Monday, July 28, 2014

The housing market halfway through 2014: a comprehensive report

 - by New Deal democrat

Wtih this morning's report on pending home sales, housing data from the first half of 2014 is in the books. At the end of last year, I politely disagreed with Bill McBride a/k/a Calculated Risk, about the direction of the market this year.  Bill thought average starts and sales would be up 20%.  Based on increased interest rates, I believed they would be down by about -100,000 at some point this year.  Except for one outlier in housing starts in April, neither has panned out so far, with data coming somewhere in the middle.  With that summary, let's take a detailed look at housing through midyear.

As I wrote last month, the housing market tends to cycle in a regular order:
  • 1st, interest rates turn
  • 2nd, permits, starts, and sales turn
  • 3rd, prices turn
  • 4th, inventory turns
Because of the time lag, prices and inventory may still be reacting to a move in interest rates that has since reversed - and that appears to be the case now.  Let's look at where each of those points in the cycle stands.

Interest rates

First, here is a graph, covering the last 30 years, of the YoY% mortgage rates (inverted so that higher rates give a lower value, blue) vs. housing permits, YoY change in 100,000's (red):

Here's a close-up of the last 5 years:

Interest rates on mortgages went up from 3.4% in early May 2013 to a high of 3.6% in August of last year.  On 16 of 19 occasions since the end of World War 2, that big a change led to a YoY decline of at least -100,000 in permits. In this case, housing permits have since drifted back lower, down to 4.1% at the end of June of this year, and in the last month have been on average about -0.3% lower than they were at this time last year.

The YoY decline in interest rates indicates that we should shortly start to see some improvement in permits, sales, and starts, although probably muted since rates have not returned to 2013 lows.

Permits, starts, and sales

Here is a graph of the change, in thousands, YoY of starts (blue), permits (red), new home sales (green), and existing home sales (orange) (note that the St. Louis FRED does not track pending home sales):

Next, here is the YoY% change in the same four statistics:

Both of these graphs show the clear deceleration in the housing market through 2013 and into 2014.  With the sole exception of housing starts in April (a more noisy series than permits), which may have been a bounce-back from an unexpectedly dismal winter, all of the major series have been dead in the water this year. New and existing home sales have been consistently negative, and permits up only +2% in the first half of 2014 compared with the first half of 2013.

This morning, pending home sales were reported as down -1.1%  from May to June, and down -7.3% from June of last year, which was also the index's post-housing bust high.  It further appears that February of this year was the subsequent low in reaction to higher interest rates. The index is up +9% on a seasonally adjusted basis since that time.

In summary, through June 2014:

  • Permits are down -10% from their October 2013 high
  • Starts are down -19% from their November 2013 high
  • New home sales are down -10% from their January 2013 high
  • Existing home sales are down -6% from their July 2013 high
  • Pending home sales are down -7% from their June 2013 high
As I noted a month ago, May new home sales were as big an outlier to the upside as March was originally reported to the downside, so a significant revision was very possible.  March was subsequently revised about 10% higher, and May has now been revised over 10% lower than as originally reported.

The impact of demographics on permits, starts, and sales

I suspect the situation this year is analogous to the late 1960's (one of the four exceptions to the rule that rising interest rates cause an actual decrease in sales), when Boomers first reached adulthood and the existing apartment stock was nowhere near adequate to the task.  Multi-unit starts skyrocketed, despite higher interest rates, while single family homes languished. It was an era of generally rising interest rates, and any temporary decline in interest rates was met with heightened housing activity.

Now it is Millennials. Now as then, it is only multi-unit (apartment) construction that is carrying the recovery in housing this year. Single family home starts and sales have completely stalled.  Here is a graph of the YoY% change in single family house permits (blue) and multi-unit permits (red) since the beginning of 2011:

Since late 2013, multiunit construction has been entirely responsible for any increase in residential construction. Single family home construction has completely stalled.


Prices continue to increase, but YoY the price gains are decelerating at various rates depending on the index.  Let's start by showing the YoY% change in median prices in the Case Shiller 20 city index:

The YoY% change in median prices for new homes (red) and existing homes (blue): shows even further deceleration:

Finally, it is worth noting that the same deceleration is also showing up in the data at Depatment of Numbers Housing Tracker. I used this database of asking prices, which is updated weekly, to call in real time both the top of the housing boom in 2006, and the bottom of the housing bust in 2012.  What is particularly noteworthy is that in 2006, it was the asking prices for houses in the 75th percentile (more expensive homes) which turned first.  Now prices for those same more expensive houses are showing the most deceleration of all, as shown in this table, which shows the YoY% change for each percentile of houses for sale nationwide:


Jun 2013
Sep 2013
Dec 2013
Mar 2014
Jun 2014
Jul 2014


With housing prices still increasing, albeit at a reduced rate, we would expect to find more inventory entering the market, as potential sellers hope to take advantage of the improved pricing situation.  And that's exactly what we find. Below is the graph of combined new and existing home inventories:

The inventory of houses for sale is not just increasing, but it is increasing at an accelerating rate YoY.

In summary, through midyear 2014:

  • Higher interest rates since May 2013 have brought growth in single family home building and sales to a complete halt. Only demographics-driven building of apartments and condos is supporting growth.  With interest rates turning slightly lower YoY as of June, there will probably be renewed vigor in housing permits, starts, and sales by the end of this year.  We have either already seen the interim bottom in permits, starts, and sales, or will shortly.
  • Decelerating and/or YoY declining sales have existed long enough for prices gains to decelerate, although they haven't turned negative on a YoY basis.  Since prices are seasonal, it is difficult to tell, but the peak may already have occurred. 
  • Although prices are decelerating, they are still higher YoY and thus inventory is continuing to pour onto the market.  This will probably continue, but will begin to decelerate between now and the end of this year.
In short, as of midyear 2014, the trends in the housing market are reacting in their normal order. Interest rates have turned positive, sales are bottoming, prices are increasing at a quickly decelerating rate YoY and may actually have peaked, while inventory is still increasing smartly and is likely to continue to pour onto the market for a while longer.

Dollar Tree Buying Family Dollar

On June 12th, I explained the reasoning behind Icahn's buying a 9.4% stake in Family Dollar.  Today, Dollar Tree has agreed to by Family dollar at a solid premium. 

Nice trade, Carl.

A note on existing home sales

 - by New Deal democrat

I put a post about last week's report of existing home sales up at

Sunday, July 27, 2014

Steven Hayward of Powerline Fails Econ 101 (Again)

I know, I know  -- saying that one of the "experts" over at Powerline fails in econ is a foregone conclusion.  But sometimes it's amazing just how inept they are.

In his latest salvo, Hayward writes:

Anyway, most economists will tell you that your attitude about the minimum wage is a test as to whether you paid attention to the first day of Econ 101 (and even the NY Times editorial page said as recently as 1987 that the right minimum wage should be zero).  But Common Core liberalism requires a higher minimum wage now as an article of faith.

Well, actually, no there's a lot more to this than drawing simple lines on a supply and demand graph.  As noted by the CEA:

Finally, as one recent review of minimum wage research published since 2000 concluded, “The weight of that evidence points to little or no employment response to modest increases in the minimum wage.” Many economists now believe that a substantial portion of the cost to employers of minimum wage increases is offset by savings from reduced employee turnover and higher worker productivity. Moreover, in the short-run in an economy that is still demand-constrained, raising the minimum wage will increase the purchasing power of a vital segment of workers and contribute to stronger overall economic activity.

Mr. Hayward might want to actually click on the link listed above -- unless Hayward's Nobel Prize in econ informs him differently.

But more importantly, he might want to look at the actual evidence that's occurred since 13 states raised their respective minimum wage:

Beginning in January of this year, 13 states individually increased their own minimum wages, creating a sort of natural experiment in which the remaining states could serve as a control group. All that was left was for someone to do the math, and the Center for Economic and Policy Research, building on research conducted earlier in the year by Goldman Sachs, delivered that in a report last week.

Of the 13 states that raised their minimum wages, all but one saw job growth in the first five months of 2014. To be sure, that’s a small achievement in an environment where the national economy is adding something on the order of 250,000 jobs per month.

The really interesting finding is that the states that raised the minimum wage saw job growth that was, on average, higher than states that did not. The 37 states that did not raise the minimum wage at the beginning of this year saw employment increase by .68 percent. Those that did raise the wage saw employment increase by .99 percent.

In other words, states that have raised their minimum wage have seen an increase in their employment -- which runs counter to Hayward's argument.  Not that reality means much to him, however.

All Hayward had to do was search "minimum wage" in the news over the last month to find that article.  In fact, practically everyone who reads economic news on a regular basis saw that piece of news over that time period. 

Two thoughts for Sunday on increasing inequality of wealth

 - by New Deal democrat

A new study by the Russell Sage Foundation on changes in wealth is yet another piece of confirmation that "the American dream" has only been working for a select few at least since the turn of the Millennium.  Two pieces of data in that study are of particular note.

First of all, the graph of median wealth per percentile since 1984 reveals that an important change happened shortly after 2000, but before the onset of the Great Recession:

Note that between 1984 and 2003, the increase in inequality did not involve the poor getting poorer (although studies of wages as opposed to wealth indicate wages for the lower percentiles were declining during that time).  Rather, the more affluent pulled away.

After 2003, however, but before the onset of the Great Recession, the bottom 25% of households, whose wealth had previously at least kept even over the previous 20 years,  experienced a real 30% decline in wealth.

This is the group most likely to live in apartments and who therefore did not benefit on paper from the housing bubble.  Almost certainly this was due to the offshoring of blue collar  labor that grew geometrically once China was granted "most favored nation" trading status in 1999.   That this large decline for a large swathe of ordinary American households occurred during a time of overall economic growth was a calamity, and an indictment of the accompanying economic policy.

Secondly, a few words of caution in interpreting this table that accompanies the report:

While the table is certainly very powerful evidence of the precarious state of the median household, I would prefer to see a table that does not include housing wealth.  This particular table mainly shows the impact of the housing bubble and bust on wealth.  While "trading down" and cashing in the difference at retirement does occur, appreciation in housing value is most usually traded in for a larger house, or simply retained over the occupant's life.

Perhaps more importantly, this table does not adjust for age, and so must be treated with caution.  For example, the household at the 75th percentile is found to be worth $260,000.  I would regard a 25 year old who is worth $260,000 as upper middle class, if not borderline wealthy.  They can already own the median house outright, have a nice car, and devote all of their wages or salary to long term saving for, e.g., retirement, and to discretionary spending.  Pretty sweet.

On the other hand, a 65 year old worth $260,000, particularly when that includes wealth tied up in a house, is faring no better than lower middle class.  Where pensions are a thing of the past, this household is going to live a very precarious old age.

Put another way, most 20-somethings are probably in the bottom 20% of households in terms of wealth (especially with student loans).  At the other end of the spectrum, not infrequently the household with a net worth at the 90th percentile is also known as "mom and dad."  They've lived beneath their means, and put away $10,000 a year or more throughout their working lives, and due to appreciation of those savings and probably some investments like mutual funds, seen the nest egg grow.

The last time I saw a study that spelled out wealth difference by percentile by age was over half a decade ago.

The Russell Sage Foundation data is powerful.  As with all data, just sift carefully.

Near 14 year low in initial jobless claims

 by New Deal democrat

I put a post up about the nearly 14 year low in initial jobless claims up at