All Bubbles are Not Created Equal

August 11, 2014
Elliot Eisenberg, Ph.D.,  GraphsandLaughs, LLC

Elliot Eisenberg, Ph.D.,
GraphsandLaughs, LLC

In early 2000, the S&P 500 hit 1,553 and the tech-heavy NASDAQ surpassed 5,000. Two years later the S&P was at 768 and the NASDAQ was at 800! In the process, $6 trillion in household wealth was wiped out. We now call that period the dot-com bubble. About half a decade later, we experienced the housing market bubble. Interestingly, the value of residential real estate destroyed during that crisis was also about $6 trillion. Yet the dot-com bubble resulted in a mild recession while the housing bust lead to the Great Recession.   What was different? It turns a major culprit was which households suffered the destruction of wealth.

To set the table, ponder this: During the housing bust, retail spending fell 8% from 2007 to 2009, one the largest drops ever. By contrast, retail spending increased by 5% between 2000 and 2002. Clearly, the losses sustained during the dot-com bust had minimal impacts on household spending decisions and thus on the overall economy. Here is why.

The decline in home prices that began in 2007 was highly concentrated among households with very limited financial resources. As a result, these now much-poorer households dramatically pulled back on spending and in the process unwittingly helped usher in the Great Recession. Remember, retail spending is about a quarter of GDP, so a decline of 8% over two years reduces GDP by 2% — a huge amount. It is as if these poorer households were the transmission mechanism through which the Great Recession got its energy.

Exacerbating and reinforcing this downward spiral was the role of debt or leverage. Remember, by 2004 or 2005 a large percentage of first-time home buyers had low FICO scores, sketchy employment histories and limited assets. To compensate, these Alt-A and subprime buyers borrowed heavily with their now highly levered house being their major financial asset. For example, among the poorest quintile of the population, 80% of their net worth is in their house. Even among the middle quintile, home equity is still 60% of their net worth. By borrowing so much, just a small decline in house prices could put these buyers upside down and wipe them out. Which is exactly what happened and is what turned a recession into the Great Recession. Between 2007 and 2010 the bottom 20% of the population saw their net worth fall from about $30,000 to zero.

By contrast, the financial losses sustained during the dot-com bubble were essentially walled off and had relatively little effect on the overall economy. This is because stock ownership is concentrated among the wealthy. As the wealthy have less debt and more assets, they could essentially shrug off the much larger financial losses they sustained yet not have them alter their day-to-day spending decisions. Among the wealthiest 20% of the population, home equity represents just 25% of their net worth. Moreover, depression-era federal laws make it hard to borrow more than 50% of the cost of stock purchases, thereby limiting the potentially negative role of leverage.

In short, the home buyers who bought in 2004 and 2005 had limited wealth and had more of it at risk than earlier home buyers. When the music stopped they were highly levered and wholly unable to protect themselves. That quickly resulted in (among other things) reduced spending, which shrank GDP and quickly cascaded into the Great Recession.

Elliot Eisenberg, Ph.D. is President of GraphsandLaughs, LLC and can be reached at His daily 70 word economics and policy blog can be seen at


House-Hold Spending

April 4, 2014
Elliot Eisenberg, Ph.D.,  GraphsandLaughs, LLC

Elliot Eisenberg, Ph.D.,
GraphsandLaughs, LLC

Before the Great Recession, household wealth peaked at $68.8 trillion or $254,600 per person. If that seems like more money than you have, it’s because wealth isn’t evenly distributed. The rich have much more of it than the poor. As a result, back in 2007 the median family had wealth of just $126,000 while the average family had $584,000. Then the recession hit, house prices plunged, stock markets cratered and household wealth hit a low of $56.6 trillion in 2009. Since then stock markets around the world have staged a remarkable recovery and house prices have been steadily recovering. As a result, household wealth now stands at $80.7 trillion, almost $12 trillion more than before the recession. So things have more than recovered, right? Not quite.

Since 2007 there has been inflation and the US population has grown by 20 million people. As a result, inflation-adjusted per capita wealth is now $254,000, just a shade less than it was before the Great Recession. So we are at least back where we were before the recession hit, right? Not so fast. The problem is that the asset price recovery has been profoundly unequal and that has caused the distribution of wealth to change dramatically. And that has huge implications for the economy.

Homeowner equity hit $10 trillion last quarter, and while way up from a low of $6.3 trillion in 2011, it’s nowhere near the pre-recession high of $13.4 trillion. By contrast, equities have soared and are now worth almost $23 billion, way more than their pre-recession high of $18.3 trillion. The economic kicker is that equities are primarily owned by upper-income households, while home equity is the major source of wealth for everybody else. This means that while the rich are roughly $5 trillion wealthier than they were before the recession, all other households are about $3.5 trillion poorer. And while the upper classes spend more when their wealth increases, it’s nothing like the increase in spending that occurs when the rest of the population feels better off.

A huge chunk of middle class spending is the result of tapping into home equity via cash-out refinancing. Regrettably, despite rising home prices many households are still under water, credit remains harder to get than ever before, and many households now have mortgages with extremely low interest rates and are simply unwilling to tap into their home equity. As a result, mortgage equity withdrawal has nearly stopped. After peaking at $320 billion in 2006, it was just $32 billion last year, a decline of almost $300 billion, and that is the highest it’s been since 2010!

In addition to the rich, another group that has done well is older Americans. Families headed by someone under 40 have on average recovered only one-third of their lost wealth, but families headed by someone middle-aged or older have recouped all their losses as more of their wealth is in stock and less in housing. And regrettably the middle-aged and the elderly, like the wealthy, are less likely to spend their capital gains than younger middle class families.

As a result of the profoundly uneven wealth recovery, spending on luxury goods has done very well but firms that rely on middle class spending are not enjoying nearly as much of a renaissance. For that to change wages will have to start rising.

Elliot Eisenberg, Ph.D. is President of GraphsandLaughs, LLC and can be reached at His daily 70 word economics and policy blog can be seen at

Interest Rate Movements: What Are They Telling Us?

February 10, 2014
Elliott Eisenberg, Ph.D.

Elliott Eisenberg, Ph.D.

Over the last eight months interest rates have gyrated more dramatically than in years.  This process has not only whipsawed investors but seriously called into question the nascent housing recovery.  After all, how can housing starts rise from their near historic lows if rates are one percent higher than they were in late spring and with interest rates expected to rise somewhat higher over the course of 2014?  Is not the housing sector highly interest rate sensitive?  And isn’t the Federal Reserve deliberately buying tens of billions a month in mortgage backed securities to keep 30-year mortgage rates low to help the housing market?  Relax.  While new residential construction is indeed interest rate sensitive, it is also heavily dependent on other macroeconomic factors and they will more than compensate for the recent rate rise.

To use an analogy, interest rate movements are like a thermometer.   A rise in body temperature may or may not be a good thing; it all depends on the initial level.  A rise in body temperature of two degrees from 94 degrees to 96 degrees is excellent news and suggests a patient recovering from hypothermia.  By contrast, a rise in body temperature of an adult from 102 to 104 is serious, and suggests a very ill patient in need of prompt medical attention.  Changes in interest rates should be similarly viewed.

Interest rates are the cost of borrowing money.  When times are good and economic growth is robust, interest rates rise because investors borrow funds for investment purposes while households borrow to finance purchases of cars, houses and other big ticket items.  This increase in demand raises rates and this rise is healthy.  Returning to our thermometer analogy, this would be like a rise from 96 to 98 degrees.  Sometimes, however, the economy grows so fast that shortages of workers and supplies start to materialize, resulting in inflation.  If allowed to fester, inflation can spin out of control.  That is why interest rates continually rose during the 1960s and 1970s.  Eventually, things got so bad the Federal Reserve raised rates to 20% to weaken the economy and squeeze inflation out of the system.  This would be equivalent to a rise in body temperature from 103 to 105 degrees.  This rise was necessary but was a sign of a profoundly sick economy.

Until recently, despite amazingly low interest rates, no one borrowed; witness the ridiculously low levels of new home construction and investment in plant and equipment by firms, because everyone was pessimistic about the future.  This would be akin to fall in temperature from 95 to 93, a bad sign.  However as the economy improves, and trust me it is, albeit way too slowly, and as we become increasingly optimistic about the future, interest rates will rise and this is what is finally starting to happen.  The thermometer is now in the process of going from 94 to 95.

In this early phase of the recovery, firms hire workers, begin buying equipment and start building plant.  As a result, unemployment rates decline, wages start rising and household spending increases.  And this boosts GDP growth, which results in yet more corporate spending and more household consumption on, among other things, housing.  Given the immense slack in our economy this process could last several years, accompanied by slowly rising interest rates akin to the thermometer rising from 96 to 98.6!

Elliot Eisenberg, Ph.D. is President of GraphsandLaughs, LLC and can be reached at  His daily 70 word economics and policy blog can be seen at

Economic Forecast for 2nd Half 2013: Sunny with Cloudy Periods

June 4, 2013

Elliot Eisenberg, Ph.D.,
GraphsandLaughs, LLC

Looking ahead at the second half of 2013, the economic news is pretty solid.  The US economy is on the mend, the labor market is slowly healing and house prices are up about 10% from year-ago levels. In addition, Europe (while in recession) appears to be holding together, DC budget brinksmanship is fading, car and light-truck sales along with consumer sentiment are rising, and new home construction continues its steady ascent.  The only serious domestic fly in the ointment is the significant fiscal drag from Washington as the result of sequestration and year-end tax increases.  The biggest foreign drag is Europe’s recession is hurting US exports.

With all this in mind, I expect Q3 GDP to be about 1.75% and Q4 GDP to come in slightly higher at 2.1%.  As for housing starts, in Q3 they should, for the first time in years, exceed a million units (seasonally adjusted and annualized) with single family starts coming in at 675,000 and multifamily starts reaching a pace of about 340,000.  In Q4 single family starts should hit to 700,000 with multifamily starts unchanged.

Inflation will remain benign.  The combination of weak global growth, flat to declining energy and commodity prices, and flat to mildly rising food prices will keep CPI growth well below 2%.  Moreover, the combination of tiny rises in import prices, producer prices, consumer prices and anemic wage growth means that personal consumption expenditure inflation, the Feds preferred inflation measure, will barely exceed 1%, giving the Federal Reserve ample room to continue its program of quantitative easing.

As for jobs, despite an improving labor market, the unemployment rate at the end of the year will remain above 7%.  And combined with an annual inflation rate of well below 2%, it makes me think Bernanke and the rest of the voting members of the interest rate-setting Federal Open Market Committee will continue purchasing $85 billion/month in Treasuries and mortgage-backed securities at least through October 2013.  Any tapering of QE3 will commence in late 2013 and more likely in early 2014.

Another reason why QE3 will be maintained in that due to weak wage growth, consumer spending is rising quite slowly and is being fueled, at least in part, by a decline in the personal savings rate which now stands at a scant 2.5%.  Of course rising stock prices, improving home values and easing credit market conditions are also aiding the rise in consumer spending. But a sudden rise in interest rates could derail these positive developments and weaken manufacturing, which is currently neither expanding nor contracting.  As such, the risk is simply not worth the return, at least for now.

What would change my thinking about QE3 would be consistent monthly non-farm payroll job growth of greater than 187,000.  If we manage to achieve that, the Fed would likely reduce the amount of its monthly bonds purchases and interest rates would rise.  However, given a growing economy, the rate rises would not be growth-sapping and I put the chances of a new recession at no more than 10%.  In the meantime, I look forward to continued, slow and steady improvement the rest of the year.

Have a wonderful summer and see you in August! 

Elliot Eisenberg, Ph.D. is President of GraphsandLaughs, LLC and can be reached at  His daily 70 word economics and policy blog can be seen at

US home prices up 9.3%, the most in nearly 7 years

April 30, 2013
April 30, 2013 8:10 AM

Colorado Springs is not part of the Standard & Poor’s/Case-Shiller 20-city home price index. But area home prices have been rising. The median price of area homes sold in March rose to $212,000, a 12.2 percent year-over-year increase, according to a Pikes Peak Association of Realtors report. 


WASHINGTON — U.S. home prices rose 9.3 percent in February compared with a year ago, the most in nearly seven years. The gains were driven by a growing number of buyers who bid on a limited supply of homes.

The Standard & Poor’s/Case-Shiller 20-city home price index increased from an 8.1 percent year-over-year gain in January. And annual prices rose in February in all 20 cities for the second month in a row.

Phoenix led all cities with an annual gain of 23 percent in February. Prices jumped nearly 19 percent in San Francisco. In Las Vegas, home prices increased 17.6 percent and in Atlanta they rose 16.5 percent.

Eleven of the 20 cities reported price gains in February compared with January. Those monthly numbers are not seasonally adjusted and reflect the slower winter buying period.

The index covers roughly half of U.S. homes. It measures prices compared with those in January 2000 and creates a three-month moving average. The February figures are the latest available.

Steady hiring and near-record low mortgage rates are driving up demand, helping sustain the housing recovery that began last year. Buyer traffic was 25 percent higher in March than it was a year ago, according to the National Association of Realtors.

At the same time, prices are surging because buyers have fewer homes to bid on. The number of homes available for sale has fallen nearly 17 percent in the past year to 1.93 million, the Realtors’ group said last week. At the current sales pace, that supply would be exhausted in 4.7 months, below the 6 months that is typical in healthier markets.

Home prices nationwide are still about 30 percent below their peak reached at the height of the housing bubble in August 2006. They are only back to where they were in the fall of 2003.

And Stan Humphries, chief economist at Zillow, a real estate data provider, cautioned that the national figures are being skewed by sharp rebounds in cities hit hard during the housing bust, including Las Vegas and Phoenix. Investors are helping drive up prices in those cities.

“This report needs to start being taken with a grain of salt, Humphries said. “The appreciation rates we’re currently seeing … are not broadly reflective of what’s happening in the national housing market right now.”

Steady home price gains can help drive the housing recovery. Higher home prices encourage more people to buy before prices rise further. They can also entice more homeowners to sell by making them more confident they’ll get a good price. In addition, higher prices raise the equity people have in their homes, which makes selling more profitable.

But many homeowners still owe more on their mortgages than their homes are worth. That can make it difficult to sell.

Higher home values can also help the economy. They increase homeowners’ wealth, which encourages more spending. Consumer spending drives 70 percent of economic growth.

Sales of previously occupied homes leveled off over the winter but may increase in the coming months. A measure of signed contracts to buy homes rose to a three-year high in March.

Homebuilders are also starting work on more new homes and apartments. That creates more construction jobs. Builders started work on more than 1 million homes at an annual rate in March. That’s the first time the pace has topped that threshold in nearly 5 years.

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Four Reasons to Be Optimistic

March 8, 2013

Elliott EisenbergBy Elliot Eisenberg, Ph.D.

While economic growth has been lackluster since the end of the recession in summer 2009, this is likely to change, despite the sequester.  Here are my top four reasons why, in rank order of their importance to the economy going forward.

The painful process of deleveraging is over.  Deleveraging is, in part, what caused this recession to be so painful compared with all other post-WWII recessions.  Non-financial corporations have outstanding balance sheets, and have actually begun to releverage.  Commercial and industrial loans are once again on the rise and the banking sector is healthier than it has ever been since record keeping began.  To give just one indicator, the core capital ratio of banks is 9.2%; the post WWII average is 7.5%. Households are pretty good shape too.  There are now only about nine million households seriously behind on some sort of payment.  At the peak of the recession, the number was 20 million, while now credit card and auto loans and personal loan defaults are all profoundly low.  The surprisingly rapid rate of deleveraging is partly why the housing sector is now recovering much faster than expected.

The housing market has turned the corner and the next few years should be excellent.  At their weakest, housing starts were 550,000 units/year.  They are now at 900,000 and should grow by 200,000 units/year for the next three to four years, topping out at about 1.7 million units in 2016. This is being driven by a rise in household formations that were delayed due to the anemic job market.  Note that each new home creates about 5 new jobs nationwide, so 200,000 new homes means a million new jobs.  And while there are still about three million first mortgages in foreclosure, that number is way down from where it was and is on its way to the 750,000 mark, which is the historic norm.

The next reason I am optimistic is because US corporations are profoundly competitive and have drastically lowered their costs.  As a result, they are now able to compete with firms anywhere and win.  Unit labor costs are way down.  In the manufacturing sector, they are back to where they were 20 years ago, and as a result corporate profits have been setting records quarterly.  Productivity is so high firms that would not have previously considered manufacturing here (like Apple) are now taking a second look.

Lastly, despite severe dysfunction on Capitol Hill, substantial progress has been made on the fiscal front.  The cumulative impact of the tax increases and spending cuts enacted in spring 2011, during the debt-ceiling fiasco of late summer 2011, the recently completed New Year’s Day fiscal-cliff negotiations, along with the most recent sequester have come close to stabilizing our public debt-to-GDP ratio somewhere in the 75% to 78% range.  With another $500 billion in spending cuts and or tax increases over the next decade, we will be done.

Our economy has come a long way.  The worst is over and by the end of the year the economy will hopefully look a lot different than it does now.  And housing will be leading the way.

Elliot Eisenberg, Ph.D. is President of GraphsandLaughs, LLC and can be reached at  His daily 70 word economics and policy blog can be seen at