Case-Shiller Home Price Index post an accelerating decline

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.

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Existing Home Sales plummet in November

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.

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CPI records the biggest drop since 1933

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.

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Pending home sales down moderately as prices drop

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.

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Mortgage Defaults Continue to Surge Higher

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.

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Unemployment Rate Rises; Most Jobs Lost in Month Since 1974

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. 

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 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.  

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Service Industry contracts at record pace

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)

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Manufacturing continues to slow

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.

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The Case-Shiller home price index posts another record decline

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.

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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.

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Existing homes sales decline slightly; prices decline sharply

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.

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CPI turns negative; Stag-Deflation, here we come

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.

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Retail sales plunge in October; retail employers are cutting back

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.

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