New Home Sales: March 2009

Subtitle: No Bottom…

Today, the U.S. Census Department released its monthly New Residential Home Sales Report for March showing continued deterioration in demand for new residential homes across virtually every tracked region resulting in a 30.6% year-over-year decline and a truly horrendous 74.37% peak sales decline nationally.

The following charts show the extent of sales declines seen since 2005 as well as illustrating how the further declines in 2009 are coming on top of the 2006, 2007 and 2008 results (click for larger versions)


It’s important to note that although the new home sales data appears to have prompted the traditional media to make many “bottom calls” recently, the evidence for their conclusions are scant.

First, most “bottom callers” have focused too closely on just the new home sales series and its historic bottoms rather than other important indicators that disclose a more complete state of the new home market.

As I have argued recently, the level of inventory and supply and level of completed new homes are still too high for a real sustained bottom for the new home market.

The following chart (click for larger) plots the new home sales (SAAR) series along with the current inventory level (NA) and the level of homes completed (NA) since 1973.

As you can see, although the new home sales series has breached the lowest level in over 30 years, the level of inventory (homes for sale at end of period) still remains higher than past historic bottoms and the level of homes completed remains much higher.

Make no mistake, I’m not suggesting that these three series will all bottom simultaneously, a simple cursory review of the chart above will dispel that notion, BUT I believe that if you consider the downward trend in home prices, the state of the job market, the lack of credit availability as well as the extent of the former boom (just look at the run builders had above.. steadily increasing sales from January 1991 to July 2005… truly unparalleled!) any sustained bottom is still a long way off.

The new home market might be in the process of clearing but at the moment it still looks seriously impaired and of the steadily shrinking pool of prospective buyers (from lack of confidence, lack of job or lack of cash and credit availability) those who wait to buy will almost certainly continue to find better pricing…. Thus sales will continue to fall.

Look at the following summary of today’s report:

National

• The median sales price for a new home declined 12.17% as compared to March 2008.
• New home sales were down 30.6% as compared to March 2008.
• The inventory of new homes for sale declined 33.7% as compared to March 2008.
• The number of months’ supply of the new homes has decreased 4.5% as compared to March 2008 and now stands at 10.7 months.

Regional

• In the Northeast, new home sales were down 32.1% as compared to March 2008.
• In the Midwest, new home sales were down 32.9% as compared to March 2008.
• In the South, new home sales were down 29.7% as compared to March 2008.
• In the West, new home sales were down 31.1% as compared to March 2008.

Massive Unemployment: Mass Layoffs March 2009

Today, the Bureau of Labor Statistics (BLS) released the March installment of the Mass Layoff Report clearly showing a dramatic deterioration of the nation’s job market with 2,191 mass layoff events resulting in 228,387 initial unemployment claims causing the six month moving average of non-seasonally adjusted mass layoff events to jump by 80.42% while total initial claimants increased 79.49% on a year-over-year basis.

The BLS considers a mass layoff event to be a condition where there are at least fifty initial claims for unemployment insurance originating from a single employer over a period of five consecutive weeks.

Existing Home Sales Report: March 2009

Today, the National Association of Realtors (NAR) released their Existing Home Sales Report for March which continued to indicate that home sales, despite the significant slide to median selling prices fueling speculative sales of distressed properties in the western region, are continuing to fall.

Existing single family home sales were down 5.7% on a year-over-year basis while the median selling price declined a dramatic 11.5% over the same period.

More notably though, the Northeast region now seems to have fully tipped into the major decline phase with single family home sales declining 21.2% on a year-over-year basis with median selling prices declining 19.6% over the same period.

The NAR leadership continues their shameless spin with their chief economist Lawrence Yun suggesting that summer may bring signs of the effects of the governments “homeowner” tax credit and realtor industry bailout.

“Buyer traffic has been rising, and real estate offices are getting phone inquires about the tax credit, … By early summer we should be seeing a positive impact on home sales from record-low mortgage interest rates in addition to the stimulus provisions.”

The following (click for larger versions) are charts showing sales for single family homes, plotted monthly, for 2006, 2007, 2008 and 2009 as well as national existing home inventory and month supply.







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

Mid-Cycle Meltdown!: Jobless Claims April 23 2009

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims increased 27,000 to 640,000 from last week’s revised 613,000 claims while “continued” claims jumped 93,000 resulting in an “insured” unemployment rate of 4.6%.

It’s important to note that the two most significant periods for job cuts on a non-seasonally adjusted basis is January 15 and July 15 so as July and clearer visibility on H2 quickly approaches it will be interesting to see how initial jobless claims fares.

Also, the continuing claims series is presenting the clearest picture of what is likely to be one of the most problematic aspects of this period of economic crisis namely how to make an immense and growing number of highly specialized (college educated) service/professional service workers productive again.

It’s obvious now that we have reached the first real test of our majority services-based economy.

Unlike the “tech-wreck” of 2000-2002, our current downturn is very broad, leaving no sector and virtually no corner of the country untouched.

With millions of college educated workers now on the market incomes will clearly suffer but moreover, it will be soon all too clear that our prior bubble economy significantly overproduced service workers (particularly professional service workers) for which current employment opportunities will be scant resulting in continued and fundamental vicious-cycle effects.

The following chart shows the recent trend in initial non-seasonally adjusted initial jobless claims with the year-over-year percent change acting as a rough equivalent of a seasonally adjustment.

Historically, unemployment claims both “initial” and “continued” (ongoing claims) are a good leading indicator of the unemployment rate and inevitably the overall state of the economy.

I have added a chart to the lineup which shows “population adjusted” continued claims (ratio of unemployment claims to the non-institutional population) and the unemployment rate since 1967.

Adjusting for the general increase in population tames the continued claims spike down a bit but as you can see, the pattern is still indicating that recession has arrived.

The following chart (click for larger version) shows “initial” and “continued” claims, averaged monthly, overlaid with U.S. recessions since 1967 and from 2000.

NOTE: The charts below plot a “monthly” average NOT a 4 week moving average so the latest monthly results should be considered preliminary until the complete monthly results are settled by the fourth week of each following month.

As you can see, acceleration to claims generally precedes recessions.


Also, acceleration and deceleration of unemployment claims has generally preceded comparable movements to the unemployment rate by 3 – 8 months (click for larger version).


In the above charts you can see, especially for the last three post-recession periods, that there has generally been a steep decline in unemployment claims and the unemployment rate followed by a “flattening” period of employment and subsequently followed by even further declines to unemployment as growth accelerated.

This flattening period demarks the “mid-cycle slowdown” where for various reasons growth has generally slowed but then resumed with even stronger growth.

Until late 2007, one could make the case (as Fed chief Ben Bernanke surly did) that we were again experiencing simply a mid-cycle slowdown but now those hopes are long gone.

Adding a little more data shows that in the early 2000s we experienced a period of economic growth unlike the past several post-recession periods.

Look at the following chart (click for larger version) showing “initial” and “continued” unemployment claims, the ratio of non-farm payrolls to non-institutional population and single family building permits since 1967.

The most notable feature of the post-“dot com” recession era that is, unlike other recent post-recession eras, job growth has been very weak, not succeeding to reach trend growth as had minimally accomplished in the past.

Another feature is that housing was apparently buffeted by the response to the last recession, preventing it from fully correcting thus postponing the full and far more severe downturn to today.

It is now completely clear that the potential “mid-cycle” slowdown that appeared to be shaping up in late 2007, had been traded for a less severe downturn in the aftermath of the “dot-com” recession, and now has we have fully entered, instead, a mid-cycle meltdown.

Prime Bomb! : Hudson City Bancorp Prime Delinquencies Q1 2009

Subtitle: The Prime Bomb Cometh... Again!

Hudson City Bancorp (NASDAQ:HCBK), fully recognized as the “poster child” for safe prime-only mortgage lending and whose CEO’s frequent media appearances usually come with heaping portions of high praise and accolades, appears now to be fully experiencing portfolio stress driven by the vicious combination of rising unemployment and falling home values.

Though Hermance appears to have succeeded in his goal of increasing confidence in his bank, its non-performing loan ratio, which jumped dramatically from .74% on December 31 to 1.06% during just Q1 2009, tells a different story.

I’ve been arguing for the better part of two years that although the traditional media and apparently general consensus has focused on subprime and other “toxic” mortgage products as the source for the credit tumult, the historic deterioration would by no means be limited to these “bleeding edge” products.

Before this massive housing and general economic contraction is complete, I expect to see new records set for prime defaults, be they prime-Jumbo ARM loans, prime-Jumbo fixed rate loans, prime-conforming ARM loans or prime-conforming fixed rate loans… we will see historic defaults across the entire spectrum of mortgage products.

Although there is significant debate about the true drivers of mortgage default, most individuals in default cite unemployment as the cause while other key instigators are: risky or insufficient household financial planning (high consumer debt and low/no savings), low-equity stake and housing depreciation, and simply general recession.

The key point to consider though is that while all of these factors have contributed to creating environments of high mortgage default in the past, our current circumstances make these past periods look like walks in the park.

It’s important to understand that although Hudson City’s total first mortgage loan portfolio has a reasonable average loan-to-value ratio of 61%, the bank is still seeing a precipitous increase in loan defaults.

In fact, currently the average LTV of their non-performing loans (defaulted loans) is 69% so “prime” borrowers with 31% equity at the time of origination are now defaulting in steadily increasing numbers.

The following chart plots Hudson City Bancorp’s Non-Performing Loan Ratio (defaulted loans to total loan portfolio) since Q1 2004.

Notice that defaults have been on the rise since Q2 2006 while in Q2 2007 things really started to heat up.


But how does the growth in defaults of the Hudson City Bancorp “prime” portfolio stack up compared to other well know default rates?

The Following charts compare the Hudson City default rate to that of Fannie Mae and the MBAA foreclosure rate.

The top chart compares the normalized default rates since Q1 2004 while the lower two compare the same data since Q1 2007 in order to get a sense of the respective growth over these periods.

It’s important to keep in mind that although Hudson City is not experiencing the same ratio of defaults (Fannie Mae and the general MBAA rates are worse) the growth of prime defaults is comparable and, since Q1 2007, has even been substantially higher.



As for Hudson City loan loss provisions, as you can see from the following chart, the capital cushion is dwindling.

The key instigators in this growth of default is more than likely home price depreciation and unemployment both working together to bear down on “prime” homeowners as is shown by the following charts plotting the year-over-year percent change to the New York area S&P/Case-Shiller home price index against the Hudson City default ratio as well as the unemployment in New York and New Jersey since 2004.


I will continue to update this data in coming quarters in order to see how slumping home values and rising unemployment affect the performance of “prime” borrowers.

Reading Rates: MBA Application Survey – April 22 2009

The Mortgage Bankers Association (MBA) publishes the results of a weekly applications survey that covers roughly 50 percent of all residential mortgage originations and tracks the average interest rate for 30 year and 15 year fixed rate mortgages, 1 year ARMs as well as application volume for both purchase and refinance applications.

The purchase application index has been highlighted as a particularly important data series as it very broadly captures the demand side of residential real estate for both new and existing home purchases.

The latest data is showing that the average rate for a 30 year fixed rate mortgage increased 3 basis points since last week to 4.73% while the purchase application volume decreased 4.20% and the refinance application volume increased 7.72% compared to last week’s results.

It’s important to recognize that the Federal Reserve’s “quantitative easing” measures have clearly pushed mortgage rates down spurring increased re-finance activity yet the rate reductions have yet to impact purchase activity, arguably the more important goal.

The following chart shows how the principle and interest cost and estimated annual income required to cover the PITI (using the 29% “rule of thumb”) on a $400,000 loan has changed since November 2006.

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages over the last number of weeks (click for larger version).


The following charts show the Purchase Index, Refinance Index and Market Composite Index since November 2006 (click for larger versions).

The Arlington Artifice: March 2009

Subtitle: Living it Up at The Hard Times Cafe!

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 (relatively) 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 disgracefully poor abilities with even the most basic economic data.

I suppose this shouldn’t come as a surprise given that Baron also appears to be presiding over the final days of his sorry paper.

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?

***

Ahh… Springtime in the Boston suburbs… Still a bit cold and rainy of course but you can almost feel the local Realtor anticipation welling up for the reemergence of the rush of “greater fools”… but I’m sure this year there is also some trepidation… and for good reason.

All current indications are suggesting that this is going to be a particularly… possibly historically… bad year for sellers and brokers of residential real estate.

The local job market is horrible and eroding fast with unemployment at 6.6% (and climbing) for Middlesex county and 7.8% for the state overall… The “values” of both single family homes and condos are plunging… the stock market remains weak and likely heading back to the lows while simultaneously halving most area residents’ retirement accounts… The state and local governments are running up against serious fiscal shortfalls… crime is up…

And Arlington… Oh sweet Arlington… for a brief moment in time an enclave for young and trendy upwardly mobile dual income professionals looking to “one up” each other with borrowed loot (but much deserved of course… they don’t give just anyone all that dough!) … now you too face the troubled times we live.

Yes, the town where “round robin bidding wars” were once all the rage is now looking more like it’s going “retro” … reverting back to its 70s and 80s rough-and-tumbly self…. Smack and Pocket Change!

Did you hear the news!? Bagles By Us has opened the “Hard Times Café” featuring the “Recession Buster Breakfast”, a $3.99 breakfast served all day every week day.

Now I’ll be darned… How Medfordy… and right at the foothills of Jason Heights too!

I suppose even the chic and trendy like a cheap meal every once and a while… or maybe they need it…

In any event…

The March results give clear indication that 2009 could be historically slow with the monthly sales count falling to the lowest level of any March on record and the year-to-date sales count hovering just above the 1991 record.

Median prices too fell dramatically.

The March median selling price dropped a stunning 32.69% to $363,500 while the year-to-date median now stands at $476,500.

The following chart (click for much larger version) shows a history of Arlington’s January median sales price since 1988 along with the annual outcome.

The next chart (click for much larger version) shows that annual home sales in Arlington have fluctuated in a range between 233 and 381 over the last 21 years with the peak selling year being 1998.

The final chart shows how the year-to-date median sales price and combined sale count for Arlington, Bedford, Belmont, Cambridge and Lexington have changed since 1988.

All towns registered modesty lower to exceptionally low sales and most showed declining median selling prices compared to last year.

The Almost Daily 2¢ - Twin Peaks!

Subtitle: Charade Finally Over?

So, here is how the story goes…

America spends the better part of 20 years in an unprecedented speculative frenzy… dot-com boom, housing boom, consumption boom, commercial real estate boom, finance boom, government boom… anything that was levered to credit and financial engineering and had an unrealistic speculative story BOOMED!

Then, as all great manias do, the party abruptly ended leaving “greater fools” strewn about every market and every corner of the economy from housing, autos and retail to banking and finance, commercial real estate, manufacturing, technology, energy and materials… on and on wreaking havoc from Wall Street to Main Street and state, local and federal government.

The cat was fully out of the bag… the mania was now obvious and over and the long deserved bust was firmly in place with broad stock markets selling off 40-55%.

But then… in just six short weeks…

“it’s a turn-around!” say the bulls on Wall Street… “The bottom is in!” … “Buy Buy Buy!” say the charlatans and cheerleaders.

The same folks who couldn’t perceive the decline in the first place were now calling the bottom and Americans, including retail and institutional investors as well as outright speculators, gamblers and other nitwits, were listening.

“The retail investor is back!” stated one enthusiastic floor trader on CNBC.

After the largest credit boom and bust in the post-Great Depression era, a 17 month long -55% deep bear market was all that was needed to put things right again… or so it seemed to the unwitting.

Nope.

That’s not the “real” story.

It appears that this unrealistic era will fade from our collective consciousness very slowly and painfully.

Make no mistake… we are in the midst of a generational decline.

A long unwind of massive debt and delusion that even the federal government cannot prevent.

2009 will be a year of somber awakening to the harsh reality that our economic troubles are more complex and intractable than is now expected.

In fact, recent trends in the job market (the continued jobless claims series specifically) clearly indicate that this economic decline is putting our primarily services-based economy to its first major test.

As the declining economic circumstances continues to drag on, a large and growing population of highly specialized service workers, particularly college educated professional business service workers, are finding out that their labor is either much less valuable or simply no longer needed.

This leaves our economic model in a bit of a predicament.

How do these workers retrain in order to become productive again… change careers… go back to college?

While many pundits still believe that a significant component of the decline to date is attributable to sentiment and psychology, it’s clear now that something truly fundamental is afoot.

Our prior bubble-laden speculative economy didn’t only bring over-consumption… the over-consumption resulted in an over-production of specialized labor skills particularly in the business services sector.

This fundamental unwind is resulting and will continue to result in serious economy-wide vicious cycle effects for the foreseeable future.

As regular readers know, I have been following along the stock market decline for well over a year now with this recurring “Twin Peaks” post whereby I simply charted some very basic technical analytics (somewhat ala the amazing Louise Yamada mixed with a couple of my own inventions) which compared the underlying average movement of the current S&P/500 index to its performance during the unwind of the “dot-com” collapse.

Be sure to study the charts well as they present several different ways of capturing market volatility and together compare past market performance to what we are seeing today.

I will continue to post the comparison to the “dot-com” era bear market for posterity but now that we have broken well through the 2002 lows all technical similarities going forward have ceased… we are firmly in uncharted territory as the two bust eras have now become one.

The “Percentage Up-Down” chart clearly shows that we have just entered a period of REAL volatility BUT also leads one to believe that we may have a long way to go in this market shakeout.


The “Up-Down Daily Closings” chart seems to indicate that although we have seen increased volatility and significant declines, we have yet to match the distribution of daily up closings and down closings (inverted red line).

Study the following image (click for very large and clear version) of the S&P 500 index from 1995 to today then read below for the technical blow by blow.



What follows below is now just maintained for old times’ sake… the second peak was obviously real and this series of posts identified it roughly a year ahead of time.

Now that we have entered effectively into uncharted territory, we are at a loss for historical comparison.

THEN (1998 – 2000 Top)

• A. October 1998 – S&P 500 gives early warning sign by crossing its 400 day simple moving average (SMA). Notice also that the 50 day SMA breached the 200 day SMA.
• B. October 1999 – S&P 500 gives a second signal by crossing its 200 day SMA after a solid twelve month expansion. 50 day SMA touches the 200 day SMA.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)

NOW (Today’s Top)

• A. June 2006 – S&P 500 gives early warning sign by crossing its 400 day SMA. Notice also that the 50 day SMA breached the 200 day SMA.
• B. March 2007 – S&P 500 gives a second signal by falling near its 200 day SMA after a solid nine month expansion. 50 day SMA similarly depressed.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)
• H. Down Down we GO! (Uncharted Death)
• I. Bh Bye! (Fodder for the Sucker-Grinder)

Follow The Leader: Index of Leading Economic Indicators March 2009

Today’s results of the Conference Board’s Leading Economic Indicators continue to indicate troubled times ahead declining 0.3% from February 2009 and 3.73% compared to March 2008, leaving the index at a level of 98.1.