Lawler: Early Read on Existing Home Sales in November

Update on the “Neutral” Interest Rate

From housing economist Tom Lawler:

Based on publicly-available local realtor/MLS reports released across the country through today, I project that existing home sales as estimated by the National Association of Realtors ran at a seasonally adjusted annual rate of 4.09 million in November, up 3.3% from October’s preliminary pace and up 4.6% from last November’s seasonally adjusted pace. Unadjusted sales should show a moderately lower YOY % gain, reflecting this November’s lower business day count compared to last November’s.

Local realtor/MLS reports suggest that the median existing single-family home sales price last month was up by about 5.3% from a year earlier.

CR Note: The NAR is scheduled to release November Existing Home sales on Thursday, December 19th at 10:00 AM. The consensus is for 3.97 million SAAR, up from 3.96 million in October. Take the over! Last year, the NAR reported sales in November 2023 at 3.91 million SAAR. This will be the second year-over-year gain since July 2021 (last month was the first).

Update on the “Neutral” Interest Rate

Also from Lawler:

Almost certainly one of the main discussion points at this week’s FOMC meeting will be the various meeting participants’ assessment of the so-called “neutral” interest rate, and the extent to which monetary policy is restrictive, especially if, as expected, the FOMC decides to cut its target fed funds rate range by 25 bp. Since the September FOMC meeting (the last meeting where the FOMC released its Summary of Economic Projections, or SEP), economic growth has been significantly higher, the unemployment rate has been somewhat lower, and inflation has been somewhat higher than meeting participant’s median projections for 2024. Presumably these developments have led several, though probably not all, meeting participants to increase their estimate of the so-called neutral interest rate.

For members or other folks looking for “model” and “market-based” estimates of the neutral rate, however, the “results” are conflicting (though with the exception of market based estimates are lagged). Below is a table showing the latest estimates of the neutral interest rate from (1) the two models available from the Federal Reserve Bank of New York (Laubach-Williams (LW) and Holston-Laubach-Williams (HLW)); (2) the Lubik-Matthes (LM) model (available from the Federal Reserve Bank of Richmond); and the 5-year forward Treasury Inflation Protected Security (TIPS) yield five-years out (TIPS5Y5Y).

As this table shows, the HLW and LW models suggest that last quarter the neutral interest rate was down significantly from the end of 2022 and relatively low; the LM model suggests the neutral rate has been relatively flat and relatively high since the end of 2022, and the market-based TIPS estimate has been trending slightly higher since the end of 2022 and is currently close to 2%.

The HLW and LW models are based on a relatively simplistic Keynesian structural model and include what some might call “quick and dirty” adjustments for the impact of Covid-19 on the economy. The HLW models allows for time-varying volatility, while the LW model includes a few variable not included in the HLW model. It is not clear which of the two is “better” than the other.

The LM model, in contrast, does not impose any structural model restrictions, but instead is based on time-varying parameter vector autoregressions (TVP-VARS).

While the HLW (and to a lesser extent the LW) models probably gets the most attention, their results are (at least to some) “problematic” at times. For example, in the HLW model the contribution of “other factors” to the estimate of the neutral interest rate declined by a massive 73 basis points from the end of 2022 to the third quarter of 2024, more than offsetting the increase in the model’s estimate of “trend” growth. These “other factors” are not specified as variables in the models, but instead “fall out” from the model/econometric technique employed. I personally can’t see what “other factors” could have produced such a massive decline in the neutral rate, and these results may reflect the misspecification of the HLW model as well as the incorrect application of a particular econometric technique. (See Buncic, “Econometric Issues in the Estimation of the Natural Rate of Interest.”)