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Guest Post: The Homeless Recovery
Submitted by ContraryInvestor.com
The
Homeless Recovery?...No,
we're not referring to some type of improvement in the
homeless
problem domestically. Unfortunately with what is
happening
both in residential real estate and labor markets, that
problem
probably gets worse before it gets better. It has been
some
time since we have looked at the National Association of
Home
Builders housing index numbers, but believe it's important
to do
so now. Especially given the ECRI message of the moment
showing us the potential for a proverbial double dip in
the macro
economy itself. You already know the recent NAHB monthly
reading in the now absence of the homebuyer tax credit was
not
good at all. Same deal with month over month new and
existing home sales. But as we have done in the past,
looking at the NAHB numbers in isolation is not the key
issue.
As we have shown you in prior discussions and is important
now,
the NAHB data has shown us its own leading tendencies
historically
that have proven to be important watch points. Will it be
so
again? If housing "double dips", what impact will
that have on the macro economy and by extension financial
asset
prices? And of course we use the characterization housing
double dip very loosely as it assumes a prior period
recovery,
which itself is very much debatable. The charts do a lot
of
the talking here, so we'll try to keep the commentary
brief.
First
up a look at the actual current impact of housing on the
real
economy itself, and this is exactly why we say the prior
period
recovery is a debatable point. As of the first quarter of
this year, residential real estate investment (actual
homebuilding
activity) as a percentage of GDP checked in at an all time
low
over the history of the data. Not exactly a shocker given
the unprecedented length of the prior up cycle and current
magnitude of available inventory of vacant homes
(obviating the
need for further building). As we've said many a time
over
the years, the three constants in US economic recoveries
past have
been pent up demand for housing, autos and credit. At
least
for now, two of the three remain down for the count with
auto
sales still far below prior cycle peaks. This is exactly
why
the rhythm and tone of government borrowing and spending
has been
and continues to be so critical at present, having
supplanted
private sector demand.
But
as
mentioned, at least historically, housing (the NAHB index)
has
been a leading indicator for key headline macro economic
watch
points as we will detail in the charts below. And
importantly, the NAHB index has led many a perceptually
important
headline macro economic stat at cycle lows and highs,
making it
pretty darn important in our eyes. Moreover, as we'll
show
you in a minute, NAHB directional movement has also been
highly
directionally correlated with the rate of change movement
in
equities over time. First the very simple relationship
between the NAHB index and consumer confidence immediately
below.
To this day the directional correlation and leading
tendency of
the NAHB numbers remains fully intact. As is clear, the
NAHB
index led the turn upward in consumer confidence after the
1990
and 2001 recessions, and at least so far likewise in the
current.
Same deal at cycle peaks seen in the late 1980's, 1999 and
late
2006. This chart we put together just before the June CC
numbers hit the tape and we've left it untouched just to
show that
the NAHB foretold the perceptually large decline for the
month. Right on cue.
Who
knows, maybe the recent monthly drop in the NAHB index is a
one
off. But if the weakness continues, it would imply a
southern turn in consumer confidence in the months ahead.
We'll just have to see what happens.
Importantly,
the NAHB index has been incredibly highly correlated with
the year
over year change in real personal consumption expenditures
over
time. Consumption, of course, being critical to the US
economy. Bythe way, importantly in the GDP revision last
week, one of the largest downside revisions was seen in
personal
consumption. The following chart is visual corroboration
of
this fact. And again, the leading tendencies of the NAHB
index are evident, albeit lead times have been very
short.
The current cycle is the anomaly so far in the history of
the
data. Is the perceptual "wealth effect" of housing
on household attitudes and ultimate behavior in terms of
consumption now changed? First, the PCE deflator used to
calculate "real" personal consumption is incredibly low
relative to historical context, helping to support a
higher PCE
rate of change number at present. Secondly, we know
government support of personal income via transfer
payments has
been historic, again helping to support consumption for
now.
Do these two factors account for the anomaly in the
relationship
below and are they sustainable even in the face of another
potential downturn in housing? Unless housing has now
become
relatively meaningless to the tone and rhythm of the
domestic
economy, we'd sure as heck expect the two data points
below to
converge at some point. We'll take it one step at a time
as
the cycle continues.
Very
quickly,
it has also been true that directional change in personal
consumption
and consumer confidence have likewise been very highly
correlated
over time. Historically, the rate of change in
consumption
has led confidence readings. But as we saw above, housing
led consumption. Again, the noticeable patterns of the
current cycle are the divergence points with historical
rhythm.
We're either looking at a changed domestic economy
relative to the
last quarter century, or some type of reconciliation lies
ahead as
either housing gets a lot better, or the rate of change in
consumption moderates.
We
know that
in the current recovery environment manufacturing has been
a
highlight bright spot. In fact when we look across
economic
cycles past, one of the key differentiation points of
cycle
specific economic character has been either consumer or
business
investment economic leadership, and sometimes both. Same
deal goes for economic contractions - either consumer led
or
business investment led have been key character points.
So,
does the economic cycle rhythm of housing coincide with
that of
production (business investment)? Turns out in rough form
it
does. The next chart looks at the NAHB numbers alongside
the
year over year change in industrial production. One more
time, in cycles past housing has led cycle peaks and
troughs in
industrial production.
To
our point
above, what we are seeing at present is a bit of a revival
in
business spending. But as we have discussed in recent
missives, the capital spending revival so far is growing
incrementally, yet muted relative to historical context as
capacity utilization numbers remain just up from historic
lows.
The high single digit annual rate of change growth you see
in
industrial production is more the result of comparisons
against
prior year Armageddon than not for now. This will
moderate
ahead, but it is fair to say capital spending is at least
moving
in the right direction. Important question looking ahead
being, can corporate capital spending alone continue to
support
macro recovery without housing at least at some point
playing a
meaningful role? Or maybe more correctly, can business
spending more than offset the boat anchor drag housing has
become
in the current cycle? A certain level of capital spending
is
mandatory in any cycle simply to replace worn out
equipment.
An extension of that spending cycle will require a
meaningful
level of private sector demand. And certainly part of
that
private sector demand is housing related/influenced.
Bottom
line? Once again the directional dichotomy above is an
anomaly. How does this reconcile is the important
question
for the economy and financial markets ahead.
One
more current cycle anomaly? Why not, right? As we
stated earlier, the constant in US economic recoveries
past has
been pent up demand for housing, autos and credit. The
following tends to validate that observation. What has
skewed the historic relationship in the current cycle?
Unlike housing, the auto industry does not have historic
excess
inventory to work off. Moreover, as has also been true to
a
point with housing, government subsidies have helped hold
up auto
sales in the last year. Finally the rate of change
rebound
in auto sales must be viewed relative to the prior period
rate of
change collapse in autos sold. But for now the current
divergence with historic experience remains unresolved.
Can
the US experience a sustainable homeless economic
recovery?
It's the sustainability point that appears to be the key
question
as we look at present cycle divergences.
Finally
the
relationship of housing and employment. One that appears
self obvious. One more time, just look at the lead and
lag
relationship historically between the two. In past cycles
housing has led at peaks and troughs. Of course certainly
a
factor making the rate of change in payrolls look better
than is
actually the sustainable case at present is the influence
of
census hiring over the last few months. Once that
influence
washes through we'll see true payroll trends once again.
It's very hard to make a case for a true housing recovery
absent
meaningful job growth. And at least so far, the housing
industry is not anticipating a significant change in labor
market
fundamentals, as has indeed been the case in prior cycles.
That's
it for reviewing the linkage between the NAHB index and
key
headline economic stats. We know you get the point by
now.
The divergences of the current cycle are nothing short of
glaring.
But in summation the key question becomes, are these more
than
noticeable divergences meaningful both to the forward
trajectory
of the real US economy and importantly to financial market
outcomes? As we have harped on for years now,
globalization
changes everything. The US domestic housing cycle could
theoretically have much less impact on domestic US macro
economic
outcomes in a more globalized economy than has ever been
the case
in prior cycles. That's a clear possibility. So maybe
the anomalies seen above speak to secular change occurring
right
before our eyes in the current cycle. As we see it, it's
just a bit too early to bet on secular change with
precious
investment capital. We'll see what happens ahead, but our
conclusion for now is that a second downturn in housing
would very
much increase the odds of a macro US double dip given the
linkages
more than apparent in the relationships we have reviewed.
If
the NAHB numbers remain soft AND the ECRI WLI continues to
deteriorate, the odds of a US double dip will rise very
meaningfully, ultimately toward certainty. You know we'll
keep you informed.
Betting
Against The House?...We
promised you above we'd quickly discuss the historic
relationship
between housing and equities. To be honest, you do not
need
lengthy discussion as the visual below tells the story
quite
succinctly, no? We're looking at the NAHB numbers
themselves
alongside the very simple price only year over year change
in the
S&P 500. You can see the historic directional
correlation and the current divergence relative to
historic
rhythm. One more time at the risk of annoyance, can we
experience a continued homeless economic expansion and
continued
cyclical equity bull? Or will the price rhythm of
equities
and housing numbers meet up ahead as has been the case for
the
last quarter century? And if that meeting is to take
place,
then how (equities rate of change decline or NAHB
acceleration)
and where will that happen?
»
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Not paying your mortgage tends to give you more money to spend.
That and a couple of $Trillion in monetary lighter fluid thrown on the fire will produce some of those chart spikes. I have yet to see or hear anyone actually explain how this will all end well other than to be told that only the big-brained economists know that.
What we are witnessing is the greatest transfer of wealth from the middle class to the financial elite since the last time they did this, which was called the Great Depression. The next 10 years will go down in the history books as the Great(est) Depression.
+1. This is the effect of owing money meaning nothing anymore. Combined with the wealth transfer effect. Speculative froth and intentional default are driving these numbers, nothing more.
Manufacturingless, jobless, homeless, consumerless recovery. Its now driven by 'wishing on a star!' and 'believing in miracles!' and 'Yes we CAN!'
Bush tax cuts not making any jobs !!!!!!!!!
Hey look, ES back to levels before the AMAZING ibm results. This is a victory for the bulls everyone.
(nice charts above, need some time to digest everything later)
Seriously, this day is F'ed up even for a market which is known for being F'ed up, what the hell is driving this bullshit?
LOL
+5 handles since i posted.
the supper dupper stress tests !
My stress test says the vix is too cheap... and forget the banks.. no measure can measure a bank's risk.
I just put a post about that subject. EvilSpeculator - go check it out.
If housing double dips?
You are kidding...right?
Indeed. Housing is Schroedinger's Cat. It's dead, but if we don't peek in the box, then it's alive. Of course, don't try getting a loan for a house (even if you do have 20% down).
Housing has been in a continuous slump, and with the continuing deluge of foreclosures, there is no way for it to go back up [unless we can refi at discount window rates].
SPX has gone green. Shorts are gettin' the squeeze.
+1072.5
they reenter on bearish reports, like exisitng homesales, as we know it will miss...
If they could just pump the economy like they pump the stock market all would be well.
Anyone else see that 1:30 PM EDT S&P pump? I feel full after being pumped like that. And it hurts so good. :>)
Read a statistic, wish I could find it again, that the majority of americans would now prefer to rent as opposed to buy a home. Not surprising given the need for job mobility, the lack of appreciation/price declines in the recent period, etc. I wonder how much of the perception of buying a home as an "investment" will simply go away. If you assume house prices keep pace with inflation, they are a loser when you strip out interest, property taxes, maintenance, depreciation, etc.
How much of our economic modeling (see prior article on ZH about economics) relies on the past to predict the future, and therefore assumes cyclicality as opposed to structural changes? How much of the housing boom over the past 20-30 years was a function of the Boomers, and now that they are sellers (not buyers) will the demographic headwinds change housing values/the perception of?
And how do you model in that FNM/FRE/FHA now guarantee or purchase 96% of all US mortgages? For how much longer?
I sold my house about a year and a half ago. Had it over twenty years so there was equity. I'm not attempting to "time" the housing market and get back in at a lower price. Frankly, I preferred to convert it to cash. I'm content to rent for the foreseeable future and most likely I will never buy a house again in my lifetime; at least in this country.
Let me hold your (home sale) cash for you. I'll put it in my breast pocket for safe keeping and you can come by every month and collect your "interest". Which after I have your cash will be whatever "interest" I say you have in "your" money, which will be none unless I say otherwise.
Come on, I'm trust worthy. Or do I mean sponge worthy? :>)
Re: If you assume house prices keep pace with inflation, they are a loser when you strip out interest, property taxes, maintenance, depreciation, etc.
Perhaps, but the real question is, how does the total financial picture of home ownership compare with that of renting? Rent, by the way, is also influenced by interest, property taxes, maintenance, depreciation, etc.
While I haven't run the numbers (which must make certain assumptions about the aforementioned interest, property taxes, maintenance, depreciation, etc.), I'm pretty sure that the finanical curves of home ownership vs renting cross somewhere within the first 5 - 10 years, and that homeownership is advantageous after that crossover. In particular, inflation punishes renters, who are subject to ever increasing rents as time goes on, whereas it rewards homeowners because home values tend to track with inflation and the mortgage payments are made with cheaper dollars over time.
Not to mention that, once the home is paid off, the homeowner is a free person. As long as the home owner has sufficient income or resources to pay property taxes, insureance and utilities, and buy groceries -- all fairly nominal expenses -- he's "home free".
A renter, on the other hand, is a wage slave for life.
What Double Dip?..... the housing Market have been dead, has not rebounded at all. I don't believe even the poor numbers from the NAHB. Like everyother economic indicator pure BS.
and the "What the fuck " markets are up....cant believe it.....and look whos leading the markets......HOMEBUILDERS...........
And GS. I'm telling you, this is a big middle finger to everyone hoping for sanity.
doesnt get as blatant as this....middle finger to anyone who was hoping to make some profits
What is really scary is that watching any financial news channel nowadays is like plugging into the Propaganda Machine. Even the regular 6 PM news is suspect - the teleprompters tell the talking heads what is allowed to be said.
I suppose that this has been going on for some time now, but not to the extent it has recently taken. Transparency my butt. I had high hopes for O Bummer, but it has gotten way worserer.
I don't believe anything coming from 'officials'. Even if they were telling the truth, not many believe a word they say anymore, me included.
...my two ounces
I guess the GS/IBM earnings were nothing to HAL9000...
Did I miss some outstanding news, like martians landed and will make us all rich? WTF is the market up on, besides heroin?
We are about to bump the trend like again...time to load up on TZA soon and make a quick 10% on some lazy cash.
No idea. 'Decent' vol came in at 135 on the ES and hasnt looked back since then. The 30min candle from then is a full +10 higher, on nothing besides the possible rate cut of a FULL 1/4 pt.
They're about to extend unemployment benefits... again...
http://finance.yahoo.com/news/Democrats-to-give-jobless-apf-1521010382.h...
not for the 99 ers !!! bush tax cuts have to go now !!! bush tax cuts made zero jobs !!!!!
Apple will save us all! BUYBUYBUY
Freaky insanity
Yes, yes, surely Apple can provide gainful employment for 150 million Americans. All will surely be well, if we all just wish hard enough upon a star!
Looks like somebody left the teleprompter on again.
Well of course the market's are green. When it decides to go up, it just goes up. No volume? No difference. Who cares why. The fed, the PPT, the easter bunny? Makes not one damn bit of difference; jump in and make some pesos.
And one more big BOO-HOO for the "economy". Things are more than fine. I can't even get a new 5 series BMW for my 16 year old without a wait. Things are bad and getting worse? Cry me a river. Those who produce are raking it in while the fat, lazy and ignorant folks who put these idiots into office are being used as toilet paper by Obama and his gang of thugs.
Man oh man, life is good when you're not stupid.
Pesos? Thats like a type of bean-food right?
As for the beemer for your son... just make sure he has a green card, amigo. You wouldnt want him to be caught speed racing as an illegal. (And btw, i hardly believe theres a wait time for that run-of-the-mill model)
Get used to the "bean food" as the Latino Nation is on the way. You may have a hard time understanding this concept since you don't grasp the wait for such a "run of the mill model"
http://motoring.asiaone.com/Motoring/News/Story/A1Story20100714-226897.html
Now, get with the program and follow the bouncing fed. Buy when he says buy and short when he says sell. Don't pretend anything is real except your ST capital gains; and the taxes of course - always with the taxes.
Be smarter like Obama man; live large on the "little guy's" stupidity. You're never going to make them any smarter, no?
That's the issue - he NEVER ever says sell. 'Subprime is contained'; 'the housing market won't collapse'
The list goes on.
You may be living the American dream... but you've been fed koolaid.
Re" Things are more than fine. I can't even get a new 5 series BMW for my 16 year old without a wait. Things are bad and getting worse? Cry me a river. Those who produce are raking it in...
I see. And exactly what did your 16 year old produce to "earn" a BMW? Oh, of course. Pushed crack for dad. Why did I even need to ask?
Yeah, we should all wise up.
+100000 for the crack comment!
To answer the simple supply and demand problem that smarty-pants No Mas truly doesn't comprehend......if there is an unlikely shortage of the 5 series, it is due to their (BMW) exports being pulled from the US to meet the demands of China! And not because all "good" US parents are buying their kids Beamers!
Great, so everybody who thinks everything's great righ now, definitely has no problem with the IMF bailing out Greece so Greek hair stylists can continue to retire with 'danger pay' at 55, right? Sounds reasonable to you, right? If not, please explain - after all, if the world is just an unlimited cornucopia of goodies why begrudge those poor greek hair stylists their share? What kind of greedy fucking monsters are you? FREE GOODIES FOR EVERYBODY!
The last NAHB/S&P chart is a stunner. Thanks for the post, TD.
In other housing news, FHA-insured delinquencies are up 200% in one year. But FHA is not discouraged. FHA proposes to get those with at least a 580 FICO and 3.5% down into the home of their dreams. Brilliant subprime redux ..... government style !!
www.doctorhousingbubble.com
Did anyone see if the EUI bill contained any extension of funds to the PPT?
Ah, don't need it. If anyone thinks they're (ppt) about out of money or time to continue the runup, I have a bridge to sell them. It will come down when it suits THEIR desires. Not on anything as full of sh*t as fundementals. What are you thinking?
bob toll sold at the top. they'll probably take it private with all the dumb money they've skimmed over the years.
Looks like the second push is coming...
lol @ this market.
but I am short only ZION right now hahahahahaha...good day for me!
this article is over two weeks old..
I said earlier, please feel free to bid the S&P up to 1130 so I can short it - 10 point increments will be fine, you dumbass bulltards.