by Calculated Risk on 7/11/2018 03:28:00 PM

A long, long, long time ago - almost twelve years ago - I wrote Investment and Recessions, explaining the usefulness of New Home Sales as a leading indicator.

Here are some updated graphs. My view is new home sales and housing starts are two of the best leading indicators for the economy (but not always).

The first graph shows the change in real GDP and Private Fixed Investment over the preceding four quarters, shaded areas are recessions. (Source: BEA)

Click on graph for larger image.

A couple of observations:

1) Since 1948, private fixed investment has fallen during every economic recession.

2) Private fixed investment has fallen 14 times since 1948, with only 11 recessions.

So what happened during the periods around 1951, 1967 and 1986 to keep the economy out of recession? These are the periods when private investment fell, but the economy didn't slide into recession. The answer is generally the same for all three periods: a surge in defense spending. The defense spending in the early '50s was due to the Korean war, in the mid '60s the Vietnam war, and in the mid '80s a general defense build-up helped offset a small decline in private investment. The mid '80s also saw a surge in MEW (mortgage equity withdrawal) that also contributed to GDP growth.

The second graph shows the separation of private fixed investment into residential and nonresidential components.

This graph shows something very interesting: in general, residential investment leads nonresidential investment. There are periods when this observation doesn't hold - like '95 when residential investment fell and the growth of nonresidential investment remained strong.

Another interesting period was 2001 when nonresidential investment fell significantly more than residential investment. Obviously the fall in nonresidential investment was related to the bursting of the stock market bubble.

But the most useful information is that typically recessions are preceded by declines in residential investment. Maybe we can use that information.

The third graph shows the YoY change in New Home Sales from the Census Bureau.

Note: the New Home Sales data is smoothed using a three month centered average before calculating the YoY change. The Census Bureau data starts in 1963.

Some observations:

1) When the YoY change in New Home Sales falls about 20%, usually a recession will follow. The one exception for this data series was the mid '60s when the Vietnam buildup kept the economy out of recession.   Note that the sharp decline in 2010 was related to the housing tax credit policy in 2009 - and was just a continuation of the housing bust.

2) It is also interesting to look at the '86/'87 and the mid '90s periods. New Home sales fell in both of these periods, although not quite 20%. As noted earlier, the mid '80s saw a surge in defense spending and MEW that more than offset the decline in New Home sales. In the mid '90s, nonresidential investment remained strong.

Conclusions:

1) New Home Sales appears to be an excellent leading indicator.

2) Currently new home sales (and housing starts) are up solidly year-over-year, and this suggests there is no recession in sight.

by Calculated Risk on 7/11/2018 10:20:00 AM

Some information from mortgage broker Solyent Green is People (an update):

For people with foreclosures or short sales on their record, the waiting period depends on if there are "Extenuating Circumstances" EC ( death in family, company relocation/shut down - about 5/10% of cases) or if the foreclosure or short sale was due to "Financial Mismanagement" FM (the majority of cases).

Jumbo loans, Foreclosure: 7 years (FM and EC)
Jumbo loans, Short Sale: 7 years FM, only 4 years EC
Fannie/Freddie, Foreclosure: 7 years FM, 3 years EC
Fannie/Freddie, Short Sale: 4 years FM, 2 years EC
FHA Foreclosure/Short Sale: 3 years (FM and EC)

Click on graph for larger image.

This graph from Black Knight shows the number of active foreclosure since 2000.

The vast majority of foreclosures were in the 2008 through 2013 period, so many of those people who lost home in the great recession are eligible to borrow again now (or will be soon).

CR Note: Even though people are eligible to borrow, doesn't mean they will. They will have to saved enough for a downpayment, and many of these people are psychological scarred (and will wait longer to buy again).

by Calculated Risk on 7/11/2018 07:00:00 AM

From the MBA: Mortgage Applications Increase in Latest MBA Weekly Survey

Mortgage applications increased 2.5 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending July 6, 2018. This week’s results included an adjustment for the Fourth of July holiday.

... The Refinance Index decreased 4 percent from the previous week to its lowest level since December 2000. The seasonally adjusted Purchase Index increased 7 percent from one week earlier. The unadjusted Purchase Index decreased 15 percent compared with the previous week and was 8 percent higher than the same week one year ago. ...

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($453,100 or less) decreased to 4.76 percent from 4.79 percent, with points increasing to 0.43 from 0.41 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.
emphasis added

Click on graph for larger image.


The first graph shows the refinance index since 1990.

Refinance activity will not pick up significantly unless mortgage rates fall 50 bps or more from the recent level.

The second graph shows the MBA mortgage purchase index

According to the MBA, purchase activity is up 8% year-over-year.

by Calculated Risk on 7/10/2018 05:03:00 PM

One of the metrics we'd like to follow is a ratio of house prices to incomes. Unfortunately most income data is released with a significantly lag, and there are always questions about which income data to use (the average total income is skewed by the income of a few people).

And for key measures of house prices - like Case-Shiller - we have indexes, not actually prices.

But we can construct a ratio of the house price indexes to some measure of income.

For this graph I decided to look at house prices and the National Average Wage Index from Social Security.

Note: For a different look at house prices and income, see this post (using median income).

Click on graph for larger image.

This graph shows the ratio of house price indexes divided by the National Average Wage Index (the Wage index is first divided by 1000).

This uses the annual average National Case-Shiller index since 1976.

As of 2017, house prices were somewhat above the median historical ratio - but far below the bubble peak. 

Prices have increased further in 2018, but house prices relative to incomes are still way below the 2006 peak (but slightly above the 1989 peak).

Going forward, I think it would be a positive if wages outpaced, or at least kept pace with house prices increases for a few years.

Note: The national wage index for 2017 is estimated using the median increase over the last 6 years.

by Calculated Risk on 7/10/2018 02:19:00 PM

At the end of last year, I posted Ten Economic Questions for 2018. I followed up with a brief post on each question. The goal was to provide an overview of what I expected in 2018 (I don't have a crystal ball, but I think it helps to outline what I think will happen - and understand - and change my mind, when the outlook is wrong).

By request, here is a quick Q2 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 2018: Will the New Tax Law impact Home Sales, Inventory, and Price Growth in Certain States?

My sense is the low end of the housing market will be fine. The Mortgage Interest Deduction (MID) will be capped at interest on a mortgage up to $750,000 instead of $1,000,000, so the lower priced markets will not be hit by the reduction in the MID. There might be some additional taxes for these buyers due to the limits on SALT and property taxes, but this should be minor.

I also expect the high end of the market to be fine. The high end is already doing well even with the MID capped at $1 million. For these buyers, the bigger impact will be the SALT and property tax limitations, but there will be offsets for these buyers due to the lower rates - and these buyers will likely benefit from the corporate tax cuts.  Many of these buyers will also benefit from the changes to the Alternative Minimum Tax (AMT).

It is the upper-mid-range in the certain markets that will probably slow.  This might be in the $750,000 to $1.5 million price range.  These potential buyers probably don't benefit from the AMT or corporate changes, but they will likely be hit by the SALT and property tax limits. 

It is early, and there isn't any clear evidence of an impact from the new tax law, although some areas (like California) are now seeing a year-over-year increase in inventory - and that could be a leading indicator that price growth will slow.

9) Question #9 for 2018: Will housing inventory increase or decrease in 2018?

I was wrong on inventory last year (and the previous year), but right now my guess is active inventory will increase in 2018 (inventory will decline seasonally in December and January, but I expect to see inventory up again year-over-year in December 2018).   My reasons for expecting more inventory are 1) inventory is historically low (lowest for November since 2000), 2) and the recent changes to the tax law.

According to the May NAR report on existing home sales, inventory was down 6.1% year-over-year in May, and the months-of-supply was at 4.1 months. This was the smallest year-over-year decline since October 2016, and inventory in some areas is now up year-over-year (For example, in May, inventory in California was up 8.3% year-over-year).  It still seems likely that inventory will be up year-over-year in December.

8) Question #8 for 2018: What will happen with house prices in 2018?

Inventories will probably remain low in 2018, although I expect inventories to increase on a year-over-year basis by December of 2018.  Low inventories, and a decent economy suggests further price increases in 2018.

Perhaps higher mortgage rates will slow price appreciation.  If we look back at the "taper tantrum" in 2013, price appreciation slowed somewhat over the next year - but that was from a high level.  In June 2013, the Case-Shiller National index was up 9.3% year-over-year.  By June 2014, the index was up 6.3% year-over-year.

If inventory increases year-over-year as I expect by December 2018, it seems likely that price appreciation will slow to the low-to-mid single digits.

If is early, but the CoreLogic data released last week showed prices up 7.1% year-over-year in May.  The CoreLogic year-over-year increase was higher than last year, and there is no evidence of price increases slowing yet.

7) Question #7 for 2018: How much will Residential Investment increase?

Most analysts are looking for starts to increase to around 1.25 to 1.3 million in 2018, and for new home sales of around 650 thousand.

I also think there will be further growth in 2018. My guess is starts will increase to just over 1.25 million in 2018 and new home sales will be just over 650 thousand.

Through May, starts were up about 10% year-over-year compared to the same period in 2017, and on pace for about 1.32 million this year.  New home sales were also up about 8% year-over-year and on pace for about 660 thousand in 2018.

6) Question #6 for 2018: How much will wages increase in 2018?

As the labor market continues to tighten, we should see more wage pressure as companies have to compete for employees. I expect to see some further increases in both the Average hourly earning from the CES, and in the Atlanta Fed Wage Tracker.  Perhaps nominal wages will increase close to 3% in 2018 according to the CES.

Through June 2018, nominal hourly wages were up 2.7% year-over-year. This is about the same as last year, and it is too early to tell if wages will increase at a faster rate in 2017.

5) Question #5 for 2018: Will the Fed raise rates in 2018, and if so, by how much?

My current guess is the Fed will hike three times in 2018.

As an aside, many new Fed Chairs have faced a crisis early in their term.   A few examples, Paul Volcker took office in August 1979, and inflation hit almost 12% (up from 7.9% the year before), and the economy went into recession as Volcker raised rates.   Alan Greenspan took office in August 1987, and the stock market crashed almost 34% within a couple months of Greenspan taking office (including over 20% in one day!).  And Ben Bernanke took office in February 2006, just as house prices peaked - and he was challenged by the housing bust, great recession and financial crisis.

Hopefully Jerome Powell will see smoother sailing.

The Fed has already hiked twice in 2018, and it now appears there will be four hikes this year.

4) Question #4 for 2018: Will the core inflation rate rise in 2018? Will too much inflation be a concern in 2018?

The Fed is projecting core PCE inflation will increase to 1.7% to 1.9% by Q4 2018.  However there are risks for higher inflation with the labor market near full employment, and new tax law providing some fiscal stimulus.

I do think there are structural reasons for low inflation, but currently I think PCE core inflation (year-over-year) will increase in 2018 and be closer to 2% by Q4 2018 (up from 1.4%), but too much inflation will still not be a serious concern in 2018.

As of May, inflation has moved up to the Fed's target.

3) Question #3 for 2018: What will the unemployment rate be in December 2018?

Depending on the estimate for the participation rate and job growth (next question), it appears the unemployment rate will decline into the high 3's by December 2018 from the current 4.1%.   My guess is based on the participation rate declining about 0.2 percentage points in 2018, and for decent job growth in 2018, but less than in 2017.

The unemployment rate was at 4.0% in June.

2) Question #2 for 2018: Will job creation slow further in 2018?

So my forecast is for gains of around 150,000 to 167,000 payroll jobs per month in 2018 (about 1.8 million to 2.0 million year-over-year) .  Lower than in 2017, but another solid year for employment gains given current demographics.

Through June 2018, the economy has added 1,287,000 thousand jobs, or 215,000 per month. This is  above my forecast, and it appears the economy will add more jobs in 2018 than in 2017 although still below gains for the years 2013 through 2016.

1) Question #1 for 2018: How much will the economy grow in 2018?

It is possible that there will be a pickup in growth in 2018 due to a combination of factors.

The new tax policy should boost the economy a little in 2018, and there will probably be some further economic boost from oil sector investment in 2018 since oil prices have increased recently.  Also the housing recovery is ongoing, however auto sales are mostly moving sideways.

And demographics are improving (the prime working age population is growing about 0.5% per year, compared to declining a few years ago).

All these factors combined will probably push GDP growth into the mid-to-high 2% range in 2018.  And a 3% handle is possible if there is some pickup in productivity.

GDP growth was at 2.0% in Q1, and most estimates suggest growth around 3.8% in Q2 (and slowing in Q3).   It looks like GDP growth will be in the high 2% range this year, and 3% is possible.

Currently it looks like 2018 is unfolding about as expected, although, employment gains will probably be higher than I originally expected.

by Calculated Risk on 7/10/2018 10:10:00 AM

Notes: In May there were 6.638 million job openings, and, according to the May Employment report, there were 6.065 million unemployed. So, for the second consecutive month, there were more job openings than people unemployed. Also note that the number of job openings has exceeded the number of hires since January 2015.

From the BLS: Job Openings and Labor Turnover Summary

The number of job openings edged down to 6.6 million on the last business day of May, the U.S. Bureau of Labor Statistics reported today. Over the month, hires and separations were little changed at 5.8 million and 5.5 million, respectively. Within separations, the quits rate and the layoffs and discharges rate were little changed at 2.4 percent and 1.1 percent, respectively. ...

The number of quits increased in May to 3.6 million (+212,000). The quits rate was 2.4 percent. The number of quits rose for total private (+204,000) and was little changed for government.
emphasis added

The following graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.

This series started in December 2000.

Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. This report is for May, the most recent employment report was for June.

Click on graph for larger image.


Note that hires (dark blue) and total separations (red and light blue columns stacked) are pretty close each month. This is a measure of labor market turnover.  When the blue line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs.

Jobs openings decreased in May to 6.638 million from 6.840 million in April.

The number of job openings (yellow) are up 16.7% year-over-year.

Quits are up 10.4% year-over-year. These are voluntary separations. (see light blue columns at bottom of graph for trend for "quits").

Job openings are at a high level, and quits are increasing year-over-year. This was a strong report.

by Calculated Risk on 7/10/2018 08:35:00 AM

From the National Federation of Independent Business (NFIB): June 2018 Report: Small Business Optimism Index

The Small Business Optimism Index posted its sixth highest reading in survey history for the month of June, at 107.2, down 0.6 from May.
..
Reports of employment gains remain strong among small businesses. Owners reported adding a net 0.19 workers per firm on average, virtually unchanged from May
emphasis added

Click on graph for larger image.

This graph shows the small business optimism index since 1986.

The index decreased to 107.2 in June.

Note: Usually small business owners complain about taxes and regulations.  However, during the recession, "poor sales" was the top problem.

Now the difficulty of finding qualified workers is the top problem.

by Calculated Risk on 7/09/2018 06:59:00 PM

From Matthew Graham at Mortgage News Daily: Mortgage Rates Edge Slightly Higher

Mortgage rates were modestly higher today amid exceptionally quiet market conditions. In general, the bond market (which underlies mortgage rates) has been sideways and fairly lifeless since the end of June. [30YR FIXED - 4.625% - 4.75%]
emphasis added

Tuesday:
• At 6:00 AM ET, NFIB Small Business Optimism Index for June.

• At 10:00 AM, Job Openings and Labor Turnover Survey for May from the BLS. Job openings increased in April to 6.698 million from 6.633 million in March.

by Calculated Risk on 7/09/2018 02:09:00 PM

The following graph shows heavy truck sales since 1967 using data from the BEA. The dashed line is the June 2018 seasonally adjusted annual sales rate (SAAR).

Heavy truck sales really collapsed during the great recession, falling to a low of 181 thousand in April and May 2009, on a seasonally adjusted annual rate basis (SAAR). Then sales increased more than 2 1/2 times, and hit 480 thousand SAAR in June 2015.

Heavy truck sales declined again - probably mostly due to the weakness in the oil sector - and bottomed at 364 thousand SAAR in October 2016.


Click on graph for larger image.

With the increase in oil prices over the last year, heavy truck sales increased too.

Heavy truck sales were at 475 thousand SAAR in June, up from 452 thousand in May, and up from 416 thousand in June 2017.

by Calculated Risk on 7/09/2018 01:28:00 PM

The BEA released their estimate of June vehicle sales. The BEA estimated sales of 17.38 million SAAR in June 2018 (Seasonally Adjusted Annual Rate), up 3.2% from the May sales rate, and up 4.7% from June 2017.

Through June, light vehicle sales are on pace to be up slightly in 2018 compared to 2017.

This would make 2018 the fourth best year on record after 2016, 2015, and 2000.

My guess is vehicle sales will finish the year with sales lower than in 2017. A small decline in sales this year isn't a concern - I think sales will move mostly sideways at near record levels.

As I noted last year, this means the economic boost from increasing auto sales is over (from the bottom in 2009, auto sales boosted growth every year through 2016).


Click on graph for larger image.

This graph shows annual light vehicle sales since 1976.   Source: BEA.

Sales for 2018 are estimated based on the pace of sales during the first six months.