Conspicuous Correlation: June 2007

Today, the Commerce Department released their monthly Retail Sales Report for June which continued to show an interesting correlation between declining consumer spending, particularly on discretionary items, and the decline in home values.

As in past months, I have isolated the primary discretionary retail sales categories into a single “discretionary” retail sales series, and then charted the year-over-year percentage changes since 2000.

I then added the year-over-year percentage changes of the S&P/Case-Shiller Composite index which broadly and accurately tracks single family home prices using data from Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco, and Washington DC.

The result is a significant correlation between the deceleration, and now outright decline, of home prices and a deceleration and subsequent decline in discretionary consumer spending.

Given the strong correlation between the decline in housing values and consumers tightening their discretionary spending one may wonder why consumers are increasing spending on the other retail categories.

The answer, possibly, is that several of the remaining non-discretionary retail categories in addition to gasoline, primarily food related, may be experiencing some degree of price inflation but only time will tell.

The first chart (click for larger version) shows the complete discretionary series comparison from January 2000 to the latest reported months of 2007.

Note the precipitous deceleration and decline to home prices starting in January 2006 and the very well correlated decline in “discretionary” retail sales.

Also note that the latest decline to retail sales is easily the most significant and sustained seen since 2000, handily surpassing the decline that occurred during and preceding the 2001 recession.

The second chart (click for larger version) simply isolates the results from January 2006 in order to provide a clearer view.

NARcasting The Future!

The National Association of Realtors (NAR) today released another downward revision to their outlook for existing home sales for 2007 along with another dose of truly preposterous spin.

In an effort to put their absurd bias into perspective I compiled all their forecasts for 2007 home sales into a chart along with a list of prominent quotes supplied with each forecast (click for larger version).


12/11/2006
Lereah "Most of the correction in home prices is behind us."

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

2/7/2007
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
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
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
Yun "Housing activity this year will be somewhat lower than in earlier forecasts."

6/6/2007
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
Yun "Home prices are expected to recover in 2008 with existing-home sales picking up late this year."

Reading Rates: MBA Application Survey - July 11 2007

The Mortgage Bankers Association (MBA) publishes 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 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 since last week and now stands at the peak for the year at 6.65% while the purchase volume increased 3.8% and the refinance volume decreased 3.0% compared to last weeks results.

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 January 2007.

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 January 2007 (click for larger versions).

What’d I Miss, What’d I Miss?

Well the trip to Maine went well. What a beautiful state… although, it was a bit difficult to see it through all those home for sale signs!

Cripes!… It’s really a sorry state of affairs up there.

They seem to be taking the housing decline a lot harder than we are down here in Massachusetts, possibly as a result of a combination of second homers and skittish “investors” jumping ship and the general lack of a robust economy.

It was amazing though to see what some sellers were asking for homes up there.

One FSBO seller had what appeared to be an elongated old tool shed dropped off on a corner lot, with no water view, priced at $250,000!

Also, although waterfront anywhere is premium and Maine’s coast is uncrowned and largely unspoiled, especially when compared to Mass and Rhode Island, there is so much of it up there…

There must be like 50 trillion miles of tidal frontage just in the Casco Bay region alone. It just winds on and on… bay, inlet, island, river, bay inlet, island, etc…

Supply is everything and I think at some point in the near future prices for coastal property will come back down to earth.

It wasn’t long ago that you could take a drive up to Maine and if you saw a nice three season cottage on a good size plot with tidal frontage that was to your liking, you could practically whip out your MasterCard and buy it outright!

Looking at the May results for home sales and median price for Maine I think a substantial price correction is well underway and likely heading for more declines.

Statewide, single family home sales were down 18.56% in May as compared to May of 2006 with the median price dropping 2.01% to $193,000.

Additionally, a majority of Maine’s coastal counties showed median price declines with the most notable being Washington County where prices slid 20.01%!

Oh Well…

So, the May Pending Home Sales Index was a real shocker ehh?

You could picture Lawrence Yun, the current Chief Economist of the National Association of Realtors (NAR) sitting in his office thinking “hmm… nationally, the existing home sales contract activity has just dropped below the average seen in 2001 and things just seem to be getting worse…. How do I put it…. Thinking… thinking…. Well… hmmm… well at least some regions were up!”

Too bad Lawrence and NAR forgot to mention that the only regions that were up were on a volatile month-to-month basis.

In fact, on the more relevant year-over-year basis, EVERY region was down and down BIG.

Additionally (and really incredibly), nationally and in every region except for the South, contract activity has now dropped below the average seen in 2001.

What we are experiencing is truly a national slowdown and nothing could indicate that more than a continuation of the decline in demand for existing homes.

The full extent of the drop in pending homes sales can be best visualized with the following charts.

The following chart shows the national Pending Homes Sales Index since 2005 compared monthly. Notice that each year, the months value is decreasing consistently (click for larger version).

The following chart shows the year-over-year changes to the national Pending Home Sales index as well as comparing the latest results against the values seen in the peak year of 2005 (click for larger version).

The following chart shows the pending home sales index nationally and for each region tracked (click for larger version).

Keep in mind that in the above charts, I had to use the Not Seasonally Adjusted (NSA) data series as NAR changed the methodology for their Seasonally Adjusted (SA) series a while back and never republished the numbers. This is why none of the data appears to be breaking below a value of 100 because it’s the SA series that is now below 100.

Look at the May pending home sales results and draw your own conclusion:

• Nationally the index was down 13.3% as compared to May 2006.
• The Northeast region was down 9.6% as compared to May 2006.
• The West region was down 13.7% as compared to May 2006.
• The Midwest region was down 11.7% as compared to May 2006.
• The South region was down 15.4% as compared to May 2006.

The Mortgage Bankers Association (MBA) publishes 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 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 declined since the prior week remaining near the peak for the year at 6.50% while the purchase volume increased 2.0% and the refinance volume decreased 2.6%.

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 January 2007.

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 January 2007 (click for larger versions).





Finally, there was an excellent piece on Bill Moyers Journal featuring Gretchen Morgenson, Pulitzer prize winning financial columnist with the New York Times, discusses at length the details of the housing and mortgage meltdown.

Morgenson, in no unequivocal terms, correctly labels the housing run-up a “bubble” and a “mania” and also blames, amongst other things, Wall Street backed easy lending, lightly regulated mortgage brokers, and lax rating agencies as major causes.

She further suggests that the decline is not over and that will be protracted and “not pretty”.

It’s good to see the traditional media at last cutting bait with the NAR charlatans and reasonably accurately reporting the reality at hand.

Watch the complete clip on BNN!

It’s good to be back!

Gone Fishin!

I’ll be away on vacation for the next week so I thought I would take this opportunity to recommend a few of the excellent blogs on the blogroll that you can read in order to stay completely current on the housing decline.

For up-to-date blogging on housing and lending, as well as interesting analysis and charts of the Countrywide Financial REO inventory check out the Countrywide Foreclosures Blog.

For an exceedingly interesting perspective on the US economy including complete coverage of the housing fiasco read Immobilienblasen.

For BNN-style video-blogging there is both the Real Estate Video Blog and the New York City Housing Blog with daily video posts of all things bubbly.

For S&P/Case-Shiller and OFHEO charts as well as a host of other really impressive charts check out Housing Bubble Bust.

For Bubble Times-esc and Digg-styled Housing Bubble news you can turn to Housing Bubble News Central and Speculative Bubble.

For the best in regional coverage of the housing and mortgage meltdown read any of the blogs in the US Regional Section of my blogroll particularly:

• Boston Bubble
• Sacramento Landing
• The Marin Real Estate Blog
• The New Jersey Real Estate Report
• The Second City Bubble blog
• The Chicago Bubble Blog

Happy bubble reading and be sure to check back to PaperMoney as I’ll be sure to be blogging away as soon as I return.

Wish Me Luck!

Constructing Capitulation: May 2007

May’s results capped another month of indisputable evidence that the housing decline did not bottom in the fall of 2006, as many optimists had hoped but, in fact, continues to collapse under the weight of slumping sales, surging foreclosures and inventories, the mortgage meltdown and increasing interest rates.

The final Q1 2007 GDP Report confirms that the historic decline to residential fixed investment continues weigh heavily the US economy with GDP registering a mere 0.7%, the weakest results since the end of 2002.

The following chart shows real residential and non-residential fixed investment versus overall GDP since Q1 2003 (click for larger version).

The housing weakness also appears to clearly show up in retail sales as consumers pullback on spending for some of the most discretionary of goods.


The Census Department’s New Residential Construction Report which continues to indicate significant weakness in the nation’s housing markets and for residential construction showing large declines on a year-over-year basis to single family permits, starts, and completions nationally and across every region.

Homebuilder confidence dropped to an 15 year low with respondents indicating that estimates of “present” and “future” conditions as well as buyer traffic continues to reach new lows.

The Census Department’s New Residential Home Sales Report that, showed renewed declines and a 5.10% downward revision to last month’s unexpected “surge”.

As with prior months, on a year-over-year basis sales are still declining in the double digits at 15.8% below the sales activity seen in May 2006.

NAR’s Existing Home Sales Report indicates worsening and uniform weakness to the nation’s housing markets with virtually all regions showing considerable declines to median price AND sales as well as significant increases to inventory and monthly supply.

Home sales were, in fact, down in EVERY region with the majority of declines in the double digits.

The April 2007 results of the S&P/Case-Shiller Indices are continued to show weakness for the nation’s housing markets with 14 of the 20 metro areas tracked reporting significant declines.

Topping the list of decliners on a year-over-year basis was Detroit at -9.35%, San Diego at -6.70%, Washington DC at -5.70%, Tampa at -4.97 and Boston at -4.52%.

Furthermore, comparing the last major downturn in the late 80s and early 90s to the current data may indicate that the current housing downturn is in its infancy with year-over-year declines only just having materialized in the last four months.

Furthermore, the Census Department’s Construction Spending Report for May again demonstrated the significant extent to which private residential construction spending is contracting.

It’s important to note that with May’s results the Census Department revised its numbers going all the way back to 1993 resulting in a substantially more sharp drop-off during the latest decline than had been originally reported as well as shifting the peak in spending from December 2005 to February 2006.

To see the difference, simply compare the charts included with last month’s Constructing Capitulation post.

With the weakening trend continuing, total residential construction spending fell -17.56% as compared to May 2006 while private single family construction spending declined by a grotesque -26.47%.

Key Report Details:

• The seasonally adjusted annul rate of private residential construction spending has now dropped 21.12% from the peak set back in February 2006.
• Overall private residential construction spending dropped -17.56% as compared to May 2006.
• Single Family residential construction spending dropped 26.47% as compared to May 2006.

The following charts show changes to construction spending (click for larger version):

OFHEO’s Absurd Sleight of Hand

This week the Office of Federal Housing Enterprise Oversight (OFHEO) published a request for public comment regarding its proposed policy changes to the procedures used to determine the conforming loan limit for 2008 and beyond.

The conforming loan limit is the maximum loan size that the Government Sponsored Enterprises (GSE), namely Fannie Mae and Freddie Mac, can purchase and today stands at $417,000.

The importance of this value should not be overlooked as it is the key determining factor that distinguishes GSE purchased loans, which generally come with a lower interest rate due to a presumed (yet not necessarily factual) government guarantee, from “Jumbo” loans which are available unfettered from private lending institutions.

In fact, OFHEO considers loans purchased by a GSE in excess of its conforming loan limit to be “unsafe and unsound practice, running contrary to statute”.

That said, the proposed changes relate to the method of determining the limit in the face of declining home prices.

First, it’s important to note that the method for determining the limit when prices are climbing is relatively simple.

The Federal Housing Finance Board (FHFB) confidentially delivers the results of their October Monthly Interest Rate Survey (MIRS) to OFHEO which intern applies a calculation to the average home price to determine the new maximum lending limit.

OFHEO then announces publicly the new limit for loans made during the following year.

Simple enough… October average home price + some calculation = new maximum limit.

So what is the issue you say?

It seems that OFHEO is struggling with the idea of applying that same simple methodology when prices are on the decline.

Reading the proposed procedures, it’s clear that the government has a bias toward inflating home values and is doing just about everything it can to maintain the current limit under the guise of not negatively impacting the market.

This is really an outrageous matter when one considers that the ever increasing limit, that was even a surprise to mortgage brokers and lenders during the boom years, had without a doubt contributed to fueling the housing mania.

With the proposed changes, a downward revision to the limit, even in the face of falling home prices, may be deferred for as long as 2-3 years or more.

I would strongly urge that you let OFHEO know what you think of their proposed changes as well as making your own recommendations by emailing OFHEO at the following email address ofheoguidancecomments@ofheo.gov.

Below are the proposed procedures for setting the limit when home values are declining:

1. In a year in which the October house price level is lower than the level of the previous October, OFHEO will defer the impact of that decline on the conforming loan limit for one full year. The effect of the price level decline of 0.16% from October 2005 to October 2006 was deferred in this manner.


2. After deferring the impact of a decline in the average price level for one year
   
   (A) if the price level falls in the following year, the latter decline will be deferred one year, and the maximum loan limit will be adjusted by the decline of the former year. However, the decrease will be deferred to the next year unless it exceeds one percent (1%); or
   (B) if the price level increases the following year, then the prior year’s (or years’) decline(s) will be subtracted from such increase, unless such subtraction(s) result(s) in a decrease of less than 1%, in which case such decrease will be carried forward to the next year.
   


3. All loans that were within the conforming loan limit at the time of origination will continue to be deemed within the conforming loan limit during the remaining lives of such loans, regardless of whether the loan limit for any subsequent year declines to a level below the limit at the time of origination.

And here is an example of the actual implementation of these procedures:

In November 2007,

(a) if the average house purchase price has gone up during the year, for example by 2 percent, the deferred decline of 0.16 percent would be subtracted, and the new loan limit beginning January 2008 would show an increase of 1.84 percent.

(b) if the average house purchase price has gone up during the year, for example by 0.10 percent, then the deferred decline would offset that 0.10 percent increase and a 0.06 decline would be carried forward. The conforming loan limit would remain the same at $417,000.

(c) if the average house purchase price has gone down, the conforming loan limit will remain at $417,000 for 2008.

The deferred decline will be added to the 0.16 percent and carried forward until the next calculation in November 2008, as follows:

(i) if the average house purchase price goes up during 2008, the conforming loan limit will be calculated per (a) or (b) above with the offset being the cumulative deferred decline of 0.16% and the November 2007 decline;

(ii) if the average house purchase price goes down during 2008 and the cumulative deferred decline of 0.16 percent from 2006 and the decline from 2007 coupled with the 2008 decline still total less than 1 percent, the conforming loan limit would remain at $417,000 in 2009; or,

(iii) if the average house purchase price goes down during 2008 and the cumulative deferred decline of 0.16 percent from 2006 and the decline from 2007 and 2008 totals 1.0 percent or greater, then the conforming loan limit for 2009 will be adjusted downward by that cumulative deferred decline.

GDP Report: Q1 2007 Final

Today, the Bureau of Economic Analysis (BEA) released their third and final installment of the Q1 2007 GDP report showing truly anemic growth of 0.7% weighed down by, amongst other things, continued weakening to fixed residential investment.

As with last months preliminary report, major praise has to go to Professor Nouriel Roubini for his accurate forecasting having called this deceleration to GDP well in advance, virtually nailing the actual figure as well.

Residential fixed investment, that is, all investment made to construct or improve new and existing residential structures including multi–family units, continued its historic fall-off registering a decline of 15.8% since last quarter while shaving .89% from overall GDP.

Housing continues to be, by far, the most substantial drag on GDP subtracting an amount far surpassing the contributions made by ALL non-durable goods including food, clothing, gasoline, fuel oil.

The following chart shows real residential and non-residential fixed investment versus overall GDP since Q1 2003 (click for larger version).

Reading Rates: MBA Application Survey - June 27 2007

The Mortgage Bankers Association (MBA) publishes 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 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 went unchanged since last week remaining near the peak for the year at 6.60% while the purchase volume decreased 4.9% and the refinance volume decreased 2.5% compared to last weeks results.

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 January 2007.


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 January 2007 (click for larger versions).

Crashachusetts Existing Home Sales: May 2007

Today, the Massachusetts Association of Realtors (MAR) released their Existing Home Sales Report for May 2007 showing further weakness to the regions residential housing market with sales of single family homes declining 7.5% compared to May of 2006.

Along with the release, MAR President Doug Azarian continued to maintain an optimistic outlook even in the face of renewed sales declines and the obvious implications of tighter lending standards.

“While tighter lending standards and reduced mortgage options for some prospective buyers this year may have had an impact on the market, stable prices and declining supply indicate there is still a steady demand. In fact, May is the fifth straight month that residential supply levels have gone down. We can speculate that demand will continue to go up during the second half of the year.”

Note that a key tenet of Azarian’s optimistic outlook depends on the “stable” prices seen when calculating the median prices based on the MAR MLS data.

Using the broader data reported during deed and mortgage transactions filed in the state's registries of deed, The Warren Group showed a 4.6% year-over-year decline to the median price of a single family home.

It’s important to note, also, that the Warren Groups numbers are more consistent with the trend and latest year-over-year results seen in the S&P/Case-Shiller index for Boston which today showed a 4.52% decline to single family home prices with futures indicating further declines for the remainder of the year and on into 2008.

Additionally, although the “MLS listed” inventory has declined throughout the last year, the sales pace has dramatically slowed resulting in an average of a 139 “days on market” for a single family home, an increase of nearly 15% compared to May 2006.

With significantly falling prices, continued declining sales volume and a slowing pace of sales, it seems hard to believe that Azarian’s optimistic outlook has any merit especially when considering that all of this weakness is coming on the back of the historic declines seen in 2006.

A more likely scenario is that our area is experiencing a fundamental correction to prices that, through unusually low interest rates and historically easy lending standards, were able to rocket to irrational heights during the run-up years.

To better illustrate the drop-off in home prices and the potential length and depth of the current housing decline, I have compared BOTH the year-over-year and peak percentage changes to the S&P/Case-Shiller home price index for Boston (BOXR) from the 80s-90s housing bust to today’s bust (ultra-hat tip to the great Massachusetts Housing Blog blogger for the concept).


The “year-over-year” chart compares the percentage change, on a year-over-year basis, to the BOXR from the last positive value through the decline to the first positive value at the end of the decline.

In this way, this chart captures only the months that showed monthly “annual declines” and as we can see, if history is to be a guide, we could be about one third of the way through the annual price declines with the majority of falling prices yet to come.

The “peak” chart compares the percentage change from the peak, comparing monthly BOXR values to the peak value seen just prior to the first declining month all the way through the downturn and the full recovery of home prices.

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

As you can see the last downturn lasted 105 months (almost 9 years) peak to peak including 34 months of annual price declines during the heart of the downturn.

Notice that peak declines have been more significant to date and, keeping in mind that our current run-up was many times more magnificent than the 80s-90s run-up, it is not inconceivable that current decline will run deeper and last longer.

As in months past, be on the lookout for the inflation adjusted charts produced by BostonBubble.com for an even more accurate "real" view of the current market trend.

May’s Key Statistics:

• Single family sales declined 7.5% as compared to May 2006
• Single family median price increased 0.7% as compared to May 2006
• Condo sales increased 0.2% as compared to May 2006
• Condo median price increased 1.4% as compared to May 2006
• The number of months supply of single family homes stands at 9.5 months.
• The number of months supply of condos stands at 7.8 months.
• The average “days on market” for single family homes stands at 139 days.
• The average “days on market” for condos stands at 134 days.

New Home Sales: May 2007

Today, the U.S. Census Department released its monthly New Residential Home Sales Report for May showing renewed declines and a 5.10% downward revision to last month’s unexpected “surge”.

As with prior months, on a year-over-year basis sales are still declining in the double digits at 15.8% below the sales activity seen in May 2006.

It’s important to keep in mind that these declines are coming on the back of the significant declines seen in 2006 further indicating that the decline is not abating.

This should not be understated as it is clearly showing continued and even accelerating weakness to new home sales.

The following charts show the extent of sales declines seen since 2006 as well as illustrating the further declines 2007 is showing on top of the 2006 results (click for larger versions)

Note that the last chart essentially combines the year-over-year changes seen in 2005 and 2006 and shows sales trending down precipitously as compared to the peak period.




Look at the following summary of today’s report:

National

• The median price for a new home was down .88% as compared to May 2006.
• New home sales were down 15.8% as compared to May 2006.
• The inventory of new homes for sale declined 5.0% as compared to May 2006.
• The number of months’ supply of the new homes has increased 14.5% as compared to May 2006.

Regional

• In the Northeast, new home sales were up 19.1% as compared to May 2006.
• In the West, new home sales were down 21.1% as compared to May 2006.
• In the South, new home sales were down 17.9% as compared to May 2006.
• In the Midwest, new home sales were down 21.1% as compared to May 2006.