Saturday, November 04, 2006

Another Apparent Statistical Discrepancy

Yesterday I pointed to the seeming contradiction between the barrage of weak economic reports that we've seen for the last few weeks and the very strong employment numbers released yesterday. But that is not the only apparent statictical discrepancy.While the overall U.S. economy is still expanding, albeit slowly, the housing sector is clearly contracting with both residential investments and house prices falling. Yet surprisingly, real estate loans from commercial banks are still expanding rapidly. Last week, it rose by 0.2% to $3281.5 billion, translating into a more than 10% rate of annual increase. And that was actually a relatively slow week, because real estate loans is up 14.2% compared to 52 weeks earlier. Lest anyone thinks this reflected increases late last year or early this year, the fact is that real estate loans are up more than 5% compared to 13 weeks earlier, translating into a annualized increase of 21.8%! And this in a housing bust!

While it to be sure is not inconceivable for real estate lending to boom during a housing bust, it is puzzling to say the least. There are three possibilities for this. Either the statistics showing a housing bust is wrong, or the statistics showing booming real estate lending is wrong or for some reasons banks are willing to increase people sharply increase their mortgage debt level even with falling house prices.

The first possibility is the least likely as the statistics come from too many sources and are too consistent for it to be true.

The second possibility is somewhat more likely as most of the increase (130 of 160) during the latest 3 month period came during a single week-between September 27 and October 4. Such a one week increase is not inconceivable but extremely unusual and therefor sort of suspicious.

The third possibility would be far more ominous as this means that debt overhang is accelerating further even with the slowdown and that thus the slowdown is not "doing its job" of clearing excesses. The excesses are then increasing at an faster rate than before, implying even more trouble lies ahead.


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