Posted by nithi.vivatrat on December 4, 2009
Economists and other talking heads were almost giddy today about November’s unexpected dip in the unemployment rate to 10%. It was not unusual to see quotes like these being tossed around:
- WSJ: “…a sign the labor market is finally healing as the economy recovers…”
- Chris Rupkey, chief financial economist at Bank of Tokyo/Mistubishi UFJ in New York, quoted by CNBC: “We’re almost back to normal… The economy is lifting at a much greater rate than expected.”
- Tom Sowanick, chief investment officer at the OmniVest Group in Princeton, New Jersey, also quoted by CNBC: “These numbers are almost too good to be true.”
I think it is. WAIT! There is more to read… read on »
Posted by nithi.vivatrat on August 24, 2009
In an opinion piece in yesterday’s Financial Times, NYU economics professor Nouriel Roubini took issue with the mainstream speculation of an imminent economic recovery, arguing that the recovery will be “U-shaped, anaemic and below trend for at least a couple of years, after a couple of quarters of rapid growth driven by the restocking of inventories and a recovery of production from near Depression levels.” He goes on to list seven systemic economic conditions dragging out a recovery.
Further, Roubini contends that, in fact, we could be facing a W-shaped, double-dip recession, caused by the Catch-22 of ending government bailout/stimulus programs (undermine recovery if they end, drive inflation risk and then interest rates if they don’t) as well as speculation on commodities.
Well-articulated, sobering analysis — must read for anyone seriously interested in planning for what’s ahead.
Posted by nithi.vivatrat on August 6, 2009
Amidst the signs being cited as proof of a recovering economy, other data still shows a rough road ahead. Yesterday, CalculatedRisk highlighted two such reports from Deutsche Bank (reported by Bloomberg) and the Wall Street Journal. The Bloomberg report indicates that:
The percentage of properties “underwater” is forecast to rise to 48 percent, or 25 million homes, as property prices drop through the first quarter of 2011, according to [Deutsche Bank] analysts Karen Weaver and Ying Shen.
According to Bloomberg, Deutsche Bank also believes that a large segment of the newly underwater homeowners will be prime borrowers (conforming and jumbo), not subprime or option ARM borrowers as has been the general case thus far.
WSJ reports an increase in the number of homeowners upside-down on their mortgages:
Some 24% of owner-occupied homes had mortgage debt that exceeded the values of those homes at the end of June, according to data from Equifax and Moody’s Economy.com. That number rises to 32% when looking at the share of homeowners with mortgages that don’t have equity left in their homes.
Overall, 16 million homeowners are “upside-down” on their mortgages, up from 10 million, or 15% of owner-occupied homes, one year ago.
Rough times ahead for a lot of homeowners, despite any improvement in the economy.
Posted by nithi.vivatrat on June 25, 2009
I’ve always felt that a balloon was a better analogy than a bubble (in no way am I claiming to be the first) to describe an economic contraction in a particular sector or area, such as housing or consumer spending. It’s not that the market in question “pops” and disappears — it just deflates to a different size after the “air” get sucked out.
The lost “air” in our economy was inflated consumer spending fueled by borrowing — borrowing largely leveraged against rising housing prices. Thus, as housing prices have fallen, consumer spending has dropped as well — causing this significant contraction of our economy. If you don’t believe me, see today’s post by Atif Mian and Amir Sufi of the University of Chicago Booth School of Business in WSJ Real Time Economics (thanks to CalculatedRisk for highlighting the post). A key finding:
Using this methodology, we find striking results: from 2002 to 2006, homeowners borrowed $0.25 to $0.30 for every $1 increase in their home equity. Our microeconomic estimates suggest a large macroeconomic impact: withdrawals of home equity by households accounted for 2.3% of GDP each year from 2002 to 2006.
WAIT! There is more to read… read on »
Posted by nithi.vivatrat on June 11, 2009
CalculatedRisk reports how an economic turnaround NEED NOT be immediately accompanied by increased hiring. This will continue to be a drag on housing prices and transaction velocity. When people don’t have jobs or are still afraid of losing them, they will be less likely to buy a home even when mortgage rates are low. Lenders will also be skittish in a poor job market. In addition, a lack of improvement in the job market will also cause foreclosures to persist as a problem. My opinion: wait for the hiring trend to improve before we see a sustained improvement in housing prices and transaction velocity.
Posted by nithi.vivatrat on March 31, 2009
Columbia University’s Edmund Phelps was on American Public Media’s Marketplace last week contending that we rethink our national obsession with home ownership.
I listened to this after having recently read David Kamp’s fascinating piece in April’s Vanity Fair titled “Rethinking the American Dream.”
Both pieces are very thought-provoking. I do think there is something disconcerting about the American Dream somehow becoming synonymous with home ownership (it wasn’t always like that), and I do have concerns about the many aspects of our government policy that encourage this mindset. To me, it is undeniable that the mortgage interest deduction played at least some role in the housing bubble run-up.
While I do believe that home ownership and renting should be theoretically economically equivalent over the long run, there are some intangible attributes to home ownership (pride of ownership and emotional investment to neighborhood development and care among them) that cannot be ignored. Anyway, the spirited back-and-forth in the comment section of the Marketplace piece is as interesting as the Phelps interview itself. Hope you find this interesting as well.
Posted by nithi.vivatrat on March 2, 2009
Two key indicators were issued last week - the S&P/Case-Shiller national home price index and the Conference Board’s Consumer Confidence Index. Both appear grim. The S&P/Case-Shiller index set a new record for the largest one-year drop in its 21-year history, dipping 18.5% over the 12 months ending in December 2008. The Consumer Confidence Index fell to an all-time low to 25.0 (1985=100), plummeting from 37.4 in January. WAIT! There is more to read… read on »
Posted by nithi.vivatrat on February 24, 2009
Given my background in data warehousing and business intelligence, it would surprise none of you that I loved Kenneth Duberstein’s op-ed piece in today’s New York Times advocated a web-based reporting system of key performance indicators for the country. The closing paragraph:
Great steps forward in American history occur at moments when our deeply held values are reaffirmed in the face of changing realities. Such a moment is at hand. We need a shared frame of reference that will enable us to practice collective accountability. If Congress acts soon, by the time President Obama delivers his first formal State of the Union address next year, Americans will be able to continually assess the state of the Union for themselves.
As a nation, we face complex problems where people legitimately have differing views on the best solutions. But it would be nice if we could at least agree what the problem looked like and where we are now. Such a system would be an important first step.
Posted by nithi.vivatrat on February 18, 2009
In more economic news, the New York Times had this article a couple of days ago pointing to a handful of economic indicators showing that, while the economy was still worsening, there are signs that at least the rate of descent may be slowing:
“You go from a free fall to a steady decline,” said Michael T. Darda, chief economist at MKM Partners. “Is that good? No, it’s not good, but at least you’re kind of falling at a slower pace, and that’s the first step to some of these indicators starting to flatten out.”
Note this section towards the end:
The government reported that 598,000 jobs were lost in January, the most for that month in two decades, and economists expect the unemployment rate to rise to 9 or 10 percent from January’s 7.6 percent. Because employment numbers typically lag the broader economy, millions of Americans may still be losing their jobs even after the recession bottoms out. [emphasis added by me]
As I have mentioned in a previous post, housing prices will rise with consumer confidence. If many Americans are losing jobs “even after the recession bottoms out,” I believe that an improvement in consumer confidence will lag behind other economic indicators in an upswing, and any increase in housing prices will lag even further behind that.
Posted by nithi.vivatrat on February 16, 2009
Paul Krugman’s NYT column yesterday discusses how, for the past decade, we have been living under the illusion that this was a period of great wealth creation. Unfortunately for us,
Last week the Federal Reserve released the results of the latest Survey of Consumer Finances, a triennial report on the assets and liabilities of American households. The bottom line is that there has been basically no wealth creation at all since the turn of the millennium: the net worth of the average American household, adjusted for inflation, is lower now than it was in 2001.
At this point, I think that illusion is fairly well shattered. Much of the growth in our economy was fueled by consumption enabled by personal leverage on real estate assets. Now that the run-up on asset values is gone, that leverage-based consumption is impossible — and our economy must contract. Further, much of that debt (secured by assets with newly-lowered values) is still there, an albatross for many consumers for some time to come.
To continue moving through the vicious cycle: the perception of our wealth drives our consumption, as well as the valuations of assets such as real estate property. As I argued in a previous post, we will need to see this perception fundamentally turn around before we see a general all-around growth in real estate prices. I think there is a long road ahead of us before we see this happen.
