Friday, January 30, 2009

Bull Trip: GDP Report Q4 2008 (Advance)

Today, the Bureau of Economic Analysis (BEA) released first installment of the Q4 2008 GDP report showing a stunning contraction with GDP declining at an annual rate of -3.8%.

Looking at the report more closely it’s easy to see that the quarter was a disaster overall with huge double-digit declines to Durable Goods, Imports (actually a benefit) and Exports as well as Fixed Investment.

Fixed investment provided significant drags on growth with non-residential investment declining -19.1% and residential investment declining -23.6%.

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

Thursday, January 29, 2009

New Home Sales: December 2008

Today, the U.S. Census Department released its monthly New Residential Home Sales Report for December showing continued and even accelerating deterioration in demand for new residential homes across every tracked region resulting in a startling 44.83% year-over-year decline and a truly horrendous 76.17% 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 12.9 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 9.31% as compared to December 2007.
  • New home sales were down 44.83% as compared to December 2007.
  • The inventory of new homes for sale declined 27.7% as compared to December 2007.
  • The number of months’ supply of the new homes has increased 31.6% as compared to November 2007 and now stands at 12.9 months.

  • In the Northeast, new home sales were down 50.0% as compared to December 2007.
  • In the Midwest, new home sales were down 31.1% as compared to December 2007.
  • In the South, new home sales were down 46.0% as compared to December 2007.
  • In the West, new home sales were down 47.4% as compared to December 2007.

Mid-Cycle Meltdown?: Jobless Claims January 29 2009

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims increased 3,000 to 588,000 from last week’s revised 585,000 claims while “continued” claims increased a whopping 159,000 resulting in an “insured” unemployment rate of 3.6%.

It’s important to note that although the last several reports have indicated a slight decrease in the seasonally adjusted initial jobless claims, the non-seasonally adjusted numbers are showing very large increases.

The following chart shows the recent trend in initial non-seasonally adjusted initial jobless claims with the year-over-year percent change acting as a rough equivalent of a seasonally adjustment.

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.

Until late 2007, one could make the case (as Fed chief Ben Bernanke surly did) that we were again experiencing simply a mid-cycle slowdown but now those hopes are long gone.

Adding a little more data shows that in the early 2000s we experienced 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.

The most 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.

It is now completely clear that the potential “mid-cycle” slowdown that appeared to be shaping up in late 2007, had been traded for a less severe downturn in the aftermath of the “dot-com” recession, and now has we have fully entered, instead, a mid-cycle meltdown.

Wednesday, January 28, 2009

The Almost Daily 2¢ - Greater Fool’s Day!

I’d like to propose that February 1st be, this year and forever, known and celebrated as “Greater Fool’s Day!”

What better and more fundamental a theme for Americans to observe (at least once a year) than the lust for fast cash, easy money, celebrity lifestyle and fame and fortune leading to the inevitable national panic and widespread financial ruin.

Yes, on this day we can pay homage to all the half-baked Ponzi-schemes that have ever swept our great nation, drawing in throngs of wide eyed “investors” full of optimism and greedy animal spirits only to finally see them crapped out again as total losers faster than our country’s macroeconomic fabric could withstand.

And what better a generation of Americans to begin this celebration than our current?

In the course of 20 short years there have been not one but THREE, successively larger, national financial calamities (S&L, dot-com, Great Housing Bubble) culminating in our current most dire predicament… truly an historic achievement in and of itself!

But, this day of celebration is not meant to be mean spirited … no … it should be a day of collective remembrance, humor and socialized atonement for all our individual acts of foolishness and stupidity.

It’s not like anyone had a gun to your head forcing you to sign the mortgage documents resulting in that 65% debt-to-income ratio or to hand over your retirement savings, paycheck after paycheck, to the “safety” of the mutual fund manager and his “well diversified” investments.

Risk was always a factor but you shirked it… even welcomed it!… and here we are… but this was a collective delusion and you are certainly not alone so why suffer individually?

So, I hereby declare February 1st to be “Greater Fools Day!”

Aside from observing the day I would also like to propose a few possible rituals that can be carried out throughout the holiday to better, and more publicly, celebrate the foolish spirit.

First, on the night of January 31st, now and forever to be known as “All Losers Eve” I propose, as a preparatory ceremony, a family, community or otherwise shared reading of the chapter titled “Financial Crisis: A Hardy Perennial” of Charles Kindleberger’s classic title “Manias, Panics, and Crashes: A History of Financial Crises”.

A better synopsis of bubble history, the bubble paradigm and post-bubble collapse has likely never been written.

Now, as for February 1st…

For those of you stuck “holding the bag” so to speak I would suggest that you distinguish yourself… Mark yourself so that others may identify your level of foolishness.

Perhaps consider wearing a tag specifying the year in which you bought your “dream home” and your level of indebtedness.

For example, your tag could read: “2006 – 100% LTV - 67% DTI – 75 days in Arrears!”

Or, for Boomers, simply indicate the year in which you would be solidly prepared for retirement and your desired location such as “Ft. Lauderdale – 2079!”

As for the many renters who were so lifelessly thrown to the side during the Great Housing Bubble or those rare “Cassandra’s” and “Chicken Little’s” who saw the whole mess brewing, sold their homes in 2005-2006 and pulled all their cash to the sidelines I would suggest that you spend the entire day patting yourself on the back while frequently screaming “see, I told you so!” and very publicly dancing that “happy jig” you have so impeccably refined in private.

Rejoice! Rejoice! You have no choice!

Reading Rates: MBA Application Survey – January 28 2009

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 2 basis points since last week to 5.22% while the purchase application volume declined 2.90% and the refinance application volume simply collapsed dropping 48.03% compared to last week’s results.

It’s important to note though that although the steady decline in mortgage rates has likely played a significant role in the large increases in refinance application volume seen recently, it’s also altogether possible that the MBAA has some difficulty in seasonally adjusting their numbers around the November to January periods.

As you can see on the charts below, November through January usually brings some erratic spikes to the volume indices but the cause, at least in some part, is likely the result of troubles seasonally adjusting a noisy weekly series and not an actual spontaneous doubling of refinance activity.

As was noted last year, it’s probably sensible to wait until February to draw a final conclusion.

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, January 27, 2009

Beantown Bust: Boston CSI and RPX November 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 November, both the CSI and RPX showed continued weakness with the CSI declining 7.38% on a year-over-year basis while the RPX dropped 16.58% over the same period.

Further, both reports indicate that area home prices have suffered significant peak declines with the Boston CSI showing a decline of 15.03% since the peak set in September 2005 while the Boston RPX shows a 29.59% price decline since its peak of June 2005.

Recently S&P introduced a new line of data series that specifically track condominium prices in five select markets including Boston which showed that in November Boston condo prices declined 5.07% on a year-over-year basis (see chart below).

It’s important to note that all measures are derived from sales data transacted in November (actually an average of prior three months ending in November) which generally includes many properties that went under agreement in 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.

The November results confirm 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: December 2008

Today, the Massachusetts Association of Realtors (MAR) released their Existing Home Sales Report for December showing that single family home sales increased slightly at 3.2% on a year-over-year basis while condo sales declined 14.8% over the same period continuing to indicate that a new leg of the housing downturn has commenced.

Further, the single family median home value declined a whopping 14.9% on a year-over-year basis to $275,000 while condo median prices dropped a significant 14.8% to $230,000.

Clearly, the impact of the recent stock market crash and ongoing economic crisis is bearing down on both consumer sentiment and, more fundamentally, credit availability resulting in a significant pullback in spending on homes and other costly purchases.

It’s perfectly clear now that home sellers that choose to wait out the “down market” did so in vain as the 2008 selling season draws to a close likely the last opportunity to sell any residential property at anywhere near the prices set in the peak boom years.

With confidence depressed and eroding and sales volumes this low Boston area home prices have nowhere left to go but down.

Of course, the new Massachusetts Association of Realtor president Gary Rogers puts a more optimistic spin on things while simultaneously looking to the Feds for an industry handout:

“Prices have adjusted to the point that buyers are seeing real value and taking the opportunity to get back into the market and that is a necessary first step to eventually turning things around, … Last year was hard and we are hopeful that any new stimulus package introduced by President Obama and Congress gets credit flowing to worthy borrowers so they can take advantage of the extremely low interest rates and more affordable prices.”

MAR reports that in December, single family home sales increased slightly at 3.2% as compared to December 2007 with a 16.0% decline in inventory translating to 9.6 months of supply and a median selling price decline of 14.9% while condo sales dropped 14.8% with an 24% decline in inventory translating to 11.3 months of supply and a median selling price decline of 14.8%.

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.

December’s key MAR statistics:

  • Single family sales increased 3.2% as compared to December 2007
  • Single family median selling price decreased 14.9% as compared to December 2007
  • Condo sales declined 14.8% as compared to December 2007
  • Condo median price declined 14.8% as compared to December 2007
  • The number of months supply of single family homes stands at 9.6 months.
  • The number of months supply of condos stands at 11.3 months.
  • The average “days on market” for single family homes stands at 140 days.
  • The average “days on market” for condos stands at 142 days.

S&P/Case-Shiller: November 2008

Today’s release of the S&P/Case-Shiller home price indices for November again confirms 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 2.16% and the 20-city index dropping 2.23% just since last month.

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 enters the year of the “Prime-Bomb” 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 19.10% as compared to November 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 Phoenix at -42.60%, Las Vegas at -41.20%, Miami at -39.61%, San Francisco at -38.05%, San Diego at -37.90%, Los Angeles at -35.81%, Detroit at -34.34%, Tampa at -32.44%, Washington DC at -28.11%, Minneapolis at -22.15%, Chicago at -16.11%, Boston at -15.03% and Atlanta at -14.58%.

Additionally, both of the broad composite indices showed significant declines slumping -26.62% for the 10-city national index and 25.15% 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.

Monday, January 26, 2009

More Pain, Less Gain: S&P/Case-Shiller Preview for November 2008

As I had noted in a prior post, given their strong correlation, the home price indices provided daily by Radar Logic can be effectively used as a preview of the more popular monthly S&P/Case-Shiller home price indices.

The current Radar Logic data reported on residential real estate transactions (condos, multi and single family homes) that settled as late as November 24 appears to indicate that price declines are continuing in every market while accelerating notably in some.

Clearly, the impact of the recent stock market crash and ongoing economic crisis is bearing down on both consumer sentiment and, more fundamentally, credit availability resulting in a significant pullback in spending on homes and other costly purchases.

As the economic fallout continues, look for more markets to experience a re-acceleration of price declines.

Phoenix, Miami, San Francisco, and Los Angeles are clearly continuing their historic price slide as the number of distressed sales climb and buyer sentiment relents to the recessionary conditions.

Boston, Denver and Chicago all appear to be following the typical seasonal pattern of increasing prices during the high transaction months of the spring and early summer and price declines during the fall and winter but it is important to note that prices are clearly accelerating lower.

Washington DC is an nearly perfect example of a market that has broken down under the strain of the housing bust showing price declines even well into the early spring where it’s normally strong seasonal pattern typically brings increasing prices.

Follow The Leader: Index of Leading Economic Indicators December 2008

Today’s results of the Conference Board’s Leading Economic Indicators continue to indicate significant economic weakness increasing slightly by 0.3% from November but declining 3.02% compared to December 2007, leaving the index at 99.5.

It’s important to note that the strong year-over-year declines seen since 2007 not only clearly suggested our current recession, the continued significant weakness likely indicates a recession that will not resolve easily.

Existing Home Sales Report: December 2008

Today, the National Association of Realtors (NAR) released their Existing Home Sales Report for December continues to indicate a new leg down in home sales despite the significant slide to median selling prices fueling a slight sales snap back from November as well as speculative distressed property buying in the west region.

Most importantly, the report continues to show stunning declines to the median selling price for both single family homes and condos across virtually every region.

The NAR leadership continues their shameless spin while simultaneously turning to the new Obama administration for a handout as Lawrence Yun notes:

“We’ve added 25 million people to our population over the past decade and housing affordability conditions are the best we’ve seen since 1973, but household formation is much lower than expected, … Consequently, there is a pent-up demand which could be unleashed with the right stimulus, including a non-repayable home buyer tax credit. The Obama administration and Congress need to move fast to stimulate a spring sales upturn which will help to stabilize home prices and set the foundation for a sustainable 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.

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