by Calculated Risk on 1/27/2016 02:03:00 PM

FOMC Statement:

Information received since the Federal Open Market Committee met in December suggests that labor market conditions improved further even as economic growth slowed late last year. Household spending and business fixed investment have been increasing at moderate rates in recent months, and the housing sector has improved further; however, net exports have been soft and inventory investment slowed. A range of recent labor market indicators, including strong job gains, points to some additional decline in underutilization of labor resources. Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation declined further; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen. Inflation is expected to remain low in the near term, in part because of the further declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.

Given the economic outlook, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

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 objectives of maximum employment and 2 percent inflation. 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. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Esther L. George; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo.
emphasis added

by Calculated Risk on 1/27/2016 11:59:00 AM

The new home sales report for December was above expectations, and sales for September, October and November were revised up. Sales were up 9.9% year-over-year in December (SA).

Earlier: New Home Sales increased to 544,000 Annual Rate in December.

The Census Bureau reported that new home sales in 2015 were 501,000. That is up 14.5% from 437,000 sales in 2014. That is a strong year-over-year gain for 2015.

Here is a table showing new home sales and the year-over-year changes since 2005:

New Home Sales (000s)
	New Home Sales	Year-over-Year Change
2005	1,283	6.7%
2006	1,051	-18.1%
2007	776	-26.2%
2008	485	-37.5%
2009	375	-22.7%
2010	323	-13.9%
2011	306	-5.3%
2012	368	20.3%
2013	429	16.6%
2014	437	1.9%
2015	501	14.5%

Click on graph for larger image.

This graph shows new home sales for 2014 and 2015 by month (Seasonally Adjusted Annual Rate).

The year-over-year gains were stronger earlier in 2015.

The comparisons in early 2016 will be more difficult.  And I expect lower growth this year.

Overall 2015 was a solid year for new home sales.

And here is another update to the "distressing gap" graph that I first started posting a number of 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 December 2015. 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 move more sideways, and I expect this gap to slowly close, mostly from an increase in new home sales.

However, this assumes that the builders will offer some smaller, less expensive homes.

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 1/27/2016 10:14:00 AM

The Census Bureau reports New Home Sales in December were at a seasonally adjusted annual rate (SAAR) of 544 thousand.

The previous three months were revised up by a total of 28 thousand (SAAR).

"Sales of new single-family houses in December 2015 were at a seasonally adjusted annual rate of 544,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 10.8 percent above the revised November rate of 491,000 and is 9.9 percent above the December 2014 estimate of 495,000.
...
An estimated 501,000 new homes were sold in 2015. This is 14.5 percent above the 2014 figure of 437,000."
emphasis added

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 since the bottom, new home sales are still fairly low historically.

The second graph shows New Home Months of Supply.

The months of supply decreased in December to 5.2 months.

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 December was 237,000. This represents a supply of 5.2 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 December 2015 (red column), 38 thousand new homes were sold (NSA). Last year 35 thousand homes were sold in December.

The all time high for December was 87 thousand in 2005, and the all time low for December was 23 thousand in both 1966 and 2010.

This was above expectations of 500,000 sales SAAR in December, and prior months were revised up - a solid report.  I'll have more later today.

by Calculated Risk on 1/27/2016 07:00:00 AM

From the MBA: Mortgage Applications Increase as Rates Continue to Drop in Latest MBA Weekly Survey

Mortgage applications increased 8.8 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending January 22, 2016. This week’s results include an adjustment to account for the Martin Luther King holiday.
...
The Refinance Index increased 11 percent from the previous week. The seasonally adjusted Purchase Index increased 5 percent from one week earlier. The unadjusted Purchase Index increased 0.4 percent compared with the previous week and was 22 percent higher than the same week one year ago.
...
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to its lowest level since October 2015, 4.02 percent, from 4.06 percent, with points decreasing to 0.40 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 was higher in 2015 than in 2014, but it was still the third lowest year since 2000.

Refinance activity will probably stay low in 2016.



The second graph shows the MBA mortgage purchase index.  

According to the MBA, the unadjusted purchase index is 22% higher than a year ago.

by Calculated Risk on 1/26/2016 09:15:00 PM

From Tim Duy at Bloomberg: The Five Scenarios Now Facing the Federal Reserve

Bottom Line: If there was ever any doubt about the “about” of this week’s FOMC meeting, it has long since been eliminated. The Fed will hold policy steady and affirm the faith in its underlying forecast while acknowledging the global and financial risks. This will be interpreted dovishly, probably more so than the policymakers at the central bank would like. Given that I’m in the “no recession” camp, I am wary that the Fed falls into risk management mode now, but at the cost of a faster pace of hikes later. Of course, if you’re in the “recession now” camp, then the game is already over.

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

• 10:00 AM, New Home Sales for December from the Census Bureau. The consensus is for a increase in sales to 500 thousand Seasonally Adjusted Annual Rate (SAAR) in December from 490 thousand in November.

• 2:00 PM, FOMC Meeting Announcement.  The FOMC is expected to make no change to policy at this meeting.

by Calculated Risk on 1/26/2016 03:49:00 PM

Here is an indicator that I'm following that appears to be a leading indicator for industrial production.

From the American Chemistry Council: Chemical Activity Barometer Notches Slight Gain As Signs of Slowing Growth Mount

The Chemical Activity Barometer (CAB), a leading economic indicator created by the American Chemistry Council (ACC), ticked up slightly in January, rising 0.1 percent following a downward adjustment of 0.1 percent in December. All data is measured on a three-month moving average (3MMA). Accounting for adjustments, the CAB remains up 1.6 percent over this time last year, a marked deceleration of activity from one year ago when the barometer logged a 3.2 percent year-over-year gain from 2014. On an unadjusted basis the CAB fell 0.1 percent and 0.2 percent in December and January, respectively, raising concerns about the pace of future business activity through the second quarter of 2016. ...
...
Applying the CAB back to 1919, it has been shown to provide a lead of two to 14 months, with an average lead of eight months at cycle peaks as determined by the National Bureau of Economic Research. The median lead was also eight months. At business cycle troughs, the CAB leads by one to seven months, with an average lead of four months. The median lead was three months. The CAB is rebased to the average lead (in months) of an average 100 in the base year (the year 2012 was used) of a reference time series. The latter is the Federal Reserve’s Industrial Production Index.
emphasis added

Click on graph for larger image.

This graph shows the year-over-year change in the 3-month moving average for the Chemical Activity Barometer compared to Industrial Production.  It does appear that CAB (red) generally leads Industrial Production (blue).

by Calculated Risk on 1/26/2016 12:41:00 PM

Here is the earlier post on Case-Shiller: Case-Shiller: National House Price Index increased 5.3% year-over-year in November

The year-over-year increase in prices is mostly moving sideways now around 5%. In November 2015, the index was up 5.3% YoY.

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 $274,000 today adjusted for inflation (37%).  That is why the second graph below is important - this shows "real" prices (adjusted for inflation).

It has been almost ten years since the bubble peak.  In the Case-Shiller release this morning, the National Index was reported as being 4.3% below the bubble peak.   However, in real terms, the National index is still about 18% 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 September) in nominal terms as reported.

In nominal terms, the Case-Shiller National index (SA) is back to September 2005 levels, and the Case-Shiller Composite 20 Index (SA) is back to May 2005 levels, and the CoreLogic index (NSA) is back to June 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 2003 levels, the Composite 20 index is back to July 2003, and the CoreLogic index back to January 2004.

In real terms, house prices are back to 2003 levels.

Note: CPI less Shelter is down 0.8% year-over-year, so this has been pushing up real prices recently.

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 July 2003 levels, the Composite 20 index is back to March 2003 levels, and the CoreLogic index is back to August 2003.

In real terms, and as a price-to-rent ratio, prices are back to 2003 levels - and the price-to-rent ratio maybe moving a little sideways now.

by Calculated Risk on 1/26/2016 10:11:00 AM

From the BLS: Regional and State Employment and Unemployment Summary

Regional and state unemployment rates were little changed in December. Twenty-five states had unemployment rate decreases from November, 14 states had increases, and 11 states and the District of Columbia had no change, the U.S. Bureau of Labor Statistics reported today.
...
North Dakota had the lowest jobless rate in December, 2.7 percent, followed by Nebraska and South Dakota, 2.9 percent each. New Mexico had the highest rate, 6.7 percent.

Click on graph for larger image.

This graph shows the current unemployment rate for each state (red), and the max during the recession (blue). All states are well below the maximum unemployment rate for the recession.

The size of the blue bar indicates the amount of improvement.   The yellow squares are the lowest unemployment rate per state since 1976.

The states are ranked by the highest current unemployment rate. New Mexico, at 6.7%, had the highest state unemployment rate.

The second graph shows the number of states (and D.C.) with unemployment rates at or above certain levels since January 2006. At the worst of the employment recession, there were 11 states with an unemployment rate at or above 11% (red).

Currently no state has an unemployment rate at or above 7% (light blue); Only eight states are at or above 6% (dark blue).

by Calculated Risk on 1/26/2016 09:15:00 AM

S&P/Case-Shiller released the monthly Home Price Indices for November ("November" is a 3 month average of September, October and November 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: Continued Increases in Home Prices for October According to the S&P/Case-Shiller Home Price Indices

The S&P/Case-Shiller U.S. National Home Price Index, covering all nine U.S. census divisions, recorded a slightly higher year-over-year gain with a 5.3% annual increase in November 2015 versus a 5.1% increase in October 2015. The 10-City Composite increased 5.3% in the year to November compared to 5.0% previously. The 20-City Composite’s year-over-year gain was 5.8% versus 5.5% reported in October.
...
Before seasonal adjustment, the National Index posted a gain of 0.1% month-over-month in November. The 10- City Composite was unchanged and the 20-City Composite reported gains of 0.1% month-over-month in November. After seasonal adjustment, the National Index, along with the 10-City and 20-City Composites, all increased 0.9% month-over-month in November. Fourteen of 20 cities reported increases in November before seasonal adjustment; after seasonal adjustment, all 20 cities increased for the month.
emphasis added

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 12.9% from the peak, and up 0.9% in November (SA).

The Composite 20 index is off 11.5% from the peak, and up 0.9% (SA) in November.

The National index is off 4.3% from the peak, and up 0.9% (SA) in November.  The National index is up 29.2% from the post-bubble low set in December 2011 (SA).

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

The Composite 10 SA is up 5.4% compared to November 2014.

The Composite 20 SA is up 5.8% year-over-year..

The National index SA is up 5.3% year-over-year.

Prices increased (SA) in 20 of the 20 Case-Shiller cities in November seasonally adjusted.  (Prices increased in 14 of the 20 cities NSA)  Prices in Las Vegas are off 39.0% from the peak.

The last graph shows the bubble peak, the post bubble minimum, and current nominal prices relative to January 2000 prices for all the Case-Shiller cities in nominal terms.

As an example, at the peak, prices in Phoenix were 127% above the January 2000 level. Then prices in Phoenix fell slightly below the January 2000 level, and are now up 55% above January 2000 (55% nominal gain in almost 16 years).

These are nominal prices, and real prices (adjusted for inflation) are up about 40% since January 2000 - so the increase in Phoenix from January 2000 until now is about 15% above the change in overall prices due to inflation.

Six cities - Charlotte, Boston, Dallas, Denver, Portland and San Francisco - are above the bubble highs (Seattle is close).    Detroit prices are barely above the January 2000 level.

I'll have more on house prices later.

by Calculated Risk on 1/25/2016 06:27:00 PM

Tuesday:
• 9:00 AM: FHFA House Price Index for November 2015. This was originally a GSE only repeat sales, however there is also an expanded index.  The consensus is for a 0.5% month-to-month increase for this index.

• 9:00 AM: S&P/Case-Shiller House Price Index for November. Although this is the November report, it is really a 3 month average of September, October and November prices.  The consensus is for a 5.7% year-over-year increase in the Comp 20 index for November. The Zillow forecast is for the National Index to increase 5.3% year-over-year in November.

• 10:00 AM: Richmond Fed Survey of Manufacturing Activity for January.

• 10:00 AM ET: Regional and State Employment and Unemployment for December.

From Diana Olick at CNBC: Homebuilder DR Horton's Bet on Entry-Level Houses Paying Off Big

... Texas-based DR Horton's CEO David Auld said on the company's quarterly earnings call. "The Express (brand) has been the driver of market share gains."

Express launched in early 2014, touting no-option, no-frills homes in exchange for prices between $120,000 and $150,000. Prices are now slightly higher, moving with the broader market gains, but still below the nation's median price. The brand has solid footing in Texas, the Carolinas and Florida, but it is now expanding strongly into Southern California. ...

"They are doing the best job of any of the large builders executing at entry level, and I think you have to have that as you go through '16," homebuilding analyst Stephen East of Evercore ISI said on CNBC's "Squawk on the Street."

As we've discussed, future growth for new home sales is partially dependent on more affordable homes.