by Calculated Risk on 12/28/2017 06:43:00 PM

Friday:
• At 9:45 AM ET, Chicago Purchasing Managers Index for December. The consensus is for a reading of 61.8, down from 63.9 in November.

The Case-Shiller house price indexes for October were released on Tuesday. Zillow forecasts Case-Shiller a month early, and I like to check the Zillow forecasts since they have been pretty close.

From Aaron Terrazas at Zillow: Case-Shiller October Results and November Forecast: Still Defying Gravity

The last few months of 2017 have clearly demonstrated the extent to which the housing market refuses to be knocked off its stride. Sales of existing homes have risen strongly and unexpectedly, despite a severe and worsening shortage of homes actually available to buy. To cope, buyers simply linger longer on the market, even into the slower winter months if needed.

The Case-Shiller National Index of home prices for October climbed 6.2 percent year-over-year, while its gain from September was 0.7 percent.

The 10-City Composite Index increased 6.0 percent year-over-year and 0.7 percent from September, while the 20-City Composite Index grew 6.4 percent year-over-year and 0.7 percent from September. Seattle, Las Vegas and San Diego continued to post the strongest annual gains among the 20 cities, with increases of 12.7 percent, 10.2 percent and 8.1 percent, respectively.

Home builders have managed to start construction on more homes than at any point since prior to the recession, despite high and rising land, labor and materials costs. An economy that keeps adding jobs and wages that continue to grow both have consumers feeling confident. And they’re boosted by mortgage interest rates that remain near all-time lows, defying expectations and conventional wisdom alike that both say – and have been saying for years – that rates have to begin rising at some point.

The Zillow forecast is for the year-over-year change for the Case-Shiller National index to be smaller in November than in October.   Zillow is forecasting a larger year-over-year increase for the 10-city index, and a smaller increase for the 20-city index in November.

by Calculated Risk on 12/28/2017 04:07:00 PM

Freddie Mac reported that the Single-Family serious delinquency rate in November was at 0.95%, up sharply from 0.86% in October.  Freddie's rate is down from 1.03% in November 2016.

Freddie's serious delinquency rate peaked in February 2010 at 4.20%.

These are mortgage loans that are "three monthly payments or more past due or in foreclosure". 

Click on graph for larger image

This increase in the delinquency rate was due to the hurricanes - and we might see a further increase over the next month (These are serious delinquencies, so it takes three months late to be counted).

After the hurricane bump, maybe the rate will decline another 0.2 to 0.4 percentage points or so to a cycle bottom, but this is pretty close to normal.

Note: Fannie Mae will report for November soon.

by Calculated Risk on 12/28/2017 02:07:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2018. I'm adding some thoughts, and maybe some predictions for each question.

10) Housing and Taxes A key change in the new tax law is limiting the deductibility of State and Local Taxes (SALT) and property taxes to $10,000. Many analysts think this will hit certain segments of the housing market in states like New York, New Jersey and California. The NAR noted their forecast today:

"Heading into 2018, existing-home sales and price growth are forecast to slow, primarily because of the altered tax benefits of homeownership affecting some high-cost areas."

Relative to the overall market, will sales slow, inventory increase, and price growth slow in these states?

First, to track the impact over the course of the year, I'll follow certain markets and compare to the overall market (possibly in California, New York and New Jersey).

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. 

There could be a ripple effect.  If the upper-mid-range slows, that could impact some of the purchases in the next higher range.   This is my current guess on the impact.

Here are the Ten Economic Questions for 2018 and a few predictions:

• Question #1 for 2018: How much will the economy grow in 2018?
• Question #2 for 2018: Will job creation slow further in 2018?
• Question #3 for 2018: What will the unemployment rate be in December 2018?
• Question #4 for 2018: Will the core inflation rate rise in 2018? Will too much inflation be a concern in 2018?
• Question #5 for 2018: Will the Fed raise rates in 2018, and if so, by how much?
• Question #6 for 2018: How much will wages increase in 2018?
• Question #7 for 2018: How much will Residential Investment increase?
• Question #8 for 2018: What will happen with house prices in 2018?
• Question #9 for 2018: Will housing inventory increase or decrease in 2018?
• Question #10 for 2018: Will the New Tax Law impact Home Sales, Inventory, and Price Growth in Certain States?

by Calculated Risk on 12/28/2017 11:03:00 AM

Reis reported that the apartment vacancy rate was at 4.5% in Q4 2017, up from 4.4% in Q3, and up from 4.2% in Q4 2016.  This is the highest vacancy rate since Q4 2012 (although the increase has been small).  The vacancy rate peaked at 8.0% at the end of 2009, and bottomed at 4.1% in 2016.

From Reis:

The apartment market continued to face pressure from added supply in the fourth quarter as the national vacancy rate increased 10 basis points to 4.5% in the quarter. Asking rents increased 0.4% in the fourth quarter, while effective rents grew 0.3%. Effective rents net out landlord concessions. Over the year, asking rents increased 3.9% while effective rents grew by 3.3%. These growth rates reflect a deceleration in apartment market fundamentals compared to recent years, due in part to the large amount of new supply coming online. New construction totaled 43,769 units in the fourth quarter, raising the year-end total to 213,802 units. The national apartment market has not seen new completions in excess of 200,000 since 1986.

At 4.5%, the national vacancy rate increased 10 basis points from 4.4% in the third quarter. This represents a 30 basis point increase in year-over-year vacancy (the year-end vacancy rate in 2016 was 4.2%); vacancies have more or less been on an upward march since the middle of 2016. The net change in occupied stock, or net absorption, was 31,554 units, lower than new supply. With supply growth outstripping demand, vacancies were pushed upwards this quarter.

At $1,364, the average asking rent grew 0.4% in the quarter. This is well below the 0.9% average quarterly growth rate for the prior six quarters. Effective rent growth was 0.3% in the quarter, also below the 0.8% average quarterly effective rent growth for the prior six quarters. Overall, these statistics reflect a distinct pullback in the national apartment market, especially when compared to 2015. However, the gap between asking rent growth and effective rent growth remained within a 10 basis point range. This suggests that landlords’ offers of free rent were less aggressive – implying that demand remains relatively robust.
emphasis added

Click on graph for larger image.

This graph shows the apartment vacancy rate starting in 1980. (Annual rate before 1999, quarterly starting in 1999). Note: Reis is just for large cities.

The vacancy rate had been mostly moving sideways for the last few years.  However it appears the vacancy rate has bottomed and is starting to increase.  With more supply coming on line next year - and less favorable demographics - the vacancy rate will probably continue to increase in 2018.

Apartment vacancy data courtesy of Reis.

by Calculated Risk on 12/28/2017 08:34:00 AM

The DOL reported:

In the week ending December 23, the advance figure for seasonally adjusted initial claims was 245,000, unchanged from the previous week's unrevised level of 245,000. The 4-week moving average was 237,750, an increase of 1,750 from the previous week's unrevised average of 236,000.

Claims taking procedures continue to be disrupted in the Virgin Islands. The claims taking process in Puerto Rico has still not returned to normal.
emphasis added

The previous week was unrevised.

The following graph shows the 4-week moving average of weekly claims since 1971.

Click on graph for larger image.


The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 237,750.

This was higher than the consensus forecast. The low level of claims suggest relatively few layoffs.

by Calculated Risk on 12/27/2017 09:00:00 PM

Thursday:
• At 8:30 AM ET, The initial weekly unemployment claims report will be released. The consensus is for 240 thousand initial claims, down from 245 thousand the previous week.

• Early: Reis Q4 2017 Apartment Survey of rents and vacancy rates.

by Calculated Risk on 12/27/2017 05:21:00 PM

Here is a review of the Ten Economic Questions for 2017.

Here are my ten questions for 2018. I'll follow up with some thoughts on each of these questions.

The purpose of these questions is to provide a framework to think about how the U.S. economy will perform in 2018, and - when there are surprises - to adjust my thinking.

1) Economic growth: Heading into 2018, most analysts are pretty sanguine and expecting some pickup in growth due to the recent tax cuts.  From Goldman Sachs:

"We are adjusting our forecasts to reflect the final details of the tax bill, as well as the incremental easing in financial conditions and continued strong economic momentum to end the year. We are increasing our GDP forecasts for 2018 and 2019 by 0.3pp and 0.2pp, respectively, on a Q4/Q4 basis (to 2.6% and 1.7%)."

How much will the economy grow in 2018?

2) Employment: Through November, the economy has added just over 1,900,000 jobs this year, or 174,000 per month. As expected, this was down from the 187 thousand per month in 2016.  Will job creation in 2018 be as strong as in 2017?  Or will job creation be even stronger, like in 2014 or 2015?  Or will job creation slow further in 2018?

3) Unemployment Rate: The unemployment rate was at 4.1% in November, down 0.5 percentage points year-over-year.  Currently the FOMC is forecasting the unemployment rate will be in the 3.7% to 4.0% range in Q4 2018.  What will the unemployment rate be in December 2018?

4) Inflation: The inflation rate has increased a little recently, and some key measures are now close to the the Fed's 2% target. Will core inflation rate rise in 2018? Will too much inflation be a concern in 2018?

5) Monetary Policy:  The Fed raised rates three times in 2017 and started to reduce their balance sheet. The Fed is forecasting three more rate hikes in 2018.  Some analysts think there will be more, from Goldman Sachs:

"We expect the next rate hike to come in March with subjective odds of 75%, and we continue to expect a total of four hikes in 2018."

Will the Fed raise rates in 2018, and if so, by how much?

6) Real Wage Growth: Wage growth picked up in 2016 (up 2.9%), but slowed in 2017 (up 2.5% year-over-year in November).  How much will wages increase in 2018?

7) Residential Investment: Residential investment (RI) was sluggish in 2017, although new home sales were up solidly.  Note: RI is mostly investment in new single family structures, multifamily structures, home improvement and commissions on existing home sales.  How much will RI increase in 2018?  How about housing starts and new home sales in 2018?

8) House Prices: It appears house prices - as measured by the national repeat sales index (Case-Shiller, CoreLogic) - will be up over 6% in 2017.   What will happen with house prices in 2018?

9) Housing Inventory: Housing inventory declined in 2015, 2016 and 2017.  Will inventory increase or decrease in 2018?

10) Housing and Taxes A key change in the new tax law is limiting the deductibility of State and Local Taxes (SALT) and property taxes to $10,000. Many analysts think this will hit certain segments of the housing market in states like New York, New Jersey and California. The NAR noted their forecast today:

"Heading into 2018, existing-home sales and price growth are forecast to slow, primarily because of the altered tax benefits of homeownership affecting some high-cost areas."

Relative to the overall market, will sales slow, inventory increase, and price growth slow in these states?

There are other important questions, but these are the ones I'm focused on right now.  I'll write on each of these questions over the next couple of weeks.

Here is some discussion and a few predictions:

• Question #1 for 2018: How much will the economy grow in 2018?
• Question #2 for 2018: Will job creation slow further in 2018?
• Question #3 for 2018: What will the unemployment rate be in December 2018?
• Question #4 for 2018: Will the core inflation rate rise in 2018? Will too much inflation be a concern in 2018?
• Question #5 for 2018: Will the Fed raise rates in 2018, and if so, by how much?
• Question #6 for 2018: How much will wages increase in 2018?
• Question #7 for 2018: How much will Residential Investment increase?
• Question #8 for 2018: What will happen with house prices in 2018?
• Question #9 for 2018: Will housing inventory increase or decrease in 2018?
• Question #10 for 2018: Will the New Tax Law impact Home Sales, Inventory, and Price Growth in Certain States?

by Calculated Risk on 12/27/2017 03:00:00 PM

From the Philly Fed:

The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for November 2017. Over the past three months, the indexes increased in 43 states and decreased in seven, for a three-month diffusion index of 72. In the past month, the indexes increased in 35 states, decreased in 11, and remained stable in four, for a one-month diffusion index of 48.
emphasis added

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 by production workers, 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 map for larger image.

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 all or mostly green during most of the recent expansion.

Recently several states have turned red.

Source: Philly Fed.

Note: For complaints about red / green issues, please contact the Philly Fed.

And here 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, 37 states had increasing activity (including minor increases).

The downturn in 2015 and 2016, in the number of states increasing, was mostly related to the decline in oil prices.  

The reason for the mid-to-late 2017 sharp decrease in the number of states with increasing activity is unclear.

by Calculated Risk on 12/27/2017 11:59:00 AM

At the end of last year, I posted Ten Economic Questions for 2017. I followed up with a brief post on each question. The goal was to provide an overview of what I expected in 2017 (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).

Here is a Q4 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 2017: Will housing inventory increase or decrease in 2017?

right now my guess is active inventory will increase in 2017 (inventory will decline seasonally in December and January, but I expect to see inventory up again year-over-year in December 2017).   My reasons for expecting more inventory are 1) inventory is historically low (lowest for November since 2000), 2) and the recent increase in interest rates.

According to the November NAR report on existing home sales, inventory was down 9.7% year-over-year in November, and the months-of-supply was at 3.4 months. I was definitely wrong.  Inventory will be a key metric to watch in 2018.

9) Question #9 for 2017: What will happen with house prices in 2017?

Inventories will probably remain low in 2017, although I expect inventories to increase on a year-over-year basis by December of 2017.  Low inventories, and a decent economy suggests further price increases in 2017.

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 2017, it seems likely that price appreciation will slow to the low-to-mid single digits.

The Case-Shiller data released yesterday showed prices up 6.2% year-over-year in November.  With falling inventory, house prices increased faster in 2017 than in 2016.

8) Question #8 for 2017: How much will Residential Investment increase?

Most analysts are looking for starts to increase to around 1.25 million in 2017, and for new home sales of around 600 to 650 thousand. This would be an increase of around 7% for starts and maybe 10% for new home sales.

I think there will be further growth in 2017, but I think a combination of higher mortgage rates, less multi-family starts, and not enough lots for low-to-mid range new homes will mean sluggish growth in 2017.

My guess is starts will increase to just over 1.2 million in 2017 and new home sales will be in the low 600 thousand range.

Through November, starts were up 3.1% year-over-year compared to the same period in 2016.  And new home sales were up 9.1% year-over-year.   About as expected.

7) Question #7 for 2017: How much will wages increase in 2017?

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 more than 3% in 2017 according to the CES.

Through November 2017, nominal hourly wages were up 2.5% year-over-year. This is a decrease from last year, and it appears wages will increase at a slower rate in 2017.  Wages were disappointing in 2017.

6) Question #6 for 2017: Will the Fed raise rates in 2017, and if so, by how much?

Analysts are being cautious on forecasting rate hikes, probably because they forecasted too many hikes over the last few years. However, as the economy approaches full employment, and with the possibility of fiscal stimulus in 2017, it is possible that inflation will pick up a little - and, if so, the Fed could hike more than expected.

My current guess is the Fed will hike twice in 2017.

The Fed hiked three times in 2017, and started to reduce their balance sheet.

5) Question #5 for 2017: Will the core inflation rate rise in 2017? Will too much inflation be a concern in 2017?

The Fed is projecting core PCE inflation will increase to 1.8% to 1.9% by Q4 2017.  However there are risks for higher inflation.  The labor market is approaching full employment, and the new administration is proposing some fiscal stimulus (tax cuts, possible infrastructure spending), so it is possible - as a result - that inflation will increase more than expected in 2017 and 2018.

Currently I think PCE core inflation (year-over-year) will increase further and be close to 2% in 2017, but too much inflation will still not be a serious concern in 2017.

Inflation has eased, and is below the Fed's target by most measures.

4) Question #4 for 2017: What will the unemployment rate be in December 2017?

Depending on the estimate for the participation rate and job growth (next question), it appears the unemployment rate will declining slightly by December 2017 from the current 4.7%.

The unemployment rate was at 4.1% in November, below the level I expected for the end of 2017.

3) Question #3 for 2017: Will job creation slow further in 2017?

So my forecast is for gains of 125,000 to 150,000 payroll jobs per month in 2017.  Lower than in 2016, but another solid year for employment gains given current demographics.

Through November 2017, the economy has added 1,916,000 jobs, or 174,000 per month, down from 187,000 per month in 2016. This was slightly above my expectations.

2) Question #2 for 2017: How much will the economy grow in 2017?

There will probably be some economic boost from oil sector investment in 2017 since oil prices have increased (this was a drag last year).

The housing recovery is ongoing, however auto sales might have peaked.

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 2017, but this will depend somewhat on which policies are enacted.

GDP was a 1.2% in Q1, 3.2% in Q2, and 3.1% in Q3.  It appears GDP will be around 3% (annualized) in Q4, putting GDP growth around 2.6% for the year.  About as expected.

1) Question #1 for 2017: What about fiscal and regulatory policy in 2017?

We are still waiting for the details. As far as the impact on 2017, my expectation is there will be both individual and corporate tax cuts - and some sort of infrastructure program. I expect that something will happen with the ACA (those that have insurance for 2017 will keep their insurance, but they might not have insurance in 2018 - and that impact would be in 2018). I think the negative proposals (immigration, trade) will impact the economy in 2018 or later - overall there will be a small boost to GDP in 2017.

A final comment:  The words of a President matter. Mr Trump has been impulsive, reckless and irresponsible with his comments, and that has continued since the election. One absurd comment could send the markets into a tailspin and negatively impact the economy (and that could happen at any time).

The key policy change was the recently passed tax cuts.   Policy had little impact on 2017, but will have an impact going forward.

Currently it looks like 2017 unfolded mostly as expected. GDP was at expectations, employment gains were slightly better, but down from 2016 (as expected), housing starts and new home sales were also at expectations.    The key surprises were wage growth disappointed and housing inventory declined further.

by Calculated Risk on 12/27/2017 10:10:00 AM

From the NAR: Pending Home Sales Inch Up 0.2 Percent in November

ending home sales were mostly unmoved in November, but did squeak out a minor gain both on a monthly and annualized basis, according to the National Association of Realtors®. Heading into 2018, existing-home sales and price growth are forecast to slow, primarily because of the altered tax benefits of homeownership affecting some high-cost areas.

The Pending Home Sales Index, a forward-looking indicator based on contract signings, rose 0.2 percent to 109.5 in November from 109.3 in October. With last month’s modest increase, the index remains at its highest reading since June (110.0), and is now 0.8 percent above a year ago.
...
The PHSI in the Northeast jumped 4.1 percent to 98.9 in November, and is now 1.1 percent above a year ago. In the Midwest the index rose 0.4 percent to 105.8 in November, and is now 0.8 percent higher than November 2016.

Pending home sales in the South decreased 0.4 percent to an index of 123.1 in November but are still 2.5 percent higher than last November. The index in the West declined 1.8 percent in November to 100.4, and is now 2.3 percent below a year ago.
emphasis added

This was above expectations of a 0.8% decrease for this index. Note: Contract signings usually lead sales by about 45 to 60 days, so this would usually be for closed sales in December and January.