Paper Economy - A US Real Estate Bubble Blog

Friday, October 29, 2010

Hong Kong Bubble?: Hong Kong Residential Property Prices August 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 August, the price of residential properties increased a whopping 4.31% since July climbing 20.84% above the level seen in August 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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University of Michigan Survey of Consumers October 2010

Today's release of the Reuters/University of Michigan Survey of Consumers for October indicated another decline in consumer sentiment with a reading of 67.7 dropping 4.11% below the level seen last year.

The Index of Consumer Expectations (a component of the Index of Leading Economic Indicators) increased to 61.9, and the Current Economic Conditions Index declined to 76.6.

It's important to recognize that while consumer sentiment is still higher than the panic laden trough level seen in late 2008, the current sentiment level is far lower than any level seen during the 2001 tech recession and roughly equivalent to the worst seen during the early 1990s and second dip 1982 recessions.

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Bull Trip!: GDP Report Q3 2010 (First Rough Estimate)

Today, the Bureau of Economic Analysis (BEA) released their first "estimate" of the Q3 2010 GDP report showing that the economy continued to weakly expand with real GDP increasing at an annualized rate of just 2.0% from Q2 2010.

On a year-over-year basis real GDP increased 3.11% while the quarter-to-quarter non-annualized percent change was 0.50%.

The latest report reveals continued weakness in housing with residential fixed investment declining at a rate of 29.1% from the second quarter though additional revisions are needed to get something that resembles accuracy from this figure.

Note that the administration (and the BEA) have yet to take down their estimates for Q2 residential fixed investment with still sits at the lofty level of a supposed 25.7% quarter-to-quarter change... not likely.... look for that figure to be revised down in coming releases impacting the anemic "final" Q2 results.

Both imports and exports of goods and services slowed in the third quarter while investment in equipment and soft registered the slowest pace of growth since Q3 2009 though still at a notable pace of 12%.

In any event, these GDP report should be viewed with a high degree of skepticism.

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Thursday, October 28, 2010

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

Today’s jobless claims report showed a notable decrease to both initial and continued claims with a flattening trend shaping up for initial claims while traditional continued claims continues to appear to be trending down.

Seasonally adjusted “initial” unemployment declined by 21,000 to 434,000 claims from last week’s revised 455,000 claims while “continued” claims declined by 122,000 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 4.65 million people receiving federal “extended” unemployment benefits.

Taken together with the latest 3.71 million people that are currently counted as receiving traditional continued unemployment benefits, there are 8.37 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, October 27, 2010

New Home Sales: September 2010

Today, the U.S. Census Department released its monthly New Residential Home Sales Report for September showing continued weakness with sales climbing 6.6% since August to 307K annualized units, near the lowest level on record.

On a year-over-year basis, new single family home sales plunged a whopping 21.5% while the monthly supply increased 3.9% to 8.0 months.

These results provide even more evidence that the government's housing tax scam policy was ultimately a complete and total failure accomplishing nothing but creating a temporary distortion of the underlying "organic" housing trends.

With numbers this weak, it could even be argued that the government's tax gimmick ultimately destabilized the nation's home markets by injecting a substantial amount of uncertainty, sponsoring feeble home buyers and preventing the natural market clearing mechanism from playing out.

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

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Hey Big Spender: Discretionary Durable Goods Orders September 2010

Today’s Durable Goods Manufacturers’ Shipments, Inventories and Orders report indicated that total new orders increased 6.3% from August to $199.2 billion while excluding transportation new orders decreased 0.8% to $144.384 billion.

Stripping durable goods orders of defense orders AND non-defense aircraft orders yields an effective measure of orders coming as a direct result of typical discretionary consumer durable goods spending on items such as motor vehicles, furniture, consumer electronic devices and home appliances.

Looking at the latest release, discretionary durable goods orders continues to slow declining 0.76% since August but still remaining 8.56% above the level seen in September 2009.

Though the trends in discretionary new orders still remain positive on the year, the recent slowing trend warrants tracking this measure closely in coming months.

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Reading Rates: MBA Application Survey – October 27 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 decreased 9 basis points since the last week to 4.25% while the purchase application volume increased 3.9% and the refinance application volume increased 3.0% 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 continued declining interest rates.

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

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages as well as one year ARMs since 2006 (click for larger dynamic full-screen version).

The following dynamic charts show the Purchase Index, Refinance Index and Market Composite Index since 2006 (click for larger versions).



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Tuesday, October 26, 2010

S&P/Case-Shiller: August 2010

Today’s release of the S&P/Case-Shiller (CSI) home price indices for July 2010 (browse the dashboard) reported that the non-seasonally adjusted Composite-10 price index declined 0.09% since July indicating that in the wake of government's housing tax gimmick, prices have started to follow sales down.

It's important to recognize that as we continue to move away from the government's tax sham expiration, the home sales and price movement fueled by that epic monstrosity are left further and further behind.

Yet, it will be some time before the effects are completely expunged from the CSI as its methodology uses a three month rolling average of the source data and further, as BostonBubble points out, since Congress moved to extend the closing deadline for the credit until September, the CSI data may not be free of the distortion until the February 2011 release!

In any event, you can see from the latest CSI data that the price trends are starting to slump and, as I recently pointed out, the more timely and less distorted Radar Logic RPX data is already capturing notable price weakness nationwide.

The 10-city composite index increased 2.57% as compared to August 2009 while the 20-city composite increased just 1.70% over the same period.

Topping the list of regional peak decliners was Las Vegas at -56.97%, Phoenix at -52.14%, Miami at -47.50%, Detroit at -43.69% and Tampa at -42.24%.

Additionally, both of the broad composite indices show significant peak declines slumping -28.35% for the 10-city national index and -28.05% 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).


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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FHFA Monthly Home Prices: August 2010

Today, the Federal Housing Finance Agency (FHFA) released the latest results of their monthly house price index (HPI) showing that, nationally, home prices increased 0.42% since July but declined a notable 2.64% since August 2009.

The FHFA monthly HPI are formulated from home purchase information collected from mortgages that have been sold to or guaranteed by Fannie Mae and Freddie Mac.

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Monday, October 25, 2010

More Pain, Less Gain: S&P/Case-Shiller Preview for August 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 August 19 and averaged for the month indicates that in the wake of the expiration of the government's final housing tax gimmick prices have continued to decline sliding 0.67% since July and declining a notable 2.17% below the level seen in August 2009.

The latest daily RPX data is indicating that the price decline picked up steam throughout August and is currently down roughly 2.68% on a year-over-year basis.

This trend is likely telling us that as transactions collapse down to the weak "organic" level post-housing tax scam, prices will follow.

Look for tomorrow's S&P/Case-Shiller home price report to reflect an equivalent flattening to declining trend for prices as the source data moves further through months affected by the tax credit activity and into reality.

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Existing Home Sales Report: September 2010

Today, the National Association of Realtors (NAR) released their Existing Home Sales Report for September showing a continued bounce-back from the truly epic collapse in demand that came in the wake of the now obviously phony baloney government tax credit sponsored surge in home sales activity.

Single family home sales increased 10% since August but remained a whopping 19.5% below the level seen last year while prices declined notably dropping 3.09% since August and 1.9% below the level seen in September 2009.

It's important to recognize that even with the latest monthly jump, the annual pace of sales is far below the lows seen even during the worst months of 2008 and early 2009.

Further, inventory remains high climbing 9% above the level seen in September 2009 which, combined with the slow pace of sales, resulted in a large monthly supply surge to 10.2.

Clearly, all can now see that the government's housing tax credit was not only a gimmick... it was a complete failure, a massively wasteful and expensive handout to the housing industry and a futile and likely very dangerous exercise in market manipulation.

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 Chicago Fed National Activity Index: September 2010

Today’s release of the Chicago Federal Reserve National Activity Index (CFNAI) indicated that national economic activity weakened notably again in September with the index declining to -0.58 from August while the three month moving average declined to -0.33.

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 -0.33 the current three month average index value is indicating extremely weak growth nearing the recessionary level of -0.70.

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Friday, October 22, 2010

Massive Unemployment: Mass Layoffs September 2010

The September release of the Bureau of Labor Statistics (BLS) Mass Layoff Report indicated a continued decline in large-scale layoffs with 1486 mass layoff events resulting in 133,379 initial unemployment claimants on a seasonally adjusted basis.

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, October 21, 2010

Recession Redux?: September 2010

With much of the econ-finance talk these days still centered around the possibility of a looming “double-dip” let’s take a closer look at two particularly sensitive and accurate leading indicators of our economic health to see if we can tease out the future trends.

First, the Federal Reserve Bank of New York is known to use the yield curve (or more specifically the spread between the 10 year and the 3 month treasury yields) to calculate a probability of recession.

This method appears to have been spearheaded by Professor Arturo Estrella of the Rensselaer Polytechnic Institute and Professor Frederic Mishkin of the Columbia Business School as outlined in the June 1996 issue of Current Issues in Economic and Finance, a journal published by the Federal Reserve Bank of New York.

The yield curve probability method is said to have a nearly perfect track record at predicting recessions some two to six quarters ahead with only one false positive, a period in 1967 that many economists, most notably the late Milton Friedman, considered to have been a credit crunch/mini-recession even though the NBER does not officially recognize it as such.

Another important leading indicator with a solid track record is the Economic Cycle Research Institutes (ECRI) weekly leading indicator (WLI).

When the growth component of the WLI turns strongly negative (< -6) it generally means a notable slowdown or recession is in the offing.

So what are these two important indicators saying about our current economic situation?

As of the latest release of each measure, we are seeing a very unusual scenario of strongly mixed signals.

The yield curve spread indicator is indicating that the probability of recession is nearly zero while the ECRI leading index is showing a very pronounced pullback since a peak set in October 2009 with the growth component currently at a strongly negative level of -6.9.

Looking at the chart (click for full-screen super dynamic version) you can see that in the past, when both of these measures moved strongly in opposite directions, recession was a certainty.

Today though, the interpretation is not so simple.

Could the Feds work on both short (ZIRP) and long (QE1 and soon QE2) rates have rendered the yield curve method ineffective at the moment?

Is the WLI just over-correcting coming off of an epically pronounced bounce back in leading activity seen from the deeply recessed levels of March of 2009?

We will have to wait to see but clearly we are in a very unusual and tricky environment.

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Philadelphia Feeling: Federal Reserve Bank of Philadelphia Business Outlook Survey October 2010

The latest release of the Federal Reserve Bank of Philadelphia Business Outlook Survey (BOS) for October indicated weak growth in the regions manufacturing activity with the current activity index at a level of 1.

The future activity index improved notably jumping to a level of 41 though still remaining well below the level of 52 seen earlier in the year.

In the first two charts, the bright green band indicates contraction (0 to -100) while any value above that band indicates expansion.


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Extended Unemployment: Initial, Continued and Extended Unemployment Claims October 21 2010

Today’s jobless claims report showed an decrease to both initial and continued claims with a flattening trend shaping up for initial claims while traditional continued claims continues to appear to be trending down.

Seasonally adjusted “initial” unemployment declined by 23,000 to 452,000 claims from last week’s revised 475,000 claims while “continued” claims declined by 9,000 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 5.07 million people receiving federal “extended” unemployment benefits.

Taken together with the latest 3.71 million people that are currently counted as receiving traditional continued unemployment benefits, there are 8.78 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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