"Consumer spending growth has remained stable over the last 1-2 years as rising equity prices and sturdy income growth have offset the drag from falling mortgage equity withdrawal (MEW) and slowing home prices"
I call bullshit. MANY HELOCs originated over the past 4 years had cushion not yet extracted that were a source of continued consumer spending. I know plenty of people that continued to pull from untapped lines of credit. Once they are tapped I doubt they will be able to go back to the well. Some are probably already dry. 2008 won't be pretty.
energyecon, thanks. Hmmm ... I might not be bearish enough!
barely, MEW is definitely declining - and consumer spending has stayed reasonably strong. I think most of us agree that both are about to decline sharply!
"Consumer spending growth has remained stable over the last 1-2 years as rising equity prices and sturdy income growth have offset the drag from falling mortgage equity withdrawal (MEW) and slowing home prices" [GS]
"I call bullshit. MANY HELOCs originated over the past 4 years had cushion not yet extracted that were a source of continued consumer spending. I know plenty of people that continued to pull from untapped lines of credit. Once they are tapped I doubt they will be able to go back to the well. Some are probably already dry. 2008 won't be pretty." [barely]
Absolutely! Every statistic I see shows real spending down year over year...
Thank you for exhibit 16. I wanted to see somehting like that for a long time (to estimate the rate of real homeownership, which starts at 80% equity. The others are mere homedebtors.). I am a little surprised that there is no spike in the 95 to 100% range, containing all the people who own their house free and clear. Are they left out of the graph?
Homeowners with negative equity lose their ability to respond to adverse financial events such as job loss or mortgage reset by refinancing or selling their home, and they therefore become much more likely to default. - GS
The dripping altruism is ruining my laptop. Let's be clear what the problem is here. Lenders lose any leverage over negative equity homedebtors to get them to perform. This isn't about some underwater buyer being forced to disgorge an obligation he cannot afford. This is about lenders getting triple hit with forced asset custody, portfolio write downs and lost revenue streams.
Psychologically speaking if they said the odds were 60% chance, this would be big.
In any case, these odds aren't very useful on a case by case basis (like any individual hand in hold-em) since either we have one or we don't. Seems like GS knows they could increase the odds just by increasing the odds.
Nice call on the starts, CR. If I remember, your last estimate was 1.1 million. This is worse but not unexpected to readers of this blog.
On the MEW, I wonder if this includes all mtgs - 1st and 2nd's (including HELOC's) and if Heloc's are included, was the total line amount used? I assume so.....but it would be interesting to see a chart of HELOC's with the Line Amount vs Balance. Exhibit 16 is an eye-opener and maybe a Heloc chart would offer additional insight on future spending potential.
Reason I ask is that I am seeing more and more refi customers with Heloc's that have drawn zero since inception. They obtained them as a "freebie" when the 1st closed..........
Yeah...so I am wondering are they projecting both the percentage of home owners in 2007 with negative equity as well as how many with a price drop of 15%?
One thing they don't seem to account for is a 30% drop in prices in California wipes out much more total dollars of equity than a 30% drop in, say, Texas.
Kett82, you make a great point, but I think this is all ballpark stuff - so a few percent doesn't matter much. It does show that a large number of homeowners will be underwater soon.
GS doesn't touch on this - but I've seen homeowners walk away from their homes simply because they were underwater - no job loss, no medical crisis, nothing other than anger that they owe more than their house is worth.
I believe we will see that behavior in the next couple of years.
A question regarding home price changes?. On what basis are they calculated?
1) Comparing median to median over time??? This would be skewed because lower price houses sell when higher priced houses don't, particulary in a slow market.
2) Same house price to previous price?? Difficult as houses move more slowly than SIV assets and in a down market, many sales are desperation or required because of a life change and thus lower than a free market.
3) If $500,000 houses drop to 400,000 and sell 4, but $100,000 houses drop to 98,000 but sell 20 units...how much is the percentage price drop? 20%? or 2% or 11% or some other number?
While I agree prices are soft, I doubt the real loss of value is as great as the Cassandras proclaim, which will make the apparent recovery in 2009 or 2015 or whenever, even more skewed upward at that time.
Does anyone know what the basis for announcements of loss of value are really based on???
hopeinsd, good point. And they are projecting 30% declines in a number of markets, from the report:
If nominal home prices fall 15% at the national level, parts of California, Florida, Arizona, and Nevada are likely to see price declines of around 30%.
New home sales will fall below 500k for at least a couple of years. With many/most homebuilders about to go BK, 750k starts is probably too optimistic. We are a nation awash in a huge housing inventory overhang (aka massively overbuilt), and it's going to take several years (3 to 7 years depending on where you live) to solve that problem.
Even with equity the persons ability to respond to a financial event is diminished. Lenders are much less likely to give cashout to 85% or even 90% now. Effectively meaning that a person with hardship will lose their house even if they have some equity.
So I think the "ability to respond to financial hardship using home equity" line is signficantly to the right of the "negative equity" line.
The difference would be, to steal a phrase from Thornberg, the duration of "Cashtration" (Cashtration- the length of time a person is rendered financially impotent after a home purchase, in this case I am using it in terms of a home loss). If one loses a home to foreclosure, they are cashtrated longer (due to the lack of available credit) than someone who is able to sell their way out from under their debts.
I agree they'll walk. Two vacant units purchased in the last year. Lived in by owners for 10 months, then attempted to rent them. They've been empty for a while.
One couple I knew, didn't realize they were almost underwater, before they left. They forgot to take into account Realtor commission. I wasn't to popular with them for the rest of that late summer BBQ.
When the Fed does a Repo/ReRepo to add/drain liquidity, the amount they add/drain depends on the +- EFF-FFT spread. They always have more requests than fills and who gets the money depends on collateral and bid. The assumption is, the money will be used to balance reserves, but the FED doesn't care how it is used, no more than they care how discount window money is used, as long as the collateral is sufficient.
With hard assets laying a turd... what are the banks going to use for collateral?
We built our house in 1974 for $60,000 and it was worth about $300,000 this summer but we've raised a family, had a life, lived well and it is home. Priceless.
My neighbors bought their house (comparable to mine) two years ago for $ 235,000. Ford closed the local plant where he workd, his wife took up with another gent, they split and lo and behold and they stopped making mortgage payments and lost it in foreclosure.
A shark more confident than I bought it out of foreclosure for about 195,000, did a wee bit of work and resold on a quick flip for 225,000...so has my house lost $25,000 (10%) in value?
Hell no...special circumstances next door, and so it is at the margins. The core is solid but the marginal changes drive the commentators.
My house is paid for, it's home, I don't care if it's worth $10,000 or $1,000,000 or anything between...and for any of my neighbors not planning to sell within the next five years (most of them) it doesn't matter either.
James. " These IB just can't say the dreaded word "recession", can they? I wonder what it will take to get them to admit we are in one."
They won't, they'll deny it. By the time the backwards looking numbers confirm recesson they will say we are "probably already climbing out". Some day they will actually be right, but most everyone will agree by then. The problem is, the recession this time around could be drag for quite a bit longer than anyone would care to admit.
swampfella - you miss the point entirely. You will not necessarily feel less wealthy now, but you'll be a bit more nervous, and if you lose your job, you still have to pay property taxes. And if you have to relocate for a new job, you'll have to sell possibly, and you won't like that I suspect. It's nice to be in the 1/3 of homesitters who own free and clear, but it doesnt change anything to be free and clear or not when it comes to calculating your net worth. The issue is whether you run into a cash flow problem when your paper net worth isn't as high as you thought and you have to move an asset in a market that isn't quite as liquid as it used to be, at least not at the price you'd like.
Also, your statement in no way justifies that the core is solid. It actually proves a very good point. Prices are set at the margin, and the margin is getting bigger and bigger, but trading slower and slower. When more of your neighbors become like the one you mentioned, and more of the buyers become like that, with unstable income, how exactly do you expect prices to clear in any direction but down? Just be lucky for now that you dont have to sell.
barely, they will be wrong about the "coming out of recession" argument, probably for as long as they've been wrong about the housing bottom argument. Heck, probably a lot longer.
"and so it is at the margins. The core is solid but the marginal changes drive the commentators." - swampfella
Swampfella - thanks for your observations. While I do not minimize the economic effects of subprime defaults, MEW reductions, the credit freeze and outright mortgage fraud (especially here in Florida), I also believe that many families share your circumstances. Most people will weather these events just fine because they did not participate in subprimes, liar loans, no money down, etc. In fact, some folks used the low interest rate environment to accelerate their mortgage repayments by converting to 15 year mortgages, rather than pulling out equity.
Goldman's analysis looks reasonable to me. Consumption growth is lower and next year it will be lower yet, but it will not fall off the cliff.
The economy will experience a period of below trend growth, after which many of the current global imbalances will have unwound and a new wave of global prosperity will ensue. (IMO)
"If the economy does enter a recession, prices could decline as much as 30% nationwide."
Jeez, I know GS is short, but the implication of this is borderline apocalyptic. A 30% NATIONAL decline implies 50% or worse in some of the bubble regions. Fannie and Freddie and C and God knows who else have already been crippled by what's happened so far -- what kind of shape will they and the rest of the financial system be in after 30% has been whacked off the value of $20 trillion in U.S. residential real estate?
That's $6 trillion -- equal to almost half of total U.S. equity market cap. Can you say debt-deflation meltdown?
What GS is forecasting, in other words, is that the US is going to just barely skirt a recession/depression that even Helicopter Ben might not be able to get us out of.
I wanted to make the same comment as Peter Principle. A 30% nationwide decrease in nominal values will do a lot of damage. On the other hand, when you look at the charts of housing prices, it does seem possible if not likely.
I think American economists are saying, "Hell, not too much chance of recession because the weak dollar means we'll be exporting like crazy." The only problem with this reasoning is that the rest of the world is about to enter the same housing-induced recession. Europe (except for Germany and a few other parts) has seen a greater increase in housing prices than the U.S. That's about to end, and European consumers are going to start spending less, and those American exports will have one fewer place to go.
We NEED a 30+% drop in the coastal regions to return to any notion of sanity. Prices have more than doubled in 5 to 7 years while wages have been flat to declining. There are only 3 ways out of that 1) Toxic loans - oh, yeah, we already did that and it didn't work, 2) massive wage increases, which will happen about when I am crowned king of the world in the first week of never, 3) Huge price declines.
We've all seen the inflation-adjusted housing price graph and how it leaps almost exponentially near the end before starting to turn around - why wouldn't it plummet to the mean or even below the mean this time down? It's not like Americans are actually wealthier now? We have more electronic widgets, but the cost of everything we NEED has increased tremendously and our jobs and benefits are vanishing. How can housing remain absurdly costly in an environment of rampant inflation that eats into declining purchasing power? Toxic loans won't "save" us, so maybe lower prices will?
As for the economy effect, the die is already cast on that one. For years, the debt-pushers have tried to use debt in place of real wages, and now we are nearing Peak Debt where people simply have little to no ability to take on more debt. There's no way out of this trap, IMHO, so let it fall as it may. Lower housing prices will go nicely with the future where people consider having any job a privelage.
Is the 15% to 30% declines real or nominal? If these are real declines over the next 5 years thats no big deal. If these are nominal declines it is a huge deal.
In prior periods of real price declines the decline was primarily attributable to high inflation vice nominal price declines. Also note that high inflation has occured immediately after prior armed conflicts (thats how we shrink our war debt). But it could be different this time.
If nominal, you can basically take this plot, and a projected equity decline curve (optimistic or recession), and some historical ratios of foreclosures to negative equity, and try to project out foreclosure rates for the next few years.
Real vs. nominal doesn't matter when wages are NOT increasing. We can't say, "Oh, inflation will make up the difference" when the only inflation people are seeing is in the price of goods (expect over $4 a gallon gas by next summer barring some major external event) while salaries are flat to declining.
In a hollowed-out economy based upon minimum wage, semi-part time McJobs with no benefits and no path for advancement, how can prices stay absurdly high? Unless we're all going to get huge, government mandated pay increases or start our own hedge funds based upon piling debt higher and deeper, prices have to plummet.
The Goldman forecast leads one to some fairly drastic conclusions.
The point is that if real estate values (nominal or real) fall 30%, then the value (nominal or real) of the mortgage debt on all that real estate is going to have to fall by something comparable, otherwise the great American middle class is going to be reduced to peonage. You're talking about a situation in which an appreciable fraction, if not a majority, of the homeowners in this country will find themselves upside down. Instead of owning their homes, their homes will own them. In an earlier economic system this was called "serfdom."
Nagahappen. Not without armed struggle, anyway.
There are three ways the debt can be reduced -- it can be liquidated (kick the serfs off the land) it can be forgiven (i.e. the biggest cramdown in the history of the world) or it can be inflated away. Presumably, even in a true stagflation, the value of a real asset like housing would hold up better than the value of paper debt.
Of course, if the proportion of floating to fixed rate debt is very high (as in the UK) and creditors are allowed to reset rates freely, then inflating away debt becomes difficult to impossible. (Which, of course, was the whole idea behind adjustable rate mortgages.)
But most U.S. housing debt is still fixed, so presumably an inflationary solution is possible, if the bond market as a whole is willing to go along. Past experience suggests it WILL go along and will happily ply the carry trade -- unless things get completely out of hand.
None of this speaks well for the Fed's credibility. Nimble, indeed.
The Fed's fundamental problem is that it is now the central bank of the most heavily indebted nation in history (or at least, the most heavily indebted nation that hasn't just fought a major war.) And if there's one group that inflation unquestionably helps, it's debtors -- or at least, debtors with lots of fixed-rate debt. If Goldman is right (or even half right) they're going to need all the help they can get.
You can listen to the conference call:
Why Housing Still Holds the Key to US Monetary Policy
Replay Numbers: 800-332-6854 or 973-528-0005 (toll)
Conference Entry Code: 4890513
Best to all.
CR,
Kudos on scoring GS blessing to use their research, it has been fascinating to watch the IB's and MSM move closer and closer to your viewpoint.
"Consumer spending growth has remained stable over the last 1-2 years as rising equity prices and sturdy income growth have offset the drag from falling mortgage equity withdrawal (MEW) and slowing home prices"
I call bullshit. MANY HELOCs originated over the past 4 years had cushion not yet extracted that were a source of continued consumer spending. I know plenty of people that continued to pull from untapped lines of credit. Once they are tapped I doubt they will be able to go back to the well. Some are probably already dry. 2008 won't be pretty.
energyecon, thanks. Hmmm ... I might not be bearish enough!
barely, MEW is definitely declining - and consumer spending has stayed reasonably strong. I think most of us agree that both are about to decline sharply!
Best to all.
"Consumer spending growth has remained stable over the last 1-2 years as rising equity prices and sturdy income growth have offset the drag from falling mortgage equity withdrawal (MEW) and slowing home prices" [GS]
"I call bullshit. MANY HELOCs originated over the past 4 years had cushion not yet extracted that were a source of continued consumer spending. I know plenty of people that continued to pull from untapped lines of credit. Once they are tapped I doubt they will be able to go back to the well. Some are probably already dry. 2008 won't be pretty." [barely]
Absolutely! Every statistic I see shows real spending down year over year...
Thank you for exhibit 16. I wanted to see somehting like that for a long time (to estimate the rate of real homeownership, which starts at 80% equity. The others are mere homedebtors.). I am a little surprised that there is no spike in the 95 to 100% range, containing all the people who own their house free and clear. Are they left out of the graph?
Hmmm...
So they are making a guess on where the dotted line in Exhibit 16 has moved?
There a couple of sentences there that don't really follow each other...
Regards,
Homeowners with negative equity lose their ability to respond to adverse financial events such as job loss or mortgage reset by refinancing or selling their home, and they therefore become much more likely to default. - GS
The dripping altruism is ruining my laptop. Let's be clear what the problem is here. Lenders lose any leverage over negative equity homedebtors to get them to perform. This isn't about some underwater buyer being forced to disgorge an obligation he cannot afford. This is about lenders getting triple hit with forced asset custody, portfolio write downs and lost revenue streams.
CR,
Any idea how they come up with the 40% chance?
I mean, do they just pull that out of a hat?
Psychologically speaking if they said the odds were 60% chance, this would be big.
In any case, these odds aren't very useful on a case by case basis (like any individual hand in hold-em) since either we have one or we don't. Seems like GS knows they could increase the odds just by increasing the odds.
Note that Exhibit 16 is for Dec. 2006.
These IB just can't say the dreaded word "recession", can they? I wonder what it will take to get them to admit we are in one.
Nice call on the starts, CR. If I remember, your last estimate was 1.1 million. This is worse but not unexpected to readers of this blog.
On the MEW, I wonder if this includes all mtgs - 1st and 2nd's (including HELOC's) and if Heloc's are included, was the total line amount used? I assume so.....but it would be interesting to see a chart of HELOC's with the Line Amount vs Balance. Exhibit 16 is an eye-opener and maybe a Heloc chart would offer additional insight on future spending potential.
Reason I ask is that I am seeing more and more refi customers with Heloc's that have drawn zero since inception. They obtained them as a "freebie" when the 1st closed..........
Thanks
Peter T,
The verbage does say "mortgage holders", so it does not include the homeowners without mortgages.
Does anybody know if the mortgage balances include seconds, or is it just the equity after the first mortgage?
Dear 4822,
Yeah...so I am wondering are they projecting both the percentage of home owners in 2007 with negative equity as well as how many with a price drop of 15%?
Regards,
Peter T, this graph is for homeowners with mortgages. Just under 1/3 of all homes in the U.S. are free and clear.
Best Wishes.
They're using 11 month old numbers on the % of equity borrowers have. I think the neg-equity and sub-15% have grown since then.
One thing they don't seem to account for is a 30% drop in prices in California wipes out much more total dollars of equity than a 30% drop in, say, Texas.
Kett82, you make a great point, but I think this is all ballpark stuff - so a few percent doesn't matter much. It does show that a large number of homeowners will be underwater soon.
GS doesn't touch on this - but I've seen homeowners walk away from their homes simply because they were underwater - no job loss, no medical crisis, nothing other than anger that they owe more than their house is worth.
I believe we will see that behavior in the next couple of years.
Best to all.
A question regarding home price changes?. On what basis are they calculated?
1) Comparing median to median over time??? This would be skewed because lower price houses sell when higher priced houses don't, particulary in a slow market.
2) Same house price to previous price?? Difficult as houses move more slowly than SIV assets and in a down market, many sales are desperation or required because of a life change and thus lower than a free market.
3) If $500,000 houses drop to 400,000 and sell 4, but $100,000 houses drop to 98,000 but sell 20 units...how much is the percentage price drop? 20%? or 2% or 11% or some other number?
While I agree prices are soft, I doubt the real loss of value is as great as the Cassandras proclaim, which will make the apparent recovery in 2009 or 2015 or whenever, even more skewed upward at that time.
Does anyone know what the basis for announcements of loss of value are really based on???
After Hours-
Wells vists the confesional
FRE reduces dividend.
Its not Friday, is it??
hopeinsd, good point. And they are projecting 30% declines in a number of markets, from the report:
If nominal home prices fall 15% at the national level, parts of California, Florida, Arizona, and Nevada are likely to see price declines of around 30%.
That is a lot of homeowners underwater.
Best to all.
swampfella, prices are based on Case-Shiller index.
Best to all.
New home sales will fall below 500k for at least a couple of years. With many/most homebuilders about to go BK, 750k starts is probably too optimistic. We are a nation awash in a huge housing inventory overhang (aka massively overbuilt), and it's going to take several years (3 to 7 years depending on where you live) to solve that problem.
Even with equity the persons ability to respond to a financial event is diminished. Lenders are much less likely to give cashout to 85% or even 90% now. Effectively meaning that a person with hardship will lose their house even if they have some equity.
So I think the "ability to respond to financial hardship using home equity" line is signficantly to the right of the "negative equity" line.
The difference would be, to steal a phrase from Thornberg, the duration of "Cashtration" (Cashtration- the length of time a person is rendered financially impotent after a home purchase, in this case I am using it in terms of a home loss). If one loses a home to foreclosure, they are cashtrated longer (due to the lack of available credit) than someone who is able to sell their way out from under their debts.
Average Joe,
50% of statistics are made up, 40% are pulled out of thin air, and 10% are based on careful number crunching of numbers pulled o thin air.
Cheers,
Certainly, GS has now turned far more bearish than CR ever was. Would you then put the bottoming of starts at 2009 with GS' number, CR?
I imagine GS has been quite busy accumulating those shorts...expect their recession chance to have an inverse relationship to their net long position.
You can put whatever clothes on a salesmen you want...at the end of the day, they're still salesmen!
CR,
I agree they'll walk. Two vacant units purchased in the last year. Lived in by owners for 10 months, then attempted to rent them. They've been empty for a while.
One couple I knew, didn't realize they were almost underwater, before they left. They forgot to take into account Realtor commission. I wasn't to popular with them for the rest of that late summer BBQ.
Cheers,
Wells fargo sets aside $1.4 billion for loan losses and is going to liquidate a portfolio of $11.9 billion worth of home equity loans.
Here is the article
OT-
My nominee for best humorous mortgage related blogging from someone not named Tanta:
An Open Euology to the Option ARM | Blown Mortgage
When the Fed does a Repo/ReRepo to add/drain liquidity, the amount they add/drain depends on the +- EFF-FFT spread. They always have more requests than fills and who gets the money depends on collateral and bid. The assumption is, the money will be used to balance reserves, but the FED doesn't care how it is used, no more than they care how discount window money is used, as long as the collateral is sufficient.
With hard assets laying a turd... what are the banks going to use for collateral?
here is real life...
We built our house in 1974 for $60,000 and it was worth about $300,000 this summer but we've raised a family, had a life, lived well and it is home. Priceless.
My neighbors bought their house (comparable to mine) two years ago for $ 235,000. Ford closed the local plant where he workd, his wife took up with another gent, they split and lo and behold and they stopped making mortgage payments and lost it in foreclosure.
A shark more confident than I bought it out of foreclosure for about 195,000, did a wee bit of work and resold on a quick flip for 225,000...so has my house lost $25,000 (10%) in value?
Hell no...special circumstances next door, and so it is at the margins. The core is solid but the marginal changes drive the commentators.
My house is paid for, it's home, I don't care if it's worth $10,000 or $1,000,000 or anything between...and for any of my neighbors not planning to sell within the next five years (most of them) it doesn't matter either.
So did we just lose $25,000...of course not.
James. " These IB just can't say the dreaded word "recession", can they? I wonder what it will take to get them to admit we are in one."
They won't, they'll deny it. By the time the backwards looking numbers confirm recesson they will say we are "probably already climbing out". Some day they will actually be right, but most everyone will agree by then. The problem is, the recession this time around could be drag for quite a bit longer than anyone would care to admit.
swampfella - you miss the point entirely. You will not necessarily feel less wealthy now, but you'll be a bit more nervous, and if you lose your job, you still have to pay property taxes. And if you have to relocate for a new job, you'll have to sell possibly, and you won't like that I suspect. It's nice to be in the 1/3 of homesitters who own free and clear, but it doesnt change anything to be free and clear or not when it comes to calculating your net worth. The issue is whether you run into a cash flow problem when your paper net worth isn't as high as you thought and you have to move an asset in a market that isn't quite as liquid as it used to be, at least not at the price you'd like.
Also, your statement in no way justifies that the core is solid. It actually proves a very good point. Prices are set at the margin, and the margin is getting bigger and bigger, but trading slower and slower. When more of your neighbors become like the one you mentioned, and more of the buyers become like that, with unstable income, how exactly do you expect prices to clear in any direction but down? Just be lucky for now that you dont have to sell.
barely, they will be wrong about the "coming out of recession" argument, probably for as long as they've been wrong about the housing bottom argument. Heck, probably a lot longer.
So did we just lose $25,000...of course not.
swampfella | 11.27.07 - 7:12 pm | #
Yes, you did. You're just so rich you didn't notice. (and in a purely philosophical way, it's true)
and it was worth about $300,000
In swampfella's "reality" a gain of 240K is real but a loss of 25K is not.
LOL!
"and so it is at the margins. The core is solid but the marginal changes drive the commentators." - swampfella
Swampfella - thanks for your observations. While I do not minimize the economic effects of subprime defaults, MEW reductions, the credit freeze and outright mortgage fraud (especially here in Florida), I also believe that many families share your circumstances. Most people will weather these events just fine because they did not participate in subprimes, liar loans, no money down, etc. In fact, some folks used the low interest rate environment to accelerate their mortgage repayments by converting to 15 year mortgages, rather than pulling out equity.
Goldman's analysis looks reasonable to me. Consumption growth is lower and next year it will be lower yet, but it will not fall off the cliff.
The economy will experience a period of below trend growth, after which many of the current global imbalances will have unwound and a new wave of global prosperity will ensue. (IMO)
Wait a second...
They didn't blame it on subprime...
The media is still calling this a subprime problem...
The chearleaders at CNBC need to realize what Goldman said without saying the word "subprime"...
So did we just lose $25,000...of course not.
Heh. But the Californian who bought the flipped house next door as an investment just did.
Zero. Sum. Game.
Get busy makin' kids.
Cheers,
prat
"Goldman now puts the odds of a recession in 2008 at around 40%, and they see the unemployment rate rising to 5.5% by the end of 2008."
5.5% and only a 40% chance of recession? That sounds foolishly optimistic.
"If the economy does enter a recession, prices could decline as much as 30% nationwide."
Jeez, I know GS is short, but the implication of this is borderline apocalyptic. A 30% NATIONAL decline implies 50% or worse in some of the bubble regions. Fannie and Freddie and C and God knows who else have already been crippled by what's happened so far -- what kind of shape will they and the rest of the financial system be in after 30% has been whacked off the value of $20 trillion in U.S. residential real estate?
That's $6 trillion -- equal to almost half of total U.S. equity market cap. Can you say debt-deflation meltdown?
What GS is forecasting, in other words, is that the US is going to just barely skirt a recession/depression that even Helicopter Ben might not be able to get us out of.
I wanted to make the same comment as Peter Principle. A 30% nationwide decrease in nominal values will do a lot of damage. On the other hand, when you look at the charts of housing prices, it does seem possible if not likely.
I think American economists are saying, "Hell, not too much chance of recession because the weak dollar means we'll be exporting like crazy." The only problem with this reasoning is that the rest of the world is about to enter the same housing-induced recession. Europe (except for Germany and a few other parts) has seen a greater increase in housing prices than the U.S. That's about to end, and European consumers are going to start spending less, and those American exports will have one fewer place to go.
We NEED a 30+% drop in the coastal regions to return to any notion of sanity. Prices have more than doubled in 5 to 7 years while wages have been flat to declining. There are only 3 ways out of that 1) Toxic loans - oh, yeah, we already did that and it didn't work, 2) massive wage increases, which will happen about when I am crowned king of the world in the first week of never, 3) Huge price declines.
We've all seen the inflation-adjusted housing price graph and how it leaps almost exponentially near the end before starting to turn around - why wouldn't it plummet to the mean or even below the mean this time down? It's not like Americans are actually wealthier now? We have more electronic widgets, but the cost of everything we NEED has increased tremendously and our jobs and benefits are vanishing. How can housing remain absurdly costly in an environment of rampant inflation that eats into declining purchasing power? Toxic loans won't "save" us, so maybe lower prices will?
As for the economy effect, the die is already cast on that one. For years, the debt-pushers have tried to use debt in place of real wages, and now we are nearing Peak Debt where people simply have little to no ability to take on more debt. There's no way out of this trap, IMHO, so let it fall as it may. Lower housing prices will go nicely with the future where people consider having any job a privelage.
Is the 15% to 30% declines real or nominal? If these are real declines over the next 5 years thats no big deal. If these are nominal declines it is a huge deal.
In prior periods of real price declines the decline was primarily attributable to high inflation vice nominal price declines. Also note that high inflation has occured immediately after prior armed conflicts (thats how we shrink our war debt). But it could be different this time.
I'm with R. Timm--real or nominal?
If nominal, you can basically take this plot, and a projected equity decline curve (optimistic or recession), and some historical ratios of foreclosures to negative equity, and try to project out foreclosure rates for the next few years.
One gets very ugly answers doing this.
Real vs. nominal doesn't matter when wages are NOT increasing. We can't say, "Oh, inflation will make up the difference" when the only inflation people are seeing is in the price of goods (expect over $4 a gallon gas by next summer barring some major external event) while salaries are flat to declining.
In a hollowed-out economy based upon minimum wage, semi-part time McJobs with no benefits and no path for advancement, how can prices stay absurdly high? Unless we're all going to get huge, government mandated pay increases or start our own hedge funds based upon piling debt higher and deeper, prices have to plummet.
Real vs. nominal matters a lot for going underwater on a loan which is made in nominal dollars.
The Goldman forecast leads one to some fairly drastic conclusions.
The point is that if real estate values (nominal or real) fall 30%, then the value (nominal or real) of the mortgage debt on all that real estate is going to have to fall by something comparable, otherwise the great American middle class is going to be reduced to peonage. You're talking about a situation in which an appreciable fraction, if not a majority, of the homeowners in this country will find themselves upside down. Instead of owning their homes, their homes will own them. In an earlier economic system this was called "serfdom."
Nagahappen. Not without armed struggle, anyway.
There are three ways the debt can be reduced -- it can be liquidated (kick the serfs off the land) it can be forgiven (i.e. the biggest cramdown in the history of the world) or it can be inflated away. Presumably, even in a true stagflation, the value of a real asset like housing would hold up better than the value of paper debt.
Of course, if the proportion of floating to fixed rate debt is very high (as in the UK) and creditors are allowed to reset rates freely, then inflating away debt becomes difficult to impossible. (Which, of course, was the whole idea behind adjustable rate mortgages.)
But most U.S. housing debt is still fixed, so presumably an inflationary solution is possible, if the bond market as a whole is willing to go along. Past experience suggests it WILL go along and will happily ply the carry trade -- unless things get completely out of hand.
None of this speaks well for the Fed's credibility. Nimble, indeed.
The Fed's fundamental problem is that it is now the central bank of the most heavily indebted nation in history (or at least, the most heavily indebted nation that hasn't just fought a major war.) And if there's one group that inflation unquestionably helps, it's debtors -- or at least, debtors with lots of fixed-rate debt. If Goldman is right (or even half right) they're going to need all the help they can get.
Could be a hell of a bull market for helicopters.