Financial Sight

Existing Home Sales Graph

2009-11-23T14:40:00.004-05:00

NAR Press Release.

MBA Mortgage Delinquencies Chart

2009-11-19T15:38:00.001-05:00

Link to the MBA Mortgage Delinquencies Press Release.

FFIEC Mortgage Delinquencies Chart

2009-11-19T15:20:00.007-05:00

Link to the FFIEC data via the Federal Reserve..

Residential Vacancies Graph

2009-10-29T12:05:00.004-04:00

Link to the U.S. Census Bureau's 3rd Quarter Residential Vacancies and Homeownership Report.

Meredith Whitney's outlook

2009-09-10T14:22:00.001-04:00

Meredith Whitney moved the markets last July when she made a bullish call on Goldman Sachs' earnings. Here she is with a bearish outlook. She is calling for a further decline in housing prices of 25%.

S&P Case Shiller Index posts strong gains

2009-08-25T18:57:00.003-04:00

The S&P Case Shiller Index posted strong gains. Month over month, the Composite-10 index increased by 1.9%. The index is still down 15.13% year over year. 17 of the 20 markets in the Composite-20 index posted positive month over month gains. The data for the index is a compiled using a three month average. Since last month was positive and the trend is moving up strongly, next month should also come in with a strong gain.
The month over month gains are the highest since the market peaked in 2005.

I have removed the CME Housing Futures data from the chart because they have become so thinly traded.

Mortgage Delinquencies continue rising higher

2009-08-20T17:32:00.003-04:00

The Mortgage Bankers Association released their National Delinquency Survey for the Second Quarter of 2009. The total residential mortgages that are at least 30 days delinquent rose to 9.24%. When including loans that are in the foreclosure process the figure rises to a startling 13.16%.

The percentage of loans that are in the foreclosure process rose to 4.30% in the second quarter up from 3.85% in the first quarter.

Meredith Whitney is bullish on banks

2009-07-13T17:13:00.002-04:00

Meredith Whitney, the so-called most powerful woman on Wall Street, moved the markets today with a bullish short term call on the banks. She was particularly bullish on Goldman Sachs. Her earnings estimate for Goldman Sachs, which reports tomorrow, is $4.65 compared to consensus estimates of $3.48. She predicts they will earn $20 for 2009 and more than $22 for 2010.

Goldman Sachs had their highest earnings in 2007 at $24.73. 2006 was at $19.71. In a year where Goldman Sachs is deleveraging, if they can pull off these types of earnings, it will be remarkable.

Naked Capitalism has two videos of Meredith Whitney making these calls.

An overview of the housing crisis

2009-07-10T17:12:00.002-04:00

Zero Hedge has a presentation from T2 Partners on where we are at in the housing crisis. It is packed full of great charts.

Here are a few of my favorites:

Case-Shiller index shows the decline in housing prices is slowing

2009-06-30T22:55:00.002-04:00

The S&P Case-Shiller home price index for April 2009 was released today by Standard and Poors. The composite-10 declined 0.67% in April compared to March 2009 (last month it declined by 2.10%) and declined by 18.01% from a year ago (compared to 18.68% last month).

The composite-10 is now down 33.56% from its peak. The Composite-10 has now declined at a slower pace year over year for three months in a row after declining at a faster pace each month for 25 months in a row. 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 the next month or two, the index could post a positive month over month gain. However, I expect it to fall again as we head into the winter months.

The CME futures market is pricing in a further drop of -10.20% by next March for the composite-10.

You can click on the images for a larger view.

Existing Home Sales and Median Prices Rise Slightly

2009-06-23T15:07:00.002-04:00

The National Association of Realtors released the existing home sales figures for May 2009 today. Sales increased to a seasonally adjusted annual rate of 4.770 million units in March up from 4.660 million units in April and down from 4.950 million units in May 2008.

The median sales price was $176,000 for May up from $166,600 in April (up 3.8%) but down from $207,900 in May 2008 (down 16.8%). Months supply was 9.6 in May, down from 10.1 in April. According to the NAR, distressed properties accounted for 33% of all transactions in May down from 45% in April.

An alternate "more adverse" scenario

2009-06-11T17:34:00.004-04:00

So far, the unemployment rate has been higher than the "more adverse" scenario used in the stress test. Calculated Risk has an updated chart using just two month's of data:

The "more adverse" scenario seems to be a plausible forecast for the economy. In fact, the Unemployment rate looks like it will reach 10.3% this year which is the "more adverse" scenario for the average unemployment rate for 2010. Per the Federal Reserve, "the likelihood that the average unemployment rate in 2010 could be at least as high as in the alternative more adverse scenario is roughly 10 percent." If the "more adverse" scenario is the new baseline forecast, then I wonder how the banks would fare in a worse case scenario.

Seeking Alpha has a great spreadsheet that let's you plug in different unemployment rate forecasts and loss rate assumptions. In the Stress Test, the economists had forecast that the average unemployment rate for 2010 would be 8.8% with a 10% chance of being 1.5% higher at 10.3%. In spreadsheet to the right, I am using an unemployment rate of 11.8% as the more adverse scenario (if you change the baseline forecast to 10.3%, then it seemed logical that there would be a 10% chance that the unemployment rate would reach 11.8%).

There is a big disparity between the healthy banks and the banks that would be stressed under a more adverse scenario than the Fed used.

Talking Heads

2009-06-10T15:03:00.004-04:00

Jon Stewart had an interesting interview with Peter Schiff where he compiled different clips over the years of people laughing at Schiff's calls.

The Daily Show With Jon Stewart

Mon - Thurs 11p / 10c

Peter Schiff

www.thedailyshow.com

Daily Show
Full Episodes

Political Humor

Newt Gingrich Unedited Interview

Here is Peter Schiff in a blast from the past:

But as David Rosenberg once said, "In order for an economic forecast to be relevant, it must be combined with a market call."

Case-Shiller Home Price Index Falls at Slower Pace

2009-05-26T18:30:00.002-04:00

The S&P Case-Shiller home price index for March 2009 was released today by Standard and Poors. The composite-10 declined 2.06% in March compared to February 2009 (last month it declined by 2.12%) and declined by 18.65% from a year ago (compared to 18.89% last month).

The composite-10 is now down 33.09% from its peak. The Composite-10 has now declined at a slower pace year over year for two months in a row after declining at a faster pace each month for 25 months in a row.

The CME futures market is pricing in a further drop of -10.40% by next March for the composite-10.

You can click on the images for a larger view.

US Debt Clock

2009-05-22T15:59:00.006-04:00

Take a deep breathe before clicking on the picture.

Job losses at the county level

2009-05-17T19:34:00.007-04:00

Slate.com has an amazing graphic showing the job losses month by month, county by county. Just as recently as June 2008 (as the map on the right shows), there was year over year job growth. Job losses really started accelerating in November 2008. April 2009 figures at the county level are not out yet, but we already know from the national data that the year over year job losses will be over 5.5 million.

Click here for the article and to view the map.

Unemployment Rate rises to 8.9%

2009-05-08T16:05:00.002-04:00

According to "The Employment Situation" for April 2009, released today by the U.S. Department of Labor, seasonally adjusted, the unemployment rate was 8.9%, up from 8.5% in March and 5.0% a year ago. The unemployment rate is now up 3.5 percentage points in the last twelve months and is up 4.1 percentage points from its recent low of 4.4%. Nonfarm payrolls decreased by 539,000 in April down from a revised 699,000 in March. This month they revised the previous two months of March and February downward by 66,000 jobs. Last month, the total jobs lost from December 2007 to March 2009 was reported to be 5,133,000. This month, with the revisions, the total jobs lost from December 2007 to April 2009 has reached 5,738,000 jobs. The average recession since World War II has had a loss of 1,917,000 job. The biggest loss before this recession came in 1982 with 2,838,000 jobs lost. In terms of job loss, we are in the biggest recession since the Great Depression.

The U.S. Department of Labor released the Weekly Claims data for Unemployment Insurance yesterday. Initial claims were at 601,000 for the week ending May 2. This is down from the previous week's number of 635,000. The four week average of initial claims, which is not as volatile, was at 623,500. This is down from the previous week's figure of 638,250. Continued claims for unemployment insurance increased to 6,351,000 for the week ending April 25th up from the previous week's number of 6,295,000. The four week average for continued claims was also up to 6,207,000 from 6,082,000. This is the highest continued claims has ever been. The previous high was in 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.

Case-Shiller Home Price Index decline slows

2009-04-28T18:21:00.004-04:00

The S&P Case-Shiller home price index for February 2009 was released today by Standard and Poors. The composite-10 declined 2.11% from January 2008 (last month it declined by 2.55%) and declined by 18.83% from a year ago (compared to 19.39% last month). The composite-10 is now down 31.64% from its peak.

The Composite-10 has now declined at a slower pace year over year for the first time in over two years. The CME futures market is pricing in a further drop of -12.30% by next February for the composite-10.

You can click on the images for a larger view.

Existing home sales decrease but median sales price is up

2009-04-24T15:47:00.002-04:00

The National Association of Realtors released the existing home sales figures for March 2009 yesterday. Sales decreased to a seasonally adjusted annual rate of 4.570 million units in March down from 4.710 million units in February and down from 4.920 million units in March 2008.

The median sales price was $175,200 for March up from $168,200 in February (up 4.16%) but down from $200,100 in March 2008 (down 12.4%). Months supply was 9.8 in March, up from 9.7 in February. According to the NAR, distressed properties accounted for just over half of all transactions in March and are selling for 20 percent less than traditional homes.

Earnings Season

2009-04-06T21:08:00.004-04:00

Earnings season is upon us once again. According to Marketwatch: "Analysts surveyed by FactSet Research on average expect earnings at S&P 500 companies to be down 35.9% from the year-earlier quarter. Those surveyed by Thomson Financial expect earnings to be down 36.6% from the year earlier."

In the fourth quarter of 2008, earnings were negative as a whole for the first time for the S&P 500. On a bottom up basis, analysts are projecting that continuing earnings for Q1 2009 will come in at $13.00 a share up from -$0.11 in Q4 2008. They are projecting as reported earnings to rebound to $8.75 up sharply from the stunning loss of -$23.16 for Q4.

Analysts missed the impact the recession would have on stocks. Just 6 months ago, they forecast that Q4 continuing earnings for 2008 would be close to the all time record reached in Q3 lf 2007. They forecast that Q1 2009 would break the record.

A year ago, they also forecast a quick recovery from the drop in continuing earnings in Q4 2007.

Analysts are pricing in that the bottom is in for the recession.

Here is an update on Robert Shiller's S&P 500 graph. Going back to 1881, the average P/E ratio using the trailing 10 years of real earnings has been 16.34. As of today, the current P/E ratio is 14.82. Using the historical average, stocks are slightly undervalued. However, the stock market has traded at much lower levels in the past. In 1982 it reached 6.82 times 10 years earnings. In the Great Depression it reached 5.56 and it reached 4.78 in 1920.

Case-Shiller Home Price Index now down over 30% from peak

2009-03-31T17:42:00.002-04:00

The S&P Case-Shiller home price index for January 2009 was released today by Standard and Poors. The composite-10 declined 2.55% from December 2008 (last month it declined by 2.34%) and declined by 19.39% from a year ago (compared to 19.14% last month). The composite-10 is now down 30.16% from its peak. The Composite-10 has now declined at a faster pace year over year for 25 straight months now.

The CME futures market is pricing in a further drop of -7.45% by next January for the composite-10.

You can click on the images for a larger view.

Existing Home Sales Rise

2009-03-23T17:21:00.002-04:00

The National Association of Realtors released the existing home sales figures for February 2009 today. Sales increased to a seasonally adjusted annual rate of 4.720 million units in February up from 4.490 million units in January but down from 4.950 million units in February 2008. The median sales price was $165,400 for February up from $164,800 in January (up 0.4%) but down from $195,800 in February 2008 (down 15.5%). The January numbers were revised downward from $170,300 as reported last month to $164,800.

Months supply was 9.7 in February, the same as it was in January. According to the NAR, currently 40-45% of all transactions are distressed sales.

New Home Sales Rise in February

2009-03-17T16:56:00.002-04:00

New home sales data showed signs of settling down. Permits rose 3% in February compared to January 2009. Year over year permits were down 44%. Starts in February were up 22% compared to the previous month and were down 47% year over year. Completions in February were up 2% compared to January and were down 37% compared to a year ago.

The bad news is this is increasing the supply of new homes. There are already 13.3 months supply of homes. Months supply has risen every month for the last 4 months now. There will continue to be downward pressure on new home prices.

Retail Sales for February show signs of life

2009-03-12T19:41:00.002-04:00

Retail Sales, seasonally adjusted, were down by 0.11% in February compared to January. However, they are up 1.71% from the lows reached in December 2008. Year over year, Retail Sales are down 8.04% compared to a year ago. This is an improvement from being down 10.58% in December 2008.

Excluding auto sales, retail sales increased in February by 0.75% compared to January. Year over year, retail sales are down 4.25% compared to being down 6.98% in December 2008.

Retail Sales are still at historical lows in terms of year over year growth, but the last two months have bounced off the lows reached in December.

Unemployment Rate at 8.1%; Jobs lost reach 4.38 million

2009-03-06T14:59:00.003-05:00

The U.S. Government is putting the largest 19 banks in the U.S. under a stress test to assess how much capital they may need to survive this recession. They have 2 scenarios: one, a baseline scenario, based on consensus forecasts and a second "more adverse" scenario. The baseline forecast has GDP declining by 2.0% in 2009 and rising by 2.1% in 2010 and has the Unemployment Rate reaching 8.4% in 2009 and 8.8% in 2010. The more adverse scenario has GPD declining by 3.3% in 2009 and rising by 0.5% in 2010 and has the Unemployment Rate at 8.9% in 2009 and 10.3% in 2010.

So far GDP and the Unemployment Rate are far worse than their "more adverse" scenario. GDP for 4th Quarter 2008 was at -6.2%. According to "The Employment Situation" for February 2009, released today by the U.S. Department of Labor, seasonally adjusted, the Unemployment Rate for February hit 8.1% and without seasonal adjustments it was 8.9%. At the current pace, the unemployment rate would hit 10.3% by August 2009. 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 3.3 percentage points in the last twelve months and is up 3.7 percentage points from its recent low of 4.4%.

Nonfarm payrolls decreased by 651,000 in February, 655,000 in January and 681,000 in December. This month they revised the previous two months of January and December downward by 265,000 jobs. In January they revised downward the amount of jobs lost in the previous two months by 66,000 jobs. In December they made a downward revision of 154,000. In November, they made a downward revision of 199,000. Last month, the total jobs lost from December 2007 to January 2009 was reported to be 3,572,000 jobs. This month, with the revisions, the total jobs lost from December 2007 to February 2009 has reached 4,384,000 jobs. The average recession since World War II has had a loss of 1,917,000 jobs on average. The biggest loss before this recession came in 1982 with 2,838,000 jobs lost. In terms of job loss, we are in the biggest recession since the Great Depression. And the end is not in sight yet.

The U.S. Department of Labor released the Weekly Claims data for Unemployment Insurance yesterday. Initial claims were at 639,000 for the week ending February 28th. This is down from the previous week's number of 670,000. The four week average of initial claims, which is not as volatile, was at 641,750. This is up from the previous week's figure of 639,750.

Continued claims for unemployment insurance increased to 5,106,000 for the week ending February 21st down from the previous week's number of 5,120,000. The four week average for continued claims was also up to 5,011,000 from 4,934,000. This is the highest continued claims has ever been. The previous high was in 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.

Iceland: Wall Street on the Tundra

2009-03-04T17:28:00.002-05:00

Michael Lewis, one of my favorite authors, has a great article on the collapse of the bubble in Iceland.

The whole article is well worth the read, but here are a few of my favorite quotes:

From 2003 to 2007, while the U.S. stock market was doubling, the Icelandic stock market multiplied by nine times. Reykjavík real-estate prices tripled. By 2006 the average Icelandic family was three times as wealthy as it had been in 2003, and virtually all of this new wealth was one way or another tied to the new investment-banking industry.

Global financial ambition turned out to have a downside. When their three brand-new global-size banks collapsed, last October, Iceland’s 300,000 citizens found that they bore some kind of responsibility for $100 billion of banking losses—which works out to roughly $330,000 for every Icelandic man, woman, and child. On top of that they had tens of billions of dollars in personal losses from their own bizarre private foreign-currency speculations, and even more from the 85 percent collapse in the Icelandic stock market. The exact dollar amount of Iceland’s financial hole was essentially unknowable, as it depended on the value of the generally stable Icelandic krona, which had also crashed and was removed from the market by the Icelandic government. But it was a lot.

It must have seemed like a no-brainer: buy these ever more valuable houses and cars with money you are, in effect, paid to borrow. But, in October, after the krona collapsed, the yen and Swiss francs they must repay are many times more expensive. Now many Icelanders—especially young Icelanders—own $500,000 houses with $1.5 million mortgages, and $35,000 Range Rovers with $100,000 in loans against them. To the Range Rover problem there are two immediate solutions. One is to put it on a boat, ship it to Europe, and try to sell it for a currency that still has value. The other is set it on fire and collect the insurance: Boom!

The world is now pocked with cities that feel as if they are perched on top of bombs. The bombs have yet to explode, but the fuses have been lit, and there’s nothing anyone can do to extinguish them. Walk around Manhattan and you see empty stores, empty streets, and, even when it’s raining, empty taxis: people have fled before the bomb explodes. When I was there Reykjavík had the same feel of incipient doom, but the fuse burned strangely. The government mandates three months’ severance pay, and so the many laid-off bankers were paid until early February, when the government promptly fell.

Back in April 2006, however, an emeritus professor of economics at the University of Chicago named Bob Aliber took an interest in Iceland. Aliber found himself at the London Business School, listening to a talk on Iceland, about which he knew nothing. He recognized instantly the signs. Digging into the data, he found in Iceland the outlines of what was so clearly a historic act of financial madness that it belonged in a textbook. “The Perfect Bubble,” Aliber calls Iceland’s financial rise, and he has the textbook in the works: an updated version of Charles Kindleberger’s 1978 classic, Manias, Panics, and Crashes, a new edition of which he’s currently editing. In it, Iceland, he decided back in 2006, would now have its own little box, along with the South Sea Bubble and the Tulip Craze—even though Iceland had yet to crash. For him the actual crash was a mere formality.

Existing Home Sales and Prices Fall

2009-02-25T14:48:00.002-05:00

The National Association of Realtors released the existing home sales figures for January 2009 today. Sales decreased to a seasonally adjusted annual rate of 4.490 million units in January down from 4.740 million units in December but down from 4.910 million units in January 2008. The median sales price was $170,300 for January down from $175,700 in December (down 3.1%) and down from $199,800 in January 2008 (down 14.8%). The price decline was again led by the West where the median price declined by 4.2% compared to the previous month dropping from a median price of $229,700 in December 2008 to $220,000 last month. The median home price for the West in July 2007 was at $349,400; the median is now 37.0% lower.

Months supply rose to 9.6 in January from 9.4 in December. This was due to a drop in sales while inventory dropped slightly. According to the NAR, currently 45% of all transactions are distressed sales.

Case-Shiller Home Price Index falls slightly faster

2009-02-24T23:26:00.002-05:00

The S&P Case-Shiller home price index for December 2008 was released today by Standard and Poors. The composite-10 declined 2.34% from November 2008 (last month it declined by 2.20%) and declined by 19.14% from a year ago (compared to 19.09% last month). The composite-10 is now down 28.34% 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 -32.98% and -33.96% respectively. Dallas and Denver are down the least year over year at -4.26% and -4.00% respectively. All 20 markets were down in December compared to the previous month. The markets with the biggest declines from the peak are also declining the fastest. 10 markets have now dropped over 25% from their peak. The Composite-10 has now declined at a faster pace year over year for 24 straight months now.

You can click on the images for a larger view.

The CME futures market is pricing in a further drop of -9.39% by next December 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 slightly 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 CME futures market is pricing in that housing will bottom at 142 in September 2010. This is a 12.4% further drop from December 2008's mark of 162.17. The CME futures are pricing in that the home price index will recover to 152 by September 2012.

Retail Sales Down by 9.3%

2009-02-12T17:29:00.003-05:00

The U.S. Census Bureau released the Retail Sales figures for January 2009 today. Adjusted for inflation and for seasonal variation, Retail Sales were up in January compared to December 2008 by 1.0% and down by 9.3% compared to a year ago. Economists were expecting a 0.8% drop compared to December. A large part of the gain in January from the previous month was due to downward revisions of previously reported figures. Retail Sales for December were revised downward this month by 0.6%.

Unemployment rate continues to rise; will hit 8.5% in 2009

2009-02-06T19:01:00.002-05:00

Some economists are predicting that the unemployment rate will hit 8.5% in 2009. Today, we already hit 8.5% unemployment rate when not seasonally adjusted, up from 7.1% in December and 5.4% a year ago. January is typically the highest month for the unemployment rate. According to "The Employment Situation" for January 2009, released today by the U.S. Department of Labor, seasonally adjusted, the unemployment rate was 7.6%, up from 7.2% in December and 4.9% a year ago. 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 2.7 percentage points in the last twelve months and is up 3.2 percentage points from its recent low of 4.4%.

Nonfarm payrolls decreased by 598,000 in January, 577,000 in December, and 597,000 in November. This month they revised the previous two months of December and November downward by 66,000 jobs. In December they revised downward the amount of jobs lost in the previous two months by 154,000. In November, they made a downward revision of 199,000. They also made huge revisions for last year and revised as far back to 2004. Last month, the total jobs lost from December 2007 to December 2008 was reported to be 2,589,000. This month, with the revisions, the total jobs lost from December 2007 to January 2009 has reached 3,572,000 jobs. The average recession since World War II has had a loss of 1,917,000 jobs on average. The biggest loss before this recession came in 1982 with 2,838,000 jobs lost. In terms of job loss, we are in the biggest recession since the Great Depression. And the end is not in sight yet.

The U.S. Department of Labor released the Weekly Claims data for Unemployment Insurance yesterday. Initial claims were at 626,000 for the week ending January 31st. This is up from the previous week's number of 591,000. The four week average of initial claims, which is not as volatile, was at 582,250. This is up from the previous week's figure of 543,250. Continued claims for unemployment insurance increased to 4,788,000 for the week ending January 24th up from the previous week's number of 4,768,000. The four week average for continued claims was also up to 4,672,000 from 4,628,000. This is the highest continued claims has ever been. The previous high was in 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.

Pending Sales Rise in December

2009-02-03T15:54:00.003-05:00

Today, the National Association of Realtors released the Pending Home Sales Index for contracts signed in December 2008. On a seasonally adjusted basis the index was at 87.7 up from 82.5 in November 2008 and up from 85.9 in December 2007. 2001 was previously the slowest year for pending home sales on record. Without seasonal adjustments, November 2008 was 17.0% lower than November 2001's sales pace. The increase in month over month pending sales were due to strong seasonally adjusted gains in the Midwest and South. The increase in the year over year pending sales was mainly due to strong sales in the West. Seasonally adjusted the West saw a decrease of 3.7% month over month but an increase of 17.5% year over year. The Midwest and South increased by an average of 12.9% month over month but increased by only an average of 0.2% year over year.

The NAR made a downward adjustment in their median home sales price forecast for 2009 to $192,800. 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 $201,700.

Pending sales have settled down over the last 12 months. However, the foreclosure mix has been rising.

PMI posts small gain; indicator shows manufacturing and economy still contracting

2009-02-02T17:52:00.002-05:00

The Institute for Supply Management released their monthly Manufacturing ISM Report on Business today. The Purchasing Manager's Index (PMI) came in at 35.6% for January which is up from 32.9% for December which was the lowest PMI had reached since May 1980. Economist's had expected PMI to drop to 32.5%. A PMI reading of 35.6% suggests that the manufacturing economy and the overall economy are both 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...if the PMI for November (36.2 percent) is annualized, it corresponds to a 1.5 percent decrease in real GDP annually....A PMI in excess of 41.1 percent, over a period of time, generally indicates an expansion of the overall economy."

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

"The only positive thing of late is that the U.S. dollar has strengthened significantly against other currencies. We import the majority of our materials so this will have the effect of lowering our COGS." (Transportation Equipment)
"Steel industry is our main customer, and they have had a real slowdown." (Computer & Electronic Products)
"Criteria for projects is significantly higher with very short ROI periods." (Food, Beverage & Tobacco Products)
"We have revised downward our top-line sales estimates for CY2009 by 8 percent due to the continued softness we see in the housing sector." (Machinery)
"Suppliers are trying to hold onto pricing, but petrochemical and commodity prices are dropping like a rock." (Plastics & Rubber Products)

In the past, when PMI has dropped below 40, the recovery is swift, averaging a 14.7% point rise in three months. The current 2.7% point rise is minor in comparison.

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

2009-01-27T18:32:00.004-05:00

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.

You can click on the images for a larger view.

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.

Existing home sales are up; prices continue down

2009-01-26T15:27:00.005-05:00

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.

New home construction at record low pace

2009-01-22T14:30:00.002-05:00

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.

Retail Sales Post Depressing Drop

2009-01-14T20:01:00.002-05:00

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.

The unemployment rate spikes to 7.2%

2009-01-09T15:45:00.002-05:00

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.

Pending Home Sales Slump in November

2009-01-06T17:16:00.002-05:00

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.

Case-Shiller Home Price Index post an accelerating decline

2008-12-31T02:53:00.002-05:00

The S&P Case-Shiller home price index for October 2008 was released today by Standard and Poors. The composite-10 declined 2.00% from September 2008 and declined by 19.03% from October 2007. The composite-10 is now down 24.97% 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 -31.68% and -32.65% respectively. Charlotte and Dallas are down the least year over year at -4.45% and -3.09% respectively. All 20 markets were down in October compared to the previous month. The markets with the biggest declines from the peak are also declining the fastest. The 10 markets with the biggest declines from the peak declined by an average of 3.27% in October compared to September while the 10 markets with the smallest declines from the peak declined by an average of 1.45%. 9 markets have now dropped over 25% from their peak. The Composite-10 has now declined at a faster pace year over year for 22 straight months now.

You can click on the images for a larger view.

The CME futures market is pricing in a further drop of -12.58% by next October 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 5.7% in September, by 2.6% in October, and by 2.8% in November. The CME futures market is pricing in that housing will bottom at 142 in September 2010. This is a 16.4% further drop from October 2008's mark of 169.78. The CME futures are pricing in that the home price index will recover to 152 by September 2012.

Existing Home Sales plummet in November

2008-12-23T21:40:00.002-05:00

The National Association of Realtors released the existing home sales figures for November 2008 today. Sales decreased to a seasonally adjusted annual rate of 4.490 million units in November down sharply from 4.980 million units in October and 5.020 million units in November 2007. The median sales price was $181,00 for November down from $186,500 in October (down 2.8%) and down from $208,800 in November 2007 (down 13.2%). The price decline was again led by the West where the median price declined by 6.3% compared to the previous month. March through August are the strongest months for home prices. We are now entering the weak time for home prices. The market turmoil is not helping things either.

In the NAR's news release Lawrence Yun, NAR chief economist, cautions:

"There will be negative consequences if housing stimulus is delayed. Falling home prices would lead to faster contraction in consumer spending and further deterioration in bank balance sheets. More importantly, falling home values would lead to higher loan defaults, including those recently modified distressed mortgages.” I agree with Yun on the consequences of falling home prices. However, I think that even with housing stimulus, home prices will continue to decline until they are in line with historical norms for Price to Rent Ratios, Price to Income Ratios, and until Supply is in line with Demand.

Month's supply rose to 11.2 in November from 10.3 in October. Month's supply is normally lowest in the winter months. November's increase is an ominous omen for 2009.

CPI records the biggest drop since 1933

2008-12-17T15:21:00.002-05:00

The U.S. Department of Labor reported the inflation numbers for November yesterday. With seasonal adjustments, the Consumer Price Index for All Urban Consumers (CPI-U) declined by 1.684% in November compared to October and was 1.01% higher than November 2007. This was the largest one month decline since the seasonally adjusted data began in 1947. CPI-U is now 2.793% below the high reached in July 2008.

The New York Times is reporting that the three month change in CPI-U not seasonally adjusted declined by 3.00% and that is the largest drop since 1933. These are truly historic times.

We have gone from inflation concerns in the beginning of the year to facing deflation. The huge rise and fall of inflation was due mostly to the oil bubble. Core CPI (CPI less food and energy) with seasonal adjustments was marginally up by 0.022% compared to October and up by 1.986% compared to a year ago.

Pending home sales down moderately as prices drop

2008-12-09T20:07:00.002-05:00

Today, the National Association of Realtors released the Pending Home Sales Index for contracts signed in October 2008. On a seasonally adjusted basis the index was at 88.9% down 0.7% from September 2008 and down 1.0% compared to October 2007's figure of 89.8. 2001 was previously the slowest year for pending home sales on record. October 2008 was 8.0% lower than October 2001's sales pace. Pending sales were bolstered by strong sales in the West. Seasonally adjusted the West saw a decrease of 8.7% month over month but an increase of 17.4% year over year. The other regions increased by an average of 1.2% month over month and decreased by an average of 7.9% year over year.

Pending home sales are being helped by a large decrease in home prices in the West. Median home prices in the West dropped from $255,100 in September to $231,400 in October (-9.3%). The median home price in the West is down 27.0% year over year. The other three regions are down by an average of 6.2%.

The NAR made a downward adjustment in their median home sales price forecast for 2008 to $198,500 and they lowered their 2009 median home sales price forecast to $199,200. Just a few months ago, their forecast for median sales prices in 2009 was $215,800. We are now entering into a period where pending home sales slow down dramatically. The credit crisis is exasperating things.

Mortgage Defaults Continue to Surge Higher

2008-12-08T18:40:00.002-05:00

The Mortgage Brokers Association released the results of their National Delinquency Survey for the third quarter of 2008 last Friday. The seasonally adjusted delinquency rate for mortgages on one-four unit residential properties was at 6.99%, up from 6.41% in the previous quarter and up from 5.59% a year ago. This is the highest on record since the survey began in 1979. Foreclosures started were at 1.07% down from 1.08% in the previous quarter and 0.78% a year ago. The percentage of loans in the foreclosure process for the third quarter was 2.97%, up from 2.75% in the previous quarter and 1.69% a year ago. 9.96% of all loans are now delinquent or in the foreclosure process.

Subprime delinquencies rose to 20.03% from 18.67% in the previous quarter and 16.31% a year ago. However, delinquencies are not confined to subprime, prime mortgage delinquencies rose to 4.34% up from 3.93% in the second quarter of 2008 and 3.12% in the third quarter of 2007. Prime delinquencies averaged 2.37% from 2003 - 2006.

Last month, the Federal Financial Institutions Examination Council (FFIEC) released their statistics on mortgage and consumer loan delinquencies. Their definition of a 30 day late is a loan that is over 30 days late when the bank reports (page 501 on this manual). For example if a loan had a March 1st due date and payment was not received by March 31st, then the MBA survey would count that as 30 days late. The FFIEC report would count not count that as "over" 30 days late. If they payment was not received by April 30, then the FFIEC methodology would count that as over 30 days late but not "over" 60 days late. Therefore, the FFIEC numbers for a 30 day late are in between the MBA's 30 day and 90 day delinquency numbers. Nevertheless, the FFIEC delinquencies are showing similar spikes up to the MBA 30 and 90 day delinquencies. Consumer loan delinquencies rose but at a slower pace in the third quarter. Consumer delinquencies spiked up during the last two recessions and did not start to fall until after the recession ended.

Unemployment Rate Rises; Most Jobs Lost in Month Since 1974

2008-12-05T20:37:00.003-05:00

The U.S. Department of Labor released the Weekly Claims data for Unemployment Insurance yesterday. Initial claims were at 509,000 for the week ending November 29th. This is down from the previous week's number of 530,000. The four week average of initial claims, which is not as volatile, was at 524,500. This is the highest initial claims has been since 1982 surpassing the recessions of 1991 and 2001.

Continued claims for unemployment insurance increased to 4,087,000 for the week ending November 22nd up from the previous week's number of 3,998,000. The four week average for continued claims was also up to 4,001,750 from 3,938,000. This is the highest it has been since January 1983.

Unemployment is on the rise. According to "The Employment Situation" for November 2008 released today by the U.S. Department of Labor, the unemployment rate was at 6.7% in November compared to 6.5% in October. 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 2.0% in the last twelve months and is up 2.3% from its recent low of 4.4%.

Nonfarm payrolls decreased by 533,000 in November, 320,000 in October, and by 403,000 in September. This was the most amount of jobs lost in one month since 1974. Last month they revised downward the amount of jobs lost in the previous two months by 179,000. This month, they made a downward revision of 199,000. If you add the payrolls lost in November to the revisions for October and September, jobs were worse off by 732,000 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 11 straight months with a net loss of 1,911,000. This recession looks like it will develop into the biggest recession in terms of jobs lost since the Great Depression.

Service Industry contracts at record pace

2008-12-03T13:08:00.002-05:00

The Institute for Supply Management released their November 2008 Non-Manufacturing ISM Report on Business today. The Non-Manufacturing Index (NMI) came in at 37.3%. 50% is the breakpoint for growth in the non-manufacturing sector. Economists had expected a reading of 42%. NMI had plunged to 44.6% in January 2008 but has been between 48%-52% until October when it dropped to 44.4%. 37.3% is the lowest level for NMI on record. The service area is quickly deteriorating along with the rest of the economy.

NMI is made up of four components: business activity, employment, new orders, and supplier deliveries. Business activity was at 33.0% in November down from 44.2% in October; employment was at 31.3% down from 44.2%; new orders were at 35.4% down from 50.5%; and supplier deliveries were at 49.5% up from 48.0%.

This is what some of the respondents were saying:

"General slowdown and cost-cutting actions." (Other Services)
"Business remains strong despite the general economy." (Health Care & Social Assistance)
"Although funding for our core goals has not changed, new programs will be curtailed." (Educational Services)
"Store closures with associated employee layoffs, the continued downturn in the construction sector and the curtailment of local government spending have combined to hammer the local economy." (Public Administration)
"One unusual aspect of the current environment is that suppliers are getting very selective about who they conduct business with. We are spending more and more time ensuring that our key [suppliers] continue to see us as a key customer." (Retail Trade)
"General concerns about the economy continue to impact consumer confidence and our sales." (Accommodation & Food Services)

Manufacturing continues to slow

2008-12-01T14:25:00.002-05:00

The Institute for Supply Management released their monthly Manufacturing ISM Report on Business today. The Purchasing Manager's Index (PMI) came in at 36.2% for November which is down from 38.9% for October. This is a dramatic drop from a few months ago where PMI for August 2008 was at 49.9%. Economist's had expected PMI to drop to 37%. PMI is now at the lowest level since May 1982. A PMI reading of 36.2% suggests that the manufacturing economy and the overall economy are both 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...if the PMI for November (36.2 percent) is annualized, it corresponds to a 1.5 percent decrease in real GDP annually....A PMI in excess of 41.1 percent, over a period of time, generally indicates an expansion of the overall economy."

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

"The only positive thing of late is that the U.S. dollar has strengthened significantly against other currencies. We import the majority of our materials so this will have the effect of lowering our COGS." (Transportation Equipment)

"Steel industry is our main customer, and they have had a real slowdown." (Computer & Electronic Products)

"Criteria for projects is significantly higher with very short ROI periods." (Food, Beverage & Tobacco Products)

"We have revised downward our top-line sales estimates for CY2009 by 8 percent due to the continued softness we see in the housing sector." (Machinery)

"Suppliers are trying to hold onto pricing, but petrochemical and commodity prices are dropping like a rock." (Plastics & Rubber Products)

Manufacturing has fallen off a cliff after holding up well in this financial downturn. Just today, the NBER declared that we are in a recession that began in December 2007. This recession is already lasting longer than the average recession. It has turned nasty in the last few months and looks like it has a ways to go. In the previous recessions, PMI has rebounded quickly right after the recession has ended.

The Case-Shiller home price index posts another record decline

2008-11-25T21:00:00.002-05:00

The S&P Case-Shiller home price index for September 2008 was released today by Standard and Poors. The composite-10 declined 1.90% from August 2008 and declined by 18.55% from September 2007. The composite-10 is now down 23.44% 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 -31.33% and -31.90% respectively. Charlotte and Dallas are down the least year over year at -3.50% and -2.75% respectively. All 20 markets were down in September compared to the previous month. The markets with the biggest declines from the peak are also declining the fastest. The 10 markets with the biggest declines from the peak declined by an average of 2.52% in September compared to August while the 10 markets with the smallest declines from the peak declined by an average of only 1.13%. 8 markets have now dropped over 25% from their peak. The Composite-10 has now declined at a faster pace year over year at a faster each month for 21 straight months now.

You can click on the images for a larger view.

The CME futures market is pricing in a further drop of -9.96% by next September 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. And this was before the credit crisis intensified in September and October. 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 5.7% in September, and by 4.2% in October. The CME futures market is pricing in that housing will bottom at 148 in September 2010. This is a 14.6% further drop from September 2008's mark of 173.25. The CME futures are pricing in that the home price index will recover to 160 by September 2012.

Existing homes sales decline slightly; prices decline sharply

2008-11-24T14:01:00.002-05:00

The National Association of Realtors released the existing home sales figures for October 2008 today. Sales decreased to a seasonally adjusted annual rate of 4.980 million units in October, down 3.11% from September 2008 and down 1.58% from October 2007. The median sales price was $183,300 for October down sharply from $191,400 in September (down 4.2%) and down from $206,700 in October 2007 (down 8.98%). The price decline was led by the West where the median price declined by 9.3% compared to the previous month. March through August are the strongest months for home prices. We are now entering the weak time for home prices. The market turmoil is not helping things either.

According to Lawrence Yun, NAR chief economist:

“Many potential home buyers appear to have withdrawn from the market due to the stock market collapse and deteriorating economic conditions. We have favorable affordability conditions, but we need more than that to give buyers with jobs the confidence they need. This is why a housing stimulus is so critical now to encourage more buyers to draw down the inventory and stabilize home prices. Without home price stabilization, there will not be an economic recovery.”

I agree with Yun in that this recession is being led by the housing crisis. I believe that we won't see the bottom until the real estate bottom is in sight. Month's supply rose from 10.0 in September to 10.2 in October. Month's supply is normally lowest in the winter months. There is a huge oversupply of homes that the industry has to work through before supply and demand is balanced.

CPI turns negative; Stag-Deflation, here we come

2008-11-20T15:22:00.002-05:00

The U.S. Department of Labor reported the inflation numbers for October yesterday. With seasonal adjustments, the Consumer Price Index for All Urban Consumers (CPI-U) declined by 0.96% in October compared to September and was 3.88% higher than October 2007. This was the largest one month decline since the seasonally adjusted data began in 1947.

We have gone from inflation concerns in the beginning of the year to facing deflation. The huge rise and fall of inflation was due mostly to the oil bubble. Core CPI (CPI less food and energy) with seasonal adjustments was down by a tamer 0.07% compared to September and up 2.22% compared to a year ago.

Nouriel Roubini, Professor of Economics at the Stern School of Business at NYU, has predicted that we would be entering into a period of stag-deflation since January:

Back in January, I argued that four major forces would lead to a risk of deflation-- or "stag-deflation," where a recession would be associated with deflationary forces--rather than the inflation that mainstream analysts have worried about. They were: (1) a slack in goods markets, (2) a re-coupling of the rest of the world with the U.S. recession, (3) a slack in labor markets, and (4) a sharp fall in commodity prices following such U.S. and global contraction, which would reduce inflationary forces and lead to deflationary forces in the global economy.

Retail sales plunge in October; retail employers are cutting back

2008-11-17T15:48:00.002-05:00

The U.S. Census Bureau announced on Friday that retail and food services sales for October 2008 with seasonal adjustments was down 2.77% from September and down 3.48% compared to a year ago. Economists had expected a decline of 2.1%. Retail sales without including autos (excluding autos makes the data less volatile) was down 2.20% compared to the previous month and up 1.38% compared to the previous year. Retail sales adjusted for inflation declined by 7.69% in October compared to the previous year. This is the worst annual decline since June 1980.

This graph on the right looks at retail employment versus regular employment year over year change. From 1968 - 1987, retail employment was stronger than regular employment. From 1987 retail employment has declined more at the lows and has had drops where regular employment was flatter. Currently more jobs are being lost on the retail side than in the general economy. The retail sector seems to be bracing for a rough recession.

The End

2008-11-13T19:31:00.002-05:00

Michael Lewis, one of my favorite authors, takes a look at the progression of Wall Street from when he wrote Liar's Poker in 1989 to end of Wall Street as we know it, delving into the world of leverage, credit default swaps, and CDOs.

Michael Lewis writes:

I thought I was writing a period piece about the 1980s in America. Not for a moment did I suspect that the financial 1980s would last two full decades longer or that the difference in degree between Wall Street and ordinary life would swell into a difference in kind.

The article is, in my opinion, a must read.

Pending home sales rise year over year; NAR lowers price forecast

2008-11-10T20:17:00.003-05:00

On Friday, the National Association of Realtors released the Pending Home Sales Index for contracts signed in September 2008. On a seasonally adjusted basis the index was at 89.2 down 4.6% from September 2008 and also up 1.6% compared to September 2007's figure of 87.8. 2001 was previously the slowest year for pending home sales on record. September 2008 was 4.7% higher than September 2001's sales pace. This is the first time since June of 2007 that the 2001 pace was eclipsed.

The increases in pending sales was due to a large increase in the West. Seasonally adjusted the West saw an increase of 3.7% month over month and 39.6% year over year. Each of the regions declined by an average of averaged an increase of 8.5% month over month and 7.9% year over year. This is due to a large decrease in home prices in the West in August. Median home prices in the West dropped from $282,000 in July to $251,600 in August and went back up to $253,600. The median home price in the West is down 39.5% year over year. The other three regions are down by an average of 7.9%.

The NAR made a downward adjustment in their median home sales price forecast for 2008 from $200,700 to $198,600. The NAR is forecasting 2009 median home sales prices to be at $200,800. Just a couple of months ago, their forecast for median sales prices in 2009 was $215,800. October median home sales prices will be announced later this month, but they must not have been pretty. We are now entering into a period where pending home sales slow down dramatically. The credit crisis is exasperating things.

The unemployment rate spikes to 6.5%; over 1 million jobs lost so far this year

2008-11-07T16:37:00.002-05:00

The U.S. Department of Labor released the Weekly Claims data for Unemployment Insurance yesterday. Initial claims were at 481,000 for the week ending November 1st. This is up from the previous week's number of 479,000 but down from the recent high of 499,000 reached for the week ending September 27. The four week average of initial claims, which is not as volatile, was at 475,250 the same as the previous week.

Continued claims for unemployment insurance increased to 3,843,000 for the week ending October 25th up from the previous week's number of 3,721,000. This is the highest it has been since February 1983. The four week average for continued claims was also up to 3,754,000 from 3,711,000.

Unemployment is on the rise. According to "The Employment Situation" for October 2008 released today by the U.S. Department of Labor, the unemployment rate was 6.5% in October up from 6.1% in September. 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 1.7% in the last twelve months and is up 1.8% from its recent low. Nonfarm payrolls decreased by 240,000 in October, by 127,000 in August and 284,000 in September. They also revised up the number of jobs lost in August and September significantly. The previously reported jobs lost were 73,000 in August and 159,000 in September. Not only did the economy lose 240,000 jobs this month, but 179,000 more jobs were lost in the previous month than was reported earlier.

Nonfarm payrolls have declined for 10 straight months with a net loss of 1,179,000. Last month the reported number was 760,000 jobs over 9 months. That is a huge increase. Over the last ten years, nonfarm payrolls have increased by an average of 107,000 jobs a month to keep up with the increasing population. Nonfarm payrolls rarely decrease outside of recession periods and it is even more rare for consecutive declines. Excluding periods right before, during and after recessions, nonfarm payrolls have declined consecutively only two times: 3 consecutive times in 1951 and 2 consecutive times in 1952. At least in regards to employment, the U.S. is in a state of recession. Some sectors, like manufacturing, are just now starting to slow down. The unemployment rate will most likely continue to rise at a fast pace in the coming months.

U.S. service industry contracts as consumers tighten belts

2008-11-05T14:20:00.002-05:00

The Institute for Supply Management released their October 2008 Non-Manufacturing ISM Report on Business today. The Non-Manufacturing Index (NMI) came in at 44.425%. 50% is the breakpoint for growth in the non-manufacturing sector. Economists had expected a reading of 47%. NMI had plunged to 44.6% in January 2008 but has been between 48%-52% ever since then. This is the lowest level for NMI on record. The service area is quickly deteriorating just like the manufacturing sector.

NMI is made up of four components: business activity, employment, new orders, and supplier deliveries. Business activity was at 44.2% in October down from 52.1% in September; employment was at 41.5% down from 44.2%; new orders were at 44.0% up from 50.5%; and supplier deliveries were at 48.0% down from 53.5%.

Here is what some of the respondents were saying:

"Financial services industry continues to be impacted by the global economic crisis — impacting all aspects and areas of the business and supply management." (Finance & Insurance)

"Economic slowdown starting to have an impact on customer count and check averages." (Accommodation & Food Services)

"Uncertainty is having the usual effect on business. Our response is traditional — stop all discretionary spending." (Management of Companies & Support Services)

"General pick-up in business in spite of all the bad economic global news." (Wholesale Trade)

"We are experiencing a slowdown in new job orders and existing job awards are lower. Clients are not extending project support professionals." (Professional, Scientific & Technical Services)

"Business down significantly! Discretionary spending disappearing." (Arts, Entertainment & Recreation)

Withheld taxes indicate personal income is taking a turn for the worse

2008-11-04T13:30:00.002-05:00

The amount of withheld taxes received by the Department of the Treasury for a 12 month period ending October 31, 2008 was 0.65% higher than a year ago after being adjusted for inflation. This is down from September's rate of 1.43%. This is significantly lower than the rate in 2006 and 2007 where 12 month's withheld taxes grew on average by 4.5% a year.

Withheld taxes gives us a day to day glimpse of how personal income is faring well in advance of the official numbers. So far, withheld taxes in this current downturn is resembling the slowdown during the 2001 recession. Withheld taxes is still currently growing. If the downturn continues, there could be a long ways to go before reaching the bottom. Especially if this turns out to be a stronger recession than the one in 2001.

Manufacturing drops dramatically as the economy contracts

2008-11-03T19:43:00.002-05:00

The Institute for Supply Management released their monthly Manufacturing ISM Report on Business today. The Purchasing Manager's Index (PMI) came in at 38.9% for October which is down from 43.5% in September. This is a dramatic drop from August 2008 which was 49.9%. Economist's had expected PMI to drop to 41%. PMI is now at the lowest level since September 1982. A PMI reading of 38.9% suggests that the manufacturing economy and the overall economy are both 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...If the PMI for September (43.5 percent) is annualized, it corresponds to a 0.8 percent increase in real GDP annually...A PMI in excess of 41.1 percent, over a period of time, generally indicates an expansion of the overall economy."

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

"Credit market causing suppliers to run closer on terms." (Food, Beverage & Tobacco Products)
"Appear to be bouncing along the bottom — volume is good but pricing is tough." (Primary Metals)
"Although the volume was down compared to last month, the volume was still higher than last year at the same time." (Chemical Products)
"Hurricane in Houston disrupted production for 10 days at our plant." (Fabricated Metal Products)
"Delivery issues continue across our range of purchased commodities as suppliers trim inventory commitments." (Electrical Equipment, Appliances & Components)

Manufacturing has fallen off a cliff after holding up well in this financial downturn. Whether or not we are in a recession is no longer being debated. Now the question is how bad will things get. In the previous recessions, PMI has rebounded quickly but after the recession has ended.

Useless Dow Jones Industrial Average Trivia

2008-10-31T16:44:00.002-04:00

Yesterday and today the Dow Jones Industrial Average had back to back gains. The Dow had had a streak of 24 days without having back to back gains. Before today, the last time the Dow had back to back gains was September 26, 2008 when the Dow closed at 11143.13. Today the Dow closed at 9325.01 (16.3% lower from 9/26).

Since October 1928, that has happened 18 times; 11 times since the Great Depression and 7 times during the Great Depression. It happened 5 times in 1931 alone. That is pretty dismal considering it could only happen 11 times within one year. The record is 52 days without back to back gains set in 1931. The last time it happened before this string was in 1995 and then 1984 before that.

GDP falls by 0.3%; consumer spending drops by 3.2%

2008-10-30T15:23:00.002-04:00

The Bureau of Economic Analysis released the advance Gross Domestic Product figures for the third quarter today. Real GDP, adjusted for inflation, fell by an annualized rate of 0.25% in the third quarter 2008 compared to the second quarter 2008. This is better than expected. Economists had expected a 0.50% drop. The second quarter grew by a revised 2.80%. This is the second time in a year that Real GDP has been negative (fourth quarter 2007 declined by 0.17%). Adjusted for both inflation and population, real per capita GDP fell at an annualized rate of 1.19% in the fourth quarter 2007. It barely rose by 0.02% in the first quarter 2008, rose by 1.92% in the second quarter, and fell by 1.28% in the third quarter.

So far the current possible recession has been very mild. However, looking at the numbers behind the GDP reveals a harsher picture. Consumer spending in the third quarter fell sharply by an annualized rate of 3.17%. This is the first drop in personal consumption expenditures (PCE) since the recession of 1990-1991. Real GDP dropped by only $7.4 billion from the third quarter to the second quarter. PCE dropped by $66.1 billion. This was offset by a net increase in exports of $31.1 billion. Helped by the weak dollar, exports rose by $22.3 billion. Recently the dollar has strengthened and the global economies have weakened. Also contributing was a new record for spending on national defense of $550.6 billion in the third quarter. This was an increase of $22.5 billion over the second quarter. In percentage terms of GDP spending on national defense is at the highest level since 1993.

S&P Case-Shiller home price index continues to slide

2008-10-28T20:08:00.003-04:00

The S&P Case-Shiller home price index for August 2008 was released today by Standard and Poors. The composite-10 declined 1.10% from July 2008 and declined by 16.97% from August 2007. The composite-10 is now down 21.96% from its peak. All 20 individual markets are still down year over year with Las Vegas and Phoenix down the most at -29.49% and -29.45% respectively. Charlotte and Dallas are down the least year over year at -2.24% and -2.00% respectively. 2 markets were up in August compared to the previous month (Boston and Cleveland). 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 -10.08% by next August 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. And this was before the credit crisis intensified in September and October. 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, and by 5.7% in September. The CME futures market is pricing in that housing will bottom at 150 in November 2010. This is a 15.1% further drop from August 2008's mark of 176.6. 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 in September are up slightly from previous month; decline in prices is picking up steam

2008-10-27T20:02:00.002-04:00

The U.S. Census Bureau and the Department of HUD announced today that the new single family home sales for September 2008 were at a seasonally adjusted annual rate of 464,000. This was 2.7% higher than August 2008 and 33.1% less than September 2007. Economists were expecting that sales would fall to 450,000. The median sales price fell to $218,400 in September down 0.9% from August 2008 and down 9.1% from September 2007. This is the steepest rate of decline since median prices peaked in March 2007.

Months Supply fell to 10.4 in September, from 11.4 in August. 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.

The financial crisis really picked up steam in October. New home sales typically rise in October from September. It will be interesting to see what happens to new home sales for October.

Existing home sales rise on lower prices

2008-10-24T14:54:00.009-04:00

The National Association of Realtors released the existing home sales figures for September 2008 today. Sales increased to a seasonally adjusted annual rate of 5.180 million units in September, up 5.50% from August 2008 and up 1.37% from September 2007. This is the first time sales have increased on a year to year basis in 30 months. The median sales price was $191,600 for September down sharply from $203,100 in August (down 5.7%) and down from $210,500 in September 2007 (down 8.98%). According to Lawrence Yun, NAR chief economist, “compared to a fairly small share of foreclosures or short sales a year ago, distressed sales are currently 35 to 40 percent of transactions. These are pulling the median price down because many are being sold at discounted prices.” March through August are the strongest months for home prices. We are now entering the weak time for home prices. The market turmoil is not helping things either.

Month's supply fell from 10.6 to 9.9 in September. Month's supply is normally lowest in the winter months. There is still a huge oversupply of homes that the industry has to work through before supply and demand is balanced.

Sales tax collection continues to decline

2008-10-21T14:24:00.006-04:00

The rate of decline in Sales and use tax collection paused in September after declining sharply in August. Using a weighted composite for the four largest states (California, Texas, New York, and Florida), the decline in real growth rose slightly to an annual decline rate of -3.28% in September which was up from the rate of -3.59% in August. Texas grew at a rate of 3.87% after adjustments for inflation in September down from 4.06% in August. This is down from the hot pace of 8.37% it averaged for 2007. New York declined at a annual rate of -2.98%. California's decline was at -5.52% in September. California declined on average of -2.03% in 2007. Florida continued its steady fall, declining -8.98% in September. The growth rate in Florida has been lower than the previous month for 23 months straight. Florida averaged a decline of -2.70% in 2007.

New home starts down sharply; supply is still rising

2008-10-17T19:37:00.003-04:00

The U.S. Census Bureau and the HUD Department announced the new homes construction stats for September 2008 today. Total building permits were at a seasonally adjusted annual rate of 786,000 which was 8.3% below August 2008 and was down 38.4% from a year ago. 1 unit permits were at a seasonally adjusted annual rate of 532,000 which was down 3.8% from the previous month and down 38.9% 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 817,000 which was down 6.3% from the previous month, and down 31.1% below September 2007. 1 unit starts were at 544,000 which is down 12.0% from August 2008 and down 41.9% from a year ago. Housing completions were at a seasonally adjusted annual rate of 1,097,000 (1 units were at 806,000) which was 11.7% above the previous month, and 20.4% below September 2007.

Permits and starts of new homes are starting to be less than demand. Completions are still higher than the current level of sales. 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.

Retail Sales down sharply in September

2008-10-15T18:24:00.004-04:00

The U.S. Census Bureau announced today that retail and food services sales for September 2008 with seasonal adjustments was down 1.16% from August and down 1.03% compared to a year ago. This was almost double the decline that economists were expecting of -0.7%. Retail sales without including autos (excluding autos makes the data less volatile) was down 0.60% compared to the previous month and up 3.61% compared to the previous year.

Retail sales adjusted for inflation declined by 6.23% in September compared to the previous year. This is the worst annual decline since January 1991. Retail sales was holding up fairly well in spite of the financial crisis. Retail sales adjusted for inflation didn't turn negative until August 2008. Even then it was negative by a tame 0.18%. However, we are now clearly in a recessionary state. This data also came before the massive declines in the stock market this month. The negative wealth effect will put extra pressure on future retail sales numbers.

A look at historical values on S&P 500 Earnings and Home Prices

2008-10-14T16:15:00.007-04:00

Throughout the housing bubble, Robert Shiller's book, “Irrational Exuberance”, has served as my compass. In particular, his graph of U.S. home prices adjusted for inflation going back to 1890 was etched in my mind.

In his book, he talked about a home price index that was constructed in Amsterdam with over 300 years of data from 1628 to 1973. He writes “Real home prices did roughly double, but took nearly 350 years to do so…the annual real price increase was only 0.2%.” He released a graph , combining the Amsterdam data with data from Norway and the U.S., in a paper he published later.

Every month I update the S&P Case-Shiller Home Price Index and include what the CME Futures market is pricing in for prices in the near future. Here is a link to my most recent post on the Indexes.

Robert Shiller also had graphs of the S&P 500 going back to 1871. His website at http://www.irrationalexuberance.com/ has spreadsheets that get updated every so often. Here are two of his graphs that I updated with data through today's close.

Going back to 1881, the average P/E ratio using the trailing 10 years of real earnings has been 16.34. As of today, the current P/E ratio is 16.98. Whether or not the stock market is fairly valued right now is in great debate (as shown by the huge gyrations of the stock market in recent weeks). It really depends on what you think will happen to earnings and how severe the slowdown will become. Here is a graph showing the earnings for the S&P 500 going back 20 years.

The analysts have been caught off guard by the severity of the credit crunch. Back in April, analysts thought that 2008 Q2 earnings would be higher than the peak in 2007 Q3. Here is a graph from my April 2008 post. 2008 Q1 and Q2 earnings were substantially lower than forecasted. For the last year, analysts have constantly been surprised by earnings and have consistently overestimated earnings for the last 12 months. Last week's plunge was in part due to the fact the market was realizing that there will be a slowdown in earnings due to the credit crunch. The million dollar question is how much and how long the slowdown will be.

Pending home sales were up in August; NAR lowers their price forecast yet again

2008-10-08T15:14:00.002-04:00

The Pending Home Sales Index for contracts signed in August 2008 on a seasonally adjusted basis was at 93.4 up 7.36% from August 2008 and also up 8.86% compared to August 2007's figure of 85.8.

Without seasonal adjustments, the index was up 4.97% compared to August 2008. 2001 was previously the slowest year for pending home sales on record. August 2008 was 6.57% below August 2001's sales pace. July 2008 was 12.77% below the 2001 level.

The increases in pending sales was mostly due to a large increase in the West. Seasonally adjusted the West saw an increase of 18.4% month over month and 37.8% year over year. The rest of the regions averaged an increase of 4.8% month over month and 2.2% year over year. This is due to a large decrease in home prices in the West in August. Median home prices in the West dropped from $282,000 in July to $251,600 in August, a drop of 10.8% month over month. The rest of the country averaged a drop of 0.9% in August month over month.

It appears the housing cycle may be moving from a period of declining sales and declining prices to one of increasing sales with declining prices. According to Lawrence Yun, NAR chief economist, said “What we’re seeing is the momentum of people taking advantage of low home prices, with pending home sales up strongly in California, Nevada, Arizona, Florida, Rhode Island and the Washington, D.C., region." He says "It’s unclear how much contract activity may be impacted by the credit disruptions on Wall Street, but we’re hopeful most of the increase will translate into closed existing-home sales.” Pending home sales in August were entered into before the credit crisis erupted in September.

The NAR made a downward adjustment in their median home sales price forecast for 2008 from $203,600 to $200,700. The NAR is forecasting 2009 median home sales prices to be at $206,300 (versus their projection last month of $208,500 and their projection in August of $215,800 for 2009). In June they had dropped their 2008 forecast by 4.1% from $213,700 to $205,000. We are now entering into a period where pending home sales slow down dramatically. The credit crisis isn't helping things either.

The unemployment rate is unchanged; nonfarm payrolls post large decline

2008-10-03T13:23:00.002-04:00

The U.S. Department of Labor released the Weekly Claims data for Unemployment Insurance yesterday. Initial claims were at 497,000 for the week ending September 20th. This is the highest initial claims have been since September 2001. The four week average of initial claims, which is not as volatile, was at 474,000 up from the previous week's mark of 462,500.

Continued claims for unemployment insurance increased to 3,591,000 for the week ending September 13th up from the previous week's number of 3,543,000. This is the highest it has been since September, 2003. The four week average for continued claims was also up to 3,528,500 from 3,481,750.

Unemployment is on the rise. According to "The Employment Situation" for September 2008 released today by the U.S. Department of Labor, the unemployment rate was 6.1% in September unchanged from August. 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 1.4% in the last twelve months and is up 1.7% from its recent low. Nonfarm payrolls decreased by 159,000 in September and decreased by 73,000 in August. Nonfarm payrolls have declined for 9 straight months with a net loss of 760,000 jobs. Over the last ten years, nonfarm payrolls have increased by an average of 107,000 jobs a month to keep up with the increasing population. Nonfarm payrolls rarely decrease outside of recession periods and it is even more rare for consecutive declines. Excluding periods right before, during and after recessions, nonfarm payrolls have declined consecutively only two times: 3 consecutive times in 1951 and 2 consecutive times in 1952.

At least in regards to employment, the U.S. is in a state of recession. Some sectors, like manufacturing, are just now starting to slow down. The unemployment rate will most likely continue to rise in the coming months.

Withheld taxes post weak growth; further slide is likely

2008-10-02T15:03:00.002-04:00

The amount of withheld taxes received by the Department of the Treasury for a 12 month period ending September 30, 2008 was 1.41% higher than a year ago after being adjusted for inflation. This is up from August's rate of 0.76%. This is significantly lower than the rate in 2006 and 2007 where 12 month's withheld taxes grew on average by 4.5% a year.

So far, withheld taxes in this current downturn is resembling the slowdown during the 2001 recession. Withheld taxes is still currently growing. If the downturn continues, there could be a long ways to go before reaching the bottom. Especially if this turns out to be a stronger recession than the one in 2001.

PMI posts a sharp decline in September

2008-10-01T13:36:00.002-04:00

The Institute for Supply Management released their monthly Manufacturing ISM Report on Business today. The Purchasing Manager's Index (PMI) came in at 43.5% for September, a dramatic drop from August 2008 which was 49.9%. A PMI reading of 49.9% suggests that the manufacturing economy is 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...If the PMI for September (43.5 percent) is annualized, it corresponds to a 0.8 percent increase in real GDP annually...A PMI in excess of 41.1 percent, over a period of time, generally indicates an expansion of the overall economy."

This was the biggest monthly drop since 1984 when PMI dropped from 69.9, which was at that time an 11 year high, to 60.5. The big drop in September comes as a big surprise. Economists had expected PMI to come in at 49.6%.

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

"We have experienced a larger-than-expected slowdown in orders during the last month." (Electrical Equipment, Appliances & Components)
"Steel, a main raw good for our business, has finally started showing some signs of softening a bit." (Machinery)
"Business continues to slow down. Fourth quarter 2008 is going to be down 15 percent from third quarter." (Fabricated Metal Products)
"Customers waiting for material price reductions in the face of falling oil prices." (Plastics & Rubber Products)
"Continued strong export demand across several product lines." (Chemical Products)

PMI was one of the last bastions holding up against the housing and credit crisis. It now looks like the contagion is spreading quickly to all parts of the economy.

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

2008-09-30T18:56:00.003-04:00

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.

New Home Sales continue to weaken

2008-09-25T14:34:00.003-04:00

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.

Existing Home Sales continue to fall; inventory stabilizes

2008-09-24T12:31:00.002-04:00

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.

Sales and Use tax collection declines rapidly

2008-09-22T14:38:00.002-04:00

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:

New housing construction continues to slow; inventory is getting smaller

2008-09-17T16:56:00.002-04:00

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.

The Federal Reserve Bails out AIG

2008-09-16T22:04:00.002-04:00

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:

Pending Home Sales were down in July

2008-09-09T13:26:00.002-04:00

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.

Fannie Mae and Freddie Mac are nationalized

2008-09-08T19:57:00.002-04:00

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.

Non-Manufacturing Index (NMI) indicates slight growth

2008-09-04T12:52:00.003-04:00

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)

Growth in withheld taxes is slowing down dramatically

2008-09-03T18:25:00.002-04:00

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.

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

2008-09-02T13:55:00.002-04:00

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.

Initial unemployment claims inch down; continued claims continue to rise

2008-08-28T19:00:00.003-04:00

The U.S. Department of Labor released the Weekly Claims data for Unemployment Insurance today. Initial claims were at 425,000 for the week ending August 23rd up from the previous week's revised figure of 435,000. The four week average of initial claims, which is not as volatile, was at 440,250 down from the previous week's mark of 446,250.

Continued claims for unemployment insurance increased to 3,423,000 for the week ending August 16th up from the previous week's number of 3,359,000. This is the highest it has been since November, 2003. The four week average for continued claims was also up to 3,336,500 from 3,329,250.

Case-Shiller Home Price Index continues to slide

2008-08-26T19:24:00.005-04:00

The S&P Case-Shiller home price index for June 2008 was released today by Standard and Poors. The composite-10 declined 0.61% from May 2008 and declined by 17.00% from June 2007. The composite-10 is now down 20.29% from its peak. All 20 individual markets are still down year over year with Las Vegas and Miami down the most at -28.55% and -28.32% respectively. Charlotte and Dallas are down the least year over year at -1.04% and -3.23% respectively. 10 markets were up in June compared to the previous month (Denver, Chicago, Boston, New York, Atlanta, Detroit, Minneapolis, Charlotte, Cleveland, and Dallas). The markets with the biggest declines from the peak are also declining the fastest; markets that declined the least are starting to rise. There are 11 markets that were down less than 15% year over year. 9 of those 11 markets were up in June compared to May 2008 and those 11 averaged a monthly gain of +0.52%. The other 2 markets were slightly down (Seattle and Portland). Of the 9 markets that are down over 15% year over year, 8 were down compared to last month (Detroit eeked out a minor gain) and the 9 markets averaged a monthly decline in value of -1.40% in June. The composite-10 is now down -20.29% from its peak. 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 -11.89% by next June for the composite-10. It is encouraging that some markets are posting month over month gains. The month to month change in the composite-10 has also improved from February when it declined by 2.80% in one month to a 0.61% decline last month over the previous month. However, 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 CME futures market is pricing in that housing will bottom at 150 in March 2010. This is a 16.8% further drop from June 2008's mark of 180.38. The CME futures are pricing in that the home price index will recover to 156 by September 2012. However, adjusted for inflation, real prices would still be declining (assuming that CPI-U drops to 3%).

Existing home sales rise; inventory rises faster

2008-08-25T17:44:00.002-04:00

The National Association of Realtors released the existing home sales figures for July 2008 today. Sales increased to a seasonally adjusted annual rate of 5.000 million units in June, up 3.09% from June 2008 and down 13.19% from July 2007. The median sales price was $212,400 in July down from $215,100 in June 2008 (down 1.26%) and down from $228,600 in June 2007 (down 7.09%). The inventory of existing homes grew to 4.669 million units up from 4.495 million in June 2008. This is the largest amount of inventory on record. Month's supply grew to 11.2. While sales rose in July, the inventory rose even faster.

U.S. Leading Index declines by 0.7% in July

2008-08-21T18:27:00.002-04:00

The Conference Board announced that their U.S. Leading index decreased by 0.7% in July. Building permits, stock prices, average weekly initial claims for unemployment insurance (inverted), real money supply, and manufacturers’ new orders for consumer goods and materials had negative contributions to the index. The interest rate spread, index of consumer expectations, and manufacturers’ new orders for nondefense capital goods had positive contributions. Average weekly manufacturing hours and the index of supplier deliveries (vendor performance) were flat for the month.

Here are charts of 5 of the 10 components:

Sales and Use Tax Collection improves slightly but is still declining

2008-08-20T17:53:00.002-04:00

Sales and use tax collection continues to decline after adjustments for inflation. Using a weighted composite for the four largest states (California, Texas, New York, and Florida), the decline in real growth improved slightly to an annual decline rate of -2.13% in July up from a rate of -2.20% in June. Texas grew at a rate of 4.49% in July after adjustments for inflation which is down from the hot pace of 8.37% it averaged for 2007. New York's growth was flat at 0.04%. California's decline was at -4.88% in July, the same as it was in June. California declined on average of -2.03% in 2007. Florida continued its steady fall, declining -8.46% in July. The growth rate in Florida has been lower than the previous month for 21 months straight. Florida averaged a decline of -2.70% in 2007.

New Home Permits at lowest level since 1982

2008-08-19T14:13:00.002-04:00

The U.S. Census Bureau and the HUD Department announced the new homes construction stats for July 2008 today. Total building permits were at a seasonally adjusted annual rate of 937,000 which was 17.7% below June 2008 and was down 32.4% from a year ago. Most of the dropoff from the previous month was due to the new construction code in New York City that went into effect on July 1. 1 unit permits were at a seasonally adjusted annual rate of 584,000 which was down 5.2% from last month and down 41.4% 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 965,000 which was down 11.0% from the previous month, and down 29.6% below July 2007. 1 unit starts were at 641,000 which is down 2.9% from June 2008 and down 39.2% from a year ago. Housing completions were at a seasonally adjusted annual rate of 1,035,000 (1 units were at 791,000) which was 8.7% below the previous month, and 31.7% below June 2007. The amount of new homes being built is starting to equal demand. However, there still remains a large amount of inventory.

Update on the TED Spread

2008-08-18T21:52:00.003-04:00

Here is an update on the TED Spread - the difference between the 3 month treasury and the 3 month Eurodollar rate. This measures the amount of perceived risk to lend to a banking counterparty. From 2002 to 2006 the spread averaged .288. Currently it is at 1.14 (as of 8/15/08).

The spreads reached very high levels in the 70s and early 80s when inflation was running rampant. The spread reached a high of 5.97 in July of 1974, and the Eurodollar rate was 13.52%. This next chart shows the spread as a percentage of the Eurodollar. This allows for comparison of the TED Spread during periods of high inflation and lower inflation. Using this matrix, the current spreads are at historic highs. The chart also shows the year over year change in the S&P 500.

The following chart shows the daily fluctuations of the TED Spread. Looking at the TED Spread, it looks like the current credit crisis has gone through 4 waves where the TED Spread has gone over 1.5.

Inflation at 17 year high

2008-08-14T17:26:00.002-04:00

The U.S. Department of Labor reported the inflation numbers for July today. Before seasonal adjustments, the Consumer Price Index for All Urban Consumers (CPI-U) rose 0.53% in July over June and was 5.60% higher than July 2007. The year over year rate of CPI is the highest since January 1991. Core CPI (CPI less food and energy) before seasonal adjustments was up by 0.23% compared to May and up 2.51% compared to a year ago. Seasonally adjusted, CPI-U rose 0.82% over June, twice as much as expected, and core CPI rose 0.33% instead of 0.2% expected by economists. The surge in CPI-U was driven by energy prices. Energy increased 4.0% in July over June. Crude Oil futures have come down recently so this should alleviate some of the inflation pressures.

Retail Sales decline by 0.12% last month

2008-08-13T14:33:00.002-04:00

The U.S. Census Bureau announced today that retail and food services sales for July 2008 with seasonal adjustments was down 0.12% from June and up 2.63% compared to a year ago. Retail sales without including autos (excluding autos makes the data less volatile) was up 0.38% compared to the previous month and up 5.84% compared to the previous year.

Retail sales adjusted for inflation declined by 3.27% in July compared to the previous year. The decline in Retail Sales over the last 6 months has been the worst 6 month span since 1992. The the decline in retail sales is causing havoc for many retailers as is reflected in the amount of retailers and restaurants going bankrupt recently.

Trade Deficit declines to $56.77 billion

2008-08-12T13:49:00.002-04:00

The Department of Commerce announced that the goods and services deficit in June declined to $56.77 billion down from the revised figure of $59.20 billion in May. This is down from when the trade deficit peaked in 2006 averaging $62.77 a month. Exports of goods increased by $5.7 billion while imports of goods increased by $5.7 billion. The goods deficit increased $2.1 billion from May to $70.0 billion and the services surplus increased by $0.4 billion to $13.3 billion.

The deficits with our biggest trade partners all increased last month. China was up to a $21.4 billion deficit (from $21.0 billion in May), OPEC was $18.1 ($17.9), the European Union $8.2 ($7.9), Canada $7.2 ($5.4), and Japan $6.1 ($5.0).

Adjusted for inflation, the trade deficit for the last twelve months ending in June declined slightly from the deficit for the one year period ending in May. The trade deficit peaked in August of 2006. The annual change in Personal Income adjusted for inflation in June was positive but this year Personal Income has been down sharply compared to last year. Before 2000, Personal Income was growing faster than the Trade Deficit. At that time an argument could be made that we were investing in the future. Since 2000, the trade deficit has ballooned while personal income growth has fallen. We are now borrowing from the future to fund our current lifestyle.

Pending Home Sales Index up 5.3% from previous month; down 12.1% versus last year

2008-08-07T17:02:00.004-04:00

The Pending Home Sales Index for contracts signed in June 2008 on a seasonally adjusted basis was at 89.0 up 5.3% from 84.5 in May 2008 but was down 12.2% compared to June 2007's figure of 101.4. Without seasonal adjustments, the index was down 12.1% compared to June 2007.

2001 was previously the slowest year for pending home sales on record. June 2008 was 6.6% below June 2001's sales pace. May 2008 was 17.5% below the 2001 level.

The NAR raised their 2008 median home sales price forecast to $206,700 from $205,300. The NAR is forecasting 2009 median home sales prices to be at $215,800. In June they had dropped their 2008 forecast by 4.1% from $213,700 to $205,000. According to Lawrence Yun, NAR chief economist, sales have been in a pattern of rising and falling within a fairly narrow range. Yun said “The vacillation of data from one month to the next indicates a housing market in transition.” It does appear that home sales has bottomed out. We may be transitioning from declining home prices and sales to rising home sales with declining prices.

I don't expect home prices to bottom until supply and demand are in equilibrium. Currently there is 11.1 months supply of existing homes. 6 months is where supply and demand are considered balanced.

April, May and June are the three biggest months for Pending Home Sales. Afterwards, sales quickly taper off. Pending Home Sales for June indicates that the July and August existing sales may pick up a little bit. Last year existing sales plummeted in the Fall. This Fall will be the big test for existing sales.

Growth in Withheld Taxes slows in July

2008-08-06T14:16:00.003-04:00

The amount of withheld taxes received by the Department of the Treasury for a 12 month period ending July 31, 2008 was 1.71% higher than a year ago after being adjusted for inflation. This is down from June's rate of 2.27%.

Through the last cycle, the year over year growth rate of withheld taxes closely mirrored the stock market. The real growth rate turned negative just as the recession ended. It wasn't until the end of 2002 and the beginning of 2003 that the growth rate bottomed and started to improve. The stock market also started growing at the same time. Currently real withheld taxes is growing year over year, but the trend is downward.

Non-Manufacturing Index (NMI) is at 49.525

2008-08-05T18:49:00.002-04:00

The Institute for Supply Management released their July 2008 Non-Manufacturing ISM Report on Business today. The Non-Manufacturing Index (NMI) came in at 49.525%. 50% is the breakpoint for growth. NMI had plunged to 44.6% in January 2008 but has been between 48%-52% for the last 6 months.

NMI is made up of four components: business activity, employment, new orders, and supplier deliveries. Business activity was at 49.6% in July down from 49.9% in June; employment was at 47.1% up from 43.8%; new orders were at 47.9% down from 48.6%; and supplier deliveries were at 53.5% up from 50.5%.

Here is what some of the respondents were saying:

"Our business remains at about the same level as the previous month, with continued focus on cost reduction." (Finance & Insurance)
"The general state of the home-building industry has not changed since last month; however, with the commodity and code changes going into 2009, we face much higher construction costs and reduced margins across the entire supply chain." (Construction)
"Continue to see slowdown in local economy." (Health Care & Social Assistance)
"While still positive, the overall outlook for 2008 for our company is not as high as earlier in the year." (Wholesale Trade)
"Governmental spending for services is up this period." (Professional, Scientific & Technical Services)

Personal Income increases by 0.06% in June

2008-08-04T15:17:00.002-04:00

The Bureau of Economic Analysis released the Personal income figures for June 2008 today. Personal income increased by 0.06% compared to May 2008. May 2008 had a large increase of 1.82% compared to April 2008 due to the 2008 tax rebates. Disposable income decreased by 1.89% in June compared to May 2008. The charts below show per capita Real Personal Income, which increased by 0.60% in June 2008 compared to June 2007.

The unemployment rate rises to 5.7%

2008-08-01T14:08:00.003-04:00

The U.S. Department of Labor released the Weekly Claims data for Unemployment Insurance yesterday. Initial claims were at 448,000 for the week ending July 26th. This is the highest initial claims have been since April 2003. The four week average of initial claims, which is not as volatile, was at 393,000 up from the previous week's mark of 382,000.

Continued claims for unemployment insurance increased to 3,282,000 for the week ending July 19th up from the previous week's number of 3,097,000. This is the highest it has been since December, 2003. The four week average for continued claims was also up to 3,174,500 from 3,131,750.

Unemployment is on the rise. According to "The Employment Situation" for July 2008 released today by the U.S. Department of Labor, the unemployment rate was 5.7% in July up from 5.5% in June. Since 1948, the unemployment ate has never risen by more than .5% without entering into a recession. The unemployment rate is now up 1.0% in the last twelve months and is up 1.3% from its recent low. Nonfarm payrolls decreased by 51,000 in July and decreased by the same in June. Nonfarm payrolls have declined for 7 straight months shedding 463,000 jobs. Over the last ten years, nonfarm payrolls have increased by an average of 107,000 jobs. Nonfarm payrolls rarely decrease outside of recession periods and it is even more rare for consecutive declines. Excluding periods right before, during and after recessions, nonfarm payrolls have declined consecutively only two times: 3 consecutive times in 1951 and 2 consecutive times in 1952.

It now looks like the unemployment rate is picking up steam. News of companies going bankrupt, closing stores, or trimming sales forces seems to be increasing.

Real GDP grew by 1.88% in the second quarter; was negative in the fourth quarter 2007

2008-08-01T00:47:00.002-04:00

The Bureau of Economic Analysis released the Gross Domestic Product figures for the second quarter today. Real GDP, adjusted for inflation, rose by an annualized rate of 1.88% in the second quarter 2008 compared to the first quarter 2008. The first quarter grew by a revised 0.87%. Fourth quarter 2007 was revised down to -0.17% down from the previously announced figure of +0.60%. December 2007 could be considered the start of the recession.

Adjusted for both inflation and population, Real per capita GDP fell at an annualized rate of 1.19% in the fourth quarter 2007. It barely rose by 0.02% in the first quarter 2008 and rose by 1.00% in the second quarter. While inflation is making the headlines with rising food and gas prices, the price deflators used to calculate GDP went down to 1.1% in the second quarter from 2.6% in the first quarter. The monthly increases in Core CPI for the second quarter averaged an annualized rate of 2.33% and CPI averaged a whopping 7.66%.

Case-Shiller home price index continues to slump but is not falling as fast as before.

2008-07-29T23:45:00.003-04:00

The S&P Case-Shiller home price index for May 2008 was released today by Standard and Poors. The composite-10 declined 0.91% from April and declined by 16.87% from May 2007. The composite-10 is now down 19.80% from its peak. All 20 individual markets are still down year over with Las Vegas and Miami down the most at -31.41% and -31.22% respectively. Charlotte and Dallas are down the least at -2.00% and -3.84% respectively. 7 markets were up in May compared to the previous month (Denver, Boston, Atlanta, Minneapolis, Charlotte, Portland, and Dallas). The markets with the biggest declines from the peak are also declining the fastest. The markets with smaller declines from the peak mostly rose last month or had a minor decline. The composite-10 is now down -19.80% from its peak. 9 markets have now dropped over 20% from their peak. The CME futures market is pricing in a further drop of -13.78% by next May for the composite-10.

It is encouraging that some markets are posting month over month gains. The month to month change in the composite-10 has also improved from February when it declined by 2.80% in one month to a 0.91% decline last month over the previous month. However, 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. Autumn and Winter will be a better indicator to see if the market is finding a bottom.

Existing home sales slows to lowest level in 8 years

2008-07-25T02:12:00.002-04:00

The National Association of Realtors released the existing home sales figures for June 2008 today. Sales increased to a seasonally adjusted annual rate of 4.860 million units in June, down 2.6% from May 2008 and down 15.5% from June 2007. This is the lowest annual sales rate since July 2000. For the first 6 months this year, only 2.386 million units have sold. The median sales price was $215,100 in June up from $207,900 in May 2008 (up 3.5%) but down from $229,000 in June 2007 (down 6.1%).

The inventory of existing homes grew to 4.490 million units up from 4.482 million in May 2008. Month's supply grew to 11.1. Lawrence Yun, NAR chief economist, said "with short sales and foreclosures accounting for approximately one-third of transactions, it’s hard to make an apples-to-apples comparison with a year ago when they were only a minor portion of the market." Distressed sales are pressuring prices, but they are also boosting sales transactions.

Option ARMs are no longer being ignored

2008-07-24T00:39:00.005-04:00

In January I posted that Option ARMs would be the next storm in the mortgage crisis. At that time, I felt that the dangers of Option ARMs were being ignored. Six months later, the situation is quite different. The Non-Performing Assets (NPAs) have nearly doubled from 2007 Q4 to 2008 Q2. Moreover, the deterioration seems to be accelerating.

Here is an update of the top 10 of Option ARM lenders of 2007. 5 of out of 10 no longer in the business: Countrywide (bailed out by BofA), American Home Mortgage, IndyMac, Capital One (shut down mortgage division), and Luminent Mortgage. Most of the others are struggling for their existence.

On Tuesday Wachovia announced $6.1 billion in writedowns. However, two analysts called the bottom on the stock and the stock rallied by nearly 30%. I think it is too early to call the bottom for many reasons:

The deterioration of the Option ARM portfolio is accelerating. Non-Performing Option ARMs grew to 5.8% in Q2 (pg. 15). In addition 3.9% of the Option ARMs are more than 30 days past due and 1.3% are more than 60 days past due.

Wachovia has a portfolio of $122.026 billion in Option ARMs (pg. 16). The average LTV at origination was 71%. It has deteriorated to 85%. With falling housing prices, Wachovia projects the LTV to reach 99% at the bottom. 58% of Wachovia's Option ARM portfolio is in California ($71.211 billion). The average LTV was 70% at origination and is now 90%. Wachovia projects the California LTV to deteriorate to 104%. Any second mortgages or further negative amortization will further increase the problem.

Wachovia's commercial division is also experiencing a surge in Non-Performing Assets. Their Real Estate Financial Services division has seen an increase in NPAs from 0.46% in Q2 2007 to 3.95% in Q1 2008 to 5.1% in Q2 2008 (pg. 47). This division has $48.355 billion in assets.

In June of 2007, Wachovia was touting their 10 year recast and 125% balance limit. As chronicled in this post, other lender's Option ARMs are starting to recast. The loan Wachovia used as an example until 2011. However when it does recast, the ramifications will be a lot worse. The balance will have grown from $250,000 to $325,000. The payment will jump from an initial payment of $804 to around $2500.

Wachovia's Option ARM borrowers are already struggling as reflected in their rising delinquencies. Their credit scores are also deteriorating. The average Option ARM borrower's FICO at origination was 675 compared to the current average FICO of 661 (pg. 34). For Wachovia's traditional mortgages, the FICO improved slightly from 731 at origination to 732 currently. If borrowers are struggling during the low payment period, how are they going to react when their payments triple and Wachovia projects that many will be underwater?

30 year fixed rates jump to 6.71%; Congress has reached agreement on rescue bill

2008-07-23T04:39:00.002-04:00

Interest rates on Conforming 30 year fixed-rate mortgages rose to 6.71% on Tuesday, up from 6.44% last Friday according to HSH Associates. For 35 year from 1967 to 2002, 6.5% was the lowest the rates had been. Rates reached 18.8% during the 1982 recession. Rates jumped because of concern about the financial health of Fannie Mae and Freddie Mac.

The government is actively firming up plans to make the implicit government backing of Fannie Mae and Freddie Mac explicit. The federal government has already proposed a rescue plan and Congress has reached agreement on the plan on Tuesday per a report on Bloomberg:

Under a modified version of proposals made by the Bush administration, the Treasury Department would gain authority to inject capital into the two largest U.S. mortgage finance companies, through loans and equity investments.

The Treasury would be barred from providing aid that would cause a breach in the federal debt ceiling under the agreement, a constraint aimed at limiting any taxpayer losses. The debt limit would be raised to $10.6 trillion from the current $9.815 trillion.

The legislation would also raise the limit on the size of the mortgages the companies may purchase. The new cap would be $625,000, or the median home price plus 15 percent, whichever is lower, Frank said.

A Congressional Budget Office estimate released today put the cost of Paulson's plan at $25 billion, a figure below the total that some lawmakers had expressed concern about.