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How Housing Has Affected the Economic “Ecology”
Paul L. Kasriel
Director of Economic Research
PH: 312.444.4145
[email protected]
© 2006
2008 Northern Trust Corporation
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How Housing Has Affected the Economic “Ecology”
This past cycle was accompanied by one of the
biggest housing booms in the post-WWII era.
Dollar Volume of Single-Family Home Sales* / Nominal GDP
percent
18
16. 3%
16
14
12
10
m e di an = 8. 4%
8
6
4
70
75
80
85
90
95
00
* combined new and existing home sales
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05
Three factors
were responsible for the strength
of the recent housing boom
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How Housing Has Affected the Economic “Ecology”
Low mortgage rates in absolute terms as well as
relative to house price appreciation.
Y/Y % Chg. in Median Price of Existing Home minus Mortgage Rate
percentage points
Purchase of Existing Single-Family Home: Contract Interest Rate
%
10
16
14
5
12
0
10
-5
8
-10
6
-15
4
70
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How Housing Has Affected the Economic “Ecology”
The increased popularity of “affordability”
mortgage products this past cycle.
MBA: Total Loans: Percent of Dollar Volume of Loans which are ARMS
%
50
50
40
40
30
30
20
20
10
10
0
0
90
95
00
Source: Mortgage Bankers Association /Haver Analytics
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Rating Agency Errors
© 2008 Northern Trust Corporation
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How Housing Has Affected the Economic “Ecology”
The housing boom played a major role in increasing employment. The
housing bust is now responsible for contracting employment.
Civilians Employed: 16 Years and Over
% Change - Year to Year
NSA, Thous
4
4
3
3
2
2
1
1
0
0
-1
-1
-2
-2
90
95
00
Source: Bureau of Labor Statistics /Haver Analytics
The Northern Trust Experience
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How Housing Has Affected the Economic “Ecology”
The recent housing boom created an enormous amount
of “paper” household wealth …
Holding Gains on Residential Real Estate as % of Disposable Personal Income
20
20
16
16
12
12
8
8
4
4
0
0
-4
-4
50
55
60
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How Housing Has Affected the Economic “Ecology”
…which, in this cycle, households could more
easily and cheaply borrow against.
Active Mortgage Equity Withdrawal as % of Disposable Personal Income
8
8
6
6
4
4
2
2
0
0
90
Source: Haver Analytics
The Northern Trust Experience
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00
05
How Housing Has Affected the Economic “Ecology”
This increased home-equity borrowing activity,
along with corporate stock buybacks …
Households: Net Sales* of Corporate Equities / Disposable Personal Income
%
12
10
8
6
4
2
0
-2
-4
1960
1970
1980
1990
2000
* Direct net sales by households plus net sales by mutual funds,
broker/dealers and ETS.
The Northern Trust Experience
How Housing Has Affected the Economic “Ecology”
… enabled households to increase their consumption to a record high
in relation to their after-tax income.
Personal Consumption Expenditures as % of Disposable Personal Income
96
96
92
92
88
88
84
84
80
80
76
76
50
55
60
Source: Haver Analytics
The Northern Trust Experience
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How Housing Has Affected the Economic “Ecology”
Households and corporations have reversed roles in
recent years with households having become net
demanders of funds and corporations net suppliers
< Households & Nonprofit Orgs: Net Financial Investment
SAAR, Bil. $
Nonfinancial Business: Net Financial Investment >
SAAR, Bil. $
400
400
200
200
0
0
-200
-200
-400
-400
-600
-600
-800
-800
50
55
60
65
70
75
80
85
Source: Federal Reserve Board /Haver Analytics
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How Housing Has Affected the Economic “Ecology”
But now with home equity falling …
Households & Nonprofit Organizations: Owners Equity in Real Estate
% Change - Year to Year
Bil $
22. 5
22. 5
15. 0
15. 0
7. 5
7. 5
0. 0
0. 0
-7. 5
-7. 5
-15. 0
-15. 0
55
60
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How Housing Has Affected the Economic “Ecology”
… with mortgage lending terms tightening …
FRB Sr Loan Survey: Res Mortgages: Net Share, Banks Tightening
Haver Est, %
80
80
60
60
40
40
20
20
0
0
-20
-20
90
95
00
Source: Federal Reserve Board /Haver Analytics
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How Housing Has Affected the Economic “Ecology”
… and with the unemployment rate rising …
Civilian Unemployment Rate: 16 yr +
SA, %
6. 5
6. 5
6. 0
6. 0
5. 5
5. 5
5. 0
5. 0
4. 5
4. 5
4. 0
4. 0
3. 5
3. 5
99
00
01
02
03
04
05
Source: Bureau of Labor Statistics /Haver Analytics
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How Housing Has Affected the Economic “Ecology”
… growth in real consumer spending is the slowest since 1991.
Real Personal Consumption Expenditures
% Change - Year to Year
SAAR, Bil. Chn. 2000$
6
6
4
4
2
2
0
0
-2
-2
90
95
00
Source: Bureau of Economic Analysis /Haver Analytics
The Northern Trust Experience
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How Housing Has Affected the Economic “Ecology”
Household balance sheets are in the worst shape in the post-WWII
era with household leverage at record highs …
Households: Total Liabilities as % of Mkt. Value of Total Assets
24
24
20
20
16
16
12
12
8
8
4
4
55
60
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How Housing Has Affected the Economic “Ecology”
… and household liquidity at near-record lows.
Households: Deposits and Money Fund Shares as % of Total Liabilities
160
160
140
140
120
120
100
100
80
80
60
60
40
40
55
60
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How Housing Has Affected the Economic “Ecology”
With the housing sector still contracting and the consumer sector
weakening, economic activity in other sectors also will slow.
Private Construction: Residential
% Change - Year to Year
NSA, Mil. $
80
80
60
60
40
40
20
20
0
0
-20
-20
-40
-40
65
70
75
80
85
Source: Census Bureau /Haver Analytics
The Northern Trust Experience
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How Housing Has Affected the Economic “Ecology”
Large and small business sentiment has soured …
CEO Business Confidence Survey: Business Executive Confidence
50+=Positive
NFIB: Small Business Optimism Index
SA, 1986=100
(I)
80
110
70
105
60
100
50
95
40
90
30
85
80
20
80
85
90
Sources: CNFBOARD, NFIB /Haver
The Northern Trust Experience
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00
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How Housing Has Affected the Economic “Ecology”
… which is reining in capital spending.
Real Private Nonresidential Investment: Equipment & Software
% Change - Year to Year
SAAR,Bil. Chn. 2000$
12
12
8
8
4
4
0
0
-4
-4
-8
-8
-12
-12
00
01
02
03
04
05
Source: Bureau of Economic Analysis /Haver Analytics
The Northern Trust Experience
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How Housing Has Affected the Economic “Ecology”
With unemployment increasing and retail spending slowing,
commercial real estate vacancy rates are beginning to rise.
National Office Vacancy Rate: Metropolitan Areas
%
22. 5
22. 5
20. 0
20. 0
17. 5
17. 5
15. 0
15. 0
12. 5
12. 5
10. 0
10. 0
7. 5
7. 5
90
95
Source: CB Richard Ellis /Haver Analytics
The Northern Trust Experience
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How Housing Has Affected the Economic “Ecology”
This augurs poorly for private nonresidential
construction activity going forward.
Architectural Billings Idx: Comm/Ind Sector, 3-Mo Moving Avg
SA,+50=Increase
65
65
60
60
55
55
50
50
45
45
40
40
35
35
95
96
97
98
99
00
01
02
03
04
Source: American Institute of Architects /Haver Analytics
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How Housing Has Affected the Economic “Ecology”
The next domino to fall will be state and local government
spending, which accounts for about 11% of real GDP.
Real State & Local Govt Consumption & Gross Investment
SAAR, Bil. Chn. 2000$
% Change - Year to Year
8
8
6
6
4
4
2
2
0
0
-2
-2
99
00
01
02
03
04
05
Source: Bureau of Economic Analysis /Haver Analytics
The Northern Trust Experience
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How Housing Has Affected the Economic “Ecology”
The relative strong performing sector will be exports. With
economic growth in the rest of the world slowing, however,
our exports will face some headwinds.
Real Exports of Goods & Services
% Change - Year to Year
SAAR, Bil. Chn. 2000$
15
15
10
10
5
5
0
0
-5
-5
-10
-10
-15
-15
99
00
01
02
03
04
05
Source: Bureau of Economic Analysis /Haver Analytics
The Northern Trust Experience
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How Housing Has Affected the Economic “Ecology”
Consumer price inflation has resurged in recent months, primarily
because of sharp advances in energy and food prices.
< CPI-U: All Items
% Change - Year to Year
NSA, 1982-84=100
CPI-U: All Items Less Food and Energy >
% Change - Year to Year
NSA, 1982-84=100
6
6
5
5
4
4
3
3
2
2
1
1
05
06
Source: Bureau of Labor Statistics /Haver Analytics
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How Housing Has Affected the Economic “Ecology”
The rate of increase in energy prices is likely to abate as the demand
for energy moderates because of the global economic slowdown.
CPI-U: Energy
% Change - Year to Year
Imports: Energy-Related Petroleum Products: Quantity
NSA, 1982-84=100
4-qtr MovingAverage
40
40
30
30
20
20
10
10
0
0
-10
-10
-20
-20
05
06
Source: Bureau of Labor Statistics /Haver Analytics
The Northern Trust Experience
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08
Thous. Bbls
1260000
1260000
1240000
1240000
1220000
1220000
1200000
1200000
1180000
1180000
1160000
1160000
05
06
Source: Census Bureau /Haver Analytics
07
08
How Housing Has Affected the Economic “Ecology”
Food price increases are less likely to moderate much because of …
CPI-U: Food
 increased
demand from
developing economies such
as China and India

competition from biofuels

low inventories of grains, in
part due to droughts and
now, floods
% Change - Year to Year
NSA, 1982-84=100
7
7
6
6
5
5
4
4
3
3
2
2
1
1
05
06
Source: Bureau of Labor Statistics /Haver Analytics
The Northern Trust Experience
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How Housing Has Affected the Economic “Ecology”
Businesses are not able to pass on completely
to consumers their higher input costs.
Ratio of Consumer Goods Prices: CPI/PPI
1. 02
1. 02
1. 00
1. 00
0. 98
0. 98
0. 96
0. 96
0. 94
0. 94
0. 92
0. 92
0. 90
0. 90
05
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How Housing Has Affected the Economic “Ecology”
With the unemployment rising and growth in employee
compensation already slowing, there is little danger of
a 1970s-style wage-price spiral.
ECI: Compensation: Private Industry Workers
NSA, 12-Mo %Chg
5. 5
5. 5
5. 0
5. 0
4. 5
4. 5
4. 0
4. 0
3. 5
3. 5
3. 0
3. 0
2. 5
2. 5
90
95
00
Source: Bureau of Labor Statistics /Haver Analytics
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How Housing Has Affected the Economic “Ecology”
In addition to food price increases, the biggest threat to higher
inflation would be a renewed weakening in the dollar.
Import Prices - Consumer goods ex Autos: Y/Y % Chg.
Import Prices - Autos: Y/Y % Chg.
CPI - Goods ex Food & Energy: Y/Y % Chg.
4
4
3
3
2
2
1
1
0
0
-1
-1
07
Source: Bureau of Labor Statistics /Haver Analytics
The Northern Trust Experience
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How Housing Has Affected the Economic “Ecology”
It is important to recall, however, that inflation
is a lagging economic process.
Real Gross Domestic Product
% Change - Year to Year
SAAR, Bil. Chn. 2000$
CPI-U: All Items
% Change - Year to Year
NSA, 1982-84=100
16
16
12
12
8
8
4
4
0
0
-4
-4
60
65
70
75
Sources: BEA, BLS /Haver
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How Housing Has Affected the Economic “Ecology”
Not surprisingly, the housing boom resulted in a mortgage
debt boom, with home mortgage debt rising to a record
high percentage of total U.S. nonfinancial debt.
Home Mortgages as % of Total Domestic Nonfinancial Debt
36
36
32
32
28
28
24
24
20
20
16
16
12
12
50
55
60
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How Housing Has Affected the Economic “Ecology”
Home mortgage debt is now twice as large as U.S. Treasury
debt held by the public.
Home Mortgages as % of U. S. Treasury Debt
240
240
200
200
160
160
120
120
80
80
40
40
0
0
50
55
60
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How Housing Has Affected the Economic “Ecology”
Herein lies the problem – the collateral of the single largest debt
class in the U.S. is experiencing perhaps its most severe decline
in value in the post-WWII era.
S&P/Case-Shiller Home Price Index: Composite 20
% Change - Year to Year
NSA, Jan-00=100
NAR Median Sales Price: Existing 1-Family Homes, United States
% Change - Year to Year
$
20
20
10
10
0
0
-10
-10
-20
-20
70
75
80
85
Sources: S&P, REALTOR /Haver
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How Housing Has Affected the Economic “Ecology”
And with still large excess inventories of homes,
there is no relief in sight for home prices.
Existing Single-Family Homes: Inventory / Sales Ratio
months' supply
14
12
July '08
10.35
10
8
median = 6.75 months
6
4
2
1985
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How Housing Has Affected the Economic “Ecology”
Contrary to conventional wisdom, commercial banks have a record
amount of mortgage-related debt on their balance sheets.
U.S Commercial Banks: Total Mortgage-Related Assets / Total Earning Assets
percent
70
60
50
40
30
20
10
1960
The Northern Trust Experience
1970
1980
1990
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How Housing Has Affected the Economic “Ecology”
Although the largest credit problems are in the home mortgage
market, distress is beginning to be signaled in the consumer loan
and commercial real estate markets, too.
Loan Delinquency Rate: Consumer Loans: All Insured Comml Banks
SA,%
Loan Delinquency Rate: Commercial Real Estate Loans: All Comml Banks
SA,%
4. 4
12. 5
4. 0
10. 0
3. 6
7. 5
3. 2
5. 0
2. 8
2. 5
2. 4
0. 0
90
95
Source: Federal Reserve Board /Haver Analytics
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How Housing Has Affected the Economic “Ecology”
With nonfinancial corporate profits contracting and
interest rates on high-yield corporate bonds rising,
increased corporate bond defaults are likely.
< Corporate Profits with IVA & CCAdj: Nonfinancial
% Change - Year to Year
SAAR, Bil. $
Merrill Lynch High Yield Corp Master II: Yield to Maturity >
EOP %
60
16
40
14
20
12
0
10
-20
8
-40
6
97
98
99
00
01
02
03
04
05
06
Sources: Bureau of Economic Analysis, Merrill Lynch /Haver Analytics
The Northern Trust Experience
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How Housing Has Affected the Economic “Ecology”
Current and expected credit losses are constraining financial
institutions’ ability to create new credit.
Financial Sector Net Lending as % of Nominal GDP
30
30
25
25
20
20
15
15
10
10
5
5
0
0
55
60
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How Housing Has Affected the Economic “Ecology”
Conclusions and implications:

The U.S. economy likely entered a recession early in 2008.

Because financial institutions will experience large losses across a
wide spectrum of debt classes and because there is the likelihood of
increased regulation, the financial system will be capital “impaired”
through 2009.

Even though the Federal Reserve is offering “cheap” credit to the
financial system, financial institutions will have diminished demand for
the Fed’s offer because they will not have the capital to support lending
to the private sector.

Thus, U.S. economic performance will be substandard through 2009
due to the relative lack of credit creation from financial institutions.
The Northern Trust Experience
How Housing Has Affected the Economic “Ecology”
In the words of Mel Brooks:
Hope for the best, expect the worst!
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How Housing Has Affected the Economic “Ecology”
© 2008 Northern Trust Corporation
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