Economic Jolt: Job Openings and Labor Turnover February 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 8.85%, job “hires” declined 4.63%, and “separations” declined 0.38% led by a 5.47% drop in “quits”.

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 – April 09 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 increased 3 basis point since last week to 5.78% while the purchase application volume increased by 8.1% and the refinance application volume increased 3.4% compared to last week’s results.

It’s important to note that all application volume values reflect only “initial” applications NOT approved applications… i.e. originations…

Also important to note, the average 30 year fixed mortgage rate has decreased significantly in the last few weeks but still remain just under the mean seen during 2007 while the interest rate for an 80% LTV 1 year ARM jumped significantly and now rests 128 basis points above the rate of an average 80% LTV 30 year fixed rate loan.

It’s important to note that the data is reported (and charted) weekly and that the rate data represents average interest rates, and the index data represents mortgage loan application volume for home purchases, home refinances and a composite of all loans.

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).

Pending Home Sales: February 2008

Today, the National Association of Realtors (NAR) released their Pending Home Sales Report for February showing a weakening to existing home sales activity and a clear continuation of the historic decline to residential housing on a year-over-year basis, both nationally and across every region.

As the decline in demand for residential housing slumps through its third year, it’s important to consider the significance of both the extent of the decline and the severity of the oncoming declines to existing home sales activity clearly indicated by the current 21.4% year-over-year drop-off in pending home sales.

It is very likely that we are now seeing the spiraling feedback effect of sharply declining prices and both the palpable sense and actual effects of recession working to depress buyer confidence thereby causing continued even accelerating declines in housing demand.

As usual, NAR Senior Economist Laurence Yun continues his attempts at self interested spin and false optimism suggesting that home sales will rise “notably” by the second half of the year as a result of the new super jumbo GSE “conforming” loan limits.

“We’re looking for essentially stable sales in the near term, before higher mortgage loan limits translate into more sales in high-cost markets. The wider access to affordable credit should increase sales activity notably this summer as pent-up demand begins to be met.”

The following chart shows the national pending homes sales index since 2005 compared monthly. Notice that each year, the months value is decreasing consistently (click for larger version).

The following chart shows the national pending home sales index along with the percent change on a year-over-year basis as well as the percent change from the peak set in 2005 (click for larger version).

Note that in the above charts, I had to use the Not Seasonally Adjusted (NSA) data series as NAR changed the methodology for their Seasonally Adjusted (SA) series a while back and never republished the numbers.

Look at February’s seasonally adjusted pending home sales results and draw your own conclusion:

• Nationally the index was down 21.4% as compared to February 2007.
• The Northeast region was down 25.4% as compared to February 2007.
• The Midwest region was down 17.4% as compared to February 2007.
• The South region was down 30.3% as compared to February 2007.
• The West region was down 17.1% as compared to February 2007.

The Almost Daily 2¢ - Attack The Index?

In the wake of the National Association of Realtors (NAR) absurd attack on Professor Robert Shiller and possibly even more ridiculous attempt to discredit the validity of the S&P/Case-Shiller Indices (CSI), it appears that there is a subtle, yet growing, effort on the part of local Realtors and other interested parties to publicly discount the accuracy of the CSI.

Spurious accusations abound but several center on the CSI being misleading, either because of an assumed complete bias towards the local metro markets they primarily track or because of the exclusion of condo and new construction properties from their calculations or even that the indices are simply used (with purposely dishonest intent) to portray a gloomier picture than reality.

Although these allegations are mostly transparent and desperate attempts to besmirch reputations and otherwise muddy the water, I thought it might make sense to compare the various modern home price indices to see how well they conform to each other and, in turn, see if any of the above mentioned allegations could be easily dispatched with.

There are three main modern home price index sources, two of which employ essentially the same “repeat sale” methodology and one that focuses on gauging the daily “price per square foot” in order to construct their respective indices and all vary notably in both region of coverage and property inclusion.

The Office of Federal Housing Enterprise Oversight’s (OFHEO) Home Price Indices (HPI) and the S&P/Case-Shiller Indices (CSI) both exclusively use single family home sale transactions, HPI’s coming from Fannie Freddie source data and CSI’s coming from county deed records, to construct their indices using two slightly different versions (HPI vs CSI methodologies) of the “arms-length repeat sale” methodology jointly proposed by Professor Karl Case of Wellesley College and Yale’s Professor Robert Shiller.

Probably the greatest difference between the HPI and the CSI is that the HPI source data is limited to “conforming” Fannie Freddie transactions and thus exclude all transactions made possible due to the use of “Jumbo” loans.

Another major difference is coverage area but although there are many hundreds more HPI indices than CSI, only a few of the HPIs are published as “purchase only” indices that include only data resulting from home “purchase” transactions rather than combining refinance (tends to skew the results) and purchase transactions.

Also, even though the CSI’s are strongly associated with designated metro markets they offer some fairly widespread coverage with inclusion of data from far reaching counties and even crossing state borders when appropriate (e.g. the Boston CSI index includes the counties of Essex, Middlesex, Norfolk, Plymouth, Suffolk, Rockingham NH and Strafford NH).

Radar Logic, on the other hand, constructs price indices (RPX) for 35 metro area markets derived from both new and existing single family and condo sale transactions using a very interesting and inventive approach that seeks to essentially establish the daily spot “price per square foot” for the entire residential property market.

All of the mentioned technologies are both highly analytical and logical and above all else offer a substantially more accurate view of real market price movement especially when compared to the Realtor’s more favored median selling price method (or sometimes average selling price…whichever way the wind is blowing of course).

But how well do these indices correlate with each other?

First, take a look at the following chart that shows the RPX for Boston (averaged monthly) and the CSI for Boston both normalized to a base of 100 and plotted since January of 2000 along with the month-to-month percent change to the CSI supplied for seasonal comparative purposes.

Notice that although the RPX is clearly capturing a more substantial seasonal variation, both indices show a well correlated (Pearson’s of 0.982, r-squared of 0.965) trend and comparable seasonality even in light of the fact that the RPX source data includes both condo and single family property transactions and CSI uses only uses single family.

Notice also that given this correlation the RPX, although not complete for February transactions, is quite possibly giving us a bit of a preview of the February results of the CSI which will be released at the end of April.

Next, study the following chart which adds the “purchase only” HPI for Massachusetts and forgive the “stepped” appearance of the series as it is published quarterly so I simply repeated each reported value as the interim monthly data.

Notice again that the HPI’s underlying trend is fairly well correlated to both the CSI (Pearson’s of 0.996, r-squared of 0.993) and the RPX (Pearson’s of 0.978, r-squared of 0.956) even though the HPI series broadly captures price changes from across all Massachusetts counties and excludes homes that were purchased using Jumbo mortgages.

So the key take away is merely this (and I suppose non-wishful thinkers and non-Realtors would have assumed as much) all of the most well regarded and highly analytical home price indices are essentially saying the same thing.

Whether you keep account by exclusively using single family homes or mix in condos, use whole property price or price per square foot, include metro-regional or look more broadly, when it comes to residential real estate… prices are trending down.

Envisioning Employment: Employment Situation March 2008

Today’s Employment Situation Report again showed declining employment with both the Household and Establishment data clearly indicating recessionary conditions.

For March, total non-farm payrolls declined 80,000 from February while employment results from the Household survey declined 24,000 yielding an unemployment rate of 5.1%.

Additionally, along with the weak results seen in March comes further downward revisions to January and February resulting in 207,000 private non-farm jobs being shed this year.

The report also confirmed continued and even peaking below trend growth overall and substantial declines in sectors directly related to residential real estate and construction.

The following chart combines both the “residential building” and “residential specialty trade contractors” into one payroll series and then plotting the data since 2002.

Notice that, in aggregate, these payrolls, having peaked in March 2006 and declined 12.82% or 442,900 jobs since then, appear to be headed lower.

Also note that independently, “residential building” has lost 14.23% of its payrolls or 145,000 jobs since it peaked during September 2006 and that “residential specialty trade contractors” have lost 12.48% of its payrolls or 304,000 jobs since it peaked during February 2006.

Next, let’s take a look a slightly broader set of industry sectors that have been directly impacted both by the housing boom and now the bust (click for larger chart).

Note that I carefully selected sectors that showed either an obvious expansion-to-contraction trend OR a flattening-to-contraction trend and that ALL sectors have both a historical and logical relationship to residential housing as well as recent industry press releases disclosing declining profits as a result of the housing bust.

As you can see, sectors that are now being directly impacted by the current housing decline are numerous and cut across many levels of the job market from construction and materials to manufacturing and finally to retail.

Combining these series into an aggregate of payrolls “directly impacted” by the housing boom and bust cycle and plotting it, along with the S&P/Case-Shiller Composite Home Price Index (click on chart below for larger version) since 1997 provides some pretty solid evidence that a relationship exists.

To expand the analysis a bit look at the following chart that shows percent change on year-over-year basis to BOTH the “directly impacted” payrolls sectors and ALL private non-farm payroll overlaid with the S&P/Case-Shiller Composite Home Price Index.

As you can see, the “directly impacted” payrolls are declining at an increasing rate and that overall private non-farm payrolls, while continuing to increase, are doing so at a declining rate.

To get a sense of the relative intensity of the pullback to the “directly impacted” payrolls by plotting both the percentage of overall private non-farm payrolls that the “directly impacted” aggregate represents as well as the contributions it is making to the rate of change of the underlying total private non-farm payrolls.

Notice that at its peak the “directly impacted” payrolls represented over 6.25% of Total Private Non-Farm Payrolls and now contracted to a degree similar to that seen during the entire course of the 2001-2003 contraction.

Plotting the ratio of overall and private non-farm payroll as well as the payroll of various business sectors to overall non-institutional population (above 16 years old and not in jail or “juvee”), the last eight years seem to pose more questions than answers.

The payroll-population ratio concept simply provides a mechanism for better isolating the changes to payroll rosters by calculating the percentage of population that is employed in a given sector at any given time.

In the following chart (click for larger version) you can see the ratio of overall non-farm payroll and private non-farm payroll to non-institutional population from 1948 overlaid with all U.S. recessions in that period.

As you can see, there is a fairly strong correlation to declining percent of population employed in non-farm and private non-farm endeavors and recession with particularly good peak-trough alignment for all recessions prior to 1990.

During the 2001 recession (and to a far lesser extent in 1990), although there where large declines to the ratio during the official recession period, the economy seemed to be able resume growth while the ratio continued to slide or stayed well below the peak of the prior expansion.

This is an interesting situation in that, although increases in population have been steady and could have replenished the literal number of jobs lost during the downdraft of 2000-2003, the latest expansion of payrolls has not been strong.

The following chart (click for larger version), on the other hand, the payroll ratio related to construction has remained above even the peak set in the 90s expansion but now seems to be coming down.

As you can see, although 3.15% of the population currently is employed in a construction occupation, there is a chance that this percentage could drop below the trend.

Of course these lost jobs could shift to some other part of the labor force but the point is, the current ratio appears poised to drop and with it will inevitably go many construction jobs.

Mid-Cycle Meltdown?: Jobless Claims April 03 2008

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims increasing 38,000 to 407,000 from last week’s upwardly revised 369,000 claims and “continued” claims increased 97,000 resulting in an “insured” unemployment rate of 2.2%.

It’s very important to understand that today’s report reflects employment weakness that is wholly consistent with past recessionary episodes and that unequivocal clarity will more than likely come in the next few releases.

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.

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

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.

So, looking at the post-“doc com” recession period we can see the telltale signs of a potential “mid-cycle” slowdown and if we were to simply reflect on the history of employment as an indicator of the health and potential outlook for the wider economy, it would not be irrational to conclude that times may be brighter in the very near future.

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.

Reading Rates: MBA Application Survey – April 02 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 increased 1 basis point since last week to 5.75% while the purchase application volume decreased by 11.8% and the refinance application volume slumped 38.1% compared to last week’s results.

It’s important to note that all application volume values reflect only “initial” applications NOT approved applications… i.e. originations…

Also important to note, the average 30 year fixed mortgage rate has decreased significantly in the last few weeks but still remain just under the mean seen during 2007 while the interest rate for an 80% LTV 1 year ARM jumped significantly and now rests 125 basis points above the rate of an average 80% LTV 30 year fixed rate loan.

It’s important to note that the data is reported (and charted) weekly and that the rate data represents average interest rates, and the index data represents mortgage loan application volume for home purchases, home refinances and a composite of all loans.

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).

The Almost Daily 2¢ - After The Shock

This morning I attended a seminar sponsored by The Warren Group’s Banker’s and Tradesman and Dwyer & Collora LLP entitled “Foreclosure Aftershock” that was hosted at the Federal Reserve Bank of Boston and I thought I might share my take on what was presented.

The keynote was given by state Attorney General Martha Coakley who appears to be fully engaged in the process of litigating at least the bleeding edge of the subprime debacle and there was a substantial amount of discussion about the recent and developing Fremont General case.

One point of interest though is that in order to make the case for fraud and unfair and deceptive practices it appears that Coakley’s office must significantly constrain the definition of what constitutes a fraudulently originated mortgage by specifically targeting short teaser period ARMs (2/28 specifically) whereby the borrower’s income could only qualify for the initial teaser rate.

Obviously this limited definition is necessary to effectively litigate this particular case but there seemed to also be an associated bias in Coakley’s presentation toward considering the era of mortgage fraud as both past (as in the era is over and now is cleanup time) and primarily related to subprime, predatory originator and Wall Street activities.

While I certainly wouldn’t argue that subprime and predatory activities were (and are) a major factor, I think Coakley is a little behind the curve in fully recognizing the extent of the actual fraud that drove the housing boom and that still exists today.

For example, I still see a fairly steady flow of homes purchased with an agency “piggyback” loan configuration where the buyer borrows up to $417,000 (now I suppose $520K with the increased limits) from Fannie-Freddie and then makes up additional “deposit” money from a simultaneous second smaller lien supplied by a non-agency lender.

While I have noticed that buyers seem to be at least expected to come up with some deposit (at most 10% resulting in a 90% LTV purchase) these activities are clearly repeating the same mistakes of the past and in a way just represent a milder form of fraud.

If prices fall another 10%, these mortgages, being "upside down", will be statistically far more likely to end up in foreclosure regardless of the fact that they were not originated through predatory activities and were not directly encouraged by Wall Street firms.

Both Fannie and Freddie have gained massive market share since the housing bust began and now mortgage brokers are simply aiming their fraudulent activities in their direction.

After Coakley, Timothy Warren, CEO of The Warren Group, presented an excellent PowerPoint that included a rundown of the most important Massachusetts housing bust data (sales, prices, foreclosures, etc.).

One novel data-point that Warren presented was a chart that essentially plotted the ratio of Massachusetts home sales to foreclosures which currently shows a startling near 1:1 relationship (i.e. there is nearly one foreclosure for every home purchased).

Needless to say there was not much potential good news that could be gleaned from the data and although I don’t believe that Warren is nearly as pessimistic about the current circumstances as I, he had a slide dedicated to what causes him to worry which was primarily related to the job picture in Massachusetts.

Clearly if we experience widespread layoffs, things will heat up significantly.

Finally, there was a bit of Q&A for Coakley, Warren and the other panelists which, to me, disclosed some of the “bias” held by individuals operating in the state’s real estate and related industries.

One questioner asked Coakley directly what she was doing about the (I forget the exact words) fraudulent and deceptive borrowers and another queried Warren about how impervious the “affluent” areas (citing Brookline and Cambridge) have been to the downturn.

Still there was some chuckling about the accuracy of The National Association of Realtors (NAR) data and plenty of the handshaking, card passing and well worded public pronouncements so typical of this type industry seminar.

Construction Spending: February 2008

Today, the U.S. Census Bureau released their February read of construction spending again demonstrating the significant extent to which private residential construction is contracting particularly for single family structures and giving a clear indication that a non-residential downturn is now well underway.

With the tremendous weakening trend continuing, total residential construction spending fell 18.83% as compared to February 2007 and 34.35% from the peak set in February 2006.

Worse off though was private single family residential construction spending which declined 33.56% as compared to February 2007 and a truly grotesque 52.41% from the peak set in February 2006.

Non-residential construction spending, currently accounting for just under half of all private construction spending, remains the only pillar of strength gaining 13.15% as compared to February 2007 but a slowing trend is now clearly materializing.

Non-residential spending has now declined on a month-to-month basis for three consecutive months and is currently growing at the slowest annual rate since March 2006.

As was noted in prior posts, commercial real estate (CRE) appears to be coming under some pressure with increasing vacancy rates and falling prices.

Keep your eye on the last chart in the months to come for a clear indication of an continued pullback.

The following charts (click for larger versions) show private residential construction spending, private residential single family construction spending and private non-residential construction spending broken out and plotted since 1993 along with the year-over-year and peak percent change to each since 1994 and 2000 – 2005.

The Arlington Artifice: February 2008

This recurring monthly post tracks the latest results of the housing market seen in Arlington Massachusetts.

I choose Arlington as a result of the Boston Globe’s recently published and absurdly anecdotal and ludicrous farce about the town’s “hot” housing market.

The ridiculous tone and outright mishandling of the housing data by the Boston Globe “reporter” would almost be comical if it weren’t for the fact that the Globe’s editor, Martin Baron, ALSO blundered seriously when he responded to my email about the discrepancies.

Baron attempted to justify the articles contents and in so doing, he disclosed his disgracefully poor and obviously unsophisticated abilities with even the most basic economic data.

The February results again confirm that Arlington is by no means a “stand out” amongst its neighboring towns as Baron suggested in his email and, in fact, is following along on a path wholly consistent with the trend seen in the county, state, region and nation.

Why would an editor of a nationally recognized newspaper think that a single town would continue to function as an isolated bubble amongst a backdrop of the most significant nationwide housing recession since the Great Depression?

As I had shown in my prior posts, this data when charted and compared to other towns in the region proves there are absolutely no grounds to call Arlington’s market exceptional.

The most notable feature of the February results is unquestionably the low number of home sales with only nine sales this month and twenty one sales for January and February combined, the lowest readings since the recessionary period of 1991.

Another important point to remember is that when sales decline dramatically the median selling price can jump wildly up or down since the smaller number of sales provides a smaller set with which to determine the “middle” sale price.

The following chart (click for much larger version) shows a history of Arlington’s February median sales price since 1988 along with the annual outcome. Notice that although the latest result spiked up to a high of $526,000, the low sales count is clearly impacting the median price and February may end up being a little misleading as home sales pick up later this spring.

The next chart (click for much larger version) shows that home sales in Arlington have been essentially flat during the last 15 years, a result that is generally to be expected when looking only at the sales of one town in isolation. That being said though, Arlington only saw 9 home sales in February, the lowest result on record since February 1991.

The final chart shows how the year-to-date median sales price for Arlington, Bedford, Belmont, Cambridge and Lexington has changed since 1988. Notice again that the one month median price data is very volatile jumping radically up or down for each of town. It’s important to note that each of the listed towns is seeing monthly home sales counts at or lower than the recessionary environments of the early 2000s and the early 1990s.

In review, the data shows that there is nothing exceptional about Arlington’s housing market proving clearly that the claims made in the Boston Globe article and later endorsed by its editor Martin Baron were entirely erroneous.

Please let editor Baron know what you think of this misstep.