The S&P Case-Shiller Home Price Index falls 17.5% and may bottom out in March 2010

The S&P Case-Shiller home price index for July 2008 was released today by Standard and Poors. The composite-10 declined 1.06% from June 2008 and declined by 17.49% from July 2007. The composite-10 is now down 21.14% from its peak. All 20 individual markets are still down year over year with Las Vegas and Phoenix down the most at -29.90% and -29.27% respectively. Charlotte and Dallas are down the least year over year at -1.77% and -2.50% respectively. 6 markets were up in July compared to the previous month (Denver, Boston, Atlanta, Detroit, Minneapolis, and Dallas). The markets with the biggest declines from the peak are also declining the fastest; and some of the markets that declined the least are starting to rise. 8 markets have now dropped over 25% from their peak.

You can click on the images for a larger view.

The CME futures market is pricing in a further drop of -9.48% by next July for the composite-10. The home price index is not seasonally adjusted. In the last 20 years, home prices have averaged appreciation of 5.29% a year. March through August are typically the strongest months for appreciation and home prices have on average appreciated by 4.40% during that 6 month period. September through February are the weakest months; home prices have on average appreciated by only 0.89% during that 6 month period. In 2007, the declines were moderate in the first half of the year and started rapidly declining in August. The month to month change in the composite-10 bottomed in February when it declined by 2.80% in one month and peaked in June with a 0.61% decline over the previous month. S&P Case-Shiller index is a three month average. The existing homes report issued by the National Association of Realtors uses seasonally adjusted median prices. Prices peaked in June 2008 and dropped in July and even faster in August.

The CME futures market is pricing in that housing will bottom at 151.6 in March 2010. This is a 15.1% further drop from July 2008's mark of 178.46. The CME futures are pricing in that the home price index will recover to 160 by September 2012.

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New Home Sales continue to weaken

The U.S. Census Bureau and the Department of HUD announced today that the new single family home sales for August 2008 were at a seasonally adjusted annual rate of 460,000. This was 11.5% less than July 2008 and 34.5% less than August 2007. Economists were expecting that sales would fall to 510,000.

Months Supply reached 10.9 in August, up from 10.3 in July. Months Supply is the amount of time it would take to completely sell the new homes inventory if no new homes were built and if the sales pace continued as is. Supply and Demand is balanced at 6 months. The current level will continue to put pressure on home prices both for new homes and existing homes.

New home sales are still weakening and now we are entering the slow months for new home sales.  The $700 billion bailout isn't helping the psychology of buyers either.

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Existing Home Sales continue to fall; inventory stabilizes

The National Association of Realtors released the existing home sales figures for August 2008 today. Sales decreased to a seasonally adjusted annual rate of 4.910 million units in August, down 2.19% from July 2008 and down 10.73% from August 2007. Sales have averaged an annual rate of 4.940 for the first eight months this year. The median sales price was $203,100 for August down sharply from $212,400 in July (down 3.4%) and down from $224,400 in August 2007 (down 9.5%). The price declines were led by the West which was down 10.8% in August compared to the previous month. The other 3 regions were only down 0.9% for the month. According to Lawrence Yun, NAR chief economist: “The highest concentration of foreclosures is in the West, which is weighing down the median price because many buyers are taking advantage of deeply discounted prices.”

The inventory of existing homes fell to 4.225 million units down from 4.575 million in July 2008. Even though sales fell in August, the fall in inventory was bigger causing Month's supply to fall to 10.4 from the previous month's figure of 10.9. While month's supply and inventory improved slightly, there is still too much supply. We are also entering into a slower season for real estate.

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Sales and Use tax collection declines rapidly

The decline in Sales and use tax collection is starting to accelerate. Using a weighted composite for the four largest states (California, Texas, New York, and Florida), the decline in real growth fell by an annual decline rate of 3.59% in August which was significantly down from the rate of -2.13% in July. Texas grew at a rate of 4.06% in August after adjustments for inflation which is down from the hot pace of 8.37% it averaged for 2007. New York's growth declined sharply to -3.05%. California's decline was at -6.42% in August. This is the biggest decline since March 2002. California declined on average of -2.03% in 2007. Florida continued its steady fall, declining -8.97% in August. The growth rate in Florida has been lower than the previous month for 22 months straight. Florida averaged a decline of -2.70% in 2007.

New York State is officially in recession according to the NY State's Budget director, Laura Anglin. She notes that the state's five last contractions averaged 25 months, more than double the national average of 11 months. California and Florida have also been in recession. The Philadelphia Federal Reserve publishes a map showing the quarterly change in economic activity at the state level. Here is their description of the Index:

The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average).

The latest map for July is dramatically different from the February 2008 map.

Here is the July 2008 map:

Here is the February 2008 map:

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New housing construction continues to slow; inventory is getting smaller

The U.S. Census Bureau and the HUD Department announced the new homes construction stats for August 2008 today. Total building permits were at a seasonally adjusted annual rate of 854,000 which was 8.9% below June 2008 and was down 36.4% from a year ago. 1 unit permits were at a seasonally adjusted annual rate of 554,000 which was down 8.9% from the previous month and down 36.4% from a year ago. 1 unit permits are at their lowest annual rate since August 1982. Total housing starts were at a seasonally adjusted annual rate of 895,000 which was down 6.2% from the previous month, and down 33.1% below August 2007. 1 unit starts were at 630,000 which is down 1.9% from July 2008 and down 34.9% from a year ago. Housing completions were at a seasonally adjusted annual rate of 961,000 (1 units were at 676,000) which was 9.8% below the previous month, and 35.8% below June 2007.

The amount of new homes being built is starting to be less than demand. This is a good thing as inventory is starting to be reduced. However, there is still a long way to go for demand to be in balance with supply.

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The Federal Reserve Bails out AIG

Today, the U.S. government agreed to lend $85 billion to American International Group (AIG) in exchange for a 79.9% percent stake. Per Bloomberg:

The Federal Reserve "determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance,'' the Fed said.

The agreement, supported by the Treasury Department, will keep New York-based AIG in business, averting a failure that could have threatened more financial companies and added to chaos in world markets. Losses industrywide could have totaled $180 billion if AIG collapsed, according to RBC Capital Markets. ... ... ...

The two-year loan will "assist AIG in meeting its obligations as they come due,'' the Fed said in its statement. The federal lifeline will allow AIG to sell assets in an orderly fashion rather than at distressed prices, said a person familiar with the agreement. ... ... ...

Interest will accrue on the outstanding balance at the three-month London interbank offered rate plus 8.5 percentage points.

Over the weekend, AIG was asking the Fed for $40 billion. That grew to $75 billion yesterday. Today the amount needed to save AIG was as high as $100 billion. AIG closed with a market cap of $10.62 billion. A 79.9% share based on close would be a share worth $8.5 billion. They are lending ten times that amount.

Before the bailout, Jim Cramer, a so-called permabull, made a case for financial meltdown if AIG was not bailed out in this video:

I was reminded of this classic video:

And here was a great parody response:

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Pending Home Sales were down in July

The Pending Home Sales Index for contracts signed in July 2008 on a seasonally adjusted basis was at 86.9 down 2.8% from 89.4 in June 2008 and is down 6.4% compared to July 2007's figure of 92.8. Without seasonal adjustments, the index was down 6.0% compared to July 2007. 2001 was previously the slowest year for pending home sales on record. July 2008 was 12.9% below July 2001's sales pace. June 2008 was 6.1% below the 2001 level.

After slightly raising their 2008 median home sales price forecast last month, the NAR made a downward adjustment from $206,700 to $203,600. The NAR is forecasting 2009 median home sales prices to be at $208,500 (versus their projection last month of $215,800 for 2009). In June they had dropped their 2008 forecast by 4.1% from $213,700 to $205,000. According to Lawrence Yun, NAR chief economist, “Pending home sales are oscillating month-to-month, with the long-term trend essentially flat." Pending home sales start to slow down dramatically in the fall and winter months.

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Fannie Mae and Freddie Mac are nationalized

Over the weekend, Fannie Mae and Freddie Mac were nationalized.  Over the last couple of months it was widely thought that this would be unavoidable, however it still came as a shock that it happened so soon.  Looking at the home price indexes that are published by the The Office of Federal Housing Enterprise Oversight (OFHEO) which oversees Fannie Mae and Freddie Mac, it is puzzling that such a small decline in values could bring the two large institutions to their knees.  The monthly OFHEO purchase only index is down only by 4.8% year over year.  The S&P Case Shiller National Home Price Index is down 15.4% year over year. 

Last May I compared the OFHEO Home Price index and the S&P Case-Shiller Home Price Index in this post.  There are four major differences between the OFHEO index and the Case-Shiller index.  The first is the geographical makeup.  The S&P Case-Shiller National index covers about 70.8% of the U.S. Real estate.  The second difference is the OFHEO index looks at both purchases and refinances whereas the Case-Shiller index only looks at purchases.  However, the OFHEO does issue a purchase only index.  The third difference is the OFHEO index discounts homes that have lengthy intervals between valuations more than the Case-Shiller index does.  The final major difference was the loan types.  The majority of ARMs and interest only loans were financed outside of Fannie Mae and Freddie Mac.  I also showed how the OFHEO index tends to lag the Case-Shiller index by about 6 months.  This is could be due to the fact that a typical appraisal may have comparables that are 4 to 6 months old by the time the loan closes but could be up to 10 months old.

This chart looks at home prices going back to 1890 adjusted for inflation.  It also shows how the CME Futures market is pricing how the home price index will look like in the future.  It appears that we are about half way through the housing crisis.  The first half of declines has dramatically changed the financial landscape.  It remains to be seen what the future will bring, but I foresee a huge burden to the U.S. taxpayer.

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Non-Manufacturing Index (NMI) indicates slight growth

The Institute for Supply Management released their August 2008 Non-Manufacturing ISM Report on Business today. The Non-Manufacturing Index (NMI) came in at 50.55%. 50% is the breakpoint for growth in the non-manufacturing sector. NMI had plunged to 44.6% in January 2008 but has been between 48%-52% ever since then.

NMI is made up of four components: business activity, employment, new orders, and supplier deliveries. Business activity was at 51.6% in August up from 49.6% in July; employment was at 45.4% down from 47.1%; new orders were at 49.7% up from 47.9%; and supplier deliveries were at 55.5% up from 53.5%.

Here is what some of the respondents were saying:

• "Despite constant reminders of a tough economy ... business prospects are fairly strong." (Professional, Scientific & Technical Services)
• "Fuel is easing, impacting many areas positively, but distributors are still under tremendous pressure due to the cost of diesel." (Accommodation & Food Services)
• "Although we've had some relief recently, energy prices continue to influence buying and budgeting decisions." (Public Administration)
• "New home construction continues to struggle under the weight of the current unsold housing inventory." (Wholesale Trade)
• "If the drop in oil prices can be sustained, we should see a more profitable third quarter." (Utilities)

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Growth in withheld taxes is slowing down dramatically

The amount of withheld taxes received by the Department of the Treasury for a 12 month period ending August 29, 2008 was 0.73% higher than a year ago after being adjusted for inflation. This is down from July's rate of 1.66%.  This is a dramatic decline from 2006 and 2007 where 12 month's withheld taxes grew on average by 4.5% a year. 

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PMI for August is 49.9% suggesting the economy is still growing

The Institute for Supply Management released their monthly Manufacturing ISM Report on Business today. The Purchasing Manager's Index (PMI) came in at 49.9% for August which was just under the reading of 50% for July. A PMI reading of 49.9% suggests that the manufacturing economy is slightly contracting. Per ISM: "A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting. A PMI in excess of 41.1 percent, over a period of time, generally indicates an expansion of the overall economy." PMI has been under 50 5 times this year, it has been at 50 once, and it has been above 50 just two times.  PMI has averaged 49.5% in 2008. Economists had expected PMI to come in at 50.0%.

Here is what some of the respondents to the ISM survey are saying:

• "Business is picking up and continues to improve for projects to be constructed in 3rd and 4th quarters 2008." (Electrical Equipment, Appliances & Components)
• "The lower oil prices and stronger dollar are good news." (Fabricated Metal Products)
• "We are contracting our manufacturing skills to companies involved in wind power, coal mining and other energy fields in order to ride the recessionary wave in the rust belt." (Machinery)
• "Material prices continue to rise; however, selling prices of our products have risen as well." (Paper Products)
• "Prices remain predictable ... they keep going up." (Food, Beverage & Tobacco Products)

Manufacturing is continuing to hold up in spite of the softening economy.

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