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 and now standing near peak for the year at 6.40% while the purchase volume increased 2.1% and the refinance volume decreased 1.1% 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).

Homebuilder Blues: NAHB/Wells Fargo Home Builder Ratings October 2007

Yesterday, the National Association of Home Builders (NAHB) released their Housing Market Index (HMI) showing additional evidence that the new home market is experiencing a new leg down in declines.

The release came along with a renewed sense of reality and some guarded, yet optimistic, outlook from Chief Economist David Seiders who continues to see home sales recovering by the second quarter of 2008.

“Consumers are still trying to sort out market realities and get the best deals they can, … Many prospective buyers may very well have unrealistic expectations regarding new-home prices as well as how much they can expect to receive for their existing homes. When the market is in proper balance, people can recognize a good deal when it comes along; at this point, they view a good deal as a moving target. … Indeed, NAHB’s housing forecast indicates that home sales should stabilize within the next six months and show significant improvement during the second half of next year.”

It’s important to understand that each component of the NAHB housing market index is now sitting AT OR BELOW the worst levels ever seen in the over 20 years the data has been being compiled.

This suggests that the current severe correction has surpassed all other events seen in the last 22 years and is now firmly in uncharted territory.

Measuring builder confidence across six key data points, the builder survey has been a bellwether for the new home market since 1985.

The component measures used to formulate the overall HMI are respondent ratings on “present conditions”, “future conditions” and “buyer traffic” all of which continue to indicating significant current and future weakness as the new home market slumps its way slowly forward.

The following charts show “present conditions”, “future conditions” and “buyer traffic” both smoothed since 1986 and unadjusted since 2005 (click for larger versions).
Keep in mind that for each measure respondents are asked to assign both a “good” and “poor” rating so in each chart you will notice “good” slumping while “poor” is surging.

Conspicuous Correlation: September 2007

Last Friday, the Commerce Department released their monthly Retail Sales Report for September 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.

As a result of reader feedback (particularly by Deejayoh) I have modified the approach of merely “eyeballing” the presumed correlation and instead used a Pearson correlation to provide a true statistical view of the data.

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

That said, the original correlation that seemed nearly perfect earlier in the year is now becoming lees correlated as home prices continue to erode and discretionary retail sales generally remain flat.

This month I have updated the analysis by using a 3 month moving average for both the CSI series as well as the discretionary retail sales series.

The CSI is calculated monthly based on home sales that could have been settled as far back as three prior months so the smoothing should serve to better align each series.

Keep in mind that the analysis is STILL assuming completely coincident changes to home values and to consumer spending which is likely not a good assumption as most homeowners would likely pull back on spending after the realization that home values have declined.

In a upcoming post I will attempt to shift the housing price decline further into the future (or spending into the past) following an assumption that declining prices are “leading” the declining spending but for now the correlation on the rates of change are still significant.

First, in order to get a sense of the original presumed correlation, take a look at the chart below showing the year-over-year percentage change to both the S&P/Case-Shiller Composite Index (measuring home price change) versus my “discretionary” retail sales index (measuring retail sales change).

Note that the chart shows that during the period from January 2001 to June 2003 retail sales faltered a little as the effects of the dot-com recession worked to dampen spending but that housing remained at exceptional rates of appreciation.

Notice also that from July 2003 to January 2006 both measures show exceptional, and possibly related or correlated growth that then seemed to also decline in tandem in early 2006 with the retail sales component having generally remained either negative or dampened similar to the rates seen during the last recession.

Next, let’s expand the chart a bit to include the full range of available data starting in January 1993 and running all the way through the latest month where both series have data points in July 2007.

Notice that in general, the rate of change of the two series do not appear to be very well correlated and, in fact, that during the tail end of the last housing recession in 1993, retail sales was growing strongly while home appreciation floundered along the bottom until 1997.

Also note that while growth (or lack thereof) of retail sales was clearly dampened during the dot-com recession, home price appreciation seems to have been little effected.


The final charts attempt to correlate the year-over-year rates of change of the underlying data series and 3 month moving average of those series by using a moving Pearson's correlation to determine the degree of correlation.

As you can see there is little consistent correlation (negative to low positive indicates no correlation, 50, 80 to 100 indicate good, strong to perfect correlation) between the rates of change of these series but that having been said, the best correlation to date has been in the trend seen since 2006.

Although the correlation has weakened a little as home prices continue to slide and retail sales has at worst flattened, this current existing correlation would be interesting to watch over the coming months.

If a measurable pullback continues to occur in discretionary retail sales, this correlation will persist, leaving us to possibly conclude that there is a direct effect between the latest decline in home values and consumption of discretionary items.

The Gloves Come Off!

In addition to putting together yesterday’s post on the ridiculous “market is hot in Arlington” article, I fired off the following email to Martin Baron (and others), Editor of the Boston Globe:

--

All,

The article published yesterday entitled "Arlington is hottest place in Eastern Mass." takes pandering the real estate advertisers many steps too far.

I implore you to read the article at the following link and then publish a retraction. Also, you might want to look over your "reporters" shoulders from time to time... you know... do a little editing every so often.

http://paper-money.blogspot.com/2007/10/boston-globes-new-bubble.html

Sold

P.S. I'm emailing this link to other media outlets as well...

--

A little snarky I know but the fact remains that the Arlington article was a true absurdity and I hardly believe that I’m alone in feeling near outrage over it.

Well, I did in fact elicit a response and I thought I might share it with PaperEconomy readers along with my in-line retorts (in bold).

This post should function as a decent counter response that I will email to Mr. Baron.

--

Thank you for your email. This story was initiated not at the suggestion of a realtor, but by a reporter. We do not kowtow to the interests of advertisers, potential advertisers, or industry groups. The Arlington story was published in the context of dozens, if not hundreds, of previous stories in the Globe on the generally weak housing market.

[
I take it back… the Boston Globe is not pandering to real estate advertisers… it is PART of the real estate industry.

Don’t believe me?

Just take a look at the Boston.com real estate section.

The Boston Globe has a direct relationship with real estate financial information firm the Warren Group and TOGETHER they sell home reports for virtually any home in the region. You buy them right through the Boston.com website.

The Globe also hosts MLS searches right on their main real estate web page which means they have established a significant relationship with the MLS Property Information Network (MLS-PIN) which owns the data.

Why is this important? Because this is not mere advertising.

With the property search and all of the associated tools and accoutrements (town stats, open house postings, mortgage rate lookups, embedded videos etc.) they are actually assisting buyers in ferreting out inventory and in nearly every aspect of the sales process.

Yes this is probably good for the consumer… the tools are useful but the fact remains that these are not mere Sunday sections or even banner ads…. we are in a new era of advertising.

These tools represent a nearly complete synthesis of news media and consumption where you literally read news and can simultaneously participate in buyer or seller activity in the same dynamic frame of reference.

Mr. Baron, you can talk editorial independence and separation from advertisers all you want but is it really likely that this hyper confluence of real estate business and media interests plays NO role in editorial decisions?
]

The story's basic premise – that the market for single-family homes in Arlington is unusually robust amid a nationwide housing slump – is supported by statewide real estate data, as well as by multiple interviews with buyers and sellers in the Boston area.

[
The interviews were anecdotal and the data absolutely does NOT support the notion of “unusually robust”.

Your suggestion again simply perpetuates a preposterous notion.

Yes the August median selling price figure you quoting (apparently recently revised from $510,000 to the $506,000 currently reported by the Warren Group) is on par with August of 2005 and near August of 2004 but what you apparently don't understand is that August settlements capture sales that originated in during June and July, easily the busiest selling months of the year.

This tends to make the August median selling price result volatile and not nearly as representative of the annual median price which is the price that actually matters.

No one quotes just the August value when referring to median selling price… they quote the annual.

Look at the following chart for Arlington and you can see what I mean.

Notice that the August (blue) trend line is the jerky and erratic especially compared to the (red) year-to-date through August and the (green) annual lines.

Notice also that, in general, the year-to-date through August is a decent predictor of the outcome of the annual result whereas the August median value is generally quite poor.

Notice also that in 2006 neither the August or the year-to-date through August was a good predictor for the annual result as the median selling price in Arlington accelerated to the downside during the fall months.
]

The story acknowledges that condo sales have slowed, that houses can still languish on the market, and that while Arlington is affordable relative to surrounding communities, homes there can still easily cost a half-million dollars. But the fact remains that Arlington distinguishes itself in eastern Massachusetts by both days-on-market data and median sale prices.

[
Day’s on the market is at best a very rough way to judge market activity as it is really a byproduct of the MLS listing and not actual market performance.

Of course, in a perfect world, a market full of homes that after being listed with a listing services (like the MLS) stay there racking up “days-on-market” until being removed as a result of a purchase would actually be a good indicator but anyone who has actively watched a town’s inventory knows that that’s not the case.

In reality, homes are removed and re-listed frequently for many reasons by both Realtors and sellers.

This skews the number and although it still serves as a rough guide to activity, Arlington’s 83 day average is certainly nothing to get exuberant over.

As for the median selling price… see above.
]

As of October 5, the median sale price for single-family homes in Arlington was $510,000 in August, the most recent month available from the Warren Group – and a traditionally slow month for house sales. In the past week, that number has dipped by $4,000 due to updated Warren Group data. The data is updated constantly.

[
No. Sorry Mr. Baron, the August results represent the highest monthly sales for the year.

It’s important to keep in mind that the sales results captured in August are from purchases that generally originated in June and July and possibly the very first few days of August.

Remember, buying a house takes time and The Warren Group captures the data after it has been finalized by a deed transaction at the registry.
]

The year-to-date median sale price for single-family homes in Arlington is $465,500 as of this afternoon. By that measure, too, Arlington is a standout in eastern Massachusetts. It is also a standout compared to the neighboring communities cited in the story – Bedford, Belmont, Cambridge, and Lexington. Sales data indicate that Arlington’s real estate market was extremely busy this summer, resulting in a higher median sale price in August. As a result, Arlington is on track this year to match and perhaps exceed its busiest-ever year for home sales, 2004.

[
Again, you are expressing an obviously fundamental misunderstanding of the data.

You are treating home sales as if they inflate like the selling price.

Short of some truly fundamental change, home sales at a town level remain relatively constant over time.

In terms of a single town market, there is a relatively fixed housing stock, similar numbers of population, similar household formation and relocations in and out of the town all resulting in a fairly stable numbers of home sales.

Of course there could be a significant period of slowing that would possibly take things down a notch but as you can see from the chart below, even the mortgage-mania that occurred between 2000 and 2006 barely registered.

Further, I don’t see how this is the “busiest-ever” year… doesn’t it look flat to you?

Additionally, I take exception with your notion that, in terms of year-to-date
median selling price, Arlington is a “standout” amongst eastern Massachusetts towns like Belmont, Bedford, Cambridge, and Lexington.

Look at the following chart of year-to-date median selling prices for those towns and see if you can explain how you arrived at the term “standout”.

I don’t see Arlington standing out very much at all… It has the lowest median price but it has always had the lowest median price.

Normalizing each towns results to a base of 100 makes the fact that the sharing the same experience even a bit more clear.


The towns are all essentially following the same path, namely up the boom years and now… heading down again.
]

Regarding the percentage of Arlington homes that sell under listing price:
This data cannot be examined in a vacuum. Without comparing it to data in surrounding cities and towns, and to historical data in Arlington, the figure has little meaning. Even in strong housing markets, homes sell under asking price. That any houses would sell above list price in the current statewide and national real estate market is remarkable.

[
Zip (i.e. use ziprealty.com) any town inside 128 and the number of homes with price reductions is roughly 50% INCLUDING Arlington (at 55%).

Sellers have been reducing prices just to lure buyers into making below list offers on 66% of all sales and list-to-below-list on 90%.

That's significant and it's a good barometer of the depth and breadth of the downturn.
]

Sincerely,
Martin Baron
Editor
The Boston Globe

---

Mr. Baron, originally you published an article that had incredibly poor quality of information with at best a few anecdotal stories supported by numbers that your reporter knew not how to interpret.

Now, you yourself defend the story with an even worse level of understanding.

I have made my case and I’m repeating my demand that you publish a complete retraction placed in a comparable position to the absurdly poor article published on Wednesday and further to cease and desist promulgating such poor quality “news”.

Countrywide Foreclosures: September 2007

Today, Countrywide Financial (NYSE:CFC) released their August Operational Results showing again that delinquencies and foreclosures are continuing to remain at troubling levels with delinquencies jumping 30.44% and foreclosures soaring 149% since September of 2006.

Prior to January 2007, Countrywide reported foreclosure data as a percentage of the total number of loans serviced which obviously lacked complete clarity.

Below, are charts of both measures; foreclosures by total number of loans serviced and foreclosures by percentage of unpaid loan principle (Click for larger versions).

Either way you slice it, Countrywide is looking at some significant increases in foreclosure activity but notice that for the “unpaid loan principle” method, things are really looking dire.

Be sure to check out the Countrywide Financial Foreclosures Blog’s Inventory Tracker for some more startling evidence that foreclosures are skyrocketing over at Countrywide Financial as well as some excellent REO tracking features.

The Boston Globe’s New Bubble?

It appears that yesterday, The Boston Globe finally completed the National Association of Realtors (NAR) training course titled “how to become a willing shill for the real estate industry in… 90 days or less!”.

Of course, it did take them a little longer… but, come on… these are staff reporters and section editors we are talking about here!

You might remember that about a year ago, the Globe published an article titled “End of housing decline near?” with the summary line “Drops in price and sales moderate, hinting market may be starting to stabilize” within which reporter Kimberly Blanton quoted a host of real estate insiders who, in typical fashion at the time, portrayed the housing decline in Massachusetts as having shown signs of stabilization.

When I called her on the obvious disconnect between reality and her reporting (during a live moderated Boston.com chat) and asked her directly how she was able to responsibly report that there were "signs of market stabilization" she replied:

“That's a great question. Frankly, an editor threw that in & I'm not sure why.”

Just too perfect…

Well, it seems now that other Boston Globe “reporters” want to get in to the act.

Yesterday, The Globe published an article entitled “Arlington is hottest place in Eastern Mass.” With the summary line “Blend of amenities, convenience keeps town's housing market strong despite slump” within which staff “reporter” Sacha Pfeiffer recounts tales of “frenzied” bidding wars leading to homes selling over list, high median prices and a “brisk” rate of sales.

No… this isn’t a retelling of the wild and bubbly days of 2000-2005… The Boston Globe is reporting that this is occurring right now!

The article even goes so far as to suggest that Arlington, a nice clean and well placed Boston suburb, is currently “enjoying its own housing bubble while many other communities in Eastern Massachusetts struggle with declining sales and prices.”

Seem fishy to you? It should.

After doing a little fact checking of my own (against MLS sales data), I’m left utterly speechless at how a supposedly celebrated national newspaper could report such absurd and fictitious information.

First, looking at the completed single family home sales for 2007 shows that 156 of 235 homes sold, or a whopping 66.4%, were sold UNDER LIST while only 56 homes, or 23.8%, were sold over the list price.

Taking into account the fact that Arlington has seen an average of 50% of all listed single family homes have price reductions (currently 55%), the sheer number of homes still selling under list is staggering.

Furthermore, the total dollar amount of all discounts on under list sales totaled $3,541,903 versus a $1,002,800 total of all over list bonuses with an average discount of $22,704 and an average bonus of $17,907.

Additionally, the median under list discount was $14,000 versus the median over list bonus of $12,250 and the median selling price of an under list home was $470,000 versus the median selling price of an over list home of $478,500.

Still further, the year-to-date median selling price for a home in Arlington is in fact $465,500, the lowest seen since 2003, according to the Warren Group NOT the $510,000 as reported in the article.

In fact, I don’t see where the Boston Globe got the $510,000 figure as it doesn’t match the median number reported for the year-to-date figure, the latest reported month or the current calendar year.

As you can see from the chart, the median price is coming down while the number of homes sold has remained nearly constant for the last 15 years.

Arlington is a nice town… It’s clean and prosperous with many young families and a good location BUT none of that justifies writing a baseless article that distorts and even fabricates statistics in an effort to create an atmosphere of exuberance.

I’m calling on the The Boston Globe to publish a complete retraction placed in a comparable position to the fictitious article published yesterday and to cease and desist functioning as the loudest part of the NAR/MAR propaganda machine.

I’m sure that making the advertisers happy is important but not nearly as important as getting the story and the facts straight.

Be sure to let The Boston Globe's Editor know what you think of his shoddy paper.

NARcasting The Future: October 2007

Today, the National Association of Realtors (NAR) released yet another downward revision to their outlook for existing home sales for 2007 along with another dose of truly ridiculous 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.


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."

Reading Rates: MBA Application Survey – October 10 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 near the peak for the year at 6.40% while the purchase volume increased 2.1% and the refinance volume increased 2.7% 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).

The Daily 2¢ - New Math, Old Reality

It’s been about a year and a half now since the husband and wife team of Gary and Margaret Hwang Smith, two professors of economics from Pomona College presented a paper at the Brookings Institute entitled “Bubble, Bubble Where’s the Housing Bubble?”.

Their paper initially took the fairly sound position of estimating a home’s “net present value” by calculating its potential cash flow, including rental income, but then proceeded at great lengths to justify the price appreciation seen during the boom years by making overly optimistic assumptions as well as including some truly fuzzy logic.

For example, the Smith’s assist the cash flow derived from rental income with additional value derived from “non-financial factors”, such as a “pride of ownership” and “desire for privacy”.

That’s about where the papers leaves reality and enters the realm of shameless contrivance.

I guess that might not be too surprising from a couple of professional real estate and financial “experts” who, having just recently purchased a nearly million dollar Craftsman style single family home in Claremont California, clearly had a lot at stake in justifying their “investment”.

The paper eventually concluded that many of the hyper inflated metro areas such as Boston, Los Angeles and Chicago were not only NOT bubbles they were actually UNDER PRICED.

"Buying a house at current market prices still appears to be an attractive long-term investment."

What’s worse though is that their paper (and story of their home purchase etc.) was picked up by the New York Times and published in an article titled “Some New Math on Homes” ironically on April Fool’s Day in 2006.

This article and the Smith’s paper undoubtedly did some serious damage as it painted that classic “things are different now” picture at the exact moment that the nation’s housing markets were beginning peak and then steadily decline.

I can only imagine the scores of people who read their story, bought into their proposition, and then felt more comfortable taking the plunge to home ownership right at the very peak of the market.

As if to add a final "insult to injury" the Smith’s now have a blog where they persist in making their “housing market still appears attractive” claim and further reveal that their analysis is to become the basis of a new book they have coming out titled “Houseonomics”.

Well, if it’s any consolation, it appears that the Smith’s home has not escaped the “actual” fundamentals of the downturn dropping nearly 2% on a year-over-year basis in August according to a SoCal Real Estate News and Data Source DataQuick.

Furthermore, southern California is now seeing homes sales fall steeply and steadily with the latest results showing sales dropping to their lowest level in 15 years.

With the S&P/Case-Shiller Futures for Los Angeles predicting continued declines to the price for single family homes and the inventory for Claremont climbing to new highs, the Smith’s may get what they deserve after all.

Correlating the Correlation

For several months now I have been producing a regular post entitled “Conspicuous Correlation” that demonstrated an apparent relationship between the decline in home prices and a near simultaneous pullback in the retail sales of the most discretionary items.

While that post generally “eyeballed” what seemed to be a fairly obvious relationship, I’d like to expand the analysis (hattip Deejayoh for proposing the concepts found below) a bit in order to present a more complete representation of the correlation as well as setting the stage for future “Conspicuous Correlation” posts.

First, in order to get a sense of the original presumed correlation, take a look at the chart below (click for larger version) showing the year-over-year percentage change to both the S&P/Case-Shiller Composite Index (measuring home price change) versus my “discretionary” retail sales index (measuring retail sales change).

Note that the chart shows that during the period from January 2001 to June 2003 retail sales faltered a little as the effects of the dot-com recession worked to dampen spending but that housing remained at exceptional rates of appreciation.

Notice also that from July 2003 to January 2006 both measures show exceptional, and possibly related or correlated growth that then seemed to also decline in tandem in early 2006 with the retail sales component having generally remained either negative or dampened similar to the rates seen during the last recession.

So this frames the heart of the matter.

Did the exceptional growth of housing values spill over to the consumption of discretionary items and then as the housing tide turned did it spill over again but in reverse?

Anecdotally, I think, we would probably all be pretty comfortable with assuming this correlation exists as we have all likely witnessed some aspect of the cash out refinancing and other related activities resulting from the housing boom but let’s see if a more complete statistical correlation exists to hang our hat on.

Next, let’s expand the chart a bit (click for much larger version) to include the full range of available data starting in January 1993 and running all the way through the latest month where both series have data points in July 2007.

Notice that in general, the rate of change of the two series do not appear to be very well correlated and, in fact, that during the tail end of the last housing recession in 1993, retail sales was growing strongly while home appreciation floundered along the bottom until 1997.

Also note that while growth (or lack thereof) of retail sales was clearly dampened during the dot-com recession, home price appreciation seems to have been little effected.

The next chart (click for larger version) shows the full range of series data (Not year-over-year change… simply the underlying data) for both the “discretionary” retails sales and the S&P/Case-Shiller Composite index starting from 1993, as well as introducing a Pearson’s correlation that calculates the degree of correlation between the two data series.

Note that in this chart, the correlation set for each successive month cumulative staring from January 1993 so although the correlation starts out nonexistent initially, the two measures begin to correlate strongly for the remainder of the dataset.

It’s important to note that I included this chart mostly as an exercise to set up the next several charts and I don’t think that this correlation shows anything of any great importance other than that, over a long period of time, both home prices and retail spending increased.

There is nothing in the chart to suggest that the home price appreciation influenced the increase to retail spending, only that they both increased over the same period.

The next chart (click for larger version) betters the prior by using a 12 month “moving” correlation whereby each successive correlation data point indicates the degree of correlation between the last 12 months of series data.

This chart clearly shows periods of variation where the two series range from closely correlated to no correlated at all.

One feature to note is that the correlation was strong during the mid to late nineties prior to the dot-com recession where both home prices and retail sales grew consistently.

Then during the dot-com recession the correlation fell apart as retail sales were clearly flattened by the downturn and home prices seemed largely unaffected.

Also note that as of late, the correlation has fallen apart again as home prices have declined and retails sales, although having flattened, have not declined.

The final chart (click for larger version) takes a different angle, instead attempting to correlate the year-over-year rates of change of the underlying data series rather than the series themselves.

As you can see there is little consistent correlation between the rates of change of these series but that having been said, the best correlation to date has been in the trend seen since 2006.

Although the correlation has weakened a little as home prices continue to slide and retail sales have at worst flattened, this current existing correlation would be interesting to watch over the coming months.

If a measurable pullback continues to occur in discretionary retail sales, this correlation will persist, leaving us to possibly conclude that there is a direct effect between the latest decline in home values and consumption of discretionary items.

Ill update the “Conspicuous Correlation” post to reflect this better assessment of the correlation so be sure to check back as the new retail sales numbers are being released on Friday and they will definitely make an impact one way or the other.

The Daily 2¢ - Put On A Happy Face!

“Gray skies are gonna clear up,
Put on a happy face;
Brush off the clouds and cheer up,
Put on a happy face.
Take off the gloomy mask of tragedy,
It's not your style;
You'll look so good that you'll be glad
Ya' decide to smile!
Pick out a pleasant outlook,
Stick out that noble chin;
Wipe off that "full of doubt" look,
Slap on a happy grin!
And spread sunshine all over the place,
Just put on a happy face!”

So I guess it’s safe to say we are out of the woods!

No more subprime mortgage woes… no more credit concerns, Job growth is back to top form… The Fed’s mojo is really working its magic!

Of course, the housing data is falling into an abyss as is indicated by the last two pending home sales results as well as a surge in inventory and foreclosure data… but pay no attention!… that of little concern.

Today, let’s just smile.

Seriously now, it is very interesting how the general sentiment of our economic circumstances seem to progress in waves oscillating between the possibility of horrendous economic collapse and exuberant speculation.

There doesn’t seem to be much room in the middle.

I suppose that this is normal, or at least how our markets and our economy have been functioning for a long while but still, you wonder whether that’s not an indication of trouble in and of itself.

After witnessing the many thousands of predictions and outlook and actions that resulted from the churn that started in early August, I think it’s safe to say that even “dyed in the wool” Bulls are now having a hard time ignoring the obvious fundamental effects being brought on by the housing decline.

Still though, these same Bulls and many others persist, latching on to small bits of positive information like life rafts, effectively postponing any conscious acceptance of the inevitable.

There are clearly periods where the sentiment has shifted dramatically.

Like for example this time last year when Greenspan issued his initial “the worst may well be over” outlook and the Gates Foundation took up a widely publicized and substantial position in homebuilder stocks.

Wall Street seemed relieved and the homebuilders surged strongly, some moving up over 40% from their lows.

Of course, that time was brief.

The Gates Foundation sold off all their positions in December (unbeknownst to the rest of the investment community… funny how that happens) and by early February of this year when again it was reaffirmed that the unwinding of the great housing-mortgage mania was truly substantial and that the slowdown we had witnessed to that date was a mere opening act in a much larger production, real estate related stocks retreated, setting new lows.

So what should we make of the current euphoria?

The Daily 2¢ - Mortgage Tsar?

In terms of government response to crisis, you know things are really going haywire when they anoint a new Tsar.

And so it goes for the housing-mortgage meltdown.

Not satisfied with intervening in the “free” market through mere Fed rate cuts and a potentially (in the bag) dramatic expansion of Freddie Fannie and FHA, Congress seems so bent on attempting to prevent a correction in the nation’s housing markets that they are now proposing the “temporary” creation of the position of “Mortgage Tsar”.

Furthermore, Representative Barney Frank (D-MA), Chairman of the House Financial Services Committee, offered up his pick for the spot, former Congressman Jack Kemp.

I think, at this point, it’s safe to say that Congress is getting a little carried away.

Senator Christopher Dodd (D-CT) even suggested that the current circumstances in the housing-mortgage market are akin to a “slow-motion, 50-state Katrina, taking people's homes one-by-one, deva­stating their lives and destroying their communities.”

So, what are the expectations for a “Mortgage Tsar” anyway?

Here is a possible “Mortgage Tsar” credo:

“Willing to combat foreclosure wherever it should strike the innocent and further to prevent the unwitting debt getter from making bad decisions. Stops at nothing to eliminate pre-payment penalties… Able to make a large Jumbo loan conform in a single bound!... look up in the air… it’s a bird… it’s a plane… it’s… it’s… The Mortgage Tsar!”

Congress… Put your hands down and slowly back away from the legislation.

Reading Rates: MBA Application Survey – October 3 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 decreased since last week and now stands near the peak for the year at 6.32% while the purchase volume decreased 1.8% and the refinance volume decreased 3.8% 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).