Sales of new and existing homes increased in November; declining price trend continues for the former, but pressures increase in the latter

 

 - by New Deal democrat

Ive been looking at new and existing home sales more in tandem recently, as we are looking for a rebalancing of the market, with prices abating in existing home sales and inventory increasing, vs. new houses where prices have been slightly declining.

Additionally, as usual let me start with the important caveat that new home sales data are very noisy and heavily revised. And heavily revised they were, as October’s preliminary report of 610,000 annualized, which was the lowest rate since November of 2022, was revised higher by 17,000 to 627,000; and November rose another 37,000 from there to 664,000 annualized, still on the low side for the past two years:

The above graph shows single family permits as well, which tend to lag new home sales by a few months, but are much less noisy. New home sales are suggesting that permits will likely stagnate near current levels in the next few months.

The relatively low number of new home sales probably has much to do with the increase in mortgage rates close to 7%:

Inventory of new houses continued to increase to a 15+ year high. This is actually “good” news for the moment because as the below long term historical graph shows, recessions have in the past happened after not just sales decline, but the inventory of new homes for sale also decline:

Meanwhile the trend in prices continues to be slightly downward:

On a YoY basis, the median price of a new home is now -6.3% lower than it was one year ago.

Turning to xxisting home sales, they have been flat in the range of 3.85 -4.10 million annualized for almost two years. After breaking to the downside two months ago at a 10+ year record low of 3.83 million, November’s report increased to an eight month high at 4.15 million units annualized:

But the moderation in the YoY% change in prices from the past few months reversed somewhat as the median price for an existing home increased 4.7% YoY (below graph shows non-seasonally adjusted data):

On a YoY basis, in response to the longer term decline in inventory, existing home prices have risen consistently since 2014, and accelerated during the COVID shutdowns. After briefly turning negative YoY in early 2023, troughing at -3.0% in May, comparisons accelerated almost relentlessly to a YoY peak of 5.8% in May of this year. 

Here are the YoY% comparisons since then:

June. 4.1% 

July.  4.2% 

August. 3.1%

September  2.9% 

October 4.0%

November 4.7%

Finally, while inventory declined seasonally in November, it is the highest inventory for that month since 2019:

Putting the picture of new and existing home sales together, mortgage rates are putting a lid on sales of either (graph shows YoY new home sales and change in mortgage rates, the latter inverted so that lower rates show to the upside):

Prices of new homes have continued to follow sales:

And as shown above inventory in both new and existing homes have continued to increase. The big inventory of new house is presumably helping keep a lid on prices, while  the inventory of existing houses, which also continues to increase, is still doing so too slowly to reverse price pressures. New houses continue to be the relative bargains. And both continue to be pressured by near 7% mortgage rates.

Weekly Indicators for December 16 - 20 at Seeking Alpha

 

 - by New Deal democrat

My “Weekly Indicators” post is up at Seeking Alpha.

The yield curve is now almost entirely un-inverted, but in part because longer term interest rates have risen (not such a good thing).

Meanwhile a variety of short leading indicators stepped on rakes this week, which may be noise, or may be of a piece of other weakening indicators we have seen lately.

In any event, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and reward me with a little change for the vending machines.

Personal income and spending continue their positive trend in November, but looking late cycle-ish

 

 - by New Deal democrat

Adjusted for inflation, both personal income and spending came in positive once again in November. But under the hood, the report looked a little tepid, and while it certainly wasn’t recessionary, the data was consistent with what I would expect later in the cycle of an expansion.

For the record, real income rose 0.2% for the month, and real spending increased 0.3%, continuing their consistent trend since mid-year 2022:

Real income less government transfers, one of the metrics that the NBER looks at to determine economic expansions vs. recessions, also increased, by 0.1%, in November, continuing its uptrend as well:

Last month the headlines were mainly about inflation. I demurred. And that was burne out by the mild 0.1% increase in prices this month, average for the past year:

Indeed, in the seven months since April prices have only risen a total of 0.9%, for a 1.6% annual rate, below the Fed’s target. 

On a YoY basis, prices increased 2.4%, up from 2.1% in September (blue in the graph below). This was all about services (gold), which are up 3.8% YoY, their approximate YoY advance for the past six months. On a YoY basis, goods (red) are still in mild *deflation*:

On a monthly basis, the deflation in goods prices appears to be ending. Prices rose very slightly (less than 0.1%) in November:

The YoY comparison is elevated all because of services, as this long term graph shows:

In contrast with the CPI, only about 0.3% of that YoY rate is housing.

If goods deflation is no longer a tailwind, and services inflation remains elevated, that is a typical late cycle configuration.

Also looking late cycle-ish was the personal saving rate at 4.4%, down from 5.5% last January.  As the below longer term historical graph which subtracts the current rate to show it at the zero line shows, the current saving rate is equivalent to that late in the last two expansions (not counting the pandemic):

Basically, as an expansion goes along, consumers get further out over their skis, and so more vulnerable to an adverse shock.

Finally, the PCE price index is used to calculate real manufacturing and trade sales (with a one month lag), another metric used by the NBER to determine if the economy is in recession or not. This declined -0.1% in October, but as the pot-pandemic graph below shows, its uptrend remains intact:

So the good news is that this very important report on the health of the consumer remained positive in November, consistent with its trend since June 2022. There wasn’t any bad news. But the continued elevation in the services price index and the low level of savings suggest that we are later in this expansion cycle. 

Jobless claims: with a dash of seasonality salt, trending towards weakness

 

 - by New Deal democrat

As expected, jobless claims declined from one week ago, as the delayed Thanksgiving week seasonality moved out of the numbers.

Initial claims declined -22,000 to 220,000, while the four week moving average increased 1,250 to 225,500. With the typical one week delay, continuing claims declined -5,000 to 1.870 million:

On the more important YoY basis, initial claims were higher by 6.3%, and the four week average higher by 7.3%. Continuing claims were also higher, by 3.9%:

Because the initial claims numbers include the weeks before, of, and after Thanksgiving, the seasonality effects should be a wash; which means that while they are not recessionary, they do imply some real weakness.

Finally, here is the look at initial and continuing claims averaged over the entire month, compared with the unemployment rate. Note all of these are rendered as YoY% changes:

One year ago the unemployment rate was 3.7%. The latest claims comparisons suggest that (absent the effects of mass immigration in the past several years) the rate should be trending higher by about 5%-10% over that level. Since this is a percent of a percent, that means trending towards 3.9%-4.1%, which is a lower range than the rate has been in the past five months. 

More importantly, with one exception weekly jobless claims have come in higher YoY every week since the beginning of September. I’m continuing to take these numbers with an extra dash of seasonality salt, but at this point claims are joining the list of indicators - ever so slightly - suggesting weakening of the economy ahead.

The housing sector now hoists a red flag recession warning

 

 - by New Deal democrat

The very important construction data from the long leading housing sector was mixed this morning for November.

The most leading datapoint, permits, increased 86,000 on an annualized basis to 1.505 million. Even more importantly, single family permits, which have the least noise and most signal of any of the datapoints, continued their rebound from their recent June low, increasing 1,000 to 972,000, their highest level since April. Measnwhile starts, which are noisier and tend to lag permits by one or two months, declined another -23,000 to 1.289 million, their second lowest reading since 2020:

Starts did rebound in the hurricane-stricken South, but that was counterbalanced by a steep decline in the Midwest. Again, this series has a lot of noise, so I am not terribly concerned about a one month pothole.

But if housing permits suggested a near term increase in construction, units presently under construction continued to plummet, down -27,000 to 1.434 million, -16.2% down from their peak, and the lowest number since August 2021:



This is very important, because in the past it has declined on average -15.1% and by a median of 13.4% before the onset of recessions:

Three months ago I hoisted a yellow flag “recession watch” for housing construction. I held off hoisting a red flag last month because of the hurricane effects in the South. With that dissipated, I am hoisting the red flag now: housing is forecasting recession.

Nevertheless, as I cautioned last month, in our present situation it appears permits have bottomed. Because starts, following permits, should start trending back upward in the next several months, and housing units under construction follow starts:

I still think housing units under construction will not decline too much further before bottoming as well. 

Additionally, employment in residential construction, which typically follows units under construction with a lag, has continued to increase so far:

Residential construction employment should decline before any recession were to occur.

Finally, recall that mortgage rates (change YoY, inverted) lead all of this data, including both measures of permits:

So the issue becomes whether mortgage rates continue to head back higher - in which case recession risks increase - or are at the top of their range going forward.

While the housing sector is now forecasting recession, focusing on it alone is not enogh. Focusing on manufacturing or residential construction employment alone is not enough. As I wrote last month, it is only when there is a more broad-based downturn across multiple goods-producing sectors that a recession typically occurs. Employment in goods producing jobs did decline slightly from two months ago, but it is not significant at this point. As I pointed out on Monday, corporate profits also stalled in Q3, but have not turned down; and if they did peak it would not forecast recession until later next year. Additionally, as we saw yesterday consumption is still going strong.

So while the housing sector is forecasting recession in the near future, it has not been joined by other critical components yet.