by Calculated Risk on 4/27/2007 10:16:00 AM

The good news in the Q1 2007 GDP report was that private non-residential investment rebounded slightly. As I noted yesterday, investment slumps correlate very well with recessions. The following graphs are an update to previous graphs and include Q1 2007 (note these are year-over-year changes, not quarter-by-quarter).

Click on graph for larger image

The first graph shows the change in real GDP and Private Fixed Investment over the preceding four quarters, shaded areas are recessions. (Source: BEA Table 1.1.1)

A couple of observations:

1) Since 1948, private fixed investment has fallen during every economic recession.

2) Private fixed investment has fallen 13 times since 1948 (14 including the current slump), with only 10 recessions.

So what happened during the periods around 1951, 1967 and 1986 to keep the economy out of recession? These are the periods when private investment fell, but the economy didn't slide into recession. The answer is generally the same for all three periods: a surge in defense spending. The defense spending in the early '50s was due to the Korean war, in the mid '60s the Vietnam war, and in the mid '80s a general defense build-up helped offset a small decline in private investment. The mid '80s also saw a surge in MEW (mortgage equity withdrawal) that also contributed to GDP growth.

The second graph shows the separation of private fixed investment into residential and nonresidential components.

This graphs shows something very interesting: in general, residential investment leads nonresidential investment. There are periods when this observation doesn't hold - like '95 when residential investment fell and the growth of nonresidential investment remained strong.

Another interesting period was 2001 when nonresidential investment fell significantly more than residential investment. Obviously the fall in nonresidential investment was related to the bursting of the stock market bubble.

However, the typical pattern is residential investment leads non-residential investment, so the current slowdown in non-residential investment is not unexpected.


The final graph is the YoY change in New Home Sales from the Census Bureau.

Note: the New Home Sales data is smoothed using a three month centered average before calculating the YoY change. The Census Bureau data starts in 1963.

Some observations:

1) When the YoY change in New Home Sales falls about 20%, usually a recession will follow. The one exception for this data series was the mid '60s when the Vietnam buildup kept the economy out of recession. Looking solely at this graph, one might expect the economy to already be in a recession - however these models are just guidelines, not perfect predictors. The pace of the current decline in new home sales hasn't been extremely high (only 20% YoY decline), and the slower the slump, the more the rest of the economy can absorb the impact.

2) It is also interesting to look at the '86/'87 and the mid '90s periods. New Home sales fell in both of these periods, although not quite 20%. As noted earlier, the mid '80s saw a surge in defense spending and MEW that more than offset the decline in New Home sales. In the mid '90s, nonresidential investment remained strong.

And that brings us back to this piece of good news in the Q1 GDP report: Non-residential investment rebounded.

Real nonresidential fixed investment increased 2.0 percent in the first quarter, in contrast to a decrease of 3.1 percent in the fourth. Nonresidential structures increased 2.2 percent, compared with an increase of 0.8 percent. Equipment and software increased 1.9 percent, in contrast to a decrease of 4.8 percent.

Perhaps non-residential investment will stay positive and help keep the economy out of recession. Later I'll review the typical lags between residential and non-residential investment.

by Calculated Risk on 4/27/2007 10:01:00 AM

MarketWatch has the headlines: GDP slows to 1.3% growth in first quarter, Inflation rages at fastest pace in 16 years, data show

Click on graph for larger image.

This graph shows Residential Investment as a percent of GDP since 1960. The median is 4.5% of GDP. Currently RI is still above 5% of GDP.

RI peaked at 6.3% in the second half of 2005.

If this housing bust is similar to previous busts, RI as a percent of GDP will bottom in the 3.5% to 4.0% range.

More on investment soon.

by Anonymous on 4/27/2007 06:58:00 AM

As a boomer, I am always interested in an historical view of things, even if it grates on the nerves. Since the phrase "the medium is the message" marked a profound shift in the understanding of culture for, um, us boomers old enough to remember Marshall McLuhan, I present the following advice to real estate brokers without further snark. "Are You Really Reaching Consumers?":

RISMEDIA, April 4, 2007-Do you speak boomer? If that's your only generational language, you are in big trouble. Gen X and Gen Y consumers don't speak your language, and, 120 million strong, they now constitute the largest demographic in the real estate market.

Simply put: As consumers become increasingly computer savvy, brokers are finding they are no longer in charge. Those brokers who don't keep up are in danger of becoming, well, endangered. But it's not just a matter of disseminating information; the medium is the message. . . .

"They are techno-literate and techno-fused," says Dallas-based consultant John Ansbach. "Gen X grew up as computers grew up. Gen Y is techno-fused. They don't know how to do anything without computers. The latch-key effect for both is a profound sense of: I can do it on my own, given the right tools. Gen X and Y-ers believe in their heart of hearts if they had enough coffee and access to the Internet, they could learn to fly the space shuttle."

Of course, Anspach maintains, this is "not reality. A real estate transaction is a complicated financial process that does require significant expertise. Consumers don't get this message, and certainly not from the media that has further told these consumers Realtors are anti-competitive and greedy and, by the way, you may not even need them."

These forces have combined "to create a perfect storm for brokers. You can fight it, or you can change, adapt and be successful with the right strategies," says Ansbach.

by Calculated Risk on 4/26/2007 02:57:00 PM

Update: add Defense spending vs. investment (note: graph scale kept the same to compare two graphs. YoY change in defense spending during Korean War went off graph). Oops, I switched the colors for investment spending. Sorry. Red in first graph is shown as blue in the second graph.

As a preview to the Q1 2007 GDP report to be released tomorrow, here is an historical look at private fixed investment vs. recessions.

"[A] major area of concern in the near-term outlook, and one that perhaps could pose noticeable downside risks, is business investment."
Fed Governor Frederic S. Mishkin, April 20, 2007

Click on graph for larger image.

This graph shows the YoY change in real GDP and Private Fixed Investment through Q4 2006; shaded areas are recessions. (Source: BEA Table 1.1.1)

A couple of observations:

1) Since 1948, private fixed investment has fallen during every economic recession.

2) Private fixed investment has fallen 13 times since 1948 (14 including the current slump), with only 10 recessions.

So what happened during the periods around 1951, 1967 and 1986 to keep the economy out of recession? These are the periods when private investment fell, but the economy didn't slide into recession. The answer is generally the same for all three periods: a surge in defense spending. The defense spending in the early '50s was due to the Korean war, in the mid '60s the Vietnam war, and in the mid '80s a general defense build-up helped offset a small decline in private investment. The mid '80s also saw a surge in MEW (mortgage equity withdrawal) that also contributed to GDP growth.

Tomorrow I'll add Q1 2007 and break the investment data down by category.

by Calculated Risk on 4/26/2007 12:20:00 PM

From the WSJ: Home Equity Stalls

After years of piling debt on their homes, Americans are becoming more cautious about using them as a piggy bank.
...
The amount borrowers owe on their home-equity lines of credit has slipped in the past six months, to $561 billion at the end of March, the first such decline since 1999, according to new data from Equifax Inc. and Moody's Economy.com Inc. Although that decline was partly offset by a pickup in fixed-rate home-equity loans, total home-equity borrowing rose just 9% in the 12 months through March, well below the 21% average annual growth rate of the past five years.

... the slowdown in home-equity borrowing is leading to weaker sales in some markets for autos, building materials and electronics ...

This is one of the keys going forward - the impact of less home equity extraction on consumer spending.

by Calculated Risk on 4/26/2007 11:32:00 AM

From Reuters: US homebuilder cash flows a ratings threat-Moody's

Less than half of Moody's rated home builders posted positive cash flows for the year through the end of 2006 ...

This "underscores a potentially serious problem and signals that their current ratings may be too high," said Moody's Vice President Joseph Snider.

by Anonymous on 4/26/2007 10:39:00 AM

I've fought harder to log into Blogger this morning than Mr. Tan Man has to liquidate his shares. Sorry. You need a place to discuss the earnings releases? Here it is.

CR Update:
IndyMac profit slumps 34% as mortgage business takes hit

California mortgage lender IndyMac Bancorp said Thursday its first quarter profit fell 34% as mortgage profits took a hit from a shakeout in the subprime, or least creditworthy sector of the market. ... "With respect to mortgage banking revenue margins, the spread widening in the private mortgage-backed securities markets that occurred in the first quarter will continue to impact margins in the second quarter," IndyMac President Richard Wohl

Countrywide profit falls 37 pct, cuts forecast

Countrywide Financial Corp. on Thursday said first-quarter profit fell 37 percent and cut its 2007 earnings forecast, reflecting difficulties for the largest U.S. mortgage lender in a weakened housing market.

Beazer Homes swings to loss, withdraws `07 view

Beazer Homes USA Inc. swung to a fiscal second-quarter loss and backed off its 2007 profit forecast in the face of slumping housing prices, but the stock rose in early dealings Thursday.
...
"We continued to experience extremely challenging operating conditions," Chief Executive Ian McCarthy said in a statement. "Most housing markets across the country continue to experience lower levels of demand coupled with higher levels of inventory, resulting in increased competition and continued significant discounting."

He said that the company was "pleased" with its latest quarter's orders, but that so far this spring selling season it's "yet to see any meaningful evidence of a sustainable recovery in the housing market, and we expect current conditions will continue to put pressure on home builders' operating results."

by Anonymous on 4/26/2007 10:30:00 AM

James Surowiecki in the New Yorker ("Subprime Homesick Blues") makes a plea for maintaining access to subprime lending:

But what’s often missed in the current uproar is that while a substantial minority of subprime borrowers are struggling, almost ninety per cent are making their monthly payments and living in the houses they bought. And even if delinquencies rise when the higher rates of the 2/28s kick in, on the whole the subprime boom appears to have created more winners than losers. (The rise in homeownership rates since the mid-nineties is due in part to subprime credit.) We do need more regulatory vigilance, but banning subprime loans will protect the interests of some at the expense of limiting credit for subprime borrowers in general. And while the absence of a ban means that some borrowers will keep making bad bets, that may be better than their never having had the chance to make any bet at all.

I don't, really, know what to say to someone who thinks there's an outright ban on subprime lending on the table, or who writes "even if delinquencies rise when the higher rates of the 2/28s kick in." The theory is, you see, that the "higher rates of the 2/28s" are the higher rates needed to make up for the higher delinquencies. It's usually called the "risk premium." If people can't afford to pay the risk premium, that suggests that their risk cannot be priced: there are no loan terms that the borrower can afford that will also cover the cost to the lender of the borrower's likelihood of default. The traditional response to a request for credit that cannot be adequately priced is to deny the request. Continuing to lend at a discount to the true premium seems like a curious way to avoid losses, but one undoubtedly makes it up on volume.

In any case, we certainly wouldn't want a regulatory regime that makes it hard for subprime borrowers to gamble on real estate. Of course, you'd have to define "winning the bet" before you'd conclude that the House sometimes loses, and some of us aren't sure that making outrageous house payments equal to 50% of your take-home on time for 30 years for a depreciating property is properly classified as "winning." Before I'd get all fired up about letting the punters punt, I'd want to know if this is Monte Carlo or Three-Card Monte.

On the other hand, it makes more sense than just asking all the sellers to stop selling until the buyers get desperate again.

by Calculated Risk on 4/25/2007 09:38:00 PM

"I'd like to make an appeal to everybody who does not need to sell to take your home off the market."
Marianne Zoll, April 25, 2007, Re/Max 5 Star/Zoll Real Estate & Auction Team.

I've never heard of this before.

by Calculated Risk on 4/25/2007 05:13:00 PM

Some people are confused as to why starts are so high (around 1.5 million on a Seasonally Adjusted Annual Rate SAAR) and New Home sales so low (0.85 million SAAR). They ask: why aren't reported inventories surging?

The answer is new homes offered for sale are a subset of starts. Starts also include homes being built by owners and units being built to rent.

Click on graph for larger image.

This graph shows total starts, starts of single unit structures, and new home sales since 1970.

During some periods (early and late-70s, mid'80s) there was a surge of apartments being built (think baby boomers leaving the nest in the '70s). But in all periods, you can't compare starts (either total or one unit structures) directly to new home sales.

Luckily there is more data available from the Census Bureau, but only on a quarterly basis. See this document: New Privately Owned Housing Units Started in the United States, by Intent and Design

In Q4 2006, there were 278K one family units started (actual, not SAAR). Of these, 205K were intended for sale and the remaining units were either intended as rental units or built by an owner (either using a contractor or by themselves).

In addition, in Q4 2006, 34K units in multi-unit buildings were started intended for sale. So the actual number of units started, with intent to sale, were 205K plus 34K equals 239K.

Also from the Census Bureau, there were 216K units sold in Q4 2006. So the inventory of homes for sale should have increased slightly (by about 23K). Now this last calculation doesn't work exactly (the Census Bureau reported inventory decreased by 24K in Q4 2006), but that is probably because of timing issues. Just remember you can't compare Starts to Sales directly.