July 31, 2006

The coming crash in consumer spending (tied ever so perfectly to the crash in housing)


Ah, the wealth effect. Always so fun on the way up (like the dot-com rush of '99 and '00). But boy, watch out for the way down (like the dot-com bust of '01 and '02).

Also, during the bubble, tons of jobs were created to build these unneeded overpriced homes. Now those same jobs (and more) go away as more homes aren't needed for quite some time, now that we have massive oversupply.

54 comments:

Anonymous said...

this is the straw that breaks the back of the u.s. economy. we have gotten away with this insanity for so long...the credit bubble is going to pop.

empty pockets, full credit cards said...

It will be interesting to see if the spending falls to negative territory. The chart shows the drom in 1990 to be the steepest, even more so than the dot bomb drop. I think the little rise in spending the last quarter may either be a sign of inflation and perhaps indicates that consumers are still living off borrowed money.

Time will tell. I would like that chart to be shown in the future, say 6-8 months out after Christmas spending occurs or doesn't.

Anonymous said...

I ignored the advice of those who told me... buy now! you'll never see interest rates like this again! while looking for a first home...

I waited, and stockpiled cash thinking to myself that it would be better to pay a lower price for a home than a lower interest rate... the rate can always be refinanced if it goes down... but the price is the price.

My intuition seems to have served me well, and I'm glad to have waited out what was now very clearly a mania driven bubble.

I think I'll keep saving, and renting and start looking in 2008.

Great blog Keith.

Anonymous said...

They were right, you likely won't see interest rates that low for a long time. They forgot to add "You'll never see price like this again!" as in you'll never see prices this HIGH for a while either.

Robert Coté said...

When even loudmouth CNBC Cramer screams about consumers spending less the evidence is undeniable.

The Thinker said...

The health of our economy is dependent on hoards of consumers making bad financial decisions. As long as they continue to spend money they don’t have the economy will be fine. It provides me with great comfort and great relief that our economy depends on the consumer’s inabilities rather than their abilities, because given a choice between the two, I would choose to keep things as they are.

Opened Eyes said...

Housing price declines plus less consumer spending equals deflation, not inflation. Add to that baby boomers saving like mad for retirement, putting money in treasuries, I would say it's time to buy bonds (but not agencies).

Anonymous said...

Wait a minute guys....I think you're overlooking something. If the housing bubble pops AND the economy slows then the FED will simply start lowering interest rates again. It won't happen overnight but it will happen.

devestment said...

Wait a minute guys....I think you're overlooking something. If the housing bubble pops AND the economy slows then the FED will simply start lowering interest rates again. It won't happen overnight but it will happen.

How cheap does borrowing have to be for me to never have to go to work.

LauraVella said...

I really dont know how people can get suckered into buying an over-priced house just because of low interest rates. I too would rather have a lower price, since the taxes are based on the selling price. Also, I'm sure insurance is less expensive, since it goes by rebuilding price per square foot.

I have friends who are complaining about how high their taxes are, one couple went from about 1,800 to 4,000 year on property taxes. Ouch,that must really hurt.

Richard said...

As I see it the U.S. is headed for recession even without an "oil export embargo" undertaken by Iran and/or Russia and/or Saudi Arabia and/or Venuzuela.  But if TPTB could instigate such an embargo we could hide the fact that world oil production is peaking and blame the economic decline on the "terrorists" and those who are "with them" instead of "with us".



. . . a coordinated reduction of oil exports between any or all of the
world's largest oil exporters of just five percent would quickly send
international oil prices toward $125 per barrel. An increase in oil
prices of this magnitude could be expected to push the United
States economy into recession.

 
http://www.pinr.com/report.php?ac=view_report&report_id=532&language_id=1
 
31 July 2006

''Escalating Conflict in the Middle East Could Spark a Global Recession''
 
fforts by Washington and Tel Aviv to militarily establish a new Middle East are designed to weaken the growing power of the Shi'a alliance between Lebanon, Syria and Iran in favor of an alliance between moderate Sunnis and Israel. International opposition to the establishment of a new Middle East is much fiercer than understood in either Washington or Tel Aviv. This opposition, which counts Russia and most moderate Arab states as well as Syria and Iran among its ranks, is likely to strike against the United States where it is most vulnerable -- its weakening economy. A successful economic strike against the United States has the possibility of triggering a global economic recession in 2007.

devestment said...

Look at 91 on the chart, that is the last California (not national) real estate bubble popping.

borkafatty said...

Christmas spending occurs or doesn't

I would say doesn't the wife an I have already talked about this issue, and to be honest, from someone that has kids, It will be a very small christmas in my home, not that we dont have the money for christmas expenses, i choose not to consume.

It will be family getting together, and 2 small gifts, and some gold for daddy :), after all what good is consuming for 1 day when the consuming has already been done year round. I will not feed into the consumer sentiment of chiristmas...and the best part is the wife feels the same way..leval playing field.

keith said...

"Housing price declines plus less consumer spending equals deflation, not inflation"

-Actually, house price declines don't touch the inflation or deflation number one bit. The government uses rental cost as thir inflation number.

Also, the Fed raising rates may not have been the thing that popped the bubble, like everyone thinks.

What popped the bubble I believe is that the last sucker entered, and the confidence of the asset appreciating went away, especially as consumers started to become aware, do the math on rental cost to ownership cost, and look at percent of income needed to afford the house.

Anonymous said...

The so-called Experts say that the Housing Bubbles in the US are in for a "soft Landing".

Consumer RED ALERT = watch out for FALLING LEAD BALLOONS Everywhere !

Anonymous said...

Affordability is the key and affordability is at an all time low right now.
The only way to sell an overpriced home today is to create new debt products that will lower the monthly payment. Of course, there is no free lunch and any lowering of the monthly payout will increase the long term total costs. But without any upside our housing consumers cannot rationalize those costs. The end result is fewer sales, higher inventories and lower prices. The prices will drop until consumers see either affordability OR an upside. The upside requires GFs but now that the MSM is on the bubble bust bandwagon ( they do love their train wrecks!) there are fewer GFs available. That leaves affordability as the ONLY aspect of the buying decision.

boomer/bubblesitter said...

GFs ???
what is that?

panicearly said...

richard,
that PINR link is broken, use tinyurl.com
here it is
http://tinyurl.com/jpu8r
lotof good articles on this site.
thanks

infidel said...

Blame the japanese! With Quantitative easing they injected trillions of yen into the world economy flushing it with easy money.

Could America do the same? if we have a meltdown will the government adopt the same measure? Would the printing presses roll and interest rates drop to zero? Isn't that a means to let everyone pay off their debt at face value, no interest, so the debt appears to be paid? On the other hand maybe Islamic teachings about the evils of usery has a point? If people didn't pay interest they could pay their debts off and have more cash to spend. Of course no one will lend without a return but 18% or higher? Criminal, Off with their heads I say!

panicearly said...

lauravella said
"I have friends who are complaining about how high their taxes are, one couple went from about 1,800 to 4,000 year on property taxes"

i was just checking the taxes for the property i sold in early 05, we paid 1900/year, the new owners as of 06 are billed $6000! it`ll go back down later but most fb need that cash now.
i hope these people are doing ok? but they bought our house before putting their 20 acre rural illinois flower farm/house on the market.
is anyone here from illinois?

Anonymous said...

"Wait a minute guys....I think you're overlooking something. If the housing bubble pops AND the economy slows then the FED will simply start lowering interest rates again. It won't happen overnight but it will happen."

But if the Fed starts lowering interest rates in such a situation, how are you going to keep the value of the dollar from falling, or should I say "dropping like a rock"???

Anonymous said...

boomer/bubblesitter said...

GFs ???
what is that?

Monday, July 31, 2006 5:26:08 PM

Guys,
Love the back and forth.
Keith, Love HP
What is GF?

john_law_the_II said...

protect dollar or lower intersest rates? let's see, who votes, foreigners or americans? they'll lower interest rates. at least for a time. if you look at a chart of interest rates during the 70s, they lowered rates around 73/74.

john_law_the_II said...

protect dollar or lower intersest rates? let's see, who votes, foreigners or americans? they'll lower interest rates. at least for a time. if you look at a chart of interest rates during the 70s, they lowered rates around 73/74.

BubbleShanker said...

The market rallied on the fact that our growth rate was just cut in half, with that rate we will be at zero next quater, a full depression by Q4, I have been warning, and now it's time to pay the band.

Anonymous said...

GF = Greater Fool

FB = Fooked Buyer

Anonymous said...

"protect dollar or lower intersest rates? let's see, who votes, foreigners or americans? they'll lower interest rates. at least for a time. if you look at a chart of interest rates during the 70s, they lowered rates around 73/74."

Hmm...But for how long? The U.S.A. wasn't so massively in debt in the 70s. If we lower our interest rates NOW, how long with the foreign CBs keep us afloat by buying our T-bills?

boomer/bubblesitter said...

GF = Greater Fool

FB = Fooked Buyer

Thanks anon.

Anonymous said...

This opposition, which counts Russia and most moderate Arab states as well as Syria and Iran among its ranks, is likely to strike against the United States where it is most vulnerable -- its weakening economy. A successful economic strike against the United States has the possibility of triggering a global economic recession in 2007.

Richard,
Where is China in this Fiscal alliance?

Anonymous said...

This recession will be scary if there is one. There is one simple reason: the United States has gotten rid of all its industrial manufacturing. While we used to produce Real Wealth, our government gave that all away, for an illusory "post-industrial economy". We re-structured our economy so that it is all based around leveraging our consumer power internationally. The problem is that much of our power is illusory, paper wealth created in a bubble. What happens if we lose that? We lose our entire economy...there are no industrial or real jobs for people to fall back on. Everything is liquid.

Anonymous said...

The bubble would have ended even if interest rates hadn't been lowered. There is a finite pool of potential purchasers out there and I imagine it was shrinking to zero rapidly in any event.

So, as the momentum cools, I doubt anyone will be enticed backing into the game by lower interest rates.

Lets be honest, rates aren't exactly that high even now. So lowering rates probably won't do a damn thing.

And keep in mind, the Feds job is to protect the banking system - it's not there to protect stupid consumers from themselves.

Anonymous said...

GF is the one who was upside down when they sold you your condo for a loss. They bought it as an investment thinking it would always go up in price. If they brought money to closing they are also a FB.

FB is the neighbor who bought their condo for an inflated price and used a ARM. They owe more than they can sell for.

Eat stucco said...

"but they bought our house before putting their 20 acre rural illinois flower farm/house on the market."

If that farm can grow a cash or food crop without irrigation it is a better place than just a house (especially a poorly built McMansion on a subdivision lot).

panicearly said...

eat stucco,
its a flower farm/nursery,with a house on it. They want 950,000 for it!
but if the housing market tanks, the nursery business will not do well.

so i cant imagine someone paying that much for it in rural illinois, but im not familiar with it. however it still hasnt sold, and its been almost 18 months since they purchased our place.

Alan_Greenscam said...

"Blame the japanese! With Quantitative easing they injected trillions of yen into the world economy flushing it with easy money.

Could America do the same? if we have a meltdown will the government adopt the same measure? Would the printing presses roll and interest rates drop to zero? Isn't that a means to let everyone pay off their debt at face value, no interest, so the debt appears to be paid?"

Yes!!! The era of the US$-Carry trade and US "quantitative easing" is nearing. The Fed will cut the funds rate to 0%, Treasury note/bond yields will fall below 3%, the montary base will soar, and 30, 40-, and 50-yr. mortgage rates will fall to 4-5%.

The problem is that this will be
occurring with skyrocketing mortgage and credit card defaults and loan losses at banks, requiring much or most of the Fed's money printing going toward the Fed being the "lender of last resort" to the US gov't forced to issue trillions of dollars to bail out Fannie & Freddie, SS, Medicare, pensions, autos, airlines, etc.

Boomers' liquidity preference and risk aversion will soar, resulting in them shifting money from real estate, stocks, and corporate bonds to insured MMFs and CDs, requiring banks to increase dramatically their reserve holdings in the form of Treasuries, further forcing them to increase lending standards and reduce lending.

Real Treasury yields will turn negative, further squeezing banks' net margins and forcing them to increase reserves against deposits and loan losses.

In this scenario money velocity will collapse, the real growth of M2 will contract, and outright deflation becomes a real risk.

M_I_fooked said...

to avoid foreclosure, i just sold my condo in phx for $205K via a short sale of $41K to a realtor flipper married to a mortgage broker. now my bro-in-law tells me i might owe the irs for the "income" i supposedly received from the short sale? has he been smokin' crack again, or is he right? am i fooked? should i be sellin' crack to pay my irs bill? i could barely afford the deposit on the closet i'm renting now. god help me.

awaiting bubble rubble said...

I agree that consumer discretionary spending is about to go into the crapper. What are some good companies to short? I was thinking SBUX and CCL.

Anonymous said...

Alan Grenscam, very interesting post. I agree with what you are saying. My disconnect is won't this eventually lower the value of the $ and end up pushing up inflation? Which would greatly benefit all people owing money. Don't understand how this would not push up the long term rates...Maybe it will on the long term, and short term will be low? In that case arms are a good deal..

Anonymous said...

Alan Greenscam, interesting comments. I am curious what your thoughts are regarding inflation. All the cheap money will eventually raise consumer prices as the value of the $ continues to slide. Seems like every borrower over their heads would be somewhat releived with the lower burden of debt as a result of inflation. Not sure what happened in Japan but did their long term rates go up during their past ordeal? If we have the inflation that seems necessary to save everyone's arse, the 10 year is going to skyrocket. Short term rates may stay down (as that is only rate fed controls) which makes an ARM look attractive.

Anonymous said...

M_I_fooked said...

to avoid foreclosure, i just sold my condo in phx for $205K via a short sale of $41K to a realtor flipper married to a mortgage broker. now my bro-in-law tells me i might owe the irs for the "income" i supposedly received from the short sale? has he been smokin' crack again, or is he right? am i fooked? should i be sellin' crack to pay my irs bill? i could barely afford the deposit on the closet i'm renting now. god help me.

u-r-fooked ):

Alan_Greenscam said...

anons,

Rates won't rise b/c credit demand will sink and risk aversion will soar, as banks load up on Treasuries rather than make loans.

The US$ will not sink in the short run b/c credit-money supply (M2+) will slow or contract in real terms, which suggests that the US$ will firm or even rise in relation to commodities, stocks, bonds, and real estate as the US economy slows or experiences recession and Asia tanks BIG time.

But, the US$ will decline in the long run against commodities or "things", but not against stocks, bonds, and leveraged real estate. That the EU, Asia, and the Americas blocs are approaching or have achieved GDP purchasing power parity, ALL FIAT CURRENCIES will decline against "things" but converge toward par with one another in the long term.

IOW, the US$ does not have to rise much with money supply flagging and commodities prices weakening for the relative value of the US$ to outperform stocks, bonds, real estate, and commodities.

I suspect US Treasuries have one more 2- to 3-year period of outperformance (despite the likelihood of negative real rates at some point) before they become "certificates of confiscation" for a generation thereafter.

Remember, the Fed has unlimited credit to pump up the monetary base and flood the system with reserves. With loan losses mounting in the months and years ahead, however, the credit money is likely to go where it went in Japan: to banks, brokers, and insurance companies to buy gov't paper, pushing short rates to 0% and long rates below 2%. But, there were so many bad loans on the books and so many cross-institutional lending relationships that everyone was broke owing to the other guy. We are in the same situation, only we're 9-10 yrs. behind the Japanese demographically.

Therefore, a slowing global economy or global recession means lower commodities prices and interest rates. Slower growth and lower nominal and real returns to assets, by definition, means that consumer spending will slow and savings will increase.

Cheers!

seattle price drop said...

Alan Greenscam-

"Savings will increase"

This is what Ben Bernanke has stated at least twice in the past 2 months.

It's about the only thing I've heard him say with some conviction- he seems so nervous most of the time.

psycho said...
This comment has been removed by a blog administrator.
psycho said...

"The Thinker said...
The health of our economy is dependent on hoards of consumers making bad financial decisions. As long as they continue to spend money they don’t have the economy will be fine. It provides me with great comfort and great relief that our economy depends on the consumer’s inabilities rather than their abilities, because given a choice between the two, I would choose to keep things as they are."


Just be glad that inept consumers have an indefinite amount of credit worthiness otherwise it would be time to prepare for change.

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