Yesterday morning, we discussed a few fun Fannie Mae (FNM) factoids from their recent quarter and conference call.
Part of that discussion noted that Fannie’s CEO sees 7-9% decrease in home prices in 2008 (previous estimate: 5 – 7%).
There’s one small rub to that: As Kevin Depew notes at MV, Fannie Mae does not use foreclosed properties in its price index. Thus, FNM significantly understates home price declines.
Let’s go to Kevin:
"The fine print at the bottom of the slide is important because it speaks to the use of the case-Shiller index versus Fannie Mae’s own index upon which their price projections are based. According to Fannie Mae, because the Case-Shiller index is value-weighted, it places greater weight on higher cost metropolitan areas. Fair enough.
Using the Case-Shiller index methodology, Fannie Mae says its projections would move from a 7-9% home price decline for 2008 to 10-13%, and from 15-19% peak-to-trough to 20-25%. There’s just one catch with those projections increases. They strip out the impact of foreclosure sales.
As Fannie Mae observes, "Foreclosure sales tend to depress the S&P/Case Shiller index relative to the Fannie Mae index."
Another awesome new indicator: In addition to Inflation ex-Inflation, we now can add Home prices ex-foreclosures.
Fannie Mae Says: "Not So Fast, Mr. Smarty-Pants Case-Shiller Index Lover"
Minyanville, May 06, 2008 12:00 pm
Click for Video
Federal Reserve Chairman Ben S.
Bernanke, seeking to end the worst housing slump in 25 years,
urged the government and mortgage lenders to intensify their
efforts to avoid home foreclosures.
Bernanke, in a speech in New York today, also reiterated his
call for lenders to forgive portions of mortgages for some
struggling homeowners. He said proposals should be “tightly
targeted” at borrowers at greatest risk of losing their
properties, and avoid providing an incentive for defaults.
The Fed chief also backed the idea of having the Federal
Housing Administration refinance troubled mortgages, a concept
included in Democratic legislation in Congress, without
explicitly endorsing the bill. His remarks indicate a gap with
the Bush administration, which has preferred to rely on industry-
"Realistic public- and private-sector policies must take
into account the fact that traditional foreclosure-avoidance
strategies may not always work well in the current environment,”
Bernanke said in remarks to a Columbia Business School dinner.
Bernanke Urges Action to Avert Further Foreclosures
Scott Lanman and Alison Vekshin
Bloomberg, May 5 2008
After the Advanced GDP came out last week at +0.6%, I was surprised to read a variety of commentary about the economy that was factually incorrect. Several pundits and economists had concluded that since GDP was positive, we therefore could not possibly be in a recession.
The meme "Positive GDP = No Recession!" is demonstrably false, as we show in the proceeding pages.
It took only a brief look at historical GDP data to unequivocally prove this to be the case. We used publicly available GDP data from the Bureau of Economic Analysis and from the Federal Reserve Bank of Philadelphia. The dating of recessions was as per the official tables kept by the Business Cycle Dating Committee of the National Bureau of Economic
The data so overwhelmingly proves that Recession can and often do begin with positive GDP, that one suspects the people making opposite arguments must never have actually reviewed any GDP data beyond the most recent headline. I have no other explanation for why so many people got this so wrong.
Before we go to the actual data, briefly consider just what a recession is. As formally defined by the NBER, it is the "Peak to Trough decrease in business activity" during an economic cycle. The peak marks the end of the expansion phase and the beginning of a recession. During the other phase of the cycle, between trough and peak, the economy is in an expansion. This is described as the economy’s "normal state."
Given that the NBER dates the beginning of a Recession from the economic peak in business activity, one would expect that GDP during that quarter would be mostly positive — not negative. And in fact, that is what the historical data often shows.
1. Many Recessions begin with a Positive GDP
Let’s look at a the beginning of several post-WWII recessions:
• The 1980 contraction was officially dated from January 1980 through July 1980. GDP for the first quarter of 1980 was +1.09%. This contraction lasted only 6 months.
Note the 1980-82 period can be called a "double dip recession, with the next contraction beginning exactly 12 months later — July 1981 — and running another 16 months to November 1982.
• The deeper 1973 recession ran for 16 months, from November 1973 – March 1975. That first quarter GDP was a positive +1.34%.
• The 1957 recession began with a GDP reading of +1.78%. It ended 8 months later in April 1958.
• GDP in the fourth quarter of 1948 was +3.61%. That 11 month recession was dated from November 1948 to October 1949.
• Lastly, its also worth noting that the 1960 and 1969 recessions began almost flat — they had a marginally negative GDP number of -0.05% and -0.33% respectively.
Hence, the historical data shows that recessions do not always begin with negative GDP numbers,. Of the 11 post WWII recessions, 4 started with positive numbers, two were flattish.
Leading Quarter of 6 Post WWII Recessions, GDP
Great piece by Martin Feldstein in the FT: Misleading growth statistics give false comfort
"Harvard University economist Martin Feldstein, a member of the committee that charts the American business cycle, said the U.S. economy is “sliding into a recession.”
"This is a weakening economy,” Feldstein, president of the National Bureau of Economic Research, said in a Bloomberg Television interview in New York. “If you compare where the economy is now, with where it began at the beginning of the year, just about every indicator is down.”
The comments by Feldstein, a Republican, go farther than anyone in the Bush administration has gone in publicly characterizing the severity of the U.S. slowdown. Treasury Secretary Henry Paulson in an interview last week said the economy is “still growing, albeit modestly.”
Misleading growth statistics give false comfort
FT, May 7 2008 18:54
Feldstein Says U.S. Economy `Sliding’ Into Recession
Anthony Massucci and Kathleen Hays
Bloomberg, May 6 2008