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Tuesday, August 25, 2009

No More Clanging Clunkers, No More Sales

Mike Smitka

What, now that the clunkers program has clanged to a close? In a couple days we'll see what total August sales were like – I'm risking bytes of criticism writing now – but I'm afraid it will be back to business as normal. Afraid, because normal this year has been an SAAR of 10 million or less. The level of enthusiasm makes it clear that sales have been pulled forward; it'll be payback time. The problems run deeper: cars were affected by the bubble, and not just housing.
A recent NBER working paper by Atif Mian and Amir Sufi of the University of Chicago bolsters the argument that I've made in earliers notes. My analysis was based solely on an analysis of sales and scrappage data relative to the vehicle stock; they started out with data on 266,000 individuals in the Equifax credit rating database. (Don't worry – they couldn't actually look at individual records, but instead had to extract information from data that Equifax had already sanitized and then mildly aggregated.) But combined with data on geography and housing prices and demographics, they could paint a picture of where prices had gone up, areas where housing supply was "inelastic" so that shifts in demand showed up as higher prices rather than more construction. They could then look at who borrowed: not those with in places where prices moved little, but those who were in "hot" markets, and who started out with lower incomes and/or lower credit scores. And did they ever tap the equity; credit records made it clear that these people were also buying a lot of vehicles, vehicles they earlier had not been able to afford. But those same locations are ones where mortgage holders are now under water (see Federal Reserve data on credit conditions, illustrated by maps color-coded at the county level). They're losing their houses and their cars, not buying new ones. In other words, there was a bubble in the auto market as well, people buying on credit backed by unrealized capital gains.
That really is not news, though it makes for sobering and poignant stories (see the New York Times series on the Beth Court neighborhood in Moreno Valley, outside LA). But what Mian and Sufi show is that behavior didn't change much in the many urban areas where there was no run-up in housing prices (I'll append a graph I created from the Case Schiller real estate index that illustrates the contrast). In other words, the big boom in car sales came from the same people who were splurging on home renovations and vacations by pulling equity out of their houses. Well, that equity isn't there to the tune $1 trillion in California alone (data from an August 13th study by First American CoreLogic). In Nevada 45% of homeowners have negative equity of 25% or more of their mortgages; in California, 25%. These people aren't buying cars anytime soon. So while house prices may have bottomed out – and the recession ended – that doesn't mean the good times will roll again.
That's not only because of all the people who lost everything (or soon will, given that 5% of the labor force has now been unemployed for over 27 weeks, and another 2% for 15-26 weeks). On average the rest of us are worried. State and local governments are only now cutting their budgets; commercial real estate hasn't hit bottom yet. There are a lot of pink slips yet to be distributed. So there's no reason to think those of us who were more conservative in our habits are suddenly going to loosen pursestrings that long have been tight. Let's be honest with ourselves; if we're thrifty, it's by necessity: home equity is what we have from paying down the mortgage, not because the spot of mother earth we occupy was suddenly worth megabucks

The graphs below look at housing prices relative to the CPI index, real GDP and nominal GDP. One focuses on four of the metropolitan areas with the greatest run-up in prices, a couple of which have come back to earth, and then some. The other highlights cities where there was comparatively little change. I left the scale the same on both, which results in a lot of blank space on the second one, plus it's hard to read because the graphs lie more or less on top of each other. Which is the point it is meant to illustrate.

Here's a link to a powerpoint from a talk I gave yesterday (Aug 25, 2009) that includes additional material.

Click to enlarge!

Click to enlarge!