Friday, June 27, 2008

Consumer Sentiment sinks even lower


The University of Michigan's Consumer Sentiment survey that was released today sank to 56.4 down from 59.8 in May. This is the third lowest reading ever for the survey that goes back to 1952. During the recession of 1980, the index hit 52.7 in April of 1980 and 51.7 in May of 1980. At the end of the 1973-75 recession, the index hit 57.6.

Here are a few highlights from their press release:

  • Surging gas prices, high food prices, disappearing jobs, declining home values, and record foreclosures were cited by consumers as the basis for their pessimism, and most consumers expected each of these problems to continue to worsen in the months ahead.
  • More consumers than any time since the first survey was conducted in 1946 reported that their financial situation had worsened (57%). When asked to explain the changes in their finances, the highest number of consumers cited higher prices for fuel and food, and the smallest number of consumers reported income gains than at any other time in the history of the surveys.
  • Nine-in-ten consumers thought that the economy was in recession in June, with record numbers citing unfavorable news about rising prices, lost jobs, slowing economic growth, and the continuing fallout from the credit and housing crises. “Perhaps the most significant development in the past few months is that two-thirds of all consumers now expect the economic slump to extend into the next several years.

While we may not be officially in a recession, the consumers are feeling pinched as if we are in a deep recession.


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Existing home sales stabilize, but low; inventory still very high

The National Association of Realtors released the existing home sales figures for May 2008 today. Sales increased to a seasonally adjusted annual rate of 4.99 million units in May, up 2.0% from April 2008 but down 15.9% from May 2007. The median sales price was $208,600 in May up from $201,200 in April 2008 (up 3.7%) but down from $222,700 in May 2007 (down 6.3%). The monthly gain in May over the previous month was fueled by increases in the Northeast. New home inventory and sales are continuing to decline as builders are paring down their activity. On the other hand, existing homes inventory is elevated and sales have bottomed out at around an annual sales pace of 5 million units.


Lawrence Yun, NAR chief economist, said “the large supply of homes on the market clearly favors buyers, and it should take several months to draw the inventory down.” From 1996 to 2005, the average inventory level was 2.17 million units. For May the inventory was 4.485 million units. It will take a lot longer than "several months" to draw the inventory down. Months Supply for May 2008 was at 10.8 down from April's Months Supply of 11.2. Months Supply will not suddenly drop down to 6 (where supply and demand are equal) in "several months".


Foreclosures are adding to the existing sales numbers. The real estate market won't hit the bottom until both sales and home prices start to rise. Lehman has this to say on the topic:

The surge in foreclosures has started to influence the data. Sales of foreclosed homes have been crowding out regular sales, particularly in formerly bubble markets. For example, according to Radar Logic, 50% of sales in Sacramento are foreclosed homes. Other bubble markets such as Las Vegas and San Diego have similarly big shares of foreclosed homes but in non-bubble markets like Seattle, foreclosures make up only 4% of sales. Foreclosures not only crowd out sales, but also add to inventory.


Inventory normally peaks in the summer months. It will be interesting to see how demand reacts to supply.


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Wednesday, June 25, 2008

New Home Sales Continue at Weak Pace


The U.S. Census Bureau and the Department of HUD announced today that the new single family home sales for May 2008 were at a seasonally adjusted annual rate of 512,000. This was 2.48% less than April 2008 and 40.26% less than May 2007. Economists had correctly forecasted that sales would fall to 512,000.



There was 10.9 Months Supply for May up from 10.7 in April. 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 continued to be weak during what is usually the peak new homes selling season. Using 2001 and 2005 for comparison, sales for May are at just 40.0% of the level reached in May 2005 at the peak of the real estate cycle and are at 60.0% of the level in May 2001.


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The S&P Case-Shiller home price index continues decline; some markets reverse course


The S&P Case-Shiller home price index for April 2008 was released today by Standard and Poors. The composite-10 declined 1.56% from March and declined by 16.34% from April 2007. The composite-10 is now down 19.06% from its peak. All 20 individual markets are now down year over with Las Vegas and Miami down the most at -26.81% and -26.73% respectively. Charlotte and Dallas are down the least at -0.12% and -3.42% respectively. 8 markets where up in April compared to the previous month (Denver, Chicago, Boston, Charlotte, Cleveland, Portland, Dallas, and Seattle).


The composite-10 is now down -19.06% from its peak. 8 markets have now dropped over 20% from their peak led by Las Vegas (-29.34%) and Phoenix (-29.06%). The CME futures market is pricing in a further drop of -14.73% by next April for the composite-10.


While it is encouraging that a few markets posted month over month gains, April was also when the market was pricing in that the worst was over and the recession had been averted. Today, the market is not as optimistic. The home price index figures are 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.








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Tuesday, June 24, 2008

The State of the Nation's Housing 2008

The Joint Center for Housing Studies of Harvard University released their annual report on housing: "The State of the Nation's Housing 2008." The 44 page report gives a detailed look at the forces currently causing the housing crisis. There is a wealth of information and graphs in the report. Here are a few excerpts:

Assuming the vacancy rate prevailing in 1999–2001 was close to equilibrium, the oversupply of vacant for-sale units at the end of last year was around 800,000 units, or 1.0 percent of the owner stock.

In addition, the number of vacant homes held off the market other than for seasonal or occasional use surged from 5.7 million units in 2005 to 6.2 million in 2007.


Despite production cuts rivaling those in the 1978–1982 downturn, the number of vacant for-sale homes on the market did not shrink in the first quarter of 2008. The weak economy, tight credit, and concerns over whether house prices had bottomed out continued to suppress demand and delay the absorption of excess units. Until this oversupply is reduced, housing markets will not mend.


At last measure in 2006, 39 million households were at least moderately cost burdened (paying more than 30 percent of income on housing) and nearly 18 million were severely cost burdened (paying more than 50 percent). From 2001 to 2006, the number of severely burdened households alone surged by almost four million. Because of the unprecedented run-up in house prices and lack of real income growth, over half of this increase was among homeowners.

Housing permits fell 24 percent nationwide in 2007, with single family permits down 29 percent and multifamily permits down 9 percent for the year. This brings the total decline from the 2005 peak to 35 percent, including a 42 percent reduction in single-family permits. The downturn has been widespread, with permits declining in 94 of the 100 largest metropolitan areas over the two-year period. Smaller metropolitan areas have also been affected by the construction pullback, with 214 of 263 posting reductions in permits.

To wipe out past appreciation, home prices have to retreat the most in once-hot markets and the least in cold markets. For example, the 6.7 percent drop in the median house price in Indianapolis from the third-quarter 2005 peak to the fourth quarter of 2007 was enough to cancel out appreciation all the way back to 2000. In Sacramento, by contrast, the larger 21.8 percent drop in the median house price from its peak in the fourth quarter of 2005 to the end of 2007 only erased gains made since 2003.

The report chronicles how housing starts plunge before and at the start of a recession and recover either right before the end of the recession or shortly after. Currently our downturn is being led by housing. It will be interesting to see if the housing crisis extends the length of the downturn, or if the economy recovers first.


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Wednesday, June 18, 2008

Will be back next week


photo by Per Ola Wiberg..(PO...or Powi)


I will be offline for the rest of this week. I will be back online Monday, June 23.

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Monday, June 16, 2008

Sales Tax revenue is flat

Sales and Use Tax is mixed for the four largest states in the U.S. In California, sales tax collections for the last 12 months is down 3.54% compared to a 12 month period ending a year ago. Florida is down 5.76%. Both California and Florida are in a recession. Texas continues to show strong growth and is up 6.63%. New York is also growing at a pace of 2.67%. The composite of all 4 weighted for GDP contribution is flat at a -0.09%. Together these 4 states account for about a third of U.S. GDP.




Sales and Use tax revenue has stalled. Even in Florida and California, the acceleration downward has leveled off. We appear to be in a wait and see mode.


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Friday, June 13, 2008

Inflation for May is not bad if you don't drive


The U.S. Department of Labor reported the inflation numbers for May today. Before seasonal adjustments, the Consumer Price Index for All Urban Consumers (CPI-U) rose 0.84% in May over April and was 4.18% higher than May 2007. Core CPI (CPI less food and energy) before seasonal adjustments was up by 0.06% compared to April and up 2.31% compared to a year ago. Seasonally adjusted, CPI-U rose 0.65% over April versus expectations of 0.5% and core CPI rose 0.20% the same as expected. "Not a bad number if you don't drive," quipped Meny Grauman, an economist for CIBC World Markets.


The Fed is starting to talk tough on inflation. Earlier this week, Fed chief Ben Bernanke said "The latest round of increases in energy prices has added to the upside risks to inflation and inflation expectations." He also said that the Fed would "strongly resist an erosion of longer-term inflation expectations." The Fed is facing a dilemma; inflation is poking its ugly head and the economy is running at a slow pace. Inflation has yet to rise in the core numbers, but inflation is making its presence felt.


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Thursday, June 12, 2008

Retail sales for May came in strong

The U.S. Census Bureau announced today that retail and food services sales for May 2008 with seasonal adjustments was up 1.02% over April and up 2.40% compared to a year ago. Retail sales without including autos (excluding autos makes the data less volatile) was up 1.18% compared to the previous month and up 4.61% compared to the previous year.



The month over month numbers were strong. Economists had expected an increase of only 0.7% excluding auto sales. Interestingly the year over year the growth rate actually declined as the increase in May 2007 over April 2007 was even stronger than the increase this year. When including autos and adjusting the numbers for inflation, retail sales declined by 1.2% in May compared to the previous year.





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Wednesday, June 11, 2008

Option ARMs: The Next Real Estate Crisis

Business Week calls Option ARMs The Next Real Estate Crisis. The article opens with this analogy:

The American homeowner must feel like one of those characters in an old cartoon who has just been hit by a falling piano. After dusting himself off and touching the large bump on his head, he probably doesn't expect another piano to be dangling overhead. But he'd be wrong.

The piano is the impending crisis caused by Option ARMs resetting to higher payments. These previous posts of mine took a look at Option ARMs: original post and an update.

The Business Week article gives us an update on some key statistics:

According to Credit Suisse (CS), monthly option recasts are expected to accelerate starting in April, 2009, from $5 billion to a peak of about $10 billion in January, 2010. Some of these loans have already started to recast. About 13% of option ARMs that were issued in 2006 were delinquent by 60 days by the time they were 18 months old, Credit Suisse said.

About a million borrowers have option ARMs, but only a fraction have already fallen due. [NOTE: should read "only a fraction have already recast."]

Among the states expected to be worst-hit is already battered California. Today, outstanding option ARM loans in the U.S. total about $500 billion, about 60% of which were sold to California homeowners, according to Credit Suisse.


Previously I had posted Credit Suisse's chart on resetting ARMs. This chart did not account for the payments recasting when the balance had grown larger than the recast amount of 110%, 115% or 125%.


The Business Week article now has Credit Suisse's updated chart accounting for recasts. According to the chart, the amount of Option ARMs recasting will rise from the current pace of about $2 billion a month to about $4 billion a month by the end of this year to about $10 billion a month by the end of next year. This is roughly $120 billion resetting in 2008 and 2009 with another $80 billion in 2010.


I posted this chart from IndyMac in my original Option ARM post. To update the status of the top 6: Washington Mutual stripped their CEO of the chairman title, Countrywide is being bailed out by Bank of America, American Home Mortgage went bankrupt, Wachovia fired their CEO, IndyMac is struggling to survive, and Capital One shut down their mortgage division. The others on the list are feeling the pain as well.

The mortgages that are resetting now have huge payment shocks. In an example I used in this post, a borrower with a first payment due in January 2005 had a beginning payment of $574.06 a month. The loan in that example reset in February 2008 to a payment of $1,468.43. That is a huge difference. Especially if the borrower could only afford the teaser payments. Many borrowers that took out these type of loans expected real estate prices to rise faster than their negative amortization. Instead, their loans are hitting 110% or 115% of their original balance causing resets and real estate prices instead of going up faster, have declined.

Wall Street is starting to address the potential problems involving Option ARMs. The recent surge in delinquencies is helping draw attention to this sector of loans.

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Wednesday, June 11, 2008


photo by fmc.nikon.d40


Quote for the day:

This is the end
Beautiful friend
This is the end
My only friend, the end

Of our elaborate plans, the end
Of everything that stands, the end
No safety or surprise, the end
I'll never look into your eyes...again

- The Doors, The End




I have decided to eliminate the photo and quote of the day posts from my daily routine and will focus on my regular posts instead.

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Tuesday, June 10, 2008

Trade deficit increases in April

The Department of Commerce announced that the goods and services deficit rose to $60.9 billion up from the revised figure of $56.5 billion in March. The increase in exports of $5.0 billion was offset by the increase in imports of $9.4 billion. The goods deficit increased $4.5 billion from March to $72.9 billion and the services surplus increased by $0.1 billion to $12 billion.


The deficits with our biggest trade partners all increased last month. China was up to a $20.2 billion deficit (from $16.1 billion in March), OPEC was $15.6 ($14.1), the European Union $8.5 ($7.5), Japan $7.6 ($7.5), Canada $7.6 ($6.4), and Mexico $6.8 ($6.0).


Adjusted for inflation, the trade deficit for the last twelve months ending in April declined slightly from the deficit for the one year period ending in March. The annual change in Personal Income adjusted for inflation in April rebounded a bit from its freefall over the last few months. However, the increases in personal income are negligible compared to our trade deficit (unlike in the past when it more than offset our trade deficit). With the increases in commodity prices and the weaker dollar we are continuing to borrow from the future to fund our current lifestyle.


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Tuesday, June 10, 2008



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Monday, June 9, 2008

Pending Home Sales improve; NAR revises home price forecast down sharply


Today, the National Association of Realtors (NAR) released the Pending Home Sales Index for April. Seasonally adjusted, the index was up to 88.2 from 83.0 in March and was down 13.1% from 101.5 in April 2007. Not seasonally adjusted, the index was down 13.8% versus a year ago. Last month the index was down 21.7% year over year. Sales are starting to show traction with lower sales prices.



2001 was the previously the slowest year since the index was started. In April 2008 the index was 11.8% lower than April 2001 and in March 2008 the index was 19.5% lower than March 2001. Compared to historical months, sales are starting to show improvement over the first few months of the year.


The NAR also releases their economic forecast at the same time as their pending home sales update. Every month they have been slowly revising their projections for housing prices downward. In March their forecast for the median prices for 2008 was $216,300; April was $215,800; May was $213,700. They have now revised their 2008 estimate down to $205,000. The median sales price for the first quarter 2008 was $198,700 and for April it was $202,300. In order to have the median sales price come to their projection, they had high projections for the third quarter of 2008. In March their forecast the median prices for the third quarter 2008 was $228,700; April was $229,600; May was $226,300. They have now dropped their third quarter forecast to $208,400. In previous posts I had questioned how and when they would revise their forecasts closer to reality. The answer was quickly and quietly. Here is how they addressed their revisions:

"After unprecedented home price declines in the first half of the year, many markets can anticipate stabilizing price trends in the second half. The aggregate median existing-home price is likely to decline 8.4 percent in the first half of this year, and then begin to stabilize in the second half before rising 4.4 percent next year to $213,900."


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Monday, June 9, 2008


photo by camshafter


Quote for the day:

"They raised billions of dollars they said they didn't need to replace losses they said they didn't have."

- David Einhorn of hedge fund Greenlight Capital on Lehman Brothers




Lehman Brothers on Monday sold $6 billion of stock and convertible securities to strengthen its balance sheet as the company prepares to post a $2.77 billion quarterly loss.

Pending home resales jumped 6.3% in April after a 1% drop in March. This was the biggest jump since 2001 after being at the lowest level on record last month.

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Friday, June 6, 2008

Unemployment spikes up to 5.5%


Today, the U.S. Department of Labor released "The Employment Situation" for May 2008. The unemployment rate rose from 5.0% in the previous month to 5.5% in May 2008. The unemployment rate has now risen 1% from a year ago. Since 1948, the unemployment rate has never risen by more than 0.5% within a 12 month period without entering a recession. The unemployment rate rose by that much in just one month and double that amount in a year. The market had been getting complacent about the possibility of a recession. The rapid jump in the unemployment rate brings the recession concerns right back to the forefront. The unemployment rate usually peaks right after the end of a recession.



Nonfarm Payrolls declined by 49,000 in the month of May and have declined for five months in a row with a total reduction of jobs numbering 324,000. For the last 10 years the economy has added on average 107,000 jobs a month so the real deficit is now over 800,000 jobs for the year. However, the losses accumulated so far are minor compared to the total usually lost in a recession. In the recession of 1990-91 a total of 1.621 million jobs were eliminated over an eleven month span. From 2001 to 2003 2.708 million jobs were eliminated over a 30 month span.



Yesterday, the U.S. Department of Labor also released the weekly figures for Unemployment Claims. The 4-week average of Initial Claims dropped slightly from the previous week's average of 371,250 to 368,500. Initial Claims peaked at the beginning of April at 376,500.


On the other hand, Continued Claims has been consistently rising and the 4-week average is now at 3,085,750. This shows that the job market is softening. Those that are laid off are having a harder time finding a replacement job.



In the second half of the year there will also be increased job cutbacks at local and state governments. The New York Times had a recent article discussing this:





State and city governments have yet to shrink the economy; indeed, they have even managed to prop it up. They have quietly maintained their spending at pre-crisis levels even as they warn of numerous cutbacks forced on them by declining tax revenues. The cutbacks, however, are written into budgets for a fiscal year that begins on July 1, a month away. In the meantime the states and cities, often drawing on rainy-day savings, have carried their share of the load for the national economy.



That share is gigantic. At $1.8 trillion annually in a $14 trillion economy, the states and municipalities spend almost twice as much as the federal government, including the cost of the Iraq war. When librarians, lifeguards, teachers, transit workers, road repair crews and health care workers disappear, or airport and school construction is halted, the economy trembles. None of that, or very little, has happened so far, not even in California, despite a significant decline in tax revenue.



This economic downturn is being led by the housing crisis which is intensifying and the employment situation is worsening with it.


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Friday, June 6, 2008


photo by mysza831



Quote for the day:

Prosperity doth best discover vice, but adversity doth best discover virtue.

- Francis Bacon, Essays


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