Busy Data Week: Case Shiller, GDP, Fed, Employment

Today is the middle of a busy week of economic data.

1. Home Prices: The Case Shiller home price data released on Monday confirmed what many of us have predicted, mainly that the housing market is not showing any signs of stabilization. In fact, the recent trends show an accelerating decline. In the Fed statement released today Bernanke and Co. described the situation as a "deepening housing contraction," hardly comforting words coming from our central bankers. Here in San Diego, home prices are off 24% since their peak:

When you look at the month over month, year to date and year over year numbers you can also tease out some interesting trends. First of all, Charlotte -- the only city posting a year over year in price increases -- is starting to see declines. Second, tract homes in the desert have a hard time holding their value. Just look at Las Vegas and Phoenix over the last 2 months, both are down nearly 10%. Finally, the cities that ran up the most during the upturn are the ones getting hit the hardest now during the downturn. All in all, no surprises here, and certainly no signs of a stabilization:

2. Then we had a dismal consumer confidence report that shows that consumers seem to be well aware of the fragile state of the economy.

I don't put too much weight on the consumer confidence data, but it does give me pause that the people who make up 70% of US GDP and 18% of Global GDP are uncomfortable with their current economic situation.

3. This morning we got the Q1 advance GDP numbers which showed that the economy is still scraping along, helped by stronger than expected inventory numbers and continued growth in net exports. Residential investment still represents an enormous drag (on the order of 1%) on GDP growth and business fixed investment dipped negative for the first time in over a year:


4. Just a few moments ago the Fed decided to lower the Fed Funds Rate and the Discount rate by 25 bps, to 2% and 2.25% respectively. The Fed has moved dramatically this year to address concerns about economic growth. You can see the path of the Fed Funds and Discount Rate in the chart below:


The good news is that the Fed did signal that they have a more balanced approach to its targets of economic growth and price stability going forward. I think it is unlikely that the Fed will aggressively lower rates from where they stand which should put pressure on commodity prices to fall and may further strengthen the nice bottom the dollar is forming.

5. Finally the end of the week is "Labor Market Friday" in which we will get our first glimpse of how weak the employment situation really is. The consensus among economists is for a tick up in the unemployment rate to 5.2% and for the NFP numbers to be negative on the order of 50 or 100 thousand.

Grantham, Recession, Case Shiller, Oh My

1. If you follow the markets and consider yourself a long-term investor, you must read Jeremy Grantham's quarterly newsletters. The most recent one was just posted today, so head on over to www.gmo.com and read it in its entirety. He has some interesting thoughts on the Fed, the Presidential Cycle and Bubbles. He included these great graph de-trended graphs of the S&P 500. Be careful with these graphs though, don't show them to a bull for there is a high likelihood that he/she will laugh in your face and call Grantham a "perma-bear":

2. Is a recession by any other name still a recession?


3. The next round of Case Shiller numbers are due out next week. If February's median price numbers (-5.7% for San Diego single family homes) are any indication, the February Case Shiller numbers aren't going to be pretty. Here are the Case Shiller numbers through January:


The size-adjusted Case Shiller indices reveal a potentially more interesting trend. In San Diego, it is the low end of the market that is bearing the brunt of this real estate bear market. Low Tier homes are off 28% since peak, while high tier homes are only down 14%.


Have a great weekend!

Only Funny Because it's True

Hat Tip: Barry Ritholtz

December 2007 Case Shiller Update

Well the new Case-Shiller numbers for December are out and they show no signs of a stabilization in home prices. Frankly, this shouldn't surprise anybody. We already have a lot of other data from December and we already know that it is was one of the worst months for real estate in recent memory - the Case Shiller numbers just confirm that. Here's how San Dieg0, the 10 City Composite, and the 20 City Composite have performed since San Diego's peak:



Other Notes:
The 10 City Composite is down 11.37% since its peak in June 2006.
The 20 City Composite is down 10.49% since its peak in July 2006.

While Robert Shiller never gets too excited, he certainly doesn't sound thrilled with the housing numbers he is looking at or what it might mean for the economy. My favorite quote from the interview is the following:

"The market has been getting worse by the month, that's been the problem. I'm looking forward to the day when it is not getting worse, when it is going down but at a slower pace. It is not clear from this that we have that news yet."

I think it is safe to say that we are all looking forward to the day when it is getting worse at a slower pace, or even better when it starts getting better . . .

No Home Price Stabilization

The November Case Shiller home price index data was released today and the numbers confirmed the acceleration in home price declines we first witnessed in the median price indexes. While I think its safe to say that no one thought these numbers would be pretty, I imagine few thought we would see 2% declines across the board:

According to my calculations San Diego is now down 16.3% from its peak in November of 2005. The 10 City Composite is down 9.4% since its peak in June 2006 and the 20 City Composite is down 8.6% since its peak in July 2006. Trillions of dollars of home equity have already been lost and price declines are not showing any signs of slowing.

When you break this data down into tiers and you adjust the numbers for inflation the data gets even more depressing. In San Diego the real price of "low-priced" homes (its all relative because for San Diego a $446,000 home is considered low-priced) has fallen by nearly 30% since its peak:


Because this post has been fairly depressing up to this point I figured I would take the first graph and invert it so that it "looks" like home prices are actually going up. I have found that charts that show prices going up and to the right generally make people very happy. So here goes:


Okay maybe that didn't work for anyone else, but it brought a smile to my face . . . .

Hat Tip: S&P Case Shiller, Piggington

Catching a Falling Knife

Anyone want to buy a house in San Diego? We could use some buyers . . .


By the time we see a meaningful recovery we could see a 40-50% correction in condo prices. We still have a year's worth of inventory on the market. I think its safe to say the blood is running in the streets . . . .

Only Funny Because it's True

Hat Tip: Jim the Realtor

Where Do Home Prices Go From Here?

The closest guess I have about home prices is what is assumed by the Chicago Mercantile Exchange (CME) housing futures market. Across the 10 major markets home prices are predicted to drop 8% in 2008 with no signs of stabilization. We are looking for home prices to form a bottom in 2009-2010. But, from there we don't expect significant appreciation. The bottom line is there is still no reason to be optimistic about home prices in the near term.


Hat Tip: Bespoke

Only Funny Because it's True

A New Mortgage Reset Graph

I'm a big fan of mortgage reset graphs. They are a great way to end a discussion about the near future of housing prices because they are just so difficult to argue with. At any rate, here's the latest from the WSJ and Bank of America. I have also attached the other mortgage reset graphs from previous months:


This is from Credit Suisse. Please note that the red arrow denoting "You are Here" is now 3 months out of date. In December we will be at the peak of the first mountain:


And this is from the IMF:
I think this last graph really validates my prediction of a 2012 stabilization in home prices.

Happy Thanksgiving!!

Want to Buy a San Diego Condo? Take your Pick

I am so glad I don't own a condo in downtown San Diego. But from the looks of things now is not the time to start buying. I'm guessing late 2011- early 2012 should be just about right. Yes, you are seeing that correctly, that is 20+ lockboxes in the Grande. All told 7.5% of the building is on sale (33/442) and that is a building that is less than 1/3 owner-occupied. If that isn't a bearish indicator . . . . :


Hat Tip: Jim the Realtor

Only Funny Because it's True

Hat Tip: Barry Ritholtz

Images for the week

Maybe I'm just lazy and didn't want to write full posts, but this past week I've come across quite a few great self-explanatory images. I've included a few below:







Hat Tips: Barry Ritholtz, Greg Mankiw, Calculated Risk, Bespoke, WSJ

Enjoying 6 Months Sans Rent

I don't know why they are trying so hard . . . they should just kick back and enjoy the house mortgage free until the bank comes and kicks them out. I just don't envy that insulting tax bill that comes saying that the loss you took on that house is actually income . . .
Hat Tip: Jim the Realtor (I can finally see your pictures!)

Biggest Home Price Drop Since 1991

Home price declines are accelerating after August's credit crunch put additional pressure on underwater borrowers. According to the S&P/Case Shiller Indices home prices for their 10 city index are off 4.5% year over year which is the largest fall in the index in 16 years. The Case Shiller Indices were pioneered by Karl Case and Yale economist Robert Shiller, who is perhaps best known for his best-selling book Irrational Exuberance, in which he examined asset bubbles throughout history. Shiller's second edition of Irrational Exuberance argued that the U.S. real estate market was a bubble in 2005.

I personally think that Shiller has made a very sound argument that real long term home price appreciation has been quite small (roughly 1%/year over the past 115 years). The graph he produced shows a significant break from trend in home prices in the latter half of the 1990's. It became increasingly difficult to explain the break from trend, and now it appears that home prices are moderating. How far they will fall is anybody's guess. Moody's thinks it will be about 11%, some aggressive economists are predicting a 25% total decline in prices. I bet if you asked Shiller he would be afraid to tell you for fear that you wouldn't take him seriously.


Before I start discussing the recent declines I think it is important to touch on why I rely on the Case Shiller numbers instead of median prices. I prefer the S&P/Case Shiller methodology because it tracks the price path of individual representative homes in a given geographical area by using "matched price pairs." This methodology enables the index to avoid many of the issues with using median based pricing models. For example in the current downturn home price declines were obscured in part by slower sales on the lower end of the spectrum while higher end homes continued selling at a brisk pace. So, although home prices were largely falling the lack of sales on the low end led to a drifting up of the median price, masking home prices declines. Needless to say I am not a big fan of median pricing. This is especially true because median prices are in large part reported by the National Association of Realtors, an industry group I don't see eye to eye with. The other index that is worth looking at is the OFHEO, which is calculated using a similar methodology to Case Shiller.

Here's the S&P Press Release:

New York, September 25, 2007 – Data through July released today by Standard & Poor’s for its S&P/Case-Shiller® Home Price Indices, the leading measure of U.S. home prices, shows a continuation of negative annual returns in the 10-City Composite and the 20-City Composite, as well as 15 of the 20 metro area indices. Both composite indices have registered negative annual growth rates since the beginning of the year. In addition, both indices rate of decline has become larger in each of the seven months from January through July.

Prices in my home town of San Diego are off 7.8% YOY, the third worst of any city of the 20 cities that S&P tracks. The worst home price depreciation occurred in Detroit, which is off 9.7% YOY. The best home price appreciation was in Seattle, which is up 6.9% YOY. The 20 city composite index is down 3.9% YOY.

Foreclosures Jump 87%

I mentioned yesterday in a post on the subprime meltdown that I thought the next round of foreclosure data would be particularly brutal. Well it is. But before we dive into the numbers please check out this "foreclosure heat map" courtesy of Barry Ritholtz. I think its safe to say things are going to be getting a lot hotter as the summer goes on.

Okay, now on to the numbers. This morning Bloomberg reported that US foreclosures increased 87% in June:

There were 164,644 loan default notices, scheduled auctions and bank repossessions in June, led by filings in California and Florida, where home prices have plummeted, and Ohio and Michigan, where automotive-related businesses have fired workers. Those four states accounted for half the national total, RealtyTrac, a seller of foreclosure data, said today in a statement.

Foreclosures are soaring amid a glut of properties and as interest rates close to an 11-month high make it more difficult for borrowers to refinance. Defaults may rise further as owners with adjustable rates see their payments soar. The share of people taking out all types of adjustable-rate home loans averaged 29 percent during the past three years, compared with the 17 percent average of the prior three years, according to Freddie Mac data.

RealtyTrac also said that 58% of the foreclosures are from subprime borrowers. What does this mean? It means that the lower end of the real estate market will be hit the hardest. Which states are the worst? You guessed it, the two states with perhaps more subprime lending than any other:

Nevada had the highest foreclosure rate in June with one filing for every 175 households, more than four times the national average of one per 704, RealtyTrac said. Nevada had 4,722 foreclosure filings, more than three times its total a year ago.

California had the second-highest rate, with one filing per 315 households, and the most filings overall, 38,801, for the sixth month in a row. Foreclosures in California, the most populous state, increased almost three-fold over a year ago.

Why am I so sure that foreclosures will continue to pick up? I hate to beat a dead horse, but if you look at the chart below we are just now entering a huge wave of resetting subprime loans. There really won't be much relief for the next 16 months. (Click to Enlarge)

This alone wouldn't be a huge deal if it weren't for the following three things that will lead many of these borrowers into foreclosure:

1. Tighter Lending Standards - There is virtually no subprime lending going on right now.
   
2. Lower Home Prices - Many if not most of these borrowers are underwater.
3. Higher mortgage rates - See graph below - We are at a 5 year high!

Subprime is Officially Melting Down

Those of us who have been saying for a while that our subprime problems are far from done have been feeling validated over the past few weeks. Here's why:

• Two weeks ago a Bear Stearns hedge fund blew up forcing Bear into a $1.6 billion bailout. That sent Bear's stock tumbling and Bear's CEO James Cayne to the golf course? Yes, that's right Mr. Cayne dealt with a tough situation by pulling out his driver. Check out his scores over the past few weeks below: If you look at Cayne's scorecard you will notice that on June 21st, the day several big lenders were pressuring Bear to increase collateral, Cayne shot a 98. On the 22nd when Bear announced what was then a $2 billion bailout, Cayne shot a 97. How he found 8 hours over those two days to play golf is incredible! I have to admit I admire his persistence, even after this story appeared in the press Cayne has continued golfing and his scores are actually improving!
  
• The ABX BBB Index has fallen consistently from its highs in the 90's at the beginning of the year and is now trading in the 40's with no signs of stopping. No one wants to hang on to subprime debt . . .
• Moody's and S&P completely missed the subprime fiasco, and they are now furiously downgrading subprime bonds and the CDO's that hold them. Moody's said today they are going to cut the credit rating on slices of $5 billion worth of CDO's. This a day after S&P decided to cut ratings on $12 billion of bonds and revamp their entire rating methodology. Fitch also sounded an alarm today about commercial real estate, predicting rising defaults in the months to come. Below is a graph of the number of bonds Moody's has downgraded over the years. Too little too late if you ask me:
• The National Association of Realtors is lowering its 2007 sales predictions again! What good is a prediction if you lower it every single month?
  

Yes folks this subprime thing isn't over yet. The foreclosure statistics for June come out this week and as of two weeks into the month San Diego was on pace for a 36% rise in foreclosures from an already elevated number. Yes, folks, the bottom is falling out of the housing market.

Add Hank Paulson to the Bottom Callers Casualty List

The latest victim of calling the housing bottom is Treasury Secretary Hank Paulson. It's a real shame too because I really do like Hank. But, earlier today Paulson repeated comments he made way back in April:

"In terms of looking at housing, most of us believe that it's at or near the bottom," he told Reuters. "It's had a significant impact on the economy. No one is forecasting when, with any degree of clarity, that the upturn is going to come other than it's at or near the bottom."

Well, its been 3 months since April and there hasn't been a single good data point on the housing market other than the strong employment numbers. In fact the crucial numbers like excess inventory and prices are still looking worse and worse. Check out this graph below which shows excess inventory and housing starts (click to enlarge).

Basically, until inventory drops housing starts will probably continue to fall which puts increased downward pressure on prices and GDP. If you ask me calling the bottom of home prices now could pose a serious threat to the integrity of one's professional opinion. I know I wouldn't do it! But of course I'm in a win-win position. If I'm right, I'll be right, which is gratifying. If I'm wrong, and housing is at the bottom then that is great for the economy, great for all you homeowners and great for all of our investments! (Hat Tip: Calculated Risk)

Subprime Isn't Done Yet Folks

Yesterday a hedge fund managed by Bear Stearns announced their intention to sell $4 billion of mortgage backed bonds. The fund -- the High-Grade Structured Credit Strategies Enhanced Leverage Fund -- has been hurt by their exposure to the subprime sector and is allegedly down almost 25% this year. One way to track the damage in the subprime sector is to monitor the ABX Home Equity BBB Index. Here is some quick background on the ABX index courtesy of Nouriel Roubini's Blog:

“One way to measure the effects of problems in the sub-prime mortgage sector is to look at Credit Default Swaps (CDS). Remember that these CDS contracts effectively work as a kind of insurance policy for banks or other holders of bad mortgages. If the mortgage goes bad, then the seller of the CDS must pay the bank for the lost mortgage payments (alternatively ... if the mortgage stays good then the seller makes a lot of money).

The index that measures the CDS market for home equity is called the ABX.HE index. The sub-variation of this index that refers to risky sub-prime loans is called the ABX.HE BBB index.

I just checked the ABX.HE BBB index. It has dropped by about 5-7% since July of 2006. This is a substantial drop! Notably, there was a major plummet of the index starting in Dec 2006 when some of the dealers in risky mortgages started going belly up.

So what does this mean? It means that someone out there is now having to cough up the losses in the bad loans. It could be hedge funds, or maybe overseas lenders. But someone is starting to see some losses happening on their balance sheets, and the problem is going to grow significantly in 2007.”

Keep in mind Roubini had this on his blog back on January 11th, 2007. Back then the ABX Home Equity Index had fallen from 101 to 93 in 6 months, which at the time surely seemed like a "substantial drop." Since then the index has fallen precipitously. It now trades in the low 60's and looks ready to re-test its February lows. See graph below courtesy of Markit:


So who is paying for these bad loans? Well in this case its the investors in Bear's fund and perhaps the banks who helped Bear lever up 10 to 1 . . . it makes you wonder who is next.

Benchmark 10-Yr Note Yield Approaching 5.25%

The dramatic 20% rise in the 10-Yr Treasury Note yield over the past month didn't let up today. It currently sits just under 5.25%. If the note passes through that level it will mark the second psychological level the yield has climbed past in the past two weeks.


There are two main areas where rising yields can hurt the economy. The first is housing, as yields are positively correlated with mortgage rates. The second is stocks, where the buyout boom and stock buybacks have in large part been financed with cheap debt and both practices will slow as borrowing becomes more expensive. We are still holding our 10 Year Treasury Note target steady at 5.5% by the end of the year.