Mish's Global Economic Trend Analysis

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Empire State Manufacturing Activity Flattens; Huge Divergences Appear - What Does It Mean? Posted: 15 Sep 2010 02:32 PM PDT Inquiring minds are digging into details of the September Federal Reserve Empire State Manufacturing Survey for clues on the economy. The Empire State Manufacturing Survey indicates that conditions held relatively steady in New York's manufacturing sector in September. The general business conditions index remained positive, although it slipped 3 points to 4.1. The new orders and shipments indexes were both up moderately for the month, at levels signaling stable activity. The prices paid index was positive and little changed from last month, while the prices received index edged up to just above zero. Employment indexes were positive, suggesting that employment levels and the average workweek continued to expand over the month. The degree of optimism about the six-month outlook continued to deteriorate, with the future general business conditions index hitting its lowest level since early 2009. Business Activity Flattens Out The general business conditions index remained above zero in September, but inched down three points from August. At 4.1, the index suggests that business activity was little changed over the month. Almost 35 percent of respondents said that conditions had improved over the month—up from the 30 percent who had said so last month, but the percentage that reported worsening conditions increased from 22 percent in August to 31 percent. Selected Empire State Charts Current Business Conditions Expectations Six Months Ahead Divergences Current conditions have stabilized while future expectations continue to deteriorate, five consecutive months. Did we just see a "last gasp" in new orders and shipments? Stabilization? More interesting yet is the way in which the current conditions index has "stabilized". A tip of the hat to reader "Ronald" who writes... In the ten years of data they have on their website, this is the first time I have seen the percentage of businesses showing increases and the number of businesses showing decreases in general activity both increased 2 months running. Moreover, this is the 3rd lowest level of businesses conditions staying at the same level. Finally, when businesses showing deteriorating conditions reached 30 percent, it has typically been during recession and the index has historically been between 0 and -10. I don't think this can continue and it looks to me like the number is going to break big up or down. A quick check shows the following. July: This month, 27 percent of respondents said that conditions had improved, while 22 percent said that conditions had worsened. August: Roughly 30 percent of respondents reported that conditions had improved, while 22 percent reported that conditions had worsened. September: Almost 35 percent of respondents said that conditions had improved over the month—up from the 30 percent who had said so last month, but the percentage that reported worsening conditions increased from 22 percent in August to 31 percent." The reports actually show consecutive rises in improved conditions with a one month huge rise in deteriorating conditions. Nonetheless, how long can a third of businesses report better conditions with nearly a third of businesses reporting worsening conditions? In conjunction with future expectations falling 5 consecutive months to the lowest level since March 2009, I suggest "not long". Look for these divergences to break to the downside, most likely in a strong way that will surprise the vast majority of economists who never bother to look at the details in these reports. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Home Prices Drop in 36 States; Beazer Warns on Orders; 8 Million Foreclosure-Bound Homes to Hit the Market; Prices to Stagnate for a Decade Posted: 15 Sep 2010 10:53 AM PDT The small upward correction in home prices from multiple tax credit offerings died in July. Worse yet, inventory of homes for sale as well as shadow inventory both soared. 8 million foreclosure-bound homes have yet to hit the market according to Morgan Stanley. Home Prices Drop in 36 States CoreLogic reports Growing Number of Declining Markets Underscore Weakness in the Housing Market without Tax-Credit Support CoreLogic Home Price Index Remained Flat in July SANTA ANA, Calif., September 15, 2010 – CoreLogic (NYSE: CLGX), a leading provider of information, analytics and business services, today released its Home Price Index (HPI) that showed that home prices in the U.S. remained flat in July as transaction volumes continue to decline. This was the first time in five months that no year-over-year gains were reported. According to the CoreLogic HPI, national home prices, including distressed sales showed no change in July 2010 compared to July 2009. June 2010 HPI showed a 2.4 percent* year-over-year gain compared to June 2009. "Although home prices were flat nationally, the majority of states experienced price declines and price declines are spreading across more geographies relative to a few months ago. Home prices fell in 36 states in July, nearly twice the number in May and the highest since last November when national home prices were declining," said Mark Fleming, chief economist for CoreLogic. Methodology The CoreLogic HPI incorporates more than 30 years worth of repeat sales transactions, representing more than 55 million observations sourced from CoreLogic industry-leading property information and its securities and servicing databases. The CoreLogic HPI provides a multi-tier market evaluation based on price, time between sales, property type, loan type (conforming vs. nonconforming), and distressed sales. The CoreLogic HPI is a repeat-sales index that tracks increases and decreases in sales prices for the same homes over time, which provides a more accurate "constant-quality" view of pricing trends than basing analysis on all home sales. The CoreLogic HPI provides the most comprehensive set of monthly home price indices and median sales prices available covering 6,208 ZIP codes (58 percent of total U.S. population), 572 Core Based Statistical Areas (85 percent of total U.S. population) and 1,027 counties (82 percent of total U.S. population) located in all 50 states and the District of Columbia. CoreLogic HPI Including Distressed Sales See the above article for additional charts Beazer Homes Warns on Orders The Wall Street Journal reports Beazer Homes Warns of Order Miss Beazer Homes USA Inc. said Wednesday it might miss order expectations for its fiscal-fourth quarter, as it also cut estimates for the year's land and development spending, reflecting the sector's weakness following the expiration of home-buyer tax credits. Last month, Beazer reported that its fiscal third-quarter loss was little changed because of a prior-year gain, while it reported a 73% surge in closings as buyers raced to qualify for the tax credit. Orders fell 33%. Inventory Soars Bloomberg reports U.S. Home Prices Face Three-Year Drop as Supply Gains The slide in U.S. home prices may have another three years to go as sellers add as many as 12 million more properties to the market. Shadow inventory -- the supply of homes in default or foreclosure that may be offered for sale -- is preventing prices from bottoming after a 28 percent plunge from 2006, according to analysts from Moody's Analytics Inc., Fannie Mae, Morgan Stanley and Barclays Plc. Those properties are in addition to houses that are vacant or that may soon be put on the market by owners. "Whether it's the sidelined, shadow or current inventory, the issue is there's more supply than demand," said Oliver Chang, a U.S. housing strategist with Morgan Stanley in San Francisco. "Once you reach a bottom, it will take three or four years for prices to begin to rise 1 or 2 percent a year." Sales of new and existing homes fell to the lowest levels on record in July as a federal tax credit for buyers expired and U.S. Rising supply threatens to undermine government efforts to boost the housing market as homebuyers wait for better deals. Further price declines are necessary for a sustainable rebound as a stimulus-driven recovery falters, said Joshua Shapiro, chief U.S. economist of Maria Fiorini Ramirez Inc., a New York economic forecasting firm There were 4 million homes listed with brokers for sale as of July. It would take a record 12.5 months for those properties to be sold at that month's sales pace, according to the Chicago-based Realtors group [National Association of Realtors]. "The best thing that could happen is for prices to get to a level that clears the market," said Shapiro, who predicts prices may fall another 10 percent to 15 percent. "Right now, buyers know it hasn't hit bottom, so they're sitting on the sidelines." About 2 million houses will be seized by lenders by the end of next year, according to Mark Zandi, chief economist of Moody's Analytics in West Chester, Pennsylvania. He estimates prices will drop 5 percent by 2013. Douglas Duncan, chief economist for Washington-based Fannie Mae, said in a Bloomberg Radio interview last week that 7 million U.S. homes are vacant or in the foreclosure process. Morgan Stanley's Chang said the number of bank-owned and foreclosure-bound homes that have yet to hit the market is closer to 8 million. Defaulted mortgages as of July took an average 469 days to reach foreclosure, up from 319 days in January 2009. That's an indication lenders -- with the help of the government loan modification programs -- are delaying resolutions and preventing the market from flooding with distressed properties, said Herb Blecher, senior vice president for analytics at LPS. "The efforts to date have been worthwhile," Blecher said in a telephone interview from Denver. "They both helped borrowers stay in their homes and kept that supply of distressed properties on the market somewhat limited." I disagree with Herb Blecher. I see little advantage stretching this mess out for a decade, and that is what the government seems hell-bent on doing. Everyone wants the government to "do something". Unfortunately tax credits stimulated the production of new homes, ultimately adding to inventory. Prices need to fall to levels where there is genuine demand. The short-term rise in the Case-Shiller home price index and the CoreLogic HPI was a mirage that will soon vanish in the reality of an inventory of 8 million homes that must eventually hit the market. Lost Decade About 2 million houses will be seized by lenders by the end of next year, according to Mark Zandi, chief economist of Moody's Analytics in West Chester, Pennsylvania. He estimates prices will drop 5 percent by 2013. After reaching bottom, prices will gain at the historic annual pace of 3 percent, requiring more than 10 years to return to their peak, he said. Home Price Pressures We are going to have structurally high unemployment for a decade. The debt deflation unwind may take another 5 years or longer. Downward pressures on wages still exist. Credit conditions reached a secular peak of absurdity that will not occur again for multiple decades. The Shopping Center Economic Model Is History. Retiring boomers hoping to downsize lifestyle will add to supply of upper end homes. Student debt will inhibit family formation for years to come. Please see How Student Debt Wrecks Marriages, Inhibits Family Formation, and Delays the Housing Recovery for details. Last Bubble Not Reblown After the bottom is found, remember the axiom: the last bubble is not reblown for decades. Look at the Nasdaq, still off more than 50% from a decade ago. The odds home prices return to their peak in 10 years is close to zero. Houses in bubble areas may never return to peak levels in existing owner's lifetimes. Zandi is way overoptimistic in his assessment of 3% annual appreciation after the bottom is found. Price Stagnation I expect small nominal increases after housing bottoms, but negative appreciation in real terms as inflation picks up in the second half of the decade. Yes, deflation will eventually end. Alternatively the US goes in and out of deflation for a decade (depending on how much the Fed and Congress acts to prevent a much needed bottom). Either way, look for price stagnation in one form or another. Thus, if you have come to the conclusion there is no good reason to hold on to a deeply underwater home, nor any reason to rush into a home purchase at this time, you have reached the right conclusions. Hyperinflation? Please be serious. When Will Housing Bottom? Flashback October 25, 2007: When Will Housing Bottom? On the basis of mortgage rate resets and a consumer led recession I mentioned a possible bottom in the 2011-2012 timeframe. See Housing - The Worst Is Yet To Come for more details. Let's take a look at housing from another perspective: new home sales historic averages and housing from 1963 to present. New Home Sales 1963 - Present New home sales reached a cyclical high in 2004-2005 approximately 50-60% higher than previous peaks.This happened in spite of a slowdown in population growth and household formation as compared to the 1960-1980 timeframe. From 1997-1998 and 2001-2002 to the recent peak, the average sales level was 1.1 million units, or 45-50% higher than the 40 year average. This translates to an average of 300,000-400,000 excess homes for nearly a decade, and arguably as many as 3-4 million excess homes. Such excess inventory may require as many as 5-7 years at recessionary average sales to absorb this inventory. Cycle Excesses Greatest In History The excesses of the current cycle have never been greater in history. The odds are strong that we have seen secular as opposed to cyclical peaks in housing starts and new single family home construction. With that in mind it is highly unlikely we merely return to the trend. If history repeats, and there is every reason it will, we are going to undercut those long term trendlines. There will be additional pressures a few years down the road when empty nesters and retired boomers start looking to downsize. Who will be buying those McMansions? Immigration also comes into play. If immigration policies and protectionism get excessively restrictive, that can also lengthen the decline. Finally, note that the current boom has lasted well over twice as long as any other. If the bust lasts twice as long as any other, 2012 just might be a rather optimist target for a bottom. When I wrote that in 2007, most thought I was off my rocker. Now, based on inventory, I may have been far too optimistic. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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