Thornberg: 'Housing a slow moving train wreck'
Submitted by
CalculatedRisk on Thu, 10/19/2006 - 8:40am (33 comments)
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Based on current trends in real, inflation-adjusted wages, Thornberg's predictions do not hold true for me.
For example ...
From 1999 to 2005, real wages in CA have dropped -3.6% while housing prices have doubled (nominally).
Nationally, real wages have dropped
-6%.
Thus, IMO, Thornberg's thesis is not the bet I would make.
"In a housing bubble ... prices tend not to fall," he said. "Housing is not something you day trade."
I really feel like this guy is a sell out.
If he makes grossly inaccurate predictions, I don't really care whether it's due to political / diplomatic motives or not - as an economist he is not credible.
I would have to agree with Mr. Campbell. Real wages have been down. Here in the Bay Area many cities have seen their populations drop or stay level over the past 5-6 years. At the same time, housing prices have doubled and tripled. Completely unrational. Not to mention, they are still breaking ground on thousands and thousands of new units. I just don't see how the price-flattening scenario can happen in light of the above. I'm not counting on the wage inflation either. If anything, corporations will likely see sales falling as the housing ATM dries up. Fewer sales=lower profits=no wage gains.
Sorry for the idiotic typo: unrational should be irrational. I wonder where my brain goes at times!
It is nearly 2007- the economic cycle is late in the game- to hear Thornberg say the economy is 'good' might be a fleeting scenario. Housing is very overpriced in many geographic regions, you have huge demographic changes around the corner, huge amounts of debt and more. Yes Thornberg is a sell out and whore.
In nominal terms, though, the data speak here. Residential housing prices tend not to fall. Cf http://www.cswcasa.com/pdfs/prices.pdf in which you can see several instances where real prices drop, but none in which nominal prices do. Given more detail, say at http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_History_101706.xls you will find some nominal decreases, but also preposterously low standard deviations, reflection the disinclination of prices to drop in nominal terms.
Could nominal prices drop from current levels? Sure. Is someone who looks at historical data and sees that residential prices tend not to fall much a shill? I don't see that.
I think housing may STAY overpriced as long as there is demand from investors. Look at the stock market, it has been overvalued since 1996 when Greenspan claimed 'irrational exuberance' and the p/e average went and stayed above 25.
But housing is different because more can be built to dampen prices. And if prices don't fall soon enough, then homebuilders should keep building more houses profitably. And if investors continue buying those new houses, it should cause a fall in rents for tenants. Should be good for many renters, but lower the rate of return on rental properties and make housing a more difficult investment to hold.
Maybe this is why homebuilder stocks are rebounding- there is more investor demand for housing even if the expected returns are low.
I blame the Chinese for lowering returns on everything.
But then again they are also responsible for falling rents which should raise the standard of living too.
For nominal prices to not drop it is all about 2 things, the economy and access to easy credit.
If we lost jobs and the ability to refi on a whim, foreclosures will force the issue. When NEED TO SELL > normal housing demand, prices will drop.
If you look back at old DQ press releases from the 90's they talk about how lending standards were the #1 factor in if a house went into foreclosure or not. High lending standards = low foreclosure rates. Well I dont think anyone thinks we are in an enviroment of high lending standards, so if there is any slowdown in the economy it could get very ugly.
If nominal prices cannot fall but real prices must, there is a third alternative, and that is higher than anticipated inflation. Of course, the Fed should prevent that, and they are talking very tough these days. But the central bank hawkishness may vary in inverse proportion to middle-class bankruptcies and foreclosures.
An off-topic question for CR or others: Does anyone know whether government securities held by the Federal Reserve are "debt held by the public" or "intergovernmental holdings"? TIA!
"In a housing bubble ... prices tend not to fall," [Thornberg] said. "Housing is not something you day trade."
Worse than wrong. Prices are set at the margin. In other futures type speculation the "last price" isn't very important for the "next price" because there is no buying on margin. Houses are almost always bought on margin and thus the "last price" carries great weight.
Poor Thornberg, he's drunk the kool-aid. True prices tend not to fall. That's called stickiness. If this were past cyclical or economic declines then yes, stickiness would apply. Stickiness resulted from people owning one home. substantial equity positions and stable expenses. No longer.
We need Thornberg watch like david(blogger) has learha watch.
I have seen Thornberg making predictions all over the place depending on the audience/customers i think.
That would also be CYA for him to claim credit irrespective of the way bubble is headed....
If home prices don't fall why is San Deigo off 4% YOY and 8% from it's peak? Ummmmmm...is that not Fallin?
Is someone who looks at historical data and sees that residential prices tend not to fall much a shill?
My gripe with Thornberg is I don't think he really believes that prices will stay flat. I have a problem with a person who's playing the part of a politician masquerading as scientest. In my experience this is dangerous.
With regard to historical data, I think you can make a very good case that it may not apply to this situation:
http://graphics8.nytimes.com/images/2006/08/26/weekinreview/27leon_graph2.large.gif
Here in SoCal, let me tell you what residential housing prices did during the 1990s downturn.
I just spoke with a lady who bought a condominium in Encinitas, CA (a coastal community about 20 miles north of San Diego) for $139,000 in 1989.
That was the peak of the cycle.
At the bottom of the cycle in 1995, the condo was selling for $85,000. That's a 39% fall.
In late 1999, she sold the condo for $157,000.
When anyone tells you that housing prices don't fall - even in CA La La Land - don't believe it.
Here is a collection of Thornberg speaks!
4/21/2006 The Daily Bruin | Error
He said the housing bubble is 20 to 30 percent off its absolute peak, and with another three to four months of sales volume drops, it will be absolutely clear that the housing bubble has peaked.
September 28, 2005
California's housing boom appears to be peaking, and the resultant slowdown is expected to produce "weak growth" in the state's economy during the next two years and a possible recession by the end of 2007.
That's the view of economists at the UCLA Anderson Forecast, which plans to release its widely watched quarterly outlook this morning.
"There are some signs that the housing party is ending," said Christopher Thornberg, senior economist at the UCLA group and author of its California forecast
8.26.05
NOW. Politics & Economy. Housing Boom or Bubble. Q and A on Mortgages with Allen Fishbein of the Consumers Federation | PBS
This can only work as long as you have new people to enter the market and keep this pyramid growing. Functionally what it is, it's a pyramid. And the pyramid works as long as you keep entering people at the bottom end.
Now when you start thinking about interest-only, variable-rate loans, what your talking about is a market that is so distended and needs these new buyers [to] enter the market so desperately that these mortgage companies will do anything to make these people qualify for a home. And that implies getting them involved in very risky loan situations that they should not be in, because that's the only way they can get into the market.
What you're seeing is a market that's really coming close to its last leg. It's running outta people entering the bottom of the pyramid, and therefore is resorting to crazier and crazier financial instruments to get these people in. It's just like back in the stock market days of 1928-1929, just before that big crash, when all sorts of people were borrowing against their stock holdings, to buy more stock, thus inflating the making-- to a greater and greater and greater extent. And that's sorta the same idea of what we're seeing in this particular market, where these loans of a symptom of an overheated market, not a cause of it nor necessarily any verification that we're not in a bubble
12-08-2004,
(California, U.S. in a Housing 'Bubble,' UCLA Forecast Says - Los Angeles Times
In an outlook to be formally released today, forecasters say California and the nation are beset by a housing "bubble" that will depress construction next year, slowing the nation's economic recovery.
Yet the fallout from the bubble in California won't be devastating, according to the UCLA Anderson Forecast. Indeed, the Golden State's economy will expand at a faster clip than the nation's in 2005, thanks in part to a recovering Bay Area, the widely watched forecast says.
All in all, next year is shaping up as "solid but not spectacular" for California, said Christopher T
I don't think this predicition by Thornberg is a 'sell out'. Sounds pretty reasonable - some modest price declines then a long period of stagnation with inflation eating away at values.
"Well I dont think anyone thinks we are in an enviroment of high lending standards, so if there is any slowdown in the economy it could get very ugly."
We don't need a slowdown in the economy, just a slowdown in house price appreciation. No one can afford homes at these prices absent the yearly ATM withdrawals.
If nominal prices cannot fall but real prices must, there is a third alternative, and that is higher than anticipated inflation. Of course, the Fed should prevent that, and they are talking very tough these days.
Fed might not be able to prevent it. Especially if the Chinese & others decide they don't want dollar assets anymore. Considering all we import and how little we produce compared to the past - we might see inflation & stagnant growth simultaneously as the Fed keeps interest rates high to fight off weak dollar driven inflation while the economy sputters domestically (due to lack of tradeable activity to offset all the prior consumption & imports).
In which case prices for RE might stay flat or even appreciate but because inflation is far worse than we anticipate now, it still loses major ground in real terms.
It just depends on so many things - including what others outside our country do with 'our' dollar.
At the 1989 peak, people tended to put 20% down & take out a fixed rate mortgage. Everybody was convinced RE prices only go up.
Even with real money invested, San Jose median prices fell -27% over the next few years. 1989 buyers were underwater for a decade. The dot-com bubble pumped so much money into the valley that they were finally bailed out.
At the 2005 peak, there was a tendency for 80/20 loans (so NO money down) and adjustable, or even pay option, mortgages. Payments and debt service will go up, regardless of what happens to prices.
A big reason people think such maneuvers still make sense is the expectation prices will rise continue rising. If you can't make the paytments, you can still flip it for a profit.
Even if you believe in the destiny of the value to produce the next new thing, it will simply not be possible for people to hold on through 10 years of flat prices waiting for it.
Compounding the nonsense from Thornberg is inflation will lead to more jobs going off-shore, not raises for those of still here. This is not the 70's with unions and skilled workers holding leverage over corporations.
Companies will see increasing inflation driving the US cost premium upwards, which will increase the savings gained by going to China or India.
For more clear thinking, visit:
http://www.viewfromsiliconvalley.com
Thanks!
"I don't think this predicition by Thornberg is a 'sell out'. Sounds pretty reasonable - some modest price declines then a long period of stagnation with inflation eating away at values."
Would you use the term "train wreck" to describe that scenario? Sounds like a soft landing to me. I think what bothers some of us (myself included) is that he's all over the board- it's a "train wreck" but "your home will cost the same amount in 5 years as it does today".
Mr. (or Ms.) viewfromsiliconvalley-
Well said. I also enjoy your web site very much, please keep up the good work.
Nominal home prices in many areas are falling. In about 40% of CA (soon to be more), in AZ, in Reno, in No. Va., in MA, in much of FL (see Sarasota!), and to a lesser extent in much of the midwest. We broke all "upside" moves in term of historical gains in prices relative to per capita income growth (a better measure than the "wages" referred to above), and any "downside historical benchmark" is likely to be violated as well. The LEHC discussion on the Phoenix housing market (sadly, only to subscribers), really said it all!
dwr - I agree he does seem a bit bi-polar. That is a major knock.
At first I wrote a long post about how Thornberg had to be right and at the same time wrong - since he's covered all the bases. I then ate it - it was redundant with what others were saying.
And I agree it doesn't look like a 'train wreck' to me yet but then I define 'train wreck' by my experience have lived & worked in the Midwest through both the 'rust belt' and the 'farm crisis'. I know a train wreck when I see one and we aren't even CLOSE to that... not yet.
But the small drop - long sideways slide looks like a winning call to me.
However to those who have only experienced up-n-up... and are leveraged... it will seem like a wreck. Well they don't know a real wreck, do they. Hopefully they will never know.
Of course that is what my dustbowl depression father told me all through the late 70s and 80s. So nothing really changes all that much, eh?
"We don't need a slowdown in the economy, just a slowdown in house price appreciation. No one can afford homes at these prices absent the yearly ATM withdrawals."
It will work the other way around, though. A slowdown in housing price appreciation will cause a slowdown in the economy because so many people are living beyond their income via the housing ATM. And things will spiral downwards from there.
(Though I suspect some people have lived as you described - paying their mortgage with equity withdrawals!)
Since the condemnation of Thornberg has continued, despite wcw's point, a point which is based in an credible reading of history, I don't really know what to do. Our host has featured Thornberg regularly in coverage of the real estate market and its likely impact of California and national economic performance, and there is little sign Thornberg is anything but a fair-minded, smart economist. Why all the spittle, folks? Why is there a question of character just because he sees an outcome different from the one others see?
This comes down to one side saying "it's different this time" and the other side saying it isn't. It is different every time, and we never know how it will be different till after the fact. This is not a cause for casting asparagus, people.
And lastly, basing a critique not on what the guy says, but on what you believe he thinks, without any supporting evidence? Please no.
k harris,
Yes, as much as I like Chris Thornberg personally - and I do respect him as a good economist - when he says that "housing prices do not tend to fall in a housing bubble" he is just flat incorrect.
And I do mean nominally, as well as adjusted for inflation.
I'm been in and around the SoCal real estate for over 40 years, and I can tell you from first-hand experience as well as personal observation, that housing prices do fall.
What amazes me, quite frankly, is that anyone can say otherwise.
BTW, did you read my post above this one where I told of a condominium price falling from $139,000 in 1989 to $85,000 in 1995? Those were nominal prices, and I assure you this was not a cherry picked example.
If I asked Chris to prove me wrong, I promise you that he could not.
Facts are facts, especially when you have first-hand experience from the street and not some academic ivory temple.
Thornberg's characterization of price behavior during a housing bust is correct, but where he falls short is in not taking into account that the current level of over-valuation in the US/UK housing markets is the most extreme ever seen. Purchasing a home versus renting is now six standard deviations expensive to the long-term average, and the total appreciation over the last ten years in these markets exceeds that seen in Japan in the ten years to 1989, which was the previous world record holder in the real estate bubble sweepstakes. We now know that real estate prices fell in Japan every year from 1990 to 2005, and that the average apartment in Japan that sold for $660,000 in 1989 is now worth $290,000. While Japan has some unique issues such as lack of population growth, why is a similiar result for the Anglo-Saxon world housing bust not on anyone's radar screen? I'm sure an economist like Thornberg has studied Japan. I know the Fed has studied Japan as was so terrified by what they saw they slashed fed funds to 1%, ironically putting us on the path to the same soft depression scenario Japan has faced for the better part of two decades now. Perhaps that outcome is so unpleasant to contemplate that nobody in an "official" position wants to acknowledge the possibility?
Why all the spittle, folks?
I think it's because 'fair minded and smart' economists don't often use terms like 'train wreck' to refer to what they later describe as 'flat pricing'.
That kind of banter is reserved for people making comments on blogs.
Sorry, the apartment prices I cited were not for Japan as a whole, but for Tokyo prefecture, which was certainly some of the most over-valued real estate the world has ever seen.
The train-wreck is "slow moving" and will result in the value of houses now being "the value of your house in 2011." Making train-wreck the focus of the critique when Thornberg is being pretty clear about what he meant is kinda small minded. Me, I don't get quoted in the paper. Thornberg does. I'm not surprised that he is a bit more colorful in speech than I would be, but what he means is clear.
And let's not pretend he said prices don't fall. He said they tend not to fall. A not-so-subtle distinction.
Everybody who has spent any time at all on this stuff knows that prices fall locally. They tend not to fall nation wide or on a broad regional basis. Nationwide, volume drops and we wait for things to get sorted out through the passage of time rather through nominal price adjustment. That's the most common pattern. "The most common pattern" is a pretty good definition of "tends to" I should think.
Is this time different? Everybody has an opinion, and nobody here has a good reason to think their own opinion is better than Thornberg's. We won't know whether he is wrong, falling short, smoking crack, or whatever, for some time to come.
???? strange behavior here
This article clearly cherry picked words from Thornberg. The "quote" as printed is:
"In a housing bubble ... prices tend not to fall,"
Terrible non-sentence for so many vitriolic retorts, did you see the ellipsis? Who knows how out of context it is stretched?
Seriously, if this were a formal paper or his own article, or a more thorough analysis of his speech, maybe, but this is clipped blurb.
I really think some of you are overreacting. Cut the guy some slack...sheesh.
Personally, I'd be surprised if nominal prices didn't fall. In the Cambrian area of San Jose, CA, prices fell 10%-15% during the initial stages of the early nineties bust. Nominal prices also fell in many other California cities.
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