The S&P Case-Shiller home price index continues its slide in November

The S&P Case-Shiller home price index for November 2008 was released today by Standard and Poors. The composite-10 declined 2.20% from October 2008 and declined by 19.09% from a year ago. The composite-10 is now down 26.62% from its peak. All 20 individual markets in the composite-20 are down year over year with Las Vegas and Phoenix down the most at -31.65% and -32.87% respectively. Dallas and Denver are down the least year over year at -3.31% and -4.28% respectively. All 20 markets were down in November compared to the previous month. The markets with the biggest declines from the peak are also declining the fastest. 9 markets have now dropped over 25% from their peak. The Composite-10 has now declined at a faster pace year over year for 23 straight months now.

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The CME futures market is pricing in a further drop of -11.17% by next November 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 composite-10 did not record a 1% loss month over month until October 2007. Right now we are declining at a faster pace than we did last year at this time. 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 uses a three month average. The existing homes report issued by the National Association of Realtors gives a glimpse of how home prices are doing (although it uses median prices instead of the more accurate method of paired sales that is utilized by S&P Case-Shiller). Prices peaked in June 2008 and dropped by 2.2% month over month in July, by 3.4% in August, by 5.8% in September, by 2.6% in October, by 3.3% in November, and by 2.7% in December. The CME futures market is pricing in that housing will bottom at 142 in September 2010. This is a 14.5% further drop from November 2008's mark of 166.05. The CME futures are pricing in that the home price index will recover to 152 by September 2012.

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Existing home sales are up; prices continue down

The National Association of Realtors released the existing home sales figures for December 2008 today. Sales increased to a seasonally adjusted annual rate of 4.740 million units in December up from 4.450 million units in November but down from 4.910 million units in December 2007. The median sales price was $175,400 for December down from $180,300 in November (down 2.7%) and down from $207,000 in December 2007 (down 15.3%). The price decline was again led by the West where the median price declined by 11.6% compared to the previous month dropping from a median price of $241,000 in November 2008 to $213,100 last month. The median home price for the West in July 2007 was at $349,400; the median is now 39.0% lower.

Month's supply dropped 9.3 in December from 11.2 in November. This was largely due to a decrease in inventory from $4.163 million units in November to $3.676 million units in December. Inventory has dropped by an average of 8.2% in December from 2001 to 2007. This year the drop was 11.7%; larger than normal but not exceptionally large.

According to the NAR, currently 45% of all transactions are distressed sales. There is currently a moratorium on foreclosures that will be ending soon, so housing will continue to fall under intense pressure. Perhaps the biggest question is when will prices in the West firm up.

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New home construction at record low pace

The U.S. Census Bureau and the HUD Department announced the new homes construction stats for December 2008 today. Total building permits were at a seasonally adjusted annual rate of 549,000 which was 10.7% below November 2008 and was down 50.6% from a year ago. 1 unit permits were at a seasonally adjusted annual rate of 363,000 which was down 12.3% from the previous month and down 49.2% from a year ago. This is the lowest rate on record going back to 1960.  If adjusted for population growth, today's figures would be much lower. Total housing starts were at a seasonally adjusted annual rate of 550,000 which was down 15.5% from the previous month, and down 45.0% below December 2007. Economists had forecast starts to be at a 605,000 annual pace.  1 unit starts were at 398,000 which is down 13.5.0% from November 2008 and down 48.9% from a year ago. Housing completions were at a seasonally adjusted annual rate of 1,015,000 (1 units were at 668,000) which was 5.2% above the previous month, and 23.6% below December 2007.

There is an oversupply of housing so these large drops in construction are actually a good thing.  Even though construction of new homes has dropped quickly, sales have dropped just as fast.  Soon months supply will start to inch down, but we are still far away from supply and demand being balanced. New homes are also adversely affected by the large surplus of existing homes.

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Retail Sales Post Depressing Drop

The American consumer is in a state of depression. I am not just talking about their mood after opening their quarterly brokerage account. The U.S. Census Bureau released the Retail Sales figures for December 2008 today. Adjusted for inflation, Retail Sales plunged in December by 2.7% compared to November and by 10.2% compared to a year ago. Economists were expecting a 1.2% drop compared to November. This is the largest annual drop since July 1951 (which was an aberration due to a very high increase in July 1950). While the NBER has declared the American economy to be in a state of recession, we are a long way off towards being a depression. Some economists define a depression as real GDP declining by 10% over a year. Retail Sales, however, have now entered into depression levels.

This current decline in Retail Sales is a result of a change in dynamics. For years, America has maintained a trade deficit, importing more goods than exports. This deficit has been funded by increases in personal income. The net result has been a positive increase in lifestyle that was sustainable. After the 2001 recession the dynamics changed. The trade deficit took off while personal income was slow in recovering. Consumer spending was no longer sustainable.

Consumer spending was being supported by changes in household net worth. The Federal Reserve publishes a plethora of information including the Balance Sheet of Households and Nonprofit Organizations in their quarterly Flow of Funds Report. From 1970 to 1994, U.S. Households averaged a gain of $2.0 trillion (in 2008 dollars) in household net worth each year. From 1995 to 1999 that increased to an average of $4.6 trillion in gains a year. During 2000 to 2002, net worth dropped by an average of $609 billion a year. But from 2003 to 2006, stock prices recovered and the housing boom took off. Household net worth went up an average of $5.9 trillion a year. Consumers, propped up with enormous paper gains continued spending even though it wasn't supported by gains in personal income.

In 2007, the financial crisis erupted. From the fourth quarter in 2007 to the third quarter of 2008, the net worth of U.S. households declined by a horrific $7.15 trillion. The S&P 500 declined by 22.5% in the fourth quarter. Housing also started declining faster last quarter. When the Fed reports the latest Flow of Funds report in March, the total loss in net worth through the fourth quarter will likely be over $10 trillion. Obama's $800 billion stimulus and the remaining $350 billion in TARP money pale in comparison to the losses sustained. Fears of rising unemployment are also affecting the consumer. We have entered into a new era; U.S. consumer spending will continue to face pressure to come down to a sustainable level.

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The unemployment rate spikes to 7.2%

The U.S. Department of Labor released the Weekly Claims data for Unemployment Insurance yesterday. Initial claims were at 467,000 for the week ending January 3rd. This is down from the previous week's number of 491,000. The four week average of initial claims, which is not as volatile, was at 525,000. This is down from the recent total of 558,000 reached a couple of weeks ago. 

Continued claims for unemployment insurance increased to 4,611,000 for the week ending December 27th up from the previous week's number of 4,510,000. The four week average for continued claims was also up to 4,470,000 from 4,425,000. This is the highest it has been since December 1982.

Initial claims is faster to move up and signals increases in the unemployment rate. Continued claims take longer to go down than the initial claims once the unemployment rate is elevated. The Unemployment rate doesn't drop until continued claims start to come down.

Unemployment is on the rise. According to "The Employment Situation" for December 2008, released today by the U.S. Department of Labor, the unemployment rate was at 7.2% in December compared to an upwardly revised rate of 6.8% in November. Since 1948, the unemployment rate has never risen by more than .5% in a 12 month span without entering into a recession. The unemployment rate is now up 2.4% in the last twelve months and is up 2.8% from its recent low of 4.4%.

Nonfarm payrolls decreased by 524,000 in December, 584,000 in November, 423,000 in October, and by 403,000 in September.  Last month they revised downward the amount of jobs lost in the previous two months by 199,000. This month, they made a downward revision of 154,000. If you add the payrolls lost in December to the revisions for November and October, jobs were worse off by 678,000 more than was previously reported. This is a significant amount of jobs lost. The average recession since World War II has had a loss of 1,917,000 jobs on average. The biggest loss came in 1982 with 2,838,000 jobs lost. Nonfarm payrolls have declined for 12 straight months with a net loss of 2,589,000. It looks like next month, this recession will develop into the biggest recession in terms of jobs lost since the Great Depression.

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Pending Home Sales Slump in November

Today, the National Association of Realtors released the Pending Home Sales Index for contracts signed in November 2008. On a seasonally adjusted basis the index was at 82.3% down 4.0% from October 2008 and down 5.3% compared to November 2007's figure of 86.9. 2001 was previously the slowest year for pending home sales on record. Without seasonal adjustments, November 2008 was 23.6% lower than November 2001's sales pace. Pending sales were bolstered by strong sales in the West. Seasonally adjusted the West saw a decrease of 2.4% month over month but an increase of 19.3% year over year. The other regions decreased by an average of 5.4% month over month and decreased by an average of 12.5% year over year.  

The NAR made a downward adjustment in their median home sales price forecast for 2009 to $198,100 (up from their forecast of $197,000 for 2008).  Just a few months ago, their forecast for median sales prices in 2009 was $215,800.  The NAR is forecasting the median home sales price for 2010 to be $207,700.  Former chief economist for the NAR, David Lereah, sees prices continuing to drop by another 5-10%.    

After relatively strong months in August and September, sales activity has dropped off considerably with the intensifying credit crunch we experienced a few months ago.  We are now entering into a period where pending home sales slow down dramatically.

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