New home sales in September are up slightly from previous month; decline in prices is picking up steam

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.

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Existing home sales rise on lower prices

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. 

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Sales tax collection continues to decline

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.

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New home starts down sharply; supply is still rising

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. 

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Retail Sales down sharply in September

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.

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

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.

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

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.

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The unemployment rate is unchanged; nonfarm payrolls post large decline

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.

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Withheld taxes post weak growth; further slide is likely

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.

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PMI posts a sharp decline in September

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.

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