San Diego’s reliance on housing for recent growth makes us a perfect reflection of Roubini’s post today. His conclusion: “we already have a housing recession, a coming non-residential construction recession, an auto recession, a manufacturing recession, a durable goods recession, an industrial sector recession, and now signs of faltering of the service sector starting with the retail sector and the fall in consumer confidence. Q4 growth is headed to be even worse than the dismal Q3 and the economy is highly likely to enter into an outright recession by Q1 or at the latest Q2 of 2007.”
Mr. Hamilton, when bubbles burst, no amount of lowering of interest rates can save the bubble. We are experiencing a credit contraction. Mr. Hamilton, did you see what happened in Japan – not even a reduction to 0% interest rates could increase consumption. We are not Japan, but the idea that lower interest rates can spur spending works only at the beginning of a credit cycle, not at the end. Second, interest rates are TOO high even today for the today’s housing prices. For people to afford homes, we need 1% interest rates again. A .5% decrease is a joke – it is not nearly enough to stimulate demand. Third, when home prices are dropping, buyer psychology has shifted from “we better buy now before prices rise more” to “we better just hold off and see how low prices will drop”. So there you have 3 reasons why a rate lowering will not jump start housing.
Housing cycles take 5-7 years to play out. Credit contraction, reversed buyer psychology, years of clearing up excess housing inventory, foreclosures, REO departments growing quickly at banks, bank foreclosures, rising unemployment, recession due to housing bust… these are all part of the housing cycle that we have yet to experience. You simply cannot wish it away. Anyone who claims that we are at the bottom is simply deluded. There is no precedence in history that says housing booms end in one year. History shows that housing busts are accompanied by all the unpleasantness and long duration of a hangover.
The only people saying this is almost over are the people who have something to gain when houses are sold: builders, lenders, realtors, politicians. Astute students of markets and economies and history know better. We know this is just the tip of the iceberg.
Furthermore, this bubble is going to 3-5x as painful as others when it pops because:
1) his bubble dwarfed the prior ones in size, i.e. appreciation was much higher
2) we increased credit so much due to MBS market, that we increased the nation’s homeownership rate by 5 points, and we gave too much credit to anyone who wanted it. We created a credit madness
3) most of our employment gains in this recovery were related to housing, so the jobs lost in housing will be extra painful; housing has become too big a part in our economy, so its contraction is going to cause more pain than at any other time in history
4) Related to opint #2 above, this easy credit not only allowed people to buy more house than they should, it also enabled them to spend more than they earn. Mortgage equity withdrawal was used to support spending. Negative savings for the first time in our history. THe repercussions when this MEW is taken away will be very very bad.
Population in San Diego is declining, and soon our unemployment rate will be over 7%. I predict 8%, and it will be all on my website (gee, if I ever get it done…). Once I have enough subscribers ( I will charge $10 max per month for my charts and forecasts), I can pay for more data. I am anxious to buy some foreclosure and mortgage data, but for now have only invested in Dataquick data.
So we are in store for a long and nasty recession.
