Beware the Ides of a March Re-test!

As we flirt with a level of 1040 on the S&P 500, a point crossed one way or the other at least eight times in the last 12 years, it’s probably a good time to consider what the economic and social landscape would look like should a new bear market shape up as the leading trend.

Nothing puts a crimp in confidence more than declining stocks… not even home price deflation.

Back in 2006 home prices started to turn down across the United States and by mid-2007 it was fairly obvious to most astute observers that the decline in prices would be substantial.

Yet, stocks kept moving up and consumer confidence and retail spending remained, more or less, near the peak seen for the entirety of the aughts.

Even as stocks topped in late 2007 it could be argued that most Americans were unaware of the severity of the oncoming financial crisis and the impact that it would have on their future.

By the close of 2007 home prices had already come down nearly 10% yet the impact of the deflation of the largest asset that most households will ever control did not, oddly enough, appear to most to constitute a crisis or a cause for panic.

Though daily observers of housing and the macro-economy will likely consider the whole period of 2007 and 2008 to constitute one long brewing crisis, it took until stocks plummeted in late 2008 for Americans more broadly to wake up and panic cutting spending and bringing on a collapse of global trade.

The moral here is that declining stock prices apparently work to hit Americans in the “here and now” whereas home price deflation comes with a slower realization of loss of wealth.

So with stocks on the decline yet again, it’s important to consider the potential impact.

Yesterday the S&P 500 closed at the lowest level since November 2009 cutting the gain since March 2009 considerably.

Should we re-enter a bear market “sell into the rally” mode as was seen during the long slow slide of late 2007 to September 2008 it would likely work to depress sentiment and cause households to retrench.

If we are heading back for a re-test of the March 2009 lows… beware!

Reading Rates: MBA Application Survey – June 30 2010

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 declined 8 basis points since the last week to 4.67% while the purchase application volume declined 3.3% and the refinance application volume increased 12.6% over the same period.

It's important to note that with the final expiration of the governments massive housing tax credit subsidy, home purchase activity has been trending down precipitously despite falling interest rates.

The purchase application volume is now near the lowest level seen in well over a decade.

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).

S&P/Case-Shiller: April 2010

Today’s release of the S&P/Case-Shiller (CSI) home price indices for April 2010 (browse the dashboard) reported that the non-seasonally adjusted Composite-10 price index increased 0.72% since March indicating that the government's housing tax gimmick worked to lift prices into the expiration.

It's important to note that since the CSI data is a three month rolling average, it will take until the July reporting period (i.e. the September release) to get beyond tax stimulated home sales so it will take some time to see what the true "organic" (non-stimulated) housing trends look like.

The 10-city composite index increased 4.61% as compared to April 2009 while the 20-city composite increased 3.81% over the same period.

Topping the list of regional peak decliners was Las Vegas at -56.21%, Phoenix at -51.60%, Miami at -48.36%, Detroit at -46.63% and Tampa at -42.42%.

Additionally, both of the broad composite indices show significant peak declines slumping -30.46% for the 10-city national index and -30.00% for the 20-city national index on a peak comparison basis.

To better visualize today’s results use Blytic.com to view the full release.

Also, follow the S&P/Case-Shiller dashboard.

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.

Where Is The Multiplier?

It appears we are nearing a critical juncture with respect to the fate of the “recovery”.

Was it really a recovery at all or just the combined effects of financial panic fatigue and a resurgence of speculative animal spirits mixed with a touch of retail therapy fueled by a giant government bamboozle of zero rate money and a trillion or two in stimulus?

Whether it was “cash for clunkers”, the housing tax credit, the massive purchase of mortgage securities, the never ending unemployment compensation, thousands of road projects and other government contracts, etc. etc… the government sought to force money through the system at a frenzied pace that can only be described as nearly comparable to the rate at which the economy collapsed during the worst of 2008.

But what was achieved for all the effort?

There was a notable jump up in stocks of course and a few transitory pops in auto sales and home sales with home prices feeling the effects of the increased buying activity.

The unemployment rate appeared to be in the process of forming a peak and consumer confidence improved resulting in some better than expected retail sales earlier in the year.

Something seems askew… Where is the multiplier?

The government embarks on a crusade of Keynesian monetary and fiscal stimulus the likes of which has never been seen before… a move that is sure to be judged by history to be outright recklessness and all we see is a pop in stocks, some additional auto and home sales, a peak in epically high unemployment and a tick up retail spending.

Worse yet, the stock market has been on the down low seemingly slumping into another “sell into the rally” bear trend since the near simultaneous end of the purchase of mortgage backed securities by the Fed, the end of the housing tax credit and the ramp up in financial regulation (Goldman debacle and Fin-Reg) back in April.

Is that it? Have we reached the end of the “shock and awe” simulative effects?

If so, what's next? What could the government possibly do next to sponsor the economy? Is there the political will to keep sponsoring the economy? Are we headed for another crisis in confidence?

This appears to be a tough situation indeed… one punctuated by the fact that all eyes now turn to China to look for signs of life in the global economy and a lead out of this epic mess.

Have we completely lost our marbles?

More Pain, Less Gain: S&P/Case-Shiller Preview for April 2010

As I demonstrated in prior posts, given their strong correlation, 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 Composite data reported on residential real estate transactions (condos, multi and single family homes) that settled as late as April 23 indicates that the final expiration of the government's tax gimmick appears to have driven a second, albeit substantially more tepid, price bounce with prices increasing since February but remaining below the tax credit fueled peak reached last year.

Look for tomorrow's S&P/Case-Shiller home price report to reflect a flattening of prices as the source data moves further into months affected by the tax credit activity.

Construction Anemia

The following are some interesting tidbits related to the state of construction supplies from the latest industrial production report.

It appears that construction supplies from plywood to carpeting to paving and roofing and glass supplies are all experiencing truly anemic production trends.

Even plywood and other wood products that have seen a bit of a spike up in recent months are sitting at levels not seen since the mid-1980s.

With the end of the government’s epic housing stimulus efforts it will be interesting to see how these measures trend but looking at the latest data it’s probably best to lower expectations.

Bull Trip!: GDP Report Q1 2010 (Final)

Today, the Bureau of Economic Analysis (BEA) released their third and final installment of the Q1 2010 GDP report showing that the economy continued to expand with real GDP increasing at an annualized rate of 2.7% from Q4 2009.

On a year-over-year basis real GDP increased 2.42% while the quarter-to-quarter non-annualized percent change was 0.68%.

Growth continued to be driven by personal consumption expenditures and a still notable increase in private non-farm inventories while residential investment took another nose dive declining at an annualized rate of 10.3% since Q4 2009.

Nonresidential structures also declined notably dropping at an annualized rate of 15.5% from the prior quarter.

Extended Unemployment: Initial, Continued and Extended Unemployment Claims June 24 2010

Today’s jobless claims report showed a decline to both initial and and continued claims with a subtle flattening continuing to shape up for both series while total continued claims including federal extended benefits appear to be trending down.

Seasonally adjusted “initial” unemployment claims declined by 19,000 to 457,000 claims from last week’s revised 476,000 claims while “continued” claims declined by 45,000 resulting in an “insured” unemployment rate of 3.5%.

Since the middle of 2008 though, 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 5.29 million people receiving federal “extended” unemployment benefits.

Taken together with the latest 4.30 million people that are currently counted as receiving traditional continued unemployment benefits, there are 9.60 million people on state and federal unemployment rolls.

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.

The following chart 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.

Also, acceleration and deceleration of unemployment claims has generally preceded comparable movements to the unemployment rate by 3 – 8 months (click for larger version).

New Home Sales: May 2010

Today, the U.S. Census Department released its monthly New Residential Home Sales Report for May showing significant revisions to prior months as well as an epic decline in sales coming in the wake of the expiration of the governments housing tax scam.

The low for this series is now firmly set far below any momentary pause caused by the government's unprecedented and irresponsible foray into housing market manipulation with the annualized sales pace reaching the lowest point in the over 40 years that data has been tracked.

New single family home sales collapsed 32.74% since April and 18.26% since May 2009 while the monthly supply jumped to 8.5 months and the median months for sale went flat at 14.2 months.

The following charts show the extent of sales decline (click for full-larger version)

Reading Rates: MBA Application Survey – June 23 2010

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 declined 7 basis points since the last week to 4.75% while the purchase application volume declined 1.2% and the refinance application volume slumped 7.3% over the same period.

It's important to note that with the final expiration of the governments massive housing tax credit subsidy, home purchase activity has been trending down precipitously despite falling interest rates.

The purchase application volume is now near the lowest level seen in well over a decade.

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).

Commercial Cataclysm!: Moody’s/REAL Commercial Property Price Index April 2010

The latest release of the Moody’s/REAL Commercial Property Index showed a notable monthly gain of 1.7% since March suggesting that the nation’s commercial property markets are continuing continuing to clear in the wake of a tremendous downturn that has seen prices down some 41.05% 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.

Long Cycles and a Century of Expansion, Contraction and Rates

Looking at the nonfinancial commercial paper rate juxtapose recessions and depressions from the late 1800s to today provides a fascinating view of long economic cycles as well as potentially holds some important perspective and clues to the economic climate going forward and the conundrum the Federal Reserve and all of us are now in.

First, for a quarterly series stretching back more than 100 years (relatively ancient times as far as macro-data is concerned) , this series is surprisingly well synched with recessions and depressions.

The general pattern typically sees rates climbing through expansions and crashing during recessions and depressions.

From a long cycle point of view, we can see that in the decades preceding the Great Depression successive recessions brought the rate down to successively lower lows finally reaching an ultimate low of .56% in the belly of the Great Depression.

All told, the rate stayed below 1% for 12 years during the depression period of the 30s and 40s before beginning a long up trend after World War II.

The rate then proceeded to trend up for better than 30 years reaching a striking 16.27% crescendo in the early 80s that pitted the Fed against inflation in an epic battle.

Looking at the period of the last 30 years you can see that, similarly to the period preceding the Great Depression, rates have trended down with each successive recession reaching what must surely be nearly the ultimate low.

The pattern has a notably deflationary look to it.

The Fed has, more or less, reached the zero bound, the lowest rates on record and a level not seen since the 30s and 40s.

Are we stuck here as we were during the Great Depression? Are we better than a decade away from any form of re-inflation? Will the next inflationary period be an epic generational trend building to a crescendo dwarfing all prior?

Existing Home Sales Report: May 2010

Today, the National Association of Realtors (NAR) released their Existing Home Sales Report for May showing a "surprise" pullback in sales coming in the wake of the phony baloney government sponsored surge in home sales activity seen in March and April.

Single family home sales declined 1.6% since April but still remains 17.5% above the level seen last year while prices increased 2.7% over the same period.

Although the current level of inventory remains just above the level seen last year, May brought the first monthly drop in inventory seen in five months resulting in a monthly supply of 7.8.

The following charts (click for full-screen dynamic version) shows national existing single family home sales, median home prices, inventory and months of supply since 2005.

Double-Digit Double-Jeopardy: Double Digit State Unemployment May 2010

The latest Regional and State Employment and Unemployment report showed that in May 17 states and the District of Columbia were experiencing double digit unemployment with a median unemployment rate of 10.8%.

Nevada showed the highest unemployment rate at 14.0% followed by Michigan at 13.6% and California at 12.4%.