FHFA and Case Shiller repeat sales indexes show YoY price growth has peaked; slow deceleration in shelter CPI should continue

 

 - by New Deal democrat

This week’s data focuses on house prices and new home sales, and the more important personal income and spending report on Friday.

In the housing data I am looking at any movement towards rebalancing between new and existing home sales. To recapitulate, the big increase in mortgage rates has locked up the existing home market, increasing the share of new houses as to total sales.  With existing homes, we saw inventory increasing. In the repeat sales index, I am looking for signs that price increases might be abating.

This morning both the FHFA and Case Shiller repeat home sales indexes were released through April. Three months ago I wrote that “for the next seven months the comparisons will be against an average 0.7% increase per month in 2023. Because house price indexes have shown a demonstrated lead over shelter costs as measured in the CPI, if present trends continue, as these YoY comparisons drop out, the YoY deceleration in OER in the CPI index should continue towards its more typical rate of between 2.5% to 4% YoY in the ten years before the pandemic.” Tow months ago month I reiterated that “I continue to believe that CPI for shelter will continue to decelerate on a YoY basis, but more slowly than before.” Then last month I concluded, “there has been no significant YoY acceleration in the FHFA repeat sales index for the past six months, and appreciation in the Case Shiller Index has likely halted, with a lag, as well…. I expect the YoY comparisons to show renewed deceleration, which will ultimately - with a decided lag - show up in the shelter component of CPI as well.”

And that’s what has happened.

To start with, Keeping in mind that mortgage rates lead sales, which in turn lead prices, here’s what the monthly average in mortgage rates (red, right scale) look like compared with the monthly % change in house prices for the past five years:

The relatively big decrease in mortgage rates between last November and this January led to a big increase in sales with an increase in prices as well. As mortgage rates have generally increased since then, sales have declined somewhat, and prices have started to follow suit. In this morning’s report, prices increased a seasonally adjusted 0.3% in the Case Shiller index, and 0.2% in the FHFA Index. Here’s what each index looks like normed to 100 as of just before the pandemic:

I’ll dispense with the long term graph this time, but instead here is the last seven years of the YoY% changes in the FHFA and Case Shiller national indexes (/2.5 for scale) compared with the CPI for owners’ equivalent rent which continues to show that the YoY gains in house prices are actually not out of line compared with prior to the pandemic:

On a YoY basis, the Case Shiller index is up 6.3%, down from its February peak of 6.6%. The FHFA Index is also up 6.3% YoY, down from its February peak of 7.2%. In other words, as anticipated the YoY increase in house prices has peaked, as monthly comparisons continue to be slightly below the equivalent gain 12 months previously, just as I first wrote would happen three months ago.

More importantly, in the next few months this trend should continue. The latest mortgage and price data continue to indicate that the shelter CPI for “owners equivalent rent” should continue to “aim” for a landing at 3.0-3.5% in roughly 12 months, or a deceleration on average of about 0.2% YoY per month.

Travelin’ man

 

 - by New Deal democrat

On the road again. . .  

Fortunately there’s no significant economic news today, so a perfect day to play hooky. See you tomorrow.

Weekly Indicators for June 17 - 21 at Seeking Alpha

 

 - by New Deal democrat

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

The high frequency data has not been confirming the relatively poor monthly reports. For example, mortgage applications have not declined since last autumn, contrary to the housing permit and construction report this past week. And nominal retail sales as updated weekly by Redbook have been running at about 5% YoY for the past 3 months, contrary to the lackluster monthly retail sales report.

As usual, clicking over and reading will fill you in on all the details, and put a little change in my pocket as a reward.

Snail’s pace of housing market rebalancing, as existing sales remain range bound, and inventory has not increased enough to relieve pricing pressure

 

 - by New Deal democrat

Existing home sales have very limited value in economic forecasting, since they are the trade of an existing product rather than indicating growth or contraction in the creation of a new product. Thus my main focus at present on this data is the extent to which it shows - or not - the rebalancing of the housing market.  That’s because, unlike existing homeowners, house builders can vary square footage, amenities, lot sizes, and offer price and/or mortgage incentives to counteract the effect of interest rate hikes.  As a result, new home sales have relatively speaking held up, while existing home sales have declined much more sharply. Conversely, the prices of new homes have moderated relative to that of existing homes, which have remained stubbornly high.

This morning’s report for May gives us very small, incremental evidence of rebalancing. In particular, seasonally adjusted sales declined a slight -3,000 to 4.11 million annualized. For the past 18 months, sales have remained range bound between 3.85 and 4.38 million annualized:

The good news, for rebalancing purposes, is that inventory has increased (note inventories and prices are not seasonally adjusted in this report, so the correct way to deduce the trend is to compare YoY). In May, inventory was higher by 18.6% YoY to 1.28 million units, vs. up 16.3% YoY in April. This also compares with May 2022’s 1.15 million and May 2021’s 1.21 million. Inventory was higher in May 2020 at 1.58 million and higher in May of all of the 5 years prior:

To reiterate, even before the pandemic, housing inventory had been falling almost relentlessly YoY since 2014, the only exception being early 2019. the pandemic exacerbated this trend, which appears to have finally bottomed out in 2022-23. There in a nutshell is most of the story about the chronic shortfall in housing in this country.

Ultimately this is good news, because we want to alleviate this shortfall in inventory, and this morning’s report means that we continue to make progress in that direction.

Unsurprisingly, in response to the longer term decline in inventory, existing home prices rose consistently since 2014, and accelerated when COVID hit and much of the market shut down. The median price for existing homes briefly turned negative in early 2023, troughing at -3.0% YoY in May. Thereafter with a brief break in March of this year, YoY comparisons have accelerated almost relentlessly. They were higher YoY by 5.7% in February, 5.6% in April, and now 5.8% in May:

In summary, COVID and Fed rate hikes conspired to exacerbate an already-existing shortfall in existing home inventory. This pre-existing shortfall has meant that prices failed to respond meaningfully to those Fed rate hikes. The continuing large YoY increases in existing home prices are gradually driving inventory higher, but not high enough yet to completely alleviate that longer term inventory shortage. New home sales, which have increased their share of the overall housing market, will continue to respond as a result. By contrast, existing home sales will likely remain range-bound at their recent levels until the Fed moves on interest rates, whenever that may be.

Housing permits and starts the lowest since 2020, units under construciton also decline further, but no yellow caution flag yet

 

 - by New Deal democrat

I’ve written repeatedly in the past few months that I am paying especial attention to the manufacturing and construction sectors for signs of weakness now that the supply chain tailwind for the economy has ended. At the beginning of this month, one show appeared to have dropped, as  the ISM report on manufacturing showed contraction for the second month in a row, declining slightly to 48.7, with the more leading new orders subindex declined sharply to 45.4, the lowest reading since last May:

This morning the construction shoe at least dangled, as housing permits and starts had their most abysmal month since 2020, and units under construction their worst in two years. In fact, housing units under construction - the real economic activity in the housing construction data - are getting close to their recession caution signal.

To wit, the longest leading signal in the data - permits (dark blue in the graph below) - declined -54,000 on an annualized basis to 1.386 million. Single family permits (red, right scale) which have the most signal and least noise of any of the data series, also declined, by -28,000 to 949,000 annualized. Starts (light blue), which are slightly less leading and much more noisy, declined -75,000 to 1.277 million annualized:

As noted above, total permits and starts are both at their lowest levels since 2020. Meanwhile single family permits, which rebounded last year, declined for the fourth consecutive month.

Earlier this year, while noting that I expected to see more of a decline in the actual hard-data metric of housing units under construction, I wrote that “With permits having increased off their bottom, I am not expecting such a 10% decline in construction to materialize.” And last month I concluded that “My sense is that, while housing units under construction will decline further, unless interest rates increase further, permits and starts will stabilize, and after a period so while units under construction, without crossing into recession warning territory.”

Mortgage rates did rise through April, but have stabilized since. Here’s what they look like in comparison with single family permits:

Although total permits did - by a slight margin - make a new low, I continue to suspect that they will not drift much lower, so long as mortgage rates remain in their past 12 month range.

But let’s take a more detailed look at units under construction. These - especially multi-unit dwellings (gold in the graph below) levitated for over a year after permits and starts declined, before finally turning down definitively this year:

Single family units under construction (magenta in the graph below) did follow their typical pattern, slightly lagging single family permits (red):

But multi-family units, as noted above, seemed to levitate, lagging the downturn in multi-unit permits by a much longer time:

That’s becuase, as the close-up below shows, the newer multi-unit construction tends to be much larger complexes than were built in the 1960s through 1990s, and builders have not increased their workforce equivalently. So in the past 10 years it has taken much longer to finish these large multi-unit projects:

The above graphs suggest that single family units under construction will probably not decline much further, while multi-unit developments under construction, which are only down about 10% vs. the 40% decline in permits for them, are likely to decline much further.  

Usually it has taken more than a 10% decline in units under construction to be consistent with a recession. In 1970 and 2001, the declines were less than that. But in the late 1980s and 2000s, it took almost a 25% decline before a recession occurred. With this morning's report, the decline is -6.9%. Hence my statement in the opening paragraph above that the construction shoe “dangled” but not quite “dropped.”

To return to my opening comment, this year I am paying extra close attention to the manufacturng and construction sectors, because a significant turndown in both of those simultaneously would be a danger signal for oncoming recession. Together with the contraction in the ISM manufacturing index, and the relatively poor real retail sales report, the next items to watch are (1) whether real personal spending on goods, which tends to trend similarly to real retail sales, weakens substantially; and (2) whether employment in manufacturing and construction, neither of which has turned down, change direction in the next few jobs reports.

Jobless claims still positive for forecasting purposes; the unresolved seasonality issue should be resolved shortly

 

 - by New Deal democrat

This morning’s jobless claims report continued the uptrend we’ve seen for the past month. But it still looks more likely than not that it is mainly unresolved post-pandemic seasonality. We’ll probably get a more definitive answer to that issue in th next several weeks.

Initial claims declined 5,000 for the week to 238,000. The 4 week moving average rose 5,500 to a new 9 month high of 232,750. With the typical one week delay, continuing claims rose 15,000 to 1.828 million, a 5 month high:

Note that last year followed a very similar trajectory from lows of just over 200,000 in January, rising through early spring before more sharply increasing in late May and June. But as the below graph shows, on a YoY% basis this year’s iinitial claims have been almost uniformly lower:

In fact, on a YoY basis, initial claims this week were down -8.8%, and the four week average down -7.5%, respectively the second best, and best, comparisons in 18 months. Since the YoY figures are more reliable as recession forecasting tools, these remain very positive. Even continuing claims, which are up 4.3% YoY, remain close to their 15 month low comparison.

If hidden seasonality is the culprit, we should know shortly. That’s because as shown in the first graph above last year there was a sharp decline in claims beginning the week of June 24. Next week will be the equivalent week this year. So if claims continue at their recent elevated levels for two more weeks, that would negative the seasonality theory. We’ll see.

Meanwhile, comparing monthly initial and continuing claims to the unemployment rate does not support the most recent increase to 4.0% in the latter:

As I’ve noted many times, there is a solid 50+ year history of initial (and continuing) claims leading the unemployment rate. Aside from the last few months, the only exceptions have been during the “jobless recoveries” immediately following the 1991, 2001, and 2008 recessions. This time around it is more likely due to an increasing share of the wave of recent immigrants (who have not been previously employed and are not eligible for jobless benefits) failing to find work. In other words, the “Sahm Rule” might be signaling a relatively weakening, but still positive labor market, rather than an economy that is close to recession.