Transcript Pitchbook-US.pot - Levy Economics Institute
A p r i l 2 0, 2 0 0 7 E C O N O M I C O U T L O O K D I S C U S S I O N, L E V Y E C O N O M I C S I N S T I T U T E, R H I N E C L I F F, N Y
Growth Without Steroids
Jim Glassman [email protected]
212-270-0778
About global imbalances …
2
Sleeping giants …
Real GDP (percent change from four quarters earlier) 0 -1 6 5 4 3 2 1 -2 90 92 94 96 G-7 (excluding the US) 98
Sources: US Department of Commerce; JPMorgan Chase & Co.
00 02 04 US 06 08 6 5 4 3 2 1 0 -1 -2 3
… it adds up over time
Real GDP (ratio to 1997 Q4 level, $ terms) 1.35
1.25
1.15
United States EU-11
1.05
Japan
0.95
1997 1999 2001
Sources: US Department of Commerce; JPMorgan Chase & Co.
2003 2005 1.35
1.25
1.15
1.05
2007 0.95
4
A planet awakening … the world isn’t flat
China’s real per capita GDP (ratio to US) 1.0
0.9
0.8
1.0
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.2
0.1
0.0
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 0.0
0.7
0.6
0.5
0.4
0.3
Sources: Alan Heston, Robert Summers and Bettina Aten, Penn World Table Version 6.2, Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania, September 2006
5
That’s what global imbalances were all about
US current account balance (percent of nominal GDP) 0 -1 2 1 -2 -3 -4 -5 -6 -7 -8 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Sources: NBER recession bars; US Department of Commerce
2 1 0 -5 -6 -7 -8 -1 -2 -3 -4 6
That’s why they will be (are) unwinding, organically
US trade balance by region or category ($ billions over the most recent 12 months) 0 -50 -100 Selected industrial economies (European Union (25), Canada, and Japan) -150 -200 -250 Petroleum balance -300 -350 1999 Other (mostly developing economies) 2000 2001 2002 2003
Source: US Department of Commerce
2004 2005 2006 2007 -200 -250 -300 -350 0 -50 -100 -150 7
State of the economy: four trends say it all
8
#1 Rising and high household net worth
Household net worth ($ trillions) Household net worth (ratio to income) 60 6.5
Ratio of net worth to income (right) 50 6.0
40 5.5
30 Dollar magnitude of net worth (left) 5.0
20 10 4.5
0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 4.0
Source: Federal Reserve Board
9
#2 Plunging new home building
Total housing starts (thousands of units annualized) 3,000 2,500 2,000 1,500 3,000 2,500 2,000 1,500 1,000 500 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 0
Sources: NBER recession bars; Census Department; various housing agencies
1,000 500 10
#3 Tight credit spreads
Non-investment grade debt yield less 10-year swap rate (basis points) 1,100 1,000 900 800 700 600 500 400 300 200 1990 1992 1994 1996 1998 2000 2002 2004 2006
Sources: Ibbotson Associates, JPMorgan
1,100 1,000 500 400 300 200 900 800 700 600 11
#4 Low and falling unemployment
Unemployment rate (percent of the labor force) 12 10 8 6 4 2 0 60 65 70 75 80 85 90
Note: Circles identify similar mid-course transitions. Sources: NBER recession bars; US Department of Labor
95 00 05 2 0 8 6 4 12 10 12
Looking for bubbles in all the wrong places …
13
Real estate may be expensive, but it’s not bubble stuff …
House prices and affordability (thousands of dollars) 250,000 225,000 200,000 175,000 Median price of existing single-family houses in thousands of dollars (National Association of Realtors and Shiller) 150,000 125,000 100,000 75,000 50,000 25,000 What someone earning the median per capita income could afford at prevailing ARM rates (top boundary of shaded region) or at the 30 year conventional fixed rate (bottom boundary), assuming monthly payments cannot exceed 33% of income and a 20% down payment 0 80 82 84 86 88 90 92 94 96 98 00 02 04 06 250,000 225,000 200,000 175,000 150,000 125,000 100,000 75,000 50,000 25,000 0
Sources: National Association of Realtors; Office of Federal Housing Enterprise Oversight; JPMorgan Chase; US Department of Commerce
14
… and when things get expensive, they stop rising
Existing house prices (percent change from 12 months earlier) 25 20 15 Case-Shiller monthly repeat sales price index of 10 metropolitan areas Chase-Shiller monthly repeat sales price index of 20 metropolitan areas (astericks)
Case-Shiller national repeat sales price index
NAR's median price index of existing single family units
OFHEO's index (purchase only)
25 20 15 10 5 0 -5 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Sources: Standard and Poor’s; National Association of Realtors
-5 10 5 0 15
Real estate is pricey, because it has many friends
the Great Disinflation gave us low rates, low credit costs economic recovery despite 1929-magnitude threats demographics (immigration, longevity, baby boomlet, ageing) ageing housing stock Big Easy’s washout 9/11 inspires cocooning subprime allows more Americans to dream legislation (Tax Payers Relief Act of 1997) what isn’t to blame … the Fed’s 1% countercyclical rate policy
16
The housing-ATM idea is overplayed
Net mortgage equity withdrawn ($ billions ar) Real consumer spending (% yoy) 1,000 900 800 700 600 500 400
Real consumer spending (right)
300 200
Mortgage equity withdrawal (left)
100 0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 2 1 0 -1 4 3 6 5
Sources: Federal Reserve Board; US Department of Commerce
17
Yes, we spend when wealth rises, but that’s not all we do …
Sources and uses of household investment ($ billions annualized) 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0
Household investment (lines): Net purchases of financial and tangible assets Net purchases of tangible assets Sources of household funds (shaded areas): Personal saving Net mortgage equity withdrawn Other borrowings (excluding net xxxxx mortgage equity withdrawn)
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 2,000 1,800 1,600 600 400 200 0 1,400 1,200 1,000 800
Source: Federal Reserve Board
18
… we’ve also been diversifying out of real estate
Selected household financial transactions ($ billions annualized) 1,400 1,200 1,000
Household investment (lines): Net purchases of financial assets Selected sources of household funds (shaded areas): Net mortgage equity withdrawn Personal saving
800 600 400 200 0 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 600 400 200 0 1,400 1,200 1,000 800
Source: Federal Reserve Board
19
In the resale market … the West got the priciest …
Relative house prices (ratio of regional to national index, 1995 Q4 = 1.0) 1.40
Pacific
1.30
1.40
1.30
1.20
1.10
1.00
0.90
0.80
0.70
95 97 99 01 03 05 07
New England South Atlantic Mid-Atlantic Mountain West North Central East North Central West South Central East South Central
09 1.20
1.10
1.00
0.90
0.80
0.70
Source: OFHEO
20
... and that’s why sales in the West are slowest
Sales of existing houses (June 2005 = 1.0) 1.1
Northeast Midwest South
1.0
0.9
0.8
0.7
West
0.6
2000 2001
Source: National Association of Realtors
2002 2003 2004 2005 2006 2007 1.1
1.0
0.9
0.8
0.7
0.6
21
Different story for new, where sales are off the most …
New and existing single family house sales (June 2005 = 1.0) 1.3
1.2
1.1
Existing houses 1.0
0.9
0.8
0.7
0.6
0.5
New houses 0.4
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Sources: Census Department; National Association of Realtors
1.3
1.2
1.1
1.0
0.9
0.8
0.7
0.6
0.5
0.4
22
… all regions equally …
New single family house sales by region (June 2005 = 1.0) 1.3
1.2
1.1
1.0
0.9
0.8
0.7
0.6
0.5
0.4
2000 2001
Single family home sales
2002 2003 2004 2005 2006
South Northeast Midwest West
2007
Source: Census Department
1.3
1.2
1.1
1.0
0.9
0.8
0.7
0.6
0.5
0.4
23
… downstream more than upstream
Sales of new single family houses by price range (June 2005 = 1.0) 1.8
1.5
1.3
Over $750,00 $500,000 - 750,000 1.0
0.8
0.5
Under $150,000 0.3
Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06
Sources: US Department of Commerce; Office of Federal Housing Enterprise Oversight
1.8
1.5
1.2
0.9
0.6
0.3
24
Credit mispricing … a mile deep, but an inch wide
25
Again, little (no?) contagion
Non-investment grade debt yield less 10-year swap rate (basis points) 1,100 1,000 900 800 700 600 500 400 300 200 1990 1992 1994 1996 1998 2000 2002 2004 2006
Sources: Ibbotson Associates, JPMorgan
1,100 1,000 500 400 300 200 900 800 700 600 26
Nor here … emerging market spreads
Emerging market debt yield less 10-year Treasury yield (basis points) 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 1990 1992 1994 1996 1998 2000 2002 2004 2006
Source: JPMorgan Chase
1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 27
Nor, where we discount eternity … equities …
Market value of all publicly-traded equities (Wilshire 5000) 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Source: Bloomberg Financial Services
16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 28
… no bubble here
Stock market valuations (price-earnings ratio) 30 25 30 25 20 15 20 15 10 10 5 After-tax economic GDP profits (right) 5 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Sources: Federal Reserve Board, Bloomberg Financial Services, US Department of Commerce
0 29
Housing recessions ≠ national recessions
30
The link we remember has nothing to do with today
Total housing starts (thousands of units annualized) 3,000 2,500 2,000 Housing starts (left) 3,000 Scenarios for Starts High* (left) Base case (left) Low (left) 2,500 2,000 1,500 1,000 500 1,500 1,000 500 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 0
Sources: NBER recession bars; Census Department
31
#1 Yes, the economy has slowed a little …
Real GDP (percent change from four quarters earlier) 5
My Guess
4
t j
3
tj a j
2 1
FOMC's most recent central tendency real GDP forecast (Q4/Q4 basis)
0 2003 2004 2005
Sources: US Department of Commerce, Federal Reserve Board
2006 2007 2008 5 4
j t
3 2 1 0 32
… but how bad could it be? …
Unemployment rate (percent of the civilian labor force) 6.50
6.25
6.00
5.75
5.50
5.25
5.00
4.75
4.50
4.25
4.00
2003 2004
FOMC's most recent central tendency unemployment forecast (Q4 of year shown) tj aj j t a
6.50
6.25
6.00
5.75
5.50
5.25
5.00
4.75
4.50
4.25
4.00
2005 2006 2007 2008
Sources: US Department of Labor, Federal Reserve Board
33
… again? …
Real GDP (annual percent change from two quarters earlier) Claims (thousands weekly) 4 3 6 5 -1 -2 2 1 0 Jobless claims (right, scale is reversed) Real GDP growth over the most recent two quarters (left) -3 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 lat est 250 275 300 325 350 375 400 425 450 475 500 525
Sources: US Department of Labor; US Department of Commerce
34
… and I wonder if we know the whole story
Real GDP and real GDI (percent change from four quarters earlier)
6 5 2 1 4 3 0 -1 -2 1990 1992 1994 1996 Gross Domestic Product 1998 2000 Gross Domestic Income 2002 2004 2006
Source: US Department of Commerce
1 0 -1 -2 6 3 2 5 4
35
#2 Yonder …
Global real GDP (percentage change from four quarters earlier) 6 3 2 5 4 1 0 -1 1990 1992 1994 1996 1998 2000 2002 2004 2006
Source: JPMorgan Chase
2 1 0 -1 4 3 6 5 36
… Planet Earth is on the move
Real GDP in selected regions (percentage change from four quarters earlier) 9 6 5 8 7 1 0 -1 -2 4 3 2 -3 -4 2000
Source: JPMorgan Chase
Emerging economies in Asia, Eastern Europe and Latin America 2001 2002 2003 2004 Japan 2005 2006 US EU-11 2007 1 0 -1 -2 -3 -4 4 3 2 9 6 5 8 7 37
#3 Profits have never been better
US corporate profits (percent of Gross Domestic Income) 1 0 8 7 6 3 2 5 4 14 13 12 11 10 9 Pretax GDP profits from current production After-tax GDP profits from current production After-tax S&P 500 operating earnings 1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 1 0 8 7 6 3 2 5 4 14 13 12 11 10 9
Sources: NBER recession bars; US Department of Commerce; Standard and Poor’s
38
#4 6+ years … but expansions don’t die of old age …
Duration of economic cycles (months from trough to peak of cycle) 140 120 100 80 60 40 20 0 Current expansion 1919 1810 1821 1838 1846 1912 1867 1894 1908 1891 1900 1927 1858 1885 1921 1823 1826 1834 1843 1897 1958 1888 1924 1854 1904 1870 1796 1804 1812 1879 1970 1945 1954 1914 1949 1861 1829 1933 1975 1848 2001 1938 1982 1961 1991 Trough Year of Business Cycle
Sources: NBER, Joseph Davis, “An Improved Annual Chronology of US Business Cycles Since the 1790s”, NBER Working Paper Number 11157.
39
… they end when inflation’s out of control …
Core chain PCE prices (percent change from 12 months earlier) Oil ($ per barrel) 10 8 6 4 2 Core PCE chain prices (left) Petroleum (right) 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Sources: NBER recession bars; US Department of Commerce; Bloomberg
40 30 20 10 80 70 60 50 0 40
… and 2.4% isn’t a deal breaker …
Chain core PCE prices (percent change from 12 months earlier) 4 3
Band is FOMC central tendency forecast
2 1
Dashed line is forecast (monthly changes average 0.154%)
0 2003 2004 2005
Sources: US Department of Commerce; Federal Reserve Board
2006 2007 2008 4 1 0 3 2 41
Investors apparently agree
Core inflation and inflation expectations (percent) 4
Five-by-five breakeven (expected inflation five years from now and beyond)
3
Core CPI, % ch. from 12 months earlier (upper boundary)
2 1
Core chain PCE prices, % ch. from 12 months earlier (lower boundary)
0 2000 2001 2002 2003 2004 2005
Sources: NBER recession bar; US Departments of Labor and Commerce; Bloomberg
2006 2007 4 1 0 3 2 42
P.S. the weakest link is where the Fed has the most leverage
House sales (thousands) Mortgage applications (1990 = 100) 9,000 550
Sales of new and existing houses (left)
8,500 500 8,000 450 7,500 400 7,000
Mortgage purchase applications (right)
350 6,500 6,000 2000 2001 2002 2003 2004 2005 2006
Sources: Mortgage Bankers Association; National Association of Realtors; Census Department
2007 300 43
Conclusion … growth without steroids
44
Looking back … an unprecedented period
The Great Disinflation Three decades of economic and financial liberalization Lights turning on where half the world lives 45
The consumer we’ve known has benefited enormously …
Real consumer spending and income (annualized percentage growth over period shown) 5 5 Real consumer spending Real income 4 4 3 2 1
Source: US Department of Commerce
1951-85 1985-05 3 2 1 46
… rising savings allowed us to lower saving …
Saving rate (% of disposable income) Net worth (ratio to disposable income) 16 6.5
Ratio of net worth to income (right) 12 6.0
8 4 Saving rate (left) 5.5
5.0
0 4.5
-4 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 4.0
Sources: US Department of Commerce; Federal Reserve Board
47
… and leverage up
Household financial obligations (% of income) Debt (ratio to income) 25 20 15 10 5 Homeowners' financial obligations (left) Consumer debt burden (right) 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 0.8
0.7
0.6
0.5
1.4
1.3
1.2
1.1
1.0
0.9
Source: Federal Reserve Board
48
Ahead, it’s back to our father’s economy, with lower rates
Nominal and real 10-year Treasury yields (percent) 4 2 8 6 16 14 12 10 0 50 55 Nominal 10-year Treasury yield 60 65 70 75
Sources: NBER recession bars; US Department of Commerce
80 Real 10-year Treasury yield 85 90 95 00 05 * 2 0 6 4 16 14 12 10 8 49
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50
The Great Disinflation brought rates down, wealth up
Inflation and interest rates (percent) 4 2 8 6 16 14 12 10 0 60
Sources: NBER recession bars; Federal Reserve Board; US Department of Commerce
10-year Treasury 65 Chain PCE prices (% ch. from 12 months earlier) 70 75 80 85 90 95 yield 00 05 * 2 0 6 4 16 14 12 10 8 51
Liberalization … here’s the proof of the pudding
Real GDP (percentage change from four quarters earlier) 25 20 15 10 5 0 -5 -10 -15 -20 1850 Average historical growth = 3.75% annually 1875 1900 1925 1950
Sources: NBER recession bars; US Department of Commerce; Ray Fair, Yale University
1975 2000 25 20 15 10 5 0 -5 -10 -15 -20 52
Profits show it …
US corporate profits (percent of Gross Domestic Income) 1 0 8 7 6 3 2 5 4 14 13 12 11 10 9 Pretax GDP profits from current production After-tax GDP profits from current production After-tax S&P 500 operating earnings 1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 1 0 8 7 6 3 2 5 4 14 13 12 11 10 9
Sources: NBER; US Department of Commerce; Standard and Poor’s
53
… we don’t call it a bubble any more, because it wasn’t
Stock market value (price-earnings ratio) After-tax corporate profits ($ billions) 30 1,200 25 1,000 20 15 Price-earnings multiple: ratio of Wilshire 5000 to GDP after-tax profits (left) 800 600 10 400 5 After-tax economic GDP profits (right) 200 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 0
Sources: Federal Reserve Board; Bloomberg Financial Services; US Department of Commerce
54
Low rates have allowed us to refinance …
Mortgage refinancing applications (1990 = 100) 30-year commitment rate (percent) 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Applications to refinance mortgages (left) 30-year fixed rate conventional mortgage rate (right) 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 20 18 16 14 12 10 8 6 4
Sources: Federal Home Loan Mortgage Corporation; Mortgage Bankers Association
55
… and leverage up …
10-year Treasury yield (percent) Debt (ratio to personal disposable income) 16 14 12 10 8 10-Year Treasury yield (left) Ratio of household debt to disposable personal income (right) 6 4 2 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 1.4
1.3
1.2
1.1
1.0
0.9
0.8
0.7
0.6
0.5
Sources: Federal Reserve Board; US Department of Commerce
56
… keeping it all in perspective, the whole balance sheet
Household assets and liabilities ($ billions) 80,000 70,000 60,000 50,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 40,000 30,000 20,000 10,000 10,000 0 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Source: Federal Reserve Board
0 57
… the real estate piece …
Household portfolios of real estate and mortgage debt ($ billions) 25,000 20,000
Real estate net worth of households Mortgage equity withdrawn (now represented by debt obligations) Other mortgage debt (e.g., debt taken to finance new residential investment)
15,000 10,000 5,000 0 47 52 57 62 67 72 77 82 87 92 97 02 07
Source: Federal Reserve Board
58
California has seen this movie before …
Ratio of existing house prices in California to the national level (1980 = 1.0) 1.7
1.6
1.5
1.4
1.3
1.2
1.1
1.0
0.9
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Source: Office of Federal Housing Enterprise Oversight
1.2
1.1
1.0
0.9
1.7
1.6
1.5
1.4
1.3
59
… in the early 1990s
Existing house prices in California (percent change from four quarters earlier) 30 25 20 15 10 5 0 -5 -10 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 5 0 -5 -10 30 25 20 15 10
Source: Office of Federal Housing Enterprise Oversight
60
… we’ve also been diversifying out of real estate
Selected household financial transactions ($ billions annualized) 1,200 1,000 800 600 400 200 0 Household net acquisition of financial assets Mortgage equity extracted (net) Household saving -200 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 1,600 1,400 1,200 1,000 800 600 400 200 0 -200 -400
Source: Federal Reserve Board
61