What is happening with US house prices and its economy?

Sometimes it helps to look back so let us dip into Yahoo Finance from the 17th of December last year.

Home price growth has slowed for six consecutive months since April, according to the S&P CoreLogic Case-Shiller national home price index. And for the first time in a year, annual price growth fell below 6%, dropping to 5.7% and 5.5%, in August and September, respectively. October home price results will be released later this month.

So we see what has in many places become a familiar pattern as housing markets lose some of their growth. There was and indeed is a consequence of this.

“A couple of years of home prices running twice the rate of home income growth leads to affordability challenges,” said Mortgage Bankers Association Chief Economist Mike Fratantoni. “If you’re a buyer in 2019, you won’t see home price running away from you at the same speed in 2018.”

I think he means wages when he says “home income growth” but he is making a point which we have seen in many places where house price growth has soared and decoupled from wage growth. This has been oil by the way that central banks slashed official interest-rates which reduced mortgage-rates and then also indulged in large-scale bond buying which in the US included Mortgage-Backed Securities to further reduce mortgage-rates. This meant that affordability improved as long as you were willing to look away from higher debt burdens and the implication that should interest-rates rise the song “the heat is on” would start playing very quickly.

Or if you wish to consider that in chart form Yahoo Finance helped us out.

That is a chart to gladden a central bankers heart as it shows that the policy measures enacted turned house prices around and led to strong growth in them. The double-digit growth of late 2013 and early 2014 will have then scrambling up into their Ivory Towers to calculate the wealth effects. But the problem is that compared to wage growth they moved away at 8% per annum back then and the minimum since has been 2% per annum. That means that a supposed solution to house prices being too high and contributing to an economic crash has been to make them higher again especially relative to wages.

What about house price growth now?

Yesterday provided us with an update.

CoreLogic® (NYSE: CLGX), a leading global property information, analytics and data-enabled solutions provider, today released the CoreLogic Home Price Index (HPI) and HPI Forecast for February 2019, which shows home prices rose both year over year and month over month. Home prices increased nationally by 4 percent year over year from February 2018. On a month-over-month basis, prices increased by 0.7 percent in February 2019.

So there has been a slowing in the rate of growth which is reflected here.

“During the first two months of the year, home-price growth continued to decelerate,” said Dr. Frank Nothaft, chief economist for CoreLogic. “This is the opposite of what we saw the last two years when price growth accelerated early.

Looking ahead they do however expect something of a pick-up.

“With the Federal Reserve’s announcement to keep short-term interest rates where they are for the rest of the year, we expect mortgage rates to remain low and be a boost for the spring buying season. A strong buying season could lead to a pickup in home-price growth later this year.”

That gives us another perspective on the change of policy from the US Federal Reserve. So far its U-Turn has mostly been locked at through the prism of equity prices partly due to the way that President Trump focuses on them. But another way of looking at it is in response to slower house price growth which was being influenced by higher mortgage rates as the Federal Reserve raised interest-rates and reduced its bond holdings. This saw the 30-year mortgage-rate rise from just under 4% to a bit over 4.9% in November, no doubt providing its own brake on proceedings.

What about now?

If we look at monetary policy we see that perhaps something of a Powell Put Option is in place as at the end of last week the 30-year mortgage rate was 4.06%. Now bond yields have picked up this week so lets round it back up to say 4.15%. Even so that is quite a drop from the peak last year.

There is also some real wage growth according to the Bureau of Labor Statistics.

Real average hourly earnings for all employees increased 1.9 percent, seasonally adjusted, from February 2018 to February 2019. The change in real average hourly earnings, combined with a 0.3-percent decrease in the average workweek, resulted in a 1.6-percent increase in real average weekly earnings over this 12-month period.

In terms of hourly earnings the situation has been improving since last summer whereas the weekly figures were made more complex by the drop in hours worked meaning we particularly await Friday’s update for them.

Moving to the economy then recent figures have been a little more upbeat than when we looked at the US back on the 22nd of February but not by much.

The New York Fed Staff Nowcast stands at 1.3% for 2019:Q1 and 1.6% for 2019:Q2..News from this week’s data releases left the nowcast for 2019:Q1 unchanged and decreased the nowcast for 2019:Q2 by 0.1 percentage point.

Of the main data so far this week we did not learn an enormous amount from the retail sales numbers from the Census Bureau.

Advance estimates of U.S. retail and food services sales for February 2019, adjusted for seasonal variation
and holiday and trading-day differences, but not for price changes, were $506.0 billion, a decrease of 0.2
percent (±0.5 percent)* from the previous month, but 2.2 percent (±0.7 percent) above February 2018.

As these are effectively turnover rather than real growth figures a monthly fall is especially troubling but January had been revised higher.

Comment

We are observing concurrent contradictory waves at the moment. The effect from 2018 was of a slowing economy combined with monetary tightening in terms of higher mortgage-rates. More recently after the policy shift we have seen mortgage-rates fall pretty sharply and since last summer a pick-up in wage growth. So we can expect some growth and maybe we might even see a phase where wage growth exceeds house price growth. But it would appear that the US Federal Reserve has shifted policy to keep asset (house and equity) prices as high as it can so it may move again,

As to the overall picture this from Corelogic troubles me.

According to the CoreLogic Market Condition Indicators (MCI), an analysis of housing values in the country’s 100 largest metropolitan areas based on housing stock, 35 percent of metropolitan areas have an overvalued housing market as of February 2019. The MCI analysis categorizes home prices in individual markets as undervalued, at value or overvalued, by comparing home prices to their long-run, sustainable levels, which are supported by local market fundamentals (such as disposable income).

Only 35% overvalued? Look again at the gap between house price rises and wage rises in the Yahoo chart above. So if we look backwards very few places must have been overvalued just before the crash. Also times are hard for younger people.

Frank Martell, president and CEO of CoreLogic. “Our research tells us that about 74 percent of millennials, the single largest cohort of homebuyers, now report having to cut back on other categories of spending to afford their housing costs.”

I am not sure that goes with the previous research. Also if the stereotype has any validity times for millennials in the US are grim or should that be toast?

The price for Hass avocados from Michoacán, Mexico’s main avocado producing region, increased 34 percent on Tuesday amid President Trump’s calls to shut down the U.S.-Mexico border ( The Hill).

Let me end with a reminder from CoreLogic that averages do not tell us the full story.

Annual change by state ranged from a 10.2 percent high in Idaho to a -1.7 percent low in North Dakota

 

 

 

 

Millennials need lower UK house prices rather than £10,000

This morning the attention of Mark Carney and the Bank of England will have been grabbed by this from the Halifax Building Society.

On a monthly basis, prices fell by 3.1% in April, following a 1.6% rise in March, reflecting the
volatility in the short-term monthly measure.

Those who watched the ending of the Lord of the Rings on television over the bank holiday weekend may be wondering if this is like when the eye of Sauron spots that the ring of power is about to be thrown into the fires of Mount Doom? More on the Bank of England later as of course it meets today ready for its vote on monetary policy tomorrow although we do not get told until Thursday.

If we step back for some perspective we see this.

House prices in the latest quarter (February-April) were 0.1% lower than in the preceding
three months (November-January), the third consecutive decline on this measure

This means that we have fallen back since the apparent boom last October and November when the quarterly rate of growth reached 2.3%. Now we see that over the past three months it has gone -0.7%,-0.1% and now -0.1%.

Moving to annual comparisons we are told this.

Prices in the last three months to April were 2.2% higher than in the same three months a year earlier, down from the 2.7% annual growth recorded in March.

Again the message is of a lower number.

What have we learnt?

Whilst the monthly number is eye-catching this is an erratic series as going from monthly growth of 1.6% to -3.1% shows. Even the quarterly numbers saw falls last year at this time but then recovered as we mull a seasonal effect. But for all that as we look back we do see a shift from numbers of the order of 5% annual growth to numbers of the order of 2%. Of course that is the inflation target or would be if the UK establishment allowed house prices to be in the inflation index rather than keeping it out of them so it can claim any rise as wealth effects. Personally I see the decline in the rate of house price inflation as a good thing as for example the last three months has seen it much more in line with the growth in UK wages.

What does the Halifax think looking ahead?

They are not particularly optimistic.

“Housing demand has softened in the early months of 2018, with both mortgage approvals and completed home sales
edging down. Housing supply – as measured by the stock of homes for sale and new instructions – is also still very
low. However, the UK labour market is performing strongly with unemployment continuing to fall and wage growth finally picking up. These factors should help to ease pressure on household finances and as a result we expect
annual price growth will remain in our forecast range 0-3% this year.”

In terms of detail we are pointed towards this.

Home sales fell in March. UK home sales dropped by 7.2% between February and March to 92,270 –
the lowest level since May 2016.

And looking further down the chain to this.

Housing market activity softens in March. Bank of England industry-wide figures show that the
number of mortgages approved to finance house purchases – a leading indicator of completed house
sales – fell for the second consecutive month in March to 62,914 – a drop of 1.4%. Approvals in the
three months to March were 1.7% higher than in the preceding three months, further indicating a
subdued residential market.

So the fires of the system are burning gently at best.

The UK establishment responds

Of course so much of the UK economic system is built on rising house prices so we should not be surprised to see the establishment riding to the rescue. Here is the Financial Times on today’s report from the Intergenerational Commission and the emphasis is mine.

After an exhaustive, two-year examination of young Britons’ strained living standards and the elderly’s concerns about health and social care, the commission recommended a £10,000 “citizen’s inheritance” for 25-year-olds to help them buy their first home or reduce their student debt, lower stamp duty for people moving home and billions more spent on health in a report published on Tuesday.

Nobody at this august institutions seems to ever stop and ask the question as to why so much “help” is always needed? The truth is that it is required because house prices are too high. They of course turn a not very Nelsonian blind eye to that reality. Also the bit about creating the money seems rather vague.

The commission said the government could find the money needed to fund the additional public expenditure by introducing new taxes on property and wealth.

Indeed the lack of thought in this bit is frightening especially when we see the role of who said it.

Carolyn Fairbairn, CBI director-general and a member of the commission, said: “The idea that each generation should have a better life than the previous one is central to the pursuit of economic growth. The fact that it has broken down for young people should therefore concern us all.”

No challenging of all about can or should we grow if it means draining valuable resources and sadly no doubt soon we will get more global warming rhetoric from the same source. Then to correct myself on the issue of taxes we do get some detail and it is something that the establishment invariably loves.

The bulk of the additional tax measures came from a proposal for a new property tax, with annual rates of 1.7 per cent of the capital value of a home for any properties worth more than £600,000 and 0.85 per cent on values below that.

What sort of mess is that? You inflate house prices and tell people they are better off. Then you make the mess even worse by taxing many on gains they have not taken! A clear cash flow issue for many who may have a more expensive property but still live in it. This will be especially true for the retired living on a pension.

Oh and £10,000 won’t go far will it? So this is something that will plainly go from bad to worse.

Also some advice to millennials. Should you ever get this £10,000 don’t pay off your student debt as that looks to be something likely to be written off road to nowhere style in the end anyway.

Comment

If we start with millennials I do think that times are troubled but the real driving factor affecting them is this.

Those in their late 20s and early 30s were the first generation not to have higher pay on average than people of the same age 15 years earlier, according to the commission.

We are back to wages again which the establishment of course then shouts look over here and moves to house prices. But then it has a problem because its claim that there has been little or no inflation faces this inconvenient reality.

With the prospect of more time spent renting from private landlords, the average millennial spent 25 per cent of their income on housing, compared with roughly 17 per cent for baby boomers when they were younger, a figure that subsequently fell for that generation as their incomes rose sharply in the 1980s and 1990s.

So we have higher prices and payments without having much inflation! It is a scam which the establishment continue with their claim that housing inflation can be measured using imputed rents. Even worse they measure rents badly and may be underestimating the rises by around 1% per annum.

Now we can return to Mark Carney and the Bank of England who no doubt feel like they have heat stroke when they read of house price falls. This is because of the enormous effort they have put into this area of which the latest was the Term Funding Scheme which ended in February.  It started in August 2016 and UK Bank Rate is the same now at the emergency rate of 0.5% but we can measure its impact on mortgage rates. You see according to the Bank the last 3 months before it saw new business at 2.39% twice and then 2.3% whereas now it has gone 1.96%,2.02% and now 2,04%. So an extra Bank Rate cut just for mortgages.

Now if we factor that into house prices would it be churlish to suggest it may have raised them by the £10,000 the Intergenerational Commission wants to gift to millennials?