UCLA has always been obsessed with job loss and high interest rates as the only causal variables associated with price declines. First of all, they have almost entirely ignored the potential impact from mortgage resets. The financing structure of the past five years is totally without precedent. Widespread hikes in monthly payments are likely to have just as detrimental an effect as job losses - both variables compromise servicing ability.
As for interest rates, UCLA is typically negligent here as well. The elasticity of demand for credit is typically path-dependent. In other words, it doesn't matter where rates are - it matters where they've been. There's over-saturation and buyer exhaustion right now. If rates stay as low as they are right now, no new buyers will be attracted by greater affordability. Only the first derivative, the CHANGE in rates, will do that.
Finally, UCLA ignores the credit cycle. As subprime mortgage holders begin to go belly-up, credit will get cut off to them. They are the plankton of the housing market. When subprime credit and the whole zero-down IO crap goes away, the market will get a LOT less liquid at ALL pricing levels, since housing is a trade-up market. They have been the bottom tier buyers. As they vanish in 2007, so will the housing stock turnover which so far still has a good 20-25% further to fall.
UCLA is negligent in ignoring exotic financing. Nowhere in their economic forecast do they consider 0% down, stated income, subprime borrowers, Option ARMs, resetting loans,etc. It is simply not mentioned, as if it didn't exist.
Let this housewife give the UCLA Anderson economists a little heads up.
UCLA Anderson economists are stuck in the 90's: housing prices can only go down when major job losses occur in at least 2 sectors of the economy, one of which is usually manufacturing. Well, guess what: manufacturing is so low now that we're not going to have major job losses there. So does that mean that we will never have another recession?
They fail to realize that prices will drop when large numbers of homeowners cannot make their mortgage payment, REGARDLESS of the reason. Whether it's an adjusting ARM that they cannot pay or refinance out of, a job lost in the real estate collapse (over half of all jobs since the last recession are in real estate, so the bust in housing feeds on itself), or a job lost as the mortgage equity withdrawal requires fewer retail clerks.
However, the UCLA Anderson economists do make some very good points in their forecast, and are very aware of our dependence on foreign borrowing, our reliance on MEW, our consumption in excess of production.
It boggles my mind that they cannot see the obvious though. It really makes me wonder who is funding them? Wachovia?
Wachovia, who just bought out the biggest subprime lender in CA, was a sponsor of one of their seminars. So they don't want to upset their sponsor, so they are as remiss in their forecast as the other 95% of economists who cannot see a recession until it's smacked them in the a$$.
I'm sorry to be so harsh, but it is criminal for any economist to report on the housing market without mentioning today's exotic lending environment. So the UCLA Anderson economists are worthless in my book.
However, it concludes "This corresponds with a 43.5% correction in house prices." Which is inaccurate since this is not price data. If the Fed gets its wish of approx 2% inflation this might correspond to something more like a 30% price decline. Still harrowing.
BTW, I agree that UCLA has botched their analysis by not taking into account the effect that unprecedented widespread price increase will have on overbuilding, speculation, vacancies in the existing home market, damage to the lending industry, and consumer finances/spending.
I was the Accounting Manager for a semiconductor start-up some years back. One of many hats was Payroll Manager. I was shocked at the number of highly paid people ($80k+ in the early 1990's) who lived hand to mouth, borrowing against their 401k's, needing advances for 1 week business trips.
I think these high-level economists are not aware that the lack of financial discipline is pervasive in most levels of American society. It's not just the Wal-Mart employees who live paycheck to paycheck and are severely in debt.
The micro-economics of these resets, one-by-one is going to roll-up to one big problem for housing when these mortgages reset en masse.
Speaking of series' on housing, we went from Silicon Valley to Florida for 10 days around Xmas & saw a number of "interesting" (in the Chinese sense of the word) items...
UCLA was going around giving talks - talking down an economic slowdown in housing. They used San Diego as an example of how housing was doing just fine. Then San Diego went Tango Uniform. Here is the embarrasing link. Google Videos Error
2007 IS GOONA BE A BODACIOUS BOOMER: SINCE 1914, the DJIA gained 50% on average from its midterm election year low (2006) to its subsequent high in the following pre-election year high (2007). There were 23 such occasions, the 5 best boomers were 89.6%, 81.2%, 74.5%, 73.6% and 65.7%. There were NO downers. THAT SMELLS A LOT LIKE DJIA 15900!
Since 1974, the NASDAQ gained 83% on the same basis.
WITH ALL THE NASTY HEADWINDS OF THE PAST 2 YEARS NOW AT OUR BACKS (THE FED AND OIL), I'm getting excited, very excited. Any normal 4-7% market correction along the way is the last opportunity to back-up the truck.
I suspect that BEARS will still be analyzing the early-2006 building plunge as the market rockets past DJIA 14000 by mid- year. I suspect that Gary Shilling will still be 100% in bonds...and I suspect that Roubini will still be talking about the "suckers rally." The other investment pigmy, some investment ant by the name of Schiff, will still be maintaNing that 2006 markets didn't even keep up with inflation....and Paul Krugman, The NYT's bought and paid for socialist and Grapes of Wrath propagandist will be urging that the Dems to accelerate spending for the greater good of society, urging them not to waste political capital on tax hikes.
The Good Lord gave us these PERMABEARS and financial pigmys to provide us with tomorrow's market ammunition. They are the "Wall of Worry" from upon which the rest of America will view wealth and prosperity.
In reference to the UCLA video: when it came to the crunch, Thornberg waffled; CR's analysis is much more detailed and to the point; CR also gets a much higher "grade" on presentation. Although Thornberg is a very bright guy, it seems to me he has been presenting to college students too long.
He did mention that the only significant employment growth in California during this cycle has been in construction, finance, and retail.
Buying a house is an emotional decision, not a rational decision. I can't think of anywhere in this over-inventoried country, where it is not cheaper to rent than buy. Even speculators, who would only buy a house if someone else wanted to buy the house, made emotional decisions. There are only three rational reasons for buying a house: 1. buying it is cheaper than renting it, 2. buying it and renting it out yields the investor a better rate on capital than leaving the money in a bank cd, and 3. someone is willing to pay more for the house that the speculator just paid. I don't see any of these conditions existing in 2007.
Major U.S. home builder Lennar Corp. (NYSE: LEN) announced this morning that it will have earnings in their 4Q almost 50% below estimates and that they are taking about 1/2 billion in impairment charges.
As with other previous builders before it, this sets a new record in impairment charges.
And yet the financial media continues to bleat that the worst in housing is behind us. I've heard convincing arguments why the HB stock prices have remained resilient through this downturn, but please, make no mistake -- the housing crisis nowhere close to the bottom. Indeed, here's Lennar CEO in today's press release:
"Market conditions continued to weaken throughout the fourth quarter and we have not yet seen tangible evidence of a market recovery."
Brian makes a good point about the market being driven by the bottom. How can a middle income family in the Boston suburbs afford a $500k house? Partly by selling the house they paid $200k for five years ago for $350k.
The big jumps in home values were, to a large extent, fueled by the big jumps in home values...
BEARS OPEN THE NEW YEAR BY LOOKING BACK TO FLOGGING OLD HOUSING/BUILDING STORY:
With both eyes fixed FIRMLY on their target in Jurassic Park and squarely in Wall Street's rear-view mirror, SCARED BEARS continues to relentlessly discover for the world what has already been discovered, analyzed and discounted over one-half a year ago. The BEARS latest supporting evidence is the Lennar financial report that tells us all what happened last year.
The time an attention desperately devoted to just 6% of GDP, the only big weak spot on the radar screen, illustrates the failed projections of the WART DOCTORING SCARED BEARS.
Meanwhile, the building stocks are up 35% during the past 6 months. Too bad today's investor's can't get yesterday's stock prices!
It won't be long before the financial pigmy's and internet blogging, talking-head and self-promoting WART DOCTORS provide the conclusive evidence needed to convince us all that 2006 really was a lousy year.
I am a stock bull and bought the perfect stocks in the past right at the bottom. While you guys are thinking this out, I will be thinking up more imaginary stories to get your attention. I have an imaginary time-machine you know.
Stocks are going up because of M&A activity. Over $600,000,000,000 worth of companies has been removed from our public stockmarket into the hands of private equity firms. These companies will be flipped, the way real estate was, until they are worth far less than their last acquisition price. Then we can all watch the liquidity bubble burst.
If you bought the S&P with the British Pound, you were in the red last year. The stockmarket didn't go up, the dollar went down.
Oh look!
A group of unrelated individuals suddenly decided at the same time to write a series of off-topic posts using nearly identical syntax and sentence structure.
Agreed, absolutely. That's one of the reasons I don't agree with Dryfly's liquidity argument.
mp - I'm not saying things are rosy, just that there is too much gasoline being poured on the fire for it to go cold.
That isn't to say a lot of people aren't going to get hurt by resets, foreclosure, and lay offs as a result of RE contraction... it will all happen.
It's just that if the FCBs keep lending us money cheap - we'll keep spending it & that activity even if bad for us in the long run will keep GDP > 0 in the short run.
UCLA has always been obsessed with job loss and high interest rates as the only causal variables associated with price declines. First of all, they have almost entirely ignored the potential impact from mortgage resets. The financing structure of the past five years is totally without precedent. Widespread hikes in monthly payments are likely to have just as detrimental an effect as job losses - both variables compromise servicing ability.
As for interest rates, UCLA is typically negligent here as well. The elasticity of demand for credit is typically path-dependent. In other words, it doesn't matter where rates are - it matters where they've been. There's over-saturation and buyer exhaustion right now. If rates stay as low as they are right now, no new buyers will be attracted by greater affordability. Only the first derivative, the CHANGE in rates, will do that.
Finally, UCLA ignores the credit cycle. As subprime mortgage holders begin to go belly-up, credit will get cut off to them. They are the plankton of the housing market. When subprime credit and the whole zero-down IO crap goes away, the market will get a LOT less liquid at ALL pricing levels, since housing is a trade-up market. They have been the bottom tier buyers. As they vanish in 2007, so will the housing stock turnover which so far still has a good 20-25% further to fall.
UCLA is negligent in ignoring exotic financing. Nowhere in their economic forecast do they consider 0% down, stated income, subprime borrowers, Option ARMs, resetting loans,etc. It is simply not mentioned, as if it didn't exist.
Let this housewife give the UCLA Anderson economists a little heads up.
UCLA Anderson economists are stuck in the 90's: housing prices can only go down when major job losses occur in at least 2 sectors of the economy, one of which is usually manufacturing. Well, guess what: manufacturing is so low now that we're not going to have major job losses there. So does that mean that we will never have another recession?
They fail to realize that prices will drop when large numbers of homeowners cannot make their mortgage payment, REGARDLESS of the reason. Whether it's an adjusting ARM that they cannot pay or refinance out of, a job lost in the real estate collapse (over half of all jobs since the last recession are in real estate, so the bust in housing feeds on itself), or a job lost as the mortgage equity withdrawal requires fewer retail clerks.
However, the UCLA Anderson economists do make some very good points in their forecast, and are very aware of our dependence on foreign borrowing, our reliance on MEW, our consumption in excess of production.
It boggles my mind that they cannot see the obvious though. It really makes me wonder who is funding them? Wachovia?
Wachovia, who just bought out the biggest subprime lender in CA, was a sponsor of one of their seminars. So they don't want to upset their sponsor, so they are as remiss in their forecast as the other 95% of economists who cannot see a recession until it's smacked them in the a$$.
I'm sorry to be so harsh, but it is criminal for any economist to report on the housing market without mentioning today's exotic lending environment. So the UCLA Anderson economists are worthless in my book.
"...it doesn't matter where rates are - it matters where they've been."
Agreed, absolutely. That's one of the reasons I don't agree with Dryfly's liquidity argument.
Orange County is ground zero for subprimes in California. Additionally, Gary Watts, "broker/economist", hasn't had a very good track record of late.
Gary who?
What a dunce.
Somebody butchered the NY Times image of Schiller's data to add a retracement. I think it's kind of interesting:
inflation adjust
However, it concludes "This corresponds with a 43.5% correction in house prices." Which is inaccurate since this is not price data. If the Fed gets its wish of approx 2% inflation this might correspond to something more like a 30% price decline. Still harrowing.
BTW, I agree that UCLA has botched their analysis by not taking into account the effect that unprecedented widespread price increase will have on overbuilding, speculation, vacancies in the existing home market, damage to the lending industry, and consumer finances/spending.
I was the Accounting Manager for a semiconductor start-up some years back. One of many hats was Payroll Manager. I was shocked at the number of highly paid people ($80k+ in the early 1990's) who lived hand to mouth, borrowing against their 401k's, needing advances for 1 week business trips.
I think these high-level economists are not aware that the lack of financial discipline is pervasive in most levels of American society. It's not just the Wal-Mart employees who live paycheck to paycheck and are severely in debt.
The micro-economics of these resets, one-by-one is going to roll-up to one big problem for housing when these mortgages reset en masse.
Speaking of series' on housing, we went from Silicon Valley to Florida for 10 days around Xmas & saw a number of "interesting" (in the Chinese sense of the word) items...
Particularly, there was a lack of traffic in the touristy areas:
http://www.viewfromsiliconvalley.com/id288.html
And a glut of inventory at ridiculous prices:
http://www.viewfromsiliconvalley.com/id289.html
We have at least two more chapters on our observations forthcoming, so stay tuned...
Thanks!
The elasticity of demand for credit is typically path-dependent. In other words, it doesn't matter where rates are - it matters where they've been.
A very shrewd observation, and especially applicable to short or intermediate term forecasts.
I want some of what he's smoking.
States Swift to Warn Mortgage Lenders - washingtonpost.com
Wapo article on the guidance being adopted by the states, its been stuck at 20 adopters for awhile, I wonder when the other 31 (50+D.C.) get in line.
UCLA was going around giving talks - talking down an economic slowdown in housing. They used San Diego as an example of how housing was doing just fine. Then San Diego went Tango Uniform. Here is the embarrasing link.
Google Videos Error
LA-LA-PA-LULA!!!!
2007 IS GOONA BE A BODACIOUS BOOMER: SINCE 1914, the DJIA gained 50% on average from its midterm election year low (2006) to its subsequent high in the following pre-election year high (2007). There were 23 such occasions, the 5 best boomers were 89.6%, 81.2%, 74.5%, 73.6% and 65.7%. There were NO downers. THAT SMELLS A LOT LIKE DJIA 15900!
Since 1974, the NASDAQ gained 83% on the same basis.
WITH ALL THE NASTY HEADWINDS OF THE PAST 2 YEARS NOW AT OUR BACKS (THE FED AND OIL), I'm getting excited, very excited. Any normal 4-7% market correction along the way is the last opportunity to back-up the truck.
I suspect that BEARS will still be analyzing the early-2006 building plunge as the market rockets past DJIA 14000 by mid- year. I suspect that Gary Shilling will still be 100% in bonds...and I suspect that Roubini will still be talking about the "suckers rally." The other investment pigmy, some investment ant by the name of Schiff, will still be maintaNing that 2006 markets didn't even keep up with inflation....and Paul Krugman, The NYT's bought and paid for socialist and Grapes of Wrath propagandist will be urging that the Dems to accelerate spending for the greater good of society, urging them not to waste political capital on tax hikes.
The Good Lord gave us these PERMABEARS and financial pigmys to provide us with tomorrow's market ammunition. They are the "Wall of Worry" from upon which the rest of America will view wealth and prosperity.
I'm sorry - what does that semi-intelligbible rant have to do with housing in OC or elsewhere?
Eprobert, Patrick is back.
In reference to the UCLA video: when it came to the crunch, Thornberg waffled; CR's analysis is much more detailed and to the point; CR also gets a much higher "grade" on presentation. Although Thornberg is a very bright guy, it seems to me he has been presenting to college students too long.
He did mention that the only significant employment growth in California during this cycle has been in construction, finance, and retail.
Buying a house is an emotional decision, not a rational decision. I can't think of anywhere in this over-inventoried country, where it is not cheaper to rent than buy. Even speculators, who would only buy a house if someone else wanted to buy the house, made emotional decisions. There are only three rational reasons for buying a house: 1. buying it is cheaper than renting it, 2. buying it and renting it out yields the investor a better rate on capital than leaving the money in a bank cd, and 3. someone is willing to pay more for the house that the speculator just paid. I don't see any of these conditions existing in 2007.
Major U.S. home builder Lennar Corp. (NYSE: LEN) announced this morning that it will have earnings in their 4Q almost 50% below estimates and that they are taking about 1/2 billion in impairment charges.
As with other previous builders before it, this sets a new record in impairment charges.
And yet the financial media continues to bleat that the worst in housing is behind us. I've heard convincing arguments why the HB stock prices have remained resilient through this downturn, but please, make no mistake -- the housing crisis nowhere close to the bottom. Indeed, here's Lennar CEO in today's press release:
"Market conditions continued to weaken throughout the fourth quarter and we have not yet seen tangible evidence of a market recovery."
Lennar sees fourth-quarter loss on land charges - MarketWatch
I should also note that Lennar will actually report a loss of between 88 cents and $1.28 a share for Q4 due to the land charges.
The ~50% reduction in profit estimate is ex-land charges (75 cents versus previous forecasts of $1.30).
Brian makes a good point about the market being driven by the bottom. How can a middle income family in the Boston suburbs afford a $500k house? Partly by selling the house they paid $200k for five years ago for $350k.
The big jumps in home values were, to a large extent, fueled by the big jumps in home values...
BEARS OPEN THE NEW YEAR BY LOOKING BACK TO FLOGGING OLD HOUSING/BUILDING STORY:
With both eyes fixed FIRMLY on their target in Jurassic Park and squarely in Wall Street's rear-view mirror, SCARED BEARS continues to relentlessly discover for the world what has already been discovered, analyzed and discounted over one-half a year ago. The BEARS latest supporting evidence is the Lennar financial report that tells us all what happened last year.
The time an attention desperately devoted to just 6% of GDP, the only big weak spot on the radar screen, illustrates the failed projections of the WART DOCTORING SCARED BEARS.
Meanwhile, the building stocks are up 35% during the past 6 months. Too bad today's investor's can't get yesterday's stock prices!
It won't be long before the financial pigmy's and internet blogging, talking-head and self-promoting WART DOCTORS provide the conclusive evidence needed to convince us all that 2006 really was a lousy year.
Hey TrueBlue, let's talk again in 6 months. Ok?
TrueBlue,
If everything out there is doing just great, then why are you wasting time posting here? Unless of course you are panicking and stressed out
Look at me!!! Look at me!!!
I am a stock bull and bought the perfect stocks in the past right at the bottom. While you guys are thinking this out, I will be thinking up more imaginary stories to get your attention. I have an imaginary time-machine you know.
Stocks are going up because they're going up. I'm right and you're wrong. Nyah-nyah.
Stocks are going up because of M&A activity. Over $600,000,000,000 worth of companies has been removed from our public stockmarket into the hands of private equity firms. These companies will be flipped, the way real estate was, until they are worth far less than their last acquisition price. Then we can all watch the liquidity bubble burst.
If you bought the S&P with the British Pound, you were in the red last year. The stockmarket didn't go up, the dollar went down.
The stock market is appreciating due to supply and demand.
Not good.
Oh look!
A group of unrelated individuals suddenly decided at the same time to write a series of off-topic posts using nearly identical syntax and sentence structure.
Agreed, absolutely. That's one of the reasons I don't agree with Dryfly's liquidity argument.
mp - I'm not saying things are rosy, just that there is too much gasoline being poured on the fire for it to go cold.
That isn't to say a lot of people aren't going to get hurt by resets, foreclosure, and lay offs as a result of RE contraction... it will all happen.
It's just that if the FCBs keep lending us money cheap - we'll keep spending it & that activity even if bad for us in the long run will keep GDP > 0 in the short run.
That's my point.