Doctorwho writes:
"The two most direct impacts of a housing slowdown are:
1) the loss of housing related employment.
2) lower MEW and the impact on personal consumption expenditures."

Huh? What happened to easy money and interest rates? Oh yeah, nobody sees rates skyrocketing or liquidity being strangled anymore, not even bubbleheads.

Change focus.
Doctorwho | 12.10.05 - 1:27 am | #

Tim writes:
Yes, construction, finance, and retail employment will suffer, but from everything I've looked at in job creation lately, what seems most likely to get hammered is food service:
-->More Restaurant Jobs
-->The Quality of the Jobs
"Over 800,000 new food service jobs in the last five years ... During the period 2001 thru 2003, when three million private sector jobs were lost, food service employment racked up gains of nearly 500,000, no doubt spurred on by the refinancing/home equity withdrawal wealth effect. cut back is by not eating out so much."
Isn't eating out the first/easiest place for people to cut back?
Tim | Homepage | 12.10.05 - 1:34 am | #

Anonymous writes:
Just when I thought I've looked at this housing situation from all angles - you came up with something totally unexpected.

I guess my new-found optimism for a soft landing was short-lived.
Anonymous | 12.10.05 - 2:29 am | #

dryfly writes:
I guess my new-found optimism for a soft landing was short-lived.

I'm beginning to believe any outcome that doesn't leave me & my family on the street and where we still have food on the table is a 'soft landing'.

Maybe it is all about expectations management... that we will all give a sigh of relief when it doesn't suck as bad as our worst fears.

dryfly | 12.10.05 - 3:06 am | #

dryfly writes:
Isn't eating out the first/easiest place for people to cut back?

I agree but can people cook anymore? Really cook?

I know there are more self-proclaimed gourmet cooks out there then ever but for everyone of them there are ten who struggle heating Lean Cuisine in their micro.

When I left home my mother gave me a helluva a crash course in cooking... called it 'bachelor boot camp'. Took all summer making me do meals & the basics... soup stocks from nothing but left over bones, red beans-n-rice, 101 hotdishes... stuff like that.

She grew up in the depression & when I left home it was in the middle of the stagflation 70s... Those skills saved me more than once...

I just don't see many folks able to do it today... able to figure out how to make a food budget really stretch. Some but not many.

dryfly | 12.10.05 - 3:36 am | #

Idaho_Spud writes:
Well that certainly explains why it feels like we've been in a recession for the last 5 years.
Idaho_Spud | 12.10.05 - 3:57 am | #

Tom Marney writes:
And a reduction in both residential construction and retail employment will probably lead to reductions in commercial construction. Anybody know how recent expansion of retail space compares to recent expansion of retail employment?
Tom Marney | 12.10.05 - 6:31 am | #

Peter writes:
I as a single guy learned to cook myself- and through trial and errors, success to flops have turned out to be a better then average person in the kitchen. Seafood is the most versatile, but I can also do 'guy' stuff like a great filet mignon on the grill. Good food does not take forever either to prepare. Eating out is something I rarely do these days-since the food I perpare is healthy to eat- and I save money to pay these horrendous heat and light bills. Recieved from Yankees gas (Connecticut) My November bill yesterday- eeek! Half of November was warm- yet my bill was still $98.00 I dare not guess what this months will be. Also Nicholas Perna, local economist in Connecticut says the real estate market in New England is likely headed for a hard landing- he tends to be very bullish on the New England economy- and this prediction from him is bad news.
Peter | 12.10.05 - 7:19 am | #

Robert Coté writes:
What's truly scary is what happened to all the MEW. It went into consumer consumption, Hummers and Plasmas. There's a huge multiplier effect from consumer consumption. In effect the Asst. Manager at Circuit City is an invisible employee of the housing bubble. This could end very badly indeed.
Robert Coté | Homepage | 12.10.05 - 8:54 am | #

11 dogs writes:
Thanks again for proving what my gut says is true. Dryfly once again, a joy listening to your dry wit and stories. Personally, I'm planting fruit and nut trees that feed not only my family but the local wildlife. The wildlife have become homeless due to new out of town developers who plan to build 160 homes on what they admit is 1/2 wetland(I believe it's more).Downstream of this development, a poor town became the recipient of last years flood waters in Jan.-- a strange occurrance since we are near Chicago. And at that point, it was just the beginning of the development. The environmental consequences of these interest rates will remain long after the foreclosures which I am hearing about in these new developments. I guess $10,000/years in taxes will do that to your budget. And they have the gaul to say they don't want big government. More FEMA anyone?
11 dogs | 12.10.05 - 9:00 am | #

mike writes:
Excellent analysis. However, I have to quibble with the MEW methodology. If you assume that incremental mortgage debt only goes to finance new single family construction, you could be significantly mistaken.

Assuming that MEW goes only to wasteful consumption is myopic. Clearly a major chunk goes to home improvement (and therefore contributes to an increased value in the home) or things like new business creation.

We're working on the methodolgy to really measure things like home-improvement's impact on home prices. When we're done I'll publish it on our blog. Would love to hear your thoughts on the topic.
mike | Homepage | 12.10.05 - 9:44 am | #

mike writes:
Here's another take on the chart.

What you've illustrated here is that in the last five years, Mortgage Equity Extraction has simply been the most economically effective method for financing all those things that need to be financed.

In '99 I sold my Cisco stock to redo the kitchen. Now it just happens to be really cheap to borrow against the house. So that's what I do.
mike | Homepage | 12.10.05 - 9:50 am | #

Tim writes:
I think the comment from this article shows just how versatile home equity withdrawal is these days:
Buy, Borrow, Buy - Couple uses leverage to build an empire of eight vacation properties
"Sacco estimates that along with McCook's mother, who has been a silent partner, they've made $1.3 million since they began their buying spree, but all of this is still in equity on their properties. Their monthly reality is more sobering. They have $2.3 million in mortgage debt and negative cash flow that ranges from $5,000 to $15,000 monthly depending on the season.
So how do they pay the bills?
"We sort of count our equity loans as our income," she says"
Tim | Homepage | 12.10.05 - 10:16 am | #

Robert Coté writes:
Mike's comments are well taken. The article assumes 2/3rds consumption. I would agree to that ratio and didn't bother to repeat it. When I said "all" in my comments I was talking about all of the 2/3rds in the article. It isn't entirely clear where to draw the line anyway. I used HELOC to buy a plasma TV. You see in my neighborhood houses go for about $500/sq ft. I bought myself 6 sq ft of living space by getting rid of the old TV cabinet. Was this home inprovement? In the other direction many remodel projects only return 20-60% of their costs. Should we call the rest consumption? I don't know or know if it matters.
MEW is really a cash advance isn't it? Doesn't matter what you use it for consumption of highly illiquid home expenses, it is still consumer debt fueling GDP.
Robert Coté | Homepage | 12.10.05 - 10:22 am | #

dryfly writes:
I'm with Robert... we can quibel all we want about what is & isn't home improvement or is and isn't consumption. The fact is MEW is all going into economic activity and if (or rather when) the train slows or heaven forbids stops & backs up... there will be hell to pay.

I think that is the point to focuse on...

dryfly | 12.10.05 - 10:57 am | #

dilbert dogbert writes:
CR,
My old friend from NASA, a smarter than usual engineer, collects and distributes RE data for San Mateo, Santa Clara, Santa Cruz and Monterey counties. His data is free via: www.creeksiderealty.com
Just another set of RE data for a data guy like you to look at.
His latest seems to show a rounding off of the peak prices in this area.
My peek at the RE world of Woodside horse property indicates the market is still hot.
Enjoy, and best reguards to you too.
dilbert dogbert | 12.10.05 - 12:12 pm | #

Tim writes:
I remember back in the mid-1980s when credit cards first became ubiquitous - people would say, "I just spent a thousand dollars and it will only cost me $15 a month" (to service the debt).
There is a similar mentality today with home equity extraction, "I just spent $25,000 and it only costs me $100 a month" (to service the debt). Up until recently, with MEW you had the ability to refinance and, from a monthly payments point of view, make the new debt go away, but you can't really do that now.
The big difference between Cisco stock and home equity is debt - the Cisco analogy about financing purchases is only good if you sell real estate.
Tim | Homepage | 12.10.05 - 12:16 pm | #

Tim writes:
One more comment about the misleading nature of GDP - real GDP uses a PCE deflator in the 3 percent range, which, if you are sensitive to the controversy surrounding inflation measurements these days (housing, medical costs, hedonics, etc.), you would agree is a might low.
One could easily argue that if you combine the debt-fueled consumer spending with a more realistic inflation measure, we've been in a recession for years.
Just don't try to convince an economist of this.
Tim | Homepage | 12.10.05 - 12:25 pm | #

dryfly writes:
Just don't try to convince an economist of this.

Or politicians.

dryfly | 12.10.05 - 1:01 pm | #

Anonymous writes:
"A significant drop in MEW will lead to the loss of retail related employment too."

We at Home Depot had a 2nd "Black Friday" yesterday and we've been informed that our customers no longer need as many aprons on the floor. This is corporate wide. Given our huge turnover, I doubt layoffs, but I do expect floor positions will go unfilled.

I've been suspecting, based on changes, that Atlanta's been planning for the coming recession since early summer.
Anonymous | 12.10.05 - 3:06 pm | #

jm writes:
From
http://www.fdic.gov/bank/ analyti...4winter_03.html

"Home Equity Lending: Growth and Innovation Alter the Risk Profile"
...
"Not only are many of these structures floating-rate products and thus exposed to rising interest rates, but many also have a loss experience that has been untested by a general downturn in the housing market. For example, interest-only loans often require a balloon, or lump-sum, payment when the term of the loan ends. Home equity disclosures do not require the creditor to disclose the amount of any balloon payment that will result under the terms of the plan. In addition, payments on some loans may not cover the interest due so negative amortization will occur, resulting in the loan balance increasing rather than decreasing and the borrower repaying a much larger loan amount in the long run. Lenders who extend HELOCs with a credit limit that automatically increases as the home appreciates or a credit line based on future value are gambling that home prices will continue to increase. Finally, HELOC borrowers who increase their draws may not be aware that the higher their use of this revolving line of credit, the more it negatively affects their credit score."

Tick, tick, tick, tick ...
jm | 12.10.05 - 4:28 pm | #

jm writes:
From
http://www.fdic.gov/bank/ analyti...4winter_03.html

"Home Equity Lending: Growth and Innovation Alter the Risk Profile"
...
"Not only are many of these structures floating-rate products and thus exposed to rising interest rates, but many also have a loss experience that has been untested by a general downturn in the housing market. For example, interest-only loans often require a balloon, or lump-sum, payment when the term of the loan ends. Home equity disclosures do not require the creditor to disclose the amount of any balloon payment that will result under the terms of the plan. In addition, payments on some loans may not cover the interest due so negative amortization will occur, resulting in the loan balance increasing rather than decreasing and the borrower repaying a much larger loan amount in the long run. Lenders who extend HELOCs with a credit limit that automatically increases as the home appreciates or a credit line based on future value are gambling that home prices will continue to increase. Finally, HELOC borrowers who increase their draws may not be aware that the higher their use of this revolving line of credit, the more it negatively affects their credit score."

Tick, tick, tick, tick ...
jm | 12.10.05 - 4:28 pm | #

Calculated Risk writes:
Doctorwho, Sorry to burst your bubble, but I've been very consistent about the impacts of a housing slowdown (see After the Housing Boom: Impact on the Economy)

Also, my understanding is the term Bubblehead refers to people that believe there is no bubble! I think it was initially coined by Bill Fleckenstein in the late '90s.

Tim, if the housing slowdown leads to a recession, I think you are correct that food service will get hit hard. However, the first jobs to go will be RE related (we are already seeing Mortgage broker layoffs). Construction employment will probably stay strong for at least 6 more months ... and maybe longer. Retail looks solid for Christmas - that is no surprise since MEW set a record in Q3.

Anon and DryFly, a soft landing is still possible. If housing just slows down (and doesn't collapse), growth could stay positive. I think both GDP growth and employment growth will slow - but hopefully the US will avoid a recession.

Mike, I agree this is a simple approach for MEW (but its close to other estimates I've seen). When I compared OFHEO to FED house values, I included home improvement. I'm looking forward to seeing your approach.

Best to all.
Calculated Risk | Homepage | 12.10.05 - 4:43 pm | #

jm writes:
The collapse after the '80s boom took construction down under 900,000 units a year. It seems thoroughly plausible that that will repeat -- a drop of more than 50% from current rates, yet only about 150,000 below the real underlying demand for new housing. So either construction will fall much more than 50%, or it will take decades to work the vacant housing stock down to levels where the market can revive.

http://www.census.gov/hhes/www/h...04/ ann04t9.html

Apologies for the inadvertent double post above.
jm | 12.10.05 - 5:39 pm | #

Anonymous writes:
At first dr.who's post was difficult to comprehend. I then realized that he was trying to say that you're changing your tune on the RE bubble. The confusion was cause by the fact that he references two CAUSES of the bubble & two RESULTS of the bubble as if they were interchangeable. I would love to step into dr.who's world every now & again: The ball arced across the sky, causing me to throw it.
Waitress, I'll have what he's having.

Dilbert Dogbert, you mentioned a SFBay Area real estate data source, thanks!
The following site shows some pretty interesting East SFBay real estate charts; of particular interest is the compelling final comment (12/05/2005 at the bottom of the page).

www.realtyworldcal.com
Anonymous | 12.10.05 - 6:23 pm | #

allan writes:
I remember the last major slowdown in California.

One result was a huge uptick in lawsuits.

Lenders sued appraisers, the ones they had picked, for over valuing the properties.

Lenders sued the buyers for overstating their incomes, even though they had encouraged the loose standards.

Everyone sued the Realtors, after all, they were the pros.

It should be fun this time too, the excesses are larger than they were then.
allan | Homepage | 12.11.05 - 6:00 am | #

vader writes:
This time we will have the mortgage brokers to go after also.
vader | 12.11.05 - 10:03 am | #

Epimethee writes:
And please remember that this time, it is a world wide bubble.
Same bubble in europe, same bubbles in the gulf ... I spent holidays in Morocco and people complained about rising property prices ...
A fall in MEW will mean rising saving rate.
A fall in housing prices will mean a fall in tax revenues.
Epimethee | Homepage | 12.11.05 - 1:07 pm | #

Doctorwho writes:
"At first dr.who's post was difficult to comprehend. I then realized that he was trying to say that you're changing your tune on the RE bubble. The confusion was cause by the fact that he references two CAUSES of the bubble & two RESULTS of the bubble as if they were interchangeable."

Correct, I was mistaken in my reading of the quote and responded inappropriately, and I apologize to the author. Moreover, I agree with his conclusion as to the RESULTS of a bubble.
Doctorwho | 12.11.05 - 8:07 pm | #

Doctorwho writes:
However, I DO NOT agree with the author's adoption of Goldman's belief that 68% of MEW is used for personal consumption in lieu the Fed's figure of 51% flow through. Considering that even the Fed's figures would suffice in making a point, why give the unmistakable impression that one is simply scrounging around for data from whomever in order to support a predetermined conclusion? It makes one look like a true believer whose beliefs are independent of the facts, and that spells death for any of us data wonks now, doesn't it?
Doctorwho | 12.11.05 - 8:20 pm | #

Grim Reaper writes:
At this point, a soft landing is impossible, at least for the majority of investors.
Grim Reaper | 12.11.05 - 8:41 pm | #

muckdog writes:
Combine that with the expiration of the Bush tax cuts (aka as a tax hike), and the Alternative Minimum Tax hitting millions and millions of additional taxpayers later in the decade, and you have a recipe for a big slowdown.
muckdog | Homepage | 12.11.05 - 10:04 pm | #

dryfly writes:
Muck - you don't think there'll be tax cutting next year? Especially if things are slowing? In an election year?

I fully expect AMT to be eliminated or at least raise the cut off... The GOP will need something to run on and that is a recipe to middle income votes. Dems wouldn't dare stand in the way of that one...

From your LA Times...

Lawmakers in Washington are working furiously to pass a stopgap measure to keep the hikes from taking effect, but those efforts are complicated by the politics of the broader budget bill. "If Congress does not act, the percentage of taxpayers earning $75,000 to $100,000 subject to the AMT would rise next year to almost 30% from 1%," said Rep. Steny H. Hoyer (D-Md.), the House Democratic whip.

Link

My guess is this will get 'fixed' soon... at least for the next five years. Neither Dems nor GOP want to face voters after obstructing this. And since 'deficits don't matter'... whats a little more, eh?

Again I maybe wrong... but if I am, 2006 is going to be even more interesting that I thought.

dryfly | 12.12.05 - 3:46 am | #

vader writes:
Tax cutting will continue until debt becomes too expensive. That is when the Asia CBs stop buying US securities.
vader | 12.12.05 - 7:55 am | #

dryfly writes:
I agree vader... but that probably won't happen before '06 mid-terms. My guess is the AMT will be taken care of, at least temporarily due to fear of voter backlash.

dryfly | 12.12.05 - 10:05 am | #

MP writes:
Dear CR,

I understand how MEW is calculated, thanks to your excellent site, but do we know with any certainty where the money goes after withdrawal? Estimates seem to vary widely. I looked for Hatzius' original paper, hoping that it would explain this question, but could not find it.
MP | 12.12.05 - 11:59 am | #

Calculated Risk writes:
MP, excellent question and I don't have the answer. I've also seen various estimates of the split between consumption, investment and savings. I'll see if I can find a paper on the subject.

Even at 50% to consumption, MEW has played a significant role in recent GDP growth. That is not a bad thing, except as MEW starts to decline, consumption growth will probably slow.

Best Regards.
Calculated Risk | Homepage | 12.12.05 - 5:43 pm | #

edhopper writes:
It must be remembered that much of the MEWs were based on unrealistic asset value due to the housing bubble. When values fall (as seems to have begun) home owners will be reluctant to take any equity out. For any purpose, whether it's consumption or remodeling.
edhopper | 12.13.05 - 1:58 pm | #

fred writes:
Given that neither Congress nor the Administration has qualms about running deficits, I really don't see any problem with shortage of demand, regardless of whether there is a soft or hard landing to the housing bubble. A $1 Trillion dollar deficit should stop any recession, and if it won't, then let's try $2 Trillion.

Such huge deficits will likely cause both inflation and long-term interest rates to rise. The Fed will respond with higher short-term interst rates, so that real-interest rates are higher across the board. This will hit housing very hard, and long-term bond prices and stocks less hard. (If the risk-free TIPS rate goes back to 3%, then risky corporate bonds and stocks with a real yield of under 3% won't look so hot anymore.) The dollar might spike down and gold might spike up, but the effect of higher real interest rates will ultimately bring the dollar back up and gold prices back down. Americans will start to save more and consume and thus import less, which will crush the Asian economies and also the commodity prices.

The big winners of the future economy are going to be those who can help consumers and businesses to reduce costs. In particular, momentum is developing for business to relocate from the coastal bubble areas to the center of the country, especially mid-sized towns with universities like Reno NV, Madison WI, Bozeman MT, Lawrence KS. People say they love the California climate, but the truth is that most people spend most of their time indoors nowadays, and climate doesn't really matter. With proper construction techniques (lots and lots of insulation), heating costs become a minor concern compared with the advantages of fleeing the mess that has developed in the bubble areas. This great migration is just beginning and it will take decades for the process to complete. A nasty flu pandemic, or a California earthquake, or another terrorist bombing in New York, would just add fuel to the fire, as businesses and individuals realize that the benefits of being located in big coastal cities don't offset the costs.
fred | 12.15.05 - 1:20 am | #

Maxim Skorniakov writes:
Hi,

It is quite interesting article.
Could you please provide a title for Goldman Sach's research which you used in your article? Is it possible you can send the research to me by email?
Maxim Skorniakov | 12.16.05 - 8:18 am | #

Kaiser Edamame writes:
Some major issues with your data:
1) you're only subtracting SINGLE-FAMILY construction spending but you're using TOTAL household mortages which include condos. Single family starts are 1.4M, total housing starts are 2.0M so you're hugely overstating the impact already by excluding spending on new multi-family construction.

2)I'm not sure where you get the new single-family construction spending number from but the numbers i see don't include the cost of purchasing land and definitely don't include the margin a builder makes. SO with land 30% of the cost of a home and builder margins at 15%, you're understating this number again by almost 50%.

If you're interested I can send you better data, the impact is drastically overstated here.
Kaiser Edamame | 12.19.05 - 2:18 pm | #

NV Mojo writes:
I just came across your post on www.democraticunderground.com and I am amazed. With the denial running rampant in this country, this won't hit anyone until reality does ...
NV Mojo | 01.26.06 - 3:45 pm | #

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Jim a writes:
MP, as has been discussed here before, not only do we not know WHAT MEW is spend on, we don't really know WHEN it's spent. Do people get HELOCs and go out and spend the money, or do they max out their CCs and then pay them off with the HELOC? Well the answer is: YES; byt we don't have a good grasp on the percentage of each. Anecdotally, there is a tendancy for BIG purchases (cars, jetskis, vacations, remodeling) to be done after the heloc and small purchases (clothes, eating out, cable bill etc.) to be done before the HELOC.
Jim a | 08.06.07 - 8:07 am | #