Hmmmm.... it's hard to take any analysis of the housing situation seriously that doesn't use the word "haircut".

CR,

Thanks and kudos for securing the OK to publish, and pass a 'thanks' back to the GS folks as well.

Was there any sort of inventory forecast, we could back into the GS view of months to clear the inventory overhang...

Listen to Mr. Zandi, he is in phase with us.

Paper Economy - A Real Estate Bubble Blog

This is way too optimistic. If starts don't fall lower than 1.10 million, the inventory will never be worked off. It shows that while Goldman is trying to be more honest than most, they still believe in incremental downward adjustments, rather than truth or insight.

It's only a 13.5% drop. People who work with house prices have to start learning how to compound negative percentages!
mort_fin | 08.29.07 - 9:29 pm |

Yep, and you'd need a 15% gain to get back to eve

Another implication of all this I don't see really discussed is "retirement shock".

There are a lot of people depending on their home equity and stocks to fund their retirement.

What happens if it's not there?

I know people in this situation, and I ask them "Why not put your money in something safe like high-grade bonds?"

And they say, "but I need something that returns more like 8%-10% a year to meet my retirement goals."

We've cultivated this belief in everybody that these kind of returns are a reasonable expectation. Everybody should get double digit returns even though real wealth in this economy isn't growing at anywhere close to that rate (even after subtracting inflation from the rates of return).

I think one real world consequence of this whole mess is that many people might have to work 5-15 years longer than they expected to get to retirement.

Sonoma county is already down more than 15% from the peak,and has a long way to go to return to fundamentals.the most optimistic i can get is a further 50% over 3 years,which assumes no hit to our economy (paging mr murphy).This is going to devastate a lot of counties in california that are already sinking under unfunded liabilities.does Rob Dawg have a guess as to how many counties will file bankruptcy?

What is so incredible, so incredible is that, when I talk to my co-workers (people who are making in high $80K), they have no Fu(*&ing clue about all of these problems.

They care more about Sunday sports than anything else in the world.

I would like to see the Appendix/Footnotes. I read "Investment" to decline. Is this home builders activity, or sales activity (new or existing?)?

I am sorry but these/this summary is far to vauge to guess anything.

In this market you have three customers:
1. I wanna own my own home (first time)
2. I wanna upgrage.
3. I wanna consolidate - I'm an empty nester.

So where are we:
1. New lending practices cuts more out of the new home purchase because, well, its tough to get financing.
2. Home sales are slow, no momentum to trade up.
3. Aging demographics - it is an population looking to downsize.

These create the matirx of where we are now. Add to this, the unsold inventory (which is huge) means a further drag on home sales.

This may be the first time as a country we find true deflation. Remember, apart from raizing a family, a house is meant to be a nest egg. Something to sell later in life, to retire, and live well. This may be the first occasion since the 30s that many folks will have had the American dream but now find themselves at the mercy of pure economics and market forces.

I sense that as the population ages in the next 2-5 years, as these folks wake up and say holy crap, we need the equity to live on for the next 15-20 years, there will be a mad rush to sell. A mad, maybe almost manic need to get rid of "it". But who knows.

Markets, on a local basis have always had hair cuts - Vancouver Canada in the early 80s a 30% haircut in less than a year and SoCal in the early 90s almost 20% in three years.

Things seem to recover. Markets find a balance. My sense is however is you look at the long view of house appreciation, and take the norm over 30 years - we saw a 60% aberation to the upside. Will we now see a 60% aberation to the downside?

ac,

And they say, "but I need something that returns more like 8%-10% a year to meet my retirement goals."

Time for another Suze Orman heckle, not that I have anything against her personally. I heckled the following article to some of my friends back in April and just happened to remember it.

Keeping Your Cool in a Choppy Market
You may have read that I currently have the bulk of my own money invested in zero coupon municipal bonds that earn about 5 percent tax-free, and a smaller portion of my assets invested in stocks. That doesn't mean I think everyone should load up on bonds.

...

Besides, that 5 percent tax-exempt yield is nothing to sneeze at. I would have to earn more than 7.5 percent in a taxable investment to match that. Anything that earns that much is going to carry a whole lot more risk than my municipal bonds.

Think about how ignorant that statement is. You can't earn 7.5% without taking on a whole lot more risk. Okay, I'll buy that. Yet, there she is earning the equivalent of 7.5%. Uh huh, yeah right. As if only she could spot the value there and the rest of the market didn't understand risk vs. reward.

So what happened recently to make this story amusing?

Muni bond funds hit by 'perfect storm'
"A 'perfect storm' of factors has caused the municipal bond market to erode rapidly over the past week," George Friedlander, a municipal strategist at Citigroup, wrote in a note to clients on Aug. 17. "Specific high-grade sectors have virtually imploded."

That's a perfect ending to a perfect heckle, if I say so myself, lol.

Sadly, I suspect you are right. There are way too many people who think they "NEED" a great rate of return, as opposed to simply wanting it.

Barley,

2. I wanna upgrage.

Freudian slip?

Is that what happens when someone wants to upgrade but can't?

(Sorry. Couldn't help it. )

Damn. I agree with CR, that is definitely the first realistic forecast I've seen. And GS has a lot of credibility.

What makes no sense is that these people make this prediction, while others at GS and the rest of the Street are forecasting no recession and that it's a great time to buy stocks.... which is it? Because if prices are going to fall like that, there sure as hell is going to be a recession.

Frankly, this is a great time to go short....

Stag..Mark>LOL! Thanks

Re Munis - I took a position in this almost two months ago and I'm very happy!

I can not to wait to see the Back to School sales and how quickly retail fronts the Hallowweeeaannnn.

What I am a bit surprized about is the lack of Back to School adverts and TV ads. It might seem as though even wireless companies have cut back a bit.

Has anbody seen the large play from Dell or HP for Back to School? I have not. And its now over.

Basic question: Are consumers becoming tired, or just strapped out?

It seems to me that by 2008 the builders will have worked through their lots.

"Worked through" is a funny term. I recommend "choked on" (causing BK) or "been crushed by" (still solvent but crushed by firesales and existing property taxes).

Even should the supply half of the equation somehow balance by the end of 2008, I have very strong doubts that the demand side is going to hold up it's end of the bargain. In order to afford the mortgage on a half price house in a bubble area, you still need a job or two or four, and given the "engine" of US employment over the last 4 years has consisted of 1) Real Estate and 2) Consumer spending of their MEW, I have a hard time imagining demand not racing lower faster than prices and supply come down.

It's easier for me to imagine the goons from "The Grapes of Wrath" protecting tracts of empty houses from families of squatters wandering through California and Florida. Kind of like "Gated Communities", but a little different...

Touche,

Sometimes you just have to anticipate breakdown (foreclosures) and build them into your forecasts. If you think there are going to be a huge amount of foreclosures, account for that in your formula when forecasting the next few years. Full information is not likely. The future is not certain, but it is probable.

Keeping Your Cool in a Choppy Market

You may have read that I currently have the bulk of my own money invested in zero coupon municipal bonds that earn about 5 percent tax-free, and a smaller portion of my assets invested in stocks. That doesn't mean I think everyone should load up on bonds.

Mark,

I don't like Suzi's advice. I think it's potentially dangerous.

Even though stocks outperform over long periods of time, I don't think the average person should own stocks.

My reasoning involves human nature and the fact that we haven't had a major recession or bear market in well over a generation.

In addition to the 1930s stock market nightmare, we had a relentless 17 year bear market starting in 1965 that took values down something like 70%. The 2000-2002 bear market was relatively minor in comparison.

Given that, I don't think most people should own stocks for the following reasons:

1) The average person simply doesn't have the psychological stamina to withstand a serious bear market. They won't be able to handle year after year of declines in their portfolio value. Many will sell at steep losses. Most people will sell at some loss near the bottom, because by definition that's what a market bottom is.

2) Serious bear markets are often accompanied by serious recessions. Businesses and people sell because they have to pay the bills, and no one is willing to make loans. It's a cruel reality of stocks that they're usually worth the least when you need them them most - i.e. you've lost your job in a recession. Your committed long-term investor may have no choice but to sell.

3) All this money coming into stocks from non-discriminating buyers (ask the average person with stocks in their 401k what a stock or p/e ratio is), allows companies to produce poorer quality stocks and still have a market, as well as focusing more of their business efforts on keeping the equity prices high as opposed to long-term development of their core business. Growth of real wealth could suffer at the expense of creating fantasy paper wealth in the financial sphere.

It's worth recalling that the Nikkei was around 40,000 in 1989 and is at about 16,000 almost 18 years later. Long-term hold outs probably aren't too happy. Of course, that could probably never happen here.

ac,

I agree.

Greenspan told us everything we needed to know about investing in 1967.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

I'm not a gold bug. I did own gold and silver from 2004 to 2006 though. What I take from his comments are that you should never become a permabull on anything. There really is no safe store of value. You have to be willing to adapt, have the ability to know when you don't know something, and learn from either your mistakes or someone else's. The last thing you should do is turn permabull on anything AFTER everyone else has.

What Greenspan basically stated was that there can be no way for the herd to protect itself from the welfare state. Once you realize that, you can better position yourself, as a member of the herd, to avoid most of the risk while still enjoying at least some of the rewards. Being eaten, to put it bluntly, is a killer.

Clearly the posters here (even the bulls) are looking for danger or we wouldn't be here. That's certainly better than most of the herd is doing. Even if we are wrong about the dangers, and we were therefore too cautious, at least we're not wrong to be looking. Ignorance really isn't bliss. Further, few fortunes were lost because people were too cautious. Of that I am fairly certain.

The London Times Online 8/30/07

"One of Germany's most venerable financial institutions, the state-owned Landesbank, is beginning to crumble from within."

Landesbanks at risk as WestLB becomes latest to show strains - Times Online

Above were mentions of impact on CA counties. What about pension funds, and the investment pools held by state and county treasurers? These guys must be quaking in their shoes.

I'm a two-bit treasurer for a local government entity. We entrust our surplus funds to the county treasurer, who administers an investment pool of a few hundred million.

I called him to ask exactly what vehicles he holds those funds in. Here's the list: corporate/commercial paper, GSE's, FHLMC's, the state pool, and some in bank CD's.

At least four times he reassured me that it was all "collateralized."

The next day, we requested that he transfer half of our surplus funds to our FDIC insured bank account.

It's possible that one of the next shoes to drop will be the default of funds like these. Illiquidity is a problem that goes far beyond lenders, brokers, IB's, and hedge funds.

"A 'perfect storm' of factors has caused the municipal bond market to erode rapidly over the past week," George Friedlander, a municipal strategist at Citigroup, wrote in a note to clients on Aug. 17. "Specific high-grade sectors have virtually imploded."

Stagflationary Mark

The "perfect storm" only hurts you if you have to sell RIGHT NOW or you're hold notes of counties at risk of default. Otherwise it's a great buying opportunity if you hold to term in the right states & counties.

Re: Eurobanks. The problem they're having is that they have fully implemented Basel II standards, which forced them to load up on MBS' to meet increased capital requirements.

Us Americans, as usual, bribed our regulators to do the job half assed, which helped matters.

... but the NAR told me that home prices never go down, housing recessions have been consigned to the scrap heap of history, it's different this time!

It will be hilarious watching Larry-boy "FunYun" try to spin this disaster over the next year. That is if he doesn't bail for a job waiting tables at Dennys.

As far as going short, there is still time. I'm moving away from homebuilders since the prices have pretty much already collapsed. Other shorting ideas are banks and makers of consumer electronics and other baubles the masses won't be needing when they have to move back in with Mom and Dad (or live under a bridge.)

Submitted Stories

Japan's Retail Sales Drop on Storm, Sliding Sentiment

Japan's Retail Sales Drop on Storm, Sliding Sentiment (Update2) - Bloomberg.com

Stagnant wages and higher taxes may delay a recovery in spending and leave the economy dependent on sustained overseas demand.

Commentary on the large SPX option trades of a few days ago...

Dispelling the 'Bin Laden' Options Trades | Options/Futures | Financial Articles & Investing News | TheStreet.com

Bob,
A watched pot never boils. We're all following this daily. The average citizen probably didn't know anything was wrong with housing at all until 3 months ago.

Liv, I think I am the only person left in the US who owns my home "free and clear."

Leastwise, the only person I know.

As for percentage of equity for the rest, well, it declines every day.

ReadingNlearning: Well, if you put it that way, how about a ballpark figure of down by two-thirds?