Is the disinflation in repeat home sales prices ending?

 

 - by New Deal democrat

There may be a new, slightly accelerating, trend developing in house prices — or it may just be noise. The former, of course, would not be good news for inflation. In any event, let’s take a look.

As per my usual preliminary comment, while existing home sales are about 90% of the market, new home construction is much more important for the economy. While the current cycle may have dispelled the notion that “housing *is* the economic cycle,” it is nevertheless an important component of the long leading indicators. But existing home sales are an important determinant of pricing equilibrium in housing, and the repeat home sales indexes, by S&P Case Shiller and the FHFA, are the best indicator of same.

The seasonally adjusted Case-Shiller National index (blue in the graphs below) declined once again, this month by less than -0.1% for the three month period ending in May, while the FHFA index (red) rose 0.3% [Note: FRED has not yet updated the Case Shiller data]:

Last month I noted that “there is something of a divergence showing in the YoY comparisons of the two national indexes,” as the Case Shiller national index had increased less than 1% YoY, while the (often slightly more leading) FHFA Index had accelerated to a 2.0% increase. This year the Case Shiller YoY comparison increased to 1.1%, and the FHFA increased to 2.2%:

As you can see, the red line has stopped declining and in the last few months has increased slightly. The blue line also appears to be ending its decline. As noted at the beginning of this post, this could be the sign of an incipient reversal of trend, but as of yet it could just be noise. 

Nevertheless, as shown in the graph below, by historical standards these are quite low increases. Additionally, while I haven’t shown it in the graph, last week existing home sales showed an increase of 1.8%. Given the lead time between house prices and the official CPI shelter component of owners’ equivalent rent (gold), here is an update of that historical comparison [Note: CPI*2.5 for scale]:

Keep in mind that the oficial CPI metric for shelter has been complicated by the “shelter kludge” that the Census Bureau performed last November as a result of the extended government shutdown. I concluded last month that  “I continue to believe that the repeat sales indexes point to continued slow deceleration in the shelter inflation in the CPI.” The increasing trend in YoY comparisons in the repeat sales indexes, if it is signal and not noise, calls that into question.

Finally, let’s take a look at how new and existing home prices as measured by repeat sales compare with households’ buying power (blue in the graph below), by adjusting for average hourly nonsupervisory earnings in the graphs below (median household income would be better, but is updated only once a year, and average wages are reasonably close for these purposes). I’ve also included the same metric for median new home prices, both monthly (thin, red) and quarterly (thick) to cut down on noise. Since the FHFA is reported as an index, I’ve used the most recent median price for existing homes as a substitute:

The bad news continues to be that existing houses remain more unaffordable than at any time before the pandemic, although they’ve backed off slightly from their highs; and indeed the median existing home is now more expensive than the median new home. Contrast that with new home prices, where builders have taken steps to meet the market. Until a lot more existing homes go on the market, this discrepancy is not going to be resolved.

Two cheers for increasing manufacturers’ new orders

 

 - by New Deal democrat

This is another one of those weeks when most of the important new data is crammed into one day, in this case Q2 GDP, personal income and spending, and jobless claims all will be released on Thursday.

Today we did get some further information on manufacturing, and the positive news in that sector continued, as new orders for durable goods (blue) increased 0.3% in June, and core capital goods orders (red) increased 0.9%. Since these are “official” (short) leading indicators, it is worth paying attention to them:

The former series in particular is noisy; hence the increased emphasis on the core. But it’s easy to see that both have been in an increasingly sharp positive trend since late 2024, interrupted somewhat in the months surrounding the T—-p Administration’s first imposition of widespread tariffs in April of last year.

This is in accord with what we have been seeing in the new orders components of the regional Fed manufacturing indexes. The average of the NY and Philadelphia indexes (gold, right scale) are shown below for comparison:

With the exception of early 2022, the regional Fed indexes have maintained a trend similar to the monthly durable goods orders reports.

The picture becomes more complicated, however, when we compare the durable and core capital goods orders metrics with the industrial (gray) and manufacturing (gold) production data (right scale):

Durable and core capital goods orders have risen over 35% since just before the pandemic, while production is up less than 1%, and manufacturing production slightly *below* their pre-pandemic level.

This brings up something that is important in the current environment, which is that the durable and capital goods orders metric are reported in nominal $ terms. Which means that, adjusted for inflation, the situation might be quite different. Below I show what both new orders metrics look like deflated by the PPI for finished goods, in comparison with manufacturing production:

Now the series look very similar, not only in terms of the trend, but also in their absolute values compared with just before the pandemic. Let me state right up front that there may be a better deflator or combination of deflators that may be better than the one I have used above, but it demonstrates that inflation has been distorting to the upside the positive trend in new orders. 

In other words, postive, but not so much. 

The NY Times finally tells its readers what I’ve been telling you for the last 6 months: wealth effect edition

 

 - by New Deal democrat

Via Ben Casselman, who authored the piece, here is the headline for a NYTimes article from last Wednesday:

As he summarizes it:

In other words, the Times finally got around to telling its readers what I’ve been telling you for about the last six months.

—-

And while I am at it, here is a link to the blog post I had to upload as an addition to the “Weekly Indicators” link one week ago, on the day when Blogger for some reason said I was unable to add a new post; on the pitfalls of mistaking the aggregate economy (and especially the stock market) as a proxy for the condition of average American working or middle class households:

 In which I defend the criticism of ‘bloodless quants’

Weekly Indicators for July 20 - 24 at Seeking Alpha

 

 - by New Deal democrat

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

With the renewed warmaking in the Middle East, the price of oil and gas shot up, and interest rates across the board as well. It looks increasingly likely that the Fed will have to hike rates to fight inflation soon, maybe as early as next month.

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

June new home sales, prices, and inventory are more evidence for a subpar housing equilibrium

 

 - by New Deal democrat

In last month’s note on new home sales,  I concluded that “This is all but unique. Historically a recession will not occur until inventory turns down again. But to reiterate, housing has been recessionary for a year, and yet no recession has occurred.”

Earlier this month, I described the housing market as being in a subpar equilibrium, with sales, construction, prices, and finall inventory moving more or less sideways - but at a level of building not nearly enough to meet the needs of the millions of mainly younger potential buyers who are unable to move out of apartments or maybe even their parents’ home.

This morning’s new home sales report for June was yet more evidence for both of the above theses. Sales, prices, and inventory all generally stayed on their recent trend level.

First, sales increased 10,000 on a seasonally adjusted basis to 628,000 annualized. Because new home sales, while perhaps the most leading metric in the housing market, are very volatile and sharply revised, below I also show the much more stable, if slightly less leading, single family permits (red, right scale):

Single family permits have been stable for a year. Meanwhile single family home sales have downshifted slightly (by about 5%) this year. In June sales were down -5.6% YoY.

The dynamic is similar in median prices, which declined -$13,700 to $398,300 on a non-seasonally adjusted basis:

This continues the very slow declining trend in new home prices ever since 2022, down -2.7% YoY in June. By contrast, repeat existing home sales as typified by the FHFA index (red, right scale) have continued to rise at a very slow pace (currently up less than 2% YoY). The difference is because builders of new homes have been able to cut lot sizes, square footage, and amenities to make their homes more affordable to potential buyers, whereas those selling their existing homes obviously cannot. Since, as noted above, this series is not seasonally adjusted, here’s the YoY comparison:

Finally, inventory has also stabilized, down only -1,000 in June. This has been almost completely stable since last September:

For the past few years, I’ve been repeating that prices follow sales, and inventory follows prices. Inventory has historically been the last shoe to drop before a recession; but as shown in the below historical graph, only once in the past 60 years has a period of stability about this long been shortly followed by a recession, in 1991 - and in that case, inventory declined again for several months before the recession:

Otherwise, a bottoming in inventory is something we typically see towards or even after the end of a recession.

 So, to sum up and repeat: unless inventory turns back down, it is not forecasting a recession. With sales relatively stable and prices slowly deflating, the new home market is meeting the existing home market in a equilibrium, which is likely to remain unless something significant happens upstream, like an increase in mortgage rates back to 7%, possibly driven by a Fed rate hike.