The New “Household” Misery Index: January 2011

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 declined notably in January dropping 0.10% but still remained near the peak for this cycle and nearly the highest level seen in 30 years while on a year-over-year basis, misery declined for just the second time since November 2005.

This is a notable improvement for misery and if the past is to be taken to be even just a crude guide, the level of household misery should continue to steadily improve in the coming months.

Philadelphia Feeling: Federal Reserve Bank of Philadelphia Business Outlook Survey March 2011

The latest release of the Federal Reserve Bank of Philadelphia Business Outlook Survey (BOS) for March indicated strong growth in the regions manufacturing activity with the current activity index increasing to a level of 43.4 while the future activity index improved notably jumping to a level of 63.

In the first two charts, the bright green band indicates contraction (0 to -100) while any value above that band indicates expansion.

Production Pullback: Industrial Production February 2011

Today, the Federal Reserve released their monthly read of industrial production showing a slight decline with total industrial production dropping 0.08% from January but remained 5.30% above the level seen in February 2010.

Extended Unemployment: Initial, Continued and Extended Unemployment Claims March 17 2011

Today’s jobless claims report showed a decline to both initial unemployment claims and continued unemployment claims as a significant declining trend continued to materialize for both initial and traditional continued claims.

Seasonally adjusted “initial” unemployment declined by 16,000 to 385,000 claims from last week’s revised 401,000 claims while seasonally adjusted “continued” claims declined by 80,000 resulting in an “insured” unemployment rate of 3.0%.

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 4.35 million people receiving federal “extended” unemployment benefits.

Taken together with the latest 4.46 million people that are currently counted as receiving traditional continued unemployment benefits, there are 8.64 million people on state and federal unemployment rolls.

Housing Seriously Double-Dipping

The housing market has taken a serious turn for the worse.

First, let’s recount that the latest release of the Radar Logic RPX is now clearly signaling that home prices nationally have broken well below the level seen prior to the government’s housing tax scams with the decline recently picking up steam as prices fall at a rate of nearly 4% since last year.

Further, eleven regional markets are now showing the same trend, breaking below the lows seen prior to the federal first time home buyer tax credit and the Feds mortgage asset purchase program to set fresh new lows.

Today’s housing starts report was a miserable showing with total permits, the most leading of indicators, dropping over 20% since last year while total starts declined nearly 21% over the same period.

Understandably, homebuilder sentiment is still historically low but arguably the most important assessment of the conditions being seen for the new home sector, namely current buyer traffic conditions, remains just 4 points above the worst level ever recorded.

As for general home purchase activity, looking at the MBAA purchase applications index clearly shows that the demand side remains historically weak with the volume of applications remaining very close to the lowest levels seen in well over a decade.

Taken together, these data-points send an unequivocal message… housing is going down for another dip.

How long the slide will run and how harsh it will be on prices is anyone’s guess but suffice it to say that real prices (inflation adjusted) are still overvalued by some 15% or 20% over historic norms so one would do well to expect the worst.

New Residential Construction Report: February 2011

Today’s exceptionally weak New Residential Construction Report showed notable declines for both single family permits single family starts which, considering the truly depressed level of new home construction activity, appears to suggest that housing is continuing to remain historically weak.

Single family housing permits, the most leading of indicators, declined 9.3% on a month-to-month basis to 382K single family units (SAAR), dropping a notable 26.96% below the level seen in February 2010 and an astonishing 78.75% below the peak in September 2005.

Single family housing starts declined a whopping 11.8% to 375K units (SAAR), dropping a notable 28.84% below the level seen in February 2010 and a whopping 79.43% below the peak set in early 2006.

With the substantial headwinds of elevated 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.

Reading Rates: MBA Application Survey – March 16 2011

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 the volume of 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 14 basis points to 4.79% since last week while the purchase application volume declined a notable 4% and the refinance application volume increased 0.9% over the same period.

While rates have generally trending up for the last four months, it will take some time to determine if this trend will continue or if rates will begin to slide back down to the historically low levels seen in mid-2010.

In any event, the purchase application volume remains near the lowest level seen in well over a decade while refinance activity continues to slow.

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages since 2006 as well as the purchase, refinance and composite loan volumes (click for larger dynamic full-screen version).

Comparing Quakes Kobe vs. Today

There is some buzz in the business media whereby analysts are comparing the impact of the current horrific Japanese earthquake and associated nuclear crisis to the destruction caused by the “Kobe” quake that occurred in Japan in January of 1995.

While the “Kobe” quake was clearly intense and tremendously damaging killing over 6400 people and causing over $100 billion in damage, it appears that the outcome of the current quake is likely to be far worse.

First, the “Kobe” quake was notably less intense at magnitude 6.8 (still supremely intense while the current was an almost unheard of 9.0 magnitude) and did not trigger a tsunami or any significant issues with the nation’s nuclear power plants.

Further, the nation’s industrial production barely registered the event only slightly pulling back for a few months then resuming the trend growth before the end of the year.

Also, it’s important to note that Japan was only some 5 years into their historic period of malaise and likely in significantly better fiscal, psychological and political shape (comparatively) than they are today some 21 years post-boom.

Look at the chart plotting Japan’s industrial production for a sense of the experience during 1995 and follow this data-point for a sense of the level of economic disruption going forward.

Homebuilder Blues: NAHB/Wells Fargo Home Builder Ratings March 2011

Today, the National Association of Home Builders (NAHB) released their latest Housing Market Index (HMI) showing a flattening for most measures with the "buyer traffic" index remaining near record lows as home builders continue to plod through the weakest activity seen in generations.

It's important to recognize that currently the HMI index is showing a slight year-over-year gain but still remains very near the lowest levels seen in over 20 years, a testament to the significance of the latest pullback.

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

U.S. vs Canadian Housing Price Mashup!: December 2010

Teranet/National Bank of Canada produces a complete line of Canadian home prices indices using the same repeat sale methodology as the S&P/Case-Shiller allowing for an interesting comparison against home prices here in the US.

Mashing-up the Teranet/NBC Composite-6 index to the S&P/CSI Composite-10 both rebased to the year 1999 provides a pretty decent “apples-apples” comparison as both the Teranet/NBC Composite-6 and S&P/CSI Composite-10 share the purpose of narrowly including just the top largest metros for their respective country.

Looking at the chart (click for full-screen dynamic version) you can see that both indices are showing a slowing trend with the Case-Shiller actually declining on an annual basis while the Teranet data suggests that Canadian home prices have slid in recent months but are continuing to show an annual increase of about 4%.

Browse the full catalog of Canadian home price indices provided by Teranet/National Bank of Canada.

IEIF France and European Property Prices: February 2011

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 increased during February rising 12.3% above the level seen a year earlier.

The Globe of Bubbles!?: U.K. vs U.S. Home Prices February 2011

One of the more interesting and most dramatic features of the housing bubble days was how pervasive and broad the mania was, encompassing a multitude of regional housing markets across the United States and around the globe.

Today, post-housing crash, we are still seeing property markets continuing to move together somewhat as governments around the globe scramble to prop up quickly deflating housing assets with boondoggles that quickly reveal themselves as being mere temporary distortions to a trend the remains "organically" in decline.

Comparing the S&P/Case-Shiller (CSI) index to that of the two popular U.K. home prices indices you can see that now all three indices are showing some significant signs of deceleration.

The following chart (click for dynamic full-screen version) shows S&P/Case-Shiller Composite-10 series along with the Nationwide and Halifax U.K. series.

U.K. Home Prices: Halifax and Nationwide February 2011

The latest release of the two most prominent home price indices for the United Kingdom are continuing to signal weakness with continued sluggishness.

The “Nationwide” series, indicated that U.K. home prices declined by a slight 0.02% from January falling 0.09% below the level seen in February 2010 while the “Halifax” series increased 0.26% from January but declined a notable 3.00% below the level seen a year earlier.

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.

The Slumping IC in BRIC: January 2011

Looking deeper into today’s OECD Leading Indicator release, one notable trend, namely the near simultaneous slowing of India and China, sticks out as very important development when considering macro-economic conditions going forward.

One theme that has been spun numerous times since the lows of March of 2009 is that outsized growth in the BRIC (Brazil, Russia, India and China) emerging economies would provide the global economy the boost it needed to shake off the malaise of the collapse and maintain an ongoing expansion.

It could easily be argued that investor enthusiasm for the speculative potential in these hot economies (along with the suspension of mark-to-market accounting and a few trillion here and there from the Feds) did, in fact, help to turn the trend during the dire days of early 2009 but many have taken the idea of these emerging economies actually driving the global economy with a “grain-of-salt” especially considering that the combined GDP of the BRIC countries is still just roughly $9.5 trillion, that compared to the United States $14.5 trillion.

Well in any event, it looks like two key BRIC economies… the I and the C… are seeing some notable slowing in recent months.

Both India and China are seeing a continued slowdown with economic activity in China currently declining 0.93% on a year-over-year basis while India has seen a 1.38% decline over the same period.

Even if a slowdown in these emerging markets lacks the potential to put the breaks on the entire global expansion, keeping an eye on these trends could prove vital as any “flight to safety” coming as a result of their degradation could have a notable… positive… impact on investment in the US.

The Fall of Greece: January 2011

Looking at the most recent OECD economic indicators, Greece makes by far the weakest showing in all the Eurozone as it continues to plod through difficult economic times.

Industrial production remains in severe contraction territory, consumer has fallen off a cliff, business confidence though trending up is clearly depressed and the leading index is turning down fast dropping 0.32% since December and 7.04% below the level seen in January 2010.

For February (more timely data), consumer confidence increased 0.53% from January but dropped 3.24% below the level seen in February 2010 while business confidence increased notably from January climbing 2.07% above the level seen in February 2010.

Industrial production remains weak but jumped 0.75% between November and December 2010 (much less timely data) remaining near the lowest levels seen since the late 1990s.