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 recession. Since World War II we have had eight recessions preceded by substantial problems in housing and consumer durables. Housing did not give an early warning of the Department of Defense Downturn after the Korean Armistice in 1953 or the Internet Comeuppance in 2001, nor should it have. By virtue of its prominence in our recessions, it makes sense for housing to play a prominent role in the conduct of monetary policy. A modified Taylor Rule would depend on a long-term measure of inflation having little to do with the phase in the cycle, and, in place of Taylor’s output gap, housing starts and the change in housing starts, which together form the best forward-looking indicator of the cycle of which I am aware. This would create pre-emptive anti-inflation policy in the middle of the expansions when housing is not so sensitive to interest rates, making it less likely that anti-inflation policies would be needed near the ends of expansions when housing is very interest rate sensitive, thus making our recessions less frequent and/or less severe."

As we have noted in the past, the past 5 years have felt like a backwards economic cycle: Debt, rather than wage gains and higher income, has been the spur of consumer spending, thus turning the virtuous cycle on its head. Home buying should have be an outgrowth of increased economic expansion, and wage gains. Instead, ultra-low rates led to a lot of borrowing and spending (so much for the Judeo-Christian work ethic).

~~~

Incidentally, mazel tov to Paul on Infectious Greed being selected by BusinessWeek’s Best of the Web

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  1. Poll Shark commented on Sep 25

    Ubiq-cerpt(tm)…

    I like it.

  2. spongetoddsquarepants commented on Sep 25

    The judeo christian work effort was marginalized long ago in America. Nihilism, relativism and victimization took its place.

  3. Justin commented on Sep 25

    So this means that lowering the rate now makes all kinds of sense, right? The recent rate-cut reminds, (this trans-planted Cheesehead), of the farmer who’s too lazy to clean his gutters out daily, and you know what happens then – you get shit on top of shit! And no, that’s not where cheese comes from city boys and girls.

  4. Chief Tomahawk commented on Sep 25

    A short time ago Jane Wells plugged her upcoming segment on CNBC “From the housing bust capital of the world: Stockton, CA”, where many lawns are ‘Foreclosure brown’…

  5. Cherry commented on Sep 25

    LOL, there never was a “Judeo-Christian” work ethic since it was hardly “Christian”. Once the realization of that occured over the last 25 years, the forces of nihilism started.

    Beware of American “Christianity”. It was based on Calvinism which is more Talmudic than Biblical(New Testament).

  6. bucky katt commented on Sep 25

    Words of wisdom from Marc Faber>
    The Fed under current and former chairman Ben Bernanke and Alan Greenspan has demonstrated breathtaking intellectual dishonesty.
    “When asset prices are going up, they appear to believe there is no reason to interfere.
    They only interfere when asset prices are going down.
    That’s a massively asymmetrical approach to the problem.”

    The complete story here>
    http://www.financeasia.com/article.aspx?CIaNID=61744

  7. Pool Shark commented on Sep 25

    Cherry,

    “If a man does not work, neither should he eat.”

    Pretty Biblical (New Testament).

  8. Mike in Denmark commented on Sep 25

    Judeo-Christian work ethic? That’s a new one. The term Max Weber coined was protestant work ethic and the whole point was that the Calvinistic view of life had started capitalism with its emphasis on hard work as beneficial for the soul contrary to the catholic emphasis on good works.

  9. randy commented on Sep 25

    i don’t think the bible has much to do with this market/situation.unless maybe that quote about a nest of vipers.anyway i’m tired of swimming up river/lossing money. some one mentioned qid in an earlier post.well qld and ddm seem to be doing ok and if you put a trailing stop some where not to far behind it,not a bad bet for now.the feds going to quarter point this thing to death.anybody thats paying any attention will see the train wreck in time to get out of the way/get short/in cash.jmo cbw hbb.

  10. New Yorker commented on Sep 25

    Well NYC has finally joined the fray- prices down 3.8% according to C-S.

  11. Mike commented on Sep 25

    I’ll be the first to admit that I’m not a economic whiz kid. Maybe someone can explain why the Fed seems to consider higher earnings at the top end of U.S. income to be an economic “good” yet higher earnings by the masses in the middle are “inflationary”. I know this sounds naive but I thought gains in productivity were supposed to lead to higher wages. Am I getting screwed every time my productivity rises because the Fed calls my salary increase inflationary?

  12. whipsaw commented on Sep 25

    randy said:
    “anyway i’m tired of swimming up river/lossing money. some one mentioned qid in an earlier post.well qld and ddm seem to be doing ok and if you put a trailing stop some where not to far behind it,not a bad bet for now.the feds going to quarter point this thing to death.anybody thats paying any attention will see the train wreck in time to get out of the way/get short/in cash.jmo cbw hbb.”

    hey thanks for the pointers to QLD and DDM, I was aware of them but had lost the knowledge some time ago. I rather doubt that I will put any cash there just because of my own rules, but at least you (unlike almost anyone else here) offered some specific suggestions.

    As for myself, I am doing ok with Jan08 QQQQ calls at the moment (did anyone else notice how well $NDX did today vs. the market?). I am also looking at entry points for EWC, EWA, IYT (short), DBA, and DIA. Patience is the main problem with all of those.

    NTC (NotWithstanding The Cassandras), it seems rather obvious that the markets are generally going to go up thru the end of the year. I am going to leg in to whatever seems to be strongest until that point, then I will reassess. I will also probably go long dollar then because Dec is usually the low, but we’ll see.

    Thanks for at least offering some trading opinions whether I agree or not. Almost everyone else here is either not in the market or is not showing their hand for some reason.

    ==whipsaw==

  13. Bourgeois Liberal commented on Sep 25

    “The term Max Weber coined was protestant work ethic and the whole point was that the Calvinistic view of life had started capitalism with its emphasis on hard work as beneficial for the soul contrary to the catholic emphasis on good works.”

    And Weber’s thesis has been ripped to shreds not only by other sociologists but also by economic historians. The only remnant of the thesis is a “weak” version which finds a correlation–no causal connection–between Calvinism and the capitalist work ethic.

    The chief objection is based on historical evidence. Medieval Italy could hardly be called Calvinist (since Calvinism didn’t even exist then), but it was there that Western commercial capitalism really got started.

    Everything from early corporate structures to letters of credit and bills of exchange to marine insurance to double-entry bookeeping began in Italy during the Middle Ages. They even had schools set up in Florence to teach kids how to use the abacus! Wanted: CPAs in the 14th century!

  14. Mike in Denmark commented on Sep 26

    I wasn’t endorsing Weber’s ideas at all, just pointing out that “judeo-christian” was all wrong because the whole idea was that one part of Christianity was more effective than the others.

  15. jg commented on Sep 26

    I’m no sociologist. But, there is a nice inverse relationship between church/synagogue attendance and rate of growth in the OFHEO index (i.e., states with high rates of church/synagogue attendance had low rates of growth in OFHEO over ’80-’06).

    http://piggington.com/love_of_god_vs_love_of_money

    I think much of America lost its religious moorings in the ’60s, and such manifested itself in wanton consumption and borrowing beginning in the ’80s.

  16. Mike in Denmark commented on Sep 26

    Jg, I live in one of the most atheistic countries (thank God :) in the world and we’re doing quite well for ourselves – http://en.wikipedia.org/wiki/Economy_of_Denmark. And China has always been mostly atheistic with a smattering of ancestor worship and they’re not exactly doing to shabby either. Correlation does not equal causation.

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