Friday, August 29, 2008

Confidence Game: Consumer, CEO and Investor Confidence August 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.

Today’s final release of the Reuters/University of Michigan Survey of Consumers for August continues to indicate historic weakness in consumer sentiment with a reading of 63, a decline of 24.46% compared to August 2007.

The Index of Consumer Expectations (a component of the Index of Leading Economic Indicators) increased to 57.9, one of the lowest readings since the 1980s recessionary environment, 21.44% below the result seen in August 2007.

As for the current circumstances, the Current Economic Conditions Index remained near record lows at 71, 27.85% below the result seen in August 2007.

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 August release of the State Street Global Markets Index of Investor Confidence indicated that confidence for North American institutional investors decreased 8.1% since July while European confidence declined 3% and Asian investor confidence increased 3.6% all resulting in an decrease of 6.8% 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.

Thursday, August 28, 2008

GDP Report: Q2 2008 (Preliminary)

Today, the Bureau of Economic Analysis (BEA) released their second installment of the Q2 2008 GDP report showing better than expected growth at an annual rate of 3.3%.

Looking at the report more closely though it appears that much of the growth was fueled by unusually large increases in exports, an unusually large decrease in imports (inverse… declining exports adds to GDP), an unusually large increase in disposable personal income (likely fueled by the tax rebate checks) and fairly strong government consumption expenditures.

Still, fixed investment, both residential and non-residential continued to come under pressure with residential investment declining 15.7% and non-residential experiencing only tepid growth of 2.2%.

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 August 28 2008

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims declined 10,000 to 425,000 from last week’s revised 435,000 claims while “continued” claims increased 64,000 resulting in an “insured” unemployment rate of 2.6%.

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.

Crashachusetts Existing Home Sales and Prices: July 2008

Yesterday, the Massachusetts Association of Realtors (MAR) released their Existing Home Sales Report for July again showing a continued deterioration of the regions residential housing market.

As was noted last month, with July comes the start of the seasonal deceleration in single family home sales that will generally continue through the Fall before concluding the following February.

With this drop-off will come additional pricing pressure as sellers compete for the scanty remains of the 2008 selling season.

With the report the Massachusetts Realtor leader Susan Renfrew attempts to backpedal from the ridiculous and overly optimistic sentiment spun last month.

“While there has been some positive change in the fact that sales declines narrowed in July compared to other months this year, the economy continues to keep some buyers out of the market,”

MAR reports that in July, single family home sales slumped 10.0% as compared to July 2007 with a 7.0% decline in inventory translating to 8.8 months of supply and a median selling price decline of 10.7% while condo sales dropped 6.7% with a 13.0% decline in inventory translating to 8.0 months of supply and a median selling price decline of 2.9%.

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 5.24% as compared to July 2007 leaving prices now 11.03% 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.

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.

July’s key MAR statistics:

  • Single family sales declined 10.0% as compared to July 2007
  • Single family median price decreased 10.7% as compared to July 2007
  • Condo sales declined 6.7% as compared to July 2007
  • Condo median price decline of 2.9% as compared to July 2007
  • The number of months supply of single family homes stands at 8.8 months.
  • The number of months supply of condos stands at 8.0 months.
  • The average “days on market” for single family homes stands at 129 days.
  • The average “days on market” for condos stands at 139 days.

Wednesday, August 27, 2008

Reading Rates: MBA Application Survey – August 27 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 declined 3 basis points since last week to 6.44% while the purchase application volume decreased 0.6% and the refinance application volume increased 0.3% 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 71 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, August 26, 2008

S&P/Case-Shiller: June 2008

Today’s release of the S&P/Case-Shiller home price indices for June continues to reflect the extraordinary weakness seen in the nation’s housing markets with now ALL 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 17.02% as compared to June 2007 far surpassing the all prior year-over-year decline records firmly placing the current decline in uncharted territory in terms of relative intensity.

Topping the list of peak decliners were Phoenix at -32.64%, Las Vegas at -32.49%, Miami at -32.40%, San Diego at -29.95%, Los Angeles at -28.55%, Detroit at -27.05%, San Francisco at -26.81%, Tampa at -26.45%, Washington DC at -21.38%, Minneapolis at -17.31%, Cleveland at -11.19%, Boston at -11.03%, Chicago at -10.88% and New York at -10.01%.

Additionally, both of the broad composite indices showed significant declines slumping -20.29% for the 10 city national index and 18.80% 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 23 months into a decline that, last cycle, lasted for roughly 54 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.

Monday, August 25, 2008

Existing Home Sales Report: July 2008

Today, the National Association of Realtors (NAR) released their Existing Home Sales Report for July further confirming a continuation of the tremendous weakness in the demand of existing residential real estate with sales of both single family homes and condos declining nearly 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 suggesting that the uptick in sales seen in California and Florida are indicating recovery.

“Sales have picked up significantly in several Florida and California markets. Home prices generally follow sales trends after a few months of lag time, … Still, inventory remains high in many parts of the country and will require time to fully absorb. We expect more balanced conditions in 2009 and will eventually return to normal long-term appreciation patterns.”

What NAR forgot to mention is that roughly 30% of all home sales in California are the result of foreclosures.

Distressed selling will inevitably result in continued price declines which then results in more distress perpetuating the vicious cycle.

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.

Friday, August 22, 2008

Collapsedachusetts Existing Home Sales Preview: July 2008

Sources inside the Massachusetts Association of Realtors (MAR) report that next week’s monthly existing home sales results will show that July’s single family home sales dropped 10% on a year-over-year basis while condo sales slumped 6.7% over the same period.

Further, the single family median home value declined a whopping 10.7% on a year-over-year basis to $326,500 while condo median prices declined 2.9% to $284,900.

It’s also important to note that the July single family home sales count was the lowest July count on record since 1995 and at 3928 units sold was 31.75% below the record July peak set in July 2004.

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

Notice that July 2008 registered a home sales count well below even the 2007 level as well as indicating that the Augusts’ results will likely remain roughly at 4000 units, a significant decline.

The Almost Daily 2¢ - I.O.U.S.A

It’s finally here folks… Addison Wiggin’s (co-writer of Daily Reckoning and Empire of Debt) documentary, billed somewhat as the “Inconvenient Truth” for this epic era of debt and financial recklessness, opens today sporadically across the country (here is the current list of locations).

I’ll be sure to review the film when I see it but for now here are some links:

I.O.U.S.A Movie Site
Agora Entertainment
Roger Ebert’s Review

And the trailer:

Thursday, August 21, 2008

Follow The Leader: Index of Leading Economic Indicators July 2008

Today’s results of the Conference Board’s Leading Economic Indicators continue to indicate troubled times ahead decreasing 0.7% from June and declining 3.25% compared to July 2007, leaving the index at 101.2.

It’s important to note that a year-over-year decline greater than 1.5% has ONLY preceded EVERY recession that has occurred in the last 59 years so the six significant consecutive year-over-year declines strongly suggests that overall the components of the index are indicating that recession is either here or very near.

Note that with today’s release The Conference Board has incorporated its annual benchmark revision to the complete series.

Philadelphia Feeling: Federal Reserve Bank of Philadelphia Business Outlook Survey August 2008

Today, the Federal Reserve Bank of Philadelphia released the results of their Business Outlook Survey for August showing continued weakness to the regions manufacturing sector with the current activity index indicating contraction at –12.7, the ninth consecutive negative monthly result.

The survey of the Philadelphia regions manufacturing sector has been a pretty solid leading indicator of the overall strength or weakness and recession experienced by general economy.

As you can see by the following chart (click for larger version), during the past three post-recession expansion periods, the “current” diffusion index (more on diffusion indices later) generally vacillated between 0 and 35 while the “future” index left the period of contraction at an elevated level and eventually joining the “current” index.

Finally, as the economy pushes closer to contraction, both indices decline dramatically with a breach of -20 by the “current” index generally indicating that recession is upon us.

As you can see from recent results, -20 has been breached by the “current” index which now stands at -12.7 while the “future” index stands at 27.6.

Clearly, there is trouble afoot but components of the latest results also display a potential dangerous parallel to the stagflationary eras of the 70s and early 80s.
The following chart shows the latest results of the “current new orders” “current prices paid” and “future employment” components (click for larger versions).

Notice that while current orders and future employment declined, current prices paid have increased indicating a potential return to a stagflationary environment that hasn’t been seen since the early 80s.

It’s important to note that these three indicators have moved, more or less, together since the expansion of 1983 and have especially moved together during the recessionary periods of 1990 and 2001.

Now though, it appears that we may be seeing a divergence with an increase in prices paid and simultaneous decrease in growth.

The following chart (click for larger) shows these measures during the last stagflationary era seen between 1976 – 1980. Notice the clear divergence of rising prices and falling growth.