Replies to post #81858 on Zeev's Turnips Patch-No Politics (ZEEV)

[Zeev Hed]

Culmus, thank you for the excellent data. They support a lot the thesis that the Fed's are engineering a more or less "soft landing". So far, for about three years now, they have managed by the low rates policy to avoid any sharp recession and thus kept more people on the job that would otherwise be. The bolus of fiscal stimulus injected last year ($300 to $600 for each tax payer) also played a role in preventing a traditional recession. Under the Austrian School "laissez faire" type of economic policy, by now, unemployment could have been easily around the 8% to maybe as high as 10%. That would have resulted in deficits not of $300 B but possibly exceeding $500 B annually. GDP would have had a solid 18 months of a decline, maybe reaching as high as a quarterly rate of -5% in one or two quarters. Sure, the period of rebalancing the economy would have been shorter, rather than possibly a 10 years period of readjustment (as I believe the current scenario may evolve, see that old forecast from April 2000, #reply-13483082) a period of 4 or 5 years, but the cumulative effect in growth in the national debt and delay in growth of the GDP would have left us in a permanently higher plateau of unemployment and much greater misery and poverty to a greater portion of the US population as well as a much lower standard of living for the majority of Americans, and last, a much greater debt burden relative to GDP.

Yes, a rise in interest rates could indeed precipitate another , consumer led, recession, most probably starting later next year or even as late as early in 2005. I think that the currently proposed tax change, however, will be counter productive in the "scheme" of a soft landing policy (I think that Greenspan's remarks a fortnight back where pointing in that direction). A better approach would be a well timed (like right now) fiscal stimulus by another bolus of stimulus (as I have suggested few times, a short 6 to 12 months period were the first $15,000 of earnings are exempt from payroll taxes and the top is raised to possibly $100,000 or so, and then a two years period where the threshold for payroll taxes is gradually brought back down to current levels, with the possibility of restoring the exemption if the bolus did not "do the trick").

As for household equity going down to 57%, that is mostly due, IMTO, to the fact that a much greater percentage of households are now owners of their own dwelling, and thus earlier in the curve of building equity in their real estate holdings, I view that as a positive rather than negative development.

Zeev

PS, do you know if the rentalvacancy rates cited applies only to residential real estate or does it include commercial and manufacturing real eststae as well? It seems to ne (from the title) it is only residential, the slow creeping up rate confirms the movement from rentl to ownership of residential real estate, and owners of rental property better pay heed to that trend.

[mlsoft]

Culmus....

Excellent post - thanks.

mlsoft

[goodluck]

Culmus,
thanks for your post on housing. But I don't agree with one comment you made: "If interest rates should increase just 2 percentage points the debt service will hit the consumer quite hard." That depends on whether people have taken out adjustable rate mortgages or not. Those with fixed rates won't suffer (unless, of course, they lose their job!). Judging from the people I know (which admittedly may not be a great sample), people are locking in these rates, not taking the chance that rates won't back up.

JMHO,
Sam

[jdaasoc]

RE Mortgage debt
Wouldn't mortgage debt at similar % of DI as late 80's at much lower interest rates and much higher family incomes mean that people are carriing a whole heck of more house value then in last peak in late 80's.

I don't think FED is going to raise rate until DI increase substancially to cause people to trade up again without paying down past indebtedness. If that happens GDP will be going gangbusters anyway your worst fears will be not come to pass.

RE bankruptcy.
It peaked in 92, 99 and I think 7 yr limitation on filing means IMO that they may not peak until 2006 well over 2 M per year. Is 13-14 M people that may file in 7 year span -- chronic bankruptcy filers -- mean the rest are not credit worthy.

You miss the fact that banks will make very hansome returns lending money at double digit rates to these people. I can't see how they can lose money as long as they keep on what they are lending at semi pretatory rates considering they acquiring money for less then 2%.

RE Homeowner equity.
In last recession or in any other in chart, homeowners equity dropped only 1-2%, 1991. I can't see how the current homeowners equity will not face similar mild reduction in equity value. I don't see them creating more land like stock certificates. Also, these new Chinese class of of dollar ruch businessmen like the Japanese, Tawinese and Koreans before them are going to have not other country to repatriotate dollars as dollars except US. I can remember my affluent neighborhood of my childhood in Bergan County, NJ literally being invaded by Iranians awash with oil dollars before Shah was booted out. Look for real estate values to increase maybe not at same recent record levels.