Friday, March 7, 2008

photo by Powi...(ponanwi)


Quote for the day:

The strongest of all warriors are these two — Time and Patience.

- Leo Tolstoy, War and Peace

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In the news:

"Payrolls fell by 63,000, the most in five years, after a revised decline of 22,000 in January, the Labor Department said today in Washington. The jobless rate dropped to 4.8 percent, reflecting a shrinking labor force as some people gave up looking for work."

"The Federal Reserve moved to add as much as $200 billion to the banking system over the next month to offset a deepening credit crisis that may have already pushed the U.S. economy into a recession. The central bank raised to $50 billion each from $30 billion the amount intended for auctions of funds on March 10 and March 24. The Fed also said in a statement in Washington today that it will make $100 billion available through weekly 28-day repurchase agreements, where the central bank will lend cash in return for assets including mortgage-backed bonds."

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Pending Home Sales continue to fall; NAR is optimistic

The National Association of Realtors (NAR) released the Pending Home Sales figures for January 2008. This is a measure of contracts that were signed in January. When a home closes then it will turn into an Existing Home Sale. The Pending Home Sales Index on a seasonally adjusted basis was unchanged from December 2007 to January 2008 but was down 19.6% from January 2007. The graph to the right compares Pending Home Sales and Existing Home Sales on a Seasonally Adjusted basis. The Pending Home Sales are shifted 2 months forward on the chart. You can click on the chart for a larger view.

Here is a graph showing Pending Home Sales not seasonally adjusted. Pending Home Sales for January 2008 were 15.7% lower than January 2001. 15% off of 2001 sales levels would equate to around 4.6 million existing home sales for 2008. Here is the NAR’s current forecast: “Existing-home sales are forecast to remain flat around an annual level of 4.9 million in the first half of the year before improving to a 5.8-million pace in the second half. With a weak first half, total sales for 2008 are projected at 5.38 million”.

Ultimately the amount of sales will depend on the how motivated the buyers and sellers are. If sellers are aggressive on lowering prices, then demand could pick up. This leads to the NAR’s most interesting and boldest prediction for 2008. The NAR predicts that ”The aggregate existing-home price is projected to decline 1.2 percent to a median of $216,300 this year, and then increase 3.5 percent to $223,800 in 2009. “ The aggregate existing-home price for 2007 was $219,000. A decline of 1.2% doesn’t sound too bad especially if prices rebound in 2009. The only problem is that prices have already declined to $201,100 (median existing homes sales price for January 2008). They are also projecting for the aggregate existing home price for all of 2008 to be at $216,300 (not just the month of December).

The aggregate existing home price for 2006 was $221,900. It went up as high as $229,000 in June of 2007, but then has steadily declined to $201,100 in January 2008. The Case-Shiller CME futures are projecting about a 6.5% decline from January 2008 to December 2008 (this previous post talks about the Case-Shiller CME futures).

If existing-prices declined by 6.5% they would be at around $188,000 by the end of this year. If prices steadily declined to that level, the aggregate existing home price for 2008 would be in the middle at around $194,500. This would be a decline of 11.4%. One way for the aggregate prices for 2008 to end up at $216,300, would be for home prices to instantly jump from 201,100 to around $217,000 and stay flat for the duration of the year. Another way to end up at a median of $216,300 would be for prices to move up from 201,100 in an orderly manner and end up at $230,000 by December 2008, then the median would be around $216,300. Prices would have to follow an inverse pattern in 2009 to go from $230,000 and fall steadily to $218,000 to end up with a median of $223,800 (to match the NAR’s 3.5% forecasted increase).

The NAR is notorious for revising their overly optimistic forecasts. Here are some quotes from Calculated Risk back in October 2007.

The comedians at the National Association of Realtors (NAR) revised down their forecast today for existing home sales in 2007 again. Their current forecast is for sales to be 5.78 million in 2007, down for 5.92 million last month. Compare this to their original forecast from Dec '06 of 6.4 million units in 2007. (My forecast was for existing home sales to be between 5.6 and 5.8 million units).

The NAR forecast is still too high, even after eight straight months of negative revisions. Luckily for the NAR, they still have two more downward revisions to go.

Note that Existing Sales ended up at 5.652 million for the year (Calculated Risk’s projection was very accurate).

It will be interesting to see how and when the NAR’s forecast of a decline of 1.2% in sales prices gets revised. Hopefully this was just a math error on their part and not an attempt to mislead the public.

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Thursday, March 6, 2008

photo by Pierre Éthier


Quote for the day:

"The success is not mine, the failure is not mine, but the two together make me."

- Charles Dickens, Great Expectations

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In the news:

The number of loans entering into the foreclosure was at a record high during the 4the quarter at 0.83% of all loans outstanding. 2.04% of all loans outstanding are at some point in the foreclosure process, up from 1.69% and 1.19% a year ago.

Pending Homes Sales were flat in Janauary 2008 compared to December 2007 on a seasonally adjusted basis, but were down 20.8% compared to January 2007.

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ISM's Non-Manufacturing Report Suggests U.S. may not yet be in a Recession

The Institute for Supply Management released their February 2008 Non-Manufacturing ISM Report on Business today.

The Non-Manufacturing Index (NMI) rose 4.7% to 49.3% up from 44.6% in January. Readings below 50 indicate that the non-manufacturing sector is generally contracting. Economists had forecasted that the NMI would rise to 47.3%.

Here is what some of the Respondents had to say:

• "Business remains strong in 2008 despite signs of an economic downturn." (Professional, Scientific & Technical Services)
  
• "January was a very slow month and February has started off at the same pace." (Wholesale Trade)
  
• "Business drops significantly as we move away from the holiday season." (Retail Trade)
  
• "Weakness continues in both volume and pricing." (Agriculture, Forestry, Fishing & Hunting)
  
• "Financial services companies are beginning to stabilize from the effects of the subprime market issues, but overall will continue to focus on business as usual by increasing productivity of current workforce and supply base and limit any increases at this time." (Finance & Insurance)

This was a strong reversal today and adds further evidence that we may not yet be in a recession. During the 2001 recession, NMI was below 50 9 out of 10 months from April 2001 to January 2002. It averaged 48.3 during that period.

Bespoke Investment Group posted a chart on the odds that the U.S. will enter a recession in 2008 (measured by Intrade contracts and defined as 2 consecutive quarters of negative GDP growth). The odds have declined from a peak of 77.5% to current odds of 59%.

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Wednesday, March 5, 2008

photo by gari.baldi


Quote for the day:

I am, therefore I'll think.

Ayn Rand, Atlas Shrugged

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In the news:

"The Institute for Supply Management's non-manufacturing index, which reflects almost 90 percent of gross domestic product, rose to 49.3 from a record-low 44.6 in January. The Tempe, Arizona-based ISM says 50 is the dividing line between expansion and contraction."

"The nation's private-sector employment rolls dropped by 23,000 net jobs in February, according to the ADP employment index released Wednesday. This is the first decline since April 2003."

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Update on the Interest Spreads

Here is an updated chart of the interest spreads. They were discussed in more detail in this earlier post.

The spread between Moody's Baa to the 10 year Treasury and the TED Spread are still at high levels indicating that the credit crunch still remains.

The S & P 500 has droppped over 20% in a one year time frame just 5 times since 1971 (in 1973, 1981, 1982, 1987, and 2001). The TED Spread was over 1.2% less than 3 months before the peak was reached in each of those 5 times. There many times where the TED Spread doesn't reach this level for years at a time. The S&P 500 is currently down 15.8% from the most recent high reached in October 2007. The TED Spread was at an elevated level this time around as well.

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Tuesday, March 4, 2008

photo by Pierre Éthier


Quote for the day:

I've reluctantly discarded the notion of my continuing to manage the portfolio after my death – abandoning my hope to give new meaning to the term “thinking outside the box."

Warren Buffet in his 2007 Letter to the Shareholders of Berkshire Hathaway

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In the news:

The head of Dubai International Capital says that Citigroup may need ”a lot more money” from outside investors after billions of dollars of write-downs.

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PMI slows in February but is not at a recessionary level

The Institute for Supply Management issued their February 2008 Manufacturing ISM Report on Business today.

Comments from the respondents showed mixed assessments on the state of the economy :

• "Every year the Chinese New Year break has a bigger impact on January and February." (Machinery)
  


• "Business is good, but there is continued pressure on margins." (Primary Metals)
  


• "Industry appears to be recovering." (Transportation Equipment)
  


• "Plastic prices still on the rise." (Food, Beverage & Tobacco Products)
  


• "Business continues to be sluggish." (Furniture & Related Products)

PMI is the closest watched part of the report. PMI for February was at 48.3% down from January’s reading of 50.7%. A reading above 50 indicates that the manufacturing economy is generally expanding; below 50 indicates contraction. A PMI in excess of 41.1%, over a period of time, generally indicates an expansion of the overall economy. PMI usually reaches its lows during the second half of a recession and can drop rapidly. Per ISM, "If the PMI for February (48.3%) is annualized, it corresponds to a 2.3 percent increase in real GDP annually." PMI may be weakening, but it is not pointing towards a recession. PMI has dropped below 45 by the third month in 8 out of the last 10 recessions.

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Monday, March 3, 2008

photo by: Midnight-digital


Quote for the day:

To be, or not to be, — that is the question: —
Whether 'tis nobler in the mind to suffer
The slings and arrows of outrageous fortune,
Or to take arms against a sea of troubles,
And by opposing end them? — To die, to sleep, —
No more; and by a sleep to say we end
The heart-ache, and the thousand natural shocks
That flesh is heir to, — 'tis a consummation
Devoutly to be wish'd. To die, to sleep; —
To sleep, perchance to dream: — ay, there's the rub;
For in that sleep of death what dreams may come,
When we have shuffled off this mortal coil,
Must give us pause: there's the respect
That makes calamity of so long life;
For who would bear the whips and scorns of time,
The oppressor's wrong, the proud man's contumely,
The pangs of despis'd love, the law's delay,
The insolence of office, and the spurns
That patient merit of the unworthy takes,
When he himself might his quietus make
With a bare bodkin? who would these fardels bear,
To grunt and sweat under a weary life,
But that the dread of something after death, —
The undiscover'd country, from whose bourn
No traveller returns, — puzzles the will,
And makes us rather bear those ills we have
Than fly to others that we know naught of?
Thus conscience does make cowards of us all;
And thus the native hue of resolution
Is sicklied o'er with the pale cast of thought;
And enterprises of great pith and moment,
With this regard, their currents turn awry,
And lose the name of action.

William Shakespeare, Hamlet, Act III, scene i

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In the news:

Manufacturing in the U.S. shrank at the fastest pace in almost five years. The Institute for Supply Management's factory index dropped to 48.3 in February from 50.7 the previous month.

Apple is number one in Fortune Magazine's Most Admired Companies this year. Berkshire Hathaway is number two.

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A look Months Supply for Existing Homes Sales

I took a look at Months Supply for New Homes going back to 1963 in last Thursday's post.


Here is the chart for Months Supply for Existing Homes going back to 1994. The patterns on the charts look similar. 6 month's supply seems to be the magic balance between the forces of supply and demand.

I dug around for some charts on some different local markets. San Diego's real estate market hit 6 months supply earlier that the U.S. as a nation did. These next two charts are from The California Housing Forecast.

San Diego hit 6 months supply in January of 2006. Prices started to decline in San Diego right about that time and before they started declining in the U.S. as a whole. This earlier post showed graphs for home prices for San Diego (and the two cities discussed below).

Prices tapered off in Los Angeles in the middle of 2006 and started to decline towards the end of 2006. Los Angeles hit 6 months supply in late summer and early fall before dropping in the winter.

Seattle was one of the last 3 cities in the Composite 20 to start to decline. As of December 2007, it was still up year over year in price. King County (Seattle) hit 6 months supply in October of 2007. Prices started to first decline in Seattle in August of 2007 .
Here is a chart from Beau Betts blog on Seattle Real Estate.

Supply usually drops in the winter and picks up in the spring and peaks in the summer. If demand doesn't pick up this year, the months supply will start to skyrocket even more.

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