What Will 2015 Bring?

Popular Economics Weekly

We already have an idea of what will happen in 2015. Firstly, job creation should continue to exceed 300,000 payroll jobs per month. Nobelist Paul Krugman is especially optimistic about economic growth, given that we have escaped much of the austerity budget cuts taken by the Eurozone and Japan.

“What about the prospects looking forward? As I’ve pointed out before, business investment has been relatively strong throughout. Residential investment, however, has been very low since 2006, suggesting that there’s a backlog of pent-up demand, which should come into play in an improving job market. So that’s one source of strength. Also, low oil prices are going to be mostly positive, although with some adverse regional effects; more on that in a later post.”

Graph: Trading Economics

We would also posit that current economic growth will remain high in 2015, following consecutive 4.6 and 5 percent growth rates in Q2 and Q3. This is because government hiring will continue to pick up as effects of the Great Recession wear off, which has been the main drag on growth, as Professor Krugman says.

"Since Obama took office, we’ve gained 6.7 million private-sector jobs, compared with just 3.1 million at the same point under Bush. But under Bush we’d added 1.2 million public sector jobs, while under Obama we’ve cut 600,000. The point is that relatively good private sector performance has been masked by public-sector cutbacks; this is the opposite of what you usually hear, but that’s no surprise.”

And Fed Chair Janet Yellen is determined to keep interest rates low until wage and salaries climb above the 2 percent inflation rate, which might happen in 2015 with continuing strong job growth.

The weak growth link remains the housing market, and any improvement will be closely watched by economists. The key will be adequate population growth (with more new household formation), especially from the millennials, children of the baby boomers as we have been saying.

Several housing specialists, including the NAR’s Realtor.com, Jed Kolko of Trulia.com, and even Robert Shiller of the Case-Shiller Housing Price Index see a better housing market in 2015. But increased household formation of those millennials that have been living with their parents, or renting, are the key. And 2015 looks to be the year when they begin to buy homes, according to Fortune Magazine’s Fortune.com. Historical household formation has been some 1 million new households per year, but has been less than half the historical average since the end of the housing bubble.

Graph: Fortune

Why? Millennials job growth, for one: “In 2014, it’s been a banner year for employment but parsed by age groups those under 35 have been gaining jobs at a 60 percent faster rate than rest – one of the best years for employment was even better for millennials,” said Realtor.com economist Jonathan Smoke in his recent release of the 2015 housing forecast.

And the oldest cohort of 25-34 puts the majority of millennials out of school and getting married. That’s combined with birth rates putting 2014 in the running for highest volume of births in years, as millennials outnumber their baby boomer parents by as much as 10 percent (as much as 88 million vs. 77 million baby boomers).

We will see what else 2015 brings, of course. More new, entry-level homes will have to be built, of course, so builders have to get the message that millennials won’t be able to afford the homes and higher prices tolerated by their parents.

There are indications that home builders are already doing this. For example, CNBC’s Diana Olick reports homebuilder D.R. Horton has a new brand, Express Homes that offers properties at $120,000 to $150,000 in lower priced states such as Texas and Georgia, well below the national median price of a new home, which in March came in at a record $290,000, according to the U.S. Census.

In other words, if and when housing returns to normal growth levels, we should see more sustained overall economic growth for 2015 and beyond.

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Why Lower Home Sales?

The Mortgage Corner

November existing home sales in November tumbled 6.1 percent, the biggest drop since July 2010, down to a seasonally adjusted annual rate of 4.93 million. New-home sales also fell slightly—probably for the same reason. Why? There were plenty of conjectures.

“While the headlines often point to first-time buyers’ reluctance to enter the market as a catalyst to the sluggish housing recovery, today’s report shows inventory needs to climb before it can support more interested buyers,” Quicken Loans Vice President Bill Banfield said. “As homeowners gain trust in the economy, they will be more comfortable leaving their current mortgage and entering the market, thus driving up inventory to support further demand.”

Graph: Calculated Risk

Existing-home inventories increased 2 percent, but are still at post-recession lows. So this makes sense, as refinancing levels have to pick up as well, for homeowners to be able to move up, or downsize their dwellings as they approach retirement. New-home inventories rose slightly from 5.7 to 5.8 months’ supply at the current sales rate.

Graph: Calculated Risk

But it’s also the winter season, with all the obstacles that winter weather brings. And sales dropped to their lowest annual pace since May (4.91 million) but are above year-over-year levels (up 2.1 percent from last November) for the second straight month, says Calculated Risk.

The NAR’s chief economist Lawrence Yun thought it might have something to do with the stock market, also. “Fewer people bought homes last month despite interest rates being at their lowest levels of the year,” he said. “The stock market swings in October may have impacted some consumers’ psyches and therefore led to fewer November closings. Furthermore, rising home values are causing more investors to retreat from the market.”

So why are for sale inventories still so low? The main reason may be credit tightness, in spite of record low mortgage rates. Both mortgage refinancing and purchase applications are still too low for this stage of the housing recovery. This is while the 30-year fixed conforming rate is down to 3.50 percent for a 1 point origination fee.

When will prospective homebuyers become more trusting of the housing market? It may already be happening. Economist Robert Shiller of the Case-Shiller Home Price Index recently reported that homeowners are becoming more optimistic again, with their latest survey now done by Dodge Data & Analytics reporting that homeowners now see housing values appreciating at +5 percent in future years.

“On average over the next 10 years,” asked Professor Shiller of a home owning sample survey, “how much do you expect the value of your property to change each year?” In 2004, a boom year, the average answer was a gain of 12.6 percent, but in succeeding years the figure began to decline, bottoming at 4 percent in 2012. The expected gain rose to 4.2 percent in 2013 and 5.5 percent in mid-2014.”

Are we returning to bubble territory with such low interest rates, as back in 2005? No, according to Dr. Shiller. “…both our data and that of the Chicago Mercantile Exchange show higher expectations than they did a couple years ago. But these new expectations are hardly wild: If inflation ran at 2 percent a year, the Federal Reserve’s target, the expected appreciation in housing would be an inflation-corrected 2 percent to 3.5 percent a year. So at the moment, there is no evidence of extravagant bubble thinking.”

Still, there are many homes either with little or no equity, or in outright foreclosure, especially in the older Judicial Foreclosure states of the Midwest and East—some 5 million at last count. And such a ‘shadow’ inventory of distressed housing can only be reduced with further price appreciation, and more job creation. It does look like that might happen in 2015, so stay tuned!

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Why Lower Home Sales?

The Mortgage Corner

November existing home sales in November tumbled 6.1 percent, the biggest drop since July 2010, down to a seasonally adjusted annual rate of 4.93 million. New-home sales also fell slightly—probably for the same reason. Why? There were plenty of conjectures.

“While the headlines often point to first-time buyers’ reluctance to enter the market as a catalyst to the sluggish housing recovery, today’s report shows inventory needs to climb before it can support more interested buyers,” Quicken Loans Vice President Bill Banfield said. “As homeowners gain trust in the economy, they will be more comfortable leaving their current mortgage and entering the market, thus driving up inventory to support further demand.”

Graph: Calculated Risk

Existing-home inventories increased 2 percent, but are still at post-recession lows. So this makes sense, as refinancing levels have to pick up as well, for homeowners to be able to move up, or downsize their dwellings as they approach retirement. New-home inventories rose slightly from 5.7 to 5.8 months’ supply at the current sales rate.

Graph: Calculated Risk

But it’s also the winter season, with all the obstacles that winter weather brings. And sales dropped to their lowest annual pace since May (4.91 million) but are above year-over-year levels (up 2.1 percent from last November) for the second straight month, says Calculated Risk.

The NAR’s chief economist Lawrence Yun thought it might have something to do with the stock market, also. “Fewer people bought homes last month despite interest rates being at their lowest levels of the year,” he said. “The stock market swings in October may have impacted some consumers’ psyches and therefore led to fewer November closings. Furthermore, rising home values are causing more investors to retreat from the market.”

So why are for sale inventories still so low? The main reason may be credit tightness, in spite of record low mortgage rates. Both mortgage refinancing and purchase applications are still too low for this stage of the housing recovery. This is while the 30-year fixed conforming rate is down to 3.50 percent for a 1 point origination fee.

When will prospective homebuyers become more trusting of the housing market? It may already be happening. Economist Robert Shiller of the Case-Shiller Home Price Index recently reported that homeowners are becoming more optimistic again, with their latest survey now done by Dodge Data & Analytics reporting that homeowners now see housing values appreciating at +5 percent in future years.

“On average over the next 10 years,” asked Professor Shiller of a home owning sample survey, “how much do you expect the value of your property to change each year?” In 2004, a boom year, the average answer was a gain of 12.6 percent, but in succeeding years the figure began to decline, bottoming at 4 percent in 2012. The expected gain rose to 4.2 percent in 2013 and 5.5 percent in mid-2014.”

Are we returning to bubble territory with such low interest rates, as back in 2005? No, according to Dr. Shiller. “…both our data and that of the Chicago Mercantile Exchange show higher expectations than they did a couple years ago. But these new expectations are hardly wild: If inflation ran at 2 percent a year, the Federal Reserve’s target, the expected appreciation in housing would be an inflation-corrected 2 percent to 3.5 percent a year. So at the moment, there is no evidence of extravagant bubble thinking.”

Still, there are many homes either with little or no equity, or in outright foreclosure, especially in the older Judicial Foreclosure states of the Midwest and East—some 5 million at last count. And such a ‘shadow’ inventory of distressed housing can only happen with further price appreciation, and more job creation. It does look like that might happen in 2015, so stay tuned!

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Fed’s Yellen—No Inflation In 2015?

Popular Economics Weekly

Fed Chair Janet Yellen has given us a very good holiday gift. that boosted stock and bond prices.  She announced at her post-FOMC meeting press conference that Fed Governor’s see little or no inflation next year. In fact, if falling prices continue in the rest of the world, the Fed may be tempted to not raise interest rates at all next year.

That is a startling conclusion, but she made particular mention of the effects of falling oil prices. They will of course help consumer spending in the developed countries, but the oil exporting countries will be hurt. And lower oil prices also mean less oil is being used, so there is less worldwide demand for energy-based products and services, which means less business activity in general.

“At this point we think it unlikely that it will be appropriate that we will see conditions for at least the next couple of meetings that will make it appropriate for us to decide to begin normalization,” Yellen said at the press conference. The bank’s policymakers meet next in late January again in mid-March, and at the end of April. Most pundits and forecasters say the Fed isn’t likely to change policies until their April meeting, at the earliest.

Graph: Econoday

Consumer price inflation turned down in November on sharply lower gasoline prices plus dips in some core subcomponents. Overall consumer price inflation fell 0.3 percent after no change in October. Energy dropped 3.8 percent, following a 1.9 percent decline the month before. Gasoline plunged 6.6 percent in November after a 3.0 drop in October.

Excluding food and energy, consumer price inflation posted at 0.1 percent in November easing from 0.2 percent in October. The Fed’s own target inflation rates were lowered to 1.0 to 1.6 percent in 2015. Within the core, the shelter index rose 0.3 percent, and the indexes for medical care, airline fares, and alcoholic beverages also rose. In contrast, the indexes for apparel, used cars and trucks, recreation, household furnishings and operations, personal care, and new vehicles all declined in November.

There are others of the same opinion that rates may not rise at all next year. Nobelist Paul Krugman, for instance, has said, “Basically, while (U.S) growth and job creation have finally been pretty good lately, there is so far no sign whatever that the economy is overheating. Core inflation remains below the Fed’s target (the Fed focuses on a different measure that usually runs lower than the CPI, so this report is actually fairly far below target.)

“Add to this troubles abroad — the direct spillover from Russia or even Europe is fairly small, but the rising dollar means that good news on manufacturing may not last — and there is a real risk that any rate hike will turn out to have been a mistake. And it’s a mistake that would be very costly, because it could all too easily set the stage for a Japan/Europe style long-term low-inflation trap (yes, at this point I think we can put the euro area in the same category).”

We also have record high consumer sentiment, which is boosting retail sales, for one.  The expectations component that offers an indication on confidence in the outlook for jobs and income, is up 3 tenths from mid-month and up a very strong 6.5 points from final November. Inflation expectations are very soft reflecting the downdraft underway in oil prices with both the 1-year and 5-year outlooks at 2.8 percent. Today's report will be especially pleasant reading for the nation's retailers.

That should also mean longer term mortgage rates could remain low next year, bringing even more buyers into the housing market (read younger millennial buyers currently renters) and so contributing to the housing recovery.

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Conference Board’s Leading Economic Indicators Near Highs

Financial FAQs

The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.6 percent in November to 105.5 (2004 = 100), following a 0.6 percent increase in October, and a 0.8 percent increase in September.

It is a further sign of strong U.S. growth in the months ahead, maybe as high as 4 percent over the next 2 quarters. GDP growth has already averaged 4.25 percent over the last 2 quarters.

Graph: Trading Economics

“The increase in the LEI signals continued moderate growth through the winter season,” said Ken Goldstein, Economist at The Conference Board. “The biggest challenge has been, and remains, more income growth. However, with labor market conditions tightening, we are seeing the first signs of wage growth starting to pick up.”

Graph: Econoday

“Widespread and persistent gains in the LEI point to strong underlying conditions in the U.S. economic expansion,” said Ataman Ozyildirim, Economist at The Conference Board. “The current situation, measured by the coincident economic index, has been improving steadily, with employment and industrial production making the largest contributions in November.”

Graph: Calculated Risk

Much of the better job numbers come from industrial production that increased 1.3 percent in November after edging up in October. Manufacturing output increased 1.1 percent, with widespread gains among industries. Factory output was well above its average monthly pace of 0.3 percent over the previous five months and was its largest gain since February. It is up 13.2 percent from its low point in 2009, according to Calculated Risk.

Janet Yellen’s Federal Reserve also helped to boost growth prospects with her post-FOMC press conference in which she said that the Fed’s rates would not increase until long term job and wage growth showed a sustained pickup.

Nobelist Paul Krugman believes the Fed might wait even longer to raise their rates. “Basically, while growth and job creation have finally been pretty good lately, there is so far no sign whatever that the economy is overheating. Core inflation remains below the Fed’s target (the Fed focuses on a different measure that usually runs lower than the CPI, so this report is actually fairly far below target.)

“In fact, the opposite is happening. Domestic and worldwide inflation continues to fall, largely because of falling oil prices, which signals less use of petroleum products, ergo slowing business activity in other parts of the world. The U.S. seems to be the exception, in what we have come to call a ‘goldilocks economy’—growth without overheating.”

So we seem to have returned to a goldilocks economy much like that the 1990s that sustained high job and economic growth with little or no inflation, thanks to plentiful oil supplies that are projected to last for several years, at least.

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

New-Home Construction, Builders’ Optimism Still Rising

The Mortgage Corner

Home builders’ optimism is still high, though builder confidence in the market for newly built single-family homes fell one point in December to a level of 57 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), following a four-point uptick last month.

Graph: Calculated Risk

“After a sluggish start to 2014, the HMI has stabilized in the mid-to-high 50s index level trend for the past six months, which is consistent with our assessment that we are in a slow march back to normal,” said NAHB Chief Economist David Crowe. “As we head into 2015, the housing market should continue to recover at a steady, gradual pace.”

What is helping new-home demand is the lack of existing-home inventory. Total housing inventory at the end of October fell 2.6 percent to 2.22 million existing homes available for sale, which represents a 5.1-month supply at the current sales pace – the lowest since March (also 5.1 months).

Meanwhile, new-home construction that would replenish housing inventories is advancing in fits and starts, largely due to uncertain weather conditions and still tough mortgage qualification standards that lenders have only recently begun to ease. Privately-owned housing starts in November were at a seasonally adjusted annual rate of 1,028,000. This is 1.6 percent below the revised October estimate of 1,045,000 and is 7.0 percent below the November 2013 rate of 1,105,000.

Single-family housing starts in November were at a rate of 677,000; this is 5.4 percent below the revised October figure of 716,000, but double the number of multiple units being started. The November rate for units in buildings with five units or more was 340,000.

Graph: Calculated Risk

Another reason for builders’ optimism and healthy new-home construction is the pickup in U.S. employment. Private non-farm payrolls increased 321,000 in November and the jobless rate held at 5.8 percent. The competition for jobs is also dropping, with just 1.9 unemployed workers looking for work per job opening, when it was as much as 4 workers per job opening just after the Great Recession.

Also, prospective borrowers may find it easier to get a loan in 2015 as some lenders, encouraged by federal regulators, ease standards. In addition, mortgage rates are still low, enabling qualified borrowers to get relatively cheap loans. For example, 30-year fixed rate conforming mortgage rates with as little as 5 percent down have dropped to 3.50 percent in California.

Another reason for the better job numbers is industrial production increased 1.3 percent in November after edging up in October. In November, manufacturing output increased 1.1 percent, with widespread gains among industries. The rise in factory output was well above its average monthly pace of 0.3 percent over the previous five months and was its largest gain since February. It is up 13.2 percent from its low point in 2009, according to Calculated Risk.

NAR also recently released its economic and housing forecast for 2015 and 2016. NAR chief economist Lawrence Yun is forecasting existing-home sales this year to fall slightly below 2013 (5.1 million) to 4.9 million, and then increase to 5.3 million next year and 5.4 million in 2016. Yun expects the national median existing-home price to rise 4 percent both next year and in 2016.

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Retail Sales Portend +4 Percent GDP in 2015

Popular Economics Weekly

We have said that the prospect of higher interest rates next year may spur some extraordinary growth over the next few quarters, and just out holiday retail sales seem to be fulfilling that prophecy.  Consumer spending is returning to pre-recession levels, and this is without the boost from housing refinance that drove the housing bubble.

Retail sales are soaring even with lower gasoline prices (since retail prices not adjusted for inflation), up 5.1 percent YoY. This put sales back to pre-recession levels. Sales in November posted a 0.7 percent boost after rebounding 0.5 percent in October. Autos in particular jumped a huge 1.7 percent after gaining 0.8 percent in October. And retail sales ex-plunging gasoline prices increased by 6.0 percent on a YoY basis.

Graph: Calculated Risk

Couple that with the highest U. of Michigan consumer sentiment since before the Great Recession, and we can see why consumers are spending more. It can’t be only falling gasoline prices creating more optimism. Payroll jobs are now increasing some 300,000 per month, which heartens householders’ future financial prospects.

Graph: Calculated Risk

Sentiment surged to 93.8 for the mid-month December reading vs an already strong 88.8 in final November and 89.4 in mid-month November. This is the strongest reading since January 2007. The current conditions component is up 3.0 points from final November to 105.7 in a gain that signals month-to-month strength in consumer activity this month. The expectations component, though lagging at 86.1, is up a very sharp 6.2 points to signal rising confidence in the outlook for income and jobs, as we said.

Graph: Econoday

The prospects for faster growth over the next 2 quarters at least may also have to be due to the possibility of higher interest rates next year, as we have been saying. But we still have severe price-cutting in many retail areas, and wholesale prices have been flat for several months.

And the Fed is worried about falling prices at both the wholesale and retail levels, rather than inflation at the moment, so don’t look for Janet Yellen’s Fed to begin to raise their short term rates, until prices have firmed and begin to climb again.

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen