The housing market is alive and well

30-yr fixed-rate mortgage rates are back down to record-low levels: a bit less than 3.4%, according to the nationwide average calculated by the Mortgage Bankers Association (see Chart #1). And they could fall further, given that the spread between current yields and the 10-yr Treasury yield are are exceptionally wide. If past norms were to return, 30-yr fixed rate mortgages could be trading at 2.4-2.7% (see Chart #2, which shows mortgage rates and 10-yr yields on the top portion, and the spread between the two on the bottom portion).

Chart #1

Chart #2

After a sharp drop in sales in March and early April, applications for new home mortgages have surged to levels last seen almost 12 years ago (see Chart #3). The housing market is responding to incentives in a healthy fashion. The economy is still weak, but home prices needn't fall much if at all, thanks to the positive impact of low and falling mortgage rates, and given the reasonable expectation that the economy will eventually return to normal.

Chart #3

As further evidence of the housing market's resilience, the Bloomberg index of home builders' stocks is now up year-to-date, though still about 14% below its February high (see Chart #4).

Chart #4

TSA throughput is surging

The most timely indicator of just how fast the US economy is recovering has to be the TSA throughput statistics, which are released every day with only a 1-day lag. As Chart #1 shows, Americans are rapidly returning to the skies. Passenger traffic at US airports, as we can infer from these numbers, has doubled since May 16, and has quadrupled since the April 17th low. Traffic is still very low compared to last year at this time, but nevertheless things are improving rapidly.

Chart #1

Chart #2 contains data as of last week, so it's not quite as timely as the TSA data. But it paints a similar picture: people are rapidly getting back on the road.

Chart #2

UPDATE (June 18th): Here is a new and updated version of Chart #1:

I've added earlier data and I've used a log scale for the y-axis to better appreciate the rate at which things are improving. TSA is processing almost 5 times as many people today as it did at the lows of April. But there is still a long way to go to return to last year's levels. 

How bad is the national debt?

Yesterday Treasury released budget stats for the month of May '20, and they were, as expected, godawful. A simple virus, potentiated by aggressive shutdown mandates, has caused government spending to explode and revenues to crater. Measured on a rolling 12-month basis, the federal deficit in the past two months has more than doubled, reaching the obscene level of $2.126 trillion, and it will be higher still when the June numbers are tallied. Our national debt now stands at $20.1 trillion (the correct measure being the portion that's owed to the public). As a percent of GDP, our national debt is about as high as it was during the height of World War II—about 110%, and that's as high as it's ever been in recorded history. 

The raw numbers are frightening, to be sure. But we are not doomed yet. The charts tell the story:

Chart #1

Chart #1 shows the 12-month moving average of federal spending and revenues. The past two months show a very sharp—but not unprecedented in size—deterioration in each from their long-term trends.

Chart #2

 Chart #1 shows total revenues and its major components. By far the biggest contributor to a revenue shortfall has come from a reduction in individual income tax receipts. Payroll tax receipts are quite likely to deteriorate in the current month.

Chart #3

Chart #3 shows federal revenues by month for the current and two previous years. The shortfall in April revenues was gigantic.

Chart #4 

Chart #4 shows the federal deficit as a percent of GDP, with the nominal value of the deficit (green) highlighted in green. I've calculated the value for Q2/20, but my estimate of actual number, which won't be available for over a month, is only very approximate. I'm assuming GDP in the second quarter declines at a 40% annualized rate. But it's highly likely that this quarter's numbers will be the worst in history, as the chart suggests.

Chart #5

Chart #5 shows federal debt held by the public (the correct measure excludes debt owed to the social security system). Looked at using a log scale for the y-axis over a long period, the growth of debt does not look all that unusual.

Chart #6

The huge jump in federal debt relative to GDP (Chart #6) is due not only to the big increase in debt outstanding, but also to the unprecedented decline in nominal GDP in the current quarter. We are revisiting the huge debt levels registered near the end of World War II. We survived that episode of massive indebtedness thanks to a slowdown in spending and a surge in economic growth. We could see a repeat of that performance in the months and years to come.

Chart #7

Chart # shows the true measure of the burden of our federal debt: interest payments on the debt as a % of GDP. It should come as a shock to most people: how can the burden of debt be so low when the actual debt is at record levels relative to GDP? Answer: it's because interest rates on the debt are at historically low levels. If interest rates remain low for the next two years, as the Fed recently predicted, and the economy recovers and federal spending is reined in, it should be easy to avert disaster.

The burden of federal debt is calculated the same way you would measure a household's debt burden: by dividing annual debt service payments by annual income. Overall, and as a nation, we are currently spending about 3% of our annual income on our national debt. In the great scheme of things, that is a drop in the bucket—rare is the household with such a low debt burden!