Commercial Cataclysm!: Moody’s/REAL Commercial Property Price Index May 2010

The latest release of the Moody’s/REAL Commercial Property Index showed a notable monthly gain of 3.6% since April suggesting that the nation’s commercial property markets are continuing to clear in the wake of a tremendous downturn that has seen prices down some 39% since the peak set in October 2007.

The Moody’s/REAL CPPI data series is produced by the MIT/CRE but is noted to be “complimentary” to their alternative transaction based index (TBI) as it is published monthly and is formulated from a completely different dataset supplied by Real Capital Analytics, Inc and Real Estate Analytics LLC.

Reading Rates: MBA Application Survey – July 21 2010

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 declined 10 basis points since the last week to 4.59% while the purchase application volume increased 3.4% and the refinance application volume increased 8.6% over the same period.

It's important to note that with the final expiration of the governments massive housing tax credit subsidy, home purchase activity has been trending down precipitously despite falling interest rates.

The purchase application volume is now near the lowest level seen in well over a decade.

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).

Facebook Founders Prepare for Battle!

The Facebook ownership story is really starting to heat up…

Yesterday, it was reported that Facebook, Inc. now acknowledges that founder Mark Zuckerberg did, in fact, enter into an agreement with Paul Ceglia in 2003 but continues to maintain that the claim is “completely frivolous”.

In what appears to be backpedaling desperation at this point, the company is now asserting everything from the statute of limitations to directly questioning the authenticity of the contract filed in the suit suggesting that “The Plaintiff has not produced the original of the alleged agreement for anyone, including the court, … We have serious questions about the authenticity of the document and, assuming an original exists, we look forward to expressing our opinion about it once we see it.”

Sure… they look forward to expressing an opinion about a contract that is more than likely completely authentic.

Despite the tough legal talk and smoke and mirrors being deployed by Facebook, this story is likely very simple.

In my estimation, in 2003 the still 18 year old Zuckerberg simply entered into a standard “work made for hire” agreement to provide development services to Ceglia who had originally solicited Zuckerberg for a project named StreetFax Database, Ceglia’s concept of a database of searchable street images.

The two probably got to talking with Zuckerberg, prior to signing their agreement, likely disclosing the details of his own project “The Face Book”.

Ceglia, likely picked up on Zuckerberg’s enthusiasm and simply decided to deploy a little investment capital doubling the original StreetFax Database stipend for a 50% interest in “The Face Book”.

But Ceglia went further than that.

Noting that Zuckerberg was still just 18 and a freshman at Harvard, Ceglia likely wanted a little leverage over Zuckerberg for the completion of the project so he was sure to specify a completion date and even a disincentive for failure, a daily penalty of 1% ownership interest (accruing to Ceglia) for each day the project was late.

Finally, the contract very shrewdly described the “already-in-progress project … designed to offer the students of Harvard university access to a wesite [sic] similar to a live functioning yearbook with the working title of ‘The Face Book.’” and stated that Ceglia would own a 50% interest in “the software, programming languages and business interests derived from the expansion of that service to a larger audience” as well as asserted that Zuckerberg was to act as the webmaster and further, would pay for the domain and hosting expenses from the funds received in the contract.

Obviously, this whole affair will have to play out in court but given what we know so far, this is bound to be a tremendously interesting case.

Into the Bunker!

The skies over Boston were a-rumblin’ with thunder last night, the fireman’s siren could be heard shrieking in the distance but not even a disgruntled mother nature or the ferocity of her “act of God” retribution could steer my attention away from the train wreck that is our macro-economy.

Yes loyal readers, I might be a bit early… I might even be wrong… but I’m heading for the bunker. Better safe than sorry.

The real (and juiced) economy has clearly hit the skids and the stock market, the sole brittle peg on which this whole global ponzi-scheme gamble currently rests, is now giving a fairly clear indication that it concurs.

The S&P 500s 200 day moving average is just barely a whisper above its level of just 30 days ago.

If that measure were to turn negative, an event that appears more certain with each passing trading day, or worse yet… 0.05% negative, we’re done for… or so I’m convinced.

You see, the 200 day moving average rarely declines during a bull run and turning notably negative is a sure sign things have taken a turn for the worse.

If stocks head back into bear territory, that is… a long slow “sell into the rally” slog with equities retreating generally 20% or more from the recent April high, it will put the wipeout of the March 2009 low clearly in view.

Stop for a moment and contemplate the potential outcome should we head back to the lows.

This would be nothing short of a major rupture in confidence with Federal Reserve and Washington goons scrambling to double down in the false hope that maybe, just maybe, an even bigger shot of stimulus will succeeded where the last effort failed.

Obviously it would all be for naught… and this time everyone would know it.

A big business friend of mine assures me that his area of the economy (consumer non-durables) is booming… they have too much demand and not enough capacity as an underestimate of 2010 activity leaves them scrambling to assemble new overseas production facilities.

What could this mean? During 2008 they also underestimated the severity of the decline believing their offering to be “recession-proof”, a miscalculation that led to an abrupt bout of layoffs in early 2009.

Could they be right this time? Could recovery really be here but just stalled in a massive consolidation of sorts?

Obviously, we will have to wait to find out but suffice it to say, I’m closing the hatch!

New Residential Construction Report: June 2010

Today’s New Residential Construction Report showed a continued pullback to both single family permits and starts suggesting that housing is continuing to retrench in the wake of the expiration of the government's tax gimmick.

Single family housing permits, the most leading of indicators, dropped 3.4% on a month-to-month basis to 421K single family units (SAAR) or 6.7% below the level seen in June 2009, the first annual drop in nine months and an astonishing 76.59% below the peak in September 2005.

With the substantial headwinds of rising unemployment, epic levels of foreclosure and delinquency, mounting bankruptcies, contracting consumer credit, and falling real wages, an overhang of inventory and still falling home prices, the environment for “organic” home sales remains weak and likely very fragile.

Hong Kong Bubble?: Hong Kong Residential Property Prices May 2010

There has been much speculation recently about an ongoing price bubble occurring in the Hong Kong residential property market.

The University of Hong Kong’s Residential Real Estate Series (HKU-REIS) indicated that, in May, the price of residential properties continued to rise increasing 1.23% since April and 26.72% since May 2009.

The “Hong Kong Island” index, “Kowloon” and “New Territories” sub-components also showed notable year-over-year increases.

The HKU-REIS is a set of property price indices constructed monthly using a “modified” repeat-sale methodology similar to that of the S&P/Case-Shiller indices yet suited to the Hong Kong property market.

Buyer Traffic Forecasting Decline

Comparing the latest new residential construction data to the today's NAHB housing market indicators appears to suggest that we may continue to see notable declines to housing starts and permits.

The “buyer traffic” index has been declining steadily since September 2009 indicating that home builders are seeing declining foot traffic with an overall level only slightly higher buyer activity than seen in the panic stricken days of late 2008.

This is a notable finding as in recent years the “buyer traffic” series has indicated the trend generally well in advance of the housing starts and permits data.

Further, as Bob Toll has noted many times in the past, the start of the year is typically the strongest period for the new home market so given the latest trends it appears that new housing is off to a particularly weak start.

Looking at the chart (click for full-screen dynamic version) the weakness suggested by the “buyer traffic” series has yet to be reflected in the housing starts series.

Homebuilder Blues: NAHB/Wells Fargo Home Builder Ratings July 2010

Today, the National Association of Home Builders (NAHB) released their latest Housing Market Index (HMI) showing a continued pullback for all measures as home builders downwardly adjusted their outlook in the wake of the home "buyer" tax credit expiration.

It's important to recognize that currently each sentiment index shows notable year-over-year declines with each still sitting near the lowest levels seen in over 20 years, a testament to the significance of the latest pullback.

Further, the "buyer traffic" index is showing the weakest results pulling back some 23% since July of 2009 and sitting just 3 points above the lowest level ever recorded.

The new home market will likely not resume any significant form of healthy function until the considerable overhang of inventory is cleared.

University of Michigan Survey of Consumers July 2010

Today's release of the Reuters/University of Michigan Survey of Consumers for July showed a notable decline in consumer sentiment with a reading of 66.5 remaining just 0.76% above the level seen last year and coming in at the lowest reading since August 2009.

The Index of Consumer Expectations (a component of the Index of Leading Economic Indicators) also dropped notably to 60.6, the lowest level since March 2009, and the Current Economic Conditions Index declined to 75.5.

It's important to recognize that while consumer sentiment is still higher than the panic laden trough level seen in late 2008, the current sentiment level is far lower than any level seen during the 2001 tech recession and roughly equivalent to the worst seen during the early 1990s and second dip 1982 recessions.

IEIF France and European Property Prices: June 2010

As I have noted before, one of the most interesting and damming bits of evidence that tipped many off to the existence of a significant real estate bubble during the early 2000s was the fact that dramatically increasing property prices were occurring in most industrialized nations.

The U.S., U.K., France, Ireland, most of continental Europe, Canada, Australia and elsewhere were all simultaneously experiencing significant property booms thereby thwarting, more or less, many of the “limited supply” and “Superstar Cities” arguments that sought to justify individual regions explosive appreciation.

Today we know that this massive boom in real estate was more a function of financialization and credit availability rather than fundamentals.

The latest data from the Institut de l'Epargne Immobilière et Foncière (IEIF), a French research and analysis firm, suggests that property prices in France and Europe went flat in June but still remained notably higher then levels seen a year ago.

This may offer more evidence that what appeared to be a property price recovery of sorts throughout 2009 might have faltered as a result of the recent European debt crisis and may foreshadow more trouble to come.

Recession Redux?

As all the econ-finance talk these days appears to center around the looming “double-dip” let’s take a closer look at two particularly sensitive and accurate leading indicators of our economic health to see if we can tease out the future trends.

First, the Federal Reserve Bank of New York is known to use the yield curve (or more specifically the spread between the 10 year and the 3 month treasury yields) to calculate a probability of recession.

This method appears to have been spearheaded by Professor Arturo Estrella of the Rensselaer Polytechnic Institute and Professor Frederic Mishkin of the Columbia Business School as outlined in the June 1996 issue of Current Issues in Economic and Finance, a journal published by the Federal Reserve Bank of New York.

The yield curve probability method is said to have a nearly perfect track record at predicting recessions some two to six quarters ahead with only one false positive, a period in 1967 that many economists, most notably the late Milton Friedman, considered to have been a credit crunch/mini-recession even though the NBER does not officially recognize it as such.

Another important leading indicator with a solid track record is the Economic Cycle Research Institutes (ECRI) weekly leading indicator (WLI).

When the growth component of the WLI turns strongly negative (< -6) it generally means a notable slowdown or recession is in the offing.

So what are these two important indicators saying about our current economic situation?

As of the latest release of each measure, we are seeing a very unusual scenario of strongly mixed signals.

The yield curve spread indicator is indicating that the probability of recession is nearly zero while the ECRI leading index is showing a very pronounced pullback since a peak set in October 2009 with the growth component currently at a strongly negative level of -8.3.

Looking at the chart (click for full-screen super dynamic version) you can see that in the past, when both of these measures moved strongly in opposite directions, recession was a certainty.

Today though, the interpretation is not so simple.

Could the Feds work on both short (ZIRP) and long (MBS purchases) rates have rendered the yield curve method ineffective at the moment?

Is the WLI just over-correcting coming off of an epically pronounced bounce back in leading activity seen from the deeply recessed levels of March of 2009?

We will have to wait to see but clearly we are in a very unusual and tricky environment.

Production Pullback: Industrial Production June 2010

Today, the Federal Reserve released their monthly read of industrial production showing continued yet flattening growth with total industrial production increasing just 0.07% from May but remaining 8.22% above the level seen in June 2009.

While this report appears to argue favorably for a continued recovery, it's important to note that massive government stimulus played an important role in generating this trend.

With the the stimulus now waning, it will be important to watch the trend in industrial production to see how sustained the growth truly is.

Extended Unemployment: Initial, Continued and Extended Unemployment Claims July 15 2010

Today’s jobless claims report showed a notable decline to initial and an large jump in continued claims with a subtle flattening continuing to shape up for both series while total continued claims including federal extended benefits appear to be trending down.

Seasonally adjusted “initial” unemployment claims declined by 29,000 to 429,000 claims from last week’s revised 458,000 claims while “continued” claims increased by 247,000 resulting in an “insured” unemployment rate of 3.7%.

Since the middle of 2008 though, two federal government sponsored “extended” unemployment benefit programs (the “extended benefits” and “EUC 2008” from recent legislation) have been picking up claimants that have fallen off of the traditional unemployment benefits rolls.

Currently there are some 4.32 million people receiving federal “extended” unemployment benefits.

Taken together with the latest 4.31 million people that are currently counted as receiving traditional continued unemployment benefits, there are 8.60 million people on state and federal unemployment rolls.

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.

The following chart 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.

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

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

On The Pulse: Ceridian-UCLA Pulse of Commerce Index June 2010

The latest release of the Ceridian-UCLA Pulse of Commerce Index™ (PCI) suggests that the economic activity slowed notably in June with the seasonally adjusted index declining 1.9% as compared to May but still remaining 8.55% above the level seen in June 2009.

Further, the three month moving average registered another significant year-over-year increase indicating that the June Industrial Production data will likely show a similar annual gain.

As cited in the release, the PCI is closely correlated to the industrial production series but given the broad nature of the series it’s not surprising to see that it correlates well with other macro data.

Looking at the chart below (click for full-screen dynamic version) you can see that while a pretty reasonable correlation exists between the PCI and the S&P/Case-Shiller Composite-10 Home Price Index (CSI), the CSI reached its peak roughly a year before the PCI.

Could the latest easing of home prices foretell a general slowing trend in the economy or is the Ceridian index forecasting increasing home prices?

We will have to wait some months to find out which trend is leading.

U.K. Home Prices: Halifax and Nationwide June 2010

The latest release of the two most prominent home price indices for the United Kingdom are signaling that the trend up in U.K. home prices is, more or less, continuing.

The “Nationwide” series, indicated that U.K. home prices increased 8.74% on a year-over-year basis while the “Halifax” series indicated that prices, while having declined for the last two consecutive months, still showed an increase of 4.47% over the same period.

Both indices are similar to our own S&P/Case-Shiller data series in that they both implement a methodology that seeks to standardize the quality homes included as source data and track the price changes occurring between sales instead of simply tracking the distorted average or median sales price.

The following chart (click for full-screen dynamic chart) show the price movement since 1991 to each index.