Tuesday, June 30, 2009

S&P/Case-Shiller: April 2009

Today’s release of the S&P/Case-Shiller home price indices for April 2009 show continued deterioration in many regional markets while some of the most seasonal markets experienced the typical spring bounce resulting in a moderate decline to the composite indices.

April brought a significant seasonal deceleration of the month-to-month price slide with the 10-city index dropping just 0.67% and the 20-city index dropping 0.56% since March (… that’s about twice as bad as 2007 but half as bad as 2008)

It’s important to recognize that the inherent seasonality of many of the component markets brings upward momentum to prices during the spring selling season be it an up-market or down.

Even a cursory glance at the charts below should result in the firm understanding that what we are experiencing today is unprecedented.

Thirty four months into the decline and the bottom to the home price slide is nowhere in sight.

The most optimistic argument one could make at the moment is that the pace of the decline is currently slower than it was a few months ago.

That should come as little comfort though considering that this decline will more than likely continue for another two to three years.

It’s important to consider that the 90s housing bust took roughly 50 months to reach the bottom in prices but as you can see from the charts below, our current housing bust literally dwarfs the 90s era tumult.

Further, the 90s housing recovery played out against the backdrop of a truly unique period of growth in the wider economy fueled primarily by novel and ubiquitous technological change (cell phones, internet, personal computers, telecommunications, etc).

In all likelihood, our current decline will play out at least as long as the 90s era (more than likely far longer) with a full recovery measured not in years but in decades.

The 10-city composite index declined 18.01% as compared to April 2008 while the 20-city composite declined 18.12% over the same period.

Topping the list of regional peak decliners were Phoenix at -54.07%, Las Vegas at -52.13%, Miami at -48.10%, San Francisco at -45.75%, Detroit at -44.97%, San Diego at -42.31%, Los Angeles at -41.82%, Tampa at -41.03%, Minneapolis at -36.52%, Washington DC at -33.37%, Chicago at -27.46%, Seattle at -22.50%, Atlanta at -22.80%, Seattle at -22.32%, Portland at -21.26%, New York at -21.08%, Cleveland at -20.58% and Boston at -19.73%.

Additionally, both of the broad composite indices showed significant declines slumping -33.56% for the 10-city national index and 32.61% for the 20-city national index on a peak comparison basis.

To better visualize the results use a Blytic.com search for "case shiller" or the PaperEconomy S&P/Case-Shiller/Futures Charting Tool as well as the PaperEconomy Home Value Calculator.

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.

Monday, June 29, 2009

More Pain, No Gain: S&P/Case-Shiller Preview for April 2009

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 April 27 appears to indicate that while price declines have decelerated for many of the hardest hit markets, most are likely only experiencing a momentary and typical seasonal bounce.

Further, the major east coast markets of New York and Washington DC show no sign of even a brief change in the trend with New York actually declining through the typically string spring selling season.

Miami is clearly continuing its historic price slide as the number of distressed sales climb and buyer sentiment relents under the weight of the recessionary conditions.

Phoenix, San Francisco and LA are showing a bounce in prices likely the result of dramatically lower prices, distressed properties and the recent gains in consumer confidence.

Seattle, Boston, Denver and Chicago are all experiencing the typical seasonal bounce with prices on course for a June-July (reported data) peak and then a resumption of decline into the seasonal lows of winter.

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 for Chicago and Boston, prices are clearly trending lower.

Washington DC and New York continue to be a nearly perfect examples of a market that have broken down under the strain of the housing bust and wider economic turmoil showing consistent price declines throughout spring and summer months where normally strong seasonal sales patterns typically brings increasing prices.

Invention of Wealth… Eureka!

Nominal personal income is flat… personal interest income… slump … personal dividend income …. slump … personal income from receipts on assets…. Slump.

Personal income from transfer payments…. WILD BULL RUN!

How novel! … This way Americans can take the ups with the ups and the downs!

No sense is feeling the pinch of that downturn (even if the pinch is coming on the heels of a multi-decade speculative frenzy and consumption boom)… with the federal government around prosperity is not just a goal … its mandatory!

With $8000 homebuyer tax credits, unemployment benefit extensions, foreclosure mitigation efforts, government controlled mortgage lending rates, corporate bailouts and emergency facilities for just about every non-functioning credit market the Federal Reserve can prop-up it seems that everyone from Wall Street titans to the (…formerly) affluent and capable “upwardly mobile” Americans to the common man are sidling up for a suck from the teat.

But, before you get all up in arms over the “transfer” portion of “transfer payments” one should first consider the extent of the money creation that has taken place in the last six months…

Yes… This is no mere “redistribution of wealth”… this is “invention of wealth”…

In this way the U.S. government (in an uncharacteristic stroke of efficiency) has cut out the middle man… no sense in promoting some fraudulent industry (like finance, mortgage, and real estate) just to tax and spread… simply print up all the dough and dole it out like monopoly money.

Is inflation on the horizon?

The government clearly has that as its foremost goal and the seeds are clearly in place but in any event, we are all a lot worse off for the multi-decade speculative manias and the government’s equally distorted and delusional response.

By the way… for those of you wondering… the image above of the sign proudly announcing a project funded by the “American Recovery and Reinvestment Act” was taken within the borders of Lincoln Massachusetts… one of America's most affluent communities...

Friday, June 26, 2009

Confidence Game: Consumer, CEO and Investor Confidence June 2009 (Early)

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 June showed a another bump up for consumer sentiment with a reading of 70.8 an increase of 25.53% above the level seen in June 2008.

The Index of Consumer Expectations (an important component of the Conference Board’s Index of Leading Economic Indicators) declined to 69.2 resting 40.65% above the result seen in June 2008.

As for the current circumstances, the Current Economic Conditions Index increased to 73.2 or 8.28% above the result seen in June 2008.

The latest quarterly results (Q1 2009) of The Conference Board’s CEO Confidence Index increased to a value of 30, but still remains near the lowest reading in the history of the index.

The May release of the State Street Global Markets Index of Investor Confidence indicated that confidence for North American institutional investors increased 9.6% since April while European confidence increased 7.5% and Asian investor confidence decreased 4.9% all resulting in an increase of 3.1% to the aggregate Global Investor Confidence Index which now rests 5.74% above the result seen last year.

It’s important to note that with the May release, State Street revised the entire series in an effort to “provide a better guide as to the level of risk tolerance”.

In the release they suggest that the only change that made was a re-basing of the series to 100 but the curve seems to reflect a change in the methodology too.

In any event, the current series appears to confirm that since 2000 the trend has been consistently down as investor’s sentiment and apparently “tolerance for risk” has continually eroded.

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

Thursday, June 25, 2009

Commercial Cataclysm?: Moody’s/REAL Commercial Property Price Index April 2009

The latest results of the Moody’s/REAL Commercial Property Index strongly suggests that the nation’s commercial real estate markets are now firmly experiencing a tremendous downturn with prices plummeting a whopping 25.34% on a year-over-year basis and a stunning 29.48% since the peak set in October 2007.

The Moody’s/REAL CPPI data series is produced by the MIT/CRE but is noted to be “complimentary” to their alternative transaction based index (TBI) as it is published monthly and is formulated from a completely different dataset supplied by Real Capital Analytics, Inc.

Bull Trip!: GDP Report Q1 2009 (Final)

Today, the Bureau of Economic Analysis (BEA) released their third and final installment of the Q1 2009 GDP report showing a (revised) significant contraction with GDP declining at an annual rate of -5.5%.

Easily the most notable features of today’s report are the stunning declines to residential and non-residential as well as exports of both goods and services.

Fixed investment provided significant drags on growth with non-residential investment declining a whopping -37.3% and residential investment plunging -38.8% while exports of goods and services declined -30.6%.

Making a positive contribution to GDP were equally stunning declines to imports of goods and services slumping -36.4% (with and over 40% decline to the import of goods) as well as positive personal consumption expenditures increasing 1.4%.

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 June 25 2009

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims increased 15,000 to 627,000 from last week’s upwardly revised 612,000 claims while “continued” claims increased 29,000 resulting in an “insured” unemployment rate of 5.0%.

It’s important to note that the two most significant periods for job cuts on a non-seasonally adjusted basis is January 15 and July 15 so as July and clearer visibility on H2 quickly approaches it will be interesting to see how initial jobless claims fares.

Also, the continuing claims series is presenting the clearest picture of what is likely to be one of the most problematic aspects of this period of economic crisis namely how to make an immense and growing number of highly specialized (college educated) service/professional service workers productive again.

It’s obvious now that we have reached the first real test of our majority services-based economy.

Unlike the “tech-wreck” of 2000-2002, our current downturn is very broad, leaving no sector and virtually no corner of the country untouched.

With millions of college educated workers now on the market incomes will clearly suffer but moreover, it will be soon all too clear that our prior bubble economy significantly overproduced service workers (particularly professional service workers) for which current employment opportunities will be scant resulting in continued and fundamental vicious-cycle effects.

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, June 24, 2009

New Home Sales: May 2009

Subtitle: Green Shoots Listless… No Bottom, No Bottom, No Bottom

Today, the U.S. Census Department released its monthly New Residential Home Sales Report for May showing a continued deterioration in demand for new residential homes with a 32.81% year-over-year decline and a truly horrendous 75.38% peak sales decline nationally.

Further, today’s release revealed significant revisions to prior months most notably affecting the latest estimate for months of supply which currently stands at a whopping 10.2 months.

The following charts show the extent of sales declines seen since 2005 as well as illustrating how the further declines in 2009 are coming on top of the 2006, 2007 and 2008 results (click for larger versions)

It’s important to note that although the new home sales data appears to have prompted the traditional media to make many “bottom calls” recently, the evidence for their conclusions were scant.

First, most “bottom callers” have focused too closely on just the new home sales series and its historic bottoms rather than other important indicators that disclose a more complete state of the new home market.

As I have argued recently, the level of inventory and supply and level of completed new homes are still too high for a real sustained bottom for the new home market.

The following chart (click for larger) plots the new home sales (SAAR) series along with the current inventory level (NA) and the level of homes completed (NA) since 1973.

As you can see, although the new home sales series has breached the lowest level in over 30 years, the level of inventory (homes for sale at end of period) still remains higher than past historic bottoms and the level of homes completed remains much higher.

In fact, the level of completed new homes remains WELL ABOVE the PEAK levels for past housing boom periods… a truly bad sign for pricing going forward.

Make no mistake, I’m not suggesting that these three series will all bottom simultaneously, a simple cursory review of the chart above will dispel that notion, BUT I believe that if you consider the downward trend in home prices, the state of the job market, the lack of credit availability as well as the extent of the former boom (just look at the run builders had above.. steadily increasing sales from January 1991 to July 2005… truly unparalleled!) any sustained bottom is still a long way off.

The new home market might be in the process of clearing but at the moment it still looks seriously impaired and of the steadily shrinking pool of prospective buyers (from lack of confidence, lack of job or lack of cash and credit availability) those who wait to buy will almost certainly continue to find better pricing…. Thus sales will continue to fall.

Look at the following summary of today’s report:


  • The median sales price for a new home declined 3.36% as compared to May 2008.
  • New home sales were down 32.81% as compared to May 2008.
  • The inventory of new homes for sale declined 35.5% as compared to May 2008.
  • The number of months’ supply of the new homes has decreased 4.7% as compared to May 2008 and now stands at 10.2 months.

  • In the Northeast, new home sales were down 12.9% as compared to May 2008.
  • In the Midwest, new home sales were down 32.0% as compared to May 2008.
  • In the South, new home sales were down 35.9% as compared to May 2008.
  • In the West, new home sales were down 31.0% as compared to May 2008.

Reading Rates: MBA Application Survey – June 24 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 declined slightly dropping 6 basis points since last week to 5.44% while the purchase application volume increased 7.31% and the refinance application volume increased 5.92% compared to last week’s results.

It’s important to recognize that while the Federal Reserve’s “quantitative easing” measures appeared to hold rates down in recent months, the trend now seems to be changing.

In any event, while low rates clearly impacted re-finance activity, purchase activity never showed notable improvement.

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, June 23, 2009

Massive Unemployment: Mass Layoffs May 2009

Today, the Bureau of Labor Statistics (BLS) released the May installment of the Mass Layoff Report clearly showing continued deterioration of the nation’s job market with 2738 mass layoff events resulting in 289,628 initial unemployment claims causing the six month moving average of non-seasonally adjusted mass layoff events to jump by 76.42% while total initial claimants increased 81.62% on a year-over-year basis.

Further, as you can see clearly from the charts below (click for full-screen super-interactive zoom-able chart) May typically brings a solid seasonal DECLINE in both mass layoff events total initial unemployment claims filed… this year however…. Things are different.

As I have pointed out in prior posts, mid-July marks the next typical seasonally spike in unemployment activity (a trend clearly seen in the non-seasonally adjusted initial unemployment claims series as well as the non-seasonally adjusted mass layoff data) and it appears from today’s mass layoff results, that the July peak may be notable.

Notice from the data below that the typical May decline in mass layoffs did NOT occur and, in fact, look to be surging… This is likely giving us an early indication that the July spike will be worse than normal.

The BLS considers a mass layoff event to be a condition where there are at least fifty initial claims for unemployment insurance originating from a single employer over a period of five consecutive weeks.