The Arlington Artifice: October 2007

This recurring monthly post tracks the latest results of the housing market seen in Arlington Massachusetts.

I choose Arlington as a result of the Boston Globe’s recently published and absurdly anecdotal and ludicrous farce about the town’s “hot” housing market.

The ridiculous tone and outright mishandling of the housing data by the Boston Globe “reporter” would almost be comical if it weren’t for the fact that the Globe’s editor, Martin Baron, ALSO blundered seriously when he responded to my email about the discrepancies.

Baron attempted to justify the articles contents and in so doing, he disclosed his poor and obviously unsophisticated abilities with even the most basic economic data.

October’s results again confirm that Arlington is by no means a “stand out” amongst its neighboring towns as Baron suggested in his email and, in fact, is following along on a path wholly consistent with the trend seen in the county, state, region and nation.

Why would an editor of a nationally recognized newspaper think that a single town would continue to function as an isolated bubble amongst a backdrop of the most significant nationwide housing recession since the Great Depression?

There are only three possible answers.

Either Baron...

(A) is a foolish and incompetent editor incapable of basic economic analysis
(B) likes ad revenues more than he likes to report the truth
(C) both A and B

I favor C.

Sadly, I have now had this very article cited to me, even by complete strangers, on at least eight occasions.

Most recently, an 80 year old local architect who should have known better given his many years of experience with numerous past downturns, but who had unfortunately placed too much trust in a newspaper that now essentially publishes propaganda, recounted the article and its numerous "facts" about Arlington's booming housing market.

Additionally, in a truly grotesque but not altogether surprising turn of events, Realtors in Arlington are now handing out copies of this article (view hideous exhibit A and B below!) during open houses in yet another shameless attempt to bamboozle buyers into confidence and activity.



October’s raw results (as reported by The Warren Group) show us the following for Arlington.

• Monthly median home sales price of $459,000.
• Year-to-Date median home sales price of $466,000, the lowest value since 2003.
• Monthly home sales count of 19.
• Year-to-Date home sales count of 289, a result on par with 2006 and 2005.

As I had shown in my prior post, this data when charted and compared to other towns in the region proves there are absolutely no grounds to call Arlington’s market exceptional.

The following chart (click for much larger version) shows how Arlington’s median sales price has changed since 1988, the first year the data was tracked by the Warren Group. Notice that while the current monthly result is clearly the most jagged and volatile measure, all three (monthly, year-to-date, and annual) measures are essentially saying the same thing, namely median prices are going down.

The next chart (click for much larger version) shows that home sales in Arlington have been essentially flat during the last 15 years, a result that is generally to be expected when looking only at the sales of one town in isolation.

The final chart shows how the year-to-date median sales price for Arlington, Bedford, Belmont, Cambridge and Lexington has changed since 1988. Notice that each town is essentially staying on the same track having made great strides during the boom and now firmly headed lower.

In review, the data shows that there is nothing exceptional about Arlington’s housing market proving clearly that the claims made in the Boston Globe article and later endorsed by its editor Martin Baron were entirely erroneous.

Please let editor Baron know what you think of this misstep.

The Almost Daily 2¢ - Immoral Hazard?

While vetting some clips for this week’s BNN lineup it became painfully obvious to me that, although the consensus tide is slowly turning on many formerly fringe notions such as the existence of a national housing bubble, the impending mortgage-credit meltdown, or the absurdity of various containment arguments, those who would knowingly “spin” our current economic predicament in either an attempt to protect their own self interest or simply as a foolish prescription to stave off a national case of the “R-word” blues, have in no respect abated.

Whether it’s a fully invested Wall Street insider, a paid analyst, an economist, an actor who fancies himself an economist, a business channel pundit, a residential real estate-mortgage industry insider, a whole host of real estate industry trade associations, misguided administration officials, a tired old Fed chairman or an obviously struggling new one, there is no lack of individuals willing, for one reason or another, to push for optimism in lieu of accepting realism.

Now don’t get me wrong, I’m not suggesting that there is literally no wiggle room for interpretation.

Although my hunch is that the economy is headed for a pretty rough patch (i.e. hard and entrenched recession), I’m still aware of the fact that, on such matters, the exact outcome is in no way a foregone conclusion.

But what if an oncoming hard landing is truly all too obvious?

The list of bright flashing warning signals is a mile long (and getting longer everyday) yet it seems to me that consensus is continuing to play a dangerous game of denial that, years from now, may be interpreted as easily contributing to needless losses for many millions of individuals.

When supposedly credible authorities and organizations portray our current circumstances with optimism and skepticism of the obvious worsening trend, there is a solid chance they are affecting the behavior and actions of the many onlookers.

From the Federal Reserve continually pushing the notion of contained fallout from the housing debacle to the National Association of Realtors (NAR) shamelessly urging on home buying activity even in the face of dramatic weakness and depreciating home values or even foolish zealots like Ben Stein suggesting back August that there would be no real losses from the subprime meltdown, the message may be the same to many, that is… no need to be concerned… go on about your business… nothing to prepare for.

It’s exactly this lack of preparation that, like the related and equally dangerous collective behavior pattern of “over doing it in the first place”, will contribute to making any coming downturn significantly more severe.

So, are these optimists and charlatans creating in effect an “immoral hazard”?

That is... by purposefully or otherwise sidestepping reality, has a perception been created (and continues to be created) that has inevitably resulted in the economy’s participants feeling insulated from risk, thus preventing them from acting responsibly and fully accounting for the risks and consequences of their actions?

Realtor’s New Reality: Existing Home Sales Q3 2007

This week the National Association of Realtors (NAR) released their existing home sales report for the third quarter of 2007 showing, in truly stark terms, the tremendously broad nature of the housing downturn.

Single family home sales, on a year-over-year basis, are now falling in every state except for Vermont and North Dakota (see chart below and click for larger version and note that NH and Idaho don’t report sales data) and even those states sales growth are anemic.

Amazingly, even given the obvious completeness of the housing downturn shown by their own data, the NAR’s newly appointed president, Richard Gaylord, blatantly continues the tradition of shameless self interested spin established by his predecessors.

“There is no such thing as a national housing market – it doesn’t perform like the equities markets, … What’s really important for consumers is to make informed decisions based on individual needs, desires and timelines in a given area. Most people plan to stay in a home for 10 years, and for buyers with a long-term view, housing is an excellent investment. … Even in most of the places that are undergoing a large price decline, long-term increases are quite respectable.”

More troubling, perhaps, is the Realtors inability to accurately portray the trend especially when comparing the current quarter’s home sales volume to that of the respective peak sales per state.

In most states, the number of single family home sales, on an annualized basis, peaked either in 2005 or 2006 with a few states peaking as late as Q1 or Q2 2007.

But as you can see from the charts (click for much larger versions) below, all states have peaked in their respective volume of single family home sales and are now declining with the most substantial decline coming from Nevada at 59.92% and the least coming from Mississippi at 3.29%.


As for median selling prices, the NAR’s data (see chart below) also shows widespread weakness among the statistical regions they track.

Given that the majority of price declines have just begun to show in 2007, look for this price chart to continue to deteriorate in coming quarters.

Also, keep in mind that the NAR data only includes sales for MLS listed properties and given this limitation, the S&P/Case-Shiller index for each respective major metro should be considered a far more accurate price reference.

The Almost Daily 2¢ - Some Food For Thought

Look on the bright side… at least you can be thankful that the following charts are not your vital signs!




Here are some interesting BNN clips…

James Lockhart, Director of the Office of Federal Housing Enterprise Oversight, joins Bloomberg to discuss the recent losses seen at Fannie Mae and Freddie Mac and the outlook for more losses in the future. One of the most interesting bits Lockhart alludes to is “model risk” exposure. Could this hint that Fannie and Freddie have some “Marking to Market” to do?

Watch Lockhart Talk Losses now on BNN!

Mark Zandi, Chief Economist with Moody’s Economy.com joins Bloomberg to discuss the latest declines in consumer confidence and the prospects for recession. Zandi states that the Fed has to act and lower rates as the economy is on the “verge of recession”.

Watch Zandi Lose Confidence now on BNN!

Happy Thanksgiving from PaperEconomy!

Goin’ Down Slow: Survey of Consumers November 2007

Today’s release of the Reuters/University of Michigan Survey of Consumers for November showed in unequivocal terms that the US consumer is feeling the burn from declining home values, increased fuel costs and a general uncertainty about the future of the economy.

In fact, short of a brief plunge in the wake of Hurricane Katrina, the current levels for the Index of Consumer Sentiment and the Index of Consumer Expectations are at lows not seen since the early 1990’s.

The Index of Consumer Sentiment fell 17.37% as compared to November 2006 mostly as a result of consumers’ expectations of future economic prospects.

The Index of Consumer Expectations (a component of the Index of Leading Economic Indicators) fell a whopping 20.43% below the result seen in November 2006.

As for the current circumstances, the Current Economic Conditions Index fell 13.68% as compared to the result seen in November 2006.

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

Furthermore, the historical survey data provides a wealth of information for anyone looking to better understand how consumer sentiment has effected or has been affected by the housing bust.

Let’s face it, something significant must have changed in the minds of consumers between the spring and fall of 2005 that led the unwinding we see today.

With the historically low interest rates, solid employment, the loose lending situation and all the news and media coverage of the “flipping” mania, the times couldn’t have been better for home buying if ease of qualification and expectations of near term appreciation were to be the deciding factors.

But yet, something major did change and well in advance of the actual economic pullback or turmoil we are seeing now.

As I believe we will see more clearly in years to come, the housing boom was simply a classic, though enormous, asset bubble fueled primarily by the unprecedented availability of cheap money combined with the totally human response of popular delusion.

The following charts (click for huge versions) show the result of the Survey of Consumers and some components that are specifically related to housing.

The first chart shows the Consumer Sentiment Index, Index of Consumer Expectations, and the Current Economic Conditions Index from 2000 to the present.

The next five charts shows key housing related components of the Consumer Sentiment Index divided between “Good Time to Buy a Home” and “Bad Time to Buy a Home” plotted against the S&P/Case-Shiller Composite Index (CSI) from 1987 to April 2007, the latest historical data available.

I will provide some more thorough analysis in a later post but for now a cursory look at the housing related charts seems to reveal some fairly interesting insight into how consumers interpreted basic aspects of the housing situation throughout the run-up and now the decline.

Reading Rates: MBA Application Survey – November 21 2007

The Mortgage Bankers Association (MBA) publishes the results of a weekly applications survey that covers roughly 50 percent of all residential mortgage originations and tracks the average interest rate for 30 year and 15 year fixed rate mortgages as well as 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 slightly since last week to 6.18% while the purchase volume decreased 2.0% and the refinance volume decreased 5.0% 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).

The Almost Daily 2¢ - Freddie’s Delinquents

The latest turmoil concerning Freddie Mac and Fannie Mae likely represents one of the most significant blows to have hit the housing markets and the overall economy since the start of this historic downturn.

Given the eroding results of Freddie Mac's third quarter operations and other tumultuous events, there has been a clear loss in confidence in these two government sponsored enterprises (GSE) both closing the door to many of the proposed opportunities for market relief and further revealing the true extent of the housing decline.

Putting aside the recent “fuzzy math” episode, today Freddie Mac has disclosed a tremendous deterioration of mortgage credit in the third quarter of 2007 resulting in a whopping $1.2 billion of expenses (this is technically a 971% increase in expenses over the same quarter last year) related to increasing loan loss provisions and REO (real estate owned) operations.

Although, Freddie Mac’s single family delinquency rate has been rising and now stands at .51% of their current mortgage holdings, that number EXCLUDES losses coming from their more risky “Structured Security” transactions and delinquent loans that have had their terms modified under individual agreements with borrowers.

The unpaid principle balance of Freddie’s single family "Structured Transactions" as of September 30, 2007 was $20.2 billion, representing approximately 1% of their total mortgage portfolio and carrying a delinquency rate of a staggering 9.0%.

Keep in mind, this is the government sponsored “conforming loan” market we are talking about.

Both Freddie and Fannie, being highly regulated, are presumed to have adhered to a greater degree of standards when transacting mortgages.

Obviously, we are now seeing a clear indication of a substantial deterioration of the near-prime and prime mortgage markets.

Additionally, given the current circumstances, I believe it is safe to say that any opportunity for either Fannie Mae or Freddie Mac to assist the Jumbo loan market, as has been suggested by both Senator Charles Schumer (D-NY) and Federal Reserve Chainman Ben Bernanke, is now totally gone.

New Residential Construction Report: October 2007

Today’s New Residential Construction Report continues to firmly indicate a new leg down in the decline to the nation’s housing markets and for new residential construction showing substantial declines on a year-over-year and month-to-month basis to single family permits both nationally and across every region.

Single family housing permits, the most leading of indicators, again suggests extensive weakness in future construction activity dropping a staggering 31.0% nationally as compared to October 2006.

Moreover, every region showed significant double digit declines to permits with the West declining 30.9%, the South declining 35.6%, the Midwest declining 22.5% and the Northeast declining 17.9%.

Keep in mind that these declines are coming on the back of last year’s record declines.

To illustrate the extent to which permits and starts have declined, I have created the following charts (click for larger versions) that show the percentage changes of the current values compared to the peak years of 2004 and 2005.

Notice that on each chart the line is essentially combining the year-over-year changes seen in 2005, 2006 and 2007 showing virtually every measure trending down precipitously.

Although year-over-year declines to permits, for example, have not accelerated measurably from their peak YOY declines, the fact that they continue to decline roughly 20%-30% should provide a solid indication that they are by no means stabilizing.





Remember that permits, starts, and completions are not simply independent measures but are, in fact, three logically related and dependent measures.

In the process of a building project, first you get the “permit”, next you “start” building, and finally you “complete” the project.

For this reason, one must adjust expectations prior to reading a newly released Census Department report to account for the true nature of the data published simultaneously each month.

As in past months, I have “smoothed” out the unadjusted data and aligned the three data series (i.e. moved starts ahead a month and completions ahead six months) to make more obvious their trend.


Here are the statistics outlined in today’s report:

Housing Permits

Nationally

• Single family housing permits down 30.1% as compared to October 2006

Regionally

• For the Northeast, single family housing down 17.8% as compared to October 2006.
• For the West, single family housing permits down 30.9% as compared to October 2006.
• For the Midwest, single family housing permits down 22.5% as compared to October 2006.
• For the South, single family housing permits down 35.6% compared to October 2006.

Housing Starts

Nationally

• Single family housing starts down 25.1% as compared to October 2006.

Regionally

• For the Northeast, single family housing starts down 4.7% as compared to October 2006.
• For the West, single family housing starts down 30.2% as compared to October 2006.
• For the Midwest, single family housing starts down 9.8% as compared to October 2006.
• For the South, single family housing starts down 31.4% as compared to October 2006.

Housing Completions

Nationally

• Single family housing completions down 25.8% as compared to October 2006.

Regionally

• For the Northeast, single family housing completions up 5.8% as compared to October 2006.
• For the West, single family housing completions down 37.4% as compared to October 2006.
• For the Midwest, single family housing completions down 33.5% as compared to October 2006.
• For the South, single family housing completions down 22.0% as compared to October 2006.

Keep in mind that this particular report does NOT factor in the cancellations that have been widely reported to be occurring in new construction.

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

Today, the National Association of Home Builders (NAHB) released their Housing Market Index (HMI) showing continued evidence that the new home market is experiencing a prolonged recession.

The release came along with a renewed sense of reality and some guarded, yet optimistic, outlook from Chief Economist David Seiders, who has now revised his outlook, pushing his prediction for some level of recovery in the new home market to the second half of 2008.

“The message from today’s report is that builders do not see any significant change in housing market conditions as compared to last month, … While they continue to work down inventories of unsold homes and reposition themselves for the market’s eventual recovery, they realize it will be some time before market conditions support an upswing in building activity – most likely by the second half of 2008.”

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.

The Almost Daily 2¢ - The Resilient Consumer

Resilient
re•sil•ient (rĭ-zĭl'yənt)
adj.
1. Marked by the ability to recover readily, as from misfortune.
2. Capable of returning to an original shape or position, as after having been compressed.

It appears that the word "resilient", when used in the context of describing American’s consumption habits, is somewhat misleading and in some sense reveals its true nature as a slogan.

As we all know, the US economy has grown considerably during the last five years, and short of the restricted, albeit not insignificant, business investment led recession of 2001, the last sixteen years has been both prosperous and transformational.

True resiliency, as its definition suggests, would be a response that resulted from a significant test of our current circumstances.

Now don’t get me wrong, I’m in no way attempting to imply that the American “individual” is not resilient.

One need only recount the collective response of our society after the 9/11 attacks (and ensuing mayhem… think Anthrax attacks, DC sniper etc.) to see that Americans are resilient and can doubtlessly recover from general misfortune.

But the start of the dot-com recession predated 9/11 and it appears that, in economic terms, the response to the attacks (i.e. dramatically lower interest rates and government spending in the preparation and implementation of the wars in Afghanistan and Iraq) served to boost our economy back to growth.

The point is, after many years of an almost unbroken growth economy, we seem to be plagued by the trappings of the good times to an extent that we describe resiliency, not as an ability to overcome a downturn, but as simply the consumer’s ability to spend more than last year.

As history shows us, our economic circumstances can, at times, become vexing as an economy that seemed transparent and obvious during an expansion becomes enigmatic and hard to control during a contraction.

Showing a strong degree of economic resiliency may inevitably be an accurate description of the response of American’s in time, but as for today, the real challenges still lay ahead.

Production Pullback: Industrial Production October 2007

Today, the Federal Reserve released their monthly read of industrial production showing a decrease of 0.5% from September and a 1.8% increase since October 2006.

More importantly though, production of “final product” consumer durable goods have been showing some recent weakness, with particularly significant declines coming specifically from home appliances, furniture and carpeting.

The following charts (click for larger) shows both the overall consumer durable component of the industrial production series along with the Home Appliances, Furniture and Carpeting sub-component with two overlay blocks marking the last two recessions.

Note: The second chart simply shows the same data on a year-over-year basis.


As you can see, a sharp pullback on home related consumer durables seems to have been a pretty good indicator that the economy may be heading for a hard landing in the past leaving the latest pullback possibly foretelling rough times ahead.

Commercial Catastrophe?: MIT/CRE Commercial Property Index Q3 2007

There has been growing speculation that the commercial real estate (CRE) markets will inevitably follow the lead of the residential markets down to a recessionary correction.

For an excellent background and thorough analysis read CalculatedRisk’s posts from earlier this year and more recently Professor Nouriel Roubini’s post from yesterday.

The notion of commercial real estate markets suffering a similar downturn as residential is both supported by historical correlations (e.g. residential and non-residential investment) as well as seeming to be an anecdotally logical outcome for a market that has seen similar levels of loose over-lending.

Fortunately, we need not speculate about the current state of CRE as the MIT Center for Real Estate tracks commercial property prices with a series of indexes that cover Apartment, Office, Industrial and Retail property types.


Notice in the top aggregate chart, after having some substantial growth between 2003 and Q2 2007 (particularly during 2005 – 2006), there has been a precipitous 2.5% drop in Q3 2007, a drop that MIT/CRE Director David Geltner sees as non-trivial.

"The fall in our index is the first solid, quantitative evidence that the subprime mortgage debacle, which hit the broader capital markets in August, may be spreading to the commercial property markets."

Also, as you can see that not all components experienced such tremendous upward movement during 2005 and 2006 particularly Apartment and Retail, the two property types most directly exposed to the consumer.

In future posts, I’ll elaborate on the correlation between residential and non-residential fixed investment and add additional charts using MIT’s CRE supply and demand index data as well as the Moodys/REAL CPPI also produced by MIT/CRE.