My most recent column for Builder & Developer magazine is a review of 2008 and a look ahead for 2009:
When 2008 began, the common wisdom of the day was that 2008 would prove to be a difficult year, and that builders should prepare for a market rebound sometime in 2009. However, with the world falling into recession and federal government bailouts becoming a staple of daily news, it now looks like any sustained market rebound could very well be postponed until 2010...
Consequently we’re in what the folks at Beacon Economics have dubbed ‘the mother of all hangovers,’ which in the short-run leads to something called the ‘paradox of thrift:’ as the savings rate goes up (which is good for household budgets) the overall economy shrinks due to less overall demand. Yet in the long run, these types of economic shifts are critical for an eventual recovery better able to leverage a productive workforce, great technology and solid investments in infrastructure... Click here for full column.
Thursday, December 11, 2008
Most recent column for Builder & Developer magazine now online
Wednesday, December 10, 2008
Fortune magazine talks to 8 prognosicators
Dow 4000? Food shortages? A bubble in Treasury bills? Welcome to 2009, courtesy of 8 different visions of economists/analysts/businesspersons opining in Fortune magazine:
We are in the middle of a very severe recession that's going to continue through all of 2009 - the worst U.S. recession in the past 50 years. It's the bursting of a huge leveraged-up credit bubble. There's no going back, and there is no bottom to it. It was excessive in everything from subprime to prime, from credit cards to student loans, from corporate bonds to muni bonds. You name it. And it's all reversing right now in a very, very massive way. At this point it's not just a U.S. recession. All of the advanced economies are at the beginning of a hard landing. And emerging markets, beginning with China, are in a severe slowdown. So we're having a global recession and it's becoming worse...
While 2008 will probably be best known as the year that global stock markets had their values cut in half, it was really much, much more. It was a year in which every major asset class - stocks, real estate, commodities, even high-yield bonds - suffered significant double-digit percentage losses, resulting in the destruction of over $30 trillion of paper wealth. To blame this on subprime mortgages alone would be to dismiss an era of leveraging that encompassed derivative structures of all types, embodying a belief that economic growth was always and everywhere a certainty and that asset prices never go down. As 2008 nears its conclusion, we as an investor nation have been forced to face a new reality. Wall Street and Main Street are fearful that a recession may be replaced by a near depression...
Robert Shiller
We don't currently have anywhere near the level of unemployment that we had in the 1930s, but otherwise there are many similarities between today's environment and the Great Depression, with things happening today that we haven't seen since then. First of all, there's the magnitude of the stock market's move up and down. The real (inflation-corrected) value of the S&P 500 nearly tripled from 1995 to 2000, and by November 2008 was down nearly 60% from its 2000 peak. The only other comparable event was the one in the 1920s where real stock prices more than tripled from 1924 to 1929 and then fell 80% from 1929 to 1932. Second, we've had the biggest housing bust since the Depression. Third, we've seen 0% interest rates. We've actually seen briefly negative short-term interest rates. That hasn't happened since 1941. There was a period from 1938 to 1941 when we were bouncing around at zero and sometimes negative, but that hasn't happened since...
My 87-year-old mother is a native Kansan who grew up in the throes of the Great Depression and the Dust Bowl. She is a classic "buy and hold" investor who would make Warren Buffett proud. Her investment returns always exceeded those of my father, to his eternal consternation. He actively traded his stocks and produced decent returns, but nothing like those my mother achieved by simply buying stocks of companies she understood and liked, and then holding onto them...
We are in a period of forced liquidation, which has happened only eight or nine times in the past 150 years. The fact that it's historic doesn't make it any more fun, of course. But it is a pretty interesting time when there is forced selling of everything with no regard for facts or fundamentals at all. Historically, the way you make money in times like these is that you find things where the fundamentals are unimpaired. The fundamentals of GM are impaired. The fundamentals of Citigroup are impaired...
I presume that although we are in a severe recession it will not decompose into a full-scale depression, because that is what everyone is afraid of and desperate to avoid. Wall Street likes to say that the market has anticipated five of the last three recessions - the point being that a market crash frightens the authorities into taking necessary action.
Keynes observed that pragmatic businessmen often could not imagine that they were the slaves of defunct economists, but ironically, never is this more true than today of Keynes himself. So we run a huge deficit to postpone the worst. That means inflation, so bonds are unsatisfactory...
What the federal government has done so far- with TARP, bailing out Citigroup, etc. - has stemmed the bleeding, but what it hasn't done is fundamentally alter the landscape. Yes, there's been a tremendous amount of capital thrown into the system, but my concern is that it's just going to plug the holes. It's not going to create new liquidity, which is what the system so desperately needs...
We are clearly in a serious recession, and more aggressive action is needed to turn things around. The federal government initially underestimated the scale of the mortgage and housing crises and later panicked into an ever-changing series of ad hoc measures that at best dealt with some of the effects of the original crises. But homeowners have now lost $5 trillion, and 12 million families have mortgages in excess of the value of their homes. Therefore the economy will not stabilize until mortgages are adjusted down to the value of homes, with affordable payment schedules, and until new mortgages become available across the home-price spectrum. Till then, the poverty effect of falling house prices and unemployment moving up toward 7% will hold consumer spending back from its former 70% contribution to our economy.
Sunday, November 30, 2008
2008 in review and a look ahead
When 2008 began, the common wisdom of the day was that 2008 would prove to be a difficult year, and that builders should prepare for a market rebound sometime in 2009. However, with the world falling into recession and federal government bailouts becoming a staple of daily news, it now looks like any sustained market rebound could very well be postponed until 2010. Yet before you look for the nearest window in which to jump out of, there do remain specific opportunities for builders who are willing to conduct detailed demand studies and plan for worst-case scenarios that have the potential to improve along with the economy.
The current recession, like any others, began with a large shock to the economy – in this case, correcting a large imbalance in real estate markets nationwide. But what’s making this shock even worse is that the combination of falling prices and tighter credit is preventing people from either refinancing their way out of trouble and staying put or simply selling their homes and perhaps changing both locales and careers. Moreover, career paths once considered safe havens – such as in government, finance or media – have become just as perilous as technology, entertainment or, as many of you well know, in real estate.
If that wasn’t enough with which to contend, this same lack of credit is beginning to force a correction in a related area -- consumer spending and savings. Over the last 12 or 13 years, American households have been saving little and spending more on newer cars, larger homes and the latest in consumer gadgets. Add to that the wealth effect from rising home values and fatter stock market valuations, and it’s not hard to see why contributions to 401k accounts and savings accounts declined as household debt rose while incomes remained mostly stagnant.
Consequently we’re in what the folks at Beacon Economics have dubbed ‘the mother of all hangovers,’ which in the short-run leads to something called the ‘paradox of thrift:’ as the savings rate goes up (which is good for household budgets) the overall economy shrinks due to less overall demand. Yet in the long run, these types of economic shifts are critical for an eventual recovery better able to leverage a productive workforce, great technology and solid investments in infrastructure.
So what’s ahead for the overall U.S. economy in 2009? At this point in time, the forecast calls for mostly more hangovers with occasional sunny days in particular markets. As forecast recently by Beacon, GDP is expected to continue declining through the third quarter of 2009 as excessive demand based on debt is wrung out of the economy.
Rising unemployment rates, which are being met by calls for a second stimulus package from the nascent Obama Administration, will continue to gradually increase, peaking at 7.8% in early 2010 before dipping back down by the end of that year. Fortunately, the fear of near-term inflation will be kept in check and rise only slightly to approach 1.29% per quarter by the end of 2010, although the entire amount of various federal bail-outs of the automobile, housing and other industries will also undoubtedly impact long-term inflation rates if the Federal Reserve continues to print money.
What that likely means for the new home market in 2009 is continued turmoil, although retiring NAHB chief economist David Seiders is hopeful for a mid-year rebound. Looking at the most recent figures, although the pace of annual new home sales rose slightly in September over August levels to 464,000 units, that level is still down by one-third from a year ago and marks the lowest September numbers since 1981 (just three years ago in the boom year of 2005, 1.3 million homes were sold.)
Even as builders continue to clamp down on production in an attempt to bring down inventory levels, at current sales rates, the number of unsold single-family homes – 394,000 -- would take just over 10 months to sell. Still, at a recent semi-annual construction forecast, Seiders was hopeful that 2009 would be a rebound year and finish up with a seasonally adjusted rate of 600,000 single-family sales. Of course he is also paid to be optimistic!
One thing on which most economists agree is the important role played by new home affordability. With a median selling price of just over $218,000 in September, the sharpest spikes in regional sales have been in markets suffering the steepest price drops, and the consensus is for prices not to fall more than another 10 percent in 2009.
It’s also in those same areas that builders, who have already cut prices just about as far as they can and still remain in business, continue to compete with foreclosures, which in the West can account for as much as 40% of existing home sales. Yet as one economist presenting at the NAHB forecast concluded, builders don’t have to convince everyone to buy a new home – just some people.
