by Calculated Risk on 8/22/2023 01:26:00 PM

Last week, housing economist Tom Lawler wrote: Is The “Natural” Rate of Interest Back to Pre-Financial Crisis Levels?. Here are some additional comments from Lawler:

While NY Fed President Williams recently argued that “there is no evidence that the era of low natural rates of interest has ended,” (which many including myself would say is not accurate), other analysts at the NY Fed who oversee its “Dynamic Stochastic General Equilibrium” (DSGE) model suggest otherwise, at least for the “short-run” measure of the natural rate of interest, or “r-star.” In a recent post on the Liberty Street Economics blog, economists Katie Baker, Logan Casey, Marco Del Negro, Aidan Gleich, and Ramya Nallamotu discuss some of the reasons why their DSGE’s estimate of the short-run natural rate of interest (in inflation-adjusted terms) increased from 0.81% in December 2022 to an eye-popping 3.57% in March 2023. (The post is available at The Evolution of Short-Run r* after the Pandemic) The latest results from the DSGE model project that r-star will decline to 2.22% at the end of 2023, 1.77% at the end of 2024, and 1.47% at the end of 2025.

Here is the last paragraph in the blog (my bold).

“In sum, to make sense of recent developments in the U.S. economy, we must explain the fact that the economy remains quite strong in spite of the FFR being more than 500 basis points higher than it was a little more than a year ago. The model rationalizes these developments by postulating that the short-run natural rate of interest has increased considerably over the past year. This, in turn, has implications for the speed of the decline of inflation toward the FOMC’s long run goal and for assessing the stance of monetary policy.”

Now I’m not a big fan of DSGE models, and I’m certainly not a big fan of the HLW model that was the basis for NY Fed Governor Williams’ assertion that there is no evidence that the natural rate of interest has increased meaningfully, if at all. There are, however, many reasons to believe that the natural rate of interest HAS in fact increased significantly, including but not limited to market-based signals.

Not surprisingly, of course, market participants are quite uncertain as to “the Fed’s” current view is on the “natural” rate of interest, as there is conflicting evidence not just within the NY FED but from research at other regional Federal Reserve Banks.

Some are hoping that the Fed Chairman Powell may address the “r-star issue” at Jackson Hole this week, or at least express his views on this issue, though given the conflicting evidence I’m not sure whether he will provide much clarity save that the level of r-star is “highly uncertain” – which is certainly the case!

But I think there is a strong case that the “natural” rate of interest is back to levels just prior to the 2008 financial crisis.

by Calculated Risk on 8/22/2023 10:56:00 AM

Today, in the CalculatedRisk Real Estate Newsletter: NAR: Existing-Home Sales Decreased to 4.07 million SAAR in July; Median Prices Increased 1.9% YoY in July

Excerpt:

On prices, the NAR reported:

The median existing-home price for all housing types in July was $406,700, an increase of 1.9% from July 2022 ($399,000). Prices rose in the Northeast, Midwest and South but were unchanged in the West.

Median prices are distorted by the mix (repeat sales indexes like Case-Shiller and FHFA are probably better for measuring prices).

The YoY change in the median price peaked at 25.2% in May 2021 and bottomed at down 3.0% in May 2023. Prices are now up 1.9% YoY. Median house prices decreased 0.8% from June to July and are down 1.7% from the peak in June 2022 (NSA).

The median price tends to lead the Case-Shiller index, and this is further evidence that Case-Shiller will likely turn positive year-over-year soon.

Note that closed sales in July were mostly for contracts signed in May and June. Mortgage rates, according to the Freddie Mac PMMS, averaged around 6.4% in May and 6.7% in June. August sales will be mostly for contracts signed in June and July, mortgage rates averaged 6.9% in July, so seasonally adjusted closed sales will likely be less in August compared to July.

The recent surge in mortgage rates over 7% will impact closed sales in September, and it now seems likely that in a few months existing home sales will fall below the previous cycle low of 4.00 million in January 2023.

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

by Calculated Risk on 8/22/2023 10:00:00 AM

From the NAR: Existing-Home Sales Slipped 2.2% in July

Existing-home sales receded in July, according to the National Association of Realtors®. Among the four major U.S. regions, sales grew in the West but faded in the Northeast, Midwest and South. All four regions registered year-over-year sales declines.

Total existing-home sales – completed transactions that include single-family homes, townhomes, condominiums and co-ops – waned 2.2% from June to a seasonally adjusted annual rate of 4.07 million in July. Year-over-year, sales slumped 16.6% (down from 4.88 million in July 2022).
...
Total housing inventory registered at the end of July was 1.11 million units, up 3.7% from June but down 14.6% from one year ago (1.3 million). Unsold inventory sits at a 3.3-month supply at the current sales pace, up from 3.1 months in June and 3.2 months in July 2022.
emphasis added

Click on graph for larger image.

This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1994.

Sales in July (4.07 million SAAR) were down 2.2% from the previous month and were 16.6% below the July 2022 sales rate.

The second graph shows nationwide inventory for existing homes.

According to the NAR, inventory increased to 1.11 million in July up from 1.08 million in June.

Headline inventory is not seasonally adjusted, and inventory usually decreases to the seasonal lows in December and January, and peaks in mid-to-late summer.

The last graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory.

Inventory was down 14.6% year-over-year (blue) in July compared to July 2022.

Months of supply (red) increased to 3.3 months in July from 3.1 months in June.

This was below the consensus forecast. I'll have more later. 

by Calculated Risk on 8/21/2023 08:17:00 PM

From Matthew Graham at Mortgage News Daily: Another Day in The New, Higher Rate Reality

"Higher for longer," they said. And they weren't kidding. ... There have been some complicating factors over the past 2 weeks, but rising rate momentum is still mostly about the economy. As such, it's the economy that will need to demonstrate a shift before we see meaningful relief. Until then, the path of least resistance is the path we've been seeing. Today was just another day on that path. [30 year fixed 7.48%]
emphasis added

Tuesday:
• At 10:00 AM ET, Existing Home Sales for July from the National Association of Realtors (NAR). The consensus is for 4.15 million SAAR, down from 4.16 million last month.

• Also at 10:00 AM, Richmond Fed Survey of Manufacturing Activity for August.

by Calculated Risk on 8/21/2023 04:14:00 PM

From the MBA: Share of Mortgage Loans in Forbearance Decreases to 0.39% in July

The Mortgage Bankers Association’s (MBA) monthly Loan Monitoring Survey revealed that the total number of loans now in forbearance decreased by 5 basis points from 0.44% of servicers’ portfolio volume in the prior month to 0.39% as of July 31, 2023. According to MBA’s estimate, 195,000 homeowners are in forbearance plans. Mortgage servicers have provided forbearance to approximately 7.9 million borrowers since March 2020.

In July 2023, the share of Fannie Mae and Freddie Mac loans in forbearance decreased 1 basis point to 0.20%. Ginnie Mae loans in forbearance decreased 13 basis points to 0.80%, and the forbearance share for portfolio loans and private-label securities (PLS) decreased 7 basis points to 0.45%.

“The prevalence of forbearance plans has dramatically dropped since 2020, and the reasons that borrowers are in forbearance are changing,” said Marina Walsh, CMB, MBA’s Vice President of Industry Analysis. “About two-thirds of borrowers are still in forbearance because of the effects of COVID-19, but a growing share of borrowers are in forbearance for other reasons that cause temporary hardship such as financial distress or natural disasters. With the COVID-19 national emergency lifted, Fannie Mae and Freddie Mac recently announced the retirement of certain COVID-19 flexibilities relating to forbearance plans and workouts.[1]”
emphasis added

Click on graph for larger image.

This graph shows the percent of portfolio in forbearance by investor type over time.

The share of forbearance plans has been decreasing and declined to 0.39% in July from 0.44% in June.

At the end of July, there were about 195,000 homeowners in forbearance plans.

by Calculated Risk on 8/21/2023 02:40:00 PM

Today, in the Calculated Risk Real Estate Newsletter: 4th Look at Local Housing Markets in July

A brief excerpt:

Note: The National Association of Realtors (NAR) is scheduled to release July existing home sales tomorrow, Tuesday, August 22nd, at 10:00 AM ET. The consensus is for 4.15 million SAAR, down from 4.16 million last month. Housing economist Tom Lawler expects the NAR to report sales of 4.06 million SAAR for July.
...
In July, sales in these markets were down 15.0%. In June, these same markets were down 16.8% YoY Not Seasonally Adjusted (NSA).

This is a smaller YoY decline NSA than in June for these markets. Note that there were the same number of selling days each year in July 2022 and July 2023.

A key factor in the smaller YoY decline was that sales were steadily declining last year due to higher mortgage rates - and sales in July on a seasonally adjusted annual rate (SAAR) basis will likely be close to 4.06 million.

Several local markets - like Illinois, Miami, New Jersey and New York - will report after the NAR release.

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

by Calculated Risk on 8/21/2023 11:12:00 AM

This is something I check occasionally.

The Department of Transportation (DOT) reported:

Travel on all roads and streets changed by +3.1% (+8.4 billion vehicle miles) for June 2023 as compared with June 2022. Travel for the month is estimated to be 283.0 billion vehicle miles.

The seasonally adjusted vehicle miles traveled for June 2023 is 268.9 billion miles, a 2.8% (7.4 billion vehicle miles) change over June 2022. It also represents a -0.2% change (-0.4 billion vehicle miles) compared with May 2023.
emphasis added

Click on graph for larger image.

This graph shows the monthly total vehicle miles driven, seasonally adjusted.

Miles driven declined sharply in March 2020, and really collapsed in April 2020.  Miles driven are now slightly below pre-pandemic levels.

by Calculated Risk on 8/21/2023 08:21:00 AM

Altos reports that active single-family inventory was up 0.9% week-over-week.

Click on graph for larger image.

This inventory graph is courtesy of Altos Research.

As of August 18th, inventory was at 497 thousand (7-day average), compared to 492 thousand the prior week.   

Year-to-date, inventory is up 1.2%.  And inventory is up 22.5% from the seasonal bottom 18 weeks ago.

The second graph shows the seasonal pattern for active single-family inventory since 2015.

The red line is for 2023.  The black line is for 2019.  Note that inventory is up from the record low for the same week in 2021, but below last year and still well below normal levels.

Inventory was down 10.0% compared to the same week in 2022 (last week it was down 10.5%), and down 48.0% compared to the same week in 2019 (last week down 48.5%). 

It appears same week inventory will be below 2022 levels for the remainder of the year. It is possible that inventory will fall below the record lows in 2021 and early 2022 later this year or in early 2024, but currently that seems unlikely.

Mike Simonsen discusses this data regularly on Youtube.

by Calculated Risk on 8/20/2023 06:27:00 PM

Weekend:
• Schedule for Week of August 20, 2023

Monday:
• No major economic releases scheduled.

From CNBC: Pre-Market Data and Bloomberg futures S&P 500 futures are up 3 and DOW futures are up 15 (fair value).

Oil prices were down over the last week with WTI futures at $81.25 per barrel and Brent at $84.80 per barrel. A year ago, WTI was at $94, and Brent was at $96 - so WTI oil prices are down about 13% year-over-year.

Here is a graph from Gasbuddy.com for nationwide gasoline prices. Nationally prices are at $3.84 per gallon. A year ago, prices were at $3.83 per gallon, so gasoline prices are down $0.03 per gallon year-over-year.

by Calculated Risk on 8/20/2023 08:17:00 AM

The BLS reported on August 10th:

The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 2.6 percent over the last 12 months to an index level of 299.899 (1982-84=100). For the month, the index increased 0.2 percent prior to seasonal adjustment.

CPI-W is the index that is used to calculate the Cost-Of-Living Adjustments (COLA). The calculation dates have changed over time (see Cost-of-Living Adjustments), but the current calculation uses the average CPI-W for the three months in Q3 (July, August, September) and compares to the average for the highest previous average of Q3 months. Note: this is not the headline CPI-U and is not seasonally adjusted (NSA).

• In 2022, the Q3 average of CPI-W was 291.901.

The 2022 Q3 average was the highest Q3 average, so we only have to compare Q3 this year to last year.

Click on graph for larger image.

This graph shows CPI-W since January 2000. The red lines are the Q3 average of CPI-W for each year.

Note: The year labeled is for the calculation, and the adjustment is effective for December of that year (received by beneficiaries in January of the following year).

CPI-W was up 2.6% year-over-year in July, and although this is early - we need the data for August and September - my early guess is COLA will probably be close to 3% this year, the smallest increase since 1.3% in 2021.

Note that CPI-W was slightly negative month-over-month in August of 2022, so it is likely there will be a larger year-over-year increase in CPI-W next month than in July, hence my 3% early guess.

Contribution and Benefit Base

The contribution base will be adjusted using the National Average Wage Index. This is based on a one-year lag. The National Average Wage Index is not available for 2022 yet, wages increased solidly in 2022. If wages increased 5% in 2022, then the contribution base next year will increase to around $168,200 in 2024, from the current $160,200.

Remember - this is an early look. What matters is average CPI-W, NSA, for all three months in Q3 (July, August and September).