Tuesday, November 25, 2008

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.



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.







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Monday, November 24, 2008

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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Thursday, November 20, 2008

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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Monday, November 17, 2008

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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Thursday, November 13, 2008

The End


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.

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Monday, November 10, 2008

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


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.


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Friday, November 7, 2008

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


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.

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 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.


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Wednesday, November 5, 2008

U.S. service industry contracts as consumers tighten belts

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)



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    Tuesday, November 4, 2008

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


    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.


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    Monday, November 3, 2008

    Manufacturing drops dramatically as the economy contracts


    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.


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