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New Estimates of the Housing Wealth Effect

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A new report from the NBER by Charles W. Calomiris, Stanley D. Longhofer, and William Miles shows that “on average, a single dollar increase in housing wealth raises consumption by between five and eight cents.”

If the value of a homeowner’s house rises by one dollar, how much will that homeowner increase spending on consumption? In The Housing Wealth Effect: The Crucial Roles of Demographics, Wealth Distribution, and Wealth Shares (NBER Working Paper No. 17740), authors Charles Calomiris, Stanley Longhofer, and William Miles determine that the impact of housing wealth on consumer spending depends crucially on the age and wealth distribution within states, as well as on the share of housing wealth relative to total wealth. In particular, they find that young people, who are more likely to be credit-constrained, and older homeowners, who are likely to be “trading down” on their housing stock, experience the largest housing wealth effects. Housing wealth effects also are higher in years when housing wealth shares represent a larger portion of overall wealth an d in years with higher poverty rates. Thus, there tends to be huge variation over time and across states in the size of housing wealth effects.

For this study, the researchers constructed a new annual dataset for each of the U.S. states for the period 1981-2009, taking into account the relative amount of state-level housing and securities wealth in any given year. They also considered differences in age distribution and poverty rates, both across states and over time, because housing wealth effects tend to be larger in state-years with high proportions of young and old people, and in state-years with higher poverty rates. In addition, they estimated holdings of corporate stock in each state by calculating aggregate U.S. stock wealth and multiplying by each state’s share of aggregate mutual fund holdings.

Calomiris, Longhofer, and Miles find that consumption responds positively to innovations in both housing wealth and securities wealth, but that housing wealth effects are significantly larger than stock wealth effects. They estimate that on average, a single dollar increase in housing wealth raises consumption by between five and eight cents. In contrast, the same dollar increase in the value of securities wealth raises consumption by less than two cents. Nonetheless, there is substantial variation across states and over time in both of these consumption responses to wealth changes, which are related to the age, poverty, and wealth characteristics of various states at particular points in time.

2010 Business Year in Review

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Care to take a guess at the top events affecting businesses in 2010? The struggling economy was voted the top business story of the year by U.S. newspaper editors surveyed by The Associated Press. The rest, as they say, is history.

1. Economy struggles: Climbing out of the deepest recession since the 1930s, the economy grows at a healthy rate in the January-March quarter. Still, the gain comes mainly from companies refilling stockpiles they had let shrink during the recession. The economy can’t sustain the pace. The lingering effects of the recession slow growth. The benefits of an $814 billion government stimulus program fade. Consumers cut spending in favor of building savings and slashing debt. Businesses hesitate to hire. Cities and states lay off workers. Growth slows through spring and summer. Unemployment stays chronically high. In May, the number of people unemployed for at least six months hits 6.8 million — a record 46 percent of all the unemployed. Pointing to the deficits, Congress resists backing more spending to stimulate the economy. The Federal Reserve seeks to fill the void by announcing it will buy $600 billion in Treasury bonds to try to further lower interest rates, lift stocks and coax consumers to spend. As the year closes, the economy makes broad gains. Factories produce more. Consumers — the backbone of the economy — return to the malls. Congress passes $858 billion in tax cuts and aid to the long-term unemployed. Yet more than 15 million Americans are still unemployed. Economists say a full economic recovery remains years away.

2. Gulf oil spill: An explosion at a rig used by BP kills 11 workers and sends crude oil gushing into the Gulf of Mexico. The spill devastates the fishing and tourism industries along the Gulf Coast and causes environmental damage that may last for decades. BP sets up a $20 billion fund to compensate fishermen, restaurateurs and others whose livelihoods were damaged. The oil giant still faces civil charges and a criminal investigation by the Justice Department and lawsuits from hundreds of individuals and businesses. BP’s stock market value shrinks by more than $100 billion after the April 20 disaster before bouncing about halfway back.

3. China’s rise: China passes Japan as the world’s second-biggest economy. The World Bank says it could surpass the United States by 2020. China’s gross domestic product is spread out over 1.3 billion people — amounting to about $3,600 per person. That compares with GDP in the U.S. of about $42,000 per person. In Japan, it’s about $38,000 per person. China’s thirst for raw materials and other products helps the rest of the world recover from the recession. Still, the U.S. and Europe complain that China gives its exporters an unfair competitive edge by keeping its currency artificially low.

4. Real estate crisis: Housing remains depressed despite super-low mortgage rates. The average rate on a 30-year fixed mortgage dips to 4.17 percent in November, the lowest in decades. But home sales and prices sink further. Nearly one in four homeowners owe more on their mortgages than their homes are worth, making it all but impossible for them to sell their home and buy another. An estimated 1 million households lose their homes to foreclosure, even though the pace slows after evidence that lenders mishandled foreclosure documents. Some did so by hiring “robo-signers” to sign paperwork without checking their accuracy.

5. Toyota’s recall: Toyota’s reputation for making high-quality cars is tarnished after the Japanese automaker recalls 10 million vehicles for sudden acceleration and other problems. Toyota faces hundreds of lawsuits alleging that some models can speed up suddenly, causing crashes, injuries and deaths. Toyota blames driver error, faulty floor mats and sticky accelerator pedals for the unintended acceleration. The uproar damages its business. Toyota’s U.S. sales rise just 0.2 percent through November in a year when the industry’s overall sales climb more than 11 percent.

6. GM’s comeback: General Motors stock begins trading again. It signals the rebirth of a corporate icon that fell into bankruptcy and required a $50 billion bailout from taxpayers. GM uses some proceeds from its November initial public offering to repay a portion of its bailout. (Washington still holds about a third of GM’s stock.) GM’s recovery helps rejuvenate the industry. Sales of cars and light trucks rise 11 percent through November compared with the same period in 2009. Shoppers who had put off replacing their old cars return to showrooms.

7. Financial overhaul: Congress passes the biggest rewrite of financial rules since the 1930s. The law targets the risky banking practices and lax oversight that led to the 2008 financial crisis. The law creates an agency to protect consumers from predatory loans and other abuses, empowers regulators to shut down big firms that threaten the entire system and shines more light into markets that have eluded oversight. Republican critics say the law goes too far, imposing burdensome rules that will restrict lending to consumers and small businesses.

8. European bailouts: Greece and Ireland require emergency bailouts, raising fears that debt problems will spread and destabilize global markets. European governments and the International Monetary Fund agree to a $145 billion rescue of Greece in May and a $90 billion bailout of Ireland in November. The bailouts require both countries to slash spending, triggering protests by workers. Investors fear that debt troubles will spread to Spain, Portugal and other countries, weaken the European Union and threaten the future of the euro as its common currency.

9. Facebook growth: Facebook tops the 500 million user mark. It expands its dominance of social media and further transforms how the world communicates. If it were a country, Facebook would be the world’s third-largest. Facebook tightens its privacy settings after criticism that personal information is being disseminated without users’ knowledge or permission. Founder Mark Zuckerberg is named Time magazine’s “Person of the Year” and is the subject of a high-profile movie about Facebook’s creation.

10. iPad mania: Apple Inc. unveils the iPad, bringing “tablet” computing into the mainstream and eroding laptop sales. Apple is expected to sell more than 13 million iPads this year. The iPads sell about twice as fast as iPhones did after their 2007 introduction. The price of Apple stock rockets more than 50 percent in 2010. Competitors scramble to try to catch up. They include the Dell Streak, BlackBerry PlayBook, the Samsung Galaxy Tag and HP Slate.

Commercial real estate indicator is positive

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Note:  This index is a leading indicator for new Commercial Real Estate (CRE) investment.

From the American Institute of Architects: Firm Billings Rebound in November

At 52.0, the AIA’s Architecture Billings Index (ABI) recorded a three point gain from the previous month, and reached its strongest level since December 2007. With ABI scores above the 50 level in two of the past three months, the prospects of a sustainable recovery in design activity are enhanced.

This graph shows the Architecture Billings Index since 1996. The index showed expansion in November (above 50) and this is the highest level since December 2007.

Note:  Nonresidential construction includes commercial and industrial facilities like hotels and office buildings, as well as schools, hospitals and other institutions.

According to the AIA, there is an “approximate nine to twelve month lag time between architecture billings and construction spending” on non-residential construction. So this indicator suggests the drag from CRE investment will end next summer. This fits with other recent stories about a pickup in design activity.

How Texas Avoided the Real Estate Bubble: Market-Oriented Land Use Policies

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Interesting post by Mark Perry today (including graph below) regarding the article How Texas Avoided the Great Recession:

“One reason that Texas did so well is that it fully escaped the “housing bubble” that did so much damage in California, Florida, Arizona, Nevada and other states (see chart above). One key factor was the state’s liberal, market oriented land use policies. This served to help keep the price of land low while profligate lending increased demand. More importantly, still sufficient new housing was built, and affordably. By contrast, places with highly restrictive land use policies (California, Florida and other places, saw prices rise to unprecedented heights), making it impossible for builders to supply sufficient new housing at affordable prices.

Speculation is often blamed as having contributed to the higher house prices that developed in California and Florida. This is correct. Moreover, with some of the strongest demand in the United States, Texas would seem to have been a candidate for rampant speculation. After all, it happened back in the 1970s when a huge oversupply of housing, industrial, retail and office space collapsed in the face of falling energy prices.

Yet the speculators were not drawn to the metropolitan areas of Texas. This is because speculators or “flippers” are not drawn by plenty, but by perceived scarcity. In housing, a sure road to scarcity is to limit the supply of buildable land by outlawing development on much that might otherwise be available.

However, the speculators did not miss California and Florida. Nor did they miss Las Vegas or Phoenix, where the price of land for new housing rose between five and 10 times as the housing bubble developed. Despite their near limitless expanse of land, much of it was off limits to building, and the exorbitant price increases were thus to be expected.”

MP: The graph below shows that Texas never had a real estate bubble like those in California, Florida, Arizona or Texas. Consequently, Texas never had the real estate crash like in the other states. This article presents an interesting perspective about how restrictive land use policies contributed to the real estate bubbles around the country, and how Texas escaped the Great Recession due to more liberal land use policies.

houseprices

More signs of mixed, but continuing recovery

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Among the noteworthy news of the week, several  examples of the continuing economic recovery include:

  • Home Depot, the largest U.S. home-improvement retailer, is adding store jobs for the first time in four years in anticipation of a rebound in sales.
  • Carload freight traffic on U.S. railroads is hit its highest level since November 2008 during the week ended March 27, 2010.
  • The ISM Business Activity Index for non-manufacturing industries has now been in expansion (index > 50) for seven out of the last eight months, and for four straight months, both for the first time in almost two years. The last time the Business Activity Index was at 60 or higher was April 2006, almost four years ago.
  • Manufacturing employment has increased for the last three months, the first time in four years of three consecutive monthly increases.
  • The number of temporary help workers increased in March by 40,200 to 2,037,000 employees, the highest level since December 2008.
  • U.S. employers created jobs at the fastest pace in three years in March, but nearly one-third came from temporary hiring for the Census, indicating the labor market has still some way to go to recover.
  • GDP has seen a recent boost due to the slowing of inventory contraction, but a real build in inventories will have an even larger impact on future GDP figures and hiring.
  • The Ten Year treasury yield hit 4.0% this morning for the first time since Oct 2008. Mortgage rates are moving up too and that probably means that refinance activity will decline sharply.
  • Usually housing starts and residential construction employment lead the economy out of a recession, but not this time because of the huge overhang of existing housing units.
  • The recently announced plans for mortgage modification probably won’t help the housing market. What will? Population growth and an improving job market.

Existing home sales take off

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From the September existing home sales report:

  • Existing home sales jumped 9.4% to a seasonally adjusted annual rate of 5.57 million units from 5.09 million in August. That was the highest since July 2007.
  • Single-family home sales gained 9.4%, while condo and cooperative sales rose 9.7%. By region, sales climbed across the board. They were up 4.4% in the Northeast, 9% in the South, 9.6% in the Midwest, and 13% in the West.
  • The raw number of homes for sale dropped 7.5% to 3.63 million units from 3.924 million in August. Supply was down 15% from a year earlier. The months supply at current sales pace indicator of inventory dropped to 7.8 from 9.3. Single family inventory dropped to 7.6 from 9, while condo inventory fell to 11 from 12.1.
  • The median price of an existing home fell 1.4% to $174,900 from $177,300 in August, down 8.5% from $191,400 a year ago.

Of course, there are logical reasons for the increase. Soon the tax credit will expire, and that combined with stabilization in the broader economy and cheap home prices drove sales to the highest level since 2007. The overall supply of used homes for sale is also steadily declining, an encouraging trend considering that new home inventory has already dropped steadily. Of course, there is some concern about the lag effect. Clearly, some buyers purchased a home this summer because of the tax credit. Unless that credit is extended or expanded, we’ll see a slight reversal in the coming couple of months. I don’t think it derails the overall recovery, but it will be noticeable.

Housing highlights

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The latest figures on home construction just came out. Here’s a rundown:

  • Total housing starts came in at 582,000 in June, up 3.6% from an upwardly revised 562,000 in May. Permitting activity also climbed — 8.7% to 563,000 from 518,000 a month earlier. Starts haven’t been higher than this since November..
  • By property type, single family construction activity rose 14.4%, while multifamily construction dropped 25.8%. Single family permits rose 5.9%, while multifamily permits rose 18.8%. The increase in single family building was the biggest since December 2004.
  • Regionally, starts rose 28.6% in the Northeast and 33.3% in the Midwest. Starts fell 1.4% in the South and 14.8% in the West. Permitting activity was up in all four regions, with the South leading the way at 13.9% and the West showing the weakest growth at 1.9%.

For some time, the housing market has been showing signs of stabilization. Not a robust recovery, but an end to the “cliff diving” we saw in 2007 and 2008. This phase will be marked by ongoing price declines in many locales, albeit more gradual ones. We will also see a gradual stabilization in sales rates … a gradual decline in the level of inventory for sale … and a gradual bottoming out of construction activity. Today’s starts and permitting figures fit with this projection, as did yesterday’s NAHB report on builder optimism.

Again, though, the word to emphasize is “gradual.” The new home industry has done a good job of reducing supply — with inventory for sale now in line with the long-term average. But the existing home market is still vastly oversupplied, and we continue to be inundated with an influx of distressed and foreclosed properties. That means anyone hoping for a robust “V”-shaped recovery is likely to be disappointed.

Home sales gaining slightly

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The existing home sales report for May just came out. Here’s what the figures showed:

  • Existing home sales gained 2.4% to a seasonally adjusted annual rate of 4.77 million units from 4.66 million in April. That was slightly below forecasts for a reading of 4.82 million and down 3.6% from 4.95 million a year earlier.
  • Single-family sales climbed 1.9%, while condo and cooperative sales rose 6.1%. Regionally, sales were mixed. They rose 3.9% in the Northeast and 9% in the Midwest. But transaction volume was unchanged in the South and down 0.9% in the West.
  • The raw number of homes for sale fell 3.5% to 3.798 million units from 3.937 million in April. That was also down 15.3% from a year earlier. The months supply at current sales pace indicator of inventory dropped to 9.6 from 10.1, with single family inventory falling to 9 from 9.5 and condo inventory slipping to 15 from 15.4.
  • The median price of an existing home rose 3.8% to $173,000 from $166,600 in April. That was down 16.8% from $207,900 in the year-ago period.

We saw another month of modest improvement in the housing sector in May. Existing home sales rose, led by the Midwest region. Sales were particularly strong in the condo sector, while the supply of homes on the market dipped. The biggest fly in the ointment continues to be pricing. It remains weak, with yet another double-digit decline from year-earlier levels showing up in the data.

Stepping back for a moment and looking at the big picture, it’s clear that the housing sector is no longer in freefall. But neither is it rebounding strongly. We’re seeing modest declines in inventory, modest improvement in sales, and some tentative signs of stabilization in pricing. But that’s it. And that should come as no surprise. We just experienced the longest, largest housing bubble in U.S. history. As a result, the recovery process will be a long, drawn-out affair.

Another thing to keep an eye on: Mortgage rates. They didn’t begin to rise significantly until late May. Since the existing home sales figures are based on contract closings, rather than contract signings, the impact of higher rates wasn’t captured in this report. We’ll likely see housing demand trail off as we head deeper into the summer unless financing costs ease back.

WASHINGTON (Dow Jones) — Existing-home sales improved again in May, but falling prices and bloated supply promise to make a housing sector recovery slow.

From Mark Perry: That’s one way to look at it. Here are some alternative views:

1. The April to May increases in median home prices (3.84%) and mean home prices (3.26%) were the largest monthly price increases in more than a year (data here).

2. The monthly May increase in both median home prices (3.84%) and homes sold (2.36%) was only the second time in at least a year that both prices and unit sales increased in the same month.

3. The back-to-back increase in home sales in both April and May is the first time in at least a year of two consecutive monthly increases.

4. The most recent two-month increase in sales of 4.84% is the largest since April 2004 (source).

5. The 9.6 months supply of inventory in May is below last year’s May level of 10.9 months by more than five weeks, and is at the second-lowest level in the last year.

According to Brian Wesbury and Bob Stein:
The data today are consistent with our outlook that the economy is recovering from a panic.

Home sales, building activity, and the rate of decline in home prices all seem to be bottoming or have already formed a bottom. In fact, the level of existing home sales in May was the highest since October 2008.

The new home sales figures for May were also released this morning. Here’s a recap …

  • New home sales dipped 0.6% to a seasonally adjusted annual rate of 342,000 from 344,000 in April. The numbers are a disappointment, considering economists were expecting sales of 360,000. Results for the past few months were also downwardly revised by 32,000 units.
  • Regionally, sales jumped 28.6% in the Northeast and 18.6% in the Midwest. They inched up 1.3% in the west, but fell 8.5% in the South, the nation’s largest new home market (184,000 units sold at a seasonally adjusted annual rate vs. 80,000 in the West … 51,000 in the Midwest … and 27,000 in the Northeast).
  • The raw number of homes for sale continued to decline, falling to 292,000 from 299,000 in April. That’s the lowest reading going back to March 2001. The months supply at current sales pace indicator of inventory dipped to 10.2 from 10.4.
  • The median price of a new home rose 4.2% last month to $221,600 from $212,600 in April. On a year-over-year basis, prices were down 3.4%, the best YOY showing since December.

Digging into the May new home sales figures, you see that sales rose in three out of four regions of the country. But they declined sharply in the South, the country’s biggest new home market, so overall sales were a disappointment. On the other hand, for-sale inventory continues to decline — a definite plus. And the year-over-year rate of home price depreciation eased markedly.

Overall, the story remains the same: The housing market is gradually stabilizing, but showing no sign whatsoever of a vigorous rebound. The biggest issues going forward remain unemployment and interest rates. The supply of new homes for sale is back in line with the long-term historical average. But if potential buyers are losing their jobs, and financing costs are going up, builders are going to have a tough time moving product.