by Calculated Risk on 11/08/2022 03:31:00 PM

On Thursday, the BLS will release inflation data for October. The consensus is for a 0.7% increase in CPI, and a 0.5% increase in core CPI. The consensus is for CPI to be up 8.0% year-over-year and core CPI to be up 6.6% YoY.

Here is a preview from Goldman Sachs economists Manuel Abecasis and Spencer Hill:

We expect a below-consensus 0.44% increase in core CPI in October (vs. 0.5% consensus), which would lower the year-on-year rate to 6.46% (vs. 6.5% consensus). We expect moderate increases in both food and energy prices to raise headline CPI by 0.49% (vs. 0.6% consensus), which would lower the year-on-year rate to 7.8% (vs. 7.9% consensus).

Recently we've seen used car prices down over 10% YoY, and framing lumber prices down 33% YoY. One of the keys will be rent, especially Owners' equivalent rent (OER). In Goldman's note, they echoed Fed Chair Powell's comment about rents have "some significant rate increases coming":

[W]e expect shelter inflation to run hot (rent +0.78%, OER + 0.75%)—even though alternative web-based measures of new tenant rent growth have slowed—because continuing tenant rent levels still have a long way to catch up to new tenant market rates.
emphasis added

However, Rental housing economist Jay Parsons argues rental data will "cool faster than the Fed expects:

Click on graph for larger image.

Here's the data to show real-life rent inflation will cool faster than the Fed suggested last week-- and not just for asking rents:

We’ve plunged back to long-term average in “loss to lease” – meaning the runway for renewal lease rents will significantly narrow going forward...

“Loss to lease” is the gap between today’s market asking rents and the average in-place (embedded) rent (aka “contract rent,” which is what the CPI attempts to measure). As a general rule of thumb: The larger the loss to lease, the larger the renewal increase...

Here is a dissertation from economist Adam Ozimek showing a significant lag in CPI measured rents: Sticky Rents and the CPI for Owner-Occupied Housing Rent inflation will be a key for the Fed.

Here was Fed Chair Powell's comment:

CHRISTOPHER RUGABER. Thank you, Chris Rugaber at Associated Press. Just to go back to housing for a minute, you mentioned the impact that rate increases have had on housing, home sales are down 25 percent in the past year, and so forth, but none of this is really showing up in, as you know, in the government's inflation measures. And as we go forward, private real-time data is clearly showing these hits to housing. Are you going to need to put a greater weigh on that in order to ascertain things like whether there's over tightening going on or will you still focus as much on the more lagging government indicators?

CHAIR POWELL. So this is an interesting subject. So I start by saying I guess that the measure that's in the CPI and the PCE, it captures rents for all tenants, not just the new, not just new leases. And that makes sense actually because that, for that reason, that conceptually that is, that's sort of the right target for monetary policy. And the same thing is true for owners' equivalent rent which comes off of, it's a re-weighting of tenant rents. The private measures are of course good at picking up the, at the margin, the new leases and they tell you a couple things; one thing is, once you, I think right now, if you look at the pattern of that series of the new leases, it's very pro-cyclical, so rents went up much more than the CPI and PCE rents did. And now they're coming down faster. So but what you're, the implication is that there are still as people, as non-new leases rollover and expire, right? You still, they're still in the pipeline, there's still some significant rate increases coming. Okay? But at some point, once you get through that, the new leases are going to tell you, what they're telling you is there will come a point at which rent inflation will start to come down. But that point is well out from where we are now. So we're well-aware of that of course and we look at it. And we've, but I would say that in terms of the right way to think about inflation really is to look at the measure that we do look at, but considering that we also know that at some point you'll see rents coming down.
emphasis added

by Calculated Risk on 11/08/2022 01:16:00 PM

From Dodge Data Analytics: Dodge Momentum Index Continues to Climb in October

he Dodge Momentum Index (DMI), issued by Dodge Construction Network, improved 9.6% (2000=100) in October to 199.7 from the revised September reading of 182.2. During the month, the DMI continued its steady ascent, with the commercial component rising 13%, and the institutional component ticking up 2.9%.

Commercial planning was bolstered by a solid increase in office and hotel projects. The institutional component was varied, experiencing growth in recreational and education projects, countered by a decline in the number of healthcare and public planning projects. On a year-over-year basis, the DMI was 28% higher than in October 2021, the commercial component was up 29%, and institutional planning was 25% higher.
...
“The sustained upward trajectory in the Momentum Index shows optimism from owners and developers that projects will continue to move forward, even with rising concerns of an economic recession,” said Sarah Martin, senior economist for Dodge Construction Network. “Specific nonresidential segments, such as data centers and life science laboratories, have thrived in 2022 and continue to support strength in planning activity. As we move into next year, however, labor and supply shortages, high material costs and high interest rates will likely temper planning activity back to a more moderate pace.”
emphasis added

Click on graph for larger image.

This graph shows the Dodge Momentum Index since 2002. The index was at 199.7 in October, up from 182.2 in September.

According to Dodge, this index leads "construction spending for nonresidential buildings by a full year".  This index suggests a solid pickup in commercial real estate construction into 2023.

by Calculated Risk on 11/08/2022 11:19:00 AM

Here is another monthly update on framing lumber prices.

This graph shows CME random length framing futures through November 8th.

Lumber was at $447 per 1000 board feet this morning.  

This is down from the peak of $1,733, and down 33% from $663 a year ago.

Prices are close to the pre-pandemic levels of around $400.

Click on graph for larger image.

There is somewhat of a seasonal demand for lumber, and lumber prices usually peak in April or May, although prices peaked much earlier this year.

It is unlikely we will see a runup in prices as happened at the end of last year due to the housing slowdown.

by Calculated Risk on 11/08/2022 08:53:00 AM

Today, in the Calculated Risk Real Estate Newsletter: 1st Look at Local Housing Markets in October

A brief excerpt:

This is the first look at local markets in October. I’m tracking about 35 local housing markets in the US. Some of the 35 markets are states, and some are metropolitan areas. I’ll update these tables throughout the month as additional data is released.

Closed sales in October were mostly for contracts signed in August and September. Mortgage rates moved higher in September, and that impacted closed sales in October.

The further sharp increase in mortgage rates in October - with the 30-year mortgage over 7% - will impact closed sales in November and December.
...
In October, sales were down 38.0%. In September, these same markets were down 28.5% YoY Not Seasonally Adjusted (NSA).

Note that in October 2022, there were the same number of selling days as in October 2021, so the SA decline will be similar to the NSA decline. And this suggests another significant step down in sales!

Many more local markets to come!

There is much more in the article. You can subscribe at https://calculatedrisk.substack.com/

by Calculated Risk on 11/07/2022 09:00:00 PM

From Matthew Graham at Mortgage News Daily: New Issuance Keeping Pressure on Bonds Ahead of CPI

CPI-watching is all the more interesting these days due to the extreme prevalence of one particular month-over-month reading. Core monthly inflation came in at 0.6% no fewer than 8 times since the start of the pandemic, and 5 of those have been in 2022. No other level has been even half as prevalent. In annualized term, 0.6% represents a 7.2% core inflation rate--well over the current 6.6% level. The 2 most recent reports both came in at 0.6%, making it even more of a line in the sand--one that can help us identify a turning point. ... [30 year fixed 7.25%]
emphasis added

Tuesday:
• At 6:00 AM ET, NFIB Small Business Optimism Index for October.

by Calculated Risk on 11/07/2022 05:06:00 PM

From the Federal Reserve: The October 2022 Senior Loan Officer Opinion Survey on Bank Lending Practices

The October 2022 Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) addressed changes in the standards and terms on, and demand for, bank loans to businesses and households over the past three months, which generally correspond to the third quarter of 2022.

Regarding loans to businesses, survey respondents reported, on balance, tighter standards and weaker demand for commercial and industrial (C&I) loans to firms of all sizes over the third quarter. Meanwhile, banks reported tighter standards and weaker demand for all commercial real estate (CRE) loan categories.

For loans to households, lending standards tightened or remained basically unchanged across all categories of residential real estate (RRE) loans and demand weakened for all such loans. In addition, banks reported tighter standards and stronger demand for home equity lines of credit (HELOCs). Standards tightened for credit card loans and other consumer loans while standards for auto loans remained unchanged. Meanwhile, demand strengthened for credit card loans, was unchanged for other consumer loans, and weakened for auto loans.
emphasis added

Click on graph for larger image.

This graph on Residential Real Estate demand is from the Senior Loan Officer Survey Charts.

This shows that demand has declined sharply.

The left graph is 1990 to 2014.  The right graph is 2015 to Q3 2022.

by Calculated Risk on 11/07/2022 12:09:00 PM

Active inventory decreased slightly.  Here are the same week inventory changes for the last four years (usually inventory is declining sharply at this time of year):

2022: -2.2K (smaller than usual decrease in inventory)

2021: -13.0K

2020: -13.4K

2019: -20.7K

Inventory bottomed seasonally at the beginning of March 2022 and is now up 138% since then.  Altos reports inventory is down 0.4% week-over-week. 

Click on graph for larger image.

This inventory graph is courtesy of Altos Research.

As of November 4th, inventory was at 575 thousand (7-day average), compared to 577 thousand the prior week. 

Compared to the same week in 2021, inventory is up 43.5% from 401 thousand, and compared to the same week in 2020 inventory is up 8.5% from 530 thousand.  Compared to 3 years ago (2019), inventory is down 36.0% from 898 thousand.

Here are the inventory milestones I’ve been watching for with the Altos data:

1. The seasonal bottom (happened on March 4, 2022, for Altos) ✅

2. Inventory up year-over-year (happened on May 20, 2022, for Altos) ✅

3. Inventory up compared to 2020 (happened on October 7, 2022, for Altos) ✅

4. Inventory up compared to 2019 (currently down 36.0%).

Here is a graph of the inventory change vs 2021 (milestone 2 above), 2020 (milestone 3) and 2019 (milestone 4).

The blue line is the year-over-year data, the red line is compared to two years ago, and dashed purple is compared to 2019.

A key will be if inventory declines slowly during the winter months.

Mike Simonsen discusses this data regularly on Youtube.

by Calculated Risk on 11/07/2022 10:33:00 AM

Today, in the Calculated Risk Real Estate Newsletter: Black Knight Mortgage Monitor: Home Prices Declined in September; Down 2.6% since June

A brief excerpt:

Here is a graph of the Black Knight HPI. The index is still up 10.1% year-over-year but declined for the third straight month in September and is now 2.6% off the peak in June.

• Housing market watchers are split on whether we will see meaningful price declines in coming months – or even years – due to low affordability, or a more lateral correction moderated by historically low inventory

• September’s data brought fodder for both sides of the debate, with home prices slipping for a third consecutive month, but at 0.52%, less than half the monthly declines seen in July and August

• All in, prices have fallen 2.6% since June – the first 3-month decline since 30-year rates spiked to near 5% back in late 2018, and the worst 3-month stretch since early 2009.

There is much more in the article. You can subscribe at https://calculatedrisk.substack.com/

by Calculated Risk on 11/07/2022 09:12:00 AM

From Manheim Consulting today: Wholesale Used-Vehicle Prices See Smaller Decline in October

Wholesale used-vehicle prices (on a mix, mileage, and seasonally adjusted basis) decreased 2.2% in October from September. The Manheim Used Vehicle Value Index declined to 200.0 and is now down 10.6% from a year ago. The non-adjusted price change in October was a decline of 2.1% compared to September, moving the unadjusted average price down 9.3% year over year.
emphasis added

Click on graph for larger image.

This index from Manheim Consulting is based on all completed sales transactions at Manheim’s U.S. auctions.

The Manheim index suggests used car prices decreased in October and were down 10.6% year-over-year (YoY).  

This also suggests the consumer price index for used cars and trucks will be down again in October.

It is likely this index will be down more than 15% YoY in November.   

by Calculated Risk on 11/07/2022 08:32:00 AM

These indicators are mostly for travel and entertainment.    It was interesting to watch these sectors recover as the pandemic impact subsided.

----- Airlines: Transportation Security Administration -----
The TSA is providing daily travel numbers.

This data is as of November 6th.

Click on graph for larger image.

This data shows the 7-day average of daily total traveler throughput from the TSA for 2019 (Light Blue), 2020 (Black), 2021 (Blue) and 2022 (Red).

The dashed line is the percent of 2019 for the seven-day average.

The 7-day average is 7.7% below the same week in 2019 (92.2% of 2019).  (Dashed line) 

Air travel - as a percent of 2019 - has picked up recently.

----- Movie Tickets: Box Office Mojo -----
This data shows domestic box office for each week and the median for the years 2016 through 2019 (dashed light blue).  

Black is 2020, Blue is 2021 and Red is 2022.  

The data is from BoxOfficeMojo through November 3rd.

Note that the data is usually noisy week-to-week and depends on when blockbusters are released.  

Movie ticket sales were at $91 million last week, down about 39% from the median for the week.

----- Hotel Occupancy: STR -----
This graph shows the seasonal pattern for the hotel occupancy rate using the four-week average.

The red line is for 2022, black is 2020, blue is the median, and dashed light blue is for 2021. Dashed purple is 2019 (STR is comparing to a strong year for hotels).

This data is through Oct 29th. The occupancy rate was up 5.2% compared to the same week in 2019. 

The 4-week average of the occupancy rate is above the median rate for the previous 20 years (Blue) and close to 2019 levels.

Notes: Y-axis doesn't start at zero to better show the seasonal change.

----- Gasoline Supplied: Energy Information Administration -----

This graph, based on weekly data from the U.S. Energy Information Administration (EIA), shows gasoline supplied compared to the same week of 2019.

Blue is for 2020.  Purple is for 2021, and Red is for 2022.

As of October 28th, gasoline supplied was down 11.5% compared to the same week in 2019.

Recently gasoline supplied has been running below 2019 and 2021 levels - and sometimes below 2020.