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Posts tagged with: "GDP"

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A mirror image of mortgages and equity

The story of the Great Recession told with two intersecting lines

Take a look at mortgage or real estate data on FRED. The main story (for a number of years, now) is all about the Great Recession, which is clear in the graph above. Let’s unpack that story.

In blue, we have the share of equity in the real estate that households own. In the 1950s, 70-80% of the value of the average house was owner equity, and 20-30% was owned by a financial institution. The share of owner equity essentially stayed within a 60-70% band until the end of the millennium. Then it quickly dropped to below 40%, before rebounding today to its previous level (from 2001 or so). What happened during the Great Recession is clearly a deviation from normal.

This being a ratio, the deviation could have come from changes on either side of that ratio: 1. Mortgages could have sharply increased without a change in owner equity. 2. Owner equity could have dramatically shrunk. To help figure this out, we can look at the red line, which tracks household mortgages normalized by GDP. It shows the opposite pattern of the blue line: Mortgages clearly become more popular in the initial years, as the financial sector develops. Then they stabilize, with a push in the 1980s before really taking off, earlier than the blue line, and then they crash; soon after, the blue line shoots up.

What does this teach us? First, there was clearly a sharp increase in mortgages before the crisis. But it was accompanied by an equivalent increase in the value of the homes, so there was no visible change in the share of owner equity until the value of homes stopped keeping up with the mortgages and even dropped. At the bottom of the crisis, owner equity is at its lowest, and it is only then that mortgages start decreasing: Virtually no new mortgages are issued, current mortgages are gradually paid off and some existing ones are foreclosed, returning to their historical levels.

How this graph was created: Search for and select “Household equity in real estate” and click “Add to Graph.” From the “Edit Graph” panel, use the “Add Line” tab to search for “home mortgages.” Select a series in levels and add it to the graph. From the “Customize data” search bar, search for and add the nominal (not real) GDP series. Finally, apply formula a/b*100.

Suggested by Christian Zimmermann.

View on FRED, series used in this post: GDP, HMLBSHNO, HOEREPHRE

Assets U.S. households hold

Changes in the value of financial assets, real estate, and durable goods

FRED just expanded its coverage of the Z.1 release from the Board of Governors. Hidden behind this obscure name is a massive dataset that describes the financial situation of the nation, divided into sectors— households, businesses, government, and “the rest of the world.” Here, we look at the assets of households, which we’ve divided into three broad categories: real estate, consumer durables (cars, household appliances, furniture, etc.), and financial assets. The value of these assets has generally increased (no surprise; inflation is a factor), so we decided to divide each series by nominal GDP. This gives us a better idea of the quantities.

We can see that financial assets are the largest type of household asset, and their value relative to the other categories has continually increased; their value has also increased relative to total income (GDP). Currently, households’ financial assets are about 4 times annual GDP, rising from 2.5 times in 1987 when the data start. There hasn’t been a substantial increase in the relative value of real estate, however, which has usually been a little over one year’s worth of GDP (an exception being the run-up before the Financial Crisis). Consumer durable goods has actually decreased, from a third to a quarter of annual GDP. And financial assets comprised about 60% of all household assets in 1987, but now stand at almost 75%.

How this graph was created: From the release table for the balance sheet of households, select the series you want displayed and click “Add to Graph.” From the “Edit Graph” panel, add to each line nominal (not real) GDP. Apply formula a/b/1000 to each line, except for real estate where we don’t need to add /1000 to a/b to get the units right.

Suggested by Christian Zimmermann.

View on FRED, series used in this post: BOGZ1FL194090005Q, BOGZ1LM155111005Q, GDP, HOOREVLMHMV

Foreign direct investment

This FRED graph plots quarterly foreign direct investment (FDI) flows into the U.S. as a percent of GDP. And what is FDI? It’s the flow of capital across borders when a firm owns a company in another country. But it’s more than simply owning stock in a foreign company: It implies that the investor is directly involved in the foreign company’s day-to-day operations.

FDI is beneficial to job creation and a country’s growth. In the U.S., it began to pick up after 1975 and spiked in the late-1990s and early 2000s, corresponding with the tech bubble. During recessions, which are represented in the graph by shaded bars, FDI systematically falls. Since the Great Recession, average FDI flows have been higher than in previous decades, ranging from 1% to 2% of GDP each quarter.

How this graph was created: Search for and select “Rest of the world; foreign direct investment in U.S.; asset, flow series (ROWFDIQ027S).” From the “Edit Graph” panel, use the customize data option to add the nominal quarterly GDP series (GDP). In the formula box, type ((a/1000)/b)*100 and click “Apply.”

Suggested by Brian Reinbold and Paulina Restrepo-Echavarria.

View on FRED, series used in this post: GDP, ROWFDIQ027S

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