This was a big day for economic reports and the Case Shiller Q4 report, the Consumer Confidence Index, and the FDIC Q4 report came out with not-so-surprising results. Since I am occasionally accused of cherry-picking negative data, I wish to point out that the following is a report and analysis of the data as it is with hyperlinks to the sources if you wish to see the original data yourself and try to squeeze good news out of them.
Case Shiller Housing Report
Here are typical news reports on housing:
For the fourth quarter, the S&P Case-Shiller U.S. National Home Price Index posted a 2.5% decrease from a year earlier, a significant easing from the 19%, 15% and 8.7% declines in the rest of 2009. It fell 1.1% sequentially but rose 0.3% adjusting for seasonal factors.
From Bloomberg:
Home prices in 20 U.S. cities rose in December for a seventh consecutive month, indicating the industry at the heart of the worst recession since the 1930s is stabilizing.
The S&P/Case-Shiller home-price index increased 0.3 percent from the prior month on a seasonally adjusted basis, more than anticipated and matching the gain in November, figures from the group showed today in New York. The gauge was down 3.1 percent from December 2008, the smallest decline since May 2007. …
“The rebound in the housing market since April seems to be related to” government efforts such as the homebuyer tax credit and the Fed’s purchase of mortgage-backed securities, Robert Shiller, who co-created the home-price index, said today in a Bloomberg Television interview. “A lot of people are coming in buying because they think the recession has just ended.”
Shiller’s comment makes a lot of sense. This is an artificially stimulated market to a great extent. While I believe that the prime driver is lower prices, when the government shuts down the home buyer tax incentives in April, the market will pick up the down trend for a while.
I was intrigued by a report from my co-reporter, Tyler Durden at Zero Hedge, who brilliantly noted a flattening in the improving rate of decline of housing prices: September 146.7; October 146.59; November 146.25; December 145.90. Here’s my chart on the trend from 2007 to the present. Note the slight rise begin to flatten and decline again in September (red line):
While small, the data fits in with the assumption that the incentives have run their course. According to the Report, only 4 of the 20 cities reported increases in December over November: Detroit, L.A., Las Vegas, and Phoenix — where the deals are.
However, as they say, all real estate is local and much of the overall quarterly decline was due to Las Vegas, Phoenix, and the Miami-Tampa area. The Report noted
The biggest [quarterly] month-to-month gain was in Los Angeles, where prices rose 1.4 percent. Home prices rose an adjusted 1.2 percent in Phoenix, 1.1 percent in San Diego, and 0.9 percent in both Boston and Las Vegas.
I see a lot of flippers back into the markets taking advantage of foreclosure and short sales which puts a floor under the market. L.A.’s growth is a direct result of this as buyers smell bargains. I think demand will remain as prices continue to decline, although at a slower pace. There are still too many potential foreclosures out there (3 million per RealtyTrac) to justify a resurgent market, but buyers find that attractive right now.
Consumer Confidence
The Conference Board’s Consumer Confidence Index took a big hit as it fell 10 points, from 56.5 in January to 46.0 in February. The Journal’s survey of forecasters predicted the Index to be 54.8, while Bloomberg’s panel projected it to be 55. Some quotes from the news reports:
“Consumer spending is going to disappoint throughout most of the year,” said Steven Ricchiuto, chief economist at Mizuho Securities USA Inc. in New York. The economy “may not be out of the woods.”
An increase in initial jobless claims so far this year signals the labor market isn’t improving, said Ricchiuto. Claims rose to 473,000 in the week ended Feb. 13, compared with 432,000 at the end of 2009, the lowest since July 2008.
“Fewer consumers [are] anticipating an improvement in business conditions and the job market over the next six months,” said Lynn Franco, director of the Conference Board Consumer Research Center. “Consumer also remain extremely pessimistic about their income prospects.”
Now they tell us. I wonder what they would have said if the numbers were a bit better.
FIDC Q4 Quarterly Banking Profile
The big banks are doing much better but the data looks bleak for the rest of the banks. Here are the key points of the FDIC report. This is fascinating data and I am excerpting it in detail because of the significance:
- Total assets [i.e., loans] of insured institutions fell for a fourth consecutive quarter, declining by $137.2 billion (1.0 percent). During the year, total industry assets declined by a net $731.7 billion (5.3 percent), the largest percentage decline in a year since the inception of the FDIC [1942].
- The average return on assets (ROA) for all four of the asset size groups featured in the Quarterly Banking Profile was better than a year ago, although only the largest size group—institutions with more than $10 billion in assets—had a positive average ROA for the quarter.
- More than one in four institutions (29.5 percent) reported negative net income for the year, up from 24.8 percent in 2008. This is the highest proportion of unprofitable institutions in any year since at least 1984. The average ROA in 2009 was 0.09 percent, up from 0.03 percent in 2008.
- As was the case in 2008, full-year industry earnings for 2009 (which consist of calendar-year net income of 8,012 insured institutions filing December 31 financial reports) would have been significantly lower if losses experienced by institutions that failed during the year were reflected in year-end reporting.
- The annualized net charge-off rate (NCO) rose to 2.89 percent, up from 1.95 percent a year earlier and 2.72 percent in the third quarter of 2009. This is the highest quarterly NCO reported by the industry in the 26 years for which quarterly NCO data are available.
- NCOs in all major loan categories increased from a year ago. The largest increases occurred in residential mortgage loans, where NCOs rose by $3.3 billion (47.7 percent); credit cards (up by $2.7 billion, or 41.4 percent); loans to commercial and industrial (C&I) borrowers (up $2.3 billion, or 37.0 percent); home equity loans (up $1.9 billion, or 58.6 percent); and real estate loans secured by nonfarm nonresidential properties (up$1.9 billion, or 130.9 percent). This is the 12th consecutive quarter [third year] that NCOs have posted a year-over-year increase.
- The total amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) increased by $24.3 billion (6.6 percent) in the fourth quarter, to $391.3 billion, or 5.37 percent of all loans and leases at yearend. This is the highest level for the industry’s noncurrent rate in the 26 years that all insured institutions have reported noncurrent loan data.
- The average coverage ratio of reserves to noncurrent loans and leases fell from 60.1 percent to 58.1 percent, ending the year at the lowest level since midyear 1991.
- The industry’s ratio of reserves to total loans and leases rose from 2.97 percent to 3.12 percent during the quarter, and is now at its highest level since the creation of the FDIC.
- Bank equity increased by only $4.1 billion (0.3 percent), the smallest increase in the last four quarters.
- During the year, total industry assets declined by a net $731.7 billion (5.3 percent), the largest percentage decline in a year since the inception of the FDIC. Total loan and lease balances declined for the sixth quarter in a row, falling by $128.8 billion (1.7 percent).
- During the quarter, the percentage of industry assets funded by deposits rose from 68.7 percent to 70.4 percent, the highest level since March 31, 1996.
- For the full year, the number of reporting institutions fell from 8,305 to 8,012. Only 31 new charters were added in 2009, the smallest annual total since 1942. Mergers absorbed 179 institutions during the year, and 140 insured institutions failed. This is the largest number of bank failures in a year since 1992. The number of institutions on the FDIC’s “Problem List” rose to 702 at the end of 2009, from 552 at the end of the third quarter and 252 at the end of 2008. Both the number and assets of “problem” institutions are at the highest level since June 30, 1993.
Banks are in deep trouble and their bad debts increase their need to retain capital and restrict new lending. Note that lending posted its biggest decline since 1942! It appears they are in a bad cycle of falling asset values and the drive to meet regulatory requirements for sufficient Tier 1 capital and reserves. Also of note is the fact that deposits are increasing as consumers refrain from spending and increase their savings. What is significant is that many of these statistics are unprecedented or at historic levels.
Here is a representation of bank failures since the start of the crisis, from the Wall Street Journal. Go see the original animated version here.
McKinsey Quarterly Survey
Here is their conclusion:
When asked about the likeliest description of the global economy over the next three months, 46 percent of executives pick “constrained global markets perpetuate imbalances”— far more than choose any other description. This view, along with a dip in the share of respondents who expect their national economies to be better in six months, implies a slight dampening of economic hopes since December. Low consumer demand is seen as the largest single threat to national economic recovery in developed economies.
Respondents in developing economies, however, see a bright picture for both their companies and national economies.
When China’s real estate bubble bursts, will the developing economies be so optimistic?
