I just read that in the LA times today too. They also said that wage/salary growth was 3.2%. That got me thinking so I looked at the housing affordiblity index from our friends at the NAR:

http://www.realtor.org/Research.nsf/files/REL0612A.pdf/$FILE/REL0612A.pdf

First I must say I think they fudged these numbers, look at the West:
– Average home price $356,500.
California is much closer to $500k if not over, but fine, this includes AZ, NV, OR, WA and maybe even ID.

– Median income: $61,078.
Any web based search brings in a number for California alone between $47k, to maybe mid $50’s. And of course this doesn’t count any undocumented salaries, which on average are more than likely much lower. CA is also higher than most other states.

The NAR claims an income of $86,064 needed to afford the median house price they gave.

Let’s just “assume” the avg price, and income above are correct.

At the wage growth given in the Times article of 3.2%, that rate will need to continue for 11 years before it catches up with the NAR avg home price above.

And that is of course assuming prices were stagnate those 11 years.

My guess, ignorant and uninformed as I am, is the worst is sitll to come.

The Institute for Supply Management said its manufacturing index registered 49.3 last month, down from a December reading of 51.4. A reading below 50 indicates that manufacturing activity is contracting rather than expanding.

This is generally flat. According to the ISM, the turning point for the economy has historically been when the manufacturing index drops below 45. At 49.3 the reading shows a slight contraction. Also, manufacturing represents less than 1/3 of the economy. Recently the service sector has more than made up for this contraction. There needs to be weakness across both sectors before a recession occurs. This has been slow to develop, thus far.

OOPS.. I double clicked on Post comment

Liquidity Liquidity…

A recession in the U.S. will likely be avoided in the short term in 2007 because of three factors:

• Corporate earnings are high, pushing down P/E ratios due to off-loading of employee medical benefits and elimination of defined benefit pension plans.
• Increased liquidity provided by a spike in M3 and the expansion of the derivitives market.
• Temporary relaxation in world commodity prices, easing the rate of inflation.

These factors are likely to keep the stock market bouyant, and consumer confidence high for a while. However-

• The inevitable rise in interest rates (via trade deficits and high government & private debt).
• The increasing likelyhood of financial meltdown if Credit Default Swaps (CDS) unravel (via the real estate bubble and domestic automotive manufacturing weakness)… [CDSs typically allow leveraging ratios of 5 to 10 on the underlying bond or mortgage].
• Demand pressure on raw materials as developing countries industrialize…

…are likely to result in the phenomenon we say in the 70's and early 80's: STAGFLATION with several recessions occurring at short intervals.

…As I recall, nationwide, severe housing price deflation didn't occur until about 1980, when FED interest rates spiked in the 13 to 20% range.

 You also might find the graph at the following website interesting (it carries a more ominous implication):

http://www.kwaves.com/debt_gdp.htm

Use:

http://www.kwaves.com/index.html

to get to Kwaves.com's home page, where you will find other interesting articles and a great set of financial links. There you will see a link for Roger Arnold. Click on "program note" under his name, and you will find MP3 downloads on the subjects of Housing/GDP/mortgages/recession and interest rates… Mighty relevent to Piggington's website.

Re; Savings rate:

Not fully. For example, we were a negative savers this year because we made a 20% down payment on and finished the basement on a new house in non-bubble but overbuilt Omaha. We have several houses and are paying down debt at the rate of about 5K/month. That all counts as spending even though our wealth is increasing. We are also paying college tuition for our kid. That counts as spending even though it is a capital investment.

National wealth is about $50 trillion. National income last year was roughly $9 trillion. Increase in national wealth was roughly $5 trillion.

Anecdote: We were not able to sell the house we moved out of, so we are renting it out at a slight negative cash flow but a very nice rental rate, so we will be unlikely to have to re-rent it anytime soon. House sales in Omaha hit a wall in August and are not picking up.

Omaha is a growing community. Having lived in Seattle, Portland, Colorado Springs, Mojave desert (Ridgecrest) in the last 12 years, I was surprised by how much I like it here. Since builders in Omaha (no national builders can break in) work on amazingly small margin and land prices are reasonable, the housing stock has little downside as an asset.

Of course, the good news is that my new house is two blocks from work. The bad news is that it was 3 degrees farenhight with a minus 12 wind chill when I walked to work this morning.