by Calculated Risk on 5/15/2009 07:11:00 PM

Home Depot (Tuesday) and Lowes (Monday) announce results next week, and this might be something to watch!

Residential investment, according to the Bureau of Economic Analysis (BEA), includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories.

In Q4 - for the first time - investment in home improvements exceeded investment in new single family structures. This continued into Q1 2009.

Click on graph for larger image in new window.

This graph shows the various components of RI as a percent of GDP for the last 50 years. The most important components are investment in single family structures followed by home improvement.

Investment in home improvement was at a $162.3 billion Seasonally Adjusted Annual Rate (SAAR) in Q1, significantly above investment in single family structures of $113.7 billion (SAAR).

Let's take a closer look at these two key components of RI:

As everyone knows, investment in single family structures has fallen off a cliff. This is the component of RI that gets all the media attention - although usually from stories about single family starts and new home sales.

Currently investment in single family structures is at 0.8% of GDP, significantly below the average of the last 50 years of 2.35% - and also below the previous record low in 1982 of 1.20%.

But what about home improvement?

The third graph shows home improvement investment as a percent of GDP.

Home improvement is at 1.15% of GDP, off the high of 1.30% in Q4 2005 - but still above the average of the last 50 years of 1.07%.

This would seem to suggest there remains significant downside risk to home improvement spending.

NOTE: Home improvement is a rough estimate by the BEA - and could be lower. Also, there could be changes in spending patterns leading to a higher percentage of GDP on home improvement.

by Calculated Risk on 5/15/2009 03:55:00 PM

Click on graph for larger image in new window.

This graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears".

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

And while we wait for the FDIC on BFF ...

From the NY Times: G.M. Notifying 1,100 Dealers That They Will Be Dropped

General Motors is telling about 1,100 dealers on Friday that they will lose their franchises by late next year.
...
“They’re dealerships that are in most cases hurting, losing money and in danger of going out of business anyway,” Mark LaNeve, G.M.’s vice president for sales, service and marketing, said in a conference call. “It’s a move that people could argue should have been taken years ago ...”

Why didn't they drop these dealerships earlier? Another example of weak management.

And from CNBC: Goldman, JPMorgan May Be First to Repay TARP

Goldman Sachs and JPMorgan Chase may receive government permission as early as next week to pay back the billions in TARP money they received last fall, sources close to both banks told CNBC.

These are not the first banks to repay TARP funds (several smaller banks have already paid the money back). Goldman received $10 billion in TARP funds, and JPMorgan received $25 billion.

by Calculated Risk on 5/15/2009 03:03:00 PM

From CNBC: Credit Card Defaults Reach Record Highs in April

U.S. credit card defaults rose in April to record highs, with Citigroup and Wells Fargo posting double digit loss rates ...

	April	March
Citigroup	10.21%	9.66%
Wells Fargo	10.03%	9.68%
JPMorgan Chase	8.07%	7.13%
Discover Financial Services	8.26%	7.39%

And the beat goes on ...

by Calculated Risk on 5/15/2009 02:00:00 PM

Note: this is not seasonally adjusted.

Sometimes port traffic gives us an early hint of changes in the trade deficit. The following graph shows the loaded inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container). Although containers tell us nothing about value, container traffic does give us an idea of the volume of goods being exported and imported.

Click on graph for larger image in new window.

Inbound traffic was 21.5% below April 2008.

Outbound traffic was 18.3% below April 2008.

There has been some slight recovery in exports the last two months (the year-over-year comparison was off 30% from December through February). But this is the 2nd worst YoY comparison for imports - only February was worse, and that might have been related to the Chinese New Year. So imports from Asia appear especially weak.

This suggests a little more improvement in the trade balance with Asia in the April trade report. Of course the overall trade deficit will probably be worse because of rising oil prices.

by Calculated Risk on 5/15/2009 12:33:00 PM

Click on puzzle for larger image in new window.

I've linked to a few pieces of the puzzle below.

But this adds up to more supply (in the mid-to-high end) because of rising foreclosures - and limited demand because sellers at the low end are mostly banks or short sales (so there are no move up buyers), and tight financing.

To me, this suggests prices will fall much further in many mid-to-high end areas.

Surging prime delinquencies.

See: OCC: More Seriously Delinquent Prime Loans than Subprime

and Fannie, Freddie Report Surge in Prime Delinquencies

and S&P: Delinquencies Surge for HELOCs and Jumbo Prime Loans

Option ARM Loan Recasts are coming.

See: Loan Reset / Recast Schedule

Limited Jumbo Financing

See: More Jumbo Financing Coming

Few Move up buyers

See: Home Sales: One and Done

And even more shadow supply, see: High Percentage of Homeowners Waiting for a Market Turnaround

by Calculated Risk on 5/15/2009 11:51:00 AM

2nd Update: From FDIC: FDIC Statement Clarifying Bloomberg Article

Statement from the FDIC Office of Public Affairs, "The Bloomberg story referencing Chairman Bair's discussion of management and board changes is misleading and does not provide the proper context of her comments. Chairman Bair said that management changes could happen based on the capital plans that an institution must submit to the government. She did not refer to CEOs specifically and the comment was in the context of capital plans submitted by the institutions. Chairman Bair also did not suggest the federal government will remove the bank CEOs."

Transcript of the exchange from Bloomberg follows:

MR. HUNT: But in the same situation, or similar situation, the government already replaced CEOs at Fannie and Freddie and General Motors -

MS. BAIR: Yes, that's right.

MR. HUNT: And some people say, well, why is the head of Bank of America still there? Or why are some of these other banks' CEO's still there?

MS. BAIR: Right, well, obviously I don't comment on open and operating institutions. I think the review needs to go with both the management and the boards as well, absolutely. And management needs to be evaluated and is this the right skill set, have they been doing a good job, are there people who can do a better job, those kinds of questions.

MR. HUNT: Do you think some will be replaced in the next couple of months without getting into the particulars?

MS. BAIR: Yeah, I think there will be an evaluation process. We're requesting it as part of the capital plan and yes.

Update: From Bloomberg: Bair Says Some Bank Chiefs Will Be Replaced in Next Few Months

From FDIC's Sheila Bair on Political Capital with Al Hunt this weekend (Bloomberg TV):

Some Bank CEOs will be replaced in next few months

'No one accountable' for entire U.S. banking system

U.S. needs to fill 'hole' on oversight of holding companies

U.S. to have management 'evaluation' process at banks

'Need is still there' to remove toxic assets from banks

Liquidity crisis is over

by Calculated Risk on 5/15/2009 09:15:00 AM

The Federal Reserve reported:

Industrial production decreased 0.5 percent in April after having fallen 1.7 percent in March. Production in manufacturing declined 0.3 percent in April and was 16.0 percent below its recent peak in December 2007. The decreases in manufacturing in April remained broadly based across industries. Outside of manufacturing, the output of mines fell 3.2 percent, as oil and gas field drilling and support activities continued to drop. The output of utilities moved up 0.4 percent. At 97.1 percent of its 2002 average, industrial output in April was 12.5 percent below its year-earlier level. The capacity utilization rate for total industry fell further in April, to 69.1 percent, a low over the history of this series, which begins in 1967.
emphasis added

Click on graph for larger image in new window.

This graph shows Capacity Utilization. This series is at another record low (the series starts in 1967).

In addition to the weakness in industrial production, there is little reason for investment in new production facilities until capacity utilization recovers.

by Calculated Risk on 5/15/2009 08:36:00 AM

From the NY Fed: Empire State Manufacturing Survey

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers worsened only modestly in May. Although negative, the general business conditions index rose 10 points to -4.6, its highest level since August of last year. The new orders index fell several points and remained below zero, while the shipments index inched into positive territory. The inventories index remained negative, but rose from last month’s record low. Price indexes also continued to be negative, with the prices received index falling 10 points to a record low. Employment indexes indicated further contraction in employment levels and in the average workweek.

Here is the general business conditions index. Note that the data only goes back to July 2001 (chart to Jan 2002). Any reading below zero is contraction, so this index shows manufacturing is contracting - but "only modestly" in May.

by Calculated Risk on 5/15/2009 12:21:00 AM

From Floyd Norris at the NY Times: A Bank Is Survived by Its Loans

World Savings ... did not sell its loans into securitizations, so it knew it stood to lose if a loan went bad. Virtually all of the pick-a-pay loans were for less than 80 percent of the appraised value of the home, and the average was just 71 percent. World said it made loans only to those who could afford the stepped-up monthly payment after the reset, and said it did not lend to subprime borrowers.
...
Most banks forced the borrower to start making much larger monthly payments if the amount owed ... rose to 110 percent of the appraised value of the home when the loan was made. World ... did not force the payments up until the amount owed was 25 percent greater than the original value.

World Savings appeared to make safe loans, but they were very generous on the cap for when the loans recast. World also used the original appraised value, and there was no reappraisal provision.

So even though the borrowers originally had substantial "skin in the game", many of the borrowers are deep underwater - and are now really renters.

Note: World was part of Golden West which was bought by Wachovia, and is now owned by Wells Fargo.

The amount owed on such loans at the end of March was $115 billion, which Wells estimates is 107 percent of the current value of the properties underlying the mortgages.
...
Only $325 million of the loans — less than a third of 1 percent — will reset by the end of 2012.
...
Wells Fargo has written the value of the pick-a-pay portfolio down by about 20 percent, and is offering to restructure some of the loans. But many of the owners may have no reason to seek such a restructuring. ... The result may be perverse: a prolonged foreclosure crisis ...

At least we don't have to worry about many of these loans blowing up over the next few years!

Note: I think Norris means recast, not reset, "Reset" refers to a rate change. "Recast" refers to a payment change.

by Calculated Risk on 5/14/2009 09:17:00 PM

After the insurers comes ...

From the WSJ: YRC to Apply for Bailout Funds

YRC Worldwide Inc., one of the nation's largest trucking companies, will seek $1 billion in federal bailout money to help relieve pension obligations, the chief executive said Thursday.
...
Chief Executive William Zollars said the company will seek the money to help cover the cost of its estimated $2 billion pension obligation over the next four years.
...
By applying to the U.S. Treasury for money under the Troubled Asset Relief Program, Mr. Zollars said he hopes to "get the conversation started" with federal authorities about reducing the company's pension obligations. He said YRC will submit an application to the Treasury Department as early as Friday.

Is YRC a bank holding company?

by Calculated Risk on 5/14/2009 07:34:00 PM

Update:from the WaPo: Insurance Companies Approved for TARP Money

The Treasury today granted preliminary approval for some of the nation's largest insurance companies to receive capital infusions under the government's Troubled Assets Relief Program, Treasury spokesman Andrew Williams said.

Recipients are Hartford, Prudential, Allstate, Ameriprise, Lincoln National and Principal Financial Group, Williams said.

From Hartford: The Hartford Receives Preliminary Approval For $3.4 Billion Participation In Treasury's Capital Purchase Program (ht jb)

The Hartford Financial Services Group, Inc. (NYSE: HIG - News) announced today that the United States Treasury Department has provided preliminary approval for the company to participate in Treasury’s Capital Purchase Program (CPP) in the amount of $3.4 billion.

by Calculated Risk on 5/14/2009 05:44:00 PM

From Edmund Andrews at the NY Times: My Personal Credit Crisis

If there was anybody who should have avoided the mortgage catastrophe, it was I. As an economics reporter for The New York Times, I have been the paper’s chief eyes and ears on the Federal Reserve for the past six years. I watched Alan Greenspan and his successor, Ben S. Bernanke, at close range. I wrote several early-warning articles in 2004 about the spike in go-go mortgages. Before that, I had a hand in covering the Asian financial crisis of 1997, the Russia meltdown in 1998 and the dot-com collapse in 2000. I know a lot about the curveballs that the economy can throw at us.

Both Tanta and I linked to articles by Andrews over the years, and I'm amazed by this story ...

But in 2004, I joined millions of otherwise-sane Americans in what we now know was a catastrophic binge on overpriced real estate and reckless mortgages. Nobody duped or hypnotized me. Like so many others — borrowers, lenders and the Wall Street dealmakers behind them — I just thought I could beat the odds.
...
Patty [his new wife] discovered a small but stately brick home in a leafy, kid-filled neighborhood in Silver Spring, Md. We sent in an offer of $460,000 and one day later got our answer: the sellers accepted.
...
The only problem was money. Having separated from my wife of 21 years, who had physical custody of our sons, I was handing over $4,000 a month in alimony and child-support payments. That left me with take-home pay of $2,777, barely enough to make ends meet in a one-bedroom rental apartment. Patty had yet to even look for a job. At any other time in history, the idea of someone like me borrowing more than $400,000 would have seemed insane.

But this was unlike any other time in history.

I won't spoil the story, but it should be obvious the number don't work...

by Calculated Risk on 5/14/2009 03:53:00 PM

Stanford Law Professor Joseph Grundfest interviews Charlie Munger, vice chairman of Berkshire Hathaway: Legal Matters

Munger makes a number of interesting comments (I believe many of you will find the interview interesting). Here are a few excerpts ...

On accounting:

Grundfest: As we look at the current situation, how much of the responsibility would you lay at the feet of the accounting profession?

Munger: I would argue that a majority of the horrors we face would not have happened if the accounting profession developed and enforced better accounting. They are way too liberal in providing the kind of accounting the financial promoters want. They’ve sold out, and they do not even realize that they’ve sold out.

Grundfest: Would you give an example of a particular accounting practice you find problematic?

Munger: Take derivative trading with mark-to-market accounting, which degenerates into mark-to-model. Two firms make a big derivative trade and the accountants on both sides show a large profit from the same trade.

Grundfest: And they can’t both be right. But both of them are following the rules.

Munger: Yes, and nobody is even bothered by the folly. It violates the most elemental principles of common sense.

And on derivatives:

Grundfest: You and your partner, Warren Buffett, have for years warned about the dangers of the modern derivatives markets, particularly credit derivatives, and about interest rate swaps, currency swaps, and equity swaps.

Munger: Interest rate swaps have enormous dangers given their size and the accounting that has been allowed. But credit default derivatives took that danger to new levels of excess—from something that was already gross and wrong. In the ’20s we had the “bucket shop.” The term bucket shop was a term of derision, because it described a gambling parlor. The bucket shop didn’t buy any securities. It just enabled people to make bets against the house and the house furnished little statements of how the bets came out. It was like the off-track betting system.

Grundfest: Until the house lost its money and suddenly disappeared. Or the house made its money and suddenly disappeared.

Munger: That is right. Derivatives trading, with no central clearing, brought back the bucket shop, because you could make bets without having any interest in the basic security, and people did make such bets in the billions and billions of dollars. Some of the most admired people in finance — including Alan Greenspan — argued that derivatives trading, substituting for the old bucket shop, was a great contribution to modern economic civilization. There’s another word for this: bonkers. It is not a credit to academic economics that Greenspan’s view was so common.

There is much more.

by Calculated Risk on 5/14/2009 02:23:00 PM

Press Release: Homeowner Confidence Shrinks; Most Americans Now Believe Their Home's Value Has Declined (ht broward, Jonathan)

The following table gives an idea of the number of homeowners waiting for a market turnaround to sell. Since about 6% of owner occupied properties turnover per year, this is a substantial shadow inventory.

Click on table for larger image in new window.

On shadow inventory:

As for selling activity, it's clear a significant number of potential sellers are holding back due to the current market. When asked about future plans to sell, 31 percent of homeowners said they would be at least "somewhat likely" to put their homes on the market in the next 12 months if they saw signs of a real estate market turnaround.
...
"Also interesting is the information we have for the first time this quarter on the levels of 'shadow inventory' - homes that people would like to sell but that aren't currently on the market, and thus aren't captured in the official number of homes on the market. With almost a third of homeowners poised to jump into the market at the first sign of stabilization, this could create a steady stream of new inventory adding to already record-high inventory levels, thus keeping downward pressure on home prices." [said Dr. Stan Humphries, Zillow's vice president of data and analytics].

Here is the full report: Q1 2009 Homeowner Confidence Survey Results

by Calculated Risk on 5/14/2009 01:36:00 PM

From HotelNewsNow: Hotel industry enters 18th month of recession

Economic research firm e-forecasting.com in conjunction with Smith Travel Research announced that following a decline of 3.7 percent in March, HIP went down 1.1 percent in April. HIP, the Hotel Industry's Pulse index, is a composite indicator that gauges business activity in the U.S. hotel industry in real-time. The latest decrease brought the index to a reading of 84.2.
...
“With April’s reading of HIP, the hotel industry is creeping up to the weak performance of the industry during the recession in 1981-1982, which lasted 20 months. Even still, there is some promise in April’s reading as it appears the decline may have hit a bottom, looking at the six-month growth rate and monthly decline,” noted Evangelos Simos, chief economist of e-forecasting.com.

See article for graph of HPI.

Also from HotelNewsNow.com: STR reports US hotel performance for week ending 9 May 2009

In year-over-year measurements, the industry’s occupancy fell 14.0 percent to end the week at 53.6 percent. Average daily rate dropped 9.8 percent to finish the week at US$97.58. Revenue per available room for the week decreased 22.4 percent to finish at US$52.32.

Click on graph for larger image in new window.

This graph shows the YoY change in the occupancy rate (3 week trailing average).

The three week average is off 12.1% from the same period in 2008. The comparable week off 14.0%.

The average daily rate is down 9.8%, so RevPAR is off 22.4% from the same week last year.

Data Source: Smith Travel Research, Courtesy of HotelNewsNow.com

by Calculated Risk on 5/14/2009 12:44:00 PM

From Dow Jones: BankUnited Auction Extended As Thrift Scrambles For Capital

The auction to find a new buyer for struggling BankUnited Financial Corp. (BKUNA) has been extended until next week, according to a person familiar with the matter.

Bidders were originally asked to submit their pitches to the Federal Deposit Insurance Corporation by noon Thursday. However, that deadline has been extended to next Tuesday, the person said.

Pitches to the FDIC? Kind of says it all ...

Update from Bloomberg: BankUnited Bidders Said to Seek Receivership Before Purchase

Bidders for BankUnited Financial Corp. are asking federal regulators to put the company into receivership before selling its assets, a step that could wipe out shareholders, people familiar with the matter said.

Potential buyers, including a private-equity group led by former North Fork Bancorp Chief Executive Officer John Kanas, have expressed an interest in purchasing the Coral Gables, Florida-based lender out of receivership ... The bidding deadline was pushed to May 19 from today ...

by Calculated Risk on 5/14/2009 10:19:00 AM

Click on graph for larger image.

This graph shows the Mortgage Bankers Association Commercial/Multifamily Mortgage Originations index since 2001.

A couple of points:

Similar to residential, Fannie and Freddie are just about the only game in town. Conduit lending has essentially stopped for commercial real estate. Commercial bank and life insurance lending has slowed dramatically.

Lending is off across all property types, but especially for: Retail lending (off 90% from the peak originations), office lending (off 93% from the peak), and hotel lending (off 99% from the peak).

Here is the press release from the Mortgage Bankers Association (MBA): MBA Survey Shows Continued Slowdown of Commercial/Multifamily Mortgage Lending in First Quarter 2009

Commercial and multifamily mortgage loan originations continued to drop in the first quarter of 2009, according to the Mortgage Bankers Association’s (MBA) Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations. First quarter originations were 70 percent lower than during the same period last year and 26 percent lower than during the fourth quarter of 2008. The year-over-year decrease was seen across all investor groups and most property types.

“In the first quarter of 2009 we saw the effects of the continued recession coupled with little demand from borrowers and a constrained supply from lenders as a result of the credit crunch,” said Jamie Woodwell, Vice President of Commercial Real Estate Research at the Mortgage Bankers Association. ...

Decreases in total commercial/multifamily mortgage originations continued to be led by a drop in commercial mortgage-backed security (CMBS) conduit loans.

There are more details in the quarterly report.

by Calculated Risk on 5/14/2009 08:31:00 AM

The DOL reports on weekly unemployment insurance claims:

In the week ending May 9, the advance figure for seasonally adjusted initial claims was 637,000, an increase of 32,000 from the previous week's revised figure of 605,000. The 4-week moving average was 630,500, an increase of 6,000 from the previous week's revised average of 624,500.
...
The advance number for seasonally adjusted insured unemployment during the week ending May 2 was 6,560,000, an increase of 202,000 from the preceding week's revised level of 6,358,000. The 4-week moving average was 6,337,250, an increase of 128,750 from the preceding week's revised average of 6,208,500.

Click on graph for larger image in new window.

The first graph shows weekly claims and continued claims since 1971.

The four-week moving average is at 630,500, off 28,250 from the peak 5 weeks ago.

Continued claims are now at 6.56 million - an all time record.

The second graph shows the four-week average of initial unemployment claims and recessions.

Typically the four-week average peaks near the end of a recession.

The four-week average increased this week by 6,000, and is now 28,250 below the peak. There is a reasonable chance that claims have peaked for this cycle, but it is still too early to be sure, and if so, continued claims should peak soon.

The level of initial claims (over 630 thousand) is still very high, indicating significant weakness in the job market.

by Calculated Risk on 5/14/2009 12:11:00 AM

Here is a summary for Wednesday:

The Obama administration proposed new rules for derivatives, from the NY Times: Obama Urges Rules on Investments Tied to Crisis

The administration asked Congress to move quickly on legislation that would allow federal oversight of many kinds of exotic instruments, including credit-default swaps ... The Treasury secretary, Timothy F. Geithner, said the measure should require swaps and other types of derivatives to be traded on exchanges or clearinghouses and backed by capital reserves, much like the capital cushions that banks must set aside in case a borrower defaults on a loan. ...

The proposal will probably force many types of derivatives into the open, reducing the role of the so-called shadow banking system that has arisen around them.

Retail sales declined in April. No Green Shoots here.

The Manufacturing and Trade Inventories and Sales report showed the inventory correction has a ways to go.

There is a new research paper on Mortgage Equity Withdrawal (MEW) suggesting the high levels of MEW contributed to the low saving rate. Since the Home ATM is now closed, the saving rate will rise further - and that will keep pressure on the growth of personal consumption expenditures (PCE).

From CNBC: SEC Staff Recommends Charges Against Mozilo

[T]he SEC sent a "Wells" notice to Mozilo weeks ago alerting him of the planned charges, which included alleged violations of insider-trading laws, as well as failing to disclose material information to shareholders.

The U.S. futures are off slightly tonight:

CBOT mini-sized Dow

Futures from barchart.com

CME Globex Flash Quotes

And the Asian markets are mostly off 1% to 3%.

Best to all.

by Calculated Risk on 5/13/2009 09:29:00 PM

Here is a new paper on Mortgage Equity Withdrawal (MEW): House Prices, Home Equity-Based Borrowing, and the U.S. Household Leverage Crisis by Atif Mian and Amir Sufi (both University of Chicago Booth School of Business and NBER) (ht Jan Hatzius)

From the authors abstract (the entire paper is available at the link):

Using individual-level data on homeowner debt and defaults from 1997 to 2008, we show that borrowing against the increase in home equity by existing homeowners is responsible for a significant fraction of both the sharp rise in U.S. household leverage from 2002 to 2006 and the increase in defaults from 2006 to 2008. Employing land topology-based housing supply elasticity as an instrument for house price growth, we estimate that the average homeowner extracts 25 to 30 cents for every dollar increase in home equity. Money extracted from increased home equity is not used to purchase new real estate or pay down high credit card debt, which suggests that consumption is a likely use of borrowed funds. Home equity-based borrowing is stronger for younger households, households with low credit scores, and households with high initial credit card utilization rates. Homeowners in high house price appreciation areas experience a relative decline in default rates from 2002 to 2006 as they borrow heavily against their home equity, but experience very high default rates from 2006 to 2008. Our estimates suggest that home equity based borrowing is equal to 2.3% of GDP every year from 2002 to 2006, and accounts for over 20% of new defaults in the last two years.
emphasis added

A couple of key points:

"[W]e estimate that the average homeowner extracts 25 to 30 cents for every dollar increase in home equity."

"[T]hese findings lend support to the view that home equity-based borrowing is used for consumption."

And this brings us to the personal saving rate.

In an earlier post I argued that the saving rate declined into the early '90s because of demographic changes, however I expected the saving rate to start to rise as the boomers reached their mid-40s (in the late 1990s). Obviously this didn't happen.

I posited that the wealth effect from the twin bubbles - stock market and housing - had led the boomers into believing they had saved more than they actually had.

This research suggests that MEW played a significant role in suppressing the saving rate too. And since the Home ATM is now closed, this is more evidence that the saving rate will increase (probably back to 8% or so) - and keep pressure on the growth of personal consumption expenditures (PCE).


For background, here are couple of graphs:

Click on graph for large image.

The first graph shows the annual saving rate back to 1929.

Notice that the saving rate went negative during the Depression as household used savings to supplement income. And the saving rate rose to over 25% during WWII.

There is a long period of a rising saving rate (from after WWII to about 1974) and a long period of a declining saving rate (from the early '80s to 2008). (corrected text)

Some of the change in saving rate was related to demographics. As the large baby boom cohort entered the work force in the mid '70s, the saving rate declined (younger families usually save less). But, as I noted above, I expected the saving rate to start to increase in the last '90s.

And here are the Kennedy-Greenspan estimates (NSA - not seasonally adjusted) of home equity extraction through Q4 2008, provided by Jim Kennedy based on the mortgage system presented in "Estimates of Home Mortgage Originations, Repayments, and Debt On One-to-Four-Family Residences," Alan Greenspan and James Kennedy, Federal Reserve Board FEDS working paper no. 2005-41.

NOTE: Anyone who wants the Equity Extraction data, please see this post for a spreadsheet and how to credit Dr. Kennedy's work.

This graph shows what Dr. Kennedy calls "active MEW" (Mortgage Equity Withdrawal). This is defined as "Gross cash out" plus the change in the balance of "Home equity loans".

This measure is near zero ($7.2 billion for the quarter) and is an estimate of the impact of MEW on consumption. When people refinance with cash out or draw down HELOCs, they usually spend the money.