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Tuesday, August 16, 2016

Comments on July Housing Starts

by Calculated Risk on 8/16/2016 08:59:00 PM

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

• During the day, the AIA's Architecture Billings Index for July (a leading indicator for commercial real estate).

• At 2:00 PM, the FOMC Minutes from the July 26-27, 2016 Meeting.

Earlier: Housing Starts increased to 1.211 Million Annual Rate in July

The housing starts report this morning was above consensus, however there were downward revisions to the prior two months.  Still a solid report.

This first graph shows the month to month comparison between 2015 (blue) and 2016 (red).

Starts Housing 2015 and 2016Click on graph for larger image.

Year-to-date starts are up 6.7% compared to the same period in 2015.  My guess was starts would increase 4% to 8% in 2016, and that still looks about right.

Multi-family starts are down 0.6% year-to-date, and single-family starts are up 10.6% year-to-date.

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.

Multifamily Starts and completionsThe 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 probably catch up to starts soon (completions lag starts by about 12 months).

I think most of the growth in multi-family starts is probably behind us - in fact multi-family starts probably peaked in June 2015 (at 510 thousand SAAR) - although I expect solid multi-family starts for a few more years (based on demographics).

Single family Starts and completionsThe 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.

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.

The housing recovery continues ...

Lawler: Early Read on Existing Home Sales in July

by Calculated Risk on 8/16/2016 03:47:00 PM

From housing economist Tom Lawler:

Based on publicly-available state and local realtor/MLS reports from across the country released through today, I project that existing home sales as estimated by the National Association of Realtors ran at a seasonally adjusted annual rate of 5.41 million in July, down 2.9% from June’s preliminary pace and down 1.3% from last July’s seasonally-adjusted pace. Unadjusted sales last month should register a significantly steeper YOY decline than seasonally adjusted sales, as there were two fewer business days this July than last July.

Local realtor/MLS data also suggest that existing home listings in aggregate increased modestly last month, and I project that the inventory of existing homes for sale as estimated by the NAR for the end of July will be 2.14 million, up 0.9% from June’s preliminary estimate and down 5.3% from last July. Finally, I project that the NAR’s estimate of the median existing single-family home sales price for July will be up 5.3% from last July’s estimate.

Compared to last July unadjusted home sales last month were down in a wide range of markets across the country, but that is less surprising when one takes into account the significantly lower business day count (two!) this July relative to last July. There were, however, a few notable markets where unadjusted sales last month were sharply lower than a year earlier.

Last month residential home sales in the Portland, Oregon metro area were down 19.6% YOY. While residential listings in July were still slightly down from a year earlier, the increase in listings since February has substantially exceeded the typical seasonal norm.

In the Denver, Colorado metro area residential home sales last month were down 17.6% YOY. And while residential listings remained historically low, listings how increased considerably faster than the seasonal norm since February.

Finally, existing single-family home sales nine-county San Francisco, California Bay area last month were down 16.1% YOY. The California Association of Realtor’s “Unsold Inventory Index” for the SF Bay Area was 2.8 months in July, up from 1.8 months last July.

All three of these markets have seen substantial home prices increases over the past years, as well as historically very low inventory levels. All three markets have also, however, seen YOY declines in sales for at least four straight months.

Key Measures Show Inflation close to 2% in July

by Calculated Risk on 8/16/2016 01:36:00 PM

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% (2.7% annualized rate) in July. 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 was unchanged (-0.5% annualized rate) in July. The CPI less food and energy rose 0.1% (1.1% annualized rate) on a seasonally adjusted basis.
Note: The Cleveland Fed has the median CPI details for July here. Motor fuel was down 43% annualized in July.

Inflation Measures 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 2.6%, the trimmed-mean CPI rose 2.0%, and the CPI less food and energy also rose 2.2%. Core PCE is for June and increased 1.6% year-over-year.

On a monthly basis, median CPI was at 2.7% annualized, trimmed-mean CPI was at 1.8% annualized, and core CPI was at 1.1% annualized.

Using these measures, inflation has generally been moving up, and most of these measures are at or above the Fed's target (Core PCE is still below).

Early Look at 2017 Cost-Of-Living Adjustments and Maximum Contribution Base

by Calculated Risk on 8/16/2016 10:36:00 AM

The BLS reported this morning:

The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 0.4 percent over the last 12 months to an index level of 234.789 (1982-84=100).
CPI-W is the index that is used to calculate the Cost-Of-Living Adjustments (COLA). The calculation dates have changed over time (see Cost-of-Living Adjustments), but the current calculation uses the average CPI-W for the three months in Q3 (July, August, September) and compares to the average for the highest previous average of Q3 months. Note: this is not the headline CPI-U, and is not seasonally adjusted (NSA).

• In 2014, the Q3 average of CPI-W was 234.242. In the previous year, 2013, the average in Q3 of CPI-W was 230.327. That gave an increase of 1.7% for COLA for 2015.

• In 2015, the Q3 average of CPI-W was 233.278. That was a decline of 0.4% from 2014, however, by law, the adjustment is never negative so the benefits remained the same this year (in 2016).

Since the previous highest Q3 average was in 2014 (not 2015), at 234.242, we have to compare Q3 this year to two years ago. 

CPI-W and COLA Adjustment Click on graph for larger image.

This graph shows CPI-W since January 2000. The red lines are the Q3 average of CPI-W for each year.

Note: The year labeled for the calculation, and the adjustment is effective for December of that year (received by beneficiaries in January of the following year).

CPI-W was up 0.4% year-over-year in July, and although this is very early - we need the data for July, August and September - my current guess is COLA will be slightly positive this year - but COLA could be zero again.

Contribution and Benefit Base

The law prohibits an increase in the contribution and benefit base if COLA is not greater than zero, so there was no change in the contribution and benefit base for 2016. However if the there is even a small increase in COLA (it will be close this year), the contribution base will be adjusted using the National Average Wage Index (and catch up for last year).

From Social Security: Cost-of-Living Adjustment Must Be Greater Than Zero
... ... any amount that is directly dependent for its value on the COLA would not increase. For example, the maximum Supplemental Security Income (SSI) payment amounts would not increase if there were no COLA.

... if there were no COLA, section 230(a) of the Social Security Act prohibits an increase in the contribution and benefit base (Social Security's maximum taxable earnings), which normally increases with increases in the national average wage index. Similarly, the retirement test exempt amounts would not increase ...
The contribution base will be adjusted using the National Average Wage Index. This is based on a one year lag. The National Average Wage Index is not available for 2015 yet, but wages probably increased again in 2015. If wages increased the same as last year, then the contribution base next year will increase to around $127,000 from the current $118,500.

Remember - this is an early look. What matters is average CPI-W for all three months in Q3 (July, August and September).

Fed: Industrial Production increased 0.7% in July

by Calculated Risk on 8/16/2016 09:22:00 AM

From the Fed: Industrial production and Capacity Utilization

Industrial production rose 0.7 percent in July after moving up 0.4 percent in June. The advance in July was the largest for the index since November 2014. Manufacturing output increased 0.5 percent in July for its largest gain since July 2015. The index for utilities rose 2.1 percent as a result of warmer-than-usual weather in July boosting demand for air conditioning. The output of mining moved up 0.7 percent; the index has increased modestly, on net, over the past three months after having fallen about 17 percent between December 2014 and April 2016. At 104.9 percent of its 2012 average, total industrial production in July was 0.5 percent lower than its year-earlier level. Capacity utilization for the industrial sector increased 0.5 percentage point in July to 75.9 percent, a rate that is 4.1 percentage points below its long-run (1972–2015) average.
emphasis added
Capacity Utilization Click on graph for larger image.

This graph shows Capacity Utilization. This series is up 9.2 percentage points from the record low set in June 2009 (the series starts in 1967).

Capacity utilization at 75.9% is 4.1% below the average from 1972 to 2015 and below the pre-recession level of 80.8% in December 2007.

Note: y-axis doesn't start at zero to better show the change.

Industrial Production The second graph shows industrial production since 1967.

Industrial production increased 0.7% in July to 104.1. This is 20.0% above the recession low, and is at the pre-recession peak.

This was above expectations of a 0.3% increase.

Housing Starts increased to 1.211 Million Annual Rate in July

by Calculated Risk on 8/16/2016 08:39:00 AM

From the Census Bureau: Permits, Starts and Completions

Housing Starts:
Privately-owned housing starts in July were at a seasonally adjusted annual rate of 1,211,000. This is 2.1 percent above the revised June estimate of 1,186,000 and is 5.6 percent above the July 2015 rate of 1,147,000.

Single-family housing starts in July were at a rate of 770,000; this is 0.5 percent above the revised June figure of 766,000. The July rate for units in buildings with five units or more was 433,000.

Building Permits:
Privately-owned housing units authorized by building permits in July were at a seasonally adjusted annual rate of 1,152,000. This is 0.1 percent below the revised June rate of 1,153,000, but is 0.9 percent above the July 2015 estimate of 1,142,000.

Single-family authorizations in July were at a rate of 711,000; this is 3.7 percent below the revised June figure of 738,000. Authorizations of units in buildings with five units or more were at a rate of 411,000 in July
emphasis added
Total Housing Starts and Single Family Housing Starts Click on graph for larger image.

The first graph shows single and multi-family housing starts for the last several years.

Multi-family starts (red, 2+ units) increased in July compared to June.  Multi-family starts are up 13% year-over-year.

Single-family starts (blue) increased in July, and are up 1.3% year-over-year.

Total Housing Starts and Single Family Housing Starts The second graph shows total and single unit starts since 1968.

 The second graph shows the huge collapse following the housing bubble, and then - after moving sideways for a couple of years - housing is now recovering (but still historically low),

Total housing starts in July were above expectations, however combined starts for May and June were revised down.  I'll have more later ...

Monday, August 15, 2016

Tuesday: Housing Starts, CPI, Industrial Production

by Calculated Risk on 8/15/2016 08:27:00 PM

From the Altanta Fed: GDPNow

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2016 is 3.5 percent on August 12, down from 3.7 percent on August 9.
From the NY Fed Nowcasting Report
The FRBNY Staff Nowcast stands at 2.4% for 2016:Q3
• At 8:30 AM ET, Housing Starts for July. Total housing starts increased to 1.189 million (SAAR) in June. Single family starts increased to 778 thousand SAAR in June. The consensus for 1.180 million, down from the June rate.

• Also at 8:30 AM, The Consumer Price Index for July from the BLS. The consensus is for a no change in CPI, and a 0.2% increase in core CPI.

• At 9:15 AM, The Fed will release Industrial Production and Capacity Utilization for July. The consensus is for a 0.3% increase in Industrial Production, and for Capacity Utilization to increase to 75.5%.

Update: Predicting the Next Recession

by Calculated Risk on 8/15/2016 04:12:00 PM

CR August 2016 Update: In 2013, I wrote a post "Predicting the Next Recession". I repeated the post in January 2015 (and last summer and early this year) because of all the recession calls. Late last year, the recession callers were out in force - arguing the problems in China, combined with the impact on oil producers of lower oil prices (and defaults by energy companies) - would lead to a global recession and drag the US into recession.  I didn't think so - and I was correct.

I've added a few updates in italics by year.  Most of the text is from January 2013.

A few thoughts on the "next recession" ... Forecasters generally have a terrible record at predicting recessions. There are many reasons for this poor performance. In 1987, economist Victor Zarnowitz wrote in "The Record and Improvability of Economic Forecasting" that there was too much reliance on trends, and he also noted that predictive failure was also due to forecasters' incentives. Zarnowitz wrote: "predicting a general downturn is always unpopular and predicting it prematurely—ahead of others—may prove quite costly to the forecaster and his customers".

Incentives motivate Wall Street economic forecasters to always be optimistic about the future (just like stock analysts). Of course, for the media and bloggers, there is an incentive to always be bearish, because bad news drives traffic (hence the prevalence of yellow journalism).

In addition to paying attention to incentives, we also have to be careful not to rely "heavily on the persistence of trends". One of the reasons I focus on residential investment (especially housing starts and new home sales) is residential investment is very cyclical and is frequently the best leading indicator for the economy. UCLA's Ed Leamer went so far as to argue that: "Housing IS the Business Cycle". Usually residential investment leads the economy both into and out of recessions. The most recent recovery was an exception, but it was fairly easy to predict a sluggish recovery without a contribution from housing.

Since I started this blog in January 2005, I've been pretty lucky on calling the business cycle.  I argued no recession in 2005 and 2006, then at the beginning of 2007 I predicted a recession would start that year (made it by one month with the Great Recession starting in December 2007).  And in 2009, I argued the economy had bottomed and we'd see sluggish growth.

Finally, over the last 18 months, a number of forecasters (mostly online) have argued a recession was imminent.  I responded that I wasn't even on "recession watch", primarily because I thought residential investment was bottoming.

[CR 2015 Update: this was written two years ago - I'm not sure if those calling for a recession then have acknowledged their incorrect forecasts and / or changed theirs views (like ECRI and various bloggers). Clearly they were wrong.]

[CR August 2016 Update: Now it has been three and a half years!  And yes, ECRI has admitted their recession calls were incorrect.  Not sure about the rest of the recession callers.]

Now one of my blogging goals is to see if I can get lucky again and call the next recession correctly.  Right now I'm pretty optimistic (see: The Future's so Bright ...) and I expect a pickup in growth over the next few years (2013 will be sluggish with all the austerity).

[CR August 2016 Update: 2013 was a little better than I expected, but still sluggish. 2014 and 2015 saw some pickup in growth, but 2016 was sluggish in the first half.]

The next recession will probably be caused by one of the following (from least likely to most likely):

3) An exogenous event such as a pandemic, significant military conflict, disruption of energy supplies for any reason, a major natural disaster (meteor strike, super volcano, etc), and a number of other low probability reasons. All of these events are possible, but they are unpredictable, and the probabilities are low that they will happen in the next few years or even decades.

[CR 2016 Update: The recent recession calls are mostly based on exogenous events: the problems in China and in commodity based economies (especially oil based).  There will be some spillover to the US such as fewer exports (and an impact on oil producing regions in the US), but unless there is a related financial crisis, I think the spillover will be insufficient to cause a recession in the US.]

2) Significant policy error. This might involve premature or too rapid fiscal or monetary tightening (like the US in 1937 or eurozone in 2012).  Two examples: not reaching a fiscal agreement and going off the "fiscal cliff" probably would have led to a recession, and Congress refusing to "pay the bills" would have been a policy error that would have taken the economy into recession.  Both are off the table now, but there remains some risk of future policy errors. 

Note: Usually the optimal path for reducing the deficit means avoiding a recession since a recession pushes up the deficit as revenues decline and automatic spending (unemployment insurance, etc) increases.  So usually one of the goals for fiscal policymakers is to avoid taking the economy into recession. Too much austerity too quickly is self defeating.

[CR 2016 Update: Most of the poor policy choices in the U.S. are behind us. Austerity hurt the recovery, but austerity appears over at the state, local and Federal levels.  It is possible the Fed could tighten too quickly. ]

1) Most of the post-WWII recessions were caused by the Fed tightening monetary policy to slow inflation. I think this is the most likely cause of the next recession. Usually, when inflation starts to become a concern, the Fed tries to engineer a "soft landing", and frequently the result is a recession. Since inflation is not an immediate concern, the Fed will probably stay accommodative for a few more years.

So right now I expect further growth for the next few years (all the austerity in 2013 concerns me, especially over the next couple of quarters as people adjust to higher payroll taxes, but I think we will avoid contraction). [CR 2015 Update: We avoided contraction in 2013!] I think the most likely cause of the next recession will be Fed tightening to combat inflation sometime in the future - and residential investment (housing starts, new home sales) will probably turn down well in advance of the recession. In other words, I expect the next recession to be a more normal economic downturn - and I don't expect a recession for a few years.

[CR 2016 Update: This was written in 2013 - and my prediction for no "recession for a few years" was correct.  This still seems correct today, so no recession in the immediate future (not in 2016 or the first half of 2017).  Note that all 2017 forecasts assume Ms. Clinton will be the next President.]

FNC: Residential Property Values increased 4.8% year-over-year in June

by Calculated Risk on 8/15/2016 12:41:00 PM

In addition to Case-Shiller, and CoreLogic, I'm also watching the FNC, Zillow and several other house price indexes.

FNC released their June 2016 index data.  FNC reported that their Residential Price Index™ (RPI) indicates that U.S. residential property values increased 1.1% from May to June (Composite 100 index, not seasonally adjusted). 

The 10 city MSA increased 1.3% (NSA), the 20-MSA RPI increased 1.2%, and the 30-MSA RPI increased 1.1% in June. These indexes are not seasonally adjusted (NSA), and are for non-distressed home sales (excluding foreclosure auction sales, REO sales, and short sales).

Notes: In addition to the composite indexes, FNC presents price indexes for 30 MSAs. FNC also provides seasonally adjusted data.

The index is still down 10.7% from the peak in 2006 (not inflation adjusted).

Click on graph for larger image.

This graph shows the year-over-year change based on the FNC index (four composites) through June 2016. The FNC indexes are hedonic price indexes using a blend of sold homes and real-time appraisals.

Most of the other indexes are also showing the year-over-year change in the mid single digit range.

Note: The June Case-Shiller index will be released on Tuesday, August 30th.

NAHB: Builder Confidence increases to 60 in August

by Calculated Risk on 8/15/2016 10:06:00 AM

The National Association of Home Builders (NAHB) reported the housing market index (HMI) was at 60 in August, up from 58 in July. Any number above 50 indicates that more builders view sales conditions as good than poor.

From the NAHB: Builder Confidence Rises Two Points in August

Builder confidence in the market for newly constructed single-family homes in August rose two points to 60 from a downwardly revised reading of 58 in July on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI).

“New construction and new home sales are on the rise in most areas of the country, and this is helping to boost builder sentiment,” said NAHB Chairman Ed Brady, a home builder and developer from Bloomington, Ill.

“Builder confidence remains solid in the aftermath of weak GDP reports that were offset by positive job growth in July,” said NAHB Chief Economist Robert Dietz. “Historically low mortgage rates, increased household formations and a firming labor market will help keep housing on an upward path during the rest of the year.”
Two of the three HMI components posted gains in August. The component gauging current sales conditions rose two points to 65, while the index charting sales expectations in the next six months increased one point to 67. The component measuring buyer traffic fell one point to 44.

Looking at the three-month moving averages for regional HMI scores, the South registered a two-point uptick to 63, the Northeast rose two points to 41 while the West was unchanged at 69. The Midwest dropped two points to 55.
emphasis added
NAHB HMI Click on graph for larger image.

This graph show the NAHB index since Jan 1985.

This was at the consensus forecast of 60, And this is another solid reading.