by Calculated Risk on 10/11/2018 02:29:00 PM

One of the metrics we'd like to follow is a ratio of house prices to incomes. Unfortunately most income data is released with a significantly lag, and there are always questions about which income data to use (the average total income is skewed by the income of a few people).

And for key measures of house prices - like Case-Shiller - we have indexes, not actually prices.

But we can construct a ratio of the house price indexes to some measure of income.

For this graph I decided to look at house prices and the National Average Wage Index released today for 2017 from Social Security.

Note: For a different look at house prices and income, see this post (using median income).

Click on graph for larger image.

This graph shows the ratio of house price indexes divided by the National Average Wage Index (the Wage index is first divided by 1000).

This uses the annual average National Case-Shiller index since 1976.

As of 2018, house prices were somewhat above the median historical ratio - but far below the bubble peak. 

Going forward, I think it would be a positive if wages outpaced, or at least kept pace with house prices increases for a few years.

Note: The national wage index for 2018 is estimated using the median increase over the last several years.

by Calculated Risk on 10/11/2018 11:14:00 AM

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% (2.3% annualized rate) in September. The 16% trimmed-mean Consumer Price Index rose 0.1% (1.7% 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 rose 0.1% (0.7% annualized rate) in September. The CPI less food and energy rose 0.1% (1.4% annualized rate) on a seasonally adjusted basis.

Note: The Cleveland Fed released the median CPI details for September here.

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 2.7%, the trimmed-mean CPI rose 2.2%, and the CPI less food and energy rose 2.2%. Core PCE is for August and increased 1.96% year-over-year.

On a monthly basis, median CPI was at 2.3% annualized, trimmed-mean CPI was at 1.7% annualized, and core CPI was at 1.4% annualized.

Using these measures, inflation slowed on a year-over-year basis in September. Overall, these measures are at or above the Fed's 2% target (Core PCE is slightly below 2%)

by Calculated Risk on 10/11/2018 09:23:00 AM

With the release of the CPI report this morning, we now know the Cost of Living Adjustment (COLA), and the contribution base for 2019.

From Social Security: Social Security Announces 2.8 Percent Benefit Increase for 2019

Social Security and Supplemental Security Income (SSI) benefits for more than 67 million Americans will increase 2.8 percent in 2019, the Social Security Administration announced today.

The 2.8 percent cost-of-living adjustment (COLA) will begin with benefits payable to more than 62 million Social Security beneficiaries in January 2019. Increased payments to more than 8 million SSI beneficiaries will begin on December 31, 2018. (Note: some people receive both Social Security and SSI benefits). The Social Security Act ties the annual COLA to the increase in the Consumer Price Index as determined by the Department of Labor’s Bureau of Labor Statistics.

Some other adjustments that take effect in January of each year are based on the increase in average wages. Based on that increase, the maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $132,900 from $128,400.

Currently CPI-W is the index that is used to calculate the Cost-Of-Living Adjustments (COLA). Here is a discussion from Social Security on the current calculation (2.8% increase) and a list of previous Cost-of-Living Adjustments.

The contribution and benefit base will be $132,900 in 2019.

The National Average Wage Index increased to $50,321.89 in 2017, up 3.5% from $48,642.15 in 2016 (used to calculate contribution base).

by Calculated Risk on 10/11/2018 08:32:00 AM

The DOL reported:

In the week ending October 6, the advance figure for seasonally adjusted initial claims was 214,000, an increase of 7,000 from the previous week's unrevised level of 207,000. The 4-week moving average was 209,500, an increase of 2,500 from the previous week's unrevised average of 207,000.
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 209,500.

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

by Calculated Risk on 10/10/2018 07:02:00 PM

Thursday:
• At 8:30 AM: The initial weekly unemployment claims report will be released.  The consensus is for 210 thousand initial claims, up from 207 thousand the previous week.

• At 8:30 AM: The Consumer Price Index for September from the BLS. The consensus is for a 0.2% increase in CPI, and a 0.2% increase in core CPI.

Note: Following the CPI release, Social Security will announce the 2019 cost-of-living adjustment (COLA) and 2019 contribution base (currently $128,400 in 2018).

by Calculated Risk on 10/10/2018 05:55:00 PM

An interesting article by Jessie Romero and Felipe F. Schwartzman at the Richmond Fed: Inequality in and across Cities

Inequality in the United States has an important spatial component. More-skilled workers tend to live in larger cities where they earn higher wages. Less-skilled workers make lower wages and do not experience similar gains even when they live in those cities. This dynamic implies that larger cities are also more unequal. These relationships appear to have become more pronounced as inequality has increased. The evidence points to externalities among high-skilled workers as a significant contributor to those patterns.

by Calculated Risk on 10/10/2018 02:47:00 PM

From the HAR: The Houston Housing Market Cools in September

After a sizzling summer of home sales and rentals, the Houston housing market cooled in September, showing no apparent lingering effects of Hurricane Harvey as it did in August.

According to the latest monthly report from the Houston Association of REALTORS® (HAR), 6,548 single-family homes sold in September compared to 6,953 a year earlier. That represents a 5.8-percent decline. On a year-to-date basis, however, home sales are running 5.6 percent ahead of 2017’s record volume.…
...
September sales of all property types totaled 7,842, a 4.4-percent decrease over the same month last year.
...
Total active listings, or the total number of available properties, climbed 5.7 percent to 41,560.
emphasis added

Another market with sales down and inventory up.

by Calculated Risk on 10/10/2018 12:46:00 PM

The Northwest Multiple Listing Service reported Balance "finally returning" to housing market as buyers welcome more choices, moderating prices (ht Tom Lawler)

Housing inventory continued to improve during September while the pace of sales slowed in many counties served by Northwest Multiple Listing Service. "Balance is finally returning to the market, and with it, slowing home price growth," stated OB Jacobi, president of Windermere Real Estate.

A new report from Northwest MLS shows double-digit increases in inventory in several of the 23 counties it serves, led by a 78 percent year-over-year gain in King County. Despite improving selection in the central Puget Sound region, a dozen counties reported drops in the number of active listings compared to last year.

System-wide, the month ended with 2.56 months of supply of single family homes and condos, well below the 4-to-6 months analysts use as an indicator of a balanced market between sellers and buyers. The current level is the highest since February 2015 when member-brokers reported 3.56 months of inventory. In King County, supply exceeded two months for the first time since January 2015.
…
Closed sales also reflected slower activity. Members reported 7,630 completed transactions during September, down 18.6 percent from the year-ago volume of 9,371. Through nine months, this year's closings are down 4.4 percent compared to 2017. [King County sales down 28.5% YoY]
emphasis added

This is another market with inventory increasing sharply year-over-year, but months-of-supply in Seattle is still on the low side at 2.8 months.

by Calculated Risk on 10/10/2018 10:10:00 AM

By request, here is an update to a previous post …

Twelve years ago I wrote Investment and Recessions, explaining the usefulness of New Home Sales as a leading indicator.

Here are some updated graphs. My view is new home sales and housing starts are two of the best leading indicators for the economy (but not always).

The first graph shows the change in real GDP and Private Fixed Investment over the preceding four quarters, shaded areas are recessions. (Source: BEA)

Click on graph for larger image.

A couple of observations:

1) Since 1948, private fixed investment has fallen during every economic recession.

2) Private fixed investment has fallen 14 times since 1948, with only 11 recessions.

So what happened during the periods around 1951, 1967 and 1986 to keep the economy out of recession? These are the periods when private investment fell, but the economy didn't slide into recession. The answer is generally the same for all three periods: a surge in defense spending. The defense spending in the early '50s was due to the Korean war, in the mid '60s the Vietnam war, and in the mid '80s a general defense build-up helped offset a small decline in private investment. The mid '80s also saw a surge in MEW (mortgage equity withdrawal) that also contributed to GDP growth.

The second graph shows the separation of private fixed investment into residential and nonresidential components.

This graph shows something very interesting: in general, residential investment leads nonresidential investment. There are periods when this observation doesn't hold - like '95 when residential investment fell and the growth of nonresidential investment remained strong.

Another interesting period was 2001 when nonresidential investment fell significantly more than residential investment. Obviously the fall in nonresidential investment was related to the bursting of the stock market bubble.

But the most useful information is that typically recessions are preceded by declines in residential investment. Maybe we can use that information.

The third graph shows the YoY change in New Home Sales from the Census Bureau.

Note: the New Home Sales NSA data is smoothed using a three month centered average before calculating the YoY change. The Census Bureau data starts in 1963.

Some observations:

1) When the YoY change in New Home Sales falls about 20%, usually a recession will follow. The one exception for this data series was the mid '60s when the Vietnam buildup kept the economy out of recession.   Note that the sharp decline in 2010 was related to the housing tax credit policy in 2009 - and was just a continuation of the housing bust.

2) It is also interesting to look at the '86/'87 and the mid '90s periods. New Home sales fell in both of these periods, although not quite 20%. As noted earlier, the mid '80s saw a surge in defense spending and MEW that more than offset the decline in New Home sales. In the mid '90s, nonresidential investment remained strong.

Conclusions:

1) New Home Sales appears to be an excellent leading indicator.

2) Currently new home sales (and housing starts) are up year-over-year, and this suggests there is no recession in sight.

by Calculated Risk on 10/10/2018 07:00:00 AM

From the MBA: Mortgage Applications Decline in Latest MBA Weekly Survey

Mortgage applications decreased 1.7 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending October 5, 2018

... The Refinance Index decreased 3 percent from the previous week. The seasonally adjusted Purchase Index decreased 1 percent from one week earlier. The unadjusted Purchase Index decreased 1 percent compared with the previous week and was 2 percent higher than the same week one year ago. ...

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($453,100 or less) increased to its highest level since February 2011, 5.05 percent, from 4.96 percent, with points increasing to 0.51 from 0.49 (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 will not pick up significantly unless mortgage rates fall 50 bps or more from the recent level.

The second graph shows the MBA mortgage purchase index

According to the MBA, purchase activity is up 2% year-over-year.