What if the glum and doomers are right, but nothng crashes

This topic has 10 replies, 9 voices, and was last updated 18 years ago by santeeman.

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October 20, 2006 at 8:45 PM #7753

bubba99
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I have been expecting a sock market crash for a few years, and even though the economy has been stale and stagnant, the stock market is reaching new highs. With mortgage rates at 5+%, real estate should be dropping like a stone, but it isn’t. Inventory of unsold homes is higher than any time in the last 10 years, but people are still buying, and that is moderating the speed of the fall.

If people keep buying the bargains (10% or 20% below the comps) the decline will be orderly. If the fed decides to keep the fall moderate, they can offer new “interim loans” to keep the banks from holding billions in bad debt. One could argue that this is even likely with new money from FNMA bonds at tax exempt rates creating the liquidity.

The quality of the employment picture has been declining for some time. Although unemployment is down, so are real wages. The economy should have been turning down for last year or so, but it has grown instead. And even if the real estate market crashes, the stock market may still keep climbing.

Today’s investor must overlook overpaid CEO’s, and boards that do nothing but run once great companies into the ground. The risk is significant, but the earnings are barely meeting CD’s at 5%. The dishonesty of managers selectively dating options should scare most people off, but it doesn’t. So given that the investors will invest even though common sense says they should not, what happens to all of that money that went into real estate, and is building up in IRA’s go to now.

Lately it has been going into the record highs for the Dow Jones industrials. As the outlook for business turns down, will investors leave their money in savings accounts, or keep pouring it into the already overpriced stock market.

If momentum continues to drive the markets, there will be no dramatic downturn in stocks. Foreign made products will prevent any product shortages even after the HELOC dollars dry up. Stores can keep selling under priced products built in Japan and China. There will be good plays on sectors like home builders and real estate agencies, but in the whole momentum will prevent any rapid deflation in the market. Even if momentum doesn’t carry the market there are new mechanisms in place to prevent any real rapid crashes.

I can’t bring myself to invest in today’s market, but it may continue to grow in spite of all the markers to the contrary.

October 21, 2006 at 3:18 AM #38119

cabinboy
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Nice post.

San Diego residential real estate is crashing. New home median price down 17% y-o-y for September. That is a stunning crash in an assett class that is supposed to be sticky on the way down. To me that statistic already indicates that 20% of the top for resale homes already is in the cards…and this is before any real panic. I’ve been concerned that housing prices would not return to historic levels. This drastic drop in one year is the most encourahing data I’ve seen yet.

So, I think the California residential RE doom and gloomers will be right, and the drop will be significant enough to be called a crash when we analyze the data 10 years from now.

As for the equity bears who are completely out of the stock market, I just don’t understand the rationale. Sure NASDAQ hasn’t gotten back to what it was, but we all know that those pre-crash P/E’s were off the charts. The Dow, S&P500, and Russell2000 didn’t have nearly the peak and retrospectively obvious overvaluation, and they did not take a precipitous fall. Since ’03, the slopes of these indices have been more or less like they were back in the pre-exuberance days of 1990-1995 (coincidentally, the last Cali RE bust). I simply do not see a need for a large correction in any of these indices at this time.

October 21, 2006 at 3:27 AM #38120

cabinboy
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Also, for the Roubini fans on this site:

Given your knowledge of his predictions, what will it take for you to consider him wrong? What if the S&P500 surges another 30% by the end of March 2007? What if the Russell2000 is up 20% by the end of May 2007? Will you consider him wrong? Just curious where people would place the “he was right” and “he was wrong” thresholds given his present predictions. If we can draw these lines in the sand now, we can realistically evaluate them when the future is upon us.

October 21, 2006 at 7:05 AM #38121

no_such_reality
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economy has been stale and stagnant

The economy isn’t stale and stagnant. The labor employment market is strong but extremely finicky. Also, like falling gas prices with strong supply, prices have fallen because the corporations have discovered a 2.2 billion person reserve that is fighting like made to have the skills needed to serve in the companies.

With globalization, the era again has shifted for the American worker, first from agrarian to industrial, then industrial to white collar service, now from service to talent.

The hardest part to realize is that even though you’re a highly skilled, highly educated, accomplished professional, if you’re just a doer, you’re a commodity. Two billion people can do, much fewer can create.

October 21, 2006 at 9:00 AM #38128

34f3f3f
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A 17% fall in median prices might seem like a lot, but when you consider the massive increases over the last few years, the word “crash” doesn’t spring to mind, unless that trend continues and we go back to pre-boom prices. I’m not sure a crash is what anyone wants, but maybe there is an argument that investors will be drawn back to stocks if real estate looks less attractive.

October 21, 2006 at 7:20 PM #38180

tangouniform
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Have a look at this analysis of the recent Dow highs. I’ve been following the Dow for awhile and I’m still amazed at how many people use that brand as a barometer of the overall market. When I was at CBOE I always looked to R2k and S&P deriviatives for overall health indications…

October 21, 2006 at 7:54 PM #38182

Nancy_s soothsayer
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Guys, it is ONLY 2006.

Please wait till 2007 for Foreclosure Heaven
Even better in 2008 Blood on the Street
In 2009, Finally make up your mind to definitely buy…
In 2010 San Diego (AND STOCKS) are Cheap Again.

October 21, 2006 at 8:50 PM #38187

santeeman
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Of course it’s pure speculation, but I think 2010 will certainly be a buyers market. That will give rents a lot of time to escalate, check this out…….
.http://www.recordnet.com/apps/pbcs.dll/article?AID=/20061021/MONEY/610210303

October 21, 2006 at 9:12 PM #38189

Nonbeliever
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It takes a long time for a tanker to turn, as will the real estate market. I too am encouraged by the haste we have seen in the downturn, but I think it is just the tip of the iceberg. As for the dow, let’s not forget that inflation adjusted, the dow is FAR from its all time high, and that the dow 30 stocks have been changed twice since 2000. Here is a good article by Eric Jansen from iTulip on the recent dow action.

Not a bubble, but not healthy growth either

October 22, 2006 at 1:10 PM #38218

Steve Beebo
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cabinboy – The 17% decrease is for new homes only, which include condo conversions. Up to this month, y-o-y resales have been steady, for both condos and SFRs. When November figures come out, you will probably see the first drops over 2% for condo and SFR resales.

Here's an interesting article with comments from a UCLA economics professor:

http://www.ocregister.com/ocregister/money/housing/article_1324023.php

"Whether prices go down or stay the way they are, you can pretty much guarantee that whatever the value of your house now, that's going to be the value of your house in 2011."

October 22, 2006 at 8:44 PM #38219

santeeman
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Did you see the latest on msn, they are predicting an 8% drop for 2007. I don’t like predictions because someone always turns out to be a liar,(the ones I listen to unfortunately)but there is no denying sales yoy are down.
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