Paper Economy - A US Real Estate Bubble Blog

Friday, November 30, 2007

Constructing Capitulation: October 2007

Looking back at October’s results (released throughout November) it’s now unequivocally obvious that the nation’s housing markets, having fully transcended the mania that existed primarily in the first half of the decade and now, in its aftermath, after being dramatically and irreparably impaired by the unwinding of the resultant mortgage-credit debacle, are now hurtling headlong into a dramatic new leg down.

While housing demand continues to slow and inventories swell far beyond historic levels, the credit markets that had provided such a plentiful supply of cheap Jumbo mortgages remains non-existent.

Homebuilders have now clearly accepted the severity of the recession and are re-pricing accordingly but, as is typical, the existing home sellers remain behind the curve.

Additionally, there are tentative signs that the commercial real estate market (CRE) is now beginning to feel the effects of the ongoing credit debacle and consumption pullback resulting in a sharp pullback in prices and swelling inventory of vacant space.

Finally, although the second preliminary installment of the Q3 2007 GDP showed strong results, most notably coming from exports, the mainstay consumer and CEO confidence surveys are now clearly showing significant trepidation particularly with respect to future prospects for the strength of the economy.

The Pending Home Sales Report, the most leading existing home sales indicator, again showing truly stark and horrendous continuation of the historic decline to residential housing on a year-over-year basis, both nationally and in every region.

We are now firmly heading down the second slope of the pullback in residential housing demand with the Northeast, Midwest, West and the National regions having now fallen over 30% BELOW the seasonally adjusted home sales activity recorded in 2001, the first year Pending Home Sales were tracked.


The National Association of Realtors (NAR) released their ninth consecutive downward revision to their annual home sales forecast for 2007 putting the current outlook far below the “rose colored” initial predictions from the start of the year.

NAR’s Existing Home Sales Report showing perfectly clearly, that demand for residential real estate, for both single family and condos, has now taken a new and substantial leg down uniformly across the nation’s housing markets likely as a direct result of the momentous and ongoing structural changes in the credit-mortgage markets.

Furthermore, the latest quarterly results for existing home sales shows that, on a year-over-year basis, home sales are now falling in every state except for Vermont and North Dakota (see chart below and click for larger version and note that NH and Idaho don’t report sales data) and even those states sales growth are anemic.



Homebuilder confidence is now sitting AT OR BELOW the worst levels ever seen in the over 20 years the data has been being compiled.

This suggests that the current severe correction has surpassed all other events seen in the last 22 years and is now firmly in uncharted territory.

The Census Department’s New Residential Construction Report firmly indicates a new leg down in the decline for residential construction showing substantial declines on a year-over-year and month-to-month basis to single family permits both nationally and across every region.

The Census Department’s New Residential Home Sales Report for October that again confirmed the hideous falloff in demand for new residential homes both nationally and in every region as well as reporting significant downward revisions to July, August and September’s results.

As with prior months, home sales and median prices are still declining significantly, with the national measure of sales dropping a truly ugly 23.5% and the median selling price declining a whopping 13.02% as compared to October 2006.

The September 2007 results of the S&P/Case-Shiller home price indices continued to show significant weakness for the nation’s housing markets with 13 of the 20 metro areas tracked reporting year-over-year declines and now ALL metro areas showing declines from their respective peaks.

Topping the list of peak decliners are Detroit at -12.77%, Tampa at -11.74%, Miami at -11.13%, San Diego at -10.99%, Phoenix at -9.74%, Las Vegas at -9.08% and Washington DC at -8.92%.



The Office of Federal Housing Enterprise Oversight (OFHEO) released their Q3 2007 home price indices showing continued deceleration of home price appreciation in most regions as well as a broadening of outright declines now including 23 states declining from their respective peaks and 11 states declining on a year-over-year basis.

Topping the list of peak decliners by state is Michigan at -9.22%, California at -8.52%, Nevada at -6.43%, Rhode Island at -5.45%, Massachusetts at -5.14%, Florida at -4.81% and New Hampshire at -2.22%.

Topping the list of year-over-year decliners by state is California at -7.24%, Michigan at -7.07%, Nevada at -6.43%, Florida at -4.56%, Rhode Island at -3.16% and Massachusetts at -3.01%.


The housing weakness still appears to be contributing to a pullback in the retail sales of the most discretionary goods although I will continue to revise the procedures for determining this correlation later this month.

Countrywide Financial (NYSE:CFC) continues to register tremendous borrower stress as delinquencies and foreclosures are continuing to remain at troubling levels with delinquencies climbing 32.96% and foreclosures continuing to soar over 112% since October of 2006.

The latest release of the Reuters/University of Michigan Survey of Consumers showed in unequivocal terms that the US consumer is feeling the burn from declining home values, increased fuel costs and a general uncertainty about the future of the economy.

The Index of Consumer Sentiment fell 17.37% as compared to November 2006 mostly as a result of consumers’ expectations of future economic prospects.

The Index of Consumer Expectations (a component of the Index of Leading Economic Indicators) fell a whopping 20.43% below the result seen in November 2006.

As for the current circumstances, the Current Economic Conditions Index fell 13.68% as compared to the result seen in November 2006.

The Federal Reserve released their monthly read of industrial production showing a decrease of 0.5% from September and a 1.8% increase since October 2006.

More importantly though, production of “final product” consumer durable goods have been showing some recent weakness, with particularly significant declines coming specifically from home appliances, furniture and carpeting.

There has been growing speculation that the commercial real estate (CRE) markets will inevitably follow the lead of the residential markets down to a recessionary correction.

After having some substantial growth between 2003 and Q2 2007 (particularly during 2005 – 2006), there has been a precipitous 2.5% drop in Q3 2007, a drop that MIT/CRE Director David Geltner sees as non-trivial.

"The fall in our index is the first solid, quantitative evidence that the subprime mortgage debacle, which hit the broader capital markets in August, may be spreading to the commercial property markets."


The preliminary GDP report for Q3 2007 showed an increase in the severity of the drag coming from the decline in residential fixed investment, that is, all investment made to construct or improve new and existing residential structures including multi–family units, with the current quarterly fall-off registering a whopping decline of 19.7% since last quarter while shaving 1.03% from overall GDP.

Finally, the Census Department’s Construction Spending report for September again demonstrated the significant extent to which private residential construction spending is contracting.

With the weakening trend continuing, total residential construction spending fell -16.23% as compared to October 2006 and 27.63% from the peak set in February 2006 while private single family construction spending declined by a grotesque -26.41%.





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OFHEO Home Price Index: Q3 2007

Yesterday, the Office of Federal Housing Enterprise Oversight (OFHEO) published their Home Price Index (HPI) data for Q3 2007 showing continued deceleration of home price appreciation in most regions as well as a broadening of outright declines now including 23 states declining from their respective peaks and 11 states declining on a year-over-year basis.

Topping the list of peak decliners by state is Michigan at -9.22%, California at -8.52%, Nevada at -6.43%, Rhode Island at -5.45%, Massachusetts at -5.14%, Florida at -4.81% and New Hampshire at -2.22%.

Topping the list of year-over-year decliners by state is California at -7.24%, Michigan at -7.07%, Nevada at -6.43%, Florida at -4.56%, Rhode Island at -3.16% and Massachusetts at -3.01%.


The OFHEO HPI series is formulated from home purchase and refinance information collected from Fannie Mae and Freddie Mac and as such suffers slightly from some basic limitations of the data.

First, Fannie and Freddie mortgages are subject to conforming loan limits which eliminates huge portions of data that are particularly relevant given the current bloated state of home prices.

A great percentage of home purchases made in the last decade, especially in the bubbliest areas, were made with Jumbo loans that, by their definition, exceed the Fannie-Freddie conforming loan limits and as such are not included in the OFHEO data.

Also, data from mortgages made for the purpose of refinance are also included which may have a tendency to skew the HPI series.

Fortunately, OFHEO now produces “Purchase Only” indices (i.e. HPI indices derived only from home purchase mortgage data only) for all census and states statistical areas.

In general, because the “Purchase Only” indices are based on home price changes from only home purchase transactions, they tend to show a greater degree of deceleration and/or decline than the complete data indices and may be a better indicator of the overall state of each particular housing market.

Although it’s generally recognized that the S&P/Case-Shiller (CSI) home price indices are more accurate than the OFHEO indices, OFHEO offers data for over 400 different census, state and metropolitan statistical areas compared to only 20 major metro areas for the CSI.

I have released a new version of the OFHEO HPI Charting Tool updating the data as well as adding some additional features that make the tool more useful and fixing a few bugs to boot!

The OFHEO HPI Charting Tool allows you to visualize the HPI data as well as compare data from different areas.

Additionally, the tool now fully supports the “Purchase Only” data as well as allowing you to “normalize” the data in order to make a true comparison from one area to another.

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Thursday, November 29, 2007

New Home Sales: October 2007

Today, the U.S. Census Department released its monthly New Residential Home Sales Report for October that continued to confirm the hideous falloff in demand for new residential homes both nationally and in every region as well as again reporting significant downward revisions to July, August and September’s results.

Additionally, today’s report appears to reflect, at least in part, the extent to which the summer “fire sale” activity has had on pricing with a 13.02% decline in the median home sales price.

As with prior months, on a year-over-year basis new home sales are still declining significantly, with the national measure dropping a truly ugly 23.5% below the sales activity seen in October 2006.

It’s important to keep in mind that these declines are coming on the back of the significant declines seen in 2006 further indicating the significance of the housing bust.

The following charts show the extent of sales declines seen since 2006 as well as illustrating the further declines 2007 is showing on top of the 2006 results (click for larger versions)

Note that the last chart essentially combines the year-over-year changes seen in 2005 and 2006 and shows sales trending down precipitously as compared to the peak period.



Look at the following summary of today’s report:

National

  • The median price for a new home was down 13.02% as compared to October 2006.
  • New home sales were down 23.5% as compared to October 2006.
  • The inventory of new homes for sale declined 6.7% as compared to October 2006.
  • The number of months’ supply of the new homes has increased 19.7% as compared to October 2006.
Regional

  • In the Northeast, new home sales were up 43.6% as compared to October 2006.
  • In the West, new home sales were down 37.7% as compared to October 2006.
  • In the South, new home sales were down 25.0% as compared to October 2006.
  • In the Midwest, new home sales were down 11.7% as compared to October 2006.

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GDP Report: Q3 2007 Preliminary

Today, the Bureau of Economic Analysis (BEA) released their second installment of the Q3 2007 GDP report showing an upwardly revised growth rate of 4.9%, buoyed by strength in, among other things, nonresidential structures, outstanding exports of goods, and federal, state and local government spending while continuing to be weighed down by tremendous weakness to fixed residential investment.

Residential fixed investment, that is, all investment made to construct or improve new and existing residential structures including multi–family units, renewed its historic fall-off registering a whopping decline of 19.7% since last quarter while shaving 1.03% from overall GDP.

Housing continues to be, by far, the most substantial single drag on GDP subtracting an amount greater than the contributions made by all personal consumption of durable (cars, furniture, etc.) and non-durable goods (food, clothing, gasoline, fuel oil) during the quarter.

The following chart shows real residential and non-residential fixed investment versus overall GDP since Q1 2003 (click for larger version).

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Wednesday, November 28, 2007

Existing Home Sales Report: October 2007

Today, the National Association of Realtors (NAR) released their Existing Home Sales Report for October again confirming, perfectly clearly, that demand for residential real estate, for both single family and condos, has now taken a new and substantial leg down uniformly across the nation’s housing markets likely as a direct result of the momentous and ongoing structural changes in the credit-mortgage markets.

Terming the latest home sales results as “stable”, NAR senior economist Lawrence Yun steps up his preposterous attempts to persuade readers that, although the changes in the mortgage market have been significant and are having an impact on sales, this is merely a temporary situation.

“As noted last month, temporary mortgage problems were peaking back in August when many of the sales closed in October were being negotiated. We continue to see the biggest impact in high-cost markets that rely on jumbo loans, … Mortgage availability has improved as evidenced by much lower mortgage interest rates and a sharp jump in FHA endorsements for home purchases.”

Additionally, the new NAR president Richard Gaylord initiates his tenure without breaking the beat of his recent predecessors adding that some areas are seeing “strong” price gains.

“Keep in mind that home prices are up in 93 out of 150 metro areas, and there is a lot of confusion in the market from reports about national data. Broadly speaking, home prices in most areas are up modestly or fairly stable, … Areas with population or job growth are seeing the strongest home price gains.”

Today’s report provides, yet again, truly stark and total confirmation that the nation’s housing markets have now taken a new leg down with EVERY region showing significant double digit declines to sales of BOTH single family and condos as well as large increases to inventory and a continued explosion in monthly supply as a result of the collapsing pace of sales.

Keep in mind that these declines are coming “on the back” of last year’s dramatic declines further indicating that the housing markets are truly in the process of a tremendous correction.

Below is a chart consolidating all the year-over-year changes reported by NAR in their October 2007 report.

Particularly notable are the following:

  • Sales are down significantly in EVERY region and for BOTH single family and condo.
  • Prices for single family homes declined for EVERY region.
  • ALL Inventory and Months Supply show significant increases on a year-over-year basis.

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Reading Rates: MBA Application Survey – November 28 2007

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 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 slightly since last week to 6.09% while the purchase volume increased 6.1% and the refinance volume decreased 15.3% compared to last weeks results.

It’s important to note that the data is reported (and charted) weekly and that the rate data represents average interest rates, and the index data represents mortgage loan application volume for home purchases, home refinances and a composite of all loans.

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 January 2007.

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 January 2007 (click for larger versions).



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Tuesday, November 27, 2007

S&P/Case-Shiller: September 2007

Today’s release of the S&P/Case-Shiller home price indices for September continues to reflect significant weakness for the nation’s housing markets with 13 of the 20 metro areas tracked reporting year-over-year declines and now ALL metro areas showing declines from their respective peaks.

Topping the list of peak decliners are Detroit at -12.77%, Tampa at -11.74%, Miami at -11.13%, San Diego at -10.99%, Phoenix at -9.74%, Las Vegas at -9.08% and Washington DC at -8.92%.

Additionally, both of the broad composite indices showed accelerating declines slumping -6.03% for the 10 city national index and -5.28% for the 20 city national index on a peak comparison basis.

Also, it’s important to note that Boston, having been cited as a possible example of price declines abating, has continued its decline dropping -3.18% on a year-over-year basis and a solid -6.42% from the peak set back in September 2005.

As I had noted in prior posts, Boston has a strong degree of seasonality to its price movements and with both the seasonal drop in sales and the recent stunning new decline to sales as a result of the disappearance of Jumbo and Alt-A loans, Boston will likely continue on yet another significant leg down in prices.

To better visualize the results use the PaperEconomy S&P/Case-Shiller/Futures Charting Tool as well as the PaperEconomy Home Value Calculator and be sure to read the Tutorial in order to best understand how best to utilize the tool.

The following chart (click for larger version) shows the percent change to single family home prices given by the Case-Shiller Indices for September 2007 as compared to each metros respective price peak set between 2005 and 2007.

The following chart (click for larger version) shows the percent change to single family home prices given by the Case-Shiller Indices for September 2007 as compared to September 2006.

Additionally, in order to add some historical context to the perspective, I updated my “then and now” CSI charts that compare our current circumstances to the data seen during 90s housing decline.

To create the following annual charts I simply aligned the CSI data from the last month of positive year-over-year gains for both the current decline and the 90s housing bust and plotted the data with side-by-side columns (click for larger version).

What’s most interesting about this particular comparison is that it highlights how young the current housing decline is, having only posted nine consecutive year-over-year (YOY) monthly declines to home prices.

Looking at the actual index values normalized and compared from the respective peaks, you can see that we are only fifteen months into a decline that, last cycle, lasted for roughly fifty four months during the last cycle (click the following chart for larger version).

The “peak” chart compares the percentage change, comparing monthly CSI values to the peak value seen just prior to the first declining month all the way through the downturn and the full recovery of home prices.

In this way, this chart captures ALL months of the downturn from the peak to trough to peak again.

As you can see the last downturn lasted 97 months (over 8 years) peak to peak including roughly 43 months of annual price declines during the heart of the downturn.

Notice that peak declines have been FAR more significant to date and, keeping in mind that our current run-up was many times more magnificent than the 80s-90s run-up, it is not inconceivable that current decline will run deeper and last longer.

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Crashachusetts Existing Home Sales: October 2007

Today, the Massachusetts Association of Realtors (MAR) released their Existing Home Sales Report for October 2007 showing again the utter foolishness of MAR president Doug Azarian’s purported two month long winning streak of increasing home sales earlier this fall.

In fact, MAR now reports that in October, single family home sales plummeted 11.4% as compared to October 2006 with a median price decline of 3.2%.

Not to be deterred from attempting to bamboozle the hapless homebuyer, Azarian continues the spin:

“While sales were down last month, it is important to note that year-to-date residential sales activity is off only 2% from this time last year, … In addition, residential inventory continues to decline from year-ago levels, and mortgage rates have come down in recent months.”

Of course, Azarian forgets to mention that home sales have been falling faster than inventory continuing to leave the current months supply substantially imbalanced toward buyers.

Also, since the Jumbo mortgage market had only vanished from existence in August, the annual sales count is deceptive as it includes roughly 7 months of sales where buyers could still secure non-conforming loans.

As usual, The Warren Group’s latest figures were significantly different than that of MARs showing single family home sales down 17.1% and a median price decline of 6.5% as compared to October of 2006.

With October’s results we have firmly crossed over to the new reality of virtually non-existent (or ridiculously costly and inaccessible… take your pick) Jumbo and No-Doc loans.

We are now clearly seeing the result of the mortgage-credit meltdown with home sales resuming double digit year-over-year declines in both September and October and even more notably, coming on the back of last year’s historic falloff.

As I predicted in past posts, the recent monthly results of the S&P/Case-Shiller index for Boston have shown renewed price declines indicating that as the mortgage-credit crisis unwinds, out area is not immune.

To better illustrate the drop-off in home prices and the potential length and depth of the current housing decline, I have compared BOTH the year-over-year and peak percentage changes to the S&P/Case-Shiller home price index for Boston (BOXR) from the 80s-90s housing bust to today’s bust (ultra-hat tip to the great Massachusetts Housing Blog for the concept).


The “year-over-year” chart compares the percentage change, on a year-over-year basis, to the BOXR from the last positive value through the decline to the first positive value at the end of the decline.

In this way, this chart captures only the months that showed monthly “annual declines” and as we can see, if history is to be a guide, we could be about one third of the way through the annual price declines with the majority of falling prices yet to come.

The “peak” chart compares the percentage change, comparing monthly BOXR values to the peak value seen just prior to the first declining month all the way through the downturn and the full recovery of home prices.

In this way, this chart captures ALL months of the downturn from the peak to trough to peak again.

As you can see the last downturn lasted 105 months (almost 9 years) peak to peak including 34 months of annual price declines during the heart of the downturn.

Notice that peak declines have been more significant to date and, keeping in mind that our current run-up was many times more magnificent than the 80s-90s run-up, it is not inconceivable that current decline will run deeper and last longer.

As in months past, be on the lookout for the inflation adjusted charts produced by BostonBubble.com for an even more accurate "real" view of the current market trend.

October’s Key Statistics:

  • Single family sales declined 11.4% as compared to October 2006
  • Single family median price decreased 3.2% as compared to October 2006
  • Condo sales declined 13.2% as compared to October 2006
  • Condo median price increased 7.3% as compared to October 2006
  • The number of months supply of single family homes stands at 11.8 months.
  • The number of months supply of condos stands at 12.3 months.
  • The average “days on market” for single family homes stands at 135 days.
  • The average “days on market” for condos stands at 133 days.

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