My wife sells stuff on Ebay all the time and spending hasn't slowed there. Maybe it's a case of people still spending, but thinking they're getting a deal.
I put this in the UBS thread, but thought I'd repost it here as well cause it was an eye-opener (and yet not surprising at the same time). Wonder how much higher SKF will go.
"It is interesting to note that the largest institutional holder in the ProShares Ultra-Short Financials (SKF) is the European bank UBS which at the end of the first quarter of 2008 owned over 318,000 shares." from Tiny URL - create a shorter link
"The CPI is a flawed statistic," said former Fed Chairman Alan Greenspan in a 1999 meeting of the Federal Open Market Committee. "It is a statistic that overweighs housing and overweighs a significant part of personal-consumption expenditures."
"We ought to set aside the consumer price index," he added.
There's no reason to believe his successor, Ben Bernanke, is any fonder of the CPI than Greenspan was -- particularly now, when the bizarre way the CPI treats housing costs is sending misleading signals about the true path of inflation. And it's only going to get worse.
The Fed is aware of this issue, and in part this could explain why they prefer to monitor the core PCE deflator, in which the measurement [as well as the weighting] of housing costs is treated differently," said Stu Hoffman, chief economist for PNC Financial.
"A core PCE deflator topping 2% will carry more weight with the FOMC than will a core CPI above 2%," he added.
"It is interesting to note that the largest institutional holder in the ProShares Ultra-Short Financials (SKF) is the European bank UBS which at the end of the first quarter of 2008 owned over 318,000 shares."
Galbraith's 1929 market crash books describes congressional hearings at which it was discovered that a major bank president (his name was Wiggan) was shorting the stock of his own bank. This sounds like the same thing. I would have thought default swaps would also provide scope for this type of activity.
Real estate agent shot and killed in Roosevelt Park office
A man upset about a property transaction shot a real estate agent in the head, mortally wounding him, during a meeting Tuesday morning in the victims office, authorities said.
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I wonder what the chart would lok like if changes in employment and incomes were factored in?
One big change over the last 20 years is how easy it is to monetize housing wealth. Refinancing is a lot easier and cheaper, there are HELOCs, etc. It seems hard to believe the effect of a loss of housing wealth will have less of an effect than previously.
As it happens, inflation has both become harder and easier to forecast, depending on ones point of view. On the one hand, inflation like many other macroeconomic time series has become much less volatile, so the root mean squared error of even naïve or relatively poor forecasts had declined since the mid-1980s. In this sense, inflation has become easier to forecast: the risk of inflation forecasts, as measured by mean squared forecast errors (MSFE), has fallen. On the other hand, the relative improvement of standard multivariate forecasting models, such as the backwards-looking Phillips curve, over a univariate benchmark has been smaller in percentage terms since the mid-1980s than before. This point was forcefully made by Atkeson and Ohanian (2001) (henceforth, AO), who found that backwards-looking Phillips curve forecasts were inferior to a naïve forecast of average twelve-month inflation by its average rate over the previous twelvemonths.
73 year old shoots 34 year old realtor -- that says it all, and interesting how the 73 year old, didn't go the bank or mortgage company! I still think realtors are the ones that drive around customers while smiling and pumping up lies and pumping hype. This is a sad example of one-on-one relationships, where a realtor is singled out for playing a role in a game where people get burned.
Consumers have closed their wallets this year because increased living costs are squeezing household budgets.
Retailers have responded by starting their annual winter sales early - and with bargains galore.
consumer confidence index is at its weakest level since 1991, and April figures from Statistics NZ show core retail sales - which excludes vehicle-related industries - were down 0.5 per cent.
The first half of the year was a shocker for investors with the benchmark NZX-50 Gross Index falling 21 per cent and the finance company sector in serious meltdown.
It was the NZX's worst six month performance since the July-December 1990 period when the benchmark index plunged 31.7 per cent. That was during the country's last full-blooded recession when the economy experienced four successive quarters of negative GDP growth, from July 1990 to June 1991.
Man-moth,
The url seems broken. I'm interested in where those stats came from. I wonder if SRS, my own favorite, is heavily owned by REITs and developers.
Someone else here has mentioned that there might be risk in cashing out with these inverse ETFs, if you get greedy and hold them too long. I have no idea if this is a real risk, but it is something I keep in mind.
If anyone does know, I would love to hear your ideas.
I am also wondering about the effect of losing so much liquidity for consumers. It would appear to have more effect that the graphs show.
OTOH, its effects can be put off into the future by other sources of liquidity such as credit cards. I'd be interested in a graph of the increase in debt against the change in house prices, but even then the effect may be offset.
For example, a fella does a cash out refi of 100k, just before a 200K decline in house prices. He will not be either increasing debt or cutting expenses until the 100K runs out. An interval almost impossible to predict.
I've argued here before that the effect of house prices on spending is less than people here were saying. This data appears to support that. Psychologically, I doubted the connection because houses are difficult to price accurately. Unless you are really in a development of identical homes where sales are frequent, it's difficult to know for sure how much your house would sell for and how long it would take to sell. So basing spending on house price is not reasonable. Stocks are different since you can sell with a mouse click for an easily determined price.
Is UBS in SKF? If so, shorting your own stock would seem to violate your fiduciary duty to shareholders. If I were a UBS shareholder, I would sue. If UBS is not in SKF, I suppose you could argue you were shorting the competition, but that still seems sketchy, since its effect on your own share price is probably still quite negative. This looks like a lawsuit waiting to happen.
What am I missing? We saw enormous Mortgage Equity Withdrawal during the runup that has faded to 1/3 or 1/4 it's peak value - the graphs were here on this site. What was the extra $300B+/yr of MEW being spent on that doesn't show up here?
Can't speak for Middle America -- maybe dryfly can weigh in here -- but you really oughtta spend some time in L.A. before dismissing it. The housing related wealth effect is so pronounced here a blind man could see it.
I did once, when I went on Jeopardy many years ago. I knew the answers, but it took me until halfway through the show to figure out the buzzers. The whole experience was enough LA for 1 lifetime.
You can say what you want; the graph is pretty clear-spending grew fast in the mid 90s, even though house prices were flat. Why? Probably because the economy was expanding and the market was rising.
Personally, I have only the vaguest idea what my house is worth today, or what it was worth at any point in time. So I never spent or didn't spend a dime based on that.
Aheadofthecurve,
your post suggests that people make considered, rational spending decisions. i think that's a pleasant thought. Disregard for the moment CR's posts on consumers in maximum distress. Just anecdotally, I am surrounded by friends, clients, relatives and neighbors, who have been spending up a storm for years. I have been told repeatedly by folks in NY, that their apt. is their retirement, their child's college fund, their ticket out of the rat race. Wages have been stagnant thru this decade, and yet folks have been buying houses, luxury goods, pimped-out cars and suvs, going for the maximum bling.
Everyone did not win the lottery, everyone did not just get a big inheritance, everyone is not making 240k a year. But lots and lots of your fellow citizens were playing housing mania, betting everything that rising RE values would provide a second income. The house was working for them. Now it's not.
Now they're saddled with unmanageable debt, and no housing ATM. I believe those are the facts.
fried-I'm not disputing your experience but the graph says that isn't the national picture (or UK either). Real spending was up much more from 1992-2000 even though house prices were flat much of that time than it was from 2000-2007.
If the graph is wrong, then show me the facts that say different and I will change my opinion. It may be that this phenomenon was limited to certain regions. I don't know, but I am prepared to be enlightened.
Equity withdrawal and other debt has been supporting unreasonable spending that the underlying economy could not have supported since 2001. The spending didn't go up, but it didn't go down as much as it should have. Just like house prices in most of the rustbelt. Remember how we were being assured until recently that flyover house prices would not go down because they had not gone up like the bubble areas?
It makes sense that the narrowing of consumer debt options has a lagged effect, but I will be very surprised if consumer spending doesn't take a sharp turn down in the very near future.
BTW, I went to a seed swap at the local farmers' market last week. There were about 50 people there for a class on raising chickens in your yard. I think things are about to get very Dryfly around here.
A man upset about a property transaction shot a real estate agent in the head, mortally wounding him, during a meeting Tuesday morning in the victims office, authorities said.
I can't wait for jury selection. I just wish these articles were more precise. "...in the victims office..." Which victim do they mean?
One thing I notice about my parents friends of retirement age. The people who spent like crazy all of their lives are still working. People who saved,on top of the house payment are pretty comfortable.
And it's a pretty even split.
I have said it once and I'll say it again. Some people will die with their work shoes on...
I need to jump in here and ask, what is real spending? I see mention of that hereon this thread and in the story, but what are we talking about?
Re: Real disposable incomes (after taxes and adjusted for inflation) increased 5.3%, the biggest increase since 1975, when the government also sent out rebate checks. Read the full report.
Excluding the impact of the rebates and inflation, real disposable incomes were flat.
Consumer spending rose 0.8% in May, the most since November, compared with the 0.6% expected. After adjusting for the 0.4% rise in consumer prices, real spending rose 0.4%, the most in nine months.
Real spending on durable goods rose 0.1%. Real spending on nondurable goods and on services increased 0.4%
the graph is pretty clear-spending grew fast in the mid 90s, even though house prices were flat.
The "wealth effect" is tied to both housing and investment portfolios, and the 90's experienced one of the greatest runs in market growth ever. It's just that the housing boom (and attendant credit bubble) had an outsized effect this decade.
Holy Schmoley, consumers spent their tax rebates after all! While it really should not be a surprise, the tax rebate checks provided a huge boost to after-tax income and helped drive spending sharply higher in May. After-tax income surged 5.7 percent and spending increased 0.8 percent. The personal saving rate surged to 5.0 percent.
Core inflation is certainly close enough to the Feds comfort zone to allow them to keep the federal funds rate at 2 percent.
The "wealth effect" is tied to both housing and investment portfolios, and the 90's experienced one of the greatest runs in market growth ever. It's just that the housing boom (and attendant credit bubble) had an outsized effect this decade.
I'd be interested in seeing a combined spending vs housing + stock graph.
"It's just that the housing boom (and attendant credit bubble) had an outsized effect this decade.
tj & the bear | 07.04.08 - 9:12 pm | # "
But the graph doesn't show an outsized effect on spending this decade at all. It looks like real spending growth was right around the long term average.
By the way, I probably would have liked LA back in the early 20th century when it was a small town.
I've got to think any spending we see now is hybrids, solar panels and last hurrah "going out of consumerism" expenditures.
It will be interesting to see what happens with the home heating oil purchases over the next few months. The people who may have been on the fence are facing $2500 bills to fill their oil tanks. Once. They might just let the pipes burst and leave it to the bank to clean up.
I think ahead is right here. the graph shows no correlation between the two. i think it would be instructive about HOW the equity was spent. I would be willing to bet that it was spent on home improvement, autos, and tuition mainly.
And now we're seeing autos crashing, home improvement drying up and...well, it's going to be interesting to see what happens in the tuition department. I'd say a lot less kids in pricey private schools.
But for regular items? people didn't cash out equity to buy most things so, therefore, not much impact if any.
"When Denise Lopez bought two new tables, a floor lamp and a chair recently, her intent was to finance it with her home-equity line of credit. But it wasn't long before she discovered that wasn't an option. Her line of credit had been frozen."
While people didn't use HELOCs as checkbooks for purchasing little things (e.g. vacations, groceries, clothing), they were definitely used for credit card payoffs...
oldskool anecdotal isn't looking at the majority of spending. and spending has held up so far even with the credit cutbacks. and that graph certainly says it doesn't either.
i'd agree about the payoffs and that's now not going to happen either. i guess the point of my statement is that this will effect big ticket spending more than anything, and we're already seeing that with autos, which is where i'd be willing to be a huge percentage of MEW went.
There's a good reason consumer spending in the UK is not following house prices down: those who are spending like there is no tomorrow have no home equity to worry about losing--they are all living free off the State: free housing, unemployment benefits, child benefits, etc. The UK economy is thriving in large part because the UK Government is subsidising it!
Re: SKF. SKF has peaked (temporarily, I'd say) according to the charts. I'd let it simmer down for a couple of weeks before it has another go. What is interesting at the moment is that although SKF seems to have topped, almost all the other inverse ETFs have a good way to go. How does that play out in the market? Could be that financials have a pop now, while the rest of the market continues down. Don't think I've ever seen that before. Not sure if it's possible, either. Ah, this market sure is "interesting."
Bloomberg has a piece on apartment rents increasing,while vacancies hold steady at under 6%.
They quote Reis Inc. as saying that the market concentrated on SFRs and that apartments were not in the pipeline.
I guess no one mentioned to them failed condo projects turning into rentals, or owners who can't sell turning their "investment homes" into rentals.
Or that broke folks might double-up with friends or move back home with family.
This is like reports from the government...I wonder whether they are really this clueless, or this is some bizarre form of wishful thinking.
I would be interested to hear everyones thoughts as to why the relationship is not as tight as for the U.K.? Is it monetary or fiscal policy? Or, perhaps, is it the U.S. philosophy on spending and credit?
t's less a change in housing value than a change on whether you can borrow on it.
More precisely, it's not a change in housing value at all, but a change in market price.
The value of a house, like any other investment, is the present discounted value of net future income, and that hasn't changed significantly since 2000.
"Price is what you pay. Value is what you get" - Buffett.
Ratfink says...those who are spending like there is no tomorrow have no home equity to worry about losing--they are all living free off the State: free housing, unemployment benefits, child benefits, etc.
Sorry Ratfink, that argument won't fly. All the European countries have had far more generous social programs than the US since the end of WWII. I remember visiting a young student couple in Sweden in 1973. They were living in a marble-foyered apartment while both attending university full time. Government paid student stipends funded what, by our standards was a pretty lavish life-style. The irony was they were the European equivalent of student radicals -- rabid conservatives opposed to all government spending-- the mirror image of the 'trust fund Marxists' I had seen in the US.
If spending in European countries were primarily the result of government subsidies it would be essentially flat for the whole post World War II period-- except for some dips from things like the Thatcher 'reforms'.
Of course if you want to argue that it's because of government programs that Europe hasn't seen anything like the divergence in wealth we've experienced in the US, with the top 1% taking the vast majority of the income gains while the bottom two-thirds of the country experiences flat or falling real wages, I'd agree.
Is UBS in SKF? If so, shorting your own stock would seem to violate your fiduciary duty to shareholders. If I were a UBS shareholder, I would sue. If UBS is not in SKF, I suppose you could argue you were shorting the competition, but that still seems sketchy, since its effect on your own share price is probably still quite negative. This looks like a lawsuit waiting to happen.
I was working for Knight Trading, an options market making operation, when it was bought by Citigroup. We had to stop making markets in C, but were allowed to continue to trade the baskets and indexes. I think that we had to also take an offsetting position in C, in proportion to its weighting in the products, but I'm not positive about that.
The relationship for housing permits and real durable goods spending is better. Although during the 90s, spending was higher than it should been given the growth in permits due to the Fed's easy money. Real durable goods spending has contracted year over year since 1992. But now that credit is no longer available like it was - and real earnings and incomes are falling - durable goods spending is set to really fall like housing permits has. Check it out at http://www.gardnerweb.com/forecast/durablegoods.htm
Response to first comment re eBay. Man-Moth, while U.S. online retail sales have risen this year, eBay sell-through rates have dropped significantly. Google Medved eBay. Reports from eBay Powersellers on the ground show a significant slowdown in sales. Whether it's due to the economy or recent changes in eBay search is not yet known. I suspect both play a role. I guess it depends on what kind of widgets you're selling online. I can tell you that sales on collectibles & antiques have dropped dramatically both at brick & mortars & on eBay. Not surprising really as such spending is considered discretionary. I can also say that the mall where I had a booth saw a significant decrease in traffic & buyers. The mall is just off I-35. Very cheap items & very expensive items are still selling, but the middle is MIA.
ipodius-If home equity money was spent on cars, then you would have seen an increase in cars bought for cash vs financed or leased. I don't know what the data on that is. As for car sales right now, much of the drop is due to a mismatch between what the car companies are making and what buyers want. SUVs are sitting on the lot while fuel efficient cars are back-ordered. It's not just cars, either. Several times in the past few months I've gone to buy stuff and found the model I wanted out of stock and scads of stock in the ones I didn't want. It's easy for companies to blame the economy, but many of them need a good look in the mirror.
As for tuition, you may see some effect on the less prestigious pricey private colleges. The Ivies and their kin turn away 3 or 4 for every student they accept, have big endowments and could fill up their spaces with overseas students if they wanted to. I've often wondered though why people pay $30k for some tiny little college you never heard of that is nowhere near as good as a decent state school.
Living in LA for the last year, i can attest that the number of Mercedes and BMW, and just generally new, large, and SUV'ish cars on the streets was completely surreal. One Saturday i was sitting in a cafe on Santa Monica and calculated that the average rate of mercedes/bmw convertibles going past was about 2 per minute, & then there were 2 in a row followed by a Ferrari.
Whereas in Europe, the vast majority of the higher end cars are actually company cars - because the tax regime is fairly favourable for that particular perk.
I'm in portfolio management and worked for a large banks. I saw with my own tow eyes what the average Joe was doing. The average Joe was using debt to finance his lifestyle, period. Most of this debt was supported by the appreciation in the value of his home. The proof is in the pudding, consumer debt is at an all time high.
One thing I can tell you is that a huge amount of consumer spending is showing up in gross private domestic investment. In 1970, it represented 11% of GDP now it stands at 16%. Plus consumer spending has gone from 67% to 72%.
Contrary to popular belief, government spending has gone down the tubes, from 27% of GDP in 1970 to 17% today.
This data reflects an economy that has gone from teamwork to indivudalism, where consumption has been financed by debt. Obviously, each incremental dollar of debt is producing less and less return. Maybe that's why the chart does not show an evident correlation.
Sarah wrote:
Of course if you want to argue that it's because of government programs that Europe hasn't seen anything like the divergence in wealth we've experienced in the US, with the top 1% taking the vast majority of the income gains while the bottom two-thirds of the country experiences flat or falling real wages, I'd agree.
Uh, Sarah, what percent of the income taxes does that top 1% pay here in the US? Just curious.
I don't think the UK is as much a consumer society as the US, for the simple reason that disposable income is not as high. People are therefore less likely to spend on unnecessary items, and essential items will remain more constant even in a downturn.
My weekly check of house price trends in 6 Cali zips where friends and family live shows 2 previously strong high end (1 Mil$ plus) zips now dropping faster than the mid and lower priced areas, down 10% in 3 months vs down 6% over the same 3 months for the under 500k areas.
The 3%/month high end decline is a noticeable steepening from the 1%/month drop from mid '07 to Feb. '08.
Foreclosures and BKs in all areas continue rising at 5%/month.
This data reflects an economy that has gone from teamwork to [individualism], where consumption has been financed by debt. Obviously, each incremental dollar of debt is producing less and less return. Maybe that's why the chart does not show an evident correlation.
Thanks for making that point. I saw the same thing in my bankruptcy law practice.
I thought about responding to Aheadofthecurve and ipodius with the same point. Debt replaced wages and that is why spending did not go down. But the debt train is coming to an end. That is why I think that this coming recession / depression will be much worse than most forecasts. Too much debt has has become an infection in our economy. The cure, unfortunately, will probably be very painful.
As a corollary to your observation, however, there has been a Great Risk Shift (interesting that I wrote this back in 2006).
Along those lines, may I make a suggestion of a less well-known blog Sudden Debt? This issue is discussed in detail there.
Theory: Strong relationship between house prices and consumer spending. Data: No clear relationship between year-over-year spending increase and year-over-year increase in house prices. Does the data contradict the theory?
Of course not. It may not support the theory, but it doesn't conflict with it. It just conflicts with the simplistic notion that affect is immediate and people make decisions based on year-over-year changes in their home value (value here meaning the price they could sell for, rather than market price, recognizing the point by yogurt earlier, but not wanting to use the term "price" for something that has not been sold and is not for sale).
Actually, even with a strong relationship between home value and consumer spending, I'd be surprised to see it show up in this chart. I don't know anyone that looks at what they could sell there house for annually, and then makes spending decisions for the year based on that knowledge. Some people will not perceive this change in value as real until it "sticks" for a couple years. Others will extrapolate the gains from a few years and spend their money assuming that gain will continue indefinitely (e.g., not bother to save for retirement because their house will save for them). The ease of borrowing against gains in home value changes gradually, and not on a year-over-year basis. If a person does decide, consciously or subconsciously, to spend more because their house is worth more, that effect is not necessarily going to show up on a year-over-year basis. If my house has doubled in value over a five year period, and my equity has gone up by a much large multiple, resulting in my feeling richer, I might keep spending for several years, even if home prices flatten out. I certainly would not be expected to stop or slow my spending because house prices only rose 8% instead of 15% or 20% [unless I'm borrowing the maximum annually against my equity and spending it, which happens but does not reflect the situation for most homeowners]. Looking at the chart from the Economist, would it really be surprising that after a decade of rising home prices, often in double digit percentage gains, homeowners would continue to spend based on this perceived increase in wealth, even after one year of falling prices? Does that really contradict the theory?
There probably is no simple model to show the relationship between consumer spending and house prices or homeowner equity, given the many factors besides house prices that affect consumer spending, and the differences in the way different people react to changes in house prices. There probably is no graph of any simple, easy to interpret statistic, that shows a clear relationship. The correct conclusion here is that the relationship, if it exists, does not match our model. You cannot reasonably consume that there is no, or no major, relationship between spending and home prices.
NC Mike, ordinary income is taxed at higher marginal rates than income from capital gains. And who earns a greater percentage of their income via capital gains?
Ipodius, I gather from what you have written that "consumer spending" does not include durables. If so, then it's easy to understand the lack of correlation between the house price index and the consumer spending.
I am also reminded of another phenomenon. I keep reading of people who believe that THEIR houses have not declined in value even though they recognize that other people's houses have done so. So, to some extent, there may be a lengthy psychological delay built into the wealth effect when the index is house prices. Let's see how it looks a year from now.
KofK: I think I get what you are saying. However, look at the graph-starting in 1998, house prices began a sustained increase, topping 5% every year and accelerating to over 10% in 2004-2006. Yet, real PCE declined with the stock market in 2001 and stayed around 3% despite the stock recovery and insane appreciation in houses. From this graph it looks like the real spending boom was in the 80s and the 90s.
flaminia-Yes I expect spending to be flat to even down in real terms over the next year. However, that is much more likely to be due to the recession and stock market declines than house prices, based on the non-correlation above.
It's always hard to say for sure in a non-empirical discipline, because all you can establish is correlation, which is not the same as causation.
"Whereas in Europe, the vast majority of the higher end cars are actually company cars - because the tax regime is fairly favourable for that particular perk."
In light of that, I find the current BMW US ad campaign particularly amusing. If you've not seen it, the ads show a nerdy German engineer passing the other office drones on bikes and buses on the way to the BMW tech center or something. The voiceover guy talks about how they're used to high gas prices in Germany so that's why the small Beamers get 28 mpg highway. Whooppee! That's may nerdy engineer guy is not riding the bus. He's a moving advertisement.
He also passes a fuel station, apparently with everything priced in $ per gallon. I noticed that the petrol was showing something in the range of 4 and diesel around 8. Since fuel would be priced in euros per liter, showing those numbers on a German fuel station would mean that the petrol is (roughly) $30 per gallon and diesel is $60. I know it's been converted for us stupid Americans, but potential Beamer drivers should catch such an obvious mistake. Isn't the target demographic made up of uptight, OCD, d-bags; uh, I mean diligent, detail-oriented, successful professionals like me.
aheadofcurve: From this graph it looks like the real spending boom was in the 80s and the 90s.
While the biggest growth in spending occurred in the 80's and 90's, remember that you are looking at year to year change in real spending. While the 80s and 90s were boom years in terms of growth in spending, after 2000 spending continued to grow from that already large base at a rate of around 6% or so a year on average.
I would agree that if you asked me to point to the boom years in consumer spending increases, the 80s and 90s stand out. I'd say this probably points to the problem that there are too many factors explaining consumer spending increases to validate any one of them based on a chart. In the 80s and 90s we had very strong economic growth and stock market growth, and baby boomers were entering their peak earning years (Not an exhaustive list of possible explanations). One explanation is that it was primarily the stock market and wage increases drove up consumer spending in the 80s and 90s and housing prices were more of a factor since 2000. Since all these factors, and numerous others (societal attitudes toward debt, income stratification, tax policies, etc.) affect consumer spending with different time lags, it's nearly impossible to make a conclusion about the causes from a graph of consumer spending vs. one of those factors.
Someone early up noted that it is "harder to monetarize housing wealth" than previously. That's accurate and it points to a much bigger socioeconomic trend:
We're starting to recognize once again what the real stuff is in life and what is actually a shell game, Ponzi scheme and casino scam. All this talk about "value" and "wealth" and "equity" but the fact remains that nothing is worth anything till you sell it and someone pays you for it. Then it's worth what they pay when you sell it, at that moment, not ten years ago or twenty weeks in the future or on Mars. Now a lot of people are figuring out what is real: a place to live, food to eat, a modest level of comfort, people you can trust, savings to ease shocks with.
I keep thinking about how the real estate industry in cahoots with lenders and banks twanged people's psychological needs for safety in an uncertain world by calling all houses "homes" when in fact most were speculative purchase or at best a live-in ATM. When the only security a "home" provides is a Monopoly money mint, generating debt-units used to buy a baroque collection of luxuries, a crash is soon to follow because that appeals to greed, not sustainable security.
I know many people who did buy into the shopping or housing bubbles. They are irretrievably screwed because many are in their 40's to 60's. They don't have the time to bounce back. The younger ones who screwed themselves are expecting to find someone to bail them out.
I also know many who didn't buy into this mess. They have savings, little or no debt, modest lifestyles. They didn't buy into the larger Reaganomics culture of luxury display, novelty and consumption. All those years, quietly saving, watching savings grow in the best times. Sad thing is: they/we are likely to be taken down by the greedy reckless spendthrifts. We didn't have the power to rein them in and now we're expected to bail them out.
There are also people whose worst parts are being brought out by these economic adjustments. I've been thinking about how my child-breeding friends have always assured me I should fork out thousands each year for their reproductive hobby. Tax breaks. school taxes, birthday parties, graduations, showers, bubble-wrapping the community, etc. Their children, they intoned solemnly and continuously, would Someday Be Taking Care Of Me. I never bought it because I saw how these people were raising those kids (me me me me me more more more more more) and I saw the end game of Reaganomics and post WW2 prosperity on the wall.
I'm thinking today about something a very young (28) friend, an IT professional, said the other night as we were talking about a variety of financial and social issues as they affect elders in our community. He wanted to talk about Hell Boy, whatever that is. "What did those old people ever do for ME?" he said.
He's going to take care of his elders alright.
My grandfather used to say "There a reason they call it DISPOSABLE income you know."
I am sure that most of the people who are aware that home prices are falling also expect that prices will behave like they did after the last period of decline (or stagnation, depending on the area), bouncing back and then soaring at 10+% to new highs.
This psychology is pervasive, because that has been the actual experience of the past.
Same with the stock market. A very good friend, retired corporate executive, recently "bought the dip" when the Dow had declined to 13,000. He's sure that any decline will be temporary, and that the Dow will be back above 13,000 and climbing higher in just a few years.
Very few people are aware of the extent to which the economy and financial system have evolved to a degree of distortion not seen since the 1930's.
Even CR, who is rather aware of that, until recently (and perhaps even still) was opining that we were probably in for only a mild recession.
When the cost of medical care and food and energy and school doubles, people spend more even if house prices drop. I believe people do still spend related to housing wealth increases or drops, but that unusual spikes in other prices can put the whole thing out of whack.
My wife sells stuff on Ebay all the time and spending hasn't slowed there. Maybe it's a case of people still spending, but thinking they're getting a deal.
I put this in the UBS thread, but thought I'd repost it here as well cause it was an eye-opener (and yet not surprising at the same time). Wonder how much higher SKF will go.
"It is interesting to note that the largest institutional holder in the ProShares Ultra-Short Financials (SKF) is the European bank UBS which at the end of the first quarter of 2008 owned over 318,000 shares." from
Tiny URL - create a shorter link
PCE negative = not good.
I'll have to take the first!
c'mon people. Hurry up. I'm lurking here impatiently waiting to read your comments.
That sure has the Wile Coyote "Gravity Lesson" look about it...
Happy 1st!
Public Storage and Uhaul, are Americans on the move?
first?
When home prices were going up, people were using their home ATMs to invest in RE, an infallible investment.
haloscan is acting up.
CR, et al,
Essentially what the chart is showing us, is the impact of $71 billion in stimulus cheques the U.S. government has already mailed out to Americans.
"The CPI is a flawed statistic," said former Fed Chairman Alan Greenspan in a 1999 meeting of the Federal Open Market Committee. "It is a statistic that overweighs housing and overweighs a significant part of personal-consumption expenditures."
"We ought to set aside the consumer price index," he added.
There's no reason to believe his successor, Ben Bernanke, is any fonder of the CPI than Greenspan was -- particularly now, when the bizarre way the CPI treats housing costs is sending misleading signals about the true path of inflation. And it's only going to get worse.
The Fed is aware of this issue, and in part this could explain why they prefer to monitor the core PCE deflator, in which the measurement [as well as the weighting] of housing costs is treated differently," said Stu Hoffman, chief economist for PNC Financial.
"A core PCE deflator topping 2% will carry more weight with the FOMC than will a core CPI above 2%," he added.
Housing is down, but inflation is up - MarketWatch
"It is interesting to note that the largest institutional holder in the ProShares Ultra-Short Financials (SKF) is the European bank UBS which at the end of the first quarter of 2008 owned over 318,000 shares."
Galbraith's 1929 market crash books describes congressional hearings at which it was discovered that a major bank president (his name was Wiggan) was shorting the stock of his own bank. This sounds like the same thing. I would have thought default swaps would also provide scope for this type of activity.
Denied the first, and it's scary out there...
Real estate agent shot and killed in Roosevelt Park office
A man upset about a property transaction shot a real estate agent in the head, mortally wounding him, during a meeting Tuesday morning in the victims office, authorities said.
.
CR,
I wonder what the chart would lok like if changes in employment and incomes were factored in?
One big change over the last 20 years is how easy it is to monetize housing wealth. Refinancing is a lot easier and cheaper, there are HELOCs, etc. It seems hard to believe the effect of a loss of housing wealth will have less of an effect than previously.
Has Inflation Become Harder to Forecast?
http://ksghome.harvard.edu/~jstock/pdf/qepd_sw_jmcb_submission_1.pdf
As it happens, inflation has both become harder and easier to forecast, depending on ones point of view. On the one hand, inflation like many other macroeconomic time series has become much less volatile, so the root mean squared error of even naïve or relatively poor forecasts had declined since the mid-1980s. In this sense, inflation has become easier to forecast: the risk of inflation forecasts, as measured by mean squared forecast errors (MSFE), has fallen. On the other hand, the relative improvement of standard multivariate forecasting models, such as the backwards-looking Phillips curve, over a univariate benchmark has been smaller in percentage terms since the mid-1980s than before. This point was forcefully made by Atkeson and Ohanian (2001) (henceforth, AO), who found that backwards-looking Phillips curve forecasts were inferior to a naïve forecast of average twelve-month inflation by its average rate over the previous twelvemonths.
Ah, the "wealth effect" and it's alter-ego, the "poverty effect". It doesn't take much of the first to lead to lots of the second.
73 year old shoots 34 year old realtor -- that says it all, and interesting how the 73 year old, didn't go the bank or mortgage company! I still think realtors are the ones that drive around customers while smiling and pumping up lies and pumping hype. This is a sad example of one-on-one relationships, where a realtor is singled out for playing a role in a game where people get burned.
Consumers have closed their wallets this year because increased living costs are squeezing household budgets.
Retailers have responded by starting their annual winter sales early - and with bargains galore.
consumer confidence index is at its weakest level since 1991, and April figures from Statistics NZ show core retail sales - which excludes vehicle-related industries - were down 0.5 per cent.
The first half of the year was a shocker for investors with the benchmark NZX-50 Gross Index falling 21 per cent and the finance company sector in serious meltdown.
It was the NZX's worst six month performance since the July-December 1990 period when the benchmark index plunged 31.7 per cent. That was during the country's last full-blooded recession when the economy experienced four successive quarters of negative GDP growth, from July 1990 to June 1991.
The winter of discontent...
Happy holidays all.
Man-moth,
The url seems broken. I'm interested in where those stats came from. I wonder if SRS, my own favorite, is heavily owned by REITs and developers.
Someone else here has mentioned that there might be risk in cashing out with these inverse ETFs, if you get greedy and hold them too long. I have no idea if this is a real risk, but it is something I keep in mind.
If anyone does know, I would love to hear your ideas.
Bob_in_MA
I am also wondering about the effect of losing so much liquidity for consumers. It would appear to have more effect that the graphs show.
OTOH, its effects can be put off into the future by other sources of liquidity such as credit cards. I'd be interested in a graph of the increase in debt against the change in house prices, but even then the effect may be offset.
For example, a fella does a cash out refi of 100k, just before a 200K decline in house prices. He will not be either increasing debt or cutting expenses until the 100K runs out. An interval almost impossible to predict.
I've argued here before that the effect of house prices on spending is less than people here were saying. This data appears to support that. Psychologically, I doubted the connection because houses are difficult to price accurately. Unless you are really in a development of identical homes where sales are frequent, it's difficult to know for sure how much your house would sell for and how long it would take to sell. So basing spending on house price is not reasonable. Stocks are different since you can sell with a mouse click for an easily determined price.
Is UBS in SKF? If so, shorting your own stock would seem to violate your fiduciary duty to shareholders. If I were a UBS shareholder, I would sue. If UBS is not in SKF, I suppose you could argue you were shorting the competition, but that still seems sketchy, since its effect on your own share price is probably still quite negative. This looks like a lawsuit waiting to happen.
Yeah, good point. House prices aren't that big a part of the population's assets, so no need to expect severe pain from a crash in equity.
Fucking idiot.
So the irony will be when UBS has to dump their SKF on the market to raise capital, dropping the price of the shares. Talk about a feedback loop.
What am I missing? We saw enormous Mortgage Equity Withdrawal during the runup that has faded to 1/3 or 1/4 it's peak value - the graphs were here on this site. What was the extra $300B+/yr of MEW being spent on that doesn't show up here?
AOTC,
Can't speak for Middle America -- maybe dryfly can weigh in here -- but you really oughtta spend some time in L.A. before dismissing it. The housing related wealth effect is so pronounced here a blind man could see it.
during a meeting Tuesday morning in the victims office, authorities said.
I didn't know that real estate agents made trips out to their client's offices . . .
For the past 3 months, SKF is up 60%, SRS is up 30%, and SDS only up 18%.
Guess which one I'm in
d'oh!
Isn't the problem with SDS is that the S&P 500 is market-cap based, so the bad eggs tend to diminish their effect over time as they go rotten?
It's less a change in housing value than a change on whether you can borrow on it.
But I looked at UK stats, and those suckers are really charging up their cards. Now their cards are beginning to be cut....
If I were a UBS shareholder and found out that they had purchased lots of SKF, I would be thrilled that they had finally made a smart investment.
"but you really oughtta spend some time in L.A."
I did once, when I went on Jeopardy many years ago. I knew the answers, but it took me until halfway through the show to figure out the buzzers. The whole experience was enough LA for 1 lifetime.
You can say what you want; the graph is pretty clear-spending grew fast in the mid 90s, even though house prices were flat. Why? Probably because the economy was expanding and the market was rising.
Personally, I have only the vaguest idea what my house is worth today, or what it was worth at any point in time. So I never spent or didn't spend a dime based on that.
Aheadofthecurve,
your post suggests that people make considered, rational spending decisions. i think that's a pleasant thought. Disregard for the moment CR's posts on consumers in maximum distress. Just anecdotally, I am surrounded by friends, clients, relatives and neighbors, who have been spending up a storm for years. I have been told repeatedly by folks in NY, that their apt. is their retirement, their child's college fund, their ticket out of the rat race. Wages have been stagnant thru this decade, and yet folks have been buying houses, luxury goods, pimped-out cars and suvs, going for the maximum bling.
Everyone did not win the lottery, everyone did not just get a big inheritance, everyone is not making 240k a year. But lots and lots of your fellow citizens were playing housing mania, betting everything that rising RE values would provide a second income. The house was working for them. Now it's not.
Now they're saddled with unmanageable debt, and no housing ATM. I believe those are the facts.
fried-I'm not disputing your experience but the graph says that isn't the national picture (or UK either). Real spending was up much more from 1992-2000 even though house prices were flat much of that time than it was from 2000-2007.
If the graph is wrong, then show me the facts that say different and I will change my opinion. It may be that this phenomenon was limited to certain regions. I don't know, but I am prepared to be enlightened.
Happy 4th!!
I am on board with the Wile E. Coyote theory.
Equity withdrawal and other debt has been supporting unreasonable spending that the underlying economy could not have supported since 2001. The spending didn't go up, but it didn't go down as much as it should have. Just like house prices in most of the rustbelt. Remember how we were being assured until recently that flyover house prices would not go down because they had not gone up like the bubble areas?
It makes sense that the narrowing of consumer debt options has a lagged effect, but I will be very surprised if consumer spending doesn't take a sharp turn down in the very near future.
BTW, I went to a seed swap at the local farmers' market last week. There were about 50 people there for a class on raising chickens in your yard. I think things are about to get very Dryfly around here.
A man upset about a property transaction shot a real estate agent in the head, mortally wounding him, during a meeting Tuesday morning in the victims office, authorities said.
I can't wait for jury selection. I just wish these articles were more precise. "...in the victims office..." Which victim do they mean?
Aheadofthecurve | 07.04.08 - 8:46 pm |
One thing I notice about my parents friends of retirement age. The people who spent like crazy all of their lives are still working. People who saved,on top of the house payment are pretty comfortable.
And it's a pretty even split.
I have said it once and I'll say it again. Some people will die with their work shoes on...
CHris
People gotta eat and drive so if food and fuel prices are increasing won't that show up as 'increased' consumer
spending?
If the rotisserie chicken I bought in January for $4.99 now costs $6.49 my 'consumer spending' increased $1.50 not that I am buying more.
I need to jump in here and ask, what is real spending? I see mention of that hereon this thread and in the story, but what are we talking about?
Re: Real disposable incomes (after taxes and adjusted for inflation) increased 5.3%, the biggest increase since 1975, when the government also sent out rebate checks. Read the full report.
Excluding the impact of the rebates and inflation, real disposable incomes were flat.
Consumer spending rose 0.8% in May, the most since November, compared with the 0.6% expected. After adjusting for the 0.4% rise in consumer prices, real spending rose 0.4%, the most in nine months.
Real spending on durable goods rose 0.1%. Real spending on nondurable goods and on services increased 0.4%
Incomes get jolt from tax rebates - MarketWatch
REALLY! Describe real!
the graph is pretty clear-spending grew fast in the mid 90s, even though house prices were flat.
The "wealth effect" is tied to both housing and investment portfolios, and the 90's experienced one of the greatest runs in market growth ever. It's just that the housing boom (and attendant credit bubble) had an outsized effect this decade.
Dont Count Consumers Out Just Yet
Holy Schmoley, consumers spent their tax rebates after all! While it really should not be a surprise, the tax rebate checks provided a huge boost to after-tax income and helped drive spending sharply higher in May. After-tax income surged 5.7 percent and spending increased 0.8 percent. The personal saving rate surged to 5.0 percent.
Core inflation is certainly close enough to the Feds comfort zone to allow them to keep the federal funds rate at 2 percent.
http://www.wachovia.com/ws/econ/view/0,,4352,00.pdf
Boo Wachovia Retards! Yah can't even run your own bank.shut up!
The "wealth effect" is tied to both housing and investment portfolios, and the 90's experienced one of the greatest runs in market growth ever. It's just that the housing boom (and attendant credit bubble) had an outsized effect this decade.
I'd be interested in seeing a combined spending vs housing + stock graph.
"It's just that the housing boom (and attendant credit bubble) had an outsized effect this decade.
tj & the bear | 07.04.08 - 9:12 pm | # "
But the graph doesn't show an outsized effect on spending this decade at all. It looks like real spending growth was right around the long term average.
By the way, I probably would have liked LA back in the early 20th century when it was a small town.
The backyard is on fire...
I've got to think any spending we see now is hybrids, solar panels and last hurrah "going out of consumerism" expenditures.
It will be interesting to see what happens with the home heating oil purchases over the next few months. The people who may have been on the fence are facing $2500 bills to fill their oil tanks. Once. They might just let the pipes burst and leave it to the bank to clean up.
But the graph doesn't show an outsized effect on spending this decade at all.
Sorry, I was speaking relatively. Spending would've declined precipitously had not housing propped it up.
oh no, 3 on line,,,,,
I think ahead is right here. the graph shows no correlation between the two. i think it would be instructive about HOW the equity was spent. I would be willing to bet that it was spent on home improvement, autos, and tuition mainly.
And now we're seeing autos crashing, home improvement drying up and...well, it's going to be interesting to see what happens in the tuition department. I'd say a lot less kids in pricey private schools.
But for regular items? people didn't cash out equity to buy most things so, therefore, not much impact if any.
people didn't cash out equity to buy most things so, therefore, not much impact if any.
In the Latest Chill for Homeowners, Banks Are Freezing Lines of Credit - WSJ.com
"When Denise Lopez bought two new tables, a floor lamp and a chair recently, her intent was to finance it with her home-equity line of credit. But it wasn't long before she discovered that wasn't an option. Her line of credit had been frozen."
While people didn't use HELOCs as checkbooks for purchasing little things (e.g. vacations, groceries, clothing), they were definitely used for credit card payoffs...
oldskool anecdotal isn't looking at the majority of spending. and spending has held up so far even with the credit cutbacks. and that graph certainly says it doesn't either.
i'd agree about the payoffs and that's now not going to happen either. i guess the point of my statement is that this will effect big ticket spending more than anything, and we're already seeing that with autos, which is where i'd be willing to be a huge percentage of MEW went.
There's a good reason consumer spending in the UK is not following house prices down: those who are spending like there is no tomorrow have no home equity to worry about losing--they are all living free off the State: free housing, unemployment benefits, child benefits, etc. The UK economy is thriving in large part because the UK Government is subsidising it!
Re: SKF. SKF has peaked (temporarily, I'd say) according to the charts. I'd let it simmer down for a couple of weeks before it has another go. What is interesting at the moment is that although SKF seems to have topped, almost all the other inverse ETFs have a good way to go. How does that play out in the market? Could be that financials have a pop now, while the rest of the market continues down. Don't think I've ever seen that before. Not sure if it's possible, either. Ah, this market sure is "interesting."
Bloomberg has a piece on apartment rents increasing,while vacancies hold steady at under 6%.
They quote Reis Inc. as saying that the market concentrated on SFRs and that apartments were not in the pipeline.
I guess no one mentioned to them failed condo projects turning into rentals, or owners who can't sell turning their "investment homes" into rentals.
Or that broke folks might double-up with friends or move back home with family.
This is like reports from the government...I wonder whether they are really this clueless, or this is some bizarre form of wishful thinking.
U.S. Apartment Vacancies Rise on Concern Over Wages (Update1) - Bloomberg.com
I would be interested to hear everyones thoughts as to why the relationship is not as tight as for the U.K.? Is it monetary or fiscal policy? Or, perhaps, is it the U.S. philosophy on spending and credit?
t's less a change in housing value than a change on whether you can borrow on it.
More precisely, it's not a change in housing value at all, but a change in market price.
The value of a house, like any other investment, is the present discounted value of net future income, and that hasn't changed significantly since 2000.
"Price is what you pay. Value is what you get" - Buffett.
Ratfink says...those who are spending like there is no tomorrow have no home equity to worry about losing--they are all living free off the State: free housing, unemployment benefits, child benefits, etc.
Sorry Ratfink, that argument won't fly. All the European countries have had far more generous social programs than the US since the end of WWII. I remember visiting a young student couple in Sweden in 1973. They were living in a marble-foyered apartment while both attending university full time. Government paid student stipends funded what, by our standards was a pretty lavish life-style. The irony was they were the European equivalent of student radicals -- rabid conservatives opposed to all government spending-- the mirror image of the 'trust fund Marxists' I had seen in the US.
If spending in European countries were primarily the result of government subsidies it would be essentially flat for the whole post World War II period-- except for some dips from things like the Thatcher 'reforms'.
Of course if you want to argue that it's because of government programs that Europe hasn't seen anything like the divergence in wealth we've experienced in the US, with the top 1% taking the vast majority of the income gains while the bottom two-thirds of the country experiences flat or falling real wages, I'd agree.
Is UBS in SKF? If so, shorting your own stock would seem to violate your fiduciary duty to shareholders. If I were a UBS shareholder, I would sue. If UBS is not in SKF, I suppose you could argue you were shorting the competition, but that still seems sketchy, since its effect on your own share price is probably still quite negative. This looks like a lawsuit waiting to happen.
I was working for Knight Trading, an options market making operation, when it was bought by Citigroup. We had to stop making markets in C, but were allowed to continue to trade the baskets and indexes. I think that we had to also take an offsetting position in C, in proportion to its weighting in the products, but I'm not positive about that.
HOLY SH?T! I'm putting away the shotgun and taking out the rifle. After this train wreck is over, depression might be considered a soft landing.
The relationship for housing permits and real durable goods spending is better. Although during the 90s, spending was higher than it should been given the growth in permits due to the Fed's easy money. Real durable goods spending has contracted year over year since 1992. But now that credit is no longer available like it was - and real earnings and incomes are falling - durable goods spending is set to really fall like housing permits has. Check it out at http://www.gardnerweb.com/forecast/durablegoods.htm
that should be "has not contracted year over year since 1992"
Response to first comment re eBay. Man-Moth, while U.S. online retail sales have risen this year, eBay sell-through rates have dropped significantly. Google Medved eBay. Reports from eBay Powersellers on the ground show a significant slowdown in sales. Whether it's due to the economy or recent changes in eBay search is not yet known. I suspect both play a role. I guess it depends on what kind of widgets you're selling online. I can tell you that sales on collectibles & antiques have dropped dramatically both at brick & mortars & on eBay. Not surprising really as such spending is considered discretionary. I can also say that the mall where I had a booth saw a significant decrease in traffic & buyers. The mall is just off I-35. Very cheap items & very expensive items are still selling, but the middle is MIA.
ipodius-If home equity money was spent on cars, then you would have seen an increase in cars bought for cash vs financed or leased. I don't know what the data on that is. As for car sales right now, much of the drop is due to a mismatch between what the car companies are making and what buyers want. SUVs are sitting on the lot while fuel efficient cars are back-ordered. It's not just cars, either. Several times in the past few months I've gone to buy stuff and found the model I wanted out of stock and scads of stock in the ones I didn't want. It's easy for companies to blame the economy, but many of them need a good look in the mirror.
As for tuition, you may see some effect on the less prestigious pricey private colleges. The Ivies and their kin turn away 3 or 4 for every student they accept, have big endowments and could fill up their spaces with overseas students if they wanted to. I've often wondered though why people pay $30k for some tiny little college you never heard of that is nowhere near as good as a decent state school.
Living in LA for the last year, i can attest that the number of Mercedes and BMW, and just generally new, large, and SUV'ish cars on the streets was completely surreal. One Saturday i was sitting in a cafe on Santa Monica and calculated that the average rate of mercedes/bmw convertibles going past was about 2 per minute, & then there were 2 in a row followed by a Ferrari.
Whereas in Europe, the vast majority of the higher end cars are actually company cars - because the tax regime is fairly favourable for that particular perk.
I'm in portfolio management and worked for a large banks. I saw with my own tow eyes what the average Joe was doing. The average Joe was using debt to finance his lifestyle, period. Most of this debt was supported by the appreciation in the value of his home. The proof is in the pudding, consumer debt is at an all time high.
One thing I can tell you is that a huge amount of consumer spending is showing up in gross private domestic investment. In 1970, it represented 11% of GDP now it stands at 16%. Plus consumer spending has gone from 67% to 72%.
Contrary to popular belief, government spending has gone down the tubes, from 27% of GDP in 1970 to 17% today.
This data reflects an economy that has gone from teamwork to indivudalism, where consumption has been financed by debt. Obviously, each incremental dollar of debt is producing less and less return. Maybe that's why the chart does not show an evident correlation.
Sarah wrote:
Of course if you want to argue that it's because of government programs that Europe hasn't seen anything like the divergence in wealth we've experienced in the US, with the top 1% taking the vast majority of the income gains while the bottom two-thirds of the country experiences flat or falling real wages, I'd agree.
Uh, Sarah, what percent of the income taxes does that top 1% pay here in the US? Just curious.
I don't think the UK is as much a consumer society as the US, for the simple reason that disposable income is not as high. People are therefore less likely to spend on unnecessary items, and essential items will remain more constant even in a downturn.
My weekly check of house price trends in 6 Cali zips where friends and family live shows 2 previously strong high end (1 Mil$ plus) zips now dropping faster than the mid and lower priced areas, down 10% in 3 months vs down 6% over the same 3 months for the under 500k areas.
The 3%/month high end decline is a noticeable steepening from the 1%/month drop from mid '07 to Feb. '08.
Foreclosures and BKs in all areas continue rising at 5%/month.
? said:
This data reflects an economy that has gone from teamwork to [individualism], where consumption has been financed by debt. Obviously, each incremental dollar of debt is producing less and less return. Maybe that's why the chart does not show an evident correlation.
Thanks for making that point. I saw the same thing in my bankruptcy law practice.
I thought about responding to Aheadofthecurve and ipodius with the same point. Debt replaced wages and that is why spending did not go down. But the debt train is coming to an end. That is why I think that this coming recession / depression will be much worse than most forecasts. Too much debt has has become an infection in our economy. The cure, unfortunately, will probably be very painful.
As a corollary to your observation, however, there has been a Great Risk Shift (interesting that I wrote this back in 2006).
Along those lines, may I make a suggestion of a less well-known blog Sudden Debt? This issue is discussed in detail there.
Okie Lawyer,
nice blog.
Theory: Strong relationship between house prices and consumer spending. Data: No clear relationship between year-over-year spending increase and year-over-year increase in house prices. Does the data contradict the theory?
Of course not. It may not support the theory, but it doesn't conflict with it. It just conflicts with the simplistic notion that affect is immediate and people make decisions based on year-over-year changes in their home value (value here meaning the price they could sell for, rather than market price, recognizing the point by yogurt earlier, but not wanting to use the term "price" for something that has not been sold and is not for sale).
Actually, even with a strong relationship between home value and consumer spending, I'd be surprised to see it show up in this chart. I don't know anyone that looks at what they could sell there house for annually, and then makes spending decisions for the year based on that knowledge. Some people will not perceive this change in value as real until it "sticks" for a couple years. Others will extrapolate the gains from a few years and spend their money assuming that gain will continue indefinitely (e.g., not bother to save for retirement because their house will save for them). The ease of borrowing against gains in home value changes gradually, and not on a year-over-year basis. If a person does decide, consciously or subconsciously, to spend more because their house is worth more, that effect is not necessarily going to show up on a year-over-year basis. If my house has doubled in value over a five year period, and my equity has gone up by a much large multiple, resulting in my feeling richer, I might keep spending for several years, even if home prices flatten out. I certainly would not be expected to stop or slow my spending because house prices only rose 8% instead of 15% or 20% [unless I'm borrowing the maximum annually against my equity and spending it, which happens but does not reflect the situation for most homeowners]. Looking at the chart from the Economist, would it really be surprising that after a decade of rising home prices, often in double digit percentage gains, homeowners would continue to spend based on this perceived increase in wealth, even after one year of falling prices? Does that really contradict the theory?
There probably is no simple model to show the relationship between consumer spending and house prices or homeowner equity, given the many factors besides house prices that affect consumer spending, and the differences in the way different people react to changes in house prices. There probably is no graph of any simple, easy to interpret statistic, that shows a clear relationship. The correct conclusion here is that the relationship, if it exists, does not match our model. You cannot reasonably consume that there is no, or no major, relationship between spending and home prices.
NC Mike, ordinary income is taxed at higher marginal rates than income from capital gains. And who earns a greater percentage of their income via capital gains?
Ipodius, I gather from what you have written that "consumer spending" does not include durables. If so, then it's easy to understand the lack of correlation between the house price index and the consumer spending.
I am also reminded of another phenomenon. I keep reading of people who believe that THEIR houses have not declined in value even though they recognize that other people's houses have done so. So, to some extent, there may be a lengthy psychological delay built into the wealth effect when the index is house prices. Let's see how it looks a year from now.
KofK: I think I get what you are saying. However, look at the graph-starting in 1998, house prices began a sustained increase, topping 5% every year and accelerating to over 10% in 2004-2006. Yet, real PCE declined with the stock market in 2001 and stayed around 3% despite the stock recovery and insane appreciation in houses. From this graph it looks like the real spending boom was in the 80s and the 90s.
flaminia-Yes I expect spending to be flat to even down in real terms over the next year. However, that is much more likely to be due to the recession and stock market declines than house prices, based on the non-correlation above.
It's always hard to say for sure in a non-empirical discipline, because all you can establish is correlation, which is not the same as causation.
Contrary to popular belief, government spending has gone down the tubes, from 27% of GDP in 1970 to 17% today.
No, government spending in the US is 36% of GDP. That has not changed substantially for decades.
http://www.stats.govt.nz/NR/rdonlyres/EF423908-04F5-4778-9897-49B90D7D9A0D/0/GovernmentSpendingandReceipts.pdf
I think your figure is federal spending. That % has indeed declined, as spending has been offloaded onto state and local governments.
Warlock:
"Whereas in Europe, the vast majority of the higher end cars are actually company cars - because the tax regime is fairly favourable for that particular perk."
In light of that, I find the current BMW US ad campaign particularly amusing. If you've not seen it, the ads show a nerdy German engineer passing the other office drones on bikes and buses on the way to the BMW tech center or something. The voiceover guy talks about how they're used to high gas prices in Germany so that's why the small Beamers get 28 mpg highway. Whooppee! That's may nerdy engineer guy is not riding the bus. He's a moving advertisement.
He also passes a fuel station, apparently with everything priced in $ per gallon. I noticed that the petrol was showing something in the range of 4 and diesel around 8. Since fuel would be priced in euros per liter, showing those numbers on a German fuel station would mean that the petrol is (roughly) $30 per gallon and diesel is $60. I know it's been converted for us stupid Americans, but potential Beamer drivers should catch such an obvious mistake. Isn't the target demographic made up of uptight, OCD, d-bags; uh, I mean diligent, detail-oriented, successful professionals like me.
Shorter me: Worst. Commercial. Ever.
aheadofcurve: From this graph it looks like the real spending boom was in the 80s and the 90s.
While the biggest growth in spending occurred in the 80's and 90's, remember that you are looking at year to year change in real spending. While the 80s and 90s were boom years in terms of growth in spending, after 2000 spending continued to grow from that already large base at a rate of around 6% or so a year on average.
I would agree that if you asked me to point to the boom years in consumer spending increases, the 80s and 90s stand out. I'd say this probably points to the problem that there are too many factors explaining consumer spending increases to validate any one of them based on a chart. In the 80s and 90s we had very strong economic growth and stock market growth, and baby boomers were entering their peak earning years (Not an exhaustive list of possible explanations). One explanation is that it was primarily the stock market and wage increases drove up consumer spending in the 80s and 90s and housing prices were more of a factor since 2000. Since all these factors, and numerous others (societal attitudes toward debt, income stratification, tax policies, etc.) affect consumer spending with different time lags, it's nearly impossible to make a conclusion about the causes from a graph of consumer spending vs. one of those factors.
Someone early up noted that it is "harder to monetarize housing wealth" than previously. That's accurate and it points to a much bigger socioeconomic trend:
We're starting to recognize once again what the real stuff is in life and what is actually a shell game, Ponzi scheme and casino scam. All this talk about "value" and "wealth" and "equity" but the fact remains that nothing is worth anything till you sell it and someone pays you for it. Then it's worth what they pay when you sell it, at that moment, not ten years ago or twenty weeks in the future or on Mars. Now a lot of people are figuring out what is real: a place to live, food to eat, a modest level of comfort, people you can trust, savings to ease shocks with.
I keep thinking about how the real estate industry in cahoots with lenders and banks twanged people's psychological needs for safety in an uncertain world by calling all houses "homes" when in fact most were speculative purchase or at best a live-in ATM. When the only security a "home" provides is a Monopoly money mint, generating debt-units used to buy a baroque collection of luxuries, a crash is soon to follow because that appeals to greed, not sustainable security.
I know many people who did buy into the shopping or housing bubbles. They are irretrievably screwed because many are in their 40's to 60's. They don't have the time to bounce back. The younger ones who screwed themselves are expecting to find someone to bail them out.
I also know many who didn't buy into this mess. They have savings, little or no debt, modest lifestyles. They didn't buy into the larger Reaganomics culture of luxury display, novelty and consumption. All those years, quietly saving, watching savings grow in the best times. Sad thing is: they/we are likely to be taken down by the greedy reckless spendthrifts. We didn't have the power to rein them in and now we're expected to bail them out.
There are also people whose worst parts are being brought out by these economic adjustments. I've been thinking about how my child-breeding friends have always assured me I should fork out thousands each year for their reproductive hobby. Tax breaks. school taxes, birthday parties, graduations, showers, bubble-wrapping the community, etc. Their children, they intoned solemnly and continuously, would Someday Be Taking Care Of Me. I never bought it because I saw how these people were raising those kids (me me me me me more more more more more) and I saw the end game of Reaganomics and post WW2 prosperity on the wall.
I'm thinking today about something a very young (28) friend, an IT professional, said the other night as we were talking about a variety of financial and social issues as they affect elders in our community. He wanted to talk about Hell Boy, whatever that is. "What did those old people ever do for ME?" he said.
He's going to take care of his elders alright.
My grandfather used to say "There a reason they call it DISPOSABLE income you know."
Mo
KpK-Yes it's very complicated, so complicated that MY BRAIN HURTS.
I am sure that most of the people who are aware that home prices are falling also expect that prices will behave like they did after the last period of decline (or stagnation, depending on the area), bouncing back and then soaring at 10+% to new highs.
This psychology is pervasive, because that has been the actual experience of the past.
Same with the stock market. A very good friend, retired corporate executive, recently "bought the dip" when the Dow had declined to 13,000. He's sure that any decline will be temporary, and that the Dow will be back above 13,000 and climbing higher in just a few years.
Very few people are aware of the extent to which the economy and financial system have evolved to a degree of distortion not seen since the 1930's.
Even CR, who is rather aware of that, until recently (and perhaps even still) was opining that we were probably in for only a mild recession.
I'm gonna buy the dip, when it becomes the grand Canyon. Look out
beeeloooooowwwwwww.
Just paid $330 for a cord of oak delivered. Summertime price. Gonna get another one before prices get any higher.
When the cost of medical care and food and energy and school doubles, people spend more even if house prices drop. I believe people do still spend related to housing wealth increases or drops, but that unusual spikes in other prices can put the whole thing out of whack.
the fact remains that nothing is worth anything till you sell it and someone pays you for it.
That is completely wrong. If you don't sell an asset, it's worth the income that it earns in the future for you. In other words its fundamental value.
You're talking about the excess of market price over fundamental value, i.e. bubble valuation.
The realtionship between RE and PCE is really hard to make an informed estimate since we haven't had drops like this since the Great Depression.
The best data source might be to look at sales tax revenue in TX and OK after the oil bust in the mid-1980's.
yogurt:
I took the GDP numbers from the BEA. Can't get more comprehensive than that. If you don't trust those numbers, that's another issue.
yogurt:
Your 30+% number includes transfer payments which just go back directly into consumer spending.
I assume that the apparent decoupling is a smoothing effect due to the increasing availability of credit.
The question is what happens in a sustained downturn when people run out of credit.
Logically, the spending crunch happens slower, and recovery takes longer.