Mid-Cycle Meltdown?: Jobless Claims February 05 2009

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims jumped 35,000 to 626,000 from last week’s revised 591,000 claims while “continued” claims increased 20,000 resulting in an “insured” unemployment rate of 3.6%.

It’s important to note that although the last several reports have indicated a slight decrease in the seasonally adjusted initial jobless claims, the non-seasonally adjusted numbers are showing very large increases.

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.

Commercial Catastrophe?: MIT/CRE Commercial Property Index Q4 2008

It’s now perfectly obvious that the commercial real estate (CRE) markets have inevitably followed the lead of the residential markets down into an historic recessionary decline.

Today, the MIT Center for Real Estate released their latest read on the nation’s commercial property market showing a steep 15.01% year-over-year decline to prices and a 23.06% decline in demand.

Worse yet, on a peak basis CRE prices have declined a staggering 21.94%.

Individually, Apartment property prices declined 16.34%, Industrial property prices declined 17.24% and Office property prices declined 18.32%.


Looking at the supply and demand indices of the “All Properties” index appears to shed some light on the factors now working to drive prices lower.

Notice that supply of retail properties has remained elevated in recent quarters, while demand has continued to deteriorate substantially.

NARcasting The Future: February 2009

This week, the National Association of Realtors (NAR) provided their latest estimate of annual existing home sales for 2009 again revising down their 2009 total year sales forecast to 5.11 million units.

As usual, the latest forecast comes with another dose of truly ridiculous spin.

In an effort to put their absurd bias into perspective I compiled all their existing home sales forecasts for 2007, 2008 and now 2009 into a chart along with a list of prominent quotes supplied with each forecast.

12/11/2006 Prediction: 6.40 million units.
Lereah "Most of the correction in home prices is behind us."

1/10/2007 Prediction: 6.42 million units.
Lereah "The good news is that the steady improvement in sales will support price appreciation moving forward."

2/7/2007 Prediction: 6.44 million units.
Lereah "After reaching what appears to be the bottom in the fourth quarter of 2006, we expect existing-home sales to gradually rise all this year and well into 2008."

3/13/2007 Prediction: 6.42 million units.
Lereah "Although existing-home sales will be marginally reduced due to subprime lending restrictions, they should be gradually rising this year and next."

4/11/2007 Prediction: 6.34 million units.
Lereah "Tighter lending standards will dampen home sales a bit, but by less than a couple of percentage points from initial projections."

4/30/2007 Lereah Leaves NAR for Move.com

5/9/2007 Prediction: 6.29 million units.
Yun "Housing activity this year will be somewhat lower than in earlier forecasts."

6/6/2007 Prediction: 6.18 million units.
Yun "Home sales will probably fluctuate in a narrow range in the short run, but gradually trend upward with improving activity by the end of the year."

7/11/2007 Prediction: 6.11 million units.
Yun "Home prices are expected to recover in 2008 with existing-home sales picking up late this year."

8/8/2007 Prediction: 6.04 million units.
Yun “With the population growing, the demand for homes isn’t going away – it’s just being delayed.”

9/11/2007 Prediction: 5.92 million units.
Yun “Patient buyers in most areas who do their homework will recognize that housing remains a good long-term investment.”

10/10/2007 Prediction: 5.78 million units.
Yun "The speculative excesses have been removed from the market and home sales are returning to fundamentally healthy levels, while prices remain near record highs, reflecting favorable mortgage rates and positive job gains."

11/13/2007 Prediction: 5.5 million units.
Yun "In some ways, the extended real estate boom from 2001 to 2005 created unrealistic expectations that housing is a short-term high-yield investment… 2007 will be the fifth best year for housing on record"

12/10/2007 Prediction: 5.67 million units in 2007, 5.7 million units in 2008.
Yun "The broad trend over the coming year will be a gradual rise in existing-home sales, but because sales are exceptionally low in the final months of 2007, total sales for 2008 will be only modestly higher than 2007."

ACTUAL: 5.652 million existing units sold in 2007

01/08/2008 Prediction: 5.66 million units in 2007, 5.7 million units in 2008.
Yun "A meaningful recovery in existing-home sales could occur as early as this spring, or it may be further delayed toward late 2008."

02/07/2008 Prediction: 5.38 million units full year.
Yun "Where builders have cut construction sharply, and in most areas with improving affordability conditions, we’ll generally see moderately higher home prices."

03/06/2008 Prediction: 5.38 million units full year.
Yun "Significant price declines in some local markets have sharply and quickly improved local affordability conditions, and are inducing buyers to return to the marketplace"

04/08/2008 Prediction: 5.39 million units full year.
Yun "Exceptionally weak home sales related to jumbo loans problems will depress home prices in the first half of the year, but steady liquidity improvements in the conforming jumbo-loan market will help prices recover in the second half of the year"

05/08/2008 Prediction: 5.39 million units full year.
Yun "Although more than half of local markets are expected to see price growth this year, the aggregate existing-home price will decline 2.4 percent in 2008, driven by a relatively few markets that are very oversupplied"

06/09/2008 Prediction 5.4 million units full year.
Yun "We’re seeing healthy price gains in moderately priced areas like Erie, Pa., and Corpus Christi, Texas, and double-digit gains in others"

07/08/2008 Prediction 5.31 million units full year.
Yun "Interestingly, there have been reports of multiple bidding after the large price cuts, so it is possible that most of the price declines have already occurred in those markets."

08/08/2008 Prediction 5.51 million units full year.
Gaylord "buyers [will] get into the market to take advantage of the unprecedented drop in home prices in many areas, as well as a wide selection of inventory, to make an investment in their future,"

09/09/2008 Prediction 5.01 million units full year.
Yun "Nationally, home sales are stable now but are expected to increase in coming quarters."

10/08/2008 Prediction 5.04 million units full year.
Yun "What we’re seeing is the momentum of people taking advantage of low home prices…"

11/07/2008 Prediction 5.02 million units full year.
Yun "…we’re still in a broad period of stabilization"

12/09/2008 Prediction 4.96 million units full year.
Yun "Given the critical role of housing in an economic recovery, we’re confident sufficient (government) stimulus will be offered to bring more buyers to the market,"

ACTUAL: 4.912 million existing units sold in 2008

1/06/2009 Prediction 4.90 million units in 2008, 5.224 million units 2009.
Yun "With a proper real-estate focused (government) stimulus measure, home sales could rise more than expected, by more than 10 percent..."

2/02/2009 Prediction 4.912 million units in 2008, 5.116 million units 2009.
Yun "Forecasting is a hazardous sport at times. With so many pieces of the puzzle now moving in opposite directions, the crystal ball reading has become even cloudier."

Reading Rates: MBA Application Survey – February 04 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 6 basis points since last week to 5.28% while the purchase application volume declined 11.2% and the refinance application volume increased 15.8% compared to last week’s results.

It’s important to note though that although the steady decline in mortgage rates has likely played a significant role in the large increases in refinance application volume seen recently, it’s also altogether possible that the MBAA has some difficulty in seasonally adjusting their numbers around the November to January periods.

As you can see on the charts below, November through January usually brings some erratic spikes to the volume indices but the cause, at least in some part, is likely the result of troubles seasonally adjusting a noisy weekly series and not an actual spontaneous doubling of refinance activity.

As was noted last year, it’s probably sensible to wait until February to draw a final conclusion.

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).

Pending Home Sales: December 2008

Today, the National Association of Realtors (NAR) released their Pending Home Sales Report for December showing a 2.1% year-over-year gain in pending home sales nationally primarily driven by a 17.5% increase in pending sales seen in the heavily foreclosure laden markets of the west region.

Meanwhile, the NAR leadership has redoubled their efforts in groveling for TARP money with NAR president Charles McMillan suggesting that more needs to be done by the federal government to support home prices.

“We can’t take our eye off the need to stimulate housing, which can set the foundation for an economic recovery, … Last week’s actions in the House to eliminate the repayment feature on the first-time home buyer tax credit, and to raise mortgage loan limits, are helpful. However, we need to take additional steps to meaningfully draw down inventory and stabilize home prices”

The following chart shows the national pending homes sales index since 2005 compared monthly. Notice that each year, the months value is decreasing fairly consistently (click for larger version).

The following chart shows the national pending home sales index along with the percent change on a year-over-year basis as well as the percent change from the peak set in 2005 (click for larger version).

Note that in the above charts, I had to use the Not Seasonally Adjusted (NSA) data series as NAR changed the methodology for their Seasonally Adjusted (SA) series a while back and never republished the numbers.

Look at December’s seasonally adjusted pending home sales results and draw your own conclusion:

• Nationally the index increased 2.1% as compared to December 2007.
• The Northeast region declined 14.5% as compared to December 2007.
• The Midwest region declined 1.2% as compared to December 2007.
• The South region increased 1.6% as compared to December 2007.
• The West region increased 17.5% as compared to December 2007.

Commercial Cataclysm?: Moody’s/REAL Commercial Property Price Index November 2008

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.

The latest results reflecting national data for all property types settled through November strongly suggest that prices for commercial real estate have eroded significantly registering a 14.32% decline on a year-over-year basis.

Taken together, the MIT/CRE Commercial Property Index and the Moody’s/REAL CPPI all appear to be firmly indicating that the nation’s commercial real estate markets are experiencing a significant decline.

Ticking Time Bomb?: Fannie Mae Monthly Summary December 2008

Decades from now the summer of 2008 will likely be remembered to mark the turning point where legislative blundering took an otherwise serious financial crisis and molested it into an epic financial collapse.

By fully assuming the liabilities of Fannie Mae and Freddie Mac, the two colossal and corrupt (and conduit of corruptness funneling junk Countrywide Financial loans onto the implied balance sheet of the federal government) government sponsored enterprises, the federal government, led by Treasury Secretary Paulson and Federal Reserve Chairman Ben Bernanke, has thrust taxpayers into an abyss of insolvency with one mighty shove.

Given the sheer size of these government sponsored companies, with loan guarantee obligations recently estimated by Federal Reserve Bank of St. Louis President William Poole of totaling $4.47 Trillion (That’s TRILLION with a capital T… for perspective ALL U.S. government debt held by the public totals roughly $4.87 Trillion) this legislative reversal making certain the “implied” government guarantee is reckless to say the least.

The following chart (click for larger) shows what Fannie Mae terms the count of “Seriously Delinquent” loans as a percentage of all loans on their books.

It’s important to understand that Fannie Mae does NOT segregate foreclosures from delinquent loans when reporting these numbers and that should they report the delinquent results as a percentage of the unpaid principle balance, things might likely look a lot worse.

Finally, the following chart (click for larger) shows the relative movements of Fannie Mae’s credit and non-credit enhanced (insured and non-insured) “Seriously Delinquent” loans.

The Arlington Artifice: December 2008

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 and obviously unsophisticated abilities with even the most basic economic data.

The December 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?

As I have shown in my prior posts, 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 most notable feature of the recent results is unquestionably the low number of home sales with only 248 sales for the entire year, a 20.51% decline as compared to 2007 and the lowest readings since the recessionary period of 1990.

Another important point to remember is that when sales decline dramatically the median selling price can jump wildly up or down since the small number of sales provides a small set with which to determine the “middle” selling price.

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

Regular readers will notice that the “year-to-date” median selling price, a more accurate median indicator, has declined significantly from where it stood earlier in the year as the number of home sales have slowly accumulated and now stands at $475,000.

Although my expectation was for the median to drop “well below $470,000” by the end of the year, the full year outcome of $475,000 was essentially flat compared to 2007 and remains well within the bubble reversion to the mean thesis.

All towns, except for Cambridge which had an exceptionally low number of single family home sales in 2008, registered flat to declining median selling prices which, as this post makes so clear, further indicates that Arlington is no “stand out” amongst its peers.

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.

This is not such a surprising result for those that have observed Arlington’s real estate market over the last two decades.

Arlington experienced tremendous growth during the 90s internet boom as young families sought its desirable location and outstanding (presumed…) school system.

Now though, it looks as if Arlington is, more or less, a perfect representation of a town struggling with our secular bear market economy.

Its housing market has essentially been eroding since the peak of the internet economy and not even the unusual conditions of the housing bubble could bring back the outstanding growth experienced during that era.

In recent years, Arlington has found itself falling behind with state cutbacks and lower property tax revenues leading to public funding stress and particularly the postponement of the much needed renovation of two dilapidated schools.

It’s important to note that the dilapidated schools happen to reside in the school districts generally considered to be the lower income areas of the town.

In fact, the higher income sections of the town, particularly the Brackett school district, were fortunate enough to get their schools completely redeveloped in “world class” style before the funding dried up.

As you can imagine, the quality of the school buildings in the lower income areas are not the only elements of those districts to have suffered with students producing notably lower MCAS scores and one school even receiving a designation of a “year 1 improvement plan” by the state department of education.

This type of blatant favoritism breeds discontent and, internally, the town’s residents have struggled with the issue of fairness.

This week an armed gunman even reined terror down on the residents of his Arlington neighborhood as he walked down his street brandishing his weapon in menacing style, threatening neighbors and even local police before being apprehended.

With the economy headed into likely the worst recessionary years of the post-WWII period, it will be interesting to watch how this firmly middle class suburban town copes.

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.

Notice again that as sales have mounted for the year, the median values are looking generally flat to trending down.

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.

On The Stamp: Food Stamp Participation November 2008

As a logical consequence of the prolonged economic downturn it appears that participation in the federal food stamp program is on the rise.

In fact, household participation has been climbing so steadily that it has surpassed the last peak set as a result of the immediate fallout following hurricane Katrina.

The latest data released by the Department of Agriculture shows that, on a year-over-year basis, household participation has increased a whopping 14.37% while individual participation, as a ratio of the overall population, has increased 12.88%.

November’s numbers had shown a slight decline for both household and individual participation from September as a result of declining temporary relief for hurricane effected regions.

However, participation is still climbing dramatically, likely as a result of the recent jump in total unemployment, driving the nominal benefit costs up 28.75% on a year-over-year basis to $3,561,667,207 for the month.

Looking at the last chart that plots the total unemployment rate (unemployment rate of all traditionally unemployed workers plus all marginally attached and part time workers) and the population adjusted individual program participation rate normalized since 2005, one can plainly see that program participation would be expected to continue its surge.

Confidence Game: Consumer, CEO and Investor Confidence January 2009 (Final)

This post combines the latest results of the Rueters/University of Michigan Survey of Consumers, the Conference Board’s Index of CEO Confidence and the State Street Global Markets Index of Investor Confidence indicators into a combined presentation that will run twice monthly as preliminary data is firmed.

These three indicators should disclose a clear picture of the overall sense of confidence (or lack thereof) on the part of consumers, businesses and investors as the current recessionary period develops.

Last week’s final release of the Reuters/University of Michigan Survey of Consumers for December showed a continued slump for consumer sentiment with a reading of 61.2 and dropping 21.94% below the level seen in January 2008.

The Index of Consumer Expectations (a component of the Index of Leading Economic Indicators) increased to 57.8 remaining 15.12% below the result seen in January 2008.
As for the current circumstances, the Current Economic Conditions Index declined slightly to 69.2 or 26.69% below the result seen in January 2008.

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

The latest quarterly results (Q4 2008) of The Conference Board’s CEO Confidence Index declined dramatically to a value of 24, the lowest reading in the history of the index.

The January release of the State Street Global Markets Index of Investor Confidence indicated that confidence for North American institutional investors increased 21.2% since December while European confidence increased 6.7% and Asian investor confidence declined 0.3% all resulting in an increase of 12.1% to the aggregate Global Investor Confidence Index which now rests 13.24% below the result seen last year.

Given that that the confidence indices purport to “measure investor confidence on a quantitative basis by analyzing the actual buying and selling patterns of institutional investors”, it’s interesting to consider the performance surrounding the 2001 recession and reflect on the performance seen more recently.

During the dot-com unwinding it appears that institutional investor confidence was largely unaffected even as the major market indices eroded substantially (DJI -37.9%, S&P 500 -48.2%, Nasdaq -78%).

But today, in the face of the tremendous headwinds coming from the housing decline and the mortgage-credit debacle, it appears that institutional investors are less stalwart.

Since August 2007, investor confidence has declined significantly led primarily by a material drop-off in the confidence of investors in North America.

The chart below (click for larger version) shows the Global Investor Confidence aggregate index.

Construction Spending: December 2008

Today, the U.S. Census Bureau released their December read of construction spending again demonstrating the significant extent to which private residential construction is contracting particularly for single family structures while non-residential spending continues to show the telltale signs of contraction.

With the tremendous weakening trend continuing, total residential construction spending fell 22.88% as compared to December 2007 and 52.81% from the peak set in March 2006.

Worse off though was private single family residential construction spending which declined 43.14% as compared to December 2007 and a truly grotesque 69.86% from the peak set in February 2006.

Non-residential construction spending, currently accounting for just under half of all private construction spending, has been expanding at a slower rate in recent months with December showing a 8.92% increase as compared to December 2007 but posting the fifth monthly decline in six months.

As was noted in prior posts, commercial real estate (CRE) appears to be coming under some pressure with reports of increasing vacancy rates and falling prices and now a back-to-back monthly decline in spending.

Keep your eye on the last two charts in the months to come for a clearer indication of a pullback.

The following charts (click for larger versions) show private residential construction spending, private residential single family construction spending and private non-residential construction spending broken out and plotted since 1993 along with the year-over-year and peak percent change to each since 1994 and 2000 – 2005.

Bull Trip: GDP Report Q4 2008 (Advance)

Today, the Bureau of Economic Analysis (BEA) released first installment of the Q4 2008 GDP report showing a stunning contraction with GDP declining at an annual rate of -3.8%.

Looking at the report more closely it’s easy to see that the quarter was a disaster overall with huge double-digit declines to Durable Goods, Imports (actually a benefit) and Exports as well as Fixed Investment.

Fixed investment provided significant drags on growth with non-residential investment declining -19.1% and residential investment declining -23.6%.

The following chart shows real residential and non-residential fixed investment versus overall GDP since Q1 2003 (click for larger version).

New Home Sales: December 2008

Today, the U.S. Census Department released its monthly New Residential Home Sales Report for December showing continued and even accelerating deterioration in demand for new residential homes across every tracked region resulting in a startling 44.83% year-over-year decline and a truly horrendous 76.17% peak sales decline nationally.

It’s important to keep in mind that this stunning year-over-year decline is coming on the back of the significant declines seen in 2006 and 2007 further indicating the enormity of the housing bust and clearly dispelling any notion of a bottom being reached.

Additionally, although inventories of unsold homes have been dropping for well over a year, the sales volume has been declining so significantly that the sales pace now stands at an astonishing 12.9 months of supply.

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


Look at the following summary of today’s report:

National

• The median sales price for a new home declined 9.31% as compared to December 2007.
• New home sales were down 44.83% as compared to December 2007.
• The inventory of new homes for sale declined 27.7% as compared to December 2007.
• The number of months’ supply of the new homes has increased 31.6% as compared to November 2007 and now stands at 12.9 months.

Regional

• In the Northeast, new home sales were down 50.0% as compared to December 2007.
• In the Midwest, new home sales were down 31.1% as compared to December 2007.
• In the South, new home sales were down 46.0% as compared to December 2007.
• In the West, new home sales were down 47.4% as compared to December 2007.