Paper Money - A US Real Estate Bubble Blog

Confidence Game: Consumer, CEO and Investor Confidence December 2008 (Final)

Posted: 24 Dec 2008 09:53 AM CST

This post combines the latest results of the Rueters/University of Michigan Survey of Consumers, the Conference Board's Index of CEO Confidence and the State Street Global Markets Index of Investor Confidence indicators into a combined presentation that will run twice monthly as preliminary data is firmed.

These three indicators should disclose a clear picture of the overall sense of confidence (or lack thereof) on the part of consumers, businesses and investors as the current recessionary period develops.

Today's final release of the Reuters/University of Michigan Survey of Consumers for December showed a continued slump for consumer sentiment with a reading of 60.1 and dropping 20.40% below the level seen in December 2007.

The Index of Consumer Expectations (a component of the Index of Leading Economic Indicators) increased to 54 remaining 17.68% below the result seen in December 2007 and just 9.8 points above the lowest value ever recorded.

As for the current circumstances, the Current Economic Conditions Index jumped off November's "lowest level ever recorded" to 69.5 or 23.63% below the result seen in December 2007.

As you can see from the chart below (click for larger), the consumer sentiment data is a pretty good indicator of recessions leaving the recent declines possibly predicting rough times ahead.

The latest quarterly results (Q3 2008) of The Conference Board's CEO Confidence Index increased marginally to a value of 40, nearly the lowest readings since the recessionary period of the dot-com bust.

It's important to note that the current value has fallen to a level that would be completely consistent with economic contraction suggesting the economy is either in recession or very near.

The December release of the State Street Global Markets Index of Investor Confidence indicated that confidence for North American institutional investors declined 15.2% since November while European confidence declined 5.1% and Asian investor confidence increased 3.9% all resulting in a decrease of 6.5% to the aggregate Global Investor Confidence Index which now rests 23.63% below the result seen last year.

Given that that the confidence indices purport to "measure investor confidence on a quantitative basis by analyzing the actual buying and selling patterns of institutional investors", it's interesting to consider the performance surrounding the 2001 recession and reflect on the performance seen more recently.

During the dot-com unwinding it appears that institutional investor confidence was largely unaffected even as the major market indices eroded substantially (DJI -37.9%, S&P 500 -48.2%, Nasdaq -78%).

But today, in the face of the tremendous headwinds coming from the housing decline and the mortgage-credit debacle, it appears that institutional investors are less stalwart.
Since August 2007, investor confidence has declined significantly led primarily by a material drop-off in the confidence of investors in North America.

The chart below (click for larger version) shows the Global Investor Confidence aggregate index.

Mid-Cycle Meltdown?: Jobless Claims December 24 2008

Posted: 24 Dec 2008 08:47 AM CST

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted "initial" unemployment claims jumped 30,000 to 586,000 from last week's revised 556,000 claims while "continued" claims declined 17,000 resulting in an "insured" unemployment rate of 3.3%.

It's very important to understand that today's report continues to reflect employment weakness that is strongly consistent with past severe recessionary episodes and that this signal is now so strong and sustained that a significant contraction in the economy is fundamentally certain.

Historically, unemployment claims both "initial" and "continued" (ongoing claims) are a good leading indicator of the unemployment rate and inevitably the overall state of the economy.

I have added a chart to the lineup which shows "population adjusted" continued claims (ratio of unemployment claims to the non-institutional population) and the unemployment rate since 1967.

Adjusting for the general increase in population tames the continued claims spike down a bit but as you can see, the pattern is still indicating that recession has arrived.

The following chart (click for larger version) shows "initial" and "continued" claims, averaged monthly, overlaid with U.S. recessions since 1967 and from 2000.

NOTE: The charts below plot a "monthly" average NOT a 4 week moving average so the latest monthly results should be considered preliminary until the complete monthly results are settled by the fourth week of each following month.

As you can see, acceleration to claims generally precedes recessions.

Also, acceleration and deceleration of unemployment claims has generally preceded comparable movements to the unemployment rate by 3 – 8 months (click for larger version).

In the above charts you can see, especially for the last three post-recession periods, that there has generally been a steep decline in unemployment claims and the unemployment rate followed by a "flattening" period of employment and subsequently followed by even further declines to unemployment as growth accelerated.

This flattening period demarks the "mid-cycle slowdown" where for various reasons growth has generally slowed but then resumed with even stronger growth.

Until recently, one could make the case that we were again experiencing simply a mid-cycle slowdown but now that now those hopes are long gone.

Adding a little more data shows that in the early 2000s we experienced a period of economic growth unlike the past several post-recession periods.

Look at the following chart (click for larger version) showing "initial" and "continued" unemployment claims, the ratio of non-farm payrolls to non-institutional population and single family building permits since 1967.

The most notable feature of the post-"dot com" recession era that is, unlike other recent post-recession eras, job growth has been very weak, not succeeding to reach trend growth as had minimally accomplished in the past.

Another feature is that housing was apparently buffeted by the response to the last recession, preventing it from fully correcting thus postponing the full and far more severe downturn to today.

It is now completely clear that the potential "mid-cycle" slowdown that appeared to be shaping up recently, had been traded for a less severe downturn in the aftermath of the "dot-com" recession, and now has we have fully entered, instead, a mid-cycle meltdown.

Reading Rates: MBA Application Survey – December 24 2008

Posted: 24 Dec 2008 09:08 AM CST

The Mortgage Bankers Association (MBA) publishes the results of a weekly applications survey that covers roughly 50 percent of all residential mortgage originations and tracks the average interest rate for 30 year and 15 year fixed rate mortgages, 1 year ARMs as well as application volume for both purchase and refinance applications.

The purchase application index has been highlighted as a particularly important data series as it very broadly captures the demand side of residential real estate for both new and existing home purchases.

The latest data is showing that the average rate for a 30 year fixed rate mortgage decreased 14 basis points since last week to 5.04% while the purchase application volume increased 10.63% and the refinance application volume jumped 62.62% compared to last week's results.

It's important to note though that although the steady decline in mortgage rates has likely played a significant role in the large increases in refinance application volume, it's also altogether possible that the MBAA has some difficulty in seasonally adjusting their numbers around the November and December periods.

As you can see on the charts below, November through January usually brings some erratic spikes to the volume indices but the cause, at least in some part, is likely the result of troubles seasonally adjusting a noisy weekly series and not an actual spontaneous doubling of refinance activity.

As was noted last year, it's probably sensible to wait until February to draw a final conclusion.

The following chart shows how the principle and interest cost and estimated annual income required to cover the PITI (using the 29% "rule of thumb") on a $400,000 loan has changed since November 2006.

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages over the last number of weeks (click for larger version).

The following charts show the Purchase Index, Refinance Index and Market Composite Index since November 2006 (click for larger versions).

GDP Report: Q3 2008 (Final)

Posted: 23 Dec 2008 10:57 PM CST

Today, the Bureau of Economic Analysis (BEA) released third and final installment of the Q3 2008 GDP report showing the second contraction in four quarters with GDP declining at an annual rate of -0.5%.

Looking at the report more closely though, the top-line GDP result would have been much weaker had it not been for a surprise and truly unusual 18.0% surge in national defense spending that, combined with a healthy increases in other federal, state and local government spending, added over 1% of growth.

Fixed investment and personal consumption, on the other hand, provided significant drags on growth with non-residential investment declining -1.7%, residential investment declining -16.0% and personal consumption expenditures declining -3.8% led by a whopping -14.8% drop-off in durable goods.

The following chart shows real residential and non-residential fixed investment versus overall GDP since Q1 2003 (click for larger version).

Existing Home Sales Report: November 2008

Posted: 23 Dec 2008 10:48 PM CST

Today, the National Association of Realtors (NAR) released their Existing Home Sales Report for November clearly showing a dramatic new leg down in the decline of home sales and prices as the historic economic shocks of September through November work to lay waste to consumer confidence and sideline buyers.

Furthermore, we are continuing to see stunning declines to the median sales price for both single family homes and condos across virtually every region.

The NAR leadership, which now includes their new president Charles McMillan, is continuing to become noticeably more pessimistic about the future while simultaneously turning to Washington for handouts as Lawrence Yun notes:

"The quickly deteriorating conditions in the job market, stock market, and consumer confidence in October and November have knocked down home sales to another level. We hope the home sales impact from the stock market crash turns out to be short-lived, as was the case in 1987 and 2001… It is, therefore, imperative to provide incentives for homebuyers to get back into the market. It also depends on how effectively Congress and the new administration can help facilitate the short sales process and unclog the mortgage pipeline – impediments remain for some buyers with good credit,"

The following (click for larger versions) are charts showing sales for single family homes, plotted monthly, for 2006, 2007 and 2008 as well as national existing home inventory and month supply.

New Home Sales: November 2008

Posted: 23 Dec 2008 10:20 PM CST

Today, the U.S. Census Department released its monthly New Residential Home Sales Report for November showing continued deterioration in demand for new residential homes across every tracked region resulting in a startling 35.29% year-over-year decline and a truly whopping 70.70% peak sales decline nationally.

It's important to keep in mind that this stunning year-over-year decline is coming on the back of the significant declines seen in 2006 and 2007 further indicating the enormity of the housing bust and clearly dispelling any notion of a bottom being reached.

Additionally, although inventories of unsold homes have been dropping for well over a year, the sales volume has been declining so significantly that the sales pace now stands at an astonishing 11.5 months of supply.

The following charts show the extent of sales declines seen since 2005 as well as illustrating how the further declines in 2008 are coming on top of the 2006 and 2007 results (click for larger versions)

Look at the following summary of today's report:

National

The median sales price for a new home declined 11.52% as compared to November 2007.
New home sales were down 35.29% as compared to November 2007.
The inventory of new homes for sale declined 25.5% as compared to November 2007.
The number of months' supply of the new homes has increased 21.1% as compared to November 2007 and now stands at 11.5 months.

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