Some really really horrible graphs

Here's a few from Calculated Risk on Homeownership and Vacancy Rates in the US, based upon latest figures. Here's the first really frightening one:

New home sales in the US has dropped horribly. Current sales have dropped to levels not seen since 1992. This is a huge drop. The graph may look bad because we're looking at final figures rather than, say, a percentage drop. So let's work it out. Look at the 1973 peak - around 800,000. And that drops down to 400,000 in 1975 which is a 50% drop. Similarly, look at the 1979 peak at around 875,000 which drops down to around 375,000 in 1982 which is about a 55% drop. Now look at the 2005 peak of 1,400,000 which has dropped to 500,000 which is about a 64% drop. In other words, this is most certainly the biggest fall in house sales - percent wise- since at least 1963. This is bad, bad, bad news. Now for graph #2:

This is, of course, a corollary graph showing "months of supply". If I take this rightly, this is an indication of housing supply as determined by demand. This is not based upon a total number like the previous graph, and can be used to compare periods in history. As you can see, the amount of supply has increased quickly and suddenly to recession-type levels. Now for another yuck:

This graph measures homeownership. In other words, it measures the percentage of home owners. As you can see, since the peak in 2005, less people own their own homes. And now for the biggy:

This is probably the most concerning graph of all and is actually from the Naked Capitalism blog site. This graph measures the total credit market debt as a percentage of GDP. As you can see, there is something very, very disturbing about debt levels rising as quickly as they have. Interestingly, this began back in the early-mid 1980s under Reagan, taking off especially in 1985 under Reagan and continuing with Bush I. Debt levels paused slightly under Clinton (but didn't drop either) before expanding again in the years before Bush II and then continuing under Dubya until today.

You might wonder if such a graph actually indicates something terrible or not. To me it shows something very, very unsustainable. I'm not suggesting that credit and borrowing is somehow bad - it isn't - but I would say that at some point such a process becomes dangerous and unsustainable. With too much money lent out and too much money owed - and this is what the graph represents since it directly compares debt with GDP - something has to eventually give.

One of the ways in which the housing market was seen to be unsustainable was when house prices were growing faster than household wages. In theory, if house prices increase at the same rate as income, it means that the buyers have a reasonable chance of repaying the loan. The fact that house prices rose so high above wages indicated a bubble in progress. The graph above from Naked Capitalism looks at the entire US economy and checks to see whether national wealth (GDP) is enough to sustain the debt it has accrued.

If my own modest economic knowledge can be relied upon, I would say that this graph pretty much proves my "perfect storm" prediction to be wildly optimistic. There is a confluence of highly damaging shocks now assailing the US economy. The housing shock is definitely one of them - the other is a vastly overextended credit market that looks like it will collapse.

And this all seems to prove the point I have been making for a while now - the US needs to stop spending and start saving, it needs to stop consuming and start producing, it needs a painful period of austerity in order to rebalance itself.


Anonymous said...

I agree that the macro-situation looks really bad...but what does that mean on a personal level? I'm not saying that if it doesn't touch me, I wouldn't care, but the economy has been in such terrible shape for what...over a year now, and I've actually been living in the greatest material comfort I ever have (which is not much granted by American standards). Do you anticipate widespread disruption of basic services, civil unrest, starvation, etc.? Or will it be more of the same but on a much larger scale?

I guess I'm just asking you to make clearer how bad is bad.

Anonymous said...

It's all W's fault. He had Matt Simon's advising him that world peak oil was on its ugly way.

JD, Neil's into the economics much more than I am but I'm into the oil and energy side of things a bit more than he is. If Neil picks certain monetary trends as 'bad' I'm at the point where I can trust that Neil is talking about something that will hurt a lot of people.

The energy crisis is unbelievable. It's time there was some serious action on a global situation. The head of the IAEA was calling for a world energy agency. I agree. Google "The Oil Depletion Protocol" which demands the same, and proposes ways to manage some of the economic chaos coming our way.

Basically, unless there is an overnight technological MIRACLE I think Neil and I would say that while we don't know the future, all signs indicate we are heading into a period of profound change and economic challenges that will probably make the Great Depression look like a dress-rehearsal for the real thing. This is going to hurt.