by Calculated Risk on 12/07/2022 09:37:00 PM

Note: Mortgage rates are from MortgageNewsDaily.com and are for top tier scenarios.

Thursday:
• At 8:30 AM ET, The initial weekly unemployment claims report will be released.  The consensus is for 230 thousand initial claims, up from 225 thousand last week.

by Calculated Risk on 12/07/2022 02:41:00 PM

The recession callers were back in the first half of 2022, and some like ARK's Cathie Wood and Home Depot's Ken Langone claimed the US was already in a recession.   I disagreed and noted I wasn't even on recession watch!

Now it seems like most forecasts are for a recession in 2023.   My answer is: Maybe.

Way back in 2013, I wrote a post "Predicting the Next Recession. This post was in response to several recession forecasts (that were also incorrect).  In that 2013 post, I wrote:

The next recession will probably be caused by one of the following (from least likely to most likely):

3) An exogenous event such as a pandemic, significant military conflict, disruption of energy supplies for any reason, a major natural disaster (meteor strike, super volcano, etc), and a number of other low probability reasons. All of these events are possible, but they are unpredictable, and the probabilities are low that they will happen in the next few years or even decades.
emphasis added

Unfortunately, in 2020, one of those low probability events happened (pandemic), and that led to a recession in 2020.

2) Significant policy error. Two examples: not reaching a fiscal agreement and going off the "fiscal cliff" probably would have led to a recession, and Congress refusing to "pay the bills" would have been a policy error that would have taken the economy into recession. 

Refusing to "pay the bills" (not raising the debt ceiling), would be a policy error - but that seems unlikely (you never know).

1) Most of the post-WWII recessions were caused by the Fed tightening monetary policy to slow inflation. I think this is the most likely cause of the next recession. Usually, when inflation starts to become a concern, the Fed tries to engineer a "soft landing", and frequently the result is a recession.

And this most common cause of a recession is the current concern.  Since inflation picked up, mostly due to the pandemic (stimulus spending, supply constraints, WFH impacts on household formation) and due to the invasion of Ukraine, the Fed has embarked on a tightening cycle to slow inflation.   

The Fed cannot ease pandemic related supply constraints (except by curbing demand), and the Fed cannot stop the war.  So, there is a possibility that the Fed will tighten too much and that will lead to a "hard landing" (aka recession).

The key will be to watch housing.  Housing is the main transmission mechanism for Fed policy.   One of my favorite models for business cycle forecasting uses new home sales (also housing starts and residential investment).   I also look at the yield curve, but I've found new home sales is generally more useful.  (See my post in 2019: Don't Freak Out about the Yield Curve)

For the economy, what I focus on is single family starts and new home sales.   For the bottoms and tops of key housing activity, here is a graph of Single-family housing starts, New Home Sales, and Residential Investment (RI) as a percent of GDP.

Note: The pandemic has distorted the economic data, and as I've noted many times, we can't be a slave to any model.

Click on graph for larger image.

The arrows point to some of the earlier peaks and troughs for these three measures - and the most recent peak.

The purpose of this graph is to show that these three indicators generally reach peaks and troughs together. Note that Residential Investment is quarterly and single-family starts and new home sales are monthly.

New home sales and single-family starts turned down last year, but that was partly due to the huge surge in sales during the pandemic - and then rebounded somewhat.   Now both new home sales and single-family starts have turned down in response to higher mortgage rates.   Residential investment has also peaked.

The second graph shows the YoY change in New Home Sales from the Census Bureau.  Currently new home sales (based on 3-month average) are down 13% year-over-year.

Note: the New Home Sales data is smoothed using a three month centered average before calculating the YoY change. The Census Bureau data starts in 1963.

Some observations:

1) When the YoY change in New Home Sales falls about 20%, usually a recession will follow. An exception for this data series was the mid '60s when the Vietnam buildup kept the economy out of recession.   Another exception was in late 2021 - we saw a significant YoY decline in new home sales related to the pandemic and the surge in new home sales in the second half of 2020.  I ignored that pandemic distortion.

Also note that the sharp decline in 2010 was related to the housing tax credit policy in 2009 - and was just a continuation of the housing bust.

2) It is also interesting to look at the '86/'87 and the mid '90s periods. New Home sales fell in both of these periods, although not quite 20%. As I noted in earlier posts, the mid '80s saw a surge in defense spending and MEW that more than offset the decline in New Home sales. In the mid '90s, nonresidential investment remained strong.

If the Fed tightening cycle will lead to a recession, we should see housing turn down first (new home sales, single family starts, residential investment).  This has happened, but this usually leads the economy by a year or more.  So, we might be looking at a recession in 2023.

There are other indicators too - such as the yield curve and heavy truck sales - but mostly I'll be watching housing.  And clearly housing is in a deep recession.   

I'm now on recession watch for 2023 (not predicting a recession yet - so much depends on inflation and the Fed).   Best to all.

by Calculated Risk on 12/07/2022 11:53:00 AM

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

A brief excerpt:

This is the first look at local markets in November. 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 November were mostly for contracts signed in September and October. Mortgage rates moved higher in September, and 30-year mortgage rates were over 7% for most of October (no points), and that likely impacted closed sales in November and December.
...
In November, sales were down 45.7%. In October, these same markets were down 39.1% YoY Not Seasonally Adjusted (NSA).

Note that in November 2022, there were the same number of selling days as in November 2021, so the SA decline will be similar to the NSA decline. And this suggests another 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 12/07/2022 09:15:00 AM

From Manheim Consulting today: Wholesale Used-Vehicle Prices See Minimal Decline in November

Wholesale used-vehicle prices (on a mix, mileage, and seasonally adjusted basis) decreased 0.3% in November from October. The Manheim Used Vehicle Value Index (MUVVI) declined to 199.4, down 14.2% from a year ago. This is the first time the MUVVI has dropped below 200.0 since August 2021. The non-adjusted price change in November was a decline of 1.6% compared to October, moving the unadjusted average price down 12.4% 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 November and were down 14.2% year-over-year (YoY).  

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

It is likely this index will be down further YoY in December.   

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

From the MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey

Mortgage applications decreased 1.9 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending December 2, 2022. Last week’s results include an adjustment for the observance of the Thanksgiving holiday.

... The Refinance Index increased 5 percent from the previous week and was 86 percent lower than the same week one year ago. The seasonally adjusted Purchase Index decreased 3 percent from one week earlier. The unadjusted Purchase Index increased 31 percent compared with the previous week and was 40 percent lower than the same week one year ago.

“Mortgage applications decreased 2 percent compared to the Thanksgiving holiday-adjusted results from the previous week, even as mortgage rates continued to trend lower. Rates decreased for most loan products, with the 30-year fixed declining 8 basis points to 6.41 percent after reaching 7.16 percent in October,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “The 30-year fixed rate was 73 basis points lower than a month ago – but was still more than three percentage points higher than in December 2021. Additionally, the pace of refinancing remained around 80 percent lower than a year ago.”

Added Kan, “Purchase activity slowed last week, with a drop in conventional purchase applications partially offset by an increase in FHA and USDA loan applications. The average loan size for purchase applications decreased to $387,300 – its lowest level since January 2021. The decrease was consistent with slightly stronger government applications and a rapidly cooling home-price environment.”
...
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) decreased to 6.41 percent from 6.49 percent, with points decreasing to 0.63 from 0.68 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.
emphasis added

Click on graph for larger image.


The first graph shows the refinance index since 1990.

With higher mortgage rates, the refinance index has declined sharply this year.

The refinance index is near the lowest level since the year 2000.

The second graph shows the MBA mortgage purchase index

According to the MBA, purchase activity is down 40% year-over-year unadjusted.

The purchase index is 4% below the pandemic low and up slightly from the lowest level since 2015.

Note: Red is a four-week average (blue is weekly).

by Calculated Risk on 12/06/2022 06:23:00 PM

The FDIC released the Quarterly Banking Profile for Q3 2022 last week:

Net Income Increased Quarter Over Quarter and Year Over Year: Quarterly net income totaled $71.7 billion in third quarter 2022, an increase of $7.3 billion (11.3 percent) from the second quarter.
...
Asset Quality Metrics Were Favorable Overall Despite Growth in Early Delinquencies: Loans that were 90 days or more past due or in nonaccrual status (i.e., noncurrent loans) continued to decline and the noncurrent rate was down 3 basis points to 0.72 percent from second quarter 2022. The noncurrent rate for total loans is at the lowest level since second quarter 2006. Total net charge-offs increased 6 basis points from a year ago to 0.26 percent, driven by higher credit card and auto loan net charge offs. Early delinquencies (i.e., loans past due 30-89 days) increased 3 basis points from last quarter and 7 basis points from the year-ago quarter to 0.51 percent. Both the quarterly and annual increases were driven by an increase in past due credit cards, C&I, and auto loans.
emphasis added

Click on graph for larger image.

The FDIC reported the number of problem banks increased to 42.

The number of banks on the FDIC’s “Problem Bank List” increased by two from second quarter to 42. Total assets of problem banks declined $5.7 billion to $163.8 billion.7 No banks failed in the third quarter.

This graph from the FDIC shows the number of problem banks and assets at problem institutions.

Note: The number of assets for problem banks increased significantly back in 2018 when Deutsche Bank Trust Company Americas was added to the list.  An even larger bank was added to the list last year, although the identity of the bank is unclear.

by Calculated Risk on 12/06/2022 12:26:00 PM

Here is another monthly update on framing lumber prices.

This graph shows CME random length framing futures through December 6th.

Lumber was at $413 per 1000 board feet this morning.  

This is down from the peak of $1,733, and down 54% from $907 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.

There was this press release yesterday announcing production cuts "due to very weak market conditions": 

Canfor Corporation (TSX:CFP) is announcing a temporary reduction in Canadian production due to very weak market conditions. The production will be reduced through curtailments at all solid wood facilities in B.C. and Alberta. This will remove approximately 150 million board feet in December and January. The curtailments will start to be implemented on December 19, 2022 and will range from one to four weeks across its Canadian operations. The Company will continue to adjust operating rates to align with market conditions and anticipates that the majority of its BC facilities will operate below full capacity in the New Year.

by Calculated Risk on 12/06/2022 09:27:00 AM

Today, in the Calculated Risk Real Estate Newsletter: Q3 Update: Delinquencies, Foreclosures and REO

A brief excerpt:

Last year, I pointed out that with the end of the foreclosure moratoriums, combined with the expiration of a large number of forbearance plans, we would see an increase in REOs in late 2022 and into 2023. However, this would NOT lead to a surge in foreclosures and significantly impact house prices (as happened following the housing bubble) since lending has been solid and most homeowners have substantial equity in their homes.
...
Here is some data on REOs through Q3 2022 …
...
This graph shows the nominal dollar value of Residential REO for FDIC insured institutions. Note: The FDIC reports the dollar value and not the total number of REOs.

The dollar value of 1-4 family residential Real Estate Owned (REOs, foreclosure houses) increased from $784 million in Q2 2022 to $818 million in Q3 2022. This is increasing, but still very low.
...
The bottom line is there will be an increase in foreclosures over the next year (from record low levels), but it will not be a huge wave of foreclosures as happened following the housing bubble. The distressed sales during the housing bust led to cascading price declines, and that will not happen this time.

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

by Calculated Risk on 12/06/2022 08:44:00 AM

From the Department of Commerce reported:

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis announced today that the goods and services deficit was $78.2 billion in October, up $4.0 billion from $74.1 billion in September, revised.

October exports were $256.6 billion, $1.9 billion less than September exports. October imports were $334.8 billion, $2.2 billion more than September imports.
emphasis added

Click on graph for larger image.

Exports decreased and imports increased in October.

Exports are up 14% year-over-year; imports are also up 14% year-over-year.

Both imports and exports decreased sharply due to COVID-19 and have now bounced back.

The second graph shows the U.S. trade deficit, with and without petroleum.

The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.

Note that net, exports of petroleum products are slightly positive.

The trade deficit with China decreased to $28.9 billion in October, from $31.3 billion a year ago.

The trade deficit was slightly smaller than the consensus forecast.

by Calculated Risk on 12/06/2022 08:00:00 AM

Notes: This CoreLogic House Price Index report is for October. The recent Case-Shiller index release was for September. The CoreLogic HPI is a three-month weighted average and is not seasonally adjusted (NSA).

From CoreLogic: US Annual Home Price Growth Slows to Half of Spring 2022 Peak in October, CoreLogic Reports

CoreLogic® ... today released the CoreLogic Home Price Index (HPI™) and HPI Forecast™ for October 2022.

Year-over-year home price growth remained in double digits in October, at 10.1%, but continued to cool and was the lowest recorded since early 2021. Several factors are contributing to slowing appreciation: low inventory due to seller preferences to keep affordable mortgage rates that they have already locked in, homebuyer loss of purchase power and current economic uncertainty. Annual U.S. price growth is expected to taper off in the coming months, perhaps moving into negative territory by spring 2023, but then slowly ticking back into single digits as the year progresses.

“Following the recent mortgage rate surge above 7%, real estate activity and consumer sentiment regarding the housing market took a nosedive,” said Selma Hepp, interim lead of the Office of the Chief Economist at CoreLogic. “Home price growth continued to approach single digits in October, and it will move in that direction for the rest of the year and into 2023.”
...
U.S. home prices (including distressed sales) increased 10.1% year over year in October 2022 compared to October 2021. On a month-over-month basis, home prices declined by 0.1% compared to September 2022.
emphasis added