July 23, 2002
From the desk of Jane Galt:This is interesting. Today I
This is interesting. Today I was reading a US News article on the collapse of the bubble, in which the author claimed that the only thing saving us from worse malaise was the rising housing market -- but that's okay, because the incredible rises in housing prices are perfectly sound. A bell went off in my head -- doesn't this sound a lot like arguments I heard in 1998-99 for why Yahoo was really worth $200 a share? -- which was not helped by the incredibly thin reasoning behind the authors' assertion, which basically boiled down to "You know, tight zoning restrictions make housing worth more". You out there in Kansas with the house that's appreciated 50% in 4 years -- don't worry. You're just like that Dutch guy who bought Manhattan for $24.
And then I find that the chief economist for Morgan Stanley has been saying pretty much the same thing, except, you know, smarter.
By any standard, this is an aging housing cycle. For starters, it is the longest upswing of new home construction of the post-World War II era. It’s now in its eleventh year, more than double the length of the typical upleg of a homebuilding cycle. Yet the latest numbers on the supply side of the housing market are starting to look a bit toppy. As of June 2002, total housing starts are off about 6.5% from their February 2002 high. However, they have a long way to go on the downside if this is indeed the turning point. At an annualized rate of 1.7 million units in June, housing starts remain 10% above the long-term average (1.5 million units from 1959 to date) and more than double their 1991 lows. Even so, the demand side -- as gauged by trends in home sales -- remains firm. Since early 1995, sales of new and existing homes combined have risen by 36%, well in excess of the 27% cumulative rise in real GDP over the same period. At the same time, house-price appreciation is now beginning to edge off -- a classic end-of-cycle early warning sign. House-price appreciation moderated to a 6% YoY rate in early 2002; while that’s a discernible slowing from the heady 9.3% peak rate of price appreciation in 1Q01, it is still a relatively vigorous increase in an otherwise low-inflation climate.A downturn in the housing cycle could prove to be a formidable problem for the American consumer. That’s because individuals have become overly reliant on property wealth. Currently (1Q02), the value of household real estate assets stands at 159% of disposable personal income; while that’s down slightly from the record 162% in late 2001, it’s still equal to the prior peak hit during the housing bubble of the late 1980s. Moreover, since the popping of the equity bubble, there has been an important shift in the mix of household sector wealth. At Nasdaq 5000 (1Q00), household equity holdings of $9.4 trillion were nearly double the net equity of $5.6 trillion in residential real estate; by contrast, only two years later (1Q02), household equity holdings had fallen by nearly 40%, to $5.7 trillion, whereas net property wealth increased by 20%, to $6.7 trillion. Once again, the home is the average American’s most important asset.
There's some pretty good evidence that the stock market was effecting the real economy in 2000 through the wealth effect. The wealth effect is the tendency of consumer demand to increase when they perceive themselves to be richer -- as when, for example, their 401(k) increases by 50%, and they decide that since they're going to be able to retire rich at 50, they might as well take out the plastic and spend some of that money right now. This helps to explain the massive increase in consumer debt in the last half of the 90's.
Well, even after the bubble burst, housing prices continued to rise. This seems to have mitigated the bursting of the wealth effect bubble (as did the fact that investors still don't seem to realize that 10% real returns year-on-year aren't coming back); people's 401(k)'s were going down, but they were able to tell themselves "Well, there's always the house." It also allowed people to borrow in order to continue the standard of living they'd learned to enjoy back when we were all going to be millionaires any day now: home equity loans, bigger mortgages, even credit card debt fueled by the knowlege that you could always consolidate.
What Roach is saying is that this is the last piling standing in the flood -- and it's about to come down. So it may be time to get out on the roof and holler for help.
Posted by Jane Galt at July 23, 2002 8:02 PM | TrackBack | Technorati inbound links"); ?>