July durable goods, home sales & prices, & the CBO on the fiscal cliff…

the year end “fiscal cliff”, which we have covered before, was back in the news this week, by virtue of a CBO (Congressional Budget Office) update to the budgetary and economic outlook (pdf) that was released mid-week…while the report from the CBO included projections for this & the next ten years, all the media & blog attention was directed towards their baseline projections for 2013, which were based on the assumption that current laws would generally remain in place, ie, that all the tax cuts & budget cuts as they are now written into law would go into effect as scheduled…in this baseline scenario, the economy would be plunged into a deep recession during the first half of next year which would reduce GDP by 2.9% and cost us 2 million more jobs, increasing the unemployment rate to 9.1%…in addition, the deficit would fall to $641 billion, the equivalent of 4.0% of GDP, from $1.128 trillion, or 7.3% of GDP, that is expected for fiscal 2012 (ends sptember 30)…briefly, what we’re facing at year end if congress is gridlocked includes the expiration of the bush tax cuts, the end of the temporary 2% payroll tax cut, and the first tranche of the $1.2 trillion in spending cuts mandated by the default provisions of the budget control act, which as written would come half out of defense and half from medicare & other social programs….in addition, there are dozens of special tax breaks and provisions which are typically renewed annually, such as the “doc fix”, which would also have to pass to prevent an immediate 27% reduction in Medicare payment rates for physicians…the CBO report also included an alternate economic scenario for 2013 (and beyond) which assumed that all expiring tax provisions would be extended indefinitely, except for the 2% payroll tax cut, that the AMT would be indexed for inflation, and that the  automatic spending cuts under the budget control act & the Medicare doctor pay cuts would be avoided…under this scenario, economic growth as measured by GDP would still be a weak 1.7%, unemployment would remain near 8% till the end of 2013, and the budget deficit woud again hit the trillion dollar mark, coming in around 6.5% of GDP…the CBO has a slide show of budget graphs which is embedded below; we’ll also include a graph from credit suisse (above) which includes 4 possible cliff scenarios, each indicating the hit to GDP from various fiscal outcomes; their best case includes just CBO’s “other spending and revenue changes” and the Obamacare tax increases; their “most likely” case also includes the expiration of the payroll tax; the “plausible downside” includes upper income tax hikes, the spending cuts under the sequestor, the expiration of all emergency unemployment insurance benefits and the “other expiring provisions”, such as the bonus depreciation allowance, and under their unlikely worst case, congress does nothing, all the bush tax cuts expire, and neither the usual AMT patch or the “doc fix” is enacted…the CBO also attempts to project both scenarios ten years out, as if either fiscal scenario could remain intact that long; under their baseline, the unemployment rate would remain above 8.4% through 2014, and gradually be reduced to 5.7% by the fourth quarter of 2017…and they project that following the alternative fiscal scenario over 10 years “would lead to a level of federal debt that would be unsustainable from both a budgetary and an economic perspective”..

Click to Viewit was a fairly light week for new economic data; probably the most telling economic release was the Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders for July (pdf) from the Census Bureau, which is most typically watched for new orders for durable goods, which in general are consumer or industrial manufactures with an expected useful life of 3 years or more; the headline looked great, as durable goods orders rose a seasonally adjusted $9.4 billion to $230.7 billion, or 4.2% in July, but it was almost all due to an increase in aircraft orders, which had already been largely reversed the day before the report was released when Quantas cancelled an order for 35 Boeing 787s worth $8.5 billionexcluding the transport sector, which rose $9.9 billion or 14.1% to $80.4 billion, orders fell  0.4%; excluding the also often volatile defense sector, new orders were up 5.7% in july…excluding both defense and transportation equipment gives us what is referred to as ‘core capital goods”, which were up 1.3% in July, the fist increase in 3 months, as you see in blue on the above chart from doug short….however, business investment, defined as new orders for capital goods excluding aircraft and defense, was particularly weak, falling 3.4% from June….unfilled orders for manufactured durable goods as of july amounted to $996.3 billion, up 0.8% for the second consecutive month; again, transport equipment had the largest increase, up $10.7 billion or 1.9% to $581.0 billion; shipments, up 7 out of the last 8 months, increased $5.9 billion or 2.6% to a seasonally adjusted $231.1 billionmanufactured durable goods inventories, which have been up 30 out of the last 31 months, again increased $2.7 billion,. or 0.7% to $369.3 billion, the highest level since this series was initiated …

two data-sets on home sales were also released this week; the first was on July Existing Home Sales from the NAR (National Association of Realtors); according to the NAR, sales of previously owned homes increased 2.3% in July to a seasonally adjusted annual rate of 4.47 million from the 4.37 million annual rate in June , which was 10.4% greater than the sales rate of a year earlier, but still below the 4.62 million seasonally adjusted rate of home sales in May; the NAR again complained that sales were constrained by unnecessarily tight lending standards and shrinking home inventory, despite indications that 90% of REO (“real estate owned” by banks or agencies) is being held off the market in order to keep prices from crashing…with less such distressed homes in the mix of homes being sold, the median existing-home price for all housing types sold in July was up for the 5th straight month to $187,300, 9.4% higher than NAR reported a year ago, as foreclosures and short sales only accounted for 24% of homes sales in July, compared to 25% in July and 29% a year ago (foreclosures sold for 17% below market, while short sales were discounted 15%)…2.40 million existing homes were on the market & available for sale at the end of July, a 1.3% increase over June’s housing inventory, which represented a 6.4 month supply at the July sales pace; this inventory was down 23.8% from a year previously, when there was a 9.3 month supply of homes availablefirst time home buyers accounted for 34% of July sales, up from the 32% in June and 32% a year ago; NAR says “under normal conditions”, they should account for 40%all cash buyers accounted for 27% of home transactions in July, down from 29% in June and 29% a year ago; real estate investors, who account for the bulk of cash sales, purchased 16% of the homes sold in July, down from 19% in June and 18% of homes sold a year ago..,there was quite a bit of regional variation, especially in price; in the northeast, sales rose 7.4% in july over june and the median price was $254,200; in the midwest, where sales rose 2.0%, the median sales price was $154,100; in the south, sales rose 2.3% and the median price in the region was $162,600, and in the west, where the sales pace was unchanged,  the median price jumped to $238,600, up 24.5% from a year ago

the other report on home sales was for new home sales for July from the census bureau (pdf); census reported sales of new single-family houses in July were estimated at a seasonally adjusted annual rate of 372,000, 3.6% (±14.1%) above the revised June rate of 359,000 and 25.3% (±18.2%) above the July 2011 estimate of 297,000…note the wide margin of error this report; which means revisions are often significant; indeed, the decrease in sales in the june report was significantly revised up, from a sales decline of 8.4% to a decline of just 3.6% from May’s revised number…the seasonally adjusted estimate of new houses on the market at the end of July was 142,000, which is an inventory of 4.6 months at the current sales rate…the median sales price of new houses sold was $224,200 and the average sales price was $263,200, which was the lowest average new home price this year…regional stats in this report display even more uncertainly than the headline, since these annualized numbers reflect a relatively smaller number of monthly sales; only 30,000 homes were sold in the northeast at an annual rate (actual 3000), for instance, which census reports as a 76.5% monthly gain for the region; however, the margin of error is ±145.9% (see table 1, p2 pdf), rendering the figures virtually useless…but while new homes sold monthly have been considerably less than the number of existing home sales, they are arguably more important economically in that building new homes increases employment in materials & construction, stimulates purchase of new durable goods (furniture, appliances) & adds to the local tax base; they are also included in the investment component of GDP; whereas sales of existing homes only generates sales commissions and income accruing to bankers, as they were already added to growth at the time they were built & sold… traditionally, the ratio of existing home sales to new home sales has been 5 or 6 to 1; however, in this post bubble bust, the ratio has been around 12 or 14 to one, which means the economy isnt getting its usual boost from new housing…bill mcbride attributes this to the influence of the large number of distressed sales on the housing market, and graphs the two sales totals together, showing what he calls the “distressing gap”, which is included here to the right; the chart shows existing home sales in blue, scale left, and new home sales in red, scale right, with that “distressing gap” between them obvious since 2008; the obvious aberrations shown in late 09 & early 2010 were due to the homebuyer tax credit…

– – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Distressing Gap  

in addition to the median home price rise reported by the NAR, which we saw was due to the change in the mix of home sold, there have been a few home price indexes which have shown year over year price improvement…FNC, which reports residential price indexes for 10, 20, 30 and 100 MSAs using a blend of sold homes and real-time appraisals, showed a 1.1% price increase in their national composite index in June, with increases in the same range for their smaller RPIs; their year over year index is now down only 0.2%, the least YoY decline they’ve shown since 2007…and the Federal Housing Finance Agency (FHFA) reported a seasonally adjusted purchase-only house price index with price information gleaned from Fannie & Freddie, which showed a 0.7% increase in June from May, a 1.8% increase from the 1st quarter to the 2nd quarter, and a 3.0% increase in prices from the 2nd quarter of 2011 to the 2nd quarter of 2012…and then Zillow, which has been fairly accurate in prognosticating the Case-Shiller index, has forecast that it will show it’s first year over year increase when it is reported on tuesday…so there has been a tendency among real estate analysts to expect a return to rising prices…however, the same analysts who panned the homebuyer tax credits as temporary market distortions are ignoring the temporary distortion in home prices caused by Fed-induced record low interest rates, which effectively reduces the amount a buyer pays for a home even as the list price rises…in large part due to the Fed’s “operation twist“, the average interest rate on fixed rate 30 year mortgages in July was 3.55%, a full percentage point lower than Freddie Mac’s had the 30 year mortgage rate at a year agoa simple mortgage calculation shows that the monthly cost per $100,000 on a 30 year mortgage in july of 2012 was $451.84, compared to the $509.66 per $100K one would have paid monthly on a 30 year mortgage last July; that means to buy the same house a year ago would have cost a potential homeowner 12.8% more in payments monthly than it would cost under current interest rate regimes…so even should July’s home price indexes show a 2.8% year over year gain in the principal price of the house, it would still mean that potential home buyers are still only willing to commit 10% less to homeownership than they were a year ago…the so-called housing recovery is merely a fiction of manipulated interest rates, which will not stay this low forever…indeed, although they remain low, in the past 4 weeks mortgage rates have already increased 17 basis points from their record lows

(the above is my weekly commentary that accompanied my sunday morning links mailing, which in turn was mostly selected from my weekly blog post on the global glass onion, and also includes other links of interest…if you’d be interested in getting my weekly emailing of selected links that accompanies these commentaries, most coming from the aforementioned GGO posts, contact me…)

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One Response to July durable goods, home sales & prices, & the CBO on the fiscal cliff…

  1. Pingback: Now and Forever Zero Mortgage Payments

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