Paper Economy - A US Real Estate Bubble Blog

Wednesday, December 31, 2008

The Arlington Artifice: November 2008

This recurring monthly post tracks the latest results of the housing market seen in Arlington Massachusetts.

I choose Arlington as a result of the Boston Globe’s recently published and absurdly anecdotal and ludicrous farce about the town’s “hot” housing market.

The ridiculous tone and outright mishandling of the housing data by the Boston Globe “reporter” would almost be comical if it weren’t for the fact that the Globe’s editor, Martin Baron, ALSO blundered seriously when he responded to my email about the discrepancies.

Baron attempted to justify the articles contents and in so doing, he disclosed his disgracefully poor and obviously unsophisticated abilities with even the most basic economic data.
The November results again confirm that Arlington is by no means a “stand out” amongst its neighboring towns as Baron suggested in his email and, in fact, is following along on a path wholly consistent with the trend seen in the county, state, region and nation.

Why would an editor of a nationally recognized newspaper think that a single town would continue to function as an isolated bubble amongst a backdrop of the most significant nationwide housing recession since the Great Depression?

As I have shown in my prior posts, this data when charted and compared to other towns in the region proves there are absolutely no grounds to call Arlington’s market exceptional.

The most notable feature of the recent results is unquestionably the low number of home sales with only 231 sales for the entire year to date, the lowest readings since the recessionary period of 1990.

Another important point to remember is that when sales decline dramatically the median selling price can jump wildly up or down since the small number of sales provides a small set with which to determine the “middle” selling price.

The following chart (click for much larger version) shows a history of Arlington’s November median sales price since 1988 along with the annual outcome.

Regular readers will notice that the “year-to-date” median selling price, a more accurate median indicator, has declined significantly from where it stood earlier in the year as the number of home sales have slowly accumulated and now stands at $475,000.

My expectation, now that we are in the weakest season for home sales, is for the median selling price to slide well below $470,000 by the end of the year.

The next chart (click for much larger version) shows that annual home sales in Arlington have fluctuated in a range between 233 and 381 over the last 21 years with the peak selling year being 1998.

This is not such a surprising result for those that have observed Arlington’s real estate market over the last two decades.

Arlington experienced tremendous growth during the 90s internet boom as young families sought its desirable location and outstanding (presumed…) school system.

Now though, it looks as though Arlington is, more or less, a perfect representation of a town struggling with our secular bear market economy.

Its housing market has essentially been eroding since the peak of the internet economy and not even the unusual conditions of the housing bubble could bring back the outstanding growth experienced during that era.

In recent years, Arlington has found itself falling behind with state cutbacks and lower property tax revenues leading to public funding stress and particularly the postponement of the much needed renovation of two dilapidated schools.

Further, the MCAS scores (a much followed measure of academic achievement of lack thereof) of some of the towns elementary schools have been in decline for multiple years with at least one Arlington school being designated for the development of a “year 1 improvement plan” by the state department of education.

With the economy headed into likely its worst recessionary years of the post-WWII period, it will be interesting to watch how this firmly middle class suburban town copes.

The final chart shows how the year-to-date median sales price and combined sale count for Arlington, Bedford, Belmont, Cambridge and Lexington have changed since 1988.

Notice again that as sales have mounted for the year, the median values are looking generally flat to trending down.

My expectation is that all the towns except for Cambridge (which will likely be flat to modestly up on record low number of single family sales) will have lower medians than 2007.

In review, the data shows that there is nothing exceptional about Arlington’s housing market proving clearly that the claims made in the Boston Globe article and later endorsed by its editor Martin Baron were entirely erroneous.

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Bernanke’s Nightmare: Commercial Paper December 31 2008

This post is a follow up and further elaboration showing the current and historical values for some key interest rates.

These interest rates are for short term (30 day) commercial paper that is typically issued by corporations to “raise needed cash for current transactions”.

A key in reading these rates is to recognize that the AA non-financial is more highly rated than A2/P2 non-financial and that, in general, the AA non-financial tends to track the Federal Reserve’s target rate while the others typically track slightly higher.

Normally, the spread between the weakest quality paper (A2/P2 non-financial) and the highest (AA non-financial) is 15-20 basis points but as of the latest Fed posting, the spread has remained dramatically elevated at 615 basis points… truly a worrying sign.

The first chart shows the spread between the A2/P2 and AA non-financial while the lower two charts show the how all the short term commercial paper rates have tracked since 1998 and mid-2007 respectively.

Notice that prior to mid-2007, the Federal Reserve had been able to keep these rates fairly tight and in-line with the target rate but now we are seeing significant trouble.

In as sense, the current crisis has effectively erased all the rate cuts Bernanke has made this cycle and even added roughly another 100 basis points.



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Mid-Cycle Meltdown?: Jobless Claims December 31 2008

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims dropped 94,000 to 492,000 from last week’s unrevised 586,000 claims while “continued” claims jumped 140,000 resulting in an “insured” unemployment rate of 3.4%.

It’s very important to understand that today’s report continues to reflect employment weakness that is strongly consistent with past severe recessionary episodes and that this signal is now so strong and sustained that a significant contraction in the economy is fundamentally certain.

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.

I have added a chart to the lineup which shows “population adjusted” continued claims (ratio of unemployment claims to the non-institutional population) and the unemployment rate since 1967.

Adjusting for the general increase in population tames the continued claims spike down a bit but as you can see, the pattern is still indicating that recession has arrived.

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

NOTE: The charts below plot a “monthly” average NOT a 4 week moving average so the latest monthly results should be considered preliminary until the complete monthly results are settled by the fourth week of each following month.

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.

Until recently, one could make the case that we were again experiencing simply a mid-cycle slowdown but now that now those hopes are long gone.

Adding a little more data shows that in the early 2000s we experienced 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.

The most 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.

It is now completely clear that the potential “mid-cycle” slowdown that appeared to be shaping up recently, had been traded for a less severe downturn in the aftermath of the “dot-com” recession, and now has we have fully entered, instead, a mid-cycle meltdown.

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Reading Rates: MBA Application Survey – December 31 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 1 basis points since last week to 5.03% while the purchase application volume increased 1.39% and the refinance application volume declined .02% compared to last week’s results.

It’s important to note though that although the steady decline in mortgage rates has likely played a significant role in the large increases in refinance application volume, it’s also altogether possible that the MBAA has some difficulty in seasonally adjusting their numbers around the November and December periods.

As you can see on the charts below, November through January usually brings some erratic spikes to the volume indices but the cause, at least in some part, is likely the result of troubles seasonally adjusting a noisy weekly series and not an actual spontaneous doubling of refinance activity.

As was noted last year, it’s probably sensible to wait until February to draw a final conclusion.

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).



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Video of The Day - Home Prices Falling Everywhere!





Professor Karl Case joins Bloomberg to discuss the latest results of the S&P/Case-Shiller home price indices.

I’m still WAY more bearish than Dr. Case.

The single most important data-point at this point is unemployment (unemployment rate and non-farm payroll level) which will, in all likelihood, continue to soar and severely weigh on the nation’s housing markets.

Now that the regions that Dr. Case mentions as having moderate declines to date (New York, New Jersey, Massachusetts, etc.) have neared or surpassed 6% unemployment, watch for their housing markets to come under the type of severe pressure already seen on the west coast (20-40% home price declines).

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Tuesday, December 30, 2008

Beantown Bust: Boston CSI and RPX October 2008

The S&P/Case-Shiller (CSI) Home Price index together with the Radar Logic (RPX) for Boston represent the most accurate indicators of the true price movement for both single family homes and the entire residential real estate market as a whole (singles, multi and condos).

For October, both the Boston CSI and RPX showed continued weakness with the CSI declining 6.0% on a year-over-year basis while the RPX dropped 14.77% over the same period.

Further, both reports indicate that area home prices have suffered significant peak declines with the Boston CSI showing a decline of 12.76% since the peak set in September 2005 while the Boston RPX shows a 25.12% price decline since its peak of June 2005.

Recently S&P introduced a new line of data series that specifically track condominium prices in five select markets including Boston which showed that in October Boston condo prices declined 3.61% on a year-over-year basis (see chart below).

It’s important to note that all measures are derived from sales data transacted in October (actually an average of prior three months ending in October) which generally includes many properties that went under agreement between August and September, well in advance of the historic stock market collapse and wider macroeconomic declines that have since sent consumer sentiment to all time lows.

In all likelihood the dramatic declines to consumer confidence and increases in unemployment will work to place significant downward pressure on property prices for the foreseeable future.
As you can see from the chart below (click for larger), although the RPX captures a greater degree of seasonality, both series are very strongly correlated.

Also, note that the although the RPX initially gave a strong indication that this year’s seasonal uptick in prices had abated with the July release, the August release brought a boost in prices and continued the pattern that is more or less typical when compared to the last three years.

Now, the October results confirms that the typical seasonal pattern is firmly in place as all indices head lower on a downward trend that generally bottoms in mid-winter.


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 normalized price movement, annual and peak percentage changes to the Boston CSI home price index from the 80s-90s housing bust to today’s bust.



The “normalized” chart compares the normalized Boston price index from the peak of the 80s-90s bust to the peak of today’s bust.

Notice that during the 80s-90s bust prices took roughly 46 months (3.8 years) to bottom out.

The “annual” chart compares the percentage change, on a year-over-year basis, to the Boston CSI 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”.

The “peak” chart compares the percentage change, comparing monthly Boston index 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.

The final chart shows that the Boston housing market has been, in a sense, declining steadily since early 2001 when annual home price appreciation peaked and the intensity of the housing expansion began to wane (click on following chart for larger version).

It appears that that the main thrust of the housing expansion occurred “in-line” with the wider economic expansion that was fueled primarily by the dot-com bubble and that since the dot-com bust, the housing market has never been quite the same.

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S&P/Case-Shiller: October 2008

Today’s release of the S&P/Case-Shiller home price indices for October confirms a worsening of deterioration seen in the nation’s housing markets with ALL of the 20 metro areas tracked reporting significant year-over-year declines and ALL metro areas showing large and even shocking declines from their respective peaks.

Further, there continues to be a notable re-acceleration of the price slide with the 10-city index dropping 2.08% and the 20-city index dropping 2.16% just since last month.

Also, it’s important to keep in mind that today’s release was compiled using settled home sales data from transactions that had gone under agreement in the August to October time-frame, many well in advance of the historic levels of financial collapse seen throughout the fall.

In all likelihood, we are now firmly sliding down an even more momentous slope of home price declines as the continued economic crisis and dramatically accelerating unemployment work to both crush consumer sentiment and force panicked mortgage lenders to continue to tighten their lending standards.

As the housing decline goes “Up-Prime” a larger and much more damaging population of homeowners will face historic levels of financial stress the outcome of which is, at the moment, very hard to calculate.

The 10-city composite index declined a record 19.06% as compared to October 2007 far surpassing the all prior year-over-year decline records firmly placing the current decline in uncharted territory in terms of relative intensity.

Topping the list of regional peak decliners were Phoenix at -40.56%, Las Vegas at -39.28%, Miami at -38.26%, San Diego at -36.44%, San Francisco at -36.15%, Los Angeles at -34.36%, Detroit at -32.23%, Tampa at -30.51%, Washington DC at -26.35%, Minneapolis at -20.69%, Chicago at -13.71% and Boston at -12.76%.

Additionally, both of the broad composite indices showed significant declines slumping -24.97% for the 10-city national index and 23.42% for the 20-city national index on a peak comparison basis.

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 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 as on a year-over-year basis.

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 both how young the current housing decline is and clearly shows that the latest bust has surpassed the prior bust in terms of intensity.

Looking at the actual index values normalized and compared from the respective peaks, you can see that we are still likely less than half of the way through the portion of the decline in which will be seen fairly significant annual declines (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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Question of The Day - Is Paulson Delusional?

As of mid-December Treasury Secretary Paulson was “…expecting no other major financial institution to fail…”

So, what about yesterday’s GMAC rescue?

That was $6 billion of “fresh capital” direct from the Treasury Department.

Was Paulson delusional, just trying to manage PR or is a $6 billion rescue just small potatoes at this point?

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Monday, December 29, 2008

More Pain, Less Gain: S&P/Case-Shiller Preview for October 2008

As I had noted in a prior post, given their strong correlation, the home price indices provided daily by Radar Logic can be effectively used as a preview of the more popular monthly S&P/Case-Shiller home price indices.

The current Radar Logic data reported on residential real estate transactions (condos, multi and single family homes) that settled as late as October 24 appears to indicate that price declines are continuing in virtually every market while accelerating notably in some.

Clearly, the impact of the recent stock market crash and ongoing economic crisis is bearing down on both consumer sentiment and, more fundamentally, credit availability resulting in a significant pullback in spending on homes and other costly purchases.

As the economic fallout continues, look for more markets to experience a reacceleration of price declines.




Phoenix, Miami, San Francisco, and Los Angeles are clearly continuing their historic price slide as the number of distressed sales climb and buyer sentiment relents to the recessionary conditions.



Boston, Denver and Chicago all appear to be following the typical seasonal pattern of increasing prices during the high transaction months of the spring and early summer and price declines during the fall and winter but it is important to note that prices are clearly trending lower.

Washington DC is an nearly perfect example of a market that has broken down under the strain of the housing bust showing price declines even well into the early spring where it’s normally strong seasonal pattern typically brings increasing prices.

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Thursday, December 25, 2008

How The Bear Popped The Bubble!

Gather 'round all ye bubble-sitting families and partake in a reading of a warm old holiday classic by Dr. SoldAtTheTop! (Originally posted Christmas 2006!)

***

Every Bull
Down in Bull-ville
Liked the Housing Bubble a lot...

But the Bear,
Who lived just South of Bull-ville
Did NOT!

The Bear hated the Bubble!
He blamed the Fed, rates and lending!
But the Bulls didn't care, they just kept right on spending.
It could be that Bulls were just very trendy.
It could be, perhaps, they were whipped into a speculative frenzy.
But I think the most likely reason of all
May have been that their noggins were two sizes too small.

But,
Whatever the reason,
Their heads or the craze,
They continued to spend, for days upon days.
And the Bear, staring up from his cave down below
Sensed the limit had been reached, things were going to BLOW!
For he knew every Bull up in Bull-ville that night
Had stretched every dollar, squeezed their finances tight.

"And they're going back for more!" he could see to his dismay
"This just cannot last, not for one more day!"
Then he ran to his closet to fetch a loud-speaker
"I MUST warn them all, before they get in any deeper!"
For, the Bear knew...

...All the Bull girls and boys
Who had been flipping, and borrowing and buying up toys
Were all skirting the edge, sitting perfectly poised
For collapse that once realized... oh, the noise! Noise! Noise! Noise!

Then the Bulls, young and old, will be in a terrible fix.
And they'd have to hunker down and stop all their mad tricks!
And the economy... oh what a mighty deep-six!
It will sink faster than boat load of bricks!

And THEN
Something would happen that he liked least of all!
Every Bull up in Bull-ville, the tall and the small,
Would all start to panic, when home prices stop swelling.
They'd reverse the craze… they'll all begin selling!

They'd sell! And they'd sell!
AND they'd SELL! SELL! SELL! SELL!
And the more the Bear thought of the Bull-Panicky-Sell
The more the Bear thought "This is NOT going to end well!"
"Why for almost a decade I've watched the bubble inflate!
I MUST warn them now!
Before it's TOO LATE!"

THEN
He mounted the loud-speaker
To the top of his car
And a siren with flood lights
That were blazing like stars

Then the Bear said, "I’m off!"
And he drove forty blocks
Toward the homes that the Bulls
Had been trading like stocks.

All their windows were bright. Flat panel glow filled the air.
All the Bulls were all carrying-on without even a care
When he came to a stop in the Bull-ville town square.
"This is the best place," the Bear thought as he reached
For the microphone that he would use when he preached.

THEN
Click! On went the siren, the lights and the speaker!
Then the Bear started yelling! "Things are looking bleaker and bleaker!
You all must come out, listen to what I have to say
Give me a chance to appeal to your senses today!"

Then one Bull emerged through his front door.
Then another came out, and some more... then still more.
Soon the square was abuzz with a large crowd of Bulls
All grumbling and muttering about association rules.

But the Bear went on "You are all in grave trouble!
I have come here to warn you of the Great Housing Bubble!
You see it's been inflating, stretching thinner and thinner..
If you don't stop now, there will be almost no winners!"

"This is the greatest Ponzi-scheme ever devised
Where all of you have been convinced to not question your eyes.
Just go right on speculating... pushing prices up higher
And assume there will always be a greater fool buyer!"

"But Things are now not looking so hot...
Home sales are plunging, The builders are shot!
Inventory is rising, there is no place to hide.
Soon you will be in for a vicious price slide!"

Then he clicked off the speaker and he heard not a sound.
The Bulls all looked puzzled, just standing around.
Then one Bull, an Economist named David Lereah (Pronounced Le-ray)
Stood up and he shouted, "I have something to say!"

"You are a very foolish Bear!" He said with a sigh
"This is a GREAT time to SELL or to BUY!
Yes prices are moderating, that much is sure true.
But that is a HEALTHY sign that the market will pull right on through.
I've seen all the numbers, I release them you know...
And what I've seen is STABILIZATION as we level off at the low"

"So pack up your things and head off down the hill!
We don't need your type of hype in Bull-ville!"

So the Bear did as he was told, all downhearted and grim.
He silently opened his car door and stepped in.
And he backed down the hill and then crawled into his cave.
And he thought about the Bull-ville that he failed to save.

But just then the Bear heard a horrible sound!
A massive explosion that sent shock waves through the ground!
As he looked from his window, he could not believe either eye...
The whole of Bull-ville had been blown to the sky!

And what happened then...?
Well, in Bear-ville they say
That although he was sad...
His pride grew three sizes that day!
And the minute his heart stopped feeling so blue
He published a book titled "What To Do and Not To Do If a Bubble Finds You!"

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Wednesday, December 24, 2008

Confidence Game: Consumer, CEO and Investor Confidence December 2008 (Final)

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 final release of the Reuters/University of Michigan Survey of Consumers for December showed a continued slump for consumer sentiment with a reading of 60.1 and dropping 20.40% below the level seen in December 2007.

The Index of Consumer Expectations (a component of the Index of Leading Economic Indicators) increased to 54 remaining 17.68% below the result seen in December 2007 and just 9.8 points above the lowest value ever recorded.

As for the current circumstances, the Current Economic Conditions Index jumped off November’s “lowest level ever recorded” to 69.5 or 23.63% below the result seen in December 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 (Q3 2008) of The Conference Board’s CEO Confidence Index increased marginally to a value of 40, nearly 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 December release of the State Street Global Markets Index of Investor Confidence indicated that confidence for North American institutional investors declined 15.2% since November while European confidence declined 5.1% and Asian investor confidence increased 3.9% all resulting in a decrease of 6.5% to the aggregate Global Investor Confidence Index which now rests 23.63% below the result seen last year.

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 chart below (click for larger version) shows the Global Investor Confidence aggregate index.

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