Flow of Funds Fun!

This chart shows the total residential real estate assets divided by the total residential real estate replacement costs. The shaded areas show economic contractions. If we truly are running out of land you would expect this trend to go up. Note the last time we apparently ran out of land was in the late 1980s, right before our last consumer recession. Japan also ran out of land then as well. This Time It Is Different™ though. You can never have too many condominiums!

Miami condo at ground zero in mortgage fraud
But the 643-unit condo known as the Club at Brickell is a leader in mortgage foreclosures and it appears also to stand at ground zero in a blizzard of fraud that may lie behind many of the failed loans threatening to bury the U.S. property market.



This chart shows the total residential real estate assets divided by the total disposable personal income. The shaded areas show economic contractions. Anyone see a problem here? It seems a bit high relative to the red trend line. How about more than one problem? The recent trend doesn't seem to be up any longer. Shall I go for three? Recessions tend to start when the trend heads down. Dare I try for a fourth? I shall! It has been so long since that trend headed down that many have forgotten what might happen. How about a fifth? Your choices are Vodka or Scotch! I'm thinking you might want both. Bottoms up!

Real Estate Confidence: Build It Up, But Don't Forget The Facts
No amount of shunning media stories or ignoring foreclosure stats can make up for the fact that houses in this country are just too expensive. You want to juice the market? Lower the price. The crazy record appreciation we saw at the beginning of this century was unwarranted and undeserved, and it came darn well close to tanking our entire credit system. That's a cold hard truth and Realtors should educate their clients about that.

It came darn well close to tanking our entire credit system? What stopped it? I'd really like to know.



Here's a chart from 1950 to 1997 showing the growth in various parts of our economy. It is not adjusted for inflation or population so therefore we would expect to see a lot of growth. It is plotted on a logarthmic scale so constant growth is shown to be a straight line.

Total residential real estate asset annual growth: 8.39%
Total residential real estate replacement cost annual growth: 8.03%
Total disposable income annual growth: 7.68%

There's probably not much to be alarmed about here. Overall disposable income did a fairly decent job keeping up with overall home prices (assuming you are CEO and your job wasn't outsourced to China that is).



Here's the chart from 1997 to 2007.

Total residential real estate asset annual growth: 9.37%
Total residential real estate replacement cost annual growth: 7.98%
Total disposable personal income annual growth: 5.13%

Hey, isn't that something. As both the disposable personal income and replacement costs began to decelerate, the price of real estate actually accelerated. How could this be? Who was telling us to commit money we didn't actually have to real estate?

Here's another thought. If you really want replacement costs and disposable personal income to decelerate, there's no better thing than a global housing bust and/or global recession. Let's not go there though, as that would make for a very nasty deflationary feedback loop. Disposable income drops, people can't afford homes or shopping mall experiences, unemployment rises, housing prices drop more, lather, rinse, and repeat.

Have no fear! Helicopters are standing by to drop fresh cash to those who need it. Unfortunately, any cash used to prop up your personal disposable income will simply make things more expensive. It doesn't actually solve the problem, but it sure will make the problems seem solved if you factor out stagflation! You see, Ben Bernanke can't actually print prosperity. All he can print is money. It can seem the same as long as we push the true cost onto the generation that follows us and we all pretend that everything is okay though. Woohoo! *extra sarcasm*

See Also:
Calculated Risk: Bloomberg's Berry: No Recession

Source Data:
FRB: Flow of Funds Accounts
National Bureau of Economic Research, Inc.