Thursday, July 31, 2008

GDP Report: Q2 2008 (Advance)

Today, the Bureau of Economic Analysis (BEA) released their first installment of the Q2 2008 GDP report showing a continuation of anemic growth with an annual rate of 1.9%.

More importantly though, the BEA revised all estimates going back to 2005 generally amending the decline in the “residential investment” component to be larger while revising the overall GDP lower for many past quarters.

In fact, it appears now that Q4 2007 was, in fact, mildly negative, the first negative quarter since the recession that followed the dot-com implosion.

This continuation of dramatically slower growth was primarily the result of significant declines in fixed residential investment, only tepid growth in fixed non-residential investment.

Residential fixed investment, that is, all investment made to construct or improve new and existing residential structures including multi–family units, continued its historic fall-off registering a whopping decline of 15.6% since last quarter shaving 0.62% from overall GDP.

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

Mid-Cycle Meltdown?: Jobless Claims July 31 2008

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims surged dramatically 44,000 to 448,000 from last week’s revised 404,000 claims while “continued” claims absolutely exploded 185,000 resulting in an “insured” unemployment rate of 2.5%.

It’s very important to understand that today’s report continues to reflect employment weakness that is strongly consistent with past recessionary episodes and that this signal is now so strong and sustained that a contraction in the economy is fundamentally certain.

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.

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.

So, looking at the post-“dot com” recession period we can see the telltale signs of a potential “mid-cycle” slowdown and if we were to simply reflect on the history of employment as an indicator of the health and potential outlook for the wider economy, it would not be irrational to conclude that times may be brighter in the very near future.

But, adding a little more data I think shows that we may in fact be experiencing 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.

One 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.

I think there is enough evidence to suggest that our potential “mid-cycle” slowdown, having been traded for a less severe downturn in the aftermath of the “dot-com” recession, may now be turning into a mid-cycle meltdown.

Wednesday, July 30, 2008

Reading Rates: MBA Application Survey – July 30 2008

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 decreased 13 basis points since last week to 6.46% while the purchase application volume decreased by 7.8% and the refinance application volume decreased a whopping 22.9% compared to last week’s results.

It’s important to note that the average interest rate on an 80% LTV 30 year fixed rate loan remains near the top of the range seen throughout 2007 while the interest rate for an 80% LTV 1 year ARM remains significantly elevated now resting 79 basis points ABOVE the rate of an average 80% LTV 30 year fixed rate loan despite all the herculean efforts by the Federal Reserve to bring rates down.

Also note that all application volume values reflect only “initial” applications NOT approved applications… i.e. originations… actual originations would likely be notably lower than the applications.

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).

Tuesday, July 29, 2008

S&P/Case-Shiller: May 2008

Today’s release of the S&P/Case-Shiller home price indices for May continues to reflect the extraordinary weakness seen in the nation’s housing markets with now ALL 20 of the 20 metro areas tracked reporting year-over-year declines and ALL metro areas showing substantial declines from their respective peaks.

Readers should take a moment to carefully reflect on the charts below as this level of price decline occurring simultaneously across the whole of the U.S. is not only unprecedented but is probably the purest expression of the fundamental collapse of wealth and well being for our nations typical home owning household.

The 10 city composite index declined a record 16.88% as compared to May 2007 far surpassing the all prior year-over-year decline records firmly placing the current decline in uncharted territory in terms of relative intensity.

This report indicates that we have now firmly entered the serious price “free-fall” phase (look at the charts below) of the housing bust.

Topping the list of peak decliners was Las Vegas at -31.41%, Miami at -31.22%, Phoenix at -30.82%, San Diego at -28.88%, Los Angeles at -27.51%, Detroit at -27.11%, Tampa at -25.60%, San Francisco at -25.49%, Washington DC at -20.65%, Minneapolis at -18.12% and Boston at -12.11%

Additionally, both of the broad composite indices showed accelerating declines slumping -19.80% for the 10 city national index and 18.39% for the 20 city national index on a peak comparison basis.

To better visualize the results use the PaperEconomy S&P/Case-Shiller/Futures Charting Tool as well as the PaperEconomy Home Value Calculator and be sure to read the Tutorial in order to best understand how best to utilize the tool.

The following chart (click for larger version) shows the percent change to single family home prices given by the Case-Shiller Indices as compared to each metros respective price peak set between 2005 and 2007.

The following chart (click for larger version) shows the percent change to single family home prices given by the Case-Shiller Indices as on a year-over-year basis.

Additionally, in order to add some historical context to the perspective, I updated my “then and now” CSI charts that compare our current circumstances to the data seen during 90s housing decline.

To create the following annual charts I simply aligned the CSI data from the last month of positive year-over-year gains for both the current decline and the 90s housing bust and plotted the data with side-by-side columns (click for larger version).

What’s most interesting about this particular comparison is that it highlights both how young the current housing decline is and clearly shows that the latest bust has surpassed the prior bust in terms of intensity.

Looking at the actual index values normalized and compared from the respective peaks, you can see that we are only eighteen months into a decline that, last cycle, lasted for roughly fifty four months during the last cycle (click the following chart for larger version).

The “peak” chart compares the percentage change, comparing monthly CSI values to the peak value seen just prior to the first declining month all the way through the downturn and the full recovery of home prices.

In this way, this chart captures ALL months of the downturn from the peak to trough to peak again.

As you can see the last downturn lasted 97 months (over 8 years) peak to peak including roughly 43 months of annual price declines during the heart of the downturn.

Notice that peak declines have been FAR more significant to date and, keeping in mind that our current run-up was many times more magnificent than the 80s-90s run-up, it is not inconceivable that current decline will run deeper and last longer.

Crashachusetts Existing Home Sales and Prices: June 2008

Yesterday, the Massachusetts Association of Realtors (MAR) released their Existing Home Sales Report for June again showing the truly dismal and deteriorating circumstances that have befallen the Bay State’s housing market.

As any astute "bay state" real estate watcher is well aware, June represents the annual peak in sales and associated price movement with July and August typically initiating the seasonal pullback in demand (and its effect on pricing) that runs through the fall and into the following winter months.

Said simply, June is the best selling month in the season and with it now well behind us, the path of least resistance is down… lower sales and lower prices.

So, where’s the price “free fall phase” where prices fall steadily even through the spring selling season?

It fully materialized for lower priced homes (lower than $284,000) and almost occurred with middle priced homes (between $284,000 and $407,000) but strong upward price movement in higher priced homes buoyed the whole Case-Shiller series resulting in now two consecutive months of price increases overall (See chart for details).

So, the typical seasonal pattern of pricing is in place and it is clear we are not going to get a sequential meltdown ala the west coast this season…. pity.

Well on the up side the seasonal pattern is clear, thus upward price movement is likely to abate during July or August at which point this historic, albeit slow, price slide will resume.

With the report the Massachusetts Realtor leader Susan Renfrew makes another attempt at a self interested spin and cheerleading by suggesting that the month-to-month increase to median selling prices may indicate that demand could start to increase in the coming months.

“However, median prices are at their highest level in several months, while the number of homes for sale and the months of supply are continuing to come down, meaning demand for those properties could start to increase.”

MAR reports that in June, single family home sales slumped 14.9% as compared to June 2007 with a 5.3% decline in inventory translating to 8.4 months of supply and a median selling price decline of 8.0% while condo sales plunged 20.3% with a 10.7% decline in inventory translating to 8.1 months of supply and a median selling price decline of 0.3%.

The S&P/Case-Shiller Home Price Index for Boston, which is the most accurate indicator of the true price movement for single family homes, showed continued weakness with Boston declining 6.21% as compared to May 2007 leaving prices now 12.11% below the peak set in September 2005.

To better illustrate the drop-off in home prices and the potential length and depth of the current housing decline, I have compared BOTH the normalized price movement and peak percentage changes to the S&P/Case-Shiller home price index for Boston (BOXR) from the 80s-90s housing bust to today’s bust (ultra-hat tip to the great Massachusetts Housing Blog for the concept).

The “normalized” chart compares the normalized Boston price index from the peak of the 80s-90s bust to the peak of today’s bust.

Notice that during the 80s-90s bust prices took roughly 46 months (3.8 years) to bottom out.

The “peak” chart compares the percentage change, comparing monthly Boston index values to the peak value seen just prior to the first declining month all the way through the downturn and the full recovery of home prices.

In this way, this chart captures ALL months of the downturn from the peak to trough to peak again.

As you can see the last downturn lasted 105 months (almost 9 years) peak to peak including 34 months of annual price declines during the heart of the downturn.

The final chart shows that the Boston housing market has been, in a sense, declining steadily since early 2001 when annual home price appreciation peaked and the intensity of the housing expansion began to wane (click on following chart for larger version).

It appears that that the main thrust of the housing expansion occurred “in-line” with the wider economic expansion that was fueled primarily by the dot-com bubble and that since the dot-com bust, the housing market has never been quite the same.

As in months past, be on the lookout for the inflation adjusted charts produced by for an even more accurate "real" view of the current home price movement.

June’s Key MAR Statistics:

  • Single family sales declined 14.9% as compared to June 2007
  • Single family median price decreased 8.0% as compared to June 2007
  • Condo sales declined 20.3% as compared to June 2007
  • Condo median price decline of 0.3% as compared to June 2007
  • The number of months supply of single family homes stands at 8.4 months.
  • The number of months supply of condos stands at 8.1 months.
  • The average “days on market” for single family homes stands at 129 days.
  • The average “days on market” for condos stands at 140 days.

Monday, July 28, 2008

Confidence Game: Consumer, CEO and Investor Confidence July 2008 (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 July continued to indicate historic weakness in consumer sentiment with a reading of 61.2, a decline of 32.30% compared to July 2007.

The Index of Consumer Expectations (a component of the Index of Leading Economic Indicators) fell to 53.5, one of the lowest readings since the 1980s recessionary environment, 34.36% below the result seen in July 2007.

As for the current circumstances, the Current Economic Conditions Index remained near record lows at 73.1, 30.05% below the result seen in July 2007.

It’s important to note that although each sentiment index experienced a “bounce” in July, the Conference Board expects it to be short lived.

Richard Curtin, Director of the “Survey of Consumers”, suggests “It is more likely that the gains in confidence reflect a dead cat bounce, … a phenomena has been repeatedly observed over the past fifty years: following a steep decline in confidence a small gain is recorded before confidence resumes its downward slide,”

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 (Q2 2008) of The Conference Board’s CEO Confidence Index increased marginally to a value of 39, nearly the lowest readings since the recessionary period of the dot-com bust.

It’s important to note that the current value has fallen to a level that would be completely consistent with economic contraction suggesting the economy is either in recession or very near.

The July release of the State Street Global Markets Index of Investor Confidence indicated that confidence for North American institutional investors decreased 6.9% since
June while European confidence declined 0.9% and Asian investor confidence increased 8.5% all resulting in an increase of 3.6% to the aggregate Global Investor Confidence Index.

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 charts below (click for larger versions) show the Global Investor Confidence aggregate index since 1999 as well as the component North America, Europe and Asia indices since 2007.

New Home Sales: June 2008

Last week, the U.S. Census Department released its monthly New Residential Home Sales Report for June showing continued weakness in demand for new residential homes across every tracked region resulting in a startling 33.17% year-over-year decline and a truly whopping 61.84% 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 fifteen straight months, the sales volume has been declining so significantly that the sales pace now stands at an astonishing 10.0 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:


  • The median sales price for a new home declined 1.95% as compared to June 2007.
  • New home sales were down 33.2% as compared to June 2007.
  • The inventory of new homes for sale declined 21.5% as compared to June 2007.
  • The number of months’ supply of the new homes has increased 20.5% as compared to June 2007 and now stands at 10.0 months.

  • In the Northeast, new home sales were down 37.5% as compared to June 2007.
  • In the Midwest, new home sales were down 27.1% as compared to June 2007.
  • In the South, new home sales were down 33.4% as compared to June 2007.
  • In the West, new home sales were down 34.9% as compared to June 2007.

Sunday, July 27, 2008

Collapsedachusetts Existing Home Sales Preview: June 2008

Sources inside the Massachusetts Association of Realtors (MAR) report that next week’s monthly existing home sales results will show that June’s single family home sales dropped a whopping 14.9% on a year-over-year basis while condo sales collapsed a spectacular 20.3% over the same period.

Further, the single family median home value declined 8.0% on a year-over-year basis to $334,900 while condo median prices declined 0.3% to $295,000.

It’s also important to note that the June single family home sales count was the lowest June count on record since 1995 and at 4225 units sold was 30.90% below the record June peak set in June 2005.

The following charts (click for larger) show the decline in single family home sales since 2005.

Notice that June 2008 registered a home sales count well below even the 2007 level as well as indicating that the July’s results will likely be well below 4000 units, a significant decline.

After over two years of declining home sales, weakening home prices and now looming recession it appears that Massachusetts has just entered the price “free-fall” phase of the housing decline where home prices continuously drop even through the spring months which are typically strong in the region.

Stay tuned as next week the S&P/Case-Shiller home price index results will be available for Boston likely showing a continued decline even during the typically strong spring selling season.

Friday, July 25, 2008

The Almost Daily 2¢ - Lost His Marbles?

Larry Kudlow has simply lost touch…. and possibly his marbles too.

Typically, I tune in to Larry’s show for a dose of his trademark “Keeping America Great” or “Goldilocks Economy” Bullhoooey sentiment or even a segment or two including those complete fools Jerry Bowyer and Don Luskin, which, paradoxically, taken together seems to motivate me to keep blogging the data behind this epic crisis but last night’s show just seemed to cross the line into Kookyville.

First, Larry presented a couple of charts which, he alleged, showed that housing was in a process of bottoming and further, he suggested that this development was being ignored (with the implication of purposely ignored) by the media.

His charts appeared show what he termed a “sequential rise” in both national existing home sales and existing home selling prices and dramatically smaller year-over-yea percent declines.

Upon closer inspection though, it appears that Larry mishandled the sales numbers and is taking a very short view of the selling price data.

It’s important to understand that the National Association of Realtors (NAR) has not yet published their quarterly existing sales results for Q2 2008 so Larry is likely using an average of the monthly data that has been published to date.

As PaperEconomy readers are already well aware, nationally, existing home sales have been falling steadily for several years now, forcing NAR economists to continually revise down their full year estimates so how is it that Larry’s chart shows that quarter-over-quarter existing home sales are only down just slightly?

The answer is… I don’t know… I can’t imagine where Larry got that data…

By every existing home sale measure that the NAR publishes (single family, condo, combined) sales are way down compared to last year.

The following is the NAR monthly national single family existing home sales (Seasonally adjusted annual rate - SAAR) plotted since November 2005 AND a quarterly average of the monthly results since Q1 2006.

As you can see, year-over-year, sales are still off nearly 15% compared to last year.

As for median selling price, Larry’s chart correctly captures the increase the median has seen since February but extending the data back a couple more years puts this rise in its proper context.

What we are seeing is simply the typical seasonal pattern of rising prices during the spring market and if past years are to be a guide, prices will resume their descent even more aggressively starting with either the July or August results.

Last night’s segment then goes on with Larry getting a bit nutty himself

Has Larry reached some sort of breaking point?

Thursday, July 24, 2008

Existing Home Sales Report: June 2008

Today, the National Association of Realtors (NAR) released their Existing Home Sales Report for June further confirming, perfectly clearly, a continuation of the tremendous weakness in the demand of existing residential real estate with sales of both single family homes and condos declining uniformly across the nation’s housing markets while inventory and supply continues to climb.

Although this continued falloff in demand is mostly as a result of the momentous and ongoing structural changes taking place in the credit-mortgage markets, consumer sentiment surveys are continuing to indicate that consumers are materially feeling the current stagflationary trends which will likely result in even further significant sales declines to come.

Furthermore, we are continuing to see SOLID declines to the median sales price for both single family homes and condos across virtually every region.

As usual, the NAR leadership continues spinning the results all the while turning to Washington for additional handouts.

“With short sales and foreclosures accounting for approximately one-third of transactions, it’s hard to make an apples-to-apples comparison with a year ago when they were only a minor portion of the market, … With many potential first-time home buyers on the sidelines, a first-time buyer tax credit would have a significant positive impact on both housing and the economy. Combined with permanent increases to mortgage loan limits and enhancing the FHA loan program, the housing stimulus package working its way through Congress would go a long way toward helping consumers and boosting the overall economy.”

Meanwhile, NAR president Dick Gaylord continues to spin his yarn that a home is a vehicle for wealth creation:

“A recent online survey of Realtors shows nearly a quarter of potential home buyers are waiting on the sidelines, … However, timing the market can be very tricky, which is why home buyers should always have a long-term view to build wealth.”

Too bad for the Realtors though since lending standards will only get more restrictive as lenders further realize losses from subprime, alt-a, prime Jumbo and even prime conforming loans.

The era of FICO driven “slam-dunk” lending is coming to a close and with it will inevitably go all the absurdities leaving borrowers and the real estate industry, if they are lucky, to simply operate in an environment of the traditional “rule of thumb” requirements of substantial down-payments and sensible earnings to debt ratios.

The latest report provides, yet again, truly stark and total confirmation that the nation’s housing markets are declining dramatically with virtually EVERY region showing significant double digit declines to sales of BOTH single family and condos as well as increases to inventory and an unusually elevated monthly supply resulting of the collapsing pace of sales.

Keep in mind that these declines are coming “on the back” of TWO SOLID YEARS of dramatic declines further indicating that the housing markets are truly in the process of a tremendous correction.

The following (click for larger versions) are charts showing sales for single family homes, plotted monthly, for 2006, 2007 and 2008 as well as national existing home inventory and month supply.

Below is a chart consolidating all the year-over-year changes reported by NAR in their most recent report.