January existing home sales and the housing slowdown

 - by New Deal democrat

Let me start out by saying that, in terms of their importance for the economy, existing home sales are the least signficant number, even though existing sales are about 90% of all sales.  That's becuase the impact from construction trades, suppliers, landscaping, furniture, appliances, etc., is much less for existing that new home sales.

But since they are 90% of the market, they dominate the housing slowdown.

Let me start by taking my graph of housing permits (blue) and starts (green) normed to 100 in September 2012, and add in existing home sales through this morning's report (red):



Existing home sales peaked earlier and are now lower than they were 16 months ago.

Next, to give you another perspective other than a YoY one, here are ths same three series, normed to 100 at their respective 2013 peaks:



All of them have declined at least 10% from those peaks.

Next, here is months' supply of inventory:



This is a little higher than during almost all of the housing boom.  It may be a neutral reading, or it may be slightly supportive of prices.

Finally, some writers are claiming that there has been a second housing "bubble."  There may have been some merit to that claim in terms of new home prices, but that claim has no credibility when applied to existing home prices.  To show you why, let's take a look at the median price for an existing home, divided by the average wage for nonsuperivosory workers.  I use this measure becuase housing itself is a component (the largest) of inflation, so measuring affordability by wages is probably a better "real" measure (note that these are not seasonally adjusted, hence the sine-wave pattern):



So measured, prices of existing homes, while more than 20% higher than they were at the bottom two years ago, still are slightly less than they were in 1999 and 2000, still far below what they were during the bubble.  I appreciate that people in California may be seeing a different situation, but that's the premium you pay to live in a beautiful climate, and the astronomical cost of living in California is a big reason for the outmigration to the interior West for the last 10-20 years.

All that being said, with home prices up 20% in two years, and interest rates having risen such that the monthly interest payment on a mortgage is about 30% more than it was for a mortgage in the same amount several years ago, it's no surprise that home sales have been falling.

Remember That The Long-Term USD/CAN Chart is Bullish

This is up over at XE.com

Existing home sales fall to 18 month low

 - by New Deal democrat

Existing home sales fell to 4.62 million annualized in January, the lowest number since July 2012 (seasonally adjusted).  Median prices also fell, but these are very seasonal, and need to be compared YoY.

While the median price for an existing home is more than 20% higher than it was in January 2012,  as a multiple of the average wage the median price is no higher than it was in 1999 or 2000.

This was  not unexpected, and is further evidence of a housing slowdown.  More later with a few graphs.

Rising natural gas partially offsets flat gasoline pries in January

 - by New Deal democrat

I have a post up at XE.com on this morning's CPI release.  It wasn't as low as I had hoped, but we are still on track for 1.0% or so YoY inflation in February.

A closer look at the housing slowdown

 - by New Deal democrat

With yesterday's reports on housing permits and starts, we now have 3 of 5 monthly reports that have turned negative YoY:  in addition to starts, pending sales and existing home sales already turned negative YoY in November and December,  respectively.

First of all, as I've documented a number of times, even in the post-World War 2 era where there was over 15 years of pent-up demand, typically a 1% rise in interest rates led to a -100,000 decline in nonfarm housing starts or permits within about 9 months.  Here's an update of that relationship covering the last 3 years, showing the YoY change in 1,000's in permits (blue) and starts (green), and comparing that with the YoY% change in treasury bond rates, expressed in basis points (red):



Now let's look at the same data, expressed as the YoY% change in permits and starts, and YoY change in treasuries by percent averaged monthly:



Permits and starts follow interest rates, it's just about that simple (with the exception being those few times when "buy now or be forever priced out" was a dominant theme, which may actually have played into the October and November 2013 spike).

The YoY low in interest rates was in early 2012 as shown in the above two graphs.  This next graph norms permits (blue) and starts (green) to 100 as of September 2012, about 8 months later:



Permits have failed to advance more than 5% above their level in September 2012 in 10 of the ensuing 16 months.  Starts are more erratic, with several spikes, but generally show the same pattern.

Finally, in the past I have documented that housing permits have typically declined 200,000 from their expansion high prior to a recession beginning (the notable exception was just prior to 2001, where they declined by 175,000.  This final bar graph shows the declines in permits from their October highs:



While the housing data continues to confirm my belief that 2014 will be marked by a deceleration in the growth of the economy, the decline above isn't serious enough to cause me to think the economy will actually contract anytime soon.  Further, I agree with Bill McBride that, over the longer term, the fundamentals favor a housing recovery.

Meanwhile, existing home sales will be reported this Friday, and new and pending home sales will be reported next week.

Emerging Markets Rebound, But Hit Resistance

 

 

 

The emerging market ETF has rallied from 37 to ~ 39.5 but has hit resistance just below the 200 day EMA and at the lower 40s -- a level that has support for technical resistance.  However, notice two important technical details with this chart: the MACD is still clearly moving lower and the CMF has been printing negative numbers over about 3 1/2 months.  Neither of these facts bodes well for the future price moves.

Will the 1.38 Level Provide Resistance For the EUR/USD Pair?

This is up over at XE.com.

Housing permits decline, housing starts now down YoY

 - by New Deal democrat

As Bill McBride reminded his readers this morning, he and I have a charitable bet on the direction of the housing market this year.  In the past, with rare exception, whenever interest rates have risen by at least 1%,  housing permits have decreased by 100,000 a year or more.  The exceptions (such as 1968 and at the peak of the housing bubble) were when "buy now or be forever priced out" was a reasonable - or widespread - argument.  In 1968 it was because of secularly and rapidly rising interest rates; in 2004-05 it was because of seemingly permanently rising prices.

This morning January housing permits and starts were reported.  Permits fell to 54,000 to 937,000.  This contrasts with 991,000 in December, and 915,000 one year ago, so permits rose 2.4% on a YoY basis.

The big story, however, is that housing starts fell 168,000 to 880,000.  Last month's number was revised upward by 49,000 to 1,048,000.  Which means that starts are down from 898,000 one year ago, or -18,000, or -2.0% YoY.

It seems obvious that weather was an issue in the January reports.  And the initial anecdotal reports from February (e.g., this morning's MBA report) look even worse.

But what is happening is what I expected to happen.  The weather has just made it happen a little sooner, I think.

PS.:  I'll update with YoY graphs once they are available on FRED.

Pound Rallies Versus Dollar; But Beware US Weather Influences

This is up over at XE.com

Australian ETF Breaks Through Resistance

Since a sell-off last fall, the Australian ETF has been trading between the upper 22s and mid 24s.  At the upper end of this range has been the 200 day EMA, the line delineating between a bull and bear market.  Now prices have moved through this level, with plenty of upside room to run.

Japanese GDP Disappoints, But the Details Are More Nuanced

This is up over at XE.com

Weekly Indicators for February 10 - 14 at XE.com

 - by New Deal democrat

My Weekly Indicators column is up at XE.com.

Weakness continues, but - maybe - Here Comes the Sun.

International Week in Review: Central Banks Take Center Stage Edition

This is up over at XE.com

Agricultural ETF Jumps

Since the beginning of February, the agricultural ETF has jumped a little over a point, or nearly 5% in percentage terms.  Prices are now about the 200 day EMA.

Diminished rainfall in Brazil is leading to price spikes in coffee and soy beans.

February 2014 may show the lowest YoY inflation rate in 50 years (ex-Great Recession)

 -by New Deal democrat

The loosening of the Oil choke collar this winter appears to be leading to the lowest YoY inflation rate in 50 years outside of the Great Recession.  I have the details up over at XE.com.

GM: "We're still not serious about hybrids"

  - by New Deal democrat

David Atkins over at Digby's blog is upset at a YouTube commercial for a new luxury car, in which the actor portraying the owner spouts a river of entitled 1%er bile..  Atkins has since corrected the error, but he  originally misidentified the ad twice as for a Chrysler, which is important from my point of view.

You see, the ad isn't for a Chrysler at all.  It's for the new Cadillac ELR, a luxury hybrid that Hybrid Cars says is 

a $76,000-plus compact coupe that offers nothing more than the Volt except ride, luxury, image and style.

That David didn't even know it was a Cadillac isn't surprising, since the ad copy (which he helpfully reproduces below the video) never once mentions the car's brand, or the fact that it is a bybrid.

And GM's ad agency, if they read David's post, would probably be doing high-5's. The entire point of the ad is that this guy is a total a*****e who thinks nothing of dropping $80,000 on a toy that he can't even be bothered to name, let alone describe.

In fact, he's their target buyer.  Cadillac only sold 24 of the ELR's in its first month.  According to Hybrid Cars,

Judging by the fictional ELR owner’s bold-as-brass attitude, and GM’s own prediction that it will not sell a lot of its new ELR, the automaker might be interpreted as saying it is just fine with the state of affairs.

And that's a shame, not just for the egregiously offensive political view that is promoted, but because of what the above says about GM's commitment to hybrids and other alternately fueled vehicles.

As Edmund's test drive concluded:

And at the end of the day it's not that quick, not that engaging to drive. Cadillac would like us to think of the ELR as a 6 Series or Tesla Model S competitor instead of a hyper-expensive Volt, but that's how it drives, for the most part.

The 2014 Cadillac ELR is stunningly beautiful from most angles. Photos truly do not do it justice. In the end, though, the 2014 Cadillac ELR displays far more show than go.

While Toyota was busy turning itself into your father's Oldsmobile, GM, especially via the Cadillac CTS and Buick LaCrosse, was turning out some state of the art styling, and with the aforesaid CTS, finally hit a home run with the kind of car they once described as a "little limousine."

But that aforesaid CTS has disappeared from the lineup, replaced with a model carrying the same badge but really a continuation of the old STS midsize.

GM could have priced the ELR at $50,000 and sold many 10,000's of the model to luxury car drivers who actually care about fuel economy, not to mention the environment, and shown that it was the carmaker to beat in the luxury hybrid niche.  Instead they have made crystal clear that the ELR is just an expensive bauble for collectors, which will undoubtedly disappear from the lineup after two or three years and sales of a few thousand. It is content to let Toyota/Lexus own the segment from the low end, and for Tesla to own it from the high end.

So the ad isn't just offensive politically.  It shows that economically GM still isn't ready to do what it needs to do not to be a dinosaur.

Yellen to Use Broader Employment Measures For Fed Decisions

This is up over at XE.com.

US Market Update; Look For Small Correction Over the Next Few Days

The QQQs (top chart) have had one heck of a strong run.  They've been rallying since February 5 and have rallied from 83.7 to 89.  But prices have hit resistance at levels from late January and the MACD is starting to decline.

In contrast, we have the DIAs (top chart) and IWMs (bottom chart).  Both have rallied over the same time period, but not as strongly and both are also hitting resistance areas.

We've had some strong upward movement over the last five days.  At the same time, we're seeing prices hit resistance on a number of fronts.  The cat is out of the bag on Yellen; she'll continue the easy money policies if Bernanke.   And considering she's using a broader measure of unemployment, we can expect a longer period of lower rates.   But over the next few days, we'll hear more of the same with added political grandstanding. 

 

OECD LEIs Point to Developed/Emerging Market Growth Divergence

This is up over at XE.com

Oil At Important Resistance Levels

After last year's traditional summer price rally (when oil traded between 102/104 and 110/112),, prices retreated to trade between the lower 90s and 100.  Now prices are again looking to breach the 100 level.  Should they do so, they face little upside resistance until the 110 level.

Vietnam ETF Consolidating Recent Gains

The Vietnamese ETF has bucked the trend of emerging market sell offs of late.  Prices started rallying in early September.  They consolidated gains at the end of last year between the 18.5-19 price level then rallied strongly in January, moving through resistance in the upper 20s.  Notice the big volume in-flow.  Prices are now consolidating in a triangle pattern between 20.3 and 22.2.

Weekly Indicators for February 3 - 7 at XE.com: The Big Chill

by New Deal democrat

My Weekly Indicators column is up at XE.com.

This was the poorest week in a long time. Is it due to the weather, at least in part, or is this real consumer weakness spreading throughout the economy?

International Week in Review: A Busy Week for Central Banks Edition

This is up over at XE.com

US Employment : Wow, Another Weak Report.

First, I have the rather unenviable task of filling in for NDD on this issue.  That does mean you'll get my somewhat different opinion about the employment report's importance.  I've grown to be less and less a fan of the monthly "US employment report" release for several reasons.  First, people only focus on the unemployment rate rather than the entire employment picture which includes such things as employer behavior (which is derived from the JOLTs report), employee confidence and labor utilization.  Second, this report is usually revised multiple times, so the first number could be an accurate number -- or nowhere near was happening.

In addition, this report as several one off points to deal with.  The first is the weather.  The entire country has been hit by massive weather disruptions over the last month or so.  We've seen this effect the ISM reports, housing numbers and auto sales.  In addition, this report has the deal with the effects of the expiration of unemployment benefits and the annual revision to the numbers.  This FT story explains this issue in more detail.

And we're off.  Let's start, well, at the beginning:

Total nonfarm payroll employment rose by 113,000 in January, and the unemployment rate was little changed at 6.6 percent, the U.S. Bureau of Labor Statistics reported today. Employment grew in construction, manufacturing, wholesale trade, and mining. 

.....
 
Total nonfarm payroll employment increased by 113,000 in January. In 2013, employment growth averaged 194,000 per month. In January, job gains occurred in construction, manufacturing, wholesale trade, and mining.  

These are not wonderful numbers.  First, 113,000 is simply a weak number.  And the 194,000/month of growth for the last year is OK but we would do better.  What is interesting is the economy was growing strongly in the last two quarters of 2013, yet the employment growth numbers were still weak.

Both the number of unemployed persons, at 10.2 million, and the unemployment rate, at 6.6 percent, changed little in January. Since October, the jobless rate has decreased by 0.6 percentage point.

The good news here is the number didn't increase.  The bad news is it didn't meaningfully decrease, either.  This is where I think the weather did play at least a marginal role.  Let's face facts: heavy snowstorms would make is difficult to get to a job interview etc...

After accounting for the annual adjustment to the population controls, the civilian labor force rose by 499,000 in January, and the labor force participation rate edged up to 63.0 percent. Total employment, as measured by the household survey, increased by 616,000 over the month, and the employment-population ratio increased by 0.2 percentage point to 58.8 percent.

This is where some of the re-benchmarking issues come into play.  The household survey number is very impressive.  Also remember this household employment number tends to lead the establishment survey.

Overall job growth was fair (see tables here).  There simply wasn't enough of it.  This is also the third month in a row when the total number of professional service jobs added has been weak.

In January, the average workweek for all employees on private nonfarm payrolls was unchanged at 34.4 hours. The manufacturing workweek declined by 0.2 hour to 40.7 hours, and factory overtime edged down by 0.1 hour to 3.4 hours. The average workweek for production and nonsupervisory employees on private nonfarm payrolls was unchanged at 33.5 hours. 

Average hourly earnings for all employees on private nonfarm payrolls rose by 5 cents to $24.21. Over the year, average hourly earnings have risen by 46 cents, or 1.9 percent. In January, average hourly earnings of private-sector production and nonsupervisory employees increased by 6 cents to $20.39.

The hours worked decline is disappointing.  However, the 5 cents/hour increase is good news.  But -- just to throw a cold blanket on that number -- hourly earnings only increased 1.9% over the last 12 months.

The market view this report as disappointing.  However, I would add the important caveat that here the weather is probably playing a role in the slowdown.

NDD will add his comments later today.

Draghi Drops the Ball

This is over at XE (link fixed).

Japanese ETF Breaks Two Key Support Areas

The Japanese ETF has broken support in both the lower 11's and the 200 day EMA.  This move was telegraphed by the slowing declining MACD over the last 6 months.

Is he Oil choke collar finally letting go of the US economy?

- by New Deal democrat

I have a new post up on the Oil choke collar over at XE.com.

Most "Problem" Emerging Economies Have Inflationary Problems

While inflation does not explain all of the problems faced by these countries, it is clearly a contributing problem.  And considering the most of these countries also have high unemployment, we can conclude there are systemic issues at work.

Read more over at XE.com.

Yes, It's A Correction. No, You Shouldn't Panic

The markets have been selling off since the beginning of the year.  Considering equities have been rallying strongly for most of last year, and that money managers poured money into the market at the end of the year to dress up their numbers, some reactionary sell-off was warranted.  And no, it's not time to panic.


First, let's look at the 30 minute chart:

We see two strong sell-offs. The first is through the 181.31 level of support and the second is through the upper 176/lower 177 level.  Both sell-offs have been strong and occurred on higher than usual volume.  From peak to trough, the overall sell-off is from about 184 to 14 or a loss of almost 6%.

Above is a chart of the daily price action.  Prices are now at important Fib levels as well as the 200 day EMA -- a very important technical point.  The sell-off has obviously hit momentum and increased volatility (increased Bollinger Bands).

But, even if prices move below the 200 day EMA, it will most likely be the result of an overly aggressive selling instinct.  While we are reading reports about traders being concerned with economic growth, remember we are seeing weaker numbers partially because of weather-related factors.  Once we thaw out, I would expect a return to more consistent, positive numbers.

Oil At Critical Resistance Levels

Oil has been trading between the upper 90s and 100 area for the last four months.  However, prices have again risen to the key resistance area of ~100.  Also note that prices are now about all the EMAs -- including the 200 day EMA. 

If consumers can't buy, and can't refinance, a recession follows

 - by New Deal democrat

It's not too often when the Progressive point of the day coincides exactly with something wonky I was going to say, but well, today is such a day.

From the New York Times via Charlie Pierce and Atrios, we learn that

As politicians and pundits in Washington continue to spar over whether economic inequality is in fact deepening, in corporate America there really is no debate at all. The post-recession reality is that the customer base for businesses that appeal to the middle class is shrinking as the top tier pulls even further away.

 In the 4th quarter of 2013, consumers only got a little help.  We got two reports on median wages in the last couple of weeks.

First came the Census Bureau's report os usual weekly wages:



Usual weekly wages went up $1 adjusted for inflation in the 4th quarter.  The post-recession bottom was in the 3rd quarter of 2012 and the 1st quarter of 2013.  Usual weekly wages have stagnated since the end of the tech boom, now nearly 15 years ago.  The big jump during the recession is when gas prices fell from $4.25 a gallon to below $1.50 a gallon, and the decline from 2009 through 2012 was gas prices going right back up to nearly $4 a gallon again.

Last week the Employment Cost Index was reported.  This is another median measure.  In nominal terms, median wages rose over 2% for the first time in over 4 years:



Adjusted for inflation, in 2013 median wages rose about 0.5% from 2012, and were at about 2007 levels. But note they are still below their 2008 levels, let alone their levels a decade ago in 2002--04


.
Which brings me to my reminder that the middle class being unable to refinance due to either a rising asset price like their house, or due to lower interest rates for at least 3 years, has been a precursor to recession:



Interest rates made a likely once-in-a-liefetime low in July 2012, over 18 months ago, and as this graph from Mortgage News Daily shows, refinancing has dried up:



As much as Pierce, Atrios and other progressives dislike the current situation, imagine a new recession and X millions more Americans losing their jobs.  That we will have an incomplete recovery before that happens is my biggest fear.

Weaker Chinese Data Hitting Hong Kong ETF

While China has been printing economic numbers showing a slowing economy, the primary ETF that is taking the hit for this slowdown has been the Hong Kong ETF.  The ETF continued to hit resistance at the 20.75 level for several months before sharply selling off over the last few weeks, sending prices through all the EMAs -- including the 200 day.

Weekly Indicators for January 27 - 31 at XE.com

 - by New Deal democrat

My column describing Weekly Indictors is up at XE.com

What was relatively strong vs. what was relatively week has been reversed in the last several weeks compared with the last 9 months.

International Week In Review: Despite the EM Rout, Some Surprisingly Good Numbers Edition

This is over at XE.com

Recent News is Euro Negative in EUR/USD Trade

This is up over at XE.com

Emerging Market ETF Has Stabilized For Now

Above is a chart of the emerging market ETF.  While it has broken the 200 day EMA and pulled the lower EMAs through the 200 day EMA, prices appear to have stabilized around the 38 level.  Finally, the sell-off has occurred on higher volume.

However, notice the declining momentum and negative CMF reading.  This ETF won't be making a strong relief rally anytime soon. 

Comparing personal consumption expenditures with real retail sales: an update

 - by New Deal democrat

A couple of years ago I wrote a few posts describing how, if you compare PCE's with real retail sales, you get a good idea where you are in the economic cycle.  I've published an update over at XE.com, and also updated my look at real per capita retail sales, which are a short leading indicator.

A Review Of Recent Extraordiary Emerging Market Central Bank Action

This is over at XE.com

NEWS FLASH: Real residential investment *declined* in the 4th quarter

  - by New Deal democrat

From the BEA:

Real residential fixed investment decreased 9.8% [in the 4th quarter of 2013].

Are all you Doubting Thomases out there starting to pay attention?

More later ....

Update:

Here's the updated graph of private fixed residential investment (green), as measured as a YoY% (blue), and as measured as a percentage of GDP (red):



I expected that real residential investment would decline measured as a YoY%, but the absolute decline is a bit of a surprise.

What I want you to pull from the graph above is that the order is (1) decline of fixed private residential investment as a percentage YoY comes first, followed by (2) decline as a share of GDP (the measure favored by Professor Leamer as the first portion of the economy to decline prior to a recession) , and finally by (3) absolute decline.

I want to emphasize that this does NOT mean we are inexorably sliding into a recession from here.  Housing could certainly bounce back.  But it does add another brick in the wall of evidence supporting my forecast of a decline in housing starts and permits in the first half of this year at least.  It also does raise a yellow caution flag to watch for further signs of deterioration in the economy as we head towards 2015.

Flight to Safety Since January 1

Above are four charts, all of which are from US treasury market ETFs.  The IEIs are for the 3-7 years, IEFs for 7-10 year, TLHs for 10-20 year and TLTs for 20+ years.  All have rallied since the beginning of the year.

What this shows is since January 1, we've seen a fundamental shift in trader's perception of the market as they prefer the relative safety of treasuries over stocks.

Q.: What's the politically correct word for "mentally retarded?" A.: Apparently, "Peter Schiff"

 - by New Deal democrat

According to Business Insider, last night Euro Pacific Capital president Peter Schiff actually took the position that "people don't go hungry in a capitalist economy.....  It's socialism that creates scarcity, that creates famine," Schiff said. "In a free market, there's plenty of food for everybody, especially the poor."

Asked who should earn a wage of $2 an hour, Schiff replied, "What the politically correct word for 'metnally retarded'?"

Never mind that in the Great Depression, with 25% unemployment in 1932, people died of starvation in nearly every single town, and at one point it was estimated that 25% of all schoolchildren were malnourished.

All of those perfectly competitive free market equations that people like Schiff love don't guarantee that people won't starve, they just (supposedly) assure that the most economically efficient number will starve.

So the answer to Schiff's question appears to be, "Peter Schiff."

He walked into that one.

A reminder about housing sales and prices

 - by New Deal democrat

House prices show a lot of seasonality, so the only good way to keep track of them is YoY, and YoY price increases are still running very strong.

So how can I be forecasting a decline in house sales if prices have continued to rise so strongly?  Because sales will peak and turn down before prices.

In case you needed a refresher, here's a graph of sales of single family homes (red, right scale) compared with median prices for new single family homes (blue, left scale) for the last 10 years:



Recall that sales peaked a full two years before nominal prices turned down.

While I don't believe we are in a new bubble (adjusted for income, prices haven't risen nearly so much off their bottom), there has been quite an outcry that traditional first time homebuyers are priced out of some markets.

In any event, I believe the transmission of higher interest rates through the housing market will unfold the same way.  Sales will turn down before prices do.

But isn't inventory still tight?  Yes, but remember that the months-of-supply metric can resolve either through more inventory coming on the market, or monthly sales declining, or both, which is what happened when the housing bubble burst.  If in the next few months sales decline to 900,000 annualized, that will go a long way to a "normal" number of months of supply.

Indian ETF Hitting Resistance

The top chart is the daily Indian ETF chart, while the bottom is the weekly chart.  Both charts show the market hitting resistance in the mid 57 area.  Anytime a market hits resistance this regularly, we need to ask why, which is almost always answered by the fundamentals.

The Indian economy is experiencing fairly serious structural problems.  On one hand, inflation is high bringing with it all the associated problems.  At the same time, growth is slowing, leaving the central bank in a rather unenviable position.

The housing slowdown has already begun

 - by New deal democrat

With yesterday morning's surprise -50,000 month/month decline in new home sales, the 2013 housing data is in the books, and it confirms that in 2013 there was a marked slowdown in the housing recovery.

Below is the graph of building permits (blue), starts (green), new home sales (beige) and existing home sales (orange) for the last three years, normed to 100 at the start of each year:



After being up over 10% in each of 2011 and 2012 (over 20% as to permits), permits, starts, and new home sales finished 2013 up 10% or less for the year, and existing home sales are actually negative for the year.

Now here is the same data presented as YoY percentage change, and compared with the YoY change in interest rates (red, inverted, right scale):



The simple fact is that the housing market follows interest rates usually with a six to nine month lag.

Finally, here are housing permits (blue) and starts (green) in 100,000's YoY vs. interest rates, inverted:



The past history is that a 1% increase in interest rates typically is consistent with a 100,000 decline in permits and starts.  The data that we have seen in December confirms that in 2013 we already have seen a slowdown, and is in accord with my forecast that at some point this year, we will see a YoY change of -100,000 in permits and/or starts.  Could it be different this time?  Of course, but history is on my side.

Australian ETF Breaks Support on Weekly Chart

Above is a weekly chart for the Australian ETF.  It had been consolidating in a triangle formation which lasted about 9 months.  But price action over the last several days has sent prices through the support of the lower trend line.

There are several reasons for this.  First, Australia's fortunes are directly tied to Chinas, as Australia exports a large amount of goods to China.  Second, Australia recently had a very negative employment print, showing a contraction of jobs rather than an expansion.  As a result, traders have sent the ETF lower.

What the Heck is Happening In the Markets?

This is up over at XE.com

The International Sell-Off In Perspective

As we start this week, we should look at the price action from the end of last week, as this will have a strong impact for the next few tradings days.

The all Asia except Japan ETF had been trading between 57/57.5 and the lower 61s.  Last week we saw a sharp sell-off as prices broke through the 57.5 level by printing two strong down-day bars.  Also note that prices moved through the 200 day EMA.  The only thing lacking from this sell-off was a huge volume spike. But this could mean the big volume spike is yet to come.

The emerging market ETF was already below the 200 day EMA, making last week's sell-off more pronounced.  Unlike the AAXJ chart above, this one does have a huge volume spike.  Also note the shorter EMAs are now below the 200 day EMA.

International Economic Week in Review: Emerging Market Sell-off And US Profit Taking Edition

This is up over at XE.com

Weekly Indicators for January 20 - 24 at XE.com

 - by New Deal democrat

Weekly Indicators for this week are up at XE.com.

One week ago rail traffic and consumer spending took a big hit, which I blamed on the extreme cold from the "polar vortex."  This week I look to see if they rebounded.  The long leading indictors also had something of a rare week of late.

The exception to the rule about interest rates and housing: "Buy now or be forever priced out"

 - by New Deal democrat

As I have written extensively in the last several months, a rise in interest rates has almost always - 17 of 21 cases since World War 2, to be precise - been consistent with an outright decline several quarters later in housing.  Typically a 1% increase in interest rates has been consistent with a 100,000 decline in the volume of housing permits and starts.

But what about the 4 exceptions?  Are they just random outliers, or is there a common thread linking them?

It turns out that, in at least 3 of the 4 cases, there is a common thread: in the immortal words of housing bubbleheads circa 2005, "Buy now or be forever priced out."

The housing bubble of 2004-06 remains the biggest exception in the nearly 70 year history of housing and interest rates that I've examined.  Here's the graph of interest rates YoY change (inverted, red) and housing permits YoY change (blue) during that period and the immediate aftermath:



As you can see, despite the fact that interest rates not only had not fallen, but in fact had risen somewhat and remained elevated for several years, housing permits continued to increase stoutly.  As we all recall that housing prices (Case Shiller Index, green, index values at right) were rising at the brisk clip of 10% or more a year for about half a decade at that point.  It was a common trope that "real estate only goes up!"  If so, you had better buy today, because tomorrow the house you wanted would only get even more expensive.  And for a long while it did.  Until it didn't, and housing crashed in equally spectacular fashion, as you can see from the latter part of the graph above.

A similar, although not identical, explanation can be found to the exceptional performance of housing in 1968, and to some extent, also in 1979.

Inflation and interest rates had remained tame throughout the 1950s, and slightly increased in the early 1960's.

But in 1965, Lyndon Johnson began his "guns and butter" fiscal policy.  Previously, it had been understood that you could only either finance wars (guns) or domestic programs (butter).  Johnson believed the US was so strong that he could do both.  The result wasn't just inflation, but increasing levels of inflation every year beginning in 1965.  By 1968, inflation had increased to 4% and showed every sign of accelerating further (and indeed it did).  In its report for 1968, the Federal Reserve Bank of St. Louis pointed out this increasing rate of inflation with alarm.  It appeared to be the number one economic issue facing the country.

This meant an aspiring homeowner had to deal with not only an increased mortgage rate (which would ordinarily drive housing construction down), but the belief that, if s/he didn't buy a house now, then in 3 or 6 or 12 months those mortgage rates would be even higher.  Needless to say, the prudent buyer bought now rather than later, despite the higher interest rates.

And that's what the graph shows (green line is YoY inflation rate):



Notice that these sales only borrowed from future demand, as at the end of 1969 the US entered its first recession in almost 10 years.

The same dynamic was in play in 1978, with the same result.  Here's the graph:



Additionally, in 1978, there were several months that mortgage interest rates (orange) declined significantly, and were in fact negative YoY.  This coincided with spikes in housing.  Contrarily, there were several months in 1978 that were negative YoY, although not negative enough to result in a negative YoY quarter. Nevertheless, the reckoning was only delayed until 1979.

That leaves only 1962.  I have been unable to find any reliable source of what may have happened with mortgage interest rates that year.  We can say that the increase in interest rates was relatively short-lived, and that while housing never turned negative, it did turn lower for about a year, falling under +50,000  for 3 of those months.  You can also see that inflation (green) began to tick up at this point:




In short, the exception to the rule that rising interest rates are associated with a decline in housing about 6 to 12 months later is when the costs of buying a house not only have risen, but it is expected that they will rise even further in the immediate future.  In those circumstances, it makes sense not to delay the purchase of a new house even though interest rates have already moved against you.

So, is there a component of "buy now or be forever priced out" in the present environment?   Actually, I believe there has been, evident in the spikes of demand in July and August in existing home sales, and in October and November in housing starts and permits, as shown in this graph of housing permits (blue), new home sales (red), and existing home sales (green) since January 2013:



A number of buyers may have tried to lock in rates before they rose any further, as evidenced by the surge in existing home sales in July and August, and permits and new home sales in October and November.  That dynamic appears to be fading, and there does not appear to be any mentality that mortgage rates will continue to rise significantly from here.  If anything, interest rates seem likely to meander around their current level, and buyers will take advantage of the dips.  But that is not the same as "buy now or be forever priced out."

The bottom line is that the exception to the rule that rising interest rates cause a decline in the housing market does not appear to be in play at present. So, having considered the exceptions to the rule, I continue to believe that housing will actually experience a decline (that has already begun) in approximately the first 6 months of 2014.

Existing home sales down YoY and down 10% from high for second month in a row

 - by New Deal democrat

Let me be the first to say that, of the measures of the housing market, existing home sales are the least important, because they don't have the impact that new home construction has on the economy.
But, that being said, they typically move in the same direction as new home construction.

So, for the Doubting Thomases who think my forecast of a weakening housing market due to the rise in interest rates last year is off the mark, the title of this post states the simple facts.

For the second month in a row, existing home sales are less than they were a year ago.

For the second month in a row, existing home sales are down over -500,000 sales annualized from their July and August 2013 peaks.  November was off slightly more than 10%, and this month was -9.6% off that peak.

Here's the graph of existing home sales since their bottom at the end of 2010, with 2013 highlighted in red (set to 100 for January 2013):



And here is the same data presented YoY:



In addition to existing sales, both housing permits and starts have cooled down from growing at a 20% rate in 2012 to +4.6% and +1.6% respectively at the end of 2013.

So far, only new home sales have not meaningfully decelerated.  Those will be reported next week.

Additionally, Bill McBride reiterated this week why he remains bullish on housing and accelerating economic growth in 2014.  He and I do disagree on what some of the facts mean, but I want to wait for next Thursday's GDP report before I explain why.

Meeting Minutes Indicates BOE Is In No Hurry to Raise Rates

This is up over at XE.com

Gas prices stay near seasonal low for nearly 3 months

 - by New Deal democrat

Gas prices have stayed at their seasonal nadir at an unusually long time.  Over at XE.com, I discuss this in the context of whether the Oil choke collar is continuing to loosen.

Australian Employment Situation Getting Worse

This is over at XE.com

Chinese Market Continues Moving Lower

The Chinese market has been in a bit of a funk over the last nine months.  Prices dropped to the 1950 level in late June.  They rose to the 2260 level twice; once in September and once in early December.  But since early December, prices have been dropping.

The reason for the lack of any meaningful rally in China is the slowing growth picture.  On Sunday, we learned that YOY GDP growth slowed again to 7.7%.  While this is still high by developed world standard, it actually represents a decline from the Chinese story.  As a result, traders are sending shares lower.

Why the decelerating trend in housing and car sales is a cause for concern

 - by New Deal democrat

As I have already written, there are increasing signs that the increase in interest rates and the death of mortgage refinancing are beginning to eat into consumer purchases.  Specifically, growth is flagging as to both the two biggest assets owned by families:  houses and cars. 

I have been sounding the alarm about decelerating housing for awhile, but now this may also have spread to vehicles as well.  I say “may” because typically vehicle sales plateau at some point in expansions – but in the last expansion vehicle sales plateaued at a level 1,000,000 vehicles per year above the maximum number sold on an annual basis in 2013.

Below is a graph (averaged quarterly to cut down on noise) of  the YoY% growth in housing permits (blue) and auto sales (green), compared with GDP (red) for the last 30 years:

Now here is the same data for the last two years, but monthly better to show up the recent trend:

Note that, measured quarterly, both houses and cars are selling at a level of YoY growth that is very strong compared with the last 30 years, even though there has been a significant decline in that rate of growth.  At the same time, when we look at the trend on a monthly basis, both housing and cars look set to turn negative by the end of the first quarter.

That housing and cars are showing relative weakness may not sound like a big deal.  Until you remember a paper presented by UCSD economist Edward Leamer at Jackson Hole in 2007, Housing and the Business Cycle, in which he said:

We have experienced 8 recessions preceded by substantial problems in housing and consumer durables....
....
Residential investment consistently and substantially contribute[d] to weakness [in GDP growth] before [these 8] recessions....
....
After residential investment as a contributor to prior weakness come consumer durables, consumer services, and then consumer nondurables.  Those are all consumer spending items -- it's weakness in consumer spending that is a symptom of an oncoming recession....  The timing is: homes, durables, nondurables, and services.  Housing is the biggest problem in the year before a recession... durables is the biggest problem during the recession [although consumer durables declined even more than housing before 2 of the 10 post World War II recessions]

The same interest rate or other variables [mainly employment] drive both the housing cycle and the durables cycle....  It turns out that much of the amplitude in consumer durables comes from vehicles not furniture

If you look at the first graph above, you'll see at least 3 occasions that were "false alarms."  Both houses and car sales turned negative YoY in 1987, 1994, and 1996 without any recession ensuing.  But they did turn negative significantly before all three of the last recessions, including the 2007-09 recession that was just about to begin when Leamer gave his presentation at Jackson Hole. 

Leamer said that on average housing's relative contribution to GDP turned down about 5 quarters before the onset of a recession, followed several quarters later by cars. *If* the present trend continues, there is an excellent chance that housing and cars will be negative by mid-2014.

A note for Sunday: a maturing expansion

  - by New Deal democrat

I thought I'd pen this note to clarify my 2014 forecast a little.

I wrote that I think this will be a year of decelerating growth.  I am still positive about the first three quarters of this year, and almost all of the indicators I use indicate that the present quarter, like the second half of last year, should be very positive.

And I do not foresee any recession, at least through the first three quarters of this year.  I'm withholding saying anything definitive about the 4th quarter until I see how corporate earnings play out in the current reporting season.

So I'm actually not pessimistic about this year at all.

Where I differ from most people who have written forecasts is that, while I expect the news to remain positive, I also see it being not quite so positive as the year progresses.

The most obvious difference I have with most is that I expect housing permits and starts to actually turn negative during the first half, in fact if the trend continues they'll be negative within 3 months.

If you want a simple phrase that captures my feeling well, it would be that we are in a maturing expansion.

All of the things that I would expect to turn up early have turned up.  With the exception of interest rates, none of the things I would expect to be negative a year or more out from a recession are negative.

Still, I feel a little like I did at the beginning of 2009.  We were in the epicenter of the recession, when I noticed that retail sales had stopped dropping like a rock.  I also saw that the pace of housing permits had been plummeting at a rate of -500,000 a year or more for several years, and was under the absolute level of 600,000 annualized.  Housing almost literally had to bottom in early or mid 2009, unless it was going all the way to zero!  So I started to watch for signs of a bottom or a turnaround.  And since I had been very bearish, even comparing the situation in 2007 to 1929, Doomers turned on me (and Bonddad) with a vengeance.

For a long time I've been trying to find sort of "anti-coincident" economic indicators.  These would be indicators that turn up or down after the lagging indicators but before the leading indicators of the next move.  There seem to be several, and they all appear to have peaked.

In general, what I am seeing are trends that I would expect to see in an expansion that is still moving along, but is getting a little long in the tooth.  For example, recently an increase in capital expenditures has been cited by bulls.  But that may well be a signal of a late point in the cycle.

This week or next week, I plan on writing about these trends, and more about my bearish housing call.  There is more supporting data, and I've pretty well figured out why 4 out of 21 times since WW2 that interest rates rose, housing didn't fall, so I'll explain that as well.

So I'm not actually pessimistic about 2014.  I am simply increasingly confident that we are in "a maturing expansion."  What is depressing is that wages are still stagnant, real disposable personal income has been improving at a pathetic rate, and employment is nowhere near recovering to its pre-recession level on a working-age population basis.