Thursday, November 01, 2007

Constructing Capitulation: September 2007

Looking back at September’s results (released throughout October) it’s now unequivocally obvious that the nation’s housing markets, having fully transcended the mania that existed primarily in the first half of the decade and now, in its aftermath, after being dramatically and irreparably impaired by the unwinding of the resultant mortgage-credit debacle, are now hurtling headlong into a dramatic new leg down.

While housing demand continues to slow and inventories swell far beyond historic levels, the credit markets that had provided such a plentiful supply of cheap Jumbo mortgages remains non-existent.

Homebuilders have now clearly accepted the severity of the recession and are re-pricing accordingly but as is typical, the existing home sellers remain behind the curve.

Pending home sales, the most leading existing home sales indicator, again showed a truly dramatic continuation of the decline to residential housing sales both nationally and in every region.

The Northeast, Midwest, West and the National regions having now fallen as much as 20% BELOW the seasonally adjusted home sales activity recorded in 2001, the first year Pending Home Sales were tracked.

The National Association of Realtors (NAR) released their eighth consecutive downward revision to their annual home sales forecast for 2007 putting the current outlook far below the “rose colored” initial predictions from the start of the year.

NAR Senior Economist Lawrence Yun is now attempting to persuade others that the speculative excesses have now cleared the market. “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."

Countrywide Financial (NYSE:CFC) continues to register tremendous borrower stress as delinquencies and foreclosures continuing to remain at troubling levels with delinquencies jumping 30.44% and foreclosures soaring 149% since September of 2006.

The housing weakness still appears to be contributing to a pullback in the retail sales of the most discretionary goods although I will continue to revise the procedures for determining this correlation later this month.

Homebuilder confidence is now sitting AT OR BELOW the worst levels ever seen in the over 20 years the data has been being compiled.

This suggests that the current severe correction has surpassed all other events seen in the last 22 years and is now firmly in uncharted territory.

The Census Department’s New Residential Construction Report firmly indicates a new leg down in the decline for residential construction showing substantial declines on a year-over-year and month-to-month basis to single family permits both nationally and across every region.

The August 2007 results of the S&P/Case-Shiller home price indices continued to show significant weakness for the nation’s housing markets with 15 of the 20 metro areas tracked reporting year-over-year declines and now virtually ALL (except Charlotte NC which changed 0.0%) metro areas showing declines from their respective peaks.

Topping the list of peak decliners are Detroit at -12.18%, Tampa at -10.57%, San Diego at -9.43%, Miami as -9.11%, Washington DC at -8.38%, Phoenix at -8.16% and Las Vegas at -7.65%.

NAR’s Existing Home Sales Report showing perfectly clearly, that demand for residential real estate has now taken a new leg down uniformly across the nation’s housing markets likely as a direct result of the significant structural changes that have taken place in the credit-mortgage markets.

The advance GDP report for Q3 2007 showed an increase in the severity of the drag coming from the decline in residential fixed investment, that is, all investment made to construct or improve new and existing residential structures including multi–family units, with the current quarterly fall-off registering a whopping decline of 20.1% since last quarter while shaving 1.05% from overall GDP.

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

The Census Department’s New Residential Home Sales Report for September again confirmed the hideous falloff in demand for new residential homes both nationally and in every region as well as reporting significant downward revisions to June, July and Augusts’ results.

As with prior months, on a year-over-year basis sales are still declining significantly, with the national measure dropping a truly ugly 23.3% below the sales activity seen in September 2006.

The latest release of the Reuters/University of Michigan Survey of Consumers showed in unequivocal terms that the US consumer is feeling the burn from declining home values.

In fact, 28% of respondents reported that their own homes had declined in value, well above the record peak result of 24% recorded during the last housing slump in 1992.

Finally, the Census Department’s Construction Spending report for September again demonstrated the significant extent to which private residential construction spending is contracting.

With the weakening trend continuing, total residential construction spending fell -16.78% as compared to September 2006 while private single family construction spending declined by a grotesque -26.14%.

Key Report Details:

  • The seasonally adjusted annul rate of private residential construction spending has now dropped 26.53% from the peak set back in February 2006.
  • Overall private residential construction spending dropped -16.78% as compared to September 2006.
  • Single Family residential construction spending dropped 26.14% as compared to September 2006.
The following charts show changes to construction spending (click for larger version):