Paper Economy - A US Real Estate Bubble Blog

Thursday, July 30, 2009

Ticking Prime Bomb!: Fannie Mae Monthly Summary June 2009

Decades from now the summer of 2008 will likely be remembered to mark the turning point where legislative blundering took an otherwise serious financial crisis and molested it into an epic financial collapse.

By fully assuming the liabilities of Fannie Mae and Freddie Mac, the two colossal and corrupt (and conduit of corruptness funneling junk Countrywide Financial loans onto the implied balance sheet of the federal government) government sponsored enterprises, the federal government, led by Treasury Secretary Paulson and Federal Reserve Chairman Ben Bernanke, has thrust taxpayers into an abyss of insolvency with one mighty shove.

Given the sheer size of these government sponsored companies, with loan guarantee obligations recently estimated by Federal Reserve Bank of St. Louis President William Poole of totaling $4.47 Trillion (That’s TRILLION with a capital T… for perspective ALL U.S. government debt held by the public totals roughly $4.87 Trillion) this legislative reversal making certain the “implied” government guarantee is reckless to say the least.

The following chart (click for larger ultra-dynamic and surf-able chart) shows what Fannie Mae terms the count of “Seriously Delinquent” loans as a percentage of all loans on their books.

It’s important to understand that Fannie Mae does NOT segregate foreclosures from delinquent loans when reporting these numbers.

Finally, the following chart (click for larger ultra-dynamic and surf-able chart) shows the relative movements of Fannie Mae’s credit and non-credit enhanced (insured and non-insured) “Seriously Delinquent” loans.

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Two Great Bounces!

The following chart is a simple comparison between the big stock bounce that occurred in the wake of the DOW crash of 1929 and the bounce we are seeing today in the S&P 500 index.

The method of alignment was simple… take the first definitive up trading day off the bottom of the preceding bear market low and set that as the start of the series… then simply re-base both series to a value of 100 so that they can be compared side-by-side.

The S&P 500 is up over 36% in just about 100 trading days… a fairly aggressive run… even a note of mania to it… and wholly comparable to the price movement seen in the 1930s-era DOW rally.

At this point in the 30s-era DOW, you would have had approximately 9 days to trade out of your positions before the first leg of decline ensued chopping the prior gains nearly in half.

I’m not saying it’s going to happen… Just keeping a watchful eye…

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Outstanding Contraction!: Commercial Paper Outstanding July 30 2009

The Commercial Paper (CP) market is essentially a private debt market used by corporations as a cheaper means of funding typical recurring operations than drawing on a line of bank credit.

Commercial paper, as financial instrument, is by no means a recent innovation and, in fact, you can read about how the CP market was affected by the many historic financial shocks experienced by the U.S. (read Panic on Wall Street: A History of America’s Financial Disasters or this account)

Although the Federal Reserve was able to artificially bring CP rates down significantly since the shocking 615 basis point spread blowout (A2/P2 spread) of late 2008, they have apparently not been successful in preventing an overall contraction in the CP market.

The Federal Reserve calculates and published the total amount of CP outstanding every week and as of the latest published period, commercial paper outstanding is contracting at the fastest rate on record, registering a whopping 38.32% decline year-over-year.

Another important insight, at $1.065 trillion the total CP market is now 16.27% smaller than the $1.272 trillion seen at the bottom of the last contraction in late 2003.

The CP market that expanded wildly throughout 2004, 2005, 2006 and most of 2007 is now no more, replaced instead by one smaller and contracting faster than at any other time in this century.

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Homebuyer Tax Break Propping the Low End?

Tuesday’s release of the S&P/Case-Shiller home price report showed that in many markets there was a sharp divergence between the price movement for the low and middle tiers and the higher tier homes.

There is a strong likelihood that this low tier bounce is at least partly the result of the widely publicized $8000 tax credit.

It’s important to note that price tiers are defined individually with the price breakout values specific to each market and reformulated, as well as seasonally adjusted, for each release.

In the Boston area housing market, possibly the best example of the tax credit fueled bounce, the seasonally adjusted low tier is currently defined as single family homes selling below $267,474, with the middle tier selling between $267,474 and $488,116 while the high tier contains everything above $488,474.

In order to qualify for the credit the following must apply:

1. The credit is for “first time” home buyers only… if you have had ownership interest in any home (including condos) anytime in the last three years you are NOT eligible.

2. The credit has income restrictions of $75,000 for individuals and $150,000 for married couples filing jointly.

3. The credit can only be used for principle residence.

4. The credit cannot be applied to the downpayment (... NOTE… some states, including MA have created programs to circumvent this item effectively lending borrowers the $8000 upfront to apply towards the downpayment… when the Federal Government pays the tax credit, borrowers pay back the state).

As you can see from the seasonally adjusted data below, homes priced below $489,000 are experiencing more than a seasonal bounce… in fact… the strongest bounce in the low tier since the decline commenced over three years ago.

Clearly, this is as a result of first time homebuyer activity.

But as you can also clearly see, the high tier has continued to fall in May dropping 1.13% compared to April, the second largest month-to-month decline seen during this housing bust.

Further, the sale pair counts are continue to decline for the entire market dropping 18.92% on a year-over-year basis firmly indicating that sale volume is headed lower.

How far this low-end bounce runs is hard to say… but it’s safe to say that the organic prices of the upper end are continuing to trend down and likely unaffected by the tax freebie.

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Mid-Cycle Meltdown!: Jobless Claims July 30 2009

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims jumped 25,000 to 584,000 claims from last week’s upwardly revised 559,000 claims while “continued” claims dropped 54,000 resulting in an “insured” unemployment rate of 4.7%.

Both initial and continued claims continue to appear to be teasing out a peaking trend although, with the economy so systemically weak, there is a substantial risk for a second wave of accelerating joblessness as well as the almost certain outcome of a prolonged period of elevated joblessness.

Careful attention needs to be paid to these indices to see how they reflect the state of the job market as we move further into the second half of the year.

Now, looking at past cycles (especially the last two recessions), this does not imply that the pain is over in the job markets… we are still seeing a level of literal initial weekly jobless claims (non-adjusted series) well over 550K.

If history is to be at least a rudimentary guide, first time and continued unemployment claims will likely remain unusually high for at least another year or two (… as they had in the aftermath of both the early 90s bust and the dot-com bust).

Given the fragile state of the economy and the substantial financial stress being felt by so many millions of households, there are serious headwinds to any sustained recovery.

Further, the current weakness in the job market continues to present the clearest picture of what is likely to be one of the most problematic aspects of this period of economic crisis namely how to make an immense and growing number of highly specialized (college educated) service/professional service workers productive again.

It’s obvious now that we have reached the first real test of our majority services-based economy.

Unlike the “tech-wreck” of 2000-2002, our current downturn is very broad, leaving no sector and virtually no corner of the country untouched.

With millions of college educated workers now on the market incomes will clearly suffer but moreover, it will be soon all too clear that our prior bubble economy significantly overproduced service workers (particularly professional service workers) for which current employment opportunities will be scant resulting in continued and fundamental vicious-cycle effects.

***

The following chart shows the recent trend in initial non-seasonally adjusted initial jobless claims with the year-over-year percent change acting as a rough equivalent of a seasonally adjustment.

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.

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.

Until late 2007, one could make the case (as Fed chief Ben Bernanke surly did) that we were again experiencing simply a mid-cycle slowdown but 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 had 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 in late 2007, 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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Bailouts are Like a Box Full of Slaughtered Swine


At the height of the panic and frenzy over the swine flu pandemic earlier in the year, it was reported that Egypt had ordered the slaughter of roughly 300,000 pigs in an effort to stave off the feared disease.

This move brought almost immediate reaction from the western MSM sources including Time Magazine and the Scientific American, all with essentially the same response… the slaughter of the pigs was pointless.

But was it? … Maybe the MSM, in typical fashion, just missed the point.

Egyptian officials order the destruction of the county’s entire population of pigs NOT for specific and proven, reasoned purposes but as a quick and overtly simple and highly visible response taken primarily to quell the fears growing among the Egyptian people.

We in the West thumbed our nose… even poked fun… at the actions taken by the young-ish republic… we knew science… we knew that the danger was no longer pig to human transmission… it was human to human… what they were doing was silly… pointless… even a bit primitive.

Yet, our conceit, as is typical with such things, prevents most of us from seeing that we are no different and that the actions taken by the Federal Reserve and Federal Government were nothing short of a complete sham, pointlessly perpetrated against taxpayers (… both today’s and for many future generations) and savers in an effort to control our own panic stricken period of financial crisis.

Our officials were equally thoughtless and ignorant, the actions taken equally pointless, unfair and brutal and the purpose literally the same… simply to control panic… without regard for reason.

Well it appears that the fraud didn’t really work for Egypt… they reported their first swine flu death last Thursday…. sans pigs… real panic may be right around the corner.

Will the deception fare any better here in the West?

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Wednesday, July 29, 2009

Two Great Bounces!

The following chart is a simple comparison between the big stock bounce that occurred in the wake of the DOW crash of 1929 and the bounce we are seeing today in the S&P 500 index.

The method of alignment was simple… take the first definitive up trading day off the bottom of the preceding bear market low and set that as the start of the series… then I simply re-base both series to a value of 100 so that they could be compared side-by-side.

The S&P 500 is up over 35% in just about 100 trading days… a fairly aggressive run… even a note of mania to it… and wholly comparable to the price movement seen in the 1930s-era DOW rally.

At this point in the 30s-era DOW, you would have had approximately 10 days to trade out of you positions before the first leg of decline ensued chopping the gains nearly in half.

I’m not saying it’s going to happen… Just keeping a watchful eye…

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Reading Rates: MBA Application Survey – July 29 2009

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 since last week to 5.36% while the purchase application volume went unchanged and the refinance application volume dropped 10.9% compared to last week’s results.

It’s important to recognize that while the Federal Reserve’s “quantitative easing” measures held down rates for a time and spurred a notable boom in refinance activity, the recent activity appears to have come to a close.

Even with historically low lending rates both refinance and purchase application volume look to be headed back to the lows of the fall of 2008 and an overall declining trend.

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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Relative Quality and an Import-Export Decline

The French expect quality… or at least higher quality than I’m used to in the U.S.

A 2 euro bottle of wine picked up on impulse at the supermarche is still a tasty treat… think of that… I’m pretty sure that even a bottle of Ripple cost you more than $2.83… especially adjusted for inflation.

Yet I suppose the simple fact is that no one here in France knows the difference… they still have a patisserie, a boulangerie, a bucherie, a fromagerie on virtually every block.

We would call them specialty shops in the U.S. … here they are not very special at all.

Times may be changing a bit though… I notice more Starbucks and more golden arches here in Paris… Is this simply to make the Yanks feel more at ease?

One would hope.

On that note… looks like French imports to the U.S. have taken a pounding along with all other forms of consumption.

Exports to France have held up a bit better… but as you can see… it’s still pretty early in a declining trend that will likely take a few years to bottom out.

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Tuesday, July 28, 2009

Two Great Bounces!

The following chart is a simple comparison between the big stock bounce that occurred in the wake of the DOW crash of 1929 and compares it to the bounce we are seeing today in the S&P 500 index.

The method of alignment was simple… take the first definitive up trading day off the bottom of the preceding bear market low and set that as the start of the series… then simply re-base both series to a value of 100 so they could be compared side-by-side.

Our current rally has a note of mania to it… It’s almost too good to be true…

I’m not saying it’s going to happen… Just keeping a watchful eye…

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A Tale of Seven Cities... and Some Condos

Today’s S&P/Case-Shiller housing market data revealed some notable differences in the trends from one metro market to the next.

It’s important to recognize that while our current national residential real estate decline is truly historic and unprecedented, a near simultaneous decline of one or more major metro markets is not.

During the 1980s/1990s boom and bust both West Coast and East Coast metro markets experienced the boom and bust cycle but while metros on the east coast, such as Boston, shook off the decline, cleared and started to climb somewhat by 1993 with the period between late 1996 and early 1997 marking the point where many markets recovered their nominal pre-bust peak levels, west coast metros generally continued to decline well into the mid-90s.

West coast metros such as San Francisco lumbered along and didn’t breach their pre-bust nominal peak level until well into 1998 in-line with the wider economic boom of the dot-com era.

Today, as in the 1990s, we see significant differences from one metro market to the next the only difference this time around is both the extent of the boom and bust and the fact that this cyclical shock has touched every market, not just a select few.

In the dynamic Blytic charts below I have arranged the three price tiers as well as a 12 month simple moving average of the “sale pair counts” for each of a selection of seven of the twenty metro markets that S&P tracks.

Notice that while some markets are showing an up-trend in sales, most are still experiencing significant price declines.

Also, metros such as New York, Atlanta and Washington DC appear to only now be tipping into the level of decline seen during 2007 and 2008 in some of the bubbliest markets of Phoenix, Miami and San Francisco.

Further, notice that while the nation’s major condo markets held fairly steady through 2008, they are now declining to a comparable extent to the single family markets.








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Beantown Bust: Boston CSI and RPX May 2009

Subtitle: Now Comes … the Fall!

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 May, both the CSI and RPX continued to showed the typical spring bounce in price movement with a month-to-month increase of 1.58% to the CSI and a 4.12% gain on the RPX while on a year-over-year basis the CSI declined 7.22% while the RPX dropped 12.02% 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 18.46% since the peak set in September 2005 while the Boston RPX shows a 26.36% price decline since its peak of June 2005.

It’s important to note that while the spring bounce is continuing in the data, the data is two months old.

This means that currently, we are likely at the seasonal peak for pricing for 2009 and soon the overarching declining trend will resume.

Typically, prices will reach the peak in June and remain close to peak (over or under) for July but as August nears (when the typical 45 day schedule puts closings beyond the start of the school year as well as just general vacation activity impact house buying activity) so too does slumping pricing and a resumption of the overarching declining trend.

In all likeliness, this year will be no different.

Looking at the seasonally adjusted data it’s easy to see that Boston is far from any real change in the overall declining trend though interestingly, the low and mid tiers showed a notable bounce (non-seasonally adjusted) in May while the high tier appears to be continuing its decline.

Click on the following ultra-cool zoom-able dynamic chart showing the three seaonally adjusted price tiers S&P provides for Boston as well as the 12 month moving average of the Boston area "sale pair counts" a near-organic single family home sales series also provided by S&P.

The most obvious difference between the 90s housing bust and today is that during the 90s the home price decline occurred mostly in-line with the larger macroeconomic decline.

Today though, all of the home price decline seen prior to mid-2008 occurred within a backdrop of an (more or less) expanding economy.

Now that the economy, particularly the jobs market, has firmly taken a turn for the worse (particularly our local Boston area economy), home prices will likely suffer to the greatest degree seen in this cycle.

The following two charts compares the Boston CSI to the Massachusetts unemployment rate during the 90s bust and today.

Notice how early we are in the unemployment cycle today… there is lots more pain to go.


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 May Boston condo prices declined 5.83% on a year-over-year basis and 14.07% on a peak decline basis (see chart below).

In all likelihood the still low consumer confidence and substantial increases in unemployment will work to place significant downward pressure on property prices, particularly condo 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.

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.

Notice that with today’s release, Boston has now exceeded the number of months of annual declines seen in the 90s bust as well as fallen further on a peak percentage basis.



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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