Economic Recovery? Focus on housing, not stocks.

From Bloomberg:

Rising House Prices, Not Stocks, Make People Feel Wealthy

As a key influence on households’ spending decisions, the health of the housing sector trumps stock-market moves, a paper released this week by the National Bureau for Economic Research claims.

The study, written by prominent economists Karl Case, John Quigley and Robert Shiller, refines their existing study of what is called the wealth effect. Case and Shiller are well known names, especially on housing issues. Quigley, another luminary, died in May, before the research’s publication.

Most economists and policymakers agree asset price gains can be big drivers of consumer spending power. Rising home or stock prices are generally agreed to increase consumer spending, while falling asset prices cut the other way.

That said, economists and policymakers have had a hard time quantifying the wealth effect. That’s problematic for many reasons, but it’s even more so due to the fact that the housing market’s crash and apparent recovery are considered central to the overall fate of the economy. To that end, the Federal Reserve is pursing a policy course deliberately aimed at driving up all manner of asset prices in hopes its actions will boost household spending to power better overall growth.

In the paper, the economists update their decade-old work, drawing on a wider and more up-to-date set of data ranging from 1975 to the second quarter of 2012. The broader information changes and clarifies what was once thought about the wealth effect’s influence.

There is “at best weak evidence of a link between stock market wealth and consumption,” the economists wrote. “In contrast, we do find strong evidence that variations in housing market wealth have important effects upon consumption,” they said.

“An increase in real housing wealth comparable to the rise between 2001 and 2005 would, over the four years, push up household spending by a total of about 4.3%,” the paper stated. Meanwhile, “a decrease in real housing wealth comparable to the crash which took place between 2005 and 2009 would lead to a drop of about 3.5%.”

This finding upends the old understanding that housing gains tended to push spending higher by a wider margin that home price declines depressed spending, the economists wrote.

From HousingWire:

Wealth effect creeps back into American households

The nascent housing recovery is beginning a shift from economic headwind to tailwind, creating the indirect effect of giving average American households hope to, once again, begin to retain a level of wealth.

Of course, being in America, the feeling of wealth is best described as a family’s healthy relationship with their overall composition of debt — and this is one relationship that is still changing.

“The wealth effect is multi-faceted: It is partly due to the psychological lift resulting from higher home values, i.e. the perception of a stronger household balance sheet position actually supports spending,” said Deutsche Bank ($47.23 -1.1%) analyst Carl Riccadonna in a note to clients. “More directly, price appreciation enables households to refinance debt, thereby reducing interest expenses, as well as tap into home equity via lines of credit or cash-out refinancing.”

The second detail is particularly interesting as, according to recent Federal Flow of Funds data, HELOCs and refis represent a large portion of the shrinking mortgage debt.

Deutsche Bank’s Riccadonna added that even small moves in home prices can have large effects on consumption, because housing comprises such a significant share of household assets.

“Based on previous analysis, we are projecting home price appreciation of 5-10% in 2013, which translates into a further increase in household assets, i.e. wealth creation, ranging between $860 billion and $1.72 trillion,” he said. “To be sure, the wealth effect on consumer spending could be substantial.”

This entry was posted in Economics, Housing Recovery, National Real Estate. Bookmark the permalink.

61 Responses to Economic Recovery? Focus on housing, not stocks.

  1. Mike says:

    Good Morning New Jersey

  2. grim says:

    Who comes up with this kind of garbage anyway?

    http://seekingalpha.com/article/1124821-the-newly-renovated-housing-bubble?source=email_partial_daily_dispatch&ifp=0

    Talk about cherry picking specific date ranges and scales in a graph to create evidence for a scenario that just doesn’t exist.

    Starts and Residential Investment are still deeply below previous peaks, and even what some would call normal trend. The very very minor blips upward hardly represent recovery, let alone bubble.

    For example, look at this chart:

    http://static.cdn-seekingalpha.com/uploads/2013/1/21/4445321-13587885837317314-Edward-Moseley_origin.png

    Who the hell would ever select 2009 as a starting point for housing starts? And by doing so, you create a set of axis which make it appear that somehow starts have spiked into bubble range? 2009 is something like a 40 year low for the series.

    When really, the story is more like:

    http://njrereport.com/blog/wp-content/uploads/2013/01/fredgraph-1.png

    Which shows starts somewhat recovering after spending 2 years at an extremely low level. Not only that but rapid accelerations post-recession are quite normal, and the extent of the current acceleration is small in comparison to the others we see historically. Even at the current level, we’re still far below what would be considered the minimum necessary just to cover the normal replacement rate.

    If you don’t think the author of this piece was being creative with his axis selections, ask why he decided to pick 2000 as the starting point for his mortgage rates graph.

    Unfortunately, the QE# attempts by the Fed are unlikely to result in a bubble in housing. Reflating a bubble with money alone is not possible, too much hinges on the sentiment of all players in the market. Credit is a necessary pre-condition, but not sufficient in and of itself. The psychology is dead. I’m not saying that some type of bubble isn’t possible, what I’m saying is look at some other asset class if you want to find it. And by the way, if you know what it is, let me in on it, I’d like to get rich quick too.

  3. Ernest Money says:

    The bubble du jour is in little green pieces of paper.

  4. Brian says:

    3 -
    Still, I wish I had more of them.

  5. Fast Eddie says:

    Nom,

    Didn’t get a chance to post; Brady played like sh1t. Maybe losing Gronk is a bigger hit than expected. And I snicker over the love for the thug, Ray Lewis. I think I gotta root for the 9ers even though I hate the coach and they’re an NFC team.

  6. Fast Eddie says:

    Clot,

    One thing I learned since the election: I’m proud to be an Amerikan, where at least I know I’m free. :0

  7. grim says:

    What’s up folks, no love for Nokia this morning? Surely the Apple h8rs have some spite left over for the underwhelming Lumia failure (goes to show you what hitching your wagon to Microsoft gets you). 4.4 million units in Q4 and only 700k sales in the US? This versus Apple’s 47.8 million iPhone units sold in the last quarter?

    Look, I’m not talking share pricing here, I’m only an indirect appl holder through index funds, they very well might have been priced to perfection. But from a technology perspective? Calling Apple’s near 48 million unit shipment in the same time period as Nokia’s 5 million? C’mon now. Windows phone is clearly dead at this point, and to some extent, that’s the consumer’s vote against their new UI strategy. (Please, spare me the “up 40% from last quarter” crap, 2 million units? That can be explained as pure accident or folks buying phones based on color choice).

  8. Essex says:

    Yesterday was an awesome day to unload options.

  9. grim says:

    Wasn’t quite finished with my MS rant yesterday. Surface Pro, no 4g/LTE connectivity at all? Not even an option? This is a tablet right? So I’ve got to carry around my hotspot too? Another big miss. If this is really targeted at the corp customer, 4g is a no-brainer, who cares, it’s going to be expensed anyway (I can only imagine the corp user being upper level management/executive).

  10. Juice Box says:

    Netflix!

  11. Essex says:

    6. Free to be a douche.

  12. grim says:

    Jobless claims strangely low for the second week in a row, 330k, hugely under estimates.

  13. Painhrtz - So Long and Thanks for all the Fish says:

    Grim Microsofts problem is they are competing in a market with 2 strong operating systems and they are acting like it is 1999 and they are the lead dog. talked to one of my buds who just got a new phone not the brightest bulb but your typical phone consumer. His thoughts, stuck with android had it on my previous phone, liked it. Said he looked at the windows phone and while some of the features were nice he did not like the interface and found it to be to busy. how many people when they are looking to an alternative to APPL are going to come to that same conclusion.

    Surface tablet looked to be neat totally priced themselves out of the market. some windows groupies will buy it, but it is going to be a major dissapointment. don’t buy the corporate market unless they are trying to get everyone to dump their laptops. not sure how it will play with most corporate infrastructure and it is laptop priced with half the features and expandability. good the Gates got his money that company has lost its fastball.

  14. grim says:

    They blew it, Surface RT should have been the corporate content consumption device, where Surface Pro starts bridging the gap to true content creation device. Problem is, Surface RT doesn’t play at all with standard Windows networking from what I can tell (you can’t connect it to a domain?, huh?). Can’t push policies to it? So basically, every user needs to top tier device?

    By the way, you can’t use the included Office RT on the Surface RT tablet for business purposes without also purchasing an additional license? Talk about considerable device confusion, that makes the RT tablet cost as much as the Pro. Imagine someone looking at the two devices side by side, RT vs Pro. You would think the RT is like the “light” version of the pro, but that isn’t the case at all, they are totally different devices. They really shouldn’t even be sharing the “surface” brand name. Should have named them “Couch” and “Desk”, respectively, because that’s where either device will be used. Would have been less confusion and in-line with the naming methodology for the wireless product, “Phone”.

  15. chicagofinance says:

    Libtard: show me the AAPL love……..when are you going to buy me the chicken broccoli, fried rice and wonton soup? Extra noodles please…….

  16. chicagofinance says:

    FWIW: The thought of selling AAPL to some of my clients was verboten. Now all of a sudden I get calls left and right such as “you a%%hole, why do I own this piece of sh!t?” ……yeah the one we bought at $90?……I digress……

  17. Mike says:

    love it when my two year old niece gets a hold of my antique LG camera phone (5 years old) and tries moving the pictures with her finger and they don’t move.

  18. grim says:

    My dad has got a cheap setup. He’s got an unlocked, no-contract (recent) Samsung from eBay or somewhere, he uses a no-contract pre-paid SIM card for voice, and now for internet, he just connects it to Optimum WiFi and his home WiFi network.

    I don’t think there is a cheaper way to get a current phone without a huge outlay of cash. The phones are still going to run in the neighborhood of two or three hundred bucks, but the monthly outlay is tiny in comparison.

  19. Essex says:

    Each of us A cell of awareness Imperfect and incomplete Genetic blends With uncertain ends On a fortune hunt That’s far too fleet…

  20. joyce says:

    18

    Mike,

    That was hilarious

  21. Juice Box says:

    re# 15 – Grim I have had people ask me all how do they load/use their IOS apps on their Macbooks.

    Surface RT uses the ARM processor and will only be on tablets and phones. Surface PRO AKA Windows 8 runs on Intel and AMD and will only be on desktops and laptops, and some hybrid tablets. I would never recommend a Surface RT tablet in an enterprise environment, for the same reasons I would not recommend iPads in an enterprise environment.

    You cannot really use a tablet to do work. I mean work now, not Facebook, Bejeweled Blitz or some other tablet games like Angry Birds, and taking notes in meetings with your iPad does not count as work.

    I have see some Surface PRO prototypes. They are really just laptops sans the attached keyboard. They even have a laptop fan built in to go along with all of the standard ports you would find on a laptop.

  22. Juice Box says:

    re#18 – I gave my son my old Droid Bionic on our home wifi to use. He watches his cartoons on it using Netflix. This frees up the iPad for my wife to use to waste time on a Facebook game or surfing the web etc. We don’t watch live TV much anymore, our usage of downloaded movies and shows has declined considerably but we still waste lots of time staring at screens. Heck even the Kindle ain’t too bad to use to surf the web and if I can’t find that there is always the iPhone 5 or my Galaxy 3 phone. No way I am going to fire up a laptop to just look something up on the web.

    I wonder if Google Glasses will really be the next evolution, from desktop to laptop to tablet to to wearable projection computer? Will we drop the flat screen touch devices altogether and just stare into space and mutter commands to open a web page or launch an angry bird at a pig?

  23. Ernest Money says:

    When Google comes up with a pair of glasses that will allow me to emit tractor beams and lethal x-ray lasers, I will buy them.

  24. Juice Box says:

    You can buy Google Glasses now for $1500 if you join their developer program, the galsses should be shipping in a month or so. I am waiting for some hipster in NY to start the trend.

  25. Libtard in the City says:

    ChiFi…good call on Apple. On the bright side, the club seems to have found some nice winners to compensate for our Apple damage. If you give me your address, I’ll FedEx you a soy sauce packet.

    It really does seem that Jobs was really that incredible. Since his departure, all Apple has done is screw up. The Forbes article today sums it up pretty well, even if it is written by a technical analyst.

    http://www.forbes.com/sites/investor/2013/01/24/heres-whats-next-for-apple

    I do see AppleTV as having some potential, but not without Jobs tweaking it enough to differentiate it enough from everything else that’s already out there.

  26. Libtard in the City says:

    Grim,

    My monthly outlay for mobile internet is zero. At least until FreedomPop folds, which it most certainly will.

  27. Anon E. Moose says:

    Sx [12];

    Nah, you’ve got that market cornered.

  28. Ernest Money says:

    “Everyone should keep gold in their portfolios” as the precious metal will be able to offer value to investors even in a worst-case scenario, said Marc Faber, the publisher of the Gloom, Boom & Doom report. “In the worst case scenario, in the systemic failure that I expect, it would still have some value,” Faber, who is also the founder and managing director of Marc Faber Ltd., said today at an event hosted by Evli Bank Oyj in Helsinki. Faber said his outlook was so bleak that he is “hyper bearish”. He joked that “sometimes I’m so concerned about the world I want to jump out of the window.”.. In response to a question from Yale University’s Robert Shiller querying the recommendation to hold gold, Faber said: “I’m prepared to make a bet, you keep your U.S. dollars and I’ll keep my gold, we’ll see which one goes to zero first.”

    http://www.zerohedge.com/news/2013-01-24/faber-shiller-%E2%80%9Cyou-keep-your-us-dollars-and-i%E2%80%99ll-keep-my-gold%E2%80%9D

  29. chicagofinance says:

    You guys still buying restaurants with a 30 P/E?

    Libtard in the City says:
    January 24, 2013 at 11:09 am
    ChiFi…good call on Apple. On the bright side, the club seems to have found some nice winners to compensate for our Apple damage

  30. chicagofinance says:

    The End Is Nigh (Super Bowl Edition):
    Shortage of chicken wings……best part is the gratuitous photo….
    http://www.nypost.com/p/news/national/chicken_wing_shortage_threatens_CWCHy7EBAqOj4WQNGfP3CL

  31. Libtard in the City says:

    Aww. Come on Chi. We made a ton off of CHIpotle.
    07/23/2009 08/05/2011 84.2% Annualized return

    Of course our latest foray into this world with BJ’s (who doesn’t love a BJ?) ain’t looking so good. Their P/E is only 28. If I recall correctly, Chipotle’s P/E approached 50.

    BJ Restaurants (BJRI) 09/20/2012 01/24/2013 -57.0% Annualized

    Still…Since our inception in 2005, we’re still kicking ass.

    Mad Loot Investment Club 9.2%
    Vanguard 500 Index Fund (VFINX) 7.5%

  32. Anon E. Moose says:

    Money [29];

    I found this interesting — scarcity + desirability == value. And to think that of it is pissed away on baubles.

    http://demonocracy.info/infographics/world/gold/gold.html

  33. Anon E. Moose says:

    Redo [33];

    “…to think that half of it is pissed away…”

  34. Brian says:

    Those guys are predicting Gold at $750/oz in a year.

    http://www.survive-prosper.com/pages/latest-research/landing/google/NB04-PPC-Gold-750-Gold-Up-Gold-Down-Gold-Price-CN.php?code=X195NB04

    33.Anon E. Moose says:
    January 24, 2013 at 12:04 pm
    Money [29];

    I found this interesting — scarcity + desirability == value. And to think that of it is pissed away on baubles.

    http://demonocracy.info/infographics/world/gold/gold.html

  35. Getto Work says:

    Yet again, no one on these boards is keeping their eye on the ball – the swoon is coming (charts say in period resembling late 07 early 08).
    This site is supposed to be primarily about NJ real estate/housing – right?

    Kansas Fed Joins NY, Philly And Richmond Fed In Contracting; Employment Index Drops To 2009 Levels
    http://www.zerohedge.com/news/2013-01-24/kansas-fed-joins-ny-philly-and-richmond-fed-contracting-employment-index-drops-2009-

    Again, no jobs, no income, no savings, no down payment, no purchases of homes – even a child can draw these conlcusions, although, it would likely end its statement with a ‘DOY!’

    Do you really care about consumer discretionary spending on electronics and fast food?
    Earnings there are imploding, all as the USD currency relatively strengthened and made those resource/retail items less expensive in USD.
    Or alternatively, as less $ is available for consumer discretionary, there’s yet less $ available for residential real estate.

    Getto Work, or Get To Work if you prefer

  36. Ernest Money says:

    Christie should shove a plunger up that punk grifter’s arse.

  37. Ragnar says:

    So what is it that Christie is trying to do now besides raise his national profile? Christie has completed about 1% of the “hard choices” New Jersey needs to make, and he has been running a victory lap for the past couple of years.
    If Christie were doing anything useful, he should be facing a recall campaign from his enemies. He needs to make a lot more enemies amongst the bloodsuckers.

  38. Ragnar says:

    Getto Work, 36,
    Most of the eminent economists of our era have declared that the production of economic goods and services is not important to the economy. Only consumption counts, in their view. When people just sit around except getting up to spend borrowed money (theirs or the government’s), they’re just being patriotic and stimulating “aggregate demand” and helping to rebuild the economy, one TV show, youtube video, and oreo cookie at a time. That’s Nobel Prize Winner Paul Krugman’s view. Except we should also be depreciating the dollar faster, so that inflation drives these consumers off the couch quicker to make sure they get their chips and soda before the price goes up. Buy those cheetos now or be priced out forever!

  39. Ernest Money says:

    ragnar (39)-

    In case no one’s noticed, Christie is a part of the problem…not the solution.

    Nothing I’ve seen from him indicates that he is one iota better than any of the thieving liars who hold elected office at every level in this God-forsaken shitbag of a country.

  40. sh1tting skittles says:

    Fiat = order – ordinance – decree – command – edict

    Gold = Fiat Commodity
    It has no real purpose outside of its percieved worth.

  41. Painhrtz - So Long and Thanks for all the Fish says:

    money excuse the pun but he has made a career out of getting fat at the public trough so why would he be any different. I love the fact that his bi partisianship is getting the neocon troglodytes panties in a bunch, but that is about it.

    I have always viewed him as part of the problem. His pseudo Jersey act on his detractors is all bark and no bite. He ahs no plan other than the usual continue f*cking the populace for the greater good.

  42. Anon E. Moose says:

    SS [42];

    Key difference: fiat comes from one or a few with the power to enforce their commands. Demand for gold, even if no more rational than a reaction to others’ around them demanding the same, is considerably more broad-based.

  43. grim says:

    Most of the eminent economists of our era have declared that the production of economic goods and services is not important to the economy. Only consumption counts, in their view.

    Have you actually taken a look at the different methodologies used to calculate domestic production? There are 3 ways to do it: You can measure the annual production (what you suggest), the annual expenditures, or the annual incomes.

    Generally, it’s the expenditure approach that yields the most meaningful breakdown of components, so it’s the most commonly used. The other approaches are sometimes more technically challenging to utilize, so they aren’t. It’s worth noting, that regardless of the measurement approach used, the final tally should be identical in all 3 cases.

    The focus on “consumption” is largely an artifact of utilizing the expenditure approach, remember the good ol’ formula: Consumption (C) + Investment (I) + Government Spending (G) + Net Exports (X – M). Since consumption of goods and services is the single largest subcomponent in this mix, it warrants a high level of focus by anyone interested. Even small moves in consumption can have major impacts to our domestic production.

  44. sh1tting skittles says:

    Since the few with power are forcing their will upon you, I’m happy to accept all of your unwanted fiat.

    44.Anon E. Moose says:
    January 24, 2013 at 2:56 pm
    SS [42];

    Key difference: fiat comes from one or a few with the power to enforce their commands. Demand for gold, even if no more rational than a reaction to others’ around them demanding the same, is considerably more broad-based.

  45. grim says:

    Jeez, I remember the first time I was in Eastern Europe in the early 90s.

    American Dollars were the same as gold, period, maybe even more desirable than gold. American dollars were always more desirable than local currency, and in some cases for large value transactions, the only mutually acceptable method of transaction.

    Funny though, because if the definition of FIAT requires some kind of governmental command or power over the people, how the hell does that explain the lust for dollars in countries where the US had absolutely no power. Even today there are a number of countries that use the USD as their de-facto currencies, even though the US has essentially zero power there as well.

  46. grim says:

    Someone made a compelling case to me one afternoon that the only real mutually acceptable method of global transaction that is near universal in it’s acceptance is a Rolex.

  47. grim says:

    Need a camel in the middle of a desert? Bet you can find someone willing to trade you one for your Rolex. Need a machine gun in the middle east? Getaway car in Columbia? Rolex. Losing at the tables in Macao? Hand over your Rolex. http://www.bloomberg.com/news/2013-01-22/rolexes-pawned-in-macau-signal-further-gains-for-casinos.html

  48. Anon E. Moose says:

    SS [46];

    Since the few with power are forcing their will upon you, I’m happy to accept all of your unwanted fiat.

    You obviously want some of it. What are you willing to give in return?

  49. Essex says:

    48. I love those. The Explorer or an older submariner are two favorites.

  50. Painhrtz - So Long and Thanks for all the Fish says:

    Yome what are the other choices Moonachie Avenue?

    I love giants/jets fans root for teams based in NJ that won’t even recognize they are based in NJ.

  51. yome says:

    Pain just embrace the business it will bring to the state. First time it will be held in a open stadium playing below 32 degrees. This will be fun. Maybe Jets will be playing

  52. Juice Box says:

    re “Maybe Jets will be playing” ROFL

  53. Sh1tting skittles says:

    I don’t like it when posters keep changing their handle. I find it irritating.

    Getto Work says:
    January 24, 2013 at 12:50 pm
    Yet again, no one on these boards is keeping their eye on the ball – the swoon is coming (charts say in period resembling late 07 early 08).
    This site is supposed to be primarily about NJ real estate/housing – right?

  54. freedy says:

    http://www.nj.com/news/index.ssf/2013/01/greg_schiano_settles_300k_loan.html#incart_river_default

    Grim : Please review as a comp killer . marked down from 2.3 to 1.9

    Rutgers has no interest in buying it back. 24k taxes

  55. Ernest Money says:

    skittle shit (42)-

    I’ll hold gold, you hold fiat. Let’s see which hits 0 first.

    I wish I could say I thunk this up, but Marc Faber said it this morning.

  56. Sh1tting skittles says:

    I actually don’t hold either.

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