by Calculated Risk on 12/30/2014 04:09:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2015. I'll try to add some thoughts, and maybe some predictions for each question.

Here is a review of the Ten Economic Questions for 2014.

4) Inflation: The inflation rate is still running well below the Fed's 2% target. Will the core inflation rate rise in 2015? Will too much inflation be a concern in 2015?

Every year some analysts (and clueless politicians) forecast runaway inflation.  And every year they have been wrong.  Someday inflation will be a concern - but not yet!

Although there are different measure for inflation (including some private measures) they all show that inflation is at or below the Fed's 2% inflation target.  I follow several measures of inflation, median CPI and trimmed-mean CPI from the Cleveland Fed.  Core PCE prices (monthly from the BEA) and core CPI (from the BLS).

Click on graph for larger image.

On a year-over-year basis, the median CPI rose 2.3%, the trimmed-mean CPI rose 1.8%, and the CPI less food and energy rose 1.7%. Core PCE is for October and increased 1.6% year-over-year

On a monthly basis, median CPI was at 1.8% annualized, trimmed-mean CPI was at 1.0% annualized, and core CPI increased 0.9% annualized.

Due to the slack in the labor market (elevated unemployment rate, part time workers for economic reasons),  and even with some real wage growth in 2015, I expect these measures of inflation will stay mostly at or below the Fed's target in 2015.  If the unemployment rate continues to decline - and wage growth picks up - maybe inflation will be an issue in 2016.

So currently I think core inflation (year-over-year) will increase in 2015, but too much inflation will not be a serious concern this year.

Here are the ten questions for 2015 and a few predictions:
• Question #2 for 2015: How many payroll jobs will be added in 2015?
• Question #3 for 2015: What will the unemployment rate be in December 2015?
• Question #4 for 2015: Will too much inflation be a concern in 2015?
• Question #5 for 2015: Will the Fed raise rates in 2015? If so, when?
• Question #6 for 2015: Will real wages increase in 2015?
• Question #7 for 2015: What about oil prices in 2015?
• Question #8 for 2015: How much will Residential Investment increase?
• Question #9 for 2015: What will happen with house prices in 2015?
• Question #10 for 2015: How much will housing inventory increase in 2015?

by Calculated Risk on 12/30/2014 02:47:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2015. I'll try to add some thoughts, and maybe some predictions for each question.

Here is a review of the Ten Economic Questions for 2014.

5) Monetary Policy: The Fed completed QE3 in 2014, and now the question is will the Fed raise rates in 2015? If so, when? And by how much? The Fed Funds rate has been at 0 to 0.25% since December 2008.

For years I've made fun of those predicting an imminent Fed Funds rate increase.  Based on high unemployment and low inflation, I argued it would be a "long time" before the first rate hike.   Well, time flies!

As far as the first rate increase and timing, Tim Duy wrote a week ago Looking Backward to See the Future

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.

Of course the Fed will be data dependent. If the unemployment rate declines to 5.5% or so in the May report, and core inflation continues to move upwards towards 2%, then a June rate hike seems likely.
 
Note: It seems very likely the FOMC will drop "patient" from the FOMC statement the meeting before hiking rates (if "patient" is in the April statement, a rate hike in June is much less likely).

If the data is less convincing, then the FOMC will probably wait until the July or September meetings (I've seen a few analysts arguing the FOMC will wait until 2016, but my feeling is the Fed will hike rates in 2015).

The FOMC will not want to immediately reverse course, so the might wait a little longer than expected.  Right now my guess is the first rate hike will happen at either the June, July or September meetings.  I expect subsequent rate hikes to be gradual, and depending on the timing of the first rate hike, I expect rates to be close to 1% at the end of 2015.

The old saying on Wall Street with regards to rate hikes is "3 steps and a stumble".  I don't think there is an validity to the saying, but I expect to hear it on CNBC in 2015!

Here are the ten questions for 2015 and a few predictions:
• Question #2 for 2015: How many payroll jobs will be added in 2015?
• Question #3 for 2015: What will the unemployment rate be in December 2015?
• Question #4 for 2015: Will too much inflation be a concern in 2015?
• Question #5 for 2015: Will the Fed raise rates in 2015? If so, when?
• Question #6 for 2015: Will real wages increase in 2015?
• Question #7 for 2015: What about oil prices in 2015?
• Question #8 for 2015: How much will Residential Investment increase?
• Question #9 for 2015: What will happen with house prices in 2015?
• Question #10 for 2015: How much will housing inventory increase in 2015?

by Calculated Risk on 12/30/2014 11:23:00 AM

This morning, S&P reported that the National index increased 0.7% in October seasonally adjusted. However, it appears the seasonal adjustment has been distorted by the high level of distressed sales in recent years. Trulia's Jed Kolko wrote in August: "Let’s Improve, Not Ignore, Seasonal Adjustment of Housing Data"

The housing crisis substantially changed the seasonal pattern of housing activity: relative to conventional home sales, which peak in summer, distressed home sales are more evenly spread throughout the year and sell at a discount. As a result, in years when distressed sales constitute a larger share of overall sales, the seasonal swings in home prices get bigger while the seasonal swings in sales volumes get smaller.

Sharply changing seasonal patterns create problems for seasonal adjustment methods, which typically estimate seasonal adjustment factors by averaging several years’ worth of observed seasonal patterns. A sharp but ultimately temporary change in the seasonal pattern for housing activity affects seasonal adjustment factors more gradually and for more years than it should. Despite the recent normalizing of the housing market, seasonal adjustment factors are still based, in part, on patterns observed at the height of the foreclosure crisis, causing home price indices to be over-adjusted in some months and under-adjusted in others.

Kolko proposed a better seasonal adjustment:

This graph from Kolko shows the weighted seasonal adjustment (see Kolko's article for a description of his method). Kolko calculates that prices increased 0.2% on a weighted seasonal adjustment basis in October - as opposed to the 0.7% SA increase and 0.2% NSA decrease reported by Case-Shiller.

The "better" SA (green) shows prices are still increasing, but more slowly.

The expected slowdown in year-over-year price increases is ongoing. In November 2013, the Comp 20 index was up 13.8% year-over-year (YoY). Now the index is only up 4.5% YoY. This is the smallest YoY increase since October 2012 (the National index was up 10.9% YoY in October 2013, is now up 4.6% - also the slowest YoY increase since October 2012.

Looking forward, I expect the indexes to slow a little further on a YoY basis, however: 1) I don't expect the indexes to turn negative YoY (in 2015) , and 2) I think most of the slowdown on a YoY basis is now behind us. This slowdown in price increases was expected by several key analysts, and I think it is good news for housing and the economy.

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

Another point on real prices: In the Case-Shiller release this morning, the National Index was reported as being 9.8% below the bubble peak.   However, in real terms, the National index is still about 24% below the bubble peak.

Nominal House Prices

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

In nominal terms, the Case-Shiller National index (SA) is back to March 2005 levels, and the Case-Shiller Composite 20 Index (SA) is back to October 2004 levels, and the CoreLogic index (NSA) is back to February 2005.

Real House Prices

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

In real terms, the National index is back to November 2002 levels, the Composite 20 index is back to July 2002, and the CoreLogic index back to March 2003.

In real terms, house prices are back to early '00s levels.

Price-to-Rent

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

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

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

On a price-to-rent basis, the Case-Shiller National index is back to March 2003 levels, the Composite 20 index is back to October 2002 levels, and the CoreLogic index is back to May 2003.

In real terms, and as a price-to-rent ratio, prices are mostly back to early 2000 levels - and maybe moving a little sideways now.

by Calculated Risk on 12/30/2014 08:36:00 AM

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

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

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

From S&P: S&P/Case-Shiller National Home Price Index Pace Eases While Eight Cities Show Faster Gains

Data released today for October 2014, shows that the pace of home prices across the country continues to decelerate although eight cities did see prices rise faster... Both the 10-City and 20-City Composites saw year-over-year declines in October compared to September. The 10-City Composite gained 4.4% year-over-year, down from 4.7% in September. The 20-City Composite gained 4.5% year-over-year, compared to 4.8% in September. The S&P/CaseShiller U.S. National Home Price Index, which covers all nine U.S. census divisions, recorded a 4.6% annual gain in October 2014 versus 4.8% in September.
...
The National and Composite Indices were both slightly negative in October. Both the 10 and 20-City Composites reported a slight downturn, -0.1%, while the National Index posted a -0.2% change for the month. San Francisco and Tampa led all cities in October with increases of 0.8%. Chicago and Cleveland offset those gains by reporting decreases of -1.0% and -0.7% respectively.

Click on graph for larger image.

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

The Composite 10 index is off 18.0% from the peak, and up 0.7% in October (SA). The Composite 10 is up 24.1% from the post bubble low set in Jan 2012 (SA).

The Composite 20 index is off 17.0% from the peak, and up 0.8% (SA) in October. The Composite 20 is up 25.0% from the post-bubble low set in Jan 2012 (SA).

The National index is off 9.8% from the peak, and up 0.7% (SA) in October.  The National index is up 21.8% from the post-bubble low set in Dec 2012 (SA).

The second graph shows the Year over year change in all three indices.

The Composite 10 SA is up 4.4% compared to October 2013.

The Composite 20 SA is up 4.5% year-over-year..

The National index SA is up 4.6% year-over-year.

Prices increased (SA) in all 20 of the 20 Case-Shiller cities in October seasonally adjusted.  (Prices increased in 8 of the 20 cities NSA)  Prices in Las Vegas are off 42.3% from the peak, and prices in Denver and Dallas are at new highs (SA).

This was lower than the consensus forecast for a 4.8% YoY increase for the National index, and suggests a further slowdown in price increases. I'll have more on house prices later.

by Calculated Risk on 12/30/2014 07:01:00 AM

According to Black Knight's First Look report for November, the percent of loans delinquent increased 12% in November compared to October, and declined 6% year-over-year.

The percent of loans in the foreclosure process declined further in November and were down 35% over the last year.  Foreclosure inventory was at the lowest level since January 2008.

Black Knight reported the U.S. mortgage delinquency rate (loans 30 or more days past due, but not in foreclosure) was 6.08% in November, up from 5.44% in October. Some of the increase was seasonal (the delinquency rate usually increases in November).  The normal rate for delinquencies is around 4.5% to 5%.

The percent of loans in the foreclosure process declined to 1.63% in November from 1.69% in October.

The number of delinquent properties, but not in foreclosure, is down 329,000 properties year-over-year, and the number of properties in the foreclosure process is down 427,000 properties year-over-year.

Black Knight will release the complete mortgage monitor for November in early January.

Black Knight: Percent Loans Delinquent and in Foreclosure Process
	Nov 2014	Oct 2014	Nov 2013	Nov 2012
Delinquent	6.08%	5.44%	6.45%	7.03%
In Foreclosure	1.63%	1.69%	2.50%	3.61%
Number of properties:
Number of properties that are 30 or more, and less than 90 days past due, but not in foreclosure:	1,925,000	1,658,000	1,958,000	1,999,000
Number of properties that are 90 or more days delinquent, but not in foreclosure:	1,163,000	1,101,000	1,283,000	1,584,000
Number of properties in foreclosure pre-sale inventory:	829,000	858,000	1,256,000	1,767,000
Total Properties	3,917,000	3,617,000	4,497,000	5,350,000