Housing Leads the Economy Up AND Down
Two weeks ago, we looked at a few Housing related charts, and discussed what they meant for the overall real estate market.
This morning, we look at three four charts that I believe are telling about both the past 3 years, as well as the next few.
First up is a longer term glance of mortgage rates:
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30 Year Fixed Mortgage; 1970-2006
click for larger chart
Source: Federal Reserve Bank of St. Louis
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Pretty astounding first how low rates were driven by Easy Al, and second, all the sturm und drung over what is essentially a rise to historically modest levels. Note thta during most of the 1980s, when Reagan was Prez and the great Bull market in histroy got underway, mortgage rates were above 10% -- but falling -- for nearly the entire decade.
This chart suggests (at least to me) how feeble the economy has been, and reveals that it was very dependent upon Real Estate as an engine of growth.
The second chart up uses the University of Michigan sentiment survey of Housing, as a leading forecastor for GDP:
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Housing Sentiment versus GDP; 1988-2006
click for larger chart
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How does Housing sentiment forecast GDP ?
"The University of Michigan regularly surveys consumers on whether or not it is a “good time” to purchase a home. This survey attempts to gauge whether or not consumers feel (a) housing is a good investment, (b) housing prices are low and there are good deals available, (c) interest rates are low, and (d) times are good. The index has ranged from 53 (low) to 87 (high) over the past eighteen years and is currently at 57 indicating that consumers do not feel it is a “good time” to buy a house. This is likely due to high home prices and rising interest rates as well as a growing belief that housing is unlikely to be a good investment going forward. Interestingly, the University of Michigan survey on housing tends to lead U.S. economic growth by a few quarters (chart above). The sharp deterioration in this survey from 75 early last year to 57 now suggests the U.S. economy should start to slow soon."
Let's put this into more concrete terms than "GDP." How about Consumer Spending ?
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Consumer Spending versus Housing Index; 1986-2006
click for larger chart
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Add these three charts together, and we see an anemic, post crash, real estate dependent economy, so feeble that a rise in Mortgage rates from 46 year lows to 35-40 year lows as fatal.
I've said this so many times, please forgive me for repeating myself: As goes real estate, so goes the US economy.
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UPDATE June 12, 2006 11:30am
One last chart:
Source: Northern Trust
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This shows how dependent Households have become on Real Estate for their net worth improvement (I'd like to find out exactly how much these numbers deviate from historical norms).
UPDATE: June 14, 2006 6:48 am
I've been meaning to reference this informative post from the Housing Bubble blog:
Housing Market ‘Jinxed’ By ‘The Obvious Reason’
http://thehousingbubbleblog.com/?p=848
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Source:
U.S. Credit Perspectives
Mark Kiesel
PIMCO, June 2006
http://www.pimco.com/LeftNav/Regional+Market+Commentary/
Global+Credit+Perspectives/2006/Kiesel_For_Sale_06+2005.htm
Net worth of Households and Real Estate
Asha Banglore
Northern Trust, June 08, 2006
http://web-xp2a-pws.ntrs.com/content//media/attachment/data/
econ_research/0606/document/dd060806.pdf
Monday, June 12, 2006 | 06:49 AM | Permalink
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Comments
I find rate attractiveness (3-yr average of 30-yr mortgage rate less the current rate) a good indicator of mortgage activity, and by extension economic growth. Each time this has turned negative by more than 50bps for more than a month the economy goes into the crapper within 6 to 12 months, using real GDP as the gauge of economic health. 1979-1982, 1989-90, 1994, 2000, and now.
Posted by: j. arp | Jun 12, 2006 7:22:39 AM
Actually the last chart looks to me like PCE is leading hosuing spending, or is conicident. However the basic structural relationships indicated by YOY% changes is very strong and indicative. It does indeed look as if consumer demand is decreasing as well as housing.
For anyone who'd care to pursue this I notice Barry has elevated 'Ahead of the Curve' on his reading lists (again) and Ellis sets out a very nice, clear method for analyzing. The basic charts are also on-line at 'AheadoftheCurve.com' and are relatively current. Worth looking into.
Posted by: DBLWYO | Jun 12, 2006 8:03:57 AM
2 points.
1. The first graph, however much i like it, if extended to the entire century and more ,would make the spike in 70-80s as unusual...rates are low now but not unusually low as it looks compared to the unusual spike before.
2. Barry had discounted the idea of housing impact before...looks like he has come around..
Posted by: andiron | Jun 12, 2006 9:10:11 AM
No, I have been saying for years now that Housing has had a disproportionate impact on growth;
What I did disagree about was whether this was a bubble; I said it was not
Posted by: Barry Ritholtz | Jun 12, 2006 9:45:37 AM
And what about that useless Hindenburg Omen? I am becomming a believer.
Posted by: me | Jun 12, 2006 9:45:47 AM
"What I did disagree about was whether this was a bubble; I said it was not"
All your data seem to indicate a bubble. And you seem to agree with Prof. Schiller's assessment.
Is this just semantics that you are not calling it a bubble.
BR: the difference is a matter of degree, between a 25-35% correcting from highs versus an 80% collapse; Think of the Nasdaq in 2000, the Nikkei in 1989, the Dow in 1929. Those were all bubbles that dropped over 75%
Posted by: edhopper | Jun 12, 2006 10:14:52 AM
It is said that some people are visual, some are auditory, and some kinesthetic in the way that they process information. Barry is out on the island by himself yet here again. He is "gustatory" and hence prefers the term real estate "souffle' ". :)
Posted by: Mark | Jun 12, 2006 10:21:52 AM
Barry:
They just refuse to let the meekest of rallies materialize. Reminds me of the spring/summer '02 tape. Does your cyrstal ball still forecast a retest of the highs?
Posted by: S | Jun 12, 2006 10:29:21 AM
"He is "gustatory" and hence prefers the term real estate "souffle' ". :)"
Ah, so instead of a pop, we are looking at a ruinous deflating. :)
Posted by: edhopper | Jun 12, 2006 10:44:59 AM
Perhaps instead of a 'bubble' we could call it a huge stinky 'whoopee cushion'.
Posted by: Bob A | Jun 12, 2006 12:48:22 PM
Here are my thoughts...
a) the housing bubble is much, much larger than people realize. Way more homes were bought for speculative purposes than people realize and a lot of people will be in financial trouble because of their purchases. Consumer spending is going to take a huge hit.
b) Wall Street hasn't noticed the bubble yet. They are all caught up in BB's inflation targets.
c) One of these days we are going to get a piece of data that shows the market how serious the housing bubble is. And then there will be another sell off. A big one.
Posted by: me2200 | Jun 12, 2006 1:07:20 PM
But Lying Larry Kudlow, Chief Carnival Barker for the RepubliCriminals sez that inflation is non-existent.....
Posted by: the_lingus | Jun 12, 2006 1:15:59 PM
I'm not going to predict what the future holds for the housing market, but I do believe it is akin to having overhead resistance in the stock market in the form of higher rates and more inventory. Sure the housing market could plow higher, but these factors are now headwinds.
But regarding this last posters comment:
>>>b) Wall Street hasn't noticed the bubble yet. They are all caught up in BB's inflation targets.<<<
I disagree. It may not have fully priced in a popping of the bubble, but it's clear Wall Street recognizes this. Have you taken a look at the housing stocks lately?
Posted by: Michael C. | Jun 12, 2006 1:17:37 PM
I think it's tough to make a call on whether housing is a "bubble" on a national level, because some localities are assuredly not bubbles, where some are experiencing raging bubbles. Do they aggregate out to one big bubble? It probably comes down to semantics.
But like I said, the bubble moniker is a no-brainer for some regions. For those interested I have put together a lot of charts demonstrating the enormity of Southern California's housing bubble.
rich
Posted by: rich | Jun 12, 2006 1:54:35 PM
i just moved from an avowed buble economy (miami beach) to a an area (KC, midwest) that has shown regular small steady gains (+5% pa vs FLA's +25%) and i can tell u there are just as many For Sale signs here as elsewhere. if people made any appreciatiion at all in the last few years they're trying desperately to realize it before it turns into depreciation. their personal accounts cannot take a loss. the fact that they're all trying to realize it insures that many will get just that
Posted by: scorpio | Jun 12, 2006 3:21:17 PM
rich,
Very nice link! I think that the home price vs. income chart speaks volumes about the pain yet to come for those late to the party.
bk
Posted by: bk | Jun 12, 2006 4:24:29 PM
excellent points Rich. You do "duh" very well. My wife and I sold our last SoCal home 2 months ago (at a 7k$ loss) to "ride/rent out" the Apocalypse.
Some of your charts neatly resemble tsunami waves....
Posted by: brian | Jun 12, 2006 4:27:00 PM
If any RE market in Kalifornia qualifies as a "bubble" SD is it.
We just sold our OC home in 10 days for full asking price. OC is not as overbuilt by a longshot as SD but I expect prices to soften as soon as participants realize the bloom is off the rose.
Posted by: Franco | Jun 12, 2006 5:59:43 PM
Man, its a bubble. And it has tons and tons of leverage.
"I disagree. It may not have fully priced in a popping of the bubble, but it's clear Wall Street recognizes this. Have you taken a look at the housing stocks lately?"
Yep, they've discounted housing stocks, but have they thought ahead to what influence cooling RE will have on:
a) commodities. Houses use a lot of copper.
b) financial institutions. Somewhere, someone is holding a lot of Mortgage Backed Securities that were sold at very low yields. I think we are headed for a big rise in default rates and someone, somewhere is going to get burnt.
c) general consumer spending. Look at Barry's other post. Kudos for Barry being in front of the curb realizing this.
d) EMPLOYMENT. How many people work in RE industries these days ? Tons. Builders, mortgage, appraisal, brokers/agents, funishing, landscaping, road building, etc. These are ALL linked to RE.
Today's sell off was interesting. No major fed speeches to drive it. Just people wanting to get out. Maybe some of these people realize what is coming. I think the sell off is going to get much, much worse.
Posted by: me2200 | Jun 12, 2006 6:00:22 PM
George Soros was on CNBC tonight and said the recent sell off is due to liquidity. And he thinks the housing market is going to be a (big?) factor in 6 months or so. He mentioned it and the 6 month number a couple times. He thinks the market may be starting to anticipate that.
Posted by: me2200 | Jun 12, 2006 6:18:31 PM
>>> My wife and I sold our last SoCal home 2 months ago (at a 7k$ loss) to "ride/rent out" the Apocalypse.
Good move. If you're going to panic, it's better to panic early.
Posted by: Robert Campbell | Jun 12, 2006 7:40:00 PM
Re Piggington’s links above,
Those Piggington’s charts are interesting and sensational. However, they are of very little value for predicting market direction. Using those charts as predictors would have kept an investor out of the best RE bull market in history. So while the market direction has now finally become consistent with those charts, the charts are themselves only correct indicators in the same way that a broken clock is right twice a day.
A particularly interesting example is the population to housing ratio, and the related price comparisons. It is very useful data, but it is presented in a manner that totally misinterprets the significance and context of the data. The text suggests that a mere 2% excess demand cannot justify the price increases. However, what is overlooked is the proper context for this data. Given that only about 3% of all homes are for sale at any given time in a normal market, an extra 2% is an excess demand of 66% relative to available supply. Imagine a game of musical chairs with 50 people and only 30 chairs. Such an imbalance is sure to cause dramatic price increases. Yet the Piggington’s suggests that this is insignificant. Of course, the market has now turned and the supply is excessive, so the situation and the pressure is now reversed.
In addition, home price to income is at best an incomplete measure. It is far too simplistic (what about interest rates, demographics, consumer wealth, consumer preferences, home size, market momentum, etc.). As simple measures go, the cost of ownership is a much better and more reliable metric for comparison to income and to rents. Of course, this metric does show that home prices are too high.
I think Piggington’s has a lot of good data, and has improved over time as the author learns more about the market. The site is well presented, as I would expect from a computer guy.
Posted by: Zephyr | Jun 12, 2006 10:35:56 PM
"Using those charts as predictors would have kept an investor out of the best RE bull market in history."
That would have been much, much better than what is going to occur now.
Somehow I don't think this crowd realizes the magnitude of the recession we are going to enter when all these bull RE investors get margin calls on their houses. It is going to be a mess.
Posted by: me2200 | Jun 12, 2006 11:25:54 PM
«all these bull RE investors get margin calls on their houses. It is going to be a mess.»
But that's why I reckon that high sustained inflation is a more likely outcome than a recession: those «bull RE investors» have lots of political leverage, and adjustments via a reduction of the value of the equity in their houses are probably too painful to contemplate.
Almost nobody likes to see homeowners with mortages worth more than the houses they are on (''negative equity'', not ''margin calls'' :->).
High sustained inflation is far more appealing, as the debtors party is rather larger than the lenders party, especially if you consider that the Government itself is a large debtor, both as to t-bills to foreigners, and welfare/pensions to its citizens, and a period of high sustained inflation is going to help a lot, as it did in the 70s after the ''bread *and* butter'' years of the Vietnam war.
If the choice is between high real interest rates and high inflation, my expectation is that Volker will not be given much opportunity to channel through Bernanke.
Posted by: Blissex | Jun 13, 2006 10:59:47 AM
The current market condition is that everyone is waiting for prices to fall, so houses aren't selling. Speculators are scared of losing more equity, so they are dumping houses on the market. ARMs are resetting, doubling people's monthly payments from a level they could barely afford, which means they have to either sell or foreclose (and then the bank sells it). The homebuilders want to finish everything they started as quickly as possible so that they can still make a profit. There are a lot of sellers that can't wait and a lot of buyers that can.
To get more buyers, wages have to catch up to house prices. Since 2000, house prices in many areas have gone up by over 100%. Wages have gone up by about 10% I think. So bubble-zone wages have to go up about 80% or prices have to drop about 50% (or some combination). To prevent prices from falling significantly, the wages would have to go up by next summer. Do you really think there is anything the government can do to push wages up even just 20% in the next year?
Posted by: jkw | Jun 13, 2006 11:27:40 AM
