Is there any way we can foist these price declines onto taxpayers so the financial industry isn't burdened with them and is free to go about their next scam unimpeded?
Another graph that I can show the wife to prove that we need to wait at least two years. Thanks CR and Tanta. Of course, this will continue the process of declining housing prices as qualified buyers will continue to wait as housing prices continue. I fully expect that Congress will pass some housing bill that will prevent a quick fall and extend it into a Japan deflation.
It's clear to me that the Government doesn't believe their own numbers. There is no way we would need all these bailouts if the true decline was only 3.1% yoy.
"Derivatives Market Grows to $596 Trillion on Hedging (Update1)
By Abigail Moses
May 22 (Bloomberg) -- The market for derivatives expanded at the fastest pace in at least a decade last year as the global credit crisis spurred trading in contracts used to hedge against losses, according to the Bank for International Settlements."
Nice to see they're containing the problem situation. Looks like they have got it all under control now. Whew!!
yes.....doubling down after you've lost billions is ALWAYS a great idea.....why wouldn't they?? Uncle Ben will just bail them out of that too.
My bet is that we get another announcement over the holiday.......bailout, backstop, another new acronym......whatever you want to call it. All under the guise of a flag waving patriotic gesture to save the system from collapsing like a wet taco.
My bet is that we get another announcement over the holiday.......bailout, backstop, another new acronym......whatever you want to call it. All under the guise of a flag waving patriotic gesture to save the system from collapsing like a wet taco.
Jingoism and pony ranches! Yee-haa!
Join the ranks of the declinists, boys and girls. The American empire is rotting from within.
That is an absolutely massive hit to household net worth.
Add the fact that oil is now averaging more than $50/bbl than in 2007 and its bad bad news for the consumer.
Since we consume 7.2 billion bbls of oil per year that $50 increase is a $360 billion hit to real GDP (even before any downstream impact which will add significantly to this hit) unless the consumers have more money to spend through wage growth and jobs.
That's about 2.5% of GDP.
Add the housing declines and it gets far uglier.
The only way we will be able to have positive GDP growth in 2008 will be if we see significant job growth and wage growth. So far that doesnt appear to be even a remote probability.
And please, dont say that exports will bail us out without wage growth because imports are still multiples of what exports are and imports are driven by the consumer - who is getting killed by fuel and housing, and seeing no wage growth or job creation.
Wright Model B anyone?
Case Shiller going down too fast? Switch to OFHEA.
OFHEA going down to fast? Switch to another index...
...How about an index like LIBOR (aka Libor) index. Let housing industry executives set the housing price. (e.g. Mr Mozilla, we don't want to 'embolden' the housing bears, so what do you think this month's price range might be?)
CR, I must apologize to you for something I said yesterday. "Cherry-picking" is the wrong word for what you are doing, in using data that's not sufficient for sound historical perspective.
The chart you provided doesn't even show two full business or housing cycles, yet it's clearly intended to show how "bad" housing is doing, in a supposedly "unprecedented" manner.
The Census Bureau has median home sales price data going back to 1963.
If one were to calculate the year-over-year change in median prices (March 2008 over March 2007, for example) since the 1960's, one would get a very different impression from what you're conveying in your chart. Today's difficulties don't look unprecedented at all, and they also look more like a climax low than the beginning of anything worse.
GSS - The problem with Zillow isn't their methodology, or even the geighness of terms like "Zesitimate" or "Zindex". It's the fact that to use it on a large scale they would charge a Zhitload.
"While being elevated to Congress in a 2007 special election, Richardson apparently stopped making payments on her new Sacramento home, and eventually walked away from it, leaving nearly $600,000 in unpaid loans and fees"
Fast Eddie, the Fed reported household real estate assets of about $20 trillion last quarter. So a 1.7% decline in prices is about $340 billion less wealth in Q1 alone.
I've seen "wealth effect" estimates on spending as high as 9 cents on the dollar, so that decline in wealth could impact consumer spending by about $30 billion (over several quarters) - to say nothing of putting more homeowners in negative equity situations.
If one were to calculate the year-over-year change in median prices (March 2008 over March 2007, for example) since the 1960's, one would get a very different impression from what you're conveying in your chart. Today's difficulties don't look unprecedented at all, and they also look more like a climax low than the beginning of anything worse.
I just plotted that series and I'd say it does look unprecedented AND nothing like a bottom - looks more like a big wave ready to curl over and break than a 'bottom'.
We have been looking at houses to buy lately, only looking at those whose asking price is about 50% less than the original listing.
All the homes in my area that are inhabitable are jumbo-loan priced.
A few weeks ago we were told we needed 10% down, plus an additional 5% down because we are in a "declining market".
We are now being told that the "extra 5% loan down payment requirement for declining markets" has been dropped.
Coincidentally, however, the overall downpayment has increased to now 15% total. But, fortunately, no "additional" down payment is required for declining markets.
What a relief. Can anyone spare $75k cash to help me out with a down payment?
Good news, Sebastian, subprime defaults are rising! That means there are less who can default in the future. And since the rate of defaults is increasing, the number of future possible defaults is decreasing. Yippee!
Credit ratings agency Standard & Poor's said Thursday that subprime mortgages bundled into securities that were rated between 2005 and 2007 continue to increasingly default.
Subprime mortgages are loans given to customers with poor credit history.
At the end of April, delinquencies among 2005 vintage loans reached 36.8 percent, an increase of 2 percent from the previous month.
Delinquent loans from 2006 totaled 37.1 percent, a 4 percent jump from March.
About 25.9 percent of loans from 2007 were delinquent at the end of April, a 6 percent increase from a month earlier.
dryfly said: "I just plotted that series and I'd say it does look unprecedented AND nothing like a bottom - looks more like a big wave ready to curl over and break than a 'bottom'."
Respectfully, I can tell from your description that you clearly did not chart it with the year-over-year percentage change I described.
From the Excel spreadsheet I used the formula (B13/B1)^1-1 in a separate column, signifying the percentage change between the prices in January 1964 and January 1963, then copied the formula all the way to the end of the data at March, 2008 and charted those percentage changes.
What you should be seeing is a chart that swings between a low of -14.55% and a high of +24.47%, with a current reading of -13.33%.
Thanks for the oecd link. It is awesome data on price/rent ratios especially for folks with international situations. Anyone know any source for those ratios on a city-by-city basis for the US?
I attended the Asia Society Southern California gala Tuesday night. Ken Courtis (former GS Vice Chair) moderated. Mohammed El-Erian (co-CIO/ CEO of PIMCO) and others including David Fisher (Chair, Capital Group), Josh Friedman (Canyon Partners), Ken Griffin (Citadel), Joe Landy (Warburg Pincus), Jim Zukin (Houlihan Lokey) sat in. All commented on general direction of US-Asia trade. Basic consensus: a bumpy road ahead. El-Erian posited that we're 75-85% through the credit crisis - but barely halfway through the financial crisis. He also said the Fed gets an "A" for effort but no better than a "B" for results - while also stating that present policy tools are severely inadequate for effecting useful remedy to the excessive leverage unwind currently occuring.
Dinner included a talk by Donald Tang (Bear Stearns - what's left of it), Bill Gross, and David Bonderman (TPG). Bonderman decried the 'worst administration since Millard Fillmore' - then apologized to Fillmore. Even Gross agreed that that as a registered Republican, he has "democratic tendencies" and as neutrally as possible advocated significant policy changes as the only possible relevant method to address the "inequities" in the system.
Basic summary - it's nowhere close to over, yet. And the policy makers in place now have inadequate tools, based on outdated models, to deal with it.
Sebastian -
Great data. Thanks for posting it.
I'm a little confused though since it merely supports the fact that the housing price decline in April is the most severe in several decades even if you look at a median basis - actually only one month in the entire data set since 1963 shows a bigger decline - August 1970 when we were in a recession. Remember, since these are not seasonally adjusted numbers that you posted they must be compared to the same month from the prior year rather than the preceding year (but of course you know that). Actually, the recent numbers look fairly awful and I can only find declines even close to this during periods of recession.
Wait a second, does that mean we're in a recession?
No way. We can't be. The Wright Model B hasnt inverted. By the way, what does an inverted Wright Model B look like since it isnt a yield curve?
I find that its really best to analyze data before you come to conclusions.
I just find it odd that you would post something that seems to support a very bearish outlook.
(B13/B1)^1-1 ????
^ in excell is a exponent expression and 1-1 is 0, so the exponent final expression is zero. Did you mean:
(B13/B1)^1)-1 which makes some since but the ^1 is worthless so why use it?
Oh, BTW, your conclusion is specious unless you factor in inflation (pick a flavor) on a forty year analysis. Your ducks are definitely not in a row here and they need to be.
From the Excel spreadsheet I used the formula (B13/B1)^1-1 in a separate column, signifying the percentage change between the prices in January 1964 and January 1963, then copied the formula all the way to the end of the data at March, 2008 and charted those percentage changes.
What you should be seeing is a chart that swings between a low of -14.55% and a high of +24.47%, with a current reading of -13.33%.
Yes I see what you are saying - I did a YOY Change, YOY % Change and then smoothed 12M SMA YOU %Change - plotted them all via excel.
There is precedent - none of them good. The drop we are experiencing is approx. equivalent to 68-71 'Rust Belt I'... 78-83 'Carter-Reagan Cardigan Misery Index' also known as 'Rust Belt II' recession and 91 'GHWB Gulf War I' recession.
The more I play with that data set the less comfortable I get. Maybe I need to plug in inflation rates to feel better - yes/no?
Son of Seb said: "...I just find it odd that you would post something that seems to support a very bearish outlook."
That's because I'm looking at the data, not defending a pre-determined position. That's always been the case, my posts simply aren't interpreted that way.
Yes, I see the same thing you see from Summer, 1970. But what happened subsequently? The economy was approaching the end of a recession, not the beginning. And the stock market had already made its low and was starting a major rally.
So, as I said before, even if we were in recession before it's looking like we're near the end of it now and not starting a whole new downturn.
But we weren't in recession before and it's not beginning now, either, because housing isn't the controlling force of the U.S. economy.
It was interesting that more metro areas actually rose than fell, despite the national decline. From looking at the data, the rises were generally small and some of the declining areas went down A LOT. Also the ones that rose tended to be mid-sized areas, other than in TX where everything seemed to be up.
I believe the Fed uses 6% of housing gains translating into consumer spending, so from OFHEO that would translate to about a 0.5% hit to 2008 GDP, and C-S implies something more on the order of 2%. Since the US produces about 50% of it's oil and gas needs domestically, higher prices are not a 1:1 hit on the economy, but as a ballpark I'd estimate sustained oil at $120 subtracts about 1.0% from 2008 gdp. Add to this the fact that with housing no longer a piggy bank, stocks basically flat for a decade now, and boomers nearing retirement, consumers may, god forbid, start actually saving again. Add it all up, and you get a headwind of 2 - 4% of gdp for 2008. The stimulus package will add back about 1% of gdp, but you have to be wearing some pretty dark rose coloured glasses to expect anything more than very weak growth for the next year or two. And then there's the credit crisis, which is only in temporary remission.
dryfly said: "The more I play with that data set the less comfortable I get."
I get more comfortable. Seeing how awful things have been in the past and the subsequent seemingly-impossible recoveries is what gives me my optimistic outlook.
When CPI-U inflation gets to 5% and persistently rises from there, then I'll start to worry. Until that time, however...
Sebastian -
Wait a second, are you saying that the only other time that we've seen housing declines even close to this was during a recession nearly 40 years ago?
How can that be when we're not in a recession?
I can't find anything even close to the currrent levels of decline except for Feb 1970 through Dec 1970 when the country was in a pretty severe recession. Maybe oil was at an inflation adjusted level of $130+ back then too.
Hmm, I cant figure out your analysis - you say the housing decline isnt severe and then you say its only happened one other time in our history (for which we have data) and that was essentially during the entire 1970 recession.
Send me that Wright Model B and show me what it looks like inverted. I'm interested in how something thats not a yield curve inverts.
I guess it cant which is the beauty of it - we'll never have a recession then!
Now I feel better.
Jamie Dimon is bearish.
Warren Buffett is bearish.
Jim Rogers is bearish (so bearish he left the country).
George Soros is bearish.
The Comptroller of the Currency says we are "bankrupt as a nation".
These guys have waaaaaaaay more track record and experience than they do. So rememeber, when you say things are "doing great", just remember that you're arguing with those 4.
Are you a "high net worth advisor" (aka stock broker) or something. I can't figure out what your agenda is, but I'd also add, if you had any brains and you were bullish on the market, an S&P index fund wouldn't be the way to go about it. You're not even making the right bet based on your viewpoint.
You might want to overlay any historical charts that show the self-correcting nature of economic downturns with a historical chart of debt to gdp, which is currently at an all-time high in the US. History also shows when the burden of debt deflation becomes too large, it overwhelms the self-correcting tendency of an economy and a prolonged downturn results. Unfortunately, the US is flirting with that abyss right now.
Sebastian - first, the Census data you describe are NEW home sale prices, average and median, which are not at all the same as paired sale comparisons for existing homes. If you don't understand that, you are winning the Special Economist Olympics today.
Second, anyone who does graph the YoY chg by month will see a rather strong recession indicator. How do you reconcile the pattern with your insistence that there is not?
Seb, where's the precedent for this level of declines BEFORE job losses hit their peak?
Job losses are increasing (and the government numbers are missing the turning point), and there will likely be a positive feedback loop of more job losses, less consumer spending, more job losses.
And home prices will show the effect of those job losses with a lag.
That should scare you, but you have a very unhealthy lack of fear, IMHO.
Thanks, Jas Jain. This data is what I needed. I have been wondering how big housing bubble we have here in Finland and this sets it quite close where I thought it is. I know the numbers between different countries are not directly comparable but I think they give some rough estimate. It has been very interesting to follow the curve there in US and compare it to our situation. The time lag is about 2 years since the prices are now topping here(real prices started to fall allready).
Sebastian - first, the Census data you describe are NEW home sale prices, average and median, which are not at all the same as paired sale comparisons for existing homes. If you don't understand that, you are winning the Special Economist Olympics today.
Do you get to wear a hockey helmet? I always liked helmets...
He is now getting ready to move the goalposts for us. We never did have a recession -- except after the fact of us being in one is self-evident, it's possible one did occur. But if it is underway, then the negative signs are just leading indicators of the inevitable recovery to follow.
I think the linked video is fairly consistent with Sebastian's argument on this topic: dumbest billy madison - Google Videos
It all makes sense to me now.
Please don't dispute what Sebastian has to say--he's got spreadsheets. And the spreadsheets clearly prove, within any possible margin of statistical error, that Sebastian
is the proud owner of real estate and he sure doesn't want it to decline in value.
"Anonymous writes: That is an absolutely massive hit to household net worth. Add the fact that oil is now averaging more than $50/bbl than in 2007 and its bad bad news for the consumer. Since we consume 7.2 billion bbls of oil per year that $50 increase is a $360 billion hit to real GDP (even before any downstream impact which will add significantly to this hit) unless the consumers have more money to spend through wage growth and jobs. That's about 2.5% of GDP."
For me, this is one of the biggest factors pointing to a continued economic downturn leading to a very deep recession. Yet I see virtually no discussion of oil price-driven reduction of consumer spending.
Miles,
You have started to see the housing impact on consumer spending which will get worse. The food and fuel impact will be next. The price increases there have now been sustained long enough (and actually increasing) that they will change consumer behavior. It doesnt happen overnight, but after a few months of seeing that their personal budgets are out of whack they will cut back. Since todays consumer relies so much on credit cards it takes a few months worth of balance and payment increases to have consumers realize they need to make an adjustment. Particularly with fuel which has seen a huge increase in credit card purchases in the past decade based on the "pay at the pump" design of the self service pumps. The days of "give me $20 of unleaded" are over - so the impact takes a couple months to realize rather than being todays cash out of pocket.
Its coming.
I have a question-why is money spent on food any less worthwhile consumer spending than that spent on TVs? I could argue it's better, since most of our food is grown in the US, whereas TVs are not made here. Of course, it's bad if you sell TVs, but it's very good if you sell combines.
Food price increases are bad because it reduces ALL consumers' discretionary income and only benefits a FEW (farmers, etc.) who cant make up for the hit to the consumers. If you assume that 100% of the price increase is additional profit to the farmers, etc. (which it isnt - their costs are way up too) and then also assume that 100% of that profit is plowed (no pun intended) back into the economy then you are right. The problem is that taxes will take about 40% of that profit off the top - so essentially the consumers' after tax dollars are converted into the farmers pre-tax profit.... Thats no way to run a robust economy...
In addition to farmers, the beneficiaries have included railroads, farm implement makers, fertilizer and seed companies and all the people who work for them. You only need look at stocks like POT, MON, etc. I'm not sure that's any narrower than the people who make and sell TVs. As far taxes, everyone pays taxes, so I don't get that point.
I'm not sold either way, but I think there should be some thought before automatically saying that a dollar spent on food is worth less than one spent on granite countertops.
In Sebastian's world, we can never have a recession, and all declines are merely "times to buy." In his view, the Great Depression was a wonderful time - clearly not a recession or worse - since things eventually went up afterwards. He also apparently believes that housing prices can not only stabilize, but actually increase, from absurdly unaffordable levels based upon declining housing prices.
In short, he lives in his own world that rarely ever crosses into reality.
giacutter- that is great news about the added 5% in required downpayment. I was hoping against hope that that would be the way it turned out once they got rid of the "declining markets" category.
MOM insultingly said: "Sebastian - first, the Census data you describe are NEW home sale prices, average and median, which are not at all the same as paired sale comparisons for existing homes. If you don't understand that, you are winning the Special Economist Olympics today."
But restricting a chart to an insufficient amount of data to prove anything, including only one housing cycle, makes a superior argument? The recent new home sales data roughly coincides with C-S and OFHEO (showing a serious deterioration over the past few years). Why shouldn't it be valid to use when looking at older housing price patterns?
"Second, anyone who does graph the YoY chg by month will see a rather strong recession indicator. How do you reconcile the pattern with your insistence that there is not?"
My insistence is immaterial. Real GDP shows no recession, unemployment shows no recession, the ISM indices show no recession. If there's a disconnect between housing price declines and other economic indicators, that's not my doing and it's incredibly unfair for you to take issue with me just for pointing it out.
Everyone goes on and on about a US recession, US recession, US recession. Folks, this is a global economy. Is the global economy in recession? Absolutely not, not even close. If India and China lost 5 % of their GDP growth they'd still be growing at 5%. That's half the world's population right there. And Russia and Brazil aren't too shabby either.
Sebastian,
You seem to be saying that most of us here are giving too much weight to the negatives facing the economy and that we are in fact ready to rebound. I ask you-what so you see as a springboard for said rebound? One thing missing from comparing the present decline in housing to the past is the overall health of the consumer. How much credit card debt did folks have in 1970? Weren't most households supported by a single wage earner and thus able to get the spouse into the workforce if times got tough? What % of household income was consumed by healthcare and education costs?
The link below if for a video of Elizabeth Warren giving a speech at UC Berkely regarding the "health" of the middle class. Note, it's about an hour long and does not leave one with the Warm & Fuzzies. YouTube - The Coming Collapse of the Middle Class
Ahead -
The point on taxes is that the consumers are spending after tax dollars to pay for the big price increases in food - if you simply assume that all of that increase is profit to the farmer (which it isnt - that was also my point) then those after tax dollars get taxed again. If the consumer invests that money (ha!), saves that money (ha!), purchases goods that generate only a marginal profit and pay workers who have low marginal tax rates, etc, then most of that spending stays out of the government's hands. The typical counter argument to that is that the govt will spend that money as efficiently as the private economy would have (ha! ha!)...
Lubricated prices.
Overrated First
Is there any way we can foist these price declines onto taxpayers so the financial industry isn't burdened with them and is free to go about their next scam unimpeded?
ouch! Frist?
Oh Sh!t graphs are fun!
All I can say is, wheeeeee!!!!
First?
Will it ever catch up with the Case Shiller index?
first??
tyaresun, I don't think so. Case-Shiller showed a bigger runup in prices, so it makes sense that C-S is falling faster too.
I think C-S is closer to what actually happened (and is happening) than OFHEO.
Best Wishes.
Another graph that I can show the wife to prove that we need to wait at least two years. Thanks CR and Tanta. Of course, this will continue the process of declining housing prices as qualified buyers will continue to wait as housing prices continue. I fully expect that Congress will pass some housing bill that will prevent a quick fall and extend it into a Japan deflation.
If ever I saw a good example of cliff diving.
CR,
It's clear to me that the Government doesn't believe their own numbers. There is no way we would need all these bailouts if the true decline was only 3.1% yoy.
What a charade.
Well, that's a shame. I thought housing only went up.
Derivatives Market Grows to $596 Trillion on Hedging (Update1) - Bloomberg.com
"Derivatives Market Grows to $596 Trillion on Hedging (Update1)
By Abigail Moses
May 22 (Bloomberg) -- The market for derivatives expanded at the fastest pace in at least a decade last year as the global credit crisis spurred trading in contracts used to hedge against losses, according to the Bank for International Settlements."
Nice to see they're containing the problem situation. Looks like they have got it all under control now. Whew!!
What? No bottom?!?
That knife is gonna cut through naive buyer's hands like butter.
anon-
yes.....doubling down after you've lost billions is ALWAYS a great idea.....why wouldn't they?? Uncle Ben will just bail them out of that too.
My bet is that we get another announcement over the holiday.......bailout, backstop, another new acronym......whatever you want to call it. All under the guise of a flag waving patriotic gesture to save the system from collapsing like a wet taco.
Ciao
MS
Anyone else suspect co-ordinated FCB intervention propping up the dollar?
It is about that time.
My bet is that we get another announcement over the holiday.......bailout, backstop, another new acronym......whatever you want to call it. All under the guise of a flag waving patriotic gesture to save the system from collapsing like a wet taco.
Jingoism and pony ranches! Yee-haa!
Join the ranks of the declinists, boys and girls. The American empire is rotting from within.
CR,
Give us a preview. What was the last reported value of all houses in the USA?
That is an absolutely massive hit to household net worth.
Add the fact that oil is now averaging more than $50/bbl than in 2007 and its bad bad news for the consumer.
Since we consume 7.2 billion bbls of oil per year that $50 increase is a $360 billion hit to real GDP (even before any downstream impact which will add significantly to this hit) unless the consumers have more money to spend through wage growth and jobs.
That's about 2.5% of GDP.
Add the housing declines and it gets far uglier.
The only way we will be able to have positive GDP growth in 2008 will be if we see significant job growth and wage growth. So far that doesnt appear to be even a remote probability.
And please, dont say that exports will bail us out without wage growth because imports are still multiples of what exports are and imports are driven by the consumer - who is getting killed by fuel and housing, and seeing no wage growth or job creation.
Wright Model B anyone?
Case Shiller going down too fast? Switch to OFHEA.
OFHEA going down to fast? Switch to another index...
...How about an index like LIBOR (aka Libor) index. Let housing industry executives set the housing price. (e.g. Mr Mozilla, we don't want to 'embolden' the housing bears, so what do you think this month's price range might be?)
What do you think about using the Zillow price estimator -- I think it's called Zestimates?
Zillow Home Value Index Compared to OFHEO and Case-Shiller Indexes | Zillow Blog - Real Estate Market Stats, Celebrity Real Estate, and Zillow News
CR, I must apologize to you for something I said yesterday. "Cherry-picking" is the wrong word for what you are doing, in using data that's not sufficient for sound historical perspective.
The chart you provided doesn't even show two full business or housing cycles, yet it's clearly intended to show how "bad" housing is doing, in a supposedly "unprecedented" manner.
The Census Bureau has median home sales price data going back to 1963.
http://www.census.gov/const/usprice_cust.xls
If one were to calculate the year-over-year change in median prices (March 2008 over March 2007, for example) since the 1960's, one would get a very different impression from what you're conveying in your chart. Today's difficulties don't look unprecedented at all, and they also look more like a climax low than the beginning of anything worse.
Sebastia
How about if we let Dr.? Yun set house prices? I glanced at the full report and was struck by the dramatic variance among states and MSAs.
OMG Sebastian you have sunk to a new low, if that's even possible.
GSS - The problem with Zillow isn't their methodology, or even the geighness of terms like "Zesitimate" or "Zindex". It's the fact that to use it on a large scale they would charge a Zhitload.
O/T but excellent read..
Saw this on Mish's blog worth the read!!
"While being elevated to Congress in a 2007 special election, Richardson apparently stopped making payments on her new Sacramento home, and eventually walked away from it, leaving nearly $600,000 in unpaid loans and fees"
Source here: Capitol Weekly: Debate intensifies over Richardson home default
Mishe here: Mish's Global etc.
Fast Eddie, the Fed reported household real estate assets of about $20 trillion last quarter. So a 1.7% decline in prices is about $340 billion less wealth in Q1 alone.
I've seen "wealth effect" estimates on spending as high as 9 cents on the dollar, so that decline in wealth could impact consumer spending by about $30 billion (over several quarters) - to say nothing of putting more homeowners in negative equity situations.
Best to all.
If one were to calculate the year-over-year change in median prices (March 2008 over March 2007, for example) since the 1960's, one would get a very different impression from what you're conveying in your chart. Today's difficulties don't look unprecedented at all, and they also look more like a climax low than the beginning of anything worse.
I just plotted that series and I'd say it does look unprecedented AND nothing like a bottom - looks more like a big wave ready to curl over and break than a 'bottom'.
Americans are fooling themselves if they think U.S. inflation is under control, the manager of the world's largest bond fund said on Thursday.
UPDATE 1-PIMCO's Gross questions U.S. inflation assumptions
| Reuters
No kidding. This dumb ass.
--
Great international data source:
http://www.oecd.org/dataoecd/6/5/2483894.xls
See table under HousePriceRatios.
Enjoy!
Jas
Sebastian
Pull my finger.
Knife-catcher update:
We have been looking at houses to buy lately, only looking at those whose asking price is about 50% less than the original listing.
All the homes in my area that are inhabitable are jumbo-loan priced.
A few weeks ago we were told we needed 10% down, plus an additional 5% down because we are in a "declining market".
We are now being told that the "extra 5% loan down payment requirement for declining markets" has been dropped.
Coincidentally, however, the overall downpayment has increased to now 15% total. But, fortunately, no "additional" down payment is required for declining markets.
What a relief. Can anyone spare $75k cash to help me out with a down payment?
Anonymous,
Sebastian is the only genius we got here.
Jas
Keep the bottom calls a comin'...they are much appreciated!
People...remember to distinguish between monetary and price inflation. The two are not the same.
dryfly,
Hate to say I agree with sebatian here. That graph has a historical precendent, which I see most sat mornings
When wiley coyote goes over the cliff...
Good news, Sebastian, subprime defaults are rising! That means there are less who can default in the future. And since the rate of defaults is increasing, the number of future possible defaults is decreasing. Yippee!
Credit ratings agency Standard & Poor's said Thursday that subprime mortgages bundled into securities that were rated between 2005 and 2007 continue to increasingly default.
Subprime mortgages are loans given to customers with poor credit history.
At the end of April, delinquencies among 2005 vintage loans reached 36.8 percent, an increase of 2 percent from the previous month.
Delinquent loans from 2006 totaled 37.1 percent, a 4 percent jump from March.
About 25.9 percent of loans from 2007 were delinquent at the end of April, a 6 percent increase from a month earlier.
dryfly said: "I just plotted that series and I'd say it does look unprecedented AND nothing like a bottom - looks more like a big wave ready to curl over and break than a 'bottom'."
Respectfully, I can tell from your description that you clearly did not chart it with the year-over-year percentage change I described.
From the Excel spreadsheet I used the formula (B13/B1)^1-1 in a separate column, signifying the percentage change between the prices in January 1964 and January 1963, then copied the formula all the way to the end of the data at March, 2008 and charted those percentage changes.
What you should be seeing is a chart that swings between a low of -14.55% and a high of +24.47%, with a current reading of -13.33%.
Sebastia
Jas Jain
Thanks for the oecd link. It is awesome data on price/rent ratios especially for folks with international situations. Anyone know any source for those ratios on a city-by-city basis for the US?
I attended the Asia Society Southern California gala Tuesday night. Ken Courtis (former GS Vice Chair) moderated. Mohammed El-Erian (co-CIO/ CEO of PIMCO) and others including David Fisher (Chair, Capital Group), Josh Friedman (Canyon Partners), Ken Griffin (Citadel), Joe Landy (Warburg Pincus), Jim Zukin (Houlihan Lokey) sat in. All commented on general direction of US-Asia trade. Basic consensus: a bumpy road ahead. El-Erian posited that we're 75-85% through the credit crisis - but barely halfway through the financial crisis. He also said the Fed gets an "A" for effort but no better than a "B" for results - while also stating that present policy tools are severely inadequate for effecting useful remedy to the excessive leverage unwind currently occuring.
Dinner included a talk by Donald Tang (Bear Stearns - what's left of it), Bill Gross, and David Bonderman (TPG). Bonderman decried the 'worst administration since Millard Fillmore' - then apologized to Fillmore. Even Gross agreed that that as a registered Republican, he has "democratic tendencies" and as neutrally as possible advocated significant policy changes as the only possible relevant method to address the "inequities" in the system.
Basic summary - it's nowhere close to over, yet. And the policy makers in place now have inadequate tools, based on outdated models, to deal with it.
Wright Model B: The "B" stands for Beta!
Any predictions on what C-S will show Tuesday?
Sebastian -
Great data. Thanks for posting it.
I'm a little confused though since it merely supports the fact that the housing price decline in April is the most severe in several decades even if you look at a median basis - actually only one month in the entire data set since 1963 shows a bigger decline - August 1970 when we were in a recession. Remember, since these are not seasonally adjusted numbers that you posted they must be compared to the same month from the prior year rather than the preceding year (but of course you know that). Actually, the recent numbers look fairly awful and I can only find declines even close to this during periods of recession.
Wait a second, does that mean we're in a recession?
No way. We can't be. The Wright Model B hasnt inverted. By the way, what does an inverted Wright Model B look like since it isnt a yield curve?
I find that its really best to analyze data before you come to conclusions.
I just find it odd that you would post something that seems to support a very bearish outlook.
Sebastian:
(B13/B1)^1-1 ????
^ in excell is a exponent expression and 1-1 is 0, so the exponent final expression is zero. Did you mean:
(B13/B1)^1)-1 which makes some since but the ^1 is worthless so why use it?
Oh, BTW, your conclusion is specious unless you factor in inflation (pick a flavor) on a forty year analysis. Your ducks are definitely not in a row here and they need to be.
From the Excel spreadsheet I used the formula (B13/B1)^1-1 in a separate column, signifying the percentage change between the prices in January 1964 and January 1963, then copied the formula all the way to the end of the data at March, 2008 and charted those percentage changes.
What you should be seeing is a chart that swings between a low of -14.55% and a high of +24.47%, with a current reading of -13.33%.
Yes I see what you are saying - I did a YOY Change, YOY % Change and then smoothed 12M SMA YOU %Change - plotted them all via excel.
There is precedent - none of them good. The drop we are experiencing is approx. equivalent to 68-71 'Rust Belt I'... 78-83 'Carter-Reagan Cardigan Misery Index' also known as 'Rust Belt II' recession and 91 'GHWB Gulf War I' recession.
The more I play with that data set the less comfortable I get. Maybe I need to plug in inflation rates to feel better - yes/no?
Son of Seb said: "...I just find it odd that you would post something that seems to support a very bearish outlook."
That's because I'm looking at the data, not defending a pre-determined position. That's always been the case, my posts simply aren't interpreted that way.
Yes, I see the same thing you see from Summer, 1970. But what happened subsequently? The economy was approaching the end of a recession, not the beginning. And the stock market had already made its low and was starting a major rally.
So, as I said before, even if we were in recession before it's looking like we're near the end of it now and not starting a whole new downturn.
But we weren't in recession before and it's not beginning now, either, because housing isn't the controlling force of the U.S. economy.
Sebastia
The more I play with that data set the less comfortable I get. Maybe I need to plug in inflation rates to feel better - yes/no?
I'll go find my Jimmy Carter Era cardigan and munch some peanuts - in the corner in a fetal position - that should help.
It was interesting that more metro areas actually rose than fell, despite the national decline. From looking at the data, the rises were generally small and some of the declining areas went down A LOT. Also the ones that rose tended to be mid-sized areas, other than in TX where everything seemed to be up.
I believe the Fed uses 6% of housing gains translating into consumer spending, so from OFHEO that would translate to about a 0.5% hit to 2008 GDP, and C-S implies something more on the order of 2%. Since the US produces about 50% of it's oil and gas needs domestically, higher prices are not a 1:1 hit on the economy, but as a ballpark I'd estimate sustained oil at $120 subtracts about 1.0% from 2008 gdp. Add to this the fact that with housing no longer a piggy bank, stocks basically flat for a decade now, and boomers nearing retirement, consumers may, god forbid, start actually saving again. Add it all up, and you get a headwind of 2 - 4% of gdp for 2008. The stimulus package will add back about 1% of gdp, but you have to be wearing some pretty dark rose coloured glasses to expect anything more than very weak growth for the next year or two. And then there's the credit crisis, which is only in temporary remission.
dryfly said: "The more I play with that data set the less comfortable I get."
I get more comfortable.
Seeing how awful things have been in the past and the subsequent seemingly-impossible recoveries is what gives me my optimistic outlook.
When CPI-U inflation gets to 5% and persistently rises from there, then I'll start to worry. Until that time, however...
Sebastia
Sebastian -
Wait a second, are you saying that the only other time that we've seen housing declines even close to this was during a recession nearly 40 years ago?
How can that be when we're not in a recession?
I can't find anything even close to the currrent levels of decline except for Feb 1970 through Dec 1970 when the country was in a pretty severe recession. Maybe oil was at an inflation adjusted level of $130+ back then too.
Hmm, I cant figure out your analysis - you say the housing decline isnt severe and then you say its only happened one other time in our history (for which we have data) and that was essentially during the entire 1970 recession.
Send me that Wright Model B and show me what it looks like inverted. I'm interested in how something thats not a yield curve inverts.
I guess it cant which is the beauty of it - we'll never have a recession then!
Now I feel better.
SEBass-
Regarding the economy into 2010:
Jamie Dimon is bearish.
Warren Buffett is bearish.
Jim Rogers is bearish (so bearish he left the country).
George Soros is bearish.
The Comptroller of the Currency says we are "bankrupt as a nation".
These guys have waaaaaaaay more track record and experience than they do. So rememeber, when you say things are "doing great", just remember that you're arguing with those 4.
Are you a "high net worth advisor" (aka stock broker) or something. I can't figure out what your agenda is, but I'd also add, if you had any brains and you were bullish on the market, an S&P index fund wouldn't be the way to go about it. You're not even making the right bet based on your viewpoint.
You might want to overlay any historical charts that show the self-correcting nature of economic downturns with a historical chart of debt to gdp, which is currently at an all-time high in the US. History also shows when the burden of debt deflation becomes too large, it overwhelms the self-correcting tendency of an economy and a prolonged downturn results. Unfortunately, the US is flirting with that abyss right now.
Sebastian - first, the Census data you describe are NEW home sale prices, average and median, which are not at all the same as paired sale comparisons for existing homes. If you don't understand that, you are winning the Special Economist Olympics today.
Second, anyone who does graph the YoY chg by month will see a rather strong recession indicator. How do you reconcile the pattern with your insistence that there is not?
I enjoyed this very much.
Seb, where's the precedent for this level of declines BEFORE job losses hit their peak?
Job losses are increasing (and the government numbers are missing the turning point), and there will likely be a positive feedback loop of more job losses, less consumer spending, more job losses.
And home prices will show the effect of those job losses with a lag.
That should scare you, but you have a very unhealthy lack of fear, IMHO.
Thanks, Jas Jain. This data is what I needed. I have been wondering how big housing bubble we have here in Finland and this sets it quite close where I thought it is. I know the numbers between different countries are not directly comparable but I think they give some rough estimate. It has been very interesting to follow the curve there in US and compare it to our situation. The time lag is about 2 years since the prices are now topping here(real prices started to fall allready).
I'm not sure what part of "largest quarterly price decline on record" Sebastian doesn't understand.
Sebastian - first, the Census data you describe are NEW home sale prices, average and median, which are not at all the same as paired sale comparisons for existing homes. If you don't understand that, you are winning the Special Economist Olympics today.
Do you get to wear a hockey helmet? I always liked helmets...
Seeing how awful things have been in the past and the subsequent seemingly-impossible recoveries is what gives me my optimistic outlook.
This strikes me as very much akin to optimism based on having 'won' the last few rounds of Russian roulette...
Sebastian is a performance artist.
He is now getting ready to move the goalposts for us. We never did have a recession -- except after the fact of us being in one is self-evident, it's possible one did occur. But if it is underway, then the negative signs are just leading indicators of the inevitable recovery to follow.
"beacuse housing isn't the controlling force of the US economy."
Sebastion, you are correct.
MEW is the controlling force.
I think the linked video is fairly consistent with Sebastian's argument on this topic:
dumbest billy madison - Google Videos
It all makes sense to me now.
Please don't dispute what Sebastian has to say--he's got spreadsheets. And the spreadsheets clearly prove, within any possible margin of statistical error, that Sebastian
is the proud owner of real estate and he sure doesn't want it to decline in value.
"Anonymous writes: That is an absolutely massive hit to household net worth. Add the fact that oil is now averaging more than $50/bbl than in 2007 and its bad bad news for the consumer. Since we consume 7.2 billion bbls of oil per year that $50 increase is a $360 billion hit to real GDP (even before any downstream impact which will add significantly to this hit) unless the consumers have more money to spend through wage growth and jobs. That's about 2.5% of GDP."
For me, this is one of the biggest factors pointing to a continued economic downturn leading to a very deep recession. Yet I see virtually no discussion of oil price-driven reduction of consumer spending.
Miles,
You have started to see the housing impact on consumer spending which will get worse. The food and fuel impact will be next. The price increases there have now been sustained long enough (and actually increasing) that they will change consumer behavior. It doesnt happen overnight, but after a few months of seeing that their personal budgets are out of whack they will cut back. Since todays consumer relies so much on credit cards it takes a few months worth of balance and payment increases to have consumers realize they need to make an adjustment. Particularly with fuel which has seen a huge increase in credit card purchases in the past decade based on the "pay at the pump" design of the self service pumps. The days of "give me $20 of unleaded" are over - so the impact takes a couple months to realize rather than being todays cash out of pocket.
Its coming.
"The food and fuel impact will be next."
I have a question-why is money spent on food any less worthwhile consumer spending than that spent on TVs? I could argue it's better, since most of our food is grown in the US, whereas TVs are not made here. Of course, it's bad if you sell TVs, but it's very good if you sell combines.
Now oil, is different since so much is imported.
Food price increases are bad because it reduces ALL consumers' discretionary income and only benefits a FEW (farmers, etc.) who cant make up for the hit to the consumers. If you assume that 100% of the price increase is additional profit to the farmers, etc. (which it isnt - their costs are way up too) and then also assume that 100% of that profit is plowed (no pun intended) back into the economy then you are right. The problem is that taxes will take about 40% of that profit off the top - so essentially the consumers' after tax dollars are converted into the farmers pre-tax profit.... Thats no way to run a robust economy...
In addition to farmers, the beneficiaries have included railroads, farm implement makers, fertilizer and seed companies and all the people who work for them. You only need look at stocks like POT, MON, etc. I'm not sure that's any narrower than the people who make and sell TVs. As far taxes, everyone pays taxes, so I don't get that point.
I'm not sold either way, but I think there should be some thought before automatically saying that a dollar spent on food is worth less than one spent on granite countertops.
In Sebastian's world, we can never have a recession, and all declines are merely "times to buy." In his view, the Great Depression was a wonderful time - clearly not a recession or worse - since things eventually went up afterwards. He also apparently believes that housing prices can not only stabilize, but actually increase, from absurdly unaffordable levels based upon declining housing prices.
In short, he lives in his own world that rarely ever crosses into reality.
maybe sebatian is right...
We are in 1970....
3 years before lines at the gas pump.
giacutter- that is great news about the added 5% in required downpayment. I was hoping against hope that that would be the way it turned out once they got rid of the "declining markets" category.
Thanks for the report.
No comments?
Why izzat?
Firstish.
Haloscan reported no comments at first. It's also not saying how many comments were posted.
MOM insultingly said: "Sebastian - first, the Census data you describe are NEW home sale prices, average and median, which are not at all the same as paired sale comparisons for existing homes. If you don't understand that, you are winning the Special Economist Olympics today."
But restricting a chart to an insufficient amount of data to prove anything, including only one housing cycle, makes a superior argument? The recent new home sales data roughly coincides with C-S and OFHEO (showing a serious deterioration over the past few years). Why shouldn't it be valid to use when looking at older housing price patterns?
"Second, anyone who does graph the YoY chg by month will see a rather strong recession indicator. How do you reconcile the pattern with your insistence that there is not?"
My insistence is immaterial. Real GDP shows no recession, unemployment shows no recession, the ISM indices show no recession. If there's a disconnect between housing price declines and other economic indicators, that's not my doing and it's incredibly unfair for you to take issue with me just for pointing it out.
Sebastia
Everyone goes on and on about a US recession, US recession, US recession. Folks, this is a global economy. Is the global economy in recession? Absolutely not, not even close. If India and China lost 5 % of their GDP growth they'd still be growing at 5%. That's half the world's population right there. And Russia and Brazil aren't too shabby either.
Sebastian,
You seem to be saying that most of us here are giving too much weight to the negatives facing the economy and that we are in fact ready to rebound. I ask you-what so you see as a springboard for said rebound? One thing missing from comparing the present decline in housing to the past is the overall health of the consumer. How much credit card debt did folks have in 1970? Weren't most households supported by a single wage earner and thus able to get the spouse into the workforce if times got tough? What % of household income was consumed by healthcare and education costs?
The link below if for a video of Elizabeth Warren giving a speech at UC Berkely regarding the "health" of the middle class. Note, it's about an hour long and does not leave one with the Warm & Fuzzies.
YouTube - The Coming Collapse of the Middle Class
Ahead -
The point on taxes is that the consumers are spending after tax dollars to pay for the big price increases in food - if you simply assume that all of that increase is profit to the farmer (which it isnt - that was also my point) then those after tax dollars get taxed again. If the consumer invests that money (ha!), saves that money (ha!), purchases goods that generate only a marginal profit and pay workers who have low marginal tax rates, etc, then most of that spending stays out of the government's hands. The typical counter argument to that is that the govt will spend that money as efficiently as the private economy would have (ha! ha!)...