New Residential Construction Report: January 2011

Today’s New Residential Construction Report showed notable declines for both single family permits single family starts which, considering the truly depressed level of new home construction activity, appears to suggest that housing is continuing to remain historically weak.

Single family housing permits, the most leading of indicators, declined 4.75% on a month-to-month basis to 421K single family units (SAAR) and declined a notable 17.29% below the level seen in January 2010 and an astonishing 76.59% below the peak in September 2005.

Single family housing starts declined 0.96% to 413K (SAAR) units dropping 19.18% below the level seen in January 2010 and a whopping 77.35% below the peak set in early 2006.

With the substantial headwinds of rising unemployment, epic levels of foreclosure and delinquency, mounting bankruptcies, contracting consumer credit, and falling real wages, an overhang of inventory and still falling home prices, the environment for “organic” home sales remains weak and likely very fragile.

Reading Rates: MBA Application Survey – February 16 2011

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 as well as application volume for both purchase and refinance applications.

The purchase application index has been highlighted as a particularly important data series as it very broadly captures the demand side of residential real estate for both new and existing home purchases.

The latest data is showing that the average rate for a 30 year fixed rate mortgage declined slightly dropping 1 basis point to 5.12% since last week, still remaining near the highest level seen since April 2010, while the purchase application volume declined 5.9% and the refinance application volume slumped 11.4% over the same period.

It's important to note that rates have been, more or less, trending up for about four months now and coincidentally somewhat in-line with the Fed making QE2 official.

While early scuttlebutt about QE2 measures worked to depress mortgage rates in early 2010, it appears that its actual implementation is having the reverse effect resulting in continued poor trends for purchase and refinance activity.

Now it appears more likely that QE2 worked to improve confidence or at least created the perception that the Fed will stop at nothing to prop the ailing stock market and, in turn, the entire macro-economy.

Thus improvements in equity prices and macro-trends are now coming in-line with a notable increases in lending rates.

The purchase application volume remains near the lowest level seen in well over a decade while refinance activity continues to slow.

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages since 2006 as well as the purchase, refinance and composite loan volumes (click for larger dynamic full-screen version).

Homebuilder Blues: NAHB/Wells Fargo Home Builder Ratings February 2011

Today, the National Association of Home Builders (NAHB) released their latest Housing Market Index (HMI) showing a flattening for most measures with the "buyer traffic" index remaining near record lows as home builders continue to plod through the weakest activity seen in generations.

It's important to recognize that currently the HMI index is showing a slight year-over-year decline and still remains very near the lowest levels seen in over 20 years, a testament to the significance of the latest pullback.

The new home market will likely not resume any significant form of healthy function until the considerable overhang of inventory is cleared.

The Empire State Manufacturing Index: February 2011

The Empire State Manufacturing Survey consists of a series of diffusion indices distilled from a monthly survey of New York regional manufacturing executives and seeks to identify trends across 22 different current and future manufacturing related activities.

Today’s report indicated expansion for current activity and slight slowing for future activity with the current business conditions index climbing to 15.43 while the future conditions index declined to 49.4.

Current new orders declined slightly to 11.8 while future new orders also declined slightly to 44.58.

Conspicuous Correlation: Retail Sales January 2011

Today, the U.S. Census Bureau released its latest nominal read of retail sales showing an increase of 0.3% since December bringing the total increase since last year to 7.8% 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, declined 1.18% from December but climbed 3.90% above the level seen in January 2010 while, adjusting for inflation, “real” discretionary retail sales increased 2.64% over the same period.

On a “nominal” basis, there had 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 chart shows the year-over-year change to nominal discretionary retail sales and the year-over-year change to nominal the S&P/Case-Shiller Composite home price index since 1993 and since 2000.

As you can see there is, 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.

Looking at the chart below (click for full-screen dynamic 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.

The Slumping IC in BRIC

Looking deeper into today’s OECD Leading Indicator release, one notable trend, namely the near simultaneous slowing of India and China, sticks out as very important development when considering macro-economic conditions going forward.

One theme that has been spun numerous times since the lows of March of 2009 is that outsized growth in the BRIC (Brazil, Russia, India and China) emerging economies would provide the global economy the boost it needed to shake off the malaise of the collapse and maintain an ongoing expansion.

It could easily be argued that investor enthusiasm for the speculative potential in these hot economies (along with the suspension of mark-to-market accounting and a few trillion here and there from the Feds) did, in fact, help to turn the trend during the dire days of early 2009 but many have taken the idea of these emerging economies actually driving the global economy with a “grain-of-salt” especially considering that the combined GDP of the BRIC countries is still just roughly $9.5 trillion, that compared to the United States $14.5 trillion.

Well in any event, it looks like two key BRIC economies… the I and the C… are seeing some notable slowing in recent months.

Both India and China are seeing an accelerating slowdown with economic activity in China currently declining 1.62% on a year-over-year basis while India has seen a 1.33% decline over the same period.

Even if a slowdown in these emerging markets lacks the potential to put the breaks on the entire global expansion, keeping an eye on these trends could prove vital as any “flight to safety” coming as a result of their degradation could have a notable… positive… impact on investment in the US.

The Fall of Greece: December 2010

Looking at the most recent OECD economic indicators, Greece makes by far the weakest showing in all the Eurozone appearing to have clearly collapsed into recession.

Industrial production remains in severe contraction territory, consumer has fallen off a cliff, business confidence though trending up is clearly depressed and the leading index is turning down fast dropping 0.35% since November and 6.95% below the level seen in December 2009.

For December, consumer confidence declined 0.33% from November dropping 5.88% below the level seen in December 2009 while business confidence increased from November and remained 0.68% above the level seen in December 2009.

Industrial production remains weak but jumped a whopping 5.25% since September (much less timely data) remaining near the lowest levels seen since the late 1990s.

China's Engine: December 2010

Looking at the latest release of the OECD economic indicators for China, it appears that the massive jump in economic activity seen since the panicky period of late 2008 took a notable pause throughout most of 2010 and now appears back on the decline.

China’s leading economic indicator suggests that economic activity slowed in December showing a notable month-to-month decline of 0.10% bringing the latest level 1.62% below the level seen in December 2009.

OECD Composite Leading Indicators: December 2010

The Organization for Economic Co-Operation and Development (OECD) publishes a wealth of data tracking the fundamental economic dynamics of the world’s largest economies.

The OECD leading indicator, industrial production, business confidence and consumer confidence series all disclose important and timely clues to the state of each respective economy or group of economies (bookmark the live dashboard).

The latest monthly results indicate that economic conditions in the global economy continued to strengthen with the total leading index increasing 0.10% since November and climbing 0.82% above the level seen in December 2009.

Total Business confidence also improved notably climbing 0.47% since November and remaining 3.72% above the level seen in December 2009.

Total Consumer confidence for December also jumped notably with the total index increasing 0.13% since November and 0.75% above the level seen in December 2009.

Hoping Obama Housing Plan is For Real

This morning the Obama administration released their plan for revamping the government’s role in the nation’s housing market and after having just read the press release I’d have to say that I’m very enthusiastic for the plans goals.

While the “devil is in the details”, the administration has clearly done a thorough post-mortem on Fannie, Freddie and the whole “government-sponosred” housing racket and appears set to significantly dismantle and restructure the system with a priority on returning most functioning to the private market.

Particularly inspiring goals, especially in light of their political consequences, are the initiatives to eliminate any pricing advantages that the GSEs have previously enjoyed thus paving the way for greater private market competition and the inevitable wind-down of Fannie and Freddie, allowing the “conforming” loan limits to adjust back down in October 2011, establishing a target of 10% minimum down payment for government insured mortgages, elevating government directed rental initiatives to an equivalent status as home purchase programs and more directly targeting stable creditworthy households in need, and increasing FHA premiums and returning it to its original role as a premium-based balanced insurance fund.

It’s important to recognize that currently 90% of all home loans are guaranteed by the government (Fannie, Freddie, FHA etc.) and it appears that the administration clearly views this (as any rational observer would) as a condition that needs to be reversed through reforms of government initiatives and regulations affecting private financial institutions.

One likely outcome from the implementation of this plan is that access to housing (over a period of years) will likely become generally more constrained as the faux-government sponsored market created over the last few decades lifts to reveal costs more in-line with real market conditions and born primarily by private institutions and individuals.

While I have yet to fully digest the entire report, so far so good…

University of Michigan Survey of Consumers February 2011 (Early)

Today's release of the Reuters/University of Michigan Survey of Consumers for February indicated an increase in consumer sentiment with a reading of 75.1 climbing 2.04% over the level seen last year.

The Index of Consumer Expectations (a component of the Index of Leading Economic Indicators) declined to 67.6, and the Current Economic Conditions Index increased to 86.8.

It's important to recognize that while consumer sentiment is still higher than the panic laden trough level seen in late 2008, the current sentiment level is still far lower than any level seen during the 2001 tech recession and roughly equivalent to the worst seen during the early 1990s and second dip 1982 recessions.

The New “Household” Misery Index: December 2010

Back in the 1970s and 80s the “Misery Index” was popularized as a measure that accurately captured the misery and malaise of the time.

The original Misery Index was a bit too simplistic as it only captured the severity of the two main vexing issues of the time, unemployment and inflation.

Today, inflation, as measured by the annual rate of change of the CPI-U, is not a significant source of financial misery.

Of course, households on fixed income may dispute that fact and many have argued that CPI itself does not accurately capture “real” inflation as it has never accounted for the ridiculous increasing costs of housing and other essentials so for the sake of formulating a new misery index, inflation will factored out.

Another key to formulating a new misery index is to specifically target “household” misery as opposed to including data that might target the miserable state of affairs of the federal government or corporate misery.

The Household Misery Index captures the following trends and weights them equally:

1. The U-3 unemployment rate
2. YOY percent change of the 10-Year moving average of total nonfarm payrolls
3. YOY percent change of the 10-Year moving average of “real” personal income
4. YOY percent change of the 10-year moving average of “real” S&P 500

The unemployment rate captures the misery associated to the threat and severity of a potential bout of unemployment while the annual change of the 10 year moving average of non-farm payrolls captures a more fundamental sense of the overall job market.

The annual change to the 10 year moving average of “real” (adjusted with CPI-U) personal income captures a household’s long term sense of income prospects.

The annual change to the 10 year moving average of “real” (adjusted with CPI-U) S&P 500 captures a household’s long term sense of typical investment prospects.

Unfortunately, all home price series are simply not long enough to include in the formulation but there may be alternative measures that can be included in the future.

The level of misery declined notably in December dropping 0.09% but still remained near the peak for this cycle and nearly the highest level seen in 30 years while on a year-over-year basis, misery declined for time since November 2005.

This is a notable improvement for misery and if the past is to be taken to be even just a crude guide, the level of household misery should continue to steadily improve in the coming months.

U.S. vs Canadian Housing Price Mashup!: November 2010

Teranet/National Bank of Canada produces a complete line of Canadian home prices indices using the same repeat sale methodology as the S&P/Case-Shiller allowing for an interesting comparison against home prices here in the US.

Mashing-up the Teranet/NBC Composite-6 index to the S&P/CSI Composite-10 both rebased to the year 1999 provides a pretty decent “apples-apples” comparison as both the Teranet/NBC Composite-6 and S&P/CSI Composite-10 share the purpose of narrowly including just the top largest metros for their respective country.

Looking at the chart (click for full-screen dynamic version) you can see that both indices are showing a slowing trend with the Case-Shiller actually indicating the first annual declines in ten months while the Teranet data suggests that Canadian home prices have slid in recent months but are continuing to show an annual increase of about 5%.

Browse the full catalog of Canadian home price indices provided by Teranet/National Bank of Canada.

IEIF France and European Property Prices: January 2011

One of the most interesting and damming bits of evidence that tipped many off to the existence of a significant real estate bubble during the early 2000s was the fact that dramatically increasing property prices were occurring in most industrialized nations.

The U.S., U.K., France, Ireland, most of continental Europe, Canada, Australia and elsewhere were all simultaneously experiencing significant property booms thereby thwarting, more or less, many of the “limited supply” and “Superstar Cities” arguments that sought to justify individual regions explosive appreciation.

Today we know that this massive boom in real estate was more a function of financialization and credit availability rather than fundamentals.

The latest data from the Institut de l'Epargne Immobilière et Foncière (IEIF), a French research and analysis firm, suggests that property prices in France and Europe increased during January at annual rate of about 14%.

Extended Unemployment: Initial, Continued and Extended Unemployment Claims February 10 2011

Today’s jobless claims report showed notable declines to both initial unemployment claims and continued unemployment claims as a significant declining trend continued to materialize for both initial and traditional continued claims.

Seasonally adjusted “initial” unemployment dropped by a whopping 36,000 to 383,000 claims from last week’s revised 419,000 claims while seasonally adjusted “continued” claims declined by 47,000 resulting in an “insured” unemployment rate of 3.1%.

Since the middle of 2008 though, 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 4.63 million people receiving federal “extended” unemployment benefits.

Taken together with the latest 4.63 million people that are currently counted as receiving traditional continued unemployment benefits, there are 9.27 million people on state and federal unemployment rolls.

The following chart (click for larger version) shows “initial” and “continued” claims, averaged monthly, overlaid with U.S. recessions since 2007.