Paper Economy - A US Real Estate Bubble Blog

Friday, January 29, 2010

Bull Trip?!: GDP Report Q4 2009 (Advance)

Today, the Bureau of Economic Analysis (BEA) released their first installment of the Q4 2009 GDP report showing that the economy expanded significantly with GDP increasing at an annual rate of 5.7% from Q3.

It's important to recognize that the majority of this growth is the result of inventory restocking, growth in fixed non-residential equipment and software investment as well as a notable slowdown in imports.

As with last quarter, estimates of fixed investment in both residential and non-residential appear too optimistic in the release which, along with the change in inventories, saw nearly a 40% increase in overall gross private domestic investment.

Residential fixed investment saw an increase of 5.7% at an annual rate but likely still has further downward revisions to come in benchmark releases.

Non-residential fixed investment saw an increase of 2.9% at an annual rate but again, will likely be revised to show a steeper contraction in future revisions.

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Ticking Prime Bomb!: Fannie Mae Monthly Summary November 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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The Chicago Fed National Activity Index: December 2009

Yesterday’s release of the Chicago Federal Reserve National Activity Index (CFNAI) indicated that national economic activity nearly contracted again in December with two of four component indices declining and with the personal consumption and housing component showing the weakest results.

The CFNAI is a weighted average of 85 indicators of national economic activity collected into four overall categories of “production and income”, “employment, unemployment and income”, “personal consumption and housing” and “sales, orders and inventories”.

The Chicago Fed regards a value of zero for the total index as indicating that the national is expanding at its historical trend rate while a negative value indicate below average growth.

A value at or below -0.70 for the three month moving average of the national activity index (CFNAI-MA3) indicates that the national economy has either just entered or continues in recession.

It’s important to note that at -0.61 the current three month average index value is very near the official recessionary indicator mark.

The following charts (click for full-screen interactive zoom-able version) plot the national activity index as well all of its four components.





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Thursday, January 28, 2010

Extended Unemployment: Initial, Continued and Extended Unemployment Claims January 28 2010

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.

Seasonally adjusted “initial” unemployment claims decreased by 8,000 to 470,000 claims from last week’s revised 478,000 claims while “continued” claims decreased 57,000 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 5.6 million people receiving federal “extended” unemployment benefits.

Taken together with the latest 5.79 million people that are currently counted as receiving traditional continued unemployment benefits, there are well over 11 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.

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.

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

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Stupid or Not… It’s Still The Economy

I suppose it should come as no surprise that there exist some pretty basic correlations between consumer mood, the unemployment rate and assessments of presidential job performance.

Of course, presidential approval or disapproval ratings can bounce around or trend for a number of reasons… the start of a first term and matters of national security tend to command an elevated approval rating while unpopular wars or impeachment will generally have the opposite effect.

But as James Carville’s old Clinton-era adage reminds, it’s the state of the economy, especially during recessionary periods, that drives Americans sense of satisfaction with their leader in the White House.

Looking at the first chart below (click for super-dynamic version) that plots all presidential approval ratings (as given by Gallup) since 1977 along with the University of Michigan’s Consumer sentiment series, you can see that during periods of low or declining consumer mood, the presidential approval tends to suffer.

Similarly, peaks and troughs in the unemployment rate also tend to be reflected in presidential performance with peaks in the disapproval rating generally climbing during periods of increasing joblessness.

Next, regardless of economic conditions it appears that Americans are getting progressively more opinionated resulting in the “No Opinion” option of the Gallup poll trending down for the better part of 30 years and now standing at a point at which generally only 5% of respondents indicate that they have no judgment on the presidents’ performance one way or another.

Finally, for quick overview of over 70 years of presidential approval ratings, take a look at the following chart (click for dynamic full-screen version) that synthesizes the last thirteen presidents’ results into a single series.

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Wednesday, January 27, 2010

New Home Sales: December 2009

Subtitle: 3% To The Low

Today, the U.S. Census Department released its monthly New Residential Home Sales Report for December showing both notable revisions to prior months results as well as a sizable 7.6% month-to-month decline in sales of newly constructed single family dwellings bringing the seasonally adjusted annual sales pace down to 342,000 units or 8.6% below the level seen in December 2008 and remaining 75.38% below the peak level seen in 2005

So much for the “end of the housing decline”…

We are now only 3% above the record low hit in early 2009 and likely on course with a breach of that level in the next few months.

It’s important to recognize the significance of revisions when interpreting both the new home sales and new residential construction data.

Although many in the traditional media and elsewhere have been treating the government sponsored bounce seen since March 2009 as if it were a solid indication that the bottom was in, those who have followed this dataset for years know that one needs to rely on a mix of multiple metrics along with healthy dashes of skepticism and hunch in order to glean out the true trend.

Needless to say, these must continue to be awfully disappointing numbers for many.

…The Feds, Wall Street, speculators, all the unsuspecting nitwits that locked in “housing bottom” new home purchases using government handouts and bribes.

Well, the system may be a shell of its former self, twisted and tortured by the feds, interested industry groups and speculators, but it’s not about to be gamed by such tomfoolery.

The bounce in new home sales seen throughout 2009 was an authentic increase in overall activity but not in “organic” activity… How would new home sales have trended without the government propping?

So, the “real” bottom is not in and, as I have noted in prior posts, given that the level of completions remains significantly elevated and since there is still currently 8.1 months of supply, it is very likely that we will be headed back for a new low come early 2010.

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 earlier this year the new home sales data prompted the traditional media to make many “bottom calls”, the evidence for their conclusions were scant.

First, most “bottom callers” 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 slightly higher than past historic bottoms and the level of homes completed remains MUCH higher.

Look at the following summary of today’s report:

National

  • The median sales price for a new home declined 6.09% as compared to December 2008.
  • New home sales were down 8.6% as compared to December 2008.
  • The inventory of new homes for sale declined 34.0% as compared to December 2008.
  • The number of months’ supply of the new homes has decreased 27.7% as compared to December 2008 and now stands at 8.1months.
  • The Median months for sale increased to another historic record of 13.9 months.
Regional

  • In the Northeast, new home sales increased 33.3% as compared to December 2008.
  • In the Midwest, new home sales declined 27.1 as compared to December 2008.
  • In the South, new home sales declined 7.8% as compared to December 2008.
  • In the West, new home sales declined 12.0% as compared to December 2008.

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Crashachusetts Existing Home Sales and Prices: December 2009

Yesterday, the Massachusetts Association of Realtors (MAR) released their Existing Home Sales Report for December showing that single family homes sales jumped 14.6% on a year-over-year basis while condo sales surged 31.7% over the same period.

Single family median home value increased 10.9% on a year-over-year basis to $305,000 while condo median prices increased 10.9% to $255,000.

Again, these results are indicating not only that the government’s ludicrous subsidy of residential real estate (the market, the industry and Realtors) worked to drive a significant number of sales, but that housing fever is still alive and well.

This should come as a truly disappointing blow to anyone who has the audacity to think that a healthy and significant correction in prices is actually a necessary step in the process of healing our distorted and high cost of living area.

What gives the government the right to attempt to create a floor under housing, an asset/service carrying likely the single greatest cost any typical household has to bear?

If market forces would naturally drive down sales and prices making the cost of living more affordable why should government and industry groups like the Realtors interfere?

But, federal meddlers and conniving interested parties don’t think in those terms… they support prices out of a bias in favor of property owners on the upper end, they create and support public housing projects for those on the lower end… and what of those in the middle?... you get to foot the bill one way or another.

So the beat goes on… Buyers snap back to a behavior we all now know caused tremendous distortions and costly excesses, the Feds feel satisfied that they bought enough votes to secure their next election and Realtors line their pockets with commission loot that is now the direct transformation of your tax dollars.

What have we learned from this whole ordeal? … likely nothing.

But in any event, this surge of activity can only run so long… contrary to popular belief, there is not simply an endless supply of sidelined buyers just ready to snap up the next government tax gimmick.

Eventually even these sneaky devices will fail to stimulate the lemmings and the natural market force will show its true character.

Whether Mr. housing market will come out of this distorted period depressed and dejected or spry and agile is anyone’s guess but, given the latest results and the recent extension of the federal governments housing policy, we should be prepared for another season of distorted sales volume.


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.

Key Statistics from the Report:

Single Family results compared to December 2008

  • Sales: increased 14.6%
  • Median Selling Price: increased 10.9%
  • Inventory: declined 14%
  • Current Months Supply: 7.2
  • Current Days on Market: 125
Condo results compared to December 2008

  • Sales: increased 31.7%
  • Median Selling Price: increased 10.9%
  • Inventory: declined 16%
  • Current Months supply: 5.6
  • Current Days on Market: 136

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Massive Unemployment: Mass Layoffs December 2009

Today, the Bureau of Labor Statistics (BLS) released thier latest installment of the Mass Layoff Report showing continued weakness in nation’s job market with 1726 mass layoff events resulting in 153,127 initial unemployment claimants on a seasonally adjusted basis.

On a seasonally un-adjusted basis, the mass layoff events totaled 2310 with 214,648 initial claimants.

The BLS considers a mass layoff event to be a condition where there are at least fifty initial claims for unemployment insurance originating from a single employer over a period of five consecutive weeks.


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Reading Rates: MBA Application Survey – January 27 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 2 basis points since the last week to 5.02% while the purchase application volume declined 3.3% and the refinance application volume slumped 15.1% over the same period.

It’s important to recognize that despite the Federal Reserve’s “quantitative easing” measures and record low interest rates, the purchase application volume has now dropped to the lowest reading since 2000.

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, January 26, 2010

S&P/Case-Shiller: November 2009

Today’s release of the S&P/Case-Shiller (CSI) home price indices for November 2009 reported that the non-seasonally adjusted Composite-10 price index declined slightly since October further indicating that the government sponsored housing bounce has drawn to a close.

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

Now that the strongest selling months have been reported, look for all remaining CSI releases until early spring to continue to indicate notable price weakness coming from typical seasonal declines as well as extra-seasonal declines as a result of reduced demand from activity that was “stimulated” forward into the summer and early fall 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).

Today, we may not be so lucky.

The 10-city composite index declined 4.50% as compared to November 2008 while the 20-city composite declined 5.32% over the same period.

Topping the list of regional peak decliners was Las Vegas at -55.61%, Phoenix at -50.77%, Miami at -46.92%, Detroit at -42.87% and Tampa at -41.34%.

Additionally, both of the broad composite indices showed significant declines slumping -29.96% for the 10-city national index and -29.17% 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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Over 100 Years of Unspectacular

It’s no doubt that we live in speculative times, so in an effort to keep perspective on a day in which the traditional media will endlessly debate and interpret the outcome of the latest S&P/Case-Shiller report, let’s reflect for a moment on Robert Shiller’s famous 1890 “real” home price index.

Below (click for full-screen super-dynamic version) is the “real” (inflation adjusted) national annual home price index constructed by Professor Robert Shiller that stretches all the way back to 1890.

The three most prominent features of this dataset are the giant crater in prices that commenced somewhere in the early 1900s and lasted until the mid 1940s, the epic run-up that started in 1997 and ongoing decline that we are experiencing today, and finally the fact that taken together the whole series indicates that home prices, more or less, have remained flat (in real terms) for more than 100 years.

That’s quite a contrast to the overconfident “houses never lose value” sentiment or the epically speculative “flip this house” mentality that ran roughshod over our culture in the 2000s.

Not only do prices sometimes go down, sometimes they go down and stay down for over twenty years.

Sometimes they trend up so dramatically, inflated by transient and artificial conditions in banking and government, that they eventually must revert to the mean in order to remain in-line with more fundamental and longstanding economic trends.

Finally, although this latest housing boom convinced many in the 2000s that they should “go long” housing, levering up and speculating to the extent that they traded pre-construction condo contracts like they were internet stocks, the long term price curve eked out by U.S. housing, as an asset class, is so unspectacular that it warrants only the most dispassionate and utilitarian “investment” approach.

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Monday, January 25, 2010

Existing Home Sales Report: December 2009

Today, the National Association of Realtors (NAR) released their Existing Home Sales Report for November showing a significant crack in the epic government sponsored surge in home sales activity with single family home sales declining 16.8% since last month but still remaining 12.7% above the level seen last year.

As for prices, December registered the first annual increase for single family home prices in at least 38 months increasing slightly at a rate of .01%.

It’s important when reflecting on the sales results to consider that over 69.2% of all sales were for properties priced below $250,000 while only 7.7% were priced at or above $500,000.

Clearly, today’s results unequivocally indicate that the government’s tax gimmick drove a surge in "lemming" demand into November, bringing a renewal of speculative animal spirits, but with an effect that appears to have been largely temporary.

Realtor's are expecting a second great surge of "buying" activity as we near the second tax gimmick expiration this spring but as today's results suggest, these tricks are likely creating very little additional demand and simply shift demand foward as "buyers" jump for the government tax carrot... a carrot likely dangled over an abyss of asset price deflation.

The following (click for larger versions) are charts showing sales for single family homes, plotted monthly, for 2006, 2007, 2008 and 2009 as well as national existing home inventory and month supply.







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