EconoMonitor

Nouriel Roubini's Global EconoMonitor

“The Biggest Slump in US Housing in the Last 40 Years”…or 53 Years?

The Biggest Slump in US Housing in the Last 40 Years: These are not my views but those of the Toll Brothers, the famous luxury McMansions homebuilders, as CNN reported last week. Also, as reported by the WSJ today: In his 40 years as a home builder, Mr. Toll says, he has never seen a slump unfold like the current one. “I’ve never seen a downturn in housing without a downturn in employment or… some macroeconomic nasty condition that took housing down along with other elements of the economy,” he says. “This time, you’ve got low unemployment, you’ve got job creation, you’ve got a stable stock market and relatively low interest rates.”.  This followed last week’s CNN headline: “Builder: Oversupply slump worst in 40 years. Toll Brothers slashes outlook on new homes as orders plunge and revenue misses forecasts” Indeed, yesterday’s sharply falling profit results from the Toll Brothers confirmed their view that this is the worst housing slump in decades. Similarly, Angelo Mozilo, the CEO of Countrywide – the country’s largest independent home mortgage lender – recently stated: “I’ve never seen a soft-landing in 53 years, so we have a ways to go before this levels out. I have to prepare the company for the worst that can happen.” So, effectively the only debate now is whether housing conditions are the worst in the last 40 years or in the last 53 years. So much for the bullish soft-landing wishful thinking coming out of Wall Street these days….

Of course, the message from the Toll Brothers and Countrywide is like the proverbial canary in the mine that is reflective of an ongoing rout – calling it slowdown or slump is a misnomer by now – in the US housing market. Every possible indicator of the housing sector that has been coming out in the last few weeks – and I will discuss their details below – suggests that the housing market is in free fall.  And today’s figures on existing home sales and unsold homes say it all; as Bloomberg concisely headlined this morning: U.S. Existing-Home Sales Tumble; Unsold Inventory Is Highest in a Decade
 

At this point there no doubt on whether the housing sector is contracting – real residential investment fell at the annualized rate of 6.4% in Q2. The first derivative of the housing market is clear and negative today and looking ahead for the next few quarters. There is not even a debate about the second derivative of the housing market as any estimate out there suggests that the housing sector will contract at a faster rate in Q3 and Q4 than in Q2. Some official estimates that I have seen suggest that real residential housing will contract at 10% – rather than the Q2 6.4% in the next two quarters. My own estimate – based on a reading of the coming data – is that, actually, the contraction is more likely to be of the order of 12-15% annualized rate in the next several quarters. So, the only remaining scary question is about the third derivative of the housing sector and at which point – in terms of quantities and prices – the housing market will bottom out. 
 

I have also argued before that the effects of housing on US economic growth and the role of housing in tipping the US economy into a recession in early 2007 are more significant than the role that the tech sector bust in 2000 played in tipping the economy into a recession in 2001. There are three reasons: 

  1. The direct effect of the fall in residential investment in aggregate demand will be as high as the effects of the fall in real investment in the 2000-2001episode. Then, real investment fell by about 2% of GDP. This time around the fall in residential investment alone – let alone the role other components of real investment, such as software and equipment, that are already falling in Q2 – will be as large as residential investment could fall from the peak of about 6.2% of GDP (the highest level since the 1950s) to as low as 4% of GDP at the bottom in 2007.
  2. The wealth effect of the tech bust was limited to the elite of folks who had stocks in the NASDAQ. The wealth effect of now falling housing prices – yes median prices are starting to fall at the national level – affects every home-owning household: the value of residential real estate has also increased to 48.5% of household wealth in 2006 from from 38.7% in 1996. Also, the link between housing wealth rising, increased home equity withdrawal (HEW) and consumption of durable and non durables is very significant (see RGE’s Christian Menegatti brief on this), much more than the effect of the tech bubbles of the 1990s. Last year, out of the $800 billion of HEW at least $150 or possibly $200 billion was spent on consumption and another good $100 billion plus went into residential investment (i.e. house capital improvements/expansions). It is enough for house price to flatten – as they already did recently – let alone start falling – as they are doing now since they are beginning to fall in major markets – for the wealth effect to disappear, the HEW dribble to low levels and for consumption to sharply fall. Note that this year there will be large increases in the borrowing costs for $1 trillion of ARM’s while this figure for 2007 will be $1.8 trillion. Thus, debt servicing costs for millions of homeowners will sharply increase this year and next. 
  3. The employment effects of housing are serious; up to 30% of the employment growth in the last three years was due directly and indirectly to housing. The direct effects are job lost in construction, building materials, real estate brokers and sales agents, and employees of the mortgage finance industry. The indirect effects imply that the role of housing is even larger than 30%. The housing boom led to a boom in consumer durables spending on home appliances and furniture. Indeed, in Q2 real consumption of such goods was already negative: as you have less new home built and purchased and less old homes refurbished and expanded, you get less purchases of home appliances and furniture. There are also other indirect effects of the housing bust on employment, even on the purchases of motor vehicles. Indeed, the current auto sector slump is not unrelated to the housing slump. As the Financial Times put recently, the sharp fall in the sales of Ford’s pick-up trucks is related to the housing slump as such truck are widely purchased by real estate contractors. And indeed in Q2 real consumer durables (that include both cars, home appliances and furniture all related to housing) already fell, consistent with the view that we have now have a glut in the stock of consumer durables (durables consumption has a investment-like nature to it as such goods last for a long time). Thus, as housing sector slumps, the job and income and wage losses in housing will percolate throughout the economy.

How bad are the signals coming from the housing sector? As a recent news headline clearly put it: it is simply UGLY. Indeed, all
the indicators from the housing sectors – including the latest housing starts and the homebuilders (NAHB) forward looking business conditions – indicate a housing sector that is literally in free fall. New home sales started to fall since the beginning of 2006 and in some regions they are down over 30% relative to a year ago. As Bloomberg summarized today the new housing data: “Sales of previously owned homes in the U.S. fell more than expected in July, resulting in the biggest supply of unsold homes in more than a decade, as higher mortgage rates discouraged would-be home buyers.. Purchases declined 4.1 percent last month to an annual rate of 6.33 million, the lowest since January 2004, from 6.6 million in June, the National Association of Realtors said today in Washington. Sales fell 11.2 percent compared with a year earlier.”  Indeed, the number of unsold homes and the ratio of unsold homes to new home sales has therefore risen sharply to over 5.5 months of supply. Similarly the ratio of unsold homes to existing home sales has also sharply increased. These are clear indicator of a glut of unsold homes in the market.  Housing starts are also sharply down elative to a year ago and expected to fall further over the next few quarters. Note also that, while overall mortgage applications are still up in the latest figures published today, due to sustained refinancing applications, applications for purchase applications have fallen 1.0% during the last week, this being  fifth  fall in  the  last six  weeks. Moreover, there is a large amount of evidence that suggests increasing cancellation of initial mortgage applications, as the slump in the housing market and in the economy is now scaring households considering buying a home. Thus, the official data on purchase mortgage applications are very likely to exceed actual home sales. 

More generally, note that when demand for housing initially falls relative to a glut of supply, the initial market response is not on price, as it is the case of financial market where prices adjust rapidly, but rather on the quantity of unsold homes and on how long unsold homes stay on the market. Housing prices, unlike financial assets, are sluggish. This market inventory adjustment eventually leads to lower prices once sellers realize that demand is low and that waiting is not going to help.

The housing market has thus followed so far the predicted various stages of adjustment to cycle driven by the initial housing bubble: initially a glut of supply of new homes as high prices (driven in part by speculative demand) led to high and excessive production of new homes; then a fall in demand as speculative high prices and rising rates made the purchases of housing less affordable to many; then, the ensuing inventory adjustment – an increase in unsold homes. Then, the reduction in the production of new homes – lower housing starts – as homebuilders with falling revenues and profits and lower expected demand finally reacted to the growing glut of unsold inventories. Indeed, the value of home builders’ shares on the NYSE has fallen by almost 50% relative to a year ago.  Finally, we have now a price adjustment in two directions: a) an increase in rents as housing affordability fell since more and more households could not afford to pay the speculative prices of existing and new homes; this increase in rents is now correctly jacking up owner equivalent rent and increasing headline CPI inflation; b) the beginning of a fall in actual housing prices as the glut of unsold homes is now putting downward pressure on actual prices.  (for more on recent indicators of the housing bust see the RGE Monitor cluster of readings on housing indicators)

The evidence on falling home prices is now becoming clearer. Since the end of World War II, there has never been a year on year fall in housing prices. There have been instead several quarters in which housing prices declined. Of course in some regions where there were housing busts prices declined for a while: in Texas during the housing bust of the mid 1980s that led to the S&L crisis; in California in the early 1990s following the recession in that state; in Boston in 1990. Those episodes were all associated with the housing bust that was related to the 1990-1991 recession So, you do not need a persistent year-on-year fall in median housing prices to have a housing bust; such bust can occur even if prices are flattening or falling in some regions, but not nationally. Moreover, such regional bust can be associated with national recession, as in the 1990-91 episode. So, the fact that the latest housing bubble was concentrated on the two coasts (North East all the way to Florida; and West Coast, especially California) does not mean that the coming housing bust in these regions will not have national macro effects. For one thing, the value of the housing stock in those two regions is close to 50% of the total housing stock given the bubble of recent years. Thus, a housing bust in the two coasts can and will have macro effects.

Indeed, today the National Association of Realtors reported today that the median price of an existing home rose only 0.9 percent in July from a year ago. So, housing prices are practically flat at the national level. Worse, relative to a year ago housing prices have already fallen in the North East (-2.1%), Mid-West (-0.6%) and the West (-0.3%). So, not only housing prices are falling in the bubbly two coast; they are also starting to fall in the Mid-West, the region where the conventional wisdom was that there was no housing bubble. The fact that home prices are falling in the Mid-West where prices did not skyrocket in the bubble years is a scary signal of how much the housing bust and glut in supply will lead to a sharp fall in housing prices in the quarters ahead with painful effects on the wealth, and thus consumption, of households.  You can expect falling median housing prices, on a year-on-year basis, at the national level starting this month of August: indeed, today’s figures on the glut of unsold homes – much larger than in the housing bust of the early 1990s – are only consistent with a highly likely actual fall in home prices in the months ahead and throughout most of 2007. Note  also that, on an inflation adjusted basis, real home prices (relative to the CPI index) are already falling at a 4% plus rate.

Also, as noted by Dean Baker: “current house price indices are failing to pick up the full decline in prices because they miss the various concessions (seller paid closing costs, buyer-side realtor bonuses, and seller subsidized mortgages) that sellers often use to move their houses.”

Even more ominously, futures markets now expect that house prices will fall during 2007. Following the lead and prodding of Robert Shiller – the maverick Yale professor who predicted the 2000 stock bust and is now predicting a housing bust – the Chicago Mercantile Exchange opened this spring a new futures market for house prices in ten U.S. cities. While this market is very new and still relatively illiquid, it is now predicting that U.S. house prices will fall in 2007 at the national average level, for the first time in over fifty years.
The index of this futures’ market for the entire US is projecting a 5% price fall in 2007. And the futures contracts for individual cities show expected declines in housing prices even larger than 5% for Miami, New York, Boston, San Francisco, Boston, San Diego and Las Vegas.

The likely fall in median home prices in 2007 may actually turn out to be larger than the 5% priced in the futures markets. In fact, one of the peculiar features of the latest housing cycle has been the presence of a large housing bubble: prices were going up well above economic fundamentals because of the speculative demand coming from expectations of increased housing prices that were feeding further speculative demand: “condo flipping” is the popular term for this speculative demand. Now that the bubble is bursting the fall in prices will be sharper than the one implied by medium term fundamantals as the initial price increase was due to a bubble that is bursting and leading to a fall in speculative demand: with prices now falling homeowners and speculators have no incentive to buy new homes as they expect prices to be lower in the future. So, an expected price fall leads to fall in speculative and fundamental demand and triggers actual larger than otherwise fall in actual prices. The speculative excess of a price bubble will now bring the bust of this price bubble. While the effect will be slower than in asset markets where prices adjust instantaneously (due to the sluggish nature of housing prices and their slow adjustment to increased inventories) eventually this price adjustment will occur – as it is now – and it will be very persistent over time. So, you can expect falling housing prices throughout most of 2007.

So, the simple conclusion from the analysis above is that this is indeed the biggest housing slump in the last four or five decades: every housing indictor is in free fall, including now housing prices. By itself this slump is enough to trigger a US recession: its effects on real residential investment, wealth and consumption, and employment will be more severe than the tech bust that triggered the 2001 recession. And on top of the housing bust, US consumers are facing oil above $70, the delayed effects of rising Fed Fund and long term rates, falling real wages, negative savings, high debt ratios and higher and higher debt servicing ratios. This is the tipping point for the US consumer and the effects will be ugly. Expect the great recession of 2007 to be much nastier, deeper and more protracted than the 2001 recession.

And the housing bust is not going to be only a US phenomenon. As I will discuss in another blog, housing bubbles festered in many other economies including many European ones. Thus, the combination of high oil prices, delayed effects of rising interest rates and slump of housing that is now leading to a US recession is a phenomenon that is common to many other economies, including several European ones. So, expect the same deadly combinations of three ugly bears (slumping housing, high oil prices and rising interest rates) to hammer Goldilocks and sharply hurt Europe and other economies in the world.

Update on August 26th:

read my new folllow-up long piece on the housing bust on my blog here (http://www.rgemonitor.com/blog/roubini/143257) 

Thursday August 24th morning update:

This  morning’s data on new homes sales, inventories of new homes and prices of new homes fully confirm and reinforce my analysis yesterday that this will be the worst housing bust – calling it slump is too mild – in decades. And since median home prices may actually fall on a year-on-year basis in 2007 – something that has not happened since the Great Depression of the 1930s – this may  end up being the biggest housing bust in the last 75 years, not just 40 years as the Toll Brothers argue or 53 years as Countrywide argues. As reported by Bloomberg this morning:

New Home Sales in U.S. Fell to a 1.072 Million Pace by Bob Willis

Aug. 24 (Bloomberg) — New home sales in the U.S. fell last month and inventories rose to a record, raising the risk for the economy that the housing market slowdown will become more pronounced.

Purchases of new homes, which account for about 15 percent of the market, dropped 4.3 percent to an annual pace of 1.072 million, the Commerce Department said in Washington. Sales in the Midwest slumped to the lowest level in almost nine years. The median U.S. home price rose 0.3 percent from July 2005, the smallest rise since December 2003.

The weakening housing market is leaving builders with record inventory and little choice but to reduce prices at a time when profits are declining. Some Federal Reserve policy makers have said a slump in housing is one of their biggest concerns because refinancing, which provided homeowners with extra cash to spend, may dry up as home values decline.

“There is no question we have what could be called a housing recession,” said James O’Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut, who forecast a drop to 1.075 million. “I don’t think we’ve seen the full effect of this yet on the overall economy.”

The decline in new home purchases follows yesterday’s report that showed a drop in sales of previously owned houses to the lowest in more than two years. The National Association of Realtors said existing home sales, which make up about 85 percent of all purchases, declined 4.1 percent to an annual pace of 6.33 million in July.

 

143 Responses to ““The Biggest Slump in US Housing in the Last 40 Years”…or 53 Years?”

Dave ChiangAugust 23rd, 2006 at 9:59 am

Of course, the National Association of Realtors is trying to put a positive spin on the imploding Housing bubble. Unfortunately, economists like NAR’s David Lereah have been mostly cheerleaders for the credit driven Housing bubble that has seriously damaged the monetary stability of the US Economy.  More evidence of the coming Recession from the California epicenter of the nation’s Housing bubble. According to Austrian Economic theory, the magnitude of the recession will be proportional to the excesses of the prior credit bubble boom. With million dollar McMansions overbuilt from coast to coast, the hangover will be a devastating hurricane to the debt bubble driven US Economy.   California Home Sales Down 25.3% in Q2 http://www.contactomagazine.com/calhomesales0808.htm   ” The decline in housing sales has spread nationwide, with the number of deals falling in 28 states, including California, during the second quarter, according to a report from the National Association of Realtors.   Nationally, the number of resale home purchases dropped 7 percent to a seasonally adjusted annual rate of 6.69 million homes, the group said. In California, the number of deals was down 25.3 percent to a seasonally adjusted annual rate of 460,500 homes. “  

Dave ChiangAugust 23rd, 2006 at 9:59 am

Of course, the National Association of Realtors is trying to put a positive spin on the imploding Housing bubble. Unfortunately, economists like NAR’s David Lereah have been mostly cheerleaders for the credit driven Housing bubble that has seriously damaged the monetary stability of the US Economy.  More evidence of the coming Recession from the California epicenter of the nation’s Housing bubble. According to Austrian Economic theory, the magnitude of the recession will be proportional to the excesses of the prior credit bubble boom. With million dollar McMansions overbuilt from coast to coast, the hangover will be a devastating hurricane to the debt bubble driven US Economy.   California Home Sales Down 25.3% in Q2 http://www.contactomagazine.com/calhomesales0808.htm   ” The decline in housing sales has spread nationwide, with the number of deals falling in 28 states, including California, during the second quarter, according to a report from the National Association of Realtors.   Nationally, the number of resale home purchases dropped 7 percent to a seasonally adjusted annual rate of 6.69 million homes, the group said. In California, the number of deals was down 25.3 percent to a seasonally adjusted annual rate of 460,500 homes. “  

Dave ChiangAugust 23rd, 2006 at 10:12 am

For a taste of what is to come for the US McMansion Housing bubble, the luxury condo market in Shanghai China has gone bust. Luxury Housing Prices collapse 10% in one week. http://business.guardian.co.uk/story/0,,1855956,00.html  ” Others blame a housing market swamped with swanky apartment blocks and luxury villas. In a single week last month, residential prices in Shanghai fell 10%.   From the top floor of its sleek, luxury apartment blocks in the Pudong development zone, you can, say the brochures, look out across the Huangpu river at one of the world’s most futuristic skylines.  Since it opened in October last year, the waterfront development has failed to attract a single buyer for any of its 74 apartments. The situation is so desperate that Tomson has decided to put a second block out to global public tender. ”  My comment: The article fails to mention that the Chinese government has slammed the brakes on the Shanghai property bubble by imposing high short-term capital gains taxes on the sale of real estate. The Shanghai property bubble would have imploded sooner or later, but monetary authorities need to address asset bubbles in their policy decisions. Not all of China is impacted by a property bubble; mostly the luxury condo and villa market in Shanghai and Beijing. The same also holds true for the United States where property bubble gains in Chicago never matched New York, Boston, or San Francisco.  Regards, 

AlvaroAugust 23rd, 2006 at 10:36 am

Thank you for your post Mr. Roubini.  Remember what the Tobin’s q of investment theory tells us?. In a market where the supply response to demand increases is slow (due to adjusment costs in capital) prices first go up and then, when supply finally responds, go down. You don’t need a bubble for this to happen.  Thank you again and sorry for my poor English

AlvaroAugust 23rd, 2006 at 10:36 am

Thank you for your post Mr. Roubini.  Remember what the Tobin’s q of investment theory tells us?. In a market where the supply response to demand increases is slow (due to adjusment costs in capital) prices first go up and then, when supply finally responds, go down. You don’t need a bubble for this to happen.  Thank you again and sorry for my poor English

EmmanuelAugust 23rd, 2006 at 11:35 am

Informative post as usual, Dr. Roubini–especially the historical perspective.  Sorry to hear that your CNBC hosts were flippant about your predictions (which are proving to be quite accurate). Perhaps you should not appear on that rah-rah channel whose boosterism is ridiculous and appear on the more sober-minded Bloomberg TV instead.

GuestAugust 23rd, 2006 at 12:08 pm

Dr. Roubini,    Your analysis is very refreshing and a welcome dose of reality as an antidote to the “happy talk” one comes to expect from the main stream media, wall street, and the government.    I have forwared your blog site to Briefing.com as part of an answer to their recent poll asking whether the US is slowing or entering a recession.    Kudos to you and others who are up to the task of truth telling.

Dave ChiangAugust 23rd, 2006 at 12:53 pm

 More indicator of the coming Housing Bubble implosion,  “They also borrowed against their homes, treating them like ATMs, to support their spending ways.  A newly unveiled car-sales indicator suggests that the U.S. economy is about to go into a recession – or is already there. News last Friday that Ford was cutting 20 percent of its production may be the first of coming problems faced by the auto giant – and industry analysts expect GM and Chrysler to make similar cuts soon.  But the bad news is that falling car sales is one of the strongest indicators of recession.  According to the indicator, if sales by new-car dealers are down by 2 percent or more over 12 months, compared to the 12 previous months and adjusted for inflation, then a recession is either underway or set to begin within a few months. And the figure stood at minus 2.4 percent when June sales figures were released by the Census Bureau.   The indicator has correctly called five recessions since 1968, and has never warned of a recession that did not occur, according to an analysis by The New York Times.  The indicator measures all sales by new-car dealers, including the sale of used cars, parts, and service. It does not measure sales by dealers who sell only used cars.Consumers tend to look for these cheaper alternatives when the economy slumps, and right now they are being pinched by higher fuel prices at the same time the slumping real estate market is making it more difficult to take money out of home equity to purchase a vehicle.   A key reason for lagging car sales during the recent recovery is the real estate bubble. Residential real estate accounted for more than two-thirds of recent GDP growth – and other key sectors never saw the same overall rebound. Now, the real estate boom has come to an end . . . and the consequences may be dire for the U.S. economy.”   http://thehousingbubbleblog.com/?p=1309#comments 

AnonymousAugust 23rd, 2006 at 2:36 pm

Great analysis–one point that bears emphasis is that housing busts of mid-80s & early-90s occurred in modestly inflationary periods. If it were not for energy(mostly oil) & commodity prices, we would still be worried about DEflation….   In past housing cycles, real house-price adjustment was typically characterized by inflation erosion of prices rather than outright declines, w/ minimal impact on consumer housing equity & confidence. But w/ low prevailing inflation, adjustment will require exaggerated declines in nominal prices–hence NASTY declines in home equity & confidence. One more reason your recession call is absolutely correct….  

jensroyenAugust 23rd, 2006 at 2:45 pm

Dr. Roubini,   Also in Denmark housing-sales has slowed very much the last 6 months.  This graph shows the total number of houses and apartments for sale: http://www.obligationskurser.dk/bonds/BoligerTilSalg.aspx  Talk in the mainstream media has just startet that _mayby_ there is trouble in the housing market. Speculators has left the market, but most ordinary people still think housing is in good shape…   Yours,  Jens  

AnonymousAugust 23rd, 2006 at 2:55 pm

I agree with the article. I am in structured Finance and what we are seeing is that the people who purchased ARM’s a few years ago, are now refinancing. This is because the initial introductory rates have expired and new increased rates, up to 8.5% have come due. Instead of paying them, they refinance at a lower initial rate and put off the inevitable. I think the slow down in housing will continue unitl the end of 2007 and stabilize in 08.

Dave ChiangAugust 23rd, 2006 at 3:09 pm

 The bursting of the U.S. housing bubble spells Recession by Dean Baker, co-director of the Center for Economic and Policy Research  http://english.hani.co.kr/arti/english_edition/e_editorial/150951.html  The evidence is mounting that the U.S. housing boom is turning into a bust. In the last week, the National Association of Realtors released data showing that house sale prices are down from last year’s levels in 26 major metropolitan areas; the Commerce Department reported that housing prices are down by more than 15 percent from their bubble peaks; and the Mortgage Bankers Association reported that applications for home purchase mortgages have dropped by more than 20 percent from their levels one year ago.  The end of the housing boom is likely to lead to the end of U.S. economic recovery. The housing sector has been hugely important to the U.S. economy since the last recession. The unprecedented run up in house prices led to a record boom in housing construction and sales. In 2005, new home construction was nearly 50 percent higher than its level a decade earlier, even though population had risen by just 10 percent. Sales of existing homes in 2005 were nearly twice the 1995 rate. The surge in both construction and sales led a boom in employment in these sectors, which together account for almost 5 million jobs.  In the last decade, house prices suddenly exploded, increasing by more than 50 percent, after adjusting for inflation. This created more than $5 trillion in housing bubble wealth.    Consumers have borrowed against this new wealth at a feverish pace, pulling more than $600 billion out of their homes in the last year. This borrowing fueled the consumption boom of the last five years, pushing the savings rate into negative territory for the first time since the beginning of the depression in the 1930s.   Of course, just like the stock bubble, the housing bubble was not sustainable. The stock bubble collapsed because the supply of new issues of tech stocks eventually exceeded the demand from speculators. Similarly, the record levels of housing construction inevitably led to a glut of housing on the market.  In addition, the borrowing spree of the last five years is likely to come to an abrupt end as stagnant or declining home prices cut off this important source of credit. There is evidence that we are already seeing the effects of this credit squeeze, as credit card debt has begun to soar in the last few months. Families who can’t get the money they need by borrowing against their homes will turn to credit cards as the best available alternative.  All of this is very bad news for the U.S. economy. If housing construction and sales fall back to trend levels, it would mean a loss of more than 2 million jobs. The decline in consumption that will result because people can no longer borrow against their homes will have an even more dramatic impact on the economy. The financial system will also be shaken by an unprecedented wave of mortgage defaults, as millions of people will face difficulty in sustaining their mortgage payments.   There is no obvious way to prevent the collapse of the housing bubble from leading to full-fledged recession, and quite likely a severe recession. It was an enormous mistake for the United States to allow a housing bubble to grow to such dangerous proportions. It is unfortunate that the Federal Reserve Board and others in policy making positions ignored warnings when this crisis still could have been averted.    

GuestAugust 23rd, 2006 at 3:20 pm

Hi from Catalonia.  I’m looking forward to your next blog on worldwide housing bubbles, more specifically in Barcelona, Europe.   How can we afford a 3-bedroom apartment for 360000 eur, with annual salary of 21000 pre-tax? this is even worse than in the US! This is crazy, hope we had more econ-bloggers in Europe, almost all REbubble blogging available is from the US!  

Dave ChiangAugust 23rd, 2006 at 3:39 pm

 Chinese government crackdown on Real Estate speculators. New government regulations crush speculation in luxury real estate in Shanghai and Beijing. http://www.theaustralian.news.com.au/story/0,20867,19924653-643,00.html  THE hectic golden days of foreign investment in China’s booming high-end real estate, especially in Shanghai and Beijing, appear to be over – or at least on hold – as the impact of new government regulations becomes clearer.  The rules, announced jointly by six agencies including the People’s Bank of China and the commerce and construction ministries, require individuals and companies buying for their own use to first live in China for at least a year and to use their own names.   Investors buying individual apartments – including increasing numbers from Australia – can now do so only if they live in them. Those buying as an investment must use a China-registered company to do so.   Foreign companies investing more than $US10 million ($13.2 million) in Chinese property must have registered capital of more than 50 per cent of the proposed investment, up from a previous requirement of 33 per cent. They must also fund at least 35 per cent of the investment themselves, before recourse to debt.   President Hu was quoted by official media as saying the Government “must thoroughly control” fixed-asset investment.   Property advisory joint venture Debenham Tie Leung said that in the first quarter of the year, foreign investors bought $6 billion worth of real estate in China, 32 per cent above the amount for the whole of 2005.   The company said 93 per cent of the investment went to Beijing and Shanghai, and most of it came from the US, Singapore and Australia. 

GeoffAugust 23rd, 2006 at 4:13 pm

What’s hilarious is hearing Toll say “I’ve never seen a downturn in housing without a downturn in employment or… some macroeconomic nasty condition that took housing down along with other elements of the economy….”  It’s important to note that all he is saying is that he’s never seen it before, but I can assure you he saw where we are now, coming last fall. Just take a look at the insider sales of the various Toll brothers around July-September. Youd think they couldnt rake it in fast enough. So, I really have to laugh that he can make statements like this where he is shocked, shocked! that this could be happening when “you’ve got low unemployment, you’ve got job creation, you’ve got a stable stock market and relatively low interest rates”. ( I dont use the gambling reference casually)  Well, guess what? Imagine what it will be like when you have rising unemployment, little or no job growth, a sinking stock market and still high rates….yeh, and there’s no housing bubble.   It just cracks me up that the analysts fell for this crap (builder sales and revenue guidance) for so long and made up every conceivable reason to think that these sales rates were sustainable and driven by fundamentals. What, was population growth suddenly faster? Were households forming faster? Was income growth faster? Were rental rates rising? Hmmmm, that’s funny, if you compare any of those trends of the last few years to the pre 2000 years, one might have expected a bust in housing. But whatever…  It’s not like we all havent been going to parties for the last few years where you could scarcely avoid hearing how someone couldnt wait to cash out their first house “equity” to buy another. I mean, what, have we been living in some kind of bizarro denial world? To not realize how much speculation is in this market, and to avoid acknowledging it now just goes to show why we should put no value on anyone who is saying that we can expect a soft landing ahead.   Ugh…..

GeoffAugust 23rd, 2006 at 4:26 pm

wawawa – you are a little late to the party of shorting the homebuilders, but there may be some opportunity left yet, despite the recent bounce. Last week was a pure suckers rally in the market in general, so for the remainder of the year, try your short strategy, but stick to a lot of cash, and also to foreign currency funds.

John RyskampAugust 23rd, 2006 at 4:34 pm

Well, here’s what I sent to Prof. Roubini:  Dear Prof. Roubini:   I read your interesting posting on housing (below), with which I agree. I realize you are not a lawyer, but the recession is coming at a time when the middle class is changing its mind with regard to facts, such as housing. Currently, government has a great deal of power over housing. This is a result of the case on which almost all government power depends, West Coast Hotel v. Parrish (1937).   Periodicially, people in this country decide that certain facts are too important to leave to the political system; these facts are then removed from the political system and nearly absolute control over them is turned over to the individual. This is what happened with legal equality, freedom from state religion and a number of other facts.   It is now happening with housing. And I think that when the bottom falls out of housing, people will decide that never again will government have so much control over the fate of housing. In short, there will be an individually enforceable right to housing.   Legally (and in case you show this to any lawyers), government can affect housing as long as the policy is rationally related to a legitimate government purpose. That is called “minimum scrutiny” for housing (the case is Lindsey v. Normet). Currently, there are only two other levels of scrutiny–intermediate and strict–at which levels it is very difficult for government to justify any policy. However, for that very reason, the Supreme Court, as well as public opinion, has resisted elevating facts to those higher levels. This is because, previously, public opinion was satisfied with the results provided by the political system with respect to most facts. That is no longer the case, and a sea change has begun.   I think new levels of scrutiny are going to be established which will give people the right to force government to fine-tune its policies with an eye toward maintaining highly important facts, such as housing, medical care and so on. You will find these new levels of scrutiny in the abstract to the book, linked below. Public opinion is about to force a reorientation of spending.   Once the level of foreclosures rises dramatically, there will be enormous pressure to–if not give housing the highest level of scrutiny (strict scrutiny)–at least raise the level of scrutiny to the point where government will not be able to evict people for nonpayment of rent or mortgage–some workout will be arranged to satisfy the creditors and at the same time keep the people in housing.   I think you ought to know that public opinion is rapidly coming to find it unacceptable for people to be removed from housing for inability to pay rent or mortgage. They won’t tolerate it for much longer. It will not prove politically acceptable to have, for example, the 30-day home mortgage delinquency rate rise to 20% or even 10%. That is simply impossible.    I have been exploring the change in public opinion with respect to facts and rights–which is proceeding toward new rights in a confusing and circuitous fashion–in my book about the response to the Kelo eminent domain decision, which will be published this fall. A link to it is provided below.   I realize the Democratic Party is wedded to the scrutiny regime set up by West Coast Hotel and fears that rolling it back will prevent government from exercising necessary health and welfare regulation. However, I don’t think that is what is implied by the change in public opinion. So I think the Democratic Party is very unwise in turning a blind eye to this change (which is what it is currently doing). The Democratic Party must change its policies, and embrace more individually enforceable rights. Members of the Democratic Party should study the eminent domain revolt (which certainly incorporates its share of right-wing kooks) with an eye toward understanding the shift taking place in public opinion. Public opinion wants more individually enforceable rights. I think it will use this recession in order to gain them.   If you have comments on the book, please let me know.   Cordially yours, John Ryskamp Ryskamp, John Henry, “The New Constitution: The Eminent Domain Revolt and the Fourth Constitutional Epoch” (December 29, 2005). Available at SSRN: http://ssrn.com/abstract=562521 or DOI: 10.2139/ssrn.562521  

The DaneAugust 23rd, 2006 at 4:45 pm

Nice to read an learn about economics on rgemonitor.com.  About the housing bubble it seems like some markets are ignoring the signals. Some economists still call for a soft landing, but i wonder if the markets will create a dominoeffect sending all assetclasses down. In the end that could lead to a nastier recession as you are writting.   Interesting link shows the correlation between NAHB housing index and S&P 500:  http://www.atimes.com/atimes/Global_Economy/HH24Dj01.html

ewulfAugust 23rd, 2006 at 4:46 pm

It is clear from Professor Roubini´s analysis, that quantities mismatch in housing markets imply price adjustments, and in this case negative wealth effects,and consumption decreases, even if it is a correction to its long term level.A different matter is the magnitude of the impact on the economy,because it will depend of the level of markets flexibility,on different sectors to absorb properly the reallocations of resources freed from the housing sectors. The greater such flexibility, the lower the negative impact on the economy,and of course the lower the chance of a deeper recession. It seems to me,and a lot of investors in recent years as well , that market flexibility in USA economy, is among its strenght.- On the other hand,it is the issue of the real impact of Housing on USA economy´s past recessions and its expected impact on the current economic downturn.According to some available data (David Romer 2006),starting from 1948 up to the year 2001´s recession,the Housing sector (with barely 4.8% of USA GDP), explain 10.7% of the USA GDP fall in that period. The first place is for inventories (41.8%), second for non residential investment (20.3%),third for durables goods(15.1%) ,and fourth residential investment (housing). So,even it is clear that the economy is on its expected downward adjustment path , the fundamentals (inflationary expectations, Fed Reserve credibility,markets flexibility levels, productivity levels,new investments opportunities) are still on track, to moderate the expected negative effect of increasing interest rates.-

BardiumAugust 23rd, 2006 at 5:23 pm

I don’t subscribe to the theory that it would be “reasonable” to have a result somewhere between Roubini and Lereah. They both have their reasons. One of them is probably right. The thing about predictions is that there is probably at any time in the economy a 50-50 chance of going into recession, more at present, less at other times. As a non-economist I have followed the Austrians for many years and they have called 20 of the last 6 recessions.   I do think that the level of correction will be more than Lereah suggests because of the level of speculation in the housing market. At one point I saw a statistic that said speculators accounted for 24% of the market. It’s not rocket science to see the economic consequences of that. I guess Mr. Toll never knew that. The question is how long will that supply pig take to get digested by the home-buying anaconda? Home sales aren’t disappearing. As Dr. Roubini pointed out many buyers were priced out of the market because of speculation. Dropping home prices and dropping interest rates could revive the market. Long-term demand/population pressures are still substantial. New homes sales are holding up better than expected (down 17% Y-O-Y). While it’s a big drop, it’s not necessarily recessionary. With prices that have gone up 58% in the last 5 years, a correction will be good for the economy. Normalizing the market will result in more housing stability and growth.  Also, I recently read somewhere that untapped home equity is still HUGE. With rates dropping, people refinancing their ARMs, this form of savings is still available to be tapped.  Every recession has its own causes. In 1989-1992 it was the repeal of easy depreciation the collapsed the market, hitting the S&Ls, killing the commercial market (depression) and spilled over into the housing market (recession). This one is speculation, not interest rates.  I don’t know who’s right but it’s good to hear a good analysis of doom. 

AriochAugust 23rd, 2006 at 5:36 pm

First of all, I am no economist or finacial guru, I’m justa “guy”. What are the chances that there will be an under the counter slide to inflate the currency base to soak up some of this pending calamity? I just find it odd that March saw the hiding of M3 which created this opportunity to quietly depreciate the dollar thereby offsetting the consumer debtload by devaluing it. Any thoughts?  And also, enjoyed the article. I’ve been calling a hard recession to be undeniable by Q3 07 for a year now, and am glad that I am not the only one seeing that in the tea leaves.

JRJunkyAugust 23rd, 2006 at 6:24 pm

Most of the money in our area right now has gone into knocking down small houses in retail zoned areas and building small rental stores on the bottom with 2 to 4 “luxury” condo’s above, most all are empty as the type of business to support $3000 rent is not viable in this type of parking restricted area, and who wants to have a $600k condo above a store on a busy noisy street. I wonder who the hell owns the paper for this nonsense???? 

AJAugust 23rd, 2006 at 6:33 pm

Someone tell me why the REITs index is still at about an all-time high, and not far off that as a proportion of the SPX????

winjrAugust 23rd, 2006 at 6:48 pm

Bardium said:  “Also, I recently read somewhere that untapped home equity is still HUGE. With rates dropping, people refinancing their ARMs, this form of savings is still available to be tapped.”  This is actually a bit misleading. It’s estimated that the current total untapped home equity is 5 Trillion. However, just 2 1/2 short years ago, that total stood at 8 trillion. In order to merely MAINTAIN the U.S. Consumer’s recent level of spending, home equity would need to be tapped in an amount that would leave the remaining balance at just 25% of the level from 1/1/04. Of course, this assumes that home prices do not fall which, at this point, seems highly unlikely.  The amount of untapped home equity is a red-herring.

CharlesAugust 23rd, 2006 at 9:00 pm

There are plenty of homes to be built in New Orleans. With hurricane season still young, one can bet that there are other parts of the Southeast and South Central where demand for Mr. Toll’s skills will be high.  All we lack is national will.  While I think Nouriel’s analysis is generally accurate, I tend to think the bust in the housing market may unfold differently than he foresees. First, it’s my impression that the storms of last year created a backlog of maintenance work. Also, my acquaintances who know something about real estate say that the quality of recent construction is awful. So construction workers in some trades may find re-employment in home repair. The aging population also creates demand for repair (though ultimately people move out of their homes into assisted living). Realtors will suffer, but some will shift into property management. With an oversupply of homes, home rental prices should drop. So, I see a recession in the housing sector, but nothing worse than, say, what New England and Southern California endured in the early 1990s.   I’m still betting that the primary tectonic shift by which the economic system will adopt to Wile E. Coyotonomics (as Brad DeLong aptly describes it) is in the dollar.

GuestAugust 23rd, 2006 at 10:59 pm

>>”There are plenty of homes to be built in New Orleans. With hurricane season still young, one can bet that there are other parts of the Southeast and South Central where demand for Mr. Toll’s skills will be high.”

RoyAugust 23rd, 2006 at 11:07 pm

I found this on “Calculated Risk”:  ‘Eeyore is a fictional character from the book series and cartoon Winnie-the-Pooh. … He is a pessimistic, gloomy, old donkey who is a friend of Winnie the Pooh. Eeyore is hardly ever happy and when he is, he is still sardonic and a bit cynical.’ And who is the archetypical Eeyore? More from Tim Duy:  “To be sure, policymakers have an eye on the housing slowdown, but I just doubt they feel much urgency. Certainly, not as much urgency as the current archetypical Eeyore, Nouriel Roubini, whose recent writing leaves me thinking about liquidating all my assets and rebalancing into a “diversified” portfolio of dry goods, gold, guns, and ammunition (which in Oregon would not be considered out of the ordinary)”.  While this statement was a joke, it seemed only partially in jest. Like much commentary recently, it raises the question: Is the coming period just a bad one for my investments, or should I really expect a significantly lower quality of life in the near future? (I being middle class, no debt, and renting for housing)  On somewhat of a tangent, I have read that this housing bust might lead to the “unraveling” of the derivatives market which I have discovered has exploded in the last five years, is opaque, unregulated, and involves sums in the 100s of trillions of dollars, many times the amount of the world GDP. Who is involved in this market? How can it be this big? Where does the money come from? And how can it be anything but a unmitigated disaster?  I am an Eeyore by the way.

DianaAugust 23rd, 2006 at 11:09 pm

Yeah…I can see it now…caravans of Toll Bros. representatives heading to the lower ninth ward of New Orleans to assist these wealthy folks in rebuilding their homes. Why do I sincerely doubt it? Maybe if Martha’s Vineyard gets ravaged…

AnonymousAugust 24th, 2006 at 12:54 am

I would ask Mr. Toll: what job creation? The construction industry has certainly created some jobs, but overall job growth has been at a historical low. Real wages have fallen, except for those in the top earning brackets. To most of us who are in the lower income rungs, it feels like we’ve been in a recession for 5 years now. My (small) company laid off two thirds of its workforce in 2000/2001 and hasn’t grown since then.

JR JunkyAugust 24th, 2006 at 6:01 am

Why is the market still almost at new highs????… Recently the stocks of UPS MMM AXP AMZM which are exact microcosms of our economy shit the bed, said the future did not look too good, yet the market erupted 2% higher, I cannot comprehend why unless there is really a PPT (Plunge protection team). The night before the latest big market up move, like 1:00am in the morning the futures were down like 1-2% all of a sudden everything flips, Japan goes from being down 300 points to down 60, all world futures turn green. Manipulation is the only answer.

Dave ChiangAugust 24th, 2006 at 8:20 am

 So much for a “Soft Landing” in Housing that the Wall Street talking heads on CNBC keep talking about…..  ” The Herald Tribune reports from Florida. “So much for a soft landing. The median price of a single-family home sold in the Sarasota region in July dropped 11 percent from a year ago and the number of homes sold plummeted nearly 50 percent, according to numbers released Wednesday. The only area in state with a greater July-to-July decline than Sarasota was Naples, at 51 percent.”  The Palm Beach Post. “Existing home sales in July continued their yearlong downward trend, plunging 44 percent in Palm Beach County and 39 percent in the Treasure Coast, year over year. The number of unsold homes in Palm Beach County also continued its yearlong trend, soaring to three times the number of homes on the market in July 2005.” 

Dave ChiangAugust 24th, 2006 at 8:20 am

 So much for a “Soft Landing” in Housing that the Wall Street talking heads on CNBC keep talking about…..  ” The Herald Tribune reports from Florida. “So much for a soft landing. The median price of a single-family home sold in the Sarasota region in July dropped 11 percent from a year ago and the number of homes sold plummeted nearly 50 percent, according to numbers released Wednesday. The only area in state with a greater July-to-July decline than Sarasota was Naples, at 51 percent.”  The Palm Beach Post. “Existing home sales in July continued their yearlong downward trend, plunging 44 percent in Palm Beach County and 39 percent in the Treasure Coast, year over year. The number of unsold homes in Palm Beach County also continued its yearlong trend, soaring to three times the number of homes on the market in July 2005.” 

NourielAugust 24th, 2006 at 8:59 am

Thanks to everyone for the many insightful additional comments and suggestions on the housing markets. I sense an overall consensus that the slump is as severe as i believe it is. And good to see many provide intelligent discussion and additional data and analysis. So, we can happily ignore all of those ostrichs who keep their hand in the sand and spend their time insulting those who provide serious and analytical discussion of the serious problems in the economy. After having been called “Dr. Strangelove of Global Macro”, and “Doomsday Cult Central”, now i am also being called “Eeyore” by some in other fora…how funny…I guess folks and commentators in this blog debate forum are intelligent realists who look at the data and try to make sense of it…I think we are here in “Reality-Based Central” while others are in “Delusional LaLaLand Central”: there are out a bunch of blinded ostrichs whose comparative advantage is insulting thoughful analysts and commentators as they have little to say about the real world and what is really happening in the economy..as they say: to each its own….So, thanks for all the constructive comments and criticisms as well: it is very good to disagree and data may, at times, provide mixed signals and be interpreted in different ways. So I fully respect those who intelligently interpret the data as potentially suggesting a softer landing of the economy rather than the hard landing that i am predicting. It is good and sensible to disagree in a constructive way. But i have little respect for those who just spend their time insulting me and calling me names after i dedicate my time and energy to detailed analyses and discussions…So, keep the good discussion going here in our forum…thanks…

Herve BenicioAugust 24th, 2006 at 10:02 am

I got out before the dot.com bust, closing my online business and re-allocating my investments. I have been watching the real estate market for quite awhile, and I fully concur with this assessment. Can anyone tell me where is the best place to put money in order to ride this out???

GuestAugust 24th, 2006 at 10:33 am

The most-read story on MarketWatch:  Recession will be nasty and deep, economist says Housing is in free fall, pulling the economy down with it, Roubini argues http://www.marketwatch.com/news/story/9mQrL6tbQK62XTQ1VjX5zm9  WASHINGTON (MarketWatch) — The United States is headed for a recession that will be “much nastier, deeper and more protracted” than the 2001 recession, says Nouriel Roubini, president of Roubini Global Economics.

DennisAugust 24th, 2006 at 11:38 am

Has there been any analysis comparing new home median vs. average sales price? Some very basic numbers I graphed show that when the median greatly outpaces the average, a correction occurs. Any thoughts on this?

GuestAugust 24th, 2006 at 11:40 am

Excellent analysis Mr. Roubini….  I’m no economist, nor, formally educated, but it doesn’t take education or brilliance to look at a duck, and determine, “Yep, that’s a duck alright”.  Mr. Ryskamp’s discussion was also interesting, but I think, irrelavant to this discussion, regards what this bubble is really about.  There is, in effect, no real housing bubble, per say. There is a terrible LENDING BUBBLE. After some of the dust has cleared (and there will be LOTS of debris caused by the falling…) folks will look back at the reckless lending practices which enabled the housing scenario to unfold. Whether your politics are right or left, it is fair to say, therre is absolutely NO REAL ECONOMIC LEADERSHIP IN OUR NATION AT PRESENT, from either side of the aisle.  Mortgage brokers who didn’t even exist 5 years ago abound, busily writing loan paper for a multitude of folks who were to un-educated about finances to realize, that there is no way they could afford their home. But, the folks writing the paper knew, it would be 2 to 4 years (or whatever the terms of the ARM) or so, before homeowners would realize how rediculous it is to get an Adujustable Rate Mortgage, in order to “afford” a home, when interest rates are at the lopwest they will likely be during their lifetimes.  I would suggest, that THAT is where the real outrage should show up. Yes, there is a housing bubble, but therre could BE no housing bubble without the support of “predatory mortgage brokers”.  It will be very interesting to see how this plays out. It is not unreasonable to predict, that there will be some billions of dollars of bad loans shaking out from all this. Once that starts to happen, foreign capitol, which behaved like mortgage paper was a drug they needed, will start to dump anything dollars.  For folks sitting in liquid assets, there will be some real deals in housing within the next couple of years.  I think maybe I’m too gloomy, I should get out more =:-)

AnonymousAugust 24th, 2006 at 11:58 am

There is a national disaster in all areas of housing in this country today. From new homes with structural defects and no consumer protection, to fraudulent lending and the creative financing that the NAHB persuaded our government to allow. No downpayment loans, interest only loans, ARM’s, etc., are all adjusting and foreclosures are at an all time high. The number of foreclosures will increase over the next year at a rapid pace when ARM’s adjust, etc. Homeowners who bought new homes with structural defects have little choice other than foreclosure due to the lack of consumer protection for the largest investment a family ever makes. They can’t sell the house for enough to pay off the mortgage due to the defects — foreclosure is their only choice.  There are many factors that contributed to the crazy rise in house prices. One that we are very aware of is inflated appraisals that were involved with fraudulent lending schemes. Nearly all of these homes will end up in foreclosure due to upside down mortgages. Our government has done nothing to stop any of this. The NAHB is a powerful lobby. Now maybe even their members will feel the effects of the out of control market that they contributed to by encouraging some of the practices I have mentioned.  Those of us who volunteer with the non profit, Homeowners Against Deficient Dwellings, http://www.hadd.com, have been predicting this housing slump and a rise in foreclosures for several years. We have done everything in our power to urge elected officials to stop the race to disaster. Unfortunately, ordinary citizens have difficulty getting our voices heard. We aren’t lobbyists, don’t have PAC’s, or money to contribute to campaigns. We are just citizens who have experienced ourselves, the devastation that lack of real oversight of the entire industry from construction to lending, appraisals, etc., can do to families. The emotional and financial destruction is devastating.

XanirAugust 24th, 2006 at 12:23 pm

“The whole world economy is at risk. The IMF has warned that, just as the upswing in house prices has been a global phenomenon, so any downturn is likely to be synchronised, and thus the effects of it will be shared widely. The housing boom was fun while it lasted, but the biggest increase in wealth in history was largely an illusion.” — The Economist, After the fall, Jun 16th 2005 [1]  and:  “The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops” — The Economist, In come the waves, Jun 16th 2005 [2]  Spain is a mess. I watched an interview with José María Aznar a year ago. And he was gloating when he told that he was proud to have resided over the ‘strong’ long-term economic growth in Spain. He didn’t tell that is was havely based upon debt.   So, here Spain:  “Spain is a particular concern. The IMF, in its annual health check last week, noted that growth had become “increasingly lopsided” and that was reflected in higher inflation than the 12-nation eurozone as a whole and in a rising current account deficit. In truth, the IMF assessment is a bit of an understatement. Spain’s current account is on course to hit 9%-10% of GDP next year; its private sector has moved from a position where it was in surplus by 6% of GDP in the early 1990s to a position where it is in deficit by 8% of GDP. These are bigger deficits than those of the US.” — Larry Elliott, The pain in Spain is there for all to see, June 19, 2006 [3]  And paste in the Guest comment from Catalonia (or many others, a property trader I know told to me (in 2004) that it was madness. They sold houses to rich Brits who liked to retire in Spain. The houses weren’t even build yet. The Brits hadn’t seen the location where they would live. Still they bought it)   By the way, Larry Elliot overlooks the huge debt growth in the UK… The coin (Pond, Dollar, Euro, Yen, Yuan etc.) doesn’t matter. Debt is everywhere. But there is an exception.  Belgium has a total combined savings account of around €800 billion (2004) and growing. They frown up on mortgages. In Germany houses are still cheap compared with the situation in the Netherlands (total savings, €291 billion in 2004 and growing. The Netherlands also experiences for the past 50 years a structural housing shortage). I consider these regions, including Luxembourg, to be more stable than avarage, even when real estate prices shall fall. There is also the saving mentality. Offsetting the debt. I would say that the economic down-turn would be a huge blow for those countries with great (debt) bubbles.  When looking to the South of Europe, like Spain, or to the East, like Eastern Europe, which seems to experience a real-estate speculation boom [4], or the Anglo-Saxon world, or in and around Moscow, In China, Australia and New-Zealand. Well. Bubbles and more bubbles.  To Charles, You remark ‘the quality of recent construction is awful’ This has been also true for the Netherlands, starting in the mid-90-ties. Office building were of sub-par quality standards. Besides, who wants a standard house when our climate is increasingly volatile, heavy rains, flooding. Our current day infrastructural can’t cope with it. Maybe it is time for different kind of real-estate… (floating houses?, different kind of waste treatment. Current day sewer systems can’t cope with heavy downpour of rain).  To Roy. It is unclear of how the derivatives market will unravele. Those who play it also write the rules:  “NEW YORK, Sept 15 (Reuters) – Fourteen credit derivative dealers met with the New York Federal Reserve Bank on Thursday and vowed to police the booming market themselves to keep regulators from doing it, a meeting participant said.” Reuters – September 15, 2005 [5]  Thats why Global Finance is a global problem [6].  X   Notes  [1] http://www.economist.com/opinion/displayStory.cfm?story_id=4079458  [2] http://www.economist.com/finance/displayStory.cfm?story_id=4079027  [3] http://business.guardian.co.uk/story/0,,1800544,00.html  [4] http://www.bloomberg.com/apps/news?pid=20601109&refer=exclusive_to_bloomberg&sid=acWX9IpxKPwM  [5] http://bazaarmodel.net/phorum/read.php?f=1&i=1430&t=1430 (The original source page has been removed). Also: Total World Wide bank-derivatives has increased to $429 trillion in the first quarter 2006 — BIS http://www.bis.org/press/p060612.htm). Note: only bank-derivatives. The Global Derivatives market is bigger.   [6] From High Noon:  “Worldwide rules on minimum risk capital for banks are in a state of flux. An older “capital ratio” formula has now been phased out by a committee managed by the Bank for International Settlements (BIS) and is about to be replaced by a new setup that takes hundreds of pages to describe-raising quite a few contrivers. “(p. 123).  “Accounting rules for financial institutions remain oddly unclear in some major respects. One reason banking sectors are so opaque and able to hide serious problems for so long is that loans remain booked at their historical value… At any rate, much work remains to be done on the accounting underpinnings of sound banking. “(p. 123).  “Hedge funds remain poorly known and monitored financial creatures. The Long-Term Capital Management debacle in late 1998 (Chapter 7) brought hedge funds into the public limelight, and they have never left is since. Hedge funds are private funds that borrow up to fifteen to thirty times their own resources and then further leverage up to gigantic position through futures, options and other derivatives-tools enabling sophisticated bets on the prices or price differences of other assets. Long-Term Capital Management, with equity capital of less than $5 billion, had times more than $1trillion in derivatives exposure. These hedge funds are mostly in the business of chasing tiny pricing aberrations between pairs of financial assets, which they then exploit at the large scale made possible by their large leverage. But sometimes their positions are more like huge outright bets on the possible rise of fall of a financial asset’s price. In 1997, one hedge fund held positions on the Thai baht amounting to 20 percent of the Thai central bank’s reserves. An intriguing recent casualty was the U.S. energy company Enron, with turned out to have a large hedge fund operation inside its belly when it collapsed in December 2001. Worldwide, there are now 6,000 to 7,000 hedge funds controlling assets worth $500 billion, not including less visible ones like the Enron case. There is some work going on to develop some principles for stronger monitoring by governments of hedge funds and their potentially destabilising activities, but it’s still early days. “(p 123, 124).  — Jean-François Rischard (2002) High Noon: 20 Global Problems – 20 Years to Solve Them – http://www.rischard.net/

John LeeAugust 24th, 2006 at 12:38 pm

Nouriel, I just hope you keep a list of all those “insulting” names as your badge of honor. They will provide all of us with some small amusement in the future regardless of the economic outcome. Cheers.

Andrew GrahamAugust 24th, 2006 at 12:51 pm

Many thanks to Mr. Roubini. I very much agree with his assessment I live in an area that has begun to feel the effects of a substantial downturn in Real Estate prices. My concern level is peaking. Can anyone provide advice, literature, links, etc. that may help me make some informed investment decisions? Thank you Andrew Graham

XanirAugust 24th, 2006 at 12:52 pm

To anonymous who writes: “Unfortunately, ordinary citizens have difficulty getting our voices heard. We aren’t lobbyists, don’t have PAC’s, or money to contribute to campaigns. We are just citizens who have experienced ourselves, the devastation that lack of real oversight of the entire industry from construction to lending, appraisals, etc., can do to families. The emotional and financial destruction is devastating.”  There is a huge democracy-deficit (it is non-existent). Within the EU (technocratic rule), China (autocratic rule), Russia (18th state of rule – City state), US (Corporate rule), Africa. Many people do feel to be represented, nor have faith in current day political system. And when we see how the instrument called money is being abused. Maybe the system needs an overhaul.

XanirAugust 24th, 2006 at 1:18 pm

 _The Daily Reckoning – 11 Aug 2006. Short interview with Dr. Kurt Richebächer_  “I’ve lived my whole life outside the mainstream,” the good doctor ruminates.  We’re sitting on his fifth-story balcony at Le Miramar, one of Cannes’ most famous landmarks. If I threw a small stone, I could probably hit the water gently swishing ashore on the beach across from the Boulevard de la Croisette. The Cotes de Provence we’re drinking is not an expensive wine, but it’s one of Richebacher’s local favorites.  He begins to tell me the story of a public debate he had with the German minister of finance in the 1970s. I’ve heard the story before. But each time is a treat. He remembers different details – how he was championed by an attorney who worked alongside him at the Dresdner Bank; how that same gentleman was later assassinated by the Red Brigade, a terrorist group active in Germany at the time. Each time I’m reminded what a remarkable life he’s led.  His beef with the German government in the ’70s will ring true to any avid reader of The Daily Reckoning – deficit spending of historic proportions… a trade deficit threatening to hollow out the nation’s economy. He sees much  of the same hubris and economic shenanigans in the U.S. today… “ONLY this  time it is much worse,” he is quick to add, with a characteristic index  finger making the point succinctly in the air.  “People always say I’m a gloom-and-doomer, a pessimist,” he says with a puzzled look on his face. “I don’t think so. I may write about negative things, but only because they need to be discussed. No one in America wants to discuss these things. They want to get their stock advice from television and be done with it. Unfortunately, that’s not the way the economy and the markets work.”  One question lingers: Without hard discussions, how will the imbalances work themselves out? “They will get stomped out during crises.”

AnonymousAugust 24th, 2006 at 1:28 pm

When people in the us stop buying goods, China shall stop receiving dollars from exports….So they shall have no more of them to lend to US. how is us government going to finance its deficit? One possible bet is by letting de dollar go down. That means inflation? Is it possible that gold and the like become a safe haven again? Here in Latin America it will be the hell again. Billy

JAugust 24th, 2006 at 1:29 pm

CHARLES posted the following on 8/23/2006: “So, I see a recession in the housing sector, but nothing worse than, say, what New England and Southern California endured in the early 1990s.” Evidently he didn’t live in either region during that time and certainly did not have to sell a home in either region in the early 90’s.   I lived in Massachusetts during that time. It was hell. Several friends and relatives “had to” sell their homes, each losing more money than the last one that was fortunate enough to sell. My aunt and uncle originally put their home on the market at $600K price in that upscale suburban Boston neighborhood. At the time the price was considered fair (not high at all) and they had just completey expanded and renovated the house from top to bottom. Three years later, they were considered lucky when they sold it for $297K. A former boss had bought a condo during the real estate boom in Boston during the late 80’s. She saw her home “equity” increase dramatically for a year. Three years later when she got married, she was forced to sell it for a 27% loss of what she paid. I’ve also heard horror stories first hand from friends in Los Angeles in the early 90’s.  Wake up CHARLES !! Start talking to people that lived in those regions. It wasn’t fun!! You’re making it sound like it was a painless set-back.   Both regions lost a significant amount of population during those times. Personally I’m wondering what effect this downturn will have on the population of the bubble cities on the left and right coasts. Will America’s heartland be ready to accept the fall out? Maybe someone should do a study on that….. 

NikkiAugust 24th, 2006 at 2:42 pm

Mr. Roubini- I caught you on CNBC last evening, you had very insightful thoughts and, as you state earlier, are one of the few willing to put aside all the “rah-rah” cheerleading and face reality. Kudlow is such a bull in denial, almost as bad as Lereah…

BrianAugust 24th, 2006 at 3:38 pm

While the downside of this market is potentially tremendous for current homeowners, and especially those who are currently trying to sell, can someone comment on the opportunities for homebuyers? Due to a failed business three years ago I was forced to sell my home and then move to another state to find employment. I was a renter there and have recently relocated back to my home state after being laid off.   I intend to buy a home within the next 18 to 24 months, and from where I sit, it seems like a good time to be in the market to purchase a home if you intend to stay in it long term as I do. Any comments?  Also, any comments on investing in Multi-Family Real Estate to be rented, not flipped. I would be interested in your perspectives. I live in the Chicago area by the way.

BardiumAugust 24th, 2006 at 3:42 pm

To Winjr from Bardium:  According to the Fed (KC), the untapped equity as of 4Q 05 was about $13 trillion. That’s a big, big number. So I don’t know if my herring is so red.

AnonymousAugust 24th, 2006 at 6:12 pm

Know what one thing seems to me to trigger recessions more than anything? Fear. That and gullibility. Remember the phrase that says if you tell a lie often enough, people will believe it’s true? That’s what happened in 2001, and that’s stuff like this does. It’s fine to caution people, but be careful of instilling fear–once people become convinced that there’s a recession coming, they’ll take protective action. That protective action will bring about that which they fear. So relax.

GeoffAugust 24th, 2006 at 7:42 pm

Anonymous – granted SOME people are stupid, but the herd isnt that stupid, and a few voices talking wildly about recession isnt the issue. The issue is the transition – from 99% bulls, to 50% bulls, and how we got there. The recession call here is much more plausible now, but it’s not because of induced fear. It is because the numbers are looking bad, and anyone who thinks about where things are going when they look at the numbers, and looks at their household budget situation, and worries about their net worth has got to be thinking that the prospects are getting worse, not better. So what does one do? well, each to his own. A few will be prudent, a few will resist reality and go on as if nothing is different, for some it doesnt matter, and maybe for a few, perhaps like yourself, you’ll run and hide and stop spending completely. But that isnt the driver of the market. At most, a couple of fearful folk might add to the downward trend, but market psychology in general isnt moved by a commentators forecast. The conventional, market consensus, which is still out there, is that everything will be ok. But when you built your household budget forecast on being able to not save and get 20% a year out of the house you just optioned (note I didnt say bought), when all the sudden the market swings into reverse from lack of affordability, lack of speculator demand, increased finance costs, and massive supply, a lot of people are waking up now and realizing they are screwed. This is what turns markets – it’s called reality, and soon to come, a healthy dose of desperation. Welcome to the great unraveling…

PWAugust 24th, 2006 at 8:06 pm

I knew this was coming, and it makes me glad I bought a house with a nice yard in BFE for about 10 percent of what it would have cost me in Southern California. Getting off the hamster wheel and having a mortgage payment that is a third of my former rent (before interest deduction) is the best thing I could have done.  If you can telecommute, I highly advise buying something in a small, inexpensive place and start saving for the rainy days to come. I blog on telecommuting at http://phoneinnation.blogspot.com — the economic and psychic benefits are immense. Even Forbes just (July) recognized this new trend as “geographic arbitraging.” If you really need to be near Broadway or Hollywood then stay, but otherwise the future is in finding an affordable place and making your own way. Eventually this will level the housing economy nationwide. A company called Forest City Enterprises is banking on it — building an entire tech-centric community in New Mexico where coastal buyers will be able to get about 3x the value for what they would spend on the coasts.  Demand is not slackening, it’s just fed up and moving to previously unexplored and much less expensive frontiers. BFE.  The important thing is to decide what you really want — do you want a big house to show off to colleagues, an investment to flip, or a nice space to enjoy with your loved ones, build equity and feel secure?   i bought low enough and save enough on overhead every month that even if there is a severe downturn, which I frankly expected to happen much sooner, I am in better shape than I would have been renting or buying in an astronomically overpriced market. 

SCAugust 24th, 2006 at 8:08 pm

Thank you, Mr. Roubini, for your fine analysis.   I am a layman in property matters.  I read from newspapers that in Japan, after the big property and stock market bubbles broke, the central bank lowered its rate to zero, and the market (very) slowly nurse back to health.  I guess it will be same for US. Life goes on.   Hopefully we can have an index to assess the affordability for the vast working class, so that we can make sensible choice on a matter so close to our life, unlike the stock market.

AnonymousAugust 24th, 2006 at 10:18 pm

After reading to this point, I can comment that the point taken about the auto industry and dealers predicting a recession is correct. The downturn came 3-6 months before we had the high gas prices here in Chicago. The gas prices have inverted out sales between larger SUV’s and smaller cars. The average customer has been qualified for the loan on the new vehicle purchase, but after reviewing the credit reports on many customers, they have taken money or refi’d their homes to make ends meet. The housing “ATM” has no more cash availiable and we will see the entire economy slow and with high heating and natural gas prices this winter the housing crash will be in full force in 2007.

AnonymousAugust 24th, 2006 at 11:44 pm

Mr. Roubini:I very much appreciate your data-related analysis. I for one believe the following is true for any commodity or market: the degree of the ensuing correction will be directly proportional to the degree of the preceding excesses. The real estate market of recent years has seen WILD excesses, as did the dot.com era. The pendulum IS going to swing, regardless of what anyone says to the contrary.  Very unfortunately for us all, in addition to economic negatives, the reversing pendulum may cause the Bush government to widen the war in the Middle East.

RogerAugust 24th, 2006 at 11:45 pm

Congratulations Dr. Roubini,  Paul Krugman of the New York Times wrote in his latest Op-Ed piece for the New York Times, “Housing Gets Ugly”, August 25, 2006, as follows:  “As far as I know, Nouriel Roubini of Roubini Global Economics is the only well-known economist flatly predicting a housing-led recession in the coming year. Most forecasters consider his call alarmist, and many Federal Reserve officials remain optimistic. Last week, Richard Fisher, the president of the Federal Reserve Bank of Dallas, dismissed “Eeyores in the analytical community” who worry about a possible recession.  Call me Eeyore. While I don’t share Mr. Roubini’s certainty, I see his point: housing has been the main engine of U.S. economic growth over the past three years, and with that engine now going into reverse, it’s hard to see how we can avoid a serious slowdown.”

GuestAugust 25th, 2006 at 2:05 am

Couldn’t agree more with the analysis, the question is, for those of us who have been on the sidelines for the past year or so because we knew this bubble was going to burst, what to do?  If the housing drags down the labormarket and most of the economy with it for a major recession, where does someone on the sidelines with cash look for safe haven?

LanceAugust 25th, 2006 at 2:20 am

Mortgages will benefit from the inflation based lower real dollars owed on our locked in loans and locked in mortgage payments. A win win situation for those who bought their property as a home or longterm investment, a losing propostion for anyone who bought there property with the intention to resell their “asset” quickly. Again, there is never a bad time to buy if you are either a homeowner looking for a longterm place to call home or an investor looking for a longterm return on rents. Only those trying to time the market, flippers and bubbleheads, can get hurt by shortterm fluctuations in price.   I like to post on Bubble Meter. 

AnonymousAugust 25th, 2006 at 3:58 am

See my blog at http://verbewarp.blogspot.com (the last two blogs)  The trend more than strongly suggests a total collapse of the US and global markets where the issues are led by white house direction or non-direction – and in the next few months – it is now too late for remedial action, and I am an optimist.

AnonymousAugust 25th, 2006 at 4:11 am

While I greatly respect Mr. Roubini’s call on the future of the US economy, one thing that I don’t understand is that if a housing bust leads to recession, then why hasn’t the UK economy fallen apart, since its real estate market started weakening in 2004, yet the stock market has held up strong and likewise its economy? Could anyone please comment on this?  Many thanks.

AnonymousAugust 25th, 2006 at 4:11 am

While I greatly respect Mr. Roubini’s call on the future of the US economy, one thing that I don’t understand is that if a housing bust leads to recession, then why hasn’t the UK economy fallen apart, since its real estate market started weakening in 2004, yet the stock market has held up strong and likewise its economy? Could anyone please comment on this?  Many thanks.

luzkannonAugust 25th, 2006 at 4:41 am

(Thank you, Mr. Roubini! Impressed by your analysis [am also short lumber for most of 2006 ;=]  I have noticed some comments & questions regarding EUROPEAN or international fallout from the impending situation. For real estate…sorry, am the log cabin or camper type.. keep my resources in suitcase sizes…i would nevertheless add these, perhaps flippant, remarks: – We are in a global economy: US consumer bone tied to the Chinese T-Bond energy buy splurge bone tied to the….However, while much of the world has its wars and other problems, I also see European big cities in flames, albeit sporadic, non-scheduled, but in flames… who wants to live in a city where you know its just a matter of time before the train/city hall/neighborhood swim hall is going to blow up!! There are only so many jobs in the outback; despite energy booming economies I have no friends planning on moving to Russia or China; the growth in Canada is splendid, but lopsided…(suddenly hearing that song “where you gonna run to, bad boy..”;=) – Could we possibly entertain the crazy notion that the USD$ will become a “safe haven” currency? Yes, the US has its problems also, but other than container threats, its a big place – and semingly the only place able to hold its own in global chaos….What – if true – would be the ramifications? just pondering…. Thanks also to the many informative blogs here!

JR JunkyAugust 25th, 2006 at 5:31 am

Why has not the UK Economy fallen?…Well our whole economy is predicated on lower class people spending, shopping princess’s spending 4-5 hours per day at the local mall maxing out their Home Equity line of credit. Most workers in the US are really doing each others laundry, I know my land scaper who cuts my lawn owns 3 rental houses and he is not even a citizen and he is a small operation, he said he rents out to people who work for him and other of his fellow landscapers, he got the loans for no money down and has max out HELOCs on them. UK Does not have Home Depots or Lowes on every corner, it is very difficult to do Flip in UK due Taxes and difficult rules and limited land for any additions, bubble and wild speculation was limited. The people who make the big money and are worshipped in the US are the whore money changers, the people who leverage Mortgaged money for housing/commercial construction and make a per cent on each transaction.

paulmAugust 25th, 2006 at 6:56 am

The reason that the UK economy hasn’t weakened yet may be that after a pause in 2004, the house price bubble is inflating faster than ever. Gross mortgage lending volume is growing at an annual rate of 26% (see http://www.cml.org.uk/cml/statistics). One factor is the arrival of an estimated 500 000 workers from Eastern Europe since EU expansion in May 2004. An even more extreme bubble has appeared in Ireland, where mortage lending has been growing at around 30% for several years and construction accounts for 20% of the economy.

Robert SnefjellaAugust 25th, 2006 at 7:24 am

The massive housing bubble has burst, but within the context of a geo-political, environmental, energy and financial context that is unprecedented. The ‘American Empire Project’ (ruling the planet by violence and intimidation and guile) is a bit overly ambitious and expensive, as well as rather unpopular among the victims; global climate change will have dramatic repercussions on every aspect of life, including the viability of agriculture (we need to eat something) in many traditional growing areas; much easy oil is burnt or problematic (Iraq) and energy prices are trending up; America is in deep debt – Federally, State-side, and consumers; America is vulnerable to and dependent upon decisions made in other capitals, many of whom loathe American attempt at brute hegemony. Many are attempting an incremental, low-profile reduction in vulnerability to American-caused massive economic instability and the inevitable (freefall?) decline in US dollar value. Those who think the housing bubbles burst is just another hiccup are hallucinating.

XanirAugust 25th, 2006 at 7:50 am

Impression – A lot of American money heads towards Europe. Causing rising prices in many segments. From companies to (high luxurious) real-estate. There is also the concern of rising interest rates in Europe. Those were doubting to buy a house in the past are now buying. Could we label this also as part of the bubble? The tail of the bubble?  To anonymous. Fear? It us useful information for investing, running a business etc. (that’s what we do). But first it is necessary to understand in what kind of global(!) environment we operate. So we will ‘keep our cool’ :-). We would rather say; dare to question, dare to doubt.  Also, the dollar is still the world currency, all other currencies are a derivative of the dollar. Understanding the financial dollar structures is essential for running a business and prosper. And, as I remarked before, politicians (world wide), traders and so on, do not understand the current day setup of economics. I am almost certain that they can’t tell how huge the combined trading volume is on the international derivatives exchanges (which is ($429 trillion in the first quarter 2006 [1]).  That the numbers are so eye popping huge is intriguing and interesting in a historic context [2]; the social mindset of the human race.  Besides, there will be a lot of cleaning up to do and being creative for adjusting to a new style of life [3] (= a chance to prosper).   Change is a constant.  X  [1] http://www.bis.org/press/p060612.htm. Here the in depth report: http://www.bis.org/publ/qtrpdf/r_qt0606.pdf (PDF, 88 pages, 597 kb) Source: http://www.bis.org/publ/qtrpdf/r_qt0606.htm   [2] Millennium http://www.amazon.com/gp/product/0684825368/qid=1043590289/sr=8-2/ref=sr_8_2/102-1119577-4324948?n=507846&s=books&v=glance  [3] Like higher energy prices (dollar dominated).  

Dave ChiangAugust 25th, 2006 at 8:20 am

 China may Shield Asia From a U.S. Slowdown http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_pesek&sid=af5AI7novkXg  ” It would seem to follow that if the U.S. slows significantly, so does Asia.   Not so fast, says David Carbon, an economist at DBS Bank in Singapore.   Carbon argues the impact of a U.S. slowdown will be “less than one would think, and certainly less than in the past.” Yet it’s his take on Asia’s exponentially increasing role in the global economy that may come as a surprise to many.   The basic gist of Carbon’s argument is that in five years’ time, domestic demand in Asia will outstrip that of the U.S. The reason: Asian economies are booming, rapidly integrating and their young, growing populations will support strong growth.   “We’re definitely on the cusp of a big handover in terms of who drives global growth,” Carbon says. “It’s looking us square in the face. Funny nobody sees it.”   – Bloomberg News Agency 

Dave ChiangAugust 25th, 2006 at 8:39 am

 Getting real about the Real Estate bubble http://money.cnn.com/2006/08/24/real_estate/pluggedin_tully.fortune/index.htm  Americans wanted to believe, and they did. Now, the giant popping noise you’re hearing is the sound of yesterday’s myths exploding like balloons pumped up with too much hot air.  Homeowners just saw their wealth shrink, by a lot. The numbers will only get worse. It’s time to examine the clichés that the “experts” – chiefly analysts and economists from realtors and mortgage associations – used to convince Americans that what they’re seeing now could never happen. Here are the four great housing myths – and why they never made much sense in the first place.  Myth #1: As long as job growth is strong, prices can’t go down  Far more houses are pouring onto the market than can be absorbed by households lured by the new jobs, and if the sellers are pressured to sell, prices will fall.  Myth #2: The builders learned their lesson in the last downturn. They won’t swamp the market with new houses when the market turns  Builders are still pouring out near-record numbers of new homes as sales decline, assuring a further fall in prices. “Buyers” are walking away from deposits on houses that were supposedly pre-sold, forcing developers to throw them back on the market at a discount.  The problem is that even now, margins on new homes are still pretty good, though well below the levels of a year ago. As a result, builders will just keep building until those big margins evaporate. High prices are sewing the seeds of their own demise. They always do  Myth #3: Low interest rates will keep values rising, or at the very least, put a floor under prices  As for what matters – real rates – what goes down later goes up, and housing prices go in the other direction, namely south.  Myth #4: restriction on development in the suburbs ensure low supply, and guarantee rising prices  America’s housing market is extremely fluid. People move farther from job centers, and commute longer hours, to get bargains where housing is plentiful. Then the jobs move to the areas with the cheap houses.   A year ago, the reigning cliché was that real estate had entered a new world of “no supply.” Now, a record 3.85 million homes are up for sale, and buyers are getting scarce.  No, the world hasn’t changed. And the myths haven’t changed either. Next time, don’t believe them.  

Dave ChiangAugust 25th, 2006 at 8:39 am

 Getting real about the Real Estate bubble http://money.cnn.com/2006/08/24/real_estate/pluggedin_tully.fortune/index.htm  Americans wanted to believe, and they did. Now, the giant popping noise you’re hearing is the sound of yesterday’s myths exploding like balloons pumped up with too much hot air.  Homeowners just saw their wealth shrink, by a lot. The numbers will only get worse. It’s time to examine the clichés that the “experts” – chiefly analysts and economists from realtors and mortgage associations – used to convince Americans that what they’re seeing now could never happen. Here are the four great housing myths – and why they never made much sense in the first place.  Myth #1: As long as job growth is strong, prices can’t go down  Far more houses are pouring onto the market than can be absorbed by households lured by the new jobs, and if the sellers are pressured to sell, prices will fall.  Myth #2: The builders learned their lesson in the last downturn. They won’t swamp the market with new houses when the market turns  Builders are still pouring out near-record numbers of new homes as sales decline, assuring a further fall in prices. “Buyers” are walking away from deposits on houses that were supposedly pre-sold, forcing developers to throw them back on the market at a discount.  The problem is that even now, margins on new homes are still pretty good, though well below the levels of a year ago. As a result, builders will just keep building until those big margins evaporate. High prices are sewing the seeds of their own demise. They always do  Myth #3: Low interest rates will keep values rising, or at the very least, put a floor under prices  As for what matters – real rates – what goes down later goes up, and housing prices go in the other direction, namely south.  Myth #4: restriction on development in the suburbs ensure low supply, and guarantee rising prices  America’s housing market is extremely fluid. People move farther from job centers, and commute longer hours, to get bargains where housing is plentiful. Then the jobs move to the areas with the cheap houses.   A year ago, the reigning cliché was that real estate had entered a new world of “no supply.” Now, a record 3.85 million homes are up for sale, and buyers are getting scarce.  No, the world hasn’t changed. And the myths haven’t changed either. Next time, don’t believe them.  

GuestAugust 25th, 2006 at 8:52 am

Some of think the UK market is right on the edge of a huge slump and indeed I came to this very interesting site through a link on http://www.housepricecrash.co.uk General opinion is the UK (as always the lapdog) follows behind America, don’t look to us for examples of how an economy can survive a hpc. Our crash has been delayed just like yours probably in part here by significant government spending on non jobs. I am off now to invest in Tulips, the next big thing!

Dave ChiangAugust 25th, 2006 at 9:31 am

 Now the Housing bubble is over. Ben Bernanke, think quick and find another asset class for us to believe in and exploit before its too late…    Stock market bubble, Real estate bubble, what Bubble asset class is big enough to mitigate the effects from the last bubble. Is this how Federal Reserve monetary policy operates?  

Dave ChiangAugust 25th, 2006 at 9:31 am

 Now the Housing bubble is over. Ben Bernanke, think quick and find another asset class for us to believe in and exploit before its too late…    Stock market bubble, Real estate bubble, what Bubble asset class is big enough to mitigate the effects from the last bubble. Is this how Federal Reserve monetary policy operates?  

Dave ChiangAugust 25th, 2006 at 10:27 am

From Bloomberg News Agency,    ” Counting retained mortgage portfolios, MBS holdings, and residential real estate construction loans, U.S. banks have record exposure to residential real estate — something around 60%. ”    ” The inventory of unsold homes in July rose to a record high of 3.86 million. At the current sales pace, it would take 7.3 months to exhaust that overhang. That is the longest period to exhaust the supply of home since the spring of 1993. ”    My comment: The collapse of the Housing bubble has only just begun. The US banking system doesn’t stand an ice cube’s chance in hell.

Dave ChiangAugust 25th, 2006 at 10:27 am

From Bloomberg News Agency,    ” Counting retained mortgage portfolios, MBS holdings, and residential real estate construction loans, U.S. banks have record exposure to residential real estate — something around 60%. ”    ” The inventory of unsold homes in July rose to a record high of 3.86 million. At the current sales pace, it would take 7.3 months to exhaust that overhang. That is the longest period to exhaust the supply of home since the spring of 1993. ”    My comment: The collapse of the Housing bubble has only just begun. The US banking system doesn’t stand an ice cube’s chance in hell.

Brian HannemannAugust 25th, 2006 at 10:39 am

I am a Southern California attorney. I have many clients who are in financial distress, having purchased homes, tapped all the equity, only to now find themselves upside down with no real remedy for escaping the debt hole. One of my clients has a first mortage which actually allows the principal balance to increase month after month. How on earth did the lender allow such a horrible situation to develop?   When the crash in real estate and its attendant problems become too pervasive to ignore by the drive-by media, then the true nature of the seriousness of the crash will be known. For me, I plan on looking to buy real estate in 18 months, likely for $0.50 on the dollar.  Excellent blog site, and analysis, by the way. I found this by reading the World Net Daily. Please do keep up the brilliant analysis.

John RyskampAugust 25th, 2006 at 10:52 am

Here is what I wrote to Prof. Roubini:  Dear Prof. Roubini:   I read your interesting posting on housing (below), with which I agree. I realize you are not a lawyer, but the recession is coming at a time when the middle class is changing its mind with regard to facts, such as housing. Currently, government has a great deal of power over housing. This is a result of the case on which almost all government power depends, West Coast Hotel v. Parrish (1937).   Periodicially, people in this country decide that certain facts are too important to leave to the political system; these facts are then removed from the political system and nearly absolute control over them is turned over to the individual. This is what happened with legal equality, freedom from state religion and a number of other facts.   It is now happening with housing. And I think that when the bottom falls out of housing, people will decide that never again will government have so much control over the fate of housing. In short, there will be an individually enforceable right to housing.   Legally (and in case you show this to any lawyers), government can affect housing as long as the policy is rationally related to a legitimate government purpose. That is called “minimum scrutiny” for housing (the case is Lindsey v. Normet). Currently, there are only two other levels of scrutiny–intermediate and strict–at which levels it is very difficult for government to justify any policy. However, for that very reason, the Supreme Court, as well as public opinion, has resisted elevating facts to those higher levels. This is because, previously, public opinion was satisfied with the results provided by the political system with respect to most facts. That is no longer the case, and a sea change has begun.   I think new levels of scrutiny are going to be established which will give people the right to force government to fine-tune its policies with an eye toward maintaining highly important facts, such as housing, medical care and so on. You will find these new levels of scrutiny in the abstract to the book, linked below. Public opinion is about to force a reorientation of spending.   Once the level of foreclosures rises dramatically, there will be enormous pressure to–if not give housing the highest level of scrutiny (strict scrutiny)–at least raise the level of scrutiny to the point where government will not be able to evict people for nonpayment of rent or mortgage–some workout will be arranged to satisfy the creditors and at the same time keep the people in housing.   I think you ought to know that public opinion is rapidly coming to find it unacceptable for people to be removed from housing for inability to pay rent or mortgage. They won’t tolerate it for much longer. It will not prove politically acceptable to have, for example, the 30-day home mortgage delinquency rate rise to 20% or even 10%. That is simply impossible.    I have been exploring the change in public opinion with respect to facts and rights–which is proceeding toward new rights in a confusing and circuitous fashion–in my book about the response to the Kelo eminent domain decision, which will be published this fall. A link to it is provided below.   I realize the Democratic Party is wedded to the scrutiny regime set up by West Coast Hotel and fears that rolling it back will prevent government from exercising necessary health and welfare regulation. However, I don’t think that is what is implied by the change in public opinion. So I think the Democratic Party is very unwise in turning a blind eye to this change (which is what it is currently doing). The Democratic Party must change its policies, and embrace more individually enforceable rights. Members of the Democratic Party should study the eminent domain revolt (which certainly incorporates its share of right-wing kooks) with an eye toward understanding the shift taking place in public opinion. Public opinion wants more individually enforceable rights. I think it will use this recession in order to gain them.   If you have comments on the book, please let me know.   Cordially yours, John Ryskamp Ryskamp, John Henry, “The New Constitution: The Eminent Domain Revolt and the Fourth Constitutional Epoch” (December 29, 2005). Available at SSRN: http://ssrn.com/abstract=562521 or DOI: 10.2139/ssrn.562521    

GeoffAugust 25th, 2006 at 11:08 am

Nouriel, is there some way you can have the comments show up with numbers? It’s becoming increasingly difficult to know where to pick up the comment thread, even when I know how many comments were posted last time and approximately where to scroll thru to start reading again. A number tag would mean I only have to remember one thing, and would make it more of a pleasure to continue returning here to read.   Also, any information for posters on how to prevent the dreaded double post of the same comment? I know on some other sites this occurs when people hit the reload button after posting a comment.   thanks, Geoff

AnonymousAugust 25th, 2006 at 12:30 pm

 I invested in SRPIX (Profunds Short Real Estate) which claims to return the inverse of the Dow Jones Real Estate Index. But it has (and is) performing poorly. Perhaps somebody can clarify this for me, but I simply don’t  understand given the poor climate in US real estate how the Dow Jones Real Estate Index cannot be negatively affected.

Wayne HarrisAugust 25th, 2006 at 12:59 pm

“More evidence of the coming Recession from the California epicenter of the nation’s Housing bubble.”  David, I couldn’t agree more with your overall argument but must take exception to this claim. Florida – where July sales were down 33% compared to California’s paltry -25% – is the true epicenter of the housing bubble. Here in Sarasota, where I live, the numbers were even more startling: home sales down 50%, with the median price declining 11%. That still left the median at a cool $301,100 – and this in a county where the average household income in 2003 was a shade over $42,000.  Across the street from my humble condo (which I rent rather than own) a developer with more chutzpah than sense or social conscience (in other words a rather typical one) has just finished razing a blockful of ’50s and ’60s vintage concrete-block, awning-windowed, formerly affordable single-family homes and duplexes. In their place will will go 26 “new urban” McMansions priced at $900,000 to $1.5 million. Beaming city commissioners helped turn the first spades of dirt on this brave new community at the grand opening ceremony.  The effect of this kind of gentrification, coupled with rampant condo-conversion and soaring property taxes and home insurance, is driving the working class out of Sarasota County. It’s unusual to see a retail establishment that doesn’t have a help wanted sign in the front window. Last year the school district was expecting its customary growth of 1,600 students (about 4%). Instead it saw fewer than 500 new students, and by the end of the year that number had declined by half. This year the number was negative again everywhere except in the county’s last bastion of quasi-affordability – the city of North Port.  Rather than improve Florida’s mediocre educational system, where teachers at all levels are among the lowest paid in the nation, Jeb Bush has spent half a billion dollars (matched by a similar amount from local officials) to encourage a couple of San Diego-based biotech research institutes – whose fortunes are largely tied to the absolutely flat-lined budget of the National Institutes of Health – to open branch facilities in Florida. Bush likens what he sees as his signature economic-development BHAG (“Big Hairy Audacious Goal”) to the transformation wrought by Disney World, with no apparent appreciation of the irony of that comparison. (Far from transforming Florida’s economy, Disney simply induced geometric growth of Florida’s low paying service industry.)   Florida in general and Sarasota in particular are the reductiones ad absurdum of Republican economic policy and, unfortunately, bellwethers of the havoc those policies are about to wreak on the national economy. 

Dave ChiangAugust 25th, 2006 at 1:24 pm

 Hi Wayne,   Thanks for the correction to my statement. The housing bubble isn’t just isolated to Florida and California. In my hometown of Freehold NJ, what once was pristine farmland has been turning into an appalling sprawl of million dollar McMansions and high priced strip malls. There are numerous 20,000 square feet homes built on flat cornfield that are larger than many Hampton Inn hotels. The property taxation levels on these new McMansions is simply unbelievable. Just the property tax alone on these homes can run from $2000-$3000 per month. I’m not sure exactly how the Housing Bubble debacle will end; let’s just hope there isn’t blood running down the streets.  Regards,

AnonymousAugust 25th, 2006 at 1:36 pm

Does your this great drop have anything to do with the fact more and more people had been buying homes to flip and not live in? Thus now we are looking at a correction long over due in the true pricing of homes?

XanirAugust 25th, 2006 at 1:39 pm

The housing bubble is a symptom of a much larger problem. The real-estate bubble is a visible reflection for many. The global financial foundation is rotten. And who ‘maintains’ the foundation? Humans.  “How on earth did the lender allow such a horrible situation to develop?”  — Brian Hannemann  But the clients are as responsible as well. They borrow. Is there a lack, on both sides (the client and the lender), of economic development and responsibility? The herd that doesn’t think. Both are greedy? Fearful to fall out? And this happened before. The BIS has a case study (will post this in the next post of Roubini) about financial banking crisis in ‘advanced’ economies. The root cause of a crisis was shrinking real-estate prices…  The banking clan knows, still they lend. And the clients borrow…     X   “I am dismayed at the low level of U.S. economic thinking. Elementary insights into economic processes that have been accepted by all schools of thought for more than 200 years are unknown, discarded or even put on their head. The facts are that you have serious structural problems that exclude any possibility of a sustained economic recovery… A profits decline, a record savings shortfall, a capital spending collapse, an unprecedented consumer borrowing and spending binge, a massive current account deficit, ravaged balance sheets and record high debt levels.”  — Kurt Richenbächer (2006)  

Scott FAugust 25th, 2006 at 2:34 pm

I apologize if someone has already covered this point.   I would be interested in peoples’ opinion on the effect of demographics on the US markets and on the general psychology as we go forward.  The first baby boomers turn 60 this year. The psychology of this group is changing as they enter retirement years. They want to build up their net worth going into retirement and up until this year, real estate was the best performing asset they had. As the real estate market peaks and rolls over, the boomers could panic as their retirement is threatened. This could cause them to sell as they are too old to wait out the market for the next bull.  I feel that when we compare todays markets to those of the past we must always consider demographics and investor psychology as the popuation ages. Does anyone else have thoughts on this??

GuestAugust 25th, 2006 at 3:31 pm

Hi All, I have read Mr. Roubini’s blog (which i believe is very accurate in many respects) and all of the responses. None has made mention of the psycological impact. That is, the consumer’s (the general public) perception, belief, and many cases fear has as much to do with the net result of any “bubble”. Of course the media has a large role in this process. I foresaw the recession in the late 80’s/early 90’s and also the recession of ’01 (I pulled out of the stock market in Dec. ’99)…I did not foresee the huge RE bubble (but did catch it early enough to participate and study it), but I certainly did foresee the coming recession as a result of the bubble bursting…this blog only affirms my own research. How bad will recession be? In Europe, the RE bubbles have already burst a few years ago, and prices adjusted downward, though not to a scary degree. Granted our economy has many differences, but I don’t expect much of a difference here. That is our course, if the consumer does not get to scared. Remember, that consumer confidence has a very large and powerful brush. If consumer confidence is not shaken too much, we can expect and overall decline in prices of about 10-15% which is really not that bad (in the grand scheme of things). However, if consumer confidence is severly shaken, we certainly can expect prices to decline much more, as high as 30-35%.  But remember, we are a strong country and we certainly can recover , hopefully sooner rather than later. jb

GuestAugust 25th, 2006 at 3:43 pm

Hi Scott F. I didn’t see your message until now and I did marginally touch on what you mentioned regarding psychology and it’s effects. You are correct in assuming that demographics and psychology have a grand effect. Remember, the numbers that economists are using are averages and mostly on a national scale. There are pockets where real estate continues to appreciate and will continue to do well (especially compared with national averages). Any prudent RE investor should research different LOCAL markets and find these pockets. Of course, others are going to different countries all together, but that could be too risky for most. In my opinion, all arrows point to Texas…particularly South Texas – South of San Antonio. And for any Baby Boomers in markets that are on a downward approach, what are you waiting for? Cut your loses and look for the next pocket market. (Note that these pockets are not large enough to offset the grand national crises that we are approaching, but for many who still want to stay in RE, the pockets are a gold mine). Another good option, the stock market. It WILL come back. JB

XanirAugust 25th, 2006 at 6:14 pm

Psychology… Fundamentals matter! Not Psychology.    From Dr. Kurt Richebächer’s Lecture (About the US economy), November 19, 2005: “…  It was a very complicated bubble system that they developed with their short term rates and propaganda to get some growth. It is impossible to re-establish this system. They may reduce their interest rates but the Federal Reserve is sure that when there is trouble they can lower the interest rates and everything will be “ok” again, because there is a blind faith in the ability of monetary policy to steer the economy. This blind faith also exists among the carry trade players. They think: “Greenspan will come into action again and then we’ll continue, as always.” It’s really a mystery! I would say that a weakening would unleash forces that would lead to cracks in the whole system. I would expect a USD crash. The USD is also a component of the carry trade bubble. When this carry trade bubble collapses I wouldn’t assume that they would reduce interest rates and everything would be fine again. I can’t and won’t believe this. No, I would say that there will be a change in perception. We have at the moment a perception that the US economy is in splendid shape. Interest rates make nothing and yet consider the bullishness in the stock market. I think the American economy is at its most critical situation point in the whole of the post-war period because all of the excesses have accumulated. There has never been a pause in this and the savings rates are in negative territory.  By the way, one word which is also unknown is “Incomes”. The Americans have a word for this and it is called “Imputed Incomes”. The statistics say that consumers and firms get a number of things for which they don’t pay for which should count as income. For example, look at the homeowner in the United States. The statistics say: “He has a house, he doesn’t pay for it (mortgaged property) so we attribute to him a rent.” You have about USD 600 to USD 700 billion which is called ‘imputed rent’. The FED publishes this in complete detail; itemising the specifics. They say: “This is imputed income which we calculate, because the consumer gets something for which he doesn’t pay.” He gets, for example, an imputed income because he doesn’t pay for payment service. The banks in America don’t charge payments. So, the statistics say, that is a gift of the bank for the consumer and they count this as income. Crazy? You bet!  By the way, for this statistic they calculate the savings rate without imputed income and that is – USD 500 billion. The fact is they detail everything but there is nobody who reads this; that is the point. In America, there is zero discussion about all of these imbalances. Why not? Well, the American is not trained to think about these things. In America basically, theory is non-existent. The Americans say: “We don’t need theory, we have statistics.” Now that has a history. The leading economist of America is a man named Wesley Mitchell. He was born in 1874 and lived until 1948. He said: “We know too little in order to develop a theory. All we can do is we must develop statistics. We must have as many statistics as possible and then we can judge what is happening.”  The Americans have more statistics than anybody else and in particular they like to ask people. This is the substitute for theory. Hayek in 1927, when he made his first visit to America, he noticed this. He has written about it. He talked with Mitchell and he said: “They refuse to do any perceptional thinking. They only believe in statistics. He also said: “How can you obtain statistics if you don’t have a theory that gives you the ability to distinguish between important and unimportant numbers?” That’s why Americans are unable to distinguish between important and unimportant numbers. I personally think, that all those surveys are total nonsense because, in my opinion, what do those people give you? Asking 5.000 consumers is no substitute for doing your homework by analysis. I mean, what do these people say? They tell you what they read in the newspaper which frankly, is worthless. Undergirding this is the belief that expectations are the key determinant for spending. If everybody tells you that he is optimistic, that means we get a rising economy.  Further to this argument is they don’t know what is important with consumer spending and investment spending. For Americans, consumer spending is the key to everything because it is the biggest component in GDP. On top of that they say: “Businesses invest only when they see consumer spending.” That’s even what leading economists – whom I appreciate – think. Stephen Roach writes about investment spending and derived demand. I mean, the consumer can only spend what businesses have given to him. The whole thing is so absolutely ridiculous because the consumer can only spend his income that business has already spent.  The beginning of recovery and economic growth is where there are businessmen who spend and where there are consumers who receive the money. But even these simple things are not understandable to the American economists. Basically, I would say that economic theory and macro-economic knowledge are completely absent. To make matters worse, is that the economic discussion in the United States today is dominated by Wall Street Economists. They know nothing about macro-economics because they are trained to look at a single economy as a micro-economy. With this view, mergers and acquisitions are the best substitute for investment, but that of course is micro-economics; it destroys the macro-economics. I would also say that Wall Street economists are corrupt; corrupt in the sense they are not allowed to say critical things. I know that some of the macro-economists write about this but it is very subdued. One economist even wrote that production is much weaker than GDP. They noticed that but they would never say what this statistic is for.  Thank you very much for your time and attention.” — Dr. Kurt Richebächer’s Lecture, November 19, 2005  PArt I: http://www.gold-eagle.com/gold_digest_05/richebacher120405.html Part II: http://www.gold-eagle.com/gold_digest_05/richebacher120805.html

XanirAugust 25th, 2006 at 6:21 pm

“The complex system approach, which involves “seeing” inter-connections and relationships, i.e., the whole picture as well as the component parts…” — Didier Sornette [1]  When you start to analyze the world economy, start with the (roughly) whole (= financial derivatives), middle (macro-economics) and the parts (the individual).  Hard numbers (complexity science(!) in actions, instead of psychology):   “We analyze the quarterly average sale prices of new houses sold in the USA as a whole, in the northeast, midwest, south, and west of the USA, in each of the 50 states and the District of Columbia of the USA, to determine whether they have grown faster-than-exponential which we take as the diagnostic of a bubble. We find that 22 states (mostly Northeast and West) exhibit clear-cut signatures of a fast growing bubble. From the analysis of the S&P 500 Home Index, we conclude that the turning point of the bubble will probably occur around mid-2006.” — (released 3rd June 2005) Didier Sornette, Professor of Geophysics [1]  [1] http://www.ess.ucla.edu/faculty/sornette/

RandAugust 25th, 2006 at 7:41 pm

Would anyone like to discusss the possibility that the housing slowdown will NOT cause a recession, that even if housing prices soften somewhat, the consumer will not not stop spending, that the economy is continue to grow fast enough that the Fed will continue to raise the fed funds rate yet again?  Any responses would be appreciated, for I think it’s a good exercise to argue both sides of the coin.  Also, when Mr. Roubini was on CNBC the other day, the other guest argued that credit remains readily available, but Mr. Roubini said that it’s not the supply of credit that will dry up, it’s the demand for credit that will fall. Which will prevail? Again, any responses appreciated?

Tom in IndyAugust 25th, 2006 at 10:12 pm

To Rand, The housing slowdown will cause a lot of pain for a lot of people. There will or will not be a recession depending on what happens over the next 6-12 months. Assuming your side of the argument, at the very least, I expect to hear the cries for help from Washington all the way to here in Indiana when people start to get forced out of their homes by higher interest rates from the Fed and the Arms and interest only loans they purchased their homes with. Right after that, there will be senate hearings complete with little white haired old ladies (hired actors) who got burned on their mortgages by those horrible banker and S & L types who led them (no, forced them) into those risky loans. All Hell will break loose from the audience when the the fact that when a person who is upside down on their loan falls behind in payments, the extra interest collected on their misery (delinquent payments) is booked as income by the bank. Oh the horror. It added an extra 220 million to Wamu’s books last quarter. So my prediction is that the bank executives will get the hot seat in front of the Senate panel on Banking which is the national pastime of pin the tail on the scoundrel. Once there is a dasterly scoundril identified and brought before the public for a passion play the search for the next scapegoat will begin. I’m in the medical field and I’m starting to get nervous….Tom in Indy

SkoobzAugust 25th, 2006 at 10:57 pm

“I invested in SRPIX (Profunds Short Real Estate) which  claims to return the inverse of the Dow Jones Real Estate  Index. But it has (and is) performing poorly. Perhaps  somebody can clarify this for me, but I simply don’t  understand given the poor climate in US real estate how  the Dow Jones Real Estate Index cannot be negatively  affected. ”  Pretty easy to clarify. You bought the wrong fund. You invested in a short index of companies that derive their income from rental fees, not selling houses. You bought REITs not homebuilders. I’ll get pedantic: do your homework and research before investing in a mutual fund – just as you would would stocks or a trading system.  If you want to short a diversified portfolio of homebuilder stocks, then you can short the SPDR Homebuilders ETF, ticker: XHB. That has been a good trade this year.  

GuestAugust 26th, 2006 at 12:40 am

Dear Mr. Roubini:  I am a Real Estate Broker in California, and I am concerned about the publication of your comments on your blog titled “The Biggest Slump…” that I read referring to your statements regarding a recession in 2007 due to a slowdown in the housing market. References to comments such as these by professional economists are permeating mainstream media, and hurting both Buyers and Sellers alike.  As a Macro Economist, I am curious as to why you would think there could ever be a recession in the US resulting from real estate depression. Rates are still at an all-time low, and people are making more money than ever. There are available channels that were non existent in even 1990 that enable innovation by our youth and boomers alike to support real estate acquisitions. Lay people now have the internet, cell phones, computers, etc. Believe me, I was 19 in 1990, and I had to learn how to use these gadgets. They have improved productivity, which is the backbone of a strong economy. Creativity reigns and innovation will save our economy.  In addition, the global marketplace is expanding more than ever. If the Yuan is pegged to the Dollar, shouldn’t that guarantee inflation? Isn’t it nearly impossible to see prices decline with the inflation that we are experiencing as a result of global expansion?  And what about our innovative capability which fuels productivity? Consider that we have more and more people flowing into the US than ever; that we are still a superpower; that we have educated people living in the US; that we are free, and will not go back; that we are, though spoiled, dedicated to our professions; that we will always change to meet new challenges; and, best of all, we are free to be innovative.  Severe price declines may be imminent for Builders in some areas, but Sellers will not take major losses to get out of making payments on extremely low interest rate loans with even lower tax bases. There will not be a huge depreciation in the real estate market where prime real estate is scarce. Banks will not sell foreclosures at a loss. Banks will not reduce their revenue outlooks. Demand will not decrease with population increase, because everyone needs a place to live. Rents are just as acceptable to Sellers with the flexible financing options available today.  Consider that California comprises roughly 15% (documented only, not counting the sub-economy) of the national GDP. Our average sale prices throughout the state are still up. Yes, up. I think 20-40% in my city, depending upon the neighborhood. Our economy is too great and variegated to fail on merely one count.  Comments such as these are scaring people, and that is why there is a slowdown. It is sad that you don’t write that the availability of housing inventory combined with great interest rates is now enabling Buyers to buy after many years of being pushed out of the market. Builders may have overbuilt in ridiculous areas and cry that they didn’t receive $1.6M, but had to accept $1.2M, but that is their problem. They were too optimistic about the future of development. That does not mean that people have stopped wanting to have a home of their own, a nice tax deduction, and no Landlord telling them what to do.  Sincerely,  Sherry Stuckey www.LuxCoast.com 

SkoobzAugust 26th, 2006 at 3:24 am

sherry, i’m not nouriel, but i want to comment on your post. you’re correct that the upside of a decline in housing is good news for those that want to buy and were priced out. this is a rather thin silver lining on a very large cloud, however. for one, prices probably need to come down a lot more in general before the yield (what it can rent for)of properties in general justify their price.  an even greater problem: although declining prices benefit prospective buyers as a group, it hurts a much, much larger group – namely, current american homeowners. this group has been using property to 1) tap home equity and stimulate our economy 2) generate income from investing/flipping 3) as a substitute for savings.  with the housing boom ending, we lose the stimulus effect, people feel poorer, and what many thought of as a substitute for savings becomes a stolen piggybank.  it’s easy to call out nouriel and other whistleblowing economists as the cause of the slowdown, but their warnings are a symptom of the problem, not the source. the cause of the down market is that credit was lent too easily and caused a slew of buyers to purchase assets at inflated values. the financial decision of the american people (and actually many urban real-estate owners around the globe) and our banking system got us into this mess. the music is stopping because price, not economists, is finally influencing the behavior of buyers and sellers in different way than it was 1 or 2 years ago.  nouriel is scared because jobs will probably be lost as the wealth effect we’ve enjoyed becomes a negative-wealth effect, or, to put it in clearer terms, a poverty effect.  i hope this clears up some issues and good luck with the real estate sales.   and one side note: i think it’s a naive idea to think that a special creativity and ingenuity exists among the american population. i think the creative gene, or innovative gene, or what have you, is pretty well distributed thoughout the globe. anyone can innovate, and it’s pretty ignorant and arrogant to think others can’t being as innovative. that’s just a myth perpetuated by ra-ra american economists (just like housing prices only go up).

JR JunkyAugust 26th, 2006 at 4:21 am

Wow, a permanent level of prosperity using bogus productivity numbers. It is amazing how people who do really nothing but leverage borrowed money think the free ride should go on and on.

GuestAugust 26th, 2006 at 5:34 am

You know things are getting desperate for California real estate agents when they take the time to post on blogs and essentially tell the blogger, “shut up, you’re scaring away the customers!”.   Right now on my “upscale” street in LA there are 2br condos selling for 1.2 million. Or not selling, apparently. These little s-boxes would rent for maybe $2,500 in today’s inflated rental market. A market inflated, I daresay, by the artificial constriction of rental stock due to flipping and condo conversion.   As Sherry will tell you, savvy flippers don’t rent their units if they intend to sell them within a year. “Get the tenant out any way you can”, they’re advised by the pros. Makes it easier to throw in those granite counters and show off your flipper palace for the next flipper.   Back to the s-boxes. If I’m not a complete tool and act like a savvy investor, you know, a fixed 30 with a decent little down payment (historically low rates, still, and not much spread between the fixed and the “real” ARM rate). Well, now I’m REALLY upside down: $2,500 in rent from my fabulous 1.2 mil “investment”.   What if I just want a place to live? Sure, I’ll pay over 6 grand a month when I can rent the same place for $2,500. No problem there. And yes, Sherry, negative am. suicide loans are indeed an “available channel” toward “making home acquisitions”. They’re also horribly destructive to working families once the teaser rates expire. In the long run they’re destructive even on a, er, MACROeconomic level, once loans of these type, which have been made to millions of gullible buyers, start defaulting to the tune of hundreds of billions of dollars nationally.   But who knows? If the dollar takes a big dump we may see $2 million starter homes as the norm. I’ll get a $125,000 a year job flipping burgers and settle in at the end of the day with a $200 six pack of my favorite microbrew. Inflation could catch us all up with our stupid real estate moves, and wipe out our debt. What’s a $40,000 credit card balance when you can make over 100k at McD’s?   Just wait out the next few years. It’s all relative in Krazy Kloud Kookoo Kalifornia-land .   

RandAugust 26th, 2006 at 6:09 am

The yield has historically done a pretty canny job of forecasting where the economy has been headed. For instance, looking at a 30 year chart of the spread between the 10 year note and the fed funds rate (I would have preferred to use the long bond as opposed to the 10 year note but new bond sales were discontinued from March 02 through June 04), it can be seen that whenever that spread has gone negative for an appreciative length of time, the US economy has always run intro trouble, such as 1979-81, 1989-90, late 1998 & late 2000. The most recent time where the spread went negative? It started in July, 06 and the spread is currently negative 45 basis points.   Note also that in the previous three slowdowns (1989-90, late 1998 – well, the economy didn’t fall into recession, but stocks did fall some 20% – and late 2000), the fed bagan easing after the negative spread was near or around one full percentage point. Based on the foregoing then, we’re not quite yet at the point of fed easing but we’re getting there, and Mr, Roubini’s call for the next fed move to be an easing is most plausible at this point.   Any comments appreciated. Cheers!

Dave ChiangAugust 26th, 2006 at 7:50 am

 “Helicopter Commander” Ben S. Bernanke should familiarize himself with analysis of Credit Bubble Ponzi Finance by Economist Hyman Minsky.    Hyman Minsky on Credit Bubbles  by Doug Noland  http://www.prudentbear.com/creditbubblebulletin.asp    ” In order to understand why our economy has behaved differently since the middle of 1960s than it has earlier in the post-World War II epoch we have to appreciate how the broad contours of the financial structure have changed.    The changes in the financial structure have increased the proportion of speculative and Ponzi finance in the total financial structure and therefore increased the vulnerability of the financial system to refinancing and debt validating crises.    In our economy it is useful to distinguish between hedge and speculative finance. Hedge finance takes place when the cash flows from operations are expected to be large enough to meet the payment commitments on debts.    Speculative finance takes place when the cash flows from operations are not expected to be large enough to meet payment commitments, even though the present value of expected cash receipts is greater than the present value of payment commitments.    In addition to hedge and speculative finance there is Ponzi finance – a situation in which cash payments commitments on debt are met by increasing the amount of debt outstanding… Ponzi financing units cannot carry on too long.    A strong analytical case can be made that our expansive Financial Sphere has been operating in the realm of Ponzi Finance Dynamics for some time now – at the minimum going back to the late-nineties technology/telecom Bubble which heralded the Mortgage Finance Bubble and the now unfolding Corporate Debt Bubble and Global Credit Bubble.    Minsky’s “big government” as “stabilizer” insights require considerable updating. Today, with the unprecedented ballooning of federal mortgage agency debt and guarantees (Fannie, Freddie, Ginnie Mae, the FHLB, FHA, VA, etc.), a large swath of US mortgage finance has been effectively nationalized.    But when it comes to masking the fragility of Ponzi Finance, one should keenly direct analysis to contemporary derivatives markets. I’ll this evening propose that the now all-encompassing Derivatives Arena amounts to The Alchemy of Big Government Stabilizers – most prominently, prospective federal government deficits and debt guarantees; central bank telegraphed “pegged” interest rates; and foreign “official” recycling of dollar Credit Inflation. ”  

http://nihoncassandra.blogspotAugust 26th, 2006 at 8:59 am

A Poster asked: “Someone tell me why the REITs index is still at about an all-time high, and not far off that as a proportion of the SPX???? ”  1. Hard assets with yield are a better [perceived] hedge in an ostensibly stagflationary environment;  2. Property Yields in Europe have always been lower than in the US; If there is truly a savings glut, perhaps we are seeing a state-change to a new regime where it’s natural that property yields fall;  3. Petrodollars pertrodollar petrodollars…. 4. How do policy investors with cash hoards who remain in dollars invest? The stagflation hedge is hugely important in current envir…. 5. Office REITs and stable tenant REIT sub-groups (health; seniors etc.) are at an all time high. Consumer-sensitive REITs (housing & hotels & Retail for example ) are languishing. Someone thinks this is a clever trade….. 6. The market in aggregate is betting that this will not be a full-blown recession. That we’ll see a pause, and a slowdown, but not a rip-roaring property office vacancy-busting downturn  7. In a rip-roaring recession where imbalances converge (loose monetary/tight fiscal mix), long rates go to 4% or south thereof and REITs become a race between declining earnings and people reaching for yield.   As for me, I reckon housing feeds takes a whack into PCE and this wil eventually feed into vacancy rates – especially as new class-A developments come on line into a softening market. We’ll probably see a classical whack upon asset values eventually as collateral is sold from uder sour loans. But as long as stagflation appears possible, and reserve accumulation continues, REITs will provide more perceived “safety” than US Govt paper…..  

http://nihoncassandra.blogspotAugust 26th, 2006 at 9:10 am

Not six months ago Ara Hovnanian was – to my astonishment – chiming how the housing market has never been better, that skies are blue, and the forecast sunny. As in most bubbles, this was predicated on a secular change in the homebuilding industry from small-lot local builders to large corporates, who presumably could centralize purchasing, make larger land acquisitions, better tread the regulatory maze, forecast better, and were not leveraged, thereby not being made forced sellers when the cycle turned. All these things may be true, but none of these remove the cyclicality from the housing business, though they may marginally reduce its amplitude. After one-and-a-half or two years of recession, and break-even earnings numbers, I reckon the market will NOT be discounting the future with generosity, and will be merciless in their ratings of these securities.

GuestAugust 26th, 2006 at 9:43 am

Rand: If you look at the site with a calculator developed by a Fed economist to predict the chances of a recession from 1) the 3mo rate; 2) the ten year rate; and 3) the Fed funds rate, it now says a recession is 46% (more or less) probable. It has been rising from 39% over the past few months. I’ll try to post the link.

AnonymousAugust 26th, 2006 at 9:45 am

Sherry,  Please spare us with your veiled blame for the downturn, your post reminds me of the pathetic Money Magazine article recently which blamed the downturn on “Bubblesitters” (IIRC), people who, like myself, are renting when we could be buying. Perhaps you forget how free markets work? The downturn is happening because of the markets own excesses, you ran out of buyers, and it’s now far cheaper to rent than to buy. I bought my house in 95, when it was cheaper to buy than rent. I sold in 2005, when we clearly were hitting an irrationally exuberent bubble peak, and it was far cheaper to rent than buy. Simple financial reasoning, which the buyers of the past five years failed to exercise.    Additionally, your argument that incomes are high is wrong – incomes are down since 2000 and continually receiving more pressure as time goes on. And your allusion to creative mortgages somehow making houses more affordable is laughable. If it take me an hour to drive between two cities, is it an innovation that I can drive twice as fast and thereby halve how long it takes? Such tactics have allowed financially weak hands to take on far too much risk, which helped feed the bubble, and the demise of which will be one of the sideshows in the aftermath.   “Comments such as these are scaring people, and that is why there is a slowdown.”   Stick to peddling houses. 

GeoffAugust 26th, 2006 at 10:29 am

Sherry Stuckey, I dont have time to respond to your post at the moment, but let me just say for starters, get ready for your 15 minutes.

NourielAugust 26th, 2006 at 10:46 am

Folks: thanks for the many useful comments, suggestions and questions. Since i cannot answer them all here i will have another long blog by monday morning addressing in quite detail many of the issues discussed here…so stay tuned…Ciao, Nouriel 

Chad from COAugust 26th, 2006 at 1:16 pm

Very interesting article. It seems that with the “flattening” of the economic landscape, wealth continues to be exported at an ever increasing rate. We USED to have an engine building wealth domestically, however, recently, the only wealth creation appears to be through our borrowing of over $8T of debt.  While we see the dollar continue to plummet, housing prices *may* stabilize through international investment, however, the true value of our assets are on a serious decline. I agree with you, that we’re heading into a deep recession, however, I would use another term which seems to have been lost from our conscience, which is “depression”. We (the US) is one paycheck away from losing our job and we have a pretty hefty mortgage hanging over us.   While the value of this debt deteriorates, it appears to be dragging overall wealth down with it. Where we land is anyone’s guess but I’m putting my chips into gold/oil/foreign currency at this point. My faith in the current administration is little to nill that they’ll help to usher in a new renaissance of wealth creation in this country. If anything, they’re helping the elite suck what’s little left out of this country through their policies of greed, short-sightedness and war…

JamesAugust 26th, 2006 at 1:22 pm

Sherry: self-serving comment from someone whose fortunes – as a real estate broker – depend on the housing bubble continuing forever are, frankly, not credible. Blaming the messengers who are just presenting the facts of a collapse of housing market that went into a bubbly craze for years – in part thanks to the misleading actions and words of the real estate brokers’ community – is pretty pathetic. As a biased and self-interested party such brokers may want to shut up at this point rather than spinning even more incredible tales and blaming the victims of the housing craze rather than themselves for the mess that is now occurring in the housing market.

pantomAugust 26th, 2006 at 2:17 pm

For the posters way up there who asked about comments on Spain, there’s a good Europe-centered economics blog that’s had a few things to say along the way: Alpha Sources. Do a search when you get there for Spain. 

GreatMoneyMakerAugust 26th, 2006 at 2:54 pm

Opinions are like assholes….  Don’t know about you, but I made a mint off the latest boom. Bring on the bust so I do it all over again.

GuestAugust 26th, 2006 at 4:19 pm

Re: Poor performance of SRPIX  If you look at the underlying components of the index, you’ll see that the DJUSR is primarily a REIT index. REITs have been popular due to their relatively high yield and good earnings to-date(partly due to recognition of negative amortization as income in mortgage REITs).   The index components represent retail, commercial, and hotel REITs as well as mortgage REITs. Given the composition, this index will tend to be a lagging representation of the RE picture in general, as opposed to builders or building supply indeces which will/have lead the RE decline. I would suggest that if you own this inverse fund, evaluate your holding period time horizon as the declines will come, albeit later in the cycle. You will need to see a dramatic drop in same store sales, office space demands, and business travel as well as rising reserves for non-performing loans at banks and higher foreclosure rates. Once these events begin to filter through to REIT earnings and dividend reductions, the sell-off in REITs will happen, but until then, existing REIT holders will continue cashing their dividend checks.

CornhuskerAugust 26th, 2006 at 6:20 pm

I live in Omaha, NE (USA) & we are BOOMING! Growth & development (both residential & commercial) as far as the eye can see. We’ve been in this “hyper-growth” mode since 2002 and if anything, the pace has increased lately. Our locally owned companies are bringing in record profits, quarter after quarter. Unemployment is somewhere around 2%. I’m in sales and I could pick up a six-figure job with about 15 employers than I can name off the top of my head.  There are some amazing pockets of growth in the U.S. that you never seem to hear about in the media (there is life outside of Cali & NY!)  The Omaha metro area has about 800,000 people and growing…BOOMING!  Kansas City & Minneapolis are BOOMING right now!  St. Louis is BOOMING!  Richmond, VA is BOOMING!  Man, things are good right now…I honestly don’t see where all this doom ‘n gloom is coming from. My prediction: DOW at 20,000 by 2012.  Peace Out!

GuestAugust 26th, 2006 at 8:16 pm

I guess when your inside the bubble looking out, as is Sherry, you see everything through rose-colored glasses. It kinda makes me wonder how far the housing indicators have to drop before she sees the light.

JR JunkyAugust 26th, 2006 at 8:41 pm

This was written last year (Jan 2005) in the Las Vegas review;; I live in Las Vegas NV (western USA) & we are BOOMING! Growth & development (both residential & commercial) as far as the eye can see. We’ve been in this “hyper-growth” mode since 2002 and if anything, the pace has increased lately. Our locally owned companies are bringing in record profits, quarter after quarter. Unemployment is somewhere around 2%. I’m in sales and I could pick up a six-figure job with about 15 employers than I can name off the top of my head. Yup a permanent level of prosperity. Why does everyone think they are different and immune forever??? 

winjrAugust 26th, 2006 at 8:49 pm

To Bardium from Winjr:  The 5 trillion of current untapped home equity is a number that was thrown out by an economist, referenced in another blog, but I cannot currently find the link. With any luck, I’ll find it, but over 60 minutes of searching has produced no results.  Even still, I would argue that the U.S. untapped home equity, whatever that amount, is irrelevant:  http://photos1.blogger.com/hello/243/2888/640/MIq206.jpg  This is a graph of total mortgage interest as a percentage of disposable personal income. Note that the current 2006 level is a record level, surpassing even the level of the early 1980’s. As ARMS reset in the next few years, this percentage is likely to go higher.   So. Given this extraordinarily high level of mortgage interest as a percentage of personal dispoable income, are you comfortable making investment decisions on the basis that the U.S. consumer will continue to HELOC the economy to even higher levels of consumption? I know I’m not.    

JR JunkyAugust 26th, 2006 at 9:36 pm

Valued added……… is what made America the worlds greatest country, even winning the last world war. A product was invented by someone with vision who then built the product in a factory which employed many innovative people continually thinking of ways to make the item quicker with better quality at a lower price, people like process engineers, designers, department managers sales managers, purchasing managers, service departments, even production workers were rewarded when this was documented. Now some fat slob sitting at a desk manipulating mortgaged/borrowed money to spin off, sell off, or transfer production overseas where there is no need for social security or health care or state or local real estate taxes expenditures is worshipped. Yup this modern business hero is making six figures making sixth grade math sound complicated by using the latest Buzz Words. Yup a Power Point presentation using the Buzz Words pulls the wool over most all brain dead board members…None of the new corporate dopes seem to understand that a chart or graph shows you what the person who is showing it to you wants you to see otherwise you would not be seeing it.

XanirAugust 27th, 2006 at 2:22 pm

Correction. Related to the post made on: 2006-08-24 12:52:21 ‘Many people do feel to be represented’  should be:  Many people do _not_ feel to be represented

GuestAugust 27th, 2006 at 5:38 pm

Let say that the Boom in the Housing Constructions has benefited almost everyone one of us; now if it is going into a RECESSION, everyone is giving BACK the Gains.  The matter is who are giving back more ! I am working in the Industry as an Urban Planner, and I think people have been spending more generously of their Money $ on some Homes (Buildings) that have no Architectual Values. But they have the $$$ >>> so LET IT BE!  Best Regards

GuestAugust 27th, 2006 at 5:38 pm

Let say that the Boom in the Housing Constructions has benefited almost everyone one of us; now if it is going into a RECESSION, everyone is giving BACK the Gains.  The matter is who are giving back more ! I am working in the Industry as an Urban Planner, and I think people have been spending more generously of their Money $ on some Homes (Buildings) that have no Architectual Values. But they have the $$$ >>> so LET IT BE!  Best Regards

Schahrzad BerklandAugust 28th, 2006 at 1:19 pm

Deep Denial Cornhusker, I was raised in Omaha, and they’ve got a huge problem in housing over there. I will post more on the next (newer) thread.

AnonymousAugust 28th, 2006 at 3:01 pm

Let’s all keep in mind that the decline in housing is from record high levels. The last 4 or 5 consecutive years set records for both new and existing home sales. The decline in housing has been predicted for the last 2 years, basically ever since the Fed starting hiking rates. Why should it be a surprise that we are now seeing a slow down? All the experts have been calling for it for some time now. It was just took longer to get here. This too shall pass. The Fed will not raise rates again and long term mortgage rates will fall, lending support to the market. In the meantime, buyers will once again have the upper hand, and owners may get some relief from escalating property taxes.

Anthony DamatoAugust 28th, 2006 at 10:16 pm

Were there any economists in 1929 as outspoken and certain as you as to the impending Depression?

GuestAugust 29th, 2006 at 12:10 am

Yes its true. From record levels. However if you look to the past you will see falls from record highs fall the farthest. Trust me twenty five years in real estate I came up in the hottest markets in the nation. Lets clear up another misunderstanting. This down turn is not caused by interest rates.Run the numbers.The difference in monthly payment is not enough to stop people from buying homes. Fear,again. People are afraid of buying at the top of the market.No one wants to buy a home that is going to drop in value.I will never forget the day I heard Mr Greenspan first say Housing Bubble.That was the beginning of the down turn.Most sill dont get whats happening. The stats you are seeing published are old stats. The most current stats are much worse than you think.The real estate industry will do what ever they can so soften the numbers. Every agent and builder fears a down turn. Dont think for a minute the National Association of Real Estate is not a political arm of the brokers and agents. Do you think they are going to jump up scare every buyer out to the market. If they published the most recent numbers I assure you there would be no buyers in the market as of last June! If you want the up to date stats of the market get the your local MLS.Example;I ran the stats of the Albuquerque MLS in the last week of June and discovered the market had turned in late May. At the end of June I ran the numbers again. June volume of sales was down 27% year over year!! that is huge. July was down 37% year over year and the week I ran the July numbers the Albuquerque news paper ran an article of how strong the market was, based on the second quarter numbers.April and May was strong enough to mask the June turn.Dont kid yourselves gentelman this will be a big one. The feds are concered with inflation. The jump in oil prices is just beginning to seep its way through the economy.The only way the feds know how to deal with inflation is by raising rates. They have brought the economy down before and they will do it again. If you want an eye opener study the oil problem. Remember when the BP enginer said 50%of what they were pumping in Alaska was salt water. Study oil, study inflation and look to the recent past for possible senarios. True it will all pass but so has every other event since the beginning of time.And dont forget what fear does to home buyers.

AnonymousAugust 29th, 2006 at 4:51 pm

I have more than 30 years experience in investments and have seen various markets go to all sorts of extremes. However, this is the first time I see everyone (almost unanymously) agree that there’s a bubble and even more surprised to see how some people cheer the bursting of a bubble that will undoubtedly hurt them as well as others. I just wonder if we’re not all classical victims of behavioral finance. As most of us failed to get out of the tech bubble, we desperately want to appear smart by spotting the next one.  Beware of the workings of the human mind!

AnonymousAugust 30th, 2006 at 7:27 am

If everyone agrees that there is a bubble, then assuming at least a modest amount of rational behavior, there is no bubble. By the time everyone agreed that there was a tech bubble, the bubble had already gone.  So this so-called “housing bubble” has already gone. And it wasn’t that bad. A modest decline in house sales and prices here and there as everyone adjusts to the new interest rate environment. Quite a healthy correction really. I forecast that by the end of the year you’ll all have forgotten your nightmares and your glass will be half-full again.      

Don in CAAugust 30th, 2006 at 7:09 pm

‘Tom in Indy’ got it right, its going to be painful for many.  He’s also quite right about their being a senate hearings TV extravaganza ‘pin the tail on the scoundrel’ I can see it now. As someone pointed out, asset price inflation of houses has been seen as a personal piggy bank to keep raiding. When that piggy bank gets taken away (“stolen”), look out.   Another poster has a good point, will it be politically acceptable for the reposession and eviction rate to rise to high numbers? Like him, I doubt it. In the ‘classless society’ (ahem), getting evicted, personal posessions on the sidewalk, is what happens to “them” not “us”. Thats not going to happen, any politico saying is should will be run out of town. There will be some financial fiddle to ‘restore confidence’, the debt will be ‘equitised’ ie morphed into taxes down the line, just like the S&L fiasco.  As for a credit boom causing a house price bubble, its hardly new. This is a repeat of UK housing market 84-90, when house price inflation and creative financing got totally out of hand. Teaser rate ARM’s are for amateurs, the really creative types (eg Legal and General) cooked up 100% interest-only, monthly adjustable, endowment mortgages. You paid the interest, they invested in the market (aka L&G mutual funds), the endowment life policy and investments paid off the capital, and you had a big pile to retire on. Ahhh, that kool-aid tasted *good*. All total bollocks as it went horribly bust. I should know, I had one.  So dont underestimate just how ‘creative’ lenders can get, nor what the pols will do to avoid the fate of the Tory party in the UK.   Don in CA

GuestSeptember 4th, 2006 at 1:17 am

To: Sherry Stuckey  “If the Yuan is pegged to the Dollar, shouldn’t that guarantee inflation?” Please Explain?  Isn’t it a fact that when the Yuan is pegged to the Dollar it is keeping the price of imported goods from China down and not up?  Isn’t it a fact that when the Yuan is pegged to the Dollar it is exporting more US manufacturing base jobs oversea due to the low operating cost of Chinese labor?  Isn’t it a fact that as USA enter electric day on November 7, 2006 more and more politicians will demand that China float the Yuan so that it give the voters the image that the politicians are trying to protect the voters’ jobs.  Isn’t it a fact that if the Yuan were to float freely then the US dollar will become weaker, because the Yuan has been kept artificially low?  Isn’t it a fact that the US Administration talks about floating the Yuan but truly wants the Yuan to be pegged to the dollar to keep inflation down?  Isn’t it a fact that the US dollar is the reserve currency of the world and at least 65% of all world commodities are traded in term of US dollars?  Isn’t it a fact that when the US dollar becomes weaker then it will bring the price of imported commodities like crude oil up, because Oil rich foreigners like the Middle Easterners who accept a weaker US dollar for their crude oil won’t be able to buy the same European goods when they exchange the weaker US dollar for Euro. Thus oil rich foreigners will have to raise the price of their crude oil to compensate for the weaker dollar.  Isn’t it a fact that when crude oil price increase it will increases inflation from a wholesale level?  Isn’t it a fact that the Federal Reserve has been raising Fed Fund rate in the past 18 months to strengthen the US dollar to bring down inflation.  Isn’t it a fact that when foreign bond investors buy US treasury they must change their currency to US dollar first?  Isn’t it a fact that if a foreign currency like the Yuan were trading eight Yuan to one US dollar during the purchase of the US bond then the Yuan were trading seven Yuan to one US dollar when US bond maturity then that bond investors will lose more money then what the yield of the US treasury is worth? Case Study: During the purchase time of the US treasury the Yuan was trading eight to one exchange rate. Thus 8000-Yuan convert to $1000 US dollar to buy $1000 US Treasury bond at 4.76% will get $1047.6 US dollar end of one year. At maturity if the exchange rate is seven to one then $1047.6 US dollar will equal 7322-yuan. Isn’t it a fact that foreign bond investors lose money when dollar gets weaker relative to their currency; therefore, their risk should come with a higher reward of higher yields during time of inflation?  Isn’t it a fact that when bond investors sell US treasury then the price of US treasury will fall?  Isn’t it a fact that when US treasury price fall then yield on US treasury will move up?  Isn’t it a fact that if the US dollar were to weaken quickly then more and more bond investors will pull out of US treasury bonds?  Isn’t it a fact that the job of the US Federal reserve is to protect the US bond market and ultimately protect the US dollar as the reserve currency of the world?  Isn’t it a fact that the US treasury bond are rated AAA because it is backed by the fact that the US dollar is the reserve currency of the world?  Isn’t it a fact that when the yields on the US treasury bond moves up more bond investors will move money into US treasury bond instead of Mortgage Back Security when the spread on the yields between the two are low? In other words bond investors can lower their risk?  Isn’t it a fact that Mortgage Back Security is competing for the same pool of investors as US treasury? Then therefore in that situation the yields on Mortgage Back Security will have to more up.  Isn’t it a fact that the yield on Mortgage Back Security is directly related to the yield of mortgage loan?  Isn’t it a fact that as Fed fund rate increase Lenders will try to keep yield on mortgage loan down to gets more qualified buyers? In other words, Lenders can make up lost profit on the lower yield of a loan through increase volume of homebuyers. Don’t that statement sounds like 2003 to 2005.  Isn’t it a fact that currently Lenders ability to make a profit on the money Lenders have borrowed and what Lenders are loaning it for is no longer as profitable?  Isn’t it a fact that as the Lenders profitability decreases the Lender willingness’ to take risk decrease?  Isn’t it a fact that as profitability decrease lending standard becomes higher also?  Isn’t it a fact that when lending standard become higher it becomes harder and harder for homebuyers to get a loan.  Isn’t it a fact that house demand is based on the availabilities qualifies homebuyers and not by people who want to buy a home but do not qualified?  Isn’t it a fact that when the availability of qualified homebuyers decrease then the inventory of house increases if the same amounts of home sellers are available?  Isn’t it a fact that as inventory of house for sell increase then the supply will eventually outnumber the demands from available qualified homebuyers?  Isn’t it a fact that when the supply of houses outnumbers the demand of qualified homebuyers then prices of house will fall?

AnonymousSeptember 5th, 2006 at 2:00 am

The bottom line is, people are extremely greedy, that’s is why we “have” an up-and-coming housing bubble. In the end, almost everyone will pay for it.

John MeyerSeptember 8th, 2006 at 4:27 pm

Seems to me that the Fed faced a rock in one direction and a hard place in the opposite after the last stock market downturn and tech bubble bust. Without the dropping of interest rates a severe crunch would have developed possibly leading to intense deflation rather than a housing ( and all real estate ) boom. The Fed shouldn’t target asset classes per se.  Hopefully, the Fed still has power enough to inflate us out of the debt timebomb.   Does it bother anyone that each peak in the Fed funds cycle occurs at a significantly lower level ? Does that say that the Fed will be “pushing on a string” in the near future ??

GuestSeptember 25th, 2006 at 11:02 pm

i have been a realtor for 23 years, and have seen housing slumps before, but this is really different. back in the mid 80s and early 90s, houses were still “reasonably priced”, interest rates were tipically 6% to as high as 9%. it was not the interest rates that slumped the market in the past, it was the economy. if a house fell 20%in value, no big deal, the house was priced at $150,000 to a mansion priced at $500,000, so the paper loss was $30,000 up to $100,000 for pricey houses, people did not panic, most had your typical 30 year mortgage, and back then buying a home was not a short term investment, people stayed in their houses, with a turnaround of maybe 5 to 10 years. BUT NOW THINGS ARE VERY DIFFERENT. houses have appreciated more than 300% since 1986, with most of the appreciation in the last 6 years. No problem, can’t get mortgage, banks got creative, adjustables, interest onlys, the list goes on. AND, 1/3 of the houses purchased in the past 6 years, were purchased to fix up and flip, hence adding fuel to the fire. MOST IMPORTANTLY, real estate investors were pulling money out of their houses to buy more real estate. NOW THE BAD NEWS. I believe it will take 3 to 5 years to shake out. The flippers will dry up (already have) those inticing adjustable and interest only mortgages are starting to adjust, and those mortgage bills for interest only mortgages are adding hundreds of dollars a month to the payment. So who wants to buy a house today with so much negative media news on the downturn in housing? The flippers are gone, first time buyers are much to afraid to buy high in a falling market, and the builders are losing so much money holding on to inventory they can’t sell. Even the move up buyer can’t move even if he wants to, because no one wants to buy his house. We are in for a lot of foreclosures, possibly even bank failures. LASTLY BAD NEWS TRAVELS FAST, AND EVERYONE I TALK TO IN REAL ESTATE IS SAYING THE SAME THING. What will the damage be. In my opinion here in the suburbs of new york city (where the appreciation was among the highest in the past 6 years),a loss of up to 40% in the subtowns, and up to 25% in the hubtowns. SELLERS HAVE TO ADJUST THEIR PRICES, DOWN, DOWN, DOWN. Good luck to all!

i am a veteran realtorSeptember 25th, 2006 at 11:02 pm

i have been a realtor for 23 years, and have seen housing slumps before, but this is really different. back in the mid 80s and early 90s, houses were still “reasonably priced”, interest rates were tipically 6% to as high as 9%. it was not the interest rates that slumped the market in the past, it was the economy. if a house fell 20%in value, no big deal, the house was priced at $150,000 to a mansion priced at $500,000, so the paper loss was $30,000 up to $100,000 for pricey houses, people did not panic, most had your typical 30 year mortgage, and back then buying a home was not a short term investment, people stayed in their houses, with a turnaround of maybe 5 to 10 years. BUT NOW THINGS ARE VERY DIFFERENT. houses have appreciated more than 300% since 1986, with most of the appreciation in the last 6 years. No problem, can’t get mortgage, banks got creative, adjustables, interest onlys, the list goes on. AND, 1/3 of the houses purchased in the past 6 years, were purchased to fix up and flip, hence adding fuel to the fire. MOST IMPORTANTLY, real estate investors were pulling money out of their houses to buy more real estate. NOW THE BAD NEWS. I believe it will take 3 to 5 years to shake out. The flippers will dry up (already have) those inticing adjustable and interest only mortgages are starting to adjust, and those mortgage bills for interest only mortgages are adding hundreds of dollars a month to the payment. So who wants to buy a house today with so much negative media news on the downturn in housing? The flippers are gone, first time buyers are much to afraid to buy high in a falling market, and the builders are losing so much money holding on to inventory they can’t sell. Even the move up buyer can’t move even if he wants to, because no one wants to buy his house. We are in for a lot of foreclosures, possibly even bank failures. LASTLY BAD NEWS TRAVELS FAST, AND EVERYONE I TALK TO IN REAL ESTATE IS SAYING THE SAME THING. What will the damage be. In my opinion here in the suburbs of new york city (where the appreciation was among the highest in the past 6 years),a loss of up to 40% in the subtowns, and up to 25% in the hubtowns. SELLERS HAVE TO ADJUST THEIR PRICES, DOWN, DOWN, DOWN. Good luck to all!

GuestOctober 6th, 2006 at 12:17 pm

Dr. Roubini,  Great blog. You are always insightful, and always data-driven. I have a few questions that are macroeconomic and sociologic in nature.  What do you think the larger, hangover effects from the housing boom and bust will be?  What societal impacts does pricing out first time buyers carry? Do these would-be first time buyers make different decisions than they would if housing were more affordable? (e.g. do people delay having children as a result of very high housing prices?) Anecdotally, there seems to be some truth to this. In my circle of friends, very few of those in their late 20s have children, or are planning to have any in the near future. Yet, among my friends in their early 30s, almost all have children, and most had these children while they were in their mid-to-late 20s. The timing of this shift seems to coincide with the housing bubble.  What larger impact will the significant devaluation of most people’s largest asset carry? I wonder how many people nearing retirement were counting on selling the house at a tidy profit to fund their retirement.  How much moral hazard has been created by the US Government’s implicit backing of Fannie Mae and Freddie Mac, as well as their history of bailing out speculators (S&L crisis, etc.)?  So, we have less young people, lots of old people retiring on assets that may be sinking like a stone, and a government that has shown a propensity to bail the latter out.  All signs seem to point to a massive transfer payment from young to old in the form of larger government liabilities to be covered by a smaller number of workers paying taxes. How did Japan cope with this? It seems like they underwent the same “double-bubble” stock and R/E boom and bust when their demographics in 1994 or so looked similar to the U.S demographics today. What were the policy implications of their “Stock market-housing-aging population” trifecta?  

GuestOctober 6th, 2006 at 12:17 pm

Dr. Roubini,  Great blog. You are always insightful, and always data-driven. I have a few questions that are macroeconomic and sociologic in nature.  What do you think the larger, hangover effects from the housing boom and bust will be?  What societal impacts does pricing out first time buyers carry? Do these would-be first time buyers make different decisions than they would if housing were more affordable? (e.g. do people delay having children as a result of very high housing prices?) Anecdotally, there seems to be some truth to this. In my circle of friends, very few of those in their late 20s have children, or are planning to have any in the near future. Yet, among my friends in their early 30s, almost all have children, and most had these children while they were in their mid-to-late 20s. The timing of this shift seems to coincide with the housing bubble.  What larger impact will the significant devaluation of most people’s largest asset carry? I wonder how many people nearing retirement were counting on selling the house at a tidy profit to fund their retirement.  How much moral hazard has been created by the US Government’s implicit backing of Fannie Mae and Freddie Mac, as well as their history of bailing out speculators (S&L crisis, etc.)?  So, we have less young people, lots of old people retiring on assets that may be sinking like a stone, and a government that has shown a propensity to bail the latter out.  All signs seem to point to a massive transfer payment from young to old in the form of larger government liabilities to be covered by a smaller number of workers paying taxes. How did Japan cope with this? It seems like they underwent the same “double-bubble” stock and R/E boom and bust when their demographics in 1994 or so looked similar to the U.S demographics today. What were the policy implications of their “Stock market-housing-aging population” trifecta?  

Eric in Tampa BayOctober 19th, 2006 at 12:38 pm

I love watching people loose everything… as if it ever really belonged to them to began with. There are very few home owners in America. At age 34 I am one of them. Most people are home entitlement holders and because of their greed they will never become home owners.  If there is any blame to be handed out, it should go to the citizens who signed on the dotted line. No one held a gun to their heads and forced them to buy overpriced homes with nutty repayment plans. People seem to be fine living beyond their means and when judgment days comes they are also fine with pointing the finger at others.   I bought my first house in 1997 for 31,500 and in June 2006 I sold it for 163,000. I then took every penny and bought my second home cash out. I could have lived like the rest of the shallow people do, by purchasing a cookie cutter home and pretending I was rich but instead I purchased land and a small home and now have no mortgage.  People complain that it takes two incomes to make it. This is only true if you live beyond your means. My wife and I live with only one paycheck coming in. Nothing will change though, regardless of how bad the financial situation gets, people will go out and spend spend spend as soon as conditions allow them to. Mark my words, as soon as the next big “Get rich scheme” comes along, everyone will be back in the drivers seat and none of this will matter till the next down turn.  Have a nice day. 

AnonymousFebruary 13th, 2007 at 8:27 pm

Professor, I am from NYU law school. With all due respect, I would like to know your track record in economoc cycle forecasting :-). I heard that most (almost all) economists failed to predict the recession in 2001. Of course, Wall Street is biased and want to paint a rosy picture all the time. You know the culture there. I predict a recession, because it is simply due after 7 years and I agree with that housing could be the catalyst, and the gridilock talk is nonsense. Something never changes.   But if you are so sure of a recession, I think you should get ready to buy some very economic cycle sensitive stocks when the recession hits and make a ton of money…just take a look at stocks/industries that suffered the most of decline of share prices and gained most after 2001…. oh, related to that, I would like to know the return you have been to able to achieve in your personal stock investment. Maybe we can trade some investment ideas. I mean, otherwise, you are just one of the many (economics) professors, and you all have different opinions :-). Now, I went too far and you are going to report me to my dean.

GuestOctober 31st, 2007 at 3:12 pm

I can’t keep from wondering,? As the baby boomer ages, we have had most of it all, the cars, big houses, good jobs, money saved and invested our incomes well. Now at retirement  time we don’t want any more debt, we are done with the big houses and want back into the ranch on one level, lower taxes, don’t need but one car. With millions of these people not wanting to spend money like we once did, what’s going to happen to the economy???

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