Has Stimulus Distorted Housing Bottom?

Two and a half years ago, I did an article on Seeking Alpha using the work of economists Carmen Reinhart and Kenneth Rogoff who have done several studies predicting how our current housing crisis will play out.

Their study predicted a return to 2003 housing price levels based on modeling the top 5 global banking crisis recessions.

This week the Case-Shiller home price data for June 2011 showed a year-over-year decline of  4.5% but it was being compared against stimulus effected data.

The June 2011 index is 104.2 (Case-Shiller reindexed to Jan 2003 = 100).  According to the study, the home value collapse was modeled to be over by this year.  But here is one case that a stimulus may have screwed up our ability to understand what is going on.

Econintersect has reported that a Federal Reserve Cash-for-Clunkers Study found that stimulus was ineffective where inventories are involved.  The study specifically included a conclusion that the First Time Homebuyer Credit was ineffective:

These findings suggest an additional caveat regarding many stimulus programs designed to give a temporary boost to spending (the recent First Time Homebuyer Credit is another example): Spending is not the same thing as output when inventories are involved; even if the desired increase in expenditures occurs, inventory reductions may undercut the broader impact on GDP.

In the case of housing, the stimulus screwed up the data.  Is the housing price crisis behind us? – unlikely, but it is closer to the end than the beginning.  But it just makes you mad when money is wasted on an ineffective stimulus – and it clouds your ability to trend the data.

This post was written before the release of the August 2011 BLS Jobs report.  I have written in the past weeks about recession markers – and a zero jobs growth is definitely a recession marker.  This week my colleague Doug Short penned a telling piece on the current economic situation and concluded:

Since the beginning of quarterly GDP data, which has been tracked since 1947, the U.S. has never had an official recession without having achieved new highs in Real GDP and nonfarm employment. Let’s hope that record continues. But ultimately the debate over recession boundaries is a minor quibble in the ongoing economic reality of The Second Great Contraction.

The reality is that the 2007 Great Recession never ended, and was wallpapered with stimulus that covered up the still unresolved economic issues.  To even think this is a double dip or new recession is ridiculous – the economy remains trapped in the Great Depression 2.0.

Economic News this Week:

The Econintersect economic forecast for September 2011 forecast the economy will contract – but there is an indication that the economy may begin slight growth in the coming months. The the majority of the weighted elements were negative, but some key elements were showing positive growth.

This week the Weekly Leading Index (WLI) from ECRI slipped further into negative territory – from -2.1% to -4.3%.  In theory, a negative number implies the economy six months from today will be worse. This index has been eroding and has been in a four month overall downtrend. This index’s value of between 1.6% and 2.1% since the end of June 2011 held until August when this new downward trend began.

This week, ECRI’s has been making the rounds explaining what is going on in his index and the economy.

Initial unemployment claims fell 12,000 (from an upwardly revised 421,000) to 409,000. Historically, claims exceeding 400,000 per week usually occurs when employment gains are less than the workforce growth, resulting in an increasing unemployment rate.  The real gauge – the 4 week moving average – rose 1,750 to 410,250 because of the backward revision. Because of the noise (week-to-week movements), the 4-week average remains the reliable gauge.

The data released this week confirms the economic soft spot is continuing. If current trend lines remain, price inflation will begin to moderate over the next few months.

Weekly Economic Release Scorecard:

Item Headline Analysis
Economic Review

Macrotides details why real USA economic expansion may be years away
August Jobs
No Jobs
Data is bad, and arguably recessionary.  However, there are methodology issues and a Verizon strike in the data
August ISM Manufacturing
Down Slightly
Still positive growth BUT ISM says manufacturing employment expanded in August – Not
2Q2011 Productivity
This downward revision is not a positive sign
July Construction Spending
The data was really flat using current dollars.  Construction is still falling if you use chained dollars.
Double Dip Recession

Doug Short documents the current realities
July Manufacturing
Up 2.4%
One sign the economy is expanding – but manufacturing is only 20% of business
August ADP Jobs
Up 91K
Really, 91K is terrible – but when you are looking for recession signs it is better than a negative number
Double Dip Recession

Rick Davis says the data show that a second dip has already occurred
September Economic Forecast

Econintersect forecasts the economy will contract in September – but the floor may be building
August Conference Board Consumer Confidence
This index has never recovered from the Great Recession – and now it is at Great Recession levels
June Case-Shiller
Up 0.4%
The Summer buying season is ending at levels 4.5% lower than last year
Congressional Debt Reduction Commission

Elliott Morss lays out the headwinds for a compromise solution to the USA debt
July Pending Home Sales
Higher YoY
Econintersect uses pending home sales to forecast existing home sales – and the possibilities for August are interesting
July Personal Consumption Expenditures
Up 0.5%
One of the highest growth rates since the end of the Great Recession

Doug Short shows current GDP level has preceded past recessions
Obama Stimulus

The USA economy would be negative for the last two quarters without the stimulus
Gauging Economic Activity

Martin Hutchinson trashes GDP claiming a better economic activity measure would be gross private product
Gut Feelings vs Data

Rick Davis looks at elements at play which logically have an economic impact with no ability to substantiate
2Q2011 GDP

Rick Davis looks at the BEA numbers and history of after-the-fact downward revisions
Winston Churchill

Frank Li postulates what Churchill would be saying today based on his famous quotes
Germany & the Eurozone

Marshall Auerbach suggests there are really three Germanys – only two of them are pro-Euro
Oil and GDP

Andrew Butter looks at oil pricing and predicts another USA GDP collapse
Western Economies

Eduard Fischer paints a gloomy picture of western economies

Michael Pettis predicts a darkening cycle for global trade
Sovereign Currency

Roger Erickson claims our handling of sovereign debt is bizarre
USA Banking

Dan Flemming ties national security issues to the banking system
Muni Bonds

John Lounsbury says doom has not happened to the municipal bond markets – and now they deserve a second look
Volatile Market

David Grandey charts out the volatility saying more will come
August Investment Review

Macrotides reviews this not-so-good month
European Banks

Kieth Fitz-Gerald worries another crisis is on the way
Summary of the Week

Jeff Miller lists the elements which are affecting the market
St Louis Fed Stress Test

Jeff Miller reviews what it is telling us – and if it is warning of economic decline
Dividend Stocks

Bill Barnhart looks at both iffy and good dividend producing stocks

Bankruptcies this Week: Nutrition 21, Solyndra

Failed Banks this Week:

6 replies on “Has Stimulus Distorted Housing Bottom?”

  1. Setting aside the fact that we find you, and almost all of your postings, to be far superior to almost everything else we read, we were shocked, absolutely SHOCKED, to see you feeling sorry for yourself, when you said: “But it just makes you mad when money is wasted on an ineffective stimulus – and it clouds your ability to trend the data.”

    You po’ baby. Yo’ “models” didn’t work they way you thought they would!!!
    Brings tears to my eyes.

    No – not that your models didn’t work; but that you totally missed what did NOT happen – aka, the dog didn’t bark.

    Steve, let’s – you, me and U.S. – try to get serious. Well, for the moment.

    What if W had NOT “nationalized” FMae&FMac, who were at the time doing over 85% of ALL loans made to U.S.? What IF China’s US$ 35 Billion a month subsidy of home loans had NOT been replaced by the FED/Treasury? What IF the total RE market had collapsed/frozen and there were NO home loans made at any price to any of U.S.?

    Have you modeled/analyzed THIS one?

    How many of the outstanding/overhanging inventory of new construction homes were sold to “brand new home buyers tax credit” purchasers? Do you know? Who would have bought them, if they had not? Anybody? What if that “absolutely NOT ‘hidden’ inventory” still existed?

    How many more builders, subs N supplier, local bank construction lenders – RE agents, escrows, title cos, mortgage brokers, et al, et ux – would have been totally wiped out?

    Have you modeled/analyzed THAT one?

    True, home builders would have had even more & larger losses to write off under their new IRS rules. Steve, do you have ANY idea how much THAT little chunk of change is?

    JMC, we might have a balanced budget today if we had not given that money away.
    (and, yes, Steve, that is, and is not, a joke)

    What even your own charts show U.S. is that post hoc, ergo propter hoc – AFTER the “nationalization” and the Buyer’s tax credits, the steep decline stopped.

    Permanently, of course not. But, for you to assume that “nothing much happened”, other than them messing with Yo’ charts, is very much in horror (sp?).

    Tis, in fact, The Fact that they DID mess up “your charts” that we are not in a full depression. And, yes, we do know that is “argumentative”. Prove me wrong.

    Even more to the point, and we are seriously complementary here, can you use your “charts” to show U.S. what w/c/should not have happened IF they had done nothing?

    To argue that nothing was changed, you are obligated to show U.S. what would have occurred if nothing had happened.

    Tis like being in college, once again; and saying that since wearing a condom was proven to prevent your being able to “feel everything on your Far Right side”, that if only you had NOT worn one, nothing significantly bad would ever have happened.

    Non post hoc, ergo propter non hoc.
    (or something like that:)

  2. JBG – – –

    You are so very correct that the counter factual analysis is missing in a lot of what we do. There is a reason for that: Doing such analysis requires making assumptions. To do a credible job of analyzing what might have been all reasonable scenarios need to be examined. Doing just one or two simply leaves open too many more what ifs.

    Steve may want to leave his own comment and may want to point out why I have missed something important. (I seem to be able to get that response from even my colleagues and friends.) But I felt necessary to write something myself when I read your comment because, between your ever present sarcasm and humor, there is much that is very fundamental to the analysis process.

    How much worse could things have gotten? That is a very legitimate and important question. But trying to answer it can make a fool out of the wisest man. I am reminded of the attempt made by former Fed assistant Chairman Alan Binder, an exceptionally talented economist, who did what appeared to be a thorough counter factual analysis of how the credit crisis collapse and The Great Recession were ameliorated by actions of the end of Bush and the start of Obama administrations. When I read the details I was left with an empty feeling that hundreds of forks in the road had been passed, with one taken each time and the other not explored sufficiently. The result was, for me, entertaining but not definitive.

    And, as I said, Alan Binder is an exceptionally talented economist and not a simple blogger like Steve or myself. (Sorry Steve, I should speak only for myself.)

    So, JGB, keep asking the tough questions and eventually fragments of answers may appear. But definitive counter factual analysis? That is a rare bird indeed.

  3. JGB, i have no problem arguing the other side of the road… http://econintersect.com/wordpress/?p=12514

    in the case of housing, the particular type of stimulus used was ineffective. not opposed to stimulus – opposed to mis-targeted stimulus.

    not a model boy either, don’t like modeling but again – this particular banking crisis model is proving particularly compelling in both foresight and hindsight.

    my purpose in writing is NOT to show all possible outcomes (which is well beyond human’s capability). i want to poke holes in common perceptions – economics is various shades of gray. there is no scientific absolute proof of any point, only some correlations possible.

    my personal belief is that trend lines do not change until they change. you will be 90% correct if you say tomorrow’s weather will be like today’s.

    i am not responsible for monetary or fiscal policy. i only care what works and what does not work – i do not use dogmatic litmus tests. the federal reserve studies say this housing stimulus likely did not work – and when the stimulus ended – the overall area under the curve (total home sales) over time was not effected.

    I would be interested to hearing a compelling argument that this stimulus worked. it is human nature to believe there is always an answer to a problem, but unfortunately there are times when there are no good answers.

  4. First, that article was “wonderful”. We would say we love you, but your SOP might not be so understanding. Very nice piece.

    Second, we – you, me and U.S. – need to be clear about which “stimulus” we are talking about.

    To try to avoid BO’s seeming inability to say what he really means, or to do what he says he will. As you point out, saying it is a stimulus does not make it so. To be fair, if it actually works, well…, then…, let’s all take the credit, shall we.

    Third, IF we look very closely at the first Buyer’s Tax Credit, we will see two prongs: the first was the obvious subsidizing of “brand new” home buyers to get them to buy NEW homes. The second was not as obvious. It was to allow the builders to write off their “current” losses on selling their surplus inventory at huge losses so that they COULD sell to the new buyers.

    We – you and U.S., but not me – paid the buyers to buy; and we paid the sellers/builders (through the use of prior taxes paid rebates for later losses) to sell off their inventory at a loss.

    We – you and me, “They” will never admit it – may think that it was terribly expensive, which it was; but we should face the simple economic fact that THAT stimulus really did work.

    A massive overhang of “speculative” homes and fully developed lots was sold off – repaying huge numbers of construction loans to local bank, S&Ls, and CUs. And, providing temporary jobs for the rest of the housing industry.

    Do NOT blame me for the 2nd Buyer’s Tax Credit. Or for the fact that Mr. Obama does not listen, to U.S. – not you, not me, and not to the rest of U.S.

    Sadly, what he is about to learn is that we are no longer listening to him. We represented divorcing couples, we know how painful this is going to be – for him, his children, and for U.S.
    (and, yes, Steve, that, again, is, and is not, a joke)

  5. John, Steve, my goal in asking you to show U.S. graphically WHAT would have happened if some of those steps were not taken, was not in any expectation that you, or anyone either of you could find, actually could.

    What we WERE trying to do is point out that something DID happen – or, more accurately, something significant did not happen.

    This is like fire protection, or better Medic One. We may not know how many people did not die, but we most certainly DO know that a lot of U.S. did.

    Two points: first, without FMae&FMac buying home loans from small local banks, S&Ls and CUs, we suspect that NONE of them would be able to make any. Look at FDICs, or better [email protected]’s “unofficial”, troubled bank lists! Can they make new loans? How? How many of them would already have been eliminated had there not been the 1st Buyers Tax Credit? What would that have cost U.S.? The only honest answer is “something” and “a lot”.

    Second, with state and local cutbacks, what reduction in response times are we now seeing in (Y)our police, fire and emergency medical protections? With huge cuts in Medicaid, how many will die?

    True, they did cut your taxes. But, they also cut something else. And, as the TV pitchman oft told U.S.: “But, it’ll cost ya.”

  6. John, do you have a copy of that article, or know where we can find it?
    Oh, and tell Steve that he should not try to use sarcasm, as he did in that other article – that is my job:)

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