Housing is the Business Cycle

Connor Dougherty, a New York Times economics journalist, does a good job analyzing the role housing has played in past recessions and why it may not be so crucial in the next.  He writes that housing declines presaged all but two of the last eleven recessions.  

Housing starts are one of our best leading indicators.  Even in one of his two exceptions (the recessions of 1953-54 and 2001), housing starts did a credible job of predicting one, 1953-54, leaving only only 2001 as a real anomaly.  Starts led the 1953-54 recession by nine months and fell 11.3% peak to trough.  In 2001 housing starts peaked a month after the economy and led by a month at the trough.  Peak to trough they fell a mere 6.6%.

The "Greenspan put" did not save Dot.Com investors or IT workers, but did provide a soft landing for housing in 2001.   An Austrian might argue that simply made the ultimate housing bust worse six years later. 

Dougherty bases his anlysis on contributions to GDP from the the work of Edward Leamer.  The latter's prescient 2007 Jackson Hole address, "Housing is the Business Cycle," which emphasizes the importance of housing in recessions. 

The Making of the Big Short (the Movie That Is.)

Michael Lewis' book, The Big Short: Inside the Doomsday Machine is one of the best on the financial crisis.  No one writes about finance like Lewis, the journalist who started as a bond trader with Salomon Brothers.   His book chronicles the outsiders who bet against the housing bubble. It short be read with Gillian Tett's book, Fools Gold, which follows the tribe of geeks who invented the credit default swaps in the first place. My favorite moment in the book is when Paulson's analysts are at a Deutsche Bank conference.  They are baffled at why the bankers are so ready to sell them credit default swaps after he had been pulling teeth to buy them months earlier. 

Adam McKay directed the movie based on the book.  Here is a Wall Street Journal Cafe interview with him: 



Oddly enough, John Paulson, who made the biggest killing–the biggest short–is not in the movie.  Richard Thaler is.  He is the Ralph and Dorothy Keller Distinguished Service Professor of Behavioral Science and Economics at the University of Chicago Booth School of Business.  He presented a paper at the 1985 FMA meetings in New York which presented evidence against the efficient market hypothesis.  That was my first professional finance meeting and I had the pleasure of discussing the paper.  I sympathized with his difficulty at the time publishing such heresy.  Times change.  Now you can see he is at the pinnacle of the profession. Thomas Kuhn taught us that a scientific orthodoxy is finally finished only when the last member of that school dies.    

Santander Takes a Big Writedown on Its Spanish Real estate Loans

10/25/2012
Banco Santander said profit fell after it amassed provisions against real-estate losses in Spain and as economic activity stuttered in some Latin American markets. Dow Jones's Margot Patrick reports:

There You Go Again, Mr President!

The editors of Wall Street Journal wonder if Ginnie Mae is "The Next Fannie Mae?" Specifically they worry, "Ginnie Mae or the Government National Mortgage Association, which will soon join them as a trillion-dollar packager of subprime mortgages." They explain, "Ginnie’s mission is to bundle, guarantee and then sell mortgages insured by the Federal Housing Administration [the FHA], which is Uncle Sam’s home mortgage shop. Ginnie’s growth is a by-product of the FHA’s spectacular growth. The FHA now insures $560 billion of mortgages—quadruple the amount in 2006. Among the FHA, Ginnie, Fannie and Freddie, nearly nine of every 10 new mortgages in America now carry a federal taxpayer guarantee."

In August, 2008, I deplored the Financial Industrial Complex, the lobbyists and investment bankers that have Congress wrapped around their fingers, in "Fannie Mae and Freddie Mac: Look Past the Jargon, and You Find a $5 Billion Scandal." The federal government's takeover of Fannie and Freddie effectively transferred private sector and foreign government losses to the American taxpayer. Now the Administration is continuing that practice on what promises to be a grand scale using Ginnie Mae. The lobbyists, their congressional clients, and the administration are happily portraying this fiscal folly as "feeling the homeowners' pain" and "dealing with the foreclosure problem."

No doubt the administration's complicity in the renewed supply of dodgy debt will keep the Chinese happy (they have a huge exposure to American mortgage backed securities) and it indirectly bails out the Fed (have you looked at the Federal Reserve Bank of New York's balance sheet lately?) The Financial Industrial Complex, which you think would be hiding in disgrace, is riding high. I past a car yesterday, and it was not a Mercedes or an SUV, which had written on its window in soup: "Honk, if I am paying your mortgage."


Mark Twain once boasted, "We have the best Congress money can buy."

Housing Bubbles & Depressions

Vernon Smith and Steven Gjerstad (Smith a professor at Chapman University and the latter visiting) analyze U.S. housing bubbles and what they wrought in a Wall Street Journal opinion piece. Economist Smith won his Nobel prize for work in behavioral economics. When he started out, economists were able to reproduce bubbles in laboratories. Bubbles seemed so transparent that the economists thought they would never occur in "the real world."

So much for economists being Pollyannas!

Did the Fed Cause the Housing Bubble?

On Marrch, 26th, the Wall street Journal published an interesting symposium:

Did the Fed Cause the Housing Bubble?

My short answer? Yes!

Home loans in the US: the biggest racket since Al Capone?

Willem Buiter, in his Maverecon blog on the FT, has some rather nasty things to save about our fetish of protecting homeowners from foreclosures. Hmmm.

In "Home loans in the US: the biggest racket since Al Capone?" he asks: "What are the costs of foreclosure? Who bears them? Are the private costs smaller than the social costs?"

Professor Buiter is Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.

Is the Wealth Effect Oversold?

One reason economists are worried about falling housing prices is the wealth effect: that changes in the value of what households own affect their consumption spending. As house prices drop, household wealth falls, pulling consumption down.
Bill Wheaton, professor at the Massachusetts Institute of Technology, thinks the wealth effect is overdone. Certainly the loss of intermediate demand and employment from the 56% drop in homebuilding is not overdone.

Can Housing Go into a Recession Without the Economy Falling Too?

New home sales plunged 8.3 percent in August while the average price fell 7.5 percent. New home sales are 21.2 percent below last year. With home building down 19.1 percent from last year, this will only make a bad situation worse.

Will Housing Cause a Recession?

We can have a recession without housing starts plummeting: the recession of 2001 proved that. But can we have a large decline in housing starts without going into a recession?

The chart above is courtesy of the Federal Reserve Bank of St. Louis. Every time we have had a comparable decline in housing starts, the economy has gone into a recession. The lone apparent exception is 1966. And that exception is more apparent than real. The NBER's failure to call the cyclical episode in 1966 a "recession" was extraordinarily controversial and in my opinion a bad call. In 1966, industrial production fell sharply for five months, private domestic spending fell two consecutive quarters, the stock and bond markets took a bloodbath. Housing starts fell by a half.

In the current cyclical environment, housing starts are 41.9 percent below their cyclical peak. That puts the housing sector's current misery right up there with the typical postwar recession.

The odds against our avoiding a recession have shortened dramatically!