2 0 0 7 S P R I N G C O N S T R U C T I O N F O R E C A S T C O N F E R E N C E A p r i l 2 6, 2 0 0...
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2 0 0 7 S P R I N G C O N S T R U C T I O N F O R E C A S T C O N F E R E N C E A p r i l 2 6, 2 0 0 7 T H E N A T I O N A L O U T L O O K, 2 0 0 7 S P R I N G C O N S T R U C T I O N F O R E C A S T Jim Glassman [email protected] 212-270-0778 Growth Without Housing
Transcript of 2 0 0 7 S P R I N G C O N S T R U C T I O N F O R E C A S T C O N F E R E N C E A p r i l 2 6, 2 0 0...
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EA p r i l 2 6, 2 0 0 7
T H E N A T I O N A L O U T L O O K, 2 0 0 7 S P R I N G C O N S T R U C T I O N F O R E C A S T C O N F E R E N C E, N A H B, D C
Jim Glassman
212-270-0778
Growth Without Housing
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Surprises in housing’s turmoil… looking for bubbles in all the wrong places
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Real estate stopped rising in 2006, as advertised …
Existing house prices (percent change from 12 months earlier)Existing house prices (percent change from 12 months earlier)
Sources: Standard and Poor’s; National Association of Realtors
-5
0
5
10
15
20
2000 2001 2002 2003 2004 2005 2006 2007
-5
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10
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20Case-Shiller national repeat sales price indexNAR's median price index of existing single family units
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… the housing ATM closed up …
Household portfolios of real estate and mortgage debt ($ billions)Household portfolios of real estate and mortgage debt ($ billions)
Source: Federal Reserve Board
0
5,000
10,000
15,000
20,000
25,000
47 52 57 62 67 72 77 82 87 92 97 02 07
Real estate net worth of householdsMortgage equity withdrawn (now represented by debt obligations)Other mortgage debt (e.g., debt taken to finance new residential investment)
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… but consumers didn’t shut down …
Net equity extraction ($ billions ann) Real consumer spending (% ch from 4 qtr earlier)Net equity extraction ($ billions ann) Real consumer spending (% ch from 4 qtr earlier)
Sources: Federal Reserve Board; US Department of Commerce
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Real consumer spending (right)
Mortgage equity withdrawal (left)
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… and house values are holding up …
House prices and affordability (thousands of dollars)House prices and affordability (thousands of dollars)
Sources: National Association of Realtors; OFHEO; JPMorgan Chase; US Department of Commerce
0
25,000
50,000
75,000
100,000
125,000
150,000
175,000
200,000
225,000
250,000
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80 82 84 86 88 90 92 94 96 98 00 02 04 06
0
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50,000
75,000
100,000
125,000
150,000
175,000
200,000
225,000
250,000
275,000
Median price of existing single-family houses in thousands of dollars (National Association of Realtors and Shiller)
What someone earning the median per capita income could afford at prevailing ARM rates (top boundary of shaded region) or at the 30-year conventional fixed rate (bottom boundary), assuming monthly
payments cannot exceed 33% of income and a 20% down payment
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… because real estate has many friends
low inflation brings a gentler Fednear-potential economy
demographics ageing housing stock
Big Easy’s washout9/11 inspires cocooningsubprime mortgage market opens doorstax advantaged (Tax Payers Relief Act of 1997)
what isn’t to blame … the Fed’s 1% countercyclical rate policy
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But credit excesses derailed new home building …
Total new house starts (000 at an annualized rate)Total new house starts (000 at an annualized rate)
Sources: NBER recession bars; Census Department; America’s Home Forecast
0
500
1,000
1,500
2,000
2,500
3,000
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
0
500
1,000
1,500
2,000
2,500
3,000
Scenarios for StartsHigh* (left)Base case (left)Low (left)
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… which slowed, but didn’t derail the economy
Real GDP (percent change from four quarters earlier)Real GDP (percent change from four quarters earlier)
Sources: US Department of Commerce, Federal Reserve Board
-1.5
-0.5
0.5
1.5
2.5
3.5
4.5
5.5
6.5
7.5
8.5
2000 2001 2002 2003 2004 2005 2006 2007 2008
-1.25
-1.00
-0.75
-0.50
-0.25
0.00
0.25
0.50
0.75
1.00
1.25
1.50
1.75
Contribution of residential
construction to real GDP growth over the quarter (right scale)
% change in real GDP from previous quarter (left scale)
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Housing recession ≠ national recession
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#1 The economy is bigger than housing …
Real GDP (percent change from four quarters earlier)Real GDP (percent change from four quarters earlier)
Sources: US Department of Commerce, Federal Reserve Board
0
1
2
3
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2003 2004 2005 2006 2007 2008
-2
-1
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tj
FOMC's most recent central tendency real GDP forecast (Q4/Q4
basis)
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… and unemployment tells the story
Unemployment rate (percent of the civilian labor force)Unemployment rate (percent of the civilian labor force)
Sources: US Department of Labor, Federal Reserve Board
4.00
4.25
4.50
4.75
5.00
5.25
5.50
5.75
6.00
6.25
6.50
2003 2004 2005 2006 2007 2008
4.00
4.25
4.50
4.75
5.00
5.25
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aj
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a
FOMC's most recent central tendency unemployment forecast (Q4 of year shown)
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#2 Beyond our shores, a world back in business …
Global real GDP (percentage change from four quarters earlier)Global real GDP (percentage change from four quarters earlier)
Source: JPMorgan Chase
-1
0
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1990 1992 1994 1996 1998 2000 2002 2004 2006
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… industrial economies and newly industrialized
Real GDP in selected regions (percentage change from four quarters earlier)Real GDP in selected regions (percentage change from four quarters earlier)
Source: JPMorgan Chase
-4-3-2-10123456789
2000 2001 2002 2003 2004 2005 2006 2007
-4-3-2-10123456789
Japan
Emerging economies in Asia, Eastern Europe and Latin America
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#3 Recessions come from business stress … find it
US corporate profits (percent of Gross Domestic Income)US corporate profits (percent of Gross Domestic Income)
Sources: NBER recession bars; US Department of Commerce; Standard and Poor’s
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1
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3
4
5
6
7
8
9
10
47 52 57 62 67 72 77 82 87 92 97 02 070
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After-tax S&P 500 operating earnings
After-tax GDP profits from current production
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#4 Longevity is a story about inflation not age …
Duration of economic cycles (months from trough to peak of cycle)Duration of economic cycles (months from trough to peak of cycle)
Sources: NBER, Joseph Davis, “An Improved Annual Chronology of US Business Cycles Since the 1790s”, NBER Working Paper Number 11157.
0
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40
60
80
100
120
14019
1918
1018
2118
3818
4619
1218
6718
9419
0818
9119
0019
2718
5818
8519
2118
2318
2618
3418
4318
9719
5818
8819
2418
5419
0418
7017
9618
0418
1218
7919
7019
4519
5419
1419
4918
6118
2919
3319
7518
4820
0119
3819
8219
6119
91
Current expansion
Trough Year of Business Cycle
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… cycles end when a stretched economy forces the Fed
Core PCE chain price index (percentage change from 12 months earlier)Core PCE chain price index (percentage change from 12 months earlier)
Sources: NBER recession bars; US Department of Commerce; Federal Reserve Board
0
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1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
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The FOMC's central
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Inflation may be a little high for the Fed’s taste …
Chain core PCE prices (percent change from 12 months earlier)Chain core PCE prices (percent change from 12 months earlier)
Sources: US Department of Commerce; Federal Reserve Board
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Band is FOMC central tendency
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Dashed line is forecast (monthly changes average 0.154%)
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… but it’s not a deal breaker when it’s about relative prices …
Core chain PCE prices (percent change from 12 months earlier) Oil ($ per barrel)Core chain PCE prices (percent change from 12 months earlier) Oil ($ per barrel)
Sources: NBER recession bars; US Department of Commerce; Bloomberg
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Petroleum (right)Core PCE chain prices
(left)
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… disguised energy costs …
Chain PCE prices (percent change from 12 months earlier) Corn prices ($ per bushel)Chain PCE prices (percent change from 12 months earlier) Corn prices ($ per bushel)
Sources: NBER recession bars; US Department of Commerce; Bloomberg
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Corn (right)Chain PCE prices (left)
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… not excess demand
Selected CPI indexes (percent change from 12 months earlier)Selected CPI indexes (percent change from 12 months earlier)
* Indirect energy impact assumed to be one-third of the direct impact.Sources: US Department of Labor; JPMorgan Chase & Co.
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CPI
Excluding direct and indirect energy*
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That’s why investors are looking beyond …
Core inflation and inflation expectations (percent)Core inflation and inflation expectations (percent)
Sources: NBER recession bar; US Departments of Labor and Commerce; Bloomberg
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2000 2001 2002 2003 2004 2005 2006 2007
0
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Core CPI, % ch. from 12 months earlier (upper boundary)
Core chain PCE prices, % ch. from 12 months earlier (lower boundary)
Five-by-five breakeven (expected inflation five years from now and beyond)
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… and why markets are biased to lower Fed rates
Market expectations for mid- and late-2007, futures markets (percent)Market expectations for mid- and late-2007, futures markets (percent)
Source: Bloomberg
4.00
4.25
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4.75
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5.25
5.50
9/1 9/29 10/27 11/24 12/22 1/19 2/16 3/16 4/13
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Actual fed funds target rate
Implied fed funds futures rate by June 30, 2007
Implied fed funds futures rate by December 31, 2007
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Growth—the old way—needs lower interest rates… yet another friend of housing
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Consumer past and present isn’t consumer future
Real consumer spending and income (annualized percentage growth over period shown)Real consumer spending and income (annualized percentage growth over period shown)
Source: US Department of Commerce
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5
1951-85 1985-05
1
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Real consumer spending
Real income
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Two decades of above-normal asset gains lifted savings
Saving rate (% of disposable income) Net worth (ratio to disposable income)Saving rate (% of disposable income) Net worth (ratio to disposable income)
Sources: US Department of Commerce; Federal Reserve Board
-4
0
4
8
12
16
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
4.0
4.5
5.0
5.5
6.0
6.5Ratio of net worth to income (right)
Saving rate (left)
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No mystery in the asset boom … but that was then
The Great Disinflation’s windfall
Economic liberalization’s transforming hand
Global awakening
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Growing the old fashioned way requires lower rates
Nominal and real 10-year Treasury yields (percent)Nominal and real 10-year Treasury yields (percent)
Sources: NBER recession bars; US Department of Commerce
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Nominal 10-year Treasury yield
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Conclusion … what investors see
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Investors see good news …
Non-investment grade debt yield less 10-year swap rate (basis points)Non-investment grade debt yield less 10-year swap rate (basis points)
Sources: Ibbotson Associates, JPMorgan
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300
400
500
600
700
800
900
1,000
1,100
1990 1992 1994 1996 1998 2000 2002 2004 2006200
300
400
500
600
700
800
900
1,000
1,100
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… from here to eternity
Stock market valuations (Wilshire 5000 price-earnings ratio)Stock market valuations (Wilshire 5000 price-earnings ratio)
Sources: Federal Reserve Board, Bloomberg Financial Services, US Department of Commerce
0
5
10
15
20
25
30
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
0
5
10
15
20
25
30
After-tax economic GDP profits (right)
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