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

The latest release of the Moody’s/REAL Commercial Property Index showed a notable monthly decline of 3.3% since July suggesting that the nation’s commercial property markets are continuing to slump through a tremendous downturn that has seen prices down some 45.31% 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 – October 20 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 increased 13 basis points since the last week to 4.34% while the purchase application volume declined 6.7% and the refinance application volume slumped 11.2% 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 continued declining interest rates.

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

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages as well as one year ARMs since 2006 (click for larger dynamic full-screen version).

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

New Residential Construction Report: September 2010

Today’s New Residential Construction Report showed a slight gain to both single family permits and single family starts suggesting that housing is continuing to remain weak in the wake of the expiration of the government's housing tax credit gimmick.

Single family housing permits, the most leading of indicators, increased just 0.5% on a month-to-month basis to 405K single family units (SAAR) and declined a notable 14.4% below the level seen in September 2009 and an astonishing 77.47% below the peak in September 2005.

Single family housing starts ticked up climbing 4.4% to 452K (SAAR) units but remaining 10.8% below the level seen in September 2009 and a whopping 75.21% below the peak set in early 2006.

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.

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

Today, the National Association of Home Builders (NAHB) released their latest Housing Market Index (HMI) showing a continued slight increase for all measures as home builders continue to plod through the weakest activity seen in generations.

It's important to recognize that currently each sentiment index is showing notable year-over-year declines with each still sitting very 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 15.38% since October of 2009 and sitting just 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.

Production Pullback: Industrial Production September 2010

Today, the Federal Reserve released their monthly read of industrial production showing a sudden pullback with total industrial production declining .22% from August but remaining 5.42% above the level seen in September 2009.

While this report appears weak, it is too soon to conclude that production is peaking though it's important to acknowledge the extent to which the massive government stimulus played a role in generating the trend since early 2009.

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.

The Empire State Manufacturing Index: October 2010

The Empire State Manufacturing Survey consists of a series of diffusion indices distilled from a monthly survey of New York regional manufacturing executives and seeks to identify trends across 22 different current and future manufacturing related activities.

Today’s report indicated continued expansion and a rebound of sorts with the current business conditions index rising to 15.73 while the future conditions index increased to 40.

Current and future new orders rebounded with current orders registering a 12.90 while future new orders increased to 31.67 both notable increases.

University of Michigan Survey of Consumers October 2010

Today's release of the Reuters/University of Michigan Survey of Consumers for October indicated another decline in consumer sentiment with a reading of 67.9 dropping 3.82% below the level seen last year.

The Index of Consumer Expectations (a component of the Index of Leading Economic Indicators) increased to 64.6, and the Current Economic Conditions Index declined notably to 73.0.

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.

Conspicuous Correlation: Retail Sales September 2010

Today, the U.S. Census Bureau released its latest nominal read of retail sales showing an increase of 0.6% since August bringing the total increase since last year to 7.3% on an aggregate of all items including food, fuel and healthcare services.

Discretionary retail sales including home furnishings, home garden and building materials, consumer electronics and department store sales increased 0.48% from August and climbed 3.39% above the level seen in September 2009 while, adjusting for inflation, “real” discretionary retail sales increased just 2.22% over the same period.

On a “nominal” basis, there had appeared to be “rough correlation” between strong home value appreciation and strong retail spending preceding the housing bust and an even stronger correlation when home values started to decline.

The following chart shows the year-over-year change to nominal discretionary retail sales and the year-over-year change to nominal the S&P/Case-Shiller Composite home price index since 1993 and since 2000.

As you can see there is, at the very least, a coincidental change to home values and consumer spending during the boom and then the bust, but as home values have continued to decline, retail spending has remained low but has not continued to consistently contract.

Looking at the chart below (click for full-screen dynamic version), adjusted for inflation (CPI for retail sales, CPI “less shelter” for S&P/Case-Shiller Composite) the “rough correlation” between the year-over-year change to the “discretionary” retail sales series and the year-over-year S&P/Case-Shiller Composite series seems now even more significant.

Extended Unemployment: Initial, Continued and Extended Unemployment Claims October 14 2010

Today’s jobless claims report showed an increase to initial claims and a decline to continued claims with a flattening trend shaping up for initial claims while traditional continued claims continues to appear to be trending down.

Seasonally adjusted “initial” unemployment increased by 13,000 to 462,000 claims from last week’s revised 449,000 claims while “continued” claims declined by 112,000 resulting in an “insured” unemployment rate of 3.5%.

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 4.79 million people receiving federal “extended” unemployment benefits.

Taken together with the latest 3.78 million people that are currently counted as receiving traditional continued unemployment benefits, there are 8.575 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 September 2010

The latest release of the Ceridian-UCLA Pulse of Commerce Index™ (PCI) suggests that the economic activity slipped again September with the seasonally adjusted index declining .50% as compared to August but remaining 5.79% above the level seen in September 2009.

Further, the three month moving average remained flat indicating that the September Industrial Production data (released tomorrow) will likely show a similar trend.

A Policy Junkie Food Stamps Extravaganza!

First, I’d like to preface this post by citing the most recent statistics for the federal food stamps program.

Currently, there are over 41 million food stamps recipients coming from over 19.4 million households resulting in a monthly cost of over $5.6 billion or just over $67 billion annually.

As many longtime Paper Economy readers know, I have been tracking these numbers since the summer of 2008 and in that time the rolls for both individual participants and households have nearly doubled!

NPR’s “On Point” segment yesterday was dedicated to the food stamps program and a recent initiative by NYC Mayor Bloomberg and NY Governor Paterson to petition the DOA in an effort to ban access to sugary soft drink items for area food stamps recipients.

Though this is a very comical NPR segment … nothing short of a melee of policy junkies lost in a vicious circle of cyclical logic and do-gooder nonsense... it should leave one with the sense that America’s future is far less then bright.

At one point, Ellen Vollinger (the Legal Director at the Washington DC based Food Research and Action Center… whatever that is), a policy junkie against the proposed ban on junk foods, suggested that there is a paradox in America, “many of the people that are hungry [in this country] are also people who have trouble with obesity”.

While I realize she could probably have added a bit more color to shore up her sentiment, that statement was truly a CLASSIC! ... Fantastic!

Meanwhile, no one on the panel was actually against the food stamps program in general, all being policy junkies of one ilk or another, they simply disagreed on the implementation and debated the merits of limiting access to junk foods or providing more education to recipients.

Even in the face of multiple callers offering eye witness testimony of food stamps being traded for cash, gasoline and even booze and drugs, the policy junkies didn’t waiver from their devotion to their religion.

Of course, NYC area recipients are mad… even furious… that they would be limited to using their Supplemental Nutritional Assistance Program (SNAP the fancy Washington name for the food stamps program) credits on actual nutrition... to them this is an issue of rights!

Readers, I can only think that we are nearing an end of sorts… something big is brewing and it can’t simply be a larger incarnation of the status quo.

No… I fear we are pushing ever closer to a critical breaking point.

The federal government is a disaster and the fact that in its largess it has spawned an industry of policy research institutions teeming with imbeciles just salivating at the chance to fritter away generations of wealth on wasteful illogical boondoggles while breeding immense classes of needy recipients (for one program or another) is a disgrace.

In the end this whole game will come down to simple math and crude economics…

Reading Rates: MBA Application Survey – October 13 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 4 basis points since the last week to 4.21% while the purchase application volume declined 8.5% while the refinance application volume jumped 21% 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 continued declining interest rates.

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

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages as well as one year ARMs since 2006 (click for larger dynamic full-screen version).

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

Handicapping “Robo-Signing”

Robot’s (… actually in this case mind numbed employees) fraudulently forging signatures and notarizing documents… what will banking think of next!

Here is an excellent NPR “On Point” segment that aired yesterday concerning the recent “robo-signing” foreclosure scandal and housing in general with guests Diana Olick, Dr. Karl Case, the great analyst Ivy Zelman and economist Allen Sinai.

I must admit that this scandal has taken me by surprise but on further consideration what’s really surprising is how surprised everyone is.

Given the size of the colossal scam that was perpetrated by borrowers, mortgage brokers, real estate agents, originators (Countrywide Financial et al.), the GSEs (Fannie and Freddie and then FHA) and private banking no one should be surprised that the unwind should be a messy process… garbage in garbage out.

Should we be surprised that the same sham institutions that neglected to perform proper due diligence when underwriting millions of home loans on the origination side would now neglect due diligence on the cleanup end?

Should we really be shocked that a blunder on the part of merely processing foreclosure documents will be exploited by all the fraudster homebuyers who intended on exploiting the housing market in the first place?

We are now at a laughable situation whereby the worst, most greedy and ruthlessly fraudulent bankers and home-borrowers are mired down in an all out competition for which class will sink lower to abuse an asset market that has already suffered years of their punishment.

For home-borrowers, at least a quarter of which qualify as nothing more than vagrants squatting in properties they haven’t made a payment on in at least eighteen months, this scandal is essentially a windfall likely tying up their property in a mountain of red tape.

To the bankers, this scandal likely equates to a disaster that they sorely deserve.

That being said, let us not forget what happened the last time banks found themselves with mountains of “troubled assets”? .... The government gave them TARP and simultaneously the taxpayer got the shaft.

These are troubled times indeed!

So, enough ranting… let’s handicap the outcome for the housing markets given this “unexpected” turn of events.

As the NAR points out every month, at least a quarter of all existing home sales are foreclosures with the percentage reaching one third if you include short sales.

This should argue for there being a significant plunge in home sales over the coming months particularly in the areas hardest hit by foreclosure (California, Nevada, Arizona, Florida, etc.).

Although many have put forth the idea that without the foreclosure sales, there would be lower inventory and better price competition between “organic” sales (i.e. non-distressed typical sales), a more holistic macro view of the housing market would argue that lower transactions generally mean lower prices.

In any event, any price stability gained by the temporary removal of distressed properties from the market would likely inevitably erode when the distressed properties (likely even more distressed after the fact) are re-introduced.

As Dr. Case points out in the segment, foreclosures are not evenly distributed so for markets where there are few distressed properties, this halt in foreclosure processing could have little to no effect, while in other markets, literally all transactions will grind to a halt.

The housing industry will likely take a hit from this scandal as well with real estate agents and all the other middle-men servicers feeling the dramatic reduction in transactions while even homebuilders will likely feel more pain given all the uncertainty that will be created by this process.

The more uncertainly there is, the longer this clearing process will take and the worse it will be for housing in general.

This episode simply sheds more light on how bad an asset class housing has become through the abuse of homebuyers, speculators, bankers and the feds.

Some day this process will clear and housing will get back to its long established boring and lackluster appreciation due to inflation and incomes.... but not today.

The New “Household” Misery Index: August 2010

Back in the 1970s and 80s the “Misery Index” was popularized as a measure that accurately captured the misery and malaise of the time.

The original Misery Index was a bit too simplistic as it only captured the severity of the two main vexing issues of the time, unemployment and inflation.

Today, inflation, as measured by the annual rate of change of the CPI-U, is not a significant source of financial misery.

Of course, households on fixed income may dispute that fact and many have argued that CPI itself does not accurately capture “real” inflation as it has never accounted for the ridiculous increasing costs of housing and other essentials so for the sake of formulating a new misery index, inflation will factored out.

Another key to formulating a new misery index is to specifically target “household” misery as opposed to including data that might target the miserable state of affairs of the federal government or corporate misery.

The Household Misery Index captures the following trends and weights them equally:

1. The U-3 unemployment rate
2. YOY percent change of the 10-Year moving average of total nonfarm payrolls
3. YOY percent change of the 10-Year moving average of “real” personal income
4. YOY percent change of the 10-year moving average of “real” S&P 500

The unemployment rate captures the misery associated to the threat and severity of a potential bout of unemployment while the annual change of the 10 year moving average of non-farm payrolls captures a more fundamental sense of the overall job market.

The annual change to the 10 year moving average of “real” (adjusted with CPI-U) personal income captures a household’s long term sense of income prospects.

The annual change to the 10 year moving average of “real” (adjusted with CPI-U) S&P 500 captures a household’s long term sense of typical investment prospects.

Unfortunately, all home price series are simply not long enough to include in the formulation but there may be alternative measures that can be included in the future.

The level of misery for August increased 0.03% since July and remained near the peak for this cycle and nearly the highest level seen in 30 years while on a year-over-year basis, misery climbed 0.19%.

The Fall of Greece: August 2010

Looking at the most recent OECD economic indicators, Greece makes by far the weakest showing in all the Eurozone appearing to have clearly collapsed into recession.

Industrial production has fallen off a cliff, consumer confidence remains historically weak, business confidence looks grim and the leading index is turning down fast dropping 0.38% since July and 5.99% below the level seen in August 2009.

For September (more timely data), consumer confidence declined 0.12% since August dropping 5.65% below the level seen in September 2009 while business confidence went flat from August and remained 0.20% above the level seen in September 2009.

Industrial production remains weak declining 1.41% since the prior month remaining near the lowest levels seen since the late 1990s.