by Calculated Risk on 10/19/2018 08:47:00 AM

A few excerpts from a Merrill Lynch note on house prices:

Home prices nationally, as measured by the S&P CoreLogic Case-Shiller index are running at 6.0% yoy as of the latest data in July. Assuming some modest slowing into the end of the year, we believe we are on track for home prices to end up 5.0% this year, as measured by 4Q/4Q change. As we look ahead into next year, we expect the slowing in home prices to persist, leaving home price appreciation (HPA) of 3% at the end of 2019.
…
Home prices are ultimately anchored to a fair value which is a function of income growth. Based on the OECD’s methodology, we compare nominal Case-Shiller home prices with disposable income per capita, indexed to 100 in 1Q 2000 (Chart 4) which shows the overvaluation during the housing bubble given the irrational exuberance in the market and easy credit conditions. The housing bust left prices to tumble back below fair value. Based on our calculation, prices are once again overvalued on a national level, albeit not nearly as much as during the bubble period. Over time the overvaluation can be solved in two ways: 1) home prices grow at a rate below income for a period of time to close the gap; 2) home prices decline to correct the valuation difference. The pull to fair value can be quite strong.

Click on graph for larger image.

This chart from Merrill Lynch shows their calculation of house prices vs. disposable income.

by Calculated Risk on 10/18/2018 09:01:00 PM

Friday:
• At 10:00 AM ET, Existing Home Sales for September from the National Association of Realtors (NAR). The consensus is for 5.30 million SAAR, down from 5.34 million in August. Housing economist Tom Lawler expects the NAR will report sales of 5.20 million SAAR. Take the under!

A key will be the increase in inventory.

• Also at 10:00 AM: State Employment and Unemployment (Monthly) for September 2018

by Calculated Risk on 10/18/2018 06:18:00 PM

This is a key housing market to follow since Phoenix saw a large bubble / bust followed by strong investor buying.

The Arizona Regional Multiple Listing Service (ARMLS) reports ("Stats Report"):

1) Overall sales declined to 6,897 from 7,328 in September 2017. Sales were down 14.2% from August, and down -5.9% from September 2017.

2) Active inventory was at 16,643, down from 17,997 in September 2017.   This is down 7.5% year-over-year.  This is the smallest YoY decrease in almost two years.  In many cities, it appears the inventory decline has ended, but not yet in Phoenix.

This is the twenty-third consecutive month with a YoY decrease in inventory in Phoenix.

Months of supply increased from 2.47 in August to 2.93 in September. This is still low.

by Calculated Risk on 10/18/2018 03:53:00 PM

From housing economist Tom Lawler: Deaths, Immigration, and “the Demographics”

Projections of the US population by characteristics, especially age, are key inputs into intermediate and long term forecasts for such key economic variables as labor force growth, household growth, and social security and Medicare expenditures. For the “adult” population, the key drivers of intermediate term population projections by age are the starting estimates of the population by age, deaths by age, and net international migration by age. Many analysts rely on “official” Census population projections to formulate forecasts of other key economic variables. Unfortunately, such reliance can be problematic, for various reasons. First, Census only releases intermediate and long term population projections every couple of years, and these projections can become quite dated (the projections from the end of 2014, which were the “latest” official projections until March of this year, overstated “actual” population growth from 2014 to 2017 by about one million.) Second, even “recent” official projections can be dated – e.g., the starting point for the Census population projections released earlier this year was the “Vintage 2016” estimates, which have been superseded by the “Vintage 2017” estimates. Third, “official” population projections may have “unrealistic” or out of date assumptions. For example, the latest Census population projections have unrealistic forecasts for US deaths by age, and questionable assumptions about US net international migration by age. And finally, there is considerable uncertainty in the current political environment about the outlook for US immigration policy, and analysts may want to use either their own assumptions about net international migration, or different “scenarios” for net international migration, to generate forecasts of other key economic variables.

While many folks who talk about the “demographic” outlook focus primarily on the current age distribution of the population, net international migration is also a key driver of adult population growth, and labor force growth. For example, the latest US population estimates (July 1, 2017) show that the US “prime” working age population (25-54) increased by 0.35% from July 1, 2016 to July 1, 2017. If there had been no international migration, however, the US prime working age population would actually have declined very slightly over this period.

Given the issues related to official US population projections, analysts attempting to project key economic variables dependent on population projections are faced with challenging choices: either using official projections knowing there are issues with these projections, or producing their own population projections. The latter choice faces its own issues, as analysts would need to formulate their own projections of deaths by age (and whatever other characteristic they are interested in), as well as their own projections of net international migration by age.

Using more realistic assumptions about death rates by age (calibrated to the latest statistics from the National Center for Health Statistics) and what I believe are more realistic assumptions on the age distribution of net international migration (NIM), I have produced US population projections by age under different NIM assumptions through 2021. I have also produced what household growth and labor force growth would be under those scenarios assuming that headship rates and labor force participation rates by age group remained constant at 2017 levels. I did not do this because I am projecting flat headship rates or labor force participation rates, but instead I wanted to show the sensitivity of forecasts to population assumptions.

My starting point was July 1, 2017 (the latest official estimates of the population by age), and I assumed that NIM for 2018 was the same as that shown in the latest Census population projections (since we’re already in the latter part of 2018, sensitivities from 2017 did not seem very useful to me.)

The scenarios I chose were (1) no international migration (this is not necessarily the same as zero net international migration, which only means that immigration inflows equal emigration outflows); (2) NIM equal to those shown in the latest Census projections; and (3) a “Trumpy” scenario, where NIM is lower than the latest Census projections by 20% in 2019, 30% in 2020, and 35% in 2o21.

The results for these various scenarios are shown in the table below. I also including what such “flat headship rates/LFPs” forecasts would have produced for this period if one used either the “official” Census 2014 population projections of the “official” Census 2017 population projections.

Household Growth and Labor Force Growth Rates Projections Assume Flat Headship Rates and LFP Rates by Age, Alternative Scenarios
	Household Growth (number)
	2019	2020	2021	Annual Average
No International Migration, Adjusted Death/NIM	1,010,107	963,727	879,765	951,200
"Trumpy" NIM, Adjusted Death/NIM	1,234,580	1,172,179	1,084,845	1,163,868
Census NIM, Adjusted Death/NIM	1,290,696	1,259,509	1,190,910	1,247,038
Official Census 2017	1,348,905	1,334,801	1,284,162	1,322,623
Official Census 2014	1,460,383	1,446,511	1,393,524	1,433,473

	Labor Force Growth Rate (%)
	2019	2020	2021	CAGR
No International Migration, Adjusted Death/NIM	0.054%	0.037%	0.032%	0.041%
"Trumpy" NIM, Adjusted Death/NIM	0.337%	0.292%	0.275%	0.301%
Census NIM, Adjusted Death/NIM	0.407%	0.400%	0.403%	0.403%
Official Census 2017	0.445%	0.446%	0.458%	0.450%
Official Census 2014	0.530%	0.529%	0.535%	0.531%

Let’s first start with household growth. Analysts using the “official” Census 2014 Population Projections (which were the latest available until this March) could credibly argue that “official” population projections suggested that household formations over the next three years could easily average over 1.4 million.

If those same analysts updated their projections using the Census population projections released this March, they would have reduced their three-year household forecast by about 8%, or about 111 thousand a year.

If those same analysts used NCHS-based death rates by age (instead of the clearly wrong death rates used in the Census 2017 projections), they would have reduced their household growth forecast by an additional 76,000 a year.

If those same analysts believed that a “Trumpy” immigration bill along the lines of certain proposed Republican bills were likely, then they would lower their household growth forecast by ANOTHER 83,000 a year. Now let’s switch to labor force growth. The Census 2014 population projections suggested that even if labor force participation rates by age remained flat at 2017 levels, the labor force would grow by about 0.53% a year over the next three years. That number is reduced to 0.45% under the latest official projections; lowered to 0.40% under a “better assumptions” scenario; reduced to 0.3% under a “Trumpy” scenario; and in the absence of any international migration there would be virtually no labor force growth over the next few years unless labor force participation rates by age increased.

Obviously, the outlook for household growth, labor force growth, and other key economic variable over the next several years is at least partly dependent on projections of the US population. Folks need to realize, however, that the “demographic” outlook is not as clear as some might lead you to believe, and that forecasts based on “official” population projections are not useful just because they are “official.”

I’ll have more on this topic sometime later this year.

by Calculated Risk on 10/18/2018 12:37:00 PM

The NAR is scheduled to release Existing Home Sales for September at 10:00 AM tomorrow.

The consensus is for 5.30 million SAAR, down from 5.34 million in August. Housing economist Tom Lawler estimates the NAR will reports sales of 5.20 million SAAR for September and that inventory will be up 4.3% year-over-year. Based on Lawler's estimate, I expect existing home sales to be below the consensus for September.

Housing economist Tom Lawler has been sending me his predictions of what the NAR will report for 8+ years.  The table below shows the consensus for each month, Lawler's predictions, and the NAR's initially reported level of sales. 

Lawler hasn't always been closer than the consensus, but usually when there has been a fairly large spread between Lawler's estimate and the "consensus", Lawler has been closer.

Last month, in August 2018, the consensus was for sales of 5.36 million on a seasonally adjusted annual rate (SAAR) basis. Lawler also estimated 5.36 million, and the NAR reported 5.34 million (both the consensus and Lawler were very close).

NOTE: There have been times when Lawler "missed", but then he pointed out an apparent error in the NAR data - and the subsequent revision corrected that error.  As an example, see: The “Curious Case” of Existing Home Sales in the South in April

Over the last eight years, the consensus average miss was 144 thousand, and  Lawler's average miss was 67 thousand.

Existing Home Sales, Forecasts and NAR Report millions, seasonally adjusted annual rate basis (SAAR)
Month	Consensus	Lawler	NAR reported1
May-10	6.20	5.83	5.66
Jun-10	5.30	5.30	5.37
Jul-10	4.66	3.95	3.83
Aug-10	4.10	4.10	4.13
Sep-10	4.30	4.50	4.53
Oct-10	4.50	4.46	4.43
Nov-10	4.85	4.61	4.68
Dec-10	4.90	5.13	5.28
Jan-11	5.20	5.17	5.36
Feb-11	5.15	5.00	4.88
Mar-11	5.00	5.08	5.10
Apr-11	5.20	5.15	5.05
May-11	4.75	4.80	4.81
Jun-11	4.90	4.71	4.77
Jul-11	4.92	4.69	4.67
Aug-11	4.75	4.92	5.03
Sep-11	4.93	4.83	4.91
Oct-11	4.80	4.86	4.97
Nov-11	5.08	4.40	4.42
Dec-11	4.60	4.64	4.61
Jan-12	4.69	4.66	4.57
Feb-12	4.61	4.63	4.59
Mar-12	4.62	4.59	4.48
Apr-12	4.66	4.53	4.62
May-12	4.57	4.66	4.55
Jun-12	4.65	4.56	4.37
Jul-12	4.50	4.47	4.47
Aug-12	4.55	4.87	4.82
Sep-12	4.75	4.70	4.75
Oct-12	4.74	4.84	4.79
Nov-12	4.90	5.10	5.04
Dec-12	5.10	4.97	4.94
Jan-13	4.90	4.94	4.92
Feb-13	5.01	4.87	4.98
Mar-13	5.03	4.89	4.92
Apr-13	4.92	5.03	4.97
May-13	5.00	5.20	5.18
Jun-13	5.27	4.99	5.08
Jul-13	5.13	5.33	5.39
Aug-13	5.25	5.35	5.48
Sep-13	5.30	5.26	5.29
Oct-13	5.13	5.08	5.12
Nov-13	5.02	4.98	4.90
Dec-13	4.90	4.96	4.87
Jan-14	4.70	4.67	4.62
Feb-14	4.64	4.60	4.60
Mar-14	4.56	4.64	4.59
Apr-14	4.67	4.70	4.65
May-14	4.75	4.81	4.89
Jun-14	4.99	4.96	5.04
Jul-14	5.00	5.09	5.15
Aug-14	5.18	5.12	5.05
Sep-14	5.09	5.14	5.17
Oct-14	5.15	5.28	5.26
Nov-14	5.20	4.90	4.93
Dec-14	5.05	5.15	5.04
Jan-15	5.00	4.90	4.82
Feb-15	4.94	4.87	4.88
Mar-15	5.04	5.18	5.19
Apr-15	5.22	5.20	5.04
May-15	5.25	5.29	5.35
Jun-15	5.40	5.45	5.49
Jul-15	5.41	5.64	5.59
Aug-15	5.50	5.54	5.31
Sep-15	5.35	5.56	5.55
Oct-15	5.41	5.33	5.36
Nov-15	5.32	4.97	4.76
Dec-15	5.19	5.36	5.46
Jan-16	5.32	5.36	5.47
Feb-16	5.30	5.20	5.08
Mar-16	5.27	5.27	5.33
Apr-16	5.40	5.44	5.45
May-16	5.64	5.55	5.53
Jun-16	5.48	5.62	5.57
Jul-16	5.52	5.41	5.39
Aug-16	5.44	5.49	5.33
Sep-16	5.35	5.55	5.47
Oct-16	5.44	5.47	5.60
Nov-16	5.54	5.60	5.61
Dec-16	5.54	5.55	5.49
Jan-17	5.55	5.60	5.69
Feb-17	5.55	5.41	5.48
Mar-17	5.61	5.74	5.71
Apr-17	5.67	5.56	5.57
May-17	5.55	5.65	5.62
Jun-17	5.58	5.59	5.52
Jul-17	5.57	5.38	5.44
Aug-17	5.48	5.39	5.35
Sep-17	5.30	5.38	5.39
Oct-17	5.30	5.60	5.48
Nov-17	5.52	5.77	5.81
Dec-17	5.75	5.66	5.57
Jan-18	5.65	5.48	5.38
Feb-18	5.42	5.44	5.54
Mar-18	5.28	5.51	5.60
Apr-18	5.60	5.48	5.46
May-18	5.56	5.47	5.43
Jun-18	5.45	5.35	5.38
Jul-18	5.43	5.40	5.34
Aug-18	5.36	5.36	5.34
Sep-18	5.30	5.20	---
1NAR initially reported before revisions.

by Calculated Risk on 10/18/2018 10:01:00 AM

Earlier: From the Philly Fed: October 2018 Manufacturing Business Outlook Survey

egional manufacturing activity continued to grow in October, according to results from this month’s Manufacturing Business Outlook Survey. The survey’s broad indicators for general activity, new orders, shipments, and employment remained positive and near their readings in September. The firms reported continued growth in employment and an increase in the average workweek this month. Expectations for the next six months remained optimistic.

The diffusion index for current general activity edged down slightly, from 22.9 in September to 22.2 this month. Nearly 36 percent of the manufacturers reported increases in overall activity this month, while 14 percent reported decreases. … The firms continued to report overall higher employment. More than 30 percent of the responding firms reported increases in employment this month, while 11 percent of the firms reported decreases in employment. The current employment index increased 2 points to 19.5. The firms also reported a longer workweek this month, as the workweek index increased from 14.6 to 20.8.
emphasis added

Here is a graph comparing the regional Fed surveys and the ISM manufacturing index:

Click on graph for larger image.

The New York and Philly Fed surveys are averaged together (yellow, through October), and five Fed surveys are averaged (blue, through September) including New York, Philly, Richmond, Dallas and Kansas City. The Institute for Supply Management (ISM) PMI (red) is through September (right axis).

This suggests the ISM manufacturing index will show solid expansion again in October.

by Calculated Risk on 10/18/2018 08:36:00 AM

The DOL reported:

In the week ending October 13, the advance figure for seasonally adjusted initial claims was 210,000, a decrease of 5,000 from the previous week's revised level. The previous week's level was revised up by 1,000 from 214,000 to 215,000. The 4-week moving average was 211,750, an increase of 2,000 from the previous week's revised average. The previous week's average was revised up by 250 from 209,500 to 209,750.
emphasis added

The previous week was revised up.

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 211,750.

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

by Calculated Risk on 10/17/2018 08:12:00 PM

Thursday:
• At 8:30 AM ET, The initial weekly unemployment claims report will be released.  The consensus is for 215 thousand initial claims, up from 214 thousand the previous week.

• At 8:30 AM, the Philly Fed manufacturing survey for October. The consensus is for a reading of 20.3, down from 22.9.

by Calculated Risk on 10/17/2018 03:57:00 PM

From housing economist Tom Lawler:

Based on publicly-available 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 5.20 million in September, down 2.6% from August’s preliminary pace and down 3.2% from last September’s seasonally adjusted pace. Unadjusted sales should show a larger YOY % decline, reflecting this September’s lower business-day count compared to last September.

On the inventory front, local realtor/MLS data, as well as data from other inventory trackers, suggest that the inventory of existing homes for sale in September showed a small (and contra-seasonal) increase over August, and I project that the NAR’s estimate of the inventory of existing homes for sale at the end of September will be 1.94 million, up 1.0% from August’s preliminary estimate and up [4.3% from September 2017].

Finally, local realtor/MLS data suggest that the median US existing single-family home sales price last month was up about 4.3% from last September.

CR Note: The NAR is scheduled to released September existing home sales on Friday. The consensus is also for sales of 5.30 million SAAR, down from 5.34 million in August.  Take the under.

by Calculated Risk on 10/17/2018 03:01:00 PM

From the Fed: Minutes of the Federal Open Market Committee, September 25-26, 2018:

In their consideration of monetary policy at this meeting, participants generally judged that the economy was evolving about as anticipated, with real economic activity rising at a strong rate, labor market conditions continuing to strengthen, and inflation near the Committee's objective. Based on their current assessments, all participants expressed the view that it would be appropriate for the Committee to continue its gradual approach to policy firming by raising the target range for the federal funds rate 25 basis points at this meeting. Almost all considered that it was also appropriate to revise the Committee's postmeeting statement in order to remove the language stating that "the stance of monetary policy remains accommodative." Participants discussed a number of reasons for removing the language at this time, noting that the Committee would not be signaling a change in the expected path for policy, particularly as the target range for the federal funds rate announced after the Committee's meeting would still be below all of the estimates of its longer-run level submitted in the September SEP. In addition, waiting until the target range for the federal funds rate had been increased further to remove the characterization of the policy stance as "accommodative" could convey a false sense of precision in light of the considerable uncertainty surrounding all estimates of the neutral federal funds rate.

With regard to the outlook for monetary policy beyond this meeting, participants generally anticipated that further gradual increases in the target range for the federal funds rate would most likely be consistent with a sustained economic expansion, strong labor market conditions, and inflation near 2 percent over the medium term. This gradual approach would balance the risk of tightening monetary policy too quickly, which could lead to an abrupt slowing in the economy and inflation moving below the Committee's objective, against the risk of moving too slowly, which could engender inflation persistently above the objective and possibly contribute to a buildup of financial imbalances.

Participants offered their views about how much additional policy firming would likely be required for the Committee to sustainably achieve its objectives of maximum employment and 2 percent inflation. A few participants expected that policy would need to become modestly restrictive for a time and a number judged that it would be necessary to temporarily raise the federal funds rate above their assessments of its longer-run level in order to reduce the risk of a sustained overshooting of the Committee's 2 percent inflation objective or the risk posed by significant financial imbalances. A couple of participants indicated that they would not favor adopting a restrictive policy stance in the absence of clear signs of an overheating economy and rising inflation.
emphasis added