Paper Economy - A US Real Estate Bubble Blog

Friday, July 29, 2011

GDP Charade Just More Fake it Till You Make it Economic Policy

Hmm… notice anything striking about the chart above?

Let me draw your attention a bit closer.

Looking at the blue line, you see one of the most important market moving data-points, namely real GDP, as it stood just yesterday showing, more or less, a typical “V”-shaped recovery coming after the messy debacle of 2008.

Notice that not only did the recovery look vigorous, as of Q4 2010 the government reported that real GDP had surpassed the prior peak set in 2007.

So for about six months market participants (and other onlookers) believed that an important (possibly the most important) measure of economic health had completely recovered from the prior downturn.

Today though, the government released its annual revision to GDP taking down their prior quarterly “estimates” and reporting instead significant downward revisions to nearly every quarter from 2007 on.

The red line above is now the “official” estimate of real GDP and, needless to say, it’s painting a far weaker picture of performance of the macro-economy than the prior “estimates” with possibly the most notable anomaly being the fact that we have yet to see real GDP reach the level of the prior peak.

We already know that the government is engaging in “fake it till you make it” economic policy with its bailouts, the suspension of mark-to-market accounting, TARP, QE1 and QE2 etc. but this is really another matter altogether.

What is the use of estimates of GDP when the values are so far off?

Given that the stock market traded up on wildly phony GDP results, what should traders do now?

How can anyone believe that the stock market is a forward looking leading indicator (i.e. discounts the future) when participants are making trading decisions based on absurdly unreliable information?

Today’s GDP revisions should have been a significant blow to confidence as another notable sign of systemic weakness is recognized and the government’s clumsy charade is further disclosed.

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Bull Trip!: GDP Report Q2 2011 (First Rough Estimate and Massive Revisions)

Today, the Bureau of Economic Analysis (BEA) released their first "estimate" of the Q2 2011 GDP report showing that the economy continued to weakly expand with real GDP increasing at an annualized rate of 1.3% from Q1 2011.

On a year-over-year basis real GDP increased 1.62% while the quarter-to-quarter non-annualized percent change was 0.32%.

Today's release also includes a regular annual revision to past years (three years) results bringing, in some cases, dramatically different assessment of the country's economic performance.

For example, Q1 2011 GDP was revised down from the reported 1.9% to a mere 0.4% while Q4 2010 GDP was revised down from 3.1% to 2.3%.

Q4 2009 GDP was revised down from the originally reported 5.0% to 3.8% while Q4 2008 was revised down from the reported -6.8% to the stunning -8.9%.

Note that the BEA has finally taken down their estimates for Q2 2010 (as I had predicted) residential fixed investment from the original lofty level of 25.7% to the still poorly estimated 22.8%... still to high.... look for that figure to be revised down further.

The latest quarterly results revealed an notable 4.4% decline in durable goods from Q1 2011 with personal consumption expenditures registering the weakest showing in eight quarters at 0.1% over the same period.

Government spending declined notably with the non-defense spending declining 7.3% from Q1 2011 while state and local spending declining 3.4%.

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Thursday, July 28, 2011

Double-Digit Double-Jeopardy: Double Digit State Unemployment June 2011

The latest Regional and State Employment and Unemployment report showed that in June, 8 states were experiencing double digit unemployment with a median unemployment rate of 10.55% while the median unemployment rate for all 50 states and the District of Columbia stood at 8.2%.

Nevada showed the highest unemployment rate at 12.4% followed by California at 11.8 and Rhode Island at 10.8%.

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The New “Household” Misery Index: May 2011

Today's release of the Household Misery Index showed that the level of misery declined in May dropping 0.03% from April but still remained near the peak for this cycle and nearly the highest level seen in 30 years while on a year-over-year basis, misery declined for the sixth consecutive month dropping 0.24% since May 2010.

Back in the 1970s and 80s the “Misery Index” was popularized as a measure that accurately captured the misery and malaise of the time.

The original Misery Index was a bit too simplistic as it only captured the severity of the two main vexing issues of the time, unemployment and inflation.

Today, inflation, as measured by the annual rate of change of the CPI-U, is not a significant source of financial misery.

Of course, households on fixed income may dispute that fact and many have argued that CPI itself does not accurately capture “real” inflation as it has never accounted for the ridiculous increasing costs of housing and other essentials so for the sake of formulating a new misery index, inflation will factored out.

Another key to formulating a new misery index is to specifically target “household” misery as opposed to including data that might target the miserable state of affairs of the federal government or corporate misery.

The Household Misery Index captures the following trends and weights them equally:

1. The U-3 unemployment rate
2. YOY percent change of the 10-Year moving average of total nonfarm payrolls
3. YOY percent change of the 10-Year moving average of “real” personal income
4. YOY percent change of the 10-year moving average of “real” S&P 500

The unemployment rate captures the misery associated to the threat and severity of a potential bout of unemployment while the annual change of the 10 year moving average of non-farm payrolls captures a more fundamental sense of the overall job market.

The annual change to the 10 year moving average of “real” (adjusted with CPI-U) personal income captures a household’s long term sense of income prospects.

The annual change to the 10 year moving average of “real” (adjusted with CPI-U) S&P 500 captures a household’s long term sense of typical investment prospects.

Unfortunately, all home price series are simply not long enough to include in the formulation but there may be alternative measures that can be included in the future.

This is a notable improvement for misery and if the past is to be taken to be even just a crude guide, the level of household misery should continue to steadily improve in the coming months.

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Kansas City Fed Manufacturing Survey: July 2011

The Federal Reserve Bank of Kansas City, like other district FRBs (New York, Philadelphia, Richmond and Dallas), tracks its region’s manufacturing activity by surveying a number of important indicators such as general activity, production, shipments, orders, employment and prices for raw materials and finished products.

The latest results are indicating that the manufacturing expansion slowed notably from last month falling to 3 from a level of 14 a month earlier while the employee index declined to 4 and the prices paid for raw materials increased to 39.

The following chart plots the seasonally adjusted Composite index since 2001 with the solid red line indicating the threshold between expansion and contraction.

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Pending Home Sales: June 2011

Today, the National Association of Realtors (NAR) released their Pending Home Sales Report for June showing home sales increased with the seasonally adjusted national index climbing 2.36% since May and increasing 19.76% above the level seen in June 2010.

Meanwhile, the NARs chief economist Lawrence Yun suggests that it would be best for housing for the economy to return to normal while adding that the Feds should not "rock the boat" in Washington.

"The best way to ensure a more solid recovery in housing is to simply return to normal, sound credit standards so more creditworthy home buyers can get a mortgage ... Washington also should not rock the boat with policy changes that would negatively impact affordable credit or otherwise increase the cost of buying or owning a home,"


The following chart shows the seasonally adjusted national pending home sales index along with the percent change on a year-over-year basis as well as the percent change from the peak set in 2005 (click for larger version).


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Extended Unemployment: Initial, Continued and Extended Unemployment Claims July 28 2011

Today’s jobless claims report showed a notable decline to both initial and continued unemployment claims as a recent rising trend was called firmly into question for initial claims.

Seasonally adjusted “initial” unemployment declined 24,000 to 398,000 claims from last week’s revised 422,000 claims while seasonally adjusted “continued” claims declined by 17,000 resulting in an “insured” unemployment rate of 2.9%.

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 3.76 million people receiving federal “extended” unemployment benefits.

Taken together with the latest 3.78 million people that are currently counted as receiving traditional continued unemployment benefits, there are 7.54 million people on state and federal unemployment rolls.


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Wednesday, July 27, 2011

Reading Rates: MBA Application Survey – July 27 2011

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 as well as the volume of 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 3 basis points to 4.57% since last week while the purchase application volume declined 3.8% and the refinance application volume declined 5.5% over the same period.

Given that we reached the end of the Feds QE2 intervention, it will be interesting to see how long rates trend in the next few months.

In any event, the purchase application volume remains near the lowest level seen in well over a decade while refinance activity continues to bounce around a bit.

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages since 2006 as well as the purchase, refinance and composite loan volumes (click for larger dynamic full-screen version).




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Tuesday, July 26, 2011

Case Still Slightly Optimistic, Shiller Still Pesimistic



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Mogadishu of the Midwest


While the nation’s housing markets continue to slump through the collapse and with today’s S&P/Case-Shiller report showing a mix of seasonality driven price increases and outright epic declines, I thought now might be a good time to highlight one of the nation’s worst markets and see if we could draw some inferences from its long slow spiral into the abyss.

Detroit is, by all accounts, a mess of a housing market with prices now receding a full 18 years to a level first seen in 1993.

Worse yet, Detroit home prices are declining at an ever increasing rate dropping a whopping 3.41% from April and 8.67% below the level seen last year.

So what can this mightily distressed market tell us about the future trends for housing and the general economy at a national level?

Let’s consider that just a generation ago the “Motor City” was a shining example of American manufacturing strength harboring the “big three” auto manufacturers and winning the world’s attention as the global automotive center.

But as liabilities steadily mounted for the auto manufactures and they lost their advantage in the face of competition, a trend that ushered in an unwind that culminated with the government takeover of General Motors.

Detroit proper was not spared from this downward slide, jobs declined the economy suffered and by the time that the housing bubble reached its epic top in 2006, Detroit was a shadow of its former self… a fragile disaster waiting to happen.

All that was required to push it over the cliff was a systemic undermining of the accumulated wealth of the area households which, as fate would have it, came in the form of a historic home price slide.

Detroit is going down fast with a broken economy and developing slums that look more like Mogadishu than Michigan, and with it goes a notable tale of the rise and fall of an exceptional city and likely a harbinger of things to come for the U.S.

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The Richmond Fed Survey of Manufacturing Activity: July 2011

Today, the Federal Reserve Bank of Richmond released their Survey of Manufacturing Activity for July showing that the composite index, the broadest measure of manufacturing activity, fell 4 points to a weak level of -1.

The most notable component measures also showed similar poor results with the new orders dropping 5 points to -5, shipments remaining at -1 and backlog of orders declined 7 points to -18.

The following chart plots the composite index with the red line marking a level of 0, or the threshold between increasing and declining activity.

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New Home Sales: June 2011

Today, the U.S. Census Department released its monthly New Residential Home Sales Report for June showing a monthly decline with sales falling 0.95% since May but increasing 1.63% from June 2010 and remaining at an epically low level of 312K SAAR units.

It's important to recognize that the inventory of new homes has now fallen to a new series low at 164K units, lowest level seen in in at least 47 years while the median number of months for sale increased to 9.9.

The monthly supply declined to 6.3 months while the median selling price increased 7.15% and the average selling price increased 4.79% from the year ago level.

The following chart show the extent of sales decline to date (click for full-larger version).

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S&P/Case-Shiller: May 2011

Note... be sure to bookmark the overall S&P/Case-Shiller Dashboard or the Scary Housing Dashboard of the weakest markets for a real-time view of all the markets tracked by S&P.

Today’s release of the S&P/Case-Shiller (CSI) home price indices for May reported that the non-seasonally adjusted Composite-10 price index increased 1.13% since April while the Composite-20 index incresed 1.02% over the same period with both measures continuing to decline notably since last year.

The latest CSI data clearly indicates that the price trends are experiencing a bit of a lift into the typically more active spring season and, as I recently pointed out, the more timely and less distorted Radar Logic RPX data is continuing to capture rising prices driven primarily by seasonality.

It's important to note though that both composite indices are continuing to show notable year-over-year declines, a weak sign indeed.

The 10-city composite index declined 3.62% as compared to May 2010 while the 20-city composite declined 4.51% over the same period.

Topping the list of regional peak decliners was Las Vegas at -59.28%, Phoenix at -55.85%, Detroit at -51.19%, Miami at -50.65% and Tampa at -47.46%.

Additionally, both of the broad composite indices show significant peak declines slumping -32.10% for the 10-city national index and -32.27% 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.

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 and normalized 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 side-by-side (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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Monday, July 25, 2011

More Pain, Less Gain: S&P/Case-Shiller Preview for May 2011

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 23 and averaged for the month indicates that with increasing spring transactions has come increasing prices (the typical trend) with the national index increasing 1.14% since April but still remaining 5.89% below the level seen in May 2010.

The Radar Logic index will likely be capturing an uptrend in prices from now until mid-summer when transactions generally start to turn down again.

Look for tomorrow's S&P/Case-Shiller home price report to reflect this trend though to a lesser degree due to its three month rolling-average nature with prices moderately higher.

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The Chicago Fed National Activity Index: June 2011

Today’s release of the Chicago Federal Reserve National Activity Index (CFNAI) indicated that national economic remained weak in June with the index remaining in contraction territory for the third consecutive month at -0.46 while the three month moving average declined to -0.60, a slight 10 points above the Feds official recessionary mark.

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 -0.60, the current three month average index value is indicating that contraction may be in the offing.

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Friday, July 22, 2011

Hong Kong Bubble?: Hong Kong Residential Property Prices May 2011

Today, the University of Hong Kong released their Hong Kong Residential Real Estate Series (HKU-REIS) indicating that, in May, the price of residential properties increased 2.01% since April climbing 26.52% above the level seen in May 2010.

The “Hong Kong Island” index, “Kowloon” and “New Territories” sub-components also showed notable monthly and annual increases with the "Hong Kong Island" series indicated that prices have now far outpaced the prior 1997 peak.

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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Massive Unemployment: Mass Layoffs June 2011

The latest release of the Bureau of Labor Statistics (BLS) Mass Layoff Report indicated a decline in large-scale layoffs with 1532 mass layoff events for June resulting in 143,444 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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FHFA Monthly Home Prices: May 2011

Today, the Federal Housing Finance Agency (FHFA) released the latest results of their monthly house price index (HPI) showing that, nationally, home prices increased 0.38% since April but declined 6.45% below the level seen in May 2010.

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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Philadelphia Feeling: Federal Reserve Bank of Philadelphia Business Outlook Survey July 2011

The latest release of the Federal Reserve Bank of Philadelphia Business Outlook Survey (BOS) for July indicated continued weakness in the regions manufacturing activity with the current activity index remaining at a near contraction level of 3.2 while the future activity index increased to a level of 23.7.

The current activity index along with many of the other current data points (new orders, unfilled orders, delivery time and inventories) are now indicating notable weakness in manufacturing activity with the size and breadth of the latest pullback clearly demanding that closer scrutiny be paid to these series in future releases.

The following chart shows the current and future activity indexes both with their corresponding 3-month moving averages. The red line marks the threshold between contraction and expansion for these diffusion indexes.

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Thursday, July 21, 2011

Extended Unemployment: Initial, Continued and Extended Unemployment Claims July 21 2011

Today’s jobless claims report showed an increase to initial unemployment claims and an decline to continued claims as a rising trend was called into question for initial claims.

Seasonally adjusted “initial” unemployment increased 10,000 to 418,000 claims from last week’s revised 408,000 claims while seasonally adjusted “continued” claims declined by 50,000 resulting in an “insured” unemployment rate of 2.9%.

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 3.69 million people receiving federal “extended” unemployment benefits.

Taken together with the latest 3.53 million people that are currently counted as receiving traditional continued unemployment benefits, there are 7.23 million people on state and federal unemployment rolls.


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Wednesday, July 20, 2011

Existing Home Sales Report: June 2011

Today, the National Association of Realtors (NAR) released their Existing Home Sales Report for June showing continued weakness with slumping sales and an increasing monthly supply.

Single family home sales went unchanged from May falling 7.4% below the level seen last year while the median selling price increased a slight 0.6% above the level seen in June 2010.

Further, inventory of single family homes remains high climbing 5.9% from May and 0.1% above the level seen in June 2010 which, combined with the relatively slow pace of sales, resulted in an increase in the monthly supply to 9.4 months.

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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