yup no recession here

For the week, the Dow dropped 4.4% (down 8.2% y-t-d) and the S&P500 fell 4.6% (down 9.3%). The Transports declined 2% (up 3.1%), and the Morgan Stanley Cyclical index sank 5.5% (down 7.1%). The Morgan Stanley Consumer index declined 2.3% (down 7.6%), and the Utilities slipped 3.1% (down 8.3%). The small cap Russell 2000 fell 4.3% (down 8.8%), and the S&P400 Mid-Caps declined 3.6% (down 7.5%). The NASDAQ100 dropped 4.4% (down 14.9%), and the Morgan Stanley High Tech index sank 5.1% (down 14.6%). The Semiconductors were hammered for 7.9% (down 14.3%). The Street.com Internet Index fell 4.5% (down 11.4%), and the NASDAQ Telecommunications index was hit for 4.4% (down 12.1%). The Biotechs dropped 4.5% (down 7.6%). The rally in financials reversed abruptly. The Broker/Dealers sank 8.1% (down 6.1%) and the Banks 8.4% (down 0.7%). Although Bullion was up $17.50, the HUI Gold index declined 1.7% (up 8.4%).

404 - Error: 404 

Housing as an "engine of growth" is a concept that needs to be examined very carefully.

As noted above, housing is for all intents and purposes a non-productive asset, whose valuation should track nothing but inflation, population growth (with a small adjustment for lost housing units to age/condition) on a national level, and inflows/outflows on a local level.

This is why I believe housing will bottom when the cost to buy (including opportunity cost of your downpayment) equals the cost to rent.

We've really screwed ourselves over through the mortgage interest deduction benefit, and the steadfast belief that housing always go up. Not to mention the prevailing national attitude of 'bigger is better' and conspicious consumption.

Once we rediscover housing as a place to live and not an investment, we can collectively shift our focus to the things that matter: elementary education, R&D, scientific research, alternative energy, etc.

I don't want to get off on a rant here, but the national focus on inflating assets and shooting money around the world as an engine of growth is absurd.

I'm very much a capitalist, but am also very much disgusted as what passes for "productivity" in america.

There's a lot of good things happening in the USA in terms of real value-added manufacturing and design; but we won't truly realize our potential until we return to some semblance of austerity and frugality, and focus our collective energies on efficient design, science (real science, not botox-science) and a better way to construct our lives.

Apologies again, the term "housing as an engine of growth" just really got under my skin.

It seems to me that there are 2 types of growth: productivity (same amount of people getting more done), and growth from just more people needing houses, food, cars, and other stuffs. The interesting question is whether the first type of growth can get you out of a recession.

dunham- Regarding the mortgage interest deduction, it is said it promotes home ownership. Yet Canada does not have it and has homeownership rates only 1 % below the US last I checked.

I agree with you that housing is a non-productive asset and there has been a huge over-investment. I think the current de-investment in housing will be beneficial for the economy, once the short-term adjustment pain is over.

CR,

I noticed something subtle yesterday while working in the daily driver. I spent about 260.00 on needed repairs and a tune. Every part I purchased except the new wiper blades was MADE IN THE USA. These parts were bought at Advance and Autozone,the kings of overseas sourcing. I know this won't pull us out of the downturn but I wonder if this is a small shift due to the weakness of the dollar ??

If you would have asked me 2-3 years ago what parts were available as made in the US I would have laughed at you...

Chris

I think one way to look at this is that, for the duration of the recession, people tend to switch their habits and become savers. That's honestly the "negative" sentiment aspect of it isn't it? People aren't spending, businesses cut back to match production to the new levels, unemployment rises as a result, and the system feeds back on itself. But consumers are turned into savers because they "have to tighten their belts and weather the storm...have six months salary in the bank!" etc

Well, what happens as things bottom out is that people have saved, have a goal in mind, and that goal is a house. This matches what also happens via the government because this is the time that interest rates are usually very favorable, so if you're going to do it the asset prices are relatively lower, intersst rates generally are seen as favorable, and you've saved a wad of cash now.

Some on this board forget that part of economics is not science but fuzz...namely that whole "taste" thing and sentiment. Houses are NOT rational decisions, they are lifestyle decisions. I do not own my primary residence because it is a good investment. I own it because I can plant flower if I want, not if I want, let my dog poop in my yard, turn my music up, and cook things that other people wouldn't want to smell. I also don't have to listen to other people next to me.

The mortgage deduction isn't an economic deduction either and it isn't going anywhere so any agitation against it, especially now, is waste. The purpose of having your citizens in thier own houses (and promoting it via tax breaks...the same as rewarding breeding via tax breaks) is that citizens that have roots are better citizens. They tend to vote, participate, and form peaceful communities that are lower in all the bad things society doesn't like. In other words they care more about the space around where they live, and that's good for stable government as a whole.

So this talk about mortgage deductions is just specious. Look at all the data about promoting owned housing on the whole. And, again, realize that buying a house is NOT an economic decision. That notion by the NAR is what got us into this mess. You BUY a house. You MAKE it a home.

We've really screwed ourselves over through the mortgage interest deduction benefit

Assuming that markets are even slightly efficient, the mortgage interest deduction is a subsidy to the mortgage lending/banking/securitization industry. The deduction causes house prices in the market to rise upwards accordingly, and thus lenders are able to lend more money, and lending more money equal more profits.

dunham, this is not nonsense at all. It is the exact motivation behind it. In fact, I was part of a lively debate about it this weekend with a political candidate and major guy from one of the political parties. The deduction motivation is to put people in houses. Just like the child deduction rewards the government interest in expanding its citizenry. I'm not insulted that I don't have kids, why should you be insulted if you rent? I don't get a child deduction but I can sure understand why people do. And I totally understand the mortgage deduction.

The Canadian philosophy about taxes is quite different from the American (as is the European). The systems are not the same, so tossing that in here is just a staw man. Look at health care and then talk to me about comparing what Canadians and Americans think about how their political system's respective tax codes should work.

Whether you like it or not, renters are not in control of where they live in ways that owners are. Therefore, representatives in districts, senators, municipal politicos, all have it in their best interest to put people in control so that they can vote for them. If your building goes condo, you buy or move. If your landlord sells, you can get told to move also. If your landlord sells to a commerical developer you get told to move as your place gets torn down. So renters aren't as tied to place as owners are, and stable voters are what they system wants.

CR -
Definately agree it will feel like a double dip. Thats what I'm seeing. In the second half of 2008 the corporate slowdown will compound what we're seeing with the consumer. I suspect we wont see a bounce back until late 2009 or early 2010 - assuming housing gets on track sometime in 2009 - which may be optimistic. Should create some very interesting opportunity for those that are liquid over the next 36 months. Thanks for the post and as usual its very well reasoned.

All the economists may not agree we're in a recession, but here's a report from the "front line":

Staples cuts expenses as recession looms - The Boston Globe

AOTC,

Previously you stated that recent GDP growth is right in line with historic medians. Given the obvious and massively stimulative economic dislocations these past years -- monstrous government deficit spending, real negative funds rates, housing / M&A / derivative bubbles, etc. -- why doesn't it frighten you that the GDP wasn't so much higher?

Welfare? On a mortgage of 250,000 at 6.25% for 30 years, the tax benefit is about $3,880 if you are in the 25% bracket, your milage may vary slightly.

How exactly is this welfare? You mean to tell me that, if you are a home owner, this is a lot of money and a reason to go out and buy? I think the average person probably spends more than that on upkeep a year. And if you are looking at the montly payment (here 1540 P&I) you just got two months for free. That's welfare? This benefit is also decreasing each year as you pay it off.

And yes, getting lower income people into houses promotes what I described upthread, and if this is a way to do it, that's a societal benefit.

getting lower income people into houses promotes what I described upthread, and if this is a way to do it, that's a societal benefit.

Have you been paying attention to what has been happening the last year?

I agree, putting the low income populace into homes is the key to our prosperity.

Regarding the MID, 90% of the country has never benefited from it anyway -- the MID never exceeded the standard deduction. The housing bubble may have made it useful to a few more people, but it comes down to Middle America subsidizing coastal homeowners.

Even though I'd benefit if I purchased a house, IMO it should not exist.

p.s.: I fail to see how the MID applying up to $1M and covering 2nd homes helps the median homeowner, too.

tj, yes I do agree with that. It's just a little bonus for them at the end of the year, which helps them with the upkeep, not with the purchase. And when I bought my first house when I was young, the tax credit was nice and helped me out when I was stretched to the max, and never owned.

As I tell my students though, I won't do someone's legwork for them. If you want to read studies, go and google them. The web is a wonderful place for information. I would suggest starting with the GSE studies, and then move on to Harvard.edu for data. Don't forget the study that shows that when gays move into a neighborhood property values increase. It's a nice one to wave about in front of conservative friends.

I will not budge on the wisdom of a tax credit for home ownership. But what I am willing to question is the wisdom that lets me also deduct the MI on my SECOND house. Now THAT might be considered welfare.

ipodius-Yes, the Canadian and US tax systems are different, but I would still expect much lower homeownership rates in Canada if the mortgage interest deduction really mattered. The fact that Canadians still buy homes suggest it is not much of a factor. I think it promotes not homeownership but buying more home and I am not sure that is such a social positive.

Ipodius-But that assumes that everyone buys right up to the lender's income limits. The tax deduction might tempt someone who would otherwise buy below the lender's limit to go right up to the limit.

If MID were brilliant policy then other countries would adopt it. But it's not; it just makes crossing the downpayment threshold (a once and future significant hurdle) harder for renters. It also allows people with significant equity to buy cars and junk on a tax-advantaged basis over renters (cash-out refi, anyone?). It's bad policy.

And then there's the capital gains exemption...

The Benefits of the Home Mortgage Interest Deduction
HOMESTEADS; A Condo on a Permanent Luxury Cruise - NY Times

CR, thank you for very insightful and very useful post for me. Thank you again for being there.

dunham, even a cursory reading of the relevant GSE studies will tell you that homeownership, especially in lower-income neighborhoods, results in less crime, better upkeep, neighborhood stability, more involvement in school systems, etc etc. The Harvard ones from their school of public policy are more detailed by segments, if you care to thrmb through them.

And NYC is NOT NYC. It isn't a monolithic entity. So look at the neighborhood studies there to get a picture of what is happening. Look at Queens, Chelsea, what is happening in Hell's Kitchen etc etc. Yes, condo conversions and ownership. And look at what happened to those neighborhoods.

I can tell you from experience what happend in the South End of Boston when buildings were converted to condos and owners moved in. It went from a place where I would walk out in the morning and find needles in the alley and empty booze bottles to a place where now people push baby-strollers. Sadly, though it used to have more character

ipodius,

gentrification starts waaaay before home ownership takes root.

renters and illegal squatters begin the cycle. home owners are just the final nail in the coffin.

Yes TJ, ipodius remembers when he could deduct all his credit card interest from his taxes. That was sweet. Perhaps we'll do it again for this bust.

Well, if j6p has kids he probably does itemize. Or if he gives to charity, has educational expenses, medical expenses, etc. Pre-boom very true. But the median in my area is probably going to push him past the limit...and you're not going to see anything happen that would have any sort of impact on lowering house prices for the foreseeable future, so this discussion is mostly academic.

Again, I'm fine with the deduction for a primary residence but I'm not so sure about why I should be given one on my second house. But, again, since that credit is now how people figure the costs associated with a second house, getting rid of it will depress prices so it's not going to happen for quite a while.

Ape Man,

Excellent summary of the changing circumstances underlying housing. That's my take too -- that we have built a huge overhang in housing at exactly the wrong time in history, i.e., just when demand is set to dramatically decline for a prolonged period going forward.

That "bulge in the python" will be pressuring things to the downside for at least a decade starting in 2010.

Since our gov is spending like a drunk on a binge and since Bush has been fiscally irresponsible, the country (us) will have to become fiscally conservative. By this I mean we will have to save more, pay higher taxes, etc. This will curb expenditurees and since consumer spending amounts to 70% of the economy, this puts us in deep do-do. The discussion is when will housing recover. I cannot see how we can avoid a limp along economy for the next 5-8 years, and this will be if things work out as well as they can. How can we pay higher taxes to take care of the entitlement promises, fight McCainiac's 100 yeart endless war, save for retirement, buy that McMansion, and take those nice vacations in my 7,500 lb SUV. The easist thing to give up is the Mcmansion and settle for smaller digs. This means that there are a lot of oversized houses to digest which will be a butt ugly process.

Elvis,

I'm relatively well-informed when it comes to resources, but due entirely to conversations with a friend with an environmental background; I'm willing to hear your thoughts on it -

Is your solution for water that we stop using it to grow crops? Perhaps rather than being snarky, you can explain your position a little better?

"To put it another way... America took a huge hit with the dot-com bust, but has since run up the credit lines to maintain appearances."

TJ, you just hit it dead-on. Incomes and everything else ratched up during that phase. And the current political regime fed the beast by making everyone believe they belonged to a class they really didn't. Everyone wants to think of themselves as upper-middle class even when they are really middle or even lower-middle. If you just have a huge house (don't rich people all have huge houses?), a big SUV with shiny stuff (don't rich people all drive big shiny cars with leather and stuff?), granite counter tops, and buy things at Tiffany, Burberry, Louis Vuitton (I mean, nothing says vulgar like something from Tiffany or the Burberry plaid which is the cruel joke) then you belong to that segment. Aspirational luxury...what the hell is that?

Of course now people are waking up to the fact that they were lied to and can't afford all this stuff except on credit. So there's your recession as retail and housing reset and all of this is "overhang". And we can't inflate wages because of global wage arbitrage, so there you go.

Elvis-You should check out this month's Nat Geo on the water situation in the Southwest. The twentieth century up to about 1995 was an unusually wet period. Things seem to be reverting to the mean much drier state. But population keeps growing. Certainly more efficient use can be a big help, but there is cause for concern.

Paul Krugman agrees with CR's analysis but adds some further comments and concludes that CR may be an optimist (hat tip to Brad DeLong at http://tinyurl.com/lrc3a ).

Jay, if you read carefully what I said, I said exactly what you did. I do NOT begrudge any chid deductions even though I don't have any, because I understand why they are there and that they are good for society. And I used "breed" in the neutral sense of what a government looks at...government wants people to have children because of future societal and economic issues.

Go back and read again.

What I questioned was why MI on a second residence should be deductable.

Walking home Friday night from Walgreen's I cam across a new type of real estate office.

In the storefront that was the local grocery store formerly run by two different couples, the first from Tibet (that's how far we have to go for gorcery store operators) the other couple was Indian (what you usually expect behind the counter), now it is a real estate office that is called, I kid you not "Exit Real Estate."

The motto was something like, "get you out of your situation" or something like that.

Who know that the housing recesson would create a new type of realtor, "the fixer."

Jay, just read my further comments in the thread and that frames my discussion.

Single people (whether gay or straight) often complain about taxes for such things, as do older people as it affects their property taxes.

I'm on record stating many times that I am willing to pay first world taxes for first world services. Unfortunately, people want the services without the taxes. And this recession is going to result in a whopping tax increase when it's all said and done among the other issues.

Spiv: My guess is that "real estate" office you saw was actually the burrow of an equity stripper, a micro-predator representing the final (decomposition) stage in the refi trophic food chain.

Very nice work looking at housing sales around the last six recessions, CR.

Different metric, but: Great Depression ran from Aug. '29 through Mar. '33. Residential fixed investment moved down through '33, and only began moving north in '34, after the recession had ended.

Question -- historically, coming out of the sales trough, does residential investment lead or lag increasing sales volume?

Population will continue to grow and housing will follow.

Elvis,

It's not about the total population, it's about the makeup of that total population. The progression of the boomers up to now has been a huge net positive to the U.S. economy; however, from 2010 through at least 2020 they'll be a dramatic net negative.

For those interested, there are two ETFs that are supposed to track "water": PHO and PIO.

Obviously, as there are no water futures, the ETFs are based on companies that would theoretically benefit from spending on water and water scarcity (filtration, pumping, infrastructure, etc.) - I believe that PIO is more global in scope.

I have PHO in my IRA - I bought it at $22 and its trading at $19 right now - I don't plan on doing anything with it, its not a huge position, and I expect that in 30 years its worth significantly more as water comes into focus. But I also haven't been thrilled with the price action relative to the overall market, so we'll see.

ipodius writes:
dunham, even a cursory reading of the relevant GSE studies will tell you that homeownership, especially in lower-income neighborhoods, results in less crime, better upkeep, neighborhood stability, more involvement in school systems, etc etc.

You mean like in Cleveland?

One more time. In the past, there has been a correlation between home ownership and responsible behavior, because you had to be responsible to buy a home in the first place. But making irresponsible people "homeowners" does not make them responsible.