Paper Economy - A US Real Estate Bubble Blog

Monday, August 31, 2009

Why No Dr. Boom?

For a few years now there has been a friendly competition of sorts going on between this era’s leading realists.

Peter Schiff, Nouriel Roubini and Marc Faber (… probably others) have all, at times, been referred to publicly as “Dr. Doom”.

Now I’m not suggesting that these “doomers” themselves are responsible for this rivalry, each has simply been tagged with this label by Wall Street types or members of the traditional media.

What’s curious though is to consider the fact that there is no counterpart… no person has been labeled as “Dr. Boom”.

More curious still… we who follow the financial media closely know that there are actual instances of individuals who have been so absurdly and publicly Bullish that they truly deserve the moniker of “Dr. Boom”… Larry Kudlow for one… as well as Brian Wesbury, Mark Perry, Jerry Bowyer, Don Luskin … so lack of a tag for these characters is perplexing.

Why no “Dr. Boom”?!...

I’ll tell you why… you are all Dr. Booms… America is a country of Dr. Booms!

There is no need to specifically identify a single Dr. Boom… Doom is a systemic outlier… Boom is the default… if you’re not Boom you’re automatically Doom… and you are in a minority… You’re either with Boom or you’re against Boom!

Though I’m treating it lightly here… there is something profound in this imbalance.

We have not had an “organic” boom since the 1990s (led by the real… albeit overblown… ubiquitous change of the internet and other revolutionary forms of communications) but still… we not only expect it… it’s the “de facto” expectation.

If we are not actively in the throes of a recessionary decline… then… we must be booming!

Although, given the circumstances of the last few years, many gladly welcome this sort of sentiment…. This is not a positive or optimistic sign… it’s a delusional one.

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Friday, August 28, 2009

Two Great Bounces!

The following charts provide 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 lower bar chart plots the cumulative percentage change since the start of each bounce.

The S&P 500 is up over 42% in just about 120 trading days… a very aggressive run with an obvious note of mania to it… and wholly comparable to yet even notably stronger than the price movement seen in the 1930s-era DOW rally.

At this point for the 30s-era DOW, the bull-run was over as the bear trend resumed in earnest… today though the Bull is on the move… how long will this boom last?

Only time will tell… But for now, let’s continue to keep a watchful eye…


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Ticking Prime Bomb!: Fannie Mae Monthly Summary July 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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Thursday, August 27, 2009

Two Great Bounces!

The following charts provide 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 lower bar chart plots the cumulative percentage change since the start of each bounce.

The S&P 500 is up over 42% in a little over 100 trading days… a very aggressive run with an obvious note of mania to it… and wholly comparable yet even notably stronger than the price movement seen in the 1930s-era DOW rally.

At this point for the 30s-era DOW, the bull-run was over as the bear trend resumed in earnest… today though the Bull is on the move… how long will this boom last?

Only time will tell… But for now, let’s continue to keep a watchful eye…


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Commercial Cataclysm?: Moody’s/REAL Commercial Property Price Index June 2009

Today's results of the Moody’s/REAL Commercial Property Index continues to suggest that the nation’s commercial real estate markets are now firmly experiencing a tremendous downturn with prices plummeting a whopping 26.85% on a year-over-year basis and a stunning 35.41% since the peak set in October 2007.

The Moody’s/REAL CPPI data series is produced by the MIT/CRE but is noted to be “complimentary” to their alternative transaction based index (TBI) as it is published monthly and is formulated from a completely different dataset supplied by Real Capital Analytics, Inc.

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Bull Trip!: GDP Report Q2 2009 (Preliminary)

Today, the Bureau of Economic Analysis (BEA) released their second installment of the Q2 2009 GDP report showing a continued contraction with GDP declining at an annual rate of -1.0%.

Easily the most notable features of today’s report are the significant declines to residential and non-residential fixed investment as well as to personal consumption expenditures and exports of both goods and services.

Fixed investment provided a significant drag on growth with non-residential investment declining -10.9% while residential investment declined -22.8%.

Making a positive contribution to GDP were significant declines to imports of goods and services slumping -15.1%.

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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Mid-Cycle Meltdown!: Jobless Claims August 27 2009

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims declined 10,000 to 570,000 claims from last week’s upwardly revised 580,000 claims while “continued” claims decreased 119,000 resulting in an “insured” unemployment rate of 4.6%.

A second round of layoffs or NOT a second round… that is the question.

We are on the verge of realizing the answer to this question and its outcome is probably one of the most important developments of our time.

If firms go for another substantial round of layoffs and job cuts during the fall to early winter (…the typical period of increasing job cutting activity regardless of economic conditions) we could see an unemployment super-spike form whereby two years of significant job cutting activity merge into one large period of unemployment.

Of course there are many ways that the job picture could trend but if firms underestimated their cutting last year and need to cut even deeper this year, it would clearly differentiate this period from most of the past post-WWII recessionary periods.

Clearly, 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.

***

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 and vice versa.


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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Wednesday, August 26, 2009

Two Great Bounces!

The following charts provide 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 lower bar chart plots the cumulative percentage change since the start of each bounce.

The S&P 500 is up over 42% in a little over 100 trading days… a very aggressive run with an obvious note of mania to it… and wholly comparable yet even notably stronger than the price movement seen in the 1930s-era DOW rally.

At this point for the 30s-era DOW, the bull-run was over as the bear trend resumed in earnest… today though the Bull is on the move… how long will this boom last?

Only time will tell… But for now, let’s continue to keep a watchful eye…


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New Home Sales: July 2009

Subtitle: Even More Green Shoots… Still… No Bottom!

Today, the U.S. Census Department released its monthly New Residential Home Sales Report for July showing the fourth consecutive increase in sales of newly constructed single family dwellings bringing the seasonally adjusted annual sales pace to 433,000 units or just slightly under the level seen in September 2008.

Still, demand for new homes appears to be weak falling 13.4% from last year and remaining 68.83% below the peak level 2005.

I realize that sticking with a no bottom call appears a bit “long in the tooth” at this point but my sense is that the “V” shaped recovery in new home sales (… as well as stocks, and other measures) reflects an unusually strong first half of the year bounce… strength that I think will wane as we move into the fall.

Also, I’m becoming more convinced that there is a major disappointment coming as forecasters and investors have effectively accounted for a picture perfect recovery which in all likeliness will not materialize.

Obviously, the bottom may have been set last January on the heels of the worst period of panic… at this point that is a perfectly logical conclusion.

BUT… this series is so sensitive to the economic climate that another major stumble (… S&P heads back to the low, widespread regional banking crisis, etc.) and all bets are off.

In fact, we could be at very similar point to that of the 80s double-dip recessions where new home sales strongly rebounded only to peak out and head back down to an even lower level.

The following charts show the extent of sales declines seen since 2005 as well as illustrating how the further declines in 2009 are coming on top of the 2006, 2007 and 2008 results (click for larger versions)


It’s important to note that although the new home sales data appears to have prompted the traditional media to make many “bottom calls” recently, the evidence for their conclusions were scant.

First, most “bottom callers” have focused too closely on just the new home sales series and its historic bottoms rather than other important indicators that disclose a more complete state of the new home market.

As I have argued recently, the level of inventory and supply and level of completed new homes are still too high for a real sustained bottom for the new home market.

The following chart (click for larger) plots the new home sales (SAAR) series along with the current inventory level (NA) and the level of homes completed (NA) since 1973.

As you can see, although the new home sales series has breached the lowest level in over 30 years, the level of inventory (homes for sale at end of period) still remains higher than past historic bottoms and the level of homes completed remains much higher.

In fact, the level of completed new homes remains near PEAK levels for past housing boom periods… a truly bad sign for pricing going forward.

Look at the following summary of today’s report:

National

  • The median sales price for a new home declined 11.46% as compared to July 2008.
  • New home sales were down 13.4% as compared to July 2008.
  • The inventory of new homes for sale declined 35.3% as compared to July 2008.
  • The number of months’ supply of the new homes has decreased 25.7% as compared to July 2008 and now stands at 7.5 months.
Regional

  • In the Northeast, new home sales increased 9.8% as compared to July 2008.
  • In the Midwest, new home sales declined 4.7% as compared to July 2008.
  • In the South, new home sales declined 18.4% as compared to July 2008.
  • In the West, new home sales declined 14.6% as compared to July 2008.

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Reading Rates: MBA Application Survey – August 26 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 9 basis points since last week to 5.24% while the purchase application volume increased 1.0% and the refinance application volume increased 12.7% 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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Tuesday, August 25, 2009

Crashachusetts Existing Home Sales and Prices: July 2009

Today, the Massachusetts Association of Realtors (MAR) released their Existing Home Sales Report for July showing that single family homes sales jumped notably increasing 12.7% on a year-over-year basis while condo sales increased 0.9% over the same period.

Single family median home value declined 5.1% on a year-over-year basis to $310,000 while condo median prices dropped 3.5% to $310,000.

Though today’s results will likely be touted by MAR and the Boston Globe (… both with significant interest in promoting “good news” for housing) as an indication that the housing market has bottomed, it’s important to note that prices are still declining and that most of the sales action has been on the lower end fueled by the first time homebuyers welfare credit.

Also, in all likelihood we have now reached the typical summer peak in sales and pricing so with confidence still largely depressed, Boston area home prices have nothing left to do but trend down.

Of course, the Massachusetts Association of Realtor president Gary Rogers continues the Realtor praise for the government handouts and trickery:

“Buyers are taking advantage of the $8,000 first-time homebuyer tax credit, low interest rates, and more affordable prices and getting into the market. While it is only one month, the number of homes put under agreement are also up, which means there is a good chance we could see additional months of increased sales ahead.”


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 home price movement.

Today’s Key Statistics:

Single Family results compared to July 2008

Sales: increased 12.7%
Median Selling Price: declined 5.1%
Inventory: declined 17%
Current Months Supply: 6.4
Current Days on Market: 129

Condo results compared to July 2008

Sales: increased 0.9%
Median Selling Price: declined 3.5%
Inventory: declined 19%
Current Months supply: 6.4
Current Days on Market: 133

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Two Great Bounces!

The following charts provide 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 lower bar chart plots the cumulative percentage change since the start of each bounce.

The S&P 500 is up over 42% in a little over 100 trading days… a very aggressive run with an obvious note of mania to it… and wholly comparable yet even notably stronger than the price movement seen in the 1930s-era DOW rally.

At this point for the 30s-era DOW, the bull-run was over as the bear trend resumed in earnest… today though the Bull is on the move… how long will this boom last?

Only time will tell… But for now, let’s continue to keep a watchful eye…


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S&P/Case-Shiller: June 2009

Today’s release of the S&P/Case-Shiller (CSI) home price indices for June 2009 showed a continued bounce in prices with the Composite-10 index increasing 1.40% on a month-to-month basis.

Again, this is another notable development but it’s important to put today’s results in perspective before getting too confident that the bottom is in for house prices.

As with last month, today’s results showed that metro areas with typically strong seasonality worked to pull up the composite series while many other markets gained modestly leaving only Detroit and Las Vegas as decliners.

It’s important to remember that the CSI data is lagged by two months and that the metro markets with strong seasonality (… especially recently) tend to reach their seasonal peak between June and July and then typically decline through the fall reaching a seasonal bottom in February.

Also, although Standard & Poor’s publishes a seasonally adjusted series, their seasonal adjustment appears to be underestimating the degree of seasonality that is currently present in many markets (… Boston is a good example).

In any event, as the summer pricing cools the Composite indices will more than likely reflect the aggregate movement of prices declines just a strongly as it has captured the spring-summer bounce.

Also, looking at the 1990s-era comparison charts below its obvious that even after the main downward thrust has been reached, the housing markets have a long tough slog ahead with the ultimate bottom likely many years out…. Or if we are currently experiencing the Japanese model… decades out.

Further, is important to remember that the 90s housing recovery played out against the backdrop of a truly unique period of growth in the wider economy fueled primarily by novel and ubiquitous technological change (cell phones, internet, personal computers, telecommunications, etc).

The 10-city composite index declined 15.13% as compared to June 2008 while the 20-city composite declined 15.44% over the same period.

Topping the list of regional peak decliners were Las Vegas at -54.29%, Miami at -48.24%, Detroit at -45.30% and Tampa at -40.82%.

Additionally, both of the broad composite indices showed significant declines slumping -32.30% for the 10-city national index and 31.31% for the 20-city national index on a peak comparison basis.

To better visualize the results use Blytic.com and specify search terms like: "case shiller" or "case shiller new york" or "sale pair count".

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.

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 month-to-month 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.

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.

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