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Wednesday, January 03, 2018

MBA: Mortgage Applications Decrease over Previous Two Weeks

by Calculated Risk on 1/03/2018 07:00:00 AM

From the MBA: Mortgage Applications Decrease Over Two Week Period in Latest MBA Survey

Mortgage applications decreased 2.8 percent from two weeks earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending December 29, 2017. The results include adjustments to account for the Christmas holiday.

... The Refinance Index decreased 7 percent from two weeks ago. The seasonally adjusted Purchase Index increased 1 percent from two weeks earlier. The unadjusted Purchase Index decreased 40 percent compared with two weeks ago and was 3 percent higher than the same week one year ago. ...

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($424,100 or less) decreased to 4.16 percent from 4.20 percent, with points decreasing to 0.35 from 0.39 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.
emphasis added
Mortgage Refinance Index 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 well below 4%.



Mortgage Purchase Index The second graph shows the MBA mortgage purchase index.

According to the MBA, purchase activity is up 3% year-over-year.

Tuesday, January 02, 2018

Wednesday: ISM Mfg, Construciton Spending, Vehicle Sales, FOMC Minutes and More

by Calculated Risk on 1/02/2018 07:29:00 PM

From Matthew Graham at Mortgage News Daily: Mortgage Rates Begin New Year Under Pressure

Bond markets weakened somewhat quickly, thus raising the risk that early 2018 would indeed follow-through on the promise that's been broken time and again when the average 30yr fixed rate has attempted to move up from the 4% level. [30YR FIXED - 4.0%-4.125%]
emphasis added
Wednesday:
• At 7:00 AM ET, The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

• Early, Reis Q4 2017 Office Survey of rents and vacancy rates.

• At 10:00 AM, ISM Manufacturing Index for December. The consensus is for the ISM to be at 58.0. The ISM manufacturing index was at 58.2% in November, the employment index was at 59.7%, and the new orders index was at 64.0%.

• At 10:00 AM, Construction Spending for November. The consensus is for a 0.6% increase in construction spending.

• All day, Light vehicle sales for December. The consensus is for light vehicle sales to be 17.5 million SAAR in December, up from 17.4 million in November (Seasonally Adjusted Annual Rate).

• At 2:00 PM, FOMC Minutes, Meeting of December 12 - 13, 2017

Update: Ten Economic Questions for 2018 #wdym

by Calculated Risk on 1/02/2018 04:00:00 PM

Note: I'll be on Bloomberg's #wdym today.

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

Here are my ten questions for 2018. See links at bottom for a 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.

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?

Hotels: Strong Finish to 2017, Record Occupancy due to Hurricanes

by Calculated Risk on 1/02/2018 02:14:00 PM

From HotelNewsNow.com: STR: US hotel results for week ending 23 December

The U.S. hotel industry reported positive year-over-year results in the three key performance metrics during the week of 17-23 December 2017, according to data from STR.

In comparison with the week of 18-24 December 2016, the industry recorded the following:

Occupancy: +7.1% to 45.1%
• Average daily rate (ADR): +0.5% to US$106.97
• Revenue per available room (RevPAR): +7.6% to US$48.28

Among the Top 25 Markets, Houston, Texas, reported the largest increase in each of the three key performance metrics: occupancy (+33.5% to 50.9%), ADR (+17.3% to US$92.28) and RevPAR (+56.7% to US$47.00).
emphasis added
Note: The hurricanes continue to drive demand in Texas and Florida, especially in Houston.

The following graph shows the seasonal pattern for the hotel occupancy rate using the four week average.

Hotel Occupancy RateThe red line is for 2017, dash light blue is 2016, dashed orange is 2015 (now 2nd best year on record), blue is the median, and black is for 2009 (the worst year since the Great Depression for hotels).

Currently the occupancy rate, to date, is ahead of the record year in 2015.  The hurricanes will push the annual occupancy rate to a new record in 2017.

Data Source: STR, Courtesy of HotelNewsNow.com

Framing Lumber Prices Up Sharply Year-over-year, Looks like Record Prices in 2018

by Calculated Risk on 1/02/2018 11:59:00 AM

Here is another update on framing lumber prices. Early in 2013 lumber prices came close to the housing bubble highs - and prices finished 2017 near the bubble highs.

This graph shows two measures of lumber prices: 1) Framing Lumber from Random Lengths through December 2017 (via NAHB), and 2) CME framing futures.

Prices in 2017 are up solidly year-over-year and will probably exceed the housing bubble highs in the Spring of 2018.  Note: CME prices hit an all time high briefly in November.

Lumcber PricesClick on graph for larger image in graph gallery.

Right now Random Lengths prices are up 20% from a year ago, and CME futures are up about 43% year-over-year.

There is a seasonal pattern for lumber prices. Prices frequently peak around May, and bottom around October or November - although there is quite a bit of seasonal variability.

It looks like we will see record prices in the Spring of 2018.

CoreLogic: House Prices up 7.0% Year-over-year in November

by Calculated Risk on 1/02/2018 09:45:00 AM

Notes: This CoreLogic House Price Index report is for November. The recent Case-Shiller index release was for October. The CoreLogic HPI is a three month weighted average and is not seasonally adjusted (NSA).

From CoreLogic: CoreLogic Reports Fourth Consecutive Month with More Than 6 Percent Year-Over-Year Home Price Growth in November

CoreLogic® ... today released its CoreLogic Home Price Index (HPI™) and HPI Forecast™ for November 2017, which shows home prices are up both year over year and month over month. Home prices nationally increased year over year by 7 percent from November 2016 to November 2017, and on a month-over-month basis home prices increased by 1 percent in November 2017 compared with October 2017,* according to the CoreLogic HPI.

Looking ahead, the CoreLogic HPI Forecast indicates that home prices will increase by 4.2 percent on a year-over-year basis from November 2017 to November 2018, and on a month-over-month basis home prices are expected to decrease by 0.4 percent from November 2017 to December 2017. The CoreLogic HPI Forecast is a projection of home prices using the CoreLogic HPI and other economic variables. Values are derived from state-level forecasts by weighting indices according to the number of owner-occupied households for each state.

“Rising home prices are good news for home sellers, but add to the challenges that home buyers face,” said Dr. Frank Nothaft, chief economist for CoreLogic. “Growing numbers of first-time buyers find limited for-sale inventory for lower-priced homes, leading to both higher rates of price growth for ‘starter’ homes and further erosion of affordability.”
emphasis added
CR Note: The YoY increase has been in the 5% to 7% range for the last couple of years.  This is the top end of that range.

The year-over-year comparison has been positive for almost six consecutive years since turning positive year-over-year in February 2012.

Monday, January 01, 2018

Monday Night Futures

by Calculated Risk on 1/01/2018 09:20:00 PM

Happy New Year!

Weekend:
Schedule for Week of Dec 31, 2017

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?

Tuesday:
• At 10:00 AM. Corelogic House Price index for November.

From CNBC: Pre-Market Data and Bloomberg futures: S&P 500 are up 5, and DOW futures are up 48 (fair value).

Oil prices were up over the last week with WTI futures at $60.23 per barrel and Brent at $66.87 per barrel.  A year ago, WTI was at $53, and Brent was at $55 - so oil prices are up solidly year-over-year.

Here is a graph from Gasbuddy.com for nationwide gasoline prices. Nationally prices are at $2.48 per gallon. A year ago prices were at $2.34 per gallon - so gasoline prices are up 14 cents per gallon year-over-year.

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

by Calculated Risk on 1/01/2018 07:25:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2018. I've added some thoughts, and a few predictions for each question.

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?

First, since I'm always asked, I don't see a recession in 2018.

Note: The Trump administration projected 3.5% annual real growth over Mr. Trump's term: "Boost growth to 3.5 percent per year on average, with the potential to reach a 4 percent growth rate." (now removed from Trump website).

Here is a table of the annual change in real GDP since 2005.  Economic activity has mostly been in the 2% range since 2010.  Given current demographics, that is about what we'd expect: See: 2% is the new 4%.

Note: This table includes both annual change and q4 over the previous q4 (two slightly different measures).  In the quote above, Goldman Sachs economists are comparing Q4 over the previous Q4 (a slightly different calculation).  For 2017, I used a 3.0% annual growth rate in Q4 2017 (this gives 2.6% Q4 over Q4 or 2.3% real annual growth).

Real GDP Growth
YearAnnual
GDP
Q4 / Q4
20053.3%3.0%
20062.7%2.4%
20071.8%1.9%
2008-0.3%-2.8%
2009-2.8%-0.2%
20102.5%2.7%
20111.6%1.7%
20122.2%1.3%
20131.7%2.7%
20142.6%2.7%
20152.9%2.0%
20161.5%1.8%
201712.3%2.6%
1 2017 estimate based on 3.0% Q4
annualized real growth rate


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.

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?

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

by Calculated Risk on 1/01/2018 01:01:00 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.

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?

For review, here is a table of the annual change in total nonfarm, private and public sector payrolls jobs since 1997.  For total and private employment gains, 2014 and 2015 were the best years since the '90s, however it appears job growth peaked in 2014.

Change in Payroll Jobs per Year (000s)
Total, NonfarmPrivatePublic
19973,4083,213195
19983,0472,734313
19993,1802,719461
20001,9501,686264
2001-1,727-2,278551
2002-500-733233
2003115157-42
20042,0401,893147
20052,5152,329186
20062,0921,883209
20071,147859288
2008-3,567-3,747180
2009-5,068-4,994-74
20101,0611,277-216
20112,0912,403-312
20122,1422,209-67
20132,3022,370-68
20142,9982,871127
20152,7132,561152
20162,2402,039201
201712,0712,02447
12017 is Year-over-year job gains through November

The good news is the economy still has solid momentum heading into 2018.

The bad news - for job growth - is that a combination of demographics and a labor market nearing full employment suggests fewer jobs will be added in 2018.  Hopefully that will be good news for wages. 

Note: There has been a large migration of families and workers from Puerto Rico to the mainland U.S., and that has increased the U.S. labor force.

Too many people compare to the '80s and '90s, without thinking about changing demographics. The prime working age population (25 to 54 years old) was growing 2.2% per year in the '80s, and 1.3% per year in the '90s. The prime working age population has actually declined slightly this decade. Note: The prime working age population is now growing slowly again, and growth will pick up the 2020s.

The second table shows the change in construction and manufacturing payrolls starting in 2006.

Construction Jobs (000s)Manufacturing (000s)
2006152-178
2007-195-269
2008-789-896
2009-1,047-1,375
2010-187120
2011144207
2012113158
2013209126
2014359208
201533668
2016155-16
20171184189
12017 is Year-over-year job gains through November

Energy related construction and manufacturing hiring increased in 2017, and will probably increase further in 2018 since oil prices have increased.  However, for manufacturing, there will probably be little or no growth in the auto sector 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.

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?

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

by Calculated Risk on 1/01/2018 08:09:00 AM

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.

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?

This first graph shows the unemployment rate since 1960.

The unemployment rate has declined steadily after peaking at 10% following the great recession.

unemployment rateClick on graph for larger image.

The current unemployment rate (4.1%) is below the low for the previous cycle (4.4%), and close to the low (3.8%) at the end of the '90s expansion.

As I've mentioned before, current demographics share some similarities to the '60s, and the unemployment rate bottomed at 3.4% in the '60s - and we might see the unemployment rate that low again this cycle.  If we look further back in time, the unemployment rate was as low as 2.5% in the 1950s.

Forecasting the unemployment rate includes forecasts for economic and payroll growth, and also for changes in the participation rate.

On participation: We can be pretty certain that the participation rate will decline over the next decade or longer based on demographic trends.  However, over the last several years, the participation rate has been fairly steady as the strong labor market offset the long term trend.

Participation rateHere is a graph of the overall participation rate since 1960. Note: The participation rate is the percent of the working age population (16 and over) that is in the labor force.

The participation increased significantly starting in the late 60s as the Boomer generation entered the workforce and women participated at a much higher rate.

Since 2000, the participation rate has generally declined, mostly due to demographics.

Here is a table of the participation rate and unemployment rate since 2008.

Unemployment and Participation Rate for December each Year
December ofParticipation RateChange in Participation Rate (percentage points)Unemployment Rate
200865.8%7.3%
200964.6% -1.29.9%
201064.3% -0.39.3%
201164.0% -0.38.5%
201263.7% -0.37.9%
201362.9%-0.86.7%
201462.7%-0.25.6%
201562.7%0.05.0%
201662.7%0.04.7%
2017162.7%0.04.1%
12017 is for November 2017.

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.

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?