Tuesday, August 15, 2006

Thornberg: Hard Landing Coming

by Calculated Risk on 8/15/2006 02:48:00 AM

The LA Times reports: Real Estate Economist Leaves UCLA Forecast

Bearish real estate economist Christopher Thornberg, who says the Southern California housing market is a bubble beginning to pop, has left UCLA Anderson Forecast to strike out on his own.

Thornberg, 38, will continue to teach economics at UCLA but will no longer be part of the quarterly Anderson Forecast on the economies of California and the nation.

"I wanted to start my own business and do things I wasn't able to do before," said Thornberg.

His new consulting firm, Los Angeles-based Beacon Economics, will prepare forecasts for regions he thinks are underserved, perhaps including San Diego, the Inland Empire, the Bay Area and Sacramento, Thornberg said. His partner at Beacon is San Francisco economist Jon D. Haveman of the Public Policy Institute of California.
Many of us have noticed that the Anderson Forecast has become less bearish on housing. I've suspected for some time that Thornberg disagreed with the consensus Anderson Forecast view that prices would be "flat" for several years.

Now Thornberg can speak freely:
Thornberg said his expectations are growing more gloomy.

"My guess is we're going to have a hard landing," he said. "It's ugly out there."

There has been large-scale overbuilding of homes and condominiums nationwide, he said. "And here in Southern California we have had this massive price appreciation that is just not justifiable by any kind of standards of reasonable economics," he said.

Although home prices in most Southern California markets are still higher than they were a year ago, "there has been no appreciation for four or five months," Thornberg said.

With interest rates rising in recent months and sales declining, "the bubble is popping, just like a bubble is supposed to," he said.

In a soft landing, prices would level out and economic growth would be flat or slow while adjusting to the loss of jobs and spending in the construction, real estate and mortgage industries.

A hard landing could come if housing prices begin to fall, Thornberg said, in large part because that would scare consumers accustomed to watching their net worth rise on paper. Their spending pullback and a corresponding drop in construction could push the economy into recession.