Paper Economy - A US Real Estate Bubble Blog

Friday, April 30, 2010

Real Private Residential Investment Sleight of Hand

Back when the Q3 2009 GDP report was first released business media cheered the arrival of the first gain in real private residential investment seen in many years and further basked in the glow of what appeared to be exceptional strength in the component which showed a lofty 23.4% annualized percent gain (later revised down to the still notable 18.86%).

I took exception with the figure on multiple levels as it was clear to me that this was an errant data-point in need of revision, juiced by government stimulus and seriously in need of some context for its proper interpretation.

Today’s advance release of the Q1 2010 report provides substantial evidence that last year’s increase in fixed residential investment was but a blip more or less mirroring other housing trends that were driven by the government tax gimmick.

Of course, the new decline to this component has been largely ignored by business media.

It wouldn’t be surprising if this series lifts going into the second quarter again mirroring the activity occurring as a result of the extended tax credit but in all likeliness this dynamic is merely temporary with the true “organic” trend remaining biased to decline.

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Bull Trip!: GDP Report Q1 2010 (Advance)

Today, the Bureau of Economic Analysis (BEA) released their first installment of the Q1 2010 GDP report showing that the economy continued to expand with real GDP increasing at an annualized rate of 3.2% from Q4 2009.

On a year-over-year basis real GDP increased 2.55% while the quarter-to-quarter non-annualized percent change was 0.8%.

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 10.9% since Q4 2009.

Nonresidential structures also declined notably dropping at an annualized rate of 14% from the prior quarter.

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Outstanding Contraction!: Commercial Paper Outstanding April 2010

The Commercial Paper (CP) market is essentially a private debt market used by corporations as a cheaper means of funding typical recurring operations than drawing on a line of bank credit.

Commercial paper, as financial instrument, is by no means a recent innovation and, in fact, you can read about how the CP market was affected by the many historic financial shocks experienced by the U.S. (read Panic on Wall Street: A History of America’s Financial Disasters)

Although the Federal Reserve was able to artificially bring CP rates down significantly since the shocking 615 basis point spread blowout (A2/P2 spread) of late 2008, they have apparently not been successful in preventing an overall contraction in the CP market.

The Federal Reserve calculates and published the total amount of CP outstanding every week and as of the latest published period, commercial paper outstanding is contracting at a fast pace, registering a whopping 22.06% decline year-over-year.

It's important to note that at $1.108 trillion, total commercial paper outstanding is significantly less now than the level seen in the trough of the dot-com recession.

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Index of Stress: April 2010

The Federal Reserve Bank of St. Louis recently began publishing a new weekly index that seeks to track the general level of financial stress.

As periods of financial stress come and go a whole host of fundamental economic indicators immediately adjust to meet the near and long term expectations of market participants

Interest rates, yields spreads, popular market volatility indices all move in real time giving observers unequivocal evidence of changes general sentiment.

The St. Louis Fed has devised a method of crunching eighteen of these sensitive indices down into one convenient index it calls the St. Louis Fed Financial Stress Index (STLFSI).

The latest results of the STLFSI indicates that the level of financial stress is continuing its trend down from the epic levels seen during the fall of 2008 but remains elevated with respect to typical levels.

At a value of 0.8 the current level of financial stress is roughly equivalent to late-2003 following the Enron/WorldCom debacle and remains nearly as elevated as period surrounding the 1998 Russian debt crisis and Long Term Capital Management.

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Thursday, April 29, 2010

Thoughts on Apple versus Adobe

…This post is a bit of a departure from my typical macro econ theme but what the heck.

Today, Steve Jobs answered the recent criticisms over the lack of support for Adobe’s Flash technology on Apple’s mobile platform with a sharp and truly cutting response.

Looking at today’s trend for AAPL versus ADBE it appears that the market is siding with Jobs.

From a one point of view (particularly that of a customer), the case Jobs makes is pretty compelling particularly in light of Apple’s present position in the mobile marketplace.

Apple currently holds a premium spot for mobile platforms with its compelling iPhone, iIPad and iPod products and tightly controlling the application architecture clearly allows them, as Jobs argued, to maintain the highest level of quality (power usage) and consistency (application features) across all applications written for their platform.

Jobs argues that the open standards supported by their mobile platform (HTML5, CSS, Javascript and H.264) are sufficient for enabling access to the entirety of the web (ostensibly implying the ongoing evolution of the web as well) including rich content (video, audio) and rich applications (web 2.0 apps).

Further, Jobs details some specific issues that are common when a platform vendor allows support for unfettered application technologies such as slow pass-through of underlying system features through the application technology and stability.

In a sense, Jobs is saying that they have created the platform for the future, it supports fundamental open standards and they have learned from past experience (with Adobe and other third parties) and thus are not about allow unfettered technologies to inhabit their platform.

From a developers point of view though, Jobs argument raises some series issues.

First, Jobs is specifically arguing that Flash is an old, proprietary (closed) and unstable (crashy) technology and further goes on to accuse Adobe of being an inattentive development shop.

Aside from being fighting words (particularly scathing coming from the head of the outfit currently associated with the highest quality technology products), Jobs accusations reveal his intentions for emerging web technologies.

Jobs is essentially indicating that if Apple doesn’t deem a technology to be “open” and compatible with their platform at a fundamental level at which Apple would specifically implement the technology on their platform (i.e. the way they support HTML5, CSS, Javascript, and H.264) themselves, then it likely will not be a technology that they will support.

This has pretty significant consequences for emerging technologies particularly those related to Rich Internet Applications like Flash Flex and Microsoft Silverlight.

Although Apples mobile platform supports HTML5, CSS and Javascript those are only some technologies suitable for development of the next generation of web applications thus, the reason that both Flash Flex and Silverlight are currently being widely adopted by the market.

For the iPhone, IPad and IPod if you want a richer experience for your user that can currently be delivered though HTML based technologies your only option is writing a “native” Cocoa application likely using Objective-C… a seriously antiquated development technology (like stepping back to the stone age of mid-1990s development languages).

Further, if a developer wants to support their application on both a typical OS and Apple mobile platform they now have to either choose to write the application using only HTML based technologies to, more or less, cover all platforms or bring in a Objective-C Cocoa developers to write a specific application for their Apple mobile offering.

For application developers there are some serious limitations and costs associated to both avenues.

Finally, Jobs has in the past stated that Java will never be implemented for the iPhone (although there are backdoors that allow for Java on the iPhone) even though Java is as open and stable a technology as you can get.

This appears to conflict with Jobs Flash argument and really yields the sense that Jobs simply wants to have complete control over the applications that run on his mobile platform.

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Extended Unemployment: Initial, Continued and Extended Unemployment Claims April 29 2010

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

Seasonally adjusted “initial” unemployment claims declined by 11,000 to 448,000 claims from last week’s revised 459,000 claims while “continued” claims declined by 18,000 resulting in an “insured” unemployment rate of 3.6%.

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 5.4 million people receiving federal “extended” unemployment benefits.

Taken together with the latest 4.98 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.

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, April 28, 2010

Miami Re-Busting!

Today’s inductee into the “Re-Busting” lineup is Miami, one of the few epic super-bubble metros.

During the boom the stories coming out of the Miami housing market immediately became legend.

Tales of pre-construction condo flipping, yearly new construction inventory being added at three or four times the historic rate and over 30% annual appreciation worked to drive the mania to epic heights.

But, as we now know very well, the party ended in 2006 and the price line (as seen by the Radar Logic data) has been in a serious tailspin ever since.

In fact, the decline has been so significant that even the massive government stimulus couldn’t stop the dire reversion.

In spring 2009 buyers in the Miami market appear to have taken the first time home “buyer” tax gimmick as a signal that prices had bottomed out… animal spirits were back on!

Prices showed the most notable increase in three years climbing sequentially for the better part of three months.

But alas… the “organic” recovery was not quite underway.

Prices peaked out in mid-summer and declined throughout September falling below the prior low.

Worse yet, short of a feeble blip in prices going into the first expiration of the housing tax gimmick, prices have continued to decline reaching the current level some 51.14% below the peak seen in 2006 and dropping at an annual rate of 13.03%.

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Hong Kong Bubble?: Hong Kong Residential Property Prices February 2010

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

The University of Hong Kong’s Residential Real Estate Series (HKU-REIS) indicated that, in February, the price of residential properties continued to rise increasing 2.13% since January and 29.98% since February 2009.

The “Hong Kong Island” index, “Kowloon” and “New Territories” sub-components also showed notable year-over-year increases.

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 – April 28 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 increased 4 basis points since the last week to 5.08% while the purchase application volume increased 7.4% and the refinance application volume declined 8.8% over the same period.

It’s important to recognize that now that the Federal Reserve’s mortgage related “quantitative easing” measures are complete, rates could soon be on the rise.

If rates continue to trend upward, purchase activity will slow despite the efforts of the federal government to incentivize home buying.

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, April 27, 2010

S&P/Case-Shiller: February 2010

Today’s release of the S&P/Case-Shiller (CSI) home price indices for Fenruary 2010 (browse the dashboard) reported that the non-seasonally adjusted Composite-10 price index declined 0.64% since January further indicating that the government sponsored housing bounce seen last year continues to erode.

On a year-over-year basis though, the Composite-10 index now shows the first increase in 38 consecutive months, a notable development.

Looking at the 1990s-era comparison charts below you can see that it took roughly 2 times longer (roughly 40 months) for our current housing decline to show its first year-over-year gain than was seen during the 1990s decline.

If the 1990s remains a good model, this would imply that we have roughly another 40 months (3.3 years) left to go until we hit the ultimate price bottom.

Further, the 1990s decline took roughly 100 months (8.3 years) to go from peak to peak (i.e. peak to trough and back to full recovery again) so again, using the 1990s as a model would imply that our current decline will run a total of roughly 200 months (16.6 years) from peak to full recovery.

This means that current holders of peak priced homes may have to wait until some time in 2023 to be made whole again.

Alternatively, if we are currently experiencing the Japanese model for residential real estate deflation… the ultimate recovery may still be many decades out.

The 10-city composite index increased 1.43% as compared to February 2009 while the 20-city composite declined 0.64% over the same period.

Topping the list of regional peak decliners was Las Vegas at -55.96%, Phoenix at -51.58%, Miami at -47.48%, Detroit at -44.51% and Tampa at -42.65%.

Additionally, both of the broad composite indices show significant peak declines slumping -30.70% for the 10-city national index and -30.26% 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.


In this way, this chart captures ALL months of the downturn from the peak to trough to peak again.

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Monday, April 26, 2010

Las Vegas Re-Busting!

The latest inductee to the “Re-Busting” lineup is Las Vegas with a Radar Logic price line reflecting the phenomenally extreme circumstances of boom and bust as has ever been seen.

Back in late 2005 and early 2006 the popular real estate boards we rife with debate over the fate of Las Vegas.

Some witnessed the extraordinary run up and saw a future with an inevitable correction, others argued that there were fundamental reasons for the appreciation and sought to double down for even greater returns.

Well, we now know how those “bets” turned out… one day your holding all the cards… the next all the loss.

In any event, the government’s attempt to ride to the rescue of the sorry lot who came out short by luring in others who had not yet had the opportunity worked to spark the best suckers rally the Las Vegas market had seen in three years.

This mini-boom lasted some three months peaking out in late summer 2009 before falling back down again by early fall.

Coming into November there was another second blip run-up into the first expiration of the home buyer tax gimmick but again, prices dropped again.

It’s important to recognize that Las Vegas is now down at series lows some 59.12% below the peak seen in 2006 and continuing to decline at the fairly brisk pace of 15.63% on a year-over-year basis.

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More Pain, Less Gain: S&P/Case-Shiller Preview for February 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 February 22 indicates that the price bounce seen as a result of the government's housing tax credit peaked in August and has since steadily trended down with the latest data dropping .73% since January.

Look for tomorrow's S&P/Case-Shiller home price report to reflect essentially the same trend showing generally declining prices and potentially another strike at last years cycle low.

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Friday, April 23, 2010

Prime Time: Hudson City Bancorp Non-Performance

Hudson City Bancorp (NYSE:HCBK) has become an icon of traditionally run, prime-only, safe and sound regional banks.

Some time ago I took exception with the PR that Hudson City was spinning as it’s CEO, Ronald Hermance, appeared on a multitude of business and non-business media (Mad Money, CNBC, Bloomberg, Barron’s… even NPR) speaking of the merits of his banks “old fashioned” sound traditional lending practices which included never making subprime loans or other toxic affordability products.

Of course, Hermance downplayed his banks non-performing loan ratio which now nearly tops 2% of total loans preferring instead to project the picture of a safe bank with only high quality loans and growing deposits.

While Hermance was making the rounds of media outlets and dropping talking points his banks big mortgages were going bad at a progressively higher rates.

Granted, the current 1.98% non-performing loan ratio is relatively low but the ratio has jumped over 167% from Q4 2008 to Q4 2009 on a delinquent loan total of $627.7 million.

Although it is true that Hudson City did not participate in subprime lending, the bank originated jumbo loans in a market (primarily the New York, New Jersey metro area) that was as overheated as any during the housing boom.

Big prime loans, even with low loan to values go bust in down economies and our current housing driven bust with significant declines to home prices makes matters worse.

I’ve been arguing for the better part of three years that although the traditional media and apparently general consensus has focused on subprime and other “toxic” mortgage products as the source for the credit tumult, the historic deterioration would by no means be limited to these “bleeding edge” products.

Before this massive housing and general economic contraction is complete, I expect to see new records set for prime defaults, be they prime-Jumbo ARM loans, prime-Jumbo fixed rate loans, prime-conforming ARM loans or prime-conforming fixed rate loans… we will see historic defaults across the entire spectrum of mortgage products.


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Detroit Re-Busting

There is no question about it… Detroit is the weakest most pitiful metro housing market in the country and looking at the latest data from Radar Logic, makes a fine inductee to the “Re-Busting” lineup.

It looks as though the first time home buyer tax gimmick drew in a significant number of “buyers” in the spring of 2009 ushering in one of the most significant jumps in prices seen in recent years.

Even after prices topped out in late summer and fell back to the lows, the first expiration of the tax scam drove prices up again yet again for a feeble rally into November.

This rally too did not last falling to where it sits now… at a series low some 49.40% below the peak value seen in 2005.

Worse yet, prices continue to head lower at a good clip declining 15.45% on a year-over-year basis.

Thus what Uncle Sam giveth, the Market taketh away!

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New Home Sales: March 2010

Today, the U.S. Census Department released its monthly New Residential Home Sales Report for March showing significant revisions to prior months as well as a notable jump in sales on a month-to-month and year-over-year basis fueled mostly from a surge in buying in the South region.

Nevertheless, the low for the series currently remains February 2010 making the huge jump in March look suspiciously "stimulated".

Should the March results be interpreted as the start of an "organic" recovery or has the government tax gimmick run roughshod over the data?

Clearly we need to wait for more data and the revisions but given that today's "good news" was so skewed by the South region's 43.5% year-over-year jump, any declaration of a general market bottom would likely still be premature.

New single family home sales jumped 26.9% since February and 23.8% since March 2009 while median prices increased 4.34% since March 2009.

Additionally, the monthly supply declined to 6.7 months while the median months for sale stayed flat at 14.4 months.

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

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Thursday, April 22, 2010

Existing Home Sales Report: March 2010

Today, the National Association of Realtors (NAR) released their Existing Home Sales Report for March showing likely the initial signs of the second epic government sponsored surge in home sales activity with single family home sales increasing 7.34% since last month and climbing 13.3% above the level seen last year.

As for prices, the March release showed the first year-over-year increase in at least 41 months climbing 0.59% since last year.

It’s important when reflecting on the sales results to consider that over 71.2% of all sales were for properties priced below $250,000 while just over 7.3% were priced at or above $500,000.

Today’s results likely indicate that the government’s tax gimmick (second and final expiration is upon us) is driving a surge of phony demand and bringing a renewal of speculative animal spirits but the effect will likely be temporary.

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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