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Housing Leads the Economy Up AND Down

Posted By Barry Ritholtz On June 12, 2006 @ 6:49 am In Consumer Spending,Economy,Investing,Real Estate | Comments Disabled

Two weeks ago, we looked at a few Housing related charts, and discussed what they meant for the overall real estate market [1].

This morning, we look at three four charts that I believe are telling about both the past 3 years, as well as the next few.

First up is a longer term glance of mortgage rates:

30 Year Fixed Mortgage; 1970-2006
click for larger chart

Mortg_max_800_480 [2]

Source:   Federal Reserve Bank of St. Louis [3]

Pretty astounding first how low rates were driven by Easy Al, and second, all the sturm und drung over what is essentially a rise to historically modest levels. Note thta during most of the 1980s, when Reagan was Prez and the great Bull market in histroy got underway, mortgage rates were above 10% — but falling — for nearly the entire decade.

This chart suggests (at least to me) how feeble the economy has been, and reveals that it was very dependent upon Real Estate as an engine of growth.

The second chart up uses the University of Michigan sentiment survey of Housing, as a leading forecastor for GDP:

Housing Sentiment versus GDP; 1988-2006
click for larger chart
Housing_leading_gdp_1 [4]

How does Housing sentiment forecast GDP ?

"The University of Michigan regularly surveys consumers on whether or not it is a “good time” to purchase a home. This survey attempts to gauge whether or not consumers feel (a) housing is a good investment, (b) housing prices are low and there are good deals available, (c) interest rates are low, and (d) times are good. The index has ranged from 53 (low) to 87 (high) over the past eighteen years and is currently at 57 indicating that consumers do not feel it is a “good time” to buy a house. This is likely due to high home prices and rising interest rates as well as a growing belief that housing is unlikely to be a good investment going forward. Interestingly, the University of Michigan survey on housing tends to lead U.S. economic growth by a few quarters (chart above). The sharp deterioration in this survey from 75 early last year to 57 now suggests the U.S. economy should start to slow soon."

Let’s put this into more concrete terms than "GDP."  How about Consumer Spending ?


Consumer Spending versus Housing Index; 1986-2006

click for larger chart
Weak_spending [5]


Add these three charts together, and we see an anemic, post crash, real estate dependent economy, so feeble that a rise in Mortgage rates from 46 year lows to 35-40 year lows as fatal.

I’ve said this so many times, please forgive me for repeating myself: As goes real estate, so goes the US economy.


UPDATE June 12, 2006 11:30am 

One last chart: 

Gains_from_re [6]

Source: Northern Trust [7]

This shows how dependent Households have become on Real Estate for their net worth improvement (I’d like to find out exactly how much these numbers deviate from historical norms).

UPDATE: June 14, 2006 6:48 am

I’ve been meaning to reference this informative post from the Housing Bubble [8] blog:

Housing Market ‘Jinxed’ By ‘The Obvious Reason’ [9]


U.S. Credit Perspectives [10]
Mark Kiesel
PIMCO, June 2006

Net worth of Households and Real Estate [7]
Asha Banglore
Northern Trust, June 08, 2006 

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2006/06/housing-leads-the-economy-up-and-down/

URLs in this post:

[1] overall real estate market: http://bigpicture.typepad.com/comments/2006/05/real_estate_dat.html

[2] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/mortg_max_800_480.png

[3] Federal Reserve Bank of St. Louis: http://research.stlouisfed.org/fred2/series/MORTG/114/Max?cs=Large&crb=on&cosd=1971-04-01&coed=2006-05-01

[4] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/housing_leading_gdp_1.png

[5] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/weak_spending.png

[6] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/gains_from_re.png

[7] Northern Trust: http://web-xp2a-pws.ntrs.com/content//media/attachment/data/econ_research/0606/document/dd060806.pdf

[8] Housing Bubble: http://thehousingbubbleblog.com/

[9] Housing Market ‘Jinxed’ By ‘The Obvious Reason’: http://thehousingbubbleblog.com/?p=848

[10] U.S. Credit Perspectives: http://www.pimco.com/LeftNav/Regional+Market+Commentary/Global+Credit+Perspectives/2006/Kiesel_For_Sale_06+2005.htm

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