Friday, August 25, 2006

Let's Play "Guess the Bottom"

MORE: A headline today: "Mortgage rates dip for a fifth straight week; 6.48% for 30-year loans"

That'll keep a floor under prices, for awhile.


"We conclude that a decline in house prices is underway [in America]," Grant's Interest Rate Observer recently remarked. "If the house market, like the stock market, were mean-reverting, the sell-off could carry a far way. A return to the post-1968 trend line would imply a drop of 22%."
Which, of course, for these real estate-centric United States, would imply disaster. "We do not predict disaster," Grant continues, "but we do expect a pullback severe enough to inhibit the leveraged American consumer and to stunt the growth of the U.S. economy..."

Real estate transactions – and related economic activities – have become a disproportionably large contributor to the overall U.S. economy. Therefore, we would miss them greatly if they took a sabbatical. "Between 1997 and 2004," Grant relates, "the value of these residential transactions amounted to 16.4% of GDP, almost double the median reading from 1968 through 2005."
This monumental real estate boom fostered "echo-booms" in all housing-related industries. Since the end of 2001, according to Northern Trust economist, Paul Kasriel, housing-related industries have produced a whopping 43% of the nation's total net private sector employment growth.

Obviously, therefore, any slackening of real estate activity could convert the nation's largest job-creator into a job-loser.

~ By Eric J. Fry


During the early-90s Southern California real estate bust, nominal prices fell by an average of 25%, and adjusted for inflation, it took a full decade for prices to recover. In Florida, there have been housing busts that, adjusted for inflation, took over twenty years to clear.
Except for London, (probably), real estate prices in Britain are headed for the cliff as well.

The good news is that the U.S. Fed has plenty of room in which to cut interest rates next year, to attempt a "soft landing". If this bust had come before the Fed had raised interest rates by over 4%, we'd be in a world of hurt.


Blogger Duck said...

Unfortunately I'll be playing this game for real, as my house will go up for sale next month. Everyone here in Minnesota has been telling me that houses don't sell between Halloween and the spring. We'll see how it goes.

August 25, 2006 2:39 PM  
Blogger Bret said...

I think the U.S. Economy will be able to fairly easily absorb the soft housing market. Conveniently, P/E ratios in the stock markets are pretty robust, limiting the likelihood that the housing market softness spills over into other asset classes. The labor market is overly tight at the moment and can absorb at least some of the resulting employment turnover.

It could still lead to a bit of a recession, but I think it will be short lived.

August 25, 2006 3:23 PM  
Blogger Bret said...

duck, I think you're in a tough spot - ya don't wanna hold in this market and ya don't wanna sell in this season. On top of it, ya might end up owing oroborous a book soon - I hope you can afford it. Perhaps he'll allow you to defer payment?

August 25, 2006 3:26 PM  
Blogger Harry Eagar said...

I ain't making any forecasts. It is an article of faith here on Maui, though, that the high ends of real estate markets have an almost limitless demand.

We're talkin' real high end, nothing any of us would ever live in.

The reason is that the generation with the highest income in history is coming into the inheritance of its parents, the generation with the highest savings in history.

I accept that as a fact. We're in uncharted territory.

Recall that the smart money in 1944-5 was that it would be difficult for the US economy to sustain the reconversion to peacetime conditions. Hardly anybody foresaw the effect of the $140 billion in war savings that the returning GIs unleashed.

I'm not saying residential real estate is not going to slip some -- it's pretty clearly slowing -- but I am saying we're in uncharted territory again.

August 25, 2006 4:06 PM  
Blogger Oroborous said...

No way !
I've been looking forward to that book all year. But I will settle for a comic book, if need be.

Bret, I agree that any recession is likely to be short-lived.
As for an "overly tight" labor market... Although that's certainly true of some locales, and even a few entire states, I think that it might be a bit of an overstatement nationally.

August 25, 2006 4:27 PM  
Blogger Oroborous said...

"Highest end on Maui", like unique and highly desirable properties in other development-limited areas, does seem immune to all but the deepest of depressions.

But that's a pretty tiny sliver of the American housing market.

The "lower" high-end stuff, like $ 750,000-in-2004 oceanside condos in San Diego, are not going to hold. They're just not special enough, and the supply isn't particularly limited.

In fact, I put up a post a few months ago about how the Key West market was in a power-dive, with run-of-the-mill housing shedding 25% of its value in the six months leading up to the post.
But no doubt there are a few $ 10 million-plus mansions there that haven't lost any value.

August 25, 2006 5:10 PM  
Blogger Duck said...

You like comic books? I would have never guessed. ;-)

Can I make the delivery of the book contingent upon the sale of my house?

August 26, 2006 7:51 AM  
Blogger Oroborous said...

Sure, of course you may.

I don't much read comics anymore, but I used to collect them quite a bit when I was in my mid-teens: X-Men, Spiderman, Daredevil, Teen Titans, and The New Mutants, among others. I still have a few hundred issues.

The quality varied, as creative staff joined and left the books, but there were some amazing story arcs, and some really great artwork, over the years.

I still like the format, but I don't seek 'em out anymore; I just enjoy whatever happens to cross my path.

August 26, 2006 10:01 AM  

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