Friday, September 16, 2005

"Housing Bust Ahead"

by Calculated Risk on 9/16/2005 09:53:00 PM

This is a summary of three commentaries on housing and the economy. Writing in the Financial Times, Jim Pickard notes many of the incorrect predictions on housing over the last few years (an amusing read).

"For some critics, the doom-monger phenomenon calls to mind the crazy men with placards who like to forecast the end of the world."
Hopefully I'm not crazy or a prophet of doom, but I do think the housing boom is nearing the end (or already peaked). At least in the UK, Pickard thinks so too:
"And yet the pessimists’ time seems to have arrived at last. Just because they got it wrong before there is no reason to believe they are more likely to be wrong now, as some would have you think. In fact, the reverse is surely true. In a few years’ time, it may be the mortgage companies and housebuilders, which have long lived on a diet of unbridled optimism, which look foolish in retrospect - whether house prices fall in nominal terms or only in real terms.

But ironically, many commentators have become so weary of being caught out yet again that they have fallen silent on the subject. Andrew Oswald, the Warwick University professor, for example, now refuses to talk publicly about house prices.

There is a widely used expression in stockmarkets that the right time to buy shares is when the last seller has sold. Perhaps the right time to sell residential property is when the pessimists have given up and the last buyer has bought."
Gary Shilling is even more direct: Housing Bust Ahead
"The link between residential real estate and the state of the economy has to do with Americans' dismally low saving rate. Leaping house prices make consumers feel wealthy so they save less and borrow more. Extracting money from their homes when they either refinance or move and take out a bigger mortgage, all too many homeowners use borrowed funds to make up for their declining incomes and huge energy bills. Baby boomer[s] ... think ... that ever rising home values will bail them out."
Shilling sees a National bust:
"The next housing bust might be national.
...
Today's boom is national in scope: low interest rates, loose mortgage-lending practices and investor caution over stocks following the 2000-02 bloodbath. Yes, today's boom is mainly on the coasts, but that's where the population and income are concentrated. When the U.S. bubble breaks, it will affect more families than the recent stock slump, since 69% of families own their abodes while 50% own stocks.
Shilling concludes:
This is a dire forecast. Still, a severe nationwide break in house prices could destroy enough net worth and spawn a big enough financial crisis to shift the good deflation of excess supply I foresee to the bad deflation of deficient demand.
And finally, on Stephen Roach:
"The world as we know it," Stephen Roach says, "must come to an end."
The article summarizes many of the global imbalances and then offers Roach's take on Katrina and the US economy:
Mr Roach found many reasons to take exception with the conventional wisdom on Katrina. Rather, he poses another troubling question: Could Katrina be the tipping point for the US economy? As he puts it, "by living beyond its means, America's energy-shocked, post-Katrina economy may be lacking in the resilience financial markets seem to be banking on".

In Mr Roach's reckoning, the US is a "shoestring economy" – there has never been a leading economic power that has tried to do "so much with so little". The US has been expanding its spending at home and abroad at a time when the fiscal spigot has next to nothing left, meaning it is unable to respond to even the slightest shock, let alone a massive disruption like Katrina, Iraq or some other unforeseen catastrophe. "All three major pieces of domestic saving – personal, government and business – are likely to be reduced further by the combination of higher energy prices and post-Katrina aftershocks. For America's saving-short economy, that will fray the shoestring all the more."
In my view, whether the US economy has reached a "tipping point" depends on housing. Housing is the key. If the boom ends, mortgage extraction will end, and the US consumer will be forced to live within their means. That isn't necessarily "dire" and I'm not wearing a sign proclaiming the "End of the World as We Know It" - but I do think these are interesting economic times. Achieving a soft landing, expecially without fiscal and public policy leadership, seems impossible.