Residential Investment Slump: We Ain't Seen Nothin' Yet
Submitted by
CalculatedRisk on Fri, 07/28/2006 - 6:09pm (23 comments)
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"Likely" is a very polite moniker for the state of the undocumented construction related economy.
The UCLA Anderson Forecast estimates that CA has the highest number of independent contractors and illegals, about 1 million employees. So you are right, this is a very large sector, about the size of the entire San Diego workforce (1.3 mil non-farm). They say this sector holds realtors, mortgage officers who are independent, and construction workers, some of whom are illegal. This data comes from the government phone survey.
In my neighborhood, several home furnishing and entertainment equipment stores closed shop lately, replaced by a "$1.25" store (the new edition of the dollar store) and soon to come a booze store.
To my eyes, it looks like residential investment ramped up far earlier than I imagined: the late 90s? I have to wonder how much of this activity has driven prices for the past 10 years? And, if these "investments" drop off precipitously, how far will home prices retrace?
And before I forget it, a number of payday loan and cash advance outfits are gracing the neighborhood. They must be rather new as they caught my attention only recently. One "psychic" has taken residence in an ex video rental.
CLASSIC:
Developer 'curbs' downtown plans | HeraldTribune.com | Sarasota Florida | Southwest Florida's Information Leader
"(the new edition of the dollar store) and soon to come a booze store."
cm, durin had tmes, we gots ta hav ar licka
So, in looking at the graph it looks like a post-bubble decline might see housing goto/drop to, say, 3% or less of GDP (which of course will be down as well) before hopefully recovering to a l.t. run-rate ? Figure of merit being 3.5% or so for a 'normal' economic situation ?
At the same time if we assume MEW goes away entirely and that it's been adding 1% + to GDP then, taken all together, keeping GDP growth above 2% will be a major victory ? That's before unusual mortgages work their weighs out with the risk of a speculative downturn around the country ?
Am I interpreting the thrust of your arguements over the last several days/months accurately ?
I'm thinking of starting a francise of mobile pawn shops.
Dear CR
I was wondering if you had read this article from the July 29, 2006 New York Times, Housing Slows, Taking Big Toll on the Economy ( HOUSING SLOWS, TAKING BIG TOLL ON THE ECONOMY - NY Times by V. Bajaj and D. Leonhardt.
It makes the point that housing is slowing and bogging down the rest of the economy, but it then implies that corporate spending will pick up the slack.
Here are the quotes:
That campaign [ Fed interest rate hikes] has been largely successful, with the decline happening gradually while other parts of the economy, mainly the corporate sector, pick up much of the slack.
After mentioning that construction workers are struggling to find work it has this:
The situation is somewhat different elsewhere. An official at the International Union of Bricklayers and Allied Craftworkers said housing work was more difficult to find, but most of its members had been able to find work on commercial building sites.
It also had this:
The fact that mortgage rates remain low by historical standards offers one reason to doubt that a crash will happen. The average rate on a 30-year conventional mortgage was 6.8 percent last week, up from 5.7 percent a year earlier, according to the Fed.
My questions:
I know that you dont have all the answers, but I enjoy the insights you provide.
Best regards,
As we went into this housing downturn I have heard several pundits say we will not have a crash because only a recession will cause a crash.
What these idiots refuse to realize it that for the last 5 years HOUSING IS THE ECONOMY. A slump in housing will likely cause a recession, thereby driving housing even lower.
Im with Ed, if you havent read any of my comments already. But as we all know, the mainstream media is about reporting, and they report what dumb optimistic folks like to say, and only get to the bad news after its already happened. Not a chance in hell they will ever listen to anyone who says that the fall in housing will lead to a slump in consumer spending, the drop in aggregate demand leading to declining investment. Ive yet to see anyone susbtantiate why corporate investment will rise when the general economy across several sectors is slowing. This is just stupid. Id be very surprised at this point if we can escape a recession late this year and next.
mainstream media could "never" really report things that would turn their sponsors off... eg: home depot and more indrectly, oh say, sony (consumer goods).
even our local NPR station is "underwritten" by local lexus dealers... there's no way they would yank their roos with their negative reporting...
that's just how it works.
someone had to crack the dam first. i suppose some (NYT, WSJ) have...
A sign of desparation: re brokers finding more buyers in Europe then here for NJ properties. Are the Europeans really that stupid? (I doubt it)
No Buyers Here? Try the Riviera - NY Times
sharkbait: All people are fundamentally cut from the same cloth. Europeans want easy investment returns, a.k.a. "let their money work for them", just as much as people in the US.
Shark - that is a completely different market and has always been global - nothing new there. The article cites an agent for a seller going to Monaco, Greece, Thailand & peddling $7.5 million 33 acre NJ estate - come on.
That isn't typical. People like that don't care if the price goes up or down next week. If you have to ask the price you can't afford it.
They weren't affected by the bubble on the way up, they won't be affected on the way down. They fly well above the traffic jams the rest of us deal with.
There will be a jam - question is when, how severe & how long. All of that is conjecture.
Kett82, great questions. I'll try to answer them - as best I can - with some graphs.
Best Wishes.
Dear CR,
Also saw this AP story, Business spending could bail out economy By Rachel Beck, Associated Press, and Chicago Tribune staff reporter Andrew Countryman, published July 30, 2006.
It seems corporations are flush with cash, but does that mean they will invest given that consumers may be tapped out?
Regards,
My greater neighborhood, which does not typically see a lot of selling activity, has been sporting an unbelievable number of open house signs this weekend. Looks like the "spring season" has finally started! If memory serves, this is also the first time I'm seeing signs on freeway exits.
Looks like the "spring season" has finally started! If memory serves, this is also the first time I'm seeing signs on freeway exits.
cm - I've seen exits with so many notices for open houses & new developments that you had trouble knowing what street you were turning on to (hidden).
Its been happening for a while in some locations.
dryfly: I'm well aware of what is happening "elsewhere" by reading the respective bubble websites. However, "here it's different" (so far at least), but things may just be starting. Combine this with the store closures/replacements above. This is the "heart of Silicon Valley", or one location claiming this descriptor.
Not to suggest we deserve anything special, although I'm hearing this not too rarely with people whose mild success, or perception thereof, gives them attitudes. But it is only of late that things may be starting. That's my whole point.
The writing has been on the wall in so many ways for quite some time. But who knows, maybe it's just another fluke and I will be fooled again. Not that I'm gloating either.
As G. B. Shaw said, "the power of accurate observation is often called cynicism by those who do not possess it". In a similar vein, pointing out there were prior signs to unfavorable events is mistaken for gloating by some.
Hear ya cm - btw on similar theme to your liquor stores popping up locally... saw a t-shirt today:
'Bob's Bullets-n-Booze' then advertized where it was (forget unfortunately - too bad for Bob).
Now THERE'S your franchise opportunity for the new economy. LOL - sort of.
Here in the Boston area, the For Sale signs continue to sprout in my neck of the woods, while the Sold signs are few and far between. I have to wonder where all these people are moving to?