Paper Economy - A US Real Estate Bubble Blog

Thursday, December 31, 2009

Two Great Bounces! - December 31 2009

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 54% in a little over 200 trading days… an historically aggressive run with an obvious note of mania to it… and wholly comparable to… even far 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 seriously 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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Benefit Explosion!: Extended Unemployment Claims December 31

While today’s jobless claims report continued to show a steady trend down to both initial and continued unemployment claims with a nearly textbook peak shaping up, considering the federal extended claims data offers a more dire view of the state of the job market and of the economy as a whole.

Since the middle of 2008 two federal government sponsored “extended” unemployment benefit programs (the “extended benefits” and “EUC 2008” from recent legislation) have been picking up claimants that have fallen off of the traditional unemployment benefits rolls.

Currently there are some 4.816 million people receiving federal “extended” unemployment benefits.

Taken together with the latest 5.34 million people that are currently counted as receiving traditional continued unemployment benefits, there are well over 10 million people on state and federal unemployment rolls.

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Mid-Cycle Meltdown!: Jobless Claims December 31 2009

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims decreased by 22,000 to 432,000 claims from last week’s revised 454,000 claims while “continued” claims decreased 57,000 resulting in an “insured” unemployment rate of 3.8%.

Today’s results, though still significantly elevated, continues to indicate that the descent to both initial and continued claims is continuing in earnest resulting in an almost textbook peak.

At this point, we are either in the "post-crisis" recovery or the "eye before the storm" of a double-dip.

Could the worst of the job-shedding be behind us? Is a major disappointment shaping up for 2010?

We will have to wait to find out.

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 end of the year and start of 2010.

***

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 did on several occasions) 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 been 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 resulted, instead, in a mid-cycle meltdown.

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Wednesday, December 30, 2009

Commercial Cataclysm!: Moody’s/REAL Commercial Property Price Index October 2009

The most recent 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 36.39% on a year-over-year basis and a stunning 43.75% 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 and Real Estate Analytics LLC.

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Tuesday, December 29, 2009

Beantown Bust: Boston CSI and RPX October 2009

Subtitle: The Decline Drags On...

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 CSI and RPX confirmed that the extra-seasonal government sponsored bounce that started in the early spring has played itself out and prices are again in decline with a month-to-month decline of 0.59% to the CSI and a 5.27% decline to the RPX while on a year-over-year basis the CSI declined 2.81% while the RPX increased 2.25% 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 15.21% since the peak set in September 2005 while the Boston RPX shows a 24.22% price decline since its peak of June 2005.

It’s important to note that while the government housing tax gimmick had an unquestionably significant effect on demand and prices for homes on the lower-end, the upper-end homes remained largely in decline even throughout the spring and summer buying binge.

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.

Longish-time Bostonians should be used to the strong cyclical nature of our residential real estate market as it has been less than two decades since our last housing meltdown.

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 job market, has firmly taken a turn for the worse (particularly our local Boston area economy), home prices will likely suffer a prolonged contraction.

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 October Boston condo prices declined 3.52% on a year-over-year basis and 12.73% 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.

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.

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 2009

Today’s release of the S&P/Case-Shiller (CSI) home price indices for October 2009 showed that the non-seasonally adjusted Composite-10 price index remained flat since September while the Composite-20 declined for the first time in six months indicating that the government sponsored housing bounce has clearly drawn to a close.

It’s important to remember that the CSI data is lagged by two months and that today’s results represent an average of prices paid from home sales closed between August-October.

Now that the strongest selling months have largely been reported, look for all remaining CSI release continue to indicate notable price weakness coming from typical seasonal declines as well as extra-seasonal declines as a result of notably reduced demand from activity that was “stimulated” forward into the summer by the tax sham.

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 6.4% as compared to October 2008 while the 20-city composite declined 7.28% over the same period.

Topping the list of regional peak decliners was Las Vegas at -55.41%, Phoenix at -51.32%, Miami at -46.92%, Detroit at -42.49% and Tampa at -40.09%.

Additionally, both of the broad composite indices showed significant declines slumping -29.82% for the 10-city national index and -29.02% for the 20-city national index on a peak comparison basis.

To better visualize today’s results use Blytic.com and search for “case shiller”.

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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Monday, December 28, 2009

More Pain, Less Gain: S&P/Case-Shiller Preview for October 2009

As I demonstrated in prior posts, given their strong correlation (r-squared generally over .90 for each market), the home price indices provided daily by Radar Logic, averaged monthly, can effectively be used as a preview of the monthly S&P/Case-Shiller home price indices.

The current Radar Logic 25 MSA data reported on residential real estate transactions (condos, multi and single family homes) that settled as late as October 26 is indicating that the price bounce seen as a result of the government housing tax credit peaked in August and is now in decline.

Further, although the S&P/Case-Shiller Composite 20 series has reported six consecutive monthly increases, the RPX 25 is giving a clear indication that the October results will likely decline on a month-to-month basis.

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Ticking Prime Bomb!: Fannie Mae Monthly Summary October 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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Down and Out: Non-Financial Commercial Paper Outstanding

It appears that, after a short respite this summer, non-financial commercial paper outstanding is continuing to trend down.

The level of non-financial commercial paper outstanding is now declining at an annual rate of 50.11% and has just breached its prior low standing now at just over $101 billion.

A contracting non-financial commercial paper market indicates contracting business activity and likely suggests that the job market is still weakening.

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Thursday, December 24, 2009

How The Bear Popped The Bubble!

Gather 'round all ye bubble-sitting families and partake in a reading of this 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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Benefit Explosion!: Extended Unemployment Claims December 24

While today’s jobless claims report continued to show a steady trend down to both initial and continued unemployment claims with a nearly textbook peak shaping up, considering the federal extended claims data offers a more dire view of the state of the job market and of the economy as a whole.

Since the middle of 2008 two federal government sponsored “extended” unemployment benefit programs (the “extended benefits” and “EUC 2008” from recent legislation) have been picking up claimants that have fallen off of the traditional unemployment benefits rolls.

Currently there are some 4.732 million people receiving federal “extended” unemployment benefits.

Taken together with the latest 5.38 million people that are currently counted as receiving traditional continued unemployment benefits, there are well over 10 million people on state and federal unemployment rolls.

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Mid-Cycle Meltdown!: Jobless Claims December 24 2009

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims decreased by 28,000 to 452,000 claims from last week’s 480,000 claims while “continued” claims decreased 127,000 resulting in an “insured” unemployment rate of 3.9%.

Today’s results, though still significantly elevated, continues to indicate that the descent to both initial and continued claims is continuing in earnest resulting in an almost textbook peak.

At this point, we are either in the "post-crisis" recovery or the "eye before the storm" of a double-dip.

Could the worst of the job-shedding be behind us? Is a major disappointment shaping up for 2010?

We will have to wait to find out.

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 end of the year and start of 2010.

***

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 did on several occasions) 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 been 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 resulted, instead, in a mid-cycle meltdown.

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