I think the Boston market is about to have a repeat of what happened in 1987-92. This graph compares the end of the 82 recession with the end of the 01 recession, and as can be seen both times had incredible house price appreciation. Interest rates from 01-04 were dropping just as they were from 82-85. I see no reason to think that prices will not decline now, just as they did in 1987.
I am going to start running this exercise for other cities (MSA's), in the near future. I will likely do Boston, Atlanta, Chicago, Denver, Miami, Phoenix, Riverside, and Washington DC. Any other cities anyone would like to see? I have the data for all 361 MSA's
Durable goods has always been a complicated metric. I might go so far as to say it is the most difficult to correctly interpret metric that the government releases. Macroblog has pulled together the best summaries of these new numbers, and as you can tell there are a wide variety of interpretations... and I don't think any of the interpretations are trying to push any personal agenda. check macroblog at http://macroblog.typepad.com/macroblog/2006/06/durable_goods_o.html
Personally, I don't have much to say on the new number, but...
I hope the decreasing volatility continues. Perhaps better analysis/forecasts due to the improved business communcations (internet), and more transparent capital markets have been helping. The mid 90's to present sure look more stable
On the consumer side, I see a lot of similarities between our economy now and our economy exactly 20 years ago. Those who were around from 1987-1992 know the implications of this are not good.
Like most things at such a macro level, there is not a single metric or reason behind this... there are just a series of items that seem to point in that direction. The 2 main points, at least amongst easily quantifiable points are:
1. Consumer spending and disposable income following the 2001 recession stayed higher then historic norms. This was also true after the 1981/82 recession. 2. National Debt has been growing for too many years following the 2001 recession. This has been driven in part by the Iraq war, but by my estimates about 25% of the national debt increase has been driven by consumers spending more then they did historically in similar situations. The same thing happened in the years following the 1982 recession.
The famous "national debt as a percent of GDP" metric does not look troublesome in recent years... but strip from GDP the questionably sustainable increases in housing prices, and the large increase in higher gas price imports and the metric starts looking more dismal. Because of this, I think the fed has no choice but to raise interest rates, and I think the consumer has no choice but to suffer through it.
On an inflation adjusted basis, house prices are declining. Here is a comparison of house price changes relating to recessions to show this. The house price data is from here: http://www.economagic.com/em-cgi/data.exe/cenc25/c25m01
Estimating the supply or demand of housing is a difficult task. The most logical step with supply is to look at new housing starts, though this has some obvious flaws since there may be trends relating to more or less houses being demolished, housing starts not finishing, and expansion or contraction in the apartment market. That aside looking at housing starts is probably the best rough estimate of how housing supply is changing.
Housing demand is even more difficult. Realtor data over the last 10 years has been getting skewed by the boom of no realtor required internet listing sites (such as housejockey.com). Aside from that, NAR is not really releasing a clear metric that could lead us to housing demand. Looking at census demographics is also futile. Illegal immigration distorts population count, and even if we could get a good population count there are no reliable ways to translate that into housing demand(it would have to be some complex equation based on employment/interest rates/etc). All of this is why I think the best estimate of demand is the same metric I posted about last week - the National Association of Homebuilders outlook survey.
So while these 2 metrics are both very simple, I think they represent the best estimate of housing supply and demand. Luckily both metrics go back quite a few years as well.
Michigan Consumer Sentiment index has small uptick
A nice change in pace from the hard downward falling we have been seeing. This index seems to be relating a little too much to gas prices... I almost wish there were 2 indexes - one energy related and one not.
The National Association of Home Builders releases survey results once per month, trying to capture the overall housing market outlook amongst home builders. The series first started in 1985 and I think it is a great metric that is a leading indicator to many other economic events. One comparison that I have seen the metric made to is consumer spending. Consumer spending and the index are highly correlated, as could be reasonably expected, since the builders index is a survey and many of the forecasts and data that the home builders see is based on consumer spending.
That said the comparison has gained attention in recent years because the 2 series have been in disconnect since the 2001 recession. This can be seen here:
There are two explanations for this. One is that home builders have been too bullish in recent years, and another is that consumer spending has been too low in recent years. I do not conclude either of these (but others do).
I don't think any meaningful conclusion can be drawn from the NAHB index vs consumer spending metric without further investigation. It is hard to get a grasp on why this is because the problems are small and independent of each other. Here are, in my opinion, the top 3:
1. The NAHB index is based on survey, which as careful as they are, is always prone to homoskedastic error. No matter how hard they try there is no way the sample population they are surveying (even if the population is all of their members) is staying consistant. 2. The cause of the high correlation leading up to 2001 is very unclear. How much of the homebuilder's survey answers are being affected by the consumer spending index numbers themselves? It could be as low as 1% and as high as 50%. Consumer spending affects many other metrics and 50% is not unreasonable. 3. Assuming we even can say the NAHB survey has been consistent for 20 years and assuming we can nail down the causality significance, there are still lurking variables that can't be determined without another 20+ years of data. 1985 - 2006 covers 2 recessions and last time I checked it is pretty tough to develop a confidence interval with only 2 data points. I could easily argue that consumer spending always declines below the index around and shortly after a recession. There are only 2 data points after recessions and we just don't know.
Blame It On Bernanke Realty Times (06/09/06) ; Evans, Blanche The National Association of Realtors has asked the Federal Reserve to stop hiking the short-term interest rate for fear another increase will derail the housing market. However, Freddie Mac economist Frank Nothaft is not worried, noting that the central bank is reviewing incoming economic data and will make its decision accordingly. He adds that long-term mortgage rates declined this week due to "a cautiously optimistic outlook in the market that core inflation remains contained." Though it predicts a drop in both existing- and new-home sales this year, NAR acknowledges that the 2006 figures will likely be the third strongest ever reported.
Consumer Credit is a difficult metric to understand
Most economic blogs pushed out analysis and graphs on yesterdays consumer credit release. The consensus seems to be that consumer debt has risen far too high and that we should be panicking. I do not completely reject this, but I think the panic level is too high. Here is what the typical graph looks like:
There are two very simple things wrong with this, and they are both painfully simple. First, the US population has been increasing since 1980 and these metrics should be based on some sort of per capita basis (it could be argued only aged 18-65 or something, but my point is some sort of population demographic). The second problem is that these numbers are not inflation-adjusted. These two items make the above graph 100% meaningless. Here is a more accurate picture of consumer credit:
While the scale of dollars per person is not at all useful to think of, it at least displays the data in a more comparative basis. This is the graph we should be basing our conclusions on, which fortunately leads me back to the same conclusion - rising consumer credit is a problem.
All that said - this months numbers were significantly higher than usual (though it not possible to see a 1 month change on a 26 year graph). The gains this month were both in revolving and nonrevolvinging credit. The revolving credit was not surprising, given last weeks strong retail reports (and I suspect this is due to Easter spending being pushed more from March into April this year compared to lastNonrevolvinging credit growth exceeds revolving, and has since 2000, though that gap will close in the months to come.
Consumer credit is broken down into three categories: auto, revolving(ie, credit card), and other. Since we already have indications on total consumer spending well before this release, there is little to be gained from learning what portion of spending was financed through acquisition of debt. Periods of strong spending can be accompanied by relatively weak credit growth and vice versa, so this measure fails even as a coincident or lagging indicator. Credit cards (revolving credit) make up 37% of total consumer credit which stands at 2.16 trillion. Non-revolving credit helps finance auto purchases, tuition (including Sallie Mae), vacations, and other forms of consumer spending.
No offense, but the last fed meeting minutes showed they toyed with the idea of a 50 basis points hike.
Anyone who believes they won't raise rates either isn't in the know, or isn't paying attention to what the FED is saying.
Inflationary pressures are strong and building even more. Once they get started, it takes a herculean effort to stem.
Most economists agree that a .25 hike is in the bag and the bond market has priced it in. Please be advised.
It seems very likely that you are right; there will be a rate hike. I hardly think the hike had been "priced into the market"
MARKET ALERT from The Wall Street Journal.
June 5, 2006
Stocks retreated following comments by Federal Reserve Chairman Ben Bernanke that raised worries of an interest-rate increase later this month. The Dow Jones Industrial Average fell 199.15 points, or 1.8%, to 11048.72; the Nasdaq Composite Index dropped 2.2% to 2169.62; and the S&P 500 fell 1.8%. The Russell 2000 small-cap index lost more than 3%. It was the third-worst one-day selloff of the year for the Dow and the second-worst day of the year for the Nasdaq and S&P. ... Federal-funds futures, which before Mr. Bernanke spoke were pricing in about a break-even chance the Fed would raise its target interest rate again at the end of the month, priced in a roughly 70% chance after he spoke
A weak job growth number was released this past Friday showing a growth in May of only 75,000 jobs were added to non-farm payrolls. This fell well short of the 175,000 that was predicted to be added in the month of May.
With a weakening job growth picture, there is belief amongst some on Wall Street that the Fed will pause in June it's recent push higher of interest rates. The Fed had been raising interest rates to battle the inflationary picture. With a weaker jobs picture and a belief because of this that we may see corporate profits that are not as strong as they have recently been, inflation may not be as bad as was once thought.
Unit labor costs grew 1.6 percent during the first quarter of 2006, following a 0.6-percent decline in the fourth quarter of 2005, as revised. The implicit price deflator for nonfarm business output rose by 2.9 percent in the first quarter of 2006.
This is great time to be looking for employment. This rise in unit labor cost is a lagged effect reflecting great employment conditions. Remember, when you find a job in a new city, don't forget to list your old house on HouseJockey.com =)
-Unit Labor Costs were released today from the census.gov
