by Calculated Risk on 12/23/2014 08:41:00 PM

From the WSJ: U.S. Economy Posts Strongest Growth in More Than a Decade

U.S. gross domestic product, the fullest measure of economic output, was shown in the Commerce Department’s third estimate to have expanded at a 5% pace in the third quarter—up from the second quarter’s growth rate of 4.6% and the strongest pace since the third quarter of 2003.

The growth was buoyed by consumer spending on health care and restaurant meals, business investment in equipment and new software, and a rise in exports.

And Q4 will be decent, although it appears some investment will slow - especially for petroleum and natural gas - but the consumer will be solid. A nice end to a good economic year!

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

• At 8:30 AM, the initial weekly unemployment claims report will be released. The consensus is for claims to increase to 290 thousand from 289 thousand.

• The NYSE and the NASDAQ will close at 1:00 PM ET.

by Calculated Risk on 12/23/2014 04:02:00 PM

At the end of each year, I post ten questions for the upcoming year. Here are the Ten Economic Questions for 2014. I follow up with a brief post on each question, and the goal is to provide an overview of what I expect for the coming year (I don't have a crystal ball, but I think it helps to outline what I think will happen - and then try to understand why I was wrong).

I've been lucky in the years with turning points (calling the recession in 2007 or the bottom for house price in early 2012 are two examples).

Here is a 2014 review. I've linked to my posts from the beginning of the year, with a brief excerpt and a few comments:

10) Question #10 for 2014: Downside Risks

Happily, looking forward, it seems the downside risks have diminished significantly. China remains a key risk ... There are always potential geopolitical risks (war with Iran, North Korea, or turmoil in some oil producing country).  Right now those risks appear small, although it is always hard to tell. ...

When I look around, I see few obvious downside risks for the U.S. economy in 2014. No need to borrow trouble - diminished downside risks are a reason for cheer. 

There are international risks - China remains a downside risk.  Russia too.  Europe (and the Euro) are still a mess, and the situations in the Ukraine and Iraq are serious, but overall it appears that downside risks to the U.S. economy were less in 2014 than in 2013.

9) Question #9 for 2014: How much will housing inventory increase in 2014?

Right now my guess is active inventory will increase 10% to 15% in 2014 (inventory will decline seasonally in December and January, but I expect to see inventory up 10% to 15% year-over-year toward the end of 2014).  This will put active inventory close to 6 months supply this summer.   If correct, this will slow house price increases in 2014.

The NAR reported inventory was up 2.0% year-over-year in November.  However Zillow is showing inventory up 12% year-over-year.  Note: I used to follow "Housing Tracker" weekly, but the site had some data problems and they discontinued the series. The "10% to 15%" increase this year was too high based on the NAR reports.

8) Question #8 for 2014: Housing Credit: Will we see easier mortgage lending in 2014?

Bottom line: I expect lending standards to loosen a bit in 2014 from the tight level of the last few years.   It will be difficult to measure, but I'll be watching what Mel Watt says, what private lenders say, comments from mortgage brokers, and MEW.

I think we are seeing a little loosening with Fannie and Freddie clarifying Reps and Warrants, and in some circumstances, lower downpayment requirements.  Mortgage equity withdrawal is still net negative (but a smaller negative).

7) Question #7 for 2014: What will happen with house prices in 2014?

In 2014, inventories will probably remain low, but I expect inventories to continue to increase on a year-over-year basis. This suggests more house price increases in 2014, but probably at a slow pace.

As Khater noted, some of the "bounce back" in certain areas is probably over, also suggesting slower price increases going forward.  And investor buying appears to have slowed.  A positive for the market will probably be a little looser mortgage credit.

All of these factors suggest further prices increases in 2014, but at a slower rate than in 2013.   There tends to be some momentum for house prices, and I expect we will see prices up mid-to-high single digits (percentage) in 2014 as measured by Case-Shiller.

We only have Case-Shiller data through September, and price increases have slowed as expected. Zillow expects the October Case-Shiller National index to show a 4.8% year-over-year gain.  My prediction was based on the Composite 20 which would be a little higher (Case-Shiller started releasing the national index monthly this year).  My prediction was pretty close, and if anything, house prices slowed more than I expected.

6) Question #6 for 2014: How much will Residential Investment increase?

New home sales will still be competing with distressed sales (short sales and foreclosures) in some judicial foreclosure states in 2014. However, unlike last year when I reported that some builders were land constrained (not enough finished lots in the pipeline), land should be less of an issue this year. Even with the foreclosures, I expect another solid year of growth for new home sales.

... I expect growth for new home sales and housing starts in the 20% range in 2014 compared to 2013. That would still make 2014 the tenth weakest year on record for housing starts (behind 2008 through 2012 and few other recession lows).

Through November, new home sales were flat compared to 2013, and housing starts were only up 7.8%  year-over-year.  Clearly I was too optimistic this year. There were a number of factors that kept RI down, but I still think fundamentals support a higher level of starts.  An optimistic view is that the sluggish growth this year means more growth over the next several years!

5) Question #5 for 2014: Monetary Policy: Will the Fed end QE3 in 2014?

[E]ven though the Fed is data-dependent, I currently expect the Fed to reduce their asset purchases by $10 billion per month (or so) at each meeting this year and conclude QE3 at the end of the 2014.

QE3 ended in October.

4) Question #4 for 2014: Will too much inflation be a concern in 2014?

[C]urrently I think inflation (year-over-year) will increase a little in 2014 as growth picks up, but too much inflation will not be a concern in 2014.

Core measures of inflation did increase a little this year, and too much inflation was not a concern in 2014.

3) Question #3 for 2014: What will the unemployment rate be in December 2014?

My guess is the participation rate will stabilize or only decline slightly in 2014 (less than in 2012 and 2013) ... it appears the unemployment rate will decline to the low-to-mid 6% range by December 2014.

The participation rate did stabilize - in December 2013, the participation rate was 62.8%, and in November 2014, the participation rate was ... 62.8%.  However the unemployment rate was 5.8% in November and I was too pessimistic on unemployment.

2) Question #2 for 2014: How many payroll jobs will be added in 2014?

Both state and local government and construction hiring should improve further in 2014.  Federal layoffs will be a negative, but most sectors should be solid.  So my forecast is somewhat above the previous three years, and I expect gains of about 200,000 to 225,000 payroll jobs per month in 2014.
...
It is possible that 2014 will be the best year since 1999 for both total nonfarm and private sector employment.

Through November 2014, the economy has added 2,650,000 jobs, or 240,000 per month - above my projection - and the best year since 1999!

1) Question #1 for 2014: How much will the economy grow in 2014?

I expect PCE to pick up again into the 3% to 4% range, and this will give a boost to GDP.   This increase in consumer spending should provide an incentive for business investment.  Add in the ongoing housing recovery, some increase in state and local government spending, and 2014 should be the best year of the recovery with GDP growth at or above 3%

PCE was sluggish at 1.2% in Q1 (due to the bad weather), picked up in Q2 to 2.5%, and in Q3 to 3.2%.  Right now, based on the November Personal Income data, it looks like PCE will be around 4.3% in Q4.  Not quite what I expected, because of Q1 weakness, but a clear acceleration.   GDP will be probably be around 2.4% (or higher) - pretty amazing because of the contraction in Q1.  Growth clearly picked up this year, and 2014 will be close to the best year of the recovery.

Overall 2014 unfolded about as expected - I anticipated the pickup in employment and economic growth, was correct on inflation and Fed policy - however I was too optimistic on housing.

by Calculated Risk on 12/23/2014 12:53:00 PM

Earlier: New Home Sales at 438,000 Annual Rate in November

The new home sales report for November was below expectations at 438 thousand on a seasonally adjusted annual rate basis (SAAR). Also, sales for the two of the previous months were revised down.

Sales in 2014 are significantly below expectations, however, based on the low level of sales, more lots coming available, and demographics, I expect sales to increase over the next several years.

It is important to remember that demographics is a slow moving - but unstoppable - force!

It was over four 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.  One major reason for that optimism was demographics - a large cohort was moving into the renting age group.

Now demographics are slowly becoming more favorable for home buying.

Click on graph for larger image.

This graph shows the longer term trend for several 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: 1990 to 2013 is actual, 2014 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 will soften starting around 2020 +/-.

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 10+ years.  

This demographics is positive for home buying, and this is a key reason I expect single family housing starts - and new home sales - to continue to increase in coming years.

This graph shows new home sales for 2013 and 2014 by month (Seasonally Adjusted Annual Rate).

The Census Bureau reported that new home sales this year, through November, were 399,000, that is up 0.2% from the same period of 2013.  Right now it looks like sales will be mostly unchanged this year compared to last year.

And here is another update to the "distressing gap" graph that I first started posting several years ago to show the emerging gap caused by distressed sales. Now I'm looking for the gap to close over the next few years.

The "distressing gap" graph shows existing home sales (left axis) and new home sales (right axis) through November 2014. This graph starts in 1994, but the relationship has been fairly steady back to the '60s.

Following the housing bubble and bust, the "distressing gap" appeared mostly because of distressed sales.

I expect existing home sales to mostly move sideways (distressed sales will continue to decline and be offset by more conventional / equity sales).  And I expect this gap to slowly close, mostly from an increase in new home sales.

Note: Existing home sales are counted when transactions are closed, and new home sales are counted when contracts are signed. So the timing of sales is different.

by Calculated Risk on 12/23/2014 10:21:00 AM

The BEA released the Personal Income and Outlays report for November:

Personal income increased $54.4 billion, or 0.4 percent ... in November, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $67.9 billion, or 0.6 percent.
...
Real PCE -- PCE adjusted to remove price changes -- increased 0.7 percent in November, compared with an increase of 0.2 percent in October. ... The price index for PCE decreased 0.2 percent in November, in contrast to an increase of less than 0.1 percent in October. The PCE price index, excluding food and energy, increased less than 0.1 percent, compared within an increase of 0.2 percent. ... The November price index for PCE increased 1.2 percent from November a year ago. The November PCE price index, excluding food and energy, increased 1.4 percent from November a year ago.

The following graph shows real Personal Consumption Expenditures (PCE) through November 2014 (2009 dollars). Note that the y-axis doesn't start at zero to better show the change.

Click on graph for larger image.

The dashed red lines are the quarterly levels for real PCE.

Using the two-month method to estimate Q4 PCE growth, PCE was increasing at a 4.3% annual rate in Q4 2014 (using the mid-month method, PCE was increasing 4.5%). It looks like Q4 will be a strong quarter for PCE growth - revise up those Q4 GDP forecasts!

by Calculated Risk on 12/23/2014 10:00:00 AM

The Census Bureau reports New Home Sales in November were at a seasonally adjusted annual rate (SAAR) of 438 thousand.

October sales were revised down from 458 thousand to 445 thousand, and September sales were unchanged at 455 thousand.

"Sales of new single-family houses in November 2014 were at a seasonally adjusted annual rate of 438,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 1.6 percent below the revised October rate of 445,000 and is 1.6 percent below the November 2013 estimate of 445,000."

Click on graph for larger image.

The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate.

Even with the increase in sales over the previous two years, new home sales are still close to the bottom for previous recessions.

The second graph shows New Home Months of Supply.

The months of supply increased in November to 5.8 months from 5.7 months in October.

The all time record was 12.1 months of supply in January 2009.

This is now in the normal range (less than 6 months supply is normal).

"The seasonally adjusted estimate of new houses for sale at the end of November was 213,000. This represents a supply of 5.8 months at the current sales rate."

On inventory, according to the Census Bureau:

"A house is considered for sale when a permit to build has been issued in permit-issuing places or work has begun on the footings or foundation in nonpermit areas and a sales contract has not been signed nor a deposit accepted."

Starting in 1973 the Census Bureau broke this down into three categories: Not Started, Under Construction, and Completed.

The third graph shows the three categories of inventory starting in 1973.

The inventory of completed homes for sale is still low, and the combined total of completed and under construction is also low.

The last graph shows sales NSA (monthly sales, not seasonally adjusted annual rate).

In November 2014 (red column), 31 thousand new homes were sold (NSA). Last year 32 thousand homes were sold in Novembe.

The high for November was 86 thousand in 2005, and the low for November was 20 thousand in 2010.

This was below expectations of 460,000 sales in November, and there were downward revisions to sales in August and October.  Another weak report.

I'll have more later today.

by Calculated Risk on 12/23/2014 08:34:00 AM

From the BEA: Gross Domestic Product: Third Quarter 2014 (Third Estimate)

Real gross domestic product -- the value of the production of goods and services in the United States, adjusted for price changes -- increased at an annual rate of 5.0 percent in the third quarter of 2014, according to the "third" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 4.6 percent.

The GDP estimate released today is based on more complete source data than were available for the "second" estimate issued last month. In the second estimate, the increase in real GDP was 3.9 percent. With the third estimate for the third quarter, both personal consumption expenditures (PCE) and nonresidential fixed investment increased more than previously estimated

Here is a Comparison of Third and Second Estimates.  PCE was revised up from 2.2% to 3.2%, and private investment was revised up.   A very strong report.

by Calculated Risk on 12/22/2014 07:56:00 PM

First, from Tim Duy: Fed Watch: Looking Backward to See the Future

[In 20004] Patient" lasted for two meetings before being replaced by "measured." This is fairly consistent with my expectations. My baseline scenario is that the Fed drops "considerable" entirely in January, retains "patient" in March, drops "patient" in April, and raise rates in June.
...
Bottom Line: Assuming the data holds, maybe history will repeat itself.

Tuesday:
• At 8:30 AM ET, Durable Goods Orders for November from the Census Bureau. The consensus is for a 2.9% increase in durable goods orders.

• Also at 8:30 AM, Gross Domestic Product, 3rd quarter 2014 (third estimate). The consensus is that real GDP increased 4.3% annualized in Q3, revised up from the second estimate of 3.9%.

• At 9:00 AM, FHFA House Price Index for October 2014. This was originally a GSE only repeat sales, however there is also an expanded index. The consensus is for a 0.2% increase.

• At 9:55 AM, Reuter's/University of Michigan's Consumer sentiment index (final for December). The consensus is for a reading of 93.0, down from the preliminary reading of 93.8, and up from the November reading of 88.8.

• At 10:00 AM, New Home Sales for November from the Census Bureau. The consensus is for an increase in sales to 460 thousand Seasonally Adjusted Annual Rate (SAAR) in November from 458 thousand in October.

• Also at 10:00 AM, Personal Income and Outlays for November. The consensus is for a 0.5% increase in personal income, and for a 0.5% increase in personal spending. And for the Core PCE price index to increase 0.1%.

• Also at 10:00 AM, Richmond Fed Survey of Manufacturing Activity for December.

by Calculated Risk on 12/22/2014 03:41:00 PM

From the Philly Fed:

The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for November 2014. In the past month, the indexes increased in 44 states, decreased in two, and remained stable in four, for a one-month diffusion index of 84. Over the past three months, the indexes increased in 48 states and decreased in two, for a three-month diffusion index of 92.

Note: These are coincident indexes constructed from state employment data. An explanation from the Philly Fed:

The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state’s index is set to the trend of its gross domestic product (GDP), so long-term growth in the state’s index matches long-term growth in its GDP.

Click on graph for larger image.

This is a graph is of the number of states with one month increasing activity according to the Philly Fed. This graph includes states with minor increases (the Philly Fed lists as unchanged).

In November, 47 states had increasing activity (including minor increases). This measure declined sharply during the winter, but is close to normal for a recovery.


Here is a map of the three month change in the Philly Fed state coincident indicators. This map was all red during the worst of the recession, and is mostly green again.  In will be interesting to see if several oil producing states - such as Texas, North Dakota, Alaska and Oklahoma - turn read in 2015.

by Calculated Risk on 12/22/2014 12:41:00 PM

• Once again housing economist Tom Lawler's forecast of 4.90 million SAAR was closer than the consensus (5.20 million) to the NAR reported sales (4.93 million).

• The most important number in the NAR report each month is inventory.   This morning the NAR reported that inventory was up 2.0% year-over-year in November.   It is important to note that the NAR inventory data is "noisy" and difficult to forecast based on other data.  Also it isn't always clear what is included in "inventory" (some areas report "active" listings, others all listings including pending short sales).   Also, some sources are reporting more inventory, as an example, Zillow's data shows inventory was up 12% year-over-year in November.  That is a big difference!

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 9.1% from the bottom. On a seasonally adjusted basis, inventory was down 2.5% in November compared to October.

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 2.1% from November 2013, however normal equity sales were up even more, and distressed sales down sharply.  From the NAR (from a survey that is far from perfect):

Distressed sales – foreclosures and short sales – were unchanged in November from October (9 percent) and remained in the single digits for the fourth month this year; they were 14 percent a year ago. Six percent of November sales were foreclosures and 3 percent were short sales.

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

A rough estimate: Sales in November 2013 were reported at 4.83 million SAAR with 14% distressed.  That gives 676 thousand distressed (annual rate), and 4.15 million equity / non-distressed.  In November 2014, sales were 4.93 million SAAR, with 9% distressed.  That gives 444 thousand distressed - a decline of about 34% from November 2013 - and 4.49 million equity.  Although this survey isn't perfect, this suggests distressed sales were down sharply - and normal sales up around 8%.. 

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

Click on graph for larger image.

Sales NSA in November (red column) were below the levels for November in 2012 and 2013.

Earlier:
• Existing Home Sales in November: 4.93 million SAAR, Inventory up 2.0% Year-over-year

by Calculated Risk on 12/22/2014 10:00:00 AM

The NAR reports: Existing-Home Sales Lose Momentum in November as Inventory Slightly Tightens

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, fell 6.1 percent to a seasonally adjusted annual rate of 4.93 million in November from a downwardly-revised 5.25 million in October. Sales dropped to their lowest annual pace since May (4.91 million) but are above year-over-year levels (up 2.1 percent from last November) for the second straight month. ...

Total housing inventory at the end of November fell 6.7 percent to 2.09 million existing homes available for sale, which represents a 5.1-month supply at the current sales pace – unchanged from last month. Despite the tightening in supply, unsold inventory remains 2.0 percent higher than a year ago, when there were 2.05 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 November (4.93 million SAAR) were 6.1% lower than last month, and were 2.1% above the November 2013 rate.

The second graph shows nationwide inventory for existing homes.

According to the NAR, inventory decreased to 2.09 million in November from 2.24 million in October.   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 2.0% year-over-year in November compared to November 2013.  

Months of supply was at 5.1 months in November.

This was below expectations of sales of 5.20 million (but you were warned).  For existing home sales, the key number is inventory - and inventory is still low, but up year-over-year.    I'll have more later ...