Great piece by Zero Hedge. The swaps that Greece has come under fire for were more widely used than I realized.
Full disclosure: I'm long the dollar. This piece is yet another reason to be. I call that my "in the land of the blind, the one eyed man is king" strategy.
Sunday, February 28, 2010
Thursday, February 25, 2010
Manhattan Rents 2002 to January 2010
I have been keeping tabs on the Manhattan rental market with the help of data culled from Citi-Habitats's market reports. I excluded the 3+ bedroom series because most of the volume is in the smaller sizes and the graph is just easier to read without it.
Some notes about the data:
1. It doesn't include the effect of incentives unless they are factored in the base rent. Adding this effect in would add an additional decline when those incentives started appearing en masse.
2. The data comes from actual rented apartments. This is why data from CH is vastly preferable to data from TREGNY, which (inexplicably) uses asking prices.
3. The series was annual from 2002-2006, has data for Q3 and Q4 2007 (none for Q1 and Q2), and monthly thereafter.
4. The data that goes into this average changed slightly between 2006 and 2007. The LES, Harlem, Washington Heights, and Morningside Heights were added into the index. This might account for the decreases between 2006 and 2007. I will post some neighborhood-specific graphs (they are much more volatile) later on, which won't have this issue.
My read is that we are around 2003 prices.
Average 2002 Jan2010
Some notes about the data:
1. It doesn't include the effect of incentives unless they are factored in the base rent. Adding this effect in would add an additional decline when those incentives started appearing en masse.
2. The data comes from actual rented apartments. This is why data from CH is vastly preferable to data from TREGNY, which (inexplicably) uses asking prices.
3. The series was annual from 2002-2006, has data for Q3 and Q4 2007 (none for Q1 and Q2), and monthly thereafter.
4. The data that goes into this average changed slightly between 2006 and 2007. The LES, Harlem, Washington Heights, and Morningside Heights were added into the index. This might account for the decreases between 2006 and 2007. I will post some neighborhood-specific graphs (they are much more volatile) later on, which won't have this issue.
My read is that we are around 2003 prices.
Average 2002 Jan2010
Wednesday, February 24, 2010
On Japan's Sovereign Debt Nightmare
Yikes
Brutal new home sales numbers and MBA purchase application numbers. The price indices (Case-Shiller, Corelogic) are going to get smoked in the January-May timeframe. I hope Congress doesn't take this as a reason to throw more money at the housing market, but they probably will. The way I see it, this is just more evidence of the futility of the government's attempts prop up house prices. If house prices drop, we will get out of this mess faster.
This data now gives us reason to believe that residential investment as a percentage of GDP might not have bottomed out yet, which would indicate that unemployment hasn't peaked.
This data now gives us reason to believe that residential investment as a percentage of GDP might not have bottomed out yet, which would indicate that unemployment hasn't peaked.
The First Step to Recovery..
On the topic of GSE reform, Rep. Scott Garrett has proposed a change to the policy of leaving GSE costs out of the budget. The President's budget didn't include the cost of the GSEs even though the government has explicitly guaranteed their debt. This guarantee means that the costs are going to be paid by the taxpayers; they need to be included in the budget. It's a simple change, the CBO has advocated for this since before the guarantee was made explicit, and there isn't any reasonable justification for the current treatment. Somehow the Democrats aren't on board with this yet, which is just embarrassing. I see no reason for the existence of the GSEs, and the first step to getting rid of them is coming to terms with their real costs to taxpayers.
Over the course of the next few years, the US is going to have to come to terms with the true costs of the life it is living. The federal budget will shrink eventually; state and municipal budgets are already in disrepair. Unfunded liabilities like Social Security and Medicare as well as trillions in private pensions will be forced to reduce entitlements. It's not going to be easy, but the earlier we get off this unsustainable path the better off we will be in the long run.
Over the course of the next few years, the US is going to have to come to terms with the true costs of the life it is living. The federal budget will shrink eventually; state and municipal budgets are already in disrepair. Unfunded liabilities like Social Security and Medicare as well as trillions in private pensions will be forced to reduce entitlements. It's not going to be easy, but the earlier we get off this unsustainable path the better off we will be in the long run.
Tuesday, February 23, 2010
Fighting the Good Fight
Great piece on Sheila Bair by the New Yorker. To this day I am shocked that Bush appointed her to head the FDIC. It's proving to be one of his best moves.
Friday, February 19, 2010
Residential Investment and Unemployment
I thought it might be worth taking a look at residential investment and unemployment over a longer period. I'm surprised at how tight the (inverse, lagged) relationship turned out to be. Every time residential investment took a nosedive, unemployment shot up quickly thereafter. Every time residential investment increased rapidly, unemployment dropped precipitously.
Here's the chart:
RI % GDP and Unemployment 1970-2009
Here are the peaks and valleys and the lag between them:
Peaks Valleys
I should note that prior to 1970, the relationship wasn't quite the mirror image you are seeing here. However, I think 40 years worth of data of this quality is sufficient to make the conclusions I am making. We shouldn't expect a dramatic drop in unemployment until we see a dramatic rise in residential investment.
Here's the chart:
RI % GDP and Unemployment 1970-2009
Here are the peaks and valleys and the lag between them:
Peaks Valleys
I should note that prior to 1970, the relationship wasn't quite the mirror image you are seeing here. However, I think 40 years worth of data of this quality is sufficient to make the conclusions I am making. We shouldn't expect a dramatic drop in unemployment until we see a dramatic rise in residential investment.
Some Housing Numbers
10% of prime loans and 15% of all mortgage loans are delinquent or in foreclosure. Stunning.
via Calculated Risk
via Calculated Risk
Wednesday, February 17, 2010
Recommended
Chicken/Egg Cont.
More on residential investment. This has been a great leading indicator of the current recession, and doesn't portend any recovery in the near future. Once we see improvement in this metric, which won't happen until we have worked through the excess inventory on the market, we can finally expect job numbers to improve. Below is residential investment as a percentage of GDP over the past decade.
RI % GDP
It appears that the typical percentage was around 4.5% before the bubble, rose to 6.2% at the peak, and has dropped to around 2.5%. We have lost around 2% of GDP directly and perhaps significantly more assuming a reasonable multiplier effect.
For more on the impact of residential investment on the economy, see Edward Leamer's 2008 paper Housing IS the Business Cycle, which expanded upon RK Green's 1997 paper on the same topic entitled Follow the Leader. This work should be far more popular given its clear evidence of residential investment's enormous impact on the American economy. Considering what I was taught in undergrad macroeconomics a few years ago, it seems that the field hasn't fully assimilated this work.
RI % GDP
It appears that the typical percentage was around 4.5% before the bubble, rose to 6.2% at the peak, and has dropped to around 2.5%. We have lost around 2% of GDP directly and perhaps significantly more assuming a reasonable multiplier effect.
For more on the impact of residential investment on the economy, see Edward Leamer's 2008 paper Housing IS the Business Cycle, which expanded upon RK Green's 1997 paper on the same topic entitled Follow the Leader. This work should be far more popular given its clear evidence of residential investment's enormous impact on the American economy. Considering what I was taught in undergrad macroeconomics a few years ago, it seems that the field hasn't fully assimilated this work.
Chicken/Egg
From Free Exchange:
As Mr Glaeser notes, slow household growth puts off housing market recovery, which prolongs the period during which residential investment and construction aren't contributing very much to output. And that's true. But I think it's also probably worth recognising this as a source of shadow demand. Shadow housing supply, recall, refers to housing units held by banks and homeowners who'd like to sell their properties but who are waiting for better market conditions. It is supposed that any brief uptick in housing could quickly lead to renewed decline as shadow supply hits the market.
But it's also likely that there is shadow demand in the system. I suspect that as economic conditions improve, twentysomethings living at home will quickly look to move out and start their own households. This, in turn, will support housing demand, housing prices, and housing construction, buoying the initial uptick.
To put this another way, everything comes back to unemployment. If you get steady job growth, many housing concerns (though not all) will begin to take care of themselves. Unfortunately, America has still had only one month of payroll growth since the onset of recession.
Free Exchange has it backwards. Calculated Risk has referred to research showing that recoveries (i.e. job growth) are generally prompted by upturns in residential investment. This rebound in residential investment can't happen until the massive inventory overhang is eliminated. At the current rate of turnover in the housing market, we shouldn't expect this to happen in the near future; S&P estimated today that it will take 3 years to clear the shadow inventory of bank-owned properties.
There are several forces slowing the process of churning through the excess inventory. Every program that "extends and pretends" - such as the federal push for loan modifications or banks holding on to properties in default to avoid taking losses - will only delay the eventual recovery. In addition, the various programs aimed at supporting house prices are similarly counterproductive as they will only decrease the volume of home sales. House prices usually overshoot their historical valuation metrics when they fall and this is exactly what we need in order to see a meaningful recovery during Obama's first term. Unfortunately, it seems like this Administration is opting for the "extend and pretend" philosophy rather than taking the pain now and recovering faster.
On Sovereign Debt
If anyone has any doubts about Goldman being more than happy to work against the best interests of its clients, the Greece swap situation is the latest bit of evidence. At some point, this behavior will catch up to them. The bigger issue is that Greece is just the canary in the coal mine of sovereign debt. The global recession has hurt the finances of almost every government. Those that were troubled before the crisis are now in danger of sovereign debt crises. I expect a few minor or medium-sized countries to default or be bailed out in the next 2 years, with relatively mild repercussions.
What concerns me most is Japan. The combination of a shrinking population, deflation, and debt of around 200% of GDP (highest among OECD countries) has more than a few people worried. A sudden increase in those worries - similar to what just happened to Greece seemingly out of nowhere - could be catastrophic.
What concerns me most is Japan. The combination of a shrinking population, deflation, and debt of around 200% of GDP (highest among OECD countries) has more than a few people worried. A sudden increase in those worries - similar to what just happened to Greece seemingly out of nowhere - could be catastrophic.
Tuesday, February 16, 2010
Housing Numbers
Good to see Free Exchange getting a little more realistic about the American housing market. A mildly positive Case-Shiller readout from November had them proclaiming a "broad-based stabilization" in house prices, despite massive and temporary government intervention in the housing market. As a non-homeowner, I am not a fan of these policies. Propping up house prices at a level that would otherwise be unsustainable is a highly inefficient undertaking. These policies are essentially wealth transfers to current homeowners from future taxpayers. To the extent that the programs are temporary, they are simply delaying future losses.
Even with all of this support, the market looks very fragile. New home sales and mortgage applications (the most current of popular housing indicators) are both at very low levels and price indicators look primed for another move downwards (my read). Inventory is still bloated and both the Fed MBS Purchase Program and Homebuyer Tax Credit program are ending in the next few months. I would expect house prices in lower-priced areas to drop around 10% with the end of these programs, as the credit currently takes a significant chunk out of down payments at the $100k-$150k price range and mortgage rates are expected to rise 50-100bp. Eventually Congress will get around to reforming the GSE's, the Fed will raise rates, and the housing market will settle at its true clearing price - ignoring for the moment the mortgage interest deduction, which most expect to continue indefinitely.
Even with all of this support, the market looks very fragile. New home sales and mortgage applications (the most current of popular housing indicators) are both at very low levels and price indicators look primed for another move downwards (my read). Inventory is still bloated and both the Fed MBS Purchase Program and Homebuyer Tax Credit program are ending in the next few months. I would expect house prices in lower-priced areas to drop around 10% with the end of these programs, as the credit currently takes a significant chunk out of down payments at the $100k-$150k price range and mortgage rates are expected to rise 50-100bp. Eventually Congress will get around to reforming the GSE's, the Fed will raise rates, and the housing market will settle at its true clearing price - ignoring for the moment the mortgage interest deduction, which most expect to continue indefinitely.
Saturday, February 13, 2010
Quadrophobia
More evidence of the pressure on companies to meet or beat quarterly earnings expectations from the WSJ via The Big Picture. The study it refers to found evidence that companies fiddle with their earnings numbers when they end in 4s to bump them up to 5s so as to round them up to the next whole number.
Friday, February 12, 2010
Captive Regulators: Toyota Edition
Toyota's is the most recent high-profile case of regulatory capture and the one that gave me that last little push to start this blog.
One would think that a profit-seeking entity not involved in the sale of tobacco products would also try to avoid killing its customers, because manslaughter tends to be expensive and a bit of a PR hit. Toyota has shown once again that this is not always the case.
The story goes that Toyota knew that its cars had a tendency to accelerate randomly without any input from the driver. Once Toyota had received multiple reports about this life-threatening problem, it had to decide what to do about it. One option was to fix the problem and initiate a recall. The other was to cover it up: hire some people from the regulatory body that controlled investigations into these sorts of things (the NHSTA) and have them smooth it over. Toyota chose the latter route, despite the fact that a problem like this will almost always be more expensive the longer you take to deal with it, because of the potential fines, criminal investigations, and the additional cars to recall. There is a chance that the problem will never be uncovered in such a public way, in which case the ill-gotten profits would be Toyota's to keep, but this is a very risky proposition.
Why then did Toyota choose the more risky/costly option? The widespread bias towards short-term profits among publicly-traded companies most likely played a key role. The quarterly reporting format puts intense pressure on companies to meet or beat quarterly profit expectations. While fixing the problem when it was identified would ultimately have been cheaper, it would have hurt short-term profits or turned them to losses. Time and time again, companies have shown that they will seek short-term profits at the expense of their long-run well-being. It is often up to regulators to counter this bias.
Bloomberg
One would think that a profit-seeking entity not involved in the sale of tobacco products would also try to avoid killing its customers, because manslaughter tends to be expensive and a bit of a PR hit. Toyota has shown once again that this is not always the case.
The story goes that Toyota knew that its cars had a tendency to accelerate randomly without any input from the driver. Once Toyota had received multiple reports about this life-threatening problem, it had to decide what to do about it. One option was to fix the problem and initiate a recall. The other was to cover it up: hire some people from the regulatory body that controlled investigations into these sorts of things (the NHSTA) and have them smooth it over. Toyota chose the latter route, despite the fact that a problem like this will almost always be more expensive the longer you take to deal with it, because of the potential fines, criminal investigations, and the additional cars to recall. There is a chance that the problem will never be uncovered in such a public way, in which case the ill-gotten profits would be Toyota's to keep, but this is a very risky proposition.
Why then did Toyota choose the more risky/costly option? The widespread bias towards short-term profits among publicly-traded companies most likely played a key role. The quarterly reporting format puts intense pressure on companies to meet or beat quarterly profit expectations. While fixing the problem when it was identified would ultimately have been cheaper, it would have hurt short-term profits or turned them to losses. Time and time again, companies have shown that they will seek short-term profits at the expense of their long-run well-being. It is often up to regulators to counter this bias.
Bloomberg
Raison D'Etre
Why start another finance/economics blog?
Basically, I need an outlet for my obsession with economics, finance, regulation, and especially the housing market. I think the traditional news media hasn't done a spectacular job on these issues in the past and blogs have served a valuable purpose over the past few years. I hope to add some value, however incremental.
Who are you?
I work for an economics firm and I live in New York.
Basically, I need an outlet for my obsession with economics, finance, regulation, and especially the housing market. I think the traditional news media hasn't done a spectacular job on these issues in the past and blogs have served a valuable purpose over the past few years. I hope to add some value, however incremental.
Who are you?
I work for an economics firm and I live in New York.
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