Benefit Explosion!: Extended Unemployment Claims January 21 2010

While today’s jobless claims report continued to show a steady trend down to both initial and continued unemployment claims with a nearly textbook peak shaping up, considering the federal extended claims data offers a more dire view of the state of the job market and of the economy as a whole.

Since the middle of 2008 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 5.91 million people receiving federal “extended” unemployment benefits.

Taken together with the latest 6.01 million people that are currently counted as receiving traditional continued unemployment benefits, there are well over 11 million people on state and federal unemployment rolls.

New and “Organic” Existing Home Sales Agree

As I have noted in prior posts, the S&P/Case-Shiller sale pair counts series are, to my knowledge, the best “organic” existing home sales series as can be found.

The methodology employed by S&P vets out “flips”, new construction and even most distressed sales providing them with a solid base of true “arms-length” sales for which to base their more popular home prices series on.

As has been widely reported, some 30%-40% of all existing sales (as reported by the NAR) are distressed properties resulting in a significant gap between the trends in new and existing home sales.

Existing home sales have been essentially propped up by the high volume of distressed properties resulting in a poor indicator of the true trends for non-distressed typical existing home sales.

Yet, looking at the chart below (click for super dynamic full-screen version) which compares the seasonally adjusted new home sales series and the non-seasonally adjusted S&P/Case-Shiller Composit-10 sale pair count series, both smoothed with a 12 month simple moving average, you can see that there is a great degree of correlation between the two trends.

Further, although both series clearly indicate that the worst of the home sales decline is likely behind us, it’s important to recognize that the formation of the “bottom” during the 90s-era housing bust took roughly two years during which time existing home sales continued to slowly trend down.

A bottom to our current housing cycle will not be defined by a single data series on a single month but instead will be a long slow slog whereby multiple market factors clear in a cumbersome "fits and starts" manner.

In the mean time, don't be surprised if sales (new and existing) continue to trend down even further and prices continue their reversion to the mean.

Commercial Cataclysm!: Moody’s/REAL Commercial Property Price Index November 2009

The latest release of the Moody’s/REAL Commercial Property Index while showing a 1% increase in prices since October, the first gain in fourteen months, still continues to suggest that the nation’s commercial property markets are experiencing a tremendous downturn with prices declining a whopping 33.5% on a year-over-year basis and a stunning 43% 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.

The Collapse of Trade

The fall of 2008 marked a momentous turning point for world trade with the U.S. consumer pulling back so severely that imports to the U.S. essentially collapsed.

Our top four trading partners saw their exports to the U.S. decline anywhere from 20% to 50% almost overnight.

Since then though there has been a recovery of sorts.

Canada has seen a slight uptick in its exports of its petroleum products and other natural resources while China’s 2009 trade of consumer electronics and other finished consumer products more or less matched its performance in 2006.

Mexico’s 2009 trade of crude oil, motor vehicles and electronic components also essentially matched their 2006 performance while Japan’s trade of motor vehicles, auto parts, industrial machinery and other finished consumer goods remains mired down at levels not seen since the early 2000s.

Was the weakness of 2008 and early 2009 simply a blip in an otherwise robust and expanding climate of global trade or did it mark the entry into a longer period of adjustment as U.S. consumers continue to retrench in the face of difficult economic times?

New Residential Construction Report: December 2009

Today’s New Residential Construction Report continued to indicate a weak recovery for the new home market showing the continued year-over-year increases to both permits and starts.

It’s clear now that the government’s housing stimulus tax credit and loose FHA lending policies have worked to prop both new and existing home sales.

The government’s efforts, which now include an extension of an even more broad housing tax credit, have sponsored demand and provided the new home market with a more fertile environment to clear.

Nonetheless, at 456K single family units (SAAR), the level of national housing starts still remains substantially below that seen in October 2008.

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

Any substantial departure from the current perception of a strong “V”-shaped recovery (i.e. stock selloff, protracted high unemployment, etc.) would likely send both new and existing home sales down for another go at the lows seen last March.

Single family housing permits, the most leading of indicators, increased a whopping 37.3% nationally as compared to December 2008 but still remains an astonishing 69.42% below the peak in January 2005.

To illustrate the extent to which permits and starts have declined, I have created the following charts (click for larger versions) that show the percentage changes of the current values on a year-over-year basis as well as compared to the peak year of 2004.

Reading Rates: MBA Application Survey – January 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 declined 13 basis points since the last week to 5.00% while the purchase application volume increased 4.4% and the refinance application volume jumped 21.8% over the same period.

It’s important to recognize that despite the Federal Reserve’s “quantitative easing” measures and record low interest rates, the purchase application volume has now dropped to the lowest reading since 2000.

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).

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

Today, the National Association of Home Builders (NAHB) released their latest Housing Market Index (HMI) showing flat to declining results for all measures.

It's important to recognize that although each sentiment index has now shown notable year-over-year increases, their levels still remain near the worst levels seen in over 20 years.

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

Recovery-less Recovery: Unemployment Duration Exploding

Nothing says recovery less than a steadily increasing pool of unemployed workers facing the specter of a quickly increasing average (and median) length stint on unemployment.

In fact, as has been widely reported, the median and average stay on unemployment has simply exploded far surpassing the highest levels seen since records have been regularly kept.

Looking at the charts below (click for super interactive versions) you can see that today’s sorry situation far exceeds even the conditions seen during the double-dip recessionary period of the early 1980s, long considered by economists to be the worst period of unemployment since the Great Depression.

Currently, there are some 6.13 million civilian workers that have been unemployed for 27 weeks or more with the average stay on unemployment standing at a whopping 29.1 weeks and the median stay reaching 20.5 weeks.



Further, as you can see from past cycles, all three of these measures will likely eventually reach their peaks well after the official end of our current economic contraction.

In fact, the most recent two completed cycles (90s S&L crisis and dot-com bust contractions) saw duration of unemployment continue to grow for some two to four years after the technical end of their respective recessions… a solemn notion indeed.

One might consider, with such stark examples of epic structural unemployment, whether the future negative feedback functions associated to this brutal a bout of joblessness are currently being underestimated.

Superstar Down!

After a year of epic government stimulation and a seemingly “all in” wager on the part of stock “investors”, it’s important to recognize that trends on the upper-end of residential real estate have little changed.

We’ve already recognized that price movement for residential real estate on the high tier of many of the country’s more affluent cities, largely unaffected by the government gimmicks and “green shoots” confidence, have continued to trend down but what of the “superstar” markets that were once thought to be immune from all economic conditions?

One "superstar" that stands out above the rest is, of course, New York City where residential real estate in Midtown once fetched well over $1300 per square foot.

Today though, prices in Midtown appear to be trending down the backside of the credit/finance bubble declining at an annual rate of over 21% and standing at a level far less than $1000 per square foot as you can see from the following chart of Radar Logic daily data.

Further, it’s important to recognize that it wasn’t that long ago (just six years) when Midtown only fetched a mere $650 per square foot for its prime residential space and if that level were to be retraced, it would represent roughly a 50% decline from the peak set in 2008 and an additional 30% from today’s level… hardly an unaffected market.

While this appears to smash the concept of “superstar” cities to bits and pieces it also speaks volumes of the character and confidence of the Wall Street moguls that tended to buy these properties during the boom period.

Wall Street is raging, absurd bonuses are essentially back on but Midtown real estate is firmly on the decline.

I Think We’re Turning Japanese!

The striking similarities between trends in the U.S. and Japan during and after their respective bubble epoch’s are well known by now… raging stock markets and raging property markets fueled by exuberant speculation on the part of “investors” and just about everyone else leading to a final magnificent debt-laden crescendo, the financial system on the brink of destruction and finally a government sponsored zombie-economy with a lifeless on-again off-again recovery.

In Japan’s case the initial “recovery” was only one of a string that would encompass the following 20 years (and still running weak!), all of which failed to restore economic trends to peak levels and lead to a constant struggle with deflation and disappointment.

First Japan was said to have experienced a “lost decade”… now they are closing in on a “lost score”.

The U.S. has just completed a lost decade of its own with both stocks and jobs declining since the late 1990s yet in a land of “jobless recoveries” and “getting back to even” you rarely hear about it in the traditional media.

We share similar demographic problems as well… over the last 40 years the population of people age 65 and older has exploded in Japan reaching a current record among all nations of 21%... over the next 40 the U.S. will see a nearly identical shift.

Given all the similarities it’s certainly plausible to expect our residential property markets, post-crash, to trend similarly as well, especially in light of the ongoing contraction of consumer credit and tightening of credit standards as well as the significant backlog of distress, both seen and unseen (shadow inventory, forced landlords, etc.), that is pent up in the U.S. property markets.

The following chart (click for super-dynamic zoom-able chart) shows Japan residential property prices (for six of its largest metros) shifted in time so as to align Japan’s bubble peak from 1991 with that of the United States from 2005.

I’ve also projected the future trend for the U.S. (the red series) by using one half the annual declines seen in the Japan residential property markets as a guide.

Notice that to date, the annual declines have been fairly comparable.

Further, if we continue to trend similarly, the U.S. will see an additional 25% price decline over the next nine years bringing us to a nominal value first seen back in 1998.

In this sense, the seven years of pre-peak “housing mania” home price appreciation would be wiped out over the course of thirteen years of post-peak decline.

Reading Rates: MBA Application Survey – January 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 5 basis points since the last week to 5.13% while the purchase application volume increased just 0.8% and the refinance application volume jumped 21.8% over the same period.

It’s important to recognize that despite the Federal Reserve’s “quantitative easing” measures and record low interest rates, the purchase application volume has now dropped to the lowest reading since 2000.

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).

Economic Jolt: Job Openings and Labor Turnover November 2009

Today, the Bureau of Labor Statistics released their latest monthly read of job availability and turnover (JOLT) showing that, on a year-over-year basis, private non-farm job “openings” declined 29.10%, job “hires” declined 0.84%, job “layoffs and discharges” decreased 9.5% and job quits declined dropping 10.65%.

Job “openings” (click chart below for larger version), the reports most leading “demand side” indicator, has now declined on a year-over-year basis for 26 consecutive months.

Sliding down that slope of the Beveridge curve, the decline in the job vacancy rate is clearly corresponding with an equal but inverse movement up in the general unemployment rate as can be plainly seen in the following chart (click chart for larger version).

Job “hiring” activity (click chart for larger version) has also been declining significantly with the latest results posting the 30th consecutive decline on a year-over-year basis further confirming the tremendous weakness seen in the job market.

With the latest revisions by the BLS, job “separations”, whereby workers and their employers go their separate ways by one means or another (layoffs, retirement, termination, quitting, etc.), appear to be flattening as a result of nearly equivalent but opposing movements in quitting and layoff activity.

It’s important to understand that job “quits” are included as a component of the “separations” data series as “quitting” is a valid means of workers “separating” from employers but their inclusion tends to create an overall procyclical trend in what would otherwise be logically thought of as a countercyclical process (i.e. downturn leads to increase in separations not decrease).

As the economy slides further into recession and the employment situation worsens workers tend to reduce quitting activity presumably for fear that they could risk a long bout of unemployment and the latest results (click chart for larger version) confirm this with the some of the sharpest year-over-year declines on record.

Layoff activity, now separated into its own series and as you can see from the chart below is showing a dramatic surge that is roughly equivalent but opposite to the decline seen in quitting activity.