jueves, octubre 25, 2018

AFTER AMAZON´S PAY MOVE, IMPROVE PRODUCTIVITY TO INCREASE WAGES / THE FINANCIAL TIMES

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After Amazon’s pay move, improve productivity to increase wages

The Federal Reserve is not concerned about a sudden outbreak of inflation

Glenn Hubbard


Amazon’s move takes aim at structurally low wages. Over the longer run, sustained growth in average wages is not simply set by companies — it depends on higher productivity growth © Bloomberg


Amazon’s decision to raise the minimum wage for its US workers to $15 an hour promises to improve the lot of its staff and has won plaudits from left-of-centre politicians.

So, with a stronger economy and this move by Amazon, are concerns about sluggish wage growth and the labour market yesterday’s news? Not quite.

Welcome increases in wage growth reflect in large part the recent strength in the US economy.

Fear of so-called secular stagnation is misplaced. The global financial crisis led to substantial slack in productive capacity and the labour market, restraining wage growth.

As the American economy approached full capacity in late 2016, wage growth resumed and has accelerated since in the US, the eurozone and Japan.

In the US, signs of a rapidly tightening labour market can be seen in employers taking longer to fill vacant jobs, the number of companies planning to raise worker compensation and, of course, in rising average hourly earnings. Wage gains would be even greater but for the modest, but larger-than-expected, jump in the labour force participation rate for prime-aged (25-54) workers.

The US Federal Reserve has signalled that it is not concerned about a sudden outbreak of inflation. While continuing its normalisation of monetary policy, the Fed seems content to let labour market gains continue.

That stance was emphasised by Fed chair Jay Powell’s speech in Jackson Hole in August, in which he praised former chair Alan Greenspan’s decision to permit faster wage growth in the 1990s. In that period, Mr Greenspan believed that productivity gains would allow faster non-inflationary wage gains. He was right.

Amazon’s move takes aim at structurally low wages. Over the longer run, sustained growth in average wages is not simply set by companies — it depends on higher productivity growth. And higher wages for more workers require greater skills and retraining. Both productivity and skills can be influenced by public policy. For the US as a whole, non-farm productivity growth generally declined in the 1970s, rose markedly through the 1980s and 1990s, and fell again in more recent years. The good news is that these patterns do not support the pessimistic contention that the US is in the midst of an inexorable decline in productivity growth. In other words, productivity can accelerate.

And, recently, it has. Very recent improvements in productivity growth do not themselves suggest a productivity resurgence, but there are reasons to be optimistic. Business tax and regulatory reforms during 2017 and 2018 should increase investment and productivity growth — and, by extension, wage growth. The 2017 reduction of the US corporate tax rate from 35 to 21 per cent is particularly positive for investment and productivity.

Many economists have concluded that much of the burden of corporate tax falls on labour, not capital, so the rate cut should boost wages. Beyond policy, artificial intelligence promises transformation across industries and activities as a new general purpose technology. It will boost productivity over time.

The tougher task is to bolster wage gains across the board, particularly for lower-skilled workers. This is what Amazon tackled with its higher minimum wage. Businesses should be free to hire or retain the workers they need and to raise wages as they see fit — think, for instance, of Henry Ford’s decision a century ago to pay his workers enough that the best workers would reliably work for Ford. If a higher wage is in a company’s interest, it will pay it. Beyond that, a broader push for higher pay requires higher productivity and skills.

A bold agenda to give more Americans the opportunity for a pay rise would centre on skill acquisition and training. Community colleges offer a good place to start.

Imagine a successor to the 19th-century Morrill acts that established “land-grant” colleges, some of which grew into today’s great public universities. A federal block-grant programme could provide new funding to community colleges, contingent on degree completion rates and labour market outcomes. Community college support can also be linked to public partnerships for training with companies.  

Amazon itself is a pioneer here with a community college partnership to create a degree programme in cloud computing. Life-long learning accounts could fund training options for more experienced workers in transition, too. And tax policy could boost human capital and wages by offering job training tax credits to employers.
 
Today’s strong labour market and solid wage gains are a good thing. The bold wage increase offered by multibillionaire Jeff Bezos has taken the spotlight. But in the next act in the drama, policymakers need to be on stage, too. Sustained wage gains require them to play more than a supporting role.



The writer is dean of Columbia Business School and was chairman of the US Council of Economic Advisers in 2001-03

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jueves, octubre 25, 2018

ONE HUNDRED YEARS OF INEPTITUDE / PROJECT SYNDICATE

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One Hundred Years of Ineptitude

Helmut K. Anheier  

old car stock market crash

BERLIN – The global financial and economic crisis that began in 2008 was the greatest economic stress-test since the Great Depression, and the greatest challenge to social and political systems since World War II. It not only put financial markets and currencies at risk; it also exposed serious regulatory and governance shortcomings that have yet to be fully addressed.

In fact, the 2008 crisis will most likely be remembered as a watershed moment, but not because it led to reforms that strengthened economic resilience and removed vulnerabilities. On the contrary, leaders’ failure to discern, much less act on, the lessons of the Great Recession may open the way for a series of fresh crises, economic and otherwise, in the coming decades.

However serious those crises turn out to be, historians a century from now will likely despair at our shortsightedness. They will note that analysts and regulators were narrowly focused on fixing the financial system by strengthening national oversight regimes. While this was a worthy goal, historians will point out, it was far from the only imperative.

To prepare the world to confront the challenges posed by globalization and technological development in a way that supports sustainable and equitable growth, governance institutions and regulations at both the national and international levels must be drastically improved. Yet not nearly enough has been invested in this effort. Beyond regional bodies like the European Union, international financial governance has remained largely untouched.

Worse, because the partial fixes to the financial system will enable even more globalization, they will end up making matters worse, as strain on already-inadequate governance and regulatory frameworks increases, not only in finance, but also in other economic and technological fields. Meanwhile, enormous financial investments focused on securing a higher rate of return are likely to fuel technological innovation, further stressing regulatory systems in finance and beyond.

Major technological advances fueled by cheap money can cause markets to change so fast that policy and institutional change cannot keep up. And new markets can emerge that offer huge payoffs for early adopters or investors, who benefit from remaining several steps ahead of national and international regulators.

This is what happened in the run-up to the 2008 crisis. New technology-enabled financial instruments created opportunities for some to make huge amounts of money. But regulators were unable to keep up with the innovations, which ended up generating risks that affected the entire economy.

This points to a fundamental difference between global crises of the twenty-first century and, say, the Great Depression in the 1930s or, indeed, any past stock-market crashes. Because of the financial sector’s growth, more actors benefit from under-regulation and weak governance in the short term, making today’s crises more difficult to prevent.

Complicating matters further, the systems affected by today’s crises extend well beyond any one regulatory body’s jurisdiction. That makes crises far unrulier, and their consequences – including their long-term influence on societies and politics – more difficult to predict.

The next crises – made more likely by rising nationalism and a growing disregard for science and fact-based policymaking – may be financial, but they could also implicate realms as varied as migration, trade, cyberspace, pollution, and climate change. In all of these areas, national and international governance institutions are weak or incomplete, and there are few independent actors, such as watchdog groups, demanding transparency and accountability.

This makes it harder not only to prevent crises – not least because it creates opportunities for actors to game the system and shirk responsibility – but also to respond to them. The 2008 crisis cast a harsh spotlight on just how bad we are at responding quickly to disasters, especially those fueled by fragmented governance.

To be sure, as the Hertie School’s 2018 Governance Report shows, there have been some improvements in preparing for and managing crises. But we must become more alert to how developments in a wide range of fields – from finance to digital technologies and climate change – can elude the governance capacities of national and international institutions. We should be running crisis scenarios and preparing emergency plans for upheaval in all of these fields, and taking stronger steps to mitigate risks, including by managing debt levels, which today remain much higher in the advanced economies than they were before the 2008 crisis.

Moreover, we should ensure that we provide international institutions with the needed resources and responsibilities. And by punishing those who exacerbate risks for the sake of their own interests, we would strengthen the legitimacy of global governance and the institutions that are meant to conduct it.

As it stands, inadequate cross-border coordination and enforcement of international agreements is a major impediment to crisis prevention and management. Yet, far from addressing this weakness, the world is reviving an outdated model of national sovereignty that makes crises of various kinds more likely. Unless we change course soon, the world of 2118 will have much reason to regard us with scorn.


Helmut K. Anheier is Professor of Sociology at the Hertie School of Governance in Berlin.

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jueves, octubre 25, 2018

IS THE FED STILL IN CONTROL OF THE MARKET? / SEEKING ALPHA

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Is The Fed Still In Control Of The Market?



by: Avi Gilburt
 

- There are many fallacies being propagated within the stock market.

- The Fed's ability to control the market is one such fallacy.

- The stock market acting as a leading indicator for the economy does not mean the market is omniscient.
     
    
This week, I read an article by Jeffrey Saut entitled “Stock Market Timing?”
 
While I have much respect for Mr. Saut’s experience and knowledge in the industry, I do not agree with his recent missive, as it is replete with market fallacies and circular logic.
 
Within this article, Mr. Saut takes market participants to task for not understanding the market:
As mentioned on numerous occasions, if nothing else, if investors only understand and appreciate the following, they will always be on the right side of the market and will never be influenced by others' opinions or news headlines: 
Investors must understand the role of the U.S. central bank (the Fed). The U.S. Federal Reserve System was created in 1913 to perform all roles monetary, but one of their key statutory (written in law) mandates is to "To maintain orderly economic growth and price stability." This agency has more and better information on the economy than anyone in the world. It was not created to promote hyperinflation or to create depressions. The Fed's key mandate must be clearly understood and appreciated. 
The stock market is a leading economic indicator. The economy does not lead the stock market. Hence, once these two points are clearly understood and remembered, the market's logic becomes apparent. Hence, when the economy slows and heads into a recession, the Fed will ease and will keep easing until the economy responds (remember, that's their mandate). The stock market, being a leading economic indicator, will have bottomed 6-9 months before the recovery begins, not after. For example, "the market" bottomed in October, 2008 and the recession ended at the end of June, 2009 and a [market] recovery commenced, eight months ahead of the [economic] recovery.
Conversely, when the economy overheats; inflation surges; and speculation is rampant, the Fed will tighten by draining liquidity from the system and raise interest rates in an attempt to cool the economy. The stock market, being a leading economic indicator, will head south long before the onset of a slowdown or recession, not after.  
This chain of logic is so simple that anyone with an IQ slightly above room temperature would understand it. Yet, most on Wall Street with umpteen degrees and decades of experience can't figure it out.
However, it seems Mr. Saut is guilty of some of the same errors for which he calls out others.
 
Let’s start with his first premise. He suggests that in order to understand the market we must understand that it is the Fed’s responsibility to “maintain orderly economic growth and price stability.” I have recently penned an article regarding my perspective on the Fed’s control of our market, and have explained why the common view of the Fed is based more upon fallacies than fact. Feel free to read it here if you have an interest. But, the gist of that article is summarized in the following paragraphs:
When the Fed began to change course on its quantitative easing process, almost any market participant and analyst you spoke with expected it to have a dramatically negative impact upon the stock market. I mean, since it is “clear” to everyone that the market rallied due to the Fed, then it was equally clear that the market would now react in the opposite manner when the Fed began reversing course. 
However, the fact is that the stock market has gained 1100 points, which is a 61% rally, from the point at which the Fed began to change course. Yes, you heard me right.
So, I will ask you again: Do you think everyone’s expectations about the Fed’s reversal of course causing a similar impact upon the stock market was correct? And, if not, shouldn’t we then question whether the Fed is really controlling the stock market and was the true cause of the rally to begin with? 
Moreover, in prior articles, I have also explained why I think the Fed and the Plunge Protection Team, with which it is involved in “maintaining price stability” within our markets, is either asleep at the wheel or simply does not control the market to the extent that so many are led to believe:
As another example of this perspective, many believe that there is something called the Plunge Protection Team, created as a response to the 1987 crash, which supposedly prevents the market from crashing anymore. And, again, analysts . . . point to this "Team" as the reason they are wrong when they expect a major drop in the markets which does not occur. 
If there really is such a team hard at work, with their ever-present finger on the "buy" trigger, then we should not have had any stock market "plunges" since 1987. Rather, the stock market should have only experienced "orderly" declines since that time, and not plunges of 10%, and certainly not over 20%, within a period of a day to a couple of weeks in the same manner as that experienced in 1987. So, the question we now have to look at is if the facts within our markets actually support the existence of such a "Plunge Protection Team" actively at work in protecting us from significant stock market "plunges." 
Since 1987, I don't think that anyone can fool themselves into believing that we have not experienced periods of significant volatility. In fact, the following instances are just some of the highlights of volatility since the supposed inception of the Plunge Protection Team: 
•February of 2001: Equity markets declined of 22% within seven weeks; 
•September of 2001: Equity markets declined 17% within three weeks; 
•July of 2002: Equity markets declined 22% within three weeks; 
•September of 2008: Equity markets declined 12% within one week; 
•October of 2008: Equity markets declined 30% within two weeks; 
•November of 2008: Equity markets declined 25% within three weeks;
•February of 2009: Equity markets declined 23% within three weeks. 
•May of 2010: Equity markets experienced a "Flash Crash." Specifically, the market started out the day down over 30 points in the S&P500 and proceeded to lose another 70 points within minutes. That is a loss of 9% in one day, but the market did manage to close down only 3.1% in one day! 
•July of 2011: Equity markets declined 18% within two weeks 
•August 2015: Equity markets decline 11% within one week 
•January 2016: Equity markets decline 13% within three weeks 
Based upon these facts, you can even argue that significant stock market "plunges" have become more common events since the advent of the Plunge Protection Team, especially since we have experienced more significant "plunges" within the 20 years after the supposed creation of the "Team" than in the 20 year period before.
So, while the Fed is charged with the responsibility of “price stability,” does it sound to you like it is effectively fulfilling its responsibility? I certainly do not and it is simply because I do not believe the Fed has anywhere near as much control as many believe. And, history has proven this to be the case.
 
Now, let’s move onto to Mr. Saut’s second premise: “The stock market is a leading economic indicator.”
 
I have always found this to be a fascinating perspective, which seems to be a belief held by a significant amount of market participants. Yet, I never understood the basis behind this premise from the perspective of the masses. Does the stock market have a crystal ball? Is it omniscient?
 
While Mr. Saut accepts it as “fact” that the stock market seems to be omniscient relative to the economy, he does not offer any reasoning as to why this is the case. While I think many agree with
 
Mr. Saut that the stock market may seem as a leading indicator, why is the stock market price action always leading the economy by as much as a year? Until you understand why the stock market is a leading indicator, I think any analysis based upon this premise will clearly be lacking.
 
I have addressed this causation chain in prior articles, so I will simply present the heart of my perspective here:
During his tenure as chairman of the Federal Reserve, Alan Greenspan testified many times before various committees of Congress. In front of the Joint Economic Committee, Greenspan noted that markets are driven by "human psychology" and "waves of optimism and pessimism." Ultimately, as Greenspan correctly recognized, it is social mood and sentiment that moves markets. I believe this makes much more sense when deriving the causality chain. 
During a negative sentiment trend, the market declines, and the news seems to get worse and worse. Once the negative sentiment has run its course after reaching an extreme level, and it's time for sentiment to change direction, the general public then becomes subconsciously more positive. You see, once you hit a wall, it becomes clear it is time to look in another direction. Some may question how sentiment simply turns on its own at an extreme, and I will explain to you that many studies have been published to explain how it occurs naturally within the limbic system within our brains. 
When people begin to turn positive about their future, they are willing to take risks.  
What is the most immediate way that the public can act on this return to positive sentiment? The easiest is to buy stocks. For this reason, we see the stock market lead in the opposite direction before the economy and fundamentals have turned. In fact, historically, we know that the stock market is a leading indicator for the economy, as the market has always turned well before the economy does. This is why R.N. Elliott, whose work led to Elliott Wave theory, believed that the stock market is the best barometer of public sentiment. 
Let's look at the same change in positive sentiment and what it takes to have an effect on the fundamentals. When the general public's sentiment turns positive, this is the point at which they are willing to take more risks based on their positive feelings about the future. Whereas investors immediately place money to work in the stock market, thereby having an immediate effect upon stock prices, business owners and entrepreneurs seek loans to build or expand a business, which takes time to secure. 
They then place the newly acquired funds to work in their business by hiring more people or buying additional equipment, and this takes more time. With this new capacity, they are then able to provide more goods and services to the public, and, ultimately, profits and earnings begin to grow - after more time has passed. 
When the news of such improved earnings finally hits the market, most market participants have already seen the stock of the company move up strongly because investors effectuated their positive sentiment by buying stock well before evidence of positive fundamentals are evident within the market. This is why so many believe that stock prices present a discounted valuation of future earnings. 
Clearly, there is a significant lag between a positive turn in public sentiment and the resulting positive change in the underlying fundamentals of a stock or the economy, especially relative to the more immediate stock-buying activity that comes from the same causative underlying sentiment change.
Lastly, while Mr. Saut recognizes that the stock market price action can lead the economy by as much as a year, he still views the Fed as controlling the market. This makes me scratch my head. If the stock market is omniscient, then would it not already know what the Fed will do and will react before the Fed does it? Does this not make the Fed action, in effect, irrelevant?
 
Does anyone else see the circular logic here?
 
Moreover, Mr. Saut’s logic seems to present us with the following chain of events: The stock market leads the economy. Yet, when the economy gets to hot, the Fed supposedly steps in to act. This places the chain of events as the stock market being the first actor as it the leading indicator, the economy the second actor as it follows the stock market, with the Fed being the third actor as it reacts to the economy. Does this not place the Fed at the end of the causation chain and not at the forefront as so many seem to believe? So, is the Fed “leading from behind” when it supposedly manages the stock market over a year after the stock market moves? Is this lending to “price stability?”
 
While these perspectives presented by Mr. Saut are viewed as truisms by most market participants, have any of you actually taken the time to analyze these perspectives?
 
Issac Asimov provided those willing to listen with some brilliant advice:
 
“Your assumptions are your windows on the world. Scrub them off every once in a while, or the light won't come in.”

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jueves, octubre 25, 2018

A SOBER LOOK AT HOUSING IN THE MIDDLE OF ALL THE CHAOS / SEEKING ALPHA

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A Sober Look At Housing In The Middle Of All The Chaos

by: Eric Basmajian
 
- While prices are still rising, the housing market is starting to contract.

- Housing stocks are the worst-performing sector in the US equity market.

- The residential housing market is typically the first sector to decline in an economic cycle.
Is this a blip or something bigger?

     
    
While the stock market continues to hit new all-time highs, the volatility in interest rate explodes, and political theatrics consume most media outlets, the housing market has had a very stealth slowdown that should start to be a cause for concern. The housing market has gone from a "yellow light" to a "red light" based on the recent data, and the housing-related equities support that view with the iShares U.S. Home Construction ETF (ITB) falling 26% since January 2018.
 
If the economic data doesn't suffice, perhaps housing stocks in a full-fledged bear market will garner some attention.
 
In this piece, I want to take a comprehensive, unbiased and data-driven approach to analyze the most popular high-frequency housing data and conclude by showing the impact to housing-related stocks.
 
I will start with the most leading of indicators in the housing market such as new construction measures and move on to the more significant existing home sales market and conclude with the price action in the housing market.
 
After the data-dump, I will turn over to the housing-related stocks for a look at their performance, and why the recent move makes sense in the context of the trending economic data on housing.
 
The first thing to slow in a housing cycle is new construction so that is where I'll begin.
 
New Construction Growth Is Contracting
 
The best place to find information on new construction is in the Census Bureau's report on New Residential Construction. The most reliable indicator is "Building Permits" which I prefer over "Housing Starts" due to the variability in weather conditions having an impact on breaking ground in a new construction. Building Permits simply measure the approval given to start a new project and are not impacted by the weather. If fewer building permits are issued or "asked" for, this is a good indication that the desire for new construction is slowing.
This is a leading indicator of economic activity. Existing projects will continue, but in the months ahead if a new project won't be started, that means fewer jobs, wages and economic activity.
 
The number of Building Permits is down 3.92% compared to one year ago and down 9.3% compared to the peak in March of 2018.
 
 
US Building Permits:
Source: YCharts, EPB Macro Research
 
 
The growth rate in the number of Building Permits has been trending lower for the past three years and now sits in contractionary territory.
 
 
US Building Permits Year over Year Change (%):
Source: YCharts, EPB Macro Research
 
 
While Building Permits lead economic activity in the new construction segment of housing, the "Housing Under Construction" indicator is more of a coincident index of what level of activity is occurring at this moment.
 
The growth rate has been relatively stable in the number of houses under construction at roughly 4.5% over the past 12 months.
 
 
US Houses Under Construction Year over Year Change (%):
Source: YCharts, EPB Macro Research
 
 
 
Pulling the chart back on the growth rate of Houses Under Construction shows a trend of deceleration.
 
US Houses Under Construction Year over Year Change (%):
Source: YCharts, EPB Macro Research
 
 
Given that the number of Building Permits is falling, we can expect the number of Houses Under Construction to continue to decelerate.
 
To finalize this stage of the analysis and prove that this level of housing activity is negatively impacting GDP, we can look at the Private Residential Fixed Investment component to GDP.
 
Private Residential Fixed Investment consists of purchases of private residential structures and residential equipment that is owned by landlords and rented to tenants.
 
Residential structures include "new construction of permanent-site single-family and multi-family units, improvements (additions, alterations, and major structural replacements) to housing units, expenditures on manufactured homes, brokers commissions on the sale of residential property, and net purchases of used structures from government agencies.
 
Residential structures also include some types of equipment that are built into residential structures, such as heating and air-conditioning equipment." - BEA
 
Residential Fixed Investment has been negative the past two quarters when looking at GDP on a quarter over quarter basis and trending towards 0% on a year over year basis.
 
 
Residential Fixed Investment Year over Year Growth (%):
Residential Investment Growth
Source: BEA, EPB Macro Research
 
 
The Atlanta Fed is estimating a third consecutive negative quarter for Fixed Residential Investment.
A "red light" in the housing market does not mean a crash but it does mean that the early signs of residential construction have turned negative.
 
The market for Existing Home Sales has held up slightly better but softened rather dramatically in recent months.
 
Existing Home Sales Volume Is Contracting
 
The volume for Existing Home Sales transactions comprises roughly 90% of the total transactions in the US residential housing market. The activity in the Existing Home Sales market, while larger, is less of a leading indicator of economic activity but still important nonetheless. The Existing-Home Sales data measures sales and prices of existing single-family homes for the nation overall.
 
The volume of Existing Home Sales transactions has also started to contract, dropping roughly 6% from the peak in November of 2017.
 
 
Existing Home Sales (Volume Of Transactions):
Source: YCharts, EPB Macro Research
 
 
In year over year growth rate terms, the volume of Existing Home Sales transactions has been negative for six consecutive months and for nine of the last 12 months.
 
 
Existing Home Sales Year over Year Growth (Volume Of Transactions):
Source: YCharts, EPB Macro Research
 
 
The 12 month moving average of Existing Home Sales is down 0.9% year over year.
 
 
Existing Home Sales Year over Year Growth 12 Month Average (Volume Of Transactions):
Source: YCharts, EPB Macro Research
 
 
Pending Home Sales are a leading indicator of Existing Home Sales by about two months.
 
Pending Home Sales measure housing contract activity and is based on signed real estate contracts for existing single-family homes, condos, and co-ops. Because a home goes under contract a month or two before it is sold, the Pending Home Sales Index generally leads Existing Home Sales by a month or two.
 
The read on Pending Home Sales can give an indication if this weakness in the Existing Home Sales market should be expected to continue.
 
The Pending Home Sales Index has been contracting recently which provides evidence that this trend is likely to persist.
 
 
US Pending Home Sales Index:
Source: YCharts, EPB Macro Research
 
 
The US Pending Home Sales index has been negative in year over year growth rate terms for nine consecutive months and for 12 of the last 13.
 
 
US Pending Home Sales Index Year over Year Change (%):
Source: YCharts, EPB Macro Research
 
 
The data suggest that the slowdown emanating from the new construction market that has leaked into the existing home market will continue. How has this impacted real estate prices?
 
Home Prices Growth Is Still Positive
 
I should caveat the statement that home price growth is still positive by saying that existing home sales growth is still positive. The data on newly constructed homes shows the median sales price falling and down over 9% from the peak.
As the data on new construction, specifically Building Permits, shows, there is an empirical slowdown that has started in the new construction market that is making its way into the Existing Home Sales market.
 
 
Newly Constructed Home Median Sales Price:
Source: YCharts, EPB Macro Research
 
 
The most popular index on the home price movements of Existing Homes is the Case-Shiller Home Price Index. The Case-Shiller Index shows that home prices are still growing around 6.24% year over year but that the rate of increase has slowed,
 
 
Case-Shiller Home Price Index - National Average Year over Year Growth:
Source: S&P, Dow Jones, EPB Macro Research
 
 
The price growth for the national average index has only dropped from 6.53% to 6.24% but the data on the 20-city composite is slightly more dramatic, falling from 6.77% growth to 5.92% growth.
 
 
Case-Shiller Home Price Index - 20-City Composite Year over Year Growth:
Source: S&P, Dow Jones, EPB Macro Research
 
 
The two following charts are tables that I frequently publish to members of EPB Macro Research that show the 20 major cities and their home price growth as of the last month, one month ago, six months ago, and one year ago for a comparison.
The first table is sorted by the rate of acceleration or the price growth this month compared to the price growth one year ago.
 
 
Home Price Index Table By City (Sorted By Rate Of Acceleration):
Source: S&P, Dow Jones, EPB Macro Research
 
 
The second table is sorted by the fastest growing cities in terms of home price growth.
 
What is interesting to note is that only 22% of the cities are showing accelerating rates of growth compared to one month ago and 43% compared to one year ago.
 
 
Home Price Index Table By City (Sorted By Year over Year Price Growth):
Source: S&P, Dow Jones, EPB Macro Research
 
 
The deceleration in home price growth is not a nitpicky topic but rather an important data point. The previous sections provided evidence for a slowdown in the housing market, starting with the residential construction sector and newly constructed homes. This data was corroborated with decreased prices for newly constructed homes.
 
Home prices are the last to move so it makes sense that the home prices have not yet started to outright contract in the Existing Home Sales market but the decelerations in price growth are what we should continue to expect.
 
The data points towards more slowing in the residential construction sector and the existing home sales sector.
 
Interest Rates?
 
Isn't this all interest rates? I don't think it is fair to say that this entire move lower in the housing space is due to interest rates but it also wouldn't be fair to say that there is no correlation.
Of course, rising mortgage rates make housing, on the margin, less affordable and the recent rise in mortgage rates is very meaningful and contributory to the declines in the housing market and housing-related stocks.
 
 
30-Year Mortgage Rate:
Source: YCharts, EPB Macro Research
 
 
We haven't yet seen the impact of the latest move in rates on the housing market. About 100 basis points on a 30-year mortgage have so far caused a roughly 10% contraction in the housing market nationwide.
 
The data suggests there is more downside to come.
 
Impact To Housing Stocks - Will It Continue?
 
As mentioned in the opening section of this note, in-line with the slowing housing data, homebuilder and housing-related stocks have been tumbling, falling as much as 26% in this year alone.
 
I will be using the iShares Homebuilder ETF as a proxy for housing stock related performance.
 
Below is a chart of the top 10 holding in ITB. Popular homebuilder stocks such as D.R. Horton (DHI) and Lennar (LEN) make up as much as 28% of the ITB ETF.
 
Other home services stores such as Home Depot (HD) and Lowe's Companies (LOW) are in the top 10 holdings as well.
 
ITB - Top Holdings:
Source: iShares
 
 
The ITB ETF has roughly 65% exposure directly to homebuilding stocks and less exposure to other housing-related categories.
 
 
ITB - Exposure Breakdown:
Source: iShares
 
 
The fact that ITB has the largest exposure directly to homebuilding companies explains why the ETF has performed so poorly. As mentioned in the first section on new construction, Building Permits are down. When Building Permits fall, homebuilding companies can post good earnings results but those are backward looking data points and the future then looks less optimistic with declining new construction activity.
 
Below is a table that shows the performance of the top 10 holdings in ITB over the past one month, three months, six months, year-to-date and the peak to trough drawdown for this year.
 
At it sits today, five of the top 10 holdings in ITB are down more than 30% from their highest level this year. Stocks like KB Home (KBH) and Toll Brothers (TOL) are down roughly 40% from their 2018 high. There is real damage that has taken place in the homebuilding sector.
 
 
What Is Going On With Homebuilders?
 
Source: YCharts, EPB Macro Research
 
 
Below is a chart of the 1-year price of the ETF ITB which shows a steadily decline all year. The declines have accelerated in recent weeks.
 
 
ITB Performance:
Source: YCharts, EPB Macro Research
 
 
The performance relative to the S&P 500 is even more dramatic. The chart on the left is a relative performance spread. As the spread moves lower, ITB is underperforming SPY. As the spread moves higher, ITB is outperforming SPY. We are at the lowest level of relative performance this year for ITB compared to SPY.
The chart on the right shows the difference in 1-year total performance between SPY and ITB.
ITB Relative Performance To S&P 500 (SPY):
 
 
Source: YCharts, EPB Macro Research
 
 
The housing data is being corroborated by the price action in the homebuilder space, specifically through ETF ITB.
 
Summary
 
There is a clear and empirical slowdown in the housing market. Building Permits are contracting and the volume of transactions in the Existing Home Sales market is down.
 
The price of a newly constructed home has rolled off the peak while Existing Home Prices are rising albeit at a decelerating pace.
 
The leading indicators of the housing market suggest this trend will continue which then means there is likely more downside for the homebuilding stocks and more downside for ITB.

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