THE KEY TO THE BALANCE SHEET RECESSION: HOUSING
I hate to oversimplify things, but sometimes it’s easier to grasp an issue when we focus on its primary cause. In the case of the balance sheet recession, there is one primary cause – housing debt. According to the NY Fed 74% of all consumer debt is mortgage related. So, it’s no surprise that a housing bubble and a subsequent bust would lead to a balance sheet recession. And as housing has remained depressed the private sector has remained depressed. This also is not surprising given the tremendous headwinds that still confront the housing market in the USA. Moody’s recently elaborated on the situation:
“Real estate price deflation trims private-sector borrowing. The first quarter’s 3.4% year to year drop in unincorporated business debt consisted of a 3.8% decline by mortgage debt and a 2.3% retreat by non-mortgage debt. Mortgage obligations comprise a comparatively large 73% of unincorporated business debt, wherein 13 percentage points of that share are home mortgages, 22 points are multi-family mortgages and 38 points are commercial mortgages. Mortgages supply an even greater 77% of household-sector debt. Thus, the price performance of real estate wields considerable influence over the paths taken by indebtedness of unincorporated businesses and households. Indeed, a normalization of the supply of credit to households and small businesses may be contingent on a convincing recovery by real estate prices. (Figure 5.)”
“In fact, the unfinished shrinkage of mortgage obligations fully explains the ongoing contraction by the broadest measure of household and business debt. The first quarter’s 0.2% year to year dip in private nonfinancial-sector debt was comprised by a 3.1% drop by mortgage obligations and a 3.7% increase by non-mortgage debt. (Figure 6.)”
So the balance sheet recession and housing markets are intricately interconnected. Finding the bottom of the balance sheet recession might be as easy as finding the bottom of the housing market. That’s easier said than done. Hopefully, when I have some time one of these days I’ll release my latest update on the outlook for housing. That should provide us with some insights into the potential end of the balance sheet recession and the beginning of the next leg up in an organic and sustainable recovery.
Source: Moodys
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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13 Comments
We are in a catch 22 with housing due to derivatives.
Allowing the housing market to reach its natural equilibrium in the market would cause the derivatives market to implode, and Wall St. would loose big time.
We all know they are not going to allow that to happen, so we will just continue to go through this slow motion train wreck until the government has done all it can to bleed the public dry, and require the working masses to pay by way of higher taxes and inflation for the sins of the banks.
Looking forward to that housing outlook update.
Someone once told me that to become a citizen of Switzerland you must pay a million dollars. Don’t know, but we could allow stable professional immigrants into the country with a prerequisite that they buy a house. Presumably, if they are a professional they would start a business and hire people.
It is not the case that one must “pay $1 million” to become a Swiss Citizen. On the other hand, one must have been a resident of Switzerland for 12 years, and that means a productive citizen, i.e. one that is earning a living through their own labour or one who is living off their own capital. So, in effect, the notion of “paying $1 million” is not far off.
Contrast that with the USA, where we welcome anyone and everyone into the country and on to the public dole.
I thought that you could not become a full citizen of Switzerland unless you were born to parents who were also born there? I always thought that was a good idea as it better ensured citizens would be integrated. Alas, my understanding may have to be dashed…
The problem is that the powers in charge are doing all they can to show that “this time is different”, not to mention to save their cronies. The reality is that a balance sheet recession takes a long and painful time to go through the system. All the rest, stimuli, bailouts, etc.. are only smokescreens. It has been like this for over five hundred years. What is worse now is that everyone wants immediate gratification, so there is a lot of media pressure to be on the “optimistic” and “bullish” bandwagon. Very soon being bearish will be declared illegal and un-patriotic.
I’m following the U.S. housing collapse with empathy. We in Canada should see the same thing in the next few years (of course no one wants to admit we’re in a bubble now). When it happens there will be pain, and the only cure is “suck it up nancy”. Take the short term pain, it will serve our grandchildren better in the future rather than the legacy we seem intent on leaving them now.
This week Canadian consumer debt came out at 1.5tril (obviously incls Mortgages) The GDP of the entire country is 1.3Tril! Un real!
Someone had an idea about principal reduction, if they continued to live in the home, with the gov retaining a “call” on future selling price. Maybe it’s time to try something like this, as it is a plausible solution to the housing balance sheet.
Why not make legal immigration easier for everyone–rich, poor and middle class? Aren’t we are a nation of immigrants? Doesn’t the Statue of Liberty have a plaque about that? More immigrants means more demand for housing; more demand for housing means higher house prices–we, the exponents of MMT, should be able to agree on this modest proposal, don’t you think?
Such exponential degradation of accurate semantics will lead to Mad Hatter economics, where ex- and pro-ponents square off in a Lilliputian WWF match over which endian of days scenario must ensue.
Which reminds me. It really is disastrous semantics to conflate Treasury securities with borrowing.
That simple point is the root of all confusion over money creation, which itself aids so much Control Fraud.
As Warren Mosler keeps saying, voluntarily linking security creation to money creation is not “borrowing” any more than is setting interest on a savings account. Even that analogy isn’t close enough, since neither private depositors nor banks are currency issuers.
Semantics counts. To paraphrase Walter Shewhart & Abe Lincoln, “Definitions, as well as data, are meaningless without context. Nevertheless, it makes so sense to switch either definitions or data streams in the middle of a context.”
“it makes [no] sense”
housing keeps us japan wayyy longer than a 2013 new secular bull call.