Monday, June 25, 2012

Some Positive Signs in Today's New Home Sales Report for a Significantly Improving Housing Market

One interesting data point from today's Census report on new home sales is the very low inventory level of homes for sale: there is currently only a 4.72 months' supply of new homes for sale at the current sales pace, which is calculated as the ratio of new houses for sale at the end of the month (145,000) to the number of homes sold in May (30,750 at a seasonally adjusted rate).  The inventory of new homes relative to demand hasn't been that low since October 2005, more than six years ago (see chart above), and is an indication that the balance between the supply and demand for new homes has returned to a more typical level than the double-digit months' supply levels back in 2008 and 2009.  In fact, the average inventory since 1963 is a 6.2 month supply of new homes, so the current level of only 4.72 months' supply is below historical norms, and reflects a very low inventory level of new homes in relation to the rising demand. 

As Brian Wesbury and Robert Stein point out today,

"The lack of availability of completed new homes is likely holding back sales, which will improve even more as builders finish some of the homes now under construction. We see the same phenomenon in the existing home market, where a lack of homes on the MLS is temporarily holding back sales. The road ahead looks better than it has in years. Look for housing to continue to move higher, and to add to GDP for the fifth consecutive quarter."

Scott Grannis also reports today on new home sales in May, which were up by almost 20% from a year ago and reached the highest sales level in more than two years, and new home starts, which were up in May by more than 26% from last year, and comments:

"To be sure, the level of sales and starts remains very depressed from an historical perspective. But from an economist's perspective, it's not the level that is important, it is the change on the margin. Correctly viewed, there has been a very significant improvement in the housing market over the past few years."

70 Comments:

At 6/25/2012 2:11 PM, Blogger Jon Murphy said...

Scott makes a very important point.

This is also good news for the sustainability of the housing recovery. We have managed to work our way through much of the backlog of foreclosures and empty units. It's too bad that foreclosures kept being frozen, prevented, adjusted, etc. over the past 4 years. Had we just allowed the market to correct itself, we would have been having this conversation 2 years ago.

 
At 6/25/2012 8:52 PM, Blogger Benjamin said...

Good news, the the Fed is asphyxiating this recovery for no reason.

Inflation is dead, output well below capacity, demand weak globally.

Yet all we hear is sniveling and whining about inflation. Now at 1.1 percent for the last four years, and unit labor costs are actually below 2008 levels.

 
At 6/26/2012 2:16 AM, Blogger PeakTrader said...

"The level of sales and starts remains very depressed...from an economist's perspective, it's not the level that is important, it is the change on the margin."

That's an oversimplification. Economists are interested in net effects, or whether changes have positive or negative effects.

A simple example is a 10% rise in the minimum wage (e.g. $10 to $11) may increase real economic growth 5% (e.g. 2% to 2.1%).

However, a 50% rise in the minimum wage may decrease real economic growth 20%, etc.

Also, when you lose 90% and then gain 100%, you're still down 80%.

 
At 6/26/2012 7:02 AM, Blogger Jon Murphy said...

Very true, Peak, but an economist would then reply: "While we are still 80% below the peak, the market is improving."

 
At 6/26/2012 7:30 AM, Blogger Moe said...

This housing report shows that new home sales are higher than they’ve been in years; three years, to be exact, putting new home sales at the third worst for the home-buying season since the US has been keeping statistics.

Nothing to see here folks.

 
At 6/26/2012 8:21 AM, Blogger Pulverized Concepts said...

If we're happy about improved home sales (and attendant higher prices) should we also be happy about higher prices for gasoline, beef and subscriptions to Gourmet?

 
At 6/26/2012 8:36 AM, Blogger morganovich said...

CS is always a little behind, but also the best index of the bunch and the least susceptible to issues like mix shift.

it showed a nice sequential pop for april but was still down yoy.

that said, CS uses a rolling 3 month avg, so it would not be expected to register a change as quickly as corelogic etc, so the fact that it remains negative does not nesc invalidate the corelogic data.



WASHINGTON (MarketWatch) — U.S. home prices shot up in April to post the first monthly gain since last autumn, according to a closely followed index released Tuesday.

The S&P/Case-Shiller 20-city composite index gained 1.3%, with 19 out of 20 cities registering gains, to take the year-on-year drop from 2.6% to 1.9%.

Of the 20 cities measured, only hard-hit Detroit took a step backward, with a 3.6% reversal. Even Atlanta, where prices were 17% below year-ago levels, enjoyed a 2.3% monthly gain.

“It’s been a long time since we enjoyed such broad-based gains,” said David Blitzer, chairman of the index committee at S&P.

“While one month does not make a trend, particularly during seasonally strong buying months, the combination of rising positive monthly index levels and improving annual returns is a good sign.”

On a seasonally adjusted basis — which S&P says is less reliable than the unadjusted data — prices rose 0.7% on the month.

 
At 6/26/2012 8:54 AM, Blogger Jon Murphy said...

If we're happy about improved home sales (and attendant higher prices) should we also be happy about higher prices for gasoline, beef and subscriptions to Gourmet?

If the increase in price comes from increased natural demand, then yes.

 
At 6/26/2012 12:19 PM, Blogger bart said...

Inflation is dead

Yep, just like stocks in the early '80s.

 
At 6/26/2012 12:19 PM, Blogger bart said...

The Housing Bust Isn't Over, We've Got 2 Or 3 More Years Of Pain

http://www.businessinsider.com/david-rosenberg-housing-shadow-inventory-2012-6

 
At 6/26/2012 1:16 PM, Blogger Jon Murphy said...

Very interesting piece, Bart. Thanks for sharing. Rosenburg's probably not wrong, but I don't think the consequences will be as severe as he thinks. Consumers are returning to the housing market. As this "shadow inventory" enters the market, I suspect the increased levels of buyers will mute their impact on home prices.

 
At 6/26/2012 3:00 PM, Blogger PeakTrader said...

So, for example, a rise in the minimum wage can increase real economic growth.

The higher wage attracts better workers, with higher reservation wages, to increase productivity.

Minimum wage workers have high marginal propensities to consume. So, a higher minimum wage increases consumption.

Only a portion of the higher minimum wage may be passed along in higher prices, because portions will be absorbed by "excess" wages of other workers and "excess" profits.

Weak or poorly managed firms will lose business or fail. However, stronger or better managed firms will gain their business, and also gain from the increased demand.

 
At 6/26/2012 3:18 PM, Blogger bart said...

So, for example, a rise in the minimum wage can increase real economic growth.

Except for the historical fact that the large majority of the time that minimum wage has been raised, a recession follows soon after.

 
At 6/26/2012 3:20 PM, Blogger PeakTrader said...

Bart, do you really believe increases in the minimum wage cause recessions?

 
At 6/26/2012 3:26 PM, Blogger bart said...

PT, do you really believe that recessions follow soon after most raises in the minimum wage?

Have you even looked at the facts, rather than making rash statements not supported by facts?

 
At 6/26/2012 3:32 PM, Blogger PeakTrader said...

Bart, you can't answer a simple question, even after you seen the "facts?"

It may just be a coincidence.

After several years of prosperity, and after minimum wage workers are left behind, the minimum wage is raised towards the end of expansions.

 
At 6/26/2012 3:46 PM, Blogger Jon Murphy said...

It probably is coincidental that recessions follow increases in the minimum wage. Seeing as raising costs tends to be the knee-jerk reaction during a period of economic slowdown, the minimum wage is likely a symptom of economic slowdown rather than the cause: politicians see activity slowing and say "more money solves the problem." The wage goes up, but it is too little too late for the lucky few who it actually affects (those whose value is equal to the minimum wage). Seeing as the vast majority of consumers aren't affected by the increase immediately, their economic activity would unlikely be affected by the increase, which would mean a recession would still happen.

This is just me thinking through this. I have no data to back this assertion up.

 
At 6/26/2012 3:54 PM, Blogger bart said...

PT, you are compelled to change the subject, not actually look up facts and FAIL on even acknowledging
"Except for the historical fact that the large majority of the time that minimum wage has been raised, a recession follows soon after."??

How droll...



Even funnier that if your silly and completely unproven assertion about minimum wage were true, everything would be wonderful and perfect if we only raised it to $1,000/hour.

 
At 6/26/2012 4:03 PM, Blogger bart said...

You funny PT - rather than actually looking or taking the risk of learning something, you chose to go into attack mode.



#2 of the 25 rules of disinformation:


Become incredulous and indignant.
Avoid discussing key issues and instead focus on side issues which can be used to show the topic as being critical of some otherwise sacrosanct group or theme. This is also known as the 'How dare you!' gambit.

 
At 6/26/2012 4:09 PM, Blogger Ron H. said...

Peak:

"Bart, do you really believe increases in the minimum wage cause recessions?"

What I believe, and what I suspect Bart believes, and what I think most people who understand the subject believe, is that increases in the minimum wage cause higher unemployment among those who produce at a level lower than the new minimum wage, and therefore don't get hired, or lose the low paying jobs they have.

You have never produced a shred of evidence to suport your claim that higher demand from newly wealthy minimum wage workers will offset the loss to those who lose their jobs or don't get hired.

 
At 6/26/2012 4:14 PM, Blogger Ron H. said...

Peak: "After several years of prosperity, and after minimum wage workers are left behind, the minimum wage is raised towards the end of expansions."

Unless you equate prosperity with higher prices, that's nonsense.

 
At 6/26/2012 4:23 PM, Blogger Ron H. said...

Jon M:

"It probably is coincidental that recessions follow increases in the minimum wage. Seeing as raising costs tends to be the knee-jerk reaction during a period of economic slowdown, the minimum wage is likely a symptom of economic slowdown rather than the cause: politicians see activity slowing and say "more money solves the problem.""

As usual, you are most likely correct. :)

 
At 6/26/2012 5:07 PM, Blogger james said...

New home sales sure look good.

 
At 6/26/2012 6:16 PM, Blogger PeakTrader said...

Ron says: "You have never produced a shred of evidence to suport your claim that higher demand from newly wealthy minimum wage workers will offset the loss to those who lose their jobs or don't get hired."

I've shown a higher minimum wage has little or no effect on employment. So, minimum wage workers have more income.

For example, you may want to read the Card-Krueger study. In the meantime, here's an article:

Chinese factories struggle to hire
By Paul Wiseman, USA TODAY
4/11/2005

The unthinkable is happening in China: This country of 1.3 billion can no longer find enough people willing to work long hours for low wages.

Entrepreneur Johnny Jiang, who owns a plastics factory in Dongguan, says workers used to be too frightened to make demands. Now, they'll walk out if he doesn't boost pay.

In January, entrepreneur Jiang visited Hunan University. He borrowed an office and waited at a desk for applicants for two hours. No one showed up.

Workers are increasingly knowledgeable about the job market....migrants are trading information about which factories are good employers and which are stingy and cruel.

"Factories in China have been spoiled," says economist Chi Lo, author of The Misunderstood China. "They still want to pay cheap wages."

 
At 6/26/2012 6:27 PM, Blogger PeakTrader said...

It's likely, higher income more than offsets any loss in employment (and unemployment benefits adds to consumption).

Survey of economists:

"Until the 1990s, economists generally agreed that raising the minimum wage reduced employment. This consensus was weakened when some well-publicized empirical studies showed the opposite, but others consistently confirmed the original view. Today's consensus, if one exists, is that increasing the minimum wage has, at worst, minor negative effects."

 
At 6/26/2012 6:32 PM, Blogger PeakTrader said...

"Surveys of labor economists have found a sharp split on the minimum wage. Fuchs et al. polled labor economists at the top 40 research universities in the United States on a variety of questions in the summer of 1996. Their 65 respondents split exactly 50-50 when asked if the minimum wage should be increased. They argued that the different policy views were not related to views on whether raising the minimum wage would reduce teen employment (the median economist said there would be a reduction of 1%), but on value differences such as income redistribution. Klein and Dompe conclude, on the basis of previous surveys, "the average level of support for the minimum wage is somewhat higher among labor economists than among AEA members."

 
At 6/26/2012 8:04 PM, Blogger bart said...

After several years of prosperity, and after minimum wage workers are left behind, the minimum wage is raised towards the end of expansions.

In other words PT, recessions follow the raising of the minimum wage.

Thanks for admitting I was correct.

No points for all the noise.







Ron: What I believe, and what I suspect Bart believes, and what I think most people who understand the subject believe, is that increases in the minimum wage cause higher unemployment among those who produce at a level lower than the new minimum wage, and therefore don't get hired, or lose the low paying jobs they have.

You have never produced a shred of evidence to suport your claim that higher demand from newly wealthy minimum wage workers will offset the loss to those who lose their jobs or don't get hired.



Bingo!

And PT even shoots himself in the foot again with "I've shown a higher minimum wage has little or no effect on employment.", after admitting that recessions follow minimum wage hikes.

And then he quotes the ever so successful (with accurate forecasts)(/sarc) "economists" group and does the foot bullet boogie yet again with "Today's consensus, if one exists, is that increasing the minimum wage has, at worst, minor negative effects.".... after having agreed that recessions follow minimum wage hikes.


Good grief... he can't even be consistent, quite sad.

 
At 6/26/2012 8:07 PM, Blogger bart said...

And in case anyone doubts the actual and simple facts, which PT never showed, here's the chart.

http://www.nowandfutures.com/images/min_wage_recessions.png

If anyone doubts that unemployment goes up during recessions, I'll post a chart. /sarc

 
At 6/26/2012 8:23 PM, Blogger Ron H. said...

Peak: "I've shown a higher minimum wage has little or no effect on employment. So, minimum wage workers have more income.

For example, you may want to read the Card-Krueger study.
"

You have repeatedly dredged up that seriously flawed Card-Krueger report that demonstrates that the demand curve slopes upward, something heretofore unknown, and considered by most economists to be impossible. CK demonstrates that if you raise the price of labor, employers will demand more of it.

Do you seriously not see a problem with that?

You forgot to mention that later attempts to recreate those results, but supported by actual employment records rather than phone surveys, were unsuccessful.

By the way, a highly educated economist shuch as yourself might want to consider quoting actual scholarly material, instead of Wikipedia.

"In the meantime, here's an article:"

LOL Thanks.

In the meantime Here's one for you.

 
At 6/26/2012 8:30 PM, Blogger bart said...

"Surveys of labor economists have found a sharp split on the minimum wage. Fuchs et al. polled labor economists at the top 40 research universities in the United States on a variety of questions in the summer of 1996. Their 65 respondents split exactly 50-50 when asked if the minimum wage should be increased. They argued that the different policy views were not related to views on whether raising the minimum wage would reduce teen employment (the median economist said there would be a reduction of 1%), but on value differences such as income redistribution. Klein and Dompe conclude, on the basis of previous surveys, "the average level of support for the minimum wage is somewhat higher among labor economists than among AEA members."


Removing all the null material from all those so-called learned economists in your quote, we find that we have virtually nothing except a small bias based on vested interests.

Yes, "standard" economics and economists... who have likely predicted 13 out of the last 5 recessions (or vice versa) too.

*yawn*

 
At 6/26/2012 10:59 PM, Blogger Ron H. said...

Peak: "Their 65 respondents split exactly 50-50 when asked if the minimum wage should be increased."

Do you see anything wrong with that statement?

Maybe one of them said "yes and no".

 
At 6/27/2012 6:10 AM, Blogger VangelV said...

"To be sure, the level of sales and starts remains very depressed from an historical perspective. But from an economist's perspective, it's not the level that is important, it is the change on the margin. Correctly viewed, there has been a very significant improvement in the housing market over the past few years."

Some perspective may help clarify the picture.

 
At 6/27/2012 6:32 AM, Blogger Jon Murphy said...

Yes,

Some perspective may help indeed

 
At 6/27/2012 7:32 AM, Blogger Jon Murphy said...

A graph in a similar vein.

This one includes all private housing starts, not just single family.

 
At 6/27/2012 7:36 AM, Blogger VangelV said...

Yes,

Some perspective may help indeed.


Actually your reference does not help at all. It is simply noise that does not tell us what is going on. It is easy to get a nice number coming off a deep correction but that does not mean that the correction is over. Sales went up because the bankrupt FHA is financing 4% down mortgages, even for $500-$700K homes.

There are 12,000,000 mortgages that are underwater in the US. Of these 3,000,000 are FHA insured yet the FHA is still doing the bidding of its political masters and trying to get Obama reelected.

 
At 6/27/2012 7:50 AM, Blogger VangelV said...

A graph in a similar vein.

This one includes all private housing starts, not just single family.


All you point to is noise. Start at 100. Have a 50% drop followed by a 40% increase, 20% decrease, and a 30% increase. You are still 17% below where you stared from. In the case you showed the numbers are a lot worse, which is why you provide the more volatile change data rather than the absolute units.

In the meantime you are still looking 12 million homes that have mortgages that under water and a bankrupt FHA still guaranteeing 4% down loans even though its default rates are running around 3 times those of the GSEs after two years.

I am sorry but I cannot see how you have enough data to buy into Mark's naive optimism. Note that I do not claim that houses will go down because if we have another QE event you could see a huge increase as the currency is devalued. But nominal gains are not exactly positive when we are looking at real losses.

 
At 6/27/2012 7:53 AM, Blogger Jon Murphy said...

Actually your reference does not help at all.

It sure does. This is the on-the-margin gains Scott Grannis is discussing.

The economist's point is simple: if all you care about is absolutes, then you will miss the signs and gains. The fact that housing is rising at a y-o-y rate shows that a recovery is underway. If you are waiting for housing starts to return to the pre-recession level before you act, you will be waiting a very long time. If you wait for things to return to pre-recession levels before acting, then you will be two and a half years behind your sharpest competitor (likewise, if you ignore marginal changes downward and wait to act, you will be behind your sharpest competitors). Economics is all about what is happening at the margins. Absolutism is what inspires such fool-hardy plans like "consumer spending is down so let's throw money at the problem" or "domestic demand is down, so let the government come in."

The second easiest way to tell someone who doesn't regularly involve himself in economics to to hear him proclaim that marginal changes don;t matter.

 
At 6/27/2012 7:55 AM, Blogger Jon Murphy said...

am sorry but I cannot see how you have enough data to buy into Mark's naive optimism.

I see no data at all to buy into your persistent pessimism.

 
At 6/27/2012 10:20 AM, Blogger Jon Murphy said...

My company tracks over a million domestic economic data series. Approximately 90% of them are growing at year-over-year rates (the other 10% are either flat or below year-ago levels, but momentum is building. The only exception to this is newspaper publishing, which is marred in a deep recession). Internationally, we track over 100,000 series covering all major countries and geographical areas. Excluding China and India (whose data is sketchy at best), most of the major economics are growing. Even Europe's situation doesn't seem to be as dire as one would think listening to the news (Germany, France, Scandinavia and Eastern Europe appear to be holding things together for now).

Given this preponderance of evidence, I cannot possibly conclude the US economy is doing anything but growing. Given the strength of the leading economic indicators, I cannot possibly conclude the US economy will do anything but grow through the remainder of 2012 and likely the first half of 2013.

 
At 6/27/2012 10:59 AM, Blogger bart said...

My company tracks over a million domestic economic data series.
...


The built in assumption that all the data series are accurate may be dangerous.

Then there's black swans and similar.

Lastly, any data series that's dollar based needs to be adjusted by inflation to be truly comparable. Failing to do so is quite misleading.
The CPI and GDP deflator are significantly under stated too.

 
At 6/27/2012 11:22 AM, Blogger Jon Murphy said...

You are right:

Our data comes from a number of different sources.

Dollar-based series are adjusted for inflation using the CPI for all items (or PPI for producer-based series). I will avoid the argument on the validity of the CPI suffice to say the data suggesting inflation should be higher than the CPI is surprisingly weak right now.

Addressing black swans and seasonality, we use NSA data and a 12MMA. It's considerably more accurate than SA data folks like to hark on, but will give you the same story faster (NSA isn't revised as severely, nor subject to as many mathematical manipulations. Basically, you just have the standard survey error to contend with). We also use historical data to determine median changes from month to month.

The "accuracy" comment can go either way, but unless the BLS, FRB, Wards Auto, CEIC, and all our other sources are engaged in some global information conspiracy, I have no reason to doubt that these reports are as accurate as possible.

Despite all those arguments, a vast majority of the economic data is pointing upwards. To ignore all this and claim the economy is stagnant is, well, borderline dogmatic.

 
At 6/27/2012 11:46 AM, Blogger bart said...

I've never said the more recent data is stagnant, just that any time dollars are involved one must adjust for inflation.

As far as the CPI correction, yes it is much lower than the average since 2000 - only about 3% currently... but that's larger than CPI-U itself.

Note also that I've posted the DataQuick weekly info & prices on real estate, and they're up a bunch on an annual change rate basis.

I also always use NSA data when available, and also note that doing a YoY change is the same as SA adjustments. Agreed on NSA data showing changes faster too.

I'm going at avoid any "conspiracy" issues, other than to note that everyone wants to look better than reality, so "Kentucky windage" applied to interpretations are wise especially in certain areas of the world.

And then there are misleading stats, even by design. Personal income is one since its includes transfer payments, and there are many others - CPI very much included. The devil remains in the details.

I tend to use CRB/CCI rather than PPI for the same reasons, etc.


By black swans, I was more referring these days to things like war, massive weather issues including tsunamais... or even poorly recognized items like the infallibility of politicians. /sarc

 
At 6/27/2012 12:29 PM, Blogger Jon Murphy said...

I've never said the more recent data is stagnant...

Sorry, I didn't mean to imply you personally were saying things were stagnant. I was making a general comment more designed for the newspapers and tv pundits than any one person specifically.

I understand now what you are saying about black swans. I thought you were referring to abnormal months, not massive world events (in retrospect, it was pretty clear by what you were saying).

Also, regarding my "conspericies" comment, that was also a more general comment. Some say you can't trust anything the government says because they have political motivation to manipulate the data. Others say you can't trust businesses because they have a financial motivation to manipulate the data. I was just rejecting both those arguments.

There certainly are flaws regarding any and all stats. That's why I am so big on using multiple stats to discover trends, as opposed to just one. If you only use CPI to measure inflation, you'll miss a lot. If you only use GDP to measure economic health, you'll miss a lot. I agree completely that the devil is in the details.

 
At 6/27/2012 12:47 PM, Blogger bart said...

Cool.

No worries on "stagnant", apparently I cam across rougher than intended.

I should add one other category to stat issues - fraud and outright lying, LIBOR being the most recent public example.

As far as multiple stats, you're conversing with a guy who generates over 2000 charts per week and has over 15,000 on his site. -g-

And as far as data accuracy or conspiracies, part of it doesn't matter. As long as people believe and act on the stats, that's the reality.
But the dot-com or "it's different this time" mentality will get 'em every time, not unlike pictures using CPI as opposed to corrected CPI.

 
At 6/27/2012 1:07 PM, Blogger Jon Murphy said...

So then, we're good, Bart?

I've never been a fan of CPI, to be honest. I feel like it doesn't tell us anything of any real value. Yeah, prices are up, but who cares? I am more concerned with discovering what the costs of something is as opposed to its price.

 
At 6/27/2012 1:50 PM, Blogger bart said...

So far, so good... and who knows if or when we might run into another wall. But even if we do (and assuming I recall your willingness to keep it basically factual and not accusatory etc.), agreeing to disagree isn't any problem for me - and I suspect you either.

You aren't PT or Jet, etc.



CPI wise and perhaps strangely enough, that's part of the reason that I generate corrections for CPI - to make it more clearly reflect both prices and costs. By virtue of it being so broad though, it'll never be anything other than a guideline - and lagging to boot.

It beats the hell out of nothing though.

 
At 6/27/2012 1:57 PM, Blogger Jon Murphy said...

It beats the hell out of nothing though.

I agree to that.

I am working on a theory. I want to measure a market basket of goods vs. median wage, the idea being to figure out how many hours worked are needed to afford the basket. So, what I am thinking is this: take a market basket of goods (say the ACCRA Cost of Living Basket), and add up its total cost. Take that number and divide it by average hourly wage. In theory, that would provide a ratio of hours worked to the market basket. However, the inherent assumption is that one only buys one of each item in the market basket. I could use weights, but then you run into the same problem as with the CPI. Do you have any thoughts?

 
At 6/27/2012 3:14 PM, Blogger VangelV said...

It sure does. This is the on-the-margin gains Scott Grannis is discussing.

I see it as grasping at straws. Do you really think that you have a healthy market when FHA is handing out 4% mortgages for homes that cost up to $700K? Whatever happened to all those people who were buying everything for cash?

The economist's point is simple: if all you care about is absolutes, then you will miss the signs and gains.

If you are tired and drowning far from shore the fact that you got your second wind is not that helpful. You will still drown unless something material happens.

The fact that housing is rising at a y-o-y rate shows that a recovery is underway.

No. It may be showing that even dead cats can bounce. I am not saying that you can't have a nominal recovery. All I am saying is that Mark has a tendency to cherry pick data and look at every tick that goes his way as a big positive because he is optimistic at all times.

If you are waiting for housing starts to return to the pre-recession level before you act, you will be waiting a very long time.

Correct.

If you wait for things to return to pre-recession levels before acting, then you will be two and a half years behind your sharpest competitor (likewise, if you ignore marginal changes downward and wait to act, you will be behind your sharpest competitors).

I am not waiting for anything. I am simply pointing out that much of the 'good news' comes from election year liquidity injections. The GSEs and FHA are doing all they can to get the housing market moving and the Fed is willing to keep rates at zero for years in order to bail out the financial system. Had we had zero rates during previous corrections you would not be getting a small bounce as you are today but a huge explosion in both starts and prices. The fact that we are not seeing all that much shows just how weak this false recovery is. Given the job situation, the inventory overhang, and the inability of FHA and the GSEs to continue for much longer I would say that we expect to see headwinds that would have real prices contract.

Economics is all about what is happening at the margins. Absolutism is what inspires such fool-hardy plans like "consumer spending is down so let's throw money at the problem" or "domestic demand is down, so let the government come in."

You are sounding like one of those neo-Kenesians. Economics is simply about human action. Period. And from what I see many people are in big trouble and under water. This means that supply is waiting for any pop in prices just so that people can get back to even. Your housing market is not all that different from Japan in 1997.

The second easiest way to tell someone who doesn't regularly involve himself in economics to to hear him proclaim that marginal changes don;t matter.

That is not what I am saying. What I am saying is that noise does not matter. As I pointed out, a healthy market does not need promises of zero percent down for years and does not have a bankrupt entity like FHA guarantee 4% down loans when it is $30 billion short of capital.

 
At 6/27/2012 3:22 PM, Blogger bart said...

All I am saying is that Mark has a tendency to cherry pick data and look at every tick that goes his way as a big positive because he is optimistic at all times.

Do you recall if he at all foresaw the housing bust or the financial crisis?

I don't recall any warnings but didn't read him every day.

 
At 6/27/2012 3:25 PM, Blogger VangelV said...

I see no data at all to buy into your persistent pessimism.

Really?

How about FHA handing out 4% down loans to middle class buyers purchasing $700K homes?

Or FHA being bankrupt and in need of a bailout?

How about the 12,000,000 underwater mortgages, including 3,000,000 FHA guaranteed mortgages?

How about the 2 million units in inventory above normal levels?

How about the fact that the equity of people with mortgages which has come from about 50% in the 1980s to less than 20% today?

Or the fact that GDP has been revised lower and is at stall speed even if the Fed and Treasury are to be believed about the deflator? Or negative if we calculate the deflator the way we used to?

How about the weak labour market? Or the fact that young people are moving back with their parents? Or that the finical system is in big trouble? Or that when rates go up many people will not be able to afford to buy houses at the current price level because they can't make the payments?

I could go on but I know that you will ignore all of the actual evidence and will only see what you want to. This should be a lesson to people who don't understand why the housing and tech bubbles grew so large. It wasn't that people were stupid or that the information was not available. It was because people did not want to see reality.

 
At 6/27/2012 3:32 PM, Blogger bart said...

There's also about another 2.8 million homeowners (per Ritholtz) where payments haven't been made for at least a year.
Those will be additional foreclosures.

Then we have the banks who settled on foreclosure fraud, and are now cranking up the foreclosure machine.

 
At 6/27/2012 3:35 PM, Blogger bart said...

Another one, almost forgot. Note that 2011 showed a similar price increase. This time of year is the strongest and prices *usually* go up.


http://www.nowandfutures.com/images/dataquick_real_estate_weekly.png

 
At 6/27/2012 3:44 PM, Blogger VangelV said...

Given this preponderance of evidence, I cannot possibly conclude the US economy is doing anything but growing. Given the strength of the leading economic indicators, I cannot possibly conclude the US economy will do anything but grow through the remainder of 2012 and likely the first half of 2013.

If the US economy were so strong why is it that the Fed has said that rates will be at zero until 2014? Doesn't a strong economy mean that rates are not at depression levels?

 
At 6/27/2012 4:06 PM, Blogger Jon Murphy said...

Vangel-

Most of what you said reflect weakness in the housing market. I can agree wit that. Although it is recovering, the recovery will be weak, because of many of the reasons you have cited.

GDP doesn't worry me much. Much of the decline has come from decreases in government spending and widening trade deficits, not declines in consumer spending nor investment (which are drivers of growth). Besides, GDP is backwards looking. I don't care what happened two quarters ago. I am concerned with the here and now and what is going to happen.

The labor market is hardly weak. In fact, NSA jobs are being added at the pre-recession rate. It only appears weak because of the massive government layoffs and the large supply of unemployed workers. Historically, though, this is a pretty average recovery for the workforce.

I disagree with you that when rates go up people will miss payments. Unless something unexpected happens, rates will likely rise gradually. Anecdotally (no hard evidence of this), most of my friends in mortgages say customers come in looking for fixed rates. Even with variable, Operation Twist will likely keep rates low at least through 2014. Depending on what happens in the second half of 2013 (some leading indicators are suggesting weakness), I don't think rates will be a huge problem.

The boomerang generation says more about college debt than anything else.

Just to sum up, there are areas of weakness in the economy still. But when I look at our data series and see some 900,000 growing year over year and most of them showing accelerating growth, plus a number of leading indicators pointing up (USLI, PMI, Retail Sales excl. autos, Nondefense Capital Goods New Orders, Chicago Fed Activity Index, to name a few), I cannot reach any other conclusion other than a continuing economic expansion. It's just hard to ignore 900,000 indicators in favor of 1.

 
At 6/27/2012 4:08 PM, Blogger Jon Murphy said...

If the US economy were so strong why is it that the Fed has said that rates will be at zero until 2014? Doesn't a strong economy mean that rates are not at depression levels?

Simple, the Fed are idiots. Although there is dissent among the FOMC. Some want to raise interest rates now. Besides, what impetus is there for the Fed to raise rates? Inflation isn't posing a threat and the media and Congress would eat them alive.

 
At 6/27/2012 4:10 PM, Blogger Jon Murphy said...

I mean, Retail Sales (excl autos) and US Industrial Production are both growing at accelerating rates. Those two together represent a large section of our economy (approx 60%). How can I possibly ignore that?

 
At 6/27/2012 4:16 PM, Blogger Jon Murphy said...

A significant number of our series are either at or above their pre-recession levels. How can I ignore that?

A number of my clients are reporting record levels of activity. How can I ignore that?

Yes, there are areas of weakness in the US economy. There are indicators we wish would be performing better. But I can't just look at those and conclude that our economy is weak, not when an overwhelming majority of indicators says otherwise.

 
At 6/27/2012 4:23 PM, Blogger VangelV said...

Do you recall if he at all foresaw the housing bust or the financial crisis?

I don't recall any warnings but didn't read him every day.


Mark began blogging after the housing market started to turn down but kept posting bits and pieces of information that could cause you to think that a turn was on its way.

There's also about another 2.8 million homeowners (per Ritholtz) where payments haven't been made for at least a year.
Those will be additional foreclosures.


Schiller has also pointed out that there are many foreclosed homes that have sat empty but are not yet on the market. I am assuming that you will see the election before all of that inventory is allowed to be released to the housing market.

 
At 6/27/2012 4:25 PM, Blogger Jon Murphy said...

I mean, think what you are asking me to do, man. You are asking me, a professional economist who advises businesses of all sizes, to ignore a mountain of data and to tell my clients "halt everything! Despite what the majority of indicators say, thinks are terrible. What do I base this on? Gut feelings and a handful of stats." I cannot, in good conscious, do that. I cannot ignore positive signals from 900,00 domestic states and about 50,000 foreign stats because of weakness in one or two. People count on me. Their employees count on me. Their families count on me to provide them with good, reliable economic data and sound advice. I cannot betray that. Just as we warned them of the recession back in 2006, I will not ignore the evidence now. I cannot. It is my duty to my clients, my nation, and my God to report these facts. Whether people accept the facts is up to them.

 
At 6/27/2012 4:29 PM, Blogger bart said...

One of the many areas where a more correct CPI makes a big difference is retail sales:


http://www.nowandfutures.com/images/retail_sales_cpi_lies1992on.png

 
At 6/27/2012 4:39 PM, Blogger bart said...

Mark began blogging after the housing market started to turn down but kept posting bits and pieces of information that could cause you to think that a turn was on its way.


Thanks V.
What about the financial crisis?



Schiller has also pointed out that there are many foreclosed homes that have sat empty but are not yet on the market. I am assuming that you will see the election before all of that inventory is allowed to be released to the housing market.


Yep, and there's also the 1.5 million additional houses being held off the market for "other reasons" per the Census Bureau.

http://www.nowandfutures.com/images/housing_vacancies_other.png


Here's the context - all vacancies by component:

http://www.nowandfutures.com/images/housing_inventory_vacant.png

 
At 6/27/2012 8:37 PM, Blogger VangelV said...

Thanks V.
What about the financial crisis?


From what I recall Mark has always been partial to citing positive data. In 2006 and 2007 he kept citing data saying that American family income was rising, how real wages were going up, how unemployment was at record lows, how inflation was very low, how corporate profits were rising, etc. I remember him as being positive in 2007, something that is easy to check. I don't recall many huge warnings but huge support for the idea that America's middle class was doing just fabulous right up until the crisis crushed most home owners. That said, he did attack the GSEs and Congress but that was after the real estate crash took place.

 
At 6/27/2012 8:44 PM, Blogger VangelV said...

Yep, and there's also the 1.5 million additional houses being held off the market for "other reasons" per the Census Bureau.

Having been around the block a few times I can accept an argument that says that housing prices will explode in nominal terms as the USD gets devalued through another series of QE activities. This means that a lot of mortgage holders could be made whole again. But that would take a destruction of the currency and the elimination of any expectation that pensions will provide any purchasing power for those that count on them. We could still witness the type of scenario described in a Rudolf Ditzen novel. But even under such a scenario many people will wind up losing their fully paid for homes because they could not afford the taxes, utilities, etc.

 
At 6/27/2012 8:58 PM, Blogger bart said...

I am working on a theory. I want to measure a market basket of goods vs. median wage, the idea being to figure out how many hours worked are needed to afford the basket. So, what I am thinking is this: take a market basket of goods (say the ACCRA Cost of Living Basket), and add up its total cost. Take that number and divide it by average hourly wage. In theory, that would provide a ratio of hours worked to the market basket. However, the inherent assumption is that one only buys one of each item in the market basket. I could use weights, but then you run into the same problem as with the CPI. Do you have any thoughts?

I have thought about this, and frankly haven't gotten much further than that. The whole point is to fix in place a certain standard of living I know, but wow... I do have honestly much sympathy for what the BLS does attempt to do.


I don't see any way of avoiding weighting the various items in the basket. The "natural" weighting is quite far away from reality, and modeling reality seems to be a sine qua non.

The weight that I'm most happy with was based on a month's usage of some mythical average person (or persons - "poor", "middle class" and "upper class") who uses two rolls of TP, has steak once a week, and enjoys wine with dinner once a month... and whatever. But when it came to actually defining those amounts, my head exploded on actually doing all the research to get even vaguely close.

As it was, I had more than a few headaches and many days burned developing weights to offset the BLS substitution bias, hedonics, etc. built ins.

At least both numerator and denominator are in dollars, so you eliminate the dollar variable.

Too bad that the BLS doesn't make all its raw data available to the public.




My only other thought is to come at it via a "dollar index" that's based on real world and world wide figures. A friend (that Vangel also knows from way back) did actually do this and has even taken his (unfortunately proprietary) also back hundreds of years. I have a great deal of respect for what he has done - quite unique work.

Holler if you want the link to his small site, or you could even email me direct via the link on my site on the "About" page.

 
At 6/27/2012 9:00 PM, Blogger bart said...

Make thatL

A friend (that Vangel also knows from way back) did actually do this and has even taken his (unfortunately proprietary) algo or model if you prefer back hundreds of years. I have a great deal of respect for what he has done - quite unique work.

 
At 6/27/2012 9:08 PM, Blogger bart said...

From what I recall Mark has always been partial to citing positive data.
...


Thanks again V. That was my best guess, but we both know how stupid guessing can be.


Having been around the block a few times I can accept an argument that says that housing prices will explode in nominal terms as the USD gets devalued through another series of QE activities. This means that a lot of mortgage holders could be made whole again. But that would take a destruction of the currency and the elimination of any expectation that pensions will provide any purchasing power for those that count on them. We could still witness the type of scenario described in a Rudolf Ditzen novel. But even under such a scenario many people will wind up losing their fully paid for homes because they could not afford the taxes, utilities, etc.

Yep, we're tracking virtually 100% although I could add a few nuances... and none of them would surprise you.

When a government (with the big corporations, ala fascism per the Mussolini definition) gets hungry enough, they have and will cannibalize their citizens with taxes, fees and regulations in order to kick the can a little further down the road.
Stupid and short sighted - of course. But history is littered with stupid human tricks.

 
At 6/27/2012 9:18 PM, Blogger VangelV said...

I am working on a theory. I want to measure a market basket of goods vs. median wage, the idea being to figure out how many hours worked are needed to afford the basket. So, what I am thinking is this: take a market basket of goods (say the ACCRA Cost of Living Basket), and add up its total cost. Take that number and divide it by average hourly wage. In theory, that would provide a ratio of hours worked to the market basket. However, the inherent assumption is that one only buys one of each item in the market basket. I could use weights, but then you run into the same problem as with the CPI. Do you have any thoughts?

I am sorry but this is totally futile. There is no ONE basket that is representative of anything. Some of us spend more on food than others, some love cars, come need to travel longer to work, some have little kids, some are retired. Everyone has a unique basket and no amount of guessing and averaging will be meaningful in a complex world where everything is in flux and there is little day to day certainty.

 
At 6/28/2012 6:34 AM, Blogger Jon Murphy said...

I am sorry but this is totally futile. There is no ONE basket that is representative of anything. Some of us spend more on food than others, some love cars, come need to travel longer to work, some have little kids, some are retired. Everyone has a unique basket and no amount of guessing and averaging will be meaningful in a complex world where everything is in flux and there is little day to day certainty.

True. That's why the idea is to create an indicator. It cannot be representative of everyone. Every measurement on Earth, regardless of what field it is in, has this same problem. That's why scientists use a system of indicators, never just one.

 
At 6/28/2012 8:01 AM, Blogger VangelV said...

True. That's why the idea is to create an indicator. It cannot be representative of everyone. Every measurement on Earth, regardless of what field it is in, has this same problem. That's why scientists use a system of indicators, never just one.

We already have an indicator. It is called the money supply. We know that when the Fed and financial system crate money and credit out of thin air and flood the economy it will affect prices of goods, services, and asset classes. This is how we saw the tech and housing bubbles and how we see the current bond bubble.

 
At 6/28/2012 3:15 PM, Blogger bart said...

We already have an indicator. It is called the money supply.

No question, but you and I both use corrected CPI - whether from SGS or via my own work.

And the correlation between, for example my CPI w/o lies and reconstructed M3, is *very* tight going all the way back into the 1870s.

 

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