New home sales continue very positive

 - by New Deal democrat

New home sales, along with purchase mortgage applications, are the most consistently positive of all of the measures of the housing market. In fact, as I have written many times before, usually new home sales are the very first measure of housing to peak, leading even permits.

The problem with new home sales is that they are very volatile and are among the most violently revised of all data releases.

But, that caveat in mind, once again new home sales in May rose to the highest level during the entire expansion save for one month:

Averaging over three months cuts down on the volatility. Measured that way, they did make a new expansion high, as shown in the below for the last year:

May 607
Jun 604
Jul 592
Aug 577
Sep 584
Oct 603
Nov 656
Dec 655
Jan 661
Feb 644
Mar 656
Apr 660
May 669

Something new I thought I'd look at this month is the comparison between new home sales and mortgage rates. Interest rates have had a very regular relationship with permits, leading them by between 3 to 9 months.

When we do the same comparison with new home sales, measured quarterly to cut down on the volatility, we see that new home sales (which are recorded as of the date the contract is signed) react almost instantly to mortgage rates (inverted in the graph below):

Zooming in on the last 7 years, and measuring monthly, we can continue to make out the two moving more or less simultaneously, but once again the demographic tailwind has been very strong:

Even though mortgage rates have been higher YoY almost consistently for the last 18 months, they haven't had much of an effect on new home sales.

Let's also compare new homes sold with new homes for sale, measured by the same survey. We can see that the former has consistently led the latter, as the number of new houses are offered for sale continues to increase even after sales have peaked:

The amount by which houses sold exceeds houses for sale, measured quarterly to cut down on volatility, if anything has tended to peak near mid-cycle:

Here is the same metric measured monthly over the last 7 years:

The peak may have been in the 4th quarter of last year, since Q1 of this year was below that, and through the first two months, Q2 is even lower.

But the bottom line is, for now new home sales remain very positive, even while permits, as I mentioned last week, may have taken a hit from higher interest rates. I continue to suspect that it will take rates on the order of 5.25% for a sustained period of time like half a year for housing to truly roll over.

Weekly Indicators for June 18 - 22

May data was focused on housing. Housing starts rose to a new expansion high, but the less volatile and more leading permits made an 8 month low, as did single family permits. As a result of the decline in permits, the Index of Leading Indicators rose less than forecast, at +0.2.

My usual note: I look at the high frequency weekly indicators because while they can be very noisy, they provide a good Now-cast of the economy, and will telegraph the maintenance or change in the economy well before monthly or quarterly data is available.  They are also an excellent way to "mark your beliefs to market."

 

In general I go in order of long leading indicators, then short leading indicators, then coincident indicators.

 

NOTE that I include 12 month highs and lows in the data in parentheses to the right.

Interest rates and credit spreads

• BAA corporate bond index 4.85% up +.03% w/w (1 yr range: 4.15 - 4.94)  
• 10 year treasury bonds 2.90% down -.02% w/w  (2.05 - 3.11) 
• Credit spread 1.95% up +.03% w/w (1.56 - 2.30)

Yield curve, 10 year minus 2 year:

• 0.34%, down -0.02% w/w (0.34 - 1.30) (new expansion low)

30 year conventional mortgage rate

• 4.69%, up +0.05% w/w (3.84 -  4.79)

BAA Corporate bonds remain neutral. If these go above 5%, they will become a negative. Mortgage rates and treasury bonds are still both negatives. The spread between corporate bonds and treasuries has now gone above 1.85%, and so I have switched it from positive to neutral. The only remaining positive is the yield curve, and if that declines to +0.25%, that too will become a neutral.

Housing

Mortgage applications  

• Purchase apps up +4% to 257 w/w 
• Purchase apps 4 week avg. +3 to 250
• Purchase apps YoY +3%, 4 week YoY avg. +3%
• Refi app up +6% w/w

 

Real Estate loans

• Unchanged w/w  

• Up +3.8% YoY ( 3.3 - 6.5) (re-benchmarked, adding roughly +0.5% to prior comparisons) 

Refi has been dead for some time. Purchase applications were strong almost all last year, began to falter YoY in late December, but rebounded during spring, ultimately making new expansion highs. The 4 week average declined from the peak enough to qualify as neutral for the last several weeks, but this week rebounded to positive.

With the re-benchmarking of the last year, the growth rate of real estate loans changed from neutral to positive. If the YoY rate falls below +3.25%, I will downgrade back to neutral.

Money supply

M1

• -1.4% w/w 
• +1.5% m/m 
• -0.4% Real M1 last 6 months
• +3.4% YoY Real M1 (1.6 - 6.9) 

M2

• +0.1% w/w  
• +0.7% m/m 
• +1.4% YoY Real M2 (0.9 - 4.1)

Since 2010, both real M1 and real M2 were resolutely positive.  Both decelerated substantially in 2017. Real M2 growth has fallen below 2.5% and is thus a negative.  Real M1 growth this week was again below 3.5% YoY, and on a 6 month basis it has returned to a negative, so real M1 overall is scored as neutral.

Credit conditions (from the Chicago Fed) 

• Financial Conditions Index unchanged at -0.81
• Adjusted Index (removing background economic conditions) unchanged at -0.52
• Leverage subindex up +.03 to -0.34

The Chicago Fed's Adjusted Index's real break-even point is roughly -0.25.  In the leverage index, a negative number is good, a positive poor. The historical breakeven point has been -0.5 for the unadjusted Index. All three metrics presently show looseness and so are positives for the economy.

 

Trade weighted US$

• Up +1.31 to 123.92 w/w +1.7% YoY (last week) (broad) (116.42 -128.62) 
• Down -0.25 to 94.54 w/w, -2.84% YoY (yesterday) (major currencies)  

The US$ appreciated about 20% between mid-2014 and mid-2015.  It went mainly sideways afterward until briefly spiking higher after the US presidential election. Both measures had been positives since last summer, but in the last two weeks the broad measure turned neutral.

Commodity prices

JoC ECRI 

• Down -3.01 to 109.57 w/w
• Up +8.23 YoY 

BBG Industrial metals ETF 

• 133.22 down -3.46 w/w, up +20.14% YoY (108.00 - 149.10)

Commodity prices bottomed near the end of 2015. After briefly turning negative, metals also surged higher after the 2016 presidential election.  With the exception of one week ago, ECRI has been neutral for many months.  On the other hand, industrial metals have been strongly positive and recently made a new high.

Stock prices S&P 500

• Down -0.9% w/w at 2754.88

Stock prices are a neutral, having not made either a new 3 month high or low in the last three months.  They made a string of new all-time highs beginning in summer 2016.

 

Regional Fed New Orders Indexes

(*indicates report this week) 

• Empire State up +5.3 to +21.3 
• *Philly down -22.7 to +17.9 
• Richmond up +25 to +16
• Kansas City up +1 to +38
• Dallas down -0.2 to +27.7
• Month over month rolling average: down -5 to +24

The regional average has been more volatile than the ISM manufacturing index, but has accurately forecast its month over month direction. After being very positive for most of this year, it has moderated slightly in the last few weeks.

Employment metrics

 Initial jobless claims

• 218,000 unchanged
• 4 week average 221,000 down -3,250 

Initial claims have recently made several 40+ year lows and so are very positive. The YoY% change in these metrics had been decelerating but is now back on its multi-year pace. 

The American Staffing Association Index

• Unchanged at 97 w/w
• Up +1.5% YoY

This index was generally neutral from May through December 2016, and then positive with a few exceptions all during 2017. It was negative for over a month at the beginning of this year, but returned to a positive since then.

Tax Withholding 

• $177.3 B for the last 20 reporting days vs. $181.1 B one year ago, down -$3.8 B or -2.1%
• 20 day rolling average adjusted for tax cut [+$4 B]: up +$0.2 B or +0.1%

With the exception of the month of August and late November, this was positive for almost all of 2017. It has generally been negative since the effects of the recent tax cuts started in February.

I have discontinued the intramonth metric for the remainder of this year, since the kludge to guesstimate the impact of the recent tax cuts makes it too noisy to be of real use.

I have been adjusting based on Treasury Dept. estimates of a decline of roughly $4 Billion over a 20 day period. Until we have YoY comparisons, we have to take this measure with a big grain of salt.

Oil prices and usage 

• Oil up +$4.85 to $69.18 w/w,  up +61% YoY 
• Gas prices down -$.03 to $2.88 w/w, up $0.55 YoY 
• Usage 4 week average up +0.9% YoY 

 The price of gas bottomed over 2 years ago at $1.69.  With the exception of last July, prices generally went sideways with a slight increasing trend in 2017.  Usage turned negative in the first half of 2017, but has almost always been positive since then. Because the YoY change has gone back above 40%, the rating is now negative.

 Bank lending rates

• 0.452 TED spread down -0.006 w/w 
• 2.090 LIBOR unchanged w/w (tied for new expansion high)

 Both TED and LIBOR rose in 2016 to the point where both were usually negatives, with lots of fluctuation.  Of importance is that TED was above 0.50 before both the 2001 and 2008 recessions.  The TED spread was generally increasingly positive in 2017, while LIBOR was increasingly negative. This year the TED spread has also turned negative, then turned positive in the past month before returning to negative in the last two weeks.

 

Consumer spending 

• Johnson Redbook up +4.7% YoY

 Both the Goldman Sachs and Johnson Redbook Indexes generally improved from weak to moderate or strong positives during 2017 and have remained positive this year.

Transport

Railroad transport

• Carloads up +1.9 YoY
• Intermodal units up +6.3% YoY
• Total loads up +4.1% YoY

Shipping transport

• Harpex unchanged at 678 (440 - 678) (tied for 6 year high)
• Baltic Dry Index down -27 to 1377 (~700 - 1700)

Rail was generally positive since November 2016 and remained so during all of 2017 with the exception of a period during autumn when it was mixed. After some weakness in January and February this year, rail has returned to positive.

Harpex made multi-year lows in early 2017, then improved, declined again, and then improved  yet again to recent highs. BDI traced a similar trajectory, and made 3 year highs near the end of 2017, declined early this year, but recently has hit multiyear highs.

I am wary of reading too much into price indexes like this, since they are heavily influenced by supply (as in, a huge overbuilding of ships in the last decade) as well as demand.

Steel production 

• Down -0.7% w/w
• Down -0.4% YoY

Steel production improved from negative to "less bad" to positive in 2016 and with the exception of early summer, remained generally positive in 2017. It turned negative in January and early February, but with the exception of three weeks (including the last two weeks) has been positive since then. 

 

 

SUMMARY: 

Among the long leading indicators, the more leading Chicago Fed Financial Conditions Indexes and real estate loans remained positive, rejoined this week by purchase mortgage applications. Corporate bonds and mortgage rates are neutral, rejoined this week by real M1. Treasuries, refinance applications, and real M2 are all negative. That the most leading monthly housing data for May declined to seven month lows is also noteworthy.

Among the short leading indicators, industrial metals, the regional Fed new orders indexes, financial leverage, jobless claims, gas usage, and staffing are all positive. Stock prices, gas prices, and the spread between corporate and Treasury bonds are all neutral, rejoined this week by the ECRI commodities index. The US$ is mixed. Oil prices turned negative.

Among the coincident indicators, positives include consumer spending, Harpex, and rail, joined this week by tax withholding. The Baltic Dry Index is neutral. LIBOR and TED remain negative, joined this week by steel.

There were a number of small moves this week across the spectrum, but (except for the unreliable tax withholding) all but one were to the downside.  As a result, while both the nowcast and the short term forecast remain positive, they are a little less so than in the last few months. The longer term forecast crossed the line ever so slightly from positive to neutral several weeks ago, and remains neutral.

Gimme shelter update: housing purchase affordability

 - by New Deal democrat

Let's update one measure of housing prices: comparing of the purchasing power of buyers vs. the price a typical house.  There are at least 3 indexes.

First, here is the N.A.R.'s "Housing affordability index," updated through May. This compares their estimate of median household income vs. the median price of an existing home:

Note that the data isn't seasonally adjusted, so there is an annual cycle. Even so, it is clear that affordability is at its lowest in 10 years. But on the other hand, the index is nowhere near its lows of 2005 or 2006.

Second, the private firm ATTOM Data Solutions publishes an index comparing annualized wages to median house prices:

This, like the N.A.R.'s Index, just made a 10 year high, or low, depending on how you look at the data, but again, is nowhere near the level of u affordability from the peak of the housing bubble.

Finally, here is the comparison, performed by Political Calculations, of monthly median household income, as measured by Rentier Research (which recently restarted this feature), compared with the median price of a *new* home:

New houses, as opposed to existing houses, are at new all time highs, even as compared with the peak of the housing bubble.

The sharp difference in affordability between new and existing houses is probably the main reason why existing houses most recently have sold after an average of only 27 days on the market, and months' inventory of existing houses is at all time lows.

Finally, just keep in mind that this measure does not tell us what the monthly mortgage payment for the median house will be. Because interest rates, even with recent increases, are still 1%-2% lower than they were during the 2000s housing boom, the monthly mortgage payment is nowhere near an extreme at this point.

The state of the housing cycle

 - by New Deal democrat

The housing market generally proceeds according to an established cyclical rhythm.

My post describing the current status of that cycle as measured by interest rates, sales, prices, and inventory can be found at XE.com.

Further comments about the state of the housing market

 - by New Deal democrat

Here are some additional salient comments about the housing market right now.

1. Existing home sales are completely stagnant

Not only did existing home sales fall for the month, not only are they down slightly YoY, but they are now less than 2% higher than where they were 3 years ago:

In May 2015, houses sold at a 5.35 million annualized rate. In today's repot they were reported as selling at a 5.43 million annualized rate.

This, of course, is at complete variance to the very positive trend of new home sales over the last three years.

2. Not only sales, but inventories of new vs. existing houses have completely diverged

There was a great article this morning on housing over at Barry Ritholtz's The Big Picture. Be sure to read it all, but here are a couple of important graphs from the piece.

Inventories of existing houses are continuing to shrink, while inventories of new homes have been slowly rising for the last couple of years:

3, Why the divergence?

The K.I.S.S. explanation is that *prices* of new and existing homes have been moving roughly in lockstep, up about 6% YoY by nearly any measure, for the last 5 years. Pricewise, they have established a stable equilibrium. Thus, the other measures tend to gravitate back to whatever is necessary for that equilibrium  point.

An interesting point that the authors of the article at The Big Picture make is that the price differential between new and existing houses has expanded from 10% to 30% since 2006:

Meanwhile, the size of new houses has increased by 10%. That obviously explains some of the difference, but there is roughly another 20% that isn't so explained.

4. Foreign buyers?

The one possible explanation that isn't covered in The Big Picture piece is whether wealthy foreign (mainly Chinese) buyers are driving up the prices of (the relatively luxurious) new houses. I haven't seen any good articles about this for about three years. At that time it looked like foreign buying might be declining, but maybe it has picked up again since than.

If the profits in new homes are at the luxury end for wealthy foreign buyers with whom in the aggregate domestic buyers can't compete, that would drive domestic buyers to the "substitute goods" of existing homes. But that same dynamic would mean that *owners* (and potential sellers) of existing homes also, relatively speaking, would be unable to afford selling and moving up to the relatively luxurious new homes. Thus existing home inventory would be capped.

Foreign buying is an excellent fit for the missing part of the puzzle. I just don't know if it is factually true.

5. In the aggregate, there's not enough evidence that the housing market is at its peak.

Purchase mortgage applications -- including both new and existing homes -- have been very positive for the last few years. They made a new expansion high about 6 weeks ago. They have backed off since:

(h/t Ed Yardeni's blog)

but they are still running, on average this year, roughly 3% higher than their level of last year.

Yesterday I wrote of a poor report for single family housing permits, While I think the preponderance of evidence is that they are on the cusp of at least trending sideways, I should clarify that there have been several times during the last 5 years when permits have pulled back about 4% from the peak. The difference is that the pullback only lasted 2 months and then permits rebounded. This time the decline has lasted 3 months so far, and while we don't know what the future holds, the fundamentals of interest rates and prices have not improved.

Preponderance of evidence from poor housing permits points to slowdown in GDP

 -  by New Deal democrat

The preponderance of evidence, based on this morning's report on housing permits and starts, is that increased interest rates and continuing increased prices are beginning to take a bite out of the market. 

First of all, let's take a look at single family permits -- the most reliable, least volatile of all the measures -- (red, left scale) and total permits (blue, right scale):

Both declined this month, but more importantly, both made 7 month lows. Outside of the expiration of the housing stimulus way back in 2010, this is the first time that single family permits have made this significant a decline -- off about 4% -- during this expansion.

At the same time, since the peaks for single family homes were only in February, and overall in March, not enough time has passed to be confident that this was the peak.

Further, declines of 4% or more took place several times in the 1990s and 2000s without signaling the top of the market, as in 1994-95, 1996, and 2004:

Meanwhile, housing starts made a new high:

This includes on a three month rolling basis, which cuts down on volatility.

But permits lead starts, and in the last eight months there has been an increased backlog of housing permits which have not yet translated into starts. This month that number declined slightly to its lowest since December:

So it is not a surprise that starts have continued to rise even though permits have declined in the last several months.

At the same time, it's worth noting that, even though the economy didn't roll over, in two of the last 3 times -- 1994 and 2004 -- where there was a similar decline in permits outside of recessions, real GDP did slow down:

Should single family permits fail to make a new high for at least one more month, and should the decline be over 5% from peak, I will switch their rating from positive to neutral. And, while the evidence is by no means conclusive, I would say the preponderance of the evidence is that housing is slowing down, and that will have an effect on the economy over the next 6 - 12 months.

Prime age employment participation and wages: not so clear arelationship

 - by New Deal democrat

In the last couple of months variations of the same graph which is supposed  to "solve" the wage conundrum have been going around. I saw another version this weekend:

Easy to see, there is what looks like a nice, nearly linear relationship between the prime age (25-54) employment to population ratio (left scale) with wages as measured by the employment cost index (ECI)(bottom scale).

While I see some merit to the approach, I don't think the graph actually means what its purveyors think it does.

First, let me reproduce it with FRED data, which I am able to do through 2001:

Same pretty linear relationship, with maybe a slight bend at area of 79% participation and 2.5% wage growth.

Now let me do the same thing, except this time, while I am continuing to use the prime age E/P ratio, let me substitute the (inverted) U6 underemployment rate:

Same nice relationship, with a little bit bigger kink at the same point in the graph.

Now let me do the same thing again, this time using the U3 unemployment rate:

Once again, same nice relationship, with more of a kink at that same point in the graph.

In other words, in the source graph that allegedly "solves" the problem, it isn't the employment/population ratio that is doing the heavy lifting at all!  Rather, it is the substitution of the Employment Cost Index for average hourly wages that is responsible for the smoother relationship. That's because, unlike other measures of wages, the ECI has shown increasing wage growth in the last several years:

When we use average hourly wages as the measure instead of the Employment Cost Index, the nice relationship disappears:

And of course, since unlike the Employment Cost Index, average hourly wages go back all the way to the 1960s, we can see what the prime age e/p ratio looks like in previous periods.  Here it is for the 1980s and early 1990s:

Hmmmm, I don't think that is the same nice relationship whereby both increase and decrease together, do you?

When we confine the prime age E/P ratio to just men, to deal with the effect of the secular entry into the workforce by women, here's what we get:

Nope, that is not really helpful proving the case either.

Let me emphasize the I do think there is some merit to the approach. But at least part of the problem is that the labor market can only absorb so many new entrants at any given time, and when too many new entrants saturate the job market (as during the time that tens of millions of women entered the market during the 1970s and 1980s), wages will be depressed.

It is thus probably not a coincidence that the three periods of time during this expansion that have seen the highest rate of new participants in the last 20 years are the exact same periods when wage growth stagnated:

In short, it looks like the nice neat relationship between prime age employment participation and wage growth disappears when we use other measures of wages, and also when we apply it to prior periods.

Children make the bestest hostages

 - by New Deal democrat

Criticisms of Trump in the business press are especially instructive, because they have no obvious partisan motivation. So Josh Barro's article at Business Insider this morning, castigating his "bully-and-threaten approach to dealmaking," is particularly noteworthy. He writes:

Donald Trump has a negotiating tactic he really likes: Threaten to do something someone else will really hate, and then offer to stop if they give you what you want.  

Call it the "Why are you hitting yourself?" approach to diplomacy. 

(More broadly, I would say that Trump threatens settled norms and agreements in all spheres precisely because others have come to take them for granted, and so have let their guards down.)

After noting that he has imposed tariffs on "national security" grounds even against US allies as a tactic to gain concessions renegotiating on existing trade agreements, they turn to the issue of immigration:

... [H]e has threatened to end the DACA immigration program, then ramped up the separation of asylum-seeking immigrant families, in an effort to press Congress to remake immigration law on his terms, including building a wall. ....

Trump's theory of immigration politics [is that] if he shows a willingness to be more cruel, he thinks that will force Democrats to the table, and that they will essentially bribe him into not mistreating vulnerable people by enacting immigration policies he's long wanted.  

Look at this hostage I've taken, he thinks. How could they possibly let me shoot it?

Like Dreamers and SCHIP recipients, the children of migrants are the most vulnerable, innocent, and helpless of all. Deliberately inflicting suffering upon them will call forth tidal waves of sympathy (witness the White House press conference the other day). So to the amoral and those without consciences, they become the perfect hostages. For that very reason, we should expect that children will be targeted again and again and again throughout the Trump presidency, and that once he has pocketed the ransom, the moment that he the ability to renege on the deal, and take the same hostages all over again, he will do so. Thus, for example, already we hear that funding for SCHIP, which was agreed to for 6 years under the February budget deal, is nevertheless again being zeroed out by the House GOP's proposed budget for next year.

Dealing with such a deliberate tactic calls for cold-blooded calculation, and steely determination. Barro writes:

In government, a combination of pride and political constraints make it very difficult for Trump's counterparties to take the hit and give him what he wants so he will go away. Plus, they know they will have to deal with him in the future and had better not get a reputation for folding easily.

(Chuck Schumer -- who in a panic last February indicated a willingness to vote for funding for Trump's wall, and thereby conceded his leverage on that point --  for your homework write that last sentence on the blackboard 100 times. Not only was poor procedurally, but a completely unsurprising outcome is that Latinos apparently drew the conclusion that Democrats had abandoned the Dreamers after paying lip service to their plight, and are the one minority unenthusiastic about showing up at the polls this November).

Being cold blooded and steely means potentially making the hard decision to protect Dreamers who are already Americans in every way but legal citizenship vs. migrants who are just arriving or may arrive in the future. But above and beyond that, it means using a fine tooth comb to examine, and reject, any deal if there are "trap doors" which would allow Trump of the GOP to renege before the gains to the hostages are realized, or to retroactively undo those gains. Because at the end of the day, appeasing hostage-takers never works.

And alas, for the next 2 years and 7 months, the entire world must deal with and face down the hostage-taker in Chief.

Weekly Indicators for June 11 - 15 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

There was a little whipsawing among some data, but the overall picture remains consistent.