Will a housing collapse bring down the economy?
From Marketwatch:
Recession will be nasty and deep, economist says
From Nouriel Roubini's Blog:
"The Biggest Slump in US Housing in the Last 40 Years"…or 53 Years?
Recession will be nasty and deep, economist says
The United States is headed for a recession that will be "much nastier, deeper and more protracted" than the 2001 recession, says Nouriel Roubini, president of Roubini Global Economics.
Writing on his blog on Wednesday, Roubini repeated his call that the U.S. would be in a recession in 2007, arguing that the collapse of housing will bring down the rest of the economy.
This is the biggest housing slump in the last four or five decades: every housing indictor is in free fall, including now housing prices," Roubini said. The decline in investment in the housing sector will exceed the drop in investment when the Nasdaq collapsed in 2000 and 2001, he said.
And the impact of the bursting of the bubble will affect every household in America, not just the few people who owned significant shares in technology companies during the dot-com boom, he said. Prices are falling even in the Midwest, which never experienced a bubble, "a scary signal" of how much pain the drop in household wealth could cause.
Roubini is a professor of economics at New York University and was a senior economist in the White House and the Treasury Department in the late 1990s. His firm focuses largely on global macroeconomics.
While many economists share Roubini's concerns about the imbalances in the global economy and in the U.S. housing sector, he stands nearly alone in predicting a recession next year.
From Nouriel Roubini's Blog:
"The Biggest Slump in US Housing in the Last 40 Years"…or 53 Years?
At this point there no doubt on whether the housing sector is contracting – real residential investment fell at the annualized rate of 6.4% in Q2. The first derivative of the housing market is clear and negative today and looking ahead for the next few quarters. There is not even a debate about the second derivative of the housing market as any estimate out there suggests that the housing sector will contract at a faster rate in Q3 and Q4 than in Q2. Some official estimates that I have seen suggest that real residential housing will contract at 10% - rather than the Q2 6.4% in the next two quarters. My own estimate – based on a reading of the coming data – is that, actually, the contraction is more likely to be of the order of 12-15% annualized rate in the next several quarters. So, the only remaining scary question is about the third derivative of the housing sector and at which point – in terms of quantities and prices – the housing market will bottom out.
...
The evidence on falling home prices is now becoming clearer. Since the end of World War II, there has never been a year on year fall in housing prices. There have been instead several quarters in which housing prices declined. Of course in some regions where there were housing busts prices declined for a while: in Texas during the housing bust of the mid 1980s that led to the S&L crisis; in California in the early 1990s following the recession in that state; in Boston in 1990. Those episodes were all associated with the housing bust that was related to the 1990-1991 recession So, you do not need a persistent year-on-year fall in median housing prices to have a housing bust; such bust can occur even if prices are flattening or falling in some regions, but not nationally. Moreover, such regional bust can be associated with national recession, as in the 1990-91 episode. So, the fact that the latest housing bubble was concentrated on the two coasts (North East all the way to Florida; and West Coast, especially California) does not mean that the coming housing bust in these regions will not have national macro effects. For one thing, the value of the housing stock in those two regions is close to 50% of the total housing stock given the bubble of recent years. Thus, a housing bust in the two coasts can and will have macro effects.
...
So, the simple conclusion from the analysis above is that this is indeed the biggest housing slump in the last four or five decades: every housing indictor is in free fall, including now housing prices. By itself this slump is enough to trigger a US recession: its effects on real residential investment, wealth and consumption, and employment will be more severe than the tech bust that triggered the 2001 recession. And on top of the housing bust, US consumers are facing oil above $70, the delayed effects of rising Fed Fund and long term rates, falling real wages, negative savings, high debt ratios and higher and higher debt servicing ratios. This is the tipping point for the US consumer and the effects will be ugly. Expect the great recession of 2007 to be much nastier, deeper and more protracted than the 2001 recession.
42 Comments:
YES
We have not had a significant economic slowdown since 1990 - 1993 before the 'decade of the consumer' began back in 1998 and going strong (even now) except for 2 weeks after 09/11/01..
The average transplant or hipster you see in Manhattan has just seen huge economic prosperity & hedonism for the past 15 years.
Remember the first gulf war, operation desert shield & desert storm?? The economy seemed to fall into recession overnight, and people actually cut back spending.
How will this affect Manhattan and the greater NYC metro area which is a playground & haven for the wealthy - specifically twenty something six figure transplants, wall streeters & trustafarians.
All of whom have unlimited spending ability on housing & clubs, restaurants, & clothing stores in Manhattan.
We need an economic slowdown or housing slowdown in this area, so people who aren't making $200,000 a year don't need to live in a bad neighborhood in a tiny apartment and maybe get a chance at buying something other than a studio co-op.
Cont from last post..
And when mommy & daddy can't cash out Home Equity in order to pay for $120,000 for 4 years at NYU or give their kid the 20% down for their first apartment in Hoboken, Tribeca, Chelsea or the Meat Packing District..
It will be interesting to see what becomes of Manhattan in the next few years given the above.
hey anon quit crying about rich kids. i grew up poor and still am by todays standards. meaning i havnt borrowed my way to wealth. but im prepared. are you? i sold my house and am currently renting with my $ in t-bills waiting with joy. cant wait to see friends and relatives who told me real estate NEVER goes down. im confident its just the tip of the iceberg. credit crunch is coming with recession
{{hey anon quit crying about rich kids. i grew up poor and still am by todays standards.}}
I only make $75,000 a year at the age of 29. I guess for a single person living in Queens, I am considered 'poor' as well.
And at $850, my rent is considered cheap. You can't even rent a coat closet in NYC / NNJ or Long Island for less than $1,500 these days plus pay the obscene realtor fee of 15% of annual rent.
But it can't happen here in the NYC area right??
I mean, 'everyone' wants to live here and will continue to pay the obscene rents, taxes & costs in order to do so.
And people will continue to pay $750,000 for a one bedroom apartment in Manhattan (where the average median income is $50,000 per person), and $600,000 in Jersey City where you also get to pay high real estate taxes & HOA fees.
Hello Everyone, In 2007 there will be more of these types of stories:
R.L
Man, unable to pay mortgage, fakes robbery report
A Piscataway man afraid to tell his wife he lacked the money to pay the mortgage concocted a story that he was robbed of $4,100 in cash in the Unity Bank parking lot in Bridgewater, setting off a county-wide alert for a fictitious armed robber, police said today.
Mohamed Mohamed-Zubair, 37, faces a third-degree charge of false reporting of a crime to authorities.
Mohamed-Zubair entered the Unity Bank at 3:15 p.m. yesterday and told the manager he had just been robbed outside, police said. The manager called police and handed the phone to Mohamed-Zubair, police said.
He gave police a detailed description of the robber and indicated he believed the man had a gun because the man poked him in the stomach with an unknown object, police said. The report triggered a county-wide alert to search for the nonexistent man, police said.
Bank surveillance tapes of the parking lot showed Mohamed-Zubair drove into the lot and entered the bank without speaking to anyone that afternoon, police said.
When confronted with the tape, Mohamed-Zubair admitted he made the story up because he couldn’t tell his wife that he didn’t have the cash to pay their mortgage, police said.
Two words.
Buy gold.
Tell ya what, the whole ECONOMY, folks, has been DRIVEN by housing over the last five years. THAT'S IT. Business investment in CAPEX has been APPALLING vis a vis prior post-recession recoveries. TO REITERATE, GROWTH HAS BEEN LARGELY DRIVEN BY MORTGAGE EQUITY WITHDRAWAL. The 'borrow/spend now / pay later' culture is completely opposite that of the 1930s. There always has been and always be emotional symmetry in the markets. That's because people gotta learn. So this time they choose to run up their credit cards and mortgages to absurd levels just to 'get what they think they're owed.' But they got it backwards. THEY OWE NOW. The 'pay it forward, get it now, worry about it later' culture is crashing. Just wait until those ARM resets start to really kick in. Just wait till the publicly traded homebuilders keep pumping out houses so they can keep some sort of semblance of EPS going, just wait till everyone who put no money down last year (THAT'S 42% OF ALL 2005 BORROWERS) realize that the debt they owe is 1.5 times the value of the asset they 'own.'
We are poised to witness a radical sea change in attitudes towards debt and consumption, the likes of which folks have not seen in many, many years.
Property values in Japan tanked for FIFTEEN YEARS. They aren't making any more land there, are they?
And don't forget this: the BLS jobs data is BOGUS, not to mention the GDP deflator data. And I'm not some data-addled conspiracy theorist with nothing to back those statement up. CLINTON AND BUSH II CHANGED THE WAY THE NUMBERS ARE CRUNCH TO REFLECT 'PERMANENT PROSPERITY.' JOHN WILLIAMS AT SHADOW STATS EXPLAINS IT ALL. And I know the only thing that matters is what people perceive and people perceive the data the gov't spits out. But sooner or later you better believe the data they spit out that has been totally massaged is going to have to be reconciled with the real, pre-CLINTON/BUSH II numbers. To say unemployment is 4.6% or whatever they say it is is ASININE. To say core CPI is 3% is just as INSANE. And all the Wall Street economists know it, too. They can hardly keep a straight face. Just ask them.
Get ready for the great DEBT/LIE unwind. It's finally here.
P.S. Suzanne, take a memo to Scores: Cheetos and -------- for all my boys.
http://www.weedenco.com/welling/
Downloads/2006/0804welling022106
.pdf#search=%22WEEDEN%20SHADOW%2
0STATS%22
What in heaven's name makes you think that lower and middle class families shut out of this market will still have jobs and qualify for a mortgage if the housing market tanks and we are plunged into recession? They do not have a down payment now and they'll be hard pressed to amass one if they are un- or underemployed in a widespread or protracted recession. Add inflation and the picture looks even worse.
He is correct!
The US economy is very resilient. I don't buy into the disaster scenarios.
We'll see what unfolds.
On another note, just poked around a bit on some prior sales for people I know who bought 5 years ago. (I know, that's evil.)
Some paid $200K and up to $325K, in nice towns with up to 1 acre lots. These are six-figure earners.
A $280K mortgage @ 7% is about $1,800. Can you imagine having a mortgage that low?
Seeing that really illustrates this bubble madness.
People have grown so accustomed to these crazy prices, it's almost unimaginable to see a nice house for $300K.
Picture two houses on the same street, one guy is paying $1,800 a month and his neighbor who just bought is paying $3,500 a month. Same town, same street, same salary -- one owner lives comfortably, one struggles to pay the bills.
Insanity.
Don't buy into this madness.
Adding to my snooping mentioned above, a colleague bought a house for over $650K last year. The guy who sold it to him bought it 2 years prior for just over $300K.
The house is new, there were no improvements in between sales.
Ouch.
A colleague of mine at work bought a 3 bed tiny townhouse for $360K and a 5/1 ARM about 3 months back. It had the cheapest Home Depot commercial carpet all over, enough to shock me into thinking why would people put themselves through so much just to buy. God help her through her soon-to-be nightmare.....
Jesus, will Anonymous Whiner go away already? It's the same damn thing everyday, with poor and living in Queens, I don't have $300 jeans story!
{{{What in heaven's name makes you think that lower and middle class families shut out of this market will still have jobs and qualify for a mortgage if the housing market tanks and we are plunged into recession? They do not have a down payment now and they'll be hard pressed to amass one if they are un- or underemployed in a widespread or protracted recession. Add inflation and the picture looks even worse.}}}
They have horrible money management skills as well.
Goto Pathmark on an average day and see what I mean. Not exactly an upper class crowd of people.
You see they load up their cart with junk food and other crap. Imagine how much money is wasted on this shit, not to mention some of the chain restaurants which many think is fine dining.
Two things that should be learned before buying a home or getting a mortgage is personal responsibility & money management skills.
Even Ken Heebner, who forsees a possible 50% decline in prices in the bubble markets, doesn't think that housing alone will tip the economy towards recession.
Heebner is most likely wrong. Anyone who follows the money through the economy will see that credit is going to contract, housing is going to fall, and the economy is going to slow.
What is going to lift the economy out of the coming slowdown? Real wages are flat. Capex hasn't increased despite strong spending--why will it now? Finally, borrowing has been at extreme levels--how can it continue when housing slows?
The arrows point to one direction--DOWN!
{{{Heebner is most likely wrong. Anyone who follows the money through the economy will see that credit is going to contract, housing is going to fall, and the economy is going to slow}}
No one answered how this will affect the NYC area and IF (and it is a big IF) the housing slowdown will affect the regional economy.
So far the only thing that has happened are that rents, property taxes & utility costs have all risen this year in tandem with each other.
Prices have just stayed high.
The result has been an exodus of people leaving the region to cheaper parts of the country.
How will this affect job growth?? Is job creation and wage growth going to be high enough to support the super high cost of living here??
{{{What is going to lift the economy out of the coming slowdown? Real wages are flat. }}}
Just the status quo of the last 5 years. Debt and borrowing money.
Very interesting to note that retail sales have not slowed at all in any segment and this holiday shopping season is forecast to be as good or better than last year (which was the second strongest after 1999).
Heebner is most likely wrong.
About what...about housing prices falling by 50% in bubble areas, or about the economy not tanking as a result?
Do you have over a billion dollars under management, with one of the best 10 year track records in the industry?
Don't dismiss someone of his experience quite so cavalierly
His whole thesis makes no sense.
If home prices decline by 50%, lenders will be crushed by bad debt. Consumer spending will screech to a halt, unemployment would shoot up to double digits.
It would get people talking about a depression.
A housing decline will have a whole chain reaction throughout the economy.
I'll cavalierly dismiss anyone who voices an opinion that violates economic logic.
Live From The Ledger (nj.com):
Man, unable to pay mortgage, fakes robbery report
A Piscataway man afraid to tell his wife he lacked the money to pay the mortgage concocted a story that he was robbed of $4,100 in cash in the Unity Bank parking lot in Bridgewater, setting off a county-wide alert for a fictitious armed robber, police said today.
Mohamed Mohamed-Zubair, 37, faces a third-degree charge of false reporting of a crime to authorities.
Mohamed-Zubair entered the Unity Bank at 3:15 p.m. yesterday and told the manager he had just been robbed outside, police said. The manager called police and handed the phone to Mohamed-Zubair, police said.
He gave police a detailed description of the robber and indicated he believed the man had a gun because the man poked him in the stomach with an unknown object, police said. The report triggered a county-wide alert to search for the nonexistent man, police said.
Bank surveillance tapes of the parking lot showed Mohamed-Zubair drove into the lot and entered the bank without speaking to anyone that afternoon, police said.
When confronted with the tape, Mohamed-Zubair admitted he made the story up because he couldn’t tell his wife that he didn’t have the cash to pay their mortgage, police said.
My apologies for reposting the Man Faking Robbery story. I didn't see it on my first read through of the thread.
In 2000, people also grew accustomed to triple-digit stock prices. Try to get someone to pay $100/share for some of those companies now. Some of them aren't even close to reaching their highs within the past 6 years.
Yes! Yes! I remember buying Microsoft at $75. and the broker saying, "they are the leader, they can only go up, up, up. I sold at $25. while the stock market went into a spin. I think it's around $25 today.
If you lived here in the early '90's you saw homes listed for over $400K start selling under $300K and then we went into this quite period. It's all cyclical folks.
Hold on to your panties! It's going to be a bumpy ride!
"Since the end of World War II, there has never been a year on year fall in housing prices. There have been instead several quarters in which housing prices declined. Of course in some regions where there were housing busts prices declined for a while: in Texas during the housing bust of the mid 1980s that led to the S&L crisis; in California in the early 1990s following the recession in that state; in Boston in 1990. Those episodes were all associated with the housing bust that was related to the 1990-1991 recession"
Seems to fly in the face of data provided by Grim and discussed here. Didn't NNJ see price declines from 1988 - 1995?
Or am I missing something?
Or am I missing something?
Yes. Nationally there has never been a YOY decline. Regionally, of course, is another matter.
His whole thesis makes no sense.
I'll cavalierly dismiss anyone who voices an opinion that violates economic logic.
Funny, the WSJ isn't quoting you.
You overestimate (a) the proportion of the US housing market affected by the bubble; and (b)the amount of mortgage debt affected by the bubble.
You underestimate the overall size and breadth of the US economy.
Both are easy enough to do if you spend a lot of time in the echo chamber that this blog has become.
Please sign your comments, even if posting as anonymous.
grim
Adding to Richard's suggestions.
- Limit your mortgage to no more than twice your combined income.
- If you have sufficient income to afford a 15 year fixed, take that option.
- Have a cushion of more than 6 months expenses.
- Plan to stay for 10-15 years.
grim
Did you guys read the WSJ article on 8/23 (front page) on housing and what's happening to folks who can't find ANY buyers via open houses, so they bite the bullet and go to auction? One woman's story goes like this: 'I put my house up for sale at a comp price, $1.1mm. There was no interest. I lowered my price several times, still no interest. So I took my home to sell at auction with a minimum reserve sale price of $675m. And the best bid I got THERE is $475m. So I cry and plead and the buyer really likes my place so I FINALLY decide to sell it them for $530m.'
That's a 50% cut, folks.
If you read the press out of AUSTRALIA about the housing BUST there, your eyes will pop out. Houses are selling for 40% below 2003 prices. That '2003' is not a typo. 40% below 2003 prices. And AUSTRALIA still has the macroeconomic benefit of being a huge commodity producer / exporter. Guess what the US exports? DOLLARS / INFLATION TO CHINA.
As for what CAPEX is, CAPEX is business capital expenditures. And yes, K. Heebner does have an excellent track record. He does, also, over and underestimate many things, just like the rest of us. He got out of the homebuilders 1.5 years too early and totally missed the massive bull market from '98 to '00. I am NOT knocking him, he is awesome. But he's not infallible.
Finally, NYC is by no means immune to any of this RE malaise. New construction in the City of condos and co/ops is off the charts. And unfortunately NYC does not have a real MLS database. But Jon Miller's data, he's been in the biz forever and is very well respected, says that inventory in NYC is at a 10 year high. Here's what's gonna happen: there's gonna be a recession and it is going to SUCK and WALL STREET is gonna lay off 100,000 people (I'm not kidding) and you will see just how fast the City sours on real estate. It's been a 12 year bull market in real estate. Now STUDIOS are offered from $450m to $750m. STUDIOS. Who is going to pay for that? The wall of debt and arrogant and ill-informed decisions is going to crash all around these folks who have decent jobs but spend 70% of their after tax income on THEIR MORTGAGE PAYMENT. New York is no more or less immune to the real estate backlash than any other overpriced city. It's that simple. It's all about intellectual and emotional symmetry. Ya gotta be honest with how you made it and what you're gonna do to keep it. If not, you're going to LOSE IT.
--Bill
Hi RIch Grim,
Here is my situation and I would greatly appreciate your input/comments.
Currently renting and waiting for a good deal.
We mad and offer last week and it was accepted.
House is 6 years old purchaed for 310k in 2000. 2500 square ft in a good town.
Our offer of 475k was accepeted, about 10% of asking.
We are putting down 20 % 30 year fixed.
Same house last year was 550k and 04 was about 500k.
WE plan to stay in this house 7-10 years
Grim,
I'm even more conservative, old school, than that.
PITI- 30%
Total expenditures- 40%
I agree with a 15 or at least bi-monthly payments. If you can prepay, you'll knock a ton of interest off the loan
Be careful with the 2 incomes. Suppose you are planning a family, what happens when one decides to stay home with the child. I know this is a revolutionary idea, but it does happen.
Yes, get comfortable. I think your intentions should be for at least 15 years.
BC Bob
sorry forgot to mention we are quotes rates between 6.125 and 6.375 20% down.
Thanks
-K
Anon @ 8:24,
Isn't it a little late to ask for opinions? After all, your offer was already accepted.
grim
I'd never do a 15-year mortgage.
You can simply pre-pay a 30-year mortgage, for the same effect, and if you lose a job or have some financial disaster, you have more leeway in your finances with a 30-year.
As for the person who just "made an offer last week" I would simply say this: if you had bought Priceline stock in 2000 at a bargain price of $200 a share (down from $900), would you be happy today?
http://finance.yahoo.com/q/bc?s=PCLN&t=my
Weigh your decision carefully, and if you can change it (failed building inspection, etc), you may want to weigh that option.
Anonymous said...
We mad and offer last week and it was accepted.
House is 6 years old purchaed for 310k in 2000. 2500 square ft in a good town.
Our offer of 475k was accepeted, about 10% of asking.
We are putting down 20 % 30 year fixed.
WE plan to stay in this house 7-10 years
8/24/2006 10:00:46 AM
All very simple - how would you feel if this house appraised for $425,000 in the year 2009?
If your answer is "I'd be teed-off, but fine.", then you have the right mindframe.
If your answer is "it would devastate us", well maybe you should be thinking a little more in-depth about the situation.
We have an old house that needs some minor improvements. Given the decline in new home orders, will construction costs go down? Are we better off waiting? Seems logical that in another year building supplies & labor will be cheaper. Thoughts?
RW
Did you guys read the WSJ article on 8/23 (front page) on housing and what's happening to folks who can't find ANY buyers via open houses, so they bite the bullet and go to auction? One woman's story goes like this: 'I put my house up for sale at a comp price, $1.1mm. There was no interest. I lowered my price several times, still no interest. So I took my home to sell at auction with a minimum reserve sale price of $675m. And the best bid I got THERE is $475m. So I cry and plead and the buyer really likes my place so I FINALLY decide to sell it them for $530m.'
That's a 50% cut, folks.
Yes, off her original asking price...which was absurd in the first place, given the tax assessment on the place.
Let's not get carried away here. Always look at the facts.
"Yes, off her original asking price...which was absurd in the first place, given the tax assessment on the place."
What was her assessed value? (Which is almost meaningless anyway.)
"Let's not get carried away here. Always look at the facts."
Houses in Summit, for example, routinely sold for 4X and 5X assessed value last year, what facts are you talking about?
Assessed value is irrelevant to market value, because most towns don't assess value every year. They assess property values every few years (5, 10, 15+ years), and then change the tax rate each year.
RW, I'm not an expert, but while labor costs may go down if contractors find themselves hard up for business, I don't think materials costs are going to go down that much -- at least not materials using petroleum in their manufacture.
Unless oil costs drop considerably, which is doubtful, what with the country being run by oil men.
Funny, the WSJ isn't quoting you.
Because something is printed in the paper, that of necessity means the person who offers the quote is
intelligent?
You overestimate (a) the proportion of the US housing market affected by the bubble; and (b)the amount of mortgage debt affected by the bubble.
a. About 40% of the dollar value of the U.S. housing stock is located in the bubble areas. Seems pretty significant to me.
b. prices of houses, like other goods, are set at the margin--ie. the point where if the price where higher, the purchase would not be made at all.
When marginal buyers cannot finance their purchase using liar loans, piggybacks, I/O option ARMS, 100 year mortgages or, 100 year I/O Options ARMS; where marginal sellers cannot carry the costs of the house, prices will come down.
When prices come down, activity related to home sales--purchase of furniture, renovations, additions, subtractions, etc., all decline.
The economic data released over the past 2 days shows declines in housing, and auto sales. These sectors are a huge portion of the U.S. economy. When they slow, it is only a matter of time before profits slow, and then people get laid off.
You underestimate the overall size and breadth of the US economy.
To run a profitable business in the U.S. you either have to manufacture your product out of the country, and import it back in, or you do the marketing for those who do.
The economy is not as strong, or diverse as you have been led to believe. The housing bubble has masked numerous problems. Those problems will be revealed once it deflates.
Can you provide a semblance of an economic rationale that can explain how a housing slump will leave the rest of the economy unaffected?
As I said, the idea makes absolutely no sense.
Because something is printed in the paper, that of necessity means the person who offers the quote is
intelligent?
Of course not. It's important to consider the source. In this case, the source is Ken Heebner, with one of the best track records on Wall Street for calling things ahead of everyone else. A billion dollars under management.
Those are his credentials. What are yours?
Ken Heebner's rationale follows:
WSJ: Given the big size of some of the markets that you see as inflated, won't the regional 'pops' reverberate throughout the economy?
Mr. Heebner: The pops will reduce the growth rate of the economy, but they won't precipitate a downturn. The economy only turns down when the Federal Reserve takes aggressive action to cause a downturn. I think the current pattern of higher interest rates reflects a decision to normalize rates after taking them to abnormally low levels to stave off potential deflation. When the extent of the housing slowdown becomes apparent, I think the Fed will pause, rather than take rates to a level that threatens an economic downturn. The only real threat to the economy is an overly aggressive Fed, and not a downturn in the housing market, which won't by itself push the economy down. In fact, it provides an insurance policy against the Fed becoming overly aggressive.
Houses in Summit, for example, routinely sold for 4X and 5X assessed value last year, what facts are you talking about?
The house that was auctioned was in Hearndon VA. Do a little sleuthing and you, too, can find out its address and assessed value. Then compare its assessed value with that of properties sold in that town over the last year.
Do your homework, and don't accept everything at face value.
Of course not. It's important to consider the source. In this case, the source is Ken Heebner, with one of the best track records on Wall Street for calling things ahead of everyone else. A billion dollars under management.
The list of people who have had historically good track records, and have made ridiculously wrong calls are legion.
One example: suffice it to say, had you shorted the dollar when Buffett was bearish, you would have lost lots of money.
I suspect Mr. Heebner will be added to the list in short order.
Mr. Heebner: The pops will reduce the growth rate of the economy, but they won't precipitate a downturn. The economy only turns down when the Federal Reserve takes aggressive action to cause a downturn.
What if the Fed has already overtightened? People like Heebner place too much faith in the power of the Federal Reserve.
Real hourly earnings have been flat for 5 years--at best. By any standard, this recovery has been underwhelming when it comes to creating employment.
The Fed reduced rates to 1%, and job growth is anemic by comparison to any other cycle.
Where was the power of the Fed to create employment with negative real rates during this recovery?
Jobs have been created in 2 major sectors--govt. workers, and real estate. And lets not forget the statistical manipulation of unemployment figures by not counting "discouraged workers."
The only way consumer spending has held up is due to 2 things: the expansion of debt, and the temporary Bush tax cuts.
I think the current pattern of higher interest rates reflects a decision to normalize rates after taking them to abnormally low levels to stave off potential deflation. When the extent of the housing slowdown becomes apparent, I think the Fed will pause, rather than take rates to a level that threatens an economic downturn. The only real threat to the economy is an overly aggressive Fed, and not a downturn in the housing market, which won't by itself push the economy down. In fact, it provides an insurance policy against the Fed becoming overly aggressive.
When cash out refis dry up, when spending related to housing turnover dries up, when risk premiums on sub-prime debt increase, and liquidity dries up, what does Mr. Heebner expect to prop up consumer spending?
We already see a turndown auto sales (particularly trucks--used by contractors/builders) in addition to a turndown in housing.
Lowes has already issued a profit warning due to the slowdown. Some restaurants (Applebee's) have blamed poor results on a reduction in consumer spending.
It is utterly ridiculous to think that these macro factors won't affect other sectors of the economy.
But, like most, Mr. Heebner isn't willing to stick his neck out in calling a recession. I can't really blame him, though. How does he profit if he is right?
If he is a typical long only manager, spooking the market is only likely to reduce his assets under management.
Think twice before accepting the word of even top rated investment managers at face value.
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