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
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.
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.
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..
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
And what about that useless Hindenburg Omen? I am becomming a believer.
“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%
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’ “. :)
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?
“He is “gustatory” and hence prefers the term real estate “souffle’ “. :)”
Ah, so instead of a pop, we are looking at a ruinous deflating. :)
Perhaps instead of a ‘bubble’ we could call it a huge stinky ‘whoopee cushion’.
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.
But Lying Larry Kudlow, Chief Carnival Barker for the RepubliCriminals sez that inflation is non-existent…..
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?
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
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
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
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….
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.
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.
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.
>>> 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.
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.
“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.
«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.
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?
Zephyer, I completely agree with your point about the change in the overal homes per person ratio vs. the amount of homes for sale at any time. However, I think you misunderstand the point that I was trying to make. (Tho it’s my fault because I through in that “2% isn’t all that much graph… I will amend that section when I get a chance.)
Anyway, here’s the point. The bulls have argued that there is an effectively permanent shortage in housing. The point of the chart is to show that, after a spike in 2000-2001, the rate of homebuilding surpassed population growth, yet from 2001-2005 home prices MORE THAN doubled. (BTW most of that population growth was births – if I used net migration you’d see home supply rising as more people moved out of San Diego than in).
Also, I disagree about price-to-rents and price to incomes. If only cost of ownership matters, then how come the price to income ratio was for a long time contained in such a well-defined range even through a period of secular interest rate declines? And as for rents, given that rates are now where they were in 2002, why shouldn’t rents and home prices be at an equivalent ratio to when they were in 2002.
The fact that using these valuation measures would have kept one out of the blowoff phase is irrelevant – you could say the same for people being kept out of the blowoff phase of any bubble, as valuations climb farther and farther away from the fundamentals. The point is not to be a timing tool, but to demonstrate the extent to which valuations have become unhinged from fundamentals.
I think you make some great points but you also make it seem like the difference of opinion is due to ignorance or an attempt at sensationalism on my part. I disagree. I understand what’s going on and I have tried very hard to be even handed… I just interpret some things differently than you do.
rich
Lets face something: housing was nothing more than an investment bubble. Nothing more. People happened to live in their investments, but other than that and the fact that these investments got financed with DEBT, it is the same thing as the dot com bubble.
Sure, houses have more value than paper. BUT we know the present value of houses is way, way more than their earning power would indicate it should be.
A correction is inevitable. For one thing, there are no more buyers. House ownership is now at 70%. Who else needs a house ? Nobody. And anyone that wants to buy a house probably already owns one and needs to sell it before they buy the next one. So the market is stuck.
Another thing that nobody is talking about is that in the next few years baby boomers are going to start SELLING their houses to finance their retirement. A retired babyboomer doesn’t need a McMansion, probably doesn’t want a McMansion and if they are short on retirement savings, it will be the first thing to go when they need the money.
“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.”
I highly DISAGREE. That might have happened with Allan Greenspan, but we have a new sheriff in town. His name is Ben. And he is going to fight inflation. That is what makes this session different from the 1970s session. In 1970 nobody was ready to fight inflation. This time we are not only going to fight it, we are going to be PROACTIVE about it, nipping it in the bud before it gets started.
«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,»
Let me add to this reflection of mine: for most of the past two decades treasuries, including the USA and UK one have been refinancing the national debt with instruments of lower duration; in the past year or two they have reintroduced fixed-rate 30 year instruments.
Some weird people think that the Treasury somehow has ”inside” information, and thus were expecting lower rates/inflation and thus keen to refinance at those ever lower rates, thus shorter term debt, and now they expect rising rates/inflation and thus are keen to lock in the existing low rates for 30 years…
«Another thing that nobody is talking about is that in the next few years baby boomers are going to start SELLING their houses to finance their retirement.»
Probably not, because their GenX/Y heirs want to get those houses without any fetter or diminution, and thus will pass laws that put the burden of financing their parents’ retirement on the state, so their parents don’t have to sell those homes.
Even a ”Republican” administration has enormously expanded Medicare, and so far the only complaint is that to little money has been allocated to it and thus the famous ”hole” between 2k and 3k.
«That might have happened with Allan Greenspan, but we have a new sheriff in town. His name is Ben. And he is going to fight inflation. That is what makes this session different from the 1970s session. In 1970 nobody was ready to fight inflation.»
Uhmmmm, that’s the other plausible outcome, the one that Barry seems to think more likely too.
In such an ”Abraham” scenario, the difference between God and the markets is that God let Isaac live, but the markets will demand the death of the economy… 1929 may well come to be looked upon as a mild pause compared to that.
But I think that even if Volker channels thru Bernanke, when the pain starts to become too much (mortage rates at 15%, waves of foreclosures, …) Congress will stop that.
Perhaps some people do not realize how horrible the pain is going to be if recession is chosen over stagflation; for example apparently the vast majority of the USA bonds is now in the hands of foreigners:
http://WWW.Economist.com/images/ga/2005w11/Bond.gif
A recession induced by high interest rate would probably cause a huge appreciation of the dollar. Very very dangerous.
But you may get your wish :-)
Blissex: I can see your scenario happening if the meltdown gets that bad. But I don’t think foreigners are going to let our dollar go to nothing because then their bonds are worthless when they get repaid.
I dunno exactly how this is going to play out in the end, but I can see Bernanke standing tough on inflation for a while and then we’ll have a whole new set of market dynamics.
It is going to be very interesting.
Rich,
I believe (as you do) that the real estate markets are overpriced relative to the long-term sustainable fundamentals. Nobody can ever know every piece of data, and no two people will ever agree on all of the details. But we seem to agree that prices should decline.
It is important to be prepared for the cyclical decline in order to protect one’s gains. However, an investor who is not in for the run-up has no gains to protect from the blow off.
Clearly, there are many who fail to understand that real estate prices can and do decline significantly in the more cyclical markets. There are some who are always optimistic no matter how the facts look. There are also those who are always pessimistic. Both groups are fools.
Many fools will get hurt by the decline that they have not prepared for. These fools are guilty of being ultra simplistic in their analysis. Simplistic measures can give false signals, and encourage suboptimal or even counterproductive action. We are all guilty of simplicity to varying degrees.
Measuring price relative to fundamentals can be very valuable if your measures reliably help guide your market timing. You say that timing is not important. However, if your measures fail this real world test then you cannot be confident that the factors, as measured or interpreted, are correct – or perhaps they are just too simplistic.
You make the point about many bulls believing that there is a permanent shortage in housing. Whether that belief has any basis in fact depends on locality and how you define the market. For example the answer is much different for suburban Denver vs. beachfront in La Jolla. The implications are also much different for condos vs. detached homes. However, even with a long-term fundamental shortage, prices can go up or down in response to strong short-term fluctuations in demand. To deny the existence of shortages is to fight the wrong bogeyman.
I believe you are approaching the market analysis from the wrong perspective. You are so intent on proving that the market makes no sense that you miss the reasons for why it is where it is. Until you can explain and quantify the basis for the observed price level you can only guess as to whether it is justified. The truth is that prices are always “justified” (ie caused) by something. The real question is whether that something can endure. I always assume that they are caused by many things and seek to identify, measure and evaluate each of those factors – individually and collectively.
I did not say that cost of ownership is the only thing that matters. I said it was a better and more reliable metric. It is also incomplete by itself, just better. There is an important distinction between saying something matters, and saying it is the only thing that matters.
I notice on the site that you disprove each factor as a singular cause of the market price level, and thus rule out that factor. You systematically do this to various factors, one by one “proving” that each does not justify the market – all the while neglecting the fact that it is the combination of all these factors that drives the market. No single factor explains it all – that is too simplistic. Your approach is like saying that each member of a winning football team did not individually cause their victory, and therefore the team’s success is not justified. But it is the combination of all the players that causes the outcome.
In my opinion you have a lot of factual knowledge, but are not sufficiently exploring how it all interplays to drive the market, and you omit important contributing factors in each of your exhibits. You have obviously put a lot of effort into developing your site, and it is loaded with valuable facts and good observations. To take your site to a higher level I think you should rely less on superficial single variable correlation, and dig deeper into the causative market forces. This will require greater inclusion of financial market perspective and economic theory, but the benefits would be substantial.
Hmmm… that sounds hard.
Just kidding. Well, kind of. The bottoms-up approach you recommend would be very interesting. But I think it is much lower-hanging fruit to look at other measures that aggregate the fundamentals together – most notably rental prices – and to assume that that is a good measurement of what the fundamentals “say” housing should be doing. You’d have to abstract out borrowing costs, of course, but you can do that by comparing the rent-to-price ratio now and in 2002 when rates were similar. (And I’m going for low hanging fruit here because the site is, in the end, a pursuit for which I have a limited amount of time).
As for the item-by-item analysis of the fundamentals, I agree that it lacks an analysis of the synergy… but that isn’t really the point. The site is not geared towards guys like you, you obviously has a very sophisticated grasp of financial markets. It’s geared towards people who have had the same propaganda drilled into them for years… with looking at the shortage, for instance, I’m not saying that there is an infinite amount of beachfront property, I am just trying to peel the curtains back on the idea that there is an intractable supply crisis that will cause home prices to rise 20% pa until the end of time. Just trying to show a little bit of the underlying reality.
BTW I do agree completely that prices are always caused by something – and I have written extensively about what that is (in short, bullish fundamentals driving prices up from 95-2001, and that momentum meeting up with the Fed’s liquidity campaign to cause people to start pricing in, and borrowing to pay for, 20% appreciation ad infinitum).
Anyway, all that said I get what you are saying and I appreciate the insights. While I honestly will probably never have time to do it, the type of analysis you propose would be pretty interesting and maybe useful for the analysis of future market conditions.
thanks,
rich
«that momentum meeting up with the Fed’s liquidity campaign to cause people to start pricing in, and borrowing to pay for, 20% appreciation ad infinitum»
Ahhhh I really like this way to express the madness in nice language. Pretty scary too worded like that :-).