August 26, 2006
More thoughts on the housing slowdown
How concerned should we be?
|The difference a year makes |
Recent data quantify housing cooldown (year-over-year changes).
Sure looks like a downturn to me.
Even so, Dave Altig at Macroblog , , another source that's always worth reading, thinks the gloom and doom has been overdone. Dave notes that even with a drop back to 2003 levels, home sales per person are still at historically high levels, a point also noted by Bizzyblog and some Econbrowser readers. I must say that I don't take much comfort in that. The bigger the preceding surge in construction, the bigger the overhang that might now have to be worked off. I certainly don't see much in the historical record to suggest that the more dramatic the prior boom, the more modest was the subsequent bust. Just the opposite-- 1929 (the year the Great Depression began) started out as a tremendous boom, as did 1973, which preceded the biggest U.S. recession since World War II.
Dave offers some other observations that give me more comfort. First, he notes correctly that none of us are really certain what's in store, given the great challenges in making these forecasts. Surely the responsible statement to be making in the current situation is that there is a significant downside risk, which may or may not materialize. Second, Dave along with the always-excellent Tim Duy notes the potential of other sectors such as nonresidential investment to pick up some of the slack from a weak housing market. Third, Dave observes, as did I, that things so far are no worse than in 1994. If we do see a replay of that "soft landing" that successfully controls inflation, then, as Dave noted last January, Bernanke could come out looking quite the hero.
I certainly hope that's what happens. But will it? I don't know.
Posted by James Hamilton at August 26, 2006 09:26 AMdigg this | reddit
If you want to look at it in another perspective, from 2000 to 2005 the housing stock expanded 3.6% while the number of households grew 6.3%.
Are we suffering from a cyclical swing in housing -- and by many past cycles it is still
a small downturn as starts are down some 20% as
compared to some 60% drops in most cycles.
Or, are we suffering from a massive mismatch where builders have been building bigger and more expensive homes relative to what households can afford? If you compare the price and size of new homes relative to the gains in real houshold income it appears to be much more the latter.
Posted by: spencer at August 26, 2006 12:18 PM
i cannot offer any educated facts, graphs, or statistics but i am from Florida and what I am seeing going on from one end of the state to another gives me that feeling that you have "that something is just not right" All of the condo building in Sarasota and Miami is dizzying. And I say to myself who is going to buy ALL of these thousands of units? And rarely discussed is where is all the WATER going to come from for all the toilets et-cetera in all those towers; let alone the dilapidated roads that surround these ma month buildings. Something is going to happen and I feel it will not be good.
Posted by: kuros at August 26, 2006 12:44 PM
Doesn't your point about the overhang undercut the assertion that "things so far are no worse than in 1994"? I don't have the statistics, but I don't recall a major building boom in the early 90s, and I would guess that inventories of unsold homes were a lot less in 1994 than they are today. At the time slowing sales weren't such a big deal because there wasn't a lot to sell. Today, holy crap!
Posted by: knzn at August 26, 2006 01:27 PM
I can offer one bit of local, anecdotal evidence that you may be correct. I live in the Princeton, N.J. area which is in the central part of the state. New Jersey has always been an expensive place to live; especially with regard to housing affordability. Back in the eighties, the last housing boom, a flood of townhouse (condo) communities were constructed in this area. Of course their value went down along with everything else in the ensuing bust. As I recall, it took 5 or 6 years to get back to late eighties values. But I digress. My point is that at least some builders were attempting to fill a need for affordable housing with these townhouse developments. This time around has been quite different. I don't claim to have driven down every byway in Central Jersey, but I can't recall seeing any "affordable" housing developments in the last 5 or 6 years. To be sure, there has been another flood of new construction but every building site I've seen has been of the McMansion or at least mini-McMansion variety.
Posted by: RMX at August 26, 2006 01:32 PM
A fourth source of comfort you might cite, though, is that real long-term interest rates have come down since June, so the fundamentals of housing are not as bad as they were a couple of months ago.
Posted by: knzn at August 26, 2006 01:40 PM
In re affordability, I ran some numbers earlier this year at http://www.bignose.org/blog/index.php?/archives/8-Mortgages-and-income.html
In short, a national average fixed mortgage on a national average price home expressed as a percentage of the median income for families of four is at levels we haven't seen since 1989.
I remember what happened to the housing market in 1989. To my mind, there are three ways this thing can adjust: prices come way down, rates come way down, or incomes come way up.
I know which way I'm betting, mainly because I discount the latter two possibilities. PIMCO thinks rates are coming down, though, and they're smart, so I could be wrong there.
Nobody thinks incomes are going way up.
As for the housing stock versus the "number of households," I'd like a cite on that, please. Click through to my post and you'll find links to all the data I used.
Posted by: wcw at August 26, 2006 03:14 PM
You folks are missing the obvious. The current housing boom is characterized by an upward spiral of housing prices and mortgage debt. The two feed on each other. In comparison to previous times, we need to look at both housing prices and consumer debt. Housing prices have risen much faster than inflation, but what about the debt?
Year Q CMDEBT / DPI
1990 1 81.6%
2000 1 93.1%
2001 1 96.9%
2002 1 101.2%
2003 1 107.9%
2004 1 112.7%
2005 1 116.8%
2006 1 127.3%
This is much worse than any previous housing bubble!
Posted by: touche at August 26, 2006 04:45 PM
Perhaps you and your collegues dont think this is worse than 1994. But I could point to large number of internet commentaries saying this is way worse than 1994. The now famous Roubini is one of them. Here is another:
BTW I take little comfort in the fact that housing is imploding amidst historically low interest rates. This should not be happening.
Posted by: vincentm at August 26, 2006 06:52 PM
"If you want to look at it in another perspective, from 2000 to 2005 the housing stock expanded 3.6% while the number of households grew 6.3%."
Can you provide a source for this? If it's true, that's a strong point, but it doesn't jive with the other figures I've seen.
Posted by: MtHood at August 26, 2006 08:41 PM
I notice that every single metric on that graphic is pessimistic. Is this because there are no optimistic ones? Or because whoever put that graphic together is intentionally presenting a biased view and trying to mislead readers by only selecting negative information?
One obvious thing missing is housing prices! Surely prices are something of interest in evaluating the impact of a slowdown. Why on earth would someone who wanted to give an accurate picture leave out such an important metric?
Posted by: Hal at August 26, 2006 11:20 PM
So, housing had an unsustainable, maybe even an "irrationally exuberant" boom which has just now begun to see the backside of the boom.
At the margin, a major sector of the economy rolling over isn't positive, but the Fed's been raising rates to slow things down and in slowdowns or shakeouts or recessions, the most overextended participant usually gets clobbered first.
Anyway, there's more to the economy than housing and with long rates coming down (the 10 yr's flirting with 4.8% !) maybe capital investment and some other sectors will get a boost.
I'm not sure if the housing thing has to be fixed by prices coming way down, rates coming way down, or incomes coming way up - over a 2-3 year period it's more likely a combination of all three variables adjusting toward some equilibrium level.
The total debt and mortgage data is troubling; but again, if intermediate/long rates keep falling from the 4.8% level as Gross/PIMCO project then the real cost of carring the debt is moderated.
I still don't understand why anyone would want to buy a ten year note at 4.8%, but that's another story.
On housing prices, Shiller's outfit has the best data, which has even been turned into a futures contract at the Merc:
Started trading in May 2006, but the liquidity and OI in all the contracts is too low to make them indicative of much, at present.
Posted by: Anarchus at August 27, 2006 04:33 AM
The eventual proportion of the shakeout is endlessly debateable, what is for sure is that it just started. View the wsj article about the house that sold for 50% of its' appraised value.
Posted by: biker at August 27, 2006 11:54 AM
Recycling a comment I posted a few days ago on the Calculated Risk blog ...
From '94 through '05, the percentage of heads of housholds reporting themselves as homeowners rose about 0.5 percentage points a year. So regardless of the exact number of households formed, the construction rate was above it by that amount, which equates to about 400k units/yr. So over those ten years about 4 million of the homes sold went to increasing the ownership rate from its historical range of 63-65% to the current level near 69%. If the ownership rate reverts to its historical range, those 4 million units are going to leave the hands of their current owners and pass to the hands of others, and the number of units to be absorbed by the market is that much larger.
Some will argue that the households currently in these units must live somewhere, so they won't become vacant and available to new households, but will at worst just move into the hands of landlord investors. This overlooks the fact that much of the growth in ownership was among young people, who will end up doubling or tripling up with roommates, or moving back in with their parents.
The crash has only just begun. We face a housing glut of unprecedented scale.
Posted by: jm at August 27, 2006 05:05 PM
Well, the guys from PIMCO want your money so they will tell you that this is a good time to buy bonds. As a matter of fact, they always think that time is good to buy bonds. It just so happens that now they are right.
Posted by: vincentm at August 27, 2006 09:35 PM
Hal, the problem with housing prices is that they lag most other indicators particularly when a decline occurs. Home sellers are tenacious and unlikely to lower prices quickly. So high home prices aren't sufficient to indicate a booming market.
The large drop in sales of new and existing homes coupled with a similar rise in inventory is IMHO a leading indicator of declines in house prices.
Having said that, the OFHEO (Office of Federal Housing Enterprise Oversight) publishes a quarterly report which indicates home prices are still rising substantially as of the begining of 2006. The last quarter I see is first quarter of 2006 and has an annualized rate of 8%, the first quarter since the begining of 2004 to have a rate of increase below 10%. The second quarter report comes out September 5.
Posted by: Karl Hallowell at August 28, 2006 12:22 AM
The FED driven slump in housing must be realized. In any market where demand surges suppliers rush into the market to satisfy demand. This always leads to an over supply then a slight slump as supply and demand stabilize.
Now enter the FED. They read their tea leaves or pig entrails or whatever and determine that it is time to cause people a little pain. They admit they actually don’t know why but to justify their existence they must occasionally cause pain; otherwise, they might be forgotten as irrelevant. But the wonderful FED inflicts pain at or near the top so that not only is there a slump due to over supply but now there is the added pain of higher interest rates.
When are we going to realize that bleeding a patient brings him nearer to death rather than curing his ills.
Posted by: Dick at August 28, 2006 03:51 AM
The data clearly suggest the possibility of a pretty severe slump in housing. Since I am on the record as someone in the "soft landing" camp, I am hopeful that the loss of the speculative demand for housing will result in a housing slowdown, and not a major collapse. Low builder sentiment is not surpising and, by itself, is not much cause for concern. The 50 basis point fall in the 10-year over the summer, and generally low long term interest rates from a historical perspective, provide some comfort that the worst case scenarios may not materialize.
Posted by: Piso Mojado at August 28, 2006 06:34 AM
Talk of a "soft landing" always makes me think of someone handing me a parachute then pushing me out of the plane at 20,000 ft. I hope I can get the straps on and that the chute will open for a "soft landing."
If you believe that the housing demand was driven by irrational exuberance you have to believe that a majority of real estate investors have to be stupid. I have a lot of trouble believing there are very many investors will plunk down more than $100k on a whim.
Posted by: Dick at August 28, 2006 08:10 AM
"I still don't understand why anyone would want to buy a ten year note at 4.8%, but that's another story."
If one believes a recession is in store sometime within the next 12 months, one would buy a 10-Y for both its 4.8% yield and the appreciation on the way to 3%. Surely beats a 30%+ decline of the stock market that historically happened in recessions.
If you believe that the housing demand was driven by irrational exuberance you have to believe that a majority of real estate investors have to be stupid. I have a lot of trouble believing there are very many investors will plunk down more than $100k on a whim."
This is a circuilar argument: people are paying the high prices, they cannot be stupid, hence the prices are correct, hence it's OK to pay the high prices. If this were true, asset bubbles would never happen, and certainly never pop. I'll take the side of history on that one.
Small Investor Chronicles
Posted by: Alex at August 28, 2006 10:55 AM
Liquidity cannot be increased much more than it was in 1994. That's when all the reserve fraction controls were effectively removed and the liquidity spigot was opened fully. That seems like a trick we can't ever pull again.
Bernanke can lower rates, but this won't be very useful unless there's somewhere else to blow a bubble and/or another large-scale source of income to service all the additional debt.
But it appears quite possible that saving the dollar on the foreign exchange and against commodities will prove a higher priority.
Posted by: Aaron Krowne at August 28, 2006 11:16 AM
In the talk of "bubbles" contemporary circumstance are often ignored, and instead the “bubble” is attributed to dumb investors, either explicitly or implicitly. Seldom are investors actually dumb, but investors do get duped by government rules and regulations.
Whether it is the Savings and Loan debacle during the 1980s or the current housing slump, if you get beneath the surface you will usually find either congress or the FED changing the rules of the game, pulling the rug out from under some pretty savvy investors. That is why most investors at the start of every day genuflect to Washington DC.
Posted by: Dick at August 28, 2006 02:12 PM
Thank god for the feds use of "Asset Targeting". Rates ARE falling. My par rate is now less than 5.875% down from a high of ~6.375%. Thats ~5% more buying power from the highs of June. If the Fed drops rates by year end we could indeed be in for a soft landing. On a side note it would be interesting to look for a correlation between the growth in homeownership and the decline in the savings rate.
Posted by: Ryan at August 28, 2006 02:43 PM
"I have a lot of trouble believing there are very many investors will plunk down more than $100k on a whim."
What makes you think investors are plunking down anything? Have you seen the stats on how many people are taking out 100% loans, some with introductory rates as low as 1%?
No, there is a surprising number of "investors" plunking down very little, so that argument doesn't work.
Posted by: MtHood at August 28, 2006 04:56 PM
Why is it that economists have such a low opinion of people? Economics certainly earns its title as the “dismal science.” Economists always seem to see themselves as the smartest kids on the block while everyone else always makes dumb decisions.
Call me the optimistic economist. I actually believe that markets can give prosperity without the infliction of pain and people are smarter than they are given credit.
Posted by: Dick at August 29, 2006 03:45 AM
Painful business cycles predate the profession of economics AND the Federal Reserve Board. But as you note, so does prosperity.
But then, economists are not the only people who sometimes believe and act upon the notion that they are smarter than other people. Many investors do bet on drawing to an inside straight. I suspect that too many individuals bought homes beyond conservative personal evaluations by factoring in speculation. The "greater fool theory" works sometimes but not at all times.
As to inventories, it takes much longer to develop and construct new housing than it does to buy or sell a unit. Hence the differences in timing between production and consumption can drive oscillations in markets, just like in pork bellies or uranium.
Posted by: Joseph Somsel at August 29, 2006 08:53 AM
With this: "if you get beneath the surface you will usually find either congress or the FED changing the rules of the game, pulling the rug out from under some pretty savvy investors. That is why most investors at the start of every day genuflect to Washington DC." you answer the Q imbedded here: "Why is it that economists have such a low opinion of people? Economics certainly earns its title as the “dismal science.” Economists always seem to see themselves as the smartest kids on the block while everyone else always makes dumb decisions."
Most "economists" are in the pay of the Maestros, no doubt found in the FedRes, and disributed political capitals, we allow to perturb the natural order of the Economy. They, the "economists" have a front-row seat to the idiocy being foisted upon the People. That the People are largely unaware of, successfully distracted from, the goings-on around them-- leads to the opinions you see demonstrated.
Posted by: Mark E Hoffer at August 29, 2006 06:57 PM