Most Popular
1. Dow Max Drawdown Bear Stock Market 2022 - Accumulating Deviations from the Highs - 21st Feb 22
2.Putin Starts WW3 in Ukraine, Will Use Tactical Nuclear Weapons, China Prepares Taiwan Blitzkrieg - 28th Feb 22
3.World War 3 Phase 1 - Putin WINS Ukraine War! - 25th Feb 22
4.INVESTORS SEDUCED by CNBC and the STOCK CHARTS COMPLETELY MISS the BIG PICTURE! - 10th Feb 22
5.Will There Be A 2024 US Presidential Election? - 3rd Mar 22
6.Gold and SIlver, Precious Metals Sector Is at a Terrific Buy Spot - 6th Feb 22
7.Why Putin Wants the WHOLE of Ukraine - World War 3 Untended Consequences - 6th Feb 22
8.Dow Stock Market Expected Max Drawdown 2022 - 19th Feb 22
9.Stock Market Calm In the Eye of the Inflation Storm - 4th Mar 22
10.M = F - Everything is Waving! Stock Market Forward Guidance - 7th Mar 22
Last 7 days
Britain's Hyper Housing Market - 27th May 22
Lower Copper price due to Chinese lockdowns is only Temporary - 27th May 22
How the United States Conquered Inflation Following the Civil War - 27th May 22
Greater Depression Now!? - 27th May 22
Stocks: Is the Really Scary Part Just Ahead? - 27th May 22
The Dark Side of the Internet - Cybersecurity - 27th May 22
Why Ray Dalio is WRONG About China - Principles for Dealing with the Changing World Order - 24th May 22
Globalists Convene to Plan Central Bank Digital Currencies - 24th May 22
After Recent Highs, What’s Next for the Gold Junior Miners? - 24th May 22
Why APPLE Could CRASH the Stock Market! - 21st May 22
Why Is Crude Oil Ignoring US Inventories? - 21st May 22
Here is Why I’m Still Bullish on Gold Mining Stocks - 21st May 22
THE INFLATION MEGA-TREND QE4EVER! - 20th May 22
US Real Estate Investors – Is There An End In Sight? - 20th May 22
How Technology Affected the Gaming Industry - 20th May 22
How To Set And Achieve Reasonable Goals For Your Company - 20th May 22
How Low Could the Amazon (AMZN) Stock Price Fall? - 19th May 22
Bitten by FANG? Clocked by Cryptos? -- 'Air Pockets' Everywhere - 19th May 22
Northern General Hospital Orthopedics Fractures and and Ankle Clinic Consultations Real Patient Experience - 19th May 22
Cathie Wood Goes All in on Teladoc, ARKK INSANE Noob Investing Strategy! - 17th May 22
This is Anything but Positive for US Housing Market - 17th May 22
What Should We Do If There Is No Fed Monetary Policy Pivot? - 17th May 22
All Possible Ways to Earn Free Litecoin - 17th May 22
How low Could the Amazon Stock Price Fall? - 16th May 22
Cathy Wood ARKK INSANITY There is NO Coming Back! - 16th May 22
NASDAQ 100 Stock Market LOWER LOWS & LOWER HIGH - 16th May 22
Sanctions, trade wars worsen US inflation - 16th May 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

So-Called Fed Model Suggests Housing Market Is Over-Valued

Economics / US Housing Jun 11, 2007 - 07:16 PM GMT

By: Paul_L_Kasriel

Economics Better late than never, huh? The so-called Fed model is often used to gauge the under-over-valuation of corporate equities by comparing the earnings yield on, say, the S&P 500 with the yield on the Treasury 10-year security. The same kind of analysis can be applied to owner-occupied housing by dividing the "earnings" or services produced by owner-occupied housing by the market value of that housing. The services produced by housing are estimated by the Bureau of Economic Analysis in its National Income and Product Table 2.45U, line item "Personal Consumption Expenditures: Owner-Occupied Nonfarm Dwellings: Space Rent."


The market value of owner-occupied housing is estimate by the Federal Reserve in its Flow-of-Funds Table B.100, line item "Balance Sheet of the Household and Nonprofit Organizations: Assets: Households: Total Owner-occupied Real Estate." Both the nominal "yield" on owner-occupied housing and the nominal yield on Treasury 10-year securities are shown in Chart 1.

Chart 1
So-Called Fed Model Suggests Housing Market Is Over-Valued

Chart 2 shows the difference in percentage points between the yield on owner-occupied housing and the yield on a Treasury 10-year security. After being slightly negative (3 basis points) in 2006:Q2, the yield on housing was 46 basis points over 10-year Treasuries in 2007:Q1. But that pales in comparison to the annual average positive yield differentials of 115 basis points, 127 basis points, 154 basis points, and 103 basis points in 2001, 2002, 2003 and 2004, respectively. Although hardly news, but the Fed model is just more confirmation that bloom and boom is off the housing rose.

Chart 2

Households: Up To Their Eyebrows in Debt, Down Top Their Ankles in Liquidity

In 2007:Q1, total household debt represented 18.584% of the market value of total household assets - just off the record high of 18.684% set in 2006:Q3 (see Chart 3).

Chart 3

Households' single-largest asset, their houses, is carrying record debt relative to its market value (see Chart 4). I can't confirm it, but conventional wisdom has it that about one-third of all owner-occupied housing has no debt associated with it. If that's case, then with record leverage in housing today, the two-thirds of houses with debt associated with them must have an incredibly high debt-to-value ratio.

Chart 4

With total household leverage just off a record high, household liquidity, defined as total household deposits as a percent of total household debt, is just off a record low (see Chart 5). I know, I know. Households don't need to be liquid today inasmuch as they can more easily borrow when those rainy days come than they could in yesteryear. My response to that is that households have already used their rainy-day borrowing during the sunny days (again see Chart 3).

Chart 5

By Paul L. Kasriel
The Northern Trust Company
Economic Research Department - Daily Global Commentary

Copyright © 2007 Paul Kasriel
Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

Paul L Kasriel Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in