ice that the chart is in constant (2000) dollars, but it would be even better for the y-axis to be on a log scale. It's easier to compare the magnitude of the slumps that way.
--
"Home Modernization," as Greenspan used to call it, was greatly added by MEW. Home Prices would to fall another 10-20% for MEW to dry up. Refi's are still going strong.
I dunno... I can't imagine there is a kitchen in this State that does not already have granite countertops.. the kind that will outlast the home by approximately 8000 years.
Have you been to a Home Depot lately? The employees don't know what graphite is. They don't know WHERE anything is.
The last time I was there I was looking for plumbers putty. I asked the nearest employee near the plumbing supplies. His response was something to the effect of "I don't work in this department, so I don't know where it is." There website is useless.
The slump for Home Depot will be greatly exaggerated by the lack of employees that know anything except when is the next payday. Finding employees is one issue, getting one that knows about something as simple as graphite is even more difficult. I refuse to wander the aisle of a large warehouse just to find something so simple when I can go to the competition and just ask.
I found where the graphite where they make duplicate keys. However, the person standing at the key machine didn't know what I was talking about and gave me the third degree on what I was going to use it for 'till finally I just left and went to the local hardware store where they still know what things are called and how to get off their @$$ and learn something.
If you think it is bad now, just wait until the private equity buyout firms buy up everything and then apply short term financial objectives to everything.
Sebastian and this post make the same point: there are missing elements if you are going to call this a recession.
I think the point is that the slopes are so steep that there are elements that just haven't had time to fall into line.
In addition, because interest rates have been and are in many parts of the world (China and Japan) ZERO, there is an enormous amount of money out there chasing just about everything. So things look good.
So, we have hyperinflation in the stock and currency market (and recently in the housing market) and a consumer who is getting epinephrine i.v. in industrial doses.
My Cincinatti real estate contact is now saying this month is slow....after reporting excellent feb to April
Her area sales are mainly above 160,000 price.
I am noticing from the inventory tracker at paperdinero.com that the spike in amount of inventory that was at 100K is now at 125K and significantly into 175K which would impact her sales.
It makes sense maybe that there is a pulse of inventory by price moving up thru the real estate chain progressively bringing reality to the market as buyers just hold out for a lower price at that range till they get it and inventory falls there.....and then the next people further up get the reality check and so forth.
bob, the data is from the BEA: Underlying Detail - NIPA Tables. It takes a little number crunching (the BEA only provides real data back to 1990 - I calculated the other numbers).
"The Montgomery County recorder, who oversees real estate filings in "Dayton, is searching for loans with balloon payments, or interest rates that may soon rise to unaffordable levels. He has found more than 3,100 in Montgomery where 540,000 residents possessed the state's second-highest foreclosure rate last year.
It's crazy,'' said the 46-year-old Blackshear.I knew it was bad, but I didn't know it was this bad.''"
China's stock valuations are ``too high'' at 50 to 60 times earnings and prices are likely to decline, according to Li Ka-shing, the world's ninth-richest man.
May 17 (Bloomberg) -- China's stock valuations are ``too high'' at 50 to 60 times earnings and prices are likely to decline, according to Li Ka-shing, the world's ninth-richest man.
There must be a bubble,'' Li, 78, said at a press briefing in Hong Kong following the annual general meeting of Cheung Kong Holdings Ltd., his flagship property company.As a Chinese, I'm worried about the stock market in China.''
China's benchmark CSI 300 Index, which tracks yuan- denominated shares listed on the nation's two exchanges, has jumped 85 percent this year, closing at a record today. Hong Kong's Hang Seng Index has gained 5.2 percent.
Investors in Hong Kong and across Asia look to Li, known locally as ``Superman,'' for a sense of where economic growth and stock markets are headed because his companies invest in businesses ranging from supermarkets to shopping malls, apartment buildings and ports.
Li joins China's central bank governor Zhou Xiaochuan in expressing concern about the rally, which has made China's stocks the most expensive among the world's major markets. Goldman Sachs Group Inc. and Credit Suisse Group analysts have in the past week said Chinese shares may face a ``correction.'
We're starting to see a more subdued consumer," says Gary Drenik, BIGresearch's president and CEO. "A lot of households have a fixed income and no savings, and rising gas prices are a shock to the system. It's wreaking havoc with their budgets, so they're hunting for ways to cut back."
Doral Financial Corporation, through its subsidiaries, provides a range of financial services primarily in Puerto Rico and New York. The company operates through four segments: Mortgage Banking, Banking, Insurance Agency, and Institutional Securities. The Mortgage Banking segment originates, purchases, sells, securitizes, and services residential mortgage loans primarily in the Commonwealth of Puerto Rico. It offers federal housing administration and veterans administration loans, rural housing service loans, conforming conventional loans, nonconforming loans, second mortgage loans, and other mortgage loans. The Banking segment accepts deposits and invests in mortgage loans, sourced primarily through the company�s mortgage banking operations in Puerto Rico, as well as through purchases from non-affiliates. It also provides construction and commercial loan financing primarily secured by real estate, as well as offers consumer loans.
"Total headcount reduced to 35 as of March 31, 2007, from 616 as of
December 31, 2006. Headcount reductions are attributable to exit from
lending business and are expected to decline further as remaining loans
held for sale are liquidated."
"Unwillingness to employ increased margin requirements by the Fed during the NASDAQ bubble, and near 0% margin downpayments accepted by mortgage bankers during the housing bubble, give evidence to the diminishing influence of CBs and the growing influence of private agents in the credit creation process. Obviously the ultimate cost of money as determined by CBs is critical in reining in unlimited credit creation, but if the price to Wall Street is far less onerous than the cost to Main Street, there may be limits as to how far CBs can raise rates and therefore control inflation."
One reason that home improvement spending may be holding up so far is that home owners wishing to sell are being told to make their homes more desirable. This is in part to stand out in a very large pool of inventory, in part because new home sellers are giving away white goods, gardens, and the like, and used home sellers have to compete. If this is the case, it becomes a question of how much potential sellers are willing to spend, and how successful the effort proves to be.
k harris, I may just be terribly confused about what counts as improvement for purposes of calculating RI, but I tend to think that most of what you're talking about here is PCE. I mean, from my perspective the exact problem is that sellers are not offering improvement investments to buyers, they're offering "stuff."
To keep me, at least, from being confused all the time, maybe we need a definition of improvement investment. Coming from the mortgage side of life, I tend to assume that means equity creation, not equity withdrawal--i.e., mortgage funds used to increase the value of the real property aren't MEW (or aren't very much MEW: the increase in value may not be dollar-for-dollar to cost, but that just means that MEW is increased only fractionally by capital improvements). Expenditures used to offset the price are just, well, expenditures.
So in my mind, if there is true blue MEW--and I'll take Greenspan & Kennedy's word for that--it is primarily maintenance, repair, decorating, and other "stuff" that is consumption.
Am I making any sense, or do I need to go back to the coffeemaker? I can do that if it helps keep the discussion useful.
Well, I don't know that I'd say the improvement chart is inaccurate--I was prepared to be comforted by it. I surely want to believe that out of those trillions of mortgage dollars we managed to improve the housing stock some instead of blowing it all on lawn ornaments.
I'm just struggling with the connection to net MEW and the idea that it can maintain that slope. "Overimprovement" is just another kind of inventory overhang, isn't it?
"Overimprovement" is just another kind of inventory overhang, isn't it?"
Interesting point. All those granite counters and stainless steel appliances that builders thought they had to install (to make their product better than the other guy's) now hang around their own neck, unsold and demanding monthly payments.
The homebuilders who I have seen remain successful for decades are the ones who never got away from the idea that they were selling value. The come-and-go guys thought they were selling flash.
those granite counters and stainless steel appliances
I don't necessarily disagree with your main point about builders, wally, but again, this is the conflation that keeps bugging me. Countertops are fixtures of real property, although they may well be fixtures of luxury material, which just puts them in the same class as marble rather than ceramic in the bathroom. You can argue that "luxury material" has become "standard material," if you want, but that's just another way of making my point about fractional MEW: it just costs more now to get the same "value."
But appliances of any quality are not fixtures of real property, they're durable goods. (Only furnaces and water heaters and such count in RI, as far as I know.) They affect the price of new construction, but they're still consumption. So, for instance, when we talk about the large category of "appraisal inflation," some part of that involves appraisals giving either excessive value to luxury materials or value of any sort to kitchen appliances (which should be functions of price).
On one hand, the "value" of a home is the replacement construction cost... on the other hand it is 100 percent perception - what would somebody pay?
To 'appraise' has never really meant anything other than to judge what the market might bear, has it?
You mentioned home improvement spending to have held up pretty well and forecast a possible slump like the early '80s and '90s.But in real terms, what figure is projected to entitle it to be called a "slump", or wouldn't it be reasonable to consider that there is a possible pullback of home improvement spending, but not a real slump?
Although the recent data look pretty good, it may be just a mirage. The BEA does not have/use high frequency improvement data. Thus the recent figures are essentially judgmental extrapolations with the help of some poor regressions. When the annual revision is published in July/August BEA will incorporate some real 2006 data.
Real outlays for residential improvements in the first quarter were $137.7 billion--essentially unchanged from the levels in the third and fourth quarters of last year.
Rana's point is very important: the BEA's estimate of improvements spending is subject to a lot of error. Last time I checked it was based on a simple econometric equation rather than on source data.
Risk,
Your info on the 3100 ballon ARM's in Dayton was interesting. Dayton is on of the most reasonable cost housing markets in the country. In the city of Dayton it would be almost impossible to spend $300k on a house. I split my time between there and Chicago, and in 2004 bought a house there for $68k (3/4 bed, vintage house, good shape, small standard city lot, detached 2 car garage, neighborhood so-so at best). I will tell you that there are an enormous number of empty houses in the city, I have heard somewhere in the neighborhood of 10K. So if all those 3100 went to default and the people were foreclosed on and forced out, it would increase the supply of vacant houses by apx 30% (although persumably those folk would rent some of the vacant houses not live on the street). Still thats a pretty big number.
I probably did a bad thing in mentioning white goods when the subject is home improvement spending. The are different categories of spending, but with he same aim of making home owners - or home buyers, depending on the intention - happier with the residence in general.
Putting down new tile in bathrooms and kitchens is home improvement, and I have the impression there is a lot of that going on. Also a lot of cosmetic effort on the outside of the home, so that potential buyers will bother to look inside.
Spending and finance are linked closely in reality, but whether one funds home improvement through mortgage cash out or reaching into a wallet does change what shows up in the BEA data, to my knowledge.
And yes, this is one of those situations in which everybody seems to be running to stay in place. One builder offering Japanese Maples for free is a clever trick. Everybody offering Japanese Maples is builders pouring money into buyers pockets. Same with home improvements. New floors are a great selling tool, unless everybody puts in a new floor. Then, it just becomes another cost of selling the house.
I probably did a bad thing mentioning white goods along side home improvements. When trying to lure buyers, the two serve the same function, but they show up differently in economic book keeping. From the point of view of the book keeper, the source of funds for new floors and new dishwashers doesn't matter in accounting for the floor and the dishwash, though it matters to us.
I'm short the DJ real estate index and Home Depot is in there. I would not recommned to short individual companies - shorting the index is much safer.
Btw, where did you get the data for this chart? Your charts are very cool, and adding one more is thrilling.
ice that the chart is in constant (2000) dollars, but it would be even better for the y-axis to be on a log scale. It's easier to compare the magnitude of the slumps that way.
--
"Home Modernization," as Greenspan used to call it, was greatly added by MEW. Home Prices would to fall another 10-20% for MEW to dry up. Refi's are still going strong.
Jas
I dunno... I can't imagine there is a kitchen in this State that does not already have granite countertops.. the kind that will outlast the home by approximately 8000 years.
CR,
could you provide the components of home improvement spending and where you pulled the specific data?
Thanks
Have you been to a Home Depot lately? The employees don't know what graphite is. They don't know WHERE anything is.
The last time I was there I was looking for plumbers putty. I asked the nearest employee near the plumbing supplies. His response was something to the effect of "I don't work in this department, so I don't know where it is." There website is useless.
The slump for Home Depot will be greatly exaggerated by the lack of employees that know anything except when is the next payday. Finding employees is one issue, getting one that knows about something as simple as graphite is even more difficult. I refuse to wander the aisle of a large warehouse just to find something so simple when I can go to the competition and just ask.
I found where the graphite where they make duplicate keys. However, the person standing at the key machine didn't know what I was talking about and gave me the third degree on what I was going to use it for 'till finally I just left and went to the local hardware store where they still know what things are called and how to get off their @$$ and learn something.
robert
If you think it is bad now, just wait until the private equity buyout firms buy up everything and then apply short term financial objectives to everything.
Sebastian and this post make the same point: there are missing elements if you are going to call this a recession.
I think the point is that the slopes are so steep that there are elements that just haven't had time to fall into line.
In addition, because interest rates have been and are in many parts of the world (China and Japan) ZERO, there is an enormous amount of money out there chasing just about everything. So things look good.
So, we have hyperinflation in the stock and currency market (and recently in the housing market) and a consumer who is getting epinephrine i.v. in industrial doses.
Sebastian, please sell now.
My Cincinatti real estate contact is now saying this month is slow....after reporting excellent feb to April
Her area sales are mainly above 160,000 price.
I am noticing from the inventory tracker at paperdinero.com that the spike in amount of inventory that was at 100K is now at 125K and significantly into 175K which would impact her sales.
It makes sense maybe that there is a pulse of inventory by price moving up thru the real estate chain progressively bringing reality to the market as buyers just hold out for a lower price at that range till they get it and inventory falls there.....and then the next people further up get the reality check and so forth.
bob, the data is from the BEA: Underlying Detail - NIPA Tables. It takes a little number crunching (the BEA only provides real data back to 1990 - I calculated the other numbers).
Best Wishes
I assume Blake is basing his comment on recent sales at Home Depot, say, April and May to date.
How old is the latest data point on your graph, CR?
"The Montgomery County recorder, who oversees real estate filings in "Dayton, is searching for loans with balloon payments, or interest rates that may soon rise to unaffordable levels. He has found more than 3,100 in Montgomery where 540,000 residents possessed the state's second-highest foreclosure rate last year.
It's crazy,'' said the 46-year-old Blackshear.I knew it was bad, but I didn't know it was this bad.''"
Foreclosures Spur States to Rescue Homes From Default (Update1) - Bloomberg.com
`Must Be a Bubble,'
Li, Asia's Richest Man, Says China Has Stock `Bubble' (Update5) - Bloomberg.com
China's stock valuations are ``too high'' at 50 to 60 times earnings and prices are likely to decline, according to Li Ka-shing, the world's ninth-richest man.
May 17 (Bloomberg) -- China's stock valuations are ``too high'' at 50 to 60 times earnings and prices are likely to decline, according to Li Ka-shing, the world's ninth-richest man.
There must be a bubble,'' Li, 78, said at a press briefing in Hong Kong following the annual general meeting of Cheung Kong Holdings Ltd., his flagship property company.As a Chinese, I'm worried about the stock market in China.''
China's benchmark CSI 300 Index, which tracks yuan- denominated shares listed on the nation's two exchanges, has jumped 85 percent this year, closing at a record today. Hong Kong's Hang Seng Index has gained 5.2 percent.
Investors in Hong Kong and across Asia look to Li, known locally as ``Superman,'' for a sense of where economic growth and stock markets are headed because his companies invest in businesses ranging from supermarkets to shopping malls, apartment buildings and ports.
Li joins China's central bank governor Zhou Xiaochuan in expressing concern about the rally, which has made China's stocks the most expensive among the world's major markets. Goldman Sachs Group Inc. and Credit Suisse Group analysts have in the past week said Chinese shares may face a ``correction.'
sorry did not see it was posted already
Consumer Spending Could Be Out of Gas
Rising gas prices finally are prompting some to cut spending. Could too much thrift hurt the economy?
Consumer Spending Could Be Out of Gas
We're starting to see a more subdued consumer," says Gary Drenik, BIGresearch's president and CEO. "A lot of households have a fixed income and no savings, and rising gas prices are a shock to the system. It's wreaking havoc with their budgets, so they're hunting for ways to cut back."
MarketWatch.com
Doral Financial Corporation, through its subsidiaries, provides a range of financial services primarily in Puerto Rico and New York. The company operates through four segments: Mortgage Banking, Banking, Insurance Agency, and Institutional Securities. The Mortgage Banking segment originates, purchases, sells, securitizes, and services residential mortgage loans primarily in the Commonwealth of Puerto Rico. It offers federal housing administration and veterans administration loans, rural housing service loans, conforming conventional loans, nonconforming loans, second mortgage loans, and other mortgage loans. The Banking segment accepts deposits and invests in mortgage loans, sourced primarily through the company�s mortgage banking operations in Puerto Rico, as well as through purchases from non-affiliates. It also provides construction and commercial loan financing primarily secured by real estate, as well as offers consumer loans.
"Total headcount reduced to 35 as of March 31, 2007, from 616 as of
December 31, 2006. Headcount reductions are attributable to exit from
lending business and are expected to decline further as remaining loans
held for sale are liquidated."
Expired
this: PIMCO - Investment Outlook- May/June 2007 "How We Learned to Stop Worrying (so much) and Love 'Da Bomb'"
is intersting. look around chart #5 - he give all the reason why interst rates may be going up but still project thy would go down.
Is it all just based on "liqudity" ?
maybe.
"Unwillingness to employ increased margin requirements by the Fed during the NASDAQ bubble, and near 0% margin downpayments accepted by mortgage bankers during the housing bubble, give evidence to the diminishing influence of CBs and the growing influence of private agents in the credit creation process. Obviously the ultimate cost of money as determined by CBs is critical in reining in unlimited credit creation, but if the price to Wall Street is far less onerous than the cost to Main Street, there may be limits as to how far CBs can raise rates and therefore control inflation."
One reason that home improvement spending may be holding up so far is that home owners wishing to sell are being told to make their homes more desirable. This is in part to stand out in a very large pool of inventory, in part because new home sellers are giving away white goods, gardens, and the like, and used home sellers have to compete. If this is the case, it becomes a question of how much potential sellers are willing to spend, and how successful the effort proves to be.
Yal,
this balancing act and bubble reflation is far more dangerous this time around, one mis-step and we have a real problem.
k harris, I may just be terribly confused about what counts as improvement for purposes of calculating RI, but I tend to think that most of what you're talking about here is PCE. I mean, from my perspective the exact problem is that sellers are not offering improvement investments to buyers, they're offering "stuff."
To keep me, at least, from being confused all the time, maybe we need a definition of improvement investment. Coming from the mortgage side of life, I tend to assume that means equity creation, not equity withdrawal--i.e., mortgage funds used to increase the value of the real property aren't MEW (or aren't very much MEW: the increase in value may not be dollar-for-dollar to cost, but that just means that MEW is increased only fractionally by capital improvements). Expenditures used to offset the price are just, well, expenditures.
So in my mind, if there is true blue MEW--and I'll take Greenspan & Kennedy's word for that--it is primarily maintenance, repair, decorating, and other "stuff" that is consumption.
Am I making any sense, or do I need to go back to the coffeemaker? I can do that if it helps keep the discussion useful.
"To keep me, at least, from being confused all the time, maybe we need a definition of improvement investment."
Agree, the improvement chart is misleading and not accurate in my opinion.
Well, I don't know that I'd say the improvement chart is inaccurate--I was prepared to be comforted by it. I surely want to believe that out of those trillions of mortgage dollars we managed to improve the housing stock some instead of blowing it all on lawn ornaments.
I'm just struggling with the connection to net MEW and the idea that it can maintain that slope. "Overimprovement" is just another kind of inventory overhang, isn't it?
"I'm just struggling with the connection to net MEW and the idea that it can maintain that slope."
Agree. It does not coincide with the definitive data being reported by the sector.
"Overimprovement" is just another kind of inventory overhang, isn't it?"
Interesting point. All those granite counters and stainless steel appliances that builders thought they had to install (to make their product better than the other guy's) now hang around their own neck, unsold and demanding monthly payments.
The homebuilders who I have seen remain successful for decades are the ones who never got away from the idea that they were selling value. The come-and-go guys thought they were selling flash.
those granite counters and stainless steel appliances
I don't necessarily disagree with your main point about builders, wally, but again, this is the conflation that keeps bugging me. Countertops are fixtures of real property, although they may well be fixtures of luxury material, which just puts them in the same class as marble rather than ceramic in the bathroom. You can argue that "luxury material" has become "standard material," if you want, but that's just another way of making my point about fractional MEW: it just costs more now to get the same "value."
But appliances of any quality are not fixtures of real property, they're durable goods. (Only furnaces and water heaters and such count in RI, as far as I know.) They affect the price of new construction, but they're still consumption. So, for instance, when we talk about the large category of "appraisal inflation," some part of that involves appraisals giving either excessive value to luxury materials or value of any sort to kitchen appliances (which should be functions of price).
On one hand, the "value" of a home is the replacement construction cost... on the other hand it is 100 percent perception - what would somebody pay?
To 'appraise' has never really meant anything other than to judge what the market might bear, has it?
You mentioned home improvement spending to have held up pretty well and forecast a possible slump like the early '80s and '90s.But in real terms, what figure is projected to entitle it to be called a "slump", or wouldn't it be reasonable to consider that there is a possible pullback of home improvement spending, but not a real slump?
Although the recent data look pretty good, it may be just a mirage. The BEA does not have/use high frequency improvement data. Thus the recent figures are essentially judgmental extrapolations with the help of some poor regressions. When the annual revision is published in July/August BEA will incorporate some real 2006 data.
Real outlays for residential improvements in the first quarter were $137.7 billion--essentially unchanged from the levels in the third and fourth quarters of last year.
Rana's point is very important: the BEA's estimate of improvements spending is subject to a lot of error. Last time I checked it was based on a simple econometric equation rather than on source data.
Risk,
Your info on the 3100 ballon ARM's in Dayton was interesting. Dayton is on of the most reasonable cost housing markets in the country. In the city of Dayton it would be almost impossible to spend $300k on a house. I split my time between there and Chicago, and in 2004 bought a house there for $68k (3/4 bed, vintage house, good shape, small standard city lot, detached 2 car garage, neighborhood so-so at best). I will tell you that there are an enormous number of empty houses in the city, I have heard somewhere in the neighborhood of 10K. So if all those 3100 went to default and the people were foreclosed on and forced out, it would increase the supply of vacant houses by apx 30% (although persumably those folk would rent some of the vacant houses not live on the street). Still thats a pretty big number.
Tanta,
I probably did a bad thing in mentioning white goods when the subject is home improvement spending. The are different categories of spending, but with he same aim of making home owners - or home buyers, depending on the intention - happier with the residence in general.
Putting down new tile in bathrooms and kitchens is home improvement, and I have the impression there is a lot of that going on. Also a lot of cosmetic effort on the outside of the home, so that potential buyers will bother to look inside.
Spending and finance are linked closely in reality, but whether one funds home improvement through mortgage cash out or reaching into a wallet does change what shows up in the BEA data, to my knowledge.
And yes, this is one of those situations in which everybody seems to be running to stay in place. One builder offering Japanese Maples for free is a clever trick. Everybody offering Japanese Maples is builders pouring money into buyers pockets. Same with home improvements. New floors are a great selling tool, unless everybody puts in a new floor. Then, it just becomes another cost of selling the house.
Tanta,
I probably did a bad thing mentioning white goods along side home improvements. When trying to lure buyers, the two serve the same function, but they show up differently in economic book keeping. From the point of view of the book keeper, the source of funds for new floors and new dishwashers doesn't matter in accounting for the floor and the dishwash, though it matters to us.