During the boom years anyone who bet that "this is as good as it gets" would have lost a lot of money.
Imo the same mistake is being made during the best years, people are assuming the situation is static.
Everything in this article is based upon the unsustainanble concepts of ever-increasing home prices, a buyer for that home, people who want to withdraw as much equity as possible, people who are happy to mortgage their house in lieu of pay increases, people who will spend that equity on non-durable junk, restaurants and services. If all those concepts hold true, and the future generation has even more money to spend on buying your house, all will be fine.
--
Optimism will keep the economy from going into a recession?
First, who all are optimistic? Second, if optimism can keep the economy from going into recession we wouldn't have had any since 1950s when optimism returned with a vengeance. Third, how many economists, or economic writers, have forecasted a recession until after the fact? 1%? Or, 2%??
How bad will it get? CoreLogic estimates that about 32 percent of teaser-rate loans, or 460,996, will be foreclosed; 12 percent of adjustable-rate subprime loans, or 385,524; and 7 percent of market-rate adjustable rate loans, or 264,184 loans.
The study assumes housing prices stay flat with December 2006 levels. Each 1 percent drop in the value of homes will result in another 70,000 loans falling into foreclosure. Conversely, each 1 percent rise in home values will keep 70,000 loans from foreclosure.
"I can count on the Easter bunny to be nice to me also." LOL...
The Times article pretty much sums up the mindset that is keeping prices stupidly high on LA's west side. Knife catchers are still jumping in, enabling "equity rich" buyers to move up. There may be less sales... but sellers won't budge much yet because there are still people paying their prices.
This area is surrounded by a RE market going bust, but sellers and buyers are still whistling past the graveyard. When the zombies finally rise from the dead, so to speak, a lot of people are going to be very surprised.
Or... everything will just keep going up as is normal. And that would suck. For me as a potential prudent buyer, and for the future of this country.
Silly, silly. I sold at the peak and am renting. Let's say I had the desire to buy a mortgage again. Should I?
Median prices around here have dropped from $630k to around $540k. Compare this to the price I bought my last house for - $200k. Say I'm a good citizen and put 20% down - $108k. Now I need a loan for $432k - oops, I need a piggyback or jumbo loan. Shoot. When I bought my original house only the big spenders needed a jumbo in the McMansion neighborhoods.
OK, running it through a simple online mortgage calculator, this average dump would cost me $2,500 per month. Wait! We need to add my prop taxes to this. That will add an additional $5k on to the yearly cost, or $2,900/month approximately. Upkeep and insurance pushes it well above $3,000/month.
Compare this to my present $2,000 rent on a house in a (presently) $800,000 dollar neighborhood. For $3,000 I could buy an average house, and buy all the attendent downside risk too.
Puff pieces like this are a joke. Prices will come down because they will come down - reversion to the mean, subprime choke, or first time buyer lacking the ability to pay lofty prices. And I have a hard time imagining that, once the proud mortgage owners of America discover their biggest financial liability is in deflation, won't cut back spending. In fact - look at the first derivative, they already have! Ho Ho Ho.
"Homeowners cashed out $640 billion in home equity last year, according to David Wyss, chief economist at Standard & Poor's. The average home has been selling at 3.2 times average household income, higher than the historic average of 2.6 times, although it is much higher in formerly hot markets such as San Diego, where the figure was 14, Wyss said. "
It seems undeniable that so far consumer confidence has not yet been changed by what is happening.
People hoping to profit from shorting the market might have to wait a while yet.
But for the consumer not to be affected by what is happening seems a hard ask for me. Only if monster lending practices come back can that part of the bubble that was inflated by those practices be reinflated. Otherwise the reinflation well need rises in wages or maybe much cheaper energy costs.
"Each 1 percent drop in the value of homes will result in another 70,000 loans falling into foreclosure. Conversely, each 1 percent rise in home values will keep 70,000 loans from foreclosure."
Let me just add that it's no good to think about this in terms of the median either. We've seen some median skewing recently due to low-volume anomolies favoring the higher-end market. A median price won't sell the house, nor will a bunch of rich people being able to sell theirs (same effect.) It's better to look at the mid and lower-priced stuff or maybe an avg. selling price/sq. ft. comparison to determine future foreclosure rates.
James add to that those affected or who will be affected by the slow down in completions & future new (not) build...
Lawn & garden mfgrs like Briggs & Stratton, Kohler, Honda & the machine builders who buy their engines (Toro, Simplicity, John Deere).
Appliance mfgrs like GE, Electrolux & Whirlpool
Window, door siding, roofing mfgrs like Anderson, Pella & Marvin.
Add to them all the supply chain support companies that make everything from loose parts, to switches, to fasteners, to paint. And there are way more of them than the OEMs I listed above.
There is a huge pyramid of activity 'portalling' through a few major outlets like HD & Lowe's... or directly marketed to the builders themselves (B2B direct contract)... all of this activity driven by new housing build & MEW... and all of that driven by debt creation.
No - there is no problem. Now move along you people.
People, economists included, never look deeper than the surface but there is one mother of an iceberg down there.
They study seems to focus only on the issue of subprime foreclosure and assumes that MEW will be a strong factor in keeping consumer spending going. It doesn't provide any data to support this nor does it explore how builders and SFH resales sales might be effected by significant changes in underwriting standards.
This article misses the point entirely. The subprime implosion isn't the cause of anything. It's merely another consequence of the housing downturn, already in its 2nd year. Looking past subprime to see the next likely victim, say credit / lenders in the AltA space and HBs is what an anticipatory stock market does.
Sheesh. Pathetic. Add another hopeless article to the duped list for a good laugh in a couple of years...
Not to pile on, but no mention of why sales are "off" and house prices only slightly so while wages remain stuck in 2000.
So...who is going to buy what where?
Not until affordability issues are addressed.
Looks to me like house prices are much more likely to adjust than one time payments to wage earners.
One - there are a lot of wealthy 'people - real wealthy. They done good by Bush. Check Nordstrom's sales the last few quarters.
Two - recessions are measured in 'aggregate'... two quarters of negative GDP. Not my personal GDP but aggregate GDP.
We might not go into 'official' inflation as long as profits remain high due to wage arbitrage & debt continues to flow freely... even if a lot of folks continue to go deeper into hock & suffer. It might feel like a recession to most but that doesn't mean it will be 'scored' as one.
There is still an awful lot of carry trade & FCB intervention... check the USD-JPY chart... something fishy happened on March 5th... as a result few folks are at risk of having their credit cards cut up anytime soon.
Until that happens I'd still say an 'official recession' is out there a ways.
True, but this kind of info is what the majority of buyers/sellers here in LA read and believe. That and what their realtor tells them. As dryfly said:
"People, economists included, never look deeper than the surface but there is one mother of an iceberg down there."
Happy talk will prop up LA until a friend/neighbor loses their house, or a foreclosure sells for 30% less than comps, or they see their realtor working at Ralphs...
There's a lot of equity floating around in this fair city... Maybe a little unease, but not a lot of pain. Maybe I know too much. I'll have to stop coming here and spend more time at realtor.org.
OT... went to National Association of Rocketry by mistake. Try it.... kind of appropriate to the recent RE market in an odd way...
I've stated before that one of the reasons this'll all end up badly is due to all the denials that there's even a problem. They can't fix what isn't (reportedly) broken.
By the time they have to acknowledge it is (in fact) a problem, it's far too late to do anything about it.
I tend to favor the SGS stats that show us in a recession as of mid-2005; even if the "classic" formulas aren't the best, they do represent a consistent yardstick.
TJ,
Yeah I think we avoid an official recession, ie 2 quarters of neg GDP growth. On the other hand I think growth will be significantly slower than the 2.5-3.0% growth that most of the street is looking for. I expect the $ to be weak and that should help our net exports (not that we will run a surplus anytime in my lifetime, just that the current account deficit will stop getting bigger, and might shrink a lil). We are anniversarying high oil prices which should give a lift, and we are finally seeing wage growth higher than inflation (sure took long enough in this recovery). These are real offsets, and I think they should (note the word should, not will) be enough to stop the implosion. That being said, I think the risk to my forecast is on the downside, not the upside. I expect real GDP to grow about 1.0% this year.
here is some evidence of who was/is going to be affected by housing bust.
The company I work for is a vinyl window profile manufacturer. We sell to local/national fabricators. They make windows and sell it to builders. Our NoVa fabricator was dead since last summer. Now it slowly comes back. Not because of booming construction, but their stock drops to a low level. Our national fabricator become dead since the beginning of this year. So does fabricators in SF bay area. Canadian is doing well. Canadian west coast is doing better than east coast.
"are finally seeing wage growth higher than inflation"
Not sure what industries you're seeing this in. I actually doubt very much that this is happening at all. Labor markets were somewhat tight last year for specific highly-skilled workers, but for most currently they are lucky to have a full-time job making what they did in 2000, government cooked numbers notwithstanding. This sounds like more government statistics dished out for the perrenial optimists and perma-bull supply-side ideologues. I prefer SGS as tj said.
Hopefully you're not serious about any kind of wage growth working to counterbalance the mushroom cloud that is forming. This would be the mythical soft-landing and it's not wise to believe in such fairy tales. Besides, what's a 5% raise at work going to do for the FB that is in the hole $2K a month? Only more asset mega-appreciation can prevent the implosion and I haven't seen any sign of that next asset bubble that JSP can easily sink his teeth into.
IMO we may very well avoid an "official recession" this year, but I see no escape from a depression in the years ahead. Housing's not even the main event, and the show's barely gotten started.
There was a recent FRONTLINE on the takeover of the LA times by the TRIBUNE corporation and its goose-stepping corporate raider leader whose name I cant remember. He basically eviscerated an editorial dept that had won scores of pulitzers over decades.
In short, the LA TImes has become a total shill of the moneyed elites, and there's no point in trusting anything they have to say. Everything I've seen about CA is that its falling apart in the new suburbs, its even been on ABC, and that other neighborhoods are on their way. CA is TOAST.
IMO we may very well avoid an "official recession" this year
Wait, what? Two weeks ago you were certain we'd have a recession this year.
Also, while we're on the topic, a recession is not necessarily two quarters of negative growth. For example, the 2001 recession did not have two consecutive quarters of contraction.
This comment had more to do with conceding TPTB's ability to obfuscate than with true economic conditions. As shown by your 2001 reference, they've almost eliminated the possibility of recessions indicating "officially". We'll see how well that fares in the face of the coming depression.
That said, IMO we've been in a recession since 2005 (per SGS), and I still expect it to register with Wall Street and the general public later this year.
You know, not so long ago I wouldn't have even considered that you could break up a potential recession into those three categories: "official", "perceived", and IMO "real". Scary, no?
all of this activity driven by new housing build & MEW... and all of that driven by debt creation.
When you say Mew are you only allowing for the money that goes into the economy via "leakage" of borrowing into general none construction/home improvement consumption?
You still surely need to account for the home improvements that dont count as MEW that are possible via valuation increases and therefore greater borrowing?
Taken together the collapse in consumer spending caused by price depreciation has to be higher than might be obvious?
Also if you ignore declining residential investment spending which forms part of mew then for example an unchanging MEW does not provide an accurate picture of the declining "consumer" spending.
I suppose this is obvious but i wonder why people emphasise MEW? After all a significant amount of home improvement spending does not result in any house price increase at all.
We all know that consumer spending is a massive amount of the economy and so i wonder how people can accept price declines being possible without also arriving at mind boggling decreases in the ability of the consumer to contribute to the economy.
During the boom years anyone who bet that "this is as good as it gets" would have lost a lot of money.
Imo the same mistake is being made during the best years, people are assuming the situation is static.
Everything in this article is based upon the unsustainanble concepts of ever-increasing home prices, a buyer for that home, people who want to withdraw as much equity as possible, people who are happy to mortgage their house in lieu of pay increases, people who will spend that equity on non-durable junk, restaurants and services. If all those concepts hold true, and the future generation has even more money to spend on buying your house, all will be fine.
And since Santa was so good to me this year, I know I can count on the Easter bunny to be nice to me also.
This is the definition of inasnity:
"home equity built up during the boom ... that could support consumer spending and the housing market."
These people have got so out of touch with real economic forces that they have no idea what it means to produce.
I guess for them a "top producer" is loan broker who sell more HELOC....
"saving" is a sale at nordstrom (another great short ?)
and "serive industry is a mortgage bank "servicing a loan"
How far will this inasnity go ?
--
Optimism will keep the economy from going into a recession?
First, who all are optimistic? Second, if optimism can keep the economy from going into recession we wouldn't have had any since 1950s when optimism returned with a vengeance. Third, how many economists, or economic writers, have forecasted a recession until after the fact? 1%? Or, 2%??
Jas
This is just another myth promoted by the vested interests.
We published a counter to one of their other myths here:
http://www.viewfromsiliconvalley.com/id315.html
Stay tuned for actual facts.
ADD together subPrime and ALT A mortgages, then what ????
Half baked analysis going on by useless economists !
How bad will it get? CoreLogic estimates that about 32 percent of teaser-rate loans, or 460,996, will be foreclosed; 12 percent of adjustable-rate subprime loans, or 385,524; and 7 percent of market-rate adjustable rate loans, or 264,184 loans.
The study assumes housing prices stay flat with December 2006 levels. Each 1 percent drop in the value of homes will result in another 70,000 loans falling into foreclosure. Conversely, each 1 percent rise in home values will keep 70,000 loans from foreclosure.
"I can count on the Easter bunny to be nice to me also." LOL...
The Times article pretty much sums up the mindset that is keeping prices stupidly high on LA's west side. Knife catchers are still jumping in, enabling "equity rich" buyers to move up. There may be less sales... but sellers won't budge much yet because there are still people paying their prices.
This area is surrounded by a RE market going bust, but sellers and buyers are still whistling past the graveyard. When the zombies finally rise from the dead, so to speak, a lot of people are going to be very surprised.
Or... everything will just keep going up as is normal. And that would suck. For me as a potential prudent buyer, and for the future of this country.
Silly, silly. I sold at the peak and am renting. Let's say I had the desire to buy a mortgage again. Should I?
Median prices around here have dropped from $630k to around $540k. Compare this to the price I bought my last house for - $200k. Say I'm a good citizen and put 20% down - $108k. Now I need a loan for $432k - oops, I need a piggyback or jumbo loan. Shoot. When I bought my original house only the big spenders needed a jumbo in the McMansion neighborhoods.
OK, running it through a simple online mortgage calculator, this average dump would cost me $2,500 per month. Wait! We need to add my prop taxes to this. That will add an additional $5k on to the yearly cost, or $2,900/month approximately. Upkeep and insurance pushes it well above $3,000/month.
Compare this to my present $2,000 rent on a house in a (presently) $800,000 dollar neighborhood. For $3,000 I could buy an average house, and buy all the attendent downside risk too.
Puff pieces like this are a joke. Prices will come down because they will come down - reversion to the mean, subprime choke, or first time buyer lacking the ability to pay lofty prices. And I have a hard time imagining that, once the proud mortgage owners of America discover their biggest financial liability is in deflation, won't cut back spending. In fact - look at the first derivative, they already have! Ho Ho Ho.
San Diego = Dot.com ???
"Homeowners cashed out $640 billion in home equity last year, according to David Wyss, chief economist at Standard & Poor's. The average home has been selling at 3.2 times average household income, higher than the historic average of 2.6 times, although it is much higher in formerly hot markets such as San Diego, where the figure was 14, Wyss said. "
P/E - any one ????
But Dr. Deflation... You are forgetting the magical tax breaks!
Has the LA Times looked at equity withdrawal rates and:
Home Depot
Ford
GM
Williams Sonoma
Pottery Barn
HP
Dell
RECENTLY?
It seems undeniable that so far consumer confidence has not yet been changed by what is happening.
People hoping to profit from shorting the market might have to wait a while yet.
But for the consumer not to be affected by what is happening seems a hard ask for me. Only if monster lending practices come back can that part of the bubble that was inflated by those practices be reinflated. Otherwise the reinflation well need rises in wages or maybe much cheaper energy costs.
"Each 1 percent drop in the value of homes will result in another 70,000 loans falling into foreclosure. Conversely, each 1 percent rise in home values will keep 70,000 loans from foreclosure."
Let me just add that it's no good to think about this in terms of the median either. We've seen some median skewing recently due to low-volume anomolies favoring the higher-end market. A median price won't sell the house, nor will a bunch of rich people being able to sell theirs (same effect.) It's better to look at the mid and lower-priced stuff or maybe an avg. selling price/sq. ft. comparison to determine future foreclosure rates.
James add to that those affected or who will be affected by the slow down in completions & future new (not) build...
Lawn & garden mfgrs like Briggs & Stratton, Kohler, Honda & the machine builders who buy their engines (Toro, Simplicity, John Deere).
Appliance mfgrs like GE, Electrolux & Whirlpool
Window, door siding, roofing mfgrs like Anderson, Pella & Marvin.
Add to them all the supply chain support companies that make everything from loose parts, to switches, to fasteners, to paint. And there are way more of them than the OEMs I listed above.
There is a huge pyramid of activity 'portalling' through a few major outlets like HD & Lowe's... or directly marketed to the builders themselves (B2B direct contract)... all of this activity driven by new housing build & MEW... and all of that driven by debt creation.
No - there is no problem. Now move along you people.
People, economists included, never look deeper than the surface but there is one mother of an iceberg down there.
They study seems to focus only on the issue of subprime foreclosure and assumes that MEW will be a strong factor in keeping consumer spending going. It doesn't provide any data to support this nor does it explore how builders and SFH resales sales might be effected by significant changes in underwriting standards.
This article misses the point entirely. The subprime implosion isn't the cause of anything. It's merely another consequence of the housing downturn, already in its 2nd year. Looking past subprime to see the next likely victim, say credit / lenders in the AltA space and HBs is what an anticipatory stock market does.
Sheesh. Pathetic. Add another hopeless article to the duped list for a good laugh in a couple of years...
...but I think there's enough offsets and optimism to keep the economy out of recession.
Dirk, are you serious? Sounds exactly like quotes from 1929 & 2000.
Not to pile on, but no mention of why sales are "off" and house prices only slightly so while wages remain stuck in 2000.
So...who is going to buy what where?
Not until affordability issues are addressed.
Looks to me like house prices are much more likely to adjust than one time payments to wage earners.
This article goes well with Greenspan and his "if prices would rise 10%, the subprime problem would go away" comment.
Who will buy the houses at these prices with old fashioned underwriting guidelines? There simply will not be enough qualified buyers (esp in CA).
tj - there are two factors in play.
One - there are a lot of wealthy 'people - real wealthy. They done good by Bush. Check Nordstrom's sales the last few quarters.
Two - recessions are measured in 'aggregate'... two quarters of negative GDP. Not my personal GDP but aggregate GDP.
We might not go into 'official' inflation as long as profits remain high due to wage arbitrage & debt continues to flow freely... even if a lot of folks continue to go deeper into hock & suffer. It might feel like a recession to most but that doesn't mean it will be 'scored' as one.
There is still an awful lot of carry trade & FCB intervention... check the USD-JPY chart... something fishy happened on March 5th... as a result few folks are at risk of having their credit cards cut up anytime soon.
Until that happens I'd still say an 'official recession' is out there a ways.
"This article misses the point entirely."
True, but this kind of info is what the majority of buyers/sellers here in LA read and believe. That and what their realtor tells them. As dryfly said:
"People, economists included, never look deeper than the surface but there is one mother of an iceberg down there."
Happy talk will prop up LA until a friend/neighbor loses their house, or a foreclosure sells for 30% less than comps, or they see their realtor working at Ralphs...
There's a lot of equity floating around in this fair city... Maybe a little unease, but not a lot of pain. Maybe I know too much. I'll have to stop coming here and spend more time at realtor.org.
OT... went to National Association of Rocketry by mistake. Try it.... kind of appropriate to the recent RE market in an odd way...
dryfly, agreed.
I've stated before that one of the reasons this'll all end up badly is due to all the denials that there's even a problem. They can't fix what isn't (reportedly) broken.
By the time they have to acknowledge it is (in fact) a problem, it's far too late to do anything about it.
I tend to favor the SGS stats that show us in a recession as of mid-2005; even if the "classic" formulas aren't the best, they do represent a consistent yardstick.
TJ,
Yeah I think we avoid an official recession, ie 2 quarters of neg GDP growth. On the other hand I think growth will be significantly slower than the 2.5-3.0% growth that most of the street is looking for. I expect the $ to be weak and that should help our net exports (not that we will run a surplus anytime in my lifetime, just that the current account deficit will stop getting bigger, and might shrink a lil). We are anniversarying high oil prices which should give a lift, and we are finally seeing wage growth higher than inflation (sure took long enough in this recovery). These are real offsets, and I think they should (note the word should, not will) be enough to stop the implosion. That being said, I think the risk to my forecast is on the downside, not the upside. I expect real GDP to grow about 1.0% this year.
dryfly,
here is some evidence of who was/is going to be affected by housing bust.
The company I work for is a vinyl window profile manufacturer. We sell to local/national fabricators. They make windows and sell it to builders. Our NoVa fabricator was dead since last summer. Now it slowly comes back. Not because of booming construction, but their stock drops to a low level. Our national fabricator become dead since the beginning of this year. So does fabricators in SF bay area. Canadian is doing well. Canadian west coast is doing better than east coast.
I tend to ignore anything the LA Times has to say.
No recession. Ha!
"are finally seeing wage growth higher than inflation"
Not sure what industries you're seeing this in. I actually doubt very much that this is happening at all. Labor markets were somewhat tight last year for specific highly-skilled workers, but for most currently they are lucky to have a full-time job making what they did in 2000, government cooked numbers notwithstanding. This sounds like more government statistics dished out for the perrenial optimists and perma-bull supply-side ideologues. I prefer SGS as tj said.
Hopefully you're not serious about any kind of wage growth working to counterbalance the mushroom cloud that is forming. This would be the mythical soft-landing and it's not wise to believe in such fairy tales. Besides, what's a 5% raise at work going to do for the FB that is in the hole $2K a month? Only more asset mega-appreciation can prevent the implosion and I haven't seen any sign of that next asset bubble that JSP can easily sink his teeth into.
Dirk,
Well, you're certainly an optimist!
IMO we may very well avoid an "official recession" this year, but I see no escape from a depression in the years ahead. Housing's not even the main event, and the show's barely gotten started.
There was a recent FRONTLINE on the takeover of the LA times by the TRIBUNE corporation and its goose-stepping corporate raider leader whose name I cant remember. He basically eviscerated an editorial dept that had won scores of pulitzers over decades.
In short, the LA TImes has become a total shill of the moneyed elites, and there's no point in trusting anything they have to say. Everything I've seen about CA is that its falling apart in the new suburbs, its even been on ABC, and that other neighborhoods are on their way. CA is TOAST.
I'm pretty sure this isn't what the LA Times writer actually meant to say...
"...sub-prime foreclosures will be only a small percentage of total foreclosures"
dk, sounds like a Freudian slip!
IMO we may very well avoid an "official recession" this year
Wait, what? Two weeks ago you were certain we'd have a recession this year.
Also, while we're on the topic, a recession is not necessarily two quarters of negative growth. For example, the 2001 recession did not have two consecutive quarters of contraction.
Steve,
This comment had more to do with conceding TPTB's ability to obfuscate than with true economic conditions. As shown by your 2001 reference, they've almost eliminated the possibility of recessions indicating "officially".
We'll see how well that fares in the face of the coming depression.
That said, IMO we've been in a recession since 2005 (per SGS), and I still expect it to register with Wall Street and the general public later this year.
Steve,
You know, not so long ago I wouldn't have even considered that you could break up a potential recession into those three categories: "official", "perceived", and IMO "real". Scary, no?
Dryfly
Can you comment on what you said here?
When you say Mew are you only allowing for the money that goes into the economy via "leakage" of borrowing into general none construction/home improvement consumption?
You still surely need to account for the home improvements that dont count as MEW that are possible via valuation increases and therefore greater borrowing?
Taken together the collapse in consumer spending caused by price depreciation has to be higher than might be obvious?
Also if you ignore declining residential investment spending which forms part of mew then for example an unchanging MEW does not provide an accurate picture of the declining "consumer" spending.
I suppose this is obvious but i wonder why people emphasise MEW? After all a significant amount of home improvement spending does not result in any house price increase at all.
We all know that consumer spending is a massive amount of the economy and so i wonder how people can accept price declines being possible without also arriving at mind boggling decreases in the ability of the consumer to contribute to the economy.