The FHA Meltdown!

Back in 2006 and 2007 I detailed the push by the Washington elites to “modernize” the FHA by lowering its standards effectively making it more “competitive” with the other major government and private institutions operating in the nation’s mortgage market.

Back then it appeared that FHA had become almost completely ineffective with loan insurance volume dropping over 95% in some areas in just the preceding five years.

But this drop-off was simply the result of the significant lowering of the lending standards of other public and private institutions and the sharp and artificial rise in home prices.

Stated plainly, FHA couldn’t compete because its statute simply prohibited its operation within such a distorted credit environment and inflated housing markets.

Rather than simply recognizing the obvious dangers in forcing FHA to compete in a market that was clearly undergoing a systemic meltdown the shameful Washington elites, prompted by the coming elections, self interested RPAC (Realtor Political Action Committee) initiatives, and just plain negligence, pushed forward with their efforts to “revitalize” FHA thereby “expanding American homeownership”.

As former senator Hillary Clinton explained in April of 2007, the proposed FHA modernization was a worthy cause “With the meltdown in the subprime housing market, it is clear that there needs to be a real alternative for more working families who want to achieve the dream of home ownership…”

So, the government continued to drive down standards while simultaneously pushing the populous theme of “homeownership for all” even directly in the face of epic levels of uncertainty and the obvious possibility that many new low standard loans would go almost directly into delinquency and foreclosure.

When, in January 2008, I protested legislative actions to increase of the “conforming loan limit” (affecting Fannie and Freddie as well as FHA) to as much as $730,000 Representative Barney Frank responded to my email with the following:

“With regard to the FHA, the Congressional Budget Office gives us a positive score with a comparable increase in the limit - that is they find that these loans will be repaid at an even higher rate than the other loans that fall below the old limit.”

Well, now comes news that FHA is in serious trouble as a result of significant levels of mortgage-related losses with 7.8% of their insured loans 90+ days delinquent or in default forcing its reserves to likely drop below 2% of the loans they insure, the minimum level mandated by Congress.

Some are suggesting a government bailout is on the way while HUD Secretary Shaun Donovan suggests that the chances are 50%-50%... either way this whole episode provides a nearly perfect example of how our government is simply disgraceful.

On The Stamp: Food Stamp Participation May 2009

As a logical consequence of the prolonged economic downturn it appears that participation in the federal food stamp program is on the rise.

In fact, household participation has been climbing so steadily that it has far surpassed the last peak set as a result of the immediate fallout following hurricane Katrina.

The latest data released by the Department of Agriculture shows that, on a year-over-year basis, household participation has increased a whopping 22% while individual participation, as a ratio of the overall population, has increased 19.96%.

The May results confirm that participation is continuing to climb dramatically, likely as a result of the recent jump in total unemployment, driving the nominal benefit costs up an astounding 60.16% on a year-over-year basis to $4,598,782,718 for the month.

Looking at the last chart that plots the total unemployment rate (unemployment rate of all traditionally unemployed workers plus all marginally attached and part time workers) and the population adjusted individual program participation rate normalized since 2005, one can plainly see that program participation would be expected to continue its surge.

A Tale of Seven Cities... and Some Condos

Today’s S&P/Case-Shiller housing market data revealed some notable differences in the trends from one metro market to the next.

It’s important to recognize that while our current national residential real estate decline is truly historic and unprecedented, a near simultaneous decline of one or more major metro markets is not.

During the 1980s/1990s boom and bust both West Coast and East Coast metro markets experienced the boom and bust cycle but while metros on the east coast, such as Boston, shook off the decline, cleared and started to climb somewhat by 1993 with the period between late 1996 and early 1997 marking the point where many markets recovered their nominal pre-bust peak levels, west coast metros generally continued to decline well into the mid-90s.

West coast metros such as San Francisco lumbered along and didn’t breach their pre-bust nominal peak level until well into 1998 in-line with the wider economic boom of the dot-com era.

Today, as in the 1990s, we see significant differences from one metro market to the next the only difference this time around is both the extent of the boom and bust and the fact that this cyclical shock has touched every market, not just a select few.

In the dynamic Blytic charts below I have arranged the three price tiers as well as a 12 month simple moving average of the “sale pair counts” for each of a selection of seven of the twenty metro markets that S&P tracks.

Notice that while some markets are showing an up-trend in sales, most are still experiencing significant price declines.

Also, metros such as New York, Atlanta and Washington DC appear to only now be tipping into the level of decline seen during 2007 and 2008 in some of the bubbliest markets of Phoenix, Miami and San Francisco.

Further, notice that while the nation’s major condo markets held fairly steady through 2008, they are now declining to a comparable extent to the single family markets.

On The Stamp: Food Stamp Participation April 2009

As a logical consequence of the prolonged economic downturn it appears that participation in the federal food stamp program is on the rise.

In fact, household participation has been climbing so steadily that it has far surpassed the last peak set as a result of the immediate fallout following hurricane Katrina.

The latest data released by the Department of Agriculture shows that, on a year-over-year basis, household participation has increased a whopping 21.16% while individual participation, as a ratio of the overall population, has increased 19.14%.

The April results confirm that participation is continuing to climb dramatically, likely as a result of the recent jump in total unemployment, driving the nominal benefit costs up an astounding 58.52% on a year-over-year basis to $4,499,152,630 for the month.

Looking at the last chart that plots the total unemployment rate (unemployment rate of all traditionally unemployed workers plus all marginally attached and part time workers) and the population adjusted individual program participation rate normalized since 2005, one can plainly see that program participation would be expected to continue its surge.

Green Shoots Starting to Wither… Soon To Die

It was such a pleasant spring too… wet mild weather… just perfect for growing “real” crops … Bulls hoped their green would grow too… now though, it looks as if the “Green Shoots” may start to spontaneously shrivel… a casualty of the overarching climate of economic decline.

Things were looking so good too… You had the Philly Fed Business Outlook Survey make a strong showing… the Conference Board’s Index of Leading Economic Indicators seemed to signal recovery… although… these indicators all signaled recovery in 2001 as well… and look how far that “recovery” got us.

Another interesting report came out on Friday as well… the Regional and State Unemployment Report showing one state with over 14% unemployment (Michigan at 14.1% unemployment and increase of 1.2% since just last month) three states with over 12%, and 13 states over 10%.

Further, 27 states experienced a notable re-acceleration to unemployment jumping anywhere from .05% to 1.2% since just last month.

This brings us one step closer to the ultimate “Prime Bomb” detonation… the point at which the level of unemployment is BOTH uncomfortably high causing systemic vicious cycling feedback effects (I would argue we are at that point now) AND obviously beyond a point at which the government can appear to have any form of control over.

Currently, the populous has almost innate or inherent confidence in the governing elite… they appear to have “fixed” the financial system and the stock market so why not the job market?

Yet, even with all the multi-trillion dollar government meddling, the job market is getting worse.

This is not a new trend…. We had a “jobless recovery” for the first half of this decade… followed by an historic decline (which destroyed all the jobs created in the jobless recovery leaving us now at payroll levels below that of early 2000… with over 20 million more work age population today) that continues to this day.

As more states push closer to the 15% unemployment level and the current crop of 12-14% unemployment states push on closer to 20%, there will be a point at which there is a clear realization that the “unemployment problem” (as they called it back in the 30s) is beyond the control of current government policy.

This will obviously bring new policies as well as a notable loss of confidence.

As I have pointed out in prior posts, mid-July is the next typical seasonally point for mass-layoff events so look for this recent unemployment re-acceleration to express itself through the summer and, if the economic climate of the second half is particularly week, merge again with the larger typical mass-layoff period of mid January.

In the near term we should be focused on a significant change in outlook for the second half of 2009 as there is clear realization that the “Green Shoots” are dead and the decline will drag on much longer.

The following chart (click for super-dynamic zoom-able version) shows what has to be the starkest evidence that our economy has not only been weak for roughly a decade but further looks to be on course for a protracted bout of nationwide systemic double-digit unemployment.

The Almost Daily 2¢ - Twin Peaks!

Subtitle: Hope Springs Eternal… Until it Doesn’t!

The Bulls are getting very ballsy lately… some would event say reckless… pushing the S&P 500 back up over the 200 simple day moving average and nearly taking the 50 day SMA with it…

But wait…

Is that a freight train I hear?

Like an 8000 hp Union Pacific steaming down the tracks the second half of 2009 (H2) is fast drawing neigh and with it a reemergence of uncertainty and a much needed dose of reality and of course… lower stock values.

“Why?!” you say… “I thought the decline was over… taken care of handily by those tremendous stewards of our great economy (the world’s greatest you know!)… the elites of the Federal Government and the Federal Reserve System…”

You go on... “What we experienced last fall was just a simple financial panic… the ripple effects of the collapse of Lehman… it’s over… there is nothing more to see here… so!… now is the time to bargain shop!... pick up some deals!... roll like Warren Buffet!”

Ahh… such simple thinking doth rule the minions… yes… that’s right everyone… It’s time to take action… please do jump in now… the water is fine… go right ahead… if you act now you can brag later and isn’t that what it’s all about anyhow?

If the decline in stocks started in October 2007 and ended at the low set in March 2009 it would be one of the shortest and most typical bear market declines on record.

This would sort of seem anti-climactic given that categorical record of the decline across a domain of virtually every macro-data series showing historic levels of decline and stress.

Yet… from another point of view… one that takes as fact that the decline started NOT in October of 2007 but way back in 2000 with the commencement of the “dot-com” bust (probably more aptly termed the “unwind of the 90s collective delusion”) we are fully embroiled in our own “lost decade… or two”.

So it really comes down to how you choose to look at things… If you think the “recovery” that “occurred” between 2002 – 2007 was real and not simply manufactured on the back of probably the most unusual credit cycle in history… double down!

Maybe you think the Feds can manufacture another phony boom… that’s always possible… yet with no basic asset class to target (like housing….) , no fire-hose of consumer credit and the economic base falling farther and farther… pretty soon these attempts at faux expansions will lose effectives… just fluff the populace from miserable to malaise… but no farther.

So... we are headed back to the lows…

As regular readers know, I have been following along the stock market decline for well over a year now with this recurring “Twin Peaks” post whereby I simply charted some very basic technical analytics (somewhat ala the amazing Louise Yamada mixed with a couple of my own inventions) which compared the underlying average movement of the current S&P/500 index to its performance during the unwind of the “dot-com” collapse.

Be sure to study the charts well as they present several different ways of capturing market volatility and together compare past market performance to what we are seeing today.

I will continue to post the comparison to the “dot-com” era bear market for posterity but now that we have broken well through the 2002 lows all technical similarities going forward have ceased… we are firmly in uncharted territory as the two bust eras have now become one.

The “Percentage Up-Down” chart clearly shows that we have just entered a period of REAL volatility BUT also leads one to believe that we may have a long way to go in this market shakeout.

The “Up-Down Daily Closings” chart seems to indicate that although we have seen increased volatility and significant declines, we have yet to match the distribution of daily up closings and down closings (inverted red line).

Study the following image (click for very large and clear version) of the S&P 500 index from 1995 to today then read below for the technical blow by blow.




What follows below is now just maintained for old times’ sake… the second peak was obviously real and this series of posts identified it roughly a year ahead of time.

Now that we have entered effectively into uncharted territory, we are at a loss for historical comparison.

THEN (1998 – 2000 Top)

• A. October 1998 – S&P 500 gives early warning sign by crossing its 400 day simple moving average (SMA). Notice also that the 50 day SMA breached the 200 day SMA.
• B. October 1999 – S&P 500 gives a second signal by crossing its 200 day SMA after a solid twelve month expansion. 50 day SMA touches the 200 day SMA.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)

NOW (Today’s Top)

• A. June 2006 – S&P 500 gives early warning sign by crossing its 400 day SMA. Notice also that the 50 day SMA breached the 200 day SMA.
• B. March 2007 – S&P 500 gives a second signal by falling near its 200 day SMA after a solid nine month expansion. 50 day SMA similarly depressed.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)
• H. Down Down we GO! (Uncharted Death)
• I. Bh Bye! (Fodder for the Sucker-Grinder)
• J. S&P 500 Breaks through 200 day SMA... decline over?!... fat chance!
  

Economic Jolt!: Job Openings and Labor Turnover April 2009

Today, the Bureau of Labor Statistics released their latest monthly read of job availability and turnover (JOLT) showing that, on a year-over-year basis, private non-farm job “openings” declined 41.36%, job “hires” declined 17.95%, job “layoffs and discharges” jumped 34.43% and job quits declined substantially dropping 37.26%.

These results are clearly indicating that the slowdown in the employment market has developed substantially over the last six months and now is quickly accelerating down into territory typical of severe recessionary contraction.

Job “openings” (click chart below for larger version), the reports most leading “demand side” indicator, has now declined on a year-over-year basis for eighteen consecutive months strongly suggesting that the private sector will curtail future hiring activity.

Sliding down that slope of the Beveridge curve, the decline in the job vacancy rate is clearly corresponding with an equal but inverse movement up in the general unemployment rate as can be plainly seen in the following chart (click chart for larger version).

Job “hiring” activity (click chart for larger version) has also been declining significantly with the latest results posting the twentieth consecutive decline on a year-over-year basis further confirming the tremendous weakness seen in the job market.

With the latest revisions by the BLS, job “separations”, whereby workers and their employers go their separate ways by one means or another (layoffs, retirement, termination, quitting, etc.), appear to be flattening as a result of nearly equivalent but opposing movements in quitting and layoff activity.

It’s important to understand that job “quits” are included as a component of the “separations” data series as “quitting” is a valid means of workers “separating” from employers but their inclusion tends to create an overall procyclical trend in what would otherwise be logically thought of as a countercyclical process (i.e. downturn leads to increase in separations not decrease).

As the economy slides further into recession and the employment situation worsens workers tend to reduce quitting activity presumably for fear that they could risk a long bout of unemployment and the latest results (click chart for larger version) confirm this with the some of the sharpest year-over-year declines on record.

Layoff activity, now separated into its own series and as you can see from the chart below is showing a dramatic surge that is roughly equivalent but opposite to the decline seen in quitting activity.

Pending Home Sales: April 2009

Today, the National Association of Realtors (NAR) released their Pending Home Sales Report for April showing a 3.2% year-over-year increase in pending home sales nationally and a surprisingly weak -2.9% year-over-year decline in pending sales seen in the heavily foreclosure laden markets of the west region.

Meanwhile, the NARs chief economist Lawrence Yun continues to sing the praises of the latest results government funded handouts for his industry.

“Housing affordability conditions have been at historic highs, but now the $8,000 first-time buyer tax credit is beginning to impact the market, … Since first-time buyers must finalize their purchase by November 30 to get the credit, we expect greater activity in the months ahead, and that should spark more sales by repeat buyers.”

The following chart shows the national pending home sales index along with the percent change on a year-over-year basis as well as the percent change from the peak set in 2005 (click for larger version).


Look at the April seasonally adjusted pending home sales results and draw your own conclusion:

• Nationally the index increased 3.2% as compared to April 2008.
• The Northeast region increased 0.8% as compared to April 2008.
• The Midwest region increased 11.1% as compared to April 2008.
• The South region increased 3.5% as compared to April 2008.
• The West region decreased 2.9% as compared to April 2008.

Commercial Catastrophe?: MIT/CRE Commercial Property Index Q1 2009

It’s now perfectly obvious that the commercial real estate (CRE) markets have followed the inevitable lead of the residential markets down into an historic recessionary decline.

Earlier this week the MIT Center for Real Estate released their Q1 2009 read on the nation’s commercial property market showing a stunning 20.71% year-over-year decline to the price of all commercial structures as an aggregate and a 27.98% decline in demand.

Worse yet, on a peak basis CRE prices have declined a staggering 26.43%.

Individually, Apartment property prices declined 22.75%, Industrial property prices declined 33.46%, Office property prices declined 23.72% and retail property prices declined 15.49% compared to their respective peaks set in 2007.


Looking at the supply and demand indices of the “All Properties” index appears to shed some light on the factors now working to drive prices lower.

More Pain, No Gain: S&P/Case-Shiller Preview for February 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 February 23 appears to indicate that price declines are continuing in nearly every market with some markets accelerating notably.

Clearly, the impact of the recent stock market crash (that keeps on crashing) 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 reacceleration of price declines.


Phoenix, and Miami are clearly continuing their historic price slide as the number of distressed sales climb and buyer sentiment relents under the weight of the recessionary conditions.



Los Angeles, San Francisco and New York appear to be showing a slight bump up in prices on a month-to-month basis but still remain significantly below each series respective 2008 level. It’s important to note that both the S&P/Case-Shiller and RPX data is NOT seasonally adjusted so in all likelihood these regions are just experiencing a little pause in the decline coming from the spring sales volume pickup.



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 continues to be a nearly perfect examples of a market that has 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.