May existing home sales show prices stabilizing, inventory continuing to increase towards its historical range

 

 - by New Deal democrat

The first part of this week is all about more housing data. This morning started out with  existing home sales, which although they typically constitute about 90% of all sales are the least important for forecasting purposes, since the main thing that happens is only a change in ownership, and therefore they have much less economic impact than new home sales.

And this month the level of sales themselves was far less important than what the median price for an existing home and inventory are telling us about the ongoing rebalancing of the housing market.

Sales of existing homes, just like new homes, have been rangebound for the past 2 years, in reaction to mortgage rates remaining in the 6%-7% range. In May they remained within that range, increasing 0.8% to 4.03 million annualized on a seasonally adjusted basis (although on a YoY basis there was a slight -0.7% decline). The below graph shows the last 10 years, showing both the immediate post-COVID surge and the low but rangebound trend since:

But as I wrote above, prices and inventory were more important this month. 

Let’s start with inventory. As I have pointed out repeatedly, the secular decline in inventory began well before onset of the pandemic, reaching a nadir in 2022. Unlike sales, this series is not seasonally adjusted, so it must be looked at YoY, and in May inventory continued to climb, to 1.540 million units, a 20.3% YoY increase, and only 1,000 units lower than May 2020 (May data not shown):

Nevertheless inventory is still below its pre-2014 levels, which typically were in the 1.7 million to 1.9 million range, which means that although it is lessening the chronic shortage still exists.

Finally, let’s look at prices. Builders of new homes are much more able to respond to market pressures, and - leaving the effects of tariffs on building materials aside - this has continued to make new homes relatively much more attractive than the constricted existing homes market, which has had strong upward pricing pressures right through the end of last year.

There was already strong evidence that this upward pricing pressure was abating. And this month added yet more such evidence. Like inventory, this data is not seasonally adjusted and so must be looked at YoY, as in the graph below of the last 10 years (May data not shown):

In the immediate aftermath of the pandemic in 2021-22, prices increased as much as 15% or more YoY. After the Fed started its sharp hiking regimen, prices briefly turned negative YoY in early 2023, with a YoY low of -3.0% in May of that year. Thereafter comparisons accelerated almost relentlessly to a YoY peak of 5.8% in May of 2024, before decelerating to 2.9% in September.

Here are the comparisons since:

October 4.0%

November 4.7%

December 6.0%

January 4.8%

February 3.6%

March 2.7%

April 1.8%

In May this deceleration continued, with a YoY% gain of 1.3%, the lowest such gain since earnly 2023.

In summary, this month’s existing home sales report tells us that the rebalancing of the housing market is continuing. Although seasonally adjusted sales remain rangebound, price increases have abated dramatically, and inventory is increasing at a big YoY clip. Although inventory is still low by historical standards, it is possible that by July’s report it could reach the 1.7 million level, i.e. the bottom of its pre-2014 historical range. 

“Economic expansions don’t die of old age; they are murdered” usually by domestic or geopolitical exogenous shocks

 

 - by New Deal democrat

There is an old saying that “economic expansions don’t die of old age. They are murdered.” 

I have been writing about the economy, and examining all sorts of leading, coincident, and lagging indicators, for 20 years; and the longer time goes on, the truer that saying appears.

My most recent examination has been based on the data showing that despite the blows inflicted on the economy by the likes of Tariff-palooza!, it just keeps powering along. It simply takes an awful lot of hits to sink a US expansion.

Which got me thinking about all the past recessions I have experienced, and that fact that, going back over 50 years now, every single one of them featured important and sometimes decisive shocks, usually geopolitical or domestic political shocks. Let’s take a brief look:

1974 - Arab oil embargo, brought about by the 1973 Yom Kippur War.

1979 - Iranian Revolution brings about another doubling in the price of oil

1981 - Paul Volcker raises interest rates from 9% to 19% to deal with the inflationary fallout from the 1979 stagflation.

1991 - Another oil shock brought about by Saddam Hussein’s invasion of Iraq

2001 - a combination of the “China shock” as manufacturing jobs flee the US for China, the 9/11 terrorist attacks, and the bursting of the internet bubble

2008 - As well as the bursting of the housing and mortgage lending bubble, there was another oil shock, as gas prices rise from $2.25 in early 2005 to $4.10 in mid-2008.

2020 - COVID

The above list isn’t to downplay cyclical events, but rather that an economy that was already vulnerable was finally knocked over by some exogenous event; or at least the exogenous event contributed. Even those recessions with the most “cyclical” or financial components - 1981, 2001, and 2008 - had at least some deliberate decision-making involvement, whether Volcker’s deliberate choice to bring about a recession in order to kill inflation, or the accession of China to regular trading status, in combination with terrorist attacks, or Greenspan’s enabling of reckless lending practices as well as the first time oil went over $100/barrel.

We entered this year with a weak if expanding economy. The most recent QCEW - an actual *census* of US employment rather than the monthly estimate - suggests that in all of 2024 only about 0.8%, or 1.25 million, new jobs were added, less than the likely population growth last year. And this year we have already had 2 exogenous political shocks: Tariff-palooza!, and now the war with Iran. The GOP tax bill is set to be a 3rd major political shock.  Will those blows be enough to sink the economy? We’ll find out soon enough.

Weekly Indicators for June 16 - 20 at Seeking Alpha

 

 - by New Deal democrat

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

The trends that have been in place ever since the start of Tariff-palooza!, aided and abetted by the GOP budget-busting bill and the burgeoning Israel-Iran war, are continuing.

The US$ is declining, oil prices are spiking, rail traffic has turned negative, and consumer spending seems to be slowly decelerating.

WINNING! One of the things I may elaborate on as early as tomorrow is that not a single US economic expansion in the past 50+ years has died a natural death. Every single one has been murdered in whole or in part by a domestic political or geopolitical shock. As noted above, in the past 5 months T—-p has managed to unleash at least 3 of them.

As usual, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and reward me with a penny or two for organizing and reporting on it.

Why hasn’t the housing downturn caused a recession yet? A detailed look

 

 - by New Deal democrat

As promised yesterday, today let me take an extended look at the important leading sector of housing. I want to walk through each of the important series generally in the order in which they have typically peaked, and how in at least one important respect this time is - somewhat - different.

First, here is another variation on a graph I have run many times, showing how mortgage rates (red) typically lead both total (dark blue) and single family (gold) permits and the more noisy starts (light blue). Here is 1972-98:

And here is 1999-present:

The magnitude of the response is not always proportionate (see the 1970s) and in at least one case (the housing bubble and bust of the 2000s) overwhelmed by other factors, but the relationship almost always holds.

Here is a close-up on the post-pandemic period:

As usual, not perfect, but the major leading/lagging relationship holds. Most importantly for today’s purposes, note that mortgage rates have not changed significantly in the past 20 months, and since then both permits and starts have become more rangebound YoY as well.

Next, let me show the relationship between new home sales (red) and permits, first from 1962 to 1994:

And 1995-present:

The point here is that sales lead even permits - but they are much more noisy (and also heavily revised), which is why I pay more attention to permits.

Here is the post-pandemic close-up, showing that as usual sales both peaked and troughed first, before permits, and have been similarly rangebound since mid-2023:

For completeness’ sake, here are purchase mortgage applications as well:

Unfortunately FRED is not allowed to publish these, but note that they peaked right after new homes sold and right before permits. They also troughed in late 2023, and were rangebound until the end of 2024, before rising in the early part of this year. That would normally be a good sign, but applications have declined again in the wake of the recent increase in mortgage rates due to Tariff-palooza!

Next, let’s delete the more noisy starts, and compare total and single family permits with housing units under construction (gold, right scale), all normed to their 2022 peaks:

The important points here are that units under construction - which as I almost always say, is the real total of the economic activity in this sector - follow permits (and starts) with a lag. And secondly that when there have been recessions, the number of units under construction continued to decline right into the period of actual economic contraction.

Once again, let’s focus on the post-pandemic period:

As usual, the number of units under construction followed permits by a little under a year. Note also that as per the above discussion of mortgage rates, the absolute number of permits has been rangebound for almost two years - until possibly yesterday’s report, which may have been the first one reflecting the impact of tariffs (on lumber, for example). 

But more importantly, the number of units under construction has declined almost every month in the past 18, and is well within the range of declines where previously recessions have begun. Indeed, if units under construction stabilized for a significant period of time, that would suggest a recession has been avoided - but that has not happened.

Before I get to the final series in chronological order, let me note that construction spending, whether nominal or adjusted for inflation, peaked almost simultaneously with permits in 2006:

Post-pandemic, as measured by construction costs, construction spending peaked at the time of the initial peak in permits in early 2001. Nominally or deflected by the CPI, it peaked several months before permits (teal) did in 2022:

Note that in the past several months residential construction spending has also declined further, just as permits have done.

Now let’s take a look at what the final shoes to drop typically have been before recessions have started, houses for sale (blue) and residential construction employment (red), in comparison with units under construction:

Although I won’t show a graph this time, remember that homes for sale lag homes sold in the housing sales report, and it has only been once homes for sale peak and then turn down that recessions have begun. There is no clear pattern as to whether homes for sale or residential construction employment peak first, but both lag units under construction.

And now, our final post-pandemic look:

The number of houses for sale declined slightly in April, but it is too soon to know whether that marks the peak or is just noise. But in the past 6 months, the number homes for sale have only increased by 1.2%. Residential construction employment is still increasing! 

Let me make one final point about these last two graphs. At the outset of this post I wrote that at least one thing was somewhat different about this cycle, which has a lot to do with why the number of units under construction seemed to levitate for so many months after permits and starts peaked, and why employment in this sector has not turned down yet. 

Notice, beginning in about 2012, how much construction employment lagged the increase in units under construction. Between then and the outset of the pandemic, units under construction nearly tripled, while the number of workers building those units only increased 50%. That has only been exacerbated since the pandemic, as units under construction peaked at more than *quadruple* their number in 2011, while employment in the sector is only up 70%. 

With such a big decline in the number of laborers per unit being built, it is no wonder that the lag time has been so great, and the need to lay off workers so little. But if there is to be a recession, almost certainly both of the final shoes in this chronological panorama will drop first. And Tariff-palooza! might just do the trick.

[P.S.: Since there is no significant data tomorrow, and given the length of this post, don’t be surprised if I play hooky.]

Housing construction looks even more recessionary

 

 - by New Deal democrat

Because no data will be released tomorrow due to the Federal holiday, I am going to defer a deeper look at the very important housing sector until then. Today I’ll just note the top line indications from this morning’s housing construction data.

As per usual, permits are much less noisy than starts, and slightly more leading. Single family permits are the least noisy of all the data, so I pay the most attention to that number. And the numbers for May were not good.

Permits (gold) declined -29,000 annualized to 1.393 million, the lowest number since June 2020. Single family permits (red) also declined, by 25,000 annualized, to 898,000, the lowest in 2 years. Starts (light blue) declined -136,000 annualized to 1.256 million, the lowest since May 2020:

Recall that mortgage rates generally lead housing permits and starts, so to some extent this is a function of those rates (blue, left scale in the graph below), which for the last seven months have hovered near the higher end of their range since late 2022:

Some of this may also be a function of Tariff-palooza!, which has caused the price of construction materials to jump (more on that tomorrow). But it is probably also part of a feedback loop, because the number that represents where the proverbial rubber meets the road for actual economic activity - housing units under construction - declined another -29,000 annualized to 1.375 million, the lowest number since June 2021, and -19.8% below their October 2022 high:

More often than not in the past, by the time units under construction had declined by this much, a recession had already begun. The only two exceptions were the late 1980s, where the pre-recession decline was -28.2%, and 2007, where the pre-recession decline was 25.6%.

I will explore more why this time around no recession has begun yet with my more in-depth look at housing tomorrow.

Jobless claims show a weakening, but not (yet) recessionary economy

 

 - by New Deal democrat

Because tomorrow is the Federal Juneteenth Holiday, initial and continuing claims were released today. They continue to show a slowly weakening, but not (yet) recessionary, economy.

Initial claims declined -5,000 to 245,000 for the week, while the four week moving average rose another 4,750 to 245,500. This four week average is the highest since August of 2023. Meanwhile, with the usual one week lag, continuing claims declined -6,000 to 1.945 million, after last week the highest since November 2021 (not shown):

While this continues the weakening trend we have seen for the past few weeks, on the YoY% basis more useful for recession forecasting, it was “more of the same.” Initial claims were up 3.4%, the four week average up 5.8%, and continuing claims up 6.2%, right in the middle of the +5% +/-5% range we have seen for the past 9 months:

Finally, let’s take our first look at what this likely means for the unemployment rate in the next several months:

In this case I think it is obvious that the increasing number of initial and continuing claims suggests at least preliminarily that the unemployment rate is likely to move higher in the next few months.

In short, a jobs economy that is slowly weakening, with a slight increase in people being laid off, and finding it increasingly difficult to find new employment, but not enough of a weakeneing at this point to mean recession in the next few months.