Economist Mark Zandi says recession will end this year

Economist Mark Zandi, co-founder of Moody's Economy.com and author of the book Financial Shock (which I reviewed last November for Inman News), hosted a webinar last Friday on the state of the economy, and he thinks the recession will officially be over by the end of 2009. From a BuilderOnline.com story:

First, the good news. Mark Zandi, chief economist for Moody’s Economy.com, believes the Great Recession will end this year.

If that’s true, that will surely be welcomed by just about everyone. During this difficult economic period, more than 8 million jobs have been lost. Housing starts have dropped to an annualized level of 500,000 units, down from more than 2 million in 2005. Banks large and small have failed...

Now the bad news for builders. “Housing will not be an early source of growth in this recovery,” said Zandi. “That’s very different from past recoveries,” when housing has typically been a leading indicator of economic growth.

But as the economy regains its footing this year and next, Zandi said growth will happen—and quickly. In 2010’s fourth quarter, for example, he forecasts housing starts to return to an annualized pace of 1 million units, and a 1.6-million-unit annualized level in 2011’s fourth quarter. “Once we work through the impediments to demand, I do think we’ll see substantial pickup in economic activity in 2011 and 2012,” he said.

Still, housing represents a major risk to Zandi’s view that the recession—generally defined as two consecutive quarters of decline in real gross domestic product (GDP)—is nearly finished. If home prices continue to fall and foreclosures continue to rise, the recession will linger. “This is the one I am most worried about,” said Zandi, who is concerned that the Obama foreclosure mitigation efforts will not be successful—or successful enough. “I am increasingly worried that these impediments [to refinancing and modifying mortgages] cannot be overcome.” (The economist did not address these obstacles or what the solutions might be during the teleconference.)

That would seem to bode ill for places such as California, where housing’s boom has turned into a foreclosure bust. But Zandi, who developed a reputation as a housing bear earlier this decade, sounded more upbeat than one might expect about the Golden State, where the state has begun issuing IOUs. “California will probably turn with the rest of the United States,” he said. “The housing problems there were much less severe than in Florida, and Californians have been conditioned to believe that if they buy housing at low prices, they will be rewarded over a 10-year period. … They are more willing and able to get into the housing market.”

Zandi also had positive words for Texas, which has been a major market for builders large and small. “Texas will recover more quickly,” he said. “It doesn’t have the serious housing overhang that California and Florida have, and energy will be a source of growth for the state.”

Floridians, on contrast, should brace themselves for a long, slow walk back to economic health. “Florida will be one of the last states to get out of the recession,” Zandi predicted. It has a serious oversupply of housing, both single-family and condos, particularly in South Florida. “Migration flows have dried up. It’s very reliant on travel and tourism, which will remain impaired [economically].”

Housing prices to bottom in 4Q 2009?

Although we've heard many optimistic scenarios from economists predicting when housing prices will reach bottom, an analysis from Mark Zandi, chief economist for Moody's Economy.com is predicting the fourth quarter of this year. For those of you who might have recently watched Dr. Zandi's testimony in front of Congress on the subject of economics and government bail-outs or read his book "Financial Shock" (which I reviewed for Inman News in 2008), he's not ever been a housing bull. From a BuilderOnline.com story:

Zandi, along with his colleagues, think that "a bottom in the housing market is coming into view," according to "Housing in Crisis: When Will Metro Markets Recover?" a paper recently released by Economy.com. "The market's correction to date has been substantial, wringing out many of the excesses that precipitated the crash," the researchers say. "More than three years since the market began correcting, inventories are flattening, prices are coming back down to earth, and sales are approaching stability."

According to research done by Zandi, housing analyst Celia Chen, Credit Analytics Director Cristian deRitis, and Economist Andres Carbacho-Burgos, the housing market's low point probably will come in 2009's fourth quarter, as measured by U.S. national home prices, which will have fallen 36.2% from their peak in 2006's first quarter.

That's a national number, though, which means that some markets will recover sooner and others will lag behind.

For example, Moody's Economy.com researchers project thatSanta Cruz/Watsonville, Calif., will hit bottom in 2009's third quarter, when its home prices will have fallen 44.3% from the area's 2005 peak. Other markets are trending downward. Homeowners in Miami/Miami Beach/Kendall, Fla., will have to wait more than two years—to 2011's second quarter, when home prices will have plummeted 66.4% from their 2007 highs—for their home prices to stop eroding...

Review of "Financial Shock" now online at Inman News

My first writing assignment for Inman News, a book review of the book "Financial Shock" by economist Mark Zandi, co-founder of Moody's Economy.com, is now online. Since the book was published in the summer -- and therefore before the recent stock market swoons and other financial challenges -- I also interviewed Dr. Zandi by phone for his views on the recent events. What I like about Zandi, both over the phone and in his book, is his ability to speak in plain English about complex economic issues. From InmanNews.com:

When Mark Zandi, chief economist and co-founder of Moody's Economy.com, decided to write a book on the implosion of the subprime mortgage industry earlier this year, the global meltdown in the financial markets and impact to the overall economy had yet to surface. Yet because the book is so comprehensive, it still provides an excellent framework from which to understand the root causes of the crisis, from the mistakes made by Alan Greenspan to the rapid rise of irresponsible lenders who rewrote the rules of underwriting based on their own short-term interests...

Click here for full review.

An update on Mark Zandi's book "Financial Shock"

As one of my first freelance writing assignments for the real estate news syndicator Inman News, I'm going to be reviewing the book by Mark Zandi called Financial Shock: A 360º Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis.

Zandi, who is also widely quoted as an economic expert in the national press as well as a consultant to the McCain campaign, has been better known as Chief Economist and co-founder of Moody's Economy.com, so he's in a particularly good position to write the book, which provides a comprehensive overview of the sub-prime crisis, the related fall-out and, more importantly, some policy prescriptions for how to avoid similar mistakes in the future.

However, since his book was printed in July it missed out on some of the recent events, so I thought it was important to interview Dr. Zandi for any updates. Some money quotes:

On whether or not a government bailout is a wise move:

"It's guarding against the downside risks, which are quite considerable...If we don't down this path quickly, then the policy choices will get overwhelmed by the magnitude of the problem."

On what's next for the homebuilding industry:

"I would expect it to go through a very significant rationalization, and expect to see more failures, although the big, publicly traded builders are still in business and I don't think that's going to change."

On what else needs to be done to fix the housing market:

"Another write-down plan should be implemented and keep on trying to forestall foreclosures...It's a reasonable way to go to write down the first mortgage to the point that it becomes affordable and guarantee the part that's written down to the lender."

On the current economy:

"I think we've been in a recession for a year and will be through next summer -- about the worst we've experienced since the end of WWII, although perhaps not as bad as the 1982 downturn. I would expect unemployment rates to peak at 8% by early 2010."

The real cause of the subprime lending bubble

There's an interesting post by Annette Haddad at the L.A. Land blog citing a new report issued by UC Irvine's entitled "Subprime Lending and the Housing Bubble: Tail Wags Dog?" The report argues that it was actually the departure of Fannie Mae and Freddie Mac from the lending market in 2003 due to their accounting scandals and related political pressures. From the blog:

When Fannie Mae and Freddie Mac pulled back from the credit markets in 2003 and significantly slowed their lending volume in response to internal accounting problems and outside political pressure, the breach was filled by aggressive securities issuers in the private mortgage market.

And helping to fuel them on was an enthusiastic administration pushing the "dream of homeownership" without a whole lot of regulatory restraint. As a result, total mortgage volume skyrocketed and pushed up home prices "with momentum characteristic of a bubble," the study says.

Although cynics might be put off by the sponsors of the report, which included the Mortgage Bankers Association, the NAR and FreddieMac, I thought it interesting that Economy.com co-founder Mark Zandi also touches on this same subject in his book "Financial Shock: A 360-Degree Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis."