Tuesday, April 24, 2018

Housing: it's Godzilla vs. Mothra!


 - by New Deal democrat

LADIES AND GENTLEMEN!

In this corner, I give you Godzilla -- the large generational tailwind of Millennials entering the market!

And in this other corner, I give you Mothra -- increasing interest rates that have now broken a 30 year trendline together with price increases of over 5% a year!

Pull up a chair (at a vary safe distance), because we don't know yet who is going to win -- but you don't want to get caught in between them.

This post, with monstrous graphs, is up at XE.com.

Monday, April 23, 2018

The consumer edges closer to the precipice


 - by New Deal democrat

In addition to my "long leading/short leading" model adapted from the work of Profs. Geoffrey Moore and Edward Leamer, and the "high frequency" weekly variation on the same, I also have several "alternate" recession forecasting models. The most noteworthy model is really a consumer nowcast. It turns on consumers running out of options to to continue increasing purchases (i.e., no interest rate financing, no wage real wage increases, and no increasing assets to cash in). When that happens, and consumers turn more cautious by saving more, a recession begins.

I first posted the model 10 years ago under the title, "Are Hard Times Near?  The great decline in interest rates is ending."  The history is straightforward.  Since the 1970s, real average hourly earnings had declined.  Average Americans coped by spouses entering the workforce, by borrowing against appreciating assets, and by refinancing as interest rates declined.

By 1995 the spousal avenue peaked.  Borrowing against stock prices ended in 2000.  Borrowing against home equity ended in 2006.  When interest rates failed to make new lows, the consumer was tapped out, and began to curtail purchases.  A recession began - and its effects lingered for a long time. "Hard Times" had indeed begun.

What does the consumer model show now? I haven't updated it in about two years, and there have been noteworthy developments. Let's take a look.

Real hourly wages haven't increased since last July, are up only 0.1% YoY and barely more in the past two years:



According to Ironman at Political Calculations, real median household income has declined slightly  for nearly two years:



Mortgage rates haven't made a new low since 2013, and if anything are trending up, on the verge of breaking a 30 year trendline:



As a result, refinancing at lower mortgage rates is dead (shaded line):



In terms of cashing in assets, the stock market hasn't made a new high in nearly 3 months:



Of course, there's nothing to preclude it making new highs later this year, but for the moment, that method of freeing up cash is stalling.

The one asset that is still very much appreciating, of course, is housing:



Unsurprisingly, home equity withdrawals have been increasing over the past 12 months (h/t Bill McBride a/k/a Calculated Risk):



Meanwhile, the personal savings rate declined sharply over the last 18 months:



So consumers are more stretched than earlier in the expansion. 

The recent upturn in the savings rate would be more concerning, except that household debt obligations as of Q4 2017 were still rising:



For this model to signal recession, consumer debt obligations would have to start to fall.

Put this all together, and we have consumers in a more precarious position than they have been at any previous point in this expansion. But on the other hand, home equity withdrawals are still an option and are being used. The most recent available data does not show consumers becoming more focused on paying down debt. As with my primary forecasting model, the lynchpin looks like the housing market. 

Sunday, April 22, 2018

A better name for The Kids Today: iGeneration


 - by New Deal democrat

You know the drill. It's Sunday so I get to ruminate about all stuff that isn't dry economics.

The oldest member of the Millennial generation is 38. Not only do I not think that The Kids Today would want to be lumped with that age group, but their uncool parents are probably precisely members of that group!

So what to name the generation that came after the Millennials? both "post-Millennials" and "Gen Z" are condescending and probably don't cut it with The Kids Today. Remember, "Gen X" was originally called "the baby bust," and Millennials were originally called "Gen Y" or "the echo boom," before catchier names were found.

A good dividing point is whether or not you remember 9/11. If you do, and were born after 1980, you're a Millennial. If you don't, you're not. Most studies seems to agree with this, using 1996 or so as the cut-off year after which you are not a Millennial. A similar if less apocalyptic marker is the Columbine school shooting of 1999. If you remember it, you're a Millennial. If your schooling always included "active shooter" drills, you're not.

But while the War on Terror or mass shootings have always been in the background for The Kids Today, everyday life has been dominated by something else.  If you were born after 1996, iPods were always around -- and there's a good chance you owned one. So were cell phones. For most of your youth -- *always* for the younger part of this cohort -- iPhones and flat screen TV's have been around, and you probably have had one (or another smart phone) since junior high school. In fact you may spend most of your time glued to one! The term "iGeneration" captures this perfectly.

I'm not the first person to think this is a better name. From Wikipedia:
iGeneration (or iGen) is a name that several persons claim to have coined. Demographer Cheryl Russell claims to have first used the term in 2009. Psychology professor and author Jean Twenge claims that the name iGen "just popped into her head" while she was driving near Silicon Valley, and that she had intended to use it as the title of her 2006 book Generation Me about the Millennial generation, until it was overridden by her publisher. In 2012, Ad Age magazine thought that iGen was "the name that best fits and will best lead to understanding of this generation". In 2014, an NPR news intern noted that iGeneration "seems to be winning" as the name for the post-Millennials.
So henceforth when I examine demographics issues, I am going to use the term "iGeneration," the earliest polling as to which indicates that they hate Trump even more than their Millennial predecessors do! 

Saturday, April 21, 2018

Weekly Indicators for April 16 - 20 at XE.com


 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

The regional Fed indexes, which presaged real strength in the industrial sector over the last year, are faltering (while still positive).

Meanwhile housing, as exmplified by purchase mortgage applications, refuses to be held down.

Friday, April 20, 2018

Do interest rates still matter for the housing market?


 - by New Deal democrat

In the past few years, the strength of the housing market has seemed to defy the impact of interest rates.

Do they still affect housing?  I take a detailed look over at XE.com.