Homebuilder Blues: NAHB/Wells Fargo Home Builder Ratings November 2008

Today, the National Association of Home Builders (NAHB) released their latest Housing Market Index (HMI) showing dramatic new lows and continued evidence that the new home market is experiencing a prolonged bout of depression.

Each component of the NAHB housing market index remain WELL BELOW the worst levels ever seen in the over 20 years the data has been being compiled strongly suggesting that the current severe contraction has surpassed all other events seen in the last 22 years and is now firmly in uncharted territory.

Question of The Day - Household Bailouts Futile?

As the bailout focus has now shifted to the country’s millions of insolvent households, particularly households that are already seriously delinquent, how long will it take Congress to realize that their efforts are futile?

Bernanke’s Nightmare: Commercial Paper November 18 2008

This post is a follow up and further elaboration showing the current and historical values for some key interest rates.

These interest rates are for short term (30 day) commercial paper that is typically issued by corporations to “raise needed cash for current transactions”.

A key in reading these rates is to recognize that the AA non-financial is more highly rated than A2/P2 non-financial and that, in general, the AA non-financial tends to track the Federal Reserve’s target rate while the others typically track slightly higher.

Normally, the spread between the weakest quality paper (A2/P2 non-financial) and the highest (AA non-financial) is 15-20 basis points but as of the latest Fed posting, the spread has remained dramatically elevated at 442 basis points… truly a worrying sign.

The first chart shows the spread between the A2/P2 and AA non-financial while the lower two charts show the how all the short term commercial paper rates have tracked since 1998 and mid-2007 respectively.

Notice that prior to mid-2007, the Federal Reserve had been able to keep these rates fairly tight and in-line with the target rate but now we are seeing significant trouble.

In as sense, the current crisis has effectively erased all the rate cuts Bernanke has made this cycle and even added another 75 basis points.

Production Pullback: Industrial Production October 2008

Today, the Federal Reserve released their monthly read of industrial production showing continued weakness to aggregate production with widespread declines across many industries, particularly those related to consumer spending, construction and business vehicles, resulting in a significant year-over-year decline to the total index of 4.06% as compared to October 2007 but a 1.26% increase since September 2008.

It’s important to note that although September showed a particularly strong declines as a result of the impacts of hurricanes Ike and Gustave, the strongly slumping trend that is clearly perceptible in the charts below was firmly in-place prior to those events.

“Final product” consumer durable goods continue to show weakness falling 13.19% as an aggregate on a year-over-year basis, with particularly significant declines coming specifically from home appliances, furniture and carpeting which declined for the thirtieth consecutive month by 17.88% on a year-over-year basis.

Construction supply production has been showing the most severe contraction to wood products seen in at least the last 20 years.

Although automotive production has been showing weakness since the middle of 2004, business vehicle production is now showing a stark contraction.

The following charts (click for larger) show the overall consumer durable component along with the Home Appliances, Furniture and Carpeting sub-component on both a time series and year-over-year basis, construction supply production with the wood products sub-component, and general and business related vehicle production all overlaid with the last two recessions for comparisons purposes.

The Almost Daily 2¢ - Nouvell Monstre

Longish-time Paper Economy readers will recall that I have, with great interest, covered various events and details surrounding the Nouvelle at Natick, an unusual “luxury” condo-retail hybrid development attached to the new Natick Mall in Natick Massachusetts (read here, here, here and here).

My fascination with the project might be a tad bit overkill but I suspect in time my initial sense will be borne out and all will judge the Nouvelle project as a crescendo of sorts… a final and lofty heave into the realm of delusional consumerism and pop-marketed luxury lifestyle and faux culture and elegance that will, in all likeliness, stand as testament to and a cautionary lesson on the risks inherent when mob-fantasy meets market speculation.

But rather than criticize the project yet again, today I bring you grim news that all is not well with its builder, General Growth Properties (NYSE:GGP), leading Natick town officials, concerned with tax revenues, “mall mitigation money” and ultimately the fate of the mall project itself, to believe that bankruptcy is in the offing.

Without digressing too far into the dirty details let it suffice to say that GGPs stock has lost 99% of its value in the last 12 months as investors, concerned over its enormous debt burdens and clear solvency issues, capitulated to its consistently collapsing share price.

But what does this failure say of the larger economy?

Although the specter of a GGP bankruptcy is obviously very unlikely to spur on any kind Washington bailout scheme, its collapse is no less systemically important in the sense that it both reflects the epic changes taking place in our rapidly decelerating culture of over-consumption and represents the plight of so many corporate entities that, after having spent the last eight years bounding far out on the limb of ultra-leveraged hyper-speculation, now face the harsh reality of being severed from the trunk with no means of escape.

GGPs predicament allows one a peek into one of the least recognized yet most destructive elements of our current predicament… the debilitating impairments that resulted from the prior era of speculative delusion which simply cannot be remedied.

You see, GGP is not a young company… it has been in continuous operation for over 50 years and effectively under the control of members of one single family.

Up until the year 2000 it would have looked just like any other consistent, dividend paying commercial REIT … safe and sound, not too high flying but income yielding and family run to boot… what more could one ask for?

But in the era of “easy money” GGP apparently found itself awash in possibilities, not for sound steady income, but for aggressive growth competing for the fruits of phony prosperity and the attention of “aspirational” nitwits.

Traditional malls and retail commercial real estate were no longer enough… in the era of competitive affluence and aspiration-through-consumption you must think BIG… you must build residential… you must marry residential and retail… living and shopping… luxury, exclusivity, consumption and lifestyle packaged into a conspicuous and smarmy convergent stew peppered with top-shelf retail brand identity, stainless steel appliances and granite countertops.

Or so it seemed.

The Nouvelle at Natick is a Frankenstein of its age.

A mad creation built in the likeness of the ideals of its time yet larger and more menacing and bearing all the telltale defects of a restless and overreaching mania.

Now though, the monster (along with other comparably atrocious projects) has turned on its maker and no amount of pleading or back-peddling can prevent the inevitable.

Question of The Day - Kindleberger's Intuition Just Too Perfect?

Isn’t it just too perfect that Charles Kindleberger’s final days in 2003 were spent clipping out newspaper articles in order to corroborate his intuition of a mounting and “dangerous” national housing bubble?

Confidence Game: Consumer, CEO and Investor Confidence November 2008 (Preliminary)

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 preliminary release of the Reuters/University of Michigan Survey of Consumers for November showed a continued slump for consumer sentiment with a reading of 57.9 and dropping 23.92% below the level seen in November 2007.

The Index of Consumer Expectations (a component of the Index of Leading Economic Indicators) also declined notably to 55.7 remaining 15.86% below the result seen in November 2007.

As for the current circumstances, the Current Economic Conditions Index remained near its lowest level seen since in at least 30 years at 61.4 or 32.90% below the result seen in November 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 October release of the State Street Global Markets Index of Investor Confidence indicated that confidence for North American institutional investors declined a whopping 24.3% since September while European confidence declined 1.5% and Asian investor confidence declined 0.6% all resulting in a decrease of 17.5% to the aggregate Global Investor Confidence Index which now rests 29.02% 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.

Conspicuous Correlation: Retail Sales October 2008

Today, the U.S. Census Bureau released its latest nominal read of retail sales showing a decline of 2.8% from September 2008 and 4.1% decline from October 2007 on an aggregate of all items including food, fuel and healthcare services.

Discretionary retail sales including home furnishings, home garden and building materials, consumer electronics and department store sales also experienced another significant decline falling 4.57% compared to October 2007.

Further, adjusted for inflation, “real” discretionary retail sales declined 8.83% since October 2007.

On a “nominal” basis, there appeared to be “rough correlation” between strong home value appreciation and strong retail spending preceding the housing bust and an even stronger correlation when home values started to decline.

The following charts show my initial analysis plotting the year-over-year change to an aggregate series consisting of the primary discretionary retail sales categories that I termed the “discretionary” retail sales series and the year-over-year change to the S&P/Case-Shiller Composite home price index since 1993 and since 2000.


As you can see there was, at the very least, a coincidental change to home values and consumer spending during the boom and then the bust, but as home values have continued to decline, retail spending has remained low but has not continued to consistently contract.

One problem with this initial analysis is that both retail sales and the S&P/Case-Shiller Composite index are reported in “nominal” (i.e. non-inflation adjusted) terms and thus result in a somewhat skewed view especially for the retail sales data.



As you can see from the above charts (click for larger version), adjusted for inflation (CPI for retail sales, CPI “less shelter” for S&P/Case-Shiller Composite) the “rough correlation” between the year-over-year change to the “discretionary” retail sales series and the year-over-year S&P/Case-Shiller Composite series seems now even more significant.

Question(s) of The Day - Secular Bear Market?

We are only about 55 points above the “dot-com” bust bear market low of 776.76 on the S&P 500…

Will we break through that level today?... tomorrow?

When we do, won’t the period since 2000 simply look like one huge secular bear market?

Economic Jolt: Job Openings and Labor Turnover September 2008

Today, the Bureau of Labor Statistics released their latest monthly read of job availability and turnover (JOLT) showing that, on a year-over-year basis, private non-farm job “openings” declined 22.24%, job “hires” declined 5.34%, and “separations” declined 9.07% led by a 11.45% drop in “quits”.

These results are clearly indicating that the slowdown in the employment market has developed substantially over the last six months and now is quickly accelerating down into territory typical of recessionary contraction.

Job “openings” (click chart below for larger version), the reports most leading “demand side” indicator, has now declined on a year-over-year basis for five consecutive months strongly suggesting that the private sector is planning to curtail future hiring activity.

Sliding down that slope of the Beveridge curve, the decline in the job vacancy rate is clearly corresponding with an equal but inverse movement up in the general unemployment rate as can be plainly seen in the following chart (click chart for larger version).

Job “hiring” activity (click chart for larger version) has also been declining significantly with December’s results posting the eighth straight decline on a year-over-year basis further confirming the recent weakness seen in the job market.

Job “separations”, whereby workers and their employers go their separate ways by one means or another (layoffs, retirement, termination, quitting, etc.), are also declining primarily due to the inclusion of “quitting” activity.

It’s important to understand that job “quits” are included as a component of the “separations” data series as “quitting” is a valid means of workers “separating” from employers but their inclusion tends to create an overall procyclical trend in what would otherwise be logically thought of as a countercyclical process (i.e. downturn leads to increase in separations not decrease).

As the economy slides into recession and the employment situation worsens workers tend to reduce quitting activity presumably for fear that they could risk a long bout of unemployment and the latest results (click chart for larger version) confirm this with the sharpest decline on a year-over-year basis seen since August of 2003.

Reading Rates: MBA Application Survey – November 13 2008

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 23 basis points since last week to 6.24% while the purchase application volume increased 9.0% and the refinance application volume jumped 16.1% compared to last week’s results.

It’s important to note that, in the wake of the conservatorship of Fannie Mae and Freddie Mac, the average interest rate on an 80% LTV 30 year fixed rate loan initially dropped significantly but more recently has remained within the range seen throughout 2007.

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).

Mid-Cycle Meltdown?: Jobless Claims November 13 2008

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims jumped 32,000 to 516,000 from last week’s revised 484,000 claims while “continued” claims increased 65,000 resulting in an “insured” unemployment rate of 2.9%.

It’s very important to understand that today’s report continues to reflect employment weakness that is strongly consistent with past recessionary episodes and that this signal is now so strong and sustained that a 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.

But, adding a little more data I think shows that we may in fact be experiencing 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.

One 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.

I think there is enough evidence to suggest that our potential “mid-cycle” slowdown, having been traded for a less severe downturn in the aftermath of the “dot-com” recession, may now be turning into a mid-cycle meltdown.

Commercial Catastrophe?: MIT/CRE Commercial Property Index Q3 2008

It’s now clearly obvious that the commercial real estate (CRE) markets have inevitably followed the lead of the residential markets down into a recessionary decline.

The notion of commercial real estate markets suffering a similar downturn as residential is both supported by historical correlations (e.g. residential and non-residential investment) as well as the logical outcome for a market that has seen similar levels of loose over-lending.

Fortunately, we need not speculate about the current state of CRE as the MIT Center for Real Estate tracks commercial property prices with a series of indexes that cover Apartment, Office, Industrial and Retail property types.


Notice that the top aggregate chart, after showing some substantial growth between 2003 and Q2 2007 (particularly during 2005 and 2006), clearly indicates that a significant pullback has formed from the second half of 2007 onward leaving prices now 11.69% below the high seen in Q2 2007.

Furthermore, in Q3 2008 the Industrial and Retail components continue to show significant peak declines of 15.75% and 8.85% respectively while the Office component declined by 9.28% from its peak set during 2007.

Looking at the supply and demand indices of the Retail component appears to shed some light on the factors now working to drive prices lower for that market.

Notice that supply of retail properties has remained high in recent quarters, while demand has continued to remain substantially below levels seen just last year.

Question(s) of The Day - Getting Ahead of Uncle Sam?

Aren’t all the recent announcements of mortgage workout plans simply Wall Street’s attempts to get ahead of the Obama administration?

Better to take your own medicine than Uncle Sam’s... no?

Won’t the work outs inevitably introduce more uncertainly?

Question(s) of The Day - Can't Stop Bailing?

So… American Express is now a bank holding company…

How’s about GM? Should GM be allowed to become a bank holding company in order to gain access to the Feds bailout cash?

How’s about Circuit City?

When does all the bailing stop?