G3 Recap 3-29-11

Main Items:

  • Conference Board Consumer Confidence dropped to 63.4 in March vs 65 expected and 72 previously.
  • S&P cut Portugal to BBB- from BBB, outlook negative
  • Case/Shiller 20 City Home Price Index fell -22bps in Jan vs -44bps expected. This takes the YoY print to -3.1% vs -2.4% previously.
  • Wheat – India’s the world’s second largest wheat grower, could end a ban on exports as production is expected to top forecasts – Bloomberg
  • Food inflation kept hidden by smaller packages according to the NYT – says that instead of raising prices, companies are decreasing packaging sizes.


  • German GfK Consumer Confidence declined to 5.9 in April vs 5.8 expected and 6.0 previously.
  • Italian Business Confidence improved to 103.8 in March vs 102.5 expected and 103.0 previously


  • I want to talk a bit about the US housing market today before we shift focus to payrolls later this week.
    The direction of the housing market has sizable effects on growth due to the wealth effect. Most research estimates suggest that consumers spend on average 3-6% of every $1 increase in perceived wealth. Current futures on the Case-Shiller 10 city index project a 6% fall over the next year:

    The latest Fed Flow of Funds report shows a total household residential equity of 14.1 trillion and asset of 16.4 trillion – suggesting that a 6% drop with a 5% wealth effect could have a negative impact on GDP growth of -50bn or -0.3% over the next year. It is likely that the effect is actually asymmetrical because of current negative expectations.

    This is relevant because recently net apparent demand, proxied by the differential between existing home sales and single family home inventory, has improved. (green line below) The last such improvement, driven by the federal housing credit, halted the decline in home prices and even generated a small uptick:

    However, this doesn’t adjust for the fact that a great deal of home inventory remain as part of the shadow inventory – homes that are near or very likely to default in the future. If we adjust the net apparent demand using simplified assumptions for likely default based the number of months that homes have been delinquent, the picture becomes much less rosy: current levels appear to only leave the market balanced. (in red above)

    More forward looking indicators such as the MBA purchase index (based off of the number of new applicants for single home purchases) are bleaker – while the index is off its 2010 lows, it remains at levels not seen since 1997:

    No brilliant conclusion here – it’s going to take a while to work through all that inventory, which means that unless we get a massive surge in household formation, single home prices are going to be stable or lower for the foreseeable future.