User login
Who's online
There are currently 49 members and 92 guests online.
Currently online
- Tom in AZ
- HomeGnome
- amiramr0
- bearly
- Y.T.
- fal to pa
- picosec
- Bad Dawg Bobby
- rickrolled
- mhdoc
- Fluffy the Obese Persian Cat
- Josh
- Anton Chigurh
- greenchutes
- REBear
- Paradigm Lost
- iambroke
- ShadowInventory
- sm_landlord
- barfly
- kcoop
- EconomicDisconnect
- Rajesh
- Vic
- patientrenter
- JimPortlandOR
- NiceCriticalThinker
- EvilHenryPaulson
- Comrade Kristina
- Rob Dawg
- Hayduke
- alambka
- Comrade Dazed and Amused
- RainyDay
- wafdof
- traderwalt
- What Could Go Wrong
- steelhead
- anotherajh
- blinkered
- rosethorn
- Jonathan
- Jackrabbit
- ac
- RueTheDay
- yuan
- creditcriminalslovetarp
- patmacnatl
- Mel
Where's the data? Is this a correlation to peaks or to all changes in Residential Investment? Is this global US data or specific markets?
While intuitively and experientially the notion of Residential Investment peaking before Non Residential Structures makes sense a bit more detail would add some credibility.
Ric, you can get the data at the BEA
. I've also plotted the data before, see this graph 
- but only residential vs. non-residential investment - I didn't break out the components of non-res.
Best Wishes.
wow, this is great!! Is there any chance you could link an excel sheet or whatever you used to make this?
Wonderful post.
Ric, this is U.S. data only, and is all changes (not just peaks).
Bryan, I'll try to link to a spreadsheet.
Best Wishes.
Bryan or anyone, there are a couple of sites I use to post jpegs and gifs to use with this blog, but they don't support other file types. Does anyone know of a site where I can post a spreadsheet ... or is someone willing to host the spreadsheet I used for this post?
Thanks.
CR,
This should work: Free File Hosting Made Simple - MediaFire
CR, you really are much nicer to 99% of us than we deserve.
I just thought I'd share that insight.
I can host any file (if it's not very large). Email it to poszi [at] gazeta [dot] pl
With a lag of 3 quarters, the YoY change would turn negative in Q1 2007. Of course the lag might be longer, or YoY investment might not turn negative this time.
CR, I'm a bit confused. When you say "We can be 99.9% confident that residential investment and equipment and software are positively correlated", are you saying that we can be 99.9% confident that equipment & software will turn negative, YOY, within 1-4 months of residential's turn? Or are you saying that we can be 99.9% confident that E&S will decline MOM within 1-4 months of residential's negative YOY turn?
Or am I completely misunderstanding everything, and not even correctly phrasing the question?
CR, as an option for spreadsheets, try spreadsheet.google.com .
Thank you, CR. That's very useful.
I really like the google site myself.
winjr, we can be confident there is an historical correlation with a certain lag (you can never be 100%, but 99.9% is pretty close!). But that doesn't give the probabilities that it will turn negative this time. If you look at the chart I linked in the comments above, you can see periods when non-residential didn't follow residential. Based on how you identify downturns, maybe 13 out of 15 times non-residential followed residential down - so call it 85% or so.
Thanks all for the offers. I'll try mediafire when I get a chance.
Best to all.
In addition to those non-residential investments, Menzie at econobrowser has also noted that industrial supplies (Can lumber) took quite a hit last quarter. This made for part of the turn around in Imports which for the first time in many quarters was not a drag on GDP growth.
So at first glance, this improvement in Imports might appear that we have ended our foolish profligate ways, but a sobering second look suggests we are going to build maybe mud huts or straw bale houses...a new way to appreciate that soft landing.
"Based on how you identify downturns, maybe 13 out of 15 times non-residential followed residential down - so call it 85% or so."
Thanks, CR, I was just a bit confused, statistically. In the only statistics course I ever took, my semester project was to prove that the "match" feature of pinball machines was indeed random, and not fixed. This forced me to grind my way through 300 games of pinball, but I'd do anything in the name of research.
All, here is the spreadsheet.
Enjoy.
My gut tells me that non residential investment causes residential investment not the other way around.
You have to have a job, a factory, whatever before you can afford a house.
Ice cream sales and crime correlate too.
Or how about this... industrial and office preceeds residential which preceeds retail. How do you split it up?
Chicken vs egg.
Looking at data and will play with it.
Here's some reading material for those looking for something to pore over on this slow day.
Housing: Suspended Animation?
Also, the simple fact that we have an unprecdented number of vacant homes as a percentage of total stock should tell you that we could easily have an unprecedented decline in residential investment, construction jobs, etc:
Interest Rate Roundup: Empty homes everywhere
Note that we had very severe downturns in residential real estate in the past (the 80s for example) when the number of vacancies was quite low relative to now. How do we not have a more serious downturn now when we have vastly more inventory as a percentage of existing stock?
graph
I was just out driving around and got a first hand look at what these graphs might mean. There's a local existing condo complex (built about 2004) where they're auctioning off homes this weekend. A good 10%-20% of the units are for sale. There are clear signs of market distress already IMO. And despite this, they're building two new condo developments in the immediate area (basically across the street).
It really looks disastrous IMO.
CR - what a beautiful and elegant piece of spreadsheet work. Will take me a while to deconstruct some of those formulas but obviously you've been down these paths before. Thanks.
Interpretatively the implication is that S&E is likely so show significant decline on a 1-4 quarter basis, especially in lagging quarters 3/4 ?
Not to put out too many special requests it would be interesting to see what the correlations are over the pre-2000 period and (enuff data ?) post-2000. In looking at the longer term time structures of S&W vs Residential (l.t. meaning 1990 to now
) my little looksee saw a major shift of investment structurally into S&W while Residential was steady-state around 4.5%. The latter being a point you've made before.
On that basis, while you've convinced me the lag structure is there, have to kinda go with the people buy houses after they've got jobs and it's business spending that creates new jobs.
You have to have a job, a factory, whatever before you can afford a house.
Not in 2005!
You have to have a job, a factory, whatever before you can afford a house.
Not in 2005!
Thank you.
As bad as the whole situation with housing stock and residential investment is, what this is really about is giving loans to people that have no capacity to pay them back.
The housing market is just a manifestation of this.
"You have to have a job, a factory, whatever before you can afford a house."
And not in Atlanta! GA has an awful lot of foreclosures and a lot of it is related to fraudulent apps.
Thanks for reminding me of obvious -
Warm body, loan, house, credit card - job if you're bored or if you didn't get enought cash out - in that order.
Steve - Chas Schwab' s article - Housing: Suspended Animation? -
Do you really think Chas Schwab would lean towards investing in real estate? Only if they had a vehicle. They're competing for dollars!
Sippn,
Hey, I'm just passing on the articles. Don't interpret my posting an endorsement of the viewpoint expressed therein.
MoM,
And the real tragedy in all of this is that the deadbeats crowded out the fiscally responsible.
I feel horribly for anyone who graduated from college in 2000-2003, decided to save 20% and a cushion before buying a house, and had the appreciation leave them further behind every year. I personally know more than a few.
Glen, I have the same sympathy for those who spent 30 years religiously making mortgage payments in order to retire debt-free, only to find that the neighbors spent so much time bidding up each other's appraised values that the property taxes and insurance are no longer affordable for the free and clear owners without major sacrifice. At either end of the spectrum, early or late, those who want to match their debts to their incomes get hosed.
CR,
It would be interesting if you did the same correlations with GDP versus Res/NonRes Investment.
I'm sure the correlations would be lower, but the magnitude and time delay issues might be useful.
HOUSING MARKET HEATS UP IN CITY - NY Times
Hello CR,
Long time-no hear about Bush's
progress on the General fund Deficit?
Will It be possible for the government
to stimulate the econ by reducing taxes or not? If yes, will it affect the recession outlook?
PS Thanks for being here.
Up and down, on the way back to reality ...
Youdovoodoo.com - you do voodoo Resources and Information.This website is for sale!
It's different this time.
Then came this years stratospheric Wall Street bonuses, and the market exploded, real estate executives said
From the NYT link provided by Anonymous | 02.19.07 - 5:51 pm
I might have to get a 'T' shirt that says...
Liquidity Lives!
Liquidity Lives!
Dryfly, having lived on the upper east side of Manhattan, I can only say that this is an exceptional exception to the rule.
If only everybody were getting stratospheric Wall Street bonuses we'd all be OK.
That NY Times article was interesting. I suppose all the liquidity still has to go somewhere, and it looks like it is still going to go into real estate.
It sounds like the bonuses were just the kick-start. The article made it sound like people were just waiting to see if prices would drop further.
What I'm more concerned about is learning how one becomes a bedding designer.
Alas, those big Wall Street bonuses may not last long:
http://online.wsj.com/public/resources/images/MI-AK420_AOT_20070214192030.gif
This is indicative of the potential for real crisis, the continued quest for additional Alpha, and the dramatic inability to properly gauge the underlying risk. The economic downturn which is currently underway is likely greatly understated due to the unfolding of recent events, particularly the tightening of credit and a debt-burdened consumer.
The most disturbing part of this puzzle lies with our own investment banks and their behavior, this could prove to be the most significant series of events over the last 24 months, the all-out frenzied move into additional hedge fund exposure followed by an equal appetite for subprime.
Wall Street Buyer Moving to Acquire UK’s Largest Subprime Lender : HousingWire || financial news for the mortgage market
Ice cream sales and crime correlate too.
Associate not correlate.
Ice cream sales and crime correlate too.
Associate not correlate.
It sounds like the bonuses were just the kick-start. The article made it sound like people were just waiting to see if prices would drop further.
I really think if it weren't for the overproduction of houses by homebuilders this situation would have going on much, much longer than it actually did.
I knew people with MBAs from good schools who'd been in business their whole lives who couldn't begin to grasp the concept that something may be wrong when home prices start increasing 25% a year in some otherwise unremarkable East coast town.
I work with a pretty smart crowd, and people uniformly told my I was crazy to suggest it was even a remote concern back in 2005.
They ain't sayin that now.
MM,
What an amazing and revealing piece of research -- thank you for providing us with the link.
Realist - so Wall Street purchases a subprime in the UK to "diversify" - I think to hide the local losses and protect the bonuses - brilliant.
AC - real estate made us all geniuses for a while.
The ECRI has been one of the very data points giving credible support to an optimistic economic outlook. Now it's down for two weeks in a row.
InvestorHives.com Full Page Picture
ac,
Last fall I was out on the street in Midtown Manhattan having a real estate discussion with a colleague (trying to talk him away from buying a REIT).
A well dressed person passing by overheard us and quipped "Real Estate...always goes up." Maybe they'll have that principle in a physics book someday.
AC - real estate made us all geniuses for a while.
Sippin - my father saw Lou Holtz give a speech at an industry convention right after 'his' Notre Dame team won the Nat'l Championship... he said:
"Speed makes dumb coaches look REAL smart."
Works in business too.
sippon,
this as rumors abound that Barclay's is attepting to unload its consumer credit problems, hell, the US will buy anything.......
Banks to write off record £6.6bn of bad personal debt - Times Online
Very, very few people are cognizant of just how rapidly the world is changing compared to the recent past, and the future implications of this inevitable continuation. For a tiny glimpse, please see this:
Error 404 - Not found
Blackstone
Prehaps, but the same was true of the Old Roman Empire. Vast advances in medical, science, knowledge and technology.
then it went poof. all was lost for hundreds if not a thousand years.
Debtors
The last great unexploited resource.
CR
I have lived through housing slowdowns and recessions from the 1960's to the present. Housing slow downs are caused by job loss and weakness in the real economy. Not the other way around. This would be a very unusual situation for a slow down in the housing market to occur with an underlying strong job market and then cause a recession. You say you have statistical data that proves this is so. Then please name the times in the past when this has occured that disprove what we have observed to happen for the last 40 years.
It seems obvious that economic activity is generally inversely correlated with interest rates. So it is hard to prove whether housing has in the past caused weakness in the overall economy independent of interest rates.
Obviously current interest rates aren't an impediment to economic activity. No sane person would claim there is currently a shortage of liquidity.
So the question is whether the current slowdown in real estate can by itself throw the US economy into a recession?
Then please name the times in the past when this has occured that disprove what we have observed to happen for the last 40 years.
Please tell me the number of times that a big internet bubble burst and caused a recession prior to 2001.
I guess that couldn't happen either.
BTW Jim, I recommend reading this article if you're interested in the damage that real estate bubbles can cause:
Take It From Japan: Bubbles Hurt - NY Times
DaveL, unfortunately there aren't enough independent data points after 2000 to analyse the correlation.
Jim, a housing downturn has led every recession during the last 40 years except 2001 - and that was an investment led recession (related to bursting of the stock bubble).
Let's pick a recession: 1990-1991. The housing downturn started at least a year before the recession. So was it a weak economy and job losses that caused housing to turn down? The answer is no.
But I don't think the housing downturn caused the recession either (correlation is not causation). More likely the housing downturn was just a leading indicator of problems that would eventually show up elsewhere. In general I'd make the same arguement now - the housing bust is a leading indicator of other problems.
I've written several times that we've never seen a housing bust alone take the economy into recession - there is always some other explanation too. However the surge in residential investment was larger in the most recent housing boom - so the bust might have a larger impact than ever before.
Best Wishes.
Jim writes:
This would be a very unusual situation for a slow down in the housing market to occur with an underlying strong job market and then cause a recession.
and I wonder how he identifies that "underlying strong job market".
Not with those famous Houston janitors with their 50% wage increase over 3 years (topping out at $7.25/hr), I bet. [Because that month long labor dispute will likely be superseded by Fed min wage laws.]
Not recently laid off Big Three auto workers who now have only their RE license to answer the employment queries with.
Could be the unemployment stat (4.5%) is not a good indicator of a 'strong' job market. Could be that more people now work more hours for less wages just in order to make mortgage payments. [The invisible hand of the free market system is...an illegal alien hand.]
Could be that the Professional Services jobs that are replacing the Manufacturing and Construction jobs losses are steps toward more underemployment.
More likely the housing downturn was just a leading indicator of problems that would eventually show up elsewhere. In general I'd make the same arguement now - the housing bust is a leading indicator of other problems.
I agree. Besides... if there are other problems - they are still out there. It is way too early to rule them out.
Fullcarry - housing isn't the only problem - autos are in a real slump. Earnings have not kept pace with inflation - last year was the first year in five in which they outpaced, and the lost ground hasn't been made up yet. And unfortunately this isn't a housing "slowdown" - it's more of a credit bubble and what now appears to be something of a correction. We do not know the extent of this going forward.
It's a huge, complex economy, and no one factor ever takes it down. My personal guess is that any widespread diffusion of economic stimulus would keep us from going into a recession this year, but unless there is an oil sell-off, I don't see one on the horizon. (I'll take one with a smile, though.) And no, a booming stock market is not a widespread stimulus - it doesn't translate into jobs or more disposable income for the average person.
Jim - in the modern economy, we have never seen a nationwide decline in housing values. We've seen local ones, but nothing like we are seeing now. Nor have we ever seen this type of lending on homes post WWII. We truly are in an unprecedented situation - beyond the known parameters.
Anonymous | 02.19.07 - 8:50 pm | = me
Halo doesn't like Foxfire anymore than it likes IE.
MaxOut
Its good to see that some of you realize that the US economy is more than Housing. Obviously as you stated the interest rate sensitive sectors of the US economy are stuggling. This shouldn't be surprising and to the Fed's economic modelers I am sure it isn't. The key question is whether the other sectors of the US economy are about to weaken along with housing. My take is they won't. The leading indicators of the economy like corporate profit growth and liquidity are just too strong to say they will.
One could very well argue that the enormous growth in the housing market was crowding out the other sectors of the economy which are now taking off with housing's sharp slowdown.
Best
I forgot to caveat the above with the following:
As long as interest rates stay low.
"Then please name the times in the past when this has occured that disprove what we have observed to happen for the last 40 years."
When is the last time you saw interest rates as low as they were in the past five years?
40 years ago.
When is the last time you saw Morgtgages like we had in the past five years? Never.
It seems obvious that economic activity is generally inversely correlated with interest rates. So it is hard to prove whether housing has in the past caused weakness in the overall economy independent of interest rates.
I think that's true to an extent. But I also believe that unusually low interest rates for a long period of time can lead to an excessive build up of debt and basically create a "drug addicted" economy that can't handle any rise in interest rates because debt servicing costs are so high, and asset values are so dependent on easy credit.
I think we're approaching that point or there already.
The correlation and the leading tendency of housing both make sense if we understand the true cause of both slow housing investment and dropping GDP; household financial distress. If people are just scraping by, the first thing they will abandon is the dream of buying a house, soon after that cars, eventually working their way down to their basic subsistance needs. HFD can be caused by many factors. In the late 70's to early 80's it was high interest rates that slowed spending, beginning with housing. Today it is record household debt levels and prices that have risen faster than wages for a number of years (not only home prices, but health care and college tuition, for example). The total abandonment of lending standards allowed home sales to temporarily balloon far past their sustainable level, and now we are paying the piper.
"The leading indicators of the economy like corporate profit growth and liquidity are just too strong to say they will."
FC, I'm not sure I understand how corporate profit growth and liquidity are leading indicators.
Topher, I think the last time we saw mortgages like we had in the past five years was in the `20s. ( Florida ). We all know what happened after that. If home equity represents close to 75% of middle class household net worth, a 15-20% price corection would be truly devastating. And I am afraid that we may see a even worse corection in commercial real estate. For a lot of people a 15-20% corection would look more like a crash.
CR, could you please explain the bit about 44 degress of freedom?
Fullcarry, you wrote:
"One could very well argue that the enormous growth in the housing market was crowding out the other sectors of the economy which are now taking off with housing's sharp slowdown."
I have no doubt that this is true. Chasing unsustainable housing profits certainly redirected capital away from more productive investments. Eventually this correction will lead to a healthier economy (unless we roll into another speculative furor).
It's a question of timing - these corrections happen for good economic reasons, and it's only when several of them happen at once that you get actual negative growth. Unfortunately, several do seem to be coinciding. In at least a few states, public debt and exceedingly high property taxes seem to be pushing property taxes down, and in more than a few, overbuilding in coastal areas and storms have caused an insurance problem that is messing things up further. The income problems and the credit problems are all part of a much larger phenomenon.
I do see this turning into a recession because most jobs are created by small businesses and a great deal of financing for small businesses is obtained through home equity. But I want very badly to be wrong about that conclusion.
I do not agree that liquidity in markets prevents recessions in our economy unless it is somehow circulated throughout the population to generate jobs and income growth. That mechanism seems to be on the verge of impairment right now. If it gets worse, I am certain that we WILL have a recession. Well, there's still room for some positive event to prevent that - as Stephen Leacock said "God takes care of drunks, fools and the United States of America."
CR, could you please explain the bit about 44 degress of freedom?
Put simply, it's the number of values used in the precision measurement:
Degrees of Freedom
Since some of the data is self-derived, there are only 44 true independent values (not 188(quarters since 1960)) from which you can draw a conclusion. Nevertheless, 44 independent values is enough to be 99% certain that residential investment and equipment and software are positively correlated.
Hope that helps.
Question to Tanta, MOM and/or other expert.
How does default->FC->REO process work for all the different parties: loan servicer, bank who originated the mortgage, investment bank who created MBS, investor who bought MBS. Are there differences for 1st,2nd mortgages, prime, not-prime loans?
I'd like to understand who holds the risk, who makes decisions and who does the job. For instance WFC and CFC have huge servicing portfolios. As I understand they carry no risk, but they have to carry out all efforts related to the process. Are they being compensated for the effort? Same question about REOs.
TIA
The leading indicators of the economy like corporate profit growth and liquidity are just too strong to say they will.
Regarding corporate profit growth:
Slower Growth In Earnings Is Already Here
Quote: "Anyone worried that earnings growth is about to slow down sharply may be missing the point: It has already happened."
Regarding liquidity, I would point you to the rapid deceleration in nominal GDP growth (according to my calculations, which deliberately excludes imports/exports to negate the effect of oil price fluctuations):
2006 Q1 10.5%\t
2006 Q2 6.1%\t
2006 Q3 4.7%\t
2006 Q4 4.4%
If the Q4 numbers get revised down 1%-1.5% as some suggest then the number above is probably over-optimistic by a similar amount.
gac, it's a statistics term, and basically is the number of independent data points. For this analysis, I calculated a YoY change every quarter, but that uses the same data 4 times - so those samples can't be considered independent.
Here is the Wikipedia definition if you want more.
Although I frequently use some statistics in my historical analysis, I usually don't post the details. I might add more details to my posts in the future - and post the spreadsheets too.
Best Wishes.
Mom
If I understand my betters, it is not that housing crowded out anything, it is that there was nothing better to invest in to get the the nominal returns.
Fullcarry
What the heck is there to invest in? Factories are going to China, Tech is going/gone to Asia and in any case it is a comodity now. It is my understand that a mature captialist society has low returns for any number of reasons, but the main one seems to be that financial instruments, give a better yield than producing tangable items.
However the surge in residential investment was larger in the most recent housing boom - so the bust might have a larger impact than ever before.
CR, you are a master of understatement.
Vader - but those "nominal returns" were fake. After all, the return on a lot of this MBS isn't going to be what was expected. As for the HELOCs and seconds, a lot of those are going to lose principal.
Traditionally, people who wanted higher returns invested in R&D type ventures, and over time, it does stimulate the economy. I think we exchanged that idea for the idea that you could earn higher returns through arbitrage, which is moving risk and money with high skill and some risk rather than investing, and then exchanged that idea for the idea that you could engage in arbitrage without risk.
OK - so reality appears to be jumping up and smacking us in the face. Sooner or later our faces will stop stinging and it will turn out to be a healthy development.
CR said: "...Jim, a housing downturn has led every recession during the last 40 years except 2001 - and that was an investment led recession (related to bursting of the stock bubble)..."
Absolutely true...as far as it goes. However, over the past 40 years there have been housing downturns of similar magnitude that have NOT led to recession.
In fact, by the time housing has been this weak in the past the economy has ALREADY been in full recession (if it was going to occur).
Without confirmation of similar weakness from other sectors there simply can't be a recession.
Any forecast on the economy has to include indicators that represent the entire economy, not just one sector.
Sebastia
MOM.
I like your summary!
Jim,
Housing has sort of a special place in the economy since it tends to be volitile. Economic booms and busts are a fucntion of changes in aggragate demand. That demand is for everything in the economy. However for somethings, demand basically does not change, or changes only gradually and predicatably. The demand for diapers does not really change much with the economic picture. Rather it changes with the number of babies born. Diapers will not fuel a boom or cause a recession. It is the volitle parts of the economy that cause them to happen. Once trends start, the economy is a series of either virtious circles, or vicious circles. The volitile parts of the economy, and housing is foremost among them, tend to be the key that switch virtuious cycles into vicious ones. So yes housing is important, even if it does only represent 5% of the overall economy (in normal times). Just go back and think of the basic Keynsian model GDP = c + i + g + x - m. C is the big one, but tends to be fairly stable, g has a tendency to move counter cyclically (although it does so with a longer than ideal lag). I is the part that tends to jump around a lot, and residential is a much bigger part of i than it is of the whole economy. That is why so much attention is paid to housing, not from a fetish for ranch's, tudors, or colonials.