionally low level of single family starts and completions.  The "wide bottom" was what I was forecasting several years ago, and now I expect several years of increasing single family starts and completions.

by Calculated Risk on 11/19/2014 02:00:00 PM

From the Fed: Minutes of the Federal Open Market Committee, October 28-29, 2014. Excerpts:

In their discussion of the economic situation and the outlook, most meeting participants viewed the information received over the intermeeting period as suggesting 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; on balance, participants judged that the underutilization of labor resources was gradually diminishing. Participants generally expected that, over the medium term, real economic activity would increase at a pace sufficient to lead to a further gradual decline in the unemployment rate toward levels consistent with the Committee's objective of maximum employment. Inflation was continuing to run below the Committee's longer-run objective. Market-based measures of inflation compensation declined somewhat, while survey-based measures of longer-term inflation expectations remained stable. Participants anticipated that inflation would be held down over the near term by the decline in energy prices and other factors, but would move toward the Committee's 2 percent goal in coming years, although a few expressed concern that inflation might persist below the Committee's objective for quite some time. Most viewed the risks to the outlook for economic activity and the labor market as nearly balanced. However, a number of participants noted that economic growth over the medium term might be slower than they currently expected if the foreign economic or financial situation deteriorated significantly.
...
In their discussion of communications regarding the path of the federal funds rate over the medium term, meeting participants agreed that the timing of the first increase in the federal funds rate and the appropriate path of the policy rate thereafter would depend on incoming economic data and their implications for the outlook. Most participants judged that it would be helpful to include new language in the Committee's forward guidance to clarify how the Committee's decision about when to begin the policy normalization process will depend on incoming information about the economy. Some participants preferred to eliminate language in the statement indicating 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. These participants were concerned that such a characterization could be misinterpreted as suggesting that the Committee's decisions would not depend on the incoming data. However, other participants thought that the "considerable time" phrase was useful in communicating the Committee's policy intentions or that additional wording could be used to emphasize the data-dependence of the Committee's decision process. A couple of them noted that the removal of the "considerable time" phrase might be seen as signaling a significant shift in the stance of policy, potentially resulting in an unintended tightening of financial conditions. A couple of others thought that the current forward guidance might be read as suggesting an earlier date of liftoff than was likely to prove appropriate, given the outlook for inflation and the downside risks to the economy associated with the effective lower bound on interest rates. With regard to the pace of interest rate increases after the start of policy normalization, a number of participants thought that it could soon be helpful to clarify the Committee's likely approach. It was noted that communication about post-liftoff policy would pose challenges given the inherent uncertainty of the economic and financial outlook and the Committee's desire to retain flexibility to adjust policy in response to the incoming data. Most participants supported retaining the language in the statement indicating that the Committee anticipates that economic conditions may warrant keeping the target range for the federal funds rate below longer-run normal levels even after employment and inflation are near mandate-consistent levels. However, a couple of participants thought that the language should be amended in light of the prescriptions suggested by many monetary policy rules and the risks associated with keeping interest rates below their longer-run values for an extended period of time.
emphasis added