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Wednesday, May 13, 2009


greenspan on housing

oh dear. via bloomberg:

Former Federal Reserve Chairman Alan Greenspan said that the decline in the U.S. housing market may be bottoming and it’s “very easy to see” financial markets continuing to improve.

“We are finally beginning to see the seeds of a bottoming” in the housing industry, Greenspan said today during a conference of the National Association of Realtors in Washington. The U.S. is “at the edge of a major liquidation” in the stock of unsold properties, which may help to stabilize prices, Greenspan said.

Home-sales figures in recent weeks have shown a slower pace of decline, and the slide in property prices has eased, according to gauges including the S&P/Case-Shiller index.

The former Fed chief, who was among the first prominent economists to warn about the risk of a recession in 2007, said housing prices could fall another 5 percent without putting too much strain on the economy.

“We run into trouble if it’s very significantly more than that
,” Greenspan said. Housing prices remain “the critical Achilles’ heel” of the economy.

i've no idea what the former fed chief's methodology is, but i hope he's aware that house prices are likely to cover the next 5% down in about three or four months and keep right on going regardless of anything that's likely to happen in either inventories or sales. he's more or less saying that greater trouble for the economy is inevitable.

UPDATE: calculated risk highlights a new high in foreclosures -- product of the flood of delayed foreclosures in the pipe now bursting forth.

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ooops, I meant for this to go up here:

is the administration paying people to go out and spread the 'good news' of the economy?

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maybe this was part of the stimulus plan. we'll hire people like buffet, greenspan and diane sawyer to say everything is getting better. this is nothing more than cheerleading at this point.

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the best part, ccd, is that you can contrast greenspan with the ECRI's leading home price index, which was in february at a low point for this cycle and still falling. this should turn up fairly sharply at least several months before actual house prices do.

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ECRI's Lakshman hasn't exactly been scintillating in his call for a home price bottom in the past . At one forum, he even mentioned advising his brother to buy a home around 2007. My own analysis, for the LA/Orange County area, points to a bottom for our parts another 25%-ish lower from current levels if we hit valuation measures similar to the mid-nineties. Beacon Economics (of Thornberg fame) had similar results while calling for a bottom in Q3 2011 for this particular MSA.

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right rb -- i think you can see the blip on their leader that apparently provoked lakshman into that insanity. contextualize your indicator!

i picked out a chart from t2's presentation a while back regarding california house prices -- not sure you've seen it.

fwiw, from what i can tell anecdotally prices in my neighborhood -- 75th percentile suburban chicago -- have to come off another 20% nominal to even begin to make any sense vis-a-vis what i'm paying to rent. and with rents now trending down under vacancy and economic prressures, there are some scary scenarios for house prices.

as i recently emailed a friend:

the math around here doesn't work yet, and it will before this is over. when i can buy my house with a monthly payment of 80% of my rent, THEN i'll be shopping. (and even then there will be downside risk for us.) my rent is $2000 -- and for that payment, even with a 5% 30-year, putting down enough to avoid PMI, net of $7000/yr taxes, we could finance a $300,000 purchase price. houses on my block still list over $370k (down from $430k when we moved in a year ago). no dice!

even if mortgage rates fall to 3%, that would still only boost purchasing power to $330k or so. so prices have to come down significantly here regardless of what the government does on mortgage rates. and given the healthy number of old for-sale signs in the neighborhood (and small but growing number of unshoveled-driveway/unmowed-lawn foreclosures) they likely will. and if they go to 7%, we could similarly finance $260k.

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by "scary scenarios" i mostly mean john templeton's 2003 call. if government fiscal efforts at cash flow maintenance fail or are derailed, it's not impossible to imagine house prices down 90% in the bubble markets. t2's california chart looks like it's beelining for it -- and one has to remind oneself that that would be another 75% down for CA house prices, as a 90% drop is really two 70% drops compounded.

i think a lot of good folks believe that housing is so bad now that you really can't get hurt by buying in and waiting. something about catching a falling knife....

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Apparently good credit scores are hard these days and we therefore managed to get a 10% reduction in rent for a new lease -- in Irvine, that's $2200 rent for a 1700 sq feet SFR in a neighborhood selling currently at $350 per square feet. Using this calculator,
I arrived at ~ 25% further drop assuming a 5% mortgage rate and 20% downpayment -- which is also in the ballpark of prior trough price-to-income multiples and Beacon's forecast (you could sort of get rental parity at our originally listed price if you zero out maintenance costs). By my estimate on the Case-Shiller, I'd put the national at 10-15% lower from current levels. Persistent deflation of course takes all of these forecasts off the table.

I have seen your T2 chart, I've seen Templeton's forecast but I too hope that he turns out to be wrong!

BTW, Lakshman has in the past on the inflation/deflation debate frequently stated that deflation is not likely unless you have frequent recessions. He has recently softened his tone on that regard and admitted that it would be a possibility if we have another recession in an environment where growth has been consistently weakening for many years.

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