Real Estate and the Post-Crash Economy

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John Mauldin took the weekend off, so I offered up the most recent Market Commentary from RR&A as a guest piece:  Real Estate and the Post-Crash Economy.

It is a dissertation that puts the real estate boom into some context:

Real Estate and the Post-Crash Economy
The Backwards Cycle
The Economy Drives Real Estate, or Vice Versa?
Where the Real Money is: Consumer Spending
Slowing Housing Market and the Economy

It a fairly comprehensive analysis, laden with charts and statistics, many you may not have seen before.

Its a 4 day weekend, so you have plenty of time to sift through it. (So far the feedback has been rather kind).

Enjoy.

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What's been said:

Discussions found on the web:
  1. bbb commented on Dec 30

    Barry,

    Qusetion about the transport data you post earlier. Does that data take into account the shipping of building materials (i.e. construction slow down)? If so if you factor that out how does thh transport data look?

  2. Cal commented on Dec 30

    Barry,

    Assuming everything you said in your article was correct.. and you had a big chunk of change to do something with.. what type of moves would you make to protect your money from devaluing (due to inflation on one part, or put in overpriced equities and dropping). Where is a good place to put your cash right now in your opinion?

  3. sam commented on Dec 30

    barry: nice summary.
    2 points
    The 68% plunge data referece 2004-05 period (from 48% of all private jobs created before)..2005-2006 , i think, has better job creation in non-realestate areas.
    Capex: You ended feebly w/ moderate capex in the 2nd quarter..What about 3 & est for 4th. Are n’t bulls pegging their hopes on increase therein.

  4. Schahrzad Berkland commented on Dec 30

    Very good work on that story, and some original ideas I had not read before.

    Now I’m just waiting for the stock markets to decline as we head into the recession. I don’t know if Barry will give you any investment tips, but here are mine: Rydex Dynamic Inverse funds (bear funds, return 2x the inverse of the index), gold, and cash, in the proportions that suit you.

  5. s0mebody commented on Dec 30

    “what type of moves would you make to protect your money from devaluing (due to inflation on one part, or put in overpriced equities and dropping). Where is a good place to put your cash right now in your opinion?” –Cal

    Isn’t that the $64k question? This isn’t investment advice, but if Barry is looking for a market correction, I don’t think he is looking for the rip roaring inflation we have seen. His call is for increases in foreclosures means that more loans go bad and has the net effect of contracting available credit leading to deflation. He cites Bernanke as a deflation hawk in his paper. The dilemma then becomes whether or not the government is willing to print its way out of this mess by bailing out banks and bad loan originators. No one knows this part. Is the government willing to print its way to making good on bad debts, or will the government give in and just let the cycle run its course? Look for the clues to the answers to these questions in the news as time passes and you will better know. For right now I know Barry is not long the market so at the least he is in cash and short some select names, and actions speak louder than words.

  6. sam commented on Dec 30

    schahrzad:
    why not buy QID/DOG and no fund fees to boot.

  7. Frank Rizzo commented on Dec 30

    $64k question indeed. For those of you who didn’t watch the Kudlow & Company of Cheerleaders that Barry was on this week (Wednesday?): Barry said it was too early to short the market, and that you couldn’t not have some exposure. He did say also say, however, that he was using rallies to sell.

    Kudlow & Co is ridiculously bullish, and contrarians seem to be mocked as if they were babyeaters. I saw the same thing the next day with another moderately bearish analyst – and this guy only said more money could be made outside the US!

  8. Richard commented on Dec 30

    the doom and gloomers are out in full force this holiday season. do yourself a favor and give yourself your blood pressure a brief respite during this festive time. there’s always next year to pick it back up again.

  9. Darin commented on Dec 31

    Liked the article and I am sure that in several years we will all be looking back at times like this to try and remember who was actually paying attention. I would only mention that one of the most important factors was the concomitance of globalization and job outsourcing. Perhaps the tried and true method of reflating the US economy failed because most of the money consumers were spending (are spending…) went overseas. It sure seems like we just spent several years picking up the tab for Asia to modernize…

  10. Bluzer commented on Dec 31

    What recession? We just executed Saddam. Isn’t that good for a coupple of hundred points on the Naz? And after that there’s Iran, Syrian and N. Korea just waiting to be whacked! Onward and Upward!

  11. winjr commented on Dec 31

    “Capex: You ended feebly w/ moderate capex in the 2nd quarter..What about 3 & est for 4th. Are n’t bulls pegging their hopes on increase therein.”

    2Q Fixed Domestic Investment, Equipment & Software was down -1.4%, but was up 7.7% for Q3. For 2004, this GDP category was up 7.3%, and was up 8.9% for 2005. Seems to me that capex will need to pick up the pace from Q3 to make any headway in offsetting Fixed Residential Investment that continues to decline from Q3, but this doesn’t seem likely for Q4 given dismal durable goods orders for October and November, weakening ISM, and contracting regional Fed results.

  12. Barry Ritholtz commented on Dec 31

    The point about Capex was that the negative number was a surprise in Q2 — that’s merely a warning signal.

    Capex is hardly the driving force we keep hearing (for 5 years now) from some observers. That’s in large part why the Nasdaq was the weakest performing index in the US in 2006

  13. scm0330 commented on Dec 31

    barry, nice piece and has been noted the bear case is inevitably branier than the bull one. coupla thoughts: you need to better integrate the “jobs/wage” complex into your analysis; it’s improving, off admittedly punk levels, but at long last we may be seeing some decent wage gains and a tightening labor market to help support the housing economy, or at least to cushion the downturn. remember, jobs and rates are the key re drivers absent crazy post-crash fed-induced liquidity bubbles. second, you are waaay too us-centric in your analysis…there are global production and trading blocs away from the us, more than ever, with implications for us-listed mncs and non-us names. again, perhaps more cushion for less than stellar growth in the aggregate but at least helping to avoid the total washout you have been suggesting for…a long time now.

  14. S commented on Dec 31

    Nice summary. One important element that the bulls conveniently ignore is the condition of the consumer’s balance sheet. We’re reminded daily that corporate balance sheets are pristine. But so what? The consumer drives 70% of the economy. And his balance sheet looks like pig shit.

    Consumer debt as a percent of GDP has never been higher. Over the 60 year period from 1945 to 2005, consumer debt averaged 47% of GDP. At Sept. 30, 2005 it had skyrocketed to a whopping 87% of GDP. Simply put, the consumer is choking on debt. Eventually the tide will turn and he’ll start saving ALOT more and spending ALOT less. Kinda like what the Japanese did during their deflationary episode.

    But it’s hard to resist the temptation to spend. From Madison Avenue to Pennsylvania Avenue, the consumer is bombarded with signals to spend, spend, spend. In a speech just prior to Christmas, Bush urged consumers to get out there and hit the malls. The last time I recall a presidential edict to shop was shortly after 9/11.

    And we know what kind of shape the economy was in then.

  15. Barry Ritholtz commented on Dec 31

    SCM:

    My analysis was of the US real estate market and the domestic economy —

    I agre with you about the rest of the world. We have been long Japan, Korea, Malaysia, Brazil and Hong Kong (thru ETFs) for over 3 years now.

    The Global economy is booming, thanks to China –the US economy looks comparatively weak

  16. Neil Simmons commented on Jun 14

    I run a real estate agency in Bangkok, a city that has experienced one of the worst ecomonic crashes in the last 20 years. The 1997 Asian crash which was primarily created by the Thai ecomony caused real estate development in Bangkok to stop overnight, although it took another 2 years for prices to reach their lowest. A 5 year stagnant period followed, and prices have been steadily increasing now for the past 3 years, now surpassing their previous highs before the crash.

  17. The Big Picture commented on Sep 25

    The Backwards Housing Cycle

    My friend Paul contributes to Housing Day here at TBP, pointing us to a new NBER paper that declares Housing is the Business Cycle. Ubiq-cerpt:™ Of the components of GDP, residential investment offers by far the best early warning sign of an oncoming r…

  18. The Big Picture commented on Mar 17

    S

    While there is plenty of blame to go around in the entire banking debacle, let’s not forget who the key enablers were: The rating agencies. Their business model is a modern form of payola, with bond underwriters as customer #9. This allowed them to sla…

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