Professor Karl Case Retires

I’d like to extend my warmest regards to Dr. Karl Case, Professor of Economics at Wellesley College and co-creator of the S&P/Case-Shiller home price index methodology, as it has been recently reported that he has decided to retire from teaching as a result of the onset of Parkinson’s disease.

It should be clear to readers of this blog that we all owe Dr. Case a debt of gratitude for his remarkably successful effort at shining the clear and crisp spotlight of reasoned and rigorous analysis into the formerly murky and outright convoluted world residential real estate pricing.

No longer do we rely solely on skewed Realtor provided median/average price data or ginned-up government statistics to gain perspective on what is arguably the largest and most important asset/service most of us will ever consume in our lifetimes.

But of course, Dr. Case’s career has spanned many decades and his success with the pricing of residential real estate is but one example of many shining achievements of his time in academia.

He is an excellent professor with a passionate and provocative style and, as with all great professors, truly generous and accessible to all his students, even ones who never attended a single one of his classes.

Further, although for the last few years his frequent media appearances in the newspapers and on business television were normally set in the context of the doom and gloom of the housing debacle, Dr. Case presented his outlook with a combination of his factual and analytical expertise mixed with a dose of authentic optimism, the type of which was not meant to lessen or spin the severity of the situation but merely as an expression for the well being of all parties caught in the crossfire of hard economic times.

That’s a lesson that we all (particularly those of us in the housing bubble blogesphere) could learn from.

Also, I think it’s important to note that Dr. Case is a veteran having served three years on active duty in the Army one of which was spent in Vietnam.

As was reported in the Boston Globe piece, Dr. Case plans on continuing to work, publishing the 10th edition of his textbook “The Principles of Economics” (an excellent textbook that I keep on hand at all times) and keeping up a schedule of speaking engagements.

Best of luck to you Dr. Case and thank you for all that you have contributed throughout your academic life.

New Home Sales: November 2009

Subtitle: Stop The Presses!!!!

Today, the U.S. Census Department released its monthly New Residential Home Sales Report for November showing both significant revisions to prior months results as well as a whopping 11.3% month-to-month decline in sales of newly constructed single family dwellings bringing the seasonally adjusted annual sales pace down to 355,000 units or 9.0% below the level seen in November 2008 and remaining 74.44% below the peak level 2005

We are now only 1.87% above the record low hit earlier this year and likely on course with a breach of that level come early 2010.

It’s important to recognize the significance of revisions when interpreting both the new home sales and new residential construction data.

Although many in the traditional media and elsewhere have been treating the bounce seen since March as if it were a solid indication that the bottom was in, those of us who have followed this data for years know that one needs to rely on a mix of multiple metrics along with healthy dashes of skepticism and hunch in order to glean out the true trend.

Needless to say, these must be awfully disappointing numbers for many.

…The Feds, Wall Street, speculators, all the unsuspecting nitwits that locked in “housing bottom” new home purchases using government handouts and bribes.

Well, the system may be a shell of its former self, twisted and tortured by the feds, interested industry groups and speculators, but it’s not about to be gamed by such tomfoolery.

The bounce in new home sales seen this year was an authentic increase in overall activity but not in “organic” activity… How would new home sales have trended without the government propping?

So, the “real” bottom is not in and, as I have noted in prior posts, given that the level of completions remains significantly elevated and since there is still currently 7.9 months of supply, it is very likely that we will be headed back for a new low come early 2010.

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 earlier this year the new home sales data prompted the traditional media to make many “bottom calls”, the evidence for their conclusions were scant.

First, most “bottom callers” 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 slightly higher than past historic bottoms and the level of homes completed remains MUCH higher.

Look at the following summary of today’s report:

National

• The median sales price for a new home declined 1.9% as compared to November 2008.
• New home sales were down 9.0% as compared to November 2008.
• The inventory of new homes for sale declined 36.5% as compared to November 2008.
• The number of months’ supply of the new homes has decreased 30.7% as compared to November 2008 and now stands at 7.9 months.

Regional

• In the Northeast, new home sales declined 23.7% as compared to November 2008.
• In the Midwest, new home sales increased 23.6% as compared to November 2008.
• In the South, new home sales declined 14.8% as compared to November 2008.
• In the West, new home sales declined 9.2% as compared to November 2008.

Crashachusetts Existing Home Sales and Prices: November 2009

This week, the Massachusetts Association of Realtors (MAR) released their Existing Home Sales Report for November showing that single family homes sales absolutely surged jumping 63.1% on a year-over-year basis while condo sales exploded up 76.2% over the same period.

Single family median home value increased 0.7% on a year-over-year basis to $285,000 while condo median prices declined 0.4% to $249,000.

Obviously these results are indicating not only that the government’s subsidy of residential real estate (the market, the industry and Realtors) worked to drive a significant number of sales, but that housing fever is still alive and well.

This should come as a truly disappointing blow to anyone who has the audacity to think that a healthy and significant correction in prices is actually a necessary step in the process of healing our distorted and high cost of living area.

What gives the government the right to attempt to create a floor under housing, an asset/service carrying likely the single greatest cost any typical household has to bear?

If market forces would naturally drive down sales and prices making the cost of living more affordable why should government and industry groups like the Realtors interfere?

But, federal meddlers and conniving interested parties don’t think in those terms… they support prices out of a bias in favor of property owners on the upper end, they create and support public housing projects for those on the lower end… and what of those in the middle?... you get to foot the bill one way or another.

So the beat goes on… Buyers snap back to a behavior we all now know caused tremendous distortions and costly excesses, the Feds feel satisfied that they bought enough votes to secure their next election and Realtors line their pockets with commission loot that is now the direct transformation of your tax dollars.

What have we learned from this whole ordeal? … likely nothing.

But in any event, this surge of activity can only run so long… contrary to popular belief, there is not simply and endless supply of sidelined buyers just ready to snap up the next government tax gimmick.

Eventually even these sneaky devices will fail to stimulate the lemmings and the natural market force will show its true character.

Whether Mr. housing market will come out of this distorted period depressed and dejected or spry and agile is anyone’s guess but, given the latest results and the recent extension of the federal governments housing policy, we should be prepared for another season of distorted sales volume.


As in months past, be on the lookout for the inflation adjusted charts produced by BostonBubble.com for an even more accurate "real" view of the current home price movement.

Key Statistics from the Report:

Single Family results compared to November 2008

• Sales: increased 63.1%
• Median Selling Price: increased 0.7%
• Inventory: declined 15%
• Current Months Supply: 6.5
• Current Days on Market: 116

Condo results compared to November 2008

• Sales: increased 76.2%
• Median Selling Price: decreased 0.4%
• Inventory: declined 14%
• Current Months supply: 6.5
• Current Days on Market: 128

Reading Rates: MBA Application Survey – December 23 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 was flat since last week at 4. 92% while the purchase application volume decreased 11.6% and the refinance application volume decreased 10.1% over the same period.

It’s important to recognize that despite the Federal Reserve’s “quantitative easing” measures and record low interest rates, the purchase application volume has now dropped to the lowest reading since 2000.

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).

Existing Home Sales Report: November 2009

Today, the National Association of Realtors (NAR) released their Existing Home Sales Report for November showing a continuation of the epic government sponsored surge in home sales activity particularly for condos and lower end properties.

In fact, the stimulative effects have been so pronounced that sales of single family homes were up over 42% annually while sales of condos jumped a whopping 60% over the same period.

As for prices, they are still declining with single family home prices declining at 4.4% annual rate while condos declined at a 3.1% annual rate.

It’s important when reflecting on the sales results to consider that over 70% of all sales were for properties priced below $250,000 while only 7.3% were priced at or above $500,000.

Clearly, today’s results unequivocally indicate that the government’s tax gimmick drove a surge in "lemming" demand, bringing a renewal of speculative animal spirits but the cost has been high with at least $500 million of outright fraud and an FHA that is on the rocks.

So, while the federal government works tirelessly to prop unaffordable housing prices, Realtors are quickly lining their pockets with commissions that are a direct result of American's current and future tax dollars.

The following (click for larger versions) are charts showing sales for single family homes, plotted monthly, for 2006, 2007, 2008 and 2009 as well as national existing home inventory and month supply.







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

Bull Trip?!: GDP Report Q3 2009 (Final)

Today, the Bureau of Economic Analysis (BEA) released their third and final installment of the Q3 2009 GDP report showing that the economy expanded with GDP increasing at an annual rate of 2.2% from Q2, a significantly slower rate than the 3.5% originally reported in October's fictitious preliminary release.

It's important to recognize the extent to which these numbers had been ginned-up within the context of the typical release process and consider the fact that the future benchmark revisions will more than likely revise the result even lower.

As I had noted in my commentary on the advance release, it was extremely unlikely that Q3 fixed residential investment expanded to a rate surpassing all quarters of the ten years of preceding housing boom.

It was also extremely unlikely that Q3 non-residential fixed investment declined by the tepid 2.5% rate during the same quarter that saw the worst contraction in CRE prices in at least twenty years.

Finally, Q3 real personal consumption was clearly not experiencing organic growth but simply showing the temporary distortion of the "cash for clunkers" policy.

With today's release we are getting closer to witnessing the actual growth seen in Q3.

Residential fixed investment was revised down to show an increase 18.9% at an annual rate but likely still has further downward revisions to come in benchmark releases.

Non-residential fixed investment was revised to show a decline of -5.9% at an annual rate but again, will likely be revised to show a steeper contraction in future revisions.

Durable goods increased at an annual rate of 20.4% propped nearly entirely as the result of the government’s one time sham “Cash for Clunkers” program.

Citizen Lereah?

Those who have been following along since the early days of the housing debacle will recall the role played by housing bubble blogesphere arch-nemesis and former National Association of Realtors chief economist David Lereah.

Until May of 2007 Lereah vigorously worked to spin the story of housing in such a way as to produce the best and most optimistic outlook possible.

When the housing bubble was inflating, Lereah wrote of the benefits of home ownership, its potential for dramatic wealth creation, and his outlook for a long-trending bull run.

When the markets started to crack, he saw stabilization around every corner, a “boom” that “would not bust”… he routinely massaged metaphors for town hall meetings… “bubbles” bursting became “fat balloons” deflating… and called out non-believers as Chicken Little’s.

Then, as the sub-prime crisis cleared the point of no return, Lereah left the National Association of Realtors for the relative safety of (more or less) obscurity.

For his efforts Lereah garnered the respect (and pay) of his association and a massive cadre of “believer” Realtors but also earned the recent title of one of the “25 People to Blame for the Financial Crisis” by Time magazine and likely the scorn of a generation.

But Lereah has since admitted his mistakes… and although his “positive spin” promotion of the narrow financial interests of an industry group over the overwhelming and truly important interests of the common good was quite a misstep, don’t we all deserve a chance at redemption?

Maybe not… but it appears that Lereah has launched a new venture… let’s call it a blog… with both an ironic title and a decidedly more realistic un-spun outlook.

“Real Estate Economy Watch” is effectively a blog that hosts daily commentary on the housing market, tracks market data, and even specifically follows the course the “housing crisis”.

The title is ironic because it is reminiscent of “David Lereah Watch” a popular blog that relentlessly pounded Lereah during the heyday of the bubble crescendo.

The content, on the other hand, bears an unrecognizable skeptical edge.

Has Lereah turned it all around? Is he “owned up” and now on the road to salvation?

Who knows… but, in any event, his site is worth a read if not simply as a basic contrast against which his past performance and the current NAR line look remarkably stark.

Bubble’s Bounce Then Bust Again!?

Against the backdrop of historically low interest rates and government stimulation, "resilient" participants in property markets in both the United States and the United Kingdom responded with nothing short of jubilance.

Whereas pessimism was the leading dynamic for the majority of 2008, it seems that the Spring of 2009 brought a renewal of housing euphoria, albeit in a more limited and fragile sense.

In the U.S., the first time “homebuyer” tax credit, the “cash for clunkers” of housing, provided significant stimulation on the lower end, driving sales and a noteworthy bounce in prices.

In the U.K., the lowest interest rates in most peoples' lifetimes taken together with significantly corrected prices provided the impetus for a notable price bounce as well.

But how long can this government-sponsored stimulation last and what will happen if it doesn’t?

The most recent data is showing signs that the euphoric bounce is likely drawing to a close.

The Radar Logic home price indices clearly show that the U.S. home price bounce topped out in mid-summer and is now trending down nationally and even in some of the worst hit markets where prices have already dropped back to levels not seen in at least a decade.

The latest data out of the U.K. shows that home prices there are continuing to bounce with the "Nationwide" series showing the second consecutive year-over-year increase while the "Halifax" series now shows the first annual increase in in twenty one months.

Yet, on a month-to-month basis both series show only tepid increases.

The S&P/Case-Shiller Composite 10 series, a comparable series to both of the U.K. series, is also showing that the rate of recent house price inflation is slowing on a month-to-month basis while remaining strongly negative on a year-over-year basis.

Two Great Bounces! - December 21 2009

The following charts provide a simple comparison between the big stock bounce that occurred in the wake of the DOW crash of 1929 and the bounce we are seeing today in the S&P 500 index.

The method of alignment was simple… take the first definitive up trading day off the bottom of the preceding bear market low and set that as the start of the series… then simply re-base both series to a value of 100 so that they can be compared side-by-side.

The lower bar chart plots the cumulative percentage change since the start of each bounce.

The S&P 500 is up over 50% in a little over 180 trading days… an historically aggressive run with an obvious note of mania to it… and wholly comparable to… even far stronger than… the price movement seen in the 1930s-era DOW rally.

At this point for the 30s-era DOW, the bull-run was over as the bear trend resumed in earnest… today though the Bull is seriously on the move… how long will this boom last?

Only time will tell… But for now, let’s continue to keep a watchful eye…

Sinking Ships – MA vs. RI November 2009

Subtitle: MA Unemployment … Peaking out or About to Pick Up!

As I had noted in my original post, historically it has been very unusual for there to be more than a 1.5% difference (either more or less) between the unemployment rates if Massachusetts and Rhode Island.

Recently though, we have seen a historically unusual spread between Rhode Island’s high rate and Massachusetts’ far lower rate.

In fact, the latest 3.9% spread nearly exceeds ALL spreads seen in at least 40 years.

This indicates that either Rhode Island’s current rate would need to fall dramatically or the Massachusetts rate would need to increase sharply…. My sense, especially in light of the financial turmoil seen since September 2008, is that Mass will be continually playing catch-up.

The latest regional unemployment report shows that, in November, the Rhode Island unemployment rate declined to 12.7% while the Massachusetts rate declined slightly to 8.8%.

Massachusetts is still experiencing large year-over-year increases to unemployment jumping 44.26% on a year-over-year basis continuing to indicate that Mass is slogging through a period of serious job weakness.

The Chicago Fed National Activity Index: November 2009

Today’s release of the Chicago Federal Reserve National Activity Index (CFNAI) indicated that national economic activity contracted again in November with three of four component indices declining and with the personal consumption and housing component showing the weakest results.

The CFNAI is a weighted average of 85 indicators of national economic activity collected into four overall categories of “production and income”, “employment, unemployment and income”, “personal consumption and housing” and “sales, orders and inventories”.

The Chicago Fed regards a value of zero for the total index as indicating that the national is expanding at its historical trend rate while a negative value indicate below average growth.

A value at or below -0.70 for the three month moving average of the national activity index (CFNAI-MA3) indicates that the national economy has either just entered or continues in recession.

It’s important to note that at -0.77 the current three month average index value is well within the official recessionary indicator mark while October’s literal value has strengthened a bit to just -0.32.

The following charts (click for full-screen interactive zoom-able version) plot the national activity index as well all of its four components.

Extended Unemployment Benefit Explosion!

While yesterday’s jobless claims report continued to show a steady trend down to both initial and continued unemployment claims with a nearly textbook peak shaping up, considering the federal extended claims data offers a more dire view of the state of the job market and of the economy as a whole.

Since the middle of 2008 two federal government sponsored “extended” unemployment benefit programs (the “extended benefits” and “EUC 2008” from recent legislation) have been picking up claimants that have fallen off of the traditional unemployment benefits rolls.

Currently there are some 4.729 million people receiving federal “extended” unemployment benefits.

Taken together with the latest 5.39 million people that are currently counted as receiving traditional continued unemployment benefits, there are just over 10 million people on state and federal unemployment rolls.

Philadelphia Feeling: Federal Reserve Bank of Philadelphia Business Outlook Survey December 2009

Today, the Federal Reserve Bank of Philadelphia released the results of their Business Outlook Survey for November showing a continued increase in manufacturing activity with the current activity index still indicating expansion with a reading of 20.4.

It's important to note that although the "future activity" reading continues to indicate expansion with a reading of 24.4, today's results show the fourth consecutive decline indicating that assessments of future manufacturing activity have weakened notably since August.


Also, today’s results show that any recent parallel to the stagflationary eras of the 70s and early 80 which had given way to a stronger stag-deflationary force, and then mildly inflationary inline with the government stimulus now appears to be, at least temporarily, looking marginally double-dipish as latest release shows predictions on future employment flattening.

The following chart shows the latest results of the “current new orders” “current prices paid” and “future employment” components (click for larger versions).

The following chart (click for larger) shows these measures during the last stagflationary era seen between 1976 – 1980. Notice the clear divergence of rising prices and falling growth.