Weekly Indicators for September 18 - 22 at Seeking Alpha

 

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

With interest rates at or near multi-decade highs, and the existing home market completely seized up, the background financial condition have trended even worse. Meanwhile the shorter term indicators may be getting reading to peak. But their previous sharp increase has worked its way into most of the coincident data.

As usual, clicking over and reading will bring you right up to the virtual moment, and reward me with a couple of centavos for my efforts.

The Big Picture of the housing market, and its almost complete bifurcation, in 3 easy graphs

 

 - by New Deal democrat

I want to spend some time commenting on the broader issue of why the public perceives that inflation is still rampant, even though almost all official measures show it rapidly decelerating, and even completely absent on a YoY basis currently by a few measures. A big part of that has to do with housing, and since I’ve discussed several facets of that issue in discussing the data releases this week, I wanted to pull that together into a “Big Picture” summary. I do that in 3 simple graphs below.

Graph #1: Active listing counts of existing homes (red, left scale) vs. new housing under construction (blue, right scale):

The average mortgage on an existing home is something like 3.5%. Huge numbers of people either bought or refinanced when mortgage rates were 3%, and now those people are locked in. For example, a $1000 monthly interest payment at 3% is a $2333 monthly interest payment at 7%. Those people are locked into their existing home for the foreseeable future.

As a result, the existing home market has collapsed. As I showed yesterday, sales are near 25 year lows. The active listing count above, which averaged 1.3 million in the years prior to the pandemic, even with a modest recovery in the past year is still only about 700,000, a -600,000 decline.

Meanwhile the number of new homes under construction has risen from about 1.125 million annualized in the years before the pandemic to about 1.725 annualized, a mirror image +600,000 increase.

In other words, the seizing up of the existing home market has diverted people to the new home market.

Graph #2: median price of existing (red) vs. new (blue) homes:

The NAR only lets FRED publish the last year of their price data, which is not seasonally adjusted, but that is fine for today’s purposes, so the above graph compares it with the not seasonally adjusted price data for new homes.

The lack of inventory of existing homes means that prices got bid up, and remain bid up. Builders responded by building lots of new units, and unlike existing homeowners, they can respond to market conditions by varying their price point, which the above graph shows they have done. The median price for a new home went down -$100,000, or 20%, a few months ago, and is still down about -15% from its peak last year.

Graph #3: Single vs. multi-family units under construction:

The Millennial generation and the first part of Gen Z are well into their home-buying years. But because they have been priced out of large parts of the market, due to both the aforesaid big rise in mortgage rates, but also the post-pandemic increase in prices, they have had to downsize their target from single family homes to the less expensive condos or apartments.

As part of their adjustment described above, apartments and condos are being built hand over fist, and builders are offering price or financing concessions. Single family houses under construction have declined by about 20% from summer 2022, while multi-family units soared to a new all-time record, about 20% higher than their level in summer 2022.

It’s the housing version of shrinkflation, since - although the data isn’t easily available - I think we can take notice of the fact that apartment and condo units are considerably less expensive on average than single family detached houses.

[As an aside, note that a very similar thing happened in the 1970s when the Baby Boom generation was well and truly into their first home-buying years. While the Millennial generation is slightly bigger numerically than the Boomers, since the total US population was only 50% of its current size back in the 1960s, proportionately the Boomers had an even bigger impact on the market.]

That’s the Big Picture of the almost complete bifurcation of the current housing market. The “shrinkflation” I’ve described above is very much a part of why the public continues to believe that inflation remains a big problem. 

With sales near 25 year lows, the huge divergence between the existing and new home markets continues

 

 - by New Deal democrat

The drastic bifurcation between the new and existing home markets continues. Existing home sales fell to 4.04 million annualized in August, the lowest level of the entire past 10+ years except for last December and January. In fact, with the additional exception of a number of months during the great home bust during and right after the Great Recession, it’s the lowest level of the past *25* years:

This is a market that is in utter collapse, down about 40% from its peak several years ago.

The reason for the collapse, as I have noted several times in the past few months, is that existing homeowners are essentially locked in place by their 3% original or refinanced mortgages. They’re not selling, and they’re not going anywhere in the foreseeable future. Such houses as are on the market are disproportionately from people who have no mortgages, and so are insensitive to those rates.

With inventory so restricted, prices have held firm. Indeed, the median price was above  $400,000 for the third month in a row (blue line), at $407,100, and is up YoY for the second month in a row (shaded gold area), at +3.9%:

All of this has been driving buyers to the new home market, where builders have been cutting prices and engaging in other incentives, and in particular the less expensive multi-family units, which made continual new records until their very slight decline this month, as I pointed out a couple of days ago.

To show you the contrast, here is a graph of the YoY% change in new home prices (red, left scale) compared with new home sales (blue, right scale):

The median price of a new home is down -8.7% YoY. The number sold remains higher than at any point in the last expansion except for four months in 2019.

So long as the Fed keeps interest rates elevated, I do not see this changing anytime soon.

Initial jobless claims: unresolved seasonality obscures cautionary YoY comparisons

 

 - by New Deal democrat

For the last few weeks, I have been highlighting that there is likely some unresolved post-pandemic seasonality in the initial claims numbers. That certainly looked like the case this week, as a sharp decline mirrored a similar sharp decline 52 weeks ago.

To wit: initial claims declined -20,000 to 201,000, the lowest number since February. But exactly one year ago, they declined -5,000 to 192,000, part of a -24,000 monthly decline to a 50 year low of 182,000 on September 24th.

The 4 week average this week also declined -7,750 to 217,000, also the lowest since February. And continuing claims, with a one week delay, declined -21,000 to 1.662 million, the lowest since January:

But the YoY% changes make clear the effect of unresolved seasonality. On that basis, weekly claims were higher by 5.2%, the 4 week average by 10.4%, and continuing claims by 28.9%:

The 4 week average being higher by more than 10% YoY is enough to maintain the “yellow caution flag” but not over the 12.5% threshold that, if maintained for 2 months, would warrant a “red flag.”

On a monthly basis, despite the big declines on a weekly basis, so far September is running 11.8% above last year:

.That suggests that the unemployment rate over the next few months is likely to trend towards 3.9%-4.0% (1.118*3.6%, the average unemployment rate in summer and autumn last year). The “Sahm Rule” for recessions would only be triggered by an average unemployment rate of 4.0% or higher this coming winter, which would be 0.5% higher than last winter’s average of 3.5%

Using the stock market and unemployment as an easy and timely coincident recession indicator

 

 - by New Deal democrat

My fellow forecaster Bob Dieli has a measure he calls “DeltaDelta,” basically an average of the YoY% change in the stock market and the unemployment rate (which hopefully he won’t mind me mentioning here). It called to mind that occasionally in the past I have noted that a YoY decline in stock prices is a yellow flag for a potential recession, although there are many false positives. I wondered whether the signal might improve if, rather than averaging the two, for a signal I insisted that each of the measures be negative YoY. So here’s where that led me.

First, here’s what the YoY% change of the average of the two measures - stock market and unemployment rate - goes back to the beginning of the Wilshire 5000 total market index over 40 years ago (S&P only lets FRED publish the last 10 years of that measure, but since on a YoY basis it is virtually identical to the Wilshire 5000, there’s no loss):

This measure occasionally leads and occasionally lags by several months, but overall is a good coincident indicator. There are a few false positives, notably two months in autumn 1988, and one month each in 1992 and early 2019. Interestingly, it was also negative last December and this past March.

Now let’s see what it looks like divided up, and also divided into pre- and post- pandemic lockdown sections:

The false positives all go away, as do the two below 0 readings in the past year. On the other hand, this look misses the 1980 recession. It occurred to me that adjusting stock market returns for inflation might take care of that, and it did:

Interestingly, it also indicates a slightly below 0 readings from this past April.

Finally, because initial jobless claims lead the unemployment rate, I substituted the former for the latter, and here’s what I got:

It doesn’t improve the model, partly because I need to adjust initial claims by 10%, and partly because stock market returns often don’t turn negative YoY until after a recession begins.

Still, I think tracking both stock market returns as well as either the unemployment rate or initial claims YoY does add value. That’s because the former generally provides a measure of the broad producer side of the economy (vs. for example the ISM manufacturing index, which only measures one slice of it), while the former provides a measure for the consumer side. At present what it is telling us is that the consumer is likely weakening, while producers still see clear sailing in the months ahead.

Since the stock market bottomed at the beginning of last October, for the next several months YoY comparisons will be easy:

In my weekly updates, to avoid noise and being whipsawed, I look at the last 3 months to see if the stock market has made a new high or low. At the moment the market is a positive, given the 12 month high it made at the end of July. Unless the market makes a new 3 month low, that rating will continue until at least the end of October.

The long awaited downturn in multi-family construction may finally have happened

 

 - by New Deal democrat

With the relative fading of manufacturing in importance to the US economy, the leading construction sector has assumed even greater importance. And the most important data about construction are the leading, and long leading, data about residential housing construction.

To give a little additional framework, typically the first data to turn are new home sales. But that data series is extremely noisy and heavily revised. The next data to turn are housing permits, and the subset with the least noise and most signal are single family permits. Next are housing starts, which are much noisier than permits, although they represent actual economic activity. Perhaps surprisingly, next in line are housing completions. Bringing up the rear, but representing the actual sum of economic activity in housing, are housing units under construction. 

And as I have pointed out almost every month for the past year, because of pandemic bottlenecks in production of relevant materials, units under construction have lagged by a particularly long time.

That may finally have changed this month.

Let’s start with permits (Note: In each of the graphs below, blue represents the total (on the right scale), gold single family units, and red multi family units). Permits have rebounded since their bottom in January, and made a 10 month high:

Single family permits, which convey the most signal, participated in that increase, rising to their highest level since May 2022. This is good news (but we’ll come back to that below). Meanwhile, while they did rise, multi-unit permits continued to languish near their 3 year low set in June.

Starts, on the other hand, declined sharply in August. Perhaps most significantly, multi-family starts declined to their worst level since August 2020 (not shown):

Because starts are so noisy, take this with a big grain of salt.

But the biggest news was what happened with units under construction. The total declined slightly, as did single family units. But most significantly, for the first time since February 2021, multi-family units under construction also declined, albeit only by 2,000 units annualized:

Why is this so important? Because, as this long term historical graph shows, total housing units under construction, although the most lagging of housing construction statistics, have also had to turn down before recessions begin:

Even moreso, as shown above multi-family units under construction, which typically turn after single family units, have also usually (except for 2008 and the pandemic) turned down before recessions have begun.

So the fact that multi-unit dwellings under construction may finally have made their turn is significant in terms of meeting the conditions for a recession to begin. If this continues, the final thing to look for is if total units under construction decline 10%, which is the average decline before the onset of recession.

In that regard, finally let’s return to permits. As I have written dozens of times in the past decade, mortgage rates lead permits. Here’s the 40 years between the beginning of the modern data and the end of the Great Recession:

With the exception of the housing bubble (where everyone “knew” that “housing only goes UP!” so continued to buy housing even after mortgage rates increased) and the mirror-image bust, permits for housing reliably followed mortgage rates.

Here’s the subsequent 10+ years through the present:

The typical leading / lagging relationship re-asserted itself. And as you can see, with mortgage rates reverting to over 7%, on a YoY% basis they are forecasting permits to turn back down perhaps by 20% or more from already depressed levels YoY as well.

It will take another couple of months’ worth of data to be more confident, but it certainly appears that the turn I have been waiting for in the housing market has finally happened. This is an important reason why, while I have removed the “recession warning” from the end of last year, the “recession watch” remains, pending a return down of several short leading indicators like vehicle sales and the stock market.