Paper Economy - A US Real Estate Bubble Blog

Friday, July 30, 2010

Bull Trip!: GDP Report Q2 2010 (Advance)

Today, the Bureau of Economic Analysis (BEA) released their first installment of the Q2 2010 GDP report showing that the economy continued to expand with real GDP increasing at an annualized rate of 2.4% from Q1 2010.

On a year-over-year basis real GDP increased 3.17% while the quarter-to-quarter non-annualized percent change was 0.59%.

It's important to note that with today's release the BEA has incorporated the annual revision to the national income and product accounts (NIPAs) which updates estimates running all the way back to Q1 2007.

A note of caution as well... as I pointed out last October, the BEA seriously overestimated the rebound in fixed residential investment first estimating that Q3 2009 came in at +23.4%, a faster rate than any during the entirety of the housing bubble.

This "estimate" was more than suspicious, it was just flatly wrong and now, after multiple revisions, reflects a much more tepid 10.6% rate.

And yet now, for Q2 2010 the BEA is again estimating that fixed residential investment expanded at a rate of 27.9%!!

With results like these, it's safe to say that the BEA is having serious trouble with accuracy, possibly as a result of the severity our current decline, and that these GDP report should be viewed with a high degree of skepticism.

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Thursday, July 29, 2010

U.S. Canadian Housing Mashup!

A chart has been making its way around the econo-blogesphere recently (hat tip TMTGM, Paul Kedrosky and Simple Financial Analysis) that matches up the trend in Canadian versus US home prices that, at first glance, provokes a sense that Canada is steadily moving closer to a bubble crescendo much like that of the US.

The original plot shows the S&P/Case-Shiller Composite-20 and the Teranet/National Bank of Canada Composite-6 indices re-based to a value of 100 at January 2000 with the latest value seeing the Canadian index within a stone’s throw of the peak level reached by the S&P/Case Shiller in 2006.

While this provides a pretty stark comparison, I think it would be more appropriate to compare the Teranet/NBC Composite-6 index to the S&P/CSI Composite-10 not the Composite-20 as had been done in the original plot.

The S&P/Composite-20 is likely too broad for this type of “apples-apples” comparison and both the Teranet/NBC Composite-6 and S&P/CSI Composite-10 share the purpose of narrowly including just the top largest metros for their respective country.

Looking at the chart (click for full-screen dynamic version) you can see that while the Teranet/NBC index is currently showing a pretty exceptional rebound with annual percentage increases of nearly 13%, it still has a ways to go in order to match the pre-bust US levels.

Further, it’s important to note that while the US housing market saw long periods of annual appreciation that topped 15% and sometimes even over 20%, the Canadian trends, though solid, have been quite a bit slower with typical annual appreciation at just about half that of the US.

That being said, it will be interesting to see how long this trend can run in Canada since as we now know very well here in the US, home prices can’t appreciate exceptionally forever.

Browse the full catalog of Canadian home price indices provided by Teranet/National Bank of Canada.

Also it’s important to note that Teranet/NBC produces their home prices indices using the same repeat sale methodology as the S&P/Case-Shiller. Read more about their methodology here.

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

Today’s jobless claims report showed a slight decline in initial claims and a jump in 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 11,000 to 457,000 claims from last week’s revised 468,000 claims while “continued” claims increased by 81,000 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 3.66 million people receiving federal “extended” unemployment benefits.

Taken together with the latest 4.57 million people that are currently counted as receiving traditional continued unemployment benefits, there are 8.23 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, July 28, 2010

Economy at the Edge

Perusing the data one theme that just seems to jump from the trends is just how precarious the situation is for the macro-economy despite the epic monetary and fiscal policy efforts of the meddlers at the Federal Reserve and in Washington DC.

We’ve seen trillions pumped into bailouts, incentives and stimulus with unprecedented quantitative easing and interest rates forced to generational lows but what do we have to show for it?

Swindler “zombified” banks and the Fed packed with junk debt, some artificially stimulated home sales and a fabricated refinance boom, a notable distribution of government money for nonsense contracts and road projects, a “clunker/caulker/whatever” boost in auto, appliance and other durable goods production and some wild claims about the number of jobs saved.

Commercial banks are buying government securities at historic rates while total loans and leases continue to decline, housing permits have clearly turned south and appear headed back to another strike at the lows of 2009, new home sales just registered the second slowest pace in history with the lowest level occurring just last month.

Manufacturing activity is clearly slowing in the wake of last year’s inventory restocking binge and retail sales and consumer credit are cooling down as is consumer sentiment while consumer prices are simply in decline.

And worse yet… all of this “success” appears to now rest almost solely on the wobbly fate of a stock market struck ill earlier in the spring with a case of the “flash-crash”, a disease of apparently unknown origin.

These are uncertain times indeed yet a recent paper by Zandi and Blinder suggest that without all the government “help” the current state of the macro-economy would, by their reckoning, be much worse even a second Great Depression.

Should the economy slump back into recession in the next few quarters, an outcome that Robert Shiller gives it better odds of occurring, one has to wonder what the Feds could possibly do next?

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Reading Rates: MBA Application Survey – July 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 10 basis points since the last week to 4.69% while the purchase application volume increased 2.0% and the refinance application volume declined 5.9% 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).



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Tuesday, July 27, 2010

S&P/Case-Shiller: May 2010

Today’s release of the S&P/Case-Shiller (CSI) home price indices for May 2010 (browse the dashboard) reported that the non-seasonally adjusted Composite-10 price index increased 1.25% since April further 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 5.40% as compared to May 2009 while the 20-city composite increased 4.61% over the same period.

Topping the list of regional peak decliners was Las Vegas at -56.41%, Phoenix at -51.19%, Miami at -47.90%, Detroit at -46.25% and Tampa at -41.92%.

Additionally, both of the broad composite indices show significant peak declines slumping -29.58% for the 10-city national index and -29.10% 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.


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Monday, July 26, 2010

Index of Stress: June 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 indicate that the level of financial stress has decreased somewhat in the last few weeks falling from a high of .90 at the start of June to the latest level of .66.

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More Pain, Less Gain: S&P/Case-Shiller Preview for May 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 May 24 indicates that the final expiration of the government's tax gimmick appears to have driven a second price bounce with prices increasing since February though still remaining below the tax credit fueled peak reached last year.

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

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The Chicago Fed National Activity Index: June 2010

Today’s release of the Chicago Federal Reserve National Activity Index (CFNAI) indicated that national economic activity slumped significantly in May with the index declining to -0.63 while the three month moving average fell to -0.05.

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 economy is expanding at its historical trend rate while a negative value indicates 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 -0.05 the current three month average index value is indicating very weak growth.

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New Home Sales: June 2010

Today, the U.S. Census Department released its monthly New Residential Home Sales Report for June showing a notable increase in sales yet, at 330K annual units the current sales pace remains near the lowest levels seen since sales have been tracked.

New single family home sales increased 23.6% since May yet remained 16.7% below the level seen in June 2009 while the monthly supply declined to 7.6 months and the median months for sale declined to 12.4 months.

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

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Friday, July 23, 2010

Prime Time: Hudson City Bancorp Non-Performance Q2 2010

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 2.46% non-performing loan ratio is relatively low but the ratio has jumped over 75% since Q2 2009 on a delinquent loan total of $790.1 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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Massive Unemployment: Mass Layoffs June 2010

The June release of the Bureau of Labor Statistics (BLS) Mass Layoff Report indicated a notable jump in large-scale layoffs with 1647 mass layoff events resulting in 145,538 initial unemployment claimants on a seasonally adjusted basis.

It's important to note that this increase in mass layoffs appears to be contributing to a flattening of the series that is, more or less, consistent with a similar flattening trend currently shaping up for the weekly unemployment claims series.

It could be that we are now seeing the initial signs of a job market that is settling into a long trend of elevated unemployment and general weakness.

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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Thursday, July 22, 2010

Existing Home Sales Report: June 2010

Today, the National Association of Realtors (NAR) released their Existing Home Sales Report for June showing another notable 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 5.62% since May but still remains 8.55% above the level seen last year while prices increased 1.26% over the same period.

It's important to note that inventory is continuing to mount with the latest level rising 5.9% above the level seen in June 2009 and resulting in a monthly supply of 8.7.

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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Extended Unemployment: Initial, Continued and Extended Unemployment Claims July 22 2010

Today’s jobless claims report showed a notable jump in initial and a large decline in 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 increased by 37,000 to 464,000 claims from last week’s revised 427,000 claims while “continued” claims declined by 223,000 resulting in an “insured” unemployment rate of 3.3%.

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 3.92 million people receiving federal “extended” unemployment benefits.

Taken together with the latest 4.39 million people that are currently counted as receiving traditional continued unemployment benefits, there are 8.32 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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