July 30, 2006 at 9:22 PM #7045
[img_assist|nid=1040|title=Tech Bubble vs. Housing Bubble|desc=”This chart suggests that the extremes of the housing bubble exceed those of the dot-com era NASDAQ bubble, which in turn suggests that the severity of the coming decline might also exceed that of the dot-bomb era wealth destruction. “|link=node|align=left|width=287|height=400][img_assist|nid=1039|title=Real
Estate and Recession, Charts|desc=”Let’s start with this chart, which shows that over-investment in real estate (let’s call it a massive mis-allocation of capital) is followed by recession. Is this causal or just bad luck? It’s causal; over-investment in any sector produces diminishing returns as supply builds and demand is slaked. At some point, money dumped into the “hot” sector no longer returns a profit or positive cash flow; at that point it is mis-allocated because it would have earned a better return left in a savings account.
This chart suggests the recession which will begin in the 4th quarter of 2006 or early 2007 will be a humdinger. Look at the last peak in 1972-73. Those of you alive during the ensuing recession recall that it was the most severe economic downturn since the Great Depression. The next spike of over-investment was followed by another devastating recession in the early 1980s.
You can blame Iran or inflation or a host of other factors, but this chart strongly suggests that mis-allocation of capital in residential real estate sets up a very vulnerable economy. |link=node|align=left|width=400|height=347]
COPIED FROM OFTWOMINDS.COM, Charles SmithJuly 30, 2006 at 9:34 PM #30124waiting hawkParticipant
That recession in 01 looked to be a joke. Wish we had a larger one at that time. Buckle you’re seat belts.July 30, 2006 at 10:46 PM #30125rankandfileParticipant
Your second chart completely thwarts the theory that real estate always goes up and that price levels will never decrease to previous levels. Just look at what happended in 1982-83.July 31, 2006 at 12:11 AM #30128CardiffBaseballParticipant
Sheesh look at 73-74 to 85. In 2005 dollars that sure is a wide swing.July 31, 2006 at 5:59 AM #30129
I wanted to post these, because some people on this forum don’t want to believe that housing prices in San Diego could drop 35% or more. Even amont us bears, there are some who think that “this time is different”.July 31, 2006 at 6:04 AM #30130DanielParticipant
Folks, the chart shows housing investment, not housing prices (I also saw versions of this chart displaying housing as a percentage of GDP). So in 1982-83, for example, it was construction that dropped significantly, not prices. I think the previous two posters are confusing the meaning of the chart.July 31, 2006 at 6:10 AM #30132
Yes, that’s right, Daniel.
Residential investment is a big part of the economy. Curerntly, it carries the economy. It is a leading indicator of the economy, and it correlates with housing prices. The other chart shows that the homebuilder stocks are overvalued.
This leads me a second thought: does it seem right that the “greatest country in the world” is sustained by building houses? Shouldn’t we be making our mark by researching and building new medicines, alternative energy, robotics, new communications and computers? I personally find it concerning that housing leads the economy. It’s not sustainable and it is “brawn” over “brain”.July 31, 2006 at 9:23 AM #30143sdduuuudeParticipant
It may be causal, but which is causing which (The recession or the housing crash), or is there a third element causing both? A classic question that cannont be answered by a chart.July 31, 2006 at 11:48 AM #30171
sduuuude, Leading Indicator Charts. Gee, you are an intellectual! You will like this site then.
Bear markets begin when growth in real consumer spending (PCE) peaks and begins to slow
“The relationship between economic slowdowns and bear markets is remarkably consistent, though not infallible, over many cycles. Most bear markets begin when the year-over-year rate of growth in consumer spending is peaking, and investor and general business optimism are at their highest! Considerable courage is required to reduce investments at such times.” – Joseph Elliott, Ahead of the Curve
Ed Leamer uses that same chart to make his forecast. Read his quote from the Wall Street Journal Real Estate section
“Ed Leamer: The history of residential investment offers a Hobson’s choice: either a housing-induced recession or a war the magnitude of Vietnam or Korea.
The figure here depicts real residential investment per worker since 1948, with the official recessions shaded. (Residential investment includes new homes and brokerage fees, but doesn’t include housing appreciation.)
This spending on homes varies from recession lows of about $2,500 per worker to expansion peaks near $4,000. During the recession of 2001, we were at that high $4,000 level, but we ploughed right through the recession without noticing it, and in the second quarter of 2005 we achieved the all-time high — $5,233 per worker. Cut that back by $1,000 to get it into “normal high” range and you lose $1,000 times 140 million workers. That’s $140 billion in lower spending. That’s enough to cause a recession, if it occurs rapidly.
Can we get out of this mess? There have been two “false positives” — problems in the housing sector that didn’t precede recessions. One was in 1966-67. Spending on the Vietnam War saved the economy that time. The other was 1950-51. Then it was the Korean War. Pretty dismal news, for sure.
For perspective, Defense Department spending on Iraq and Afghanistan was 4.8% of gross domestic product in 2004 according to the Bureau of Economic Analysis. During the Vietnam and Korean wars it was as high as 10.2% and 15% of GDP, respectively.”July 31, 2006 at 1:29 PM #30202AnonymousGuest
What does the red “homebuilders” line represent? Is it an index of homebuilder stock prices or something else?July 31, 2006 at 3:03 PM #30216DanielParticipant
I have no qualms with the chart. As I said, I’ve seen it before. I also think we’re headed for a recession next year. I was just pointing out that some folks on the board seemed to have grossly misinterpreted what the chart actually shows.
It goes without saying that current investment in residential RE is excessive. Residential RE is going to be a drag on GDP for quite some time, I think.July 31, 2006 at 3:56 PM #30222
It’s the S&P 500 homebuilders index. It dropped 50% this year.August 1, 2006 at 9:49 PM #30427North County JimParticipant
Do you know how many components make up the index for homebuilders? I was only able to locate the Philadelphia Housing Index, which consists of 20 individual issues.
Based on the PHI, I’m not sure I would draw the same conclusion as you from the comparison of the homebuilder index to the Nasdaq 100.
Wouldn’t you expect an index consisting of fewer components and a narrower focus to show more volatility than a more diverse group of stocks?August 1, 2006 at 9:58 PM #30431
I can’t speak for how S&P came up with the homebuilder index, and how they decided this was a representative sample for homebuilders in the U.S. The chart does show that the builders boomed, and their valuations are falling. They were clearly overpriced, just as technology stocks were at one time. They were selling for much more than they should have. They were bubble stocks, if you will.August 1, 2006 at 10:13 PM #30434North County JimParticipant
“This chart suggests that the extremes of the housing bubble exceed those of the dot-com era NASDAQ bubble, which in turn suggests that the severity of the coming decline might also exceed that of the dot-bomb era wealth destruction.”
We agree there’s a housing bubble. That’s why we’re here. I just think you and Charles Smith are reading too much into the chart. Like I said, you’re comparing a basket of 100 stocks across multiple industries to 20 stocks focused on one industry.
Also, maybe it’s a matter of semantics but I don’t consider the homebuilders to be bubble stocks. They made money off a bubble but their valuations were never close to the nuttiness that characterized the tech bubble.
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