August jobs report: “Recession Watch” as the leading indicators across the spectrum turn negative

 

 - by New Deal democrat

Even before the utter chaos of the new Administration in Washington, my focus had been on whether the economy would have a “soft” or “hard” landing, i.e., recession. Last month I said that the report virtually screamed “Hard Landing!!!” 

If so, this month’s report added the sound of a crash with explosions. Almost everything about this report with the exception of the headline number indicated a recession is imminent or at least close.

Below is my in depth synopsis.

HEADLINES:

• 22,000 jobs added. Private sector jobs increased 27,000. Government jobs declined -6,000. The three month average declined sharply to +29,000, well below the breakeven point necessary with any kind of population growth.
• The pattern of downward revisions to previous months continued. June was revised downward by -27,000 to a *decline* of -13,000, while July increased 6,000 to +79,000, for a net declined of -21,000. 
• The alternate, and more volatile measure in the household report, rose by 288,000 jobs. On a YoY basis, this series increased 1,969,000 jobs, or an average of 164,000 monthly.
• The U3 unemployment rate rose 0.1% to 4.3%. Since the three month average is 4.2% vs. a low of 4.0% for the three month average in the past 12 months, or an increase of 0.2%, this means the “Sahm rule” is not in play.
• The U6 underemployment rate rose 0.2% to 8.1%, a new 3.5 year high.
• Further out on the spectrum, those who are not in the labor force but want a job now rose by 179,,000 to 6.354 million, its highest level since July 2021.

Leading employment indicators of a slowdown or recession

These are leading sectors for the economy overall, and help us gauge how much the post-pandemic employment boom is shading towards a downturn. For the second month in a row they were sharply negative:

• the average manufacturing workweek, one of the 10 components of the Index of Leading Indicators, was fell -0.2 hours to 40.9 hours, and is down -0.7 hours from its 2021 peak of 41.6 hours.

• Manufacturing jobs decreased by -12,000, the fourth decline in a row. This series declined sharply in the second half of 2024 before stabilizing earlier this year. It is now at a 3+ year low.
• Truck driving, which had briefly rebounded earlier this year, declined another -900.
• Construction jobs fell -7,000.
• Residential construction jobs, which are even more leading, declined -900. This is the 5th decline in a row for this important series.
• Goods producing jobs as a whole declined -25,000. This is now the 4th decline in a row, which is very important because these jobs typically decline before any recession occurs. Further, on a YoY% basis, these jobs are now negative by -0.2%. Only three times in the past 70+ years - 1952, 1967, and 1984 - has this series been more negative YoY than this without it being during or shortly before a recession. 

• Temporary jobs, which have declined by over -650,000 since late 2022, declined again this month, by -9,800, a new post-pandemic low.
• the number of people unemployed for 5 weeks or fewer rose 177,000 to 2,476,000, its highest level in 3.5 years.

Wages of non-managerial workers 

• Average Hourly Earnings for Production and Nonsupervisory Personnel increased $.12, or +0.4%, to $31.46, for a YoY gain of +3.9%, close to its lowest YoY% gain in 4 years set last month. Nevertheless, this continues to be well above the 2.7% YoY inflation rate as of last month.

Aggregate hours and wages: 

• The index of aggregate hours worked for non-managerial workers was unchanged, but is up 1.0% YoY, about average for the past two years.

• The index of aggregate payrolls for non-managerial workers rose 0.4%. It is now up 5.0% YoY, about average for the past 18 months. 

Other significant data:

• Professional and business employment declined another -17,000. These tend to be well-paying jobs. This is the fourth decline in a row, and is the lowest number in over 3 years. It is also lower YoY by -0.2%, which in the past 80+ years - until now - has almost *always* meant recession. This is vs. last spring when it was down -0.9% YoY.
• The employment population ratio was unchanged at 59.6%, vs. 61.1% in February 2020.
• The Labor Force Participation Rate increased +0.1% from last month’s 2.5 year low to 62.3% , vs. 63.4% in February 2020.

SUMMARY

This was probably the worst report, including last month’s, since the 2020 pandemic shutdown months.

The *only* bright spots in addition to the positive headline number were the YoY increase in average hourly earnings and in real aggregate nonsupervisory payrolls, an excellent short leading indicator for continued economic growth, which likely another new all-time high once we find out about inflation last month.

Everything else was negative: all of the leading indicators in the goods producing sector, plus temporary and professional jobs. In particular, residential construction jobs, typically one of the last shoes to drop in that sector before a recession begins, declined further. And more broadly, goods producing jobs as a whole continued their significant downward turn.

Additionally, both unemployment and underemployment increased. Further out on the spectrum, once again those not in the labor force but who want a job increased to the highest level in 4 years. And the icing on the cake was the revised negative June payrolls number, the first negative print since 2020.

Last month I concluded that “We are now a hair’s breadth away from ‘recession watch.’” Last month’s ISM reports confirmed that, but then they rebounded in August. But with this report, the “recession watch” is back on. In fact, depending on how other short leading reports come in later this month, it may need to be upgraded to a “recession warning.”

Economically weighted ISM headline and new orders indexes back into weak expansion

 

 - by New Deal democrat

The regional Fed August indexes, including both manufacturing and general business activity, rebounded sharply, telegraphing that a rebound was also likely in the ISM indexes. On Tuesday, the ISM manufacturing index rose slightly. This morning the ISM services index increased sharply.

To wit, the headline number increased to 52.0, while the new orders index rocketed all the way to 56.0:

As a result, the three month average of the headline number rose 0.7 to 51.0, and the new orders subindex rose 3.2 to 52.5.

For a read on the general economy, I assign a weight of 75% to the services index and 25% to the manufacturing index. Here is what the comparison of two headline numbers looks like:

Since the three month average of the manufacturing index was 48.6, the economically weighted headline number rose above 50 to 50.4.

Next, here is the comparative look at the two new orders indexes: 

Since the three month average of the manufacturing new orders subindex was 48.3, the economically weighted new orders number rose sharply to 51.5.

This takes the economically weighted averages back out of “recession watch” territory. Because of the ever-changing situation with tariffs, I expect the monthly ISM numbers to be particularly volatile, so this isn’t really an all-clear vs. a respite. But the bottom line is, the economically weighted averages are at back a level suggesting a weak continuing expansion.

Jobless claims revert to neutral

 

 - by New Deal democrat

In the last few weeks, there has been speculation that jobless claims may have been affected by the jihad against immigrants, the theory being enough were being deported or else were simply afraid to report to work that the number of jobless claims was held down. But I suspected it might at least mainly be due to unresolved seasonality issues involving educational layoffs and rehires. 

To refresh, in the past several years even the seasonally adjusted data appeared to show a bottom in claims after the Holiday season, rising through spring to a wave peaking during the summer, and then declining back through the end of the year. Because of issues involving the school calendar this year, the June and July employment reports showed sharp, adjusted, swings in education employment. I hypothesized the same thing might be going on with jobless claims.

This week’s report added to evidence that my hypothesis has been correct. Initial claims rose 8,000 to 238,000, a ten week high. The four week average rose 2,500 to 231,000, a seven week high. With the typical one week delay, continuing claims declined -4,000 to 1.940 million, near the bottom of this summer’s range, but above any other readings since November 2021:

As usual, the YoY% changes are more important for forecasting purposes. And as of this week, all three were higher. Initial claims were up by 3.9% YoY, the four week average up 0.4%, and continuing claims up 4.9%:

Thus, after over a month as a “positive” indicator, jobless claims now revert to “neutral,” suggesting a weak but still expanding economy in the next several months.

Tomorrow we will get the August jobs report. The comparison of the monthly YoY% changes in jobless claims vs. the unemployment rate (which was either 4.1% or 4.2% in the July through September period last year), suggests that it will remain in that range, or possibly tick higher to 4.3%:

The important takeaway today is that initial claims had been one of the two main positive indicators, along with the stock market, suggesting clear sailing ahead. While it is not forecasting recession, it is no longer suggesting strength either.

The “soft landing” scenario in the JOLTS report remains intact

 - by New Deal democrat

In contrast to much other data in the jobs sector, the JOLTS reports have been very much consistent with a “soft landing scenario,” and that trend continued in this morning’s report for July.

As a quick refresher, this survey decomposes the employment market into openings, hires, quits, and layoffs. So to begin, here are job openings, hires, and quits all normed to 100 as of just before the pandemic:

Except for openings, which declined over -2% to close to their post pandemic low, all of the other series were close to unchanged for the month. Since I regard openings are “soft” data, which have trended down for several years, but remained above their pre-pandemic levels, they are not of much concern to me. While the remaining metrics are all weaker than one year ago, their trend has been virtually flat for the past 11 months.

Now let’s look at several components are slight leading indicators for jobless claims, unemployment and wage growth.

Layoffs and discharges, which have trended slightly higher since last summer, but have been rangebound since last autumn, remained so again (although if you are looking for a negative take, their three month average is the highest since last autumn):

This generally accords with both the increase in the unemployment rate in 2023-24, as well as its plateauing this year (red, right scale), as well as the recent trends in new and continuing jobless claims (not shown), which after a YoY increase earlier this year, improved in July and remained lower YoY in August.

Finally, the quits rate (left scale) typically leads the YoY% change in average hourly wages for nonsupervisory workers (red, right scale):

In July the quits rate continued to remain steady at 2.0%, about average for the past 12 months. The latest data suggests that nominal wage growth will not decelerate further in the next several months, and may increase slightly back to 4.0%.

To reiterate, the recent JOLTS reports have been consistent with the “soft landing” scenario remaining intact. In two days we will get the jobs report for August. Because T—-p’s partisan lackey has not been confirmed by the Senate (at least, not yet), I anticipate Friday’s report will not be skewed. As you know, last month there were severe downward revisions. Since much of that had to do with unresolved seasonality in the education sector, and in August many of these people are rehired, I would not be surprised by an equally sharp rebound - but we’ll see. Further, the final QCEW revisions for 2024 will be unveiled later this month, and they are likely to be very substantial and further muddy the waters.

ISM manufacturing confirms rebound in new orders in August, but construciton spending continues to decline

 

 - by New Deal democrat

As usual, the new month begins with important manufacturing and construction reports which give us the pulse of the goods-producing economy.

The ISM manufacturing report has been a recognized leading indicator for the past 60+ years, although of diminished importance since the turn of the Millennium and China’s accession to regular trading status. While any number below 50 indicates contraction, the ISM itself indicates that the number must be under 42.8 to signal recession. 

Because of the report’s diminished importance, for forecasting purposes, I use an economically weighted three month average of the manufacturing and non-manufacturing indexes, with a 25% and 75% weighting, respectively. For the last three months,  months ago, that average justified a “recession watch.” 

Today’s report was an improvement, although the headline number continued in contraction at 48.7. Significantly, the more leading new orders subindex rose from 47.1 in July to 51.4 in August. Here is a look at both the total index (blue) and new orders subindex (god) for the past fifteen years (via Briefing.com):

Note that both remain slightly better than their low points in 2022-23.

Hare the last six months of both the headline (left column) and new orders (right) numbers:

MAR 49.0. 45.2

APR 48.7. 47.2

MAY 48.5. 47.6

JUN. 49.0. 46.4

JUL 48.0.  47.1

AUG 48.7. 51.4

The current three month average for the total index is 48.6, and for the new orders subindex 48.3. Note that the regional Fed reports, which turned positive during the last month, accurately telegraphed the improvement in the new orders subindex into expansion. But at the same time, although the three month averages improved, they both remain in slight contraction.

As I indicated above, for the economy as a whole the weighted index of manufacturing (25%) and non-manufacturing (75%) indexes is more important. In the non-manufacturing report, the average of the last two months for the headline and new orders numbers has been 50.5 and 50.8, respectively. Pending the ISM report on services Thursday, the economically weighted headline number is exactly 50.0, and the new orders average is 50.2.

If the ISM services report on Thursday does not indicate any further downturn, this means that the economy as a whole is every so slightly expanding, and would justify lifting the “recession watch” posted last month.

But if the news from new orders in particular in the manufacturing index was a relief, construction in July, the month covered by this morning’s report, continued to be more of the same, i.e., a continuing decline since a summer of 2024 once we adjust for the cost of construction materials.

For the month, total construction spending (blue in the graph below) declined -0.1%,  while residential construction spending (red) increased 0.1%. Nominally, total  residential construction spending has declined every month but one since last August, and is now down -3.4% from its August 2024 peak. Residential construction spending has declined every month but two (including this month) in the past year, and is down —6.8% since May of last year:

Adjusted by the cost of construction materials, both measures declined again last month. So adjusted from their peaks last year, total construction is down -7.1%, while residential construction is down -9.4%. If there is a silver lining, it is that adjusted residential construction spending may have stabilized in the past three months:

For the last three months I have concluded that these two reports together suggested that the goods-producing part of the economy as a whole has been contracting, if only slightly. That still appears to be the case.

Weekly Indicators for August 25 - 29 at Seeking Alpha

 - by New Deal democrat 

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

The most significant benefit of these high frequency indicators is to alert you of possible changes in trend that are unexpected. In the case of the past several weeks, that would be the sharp improvement in the regional Fed surveys of both manufacturing and services. The latter are almost exactly back in equipoise, and the former have improved all the way back to positive, showing expansion in the manufacturing sector.

This may be of a piece with the improved consumer spending we saw Friday in the persona income and spending data, and suggests the end to distortions based on the original April imposition of tariffs. 

As usual, clicking over and reading will bring you up to the moment as to all of the economic sector trends, and bring me a penny or two.

July real income and spending rebound, keeping the expansionary trends intact

 

 - by New Deal democrat

Last month I concluded: “This was a very weak report, although not negative. If there were not distortions from the front-running of tariffs earlier this year, it would come very close to meriting a ‘recession watch.’  But by next month, the payback from this previous front-running should have largely abated. If there is a rebound, needless to say that will be good. But if the weakness persists, we may cross the threshold. As it is, because of this uncertainty a ‘yellow flag’ caution, ie., pay extra close attention, is merited.”

This month we indeed got the answer. The “payback” for front-running did abate, and there was a rebound across all the data, meaning the yellow flag can be removed for now.

Nominally income rose 0.4% and spending 0.5%. Since the PCE inflation gauge only rose 0.2%, real income increased 0.2% and real spending rose 0.3%. Real personal income is below only April’s outlier, while real spending set a new record.:

[Note: with the exception of the personal saving rate, and one YoY graph, all of the data in the below graphs is normed to 100 as of just before the pandemic.]

Since real spending on services (blue, right scale) rarely turns down, even in recessions, the focus is on goods (red, left scale). In July they rose a strong 0.9%, also to a new record high:

Additionally, there is authority for the fact that spending on durable goods usually cools risk before spending on non-durable goods. In July, this rose 2.0%, but the absolute level remained below that of March and April, as well as last December:

While this is positive, the YoY trend shows considerable deceleration, as at 3.2%, it is no better than the level last summer:

One way to differentiate between noise and trend is to look at the YoY comparisons.In general while real income and spending do not turn negative YoY until after a recession has started, usually they have declined 50% or more from their YoY peaks within the previous 12 months (e.g. a decline from up 4.0% YoY to being up 2.0% YoY). After the improvements this month, total real spending as well as real spending on goods are nowhere near this threshold, but as shown above real spending on durable goods is very close, as measured on a three month average basis,  it is down -49% from +6.2% YoY to 3.2% YoY.

Next, here is the personal savings rate. I follow this because just before and going into recessions it tends to turn up as consumers get more cautious. In July it remained steady at 4.4%, in line with its typical reading this year:

Finally, let’s take a look at two coincident indicators from this report which the NBER pays close attention to in dating recessions. First, here is real income less government transfers:

This rose 0.3%, reversing the declines in the two previous months. It is now higher 1.6% YoY, and less than -0.1% below its April all-time high. Last month it was on the cusp of being recessionary. With this month’s improvement, the trend this year has stabilized, although over a longer time period, the deceleration that started last year has persisted.

Second, here is real manufacturing and trade industries sales, which is delayed one month and so if for June:

This rose 0.3% for the month, and the upward trend since 2022 is intact, although this remains below April and May levels. 

On an YoY basis this is also up, by 3.1%, in line with the trend in 2024 before tariff front-running came into play:

While both coincident indicators are below their spring peaks, I am not concerned that they signal a present recession, since the leading indicators would turn down first, and they have not done so.

In conclusion, as I said above, last month’s yellow caution flag can be removed, as all components rebounded, some to new all-time highs. There was no consumer retrenchment in savings, and real goods sales improved as well. The only ambiguous measure was real spending on durable goods, which typically is the first area where a downturn would be seen, and even there the more pessimistic reading is flatness rather than down.

Jobless claims suggest continuing, but resolving seasonality issues

 

 - by New Deal democrat

Initial jobless claims have been relatively subdued for the past month. Some have suggested that this is a byproduct of the large immigrant deportations which have recently taken place. Last week I noted that, “comparing the SA and NSA readings in the past several months suggests that [unresolved seasonality] has affected initial claims as well, with markedly fewer claims at the early July peak. But whereas NSA claims continued to decline through August last year, for the past three weeks this year they have held steady.”

This week’s report did not resolve the issue, but tilted it slightly back towards the unresolved seasonality argument.

Initial claims declined -5,000 to 229,000, while the four week average increased 2,500 to 228,500. With the typical one week delay, continuing claims declined -7,000 to 1.954 million:

It is interesting that during the recent weeks in which initial claims have declined, continuing claims have if anything drifted higher - again, suggesting that it is not a lack of immigrants making (initial, and then continuing) claims that is the main driver.

On a YoY basis, which is more important for forecasting, both the one week and four week average of initial claims were down -1.3%, while continuing claims were higher by 4.5%:

Note that in both 2023 and 2024, initial claims were declining all during August. This year on a SA basis they declined in late July and have instead trended higher during August. My suspicion is that within the next two weeks both the one week and four week average for initial claims will revert to being higher YoY once again. We’ll see.

Next week we will get the jobs report for August. Since jobless claims generally lead the unemployment rate, here’s the latest on what that comparison looks like, as YoY% changes:

One year ago the unemployment rate was 4.2% in August, declining to 4.1% in September. Last month it was also 4.2%. Initial claims suggest that it will remain 4.2% or perhaps decline to 4.1% in the next month or two, while the less leading but more comprehensive total of initial+continuing claims suggest it may rise to 4.3%.

Manufacturers’ new durable goods orders is a bright spot

 

 - by New Deal democrat

No new significant economic data today, but yesterday we did get a look at manufacturers’ orders for durable goods.

This is one of those noisy indicators that sometimes is leading (2000), sometimes is not (2007), and sometimes gives false positives (2016 and 2019), but has historically been considered a leading indicator for the economy:

Yesterday’s report for July showed a -2.8% monthly decline, which still kept the value higher than at any point before May. Since much of the volatility has to do with airplane orders (Boeing), the core capital goods measure, which excludes aircraft and defense, is typically more important. This rose 1.1% monthly, to the highest level since late 2022:

The general trend this year remains positive, which is a good - if surprising - thing; particularly as spending on goods, especially durable and consumer goods, is an important short leading indicator I am watching more closely since I have gone on “Recession Watch.”

Because so many durable goods are imported, real consumer spending on such goods has risen much faster than domestic production of such goods, so the best way to compare the two is YoY, which is shown in the graph below:

There has been some marked deceleration in real consumer spending on durable goods in the past few months, after the tariff front-running of earlier this year.

Real consumer spending will be updated on Friday. Will it resume its prior uptrend, or continue below the levels of earlier this year?

Repeat home sales indexes provide final confirmation that the housing market is in deflation

 

 - by New Deal democrat

Last week YoY existing home prices increased only 0.2%. Since those were not seasonally adjusted, it was apparent that the actual peak in such prices was about early this spring. Yesterday we saw that new home prices continued to deflate. This morning’s repeat home sales reports from the FHFA and S&P Case Shiller are the final confirmation that the housing market is in deflation.

On a seasonally adjusted basis, in the three month average through June, the Case-Shiller national index (light blue in the graphs below) declined -0.3%, while the FHFA purchase index declined -0.2%, matching their declines from the previous report. The FHFA index (blue in the graphs below) has now been declining for three straight months, and the Case-Shiller Index (gray) for four. the third. (note: as per usual, FRED hasn’t updated the FHFA information yet):

In other words, there has been actual *de*flation in the house price indexes since February, by -0.7% in the FHFA Index and -1.2% in the Case Shiller Index:

On a YoY basis, price gains in both indexes not only continued to decelerate, at 1.9% for the Case Shiller index, and 2.7% for the FHFA index; but these were the lowest YoY% increases since 2012 for both indexes excluding 5 months in 2023 for the Case Shiller index:

Because house prices lead the shelter component of the CPI by 12 - 18 months, this strongly indicates that they will continue to decelerate over that period. Here is the same graph as above (/2.5 for scale) plus Owners’ Equivalent Rent from the CPI YoY (red):

The last time the Case-Shiller and FHFA Indexes were in this range, excluding the Great Recession, was in the 1990s, during which time Owners Equivalent rent was in the 2.5%-3.5% range (vs. 4.1% as of the most recent CPI report).

Similarly, although I won’t bother with the graph, the latest “National Rent Report” from Apartment List from the end of July showed precisely zero YoY rent increases.

As of now, all phases of the housing market are either at or near their low points (sales, permits, starts), or declining (prices, construction, employment, and new spec units for sale). After a brief spurt earlier this year, for the past few months industrial production has also been flat. Before 2000, when both goods producing sectors of the US economy were flat to negative, the economy contracted promptly. On Friday, we will find out if consumer purchases of goods are flashing a warning (or not) as well.

New home sales: the final shoe in the housing sector has dropped

 

 - by New Deal democrat

In this month’s report on new home sales for July, the most important news was at the tail end, which I’ll get to last.

As per my usual intro, while new home sales are the most leading measure of the housing market, they are very noisy and heavily revised - which turned out to be important this month - and which is why I generally pay more attention to single family permits. Still, if averaged over three or more months they are valuable indicators of the underlying upward or downward pressure on the economy going forward one year or more. Further, as per usual, sales turn first, followed by prices and inventory, which is typically the last shoe to drop.

So let’s turn to each metric in order.

With mortgage rates remaining in the 6%-7% range, sales of both new and existing homes have also been rangebound for over two years. In July that continued to be the case, as new home sales declined -4,000 (from a June level upwardly revised by 29,000!) to 652,000, near the bottom of that range: 

After sales peaked, prices also stalled, and then began a very slow deflation on the order of -1% -5% YoY. That trend not only continued but amplified in July, as on a non-seasonally adjusted basis prices declined -$3,400 to $403,800 (gold, right scale in the graph below). More importantly, on a YoY basis prices declined -5.9%, the steepest such decline since last November (blue, left scale):

Recall that last week the median price for existing home sales was only up 0.2% YoY. Tomorrow we will get both the FHFA and Case Shiller repeat sales indexes, which also have shown recent, seasonally adjusted, declines. If that continues, it will be the steepest such retreat since the Great Recession’s housing bust.

But the most important news was at the tail end. Last month’s initial report indicated that the inventory of homes for sale had risen to 511,000, a new post-pandemic high.

Revisions made a major difference this month. The data now indicates that the inventory of new homes for sale in fact peaked in March at 504,000, with both May and June being revised down, the latter by -9.000 to 502,000. And this month inventory for sale was reported declining another -3,000 to 499,000:

Why is this so important? Because in the past recessions have happened after not just sales decline, but the inventory of new homes for sale (red, right scale) - which also consistently lag - also decline, as builders pull back:

To reiterate: in the typical housing cycle mortgage rates lead sales, which slightly lead permits and starts, which in turn lead prices and housing units under construction (gold in the graph below), which finally lead employment in residential construction (blue) and housing for sale (red):

For the record, I pay very little attention to months’ supply, becuase it depends on both units sold and for sale. There does not appear to be any “magic level” that serves as a turning point, and indeed, it frequently only turns down after a recession has begun, as homes for sale decline even more than homes sold:

So, the important conclusion is: all of the important sequence of metrics in the housing sector have now turned down. The final shoe has dropped. Now we pay more attention to short leading indicators like major durable goods purchases and initial jobless claims, for signs that the turn in the bigger economy is near.

Weekly Indicators for August 18 - 22 at Seeking Alpha

 

 - by New Deal democrat

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

There were no big changes this week, but what continues to stick out in the data as far as I am concerned is just how strong consumer spending continues to be: weekly retail spending was up nearly 6% YoY, and restaurant reservations - a very easy thing to cut back if consumers feel pinched - are up 10%. That simply is not compatible with a big slowdown.

As usual, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and bring me a penny or two in my pocket for organizing the data for you.

The rebalancing of the housing market continues, as existing home price increases have halted, and inventory finally exceeds 2020 levels

 

  - by New Deal democrat

The housing market, for all of its economic importance, tends to move as slow as molasses. This is especially true as to prices, where sellers are loathe to realize a loss, even when compared to hypothetical gains they could have had by selling earlier.

The pandemic, of course, through the entire market out of whack, since there was a period of time that it was for all intents and purposes shut down. It is only now rebalancing.

After the Fed began hiking rates in 2022, mortgage rates also rapidly rose from 3% to the 6%-7% range, where they have remained ever since. Since sales follow mortgage interest rates, existing home sales rapidly declined to 4.0 million annualized, and have remained in that range, generally +/-0.20 million for the past 3.5+ years:

In July, the rangebound behavior continued, with sales of 4.01 Million annualized (blue, right scale). Note that new home sales (gray, left scale) similarly declined and have similarly stabilized in the 625,000-725,000 annualized range.

The trend I have been looking for in the past several years is the rebalancing of the new and existing homes markets. Existing home inventory has been removed from the market for over 10 years (likely due in part to absentee rental owners buying increasing chunks of inventory), and really accelerated during the pandemic. This caused an acute shortage of houses for sale, which in turn led to bidding wars among buyers and a spike in prices.

A rebalancing of the market more than anything would require an increase in inventory at least to pre-COVID levels, and a deceleration of price increases, or even outright decreases. Which means that 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.

The secular decline in inventory reached a nadir in 2022. This series is not seasonally adjusted, so it must be looked at YoY. In July inventory increased by only 1,000, but more importantly, inventory finally exceeded its 2020 level for the same month, up 5,000:

Still, pre-2020, inventory was typically in the 1.7 million to 1.9 million range, which means that although it is lessening the chronic shortage still exists.

But even more important is what happened, and has continued to happen, with prices. As shown in the below graph, the average price of a new home (gray, left scale, not seasonally adjusted) rose almost 40% between June 2019 and June 2022 before slowly declining about -7% through June 2025. Meanwhile, the average price of an existing home (blue, right scale, not seasonally adjusted) rose about 45% between July 2019 and July 2022 and another 5% through July of this year, as was reported yesterday:

With seasonal adjustments are not made, my rule of thumb is that a peak (or trough) occurs when the YoY% change is less than half of its maximum change in the past 12 months. Here are the comparisons in the past 12 months:

July 4.2%

August 3.1%

September 2.9%

October 4.0%

November 4.7%

December 6.0%

January 4.8%

February 3.6%

March 2.7%

April 1.8%

May 1.3%

June 2.0%

As of yesterday’s report for July, the YoY% change in average prices was only 0.2% higher than one year ago.

Last month I concluded with “I still expect moderation in price increases and more importantly, for inventories finally to exceed their 2020 levels.”

This month, both happened. Inventory finally exceeded 2020 levels, and further, it is safe to say that if we had seasonally adjusted measurements, we could conclude that prices for existing homes peaked sometime this spring, and have started to decline.

Even so, prices of existing homes are still up about 50% from 2019 levels, vs. new single family homes, which are up less than 30%. Which means that while the July existing home sales report confirmed the ongoing rebalancing of the market, there is still some distance to go.