After reading your post I searched for housing start forecasts to see whether the housing industry is foreseeing further drops in housing sales.
According to U.S. Housing Starts Forecast
housing starts, which have been dropping between february and july will recover as soon as this autumn from about 1,800 thousands expected in August to about 2,000 thousands in december. These data look contradictry when compared with recent reported data on building permits.
If this forecast matches the reality there must be a recovery on new home sales or an enormous inventory of unsold houses will be buildt.
Back in periods around 1951, 1967 and 1986 the US did not have the massive amount of debt you guys enjoy now.
How much more debt can the US government
create before the foreigners pull out?
The FED seems to be trapped. They cannot raise rates to tame inflation without killing the economy. Currently the economy is slowing (going into recession ) and they will need to lower rates to help it. However the dollar will get smacked which would be inflationary.
So the FED has to choose between the keeping the Dollar up and fighting inflation or saving the economy from a possible recession/depression senario.
Guess what they will do?
My bet is on the latter.
It looks to me that the volatility in investment and GDP growth has been decreasing as well. The 50's to the 90s looks like a roller coaster ride. After the 90s - rough pavement.
In addition, the peak decrease in new home sales occurs immediately before the recession. Once the recession is underway, housing begins to recover.
The NAR has released its 6-month-ahead commercial real estate index, showing a 0.4% rise for Q2. That is the slowest rise in 3 quarters and the second slowest in at least 5 quarters. That component of non-residential fixed investment, at least, seems to be cooling rather than accelerating. Same story in the construction spending data. Non-residential spending is still growing, but not accelerating.
I have always believed that much of the investment will transfer from residential to non residential (stock market) once appreciation in residential stagnates. We saw in the 90's and I think we will see it again in a couple of years. The stock market will continue to grow as long as profits remain healthy. This can take place even in a recession if companies trim their expenses.
If the economy slows because of real estate, it will be pretty tough for the stock market to do well.
Lowes this morning missed expectations, if the consumer only slows spending, corporate profits will slow. If worse, look for the Stock Market to decline a fair amount
CR, another great post. You charts remind of Joseph Ellis' charts in his book Ahed of the Curve. Like you, he uses the second derivative, the change in the year over year rate of change. He uses a 3 month trailing average also. Perhaps you got your charting from his book?
I plan to try some similar charting for the San Diego housing market, to forecast price changes. The leading indicator would be inventory, or months inventory. The lagging indicator would be sales or median price.
RE the non residential spending. Ellis charts going back to the 1960s show that consumer spending leads the economy, followed closely by industrial production, and then by 2-4 quarters later, capital production. Non residential investment is probably in that last category.
No way are companies expanding next year, when the consumer is already slowing down. There are still project in the planning stages, which are going up. We will see a commercial construction boom likely through next summer, as there is a long lag between the time these projects were planned, and when they are executed.
I agree with Nouriel Roubini: we are heading in to a recession Q1 07.
Schahrzad Berkland
Poway, CA
One of the things I see from your charts is the reverse effect... that residential investment leads us out of recessions... in fact, without crunching the numbers it looks to me like that correlation going out is even stronger than the one driving us into recession.
There are obvious implications considering (1) current inventory and (2) existing high prices and (3) overall debt levels... that is should we fall into recession it will be very difficult to 'stimulate' our way out if we have to absorb all that inventory & clear the markets (reset prices). There is going to have to be an awful lot of pain before that happens.
And I don't see any other way to pump stimulus in as quickly & 'effectively' as through real estate. Defense worked great when defense was far more labor intensive - but the same things driving labor out of mfg in general drives labor out of defense... If we had a big build up we might as well send the dividend checks straight through to the investors holding UD, ATK, Lockheed, etc. Much less of that will show up in wages & into the general economy as quickly as it did in the Cold War wars.
So what happens if we go into recession? Where will the 'sweet spots' be? Anyone thinking that far ahead?
From dryfly - out in the boondocks thinking about what to do with a bumper crop of lemons coming due when the world is already awash in lemonade?
You're right that the implications for further increases in defense spending are scary. Let's hope the Republicans don't take us there in an effort to mask their fiscal problems.
Tom Marney, I'm looking for something to offset the drop in residential investment over the next year or two. The best bet is nonresidential investment. No one wants a significant surge in defense spending - since that would be a serious war. Health care spending can't ramp up quick enough.
dryfly, you are cheating by looking ahead! Yes residential investment (RI) usually leads the recovery. I bet it will again - but it will start from a much lower level.
All, Several times I've mentioned in comments and posts the 1.05 million New Home sales number as a possible indicator of a recession. There is nothing magical about that number, but I figured I might explain how I derived that number. This post shows my approach. Thanks for all the nice comments.
A note on timing. I expect New Home sales to fall below the 20% threshold in the next couple of months. If my guess on New Home sales are close, this indicator would suggest a recession starting around November or December (about 3 months after the 20% threshold is passed).
Of course my guess on sales could be too pessimistic, or nonresidential investment could save the day. Either way, these next few months will be interesting.
Some interesting numbers in Baron's this weekend (pg 33). The article is called "The No-Money Down Disaster". Sorry if this has already been discussed.
32.6% of new mortgages and home equity loans in '05 were interest only, up from 0.6%
43% of 1st time buyers in '05 put no money down
15.2% of '05 buyers owe at least 10% more than their home is worth
10% of all home owners with mortgages have no equity in their homes.
$2.7 trillion in loans will adjust to higher rates in '06 and '07
It's a decent article of you can track it down. At what point will people hand the bank back the keys to their homes? That will be an ugly time when repossessions spike to a material absolute number rather than just a YoY increase
We can all hope residential investment takes off, but I believe the fat profits have been very narrowly distributed toward energy producers and it is difficult to see them making substantial new investments. If there were suddenly an oil glut, this could invigorate the economy, but that seems quite remote.
is there any information in the trends in the revision of the data that you mention? ie. once revisions of the preliminary new home sales estimates start being revised downwards so do subsequent monyjly readings?
1986 was not offset by increased defence spending.
actually defence spending increases had peaked. Reagan's big buildup in defence was in his first term.
What did happen was there was a commercial property investment boom-- driven by deregulation aka The Savings and Loan debacle.
Post the 1986 tax reform this began to unwind, eventually to crash post 1990.
Post 1987 the Fed aggressively cut interest rates, fearing the October market crash would trigger a recession. This was like pouring gasoline on the bonfire.
There was massive commercial overbuilding, particularly in the likes of Boston, as well as the Sunbelt.
The subsequent crash was so bad that it would be over 10 years before the Boston commercial property market recovered.
As a benchmark in another boom market, the first new major office building in downtown Toronto in 14 years has just been started-- office rents in Toronto now are not higher than they were in 1990 (in nominal dollars ie 30-40% lower in real terms).
Commercial property has a longer cycle than residential: typically 12 years, and up to 15, peak to trough. Buildings take longer to build, and when built they sit empty, depressing the market for far longer. So the correction is very slow to come.
There is a strong parallel with what happened this time in the US residential lending market: banking led innovation allowed valuations to reach 'bubble' levels.
It doesn't really have to be a surge in defense spending, does it? Wouldn't a surge in, say, healthcare spending be at least as effective?
Excellent post
After reading your post I searched for housing start forecasts to see whether the housing industry is foreseeing further drops in housing sales.
According to
U.S. Housing Starts Forecast
housing starts, which have been dropping between february and july will recover as soon as this autumn from about 1,800 thousands expected in August to about 2,000 thousands in december. These data look contradictry when compared with recent reported data on building permits.
If this forecast matches the reality there must be a recovery on new home sales or an enormous inventory of unsold houses will be buildt.
hello from germany,
the thesis that non residantial will pcik up when the rest is falling of the cliff is a clear joke and looks like some kind of propagnada.
thank for the correlation.
immobilienblasen
Back in periods around 1951, 1967 and 1986 the US did not have the massive amount of debt you guys enjoy now.
How much more debt can the US government
create before the foreigners pull out?
The FED seems to be trapped. They cannot raise rates to tame inflation without killing the economy. Currently the economy is slowing (going into recession ) and they will need to lower rates to help it. However the dollar will get smacked which would be inflationary.
So the FED has to choose between the keeping the Dollar up and fighting inflation or saving the economy from a possible recession/depression senario.
Guess what they will do?
My bet is on the latter.
Excellent post.
It looks to me that the volatility in investment and GDP growth has been decreasing as well. The 50's to the 90s looks like a roller coaster ride. After the 90s - rough pavement.
In addition, the peak decrease in new home sales occurs immediately before the recession. Once the recession is underway, housing begins to recover.
The NAR has released its 6-month-ahead commercial real estate index, showing a 0.4% rise for Q2. That is the slowest rise in 3 quarters and the second slowest in at least 5 quarters. That component of non-residential fixed investment, at least, seems to be cooling rather than accelerating. Same story in the construction spending data. Non-residential spending is still growing, but not accelerating.
I have always believed that much of the investment will transfer from residential to non residential (stock market) once appreciation in residential stagnates. We saw in the 90's and I think we will see it again in a couple of years. The stock market will continue to grow as long as profits remain healthy. This can take place even in a recession if companies trim their expenses.
If the economy slows because of real estate, it will be pretty tough for the stock market to do well.
Lowes this morning missed expectations, if the consumer only slows spending, corporate profits will slow. If worse, look for the Stock Market to decline a fair amount
CR, another great post. You charts remind of Joseph Ellis' charts in his book Ahed of the Curve. Like you, he uses the second derivative, the change in the year over year rate of change. He uses a 3 month trailing average also. Perhaps you got your charting from his book?
I plan to try some similar charting for the San Diego housing market, to forecast price changes. The leading indicator would be inventory, or months inventory. The lagging indicator would be sales or median price.
RE the non residential spending. Ellis charts going back to the 1960s show that consumer spending leads the economy, followed closely by industrial production, and then by 2-4 quarters later, capital production. Non residential investment is probably in that last category.
No way are companies expanding next year, when the consumer is already slowing down. There are still project in the planning stages, which are going up. We will see a commercial construction boom likely through next summer, as there is a long lag between the time these projects were planned, and when they are executed.
I agree with Nouriel Roubini: we are heading in to a recession Q1 07.
Schahrzad Berkland
Poway, CA
Good one CR.
One of the things I see from your charts is the reverse effect... that residential investment leads us out of recessions... in fact, without crunching the numbers it looks to me like that correlation going out is even stronger than the one driving us into recession.
There are obvious implications considering (1) current inventory and (2) existing high prices and (3) overall debt levels... that is should we fall into recession it will be very difficult to 'stimulate' our way out if we have to absorb all that inventory & clear the markets (reset prices). There is going to have to be an awful lot of pain before that happens.
And I don't see any other way to pump stimulus in as quickly & 'effectively' as through real estate. Defense worked great when defense was far more labor intensive - but the same things driving labor out of mfg in general drives labor out of defense... If we had a big build up we might as well send the dividend checks straight through to the investors holding UD, ATK, Lockheed, etc. Much less of that will show up in wages & into the general economy as quickly as it did in the Cold War wars.
So what happens if we go into recession? Where will the 'sweet spots' be? Anyone thinking that far ahead?
From dryfly - out in the boondocks thinking about what to do with a bumper crop of lemons coming due when the world is already awash in lemonade?
Great work CR. Thanks.
You're right that the implications for further increases in defense spending are scary. Let's hope the Republicans don't take us there in an effort to mask their fiscal problems.
Tom Marney, I'm looking for something to offset the drop in residential investment over the next year or two. The best bet is nonresidential investment. No one wants a significant surge in defense spending - since that would be a serious war. Health care spending can't ramp up quick enough.
dryfly, you are cheating by looking ahead! Yes residential investment (RI) usually leads the recovery. I bet it will again - but it will start from a much lower level.
All, Several times I've mentioned in comments and posts the 1.05 million New Home sales number as a possible indicator of a recession. There is nothing magical about that number, but I figured I might explain how I derived that number. This post shows my approach. Thanks for all the nice comments.
Best to all.
A note on timing. I expect New Home sales to fall below the 20% threshold in the next couple of months. If my guess on New Home sales are close, this indicator would suggest a recession starting around November or December (about 3 months after the 20% threshold is passed).
Of course my guess on sales could be too pessimistic, or nonresidential investment could save the day. Either way, these next few months will be interesting.
Best to all.
Some interesting numbers in Baron's this weekend (pg 33). The article is called "The No-Money Down Disaster". Sorry if this has already been discussed.
32.6% of new mortgages and home equity loans in '05 were interest only, up from 0.6%
43% of 1st time buyers in '05 put no money down
15.2% of '05 buyers owe at least 10% more than their home is worth
10% of all home owners with mortgages have no equity in their homes.
$2.7 trillion in loans will adjust to higher rates in '06 and '07
It's a decent article of you can track it down. At what point will people hand the bank back the keys to their homes? That will be an ugly time when repossessions spike to a material absolute number rather than just a YoY increase
We can all hope residential investment takes off, but I believe the fat profits have been very narrowly distributed toward energy producers and it is difficult to see them making substantial new investments. If there were suddenly an oil glut, this could invigorate the economy, but that seems quite remote.
on residential investment, that is
is there any information in the trends in the revision of the data that you mention? ie. once revisions of the preliminary new home sales estimates start being revised downwards so do subsequent monyjly readings?
satyen mehta, Yes, recently the revisions have been down. See the post and graph for details.
Best Wishes.
CR,
I doubt I could find a more tightly reasoned, concise argument for a recession in 2007, than this blog entry of yours.
I don't know how the bulls can fail to understand the implications of this state of affairs.
1986 was not offset by increased defence spending.
actually defence spending increases had peaked. Reagan's big buildup in defence was in his first term.
What did happen was there was a commercial property investment boom-- driven by deregulation aka The Savings and Loan debacle.
Post the 1986 tax reform this began to unwind, eventually to crash post 1990.
Post 1987 the Fed aggressively cut interest rates, fearing the October market crash would trigger a recession. This was like pouring gasoline on the bonfire.
There was massive commercial overbuilding, particularly in the likes of Boston, as well as the Sunbelt.
The subsequent crash was so bad that it would be over 10 years before the Boston commercial property market recovered.
As a benchmark in another boom market, the first new major office building in downtown Toronto in 14 years has just been started-- office rents in Toronto now are not higher than they were in 1990 (in nominal dollars ie 30-40% lower in real terms).
Commercial property has a longer cycle than residential: typically 12 years, and up to 15, peak to trough. Buildings take longer to build, and when built they sit empty, depressing the market for far longer. So the correction is very slow to come.
There is a strong parallel with what happened this time in the US residential lending market: banking led innovation allowed valuations to reach 'bubble' levels.