Reading Rates: MBA Application Survey – April 16 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 4 basis point since last week to 5.74% while the purchase application volume decreased by 0.8% and the refinance application volume increased 5.2% compared to last week’s results.

It’s important to note that all application volume values reflect only “initial” applications NOT approved applications… i.e. originations…

Also important to note, the average 30 year fixed mortgage rate has remained just under the mean seen during 2007 while the interest rate for an 80% LTV 1 year ARM has remained elevated now resting 128 basis points above the rate of an average 80% LTV 30 year fixed rate loan.

It’s important to note that the data is reported (and charted) weekly and that the rate data represents average interest rates, and the index data represents mortgage loan application volume for home purchases, home refinances and a composite of all loans.

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).

Production Pullback: Industrial Production March 2008

Today, the Federal Reserve released their monthly read of industrial production showing continued declines across many industries, particularly for those related to consumer spending, construction and business vehicles, resulting in a tepid 0.3% increase to total aggregate production.

“Final product” consumer durable goods continue to show accelerating weakness falling 3.92% as an aggregate on a year-over-year basis, with particularly significant declines coming specifically from home appliances, furniture and carpeting which declined for the twenty first consecutive month by 7.90% on a year-over-year basis.

Construction supply production has been showing the most severe contraction to wood products seen in at least the last 20 years.

Although automotive production has been showing weakness since the middle of 2004, business vehicle production is now showing a stark contraction.

The following charts (click for larger) show the overall consumer durable component along with the Home Appliances, Furniture and Carpeting sub-component on both a time series and year-over-year basis, construction supply production with the wood products sub-component, and general and business related vehicle production all overlaid with the last two recessions for comparisons purposes.

New Residential Construction Report: March 2008

Today’s New Residential Construction Report continues to firmly demonstrate the intensity of the total washout conditions that now exist in the nation’s housing markets and particularly for new residential construction showing tremendous declines on both a peak and year-over-year basis to single family permits both nationally and across every region.

Single family housing permits, the most leading of indicators, again suggests extensive weakness in future construction activity dropping 46.42% nationally as compared to March 2007.

Moreover, every region showed significant double digit declines to permits with the West declining 56.8%, the Midwest declining 47.7%, the South declining 42.0%, and the Northeast declining 39.4%.

Keep in mind that these declines are coming on the back of last year’s record declines.

To illustrate the extent to which permits and starts have declined, I have created the following charts (click for larger versions) that show the percentage changes of the current values on a year-over-year basis as well as compared to the peak year of 2004.

Declines to single family permits have NOW ACCELERATED measurably in terms of monthly YOY declines, and the fact that we are now seeing declines of roughly 40%-60% on the back of 2006 and 2007 declines should provide a an unequivocal indication that the housing markets are by no means stabilizing.




Here are the statistics outlined in today’s report:

Housing Permits

Nationally

• Single family housing permits down 46.4% as compared to March 2007.

Regionally

• For the Northeast, single family housing down 39.4% as compared to March 2007.
• For the Midwest, single family housing permits down 47.7% as compared to March 2007.
• For the South, single family housing permits down 42.0% compared to March 2007.
• For the West, single family housing permits down 56.8% as compared to March 2007.

Housing Starts

Nationally

• Single family housing starts down 43.6% as compared to March 2007.

Regionally

• For the Northeast, single family housing starts down 30.4% as compared to March 2007.
• For the Midwest, single family housing starts down 51.5% as compared to March 2007.
• For the South, single family housing starts down 40.9% as compared to March 2007.
• For the West, single family housing starts down 48.3% as compared to March 2007.

Housing Completions

Nationally

• Single family housing completions down 27.4% as compared to March 2007.

Regionally

• For the Northeast, single family housing completions down 6.7% as compared to March 2007.
• For the Midwest, single family housing completions down 20.7% as compared to March 2007.
• For the South, single family housing completions down 30.5% as compared to March 2007.
• For the West, single family housing completions down 30.8% as compared to March 2007.

Keep in mind that this particular report does NOT factor in the cancellations that have been widely reported to be occurring in new construction.

Commercial Calamity? S&P/GRA Commercial Real Estate Index December 2007

Like the MIT/CRE Property Index, Standard & Poor’s also tracks commercial real estate (CRE) prices for various commercial property types.

Although recent results have revealed some slowing across all classes of commercial real estate, December’s results show a continuation of price growth.

All components experienced growth both on a year-over-year basis and as compared to the prior monthly result with the greatest gains seen in office properties.

The charts below show the National index and the component indices since 1993 (click for larger).

This report will be particularly important to monitor over the next few months as continued growth and stability would surely quell much concern over potential spillover effects of the recession and credit crunch on to commercial real estate.

Homebuilder Blues: NAHB/Wells Fargo Home Builder Ratings April 2008

Today, the National Association of Home Builders (NAHB) released their Housing Market Index (HMI) showing continued evidence that the new home market is experiencing a prolonged bout of depression.

The release came along with a renewed plea for a government bailout of the housing debacle from Chief Economist David Seiders who now suggests that without such measures, the current recession could become more severe.

“While builders continue to report improvements in traffic through their model homes compared with late last year, this activity has not translated to actual sales. That’s where Congress can make a big difference … Measures that stimulate consumer confidence in the housing market, push the fence-sitters into the ring and put a floor under house prices can successfully halt the drag that housing is exerting on the national economy, and help stabilize financial markets at the same time. But such measures need to be implemented as soon as possible in order to limit the severity of the economic recession that now is underway.”

It’s important to understand that sales for the new home market generally peak in the February-April timeframe and that this year’s results have been generally disappointing as noted by Sandy Dunn, current president of the NAHB “With the traditional home buying season now well underway, we have not seen the bump in sales activity that we normally would this time of year,”

Each component of the NAHB housing market index is now sitting at or near the worst levels ever seen in the over 20 years the data has been being compiled strongly suggesting that the current severe contraction has surpassed all other events seen in the last 22 years and is now firmly in uncharted territory.

The Almost Daily 2¢ - More Pain, Less Gain

One of the more interesting aspects of this era of housing downturn that set it apart from past periods is that today’s events are unfolding against the backdrop of the internet information age.

Aside from the Blogesphere and other internet-based means of mass communications, this is the first housing downturn in which market participants (who are inclined) can easily and efficiently follow aggregate home prices, peruse listings, track price reductions and even “snoop” deed records and seller debt obligations.

Just imagine what the progress of today’s housing downturn would be like without all that information… possibly the 90s bust?

To that end, recall that there are three major sources of housing price data, S&P/Case-Shiller, OFHEO and Radar Logic.

Each handle the data a bit differently but each are modern, analytical and represent a major step forward in the accuracy of modeling aggregate home price movement, especially when compared to the older median or average price method.

Also, since each is fairly strongly correlated (as I demonstrated in a prior post), taken together they offer strong evidence that the price movement is accurate.

One interesting development that falls out of this correlation is that the most timely index data, supplied by Radar Logic (RPX), can act as a predictor for both the S&P/Case-Shiller (CSI) and OFHEO (HPI) indices with the CSI also leading the HPI.

The following charts (click for larger versions) show the latest RPX and CSI data for Boston, Denver, Chicago, Miami, San Francisco, Los Angeles, Washington DC and Seattle.

Notice that the RPX (based on preliminary February data) is leading into February and that for some metros, notably Boston and Denver, are showing significant downward price movement that would possibly defy typical seasonal patterns.

Conspicuous Correlation: Retail Sales March 2008

Today, the U.S. Census Bureau released its latest nominal read on retail sales showing a increase of 0.2% from February 2008 and 2.0% since March 2007 on an aggregate of all items including food, fuel and healthcare services.

Discretionary retail sales including home furnishings, home garden and building materials, consumer electronics and department store sales, on the other hand, experienced a significant decline falling 0.58% since February 2008 and 3.66% compared to March 2007.

Further, adjusted for inflation, discretionary retail sales declined 0.61% since February 2008 and 7.05% since March 2007.

On a “nominal” basis, there appeared to be “rough correlation” between strong home value appreciation and strong retail spending preceding the housing bust and an even stronger correlation when home values started to decline.

The following charts show the initial analysis plotting the year-over-year change to an aggregate series consisting of the primary discretionary retail sales categories that I termed the “discretionary” retail sales series and the year-over-year change to the S&P/Case-Shiller Composite home price index since 1993 and since 2000.


As you can see there was, at the very least, a coincidental change to home values and consumer spending during the boom and then the bust, but as home values have continued to decline, retail spending has remained low but has not continued to consistently contract.

One problem with this initial analysis is that both retail sales and the S&P/Case-Shiller Composite index are reported in “nominal” (i.e. non-inflation adjusted) terms and thus result in a somewhat skewed view especially for the retail sales data.

In fact, the year-over-year change to “nominal” discretionary retail sales has been positive for seven of the last eight months while the year-over-year change to “real” discretionary retail sales has been negative for twelve straight months (see the following chart).

The key point here is that although inflation (as reported by the CPI) has been relatively stable in recent years it is always a factor and in light of the latest surprise increases to the CPI results as well as many anecdotal reports of producers now passing through increasing energy prices to the consumer, it’s important to adjust retail sales (and home values) in order to fully understand its direction.


As you can see from the above charts (click for larger version), adjusted for inflation (CPI for retail sales, CPI less shelter for S&P/Case-Shiller Composite) the “rough correlation” between the year-over-year change to the “discretionary” retail sales series and the year-over-year S&P/Case-Shiller Composite series seems now even more significant.

Given the anecdotal accounts of homeowners drawing equity out of their homes with refi’s and HELOCs and using the proceeds to buy consumer goods, it could be interesting to attempt to “shift” the retail spending in time as the decline to home values would surely precede a pullback in consumer spending but for now I’ll leave it aligned and work on the shifting in a later post.

In past posts I attempted to build a 12 month moving Pearson’s correlation series in order to demonstrate the true correlation between the rate of change of both discretionary retail sales and home values but although the movements may be coincidental, they really share no actual binding correlation.

I may dust off the correlation chart in future posts but for now let’s just assume that both home values and discretionary retail sales are not doing very well, especially in “real” terms and the correlation is at least coincidental with the overall unhealthy state of the economy.

The Almost Daily 2¢ - Visualize The Volatility

As you know, in recent months I have been tracking the S&P 500 index as it has descended into a classic “Bear Market” trade down that appears remarkably similar to the nearly 50% selloff that it experienced in the wake of the “dot-com” bust.

But aside from technical similarities (that I will cover again in a later “Twin Peaks” post) I would like to share an interesting chart that I whipped up in an attempt to better reveal the trend and volatility inherent in the broad index and more importantly, the role volatility plays in signaling a bottom to a market selloff.

One important aspect to consider before delving into the chart is the true temperament of the bottoming process.

Reflecting a bit on markets and human nature, I believe that any real bottoming to the stock market must come with some significant struggle between market participants in an effort to establish value.

Unlike the current Wall Street consensus, I don’t believe that this struggle can take place in just a few trading days and further be founded on just a few key events, even substantial events such as the Bear Stearns debacle.

I see the market bottoming process as a prolonged and uncertain fight resulting in significant thrashing about, lasting at least as long as it takes to establish some “real” confidence about the outcome of the crisis that initially brought about the contraction.

In order to better visualize this market struggle I created two simple indices, one that plots the positive percent change of consecutive trading days and one that plots the negative.

So, for the “positive” index I add up the percent change on consecutive “up days” and if there is a “down day” the index goes back to 0.

For the negative index, on the other hand, I sum the percent change of consecutive “negative” “down days” and set it back to 0 if there is an “up day”.

Along with these indices I plot a 30 day moving average of each as well as the S&P 500 index itself.

This chart starts in 1969 and is simply huge (but loads well in the browser) so click the following to load it up and make sure it zooms in completely.

Notice, scrolling from left to right (1969 to today), that there have been six recessions in the U.S. since 1969 (indicated by the rectangular overlays) and that in general, the distribution of consecutive up and down days becomes more erratic and amplified during (and surrounding) the recessionary periods and noticeably more quite in-between.

Notice also that between 1992 and 1996 there was fairly even and essentially quiet trading leading into the dot-com boom but then the trading became markedly more volatile, eventually leading to the crescendo of the dot-com peak.

After the peak was established in 2000, the volatility continued only to be amplified dramatically during 2002 to early 2003, the period that would ultimately establish the bottom of the market downturn.

Now, study the period between 2004 and the middle of 2007 which appears to show very low volatility somewhat similar to, if not even a bit more quiet than, the period that preceded the dot-com boom.

Today though, the volatility has reappeared but it’s important to note that it is very new and still fairly low.

So, my contention is simply that the S&P 500 has not bottomed as the REAL struggle has yet to even take place and given the truly immense nature of our latest crisis (housing, mortgage, credit and consumer), it is altogether likely that we will see a considerable amount of thrashing and volatility resulting in a prolonged trade down that will last at least until there is some “real” confidence established.

Confidence Game: Consumer, CEO and Investor Confidence April 2008 (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 early release of the Reuters/University of Michigan Survey of Consumers for April showed another startling plunge in consumer sentiment to a reading of 63.2, a decline of 27.44% compared to April 2007.

It’s important to note that this is the lowest consumer sentiment reading seen since the recessionary period of March 1982 which, according to many metrics most notably employment, was the most severe recession seen in the U.S. since the Great Depression.

The Index of Consumer Expectations (a component of the Index of Leading Economic Indicators) fell to 53.4, the lowest reading since November 1990’s recessionary environment, 29.64% below the result seen in April 2007 and 39.04% below the most recent peak set in January 2007.

As for the current circumstances, the Current Economic Conditions Index fell to 78.4, the lowest reading since January 1983, 25.05% below the result seen in April 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 (Q4 2007) of The Conference Board’s CEO Confidence Index fell to a value of 39 with the “current economic conditions” component registering 33.54, the lowest readings since the recessionary period following the dot-com bust.

It’s important to note that on every instance that the CEO “current economic conditions” index dropped below a level of 40, the economy was either in recession or very near.

The March release of the State Street Global Markets Index of Investor Confidence indicated that confidence for North American institutional investors increased 6.91% since February while European and Asian investor confidence increasing comparably all resulting in an increase of 6.61% to the aggregate Global Investor Confidence Index.

Given that that the confidence indices purport to “measure investor confidence on a quantitative basis by analyzing the actual buying and selling patterns of institutional investors”, it’s interesting to consider the performance surrounding the 2001 recession and reflect on the performance seen more recently.

During the dot-com unwinding it appears that institutional investor confidence was largely unaffected even as the major market indices eroded substantially (DJI -37.9%, S&P 500 -48.2%, Nasdaq -78%).

But today, in the face of the tremendous headwinds coming from the housing decline and the mortgage-credit debacle, it appears that institutional investors are less stalwart.

Since August 2007, investor confidence has declined significantly led primarily by a material drop-off in the confidence of investors in North America.

The charts below (click for larger versions) show the Global Investor Confidence aggregate index since 1999 as well as the component North America, Europe and Asia indices since 2007.

Mid-Cycle Meltdown?: Jobless Claims April 10 2008

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims declining 53,000 to 357,000 from last week’s upwardly revised 410,000 claims and “continued” claims increased 3,000 resulting in an “insured” unemployment rate of 2.2%.

It’s very important to understand that today’s report reflects employment weakness that is wholly consistent with past recessionary episodes and that unequivocal clarity will more than likely come in the next few releases.

Historically, unemployment claims both “initial” and “continued” (ongoing claims) are a good leading indicator of the unemployment rate and inevitably the overall state of the economy.

The following chart (click for larger version) shows “initial” and “continued” claims, averaged monthly, overlaid with U.S. recessions since 1967 and from 2000.

As you can see, acceleration to claims generally precedes recessions.


Also, acceleration and deceleration of unemployment claims has generally preceded comparable movements to the unemployment rate by 3 – 8 months (click for larger version).


In the above charts you can see, especially for the last three post-recession periods, that there has generally been a steep decline in unemployment claims and the unemployment rate followed by a “flattening” period of employment and subsequently followed by even further declines to unemployment as growth accelerated.

This flattening period demarks the “mid-cycle slowdown” where for various reasons growth has generally slowed but then resumed with even stronger growth.

So, looking at the post-“doc com” recession period we can see the telltale signs of a potential “mid-cycle” slowdown and if we were to simply reflect on the history of employment as an indicator of the health and potential outlook for the wider economy, it would not be irrational to conclude that times may be brighter in the very near future.

But, adding a little more data I think shows that we may in fact be experiencing a period of economic growth unlike the past several post-recession periods.

Look at the following chart (click for larger version) showing “initial” and “continued” unemployment claims, the ratio of non-farm payrolls to non-institutional population and single family building permits since 1967.

One notable feature of the post-“dot com” recession era that is, unlike other recent post-recession eras, job growth has been very weak, not succeeding to reach trend growth as had minimally accomplished in the past.

Another feature is that housing was apparently buffeted by the response to the last recession, preventing it from fully correcting thus postponing the full and far more severe downturn to today.

I think there is enough evidence to suggest that our potential “mid-cycle” slowdown, having been traded for a less severe downturn in the aftermath of the “dot-com” recession, may now be turning into a mid-cycle meltdown.