by Calculated Risk on 10/30/2006 10:07:00 PM

In mid-August, Dallas Fed President Richard Fisher said:

"I expect second-quarter GDP growth to be revised upward to closer to 3 percent. And my best guess one month and two weeks into the third quarter is that the speed at which we are now proceeding is roughly of that magnitude. From my vantage point, despite what you hear from some of the Eeyores in the analytical community, a recession is not visible on the horizon."

Of course we've been having fun with Fisher's Eeyore remark ever since. It was Professor Duy who, after Fisher's speech, first jokingly called Dr. Roubini the "archetypical Eeyore".

And of course those Eeyores in the analytical community have been correct so far.

Here is some more from Dr. Roubini: Another Recession "Canary in the Mine": Wal-Mart Sales Flat in Spite of Lower Oil Prices. A short excerpt:

One of the latest variants of the optimists' soft-landing view is that the weakness in economic growth in Q3 was driven by the spike in oil prices during the summer. Now that oil prices are 25% down relative to the summer peak, the extra income in the pocket of consumers will be spent driving a rebound of consumption and growth in Q4 and 2007. So, now "low" oil prices will come to rescue the US consumer.

It is too bad that this fairy tale has a very week base of support. This weekend Wal-Mart reported on its same store sales for October so far; and guess what: they are as bad as they were in December 2000 at the very outset of the last US recession.

And from Dr. Krugman (NDN’s James Crabtree notes from speech, hat tip: Mark Thoma):

In general economic terms we are off the map - in two ways on (1) housing and (2) the trade deficit. Because we are off the map, we are struggling to use our fundamental understanding of economics, and some dubious number crunching, to make sense of a situation that doesn’t look like anything we’ve seen before.
...
So here is the economic problem. We have a big trade deficit and a highly inflated housing sector. One result has been that we’ve lost a lot of manufacturing jobs – which are tradable – but we’ve made that up in domestically orientated employment. (Among other things this has included a 50% increase in real estate jobs.) Eventually this will slide back, and we’ll see more jobs in manufacturing if exports pick up. The thing is that the transition will be unlikely to be smooth.

Eeyore lives!

by Calculated Risk on 10/30/2006 03:31:00 PM

Using my method for calculating Mortgage Equity Extraction (MEW), the following graph shows MEW for the first two quarters of the year, and the total year.

Click on graph for larger image.

Over the last few years, a growing percentage of equity extraction has occurred in the second half of the year.

Based on preliminary reports from the BEA, Q3 MEW was probably around $100 Billion.

NOTE: Maybe a few more abbreviations in the graph title will make this clear: MEW = Mortgage Equity Extraction, NSA = Not Seasonally Adjusted, CR = Calculated Risk.

by Calculated Risk on 10/30/2006 12:07:00 PM

Professor Kash Mansori of Angry Bear has his own blog: The Street Light.

Today, Kash looks at how the previous 'soft landing' was being reported in 2000. A few excerpts:

September 18, 2000
The Wall Street Journal
Economic Data Continue to Augur Soft Landing:

November 27, 2000
Business Week
This Political Shock Won't Upset the Soft Landing: THE FED SEEMS CONTENT that the slowdown is leading toward the desired soft landing, although policymakers are still not convinced that the threat of rising inflation is abating.

A nice review. Enjoy!

by Calculated Risk on 10/30/2006 12:26:00 AM

Note: This might be boring. For a more interesting piece, the previous post has excerpts (and links) to Krugman's piece today on the housing bubble.

When I excerpted from the recent Merrill Lynch economic forecast, I also presented a graph from Merrill Lynch of Net Mortgage Equity Extraction - what I call mortgage equity withdrawal or MEW.

Click on graph for larger image.
Brad Setser asked how the Merrill Lynch estimate of MEW compared to my estimate of MEW. Once again, here is the Merrill Lynch graph based on data from the Federal Reserve and Haver Analytics.

This data is presented seasonally adjusted, at an annual rate (SAAR).

This is the graph I presented on MEW. This data is also based on the Federal Reserve Flow of Funds report and the BEA GDP report.

The data is presented as a percent of GDP. Also, this is an estimate of MEW presented on a quarterly basis, NOT seasonally adjusted (NSA).

The third graph shows my estimate of MEW at an annualized rate (but still NSA) compared to the Merrill Lynch SA data. It appears my method yields a lower value for MEW, and there are some differences because I haven't SA the data.

The seasonal pattern is Q2 and Q3 are the strongest quarters for equity extraction (about 2/3 of the total annual extraction), followed by Q4. The first quarter is usually the weakest quarter with typically less than 10% of the annual extraction. So SA, Merrill Lynch shows strong MEW in Q1 2006 with a significant decline in Q2. NSA data shows Q1 and Q2 about the same for '06.

As a final note, before the Flow of Funds report is available, the BEA provides an estimate of quarterly mortgage interest paid and the effective mortgage interest rate, based on preliminary data from the Fed. It isn't perfect for MEW because the BEA data includes interest on tenant occupied rental housing, but by dividing interest paid by the effective rate, we can estimate the increase in mortgage debt in Q3 2006. This shows that MEW in Q3 2006 was close, or slightly higher, than the level of Q2 2006.

by Calculated Risk on 10/29/2006 11:16:00 PM

Professor Krugman writes in the NY Times: Bursting Bubble Blues

Economist's View has some excerpts:

Here are the five stages of housing grief:

1. Housing bubble? What housing bubble? “A national severe price distortion [in housing] seems most unlikely in the United States.” (Alan Greenspan, October 2004)

2. “There’s a little froth in this market,” but “we don’t perceive that there is a national bubble.” (Alan Greenspan, May 2005)

3. Housing is slumping, but “despite what you hear from some of the Eeyores in the analytical community, a recession is not visible on the horizon.” (Richard Fisher, president of the Federal Reserve Bank of Dallas, August 2006)

4. Well, that was a lousy quarter, but “I feel good about the U.S. economy, I really do.” (Henry Paulson, the Treasury secretary, last Friday)

5. Insert expletive here.

See Economist's View for more.

by Calculated Risk on 10/28/2006 12:06:00 AM

From the Oct 24th Merrill Lynch forecast: 2007 US interest rate outlook

UPDATE: Bill Cara also has this Merrill Lynch report: The "D" word sets in for the builders — "Desperation"

*[W]e expect that GDP growth could hard-land in late 2007 and early-2008 ...

Click on graph for larger image.

* Unlike the Fed’s view for “limited” spillover effects from the housing correction, we foresee a substantial degree of economic contagion (from the residential construction correction and from a decline in mortgage equity withdrawals).

* In our hard-landing view, this contagion likely will be severe enough to drive the unemployment rate up to 5.8% by the end of 2007 (currently, the unemployment rate is 4.6%).

* In our hard-landing view, monthly US nonfarm payroll growth likely will average 75k to 125k over the very near-term, but that monthly jobs growth should begin to turn negative by 2Q-2007.

If there is spillover from the housing bust into the general economy, the initial impacts will be from the loss of housing related jobs and the decline in mortgage equity withdrawal. I don't think we will have to wait until late 2007 to see if there is spillover from the housing bust - the next few quarters should tell the tale.

by Calculated Risk on 10/27/2006 11:44:00 PM

As a supplement (excel file) to the GDP report, the Bureau of Economic Analysis provides an estimate of aggregate mortgage interest and the effective rate of interest on mortgage debt outstanding. This supplement includes mortgage interest for tenant occupied residential housing, so we have to wait for the Fed's Flow of Funds report to calculate mortgage equity withdrawal for Q3.

However this report does suggest that MEW in Q3 was about the same level as Q2.

Click on graph for larger image.

This graph is based on the BEA supplement, and shows mortgage debt as a percent of disposable personal income.

Not surprisingly, mortgage debt as a percent of DPI is at an all time high.


The second graph shows mortgage interest as a percent of DPI.

During the late '80s housing boom, mortgage interest payments, as a percent of DPI, peaked at 6.3% in 1989. Currently mortgage interest payments as a percent of DPI are a record high of 6.5% - even with relatively low interest rates.

by Calculated Risk on 10/27/2006 11:11:00 AM

Real residential fixed investment decreased at an annualized rate of 17.4% in Q3 2006.

Click on graph for larger image.

Residential investment (RI) has now fallen to 5.7% of GDP from the peak of 6.3% in the second half of 2005.

If RI falls back to the median level of the last 35 years (4.5% of GDP), the decline in RI has just started.

NOTE: It appears home equity extraction was strong in Q3 2006 based on preliminary GDP numbers (I'll post later today). So far there has been little spillover from the housing bust into the general economy, but that might be about to change for two reasons: 1) significant housing related job losses should start in Q4, and 2) declining home prices should start impacting MEW in Q4 or early 2007.

by Calculated Risk on 10/26/2006 07:18:00 PM

Rex Nutting at MarketWatch asks: Has housing bottomed? Most economists say no. A few excerpts:

"Housing is going to be very inelastic to falling interest rates on the way down, just as it was very inelastic to rising rates on the way up," McCulley said. "To think otherwise after a bubble is to not understand bubbles. Risk appetite in property markets will not be restored by modest declines in market-determined interest rates."

Real estate is "the ultimate momentum market," McCulley said. "Can't get enough on the way up and can't run away fast enough on the way down."
...
Jan Hatzius, chief economist for Goldman Sachs, figures that selling prices will fall about 3% in 2007 in both the realtors' index of median sales prices and in the more comprehensive price index published by the Office of Federal Housing Enterprise Oversight. The OFHEO index has never fallen in any calendar year.

Such declines "would likely put significant financial pressure on households," Hatzius said.

Pimco's McCulley figures that, based on historic relationships, if house price appreciation is zero in 2007, home sales will fall about 2.5 million from the peak to 6 million by January 2008. By that reckoning, we aren't even half way into the correction.

And on existing home inventory levels from the USA Today: Sellers sing the blues as price drop sets record

... about half of American homeowners who thought of selling their homes in the past year have delayed putting their homes on the market, according to a USA TODAY/Gallup poll conducted this month.

And roughly one-third of those who had considered selling have abandoned the idea.

by Calculated Risk on 10/26/2006 04:09:00 PM

UPDATE: Dirk van Dijk says it was one more Saturday: see Zacks Equity Research Analyst Blog

In discussing the NAR Existing Home Sales report, I noted that the SA factor changed as compared to 2005. Several people have asked me about this - so let me explain. (SAAR: Seasonally Adjusted Annual Rate, NSA: Not Seasonally Adjusted)

First, here is the NAR data (NAR excel file).

Sept 2005:
NSA 630,000
SAAR 7,200,000
Factor: 11.43 (divide 7,200,000 by 630,000)

Sept 2006:
NSA 527,000
SAAR 6,180,000
Factor: 11.73

SAAR decline: 14.2%
NSA decline: 16.3%

I'm pretty sure NAR just uses a computer program to calculate the SAAR number. They plug in the raw data and it gives them the answer. It isn't anything nefarious. So why did the factor change?

First, the idea behind presenting the SAAR number is to make it is easy to compare between different periods. For example, sales are seasonally slow in January and February, so the adjustment to the NSA data is much larger than say for July and August. So the factor could be significantly different month to month, but all else being equal, the factor would be the same for the same month each year.

However some things are different. A common method to calculate SAAR from monthly data uses three components: seasonal, trend, and irregular (like weather, holidays or number of weekends in a month). If the trend stays the same, and there are no irregular component adjustments, then the seasonal adjustment would be the same.

I don't know if NAR uses any irregular adjustments. I don't think they adjust for weather, but they might be adjusting for the number of weekends during the sales period. But one thing is clear: the trend changed, and that impacts the SAAR number.

I have no idea what the NAR program is using for the trend, but during periods when the trend clearly changes, I prefer to use the NSA data to compare to previous years.