2007 Predictions
In general, ever since I lived in MA, I took a hard look at the real estate prices and said to myself "this can't last - its unsustainable". At that time, I took great issue with one homebuilders group that had come out with its "affordibility indicators" (I can't find the report at this moment). What bothered me was that their calculations were made on the basis of the relationship between home prices in a particular area and the incomes of those who live there. I argued that this was a flawed formula, as affordibility should really be based on the relationship between home prices and the income of the people who WORK there. The people who live there have obviously moved ahead of the curve and have chosen to live there because they can afford to do so. However, If people have to commute for 2.5 hours to get to their place of work, then the city has significant affordibility issues.
Also, in 2005 I had a friend of mine that got married a couple of months before I did, immediately got pregnant and then bought a house in New Hampshire (she works in Cambridge MA). I warned her to hold off for a year or two - as she was buying at the very top of the market, but she didn't listen. I wonder how she'll fare if her home price falls below the level of the mortgage she took out.
There was actually an article in the Financial Times last week that had this quote: "Robert Shiller of Yale argued at the same conference that US house prices might ultimately fall by as much as 50 per cent, which would lower US household wealth by more than Dollars 10,000bn (Pounds 4,930bn). " Thats an awful lot of billions to be pulling out of the economy.
http://www.ft.com/cms/s/0/ecbc4326-60c7-11dc-8ec0-0000779fd2ac.html
Last weekend, Dad and I had a long conversation in which I asked the question: What were the economic factors that contributed to Black Tuesday and the lead up to the Great Depression? I know Wikipedia isn't necessarily the most authoritative place to look, but there were a few really interesting things there (I know that there is ongoing debate among economists about all of the contributing factors). In particular I noticed this paragraph:
"The crash followed a speculative boom that had taken hold in the late 1920s, which had led millions of Americans to invest heavily in the stock market, a significant number even borrowing money to buy more stock. By August 1929, brokers were routinely lending small investors more than 2/3 of the face value of the stocks they were buying. Over $8.5 billion was out on loan, more than the entire amount of currency circulating in the U.S.[7] The rising share prices encouraged more people to invest; people hoped the share prices would rise further. Speculation thus fueled further rises and created an economic bubble. The average P/E (price to earnings) ratio of S&P Composite stocks was 32.6 in September 1929 [8], clearly above historical norms."
For today's situation, insert the words "real estate" along side the word "stock" in the paragraph above, and we have a close parallel to today's economic environment. I would argue that, artificial inflation of stock is concern enough - however stock is an additional asset held by people of some means, and losses in the stock market will usually only dig into someone's savings (unless you are a current retiree living off the dividends). However, in the current crisis the artificial inflation is of real estate (this is of course an investment vehicle for some) but for most people (especially these days, and especially in the U.S.) it is their ONLY ASSET, and it is also essential to these consumers. If your stocks take a hit, as a consumer you can recover. If your HOME price takes a hit, as a consumer you might not.
Similarly I've noted this:
U.S. Currency currently in circulation: June 30, 2007 $812,760,455,370
http://fms.treas.gov/bulletin/index.html
U.S. Consumer debt: Sept. 10, 2007 $2,456.6 billion
http://132.200.33.130/releases/g19/Current/
Another interesting parallel, don't you think?
SO, in my mind, the hit on the U.S. consumer is going to be the ultimate problem. BUT compounding the issue is the extent to which the housing industry contributes to U.S. GDP and employment:
My Research:
United States - 2005 Data
http://www.bea.gov/industry/gpotables/gpo_action.cfm?anon=52445&table_id=19052&format_type=0
Gross Domestic Product by Industry Accounts, Full-Time and Part Time Employees by Industry, release date April 24, 2007.
Construction employed 7,657,000 people in 2006.
Finance, Insurance, Real Estate, Rental and Leasing employed 8,308,000 people in 2006.
Gross Domestic Product by Industry Accounts, Value Added by Industry as A Percentage of Gross Domestic Product (Percent)
http://www.bea.gov/industry/gpotables/gpo_action.cfm?anon=52445&table_id=19019&format_type=0
Construction was 4.9 percent of GDP in 2006.
Also affects manufacturing (ie. furniture manufacturing was .6 % of GDP).
Finance, insurance, real estate, rental and leasing was 20.8 percent of GDP in 2006.
Total Contribution of the Housing Industry to the U.S. Economy:
26.3% of GDP
15,965,000 employees
Ultimately, our current situation the result of an economic bubble in the United States. However, before today's economic concerns really came onto the radar, I had a discussion with a friend who had recently read a book in which it was argued ten years ago by an economist that the baby boom itself has created a bubble of sorts in the U.S. economy. He argued that the economy will continue to rise until 2010 or so while the baby boomers are battening down the hatches (buying new cars, new roof, new furnace, etc. - everything to get ready for retirement) and then these economic actors will be withdrawing from the economy in large groups as they enter the world of fixed income living. This in itself will have a huge impact, but he also noted that at the same time as this is happening, this same group will, in turn, become a heavy liability on U.S. government programs for seniors that are not adequately resourced, while the government itself is already in debt over its eyeballs. In this book it was argued that demographics alone would cause a significant economic downturn in the U.S.
For our generation the timing couldn't be worse - because it will bel happening as the younger generations of U.S. consumers are absolutely crunched by losing ground on the price of their houses, skyrocketing medical costs, stagnant or falling wages, higher tuition, higher unemployment, fewer benefits, etc. (And low Walmart prices for consumer goods will not save them. If China's inflation and manufacturing issues continue, and if the U.S. dollar continues to drop, then Walmart might not be able to keep its prices so low indefinitely anyhow.)
So, indeed there will be plenty of purchasing opportunities presented as U.S. markets "readjust" as Wall Street folk like to say, but if there is an absence of liquidity (ie. consumers can't get credit and have no savings and declining incomes) then this might not have the impact we are hoping for, regardless of the strength of corporate profits. There's no trickle down happening to the largest group of consumers who fuel the whole economy, and that's ultimately the problem. In my opinion, rising corporate profits primarily benefit bankers in the Cayman Islands. ;)
As a side note, I find it interesting that they've made a Great Depression scholar the Chairman of the Federal Reserve. Hopefully that will help!
SO I'm watching carefully - I'd like to know your thoughts, sorry for this extremely long email!
Also, in 2005 I had a friend of mine that got married a couple of months before I did, immediately got pregnant and then bought a house in New Hampshire (she works in Cambridge MA). I warned her to hold off for a year or two - as she was buying at the very top of the market, but she didn't listen. I wonder how she'll fare if her home price falls below the level of the mortgage she took out.
There was actually an article in the Financial Times last week that had this quote: "Robert Shiller of Yale argued at the same conference that US house prices might ultimately fall by as much as 50 per cent, which would lower US household wealth by more than Dollars 10,000bn (Pounds 4,930bn). " Thats an awful lot of billions to be pulling out of the economy.
http://www.ft.com/cms/s/0/
Last weekend, Dad and I had a long conversation in which I asked the question: What were the economic factors that contributed to Black Tuesday and the lead up to the Great Depression? I know Wikipedia isn't necessarily the most authoritative place to look, but there were a few really interesting things there (I know that there is ongoing debate among economists about all of the contributing factors). In particular I noticed this paragraph:
"The crash followed a speculative boom that had taken hold in the late 1920s, which had led millions of Americans to invest heavily in the stock market, a significant number even borrowing money to buy more stock. By August 1929, brokers were routinely lending small investors more than 2/3 of the face value of the stocks they were buying. Over $8.5 billion was out on loan, more than the entire amount of currency circulating in the U.S.[7] The rising share prices encouraged more people to invest; people hoped the share prices would rise further. Speculation thus fueled further rises and created an economic bubble. The average P/E (price to earnings) ratio of S&P Composite stocks was 32.6 in September 1929 [8], clearly above historical norms."
For today's situation, insert the words "real estate" along side the word "stock" in the paragraph above, and we have a close parallel to today's economic environment. I would argue that, artificial inflation of stock is concern enough - however stock is an additional asset held by people of some means, and losses in the stock market will usually only dig into someone's savings (unless you are a current retiree living off the dividends). However, in the current crisis the artificial inflation is of real estate (this is of course an investment vehicle for some) but for most people (especially these days, and especially in the U.S.) it is their ONLY ASSET, and it is also essential to these consumers. If your stocks take a hit, as a consumer you can recover. If your HOME price takes a hit, as a consumer you might not.
Similarly I've noted this:
U.S. Currency currently in circulation: June 30, 2007 $812,760,455,370
http://fms.treas.gov/bulle
U.S. Consumer debt: Sept. 10, 2007 $2,456.6 billion
http://132.200.33.130/rele
Another interesting parallel, don't you think?
SO, in my mind, the hit on the U.S. consumer is going to be the ultimate problem. BUT compounding the issue is the extent to which the housing industry contributes to U.S. GDP and employment:
My Research:
United States - 2005 Data
http://www.bea.gov/industr
Gross Domestic Product by Industry Accounts, Full-Time and Part Time Employees by Industry, release date April 24, 2007.
Construction employed 7,657,000 people in 2006.
Finance, Insurance, Real Estate, Rental and Leasing employed 8,308,000 people in 2006.
Gross Domestic Product by Industry Accounts, Value Added by Industry as A Percentage of Gross Domestic Product (Percent)
http://www.bea.gov/industr
Also affects manufacturing (ie. furniture manufacturing was .6 % of GDP).
Finance, insurance, real estate, rental and leasing was 20.8 percent of GDP in 2006.
Total Contribution of the Housing Industry to the U.S. Economy:
26.3% of GDP
15,965,000 employees
Ultimately, our current situation the result of an economic bubble in the United States. However, before today's economic concerns really came onto the radar, I had a discussion with a friend who had recently read a book in which it was argued ten years ago by an economist that the baby boom itself has created a bubble of sorts in the U.S. economy. He argued that the economy will continue to rise until 2010 or so while the baby boomers are battening down the hatches (buying new cars, new roof, new furnace, etc. - everything to get ready for retirement) and then these economic actors will be withdrawing from the economy in large groups as they enter the world of fixed income living. This in itself will have a huge impact, but he also noted that at the same time as this is happening, this same group will, in turn, become a heavy liability on U.S. government programs for seniors that are not adequately resourced, while the government itself is already in debt over its eyeballs. In this book it was argued that demographics alone would cause a significant economic downturn in the U.S.
For our generation the timing couldn't be worse - because it will bel happening as the younger generations of U.S. consumers are absolutely crunched by losing ground on the price of their houses, skyrocketing medical costs, stagnant or falling wages, higher tuition, higher unemployment, fewer benefits, etc. (And low Walmart prices for consumer goods will not save them. If China's inflation and manufacturing issues continue, and if the U.S. dollar continues to drop, then Walmart might not be able to keep its prices so low indefinitely anyhow.)
So, indeed there will be plenty of purchasing opportunities presented as U.S. markets "readjust" as Wall Street folk like to say, but if there is an absence of liquidity (ie. consumers can't get credit and have no savings and declining incomes) then this might not have the impact we are hoping for, regardless of the strength of corporate profits. There's no trickle down happening to the largest group of consumers who fuel the whole economy, and that's ultimately the problem. In my opinion, rising corporate profits primarily benefit bankers in the Cayman Islands. ;)
As a side note, I find it interesting that they've made a Great Depression scholar the Chairman of the Federal Reserve. Hopefully that will help!
SO I'm watching carefully - I'd like to know your thoughts, sorry for this extremely long email!
posted by Annette | 2:14 p.m.
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