by Calculated Risk on 9/17/2024 10:00:00 AM

The National Association of Home Builders (NAHB) reported the housing market index (HMI) was at 41, up from 39 last month. Any number below 50 indicates that more builders view sales conditions as poor than good.

From the NAHB: Builder Sentiment Rises as Rates Fall but Affordability Challenges Persist

With mortgage rates declining by more than one-half of a percentage point from early August through mid-September, per Freddie Mac, builder sentiment edged higher this month even as builders continue to grapple with rising costs.

Builder confidence in the market for newly built single-family homes was 41 in September, up two points from a reading of 39 in August, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) released today. This breaks a string of four consecutive monthly declines.

“Thanks to lower interest rates, builders now have a positive view for future new home sales for the first time since May 2024,” said NAHB Chairman Carl Harris, a custom home builder from Wichita, Kan. “However, the cost of construction remains elevated relative to household budgets, holding back some enthusiasm for current housing market conditions. Moreover, builders will face competition from rising existing home inventory in many markets as the mortgage rate lock-in effect softens with lower mortgage rates.”

“With inflation moderating, the Federal Reserve is expected to begin a cycle of monetary policy easing this week, which will produce downward pressure on mortgage interest rates and also lower the interest rates on land development and home construction business loans,” said NAHB Chief Economist Robert Dietz. “Lowering the cost of construction is critical to confront persistent challenges for housing affordability.”

The latest HMI survey also revealed that the share of builders cutting prices dropped in September for the first time since April, down one point to 32%. Moreover, the average price reduction was 5%, the first time it has been below 6% since July 2022. Meanwhile, the use of sales incentives fell to 61% in September, down from 64% in August.
...
ll three HMI indices were up in September. The index charting current sales conditions rose one point to 45, the component measuring sales expectations in the next six months increased four points to 53 and the gauge charting traffic of prospective buyers posted a two-point gain to 27.

Looking at the three-month moving averages for regional HMI scores, the Northeast fell three points to 49, the Midwest edged one-point higher to 40, the South decreased one point to 41 and the West increased two points to 39.
emphasis added

Click on graph for larger image.

This graph shows the NAHB index since Jan 1985.

This was slightly above the consensus forecast.

by Calculated Risk on 9/17/2024 09:15:00 AM

From the Fed: Industrial Production and Capacity Utilization

In August, industrial production rose 0.8 percent after falling 0.9 percent in July. Similarly, the output of manufacturing increased 0.9 percent in August after decreasing 0.7 percent during the previous month. This pattern was due in part to a recovery in the index of motor vehicles and parts, which jumped nearly 10 percent in August after dropping roughly 9 percent in July. The index for manufacturing excluding motor vehicles and parts moved up 0.3 percent in August. The index for mining climbed 0.8 percent, while the index for utilities was flat. At 103.1 percent of its 2017 average, total industrial production in August was the same as its year-earlier level. Capacity utilization moved up to 78.0 percent in August, a rate that is 1.7 percentage points below its long-run (1972–2023) average
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Click on graph for larger image.

This graph shows Capacity Utilization. This series is up from the record low set in April 2020, and above the level in February 2020 (pre-pandemic).

Capacity utilization at 78.0% is 1.7% below the average from 1972 to 2022.  This was above consensus expectations.

Note: y-axis doesn't start at zero to better show the change.

The second graph shows industrial production since 1967.

Industrial production increased to 103.1. This is above the pre-pandemic level.

Industrial production was above consensus expectations.

by Calculated Risk on 9/17/2024 08:30:00 AM

On a monthly basis, retail sales increased 0.1% from July to August (seasonally adjusted), and sales were up 2.1 percent from August 2023.

From the Census Bureau report:

Advance estimates of U.S. retail and food services sales for August 2024, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $710.8 billion, an increase of 0.1 percent from the previous month, and up 2.1 percent from August 2023. ... The June 2024 to July 2024 percent change was revised from up 1.0 percent to up 1.1 percent.
emphasis added

Click on graph for larger image.

This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline).

Retail sales ex-gasoline was up 0.1% in August.

The second graph shows the year-over-year change in retail sales and food service (ex-gasoline) since 1993.

Retail and Food service sales, ex-gasoline, increased by 3.0% on a YoY basis.

The change in sales in August was slightly below expectations, however sales in June and July were revised up, combined.

by Calculated Risk on 9/16/2024 07:01:00 PM

From Matthew Graham at Mortgage News Daily: Mortgage Rates Inch Lower to Begin Potentially Wild Week

The new week began on a relatively quiet note in terms of mortgage rate movement and the underlying bond market. ... Traders have quickly shifted back to expecting slightly better odds of a 0.50% rate cut versus the minimum 0.25%. That's not even the important part of the announcement, however. Markets will be more focused on the rate trajectory outlined in the Fed's economic projections as well as the guidance offered in the text of the announcement and Fed Chair Powell's press conference. ... Any time an outcome is guaranteed to surprise about half the market, it's pretty much impossible to avoid volatility. [30 year fixed 6.12%]
emphasis added

Tuesday:
• At 8:30 AM ET, Retail sales for August will be released.  The consensus is for a 0.2% increase in retail sales.

• At 9:15 AM, The Fed will release Industrial Production and Capacity Utilization for August. The consensus is for a 0.1% increase in Industrial Production, and for Capacity Utilization to increase to 77.9%.

• At 10:00 AM, The September NAHB homebuilder survey. The consensus is for a reading of 40, up from 39 in August. Any number below 50 indicates that more builders view sales conditions as poor than good.

by Calculated Risk on 9/16/2024 02:46:00 PM

Today, in the Calculated Risk Real Estate Newsletter: Part 2: Current State of the Housing Market; Overview for mid-September 2024

A brief excerpt:

On Friday, in Part 1: Current State of the Housing Market; Overview for mid-September 2024 I reviewed home inventory, housing starts and sales.

In Part 2, I will look at house prices, mortgage rates, rents and more.
...
Other measures of house prices suggest prices will be up less YoY in the July Case-Shiller index than in the June report. The NAR reported median prices were up 4.2% YoY in July, up from 4.1% YoY in June.

ICE reported prices were up 3.6% YoY in July, down from 4.1% YoY in June, and Freddie Mac reported house prices were up 4.4% YoY in July, down from 5.2% YoY in June.

Here is a comparison of year-over-year change in the FMHPI, median house prices from the NAR, and the Case-Shiller National index.

The FMHPI and the NAR median prices appear to be leading indicators for Case-Shiller. Based on recent monthly data, and the FMHPI, the YoY change in the Case-Shiller index will likely be lower YoY in July compared to June.

There is much more in the article.

by Calculated Risk on 9/16/2024 01:06:00 PM

Back in June, I wrote: The Art of the Soft Landing

A few excerpts and an updated graph ...

The "Art of the Soft Landing" requires that the Fed reduce rates quick enough to keep economic growth positive, and slow enough not to reignite inflation.  My view is a soft landing is achieved if growth stays positive, inflation returns to target, and the yield curve flattens or reverts to normal (long yields higher than short yields).

The good news is growth has stayed positive and inflation has moved closer to the 2% target.  However, the yield curve is still inverted, and we are not out of the woods yet.

Here is an updated graph of 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity from FRED since 1976. 

The yield curve is no longer inverted.  The next 6 months or so will tell the tale if the Fed reduced rates quick enough to accomplish a soft landing.  That probably means the Fed Funds rate will need to be down to around 4% or so.

Click here for interactive graph at FRED.

by Calculated Risk on 9/16/2024 11:24:00 AM

Today, in the Calculated Risk Real Estate Newsletter: Q2 Update: Delinquencies, Foreclosures and REO

A brief excerpt:

We will NOT see a surge in foreclosures that would significantly impact house prices (as happened following the housing bubble) for two key reasons: 1) mortgage lending has been solid, and 2) most homeowners have substantial equity in their homes.
...
And on mortgage rates, here is some data from the FHFA’s National Mortgage Database showing the distribution of interest rates on closed-end, fixed-rate 1-4 family mortgages outstanding at the end of each quarter since Q1 2013 through Q1 2024 (Q2 2024 data will be released in two weeks).

This shows the surge in the percent of loans under 3%, and also under 4%, starting in early 2020 as mortgage rates declined sharply during the pandemic. Currently 21.9% of loans are under 3%, 57.3% are under 4%, and 76.0% are under 5%.

With substantial equity, and low mortgage rates (mostly at a fixed rates), few homeowners will have financial difficulties.

There is much more in the article.

by Calculated Risk on 9/16/2024 08:11:00 AM

Altos reports that active single-family inventory was up 1.4% week-over-week. Inventory is now up 44.5% from the February seasonal bottom.  

Click on graph for larger image.

This inventory graph is courtesy of Altos Research.

As of September 13th, inventory was at 714 thousand (7-day average), compared to 704 thousand the prior week.   

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

The red line is for 2024.  The black line is for 2019.  

Inventory was up 37.4% compared to the same week in 2023 (last week it was up 38.0%), and down 25.2% compared to the same week in 2019 (last week it was down 25.7%). 

Back in June 2023, inventory was down almost 54% compared to 2019, so the gap to more normal inventory levels is slowly closing.

Mike Simonsen discusses this data regularly on Youtube.

by Calculated Risk on 9/15/2024 06:52:00 PM

Weekend:
• Schedule for Week of September 15, 2024

• FOMC Preview: Fed to Cut Rates

Monday:
• 8:30 AM ET: The New York Fed Empire State manufacturing survey for September. The consensus is for a reading of -4.0, up from -4.7.

From CNBC: Pre-Market Data and Bloomberg futures S&P 500 are up 5 and DOW futures are up 69 (fair value).

Oil prices were up over the last week with WTI futures at $68.65 per barrel and Brent at $71.61 per barrel. A year ago, WTI was at $91, and Brent was at $96 - so WTI oil prices are down about 25% year-over-year.

Here is a graph from Gasbuddy.com for nationwide gasoline prices. Nationally prices are at $3.13 per gallon. A year ago, prices were at $3.85 per gallon, so gasoline prices are down $0.72 year-over-year.

by Calculated Risk on 9/15/2024 10:17:00 AM

Most analysts expect the FOMC will cut the federal funds rate at the meeting this week by 25bp lowering the target range to 5 to 5-1/4 percent.   It is possible the FOMC will cut by 50bp.

Currently market participants are split evenly between a 25bp and a 50bp cut this week.  Market participants are also pricing in a total of 75bp in cuts by the November meeting, and between 100bp to 125bp in cuts by December.

From BofA:

Next week, the Fed is widely expected to end the longest hold after a hiking cycle in its history (Exhibit 1).

We look for the Fed to cut rates by 25bp, which should kick off a series of 25bp cuts over the next five meetings. Markets still perceive a meaningful risk of a 50bp cut next week, but this week’s data leave us comfortable with our 25bp call. The main message from the meeting should be one of cautious optimism despite greater concerns over downside risks.
emphasis added

Projections will be released at this meeting. For review, here are the June projections. 

Since the last projections were released, economic growth has been above expectations, the unemployment rate is slightly above expectations, and inflation lower than expected (although there are some "base effects" that might push PCE inflation up a little later this year).  

The BEA's second estimate for Q2 GDP showed real growth at 3.0% annualized, following 1.4% annualized real growth in Q1.  Current estimates for Q3 GDP are around 2.5%.  That puts real growth in the first 3 quarters at the top end of the June FOMC projections.  

GDP projections of Federal Reserve Governors and Reserve Bank presidents, Change in Real GDP1
Projection Date	2024	2025	2026
June 2024	1.9 to 2.3	1.8 to 2.2	1.8 to 2.1
Mar 2024	2.0 to 2.4	1.9 to 2.3	1.8 to 2.1

¹ Projections of change in real GDP and inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

The unemployment rate was at 4.2% in August.  This is at the high end of the June projections.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents, Unemployment Rate2
Projection Date	2024	2025	2026
June 2024	3.9 to 4.2	3.9 to 4.3	3.9 to 4.3
Mar 2024	3.9 to 4.1	3.9 to 4.2	3.9 to 4.3

² Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

As of July 2024, PCE inflation increased 2.5 percent year-over-year (YoY). This is at the low end of the June projections.  Current analyst estimates are that PCE inflation will fall to 2.3% YoY in August.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents, PCE Inflation1
Projection Date	2024	2025	2026
June 2024	2.5 to 2.9	2.2 to 2.4	2.0 to 2.1
Mar 2024	2.3 to 2.7	2.1 to 2.2	2.0 to 2.1

PCE core inflation increased 2.6 percent YoY in July. This is lower than the June FOMC projections for Q4, although analysts expect core PCE inflation to tick up slightly in August.

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents, Core Inflation1
Projection Date	2024	2025	2026
June 2024	2.8 to 3.0	2.3 to 2.4	2.0 to 2.1
Mar 2024	2.5 to 2.8	2.1 to 2.3	2.0 to 2.1