Homebuilder Blues: NAHB/Wells Fargo Home Builder Ratings June 2009

Today, the National Association of Home Builders (NAHB) released their latest Housing Market Index (HMI) showing a decline to the overall index as well as at best a flattening to most component indices.

It’s important to recognize that although the series are seasonally adjusted, each series has generally shown notable strength or noticeable flattening during the first quarter of each of the last 4 years.

Now that the early season optimism has likely run its course, look for these indices to turn southward again as builders more clearly contemplate the horrendous condition of their market.

The new home market will likely not resume any significant form of healthy function until the considerable overhang of inventory is cleared and with unemployment on the rise and the level of completion still unusually high, it appears that the overhang is here to stay.

Each component of the NAHB housing market index remains WELL BELOW the worst levels ever seen in the over 20 years and continues to remain firmly in uncharted territory.

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!
  

Nothing a Little Money Couldn't Solve!

Bernanke and company seem bent on creating an hyper-inflationary environment... and nothing tells the story better then a few extra hundred billion squirted out as physical greenbacks!

Also, check out Total Reserves... Yikes!

Booming and Busting In Non-Metro Style

During the housing boom house price appreciation was particularly uneven across both house product and location.

One way to get a sense of the price movement associated to different house products is to look at the S&P/Case-Shiller (CSI) tier indices which track repeat sales of homes in three distinct pricing tiers (really ranges).

This is likely not an exact science as there has almost certainly been homes that have either jumped from a lower tier to a higher or, as we are likely seeing today, have fallen to a lower.

But, in any case, the CSI tier indices do not give any sense of location although many observers may presume certain facts about the location of homes in the low versus high tiers.

With the recent introduction of the non-metro home price indices, the Federal Housing Finance Administration (FHFA) offers an interesting point of comparison to the metro-laden CSI data.

The FHFA data has its quirks (GSE source for data, includes ref-fi transactions, etc) but still… it serves as a good point of reference and the full dataset is quite large including nearly 700 series from census divisions to MSAs.

Comparing a non-metro HPI to a regionally similar high tier metro CSI yields some interesting points.

First, although both non-metro and high tier metro home prices boomed during the housing bubble, non-metro was the real shining star in terms of rate of appreciation.

There are points in 2000 where the annual appreciation for non-metro homes exceeded 35% while the best growth rates for high tier metro housing was around 18%.

Next, although the “dot-com” toned both housing markets down a bit, annual rates of appreciation for non-metro housing resumed their exceptional gains in 2004 and 2005 and even remained positive as late as the first half of 2007.

This is a stark contrast to high tier metro housing where rates of appreciation slowed consistently after the “dot-com” bust only to turn to consistent depreciation in early 2006.

So now when someone tells you that “your sooo.. non-metro” stand proud!

The Almost Daily 2¢ - The Elderly in Stocks? … I Hope They Get Crushed!

Heartless I know… but let me give you the back-story.

Standing in line at the bank a few days ago I was warmly greeted by an older woman (probably in her 70s) standing in front of me seeming bright and peppy and actively soliciting my attention.

When I finally relented, she proudly (and with an overt and exaggerated savvy air about her) went on to detail the particulars of a recent stock transaction and how happy she was to have made it.

Back in March, apparently, she rolled over her 401K simultaneously converting it to an IRA and as she put it “put it all in the DOW 30”.

“It’s gone up over 30%!” she nearly shouted.

She was so excited, I had to remind her that the teller was looking for another customer.

So, I quickly wished her luck on her good fortune and we parted ways.

Things are not at all as they should be.

We (folks interested in finance) know some basic rules of thumb… one of them being that when you are near or in active retirement, you should generally not be in stocks… certainly not actively speculating with your retirement funds.

This simple rule is for good reason.

Replacing lost wealth in your 70s has got to be much harder and physically (likely mentally) costlier than replacing it in your 30s and 40s when most folks are typically fully engaged in the process of creating wealth.

What is the real cost of re-earning a dollar at 70? … I would think it’s a fair amount more than a dollar.

So what’s going on here?

Why would a person who has spent a lifetime acquiring wealth take such risk even if it were just a portion of her life savings?

One word… Bernanke.

We live in a world in which savers and the prudent are penalized while bold speculators are held up as the gold standard.

That’s why this woman was so proud of herself.

The days are long gone since cautious saving and careful investing made any sense or, more accurately, earned any respect... interest rates are at rock bottom and everyone knows it… you would be a fool to squirrel away your money in any form of basic fixed income account.

Further, it wasn’t enough for her that her “investments” increased notably in some fluke bear market zig-zag, she had to let to world know…. She was some sort of financial genius!

Think of that!

You just dump a pile of your dough into the DOW (“or whatever they call that thing”) and next thing you know, it grows by 30%... isn’t life grand?

Why… if we all did that, what fortunes would befall our land… what wealth… what good tidings!

Sorry folks… this is a bear market rally and if you don’t get that fact you not paying close enough attention.

Conspicuous Correlation: Retail Sales May 2009

Today, the U.S. Census Bureau released its latest nominal read of retail sales showing a increase of 0.5% from April 2009 and 9.6% decline from May 2008 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 experienced another significant decline falling 9.65% compared to May 2008.

Further, adjusted for inflation, “real” discretionary retail sales declined 8.64% since May 2008.


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 my 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.


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.

Mid-Cycle Meltdown!: Jobless Claims June 11 2009

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims declined 24,000 to 601,000 from last week’s upwardly revised 625,000 claims while “continued” claims jumped 59,000 resulting in an “insured” unemployment rate of 5.1%.

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.

Reading Rates: MBA Application Survey – June 10 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 jumped another 32 basis points since last week to 5.57% while the purchase application volume increased 1.12% and the refinance application volume slumped 11.8% 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 improvemen.

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).

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.

Certified Near-Organic and Naturally Shrunk

As I have noted before, I believe that the “sale pair counts” published by S&P within the S&P/Case-Shiller report represents likely the most accurate index of “organic” (as Mr. Mortgage Mark Hanson termed it) single family home sales available.

Remember that in order to derive each of the S&P/Case-Shiller series, S&P vets each transaction in order to judge whether it meets their criteria as an “arms-length” transaction as specified (roughly) in their methodology.

Now, in all likelihood, the “arms-length” vetting does NOT eliminate all distressed property sales as that isn’t the general purpose of the process.

Instead S&P is simply trying to remove from the collection of source data those transactions that were either made for nominal exchange (such as $1 transactions between family members) or cases where the change in value is completely out of scope… for example where an addition was added to the property doubling the square footage.

Another very important point to consider is that S&P excludes all sales that occur less than 6 months after a previous sale or as they note in their methodology, they exclude “a property flip”.

So, the only fuzzy area in the “sale pair count” indices “organic-ness” is with distressed properties that decline in value but not substantially so.

I called S&P and confirmed that foreclosed properties are NOT specifically excluded from the source data BUT they did note that if a price decline was particularly substantial and there was no other source data indicating the nature of the change, it would be excluded just as in the case where the price increases disproportionate to the average seen in the area.

So, with the “sale pair count” data what we really have are “near-organic” single family home sales indices.

As I had noted last week, there are many markets where the sale count trend is specifically in decline most notably the east-coast metro markets which appears to square with the fact that the general economic conditions in the east only turned decidedly awful in late 2008.

The top-tier bubble markets (Phoenix, Las Vegas, Tampa, Miami, San Francisco, San Diego and Los Angeles), on the other hand, all showed a notable bounce for most of 2008 with the fervor tapering off a bit at year end.

Taken together, the total sales for all markets present what appears to be a marked slowdown to the near-“organic” sales decline yet, I strongly caution, we are so early in the process that little real conclusion can be drawn.

As you can see from perusing the data, since late 2008, the top-tier bubble markets have all turn south again.

Click on the following charts for ultra-cool interactive versions.

For comparisons sake, let’s look at the physics of the bottom of the 90s housing bust in terms of sale-counts and prices.

Notice that although the literal non-seasonally adjusted bottom in sales occurred in February 1991, it took three more years (comparing only February’s) to register any notable increase in sales and even after six years, sales were still off considerably from the peak of the late 80s.

Also, notice that home prices continued to trend down for nearly three years after the literal low in home sales and didn’t pick up notably until well within the bubble-laden economic atmosphere of the “dot-com” boom.

So, the bottoming process to sales (if it has even commenced) will take many years to take shape during which time households will be facing immense financial stress which when combined will more than likely result in a fragile macro-economy.

On The Stamp: Food Stamp Participation March 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 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 18.93% while individual participation, as a ratio of the overall population, has increased 17.87%.

The March 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 34.17% on a year-over-year basis to $3,775,669,351 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.

Not Participating In The Boom or The Bust!

Probably the most significant issues currently plaguing the U.S. economy are posed not by the housing market but by the job market.

In order to recognize the severity of the situation one needs to consider that since 2000, nearly a decade, our labor market has been showing significant and unusual signs of weakness.

This is not a new revelation.

The concept of a “jobless recovery” was spun precisely for the purpose of “explaining” how we could “recover” from our last decline (dot-com bust) but not in typical fashion…. a “recovery” without the jobs.

As I have stated before, I don’t happen to believe that there is such thing as a “jobless recovery”… your economy either grows in a real and meaningful way (at least trend job creation) or it doesn’t.

In the past (see the Envisioning Employment posts) I have plotted the ratio of total and private non-farm payrolls to the civilian non-institutional population (in effect factoring out growth in population) and its quite clear that the run seen since 2000 stands out as the single weakest 10 year period in the post WWII period.

Another way to look at this weakness is the “civilian participation rate” which is essentially the same as my “non-farm payroll population ratio series” except its baked off of the household survey side of the employment situation report (i.e. NOT from the establishment).

Study the interactive chart below (click and install Microsoft Silverlight (like the Flash player) if you haven’t already).

Although the period between late 1956 and late 1962 (scroll over to the left…) looks to have brought a fairly significant 1.8% decline in workforce participation (against the backdrop of a growing population of workforce participants) our current decline appears not only to be about to best that percentage, but possibly more importantly, has been experiencing this declining trend far longer.