More Spanish Mortgage Data

Indexing INE mortgage issuance data to the beginning of the series produces the chart on the left. Some things stand out.

1). From early 2005 through at least late 2007, one can note a pronounced deviation of totals loaned from number of mortgages contracted. This reflects price increases, the greater willingness of bankers to finance beyond 80% of the value and the vibrancy of the higher end market;

2). The marked volatility of the same two series from mid-2005 through most of 2008 is (aside from the expected effects of Easter, Christmas and August vacations) was a result of the sheer volume of pre-sold new projects coming on line. Work is finished, approvals are granted and suddenly a 200 unit promotion represents 200 new mortgages. The data will have a tendency to clump*;

3). The noticeable improvement in both numbers and value of mortgages contracted in recent months may be the result of pent up legitimate demand usatisfied during the credit crisis. The lag between approval and the actual depositing of the money in a creditor's account is likely in the range of three months. But it probably also represents more certainty on the part of financial institutions concerning their ability to assess risk and a greater willingness of potential buyers to proceed. Clearly, these do not expect more negative surprises on the macro-economic, or personal, front;

4). Despite the fact that both numbers and total value of mortgages have stabilized in recent months, their average value continues to fall. This is possibly representative of price adjustments, the new found common sense of bankers and the utter collapse of the luxury trade.

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*A perfect example of this effect is the latest offering from the multiple loudspeakers of Edward Hugh's re-education camp. His proposal that the fact that the assessed values of new dwellings have tanked in various (but by no means all) municipalities in Madrid is representative of anything at all reveals his utter lack of comprehension of the data presented.

The assessment of new projects is done on a mass basis. This is to say that when a new project of, say, 100 units, is finished the assessor moves in and does them all. Hence, the series is skewed by the sudden appearance of that number of near identical (in price per square metre terms) homes - the totality of these statistically, in the real world, being only one data point.** This does not happen in the case of second hand residences, which thus constitute a much larger, more reliable and independent sample. The difference is evident in the chart above. Note the near tenfold difference in the results for Colmenar Viejo - and the, interesting in its own right, coincidence of the two categories in many of the lower income suburbs to the south of Madrid city.

As an aside, the offending entry itself was a repeat, without any further analysis, or probably even bothering to look at the source data, of an article in idealista.com - a website exclusively dedicated to marketing residential properties. The reader, and Mr. Hugh, would best consider this a mild, and legal, form of bait-and-switch.

The Ministerio de Vivienda source spreadsheet can be found here.

**Magnifying this effect was the continued diminution of apartment size over the course of the period, and the corresponding increase in numbers built and later assessed per buildable surface, as developers tried to keep price entry points constant without prejudicing their margins.

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Productivity and Unemployment

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The above chart, derived from OECD data, shows the year-on-year changes in labour productivity (measured as GPD per hour worked) for a selection of countries. Readers might note that in 2007 Spain led the United States, France and Germany in this regard and, in 2008, only fell behind the U.S.A.

We thought this to be a touch odd, and drew up the next graph, from OECD, Eurostat and INE data.



It shows the Spanish unemployment rate (divided by 100 to make it scale properly) alongside the measure illustrated above, all from 1997 to 2008. Decreases in the UR are always accompanied by the same in the productivity measure - and vice versa.

This writer thinks that the chart bears some witness to the, now widely reported, expansion of the submerged economy here. The relationship is simple. When times are good, unregistered workers sign up officially, or get signed on by their employers, in droves and reported hours worked increase.* The dip arrives and the brunt is taken by government finances as everyone involved starts gaming the system by falsely reporting reduced hours or outright unemployment. Hours officially decrease and productivity smells like a rose.

Readers should feel free to suggest other explanations, but we continue to see reasons to not take to heart Spanish economic statistics.

*Among the reasons for this would be that small enterprises suddenly become big enough to appear on the social security and Hacienda radar.

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The Credit Bubble Lives

There has been a fairly generalized consensus that one of the sources of our current economic straits was the widespread availability, and subsequent abuse, of credit. In the simplest terms, many wrongly thought that reeling in resources from the future to fund a present, that would presumably be unsatisfactory without this facility, was a rational life plan.

Little did we know, at least until Edward Hugh gladly straightened us out yesterday, that this strategy can also be used in the provisioning of evidence to back a thesis.

In a post entitled, Three Million Unsold Properties In Spain? (published in Spain Economy Watch, A Fistful of Euros and probably the five or six other blogs to which he cross posts his stuff in order to clog up Google searches with the one true truth*), Mr. Hugh reveals the existence of 1,098,264 heretofore unaccounted for dwellings - adding yet another millstone around the neck of the Spanish economy. The figure comes from a recent study of Spain's property and construction sectors and appears in the table on page 34 with the heading, 'Viviendas no iniciadas con proyecto' - a good enough translation being 'Homes not started but with approvals in place'.

Can the reader see the similarities here?

Edward, apparently not getting enough bang for his histrionic buck from current data, ups and decides to borrow a million homes from the future and add them to the present stock. This may be effective in a headline generating (if not factual) sense, but he should be advised that it is not a costless or risk free gain. In some admittedly far distant future, when those projects slowly begin to wake up, he will have to remove them from any calculation he might conjure up concerning the resumption of an unsustainable real estate trade. That's how credit works.

Not that we expect him to honour the rules of coherence or fair play, we'll also point out that there are 327,350 dwellings started, but stopped only partly finished (which Mr. Hugh wrongly identifies as being 'under construction', duplicating the prior category on the table) which also have to be withdrawn from play. To repeat: spend them now, you can't have them later.

There is one group of Spaniards that may, on the other hand, take heart from this numerical legerdemain - those that find themselves shut out of the home buying market for reasons of price, income and accessibility of credit. They will, in this magical world in which homes require neither roofs nor walls nor electricity nor plumbing in order to be defined as such, probably be able to pick up a nice three bedroom in Arturo Soria for about 50,000 euros, say.

*Some of these are listed in the sidebar links under the heading, 'What Gutenberg Hath Wrought'.

Update 20:52 same day

The above mentioned piece has now undergone its (at least) second re-edition in twenty four hours. The first was in response to a comment which we sent questioning certain aspects of his analysis. Having 'comment moderation' set to 'on', our remarks were apparently not seen as fit to be viewed by minors. The suggestion was, however, taken to heart and the appropriate changes were made.

Today's edit involves the correction of the 'under construction' error mentioned above and the insertion of, ...together with the 1.098 millon for which planning permission has been granted and which now have two years - by law - to be completed...'. This is quite true. Unfortunately for the thesis, the fact is that the penalty for not beginning construction within two years of receiving the approval is the expiry of the work permit... which, in the unlikely event that we're thinking clearly, seems to imply that they would no longer count as viviendas no iniciadas con proyecto from the moment that they had outlived their legalized status. Taking a reasonable guess that the bulk of these enterprises would have dated from late 2007 forward, one would not be remiss in believing that the most of these phantom houses will cease to exist in even a statistical sense by the middle of next year.

Will Mr. Hugh, at that point, post an article on the rapidly dwindling Spanish housing stock? Don't bet on it.

Check it out here - before it gets edited again.

By the way, no charge for the redaction services, sir. A citation would be nice, though.

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A Chart

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Bad Omen?

Front running horses, even those entered at a distance, are the most exciting to bet. Clutching your ticket, the gate opens and you are immediately counting your winnings - until darling Alpo is run down by the entire field in the last furlong.

May that not be the fate of Tuesday's little eight stock long-short quant - to glorify what is simple arithmetic - experiment. Up an unsustainable 1.7% in three days, slightly outperforming the index in the process. Despite its early success, we still think the logic behind the selection is sound.

Aside from posting a chart showing its progress, we've made a couple of other changes to the sidebar contents and organization.

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Latecomer's Lament

The Spanish Ministry of Housing releases a wide variety of property-related statistics on a quarterly basis. Many of their studies, particularly those that claim to represent price levels, are useless beyond description. Supposing, however, that they cannot mess up too seriously a time series consisting solely of the number of transactions involving raw land, we have graphed our index of this measure, on the left.

The blue line shows the numbers for all of Spain, up in the last period but not showing any real change in a general downward trend. The red shows the same for the Autonomous Community of Madrid - the capitol and surrounding areas. After bottoming in Q3 of 2008, land transfers there have returned approximately to 2007 levels.

Note also that the above figures for Spain and Madrid dropped precipitously over the course of 2005 - a roundabout way of confirming that nobody made any money at this game with investments made after 2004 - buying the low volume top, as it were. One could also make the possibly far-fetched assumption that many builders and promotors knew by then that the game was over. These may have not made out so badly but for the continued entry of suckers and true believers.

Thinking of this last group, the yellow line on the graph shows the same stats for Castilla-La Mancha, the community which surrounds Madrid on three sides. The region apparently kept the raw land ball rolling right into 2008. We guess it comes as no surprise that Caja Castilla-La Mancha is the only Spanish financial institution to date taken over by the Banco de España. Under government management, CCM still sports a 12% overall loan default rate on a book 40% devoted to funding the real estate trade - this not including individual home mortgages.

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Don't Try This At Home

Suffering from the same lack of serviceable ideas as this guy (but not this one), we are putting together a little portfolio based on dreaded 'technical' indicators - one, in fact.

The culprit is a hand rolled item, using weekly data, that might give some indication as to the willingness of market participants to hold on to positions for more than five minutes at a time, say. Bounded by 0 and 100, the calculation does not result in anything that could be remotely described as 'momentum' or any other misapplied physical metaphor - 'up' and 'down' being other examples of this.

Longs
1). Insurer Mapfre (map.mc on Yahoo!) - 2.97€;
2). Software place Indra (idr.mc) - 16.69€;
3). Banco Popular (pop.mc) - 6.975€;
4). TV station Telecinco (btl.mc) - 8.845€.

Shorts

1). Energy infrastructure outfit Abengoa (abg.mc) - 20.825€;
2). Infrastucture constructor ACS (acs.mc) - 35.80€;
3). Bankinter (bkt.mc) - 8.745€;
4). Media company Prisa (prs.mc) - 4.115€.















The basic plan is long readings over 70 and short those under about 60 that were once above 70 - these latter not 'confirming' current repeat local maxima in the stock price. We'll pop up a progress graphic when we have a few days under the belt.

Readers, as always, are reminded not to take this as a recommendation.

The chart at the top of the page shows the line for Smith & Wesson for the last few years. Nice argument for a short position right about now - at least according to this plan.

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Home Sales Update

The INE has released Spanish property transfer statistics for the month of July. Worth noting are the following points:

1). The number ownership changes of used dwellings has rebounded to just shy of October 2008 numbers;

2). The month-on-month percentage change in the 12-month rolling sum of the above is -2.2%, the best reading since the series begins in January 2008 - and 1.93% above the average for the period;

3). For the first time in a year, the number of used and new residences transferred are approximately equal.

Unfortunately, the INE is not near as quick in producing their quarterly House Price Index, which also distinguishes between new and used residences. Up until the first quarter of this year (date of the last report), prices of the latter had plummeted with respect to the former. A continuation of this trend into the summer would go some distance towards explaining the sudden upsurge in sales - possibly contributing to the establishment of a knowable fair market value for homes in general in the process.

Given (and, yes, it is a given) that real estate is the fundamental store of value to Spaniards - beating out money itself by an unassailable margin - some clarity in this regard would certainly be positive for the national economy.

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Early Warning

Drawn from the INE's Spanish unpaid merchandise statistics, the chart shows the number of occurences breaking above the 500,000 mark, for the first time since 2003, in the spring of 2008. The number, in blue, has now dropped below that figure and into the high end of its normal range since 2002. Notable is the exuberance of the red line representing the average (and unadjusted for inflation) value of these returns beginning in mid-2007. It is falling quickly, but still has a ways to go before making its way back to expected levels. That would be continuing hangover from the credit/expectations bubble.

Astute readers will note that both of these measures of stress (but especially the latter) led GDP stats by a good temporal margin.

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The Sky Is Falling

Reader JL has recently suggested that we forget about the Millionth Monkey and all that other blather and, instead, go back to the land - this with the caveat that we watch out for falling airplanes.

Referring to Friday morning's crash of a Spanish Air Force Mirage up the road from us a short piece. Little does he know that about ten minutes after the incident occurred (and as yet unbeknownst to ourselves) we were taking a break from agricultural stuff at the truly fabulous Bar-Restaurante-Gasolinera 'Cruce de Chilluévar' - number 1 on the map - when we heard the roar of fighter jets overhead. Looking up, we noted the leader of the four signalling something or other to the rest with a wag his wingtips, and they all veered off to the left, presumably to check out the crash scene - number 2 on the map.

Thanks for your concern JL, but we've got that situation covered already.

Speaking of falling skies - we noted that the apocalypse crowd has lost an invaluable, if never actually willing, ally. Although never affiliated with that lot in any way, Willem Buiter's really hard-nosed analysis has been a constant source of invaluable legitimacy for the worst case scenario crowd for the last couple of years. Last Thursday's piece will have put an end to that intellectually uneven relationship.

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Sorry, But We Can't Help It

Bored, we decided to have a look - for the first time in weeks - at the Millionth Monkey, Zero Hedge. This was the lead post at 8 PM CT.

Cut and paste of the first line, with boldface theirs:

Yields 3.510% vs. Exp. 3.350%, 16 bps miss in final High vs. Exp.

Whatever member of the fuckwit collective was posing as Tyler Durden at that moment was plainly too stupid to even suspect that the 3.350% 'expected' number, wherever he or she may have read it (assuming literacy, of course), might be a little out of line.

Fact is it was 3.53%, buyers knocking two bps off in their eagerness to get on the ten-year bus.

As a fun aside, the banner ad appearing at the top of the page was for some boiler room place touting investments in lithium. Maybe they should just take some.

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What Does The Bond Market Think?

At the end of August, Santander announced that they would bid to buy back 16,5 billion euros of asset-backed bonds at a secondary market beating average of a bit over 80% of face value - this figure notwithstanding the usual media citing of the worst case, 61%, as the typical - and the uptake was dismal. Reuters reports that a mere 600 million were tendered. That's 3.6% and should give an indication of where institutional investors think the risks to the Spanish banking system lie.

Similarly, the most recent Banco de España bulletin notes yesterday's auction of 1.55 billion two-years, yielding at the average bid 1.527% - 25 bps over the similar German bond in the secondary market, and 3.26 billion of five-years turning over 2.797% to their holders - 43 bps over the Deutsch version. Invertia tells us that the BE had originally intended to issue between 3.5 and 4.5 billion euros worth. The final tally was 4.811 billion for the two series.

Interesting to know, when they become available, will be the results of a three-year US dollar issue auctioned yesterday.

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Maybe Later

As the reader might imagine, we were not all that eager to sell into yesterday morning's equity action. So we didn't. Today, the whole mess is starting to look like a repeat of the springtime.

Long: equities, gold, schatz.

Short: dollar, bund.

Is it going to be like this for the rest of our lives?

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Mutiny

Today's full frontal broadside (yeah well, whatever - it sounds good and it stays) against the economic policies of the Zapatero government in the weekly business supplement of this morning's El País came with the added extra, at least for that newspaper, of an open 'comments' section. At this moment (4:50 PM), 369 readers have voiced their opinions, and the number seems to continue to increment at a rate of about one every two minutes. And it is not a pretty sight.

Having read through several pages of these generally well expressed remarks, the closest we can find to actual support from the readers of the daily that since its inception at the hands of Juan Luís Cebrián (this writer's grandfather's godson, by all accounts*) in 1976 has been the right hand of the dominant PSOE version of Spanish socialism - are the occasional remarks that the 'other guys' are worse. We all know the term, 'swing voter'. Right?

The lead article - first of many of the same style - is entitled 'Rudderless'** (the link's at the top of the page) and comprises a nearly four page litany of the ineffective measures and conflicting and ever-changing policies that have characterized the socialists' crisis leadership. The picture at the top, showing Zapatero steering the ship of state through waters infested by three sharks named 'Deficit', 'Unemployment' and 'GDP', occupies 80% of the front page of the supplement.

We've said it before and we continue to believe that he will not finish out his term. That his latest salvo directed at the beast consists of a 'guarantee' that pension payments will continue to increase, recession, deflation and fiscal deficit notwithstanding, has us hoping that this takes place sooner than later.

*That our cousins, cripto-fascists and Franco-piners that they all are, would even admit this leads us to believe that it is true.

**For readers not fluent in Spanish, with some luck a version of this may be incuded in an upcoming edition of the International Herald Tribune.

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Addendum

Thinking about this morning's post later in the day, we might start getting short equities on Monday morning. That looks like a setup just begging for someone to shout 'Fire!'.

The usual disclaimers about doing one's own homework.

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Heat Wave Brings Record Snowfall

Markets, as if consciously conniving to piss up a perfectly good American end-of-summer party, closed the week with a spectacular display of the unknowable.

Friday's Labour Day weekend weather report:

1). Gold right up to the brink of $1,000. Copper not totally impressed, however;

2). The steepener in play once again - at the expense of short yields, not the bund. 10-years outside Germany were another story;

3). The VIX, right jittery mid-week regained its composure by Friday as equities did little, but threatened to the downside;

4). And EUR/USD? Up-ish looking, if you're a stickler for minute details.

Too many charts for the sparse text. Click on the links to see what we're talking about.

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Don't Like The Game? Change The Rules

Apparently taking heed of our warning that the salad days (for those who gorge themselves on the green shoots of adversity) of horrific year-on-year declines in economic statistics were coming to an end, Edward Hugh has come up with a plan - compare everything to the peak, forever. From his latest:

...I have also introduced a new measure - P2P - which stands here for "Peak to Present", since after 12 months of decline the year on year measure is no longer interesting, and more than often misleading.

This fatuous statistical sleight-of-hand, journalistically clever as it may be, is unsatisfactory on at least a couple of levels:

1). It implies that the economic activity generated during a credit, and coincident asset price, bubble of unusually large proportions is the measure against which recovery should be measured. Is his official position that the bubble was sustainable? Admitting, of course, that this ploy will allow him to presume that he is right for a good number of years - recovery will be slow - it strikes us as also being a good excuse for the immediate republishing of a 'NASDAQ is doomed forever' headline that one might have read in late 2002 and its continued appearance until the index hits 5132.52 points once again;

2). The tactic of quoting a non-standard (especially with regards to the time frame) data set when making an argument ensures that Mr. Hugh will never have to suffer the indignity of a peer group comparison - being equivalent to claiming victory at a debate conducted in Catalán in which he spoke in Sanskrit.

An interesting feature, by the way, of this latest advance in the clear-headed analysis of Spain's economy is its similarity to the gambit being employed by both governments and financial institutions, in countries throughout the world, to escape the current conundrum - drag the demise out over as long a time line as possible, and keep up the spin. In light of his recent insistence that the Spanish banks renounce their contrivances and confess their sins immediately, we have to ask:

Is what's good for the goose not for the gander?

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The Raw And The Cooked

One of the nice things about the inexorable passage of time is that, in a downturn, eventually the shockingly bad year-on-year economic statistics that are the primary fodder for the noisy and gaseous ruminations of a certain class of analyst, flatten out. When that happens, the pundits are stuck with the raw data - a far less fertile font of flatulence.

The first chart on the left shows the absolute number of house sales inscribed at Spanish land registry offices. Readers might note that there is some probability that, when the September and October, 2008 spike in sales falls off the back of the series, the 'sky is falling' game will be over.

The second chart shows raw numbers of residential mortgages constituted. It is very hard to imagine this number not being postive when the November, 2009 report comes out.

Salvation might, however, be found in the rolling twelve-month sum of new home sales - pitching headlong towards Hades in the third chart. Those less easily hipnotized by the mere trajectory of a brightly coloured line will read the vertical axis and perhaps marvel at the fact that 240,000 of them were sold in the last year - presumably because many Spaniards thought that it would be more agreeable to witness Armageddon from the vantage point of a brand new flat. Add to this that the stock of new residences will cease to grow right about now because almost no ground was being broken by the end of 2007.

A look at the website set up by Banco Santander to sell off foreclosed and exchanged-for-debt properties is fairly interesting in this regard. Comparing Madrid with a Mediterranean coastal area like Almería, the difference in rates of success is notable. The obvious conclusion to be drawn is that, with demand concentrated in the area of large capitols, these areas could prove themselves to be underbuilt sooner than gross national statistics would suggest.

As an aside, the first graph also shows the progress of the sales of second hand homes, which have really taken the brunt of the downturn. This is to be expected. Who would buy a used residence with so much brand new on offer at competitive prices? The advantage for the banks, and the Spanish economy, is that potential mark-to-market losses resulting from a collapsed property trade become progressively more concentrated in a sector that, generally speaking, does not have to do that calculation. In terms of sheer numbers, sales of used homes, which outpaced those of new by 50% at the beginning of 2007, now have been trailing them by about 20% since August of last year. The natural implication would be that the beginnings of some sort of price equilibrium have been established - at least in the larger cities.

Those thinking there might be something to be made on the basis of this should keep in mind that that same large stock of used homes will put a cap on prices for new construction for a long time - although well-priced second hand digs might avail themselves of mean reversion effects that will surely result from the current situation. And Spanish builders and developers? Horribly overpriced right now, but gains on the short side may be restricted to those attributable to the correction of that condition. In the event of localized resurgence of the business at some future point, the high unemployment rate and the huge overcapacity in the materials industry will ensure that they can extract good margins at depressed real estate price levels.

Charts from data to be found at the Instituto Nacional de Estadística.

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