Another Resale Home Price Drop in December

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It was more of the same for the median-based home price indicators last month. The median price per square foot for single family homes fell 2.6 percent for the month, racking up a decline of 27.8 percent for the year and 42.7 percent from the September 2005 peak of this measure.

Condos have fared even worse, with the size-adjusted median down a brutal 7.8 percent last month and down 36.3 percent for 2008. I've had to increase the scale on the accompanying graph now that the size-adjusted median condo price has dropped over 50 percent from the peak (51.0 percent, to be exact).

A combined aggregate of the price indicators for condos and detached homes was down 4.0 percent for the month, 30.5 percent for the year, and 45.4 percent from the peak.

A chart of the not-adjusted-for-size median price, oft-quoted by analysts, would be a lot bumpier and more volatile but would tell pretty much the same story.

It's not clear how much of last month's decline was caused by the shift in activity towards cheaper homes and how much was caused by an actual decline in home values. Such is the problem with using the median price, which measures how much the typical buyer paid without adjusting for how nice a home he or she got in return.

The most recent Case-Shiller data for October compares subsequent same-home sales to indicate that home prices were indeed falling at that time. It's probably safe to assume that they are still falling, though probably not quite as fast as the median-based indicators make it seem.

-- RICH TOSCANO

Tuesday, January 6 -- 4:06 pm

Mortgage Rates Forced Down by the Fed

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As I noted a couple weeks back, the Federal Reserve will be conjuring money out of thin air to buy "large quantities" (their words) of mortgage-backed securities. The mere anticipation of this flood of freshly-printed cash into the mortgage market has been enough to increase the demand for mortgages and thus lower rates.

The accompanying graph shows that 30-year fixed mortgage rates, depicted in blue, have dropped to a level not seen in years. As a matter of fact, fixed mortgage rates have not been this low for three decades.

Note that the Fed has not actually begun purchasing mortgages just yet, though it is set to begin doing so this month. The drop in rates appears to have taken place just in anticipation of the Fed's artificial goosing of demand.

The Fed intends to have purchased $500 billion worth of mortgage-backed securities by mid-2009. So once they really get going, they may push mortgage rates lower still.

-- RICH TOSCANO

Friday, January 2 -- 4:40 pm

Higher-Priced Homes Feeling the Pressure

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The Case-Shiller index data for October was released today. Kelly Bennett has written it up here and here, for those who want the full rundown.

The thing that jumped out at me was that for the first time during this bust, the highest-priced of the three Case Shiller price tiers experienced a greater monthly decline than either of the other two.

The high-priced tier fell 2.9 percent between September and October, easily beating the 1.8 percent drop in the middle tier and just edging out the 2.8 percent drop in the low-priced tier. Until this month, the low tier had almost always declined the most of the three with the middle tier falling the second hardest. The accompanying graph shows that the high tier has been the most resilient of the three.

There are a few reasons for this relative strength. The biggest is that high-tier prices experienced the least dramatic rise during the housing boom, so they had less ground to make up on the journey towards affordability. The second is that the utter devastation in the subprime mortgage industry had a much bigger impact on the lower-priced areas where subprime mortgages were used more widely.

Now the cards may not be so stacked in favor of the high end. First, the lower tiers have fallen to a point where they are more on par, valuation-wise, with high tier homes. While they initially rose higher, they've now fallen further to make up for it. So all other things equal it would make sense for the tiers to commence falling at a more similar rate.

Second, as I wrote about last month, higher-priced homes are in much less demand than their cheaper counterparts. Lower demand equates to less support for prices.

Third, while the high-end areas were fairly well shielded from the subprime debacle, no area is immune from job loss among its residents. Recent job losses could be affecting the high tier in a way that the subprime crisis could not.

Bear in mind that because of a combination of falling prices and a shift in buyer preferences towards lower-cost houses, the "high tier" consists of a cheaper set of houses, on average, than it used to. But because the Case-Shiller index is calculated by comparing same-home sales, that set of houses was indeed falling in price as of October. And for the first time since the bust started it was doing so faster than the houses in the middle or low tiers.

-- RICH TOSCANO

Thursday, November 6 -- 9:07 am

The Fastest Population Growth in Five Years

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The California Department of Finance recently released a new estimate of San Diego County's population growth. According to the DOF, San Diego's population grew by 46,634 people in the year to July 2008. This 1.5 percent increase represents the fastest annual percent growth since 2003.

The accompanying graph shows the DOF's population growth data since 2001 in orange. Just for kicks I've also included the US Census Bureau's estimates of the same in blue. The Census Bureau didn't release a San Diego-specific estimate for 2008 population growth, although it did estimate that statewide population increased by 1.2 percent.

We looked at the difference between the Census and DOF population stats a while back and found that the consensus at the time seemed to be that the DOF data was better. So I will stick with that assumption unless I hear otherwise.

According to the DOF, people moving to San Diego from elsewhere in the United States accounted for only 3,032 people out of the 46,634-person total increase. The remainder of the increase was due to immigration (16,053 people) and natural population growth (births minus deaths, totalling 27,549 people).

Note that the growth in San Diego's population is taking place even as the number of employed San Diegans is on the decline.

-- RICH TOSCANO

Thursday, November 6 -- 9:07 am

San Diego's Job Situation Darkens

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According to the latest EDD estimates, San Diego's employment situation deteriorated noticeably in November. The retail industry took the worst of it, turning in a year-over-year decline of 6,400 jobs or or 4.2 percent. (Retail employment actually increased month-to-month, but the increase was very weak compared to the holiday-related surge that takes place in a typical November).

The finance and construction sectors also continued to shrink, shedding 3,800 jobs (4.9 percent) and 6,200 jobs (7.4 percent) respectively in the year to November.

Outside these three sectors, the rest of the local economy eked out a gain of 1,100 jobs or .1 percent. This was not nearly enough to offset the losses in retail, construction, and finance. Total employment across all sectors was down for the year by 15,300 jobs or 1.2 percent.

-- RICH TOSCANO

Monday, December 22 -- 10:40 pm

The Fed Has Gone Nuclear

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On Tuesday, Federal Reserve Chairman Ben Bernanke announced that the Fed was for the first time in history cutting its target funds rate to 0 percent (a range of 0 to .25 percent, to be exact, but it's close enough). Additionally, the Fed will shunt "large quantities" of money directly into the mortgage market. They will also consider directly buying long-term U.S. Treasury bonds, thus funding the government's activities and putting downward pressure on long-term rates. Finally, they are creating a new lending program to "facilitate the extension of credit to households and small businesses." I'm not sure what that means but I'm pretty certain that it entails the Fed handing out yet more money.

They certainly are spreading it around. One might wonder where all this money is going to come from. Chairman Bernanke left that part out of his statement, but the answer is that the money will largely be created out of thin air.

This may well help to boost consumer spending and the prices of homes and other assets, as it is intended. (I've written before on why such artificial stimulus is not the unabashedly good thing that everyone seems to think it is, so I will spare you this time around). But whether these tactics do end up goosing spending and asset prices or not, they are unprecedented and exceedingly risky.

In many places all over the world, not just the United States, the US dollar is used by default as both a medium of exchange and a store of value. This is so only because people have confidence that it will continue to be a reasonable store of value and to be accepted as a medium of exchange. The dollar derives its value entirely from this widely-held faith.

The Fed's actions, both recent and newly-threatened, put this faith at risk. Each new dollar created out of the ether renders all existing dollars a little less valuable. An onslaught of printed-out-of-nowhere dollars dumped into the world economy could, to say the least, prove a challenge the world's belief in the dollar.

If that belief ever really does crack, we Americans will find that the coin of our realm is not nearly so valuable as we thought. The Fed's increasingly aggressive attempts to paper over our economic woes could bring on huge problems of their own.

-- RICH TOSCANO

Friday, December 19 -- 9:19 am

Foreclosure Activity Remains Subdued

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Readers may recall that the number of San Diego homes entering the foreclosure process plummeted in September. This drop was coincident with a new state law mandating an extra 30 days before foreclosure could be initiated.

Yet as of November, 30 days had come and gone a couple times over but foreclosures had not started back up again. It seems that there is something else causing a downshift in in foreclosure activity. The manifold bailout attempts would be my guess.

The question is whether the assorted bailouts have merely caused a temporary slowdown in foreclosure processing or whether they are actually inducing troubled mortgages to be worked out in a sustainable manner. I don't know the answer to that question, but I suspect that it's a little bit of both for the time being.

-- RICH TOSCANO

Sunday, December 14 -- 8:44 pm

Home Buyers Pull In Their Horns

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After going on a tear for most of 2008, resale home purchase activity slowed significantly in November. The number of closed sales was down 23 percent from October.

The accompanying graph shows that over the past couple of years, it has not been a normal seasonal pattern for sales to slow so rapidly between October and November. Sales were still up 40 percent from a year prior -- but that compares to an 89 percent year-over-year increase in the prior month.

Inventory for sale declined again, ending down 22 percent from a year prior. This hasn't been a very meaningful indicator for a while, however, as inventory has declined steadily even as prices plunged. The fact is that much of the inventory that is selling consists of foreclosures or other types of "must-sell" housing. For as long as that continues to be the case, marginal changes in inventory levels probably won't make much difference.

There were 6.9 months' worth of inventory for sale, up from 5.5 months last month but down from 8.0 months a year prior.

I think it's plausible to assume that the dropoff in sales activity could be due to increased caution in the wake of the recent widespread job loss and general financial market shellacking. People are less likely to buy homes if they think they might lose their jobs, and watching their other investments plummet in value can't be helping either. If potential buyers started to get spooked in October, which is when things got really ugly in the markets, that would just be starting to show up in the number of closed November sales.

If this is what's going on, sales activity could moderate for a while -- barring heavy-duty government intervention, of course.

On that note, Dean Calbreath over at the UT has good overview of our fearless leaders' new scheme to prop up the housing market by forcing mortgage rates down to 4.5 percent. Dean quotes me in the article, but don't hold that against him.

-- RICH TOSCANO

Tuesday, December 9 -- 8:27 pm

Median-Based Home Prices Down Again in October

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The size-adjusted median price for San Diego condos actually rose by 2.8 percent last month, but that isn't saying much after last month's 14.8 percent beatdown. And single family homes took their turn for some pain as the size-adjusted median dropped by 6.1 percent. Prices in aggregate dropped by 3.6 percent.

These are month-to-month changes -- the total change from the peak is indicated in the accompanying graph.

A healthy portion of the recent declines in the size-adjusted median (as well as the unadjusted median) doubtless derives from the shift in activity towards lower priced homes. People are paying less, but also get less home for their money, meaning that the price of a given home isn't actually dropping as much as the median. Distortions of this type are the reason that we focus so much on the Case-Shiller home price index, which models market prices by comparing same-home sales.

But while the median-based price indicators may be exaggerating the extent of the decline, it's pretty clear that home prices are still falling.

-- RICH TOSCANO

Sunday, December 7 -- 8:07 pm

Unemployment Likely to Keep Rising

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The National Bureau of Economic Research, the official arbiters of whether or not the United States is in a recession, finally called it yesterday. That's not terribly newsworthy considering that everyone knew we were in a recession already.

What's interesting is that they designated the official recession start date as December 2007, a full year ago. This means that (assuming that the recession didn't end months ago, which seems pretty safe) this is the longest recession since the 16-month long downturn beginning in July 1981.

Now that we have a start date, we can compare unemployment trends during the current recession to those of recessions past. The graph to the right indicates how the San Diego unemployment rate fared during and after each of the last three recessions (that's as far back as the unemployment data goes). The horizontal axis denotes the number of months after each recession began, starting of course with month zero, and the three colored lines indicate each recession's unemployment rate over that period.

This current downturn looks a lot more like that of the early 1990s than the relatively breezy 2001 affair that followed the dot-com crash.

According to the NBER, each of the prior two national recessions lasted just 8 months, although San Diego in specific was hit much harder in the 1990s than in the early 2000s.

Employment, or lack thereof, tends to lag economic activity. The accompanying table shows that unemployment worsened long after each of the prior recessions-- even the recent and relatively mild one -- had ended.

Considering the severity and length of the current recession, San Diego unemployment could continue to rise for quite some time.

-- RICH TOSCANO

Tuesday, December 2 -- 9:19 pm

Home Price Chartfest

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Kelly Bennett has written extensively on the September release of the Case-Shiller home price index, so I'm just going to throw a couple extra charts into the mix. OK, and one comment (I just can't help myself).

I'll begin with the charts. First, here is a table showing the last time the Case-Shiller index value for each price tier was lower than September's level. The right-hand column is the same thing but with prices adjusted to remove the effects of inflation.

Next up is the familiar chart showing each tier's decline from its respective peak:

This longer term chart, beginning with the earliest available series data in 1989, shows that the low-priced tier's swan dive was preceeded by a commensurately large increase (the same is true to a lesser extent for the mid-priced tier):

The next two charts are just like the prior two except that they adjust the price indexes to account for inflation as measured by the Consumer Price Index. This tells us more or less how much home prices have changed in comparison to everything else:

The threatened comment consists of my near-monthly reminder that the Case-Shiller index is very lagging. The latest data point is calculated based on home sales that closed in July, August, and September, with the escrow period typically beginning at least a month before that.

Where financial markets are concerned, that seems like an eternity ago. Whatever impact the recent market and economic turmoil has had on the housing market will not even begin to show up in the Case-Shiller index releases for a couple of months yet.

-- RICH TOSCANO

Friday, November 28 -- 11:50 am

Job Losses Pick Up the Pace

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For a long while, as the accompanying graph illustrates, employment sectors that benefited from the housing boom bled jobs while the rest of the economy continued to grow. That has changed in the past few months as employment weakness has spread throughout the economy.

As of October, according the California Employment Development Department's latest estimates, year-over-year growth in the non-housing sectors was effectively zero. Given that the housing sectors continue to shrink, overall year-over-year job losses for San Diego leapt to a loss of 12,200 jobs or .9 percent.

I've included retail in the trio of housing beneficiary sectors (along with finance and construction) because the retail sector got such a boost from years of cashed-out homeowner equity back in the day. Clearly, though, retail activity is not solely dependent on housing, and the retail industry is shrinking faster now that employment weakness has become more widespread.

The only sectors that grew year-over-year by more than a couple hundred jobs were education/health (which grew by 2,400 jobs from last year, pretty much the same as the year-over-year increase of 2,500 jobs in September) and leisure/hospitality (which grew by 1,100 jobs from last year, down substantially from 2,000 new jobs in the year to September).

The unemployment rate for San Diego was estimated at 6.8 percent. This is high but still somewhat better than what was seen at the worst of the region's early-1990s recession. Because of seasonal factors, months should be compared with like months. With that in mind, the worst October during the 1990s bust was in 1993, when unemployment reached 8.0 percent.

So even though mainstream media outlets are declaring this to be the next Great Depression, San Diego's job market is -- according to the EDD's oft-revised estimates, anyway -- as of yet more robust than it was at the worst of the 1990s recession.

-- RICH TOSCANO

Monday, November 24 -- 5:27 pm

Cheap Homes Selling Fast, Expensive Homes Not

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Home sales have increased dramatically in recent months, but that brisk activity is far from uniform. While cheap homes are positively flying off the shelves, sales have actually slowed in many of the more expensive markets.

The October resale data makes this conclusion starkly clear. I tallied up the 20 San Diego zip codes with the largest year-over-year sales increases (I will refer to these as the fast zip codes) and the 20 zip codes with the smallest increases (the slow zips). As shown in the nearby table, there was huge disparity in the results. The fast zip codes experienced a huge year-over-year volume increase of 186 percent on average. Sales in the slow zip codes, in comparison, were actually down 11 percent.

It's pretty clear that what separates the brisk markets from the slow ones is price. While the fast zip codes averaged to a median price of $279,938, the average price in the slow zips was double that at $561,113. Those lower-end home prices had been harder hit, unsurpsingly -- the average year-over-year price decline for the fast zips was 30 percent versus just 12 percent for the slow ones.

For the curious, the full list of the zip codes I used can be found here.

This bifurcation, while not new, is getting more dramatic. I ran this study back in June and a quick gander at that article will show that the disparity in both sales and prices has increased markedly.

-- RICH TOSCANO

Thursday, November 20 -- 11:13 pm

Homes Sales Up Big in October

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October was a great month for home sales, with resale activity up a huge 89 percent from a year ago. Resale inventory was down 21 percent from last October.

The improving supply and demand made for a new multi-year low in the months-of-inventory figure, which tracks how fast resale homes are selling in comparison to how many are available. The 5.5 months of inventory represents an incredible 58 percent decline from the 13.1 months' worth of inventory available in October 2007.

This is obviously a big improvement, but as always, there are several caveats.

First, sales closed in October generally represent deals inked in September or August. Economic, market, and employment conditions have deteriorated substantially in the past couple months, so future demand may not be so robust as what we see here.

Second, while inventory for sale is declining, the rapid foreclosure rates throughout 2008 imply that there are still a lot of foreclosed homes out there that have not yet hit the market. Eventually, they have to, so there may be a lot of "pent up supply" out there.

Third, a lot of what's selling consists of foreclosures and other must-sell inventory. So sellers may on average be more motivated than the relatively low months-of-inventory figure implies.

Finally, these countywide sales figures fail to reflect the fact that activity has been improving a lot faster in low-priced areas than in higher-priced areas. I will try to write more about this disparity later this week.

-- RICH TOSCANO

Monday, November 17 -- 1:40 pm

Foreclosure Activity Drops Again

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After dropping like a rock in September, San Diego mortgage default notices declined again -- mildly, this time -- in October.

In last month's report, I attributed the decline in default notices (NODs) to a new state law requiring an extra 30 days before homeowners can be put into foreclosure. But trustee sale notices (NOTs), which take place further along in the foreclosure process, slowed down considerably in October. Trustee notices can take place no sooner than 90 days after default notices, so the drop in NOTs can't have been directly caused by the prior month's drop in NODs.

The drop in trustee sale notices suggests that more than just the extra-30-days state law may be at work. Perhaps some of the many and varied bailouts underway have been causing lenders to hold off on initiating foreclosure activity. (If this is the case, however, Treasury Secretary Paulson's just-announced switcheroo from propping up mortgage markets to goosing consumer spending could shake things up). Or perhaps lenders just took a breather as they did last November.

These are all just speculations, of course. The next couple of months should help us put the pieces together a little better.

-- RICH TOSCANO

Thursday, November 13 -- 11:18 am

A Big Drop in Median Home Prices

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The median price per square foot for single family homes had a pretty typical month, dropping by 2.6 percent. But the same figure for condos dropped an amazing 14.8 percent in a single month. A volume-weighted aggregate of the two property type medians dropped by 6.4 percent for the month, ending up 41 percent lower than it was at the September 2005 peak.

Actual condo prices clearly did not drop by nearly 15 percent in a single month, of course. The drop in the median price per square foot likely reflects some degree of actual price declines, but the bulk of the decrease in the median almost certainly represents a shift in buyer activity toward lower priced properties. This is a phenomenon that has been going on for a while, though not to last month's dramatic extent.

Such are the hazards of measuring what the typical buyer paid for a house or condo without accounting for how nice a property he or she got. Adjusting for square footage helps a little, but it does not account for differences in location, quality, or anything else. More about the travails of measuring home prices can be found here.

So while this month's median price data doesn't give us much useful information about actual prices, it tells us that -- among condos, anyway -- low-priced homes are selling a lot faster than high-priced homes.

-- RICH TOSCANO

Thursday, November 13 -- 4:19 pm

Financial Flood Insurance

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Credit default swaps have been a major element in the ongoing financial crisis. That doesn't mean it's necessarily easy to understand just what the problem is with them. I've taken a crack at it in the past, but more recently I heard an analogy that makes the entire situation a lot easier to visualize.

I heard the analogy during a radio interview with Doug Noland, a mutual fund manager who's been writing dire weekly analyses of the credit market for years. It went something like the following.

Imagine a city near a river that is prone to the occasional flood. At some point, an enterprising citizen gets into the business of writing flood insurance, collecting premiums from insurees in exchange for a promise to pay back the insurees should a flood do any damage to their properties.

Now, imagine that there is an unusually long drought and the river goes a long time without experiencing a flood. Other enterprising types begin to notice that the flood insurer has for years been collecting all this money for doing absolutely nothing. A flood hasn't taken place for ages -- maybe climate patterns have changed so that the river doesn't flood any more. And even if it does flood at some point, they will probably be retired by then. They want in to the easy money flood insurance game too.

So they start writing flood insurance, but in order to gain some market share, they lower the premiums to attract new business away from the original insurer. The lower cost of insurance encourages more people to build houses next to the river, assuming that if it ever does flood again, they will be reimbursed for their losses.

As the years go on and still no flood comes, more and more people enter the flood insurance business, driving the cost of flood insurance to ridiculously low levels. It costs so little to insure against disaster that eventually the entire city gets relocated to the shoreline.

Everyone's seemingly a winner. The insurers are making a lot of money and the citizens get to feel safe and secure in their riverfront properties. Until the flood comes. Then the entire city is wiped out and it becomes clear that the insurers simply don't have enough money to reimburse the insurees for all of their losses.

Credit default swaps are basically insurance against a borrower not paying back a loan. If the borrower defaults, the insuree is made whole by the issuer of the credit default swap. Writing credit swaps was easy money in flush economic times and everyone jumped on board -- just like being a flood insurer was great as long as the drought went on. Since lenders felt protected against borrower defaults by all that insurance they bought, they made many more loans than they otherwise would have. This vast increase in lending is akin to the buildup of riverfront property. And the mass debt defaults underway are obviously analogous to the flood.

There are a couple of ways in which the credit insurance situation risks are even more self-reinforcing than those for flood insurance. In the modern age we have the credit ratings agencies that declared all that subprime mortgage-backed debt to be safe and sound. Perhaps we could insert the ratings agencies into the analogy by saying that we have a well-respected weatherman study the data and determine that because a flood has not happened for so long, flooding should no longer be considered a risk. (Maybe our allegorical weather expert created a model based on 20 years' worth of data, not realizing that the last big flood took place 21 years ago). The weatherman's soothing predictions would encourage even more people to get into the flood insurance business and collect that free money.

Noland points out an even bigger difference: in the river city scenario, the amount of property built on the shoreline by overly confident insurees does not influence the probability of a flood. But all the extra lending undertaken by overconfident credit insurees -- think subprime mortgages here -- actually increased the chance of future defaults even as the price of insuring against default plummeted.

Noland's analogy ends when the flood takes place. Now that we've seen the real-life version in the credit markets, we can go back and complete the story for our fictional river city: the citizens (whether they built on the river or not) are taxed to repair the buildings, the flood insurers are bailed out, and everyone inexplicably continues to believe the weatherman.

-- RICH TOSCANO

Thursday, November 6 -- 9:07 am

More Case-Shiller Charts

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Kelly Bennett has already done a thorough writeup of the August Case-Shiller home price data, so I thought I'd just add a couple of charts into the mix.

The first shows how low-priced homes have suffered in comparison to higher-priced homes. At this point, the low-priced tier of the index has fallen almost twice as far from the peak as the high-priced tier:

The second graph provides a lot of insight into why this has happened. During the boom, the frenzy of easy lending was concentrated among borrowers of low-priced homes. The huge decline from the peak in the low tier is just the flipside of the incredible boom-time runup in which prices of lower-end homes increased far faster on a percentage basis than those of more expensive properties.

The next two graphs present exactly the same price information except that the prices have been adjusted to account for the effects of inflation as measured by the Consumer Price Index. This approach details how much home prices have changed not in terms of dollars, but in comparison to everything else (or at least that subset of "everything else" measured by the CPI -- but that's a whole other topic).

After accounting for inflation, even high-end home prices are down nearly a third from the peak. Low-priced homes have dropped almost in half by this measure.

Despite the price drops, homes remain 30 percent more expensive on an inflation-adjusted basis than they were in 2000.

Keep in mind that the Case-Shiller data lags quite a bit. The latest figure is calculated based on sales closed in June, July, and August. Here at the end of October prices have almost certainly dropped further than what you see above.

-- RICH TOSCANO

Date: 10/29/08

Where the Jobs Were in September

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Here's a graph I haven't updated for a while. It shows how many jobs were gained or lost, according to the latest monthly employment estimates, by varying San Diego employment sectors in the year leading up to September 2008. (Sectors that changed by fewer than 300 jobs have been excluded to keep the graph a little more readable).

Here's how this chart looked a little over a year ago. Back then, the leisure and hospitality sector was providing a huge boost. That sector is still growing, but not nearly so fast. Meanwhile the housing bubble beneficiary sectors (construction, finance, and retail) have deteriorated significantly. One bright spot: the manufacturing sector, while still shrinking slightly, is doing so at a notably slower pace than it was last year.

-- RICH TOSCANO

Date: 10/27/08

Regional Employment Declining Slowly but Steadily

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San Diego County employment declined in September, according to the monthly estimates provided by the state's Employment Development Department.

The housing boom beneficiary sectors acted as a drag once again. Year over year, the construction sector lost 6,800 jobs or 7.8 percent, the finance sector (including real estate) lost 4,100 jobs or 5.2 percent, and the retail sector lost 3,000 jobs or 2.0 percent.

The accompanying graph shows that while the contruction and finance sectors were still losing jobs on an annual basis, the yearly rate of loss was lower than it had been in recent months. In other words, while those two sectors are still shrinking, they aren't shrinking as fast as they were earlier in the year. The retail sector, in contrast, declined faster on a year-over-year basis in September than it had at any time during the current downturn.

Outside the housing beneficiary sectors, job growth was positive by 8,800 jobs or .9 percent, but that wasn't enough to offset the weakness coming from construction, finance, and retail. In total, the region lost 5,100 jobs between September 2007 and September 2008, a decline of .4 percent.

-- RICH TOSCANO

Tuesday, October 21 -- 8:39 pm

Housing Demand Improves Again in September

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September was a good month for existing home sales, at least as things have gone in recent years. Sales were up a whopping 71 percent from last September and were even 18 percent higher than in September 2006.

The inventory of resale homes on the market was also improved, down 18 percent from a year prior.

This made for another big improvement of the months-of-inventory figure, which measures how fast homes are selling in comparison to how many homes are on the market. There were just over 6 months' worth of inventory in September -- a level that is typically considered normal.

Beneath the surface, however, the market is anything but normal. "Must-sell" inventory continues to dominate and, per Kelly Bennett's latest, it appears that there is plenty more to come.

Foreclosure sanctuaries and other forms of government intervention may change this course of events at some point in the future. But until must-sell inventory become less of a factor, the seemingly normal ratio between supply and demand will continue to mask some serious non-normality.

-- RICH TOSCANO

Thursday, November 6 -- 9:07 am

Median Price Declines Picking Up the Pace

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The median price per square foot of resale single family homes dropped 2.6 percent in September. The condo median, which took a much harder hit in August, dropped a more moderate .9 percent for the month. An aggregate of the two property types dropped 2.0 percent.

The accompanying graph displays the declines for the size-adjusted median since it peaked three years ago in September 2005.

Home prices tend to move upward during the spring and early summer months. This has even historically been the the case during protracted housing downturns. Such is the power of the current bust, however, that this year's "spring rally" seems to have manifested itself as a period of slightly more subdued price declines.

There are a number of crosscurrents at work in the housing market. Significant job losses appear to be an increasingly higher risk, and not just in the housing-related sectors. At the same time the government is going all out prop up the housing and credit markets. How this all plays out in the end is anyone's guess at this point. For now, the downturn holds sway.

-- RICH TOSCANO

Thursday, November 6 -- 9:07 am

Mortgage Defaults Plummet, For Now

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The number of homes entering the foreclosure process declined steeply in September -- but the drop is likely temporary.

The blue line on the accompanying graph represents how many Notices of Default, which are the nastygrams sent to delinquent borrowers, were delivered in September. The orange line tracks Notices of Trustee Sale, which inform said delinquent borrowers that their homes are about to be repossessed.

The graph makes it pretty clear that NODs dropped like a rock last month. We haven't seen a number of default notices this low since February 2007 -- a breezier time, when it would have seemed laughable to suggest that mainstream media outlets would be publishing stock photos of Depression-era breadlines a year and a half down the road.

Trustee sale notices, for their part, more or less soldiered on.

It's pretty unlikely that the number of folks blowing off their mortgage payments dropped in half (and then some) in a single month. Instead, it appears that the statewide foreclosure legislation I mentioned a couple months ago is making itself known. The law inserts an extra 30 days into the period between an initial missed payment and the eventual NOD. It would explain why NODs fell off a cliff while NOTs remained relatively unchanged.

If the new law is at work, that blue line is likely to start heading up again within a month or two.

-- RICH TOSCANO

Thursday, November 6 -- 9:07 am

A Step in the Wrong Direction

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In response to the prior column on the latest bailout, some people asked for more specific thoughts on the Paulson Plan and what would have happened if it hadn’t been passed.

In truth, I don’t actually know what would have happened had the plan not gone through. Most of the people offering predictions on the topic don’t know either; I’m just admitting it.

I do know this. Our economy has become far too dependent on finance and debt-fueled consumption. We need to return to our economic roots of production and saving. This shift will be painful, and one could make a case for some sort of government intervention to ease the transition.

But the Paulson Plan, the central focus of which is to prop up the prices of financial assets that no private buyer wants to touch, is not intended to ease the transition. It is intended to prevent it.

The plan is thus a giant step in the wrong direction. But this is exactly what you’d expect given that it was developed by the same group of people, using the same flawed analytical framework, that has misdiagnosed the problems all along.

-- RICH TOSCANO

Thursday, November 6 -- 9:07 am

Bailouts Don't Address the Real Problem

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Every pundit on Earth is playing the game of picking the various bailouts apart and proposing their own improved bailout schemes. But I think that most of the conversations going on out there miss a critical point: that this bailout and the ones that will in all likelihood follow it fail to address the root cause of the problems.

That root cause, in my opinion, is that the vast majority of political leaders, regulators, and pundits zealously cling to a deeply flawed analytical framework.

To put it more simply: the people and principles that blithely led us into this mess are absolutely the wrong people and principles to lead us out of it.

The problems we are facing have been coming down the pike for a long time. Many, many people saw them coming. Here at VoiceofSanDiego.org, I wrote about the risks posed by credit default swaps (one of the latest credit crisis bogeymen) in January 2007 and collateralized debt obligations (which were at the heart of the subprime crisis) in June of that year. I wrote about the possibility of widespread mortgage defaults as far back as February of 2006 (my second month of writing for Voice) and I have been writing about the risks of the speculative housing bubble at my own website since mid-2004.

I don't say this to pat myself on the back, but to offer specific examples that these problems were knowable well ahead of time. (This is a necessity, sadly, given the constant historical revisionism practiced by many financial commentators). But it wasn't just me -- a few minutes of Googling will show that many, many analysts identified these problems ahead of time.

So if the problems were knowable to so many people -- including me, a regular guy here in San Diego with no letters behind his name or anything -- then how is it that the people in charge of running the world's largest economy were absolutely blindsided by them?

Consider the following quotes:

"[House] price increases largely reflect strong economic fundamentals, including robust growth in jobs and incomes, low mortgage rates, steady rates of household formation, and factors that limit the expansion of housing supply in some areas." -- Fed Chairman Ben Bernanke, Oct. 20, 2005

"[The housing downturn] looks to be a very orderly and moderate kind of cooling." -- Fed Chairman Ben Bernanke, May 18, 2006

"All the signs I look at [show] the housing market is at or near the bottom." -- Treasury Secretary Henry Paulson, April 20, 2007

"I don't see [subprime mortgage market troubles] imposing a serious problem. I think it's going to be largely contained." -- Treasury Secretary Henry Paulson, April 20, 2007

“Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited.” -- Fed Chairman Ben Bernanke, May 17, 2007

I could dig up enough to fill a book, coming from these two guys and a whole lot more of our leaders, but hopefully the above quotes are enough to give a flavor. These guys had absolutely no idea what was going on. With homes priced in vast excess to any prior relationship they'd had to incomes, Bernanke came out and actually claimed that prices were supported by those same incomes. Paulson then called the bottom in Spring of 2007, with homes still exceedingly overpriced and a huge glut of foreclosures already in the pipeline. And all along they denied that there would be any ill effects outside of homes bought with subprime loans (this after they and their predecessors had for years denied that subprime loans would become a problem at all).

Given the above statements by Paulson and Bernanke, there are only two possibilities: they are incompetent or they are liars. I tend not to think they were lying, because if they really knew what was going on they would have been a lot more non-committal rather than making statements like those above that could later be proven to have been hugely wrong. So that leaves incompetence as the most likely explanation.

I single out Bernanke and Paulson, by the way, because they are spearheading the bailout efforts and because these two unelected men wield phenomenal power over our financial future. But they are absolutely not alone in having had no idea what was underway -- they are joined in this honor by the Administration and, as far as I can tell most of Congress and the financial regulatory structure.

Yet all these people are still at the helm. And despite their proven and repeated inability to understand the situation, they are for some reason expected to successfully lead us out of it.

It's not that any of these people are stupid. Not by any stretch. The issue, as I posited at the outset, is that they are under the sway of an analytical framework that is dangerously misguided.

I don't want to get too deep into the weeds, here, but by way of providing some justification for the above statement I will outline below a sampling of the misapprehensions that have been at work in guiding us into this morass. The italicized statements below are all core beliefs of what I would contend has been the mainstream view for many years among politicians, regulators, and pundits. They are all, in my opinion, wrong, for reasons explained after each italicized statement.

Financial market prices are always right. Despite having experienced the world's biggest stock bubble followed by the world's biggest housing bubble in less than a decade, people still cling to this one. The mainstream view is that market prices reflect the combined knowledge of all market participants and so they must be correct. Whatever prices are, it follows that that some rationalization should be reverse-engineered to explain them. See Bernanke's laughable attempt to justify home prices in 2005 as an example. But history has proven time and time again, and is once again proving as we speak, that markets get it wrong all the time.

Debt doesn't matter. The economic boom we just went through was greatly dependent upon people borrowing against rising home prices to increase their consumption spending. Most people only looked at the economic growth side of the equation (such as GDP, or gross domestic product) without seeing that on the other side, our level of indebtedness to foreigners was growing faster than economic activity. This is neither sustainable nor desirable.

There is nothing wrong with borrowing if the proceeds are used to increase future productive capacity by building up infrastructure or the means of production, because these expenditures will lead to an increase in our economic potential and earning power down the road. But when the proceeds are used to buy consumer goods that have no productive capacity -- and houses are consumer goods, by the way -- that increases the debt we will have to eventually pay without a commensurate increase in our future earning power. This is bad.

Consumer spending is the basis of our economy. People panic whenever consumer spending drops and many bailouts, specifically the government "stimulus checks," are directly aimed at increasing consumer spending. But long-term economic strength is based on what a society produces, not what it consumes. Seems like common sense, doesn't it? Yet our economic policies are overwhelming geared towards stimulating consumption.

As a nation we have consumed more than we produced for so long that people think that this pattern can be sustained forever. It cannot. Someday we will have not only to produce the same amount as we consume, but to produce even more than we consume in order to pay back all the debt we've racked up. But as we've seen so many times recently, unsustainable trends like these are often ignored and rationalized until they become crises.

This misunderstanding is tied in closely to the above idea that debt doesn't matter. When the debt starts to matter -- as it inevitably will when our creditors eventually come calling -- it will be clear that it would have been much better to encourage the development of more productive capacity and earning potential rather than to stimulate consumer spending.

A rise in home prices is the same as saving. During the boom we constantly heard that it didn't matter that Americans spent more than they earned. Their home prices were going up, we were told, so the country was getting wealthier. This reasoning is very flawed.

An individual who owns a home that goes up in price can indeed become wealthier if he sells the house. But in that case, the person to whom he sells has to come up with the money to buy the house. There is no increase in overall wealth -- just a transfer of wealth from buyer to seller. If on the other hand the owner keeps the house and takes out some equity, he has to borrow money from someone else in order to do so. Again, there is no net increase in wealth -- just a temporary transfer of money from lender to borrower.

Saving is the act of foregoing current consumption in order to use your capital (money, in this case) at a future date. From an overall standpoint, rising home prices (or any asset prices, for that matter) do not lead to any increase in society's accumulation of saved capital.

High asset prices are good for the economy. Over the long haul, society's prosperity is dependent largely on how effectively it utilizes its resources, including its people, its natural resources, its existing means of production, and its saved money. The purpose of the investment markets is to foster the most efficient allocation of saved money. To this end, neither high asset (specifically stock and bond) prices nor low asset prices are desirable.

When asset prices are too high, it is too easy for businesses to gain access to capital (again, money) and many inefficient business ventures will be funded, thus wasting society's resources. Good examples of this phenomenon from recent times include the free-spending yet profitless dot-com companies during the tech stock bubble and the glut of McMansions in the Inland Empire more recently. In both cases, society's resources were squandered because asset prices were too high.

If asset prices are too low, on the other hand, it is hard even for viable businesses to gain access to capital. Society's resources will not be used to their full potential. It's tougher to find recent examples of this phenomenon, given that so much money was until recently chasing financial assets, but it certainly has happened in times past.

If asset prices are too low, it's better for them to go higher. Everyone can probably agree to that. But if asset prices are too high, such that they are encouraging a wasteful use of resources, it's better for society's long-term prosperity that they go lower. A big part of the current (and future, I surmise) bailouts entails propping up asset prices. This is bad for the economy in the long haul.

Inflation isn't inflation unless it shows up in the CPI. A sensible definition of inflation, I would think, would be: "your dollars buy less." As such it makes sense that inflation can occur in anything that can be bought with dollars. Anything can become more expensive, after all. This includes consumer goods as well as producer goods and even financial assets. (What we saw with the tech stock bubble and then the mortgage-backed securities bubble was rampant inflation in financial assets in which prices of those assets rose in great excess to their capacity to generate future earnings.)

But the government has this inflation measure called the Consumer Price Index, or CPI, which measures changes to consumer goods and services prices. There is nothing wrong with this, but the problem is that if inflation doesn't happen to show up in the CPI, it is ignored.

Here's one recent and significant example of why this matters. The CPI happens to measure rents instead of home prices. So when home price inflation raged here in San Diego during the housing boom, it never registered in the CPI. And thus, as far as mainstream economists were concerned, those 25 percent per year home price increases weren't "inflation" -- even though by any common sense definition, inflation is exactly what they were.

Money supply growth does not matter. OK, despite earlier promises I've long since entered the weeds. Last one. It's pretty widely acknowledged that over the long term, inflation is a function of how much money is created. But per the above item, if the money supply increases and the resulting inflation happens to take place in items not measured by the CPI, it's deemed to be a non-issue.

Rampant home price inflation, to continue with the above example, was deemed to have nothing to do with the breakneck pace of money creation that took place earlier in the decade. That was just a coincidence, we were implicitly told. Instead, the home prices were deemed by the establishment to be fundamentally sound despite the fact that prices were far higher than those fundamentals would have dictated. After all, market prices must be right, no?

And with that we've looped around to the first misconception. I'll stop now. I realize that I've blazed through some pretty complex topics here, but I believe that most of what I'm saying aligns with common sense. Hopefully this provides at least an idea as to some of the the flawed, unrealistic, and often nonsensical ideas that infest mainstream economic thought.

The vast majority of policymakers, and Bernanke and Paulson in specific, cling to a dangerously misguided analytical framework. That is a huge problem. The best fix we could put in place for the long-term health of the economy would be to forsake the wrong and now-disproven framework and to embrace a view of the world that, while surely less appealing to quick-fix oriented politicians, is both more realistic and more focused on sustainable long-term prosperity.

Unless and until this happens, I don't expect any of the bailouts to do much good in the long run.

-- RICH TOSCANO

Friday, October 3 -- 4:13 pm

August Housing Supply and Demand

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The number of resale homes sold in August was up 9.0 percent from a year prior. Inventory was down over the same period by 11.2 percent.

Putting supply and demand together, there were 6.9 months' worth of inventory for sale in August -- substantially better than August 2007's 8.4 months and just about the same as the August 2006 figure.

The 6-7 months' worth of inventory we've been seeing lately would in normal times be the hallmark of a reasonably healthy, if not exactly fast-paced, market.

But these are not normal times, as the following graph of foreclosure activity indicates:

More existing homes are entering foreclosure each month (the blue line) than are being sold. That situation is unprecedented, as far as I can tell, and it's clearly not a positive. So while the first graph would indicate that supply and demand are getting back into balance, the ever-fuller pipeline of potential must-sell inventory depicted in the second graph shows that things are more out of whack than they seem.

-- RICH TOSCANO

Friday, September 26 -- 7:31 pm

More San Diego Job Losses

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This month's employment estimates show a deterioration in the retail sector but a slight improvement in the construction sector. Other than that the region's job growth, or lack thereof, has been on a path similar to recent months. So I will simply note that overall employment fell by 5,700 jobs or .4 percent from last year and then move on to the graphs.

The first graph is the usual one displaying the number of jobs gained or lost by the housing beneficiary sectors (construction, finance/real estate, and retail), the rest of the economy, and all sectors combined on a year-over-year basis. Each month's data point represents the year-over-year change for that month (I use this technique to smooth out seasonal effects).

This next graph is the same as the first except that it displays the percent change to the size of each sector rather than the number of jobs gained or lost.

The third graph shows how the three housing beneficiary sectors (in red, dark blue, and light blue) have offset growth in the rest of the economy (in green).

In short, the non-housing portion of the economy continues to grow -- but not as much as it used to, lately, and no longer as much as is necessary to offset the decline that originated with the housing bust.

-- RICH TOSCANO

Tuesday, September 23 -- 9:15 pm

It's Bailout Week!

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Earlier in the week I jokingly suggested that the federal government was limiting itself to one financial industry bailout per day. Well, that was sure wrong.

Let's review the week so far:

• The Fed announced it will lend even more to financial institutions (many of them not under the Fed's regulatory authority) in exchange for even more dubious collateral than before. This allows everyone to continue to pretend that the collateral, such as some subprime mortgage backed securities, is worth more than it actually is, which in turn allows everyone to pretend that financial institutions have more money than they actually do.



• Because the Fed has run low on funds due to all of that lending, the Treasury announced it will borrow more money to give to the Fed so that they can keep up their lending and continue the charade described above.



• The Fed nationalized insurance giant AIG (also not under its regulatory authority).



• The Fed pumped a hundreds of billions of dollars into the system both domestically and globally via loans to foreign central banks.



• In an fit of open market manipulation and blatant industry favoritism, the SEC banned short selling for 799 financial stocks.



• The Treasury announced that it will earmark $50 billion to protect the value of money market funds.



• This is the big one. The Treasury announced that it will start using taxpayer money to take junk assets off the hands of financial institiutions. Remember back in the housing bubble when you asked yourself what idiot was making these super risky mortgage loans that would clearly never be paid back? Turns out that in the end, it was you (and the rest of the taxpayers).

NY Times articles here and here do a good job of describing all the shenanigans.

For years, almost without exception, politicians and regulators have studiously ignored the mounting financial system risks despite the fact that they were growing ever more obvious (we've been writing about them here at Voice since 2006). In fact, many of our leaders cheered on the "financial creativity" and encouraged, by word or policy deed, further risk taking. Now that the consequences have arrived, they are panicking and throwing vast amounts of your money at belatedly fixing the problems that they so recently denied even existed.

Our heavily indebted federal government does not actually have the hundreds of billions of dollars required for the various financial industry handouts. The money will have to come from somewhere, be it via borrowing, increased taxation, or the metaphorical dollar printing press. In the end, it is the nation's savers and taxpayers who will end up on the hook.

-- RICH TOSCANO

Friday, September 19 -- 1:53 pm

Another Huge Bailout or Two

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I spoke too soon yesterday. After Treasury Secretary Paulson apparently refused to bail out AIG, the Federal Reserve stepped in and cut the mortgage giant a check for $85 billion in exchange for 80 percent of AIG shares. That $85 billion of taxpayer money is just a loan, we are told, but I don't quite understand the distinction between and loan and a handout when the whole trigger for this loan was that AIG is unable to pay back its other loans.

Once again, this is being covered everywhere in the MSM. Here's a good overview.

Although a cut in the Fed funds rate had become widely expected by yesterday, the Fed ended up holding rates steady. Perhaps they are trying to limit themselves to one Wall Street bailout per day.

Today is a new day, however. The Treasury has just announced it's going to borrow some extra money to hand over to the Fed.

The Fed, via its assorted acronym-tastic lending facilities, has been lending out money (or Treasuries, aka government bonds, which are just as good) to financial institutions in exchange for assets of more dubious value such as mortgage-backed securities. As I noted in yesterday's post, they just announced that they will accept even more questionable collateral and that, for the first time in history as far as I know, they will accept stocks as well.

These lending facilities allow financial companies to get money (temporarily, admittedly) in exchange for their assets without having to sell them, thus propping up asset prices. The problem is that the Fed has run a little low on funds as a result of all lending. So the Treasury is borrowing more money -- to be eventually be paid back by you, the taxpayer -- so that the Fed's handouts to Wall Street don't miss a beat.

Despite the government's tough talk earlier in the week, the bailout machine appears to remain fully operational.

-- RICH TOSCANO

Thursday, November 6 -- 9:07 am

One-Two Punch for the Default Swap Market

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A quick update to the last post. This morning I read in Housing Wire that ailing insurance company AIG poses an even bigger threat to the CDS market than Lehman:

AIG sold banks and other investors CDS protection on $441 billion of fixed-income assets, including $57.8 billion in subprime-mortgage related securities. There are likely very few firms with this much exposure into the CDS market...

My snarky comment in the prior post notwithstanding, the folks at the Treasury have to their credit not directly bailed out either Lehman or AIG. (They have stepped up the indirect bailouts, however: the Fed will now be lending more money to more people with more questionable collateral, and word is that they may also cut rates again today.)

But while they are finally turning some pigs away from the trough, the government's frantic interventions to date suggest that they will not sit idly by as things get really out of hand. We shall see.

I haven't gone into much detail on this week's drama because for the most part I'd be rehashing what's already been, uhm, hashed many times over. All the mainstream outlets are covering the issue, but for good up-to-the-minute updates and commentary the folks at the blog Naked Capitalism have been doing an outstanding job.

-- RICH TOSCANO

Tuesday, September 16 -- 8:34 am