Thursday, October 11, 2007

How Bad Will It Get in the Housing Market?

Nouriel Roubini had a recent posting on his blog where he concluded he had been "Way Too Optimistic on the Housing Recession", this coming from someone known as one of the biggest bears on the housing market. He notes that his assessment of the housing market a few months, which many observers considered to be extreme, is now sounding very similar to the forecasts for the housing market coming from major investment banks on Wall Street. For example, Morgan Stanley is now calling for a cumulative decline in the number of housing starts to reach 56% while Goldman Sachs is saying housing prices will fall a further 15% on average before the dust settles sometime in 2008-2009. Robert Shiller is saying home prices will need to fall as much as 50% in some areas. So Nouriel was not too far off calling this the worst housing recession since the Great Depression.

The chief economist at Standard & Poors is now seconding this bleak outlook, as reported in the New York Post. (hat tip: NYC Housing Bubble). Some excerpts:

October 10,2007--A top economist predicted an even bleaker housing recession, saying it will last at least another two years, dragging down the American economy to trail the rest of the world. "Housing prices won't hit bottom until next summer and the losses won't peak for another two years, until 2009," said David Wyss, chief economist of Standard & Poor's. "We are not halfway through this crisis yet."

Although there has been an improved outlook for the economy overall, this housing sector analysis suggests we can look forward to deteriorating conditions in the housing market though 2009. Hang in there America.

Sudeep Reddy at the WSJ Real Time Economics blog reports on a AEI panel discussion today on the outlook for the housing market and its influence upon the broader economy. Here is some of what Sudeep reports:

But the recent interest-rate cut by the Federal Reserve, and a rallying stock market, aren’t swaying some economists from their expectation of a housing-induced recession. It was more a question of when, not if, during
a discussion today at the American Enterprise Institute about risks from the deflating mortgage and housing bubble.

"AEI visiting scholar John Makin said the recent performance of stocks suggests “financial markets are in a period of denial.” Housing downturns of today’s magnitude have always been followed by a recession, Mr. Makin says, calling the current environment a “textbook recession lead-up.”

“When you have a recession and the market doesn’t believe a recession [is coming], you get very radical changes in the financial markets,” he said. Credit instruments today “that are sort of hanging on by their fingernails…are not priced for a recession. I’m very concerned that we have a bit of a false dawn here, because that only delays the adjustment process.”

Desmond Lachman, a resident fellow at AEI, spelled out the key figures in case they’ve been forgotten: Previous housing booms featured a 20% inflation-adjusted appreciation in home prices. The current housing boom: an 80% increase in prices. House prices from 1979 to 2000 were 3.2 times people’s incomes; now they’re 4.5 times income. Mr. Lachman expects house prices to fall 15% to 30% from the peak to the ultimate trough. “This isn’t your regular kind of housing bust,” he said. “This is the worst housing bust that we’ve had in the post-war period.”

New York University economics professor Nouriel Roubini said housing starts would fall from the current annual rate of 1.3 million (a 12-year low) to 900,000 to clear the market glut, pushing down prices along the way. With a drop in business investment and consumer spending as well, that means a hard landing for the economy, he said. The stock market rallied in April and May of 2001 (just after a recession started) as the Fed eased interest rates. “The Fed cannot rescue neither the markets nor the economy,” he said."

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