Reading Rates: MBA Application Survey – May 21 2008

The Mortgage Bankers Association (MBA) publishes the results of a weekly applications survey that covers roughly 50 percent of all residential mortgage originations and tracks the average interest rate for 30 year and 15 year fixed rate mortgages, 1 year ARMs as well as application volume for both purchase and refinance applications.

The purchase application index has been highlighted as a particularly important data series as it very broadly captures the demand side of residential real estate for both new and existing home purchases.

The latest data is showing that the average rate for a 30 year fixed rate mortgage increased 8 basis points since last week to 5.90% while the purchase application volume decreased by 6.9% and the refinance application volume decreased 8.7% compared to last week’s results.

It’s important to note that the average interest rate on an 80% LTV 30 year fixed rate loan has dipped just below the range seen throughout 2007 while the interest rate for an 80% LTV 1 year ARM remains elevated now resting 81 basis points ABOVE the rate of an average 80% LTV 30 year fixed rate loan despite all the herculean efforts by the Federal Reserve to bring rates down.

Also note that all application volume values reflect only “initial” applications NOT approved applications… i.e. originations… actual originations would likely be notably lower than the applications.

The following chart shows how the principle and interest cost and estimated annual income required to cover the PITI (using the 29% “rule of thumb”) on a $400,000 loan has changed since November 2006.

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages over the last number of weeks (click for larger version).


The following charts show the Purchase Index, Refinance Index and Market Composite Index since November 2006 (click for larger versions).

The Almost Daily 2¢ - Moral Haphazard

If you Google around the web, especially the Federal Reserve’s site, you can find endless definitions and references as well as debate and discussion related to the term “moral hazard”.

One definition caught my eye which seems to precisely sum up the process that has taken place on Wall Street in the wake of the Bear Stearns collapse … although I’m taking it out of context just slightly.

As Donald Kohn, Vice Chairman of the Federal Reserve, put it in his February 2007 speech entitled “Financial Stability: Preventing and Managing Crisis” moral hazard:

“refers to the heightened incentive to take risk that can be created by an insurance system. “

In light of recent events, what better “insurance system” is there but the Federal Reserve itself?

The Bear Stearns bailout succeeded in calming the markets not because any of the fundamental precursors to its collapse had been addressed but merely because Bernanke’s Fed put its balance sheet up as a backstop for all the junk securities whose collapsing value instigated the panic.

But what really has changed since the Bear Stearns bailout?

The Fed funds rate is a bit lower and inflation, especially in fuel and commodities, seems to have become “unanchored” but more importantly the housing crisis is showing itself to be incredibly severe.

In some markets, home price declines seen in just the last year are comparable or even far exceed similar past declines seen over periods of five or more years.

But the current housing decline is still in full gear.

Home prices are continuing to slide, foreclosures are growing dramatically, rates of “walking away” and even arson are on the rise.

Lastly, it appears that nearly every macroeconomic indicator is showing the typical patterns of weakness indicating recession is either upon us or very near with the most notable data tracking non-farm payrolls, industrial production and retail sales (especially inflation adjusted) all clearly presenting a bleak outlook for the future.

Bernanke’s insurance policy has done more than to simply set up a potential “moral hazard” for the financial industry, it HAS created a PRESENT moral hazard for Wall Street investors, large and small alike, who firmly believe that the Fed will stop at nothing to prevent a calamitous decline and that the Bear Stearns bailout marked the bottom of the current turmoil.

As the housing crisis continues and the recession worsens though, home price declines and increasing unemployment will usher in a whole new class of disruptions with defaults eroding its way up the chain to the prime mortgaged “homeowner” and only then would it be appropriate to attempt to discover the bottom.

Commercial Calamity? S&P/GRA Commercial Real Estate Index January 2008

Like the MIT/CRE Property Index, Standard & Poor’s also tracks commercial real estate (CRE) prices for various commercial property types.

Although recent results have revealed some slowing across all classes of commercial real estate, January’s results again show a continuation of price growth.

All components experienced growth both on a year-over-year basis with all but the “office” component gaining as compared to the prior monthly result.

The charts below show the National index and the component indices since 1994 (click for larger).

This report will be particularly important to monitor over the next few months as continued growth and stability would surely quell much concern over potential spillover effects of the recession and credit crunch on to commercial real estate.

Follow The Leader: Index of Leading Economic Indicators April 2008

Today’s results of the Conference Board’s Index of Leading Economic Indicators continues to indicate troubled times ahead increasing 0.1% from March but declining 1.83% compared to April 2007, leaving the index at 102.

It’s important to note that a year-over-year decline greater than 1.5% has ONLY preceded EVERY recession that has occurred in the last 59 years so the six significant consecutive year-over-year declines strongly suggests that overall the components of the index are indicating that recession is either here or very near.

Note that with today’s release The Conference Board has incorporated its annual benchmark revision to the complete series.

Economic Jolt: Job Openings and Labor Turnover March 2008

Yesterday the Bureau of Labor Statistics released their latest monthly read of job availability and turnover (JOLT) showing that, on a year-over-year basis, private non-farm job “openings” declined 11.86%, job “hires” declined 6.29%, and “separations” declined 4.82% led by a 10.81% drop in “quits”.

Job “openings” (click chart below for larger version), the reports most leading “demand side” indicator, has now declined on a year-over-year basis for five consecutive months strongly suggesting that the private sector is planning to curtail future hiring activity.

Sliding down that slope of the Beveridge curve, the decline in the job vacancy rate is clearly corresponding with an equal but inverse movement up in the general unemployment rate as can be plainly seen in the following chart (click chart for larger version).

Job “hiring” activity (click chart for larger version) has also been declining significantly with December’s results posting the eighth straight decline on a year-over-year basis further confirming the recent weakness seen in the job market.

Job “separations”, whereby workers and their employers go their separate ways by one means or another (layoffs, retirement, termination, quitting, etc.), are also declining primarily due to the inclusion of “quitting” activity.

It’s important to understand that job “quits” are included as a component of the “separations” data series as “quitting” is a valid means of workers “separating” from employers but their inclusion tends to create an overall procyclical trend in what would otherwise be logically thought of as a countercyclical process (i.e. downturn leads to increase in separations not decrease).

As the economy slides into recession and the employment situation worsens workers tend to reduce quitting activity presumably for fear that they could risk a long bout of unemployment and the latest results (click chart for larger version) confirm this with the sharpest decline on a year-over-year basis seen since August of 2003.

Homebuilder Blues: NAHB/Wells Fargo Home Builder Ratings May 2008

Yesterday, the National Association of Home Builders (NAHB) released their Housing Market Index (HMI) showing continued evidence that the new home market is experiencing a prolonged bout of depression.

The release came along with a continued plea for a government bailout of the housing debacle from Chief Economist David Seiders who now suggests that without such measures, the economic growth could be impacted.

“The latest HMI shows that even fewer builders now foresee market conditions improving over the next six months compared with our April survey, and builder ratings of buyer traffic through model homes also have dropped off over the past month on a seasonally adjusted basis. This certainly adds fuel to the argument that targeted policy stimulus, in the form of a temporary tax credit for home buyers, is essential to halt the housing downswing and remove the heavy drag being exerted by housing on overall economic growth.”

It’s important to understand that sales for the new home market generally peak in the February-April timeframe and that this year’s results have been generally disappointing as noted by Sandy Dunn, current president of the NAHB “With the traditional home buying season now well underway, we have not seen the bump in sales activity that we normally would this time of year,”

Each component of the NAHB housing market index is now sitting at or near the worst levels ever seen in the over 20 years the data has been being compiled strongly suggesting that the current severe contraction has surpassed all other events seen in the last 22 years and is now firmly in uncharted territory.

Confidence Game: Consumer, CEO and Investor Confidence May 2008 (Early)

This post combines the latest results of the Rueters/University of Michigan Survey of Consumers, the Conference Board’s Index of CEO Confidence and the State Street Global Markets Index of Investor Confidence indicators into a combined presentation that will run twice monthly as preliminary data is firmed.

These three indicators should disclose a clear picture of the overall sense of confidence (or lack thereof) on the part of consumers, businesses and investors as the current recessionary period develops.

Today’s early release of the Reuters/University of Michigan Survey of Consumers for April confirmed another startling plunge in consumer sentiment to a reading of 59.5, a decline of 32.62% compared to May 2007.

It’s important to note that this is the lowest consumer sentiment reading seen since the recessionary period of June 1980 which, according to many metrics most notably employment, was the most severe recession seen in the U.S. since the Great Depression.

The Index of Consumer Expectations (a component of the Index of Leading Economic Indicators) fell to 51.7, the lowest reading since October 1990’s recessionary environment, 33.38% below the result seen in May 2007.

As for the current circumstances, the Current Economic Conditions Index fell to 71.7, 31.78% below the result seen in April 2007.

As you can see from the chart below (click for larger), the consumer sentiment data is a pretty good indicator of recessions leaving the recent declines possibly predicting rough times ahead.

The latest quarterly results (Q1 2008) of The Conference Board’s CEO Confidence Index fell to a value of 38 the lowest readings since the recessionary period of the dot-com bust.

It’s important to note that the current value has fallen to a level that would be completely consistent with economic contraction suggesting the economy is either in recession or very near.

The April release of the State Street Global Markets Index of Investor Confidence indicated that confidence for North American institutional investors decreased 4.9% since February while European and Asian investor confidence both declined all resulting in a drop of 4.4% to the aggregate Global Investor Confidence Index.

Given that that the confidence indices purport to “measure investor confidence on a quantitative basis by analyzing the actual buying and selling patterns of institutional investors”, it’s interesting to consider the performance surrounding the 2001 recession and reflect on the performance seen more recently.

During the dot-com unwinding it appears that institutional investor confidence was largely unaffected even as the major market indices eroded substantially (DJI -37.9%, S&P 500 -48.2%, Nasdaq -78%).

But today, in the face of the tremendous headwinds coming from the housing decline and the mortgage-credit debacle, it appears that institutional investors are less stalwart.

Since August 2007, investor confidence has declined significantly led primarily by a material drop-off in the confidence of investors in North America.

The charts below (click for larger versions) show the Global Investor Confidence aggregate index since 1999 as well as the component North America, Europe and Asia indices since 2007.

New Residential Construction Report: April 2008

Today’s New Residential Construction Report continues to firmly demonstrate the intensity of the total washout conditions that now exist in the nation’s housing markets and particularly for new residential construction showing tremendous declines on both a peak and year-over-year basis to single family permits both nationally and across every region.

Single family housing permits, the most leading of indicators, again suggests extensive weakness in future construction activity dropping 40.07% nationally as compared to April 2007.

Moreover, every region showed significant double digit declines to permits with the West declining 50.19%, the Midwest declining 34.13%, the South declining 38.24%, and the Northeast declining 32.58%.

Keep in mind that these declines are coming on the back of last year’s record declines.

To illustrate the extent to which permits and starts have declined, I have created the following charts (click for larger versions) that show the percentage changes of the current values on a year-over-year basis as well as compared to the peak year of 2004.

Declines to single family permits have contracted measurably in terms of monthly YOY declines, and the fact that we are now seeing declines of roughly 40%-50% on the back of 2006 and 2007 declines should provide a an unequivocal indication that the housing markets are by no means stabilizing.





Here are the statistics outlined in today’s report:

Housing Permits

Nationally

• Single family housing permits down 40.07% as compared to April 2007.

Regionally

• For the Northeast, single family housing down 32.58% as compared to April 2007.
• For the Midwest, single family housing permits down 34.13% as compared to April 2007.
• For the South, single family housing permits down 38.24% compared to April 2007.
• For the West, single family housing permits down 50.18% as compared to April 2007.

Housing Starts

Nationally

• Single family housing starts down 42.23% as compared to April 2007.

Regionally

• For the Northeast, single family housing starts down 38.46% as compared to April 2007.
• For the Midwest, single family housing starts down 40.11% as compared to April 2007.
• For the South, single family housing starts down 42.94% as compared to April 2007.
• For the West, single family housing starts down 43.33% as compared to April 2007.

Housing Completions

Nationally

• Single family housing completions down 37.63% as compared to April 2007.

Regionally

• For the Northeast, single family housing completions increased 1.26% as compared to April 2007.
• For the Midwest, single family housing completions down 37.5% as compared to April 2007.
• For the South, single family housing completions down 39.26% as compared to April 2007.
• For the West, single family housing completions down 44.22% as compared to April 2007.

Keep in mind that this particular report does NOT factor in the cancellations that have been widely reported to be occurring in new construction.

Philadelphia Feeling: Federal Reserve Bank of Philadelphia Business Outlook Survey May 2008

Yesterday, the Federal Reserve Bank of Philadelphia released the results of their Business Outlook Survey for May showing continued weakness to the regions manufacturing sector with the current activity index indicating contraction at –15.6, the sixth consecutive negative monthly result.

The survey of the Philadelphia regions manufacturing sector has been a pretty solid leading indicator of the overall strength or weakness and recession experienced by general economy.

As you can see by the following chart (click for larger version), during the past three post-recession expansion periods, the “current” diffusion index (more on diffusion indices later) generally vacillated between 0 and 35 while the “future” index left the period of contraction at an elevated level and eventually joining the “current” index.

Finally, as the economy pushes closer to contraction, both indices decline dramatically with a breach of -20 by the “current” index generally indicating that recession is upon us.


As you can see from last month’s results, -20 has been breached by the “current” index which now stands at -15.60 while the “future” index stands at 28.2.

Clearly, there is trouble afoot but components of the latest results also display a potential dangerous parallel to the stagflationary eras of the 70s and early 80s.

The following chart shows the latest results of the “current new orders” “current prices paid” and “future employment” components (click for larger versions).

Notice that while current orders and future employment declined, current prices paid have increased indicating a potential return to a stagflationary environment that hasn’t been seen since the early 80s.

It’s important to note that these three indicators have moved, more or less, together since the expansion of 1983 and have especially moved together during the recessionary periods of 1990 and 2001.

Now though, it appears that we may be seeing a divergence with an increase in prices paid and simultaneous decrease in growth.

The following chart (click for larger) shows these measures during the last stagflationary era seen between 1976 – 1980. Notice the clear divergence of rising prices and falling growth.

Production Pullback: Industrial Production April 2008

Yesterday, the Federal Reserve released their monthly read of industrial production showing continued declines across many industries, particularly for those related to consumer spending, construction and business vehicles, resulting in a decline of 0.7% to total aggregate production.

“Final product” consumer durable goods continue to show accelerating weakness falling 9.53% as an aggregate on a year-over-year basis, with particularly significant declines coming specifically from home appliances, furniture and carpeting which declined for the twenty first consecutive month by 11.05% on a year-over-year basis.

Construction supply production has been showing the most severe contraction to wood products seen in at least the last 20 years.

Although automotive production has been showing weakness since the middle of 2004, business vehicle production is now showing a stark contraction.

The following charts (click for larger) show the overall consumer durable component along with the Home Appliances, Furniture and Carpeting sub-component on both a time series and year-over-year basis, construction supply production with the wood products sub-component, and general and business related vehicle production all overlaid with the last two recessions for comparisons purposes.

Mid-Cycle Meltdown?: Jobless Claims May 15 2008

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims increased 6,000 to 371,000 from last week’s unrevised 365,000 claims and “continued” claims increased 28,000 resulting in an “insured” unemployment rate of 2.3%.

It’s very important to understand that today’s report continues to reflect employment weakness that is wholly consistent with past recessionary episodes and that unequivocal clarity will more than likely come in the next few releases.

Historically, unemployment claims both “initial” and “continued” (ongoing claims) are a good leading indicator of the unemployment rate and inevitably the overall state of the economy.

The following chart (click for larger version) shows “initial” and “continued” claims, averaged monthly, overlaid with U.S. recessions since 1967 and from 2000.

As you can see, acceleration to claims generally precedes recessions.


Also, acceleration and deceleration of unemployment claims has generally preceded comparable movements to the unemployment rate by 3 – 8 months (click for larger version).


In the above charts you can see, especially for the last three post-recession periods, that there has generally been a steep decline in unemployment claims and the unemployment rate followed by a “flattening” period of employment and subsequently followed by even further declines to unemployment as growth accelerated.

This flattening period demarks the “mid-cycle slowdown” where for various reasons growth has generally slowed but then resumed with even stronger growth.

So, looking at the post-“doc com” recession period we can see the telltale signs of a potential “mid-cycle” slowdown and if we were to simply reflect on the history of employment as an indicator of the health and potential outlook for the wider economy, it would not be irrational to conclude that times may be brighter in the very near future.

But, adding a little more data I think shows that we may in fact be experiencing a period of economic growth unlike the past several post-recession periods.

Look at the following chart (click for larger version) showing “initial” and “continued” unemployment claims, the ratio of non-farm payrolls to non-institutional population and single family building permits since 1967.

One notable feature of the post-“dot com” recession era that is, unlike other recent post-recession eras, job growth has been very weak, not succeeding to reach trend growth as had minimally accomplished in the past.

Another feature is that housing was apparently buffeted by the response to the last recession, preventing it from fully correcting thus postponing the full and far more severe downturn to today.

I think there is enough evidence to suggest that our potential “mid-cycle” slowdown, having been traded for a less severe downturn in the aftermath of the “dot-com” recession, may now be turning into a mid-cycle meltdown.

The Almost Daily 2¢ - Boom (And Bust) From The Past

Again, some things never seem to change.

Here’s excerpt from the article that appeared in the July 1933 edition of Harper’s entitled “Gentlemen, The Corn Belt!” as reprinted in the book “The Great Depression” by David A. Shannon:

"The boom period (for Midwest farmland during the period between the end of WWI and the crash of 1929) of the last years of the World War and the extreme inflationary period of 1919 and 1920 were like the Mississippi Bubble and the Tulip Craze in Holland in their effect on the general public. Farm prices shot sky high almost overnight. The town barber and the small-town merchant bought and sold options until every town square was a real estate exchange. Bankers and lawyers, doctors and ministers left their offices and clients and drove pell mell over the country to procure options and contracts upon this farm and that, paying a few hundred dollars down and expecting to sell the rights before the following March brought settlement day.

Not to be in the game marked one as an old fogy, while paper profits were pyramided and Cadillac cars and pleasure trips to the cities took the place of Fords and Sunday afternoon picnics. Everyone then maintained that there was only a little land as fertile as the fields of Iowa, Illinois and Minnesota, and everyone sought to get his part before it was all gone. Like gold, it was limited in extent and of great potential value.

Prices skyrocketed from $100 to $250 and $400 per acre without regard of the producing power of the land.

During this period, insurance companies were bidding against one another for the privilege of making loans on Iowa farms at $90 or $100 of $150 per acre. Prices of products were soaring. Everyone was on the high road, not only to comfort, but to wealth and luxury.

Second, third and fourth mortgages were considered just as good as government bonds.

Money was easy, and every bank was ready and anxious to loan money to any Tom, Dick or Harry on the possibility that he would make enough in these trades to repay the loans almost before the day was over.

Every country bank and every county-seat town was a replica in miniature of a brisk day on the board of trade.

… but, alas, from then on a painful awakening from this financial carousal brought long continuing headaches to the investors, the holders of the second mortgages, and the bankers that had financed these endeavors.

… during the year of the great debacle of 1929 the flood of foreclosure actions did not reach any great peak, but in the years 1931 and 1932 the tidal wave was upon us. Insurance companies and large investors had not yet realized (and in some instances do not yet realize) that, with the low price of farm commodities and the gradual exhaustion of savings and reserves, the formally safe and sane investments in farm mortgages could not be worked out, taxes and interest could not be paid, and liquidation could not be made.

With an utter disregard of the possibilities of payment or refinancing, the large loan companies plunged ahead to make the Iowa farmer pay his loans in full or turn over the real estate to the mortgage holder. Deficiency judgments were the clubs they used to make the honest but indignant farm owners yield immediate possession of the farms.

… The conservative investments in real estate which we Middle Westerners have for years considered the best possible have become not only not an asset, but a liability, with the possibility of deficiency judgments, the bane of mortgage debtors, staring us in the face.
Not only have the luxuries and comforts of life been taken away from us, but the necessaries are not secure."

Realtor’s New Reality: Existing Home Sales Q1 2008

Yesterday, the National Association of Realtors (NAR) released their existing home sales report for the first quarter of 2008 showing, in truly stark terms, the tremendously broad nature of the housing downturn.

Single family home sales, on a year-over-year basis, are now falling in every state except for Indiana, Alaska and New Jersey (see chart below and click for larger version and note that NH doesn’t report sales data).

Worse yet, Q1 2008 home sales on an annualized basis compared to peak home sales set between 2005 and 2007 showed significant declining home sales in virtually every state (see chart below and click for larger version) except for Alaska and Indiana.

As for median selling prices, the NAR’s data (see chart below) also shows truly tremendous and widespread weakness among the statistical regions they track with virtually EVERY (147 of the 157 NAR tracks … some of the remaining 10 declined but didn’t report enough data for prior years to be included in a peak comparison) metro region showing significant declines from their respective peaks set between 2005 and 2007 and MOST (99 of the 147) metro regions showing declines as compared to Q1 2007.


Given that the majority of price declines have just begun to show in 2007, look for this price chart to continue to deteriorate in coming quarters.

Also, keep in mind that the NAR data only includes sales for MLS listed properties and given this limitation, the S&P/Case-Shiller index for each respective major metro should be considered a far more accurate price reference.

Amazingly, even given the obvious completeness of the housing downturn shown by their own data, the NAR officials are terming the results “Unusual” with their president, Richard Gaylord, blatantly continues the Realtor tradition of shameless self interested spin.

“It’s more important than ever to examine what’s happening with home prices at the city and neighborhood level, … The old real estate mantra of ‘location, location, location’ is perhaps more relevant today than ever before. Consumers should check with REALTORS® for local expertise on what’s going on in their own area because conditions can vary considerably from one neighborhood to the next.”

Reading Rates: MBA Application Survey – May 14 2008

The Mortgage Bankers Association (MBA) publishes the results of a weekly applications survey that covers roughly 50 percent of all residential mortgage originations and tracks the average interest rate for 30 year and 15 year fixed rate mortgages, 1 year ARMs as well as application volume for both purchase and refinance applications.

The purchase application index has been highlighted as a particularly important data series as it very broadly captures the demand side of residential real estate for both new and existing home purchases.

The latest data is showing that the average rate for a 30 year fixed rate mortgage decreased 9 basis points since last week to 5.82% while the purchase application volume decreased by 0.7% and the refinance application volume increased 6.5% compared to last week’s results.

It’s important to note that the average interest rate on an 80% LTV 30 year fixed rate loan has dipped just below the range seen throughout 2007 while the interest rate for an 80% LTV 1 year ARM remains elevated now resting 78 basis points ABOVE the rate of an average 80% LTV 30 year fixed rate loan despite all the herculean efforts by the Federal Reserve to bring rates down.

Also note that all application volume values reflect only “initial” applications NOT approved applications… i.e. originations… actual originations would likely be notably lower than the applications.

The following chart shows how the principle and interest cost and estimated annual income required to cover the PITI (using the 29% “rule of thumb”) on a $400,000 loan has changed since November 2006.

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages over the last number of weeks (click for larger version).


The following charts show the Purchase Index, Refinance Index and Market Composite Index since November 2006 (click for larger versions).

Conspicuous Correlation: Retail Sales April 2008

Today, the U.S. Census Bureau released its latest nominal read on retail sales showing a decline of 0.2% from March 2008 but was 2.0% above April 2007 on an aggregate of all items including food, fuel and healthcare services.

Discretionary retail sales including home furnishings, home garden and building materials, consumer electronics and department store sales, on the other hand, experienced another significant decline falling 1.26% compared to April 2007.

Further, adjusted for inflation, discretionary retail sales declined 4.76% since April 2007.

On a “nominal” basis, there appeared to be “rough correlation” between strong home value appreciation and strong retail spending preceding the housing bust and an even stronger correlation when home values started to decline.

The following charts show the initial analysis plotting the year-over-year change to an aggregate series consisting of the primary discretionary retail sales categories that I termed the “discretionary” retail sales series and the year-over-year change to the S&P/Case-Shiller Composite home price index since 1993 and since 2000.


As you can see there was, at the very least, a coincidental change to home values and consumer spending during the boom and then the bust, but as home values have continued to decline, retail spending has remained low but has not continued to consistently contract.

One problem with this initial analysis is that both retail sales and the S&P/Case-Shiller Composite index are reported in “nominal” (i.e. non-inflation adjusted) terms and thus result in a somewhat skewed view especially for the retail sales data.

In fact, the year-over-year change to “nominal” discretionary retail sales has been positive for seven of the last eight months while the year-over-year change to “real” discretionary retail sales has been negative for twelve straight months (see the following chart).

The key point here is that although inflation (as reported by the CPI) has been relatively stable in recent years it is always a factor and in light of the latest surprise increases to the CPI results as well as many anecdotal reports of producers now passing through increasing energy prices to the consumer, it’s important to adjust retail sales (and home values) in order to fully understand its direction.


As you can see from the above charts (click for larger version), adjusted for inflation (CPI for retail sales, CPI less shelter for S&P/Case-Shiller Composite) the “rough correlation” between the year-over-year change to the “discretionary” retail sales series and the year-over-year S&P/Case-Shiller Composite series seems now even more significant.