Looking at Home Prices

Four cities have set new all-time highs for prices, two are more than 20% above their pre-crisis peaks:

(click on table or chart for larger image)

Home prices are much more volatile than rents and are rising a bit faster currently:

With inflation quite low, the real and nominal home prices track one-another, unlike the more distant past:

Affordability should survive the prospect of rising interest rates:

Home Prices Are Rising Faster Than You Think

Prices of existing single family homes, as measured by the S&P/Case-Shiller National Home Price index, are rising is single digit terms.  However, the price changes that matter – the real or inflation adjusted changes – may be higher than many suspect. Backing out inflation, as shown in the chart, gives real increases averaging 6.3% annually in 2012-20015. The compares to real increases of 6.8% annually during 1998-2005, the peak years of the housing boom. With two percent wage increases and one percent inflation, a real increase of 6% or more can make a difference.  These numbers may offer one explanation for the recent popularity of apartments and renting.

The chart shows the rate of inflation (green bars), the real increase in the S&P/Case-Shiller National Home Price Index (red bars) and the nominal increase in the index (blue line). The data for 1976 through 2014 are the 12 months ended in December; for 2015 data for December 2014 to July 2015 are used and annualized.

U.S. Weekly Economic Roundup: What’s The Rush?

The September Federal Open Market Committee (FOMC) meeting is shaping up to be a real cliffhanger. The minutes of July’s meeting didn’t give a clear signal regarding the September move for a rate hike. It is clear, however, that the participants are not in agreement yet. The Fed’s downside risks have increased since their meeting in July: Oil and commodity prices have declined further, and economic and financial developments abroad, especially in China, have deteriorated. We believe the odds for a liftoff have shifted to December from September, though it remains a close call given that domestic economic data since the July meeting continue to be more positive than negative.

The economic releases this week include:

  • Housing starts grew 0.2% to an annual rate of 1.206 million in July (the highest since October 2007) from a revised 1.204 million (was 1.174 million) in June. The rise in starts was driven by a sizeable gain in single-family starts, up 12.8% to 782,000–the highest since the end of 2007. Multifamily starts fell 17.0% to 424,000, though this comes on the heels of a surge in June. Building permits, a forward-looking indicator of starts, fell 16.3% to an annual rate of 1.19 million in July after jumping to 1.337 million (was 1.343 million) in June.
  • Existing home sales climbed 2% to an annual rate of 5.59 million in July–an eight-year high–from a downwardly revised 5.48 million (was 5.49 million) in June. On an annual basis, existing home sales climbed 10.3% in July–the 10th consecutive month of growth. Inventories fell to 2.24 million homes available for sale, representing a historically low 4.7 months at the current sales pace.
  • The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) ticked up one point to 61 in August. Both the current-sales index and the prospective-sales index hit their highest levels in nearly 10 years. However, the index for buyer traffic remains low at 45 (indicating that more than half of the builders think buyer traffic is still low).
  • The Consumer Price Index (CPI) edged up 0.1% in July after climbing 0.3% in June. The core CPI (excluding food and energy) ticked up 0.1% in July following a 0.2% increase in June. Consumer prices were up 0.2% year over year in July, while the core CPI grew 1.8% year over year.
  • The Empire State Manufacturing Index tumbled to negative 14.9–a six-year low–in August from positive 3.9 in July.
  • The Philadelphia Fed Manufacturing Index rose to 8.3 in August from 5.7 in July.
  • U.S. leading economic indicators fell 0.2% in July, after rising 0.6% in June. Eight out of 10 components of the leading index made positive contributions in July. The biggest gain, as usual, came from the interest-rate spread. The only large negative was the contribution from building permits, which pulled back sharply in July after three months of solid gains.
  • Initial jobless claims edged up to a seasonally adjusted 277,000 in the week ended Aug. 15 versus 273,000 (was 274,000) the week before. The four-week moving average rose to 271,500 in the week ended Aug. 15 from 266,000 (was 266,250) the week before. Continuing claims fell to 2.254 million in the week ended Aug. 8.

A Higher Hurdle To Clear

The July FOMC minutes released on Aug. 19 indicated less conviction among Fed members on their two mandates, which left markets guessing on the Fed’s next move. The minutes said that “most judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point.” With FOMC members relatively convinced that the jobs market was strong enough for them to initiate a hike, they weren’t “reasonably confident” that inflation outlook was improving. Finally, the minutes highlighted more division between committee members and less conviction in discussions on labor and inflation–not a unified front when they decide on when to initiate the first rate hike in almost 10 years.

Even member agreement on an improving jobs outlook had caveats. FOMC participants agreed that “labor market conditions had improved further” with “many” voters thinking that slack “would be largely eliminated in the near term” if their forecasts were realized. But not everyone agrees with that rosy outlook. “Several” members contended that “some noticeable margins of slack remained.” And while several saw “labor market conditions as at or very close to” maximum employment, others were concerned that “maximum employment could take longer to achieve, noting, for example, the lack of convincing signs of accelerating wages.” That doesn’t bode well for agreement on when to move.

The inflation outlook was even more muddled in the July minutes. While “most” participants still thought that the downward pressure on inflation from low energy prices and a strong dollar would “prove to be temporary” and that inflation would increase to the committee’s objective over the medium term, some participants disagreed, noting that “incoming information had not yet provided grounds for reasonable confidence that inflation would move back to 2% over the medium term” and that the inflation outlook thus “might not soon” meet conditions needed to initiate a firming of policy.

Still, they did agree on one thing. “Almost all members” said that they need more evidence that economic conditions had “firmed enough for them to feel reasonably confident that inflation would return to the committee’s longer-run objective over the medium term.”

While the Fed has not ruled out a September hike, the bar has been set a bit higher than earlier thought. It seems that the “burden of proof” is on September’s shoulders. Incoming data now needs to support a September hike “beyond a reasonable doubt,” rather than strongly argue against it. Overall, we believe the odds for a liftoff has shifted to December, though we’ll still be keeping our eyes on the incoming news to see if the needle moves closer to a September move. Given a more divided committee, we suspect there will be a few dissents either way.

U.S. Weekly Economic Roundup: Still On Track

The first set of data for the third quarter has been more positive than negative. Last week we saw solid employment numbers and business sentiment. This week, the positives continued to outweigh the negatives. Even revisions of key second-quarter data points are now showing that the economy may have in fact expanded at closer to 3% versus a much lower 2.3% estimate from the Bureau of Economic Analysis’ (BEA’s) first release. The trend so far since the last Federal Open Market Committee meeting has been consistent with a September liftoff of raising rates, though it remains a close call whether the recent plunge in commodity prices, dollar strength, and remaining uncertainties over the outlooks for China and Greece will prompt a delay in the first expected quarter-point hike from the Fed.

The economic releases this week include:

  • Retail sales rose 0.6% in July after coming in unchanged (was negative 0.3%) in June. Core retail sales (excluding autos, gasoline, and building materials) rose 0.3% in July, following a 0.2% increase in June. Total retail sales in July were up 2.4% year over year.
  • Industrial production climbed 0.6% in July after inching up 0.1% (was 0.3%) in June. Manufacturing output rose 0.8%, but excluding the motor vehicles output, manufacturing was up only 0.1%. The capacity utilization rate rose to 78% in July from 77.7% the previous month.
  • Wholesale inventories climbed 0.9% in June following a revised 0.6% increase (was 0.8%) in May and grew 5.4% year over year. Wholesale sales inched up 0.1% in June after edging up 0.2% in May. Wholesale sales fell 0.5% year over year.
  • Business inventories climbed 0.8% in June after rising 0.3% in May. Business sales edged up 0.2% in June following a 0.4% increase in the previous month.
  • Labor productivity rose at a seasonally adjusted annual rate of 1.3% in the second quarter following a revised 1.1% decrease (was negative 3.1%) in the first quarter. The unit labor costs rose 0.5% in the second quarter after a downwardly revised 2.3% increase (was 6.7%) in the first. Productivity edged up 0.3% year over year in the second quarter and output climbed 2.8% year over year.
  • Producer prices edged up 0.2% in July after climbing 0.4% in June. The core producer price index (excluding food and energy prices) rose 0.3% in July, matching the previous month’s rate. The producer price index was down 0.8% year over year in July. The core PPI also slowed to 0.6% in July.
  • Import prices fell 0.9% in July after coming in unchanged in June. Export prices edged down 0.2% in July after falling 0.3% in the previous month. On an annual basis, import prices were down 10.4% in July, while export prices were down 6.1%.
  • The federal government budget deficit widened by $54.6 billion year over year in July to $149.2 billion. The year-to-date deficit in fiscal 2015 is $465.5 billion. Government receipts increased by $11.0 billion (or 5.1% year over year) in July. Meanwhile outlays grew $65.6 billion (or 21.2% year over year).
  • According to New York Fed’s Quarterly Household Debt and Credit Report, aggregate household debt balances were unchanged in the second quarter of 2015. As of June 30, 2015, total household indebtedness was $11.85 trillion. Overall household debt remains 6.5% below its third-quarter 2008 peak of $12.68 trillion. Mortgage debt fell while consumer credit and auto loans rose in the quarter. Even as overall debt balances remained steady, the proportion of debt that was delinquent continued to decrease–to 5.6% from 5.7%. This share is still elevated from prerecession levels. Bankruptcies increased slightly over the previous quarter, which had seen the lowest level since before the recession; still, they are down a significant 14% year on year.
  • The preliminary reading of the University of Michigan consumer sentiment index came in at 92.9 in August compared with the final July reading of 93.1.
  • Initial jobless claims edged up to a seasonally adjusted 274,000 in the week ended Aug. 8 versus 269,000 (was 270,000) the week before. The four-week moving average fell to 266,250 in the week ended Aug. 8 from 268,000 (was 268,250) the week before. Continuing claims increased to 2.27 million in the week ended Aug. 1.

Second-quarter real GDP growth was 2.3% in the first release by the BEA, lower than our forecast of 2.8%. However, with the upward revisions of key data points that have come out since the first release, we expect the second-quarter real GDP growth to be revised up–close to 3%. We continue to expect the economy to grow on average at a 3%+ pace during the second half of this year. We see a high rate of inventory accumulation during the first half and weak growth in international demand for U.S. products posing a drag in second half growth. On the other hand, we look for consumers to carry the economy to the finish line. The outlook for consumer spending is bright due to real disposable income gains, modest consumer price inflation, lower energy prices, relatively good employment gains, and a housing market that is gaining traction.

Mortgage Demand Up, Some Softening of Credit Standards

The Fed’s Senior Loan Officer Survey was published this week and shows both an increase in the demand for mortgages and that some banks have eased their credit standards somewhat.  While neither of these shifts heralds a huge boom, they are welcome news.  Click on the chart for a larger image.

The full survey can be found here

Home Prices Continue to Rise Nationally; First Time Homebuyers Remain the Weak Spot: S&P/Case-Shiller

Data released today for May 2015 show that home prices continued their rise across the country over the last 12 months.

S&P/Case Shiller Press Release

Bob Shiller on Home Prices and Job Growth

These charts are from Bob Shiller. The first scatter gram compares the unemployment rate with the change in home prices in the 12 months through April, 2015.  There is no obvious pattern orrelation between unemployment rates and the change in home prices.  The second scatter gram tells a different story: the faster employment grew over the year ending April 2015 (the horizontal axis), the faster home prices rose in the same time period (vertical axis).   Job growth, not unemployment, matters for home prices.   Click on the charts for a larger image.

The home price data is from the latest release of the S&P/Case-Shiller Home Price Indices. Unemployment rate and growth in employment data are from the US Bureau of Labor Statistics.

From This Morning’s S&P/Case-Shiller Release

The table shows the high and low index levels and dates for the 20 S&P/Case-Shiller Home Price Index cities.  The chart shows the recent evolution of the year-over-year change in the S&P/Case-Shiller National Index.  Since late 2013 the year-over-year gains have dropped from an unsustainable double digit pace and now may be leveling off with annual increase of about 4%. However, 4% is still more than double the rate of inflation compared to a long term annual average of one percent after inflation.

cities april 2015

nationa pctch

Home Price Gains Ease in April According to the S&P/Case-Shiller Home Price Indices

 

Data through April 2015 show that home prices continued their rise across the country over the last 12 months.  S&P/Case-Shiller Home Price Indices – April 2015

U.S. Economic Forecast: The Terrible Twos

Recent data suggest the U.S. economy has rebounded fairly well from its contraction in the first quarter of the year, giving financial-market participants, as well as American businesses and consumers, reason to be somewhat optimistic. Job gains accelerated after a lull in March, and housing activity strengthened after a deep winter chill. Also, at long last, households are spending some of their now-rising wages and the money they’ve saved at the gas pumps.

In this light, we have raised our forecast for second-quarter U.S. GDP growth to 2.8%, from 2.1% in May. The Bloomberg June survey of consensus forecasts had second-quarter growth at 2.5%.

But while markets may have breathed a sigh of relief, there’s a lingering feeling that the first quarter’s contraction represents more than a mere blip. In fact, a number of indicators suggest U.S. growth will toddle along at best. In this light, we now expect full-year U.S. GDP growth of 2.3%, down from 2.4% in our May forecast and below last year’s economic expansion of 2.4%. Worse yet, we don’t expect the world’s biggest economy to outgrow these “terrible twos” any time soon.

To be sure, much of the economy has warmed up, concurrent with the weather. And it’s not just jobs data that suggest the ongoing recovery remains on track. Consumers have hit the malls and bought big-ticket items such as cars, and even the housing market has shown signs of renewed strength. Additionally, businesses seem more optimistic about economic conditions, with most manufacturing sentiment readings climbing further into positive territory.

However, although the domestic side of the economic equation seems to be rumbling along–with temporary factors such as the weather, West Coast port disruptions, and the so-called residual seasonality dissipating–the drag from still-low oil prices and the strong dollar, which has weighed on capital spending and production, may still do some damage. And, of course, businesses will need to unwind their inventory accumulation in the first quarter, which will damp spending.

Even with a second-half rebound, 2015 won’t likely be the year the U.S. economy enjoys the level of expansion that typically follows recessions. Although we expect some pickup in 2016, we see GDP growth remaining below 3% through the end of the decade. Our reasons for holding this view are similar to concerns that the International Monetary Fund and the Congressional Budget Office raised last year–to wit, the effects of an aging population on the economy and the prospect of only modest productivity growth.

Whether the U.S. enters into what former Secretary of the Treasury Lawrence Summers has called “secular stagnation”–a period of slow growth, marked by only marginal increases in the size of the workforce and small gains in productivity–remains to be seen. And while specific causes of secular stagnation are difficult to determine, a slower-growing and aging population, greater globalization, and increasingly unequal distribution of income and wealth are generally recognized as contributing factors.

Either way, we’ve yet to even approach the level of post-recession economic expansion that we’ve historically seen. When you consider that the 2.2% average annual growth (2010-2014) we’ve had since the recovery started is only about half the 4.6% five-year average following U.S. recessions (going back 50 years), the recent underperformance is especially notable.

Nonetheless, we think the Federal Reserve will soon raise benchmark interest rates–for the first time in almost a decade. The apprehension that Federal Open Market Committee (FOMC) members showed at their April meeting has eased, and we expect policymakers to lift the federal funds rate twice this year, starting in September–with the target rate rising to 0.5%-0.75% by year-end. However, the central bank is certainly well aware that, while the economy continues to strengthen, there are reasons to take baby steps in normalizing monetary policy. We now expect the fed funds rate to be 1.5%-1.75% by the end of 2016.

Click here to read the full economic update.

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