Thursday, November 02, 2006

Constructing Capitulation

Clearly, October represented a “suckers rally” of sorts, led by the unparalleled optimism created when some influential figures, most notably former Federal Reserve Chief Alan Greenspan, indicated that the worst of the much feared housing correction “may well be over”.

It seemed that no amount of data could convince some analysts and economists to break from the prevailing message that housing was setting a bottom, so much so that this sentiment gained almost a “talking point”-like status on CNBC.

Now though, after observing the full measure of economic data that is obviously indicating that housing is not bottoming, and the consumer is not unstoppable, sentiment seems to be changing a bit.

Hopefully, some of these analysts and economists will see the error made by standing in the shadow of folks like Greenspan who may well have long lost their ability to provide truly independent analysis.

October gave us the following:

  • Pending home sales report showing an increasing declines, nationally and regionally, in existing homes sales especially for single family homes.
  • Beige book report indicating that the housing decline is significantly effecting a surprisingly large portion of the US.
  • New construction report showing increasing declines to construction activity in ever region of the US.
  • Existing home sales report showing continued weakness, nationally and regionally, in home sales and prices particularly for single family homes.
  • New home sales report showing continued weakness nationally and regionally as well as a significant decline in prices of new homes.
  • An unexpectedly weak GDP report made so by a significant decline to “residential investment”.
  • Durable goods report clearly showing that the consumer is pulling back on spending on traditional consumer durables.
Now, November is opening with another, significant indicator that the housing decline is having a wider impact on the overall economy with the latest release of the Commerce Departments “Construction Spending” report.

September was reported to have shown an “unexpected” drop in overall construction spending after posting a 0.3% decline with “residential construction” clearly impacting the result as it posted its sixth straight monthly decline to total dollars and the tenth consecutive year-over-year decline as a percentage change.

Key Report Details:

  • The seasonally adjusted annul rate of private residential construction spending has now dropped 8.35% from the peak set back in December of 2005.
  • Overall private residential construction spending dropped 6.9% as compared to September 2005.
  • Single Family residential construction spending dropped 12.8% as compared to September 2005.
  • The latest 6.9% year-over-year decline is the third largest percentage drop in 12 years and the greatest drop to date for this year and for this cycle.
Review the following charts (click for larger version) to see the extent of the current decline in private residential construction:

With the hindsight view of October clearly revealing considerable and even increasing weakness for housing, the consumer, and the general economy it will be interesting to see if, as November follows suit, bullish analysts and economists finally start presenting original and accurate analysis rather than erroneous and overly optimistic future forecasts.

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