u.k. housing bust- pomboy

[jk]

http://www.minyanville.com/articles/index.php?a=11569




Editor's Note: The following article was written by Minyan Stephanie Pomboy of Macro Mavens.

Remember the argument that the US housing bubble's deflation wouldn't hurt a bit...'cuz we were sure to follow the UK analogue? If not, don't feel bad. Even the folks who promulgated this view seem to have forgotten. Either that or they're still wiping the egg from their faces.

How else to explain the deafening silence surrounding news last week that personal bankruptcies in the UK had soared to an all-time record and were now up 55% from the year before? Towel, please!

What makes this UK credit bust so chilling is that the British have had it relatively easy. In contrast to US consumers, for the British, home equity withdrawal was a serendipitous supplement to wages, whereas here it has been a substitute for it. REAL wage growth in the UK has been solid whereas, here in the US, it only recently turned positive… and that due to declining energy prices. On top of which, the Brits have a fluffy savings cushion to fall back on (6% versus NEGATIVE -0.2% in the US).

All of this would seem to suggest that the exposure to home price deflation here is significantly higher than it is there. And that brings us to the real spine-tingler. This bumper crop in delinquencies in the UK has occurred even though home prices NEVER DECLINED! They simply rose at a slower pace! Sure, it was a sharp slowdown - from 27% to 1.7% - but nonetheless, incidents of 'negative equity' were widely averted.

Given the copious inventory the US has built (another blaring difference between the US and the UK housing bubbles), the potential for material declines here is high. Meanwhile the exposure to said declines is far greater for US consumers than it was for their British peers.

But hey, don't take my word for it. Realty trac reported last week that foreclosures rose 17% in the 3rd quarter and are up 43% y/y. This means one in every 363 households is now in default. No wonder the mortgage finance companies are tripping over themselves to securitize this stuff STAT!!

[blazespinnaker]

Re: u.k. housing bust- pomboy

Actually, it's not clear that the US has a negative savings rate and where household income is coming from.

You might want to check out this video on Bloomberg:

Phelps of Columbia Discusses U.S. Inflation, China's Economy
http://www.bloomberg.com/

(before it's gone)

[DemonD]

Re: u.k. housing bust- pomboy

Okay, this has been bothering me greatly. I do not believe that the US savings rate is "negative" as statistics one way or another can be manipulated, or at least not present the whole story. How is the savings rate calculated?

Here are just a few links that argue against the fact that US savings are negative, or that the negative savings rate does not tell us the whole picture:


http://www.thestalwart.com/the_stalw...ings_rate.html
Townhall.com Article
Marketwatch Article

Quote from marketwatch article:

For instance, the personal savings rate includes retirees who for the most part are spending their savings rather than bulking them up. Take those retirees out and you get a rosier picture, says Alicia Munnell, director of Boston College's Center for Retirement Research.
"If you take out both the income of the older people and the spending of the older people you get a much higher savings rate, because they are the ones with negative numbers," Munnell said. "Since we have the older people becoming a bigger portion [of the population], I thought their dissavings were pulling down the statistic."
When Munnell and her colleagues pulled retirees out of the picture, they came up with a personal savings rate of 5.4% compared with the official rate of 2.1% in 2003 (the most recent data available when they conducted their 2005 study). Paul B. Farrell says we should quit obsessing about savings.

Anecdotally: My parents have a total net wealth of upwards of 2 million. My father does not worked, and has not worked for about 7 years. My mother works sporadically but more for fun and pocket money so my parents can keep up their 401k well into retirement. They are not hurting for money and in fact very likely have made money over the past 3 years with the resurgence of the stock market. This is what they do:

Play on computer
Take cruises
Play mah jong
Build model trains
Have dinner with lots of friends
Mow the lawn
See family


Basically, your typical old fart retirement. Most of the people in their neighborhood are in their boat. They are likely spending a lot more than me or my sister are saving. Yet I "save" quite a bit of money every month, every year. As the baby boomers move into retirement, and the baby busters move into their biggest earning years, I would expect nothing less than a negative savings rate. Especially if the savings rate is only taking into account income as opposed to capital gains, on which many people make their livings nowadays.

So count me as an anti-contrarian when it comes to US spending. Even when the tech bubble bursted, there were still huge gains made by many people who were in stocks from the early 80's and before. Just like the BLS stats, I take issue with how the savings rate is calculated and furthermore what it means for the future of the US economy. Yes we spend more money and save less than the japanese or the chinese. But how many chinese have over 100 thousand in their 401k's? How many japanese have that much? I don't know, but I'm thinking not as many percentage wise as we have in the US.

401K Savings for Workers Up 50% from 1999-2005

I still see the credit bubble bursting and things getting painful for the home team. Just not quite as absolutely doom and gloom as the 'OH MY GOD WE ARE SPENDING MORE THAN WE ARE MAKING' doomsday predictors out there.

[jk]

Re: u.k. housing bust- pomboy

to say that some of the dissaving is by retirees doesn't mean it doesn't count. it just points to the demographic challenge ahead: relatively fewer productive workers in the economy, and a diminishing pool of domestic savers to buy the assets of the retirees. thus as retirees sell assets, they will either be acquired by foreign investors and/or their value will plummet. and if, as a nation, we have any kind of positive savings rate, you'll need to explain how all those bonds are piling up overseas.

[jk]

employment numbers may obscure housing bust

emplyment numbers may obscure housing bust

from a piece by michael drury, chief economist at mcvean llc.

The reduction in construction activity may not be immediately visible in lower employment.
Many employees in the housing sector are self-employed or on commission. Rather than
showing up as fewer employees, it is easier to see as weak growth in non-farm propreitors
income, or weaker retail sales as incomes decline faster than employment. Indeed, employees
in construction only make up about a quarter of the value of a home; less recently as
materials prices have soared. Lawyers, financial services, materials manufacturers, retailers,
shippers etc. make up more of the value of the home. Thus, the employment effect may be
more spread out and harder to identify than say auto sector layoffs.

[DemonD]

Re: u.k. housing bust- pomboy

JK, i agree. But I see that as a GOOD thing. Especially here in LA, where there was so much work for so long... there is still a job for anyone who can pick up a hammer and hit a nail. Probably will be for quite some time. The RE market here is still way way above where it should be, it needs to correct. How many people make their primary living from investing in real estate? I'm not sure, but the RE investors I know invest for the cash - rental properties (either commercial or residential), and if they are smart they did it for cashflow and not for capital gains. These people are still going to be making their money.

Some pain in the RE market will make it easier for Gen Y to start buying homes, and will hopefully weed out some of the fraudulent contracting that LA has such a huge problem with. I see a slow downturn in housing as a great thing in the near term as it reverts to the mean.

Maybe I'm biased because I'm a renter and not involved in any way in RE, but I have no sympathy nor do I see a correction in housing as destroying millions of people's livelihoods. With amount of bond issues that California just passed TODAY, there will be jobs for the next 10 years if you can still wield a hammer.