Question(s) of The Day - Irresponsible Congress and Americans?

As Greenspan and Cox are being seriously lampooned on Capitol Hill isn’t now a perfect time to remember all the significant contributions to the economic crisis initiated by our completely inept and vile members of Congress?

And what of Americans themselves?

Aren’t they culpable for attempting to live above their means and using debt to roll like celebrities?

Question(s) of The Day - Buffet the New Lereah?

Is Warren Buffet the new David Lereah?

Is his call for going long the U.S. stock markets correct, shortsighted or simply shill-like propaganda?

Will Buffet go the way of Greenspan… godlike hero to reviled scoundrel almost overnight?

The Almost Daily 2¢ - The Greenspan-Bernanke-Paulson Wreck

Make no mistake, today’s stock market plunge was as much the result of the bailouts of Bear Stearns, Fannie Mae and Freddie Mac as the absence of a bailout for Lehman Brothers and now for AIG.

Further, just as Bernanke-Paulson grossly underestimated the severity of the housing decline, their immediate socialization of the initial losses should unequivocally confirm their total lack of understanding of the depth and breadth of this crisis with behemoth disasters continuing to fall like dominos.

The bailouts that were nearly immediately doomed to irrelevance in terms of prevention will now wreak havoc on average Americans for decades to come.

Given our current circumstances, can everyone plainly see the absurdity of bailing out Bear Sterns in order to prevent the dreaded ripple effects?

It should come as no surprise, though I suppose with some irony, that a nearly two decade run of “Easy Al” monetary policy would give way to crisis and to even more irresponsible and unethical Federal Reserve mismanagement of our economic system.

It should be perfectly obvious to all that both Bernanke and Paulson need to resign immediately in order provide even the slimmest possibility for their replacements to implement measured, effective and fair policy.

Follow The Leader: Index of Leading Economic Indicators February 2008

Today’s results of the Conference Board’s Index of Leading Economic Indicators continues to predict troubled times ahead declining 0.4% from January’s revised level and 1.53% on a year-over-year basis compared to February 2007, a fifth straight monthly decline and sixth straight year-over-year decline leaving the index at 135.4.

It’s important to note that a year-over-year decline greater than 1.5% has ONLY preceded EVERY recession that has occurred in the last 59 years so the six significant consecutive year-over-year declines strongly suggests that overall the components of the index are indicating that recession is either here or very near.

Note that at the end of March, The Conference Board will release its annual benchmark revision to the index as some of the source data is updated.

Production Pullback: Industrial Production February 2008

Today, the Federal Reserve released their monthly read of industrial production showing widespread declines across industries resulting in a 0.5% decline to production with particularly significant weakness indicated in various consumer, construction and business related durables.

“Final product” consumer durable goods continue to show accelerating weakness falling 1.28% as an aggregate on a year-over-year basis, with particularly significant declines coming specifically from home appliances, furniture and carpeting which declined for the twenty first consecutive month by 9.87% on a year-over-year basis.

Construction supply production has been showing the most severe contraction to wood products seen in at least the last 20 years.

Although automotive production has been showing weakness since the middle of 2004, business vehicle production is now showing a stark contraction.

The following charts (click for larger) show the overall consumer durable component along with the Home Appliances, Furniture and Carpeting sub-component on both a time series and year-over-year basis, construction supply production with the wood products sub-component, and general and business related vehicle production all overlaid with the last two recessions for comparisons purposes.




As you can see, each measure appears to indicate that recession is either currently upon us or drawing ever nearer as the unwinding of the housing-led business cycle exacts its toll on the general economy.

Confidence Game: Consumer, CEO and Investor Confidence March 2008 (Early)

This post combines the latest results of the Rueters/University of Michigan Survey of Consumers, the Conference Board’s Index of CEO Confidence and the State Street Global Markets Index of Investor Confidence indicators into a combined presentation that will run twice monthly as preliminary data is firmed.

These three indicators should disclose a clear picture of the overall sense of confidence (or lack thereof) on the part of consumers, businesses and investors as the current recessionary period develops.

Today’s early release of the Reuters/University of Michigan Survey of Consumers for March confirmed the recent plunge in consumer sentiment falling further still to a reading of 70.5, a decline of 20.25% compared to March 2007.

It’s important to note that this is the lowest consumer sentiment reading seen since the recessionary period of February 1992 which, according to Richard Curtin, the Director of the Reuters/University, indicates that recessionary environment is upon us.

“The Sentiment Index has only been this low during the recessions of the mid 1970's, the early 1980's and the early 1990's … Past declines of this magnitude have always been associated with a subsequent recession”

The Index of Consumer Expectations (an component of the Index of Leading Economic Indicators) fell to 61.4, a whopping 21.98% below the result seen in March 2007.

As for the current circumstances, the Current Economic Conditions Index fell to 84.6, 18.26% below the result seen in March 2007.

As you can see from the chart below (click for larger), the consumer sentiment data is a pretty good indicator of recessions leaving the recent declines possibly predicting rough times ahead.

The latest quarterly results (Q4 2007) of The Conference Board’s CEO Confidence Index fell to a value of 39 with the “current economic conditions” component registering 33.54, the lowest readings since the recessionary period following the dot-com bust.

It’s important to note that on every instance that the CEO “current economic conditions” index dropped below a level of 40, the economy was either in recession or very near.

The February release of the State Street Global Markets Index of Investor Confidence indicated that confidence for North American institutional investors increased 6.0% since January while European and Asian investor confidence remained relatively flat to mildly negative all resulting in an increase of 3.5% to the aggregate Global Investor Confidence Index.

Given that that the confidence indices purport to “measure investor confidence on a quantitative basis by analyzing the actual buying and selling patterns of institutional investors”, it’s interesting to consider the performance surrounding the 2001 recession and reflect on the performance seen more recently.

During the dot-com unwinding it appears that institutional investor confidence was largely unaffected even as the major market indices eroded substantially (DJI -37.9%, S&P 500 -48.2%, Nasdaq -78%).

But today, in the face of the tremendous headwinds coming from the housing decline and the mortgage-credit debacle, it appears that institutional investors are less stalwart.

Since August 2007, investor confidence has declined significantly led primarily by a material drop-off in the confidence of investors in North America.

The charts below (click for larger versions) show the Global Investor Confidence aggregate index since 1999 as well as the component North America, Europe and Asia indices since 2007.

Conspicuous Correlation: Retail Sales February 2008

Today, the U.S. Census Bureau released its latest nominal read on retail sales showing a decline of 0.6% from January 2008 and a 2.6% increase since February 2007 on an aggregate of all items including food, fuel and healthcare services.

Discretionary retail sales including home furnishings, home garden and building materials, consumer electronics and department store sales, on the other hand, experienced a significant decline falling 0.38% since January 2008 and 1.88% compared to February 2007.

Further, adjusted for inflation, discretionary retail sales declined 5.74% since February 2007.

On a “nominal” basis, there appeared to be “rough correlation” between strong home value appreciation and strong retail spending preceding the housing bust and an even stronger correlation when home values started to decline.

The following charts show the initial analysis plotting the year-over-year change to an aggregate series consisting of the primary discretionary retail sales categories that I termed the “discretionary” retail sales series and the year-over-year change to the S&P/Case-Shiller Composite home price index since 1993 and since 2000.


As you can see there was, at the very least, a coincidental change to home values and consumer spending during the boom and then the bust, but as home values have continued to decline, retail spending has remained low but has not continued to consistently contract.

One problem with this initial analysis is that both retail sales and the S&P/Case-Shiller Composite index are reported in “nominal” (i.e. non-inflation adjusted) terms and thus result in a somewhat skewed view especially for the retail sales data.

In fact, the year-over-year change to “nominal” discretionary retail sales has been positive for seven of the last eight months while the year-over-year change to “real” discretionary retail sales has been negative for twelve straight months (see the following chart).

The key point here is that although inflation (as reported by the CPI) has been relatively stable in recent years it is always a factor and in light of the latest surprise increases to the CPI results as well as many anecdotal reports of producers now passing through increasing energy prices to the consumer, it’s important to adjust retail sales (and home values) in order to fully understand its direction.


As you can see from the above charts (click for larger version), adjusted for inflation (CPI for retail sales, CPI less shelter for S&P/Case-Shiller Composite) the “rough correlation” between the year-over-year change to the “discretionary” retail sales series and the year-over-year S&P/Case-Shiller Composite series seems now even more significant.

Given the anecdotal accounts of homeowners drawing equity out of their homes with refi’s and HELOCs and using the proceeds to buy consumer goods, it could be interesting to attempt to “shift” the retail spending in time as the decline to home values would surely precede a pullback in consumer spending but for now I’ll leave it aligned and work on the shifting in a later post.

In past posts I attempted to build a 12 month moving Pearson’s correlation series in order to demonstrate the true correlation between the rate of change of both discretionary retail sales and home values but although the movements may be coincidental, they really share no actual binding correlation.

I may dust off the correlation chart in future posts but for now let’s just assume that both home values and discretionary retail sales are not doing very well, especially in “real” terms and the correlation is at least coincidental with the overall unhealthy state of the economy.

Economic Jolt: Job Openings and Labor Turnover January 2008

Today the Bureau of Labor Statistics released their latest monthly read of job availability and turnover (JOLT) showing that, on a year-over-year basis, private non-farm job “openings” declined 9.67%, job “hires” declined 11.25%, and “separations” declined 6.60% led by a 8.51% drop in “quits”.

Job “openings” (click chart below for larger version), the reports most leading “demand side” indicator, has now declined on a year-over-year basis for five consecutive months strongly suggesting that the private sector is planning to curtail future hiring activity.

Sliding down that slope of the Beveridge curve, the decline in the job vacancy rate is clearly corresponding with an equal but inverse movement up in the general unemployment rate as can be plainly seen in the following chart (click chart for larger version).

Job “hiring” activity (click chart for larger version) has also been declining significantly with December’s results posting the eighth straight decline on a year-over-year basis further confirming the recent weakness seen in the job market.

Job “separations”, whereby workers and their employers go their separate ways by one means or another (layoffs, retirement, termination, quitting, etc.), are also declining primarily due to the inclusion of “quitting” activity.

It’s important to understand that job “quits” are included as a component of the “separations” data series as “quitting” is a valid means of workers “separating” from employers but their inclusion tends to create an overall procyclical trend in what would otherwise be logically thought of as a countercyclical process (i.e. downturn leads to increase in separations not decrease).

As the economy slides into recession and the employment situation worsens workers tend to reduce quitting activity presumably for fear that they could risk a long bout of unemployment and the latest results (click chart for larger version) confirm this with recent weakness showing some of the sharpest declines on a year-over-year basis seen since August of 2003.

Reading Rates: MBA Application Survey – March 12 2008

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 39 basis points since last week to 6.37% while the purchase application volume increased slightly by 1.6% and the refinance application volume decreased 4.7% compared to last week’s results.

The average 30 year fixed mortgage rate has increased significantly since last week and is now within the mean seen during 2007 and nearing the peak level seen during the initial stages of the ongoing mortgage-credit debacle.

It’s important to note that all application volume values reflect only “initial” applications NOT approved applications… i.e. originations… I will post on originations on the coming weeks.

Also note that the interest rate for an 80% LTV 1 year ARM jumped significantly and now rests 35 basis points above the rate of an average 80% LTV 30 year fixed rate loan.

It’s important to note that the data is reported (and charted) weekly and that the rate data represents average interest rates, and the index data represents mortgage loan application volume for home purchases, home refinances and a composite of all loans.

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).

The Almost Daily 2¢ - Capitol Appeal (A Slight Return)

The following is a sequential exchange between Representative Barney Frank (D-MA), Chairman of the House Committee on Financial Services, and yours truly.

Hopefully the dialog will continue…

>>

January 24, 2008

Representative Frank,

I'm writing to voice my concern over the recently announced homeowner bailout initiative.

Although the cash refunds and other business investment components of the proposal may qualify as a sound fiscal response to the current economic turmoil, the increasing of the GSE conforming loan limits to $730K is a gross misapplication federal regulatory powers and will continue to perpetuate and even exacerbate the unsustainable conditions that have come about in many of our nation's metro housing markets.

It's important to keep in mind that the majority of the housing bubble conditions occurred in metro areas where the now well known era of dangerously lax lending standards resulted in home prices that are completely disconnected from the basic market fundamentals that guided and regulated affordability for many decades as well as a large cohort of homeowners that cannot afford their homes even under the best conditions.

This is NOT a subprime issue. Understand that "prime" Jumbo homeowners are almost as significantly over-leveraged as the now vilified subprime borrower.

By increasing the conforming loan limits so substantially the federal government is merely perpetuating this unsustainable situation and prohibiting the orderly deflating of the nation's home price bubbles.

If this feature of the proposal is allowed to become law it will unquestionably result in continued speculative behavior and inevitably a harder and more substantial housing price crash in the near future.

.

<<

March 5, 2008

We disagree on the question of raising the loan limit for Fannie Mae and Freddie Mac. First, I should note that the loan limit does not go to $730K across the board. In fact, the major problem, in my judgment, intellectually as well as economically with the current limit is that it sets one maximum price for the whole country, when in fact house prices vary greatly geographically. If we have a maximum limit for loans that make sense in Nebraska, it cannot be sensible for parts of California, Massachusetts, Illinois and New York. For Massachusetts, the limit will be $516K- hardly a luxury price in much of Massachusetts. I do agree that we should be welcoming some deflation of house prices, but the pace at which this happens is very important, and having a very rapid decline exacerbated by a freeze in the credit markets for houses in the $400K to $516K range seems to me unwise.

I agree that this is not a subprime issue. But it is an issue that was brought about by the subprime crisis, and by an excessive reaction to it. Your assertion that people who own homes in Eastern Massachusetts that are worth between $417K and $516K are as over-leveraged as subprime borrowers is not accurate according to any of the data I've seen.

BARNEY FRANK

>>

March 11, 2008

Representative Frank,

Thank you for responding to my initial protest of the Government Sponsored Enterprise (GSE) conforming loan limit increase provision of the recently enacted economic stimulus package but I would like to respectfully challenge some elements of your response.

First, although under prior regulation the Office of Federal Housing Enterprise Oversight (OFHEO) set $417,000 as the maximum sized loan a GSE could purchase for a single family home located in all states and regions except Alaska, Hawaii, Guam and the U.S. Virgin Islands, your assertion that a single limit poses a regulatory dilemma for the nation’s diverse housing markets is incorrect.

It’s important to remember that this limit was intended not to satisfy a sense of fairness for participants in any particular local housing market but rather to ensure the security of the GSEs and prevent unsafe and unsound practices that would run contrary to their statutory charters.

In states and regions where the prior limit of $417,000 was far greater than the typical median single family home price (i.e. Nebraska in your example) homes would still have to meet basic appraisal and other loan qualifying guidelines (also set out by existing statute) thus prohibiting the wholesale distribution of the maximum principal amount.

In states and regions where the prior limit was less than the typical median home price, the $417,000 combined with a healthy 20% down-payment provided for a significant $520,000 home purchase and homebuyers who needed more would be expected to be of the means not requiring affordable housing assistance.

Keep in mind that, as a basic guide, only 12 of the 145 metro area home markets tracked by the National Association of Realtors (NAR) has EVER recorded median home values in excess of $417,000.

Next, it’s important to consider that under the strict interpretation of prior regulatory guidelines the conforming loan limit should have, in fact, decreased for 2007 and again for 2008 as the Federal Housing Finance Boards (FHFB) national average house price declined on a year-over-year basis for both preceding October results.

In the face of the national price declines though, OFHEO took it upon itself to devise a new and substantially more complex strategy for determining the conforming loan limit that sought to mitigate any potential market instability that could arise from an abrupt decrease.

But even under the new guidelines the limit IS scheduled to decrease for 2009 and in all likelihood will continue to require a downward adjustment as the FHABs October average home price continues to decline.

How does Congress intend on accounting for this phenomenon?

Aside from the folly of maintaining a regulatory guideline that only gets amended up and never down, Congress has created a scenario whereby 125% of a greatly decreased median home price may in fact soon be materially LESS than the original $417,000.

Lastly, what I believe Congress and the President have done by enacting this provision is to introduce a substantial amount of uncertainty into an already wounded and fragile marketplace for agency securities.

Investors in agency securities not only know that the changes that have been enacted are unsound, they are now beginning to recognize the significant credit losses that will inevitably be associated to securities produced under even the prior, more restrictive, regulatory environment.

This recognition of instability has already affected GSE operations resulting in the highest yields on agency securities seen in 22 years thus driving up costs for all home-borrowers.

Although Congressional and Executive mandate apparently provide a dynamic and flexible environment for generating regulatory statute that suits the perceived whim of constituents (particularly in an election year), the “law of unintended consequences” remains largely rigid as it appears now quite clear that the main focus of Congress and the Administration later this year will be the federal bailout of Fannie Mae and Freddie Mac.

.

P.S. As for $417,000 to $516,000 being suitable for eastern Massachusetts remember that the conforming loan limit was $300,700 in 2000 and $359,650 in 2005 and that GSE loans combined with “piggyback” second liens provided plenty of stimulus for our local market bubble.

Massachusetts is not immune and in fact will undergo substantial socio-economic stress in the coming years as home prices don’t deflate slowly as you suggest but in fact continue to re-price sharply downward.

<<

NARcasting The Future: March 2008

Today, the National Association of Realtors (NAR) provided their latest estimate of annual existing home sales for 2008 leaving their prior estimates unchanged at a 4.9 million unit annual pace for the first half of the year and a 5.8 million unit annual pace for the second half of the year resulting in total year sales of 5.38 million units.

I’m fairly certain that in the coming months NAR will choose to discontinue publishing first half and second half sales pace estimates and simply go back to stating their total year sales estimate but for now I will chart all predictions.

Note that in this month’s chart I simply broke out each prediction and connected them to the 2007 year end result so as to best capture the flow of predictions.

As usual, the latest forecast comes with another dose of truly ridiculous spin.

In an effort to put their absurd bias into perspective I compiled all their existing home sales forecasts for 2007 and now 2008 into a chart along with a list of prominent quotes supplied with each forecast.


12/11/2006 Prediction: 6.40 million units.
Lereah "Most of the correction in home prices is behind us."

1/10/2007 Prediction: 6.42 million units.
Lereah "The good news is that the steady improvement in sales will support price appreciation moving forward."

2/7/2007 Prediction: 6.44 million units.
Lereah "After reaching what appears to be the bottom in the fourth quarter of 2006, we expect existing-home sales to gradually rise all this year and well into 2008."

3/13/2007 Prediction: 6.42 million units.
Lereah "Although existing-home sales will be marginally reduced due to subprime lending restrictions, they should be gradually rising this year and next."

4/11/2007 Prediction: 6.34 million units.
Lereah "Tighter lending standards will dampen home sales a bit, but by less than a couple of percentage points from initial projections."

4/30/2007
Lereah Leaves NAR for Move.com

5/9/2007 Prediction: 6.29 million units.
Yun "Housing activity this year will be somewhat lower than in earlier forecasts."

6/6/2007 Prediction: 6.18 million units.
Yun "Home sales will probably fluctuate in a narrow range in the short run, but gradually trend upward with improving activity by the end of the year."

7/11/2007 Prediction: 6.11 million units.
Yun "Home prices are expected to recover in 2008 with existing-home sales picking up late this year."

8/8/2007 Prediction: 6.04 million units.
Yun “With the population growing, the demand for homes isn’t going away – it’s just being delayed.”

9/11/2007 Prediction: 5.92 million units.
Yun “Patient buyers in most areas who do their homework will recognize that housing remains a good long-term investment.”

10/10/2007 Prediction: 5.78 million units.
Yun "The speculative excesses have been removed from the market and home sales are returning to fundamentally healthy levels, while prices remain near record highs, reflecting favorable mortgage rates and positive job gains."

11/13/2007 Prediction: 5.5 million units.
Yun "In some ways, the extended real estate boom from 2001 to 2005 created unrealistic expectations that housing is a short-term high-yield investment… 2007 will be the fifth best year for housing on record"

12/10/2007 Prediction: 5.67 million units in 2007, 5.7 million units in 2008.
Yun "The broad trend over the coming year will be a gradual rise in existing-home sales, but because sales are exceptionally low in the final months of 2007, total sales for 2008 will be only modestly higher than 2007."

01/08/2008 Prediction: 5.66 million units in 2007, 5.7 million units in 2008.
Yun "A meaningful recovery in existing-home sales could occur as early as this spring, or it may be further delayed toward late 2008."

02/07/2008 Prediction: 4.9 million units in H1, 5.8 million units in H2, 5.38 million units full year.
Yun "Where builders have cut construction sharply, and in most areas with improving affordability conditions, we’ll generally see moderately higher home prices."

03/06/2008 Prediction: 4.9 million units in H1, 5.8 million units in H2, 5.38 million units full year.
Yun "Significant price declines in some local markets have sharply and quickly improved local affordability conditions, and are inducing buyers to return to the marketplace"

Existing Home Sales Report: December 2007

Today, the National Association of Realtors (NAR) released their Existing Home Sales Report for December again confirming, perfectly clearly, that demand for residential real estate, both single family and condos, has taken a new and substantial leg down uniformly across the nation’s housing markets likely as a direct result of the momentous and ongoing structural changes that are taking place in the credit-mortgage markets.

Furthermore, we are now seeing solid declines to the median sales price for both single family homes and condos across virtually every region (save for a paltry increase for condos in the Midwest) with the most notable being declines of 11.2% and 9.7% on a year-over-year basis to the single family home sales price in the West and Northeast respectively.

In the obvious face of home sales not “hovering in a narrow range”, NAR senior economist Lawrence Yun is now calling on Washington to provide a “quick boost” to the nation’s housing market by increasing the non-conforming loan limit (the limit that defines the boundary between Fannie Freddie insured loans and non-agency Jumbo loans).

“Home sales remain weak despite improved affordability conditions in many parts of the country, but we could get a quick boost to the market if loan limits are raised in combination with the bold cut in the Fed funds rate, … Home prices are lower, mortgage interest rates continue to decline and incomes are higher, but many potential buyers are delaying a purchase.”

NAR president Richard Gaylord also chimed in with a shrill and truly offensive take suggesting that it’s “unfair” that some Americans cannot get an $625,000 loan through the federal governments “affordable housing” program.

“The most effective way to stimulate housing and minimize the potential for a recession is for lawmakers to raise the limit on conforming mortgages to $625,000, which would open safe and affordable financing to buyers in high-cost areas, … It is grossly unfair that some Americans do not have access to low-interest rate loans. This would help people as they move away from risky subprime mortgages and high-interest rate jumbo loans.”

The latest report provides, yet again, truly stark and total confirmation that the nation’s housing markets have now taken a new leg down with EVERY region showing significant double digit declines to sales of BOTH single family and condos as well as large increases to inventory and a continued explosion in monthly supply as a result of the collapsing pace of sales.

Keep in mind that these declines are coming “on the back” of last year’s dramatic declines further indicating that the housing markets are truly in the process of a tremendous correction.

The following (click for larger versions) are charts showing sales for single family homes, plotted monthly, for 2006 and 2007 as well as national existing home inventory and month supply.





Below is a chart consolidating all the year-over-year changes reported by NAR in their December 2007 report.

The Almost Daily 2¢ - Drop In The Bucket

Today, the Federal Reserve Bank of Boston (FRBB) announced an initiative designed to help troubled New England homeowners facing foreclosure.

The FRBB, together with five prominent banks (Bank of America, Citizens Bank, Sovereign Bank, TD Banknorth, and Webster Bank), have created what they term a “Mortgage Relief Fund” of $125 Million allocated to “make it easier for some homeowners who are paying high rates – and those who face a reset of an adjustable-rate loan – to refinance into a more affordable mortgage, avoid delinquency, and avoid foreclosure.”

First, it’s important to understand that this “fund” is essentially simply a commitment to make new home loans to "qualifying" homeowners and in a sense can be interpreted as a commitment to not flatly deny troubled homeowners access to loans with better terms.

Each of the five banks are in the business (at least in part) of making home loans, so by participating in this “fund”, they are simply stating that they will each consider lending up to $25 million to existing troubled homeowners so long as they meet basic qualifications.

But what are the basic qualifications homeowners must meet in order to be considered worthy of being lent to?

• Your house is worth MORE than the total of your mortgage loan balance(s)
• You have generally made your mortgage payments on time
• You reside in the property
• You can document your current income

Then you “may” be eligible for consideration under this initiative.

Additionally, it’s important to understand that this effort is NOT simply a private affair as each lender will be turning to both the New England state governments and the federal government for assistance in both insuring and underwriting these loans as stated in the release.

“The banks expect to incorporate Federal Housing Administration (FHA) insurance and beneficial aspects of state programs, which often include flexible underwriting and eligibility guidelines.”

Finally, since $125 million can at best help 500 homeowners (each with $250,000 mortgage obligations), the FRBB has stated that if demand were to surpass the initial amount “funded”, they would consider expanding the program “especially if the mortgages can be securitized.”

All in all this initiative, though it may be touted with high and congratulatory praise, represents virtually no real effort to address the debacle we see before us today and, in fact, seems to provide further evidence that the Federal Reserve is seriously underestimating the severity of the situation.

Conspicuous Correlation: November 2007

In light of yesterday’s results for Producer Prices, and Retail Sales and Today’s results for Consumer Prices, I’m reworking my analysis of the possible correlation between falling home values and declining consumption of the most “discretionary” retail items.

On a “nominal” basis, there appeared to be “rough correlation” between strong home value appreciation and strong retail spending preceding the housing bust and an even stronger correlation when home values started to decline.

The following charts show the initial analysis plotting the year-over-year change to an aggregate series consisting of the primary discretionary retail sales categories that I termed the “discretionary” retail sales series and the year-over-year change to the S&P/Case-Shiller Composite home price index since 1993 and since 2000.


As you can see there was, at the very least, a coincidental change to home values and consumer spending during the boom and then the bust, but as home values have continued to decline, retail spending has remained low but has not continued to consistently contract.

One problem with this initial analysis is that both retail sales and the S&P/Case-Shiller Composite index are reported in “nominal” (i.e. non-inflation adjusted) terms and thus result in a somewhat skewed view especially for the retail sales data.

In fact, the year-over-year change to “nominal” discretionary retail sales has been positive for the last seven months while the year-over-year change to “real” discretionary retail sales has been negative for twelve straight months (see the following chart).

The key point here is that although inflation (as reported by the CPI) has been relatively stable in recent years it is always a factor and in light of the latest surprise increases to the PPI and CPI results as well as many anecdotal reports of producers now passing through increasing energy prices to the consumer, it’s important to adjust retail sales (and home values) in order to fully understand its direction.


As you can see from the above charts (click for larger version), adjusted for inflation (CPI for retail sales, CPI less shelter for S&P/Case-Shiller Composite) the “rough correlation” between the year-over-year change to the “discretionary” retail sales series and the year-over-year S&P/Case-Shiller Composite series seems now even more significant.

Given the anecdotal accounts of homeowners drawing equity out of their homes with refi’s and HELOCs and using the proceeds to buy consumer goods, it could be interesting to attempt to “shift” the retail spending in time as the decline to home values would surely precede a pullback in consumer spending but for now I’ll leave it aligned and work on the shifting in a later post.

To make the analysis even a bit more formal (at the prompting of reader Deejayoh) I also plotted the year-over-year changes an overlaid a 12 month moving Pearson’s correlation in order to see the “exact” correlation between the two data series (click for larger chart).

As you can see, although there was a significant correlation of the declines of these series starting in August 2006, this relationship has been falling away as real home values consistently contract and real retail sales remain negative but not falling as consistently.

This is probably a reasonable conclusion as expecting perfectly correlated changes in home values and consumer spending seems unlikely BUT it is probably important to note that home values and the level of consumer spending on discretionary items are in fact both consistently contracting.