Wednesday, November 26, 2008

Confidence Game: Consumer, CEO and Investor Confidence November 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 November showed a continued slump for consumer sentiment with a reading of 55.3 and dropping 27.33% below the level seen in November 2007 and just 3.6 points above the lowest value ever recorded.

The Index of Consumer Expectations (a component of the Index of Leading Economic Indicators) also declined notably to 53.9 remaining 18.58% below the result seen in November 2007 and just 9.7 points above the lowest value ever recorded.

As for the current circumstances, the Current Economic Conditions Index is now at its lowest level ever recorded at 57.5 or 37.16% below the result seen in November 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 (Q3 2008) of The Conference Board’s CEO Confidence Index increased marginally to a value of 40, 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 November release of the State Street Global Markets Index of Investor Confidence indicated that confidence for North American institutional investors declined 0.1% since October while European confidence declined 5.9% and Asian investor confidence declined 5.5% all resulting in a decrease of 1.4% to the aggregate Global Investor Confidence Index which now rests 24.80% below the result seen last year.

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 chart below (click for larger version) shows the Global Investor Confidence aggregate index.

New Home Sales: October 2008

Today, the U.S. Census Department released its monthly New Residential Home Sales Report for October showing continued deterioration in demand for new residential homes across every tracked region resulting in a startling 40.11% year-over-year decline and a truly whopping 68.83% 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 well over a year, the sales volume has been declining so significantly that the sales pace now stands at an astonishing 11.1 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 6.96% as compared to October 2007.
  • New home sales were down 40.11% as compared to October 2007.
  • The inventory of new homes for sale declined 25.7% as compared to October 2007.
  • The number of months’ supply of the new homes has increased 29.1% as compared to October 2007 and now stands at 11.1months.

  • In the Northeast, new home sales were down 41.5% as compared to October 2007.
  • In the Midwest, new home sales were down 44.5% as compared to October 2007.
  • In the South, new home sales were down 38.5% as compared to October 2007.
  • In the West, new home sales were down 39.7% as compared to October 2007.

Mid-Cycle Meltdown?: Jobless Claims November 26 2008

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims declined 14,000 to 529,000 from last week’s revised 543,000 claims while “continued” claims decreased 54,000 resulting in an “insured” unemployment rate of 3.0%.

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.
I have added a chart to the lineup which shows “population adjusted” continued claims (ratio of unemployment claims to the non-institutional population) and the unemployment rate since 1967.

Adjusting for the general increase in population tames the continued claims spike down a bit but as you can see, the pattern is still indicating that recession has arrived.

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.

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.

Reading Rates: MBA Application Survey – November 26 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 17 basis points since last week to 5.99% while the purchase application volume increased 5.27% and the refinance application volume declined 2.12% compared to last week’s results.

It’s important to note that, in the wake of the conservatorship of Fannie Mae and Freddie Mac, the average interest rate on an 80% LTV 30 year fixed rate loan initially dropped significantly but more recently has remained within the range seen throughout 2007.

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, November 25, 2008

Beantown Bust: Boston CSI and RPX September 2008

The S&P/Case-Shiller (CSI) Home Price index together with the Radar Logic (RPX) for Boston represent the most accurate indicators of the true price movement for both single family homes and the entire residential real estate market as a whole (singles, multi and condos).

For September, both the CSI and RPX showed continued weakness with the CSI declining 5.71% on a year-over-year basis while the RPX dropped 10.68% over the same period.

This month S&P introduced a new line of data series that specifically track condominium prices in five select markets including Boston which showed that in September Boston condo prices declined 2.90% on a year-over-year basis (see chart below).

It’s important to note that all measures are derived from sales data transacted in September which generally includes properties that under agreement in August and September, well in advance of the historic stock market collapse and wider macroeconomic declines that have since sent consumer sentiment to all time lows.

In all likelihood the dramatic declines to consumer confidence and increases in unemployment will work to place significant downward pressure on property prices for the foreseeable future.

As you can see from the chart below (click for larger), although the RPX captures a greater degree of seasonality, both series are very strongly correlated.

Also, note that the although the RPX initially gave a strong indication that this year’s seasonal uptick in prices had abated with the July release, the August release brought a boost in prices and continued the pattern that is more or less typical when compared to the last three years.

Now, the September results confirms that the typical seasonal pattern is firmly in place as all indices head lower on a downward trend that generally bottoms in mid-winter.

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, annual and peak percentage changes to the Boston CSI home price index 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 “annual” chart compares the percentage change, on a year-over-year basis, to the Boston CSI from the last positive value through the decline to the first positive value at the end of the decline.

In this way, this chart captures only the months that showed monthly “annual declines”.

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.

Crashachusetts Existing Home Sales and Prices: October 2008

Yesterday, the Massachusetts Association of Realtors (MAR) released their Existing Home Sales Report for October again showing a continued deterioration of the regions residential housing market resulting in a 10.6% annual decline to the median single family selling price.

As was noted last month, with October comes continued seasonal deceleration in single family home sales that will generally continue slumping through the Fall before reaching a low in seasonal sales next February.

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

Although October showed a much heralded second monthly 6.6% year-over-year increase of single family home sales, it’s important to remember that many sales in September and October were put under contract prior to the epic economic meltdown that transpired throughout September, October and November leaving consumer sentiment at all time lows.

MAR reports that in October, single family home sales increased 6.6% as compared to October 2007 with a 11.0% decline in inventory translating to 9.8 months of supply and a median selling price decline of 10.6% while condo sales dropped 1.0% with a 18.0% decline in inventory translating to 10.2 months of supply and a median selling price decrease of 10.7%.

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.

October’s key MAR statistics:

  • Single family sales increased 6.6% as compared to October 2007
  • Single family median selling price decreased 10.6% as compared to October 2007
  • Condo sales declined 1.0% as compared to October 2007
  • Condo median price declined 10.7% as compared to October 2007
  • The number of months supply of single family homes stands at 9.8 months.
  • The number of months supply of condos stands at 10.2 months.
  • The average “days on market” for single family homes stands at 140 days.
  • The average “days on market” for condos stands at 141 days.

OFHEO Home Price Index: Q3 2008

Today, the Office of Federal Housing Enterprise Oversight (OFHEO) published their Home Price Index (HPI) data for Q3 2008 showing widespread home price declines with 46 states including Washington DC experiencing peak home price declines with 32 declining better than 2%, 12 declining more that 7% and 7 declining more than 10%.

Topping the list of peak decliners by state is California at -33.37%, Nevada at -29.85%, Florida at -24.64%, Arizona at -19.53%, Michigan at -19.08%, Rhode Island at -14.09% and Massachusetts at -10.52%.

Topping the list of year-over-year decliners by state is California at -25.60%, Nevada at -24.11%, Florida at -20.58%, Arizona at -17.87%, and Michigan at -9.92%.

The OFHEO HPI series is formulated from home purchase and refinance information collected from Fannie Mae and Freddie Mac and as such suffers slightly from some basic limitations of the data.

First, Fannie and Freddie mortgages are subject to conforming loan limits which eliminates huge portions of data that are particularly relevant given the current bloated state of home prices.

A great percentage of home purchases made in the last decade, especially in the bubbliest areas, were made with Jumbo loans that, by their definition, exceed the Fannie-Freddie conforming loan limits and as such are not included in the OFHEO data.

Also, data from mortgages made for the purpose of refinance are also included which may have a tendency to skew the HPI series.

Fortunately, OFHEO now produces “Purchase Only” indices (i.e. HPI indices derived only from home purchase mortgage data only) for all census and states statistical areas.

In general, because the “Purchase Only” indices are based on home price changes from only home purchase transactions, they tend to show a greater degree of deceleration and/or decline than the complete data indices and may be a better indicator of the overall state of each particular housing market.

Although it’s generally recognized that the S&P/Case-Shiller (CSI) home price indices are more accurate than the OFHEO indices, OFHEO offers data for over 400 different census, state and metropolitan statistical areas compared to only 20 major metro areas for the CSI.

Be sure to check out the PaperEconomy OFHEO HPI Charting Tool allows you to visualize the HPI data as well as compare data from different areas.

Additionally, the tool now fully supports the “Purchase Only” data as well as allowing you to “normalize” the data in order to make a true comparison from one area to another.

S&P/Case-Shiller: September 2008

Today’s release of the S&P/Case-Shiller home price indices for September firmly indicates a re-acceleration of deterioration seen in the nation’s housing markets with ALL of the 20 metro areas tracked reporting significant year-over-year declines and ALL metro areas showing large and even shocking declines from their respective peaks.

Further, there continues to be a notable re-acceleration of the price slide with the 10-city index dropping 1.94% and the 20-city index dropping 1.85% just since last month.

Also, it’s important to keep in mind that today’s release was compiled using home sales data primarily from August and September, most well in advance of the historic levels of financial collapse seen in September, October and November.

In all likelihood, we are now firmly sliding down an even more momentous slope of home price declines as the continued economic crisis and dramatically accelerating unemployment work to both crush consumer sentiment and force panicked mortgage lenders to continue to tighten their lending standards.

As the housing decline goes “Up-Prime” a larger and much more damaging population of homeowners will face historic levels of financial stress the outcome of which is, at the moment, very hard to calculate.

The 10-city composite index declined a record 18.55% as compared to September 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 regional peak decliners were Las Vegas at -37.57%, Miami at -36.37%, San Francisco at -33.36%, Detroit at -29.03%, Tampa at -28.08%, Washington DC at -24.36%, Minneapolis at -17.89%, Chicago at -12.31%, Boston at -11.77% and New York at -11.36%

Additionally, both of the broad composite indices showed significant declines slumping -23.44% for the 10-city national index and 21.77% 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 still likely less than half of the way through the portion of the decline in which will be seen fairly significant annual declines (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.

GDP Report: Q3 2008 (Preliminary)

Today, the Bureau of Economic Analysis (BEA) released second installment of the Q3 2008 GDP report showing the second contraction in four quarters with GDP declining at an annual rate of -0.5%.

Looking at the report more closely though, the top-line GDP result would have been much weaker had it not been for a surprise and truly unusual 18.0% surge in national defense spending that, combined with a healthy increases in other federal, state and local government spending, added over 1% of growth.

Fixed investment and personal consumption, on the other hand, provided significant drags on growth with non-residential investment declining -1.5%, residential investment declining -17.6% and personal consumption expenditures declining -3.7% led by a whopping -15.2% drop-off in durable goods.

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

Monday, November 24, 2008

Existing Home Sales Report: October 2008

Today, the National Association of Realtors (NAR) released their Existing Home Sales Report for October indicating a resumption of the decline in sales and prices as the historic economic shocks of September and October work to dramatically reduce consumer confidence and sideline buyers.

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

The NAR leadership, which now includes their new president Charles McMillan, is becoming more pessimistic about the future while simultaneously turning to Washington for handouts as Lawrence Yun notes:

“Many potential home buyers appear to have withdrawn from the market due to the stock market collapse and deteriorating economic conditions … We have favorable affordability conditions, but we need more than that to give buyers with jobs the confidence they need. This is why a housing stimulus is so critical now to encourage more buyers to draw down the inventory and stabilize home prices. Without home price stabilization, there will not be an economic recovery.”

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.