by Calculated Risk on 6/11/2007 06:09:00 PM

Dryfly can stop holding his breathe!

David Malpass, chief economist at Bear Stearns, kindly responded to my email today (see this post for background: Bear Stearns and RI as Percent of GDP). I don't have permission to post his email, but basically he says the chart is as intended - the chart uses chained 2000 dollars for both Residential Investment (RI) and GDP, and then presents the ratio of RI (chained 2000 dollars) as a percent of GDP (chained 2000 dollars).

UPDATE: Professor Tim Duy provides a Fed paper that explains the error in using real ratios from chained series, and recommends the approach I used. See: A Guide to the Use of Chain Aggregated NIPA Data, Section 4.

Click on graph for larger image.

This graph shows Residential Investment as a percent of GDP (red), and using a ratio of chained dollars (dashed purple, Bear Stearns).

At the least, the chart in the Bear Stearns research note (not shown), is mislabeled. Note that Bear Stearns shows RI as a percent of GDP for Q1 2007 as 4.5%, but in reality it is 5.07%. Here are the numbers from the BEA:

Q1 GDP: $13,613.0 Billion
Q1 RI: $690.5 Billion
RI as % of GDP: 5.07%

I frequently use real quantities (adjusted for inflation), but one of the exceptions is when I normalize by some other factor. In this case, I normalized RI with GDP.

David Malpass argues "Our graph is relevant in thinking about the number of
people employed in the sector, the useage of commodities, etc.". I don't share his view. I think normalizing by GDP (red line) provides a better view of how much of GDP is dedicated to housing.

And finally, I'd like to note that RI is not the same as housing prices (see What is "Residential Investment"?). Most of RI is value put in place for new construction, home improvement spending, and commissions. Only brokers commissions are directly tied to housing prices (although there is usually more RI when prices go up significantly). So when we talk about RI, we are mostly talking about construction materials and labor costs.