Paper Economy - A US Real Estate Bubble Blog

Friday, February 26, 2010

Beantown Bust: Boston Home Sales and Prices January 2010

This week, the Massachusetts Association of Realtors (MAR) released their Existing Home Sales Report for January showing that single family homes sales declined 37% on a month-to-month basis but remained 9.1% above the level seen last year while condo sales continued to surge jumping 35% since January 2009.

The single family median home value increased 14.1% on a year-over-year basis to $300,000 while condo median prices increased 26.5% to $257,980.

Although both sales and prices were up notably, it’s important to recognize that the majority of the activity seen in the late fall came as a result of the governments housing tax gimmick and since the epic November surge, sales have been trailing off steadily.

In fact, there is slight possibility that next month’s sales results could actually drop below the level seen in February 2009 as the sales that were incentivized into November take their toll on future months.

We’ll have to wait to see…


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 December, both the CSI and RPX confirmed that there has been an “extra-seasonal” bounce in prices that while cooling notably going into October, has remained elevated with the latest data showing a month-to-month decline of 0.14% to the CSI and a 2.49% increase to the RPX while on a year-over-year basis the CSI increased 0.47% while the RPX increased 13.91% over the same period.

As for condos, the latest S&P/Case-Shiller data indicated that prices declined slightly dropping 0.09% on a year-over-year basis.

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.



It’s important to note that the CSI data is now showing the first nominal year-over-year gain in 45 consecutive months and, when comparing to the 90s housing bust, appears to indicate that the period of nominal annual price declines may be complete yet, again, since much of the strength recently has come on the back of massive government stimulus, we will have to wait to see how the trend shapes up.

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 “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 while today we have seen 45 consecutive months of annual price declines.

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.

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Existing Home Sales Report: January 2010


Today, the National Association of Realtors (NAR) released their Existing Home Sales Report for January showing another significant crack in the epic government sponsored surge in home sales activity with single family home sales declining 6.93% since last month but still remaining 8.58% above the level seen last year.

As for prices, the January release showed a tepid 0.37% decline on a year-over-year basis as well as revisions to prior results erasing last month’s annual gain resulting in 39 consecutive year-over-year declines.

It’s important when reflecting on the sales results to consider that over 69% of all sales were for properties priced below $250,000 while just over 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 the fall of 2009, 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 forward as "buyers" jump for the government tax carrot... a carrot likely dangled over an abyss of asset price deflation.

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.



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The Globe of Bubbles!

One of the more interesting and most dramatic features of the housing bubble days was how pervasive and broad the mania was, encompassing a multitude of regional housing markets across the United States and around the world.

In fact, that was one of the primary arguments that prescient author John Talbott outlined out in his early 2000s books on the housing bubble, as he asserted that the sheer fact that bubbles were occurring in so many world property markets simultaneously likely implied that local supply constraints were NOT the cause of the significant house price appreciation, as many had argued.

Talbott accurately concluded that relaxed lending standards and a global credit boom were the real causes of the majority of outstanding property price appreciation.

Today, post-housing crash, we are still seeing property markets moving together somewhat as governments around the globe scramble to prop up quickly deflating housing assets.

One notable example can be seen by comparing the S&P/Case-Shiller index to that of the two popular U.K. home prices indices.

Today, Nationwide released the latest data confirming that U.K. property prices have fallen back a bit as was suggested by the January Halifax release.

Now, all three series, are showing a similar trend of a great decline, a government sponsored bounce and now indications of continued price deflation.

The following chart (click for dynamic full-screen version) shows S&P/Case-Shiller Composite-10 series along with the Nationwide and Halifax U.K. series.

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Bull Trip!: GDP Report Q4 2009 (Preliminary)

Today, the Bureau of Economic Analysis (BEA) released their second installment of the Q4 2009 GDP report showing that the economy expanded significantly with real GDP increasing at an annualized rate of 5.9% from Q3.

On a year-over-year basis real GDP was just barely positive coming in at just 0.15% while the quarter-to-quarter non-annualized percent change was 1.45%.

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 growth in exports of goods.

Change in private inventories alone accounted for 3.88% of the percent change in real GDP.

Residential fixed investment was revised down to an annualized increase of 5.0% but likely still has further downward revisions to come in benchmark releases.

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Thursday, February 25, 2010

Extended Unemployment: Initial, Continued and Extended Unemployment Claims February 25 2010

Today’s jobless claims report showed another significant surprise jump in initial claims bending the trend somewhat and throwing into question what would otherwise look like a nearly textbook peak.

Seasonally adjusted “initial” unemployment claims jumped by 22,000 to 496,000 claims from last week’s revised 474,000 claims while “continued” claims increased by 6,000 resulting in an “insured” unemployment rate of 3.5%.

It's important to note that at nearly 500K claims, initial claims is at the highest level seen since November 2009 and taken together with the federal extended claims data, offers a dire view of the state of the job market and of the economy as a whole.

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 5.6 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.

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).

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Wednesday, February 24, 2010

Bottomless New Home Sales

Although I’m not surprised by today’s new home sales results, the lack of coverage of this important housing indicator breaking to a new all time low leaves me with a sense of… let’s call it… ironic incredulity.

For those who have not been following along, this series was fingered early last year as one of the most notable “Green Shoots” economic developments as, prompted by the immense government stimuli, it began turning up from an all time low of 329,000 seasonally adjusted annualized units.

As the government sponsored uptrend continued, many in the traditional media and elsewhere hopped on the “housing bottom” bandwagon applying their new found sense of optimism to everything from the new residential construction series to home prices to just about anything else that appeared to follow the trend.

Many, including myself, underestimated the significance of the “first time homebuyer” tax gimmick and the effect it would have on an unwind of a massive charade that had, for all intents and purposes, be made brutally obvious to all… yet the buyers came back in droves to the market mid-correction (not middle but not fully corrected) for their chance to jump and snatch that $8000 tax carrot.

With today’s new home sales numbers we see very clearly that the government gimmickry simply brought a temporary pause to an “organic” decline that is still the overarching trend.

In 2010 the housing market will be confronted again with another, even larger, housing tax gimmick and judging on the outcome from 2009, it’s safe to conclude that it will drive sales but will it finally lead to a bottom in new home sales and foreshadow a wider bottom for housing a whole?

The answer lies partially in your point of view.

If you believe that massive malinvestment in a market as large as the residential housing market of the United States of America can be fundamentally cleared through government subsidy (a conclusion that was clearly wrong in 2009), you may opt for “Green Shoots 2.0” and go with 2010 as your entrypoint into housing bottom land.

Alternatively, you can hold the point of view that markets work and as such will only fundamentally clear when all the excesses have been wrung out, all distortions revert, all losing participants lose, all failures fail and the longstanding economic trends are born out.

The following chart plotting new home sales against the median months for sale demonstrates very clearly that 2009 was NOT the bottom for new home sales.

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New Home Sales: January 2010

Today, the U.S. Census Department released its monthly New Residential Home Sales Report for January showing significant declines on a month-to-moth and year-over-year basis resulting in a new home sales level that is far lower than the temporary low seen last year in advance of the government sponsored housing bounce, and in fact, is the lowest level seen in at least 47 years.

New single family home sales plunged 11.2% since December 2009 and 6.1% since January 2009 while median prices have continued to decline dropping 2.44% since January 2009.

Additionally, the monthly supply increased to 9.1 months while the median months for sale jumped to 14.2 months.

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

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 be awfully disappointing numbers for many.

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?

In any event, the “real” bottom was NOT IN during 2009, as I had correctly predicted in prior posts, and the level of new home sales is now at a low for this cycle.

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

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Hong Kong Bubble?: Hong Kong Residential Property Prices December 2009

There has been much speculation recently about an ongoing price bubble occurring in the Hong Kong residential property market.

In fact, the concern has been so great that Hong Kong Financial Secretary John Tsang recently announced significant measures that will be taken in order to mute the real estate trading activity including a higher levy on luxury properties, adjustments to the rate of land auctions and tighter scrutiny on bank lending.

Looking at the latest residential property price indices for Hong Kong, you can see that Tsang’s concern is warranted.

The University of Hong Kong’s Residential Real Estate Series (HKU-REIS) indicated that, in December, the price of residential properties went flat since November but increased a whopping 31.35% on a year-over-year basis.

The “Hong Kong Island” index, “Kowloon” and “New Territories” sub-components also showed notable year-over-year increases jumping 35.88%, 29.00% and 26.19% respectively.

The HKU-REIS is a set of property price indices constructed monthly using a “modified” repeat-sale methodology similar to that of the S&P/Case-Shiller indices yet suited to the Hong Kong property market.

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Reading Rates: MBA Application Survey – February 24 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 the last week to 5.03% while the purchase application volume declined 7.3% and the refinance application volume decreased 8.9% 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 now sits at the lowest reading since 1997.

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, February 23, 2010

S&P/Case-Shiller: December 2009

Today’s release of the S&P/Case-Shiller (CSI) home price indices for December 2009 reported that the non-seasonally adjusted Composite-10 price index declined slightly since November 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 October-December of 2009.

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 2.41% as compared to December 2008 while the 20-city composite declined 3.08% over the same period.

Topping the list of regional peak decliners was Las Vegas at -55.54%, Phoenix at -50.52%, Miami at -47.07%, Detroit at -42.87% and Tampa at -41.67%.

Additionally, both of the broad composite indices show significant peak declines slumping -30.10% for the 10-city national index and -29.35% 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, February 22, 2010

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

The latest release of the Moody’s/REAL Commercial Property Index while showing a whopping 4.1% increase in prices since November, the second consecutive gain in fifteen months and the largest monthly gain on record, still continues to suggest that the nation’s commercial property markets are experiencing a tremendous downturn with prices declining 29.22% on a year-over-year basis and a stunning 40.8% 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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The Federal Reserve Bank of Dallas Texas Manufacturing Outlook Survey: February 2010

Today, the Federal Reserve Bank of Dallas released their latest read on the manufacturing activity of their region indicating a continuation of the expansion seen in recent months yet with a few notable instances of weakness.

While, the current production index declined slightly since January, the value remained in expansion territory at 2.3 indicating that more respondents saw increasing production than flat to declining.

Predictions of future production also declined since January but remained firmly in expansion at a level of 40.

The “volume of new orders” index showed a notable drop-off, declining from a very robust level of 26.8 in January to a weak -6 in February indicating that respondents currently see new orders dropping off.

Respondents also saw the prices paid for raw materials continuing to increase for the seventh consecutive month with the index now standing at a level of 40.9.

Finally, the outlook for the current employment level continues to be weak with the “number of employees” index registering -5.2 while the future number of employees index went flat at 22.5.




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