Philadelphia FED Survey
My “touchstone” for economic forecasting is the quarterly Philadelphipa FED Survey of Professional Forecasters. They survey about 50 or so forecasters each quarter representing the top forecasting “shops” in the country. (The number isn’t exact, because many of the forecasters wish to remain anonymous.) Included in the mix are the usual suspects — Mark Zandi from Moody’s, Ethan Harris from BofA, Dean Maki from Barclays, Ardavan Mobasheri from AIG, Sean Snaith of U. Central Florida, and so forth. I mention these names as examples to demonstrate these are folks who span the broad array of economic perspectives, and who usually represent firms that are actually putting their “money where their mouth is.”
An additional strength of this survey is methodological — the Phily-FED reports not only the mean of the responses, but also the distribution of those responses. Thus, it’s very helpful to see when individual forecasts are highly coalesced around a central tendency, or if there is a great degree of dispersion in the estimates.
Bottom line — the current projections for 2012 and 2013 are now weaker than they were three months ago (in the previous survey). While a double-dip recession doesn’t appear to be in the offing, the panelists expect real GDP growth to end up at 1.8% for 2011, 2.4% in 2012, and 2.7% in 2013. While 2011 will end slightly rosier than previously forecast, the numbers for out-years are about 0.2% lower than previously expected. The outlook for 2014 is also less than previously expected.
Courtesy Philadelphia FED Quarterly Survey of Professional Forecasters
These downward revisions in GDP growth come primarily from “…upward revisions to unemployment and downward revisions to job growth.” Specifically, unemployment is expected to end this year right at 9.0%, and is expected to fall to 8.8% next year, 8.5% ini 2013, and 7.8% in 2014. The prior survey had a fair amount dispersion in estimates for end-of-year 2011 unemployment, with over 30% of respondents optimistically thinking that unemployment could end the year between 8.5% and 8.9%. That number has now dropped to about 20%, and about 75% of respondents now believe that unemployment will end this year between 9.0% and 9.4%.
Courtesy Philadelphia FED Quarterly Survey of Professional Forecasters
Intriguingly, the central tendency of next year’s forecast didn’t change much from the last survey to this one, with between 30% – 40% of respondents thinking that unemployment would hover between 8.5% and 8.9% next year. The real change in the forecast came in the next-lower and next-higher brackets of estimates, which nearly reversed themselves from last survey to this survey. A quarter ago, about 25% of respondents thought that unemployment would end up around 8.6% in 2012, and only about 20% projected 9.2%. Today, only about 15% forecast the lower range, and about 32% are opting for the higher range.
Finally, while forecasts of inflation over the next ten years is still nearly flat-lined around 2.5%, there have been slight up-tics in forecasts ever since mid-2010. The following chart shows the general sentiment among forecasters, as well as the “track” of their forecasts over the past 20 years, which as you can see is pretty neatly distributed in a tight range. In general, inflation has not been a major issue in over a decade, but it is still worth tracking.
Courtesy Philadelphia FED Quarterly Survey of Professional Forecasters
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Now for a little good news….
Globe Street has a great piece about the self storage market, which is doing very nicely lately. Top firms in the fiele had revenue growth of 4% to 5.8% in the 3rd quarter, with net operating income growing 7.3% to 8.6%. ranged as high as 91.7% at Public Storage. The article properly notes that this sector is now joining apartments in strong, positive territory. Overall REIT share performance, as noted in the chart below, certainly underscores this (YTD as of October 2011, data courtesy NAREIT).
While the article correctly notes the strength in this market segment, it doesn’t connect the dots vis-a-vis why. Some of this is obvious, but it bears noting due to the very signficant long-range implications. The more-or-less simultaneous strength of the apartment sector and the self storage sector isn’t coincidental — the popularity of apartments for households which WOULD HAVE been in the owner-occupied housing market is driving the need for self storage. Anecdotal evidence of late suggests that the trend is toward smaller apartments — studios, efficiencies, and one-bedrooms seem to be in higher demand lately, although I haven’t seen this formally quantified as of yet. Given that, not only is there a need for self-storage, there will also be an increased need for SMALLER self-storage units as opposed to larger ones, urban infill units (or at least units near apartment communities) and even self-storage as an adjunct to apartment communities themselves.
Long term? This market risks getting over-build whenever the housing market stabilizes. However, that seems to be several years out. In the intermediate term, one would suspect a strong demand for more units paralleling the demand for apartments.
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And yet another post about housing
With all the negative news about housing, the market may have a tendency to grasp at any straw that floats along. In today’s news, that straw is a report from the census bureau that home ownership rates — which have been declining steadily for two years, and are now at a 13-year low — seemed to reverse trend in the 3rd quarter and rise by 0.4% to 66.3%.
courtesy U.S. Census Bureau, 11/9/11
Of course, a quick read of the footnotes belies the problem with this pronouncement. First, as you can see, there’s a fair amount of cycling around long-term trends, and that’s probably what this is. Second, on a seasonally adjusted basis (which is really where the truth can be found), the increase was only 0.2%, which is statistically insignificant. Further, on a year-to-year basis, we’re still lower than where we were a year ago, which really underscores the long-term trend. I continue to believe that ownership rates will stabilize somewhere above 64%, but probably pretty close to it. At the current trend, that may take 3 – 5 years.
More importantly, though, an increase in housing demand (and prices) led us out of prior recessions, but housing is continuing to be a drag on the market following this most recent one. Unless and until the housing market doldrums stabilize, solid economic growth will elude us.
courtesy U.S. Census Bureau, 11/9/11
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Housing redux
While I’m on the subject, the Royal Instition of Chartered Surveyors (RICS), of which I’m a Fellow, publishes a great . Last week’s edition had a piece on the U.S. housing market doldrums, with a particular emphasis on the dearth of mortgage purchases (the secondary market which is vital to the liquidity of the mortgage business).
As you might guess, this important segment of the market peaked in 2005/6, and with a brief attempt at pick-up in early 2008, has been on a downward slide ever since. The index currently stands more than 60% down from the peaks of just 5 years ago. The trend continues downward, and fell 3.5% in the third quarter of this year.
Mortgage Purchase Index
They note that residential investment as a percentage of GDP currently stands at 2.2%, down from pre-recession levels of 6.6%. What’s more, the excess supply overhang will take years to absorb, according to their analysis.
The health — or lack thereof — us currently a front-burner issue for the Federal Reserve, which is now looking at the mortgage bond market as a means of helping to stimulate this anemic sector. Both FRB member Daniel Turillo and Vice Chair Janet Yellen have made public pronouncements in that direction recently.
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The housing market — Damning with faint praise
Sorry we’ve been absent for so long — it’s been a terrifically busy summer and early fall here at Greenfield. Hopefully, we’ll be back in the saddle more frequently for the rest of this year.
From an economist’s perspective, there’s plenty to talk about — Euro-zone debt crisis, job growth (or lack thereof), Federal and state debt, etc., etc., etc. My own focus is the mixed-message on the housing market, which continues in the doldrums. If you listen to the reports from the National Association of Realtors, you get some positive headlines followed by fairly depressing details. Existing home sales are better than forecasted, mainly due to great borrowing rates and the influx of “investor-buyers”. Lots of single family homes and condos are being turned into rental property or held “dark” for the economic lights to come back on. A surprisingly large number of homes are purchased for all-cash, since if you believe that housing prices are near their bottom, then residential real estate may be more stable — and potentially have better returns — than equities.
On the other hand, new home sales continue to languish at their lowest levels since we started keeping score in 1963.
Intriguingly, if you ignore the post-2003 “bubble” period, and trendline the data (which grows over time, to account for the increasing population), you end up with about 900,000 new home sales in 2011. As it happens, we’re actually around 300,000, reflective of a significant decline in home ownership rates — now down to about 66%.
The real question is whether or not this change in home ownership rates is temporary or permanent. We happen to think it’s permanent. That’s not all bad news, but it means that when new home sales come back on-line (eventually getting back to somewhere short of 900,000, but certainly higher than 300,000), we won’t see a return to bubble-statistics.
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Allison versus Exxon
If you follow the litigation news, you’re probably aware that this past week, a state-court jury in Towson, MD, awarded a group of plaintiffs $495 million in actual damages plus about $1 Billion in punitives in the mass-tort matter of Allison v. Exxon. The facts of the case are pretty straight-forward: Exxon leaked a significant amount of MTBE-laden gasoline into the drinking water aquifer of an unincorporated suburban Baltimore community known as Jacksonville.
I was the sole damages expert testifying for the plaintiffs, and methodologically, this was one of the more intriguing cases in my career. We utilized a mass-appraisal hedonic model for my determination of the unimpaired value of the properties as of February, 2006 (the date of the spill) and then amended this model to add factors for the impact of the contamination on these property values (using contingent valuation, meta-analysis, and case studies in the absense of a well-functioning transactional market). We also developed business loss determinations, loss of use-and-enjoyment measures, and present value calculations for medical monitoring costs.
Exxon literally threw everything they had into the damages aspect of the case — they knew this case had the potential to be both big as well as precedent-setting. They hired a veritable battalion of big-named appraisers, professors, modeling experts, and consultants, and one of their two damages testifying experts was a hold-over from the Exxon Valdez case. The multiple days of deposition, motions-in-limine hearings, and trial testimomy (and cross examination) were among the toughest I’ve ever seen.
Naturally, I’m always pleased when my clients win, but not for the reasons people tend to think. I’m not in this for the “win or lose” part of it, but it is intellectually challenging to climb these sorts of mountains, and when a court agrees with me, I’d be disingenuous to say it’s not intellectually affirming.
I’ll be developing a white-paper on this case very soon, and by some coincidence, I’m slated to speak in Manhattan at the semi-annual meeting of the American Academy of Justice next Monday on the topic of “Use and Enjoyment Damages”. As you might guess, this case will be featured in that talk — and probably plenty of subsequent ones.
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CNBC reports on housing doldrums
Diana Olick is the real estate blogger/reporter for CNBC, and has a great column this week commenting on the recent “semi-good-news” from CoreLogic. For her full column, and links to the CoreLogic report, click here.
The synopsis — CoreLogic reports that foreclosure sales as a percentage of total sales are down. Great news, if it wasn’t for the sad fact that distress sales in May were still at 31% of the total market, albeit down from 37% in April.
Ms. Olick correctly notes that the “shadow” market hanging out there is huge. A few snippits:
Loans in the foreclosure process (either REOs or in-process) total 1.7 million homes, down from 1.9 million a year ago. Given that total home sales in America seem to be hovering around 5 million per year, this is a huge portion of the inventory.
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The Livingston Survey — Semi-Good News
Regular readers of this blog will note that I’m enamored with the Philadelphia FED’s surveys of professional economists. They actually do two surveys — one quarterly series, which has a slightly larger survey base, but doesn’t go into as much depth; and the semi-annual Livingston Survey, which has a smaller audience but a lot of detail. For direct access to the current Livingston Survey, click here.
Bottom line? The first half of 2011 isn’t as rosy as economists previously predicted, but they’re still modestly bullish on the second half of the year. Currently, the annualized GDP estimate is an anemic 2.2%, down from an almost-equally boring 2.5% in the December survey. However, GDP growth in the second half of the year is expected to be even stronger than previously thought, with second-half growth forecasted at an annual rate of 3.2%. More significantly, previous estimates of unemployment are being cut. In the last survey, economists collectively projected that year-end 2011 unemployment would stand at 9.2%; today, that projection has been lowered to 8.6%. Of course, these projections were surveyed before the most recent nasty jobs-growth reports, so everyone who uses this data is taking a bit of a “wait and see” prospective.
The nasty news is on the inflation front — prior estimates put the consumer price index rise from 2010 to 2011 at 1.6%; current consensus thinking is 3.1%. While that doesn’t sound like much, the producer price index is even worse — a prior estimate of 1.9% is now being revised to 6.3%. Both indices are expected to settle down in 2012, but we can only hope.
With that in mind, projections of T-Bill and T-Note rates are, not unexpectedly, higher than previously thought. The current 3-month T-Bill rate (as of this morning) is 0.04%. Current thinking is that we will end June in the range of 0.08%, but that by the end of 2012, 3-month bill rates will be up to 1.58%. Ten-year Note rates will follow a similar, but slightly flatter pattern (representing a slight expected flattening in the yield curve). The 10-year composit Note rate as of this morning (according to the Treasury Department) was 3.77%. Economists actually project it will decline a bit by month-end (to 3.25%), then rise slightly by the end of 2012 to 4.5%.
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A Movie Review of Sorts
I just saw HBO’s “Too Big To Fail”, staring a whole host of Hollywood “names” (James Woods, John Heard, William Hurt, Paul Giamatti, Cynthia Nixon, Topher Grace, Ed Asner etc.). Sadly, it’s a fairly boring movie, albeit about a terrifically exciting piece of near-term history. It focuses on the collapse of Lehman Brothers, mostly through the eyes of Treasury Secretary Hank Paulson (played spot-on by William Hurt). Asner does a wonderful Warren Buffett (who almost, albeit reluctantly, came to Lehman’s rescue) and Giamatti is a wonderful Ben Bernake. (As an aside — Bernake is the most dead-pan person I’ve ever met. Giamatti’s version of Bernake is even more deadpan than reality.)
The movie gets one thing right and one thing wrong. First, the wrong, and then the right.
The movie keeps referring to Lehman’s “real estate”. No one will buy Lehman if they have to buy its real estate holdings, too. Lehman’s real estate “problem” is at first estimated at $40 Billion, then $70B, then “who knows”. The truth, of course, was “who knows”. Cynthia Nixon plays Paulson’s press secretary, who serve as an amiable foil to allow Paulson and his Chief-of-Staff Jim Wilkinson (Topher Grace) to explain the nature of the crisis to her (and thus to the viewer). Unfortunately, Lehman’s “real estate” isn’t “real estate” but “real estate mortgages”. More to the point, they have “tranches” of real estate mortgage pools, and to understand what a “tranche” is would be well beyond the capacity of a two-hour movie. Tranche, by the way, comes from the French word for “slice”. Imagine we pool $100 million or so in mortgages, then split up the ownership into three equal parts — an “A” tranche which will get paid in full, including interest, before anyone else gets paid; a “B” tranche which gets paid next, and a “Z” tranche which only gets paid after everyone else gets paid.
In theory, all three tranches should be good securities, since the underlying mortgages are pretty safe bets, and in practice the “A” and “B” tranches really were pretty good. However, the “Z” tranches will bear all the default risks. Banks (both mortgage and investment) made tons of money on these things, because the default risks could be “priced” as long as market continued to rise. Various investment banks then borrowed money to buy “Z” tranches, and coupled with credit-default swaps (essentially, a mutual insurance pact among investment banks), they were able to borrow huge amounts of money with very little capital.
The Paulson/Wilkinson explanation in the movie makes it sound like the whole problem came from mortgage defaults and foreclosures. In reality, mortgage defaults DO cycle up when a recession comes along, but these are usually predictable cycles. The REAL problem came from borrowing huge amounts of money — with almost no capital — to buy “Z” tranches that didn’t reasonably price the increased in defaults. A slight up-tick in defaults sent everyone to the emergency room, and when owners couldn’t sell or re-finance, the whole market went down the tubes. THAT was the “real estate” problem which plagued Bear Sterns, Lehman Brothers, Salomon Brothers, Morgan Stanley (my old alma-mater) and all the others. Sadly, the movie perpetuates the myth that the real estate down-turn was an exogenous event, and fails to discuss the sins of the secondary mortgage market which took a simple, cyclical downturn and turned it into a long-term, world-wide crisis.
But, even with that, the movie got one thing so very right that made up for the mistakes. In one pivotal scene, Paulson and his team are presenting the TARP idea to the leaders of Congress. (Central Casting found some excellent look-alikes for Pelosi, Dodd, Shelby, Frank, and the rest.) Note that this comes very late in the movie, well after Paulson (an almost billionaire, who really didn’t sign on for this level of stress) and his team have tried ever possible solution to stem the crisis. The movie does a great job of playing Paulson up as the unsung hero who really saved the world’s economic life, by the way. Anyway, the leaders of Congress don’t “get it” until Giamatti’s Bernake gives the most important 2-minute economic lecture in history. He notes that while the Great Depression started with a stock market crash, it was the failure of the credit markets which made the depression last so long. The current crisis, if left un-solved, would spin the world into a much worse, much longer economic depression. Giamatti really nails the tone of the reality which was facing the nation’s top economic thinkers at the time.
Anyway, I don’t watch very many movies. I saw Adam Sandler and Jennifer Anniston in “Just Go With It” on an airplane last week, and thought it was a hoot. As movies come-and-go, “Too Big To Fail” doesn’t even rise to the entertainment level of “Just Go With It”, but as an educational piece, it’s a must-see, even with its critical flaws.
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Housing Finance — Take 2
Again, from the Wall Street Journal, we find reasons for concern. The “Ahead of the Tape” column in today’s Journal, we find an excellent — but troubling — article by Kelly Evans titled “Economy Needs a Borrower of Last Resort.” It really follows my theme from yesterday, and I couldn’t agree more.
Graph courtesy The Wall Street Journal
Imagine a dollar (or a hundred thousand dollars) injected into the system which is loaned to a family buying a new home. They pay the builder, who deposits the money in the bank (actually, paying off the construction loan) and then that money can be loaned back into the system. Some of it bleeds off into taxes, exports, and such, with each iteration of the deposit-and-loan cycle, but still, the money cycles thru the system. Since each subsequent deposit and loan doesn’t happen instantly, there is a little bit of a lag. Nonetheless, over a short period of time, the system should work. The math behind this is called the “Cambridge Velocity Equation” and it’s been known to economists for hundreds of years.
So, since November, the FED has purchased $684 Billion in bonds, which SHOULD have resulted in trillions of dollars in new money creation. Instead, M2 (the abbreviation for the money supply, defined as all of the cash, bank deposits, and money market funds in the system) has only increased by $326 Billion, suggesting that the velocity of money is about 0.5. Note that it SHOULD be 2 or 3 or more in a vibrant economy. This means that for every dollar injected into the system by the FED, half of it has dissipated.
As the article points out, this is why the recovery has remained so anemic. I would posit that a big problem is in the home loan business, which is far weaker than merely “anemic” — it’s on life support with the undertaker waiting in the lobby.
Kelly Evans posits that the market needs a lender of last resort, which is exactly what I was saying yesterday. Unless and until the system starts turning into the skid, by fixing the totally busted mortgage market, a double-dip recession seems inevitable.
From a small northwestern observatory... 