Here’s one way to look at it.
According the Federal Reserve Bank of New York, the NYC economy is crushing it, growing far faster than the states of New York and New Jersey.
They are using an Index of Coincident Economic Indicators:
A coincident index is a single summary statistic that tracks the current state of the economy. The index is computed from a number of data series that move systematically with overall economic conditions.
I really like the way this chart illustrates the 20 year decline in the homeownership rate. A few thoughts on what it shows:
Under 35 – Lowest in 20 years – record student debt and tepid economy plays a significant role in falling rate.
35-44 – most volatile, has overcorrected – large gain during credit boom and fell well below 1994 levels.
45-54 – fell below 1994 levels but didn’t rise as much during credit housing boom.
55-60 – higher than 45-54 group but followed a similar arc – fell below 1994 levels but didn’t rise as much during credit housing boom.
65 and above – only category to finish higher than 1994 levels – not heavily influenced by credit bubble.
Overall – is currently higher than 1994 levels. Coming down from artificial credit bubble high – probably won’t stop declining until credit begins to normalize.
[click to open report]
I like to say that we never had a housing bubble in the US. It was a credit bubble with a housing as a symptom. The same credit bubble logic applies to college costs which have run unchecked well past the housing bubble “pop” in 2006 and the great recession. Lately there has been discussion on the student debt crisis by economists and financial journalists that the phenomenon is overhyped – which prompted this post as a college tuition paying parent.
College costs for a 4 year degree are growing at a rate of about 5%, well above inflation. Access to credit has remained easy for students and parents to obtain so there are no real checks and balances (no pun intended) on college costs. Demand is high as students and their parents often fight to gain admission and can worry about paying off the debt later.
It’s been widely discussed that anemic household formation is holding back the housing market and the economy from fully recovering, that student debt has been the key culprit in holding back young people from striking out on their own, resigned to live at home until their finances get better. Speaking as a parent who just finished sending a son through college with more on the way, it’s a hard reality for parents too.
I was standing on the platform the other day waiting for a delayed commuter train (hey, it’s Metro North, who else) and struck up a conversation with a woman who was lamenting about all the debt she and her husband incurred sending their 4 kids to Ivy League schools – only for them to be unable to find a job in their chosen profession or find one that pays a living wage – these factors are often mutually exclusive.
Parents that borrow heavily to finance their children’s education is the sort of thing that is missed in economic data because that debt is in some other form of a home equity loan or other debt.
“Parents are facing an economic crisis because they are borrowing too much for college,” says Rick Darvis, executive director of the National Institute of Certified College Planners. “They’re sacrificing their current lifestyle and robbing their future retirement.” The rising levels of parental debt could ripple through the rest of the economy. By the time parents are in their 50s and 60s, they should be saving for retirement instead of taking on new liabilities, says Joseph S. Messinger, a certified college planner and president of Capstone Wealth Partners in Columbus, Ohio.
We are seeing financial coping strategies emerge like going to a community college for 2 years to save money and transferring to a better school for the remainder – or questioning the value of college all together. The cost/benefit of a college degree is being called into question because of the combination of spiraling costs and tepid job opportunities for many in the current economy.
The baby boomers have taken on significant debt to finance their children’s education. Sure the average student debt is $25k to $29K, the cost of a new or used car, but I contend a large portion of college debt is in the shadows born by the parents.
The average cost for a 4-year degree is about $23K (blended cost of private and public) which suggests that the debt would only cover about 80% of the cost of first year. This would imply that more than 3/4 of the cost of a 4-year degree was paid in cash through savings and working during the four year period. That doesn’t seem plausible to me – actually it seems ludicrous. Parents have to be paying cash or taking on an inordinate amount of debt to pay for the other 75% of the cost that doesn’t show up in the school related debt numbers. How common is it to see parents in our helicopter nanny state shoulder little to no financial burden for their children’s college educations? No matter the demographics, I contend it’s quite rare.
And how does this impact the US housing market recovery?
The tepid economy has exposed the problem – and the heavy debt loads could provide a drag on housing for an extended period of time.
Former US Treasury Secretary Timothy Geithner is promoting his book chronicling the financial crisis Stress Test: Reflections on Financial Crises. Great book name, btw.
He sits down with Vox Media’s Ezra Klein to talk about what happened. I highly recommend watching this entire interview. Once you get past Ezra Klein’s sock selection, he touches on all the key points that would help us better understand what went wrong. It reconfirms why I enjoy reading anything Ezra writes.
I also have to say that Geithner has a great engaging conversational style that I enjoyed and helped me gain additional insights. However the problem with the Geithner’s responses – that I can’t seem to get past – is that Geithner was head of the New York Fed, surrounded by Wall Street, during the housing bubble run up. You walk away from this conversation feeling like his actions were the only appropriate responses to the crisis – ie focus only on the banks (and grow moral hazard significantly). Of course it has to be a nightmare to get anything done in Washington. However, I also got that same feeling when I read Andrew Ross Sorkin’s well written “access journalism” book, “Too Big To Fail” – that saving the banks was all that mattered to him.
It doesn’t help that I read previously Neil Barofsky’s terrific book “Bailout” which provides a lot of insights into how the sausage was made – identifying the US Treasury’s exclusive focus on the banking system when there were opportunities to help main street at the same time. Apparently Geithner takes Barofsky to task in the book, probably because Barofsky did the same.
I’m not sure if I’m going to pick up a copy.
Ian Shepherdson, chief economist at Pantheon Macroeconomics as a guest on Bloomberg Television points out some key issues relating to housing and the economy. It’s a great quick overview on how housing fits into the economic recovery equation. So much for a “soft handoff,” the idea of the housing moving from dependency on low mortgage rate to thriving on a stronger economy. The ideas being projected here are that the economy may improve without housing’s help.
“It is not quite as important as the fed seems to think.” “I sometimes say the fed is almost as obsessed with housing as the labor market.”
“I’m not convinced it is absolutely essential that housing keeps charging upwards in order for the rest of the economy to grow.”
“It’s a relatively small share of gdp now in terms of housing construction and even when you add in the retail stuff related to housing.”
“It is important to sentiment.”
“They were ready to dismiss it as something temporary and clearly the worries are more deeper.”
“Mortgage rates, if they rise further as the economy picks up, housing will be under further pressure.”
“It is a paradox that the stronger the rest of the economy gets and the more worried the market gets about the fed raising rates, the higher 10 year yields will go and mortgage rates and potentially the housing market will get weaker.”
“This is a three or four year process to get back to normal.”
“Housing unfortunately will be a necessary casualty.”
“My guess is that that’s the way the fed’s thinking evolves great if we see the economy strengthening brother that housing is weakening, i think they will have to live with that and stand up and say it’s a price we have to pay in order to get the rest of the economy moving.”
has worried some economists, because it makes the U.S. more vulnerable to major shifts in the global economy. But it also could show strengthening confidence in the American economy.
These gains are largely due to the rising US stock prices rather than more investment. However in the housing sector, I do think rising property values are attracting even more new capital for investment – whether for new development or unit purchases. We can see this in markets like New York City and Miami. Foreign investors seem to be chasing safety and a long term equity play.
The annual release by the New York State Office of Comptroller brought upbeat news to the real estate economy in NYC. Wall Street compensation has long accounted for roughly a quarter of personal income but only 5% of employment so the industry remains very important to NYC’s tax revenues. Here are some of the key points:
Here are a few charts that layout the bonus trends in NYC. Wall Street is a key economic driver of NYC and therefore important to the health of the NYC housing market.
Wall Street compensation is 5x that of mere mortals (other private employment compensation) and that ratio has stabilized after a modest correction following the 2008 stock market crash.
[click to expand]
Wall Street bonuses rose steadily as a portion of total compensation but after the 2008 stock market correction and financial reform, the market share fell – but not as much as perceived.
[click to expand]
Source: Yahoo! Finance
I had a nice conversation with Lauren Lyster today over at Yahoo!’ The Daily Ticker.
I find the bifurcation (yes Bernice, I actually used this word!) between those who see the housing market as recovered and those who don’t fascinating. A recovery is a process and we are in the middle of it – but it hasn’t reached it’s destination. As far as the <7% unemployment comment in their post headline goes…I see housing as normalizing when employment normalizes – not that 7% is a trigger for housing to suddenly recover below this threshold. Nuance, baby.
Why else would so many fret about rising mortgage rates? Nearly every comment on the video – 146 when I wrote this, referenced the weakness of the job market, under employed, lower wages.
I think rising rates are a good thing for housing, long term because they take some of the froth out of the market. Seriously – how can prices rising more than 12% YoY with flat income, high (but improving) unemployment and tight credit? One could even argue that a better rate spread with higher rates and bank business decision pressure to loosen standards as refi volume drops sharply will bring some easing to underwriting standards eventually.
If you want to get some clarity, watch this video earlier this morning over at The Daily Ticker on Why Investors Should Ignore Economists. No one makes a point more clear (or more bluntly) than my friend Barry Ritholtz.
[Source WSJ: click to expand]
Check out this excellent interactive graphics post at the WSJ on the economy since the recession. My fave is above but there are others worth mentioning. Things are slowly improving but note that in the “consumer” section of the interactive (not above), real wages are unchanged since 2009 (housing prices up 12.1% in past year alone).
This documentary is compelling and so are all the cast members. It includes a who’s who list of current and past members of the Federal Reserve as well as economists and Wall Street experts. Cast members include my friend Barry Ritholtz and Gary Shilling who both have been on my podcast. Todd Harrison of the great site Minyanville.com and John Mauldlin who I have always looked to for insights. Jim Grant of Grant’s Interest Rate Observer who called me at the height of the crisis to get a gauge on the Manhattan housing market.
During the housing bubble I often felt like screaming as I saw the financial world through my appraisal glasses thinking I missed an important math class in 8th grade. Fast growing banks with gigantic mortgage volume and many of my appraisal competitors in bed with mortgage brokers were clearly smarter than me – they could make the numbers work and I couldn’t.
In 2003 and 2004 I remember being absolutely confident as a non-economist that the Fed was keeping interest rates too low for too long. I could see it in the loss of lending standards and the lavish incomes enjoyed by those around me who embraced a world of based on moral flexibility. The froth was simply ignored.
Don’t mean to get sentimental on you dear readers, but this movie struck a chord with me. Enjoy the trailer and watch for the release date announcement.
Tags: Barry Ritholtz
In case you have any doubts about the amount of compensation that the securities industry enjoys versus the private sector in NYC, I created the chart above. While the bonus comp results has been released for 2012, the salary data is not out yet so I built this chart from 1985-2011. In 2011, securities industry salaries + bonuses were 7x larger than private industry salaries.
In case you had any doubts about how important the industry is to the NYC, regional and state economy, hopefully you are now – love them or hate them.
Since Wall Street bonuses were announced yesterday and have been talked about and analyzed a lot over the past 24 hours, I thought I’d share the following video which apologizes a lot for compensation levels of the securities industry but breaks down the advantages of the bonus compensation practice on Wall Street.
Three Cents Worth: Have Bonus, Will Buy in Manhattan? [Curbed NY]
In Defense of the Wall Street Bonus [OnlineMBA]
NYC Securities v. Other Private Industry Compensation [Miller Samuel Charts]
Wall Street Bonuses Rose in 2012 [NYS Comptroller]
UPDATE: Bloomberg Television saw this post and made it their “Single Best Chart” of the day.