The Oser View

New Home Sales--The Collapse Continues

The Commerce Department reported this morning that sales of new homes in December fell to the lowest level since national recordkeeping began in 1963, when the population of the United States was 61% smaller.  Like most housing data, new home sales are reported on an annualized basis.  In December, sales were reported at an annualized pace of 331,000.  The actual number sold was 23,000, a mere 6.4% of the total 359,000 new homes available for sale.  Of these 23,000 homes, only half were sold before they were completed.  If a new home is completed before it can be sold, the median time it will stand vacant is now more than nine months.  Prices are falling too.  The median sale price of a new home in December was $206,500.  That’s a 9.3% decline from a year earlier and a 21% drop from the peak in March 2007.  Less than 1,000 homes in the entire country were sold for more than $750,000.    

In other news, the number of Americans collecting unemployment insurance surged to 4,776,000.  As with so many negative statistics these days, this is the largest number since recordkeeping began in 1967.  With many large companies—Caterpillar, Starbucks, Jabil Circuit, just to name a few recent ones—announcing layoffs, the ranks of the unemployed are certain to swell in the weeks ahead.

The Fed Pulls out the Stops

The expression “pull out all the stops” literally means to open all the pipes of a pipe organ to make it as loud as possible. The statement issued today by the Federal Open Market Committee (FOMC), the Fed’s policy arm, is a figurative example of pulling out the stops. The FOMC is saying, loud and clear, that the economy is in big trouble. The statement is a promise that the Fed will do everything it can to “promote the resumption of sustainable economic growth and to preserve price stability.” The Fed acknowledges that key economic indicators of business and consumer activity and of employment “have continued to decline steeply.” The FOMC does not use the word “deflation,” instead employing an elaborate circumlocution. “The Committee sees some risks that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.” Alan Greenspan, the master of obfuscation, could note have enunciated it more eloquently. Since the fed funds rate is already at rock bottom, the “all available tools” the FOMC vows to use essentially means that the Fed will pipe liquidity into the financial system by expanding its already substantial purchases of Treasury securities and other high-grade bonds. The goals are to stimulate mortgage lending and the housing market and to unfreeze non-government credit markets. Under most circumstances, the promise of virtually unlimited government liquidity would be a wildly inflationary monetary policy. Under present circumstances, it may be just sufficient to achieve the Fed’s aims.

An Inglorious End to an Inglorious Era

The George W “Herbert Hoover” Bush presidency comes to a fitting and dismal close with the most job losses since 1945.  All told, the economy shed 2,589,000 jobs last year, of which 1,531,000 came in the fourth quarter.  The unemployment rate jumped from 5.0% in December 2007 to 7.2% last month.  In December 2000, Bill Clinton’s last full month as President, it was 3.9%.  The number of unemployed persons, including those actively seeking work and so-called “discouraged workers” who have despaired of finding suitable employment, has risen 40%, from 19.4 million In December 2007 to 27.3 million.   Employment in the manufacturing sector dropped to 13 million, a mere 9.6% of the labor force.  Fewer workers are engaged in manufacturing than at time since 1949, when the total labor force was less than a third of what it is now. 

I could go on, but it’s too depressing.  The employment situation is bad, and—as President-elect Obama said yesterday, “It’s going to get worse before it gets better.” 

White Christmas, Blue Economy

Bad news abounds this morning with more depressing reports on housing, retail sales, and the automobile industry.

 

Item:  The Commerce Department reported that new home sales in November fell to an annualized rate of 407,000 units, the lowest since January 1991 and a decline of 35% from a year earlier.  The median sale price of $220,000 marked an 11.5% drop from November 2007.

 

Item: The National Association of Realtors reported that sales of existing homes dropped to an annualized rate of 4.49 million units in November, by far the lowest since national records began being kept in 1999.  The median price of $181,300 is 13% lower than a year ago.  The supply of available single-family homes jumped to 11.2 months.  The supply of available condo units soared to 16.7 months. 

 

Bottom Line:  Home sales have been weak all year, but November's data shows them taking a new leg lower.  The best hope is falling mortgage rates, which were down to an average 5.18% last week, the lowest in 5 1/2 years, but the benefits will be muted by rising unemployment and tougher credit standards.

 

Item: The International Council of Shopping Centers reported that sales at stores open at least a year declined by 0.6% in the week ending December 20 from a year ago.  The group predicted that holiday-season sales may fall as much as 2%, making 2008 the worst Christmas season since 1969, when comprehensive record-keeping began. 

 

Bottom Line: Look for more retail bankruptcies in January.

 

Item: Despite a promise of $9.4 billion in government loans in the next few weeks, General Motors' stock price has dropped 30% in the last five trading days and is now below $3/share.  The auto giant's market capitalization is a mere $1.8 billion.  The cost of insuring a $10 million five-year GM bond against default rose to $8.15 million up front plus $500,000 a year thereafter. 

 

Bottom Line: Bailout or not, most investors do not expect General Motors to survive.

Almost Nothing

Today, the Federal Open Market Committee (FOMC), the Fed’s policy arm, took the unprecedented action of lowering the overnight borrowing cost between banks to virtually nothing.  Technically, the FOMC set a “target range for the federal funds rate of 0% to 0.25%.”  Don’t expect rates to rise anytime soon.  The FOMC “anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.”  The Committee also expects “inflation to moderate further in coming quarters,” even after a 1.7% drop in the consumer price index from October to November.  Even more important than the rate cut is the Fed’s decision to buy “large quantities” of Fannie Mae, Freddie Ma and Federal Home Loan Bank bonds plus mortgage-backed securities issued by these and other agencies.  In sum, the Fed has pledged to “employ all available tools to promote the resumption of sustainable economic growth.”   They have their work cut out for them.  This morning the Commerce Department announced that homebuilders started construction on just 625,000 new homes in November (on a seasonally-adjusted, annual rate.)  That was the lowest number since the Department began keeping records almost 50 years ago.   

The Slide Continues

The Labor Department reported this morning that the economy lost 159,000 jobs in September.  The unemployment rate ticked up slightly from 6.055% to 6.125%.  So far this year, the US has lost 760,000 jobs, with manufacturing, as usual, bearing the brunt.  Factory workers have not enjoyed a sustained period of job growth since the mid-1990s.  Manufacturing employment hit a peak of 17,637,000 jobs in March 1998.  Factory workers then represented 14.15% of the workforce.  In September 2008, only 13,380,000 factory jobs were left, representing 9.74% of payroll employment.  Construction employment peaked three years ago at 7,732,000 jobs.  It has since declined steadily to 7,125,000 jobs, a drop of almost 8%.  Jobs in the service sector have long been the mainstay of the economy, but even in this sector, payroll employment has eroded from 116,140,000 in May of 2007 to 116,015,000 last month. 

A recession now seems unavoidable; in fact, we are probably in one already.  The questions are how long and how deep it will be. 

What a Difference a Day Makes

Yesterday the markets sent Congress a message.  Today Congress acknowledged receipt.  Both political parties have vowed to get a rescue bill passed this week, with President Bush and Senators McCain and Obama in strong support.  The stock market recovered with a 485-point gain, and the financial sector led the way.  In addition, the FDIC will ask Congress for “the temporary ability to raise deposit insurance limits.”  FDIC Chairman Sheila Bair has not specified a limit, although the amount most people expect is $250,000.  Nor did she explain what “temporary” means, but it’s hard to imagine that any increase in FDIC protection, once enacted, could ever be rescinded.  Not to be outdone, the Securities & Exchange Commission (SEC) joined the Financial Accounting Standards Board (FASB) in issuing additional guidance on fair-value accounting rules.  The clarifications allow financial institutions to employ a wider range of tools and practical factors in determining the value of assets when market conditions are turbulent.  In particular, banks can use such common sense judgments as the reliability of future cash flows to evaluate loans and securities.  In recent months, many financial institutions have been hamstrung by overly rigorous application of accounting rules.  Even when the institutions had the ability to carry assets to maturity and good reason to believe they would pay as agreed, they were often forced to take write downs when current market values were difficult to discover.  All of these measures have the same goals: to restore necessary confidence in the banking system and get credit pumping again.   

The failure of the House of Representatives to pass a rescue bill yesterday has been blamed on just about everyone.  Republicans blamed the Democrats for being too partisan.  The Democrats blamed the Republicans for not supporting their own President.  Personally, I blame the media.  “BAILOUT OF WALL STREET!” the newspapers and talking heads screamed.  No one, of course, is in favor of bailing out Wall Street.  The problem is that Wall Street wasn’t being bailed out; we were, the ordinary homeowners, investors, and yes, taxpayers of America.  That was the stock market’s message yesterday.  Those Congressmen who claimed to be saving us $700 billion actually cost us more than $1 trillion in lost market value in one day.   In a speech today, Federal Reserve Bank of Atlanta President, Dennis Lockhart, made the point succinctly, “A working financial sector matters to us all. Credit is the lifeblood of a modern economy. Illiquid credit markets mean illiquid banks and ultimately illiquid businesses. I don't need to explain to a room full of businesspeople what happens when credit dries up and a business becomes illiquid. Cash becomes king, and cash outlays are reduced.  Managers focus on discretionary expenses, and then the biggest categories of cash outflows—salaries and investments. Jobs, and livelihoods, are at stake.”

Progress & Peril

As I write, it appears increasingly likely that Congress will pass some version of the Treasury’s rescue plan.   It can’t come soon enough, as economic indicators continue to deteriorate.  This morning the Commerce Department reported that durable goods orders in August were down 4.5% from July and 8.1% from a year ago.  Weakness is particularly acute in the transportation sector where vehicles & parts orders are down 28.7% year-over-year and non-defense aircraft orders are off 35.5%.  First-time unemployment claims jumped to 491,000 last week, the highest total in seven years.  The Labor Department estimates that 50,000 claims were filed in the wake of the hurricanes and flooding in Texas, but it all counts when it comes to how much disposable income Americans will have.  Last and worst, new home sales plunged 11.5% in August to an annualized rate of 460,000 units. This is a 17-year low and came despite lower mortgage rates and substantially lower prices.  The average new home price fell to $263,900 and the median new home price dropped to $221,900. Both are the lowest in four years. 

 

Meanwhile, expectations of a cut in the fed funds target are approaching certainty.  Fed funds futures indicate a 92% probability of a 0.25% cut to 1.75% at the Federal Open Market Committee meeting at the end of October.  A month ago, the probability was zero. 

Wars and Rumors of Wars

This morning Federal Reserve Chairman Bernanke and Treasury Secretary Paulson resumed their all-out battle to prevent what Warren Buffett is calling an “economic Pearl Harbor.”  The World War metaphor is on target.  The US was blasted at the United Nations yesterday by countries near and far for exporting the financial crisis. Leaders of Brazil, Argentina, France, the Philippines, Turkey and Tanzania took turns excoriating the US for allowing “the burden of the boundless greed of a few to be shouldered by all,” to quote Brazil’s President Luiz Inacio Lula.  I doubt it’s a coincidence that both Iran and North Korea chose this moment to announce they will no longer cooperate with UN atomic inspectors.

Here at home, the economy continues to slide.  Existing home sales in August dipped 2.2% to an annual rate of 4.91 million units, down more than 10% from a year earlier.  Applications for new mortgages and refinancing of existing mortgages also dropped as the average rate for 30-year fixed loans rose back above 6.00%.    

Will Congress pass Paulson’s rescue plan and should it? The plan is inchoate, perhaps even embryonic, but, in my opinion, firm and unified action is required to preserve the financial system.  Only the Federal government can provide the necessary leadership, money, and discipline.  Confidence must be restored to permit an orderly disposal of excessive debt.  Everyone—individuals, companies, governmental units—borrowed too much money on too little equity.  It will take time and patience to restore the balance.  Those are qualities that the markets, left to their own devices, sorely lack.

Chairman Bernanke’s prepared remarks can be found at link below.  The second part, beginning “I will now turn to a brief update on the economic situation” is sobering.    

www.federalreserve.gov/newsevents/testimony/bernank20080924a

Feeling the Pinch

Retail sales declined 0.3% in August, following a 0.5% decline in July.  Excluding autos, which received a boost from GM’s employee-price discount, sales were down 0.7%.  Basically, consumers have cut back sharply on discretionary spending.  Sales of electronics, clothing, and general merchandise all fell, as did sales at department stores and mail order outlets.  On a year-over-year basis, retail sales have dropped 0.4%.  Nearly every available dollar went into our gas tanks. Gasoline station sales increased 20.8%, while sales of automobiles, furniture, and building materials were plummeting.

 

With unemployment and foreclosures rising and no more tax rebates to cushion the blow, the next several months at least are looking bleak.  Barring an unexpected turnaround, the Federal Reserve is almost certain to keep the fed funds target at 2.00% through year-end, although sentiment is growing that their next move may be another cut.  Fed funds futures have priced in a better than one-third probability that the fed funds target will be lowered to 1.75% by December.