Presentation on theme: "Why the housing meltdown is hurting the US economy Jon Haveman Principal February 13, 2008."— Presentation transcript:
Why the housing meltdown is hurting the US economy Jon Haveman Principal February 13, 2008
What’s going on? Yet denial still runs strong Survey of Professional Forecasters
What is a Recession? Economic Growth is all about trends and bends Trends are long run growth trends driven by demographics productivity and policy Bends are short run fluctuations driven by some imbalances Imbalances have to be large, rapid and sustained A recession is a bend 2 quarters negative growth rule confuses the symptoms with the disease Shock to economy causes rapid changes, factor markets can’t clear: Unemployment rises, capacity utilization falls Recovery is a given, but the process is painful
Trends and the 2001 ‘Bend’ US Corporate Profits US Business Investment Log Run Growth 3.1%
2001: An odd cycle No Housing Cycle No Consumer Cycle Just one big investment cycle
How did California fare?
A slow recovery in SJ?
2000 was unusual, not today
Local Growth Yr % Construction % Manufacturing % Computer % Wholesale trade % Retail trade % Information % Finance and insurance % Real estate and rental and leasing % Professional and technical services % Administrative and waste services % Educational services % Health care and social assistance % Arts, entertainment, and recreation6640.0% Accommodation and food services % Other services, except government % Government % Local Output (GSP) Growth Q Yr Ch Total, All Industries924,83348,967 Construction48,7004,400 Durable Goods159,933-1,500 Computer and Electronic115, Wholesale Trade39,7334,833 Retail Trade88,2332,567 Information40,7677,133 Internet Service Providers20,0676,200 Financial Activities37,2671,267 Professional, Scientific108,10010,267 Computer Systems48,3335,300 Administrative Support53, Educational Services32,4673,233 Health Care74,3677,067 Leisure and Hospitality77,8677,467 Government98,8332,300 Local Employment Growth 04-07
So what’s happening today? What’s right? Current national numbers: we are NOT in a recession
GDP / Employment
Industry has been stable.
Consumers: Weak, but not recession weak
Financial Markets? Turbulent but Solid Fundamentals
So what’s happening today? What’s wrong? Housing!
Transactions: Drop started in late 05
What does residential construction mean to the economy? Not Much
The 3 parts of a housing bubble 1. The transaction cycle The collapse of the pyramid 2. The building cycle The loss of jobs 3. The price cycle The impact on financial markets and consumer spending
Reason # 2 The Mortgage Markets Bernanke May 2007: “About 7-1/2 million first-lien subprime mortgages are now outstanding, accounting for about 14 percent of all first-lien mortgages.1 So-called near-prime loans--loans to borrowers who typically have higher credit scores than subprime borrowers but whose applications may have other higher-risk aspects-- account for an additional 8 to 10 percent of mortgages.”
The housing markets Beacon Economics % Agg Value Share Nation % Agg Value Share Nation NEVADA21.0%2.7%DELAWARE5.8%0.2% CALIFORNIA13.5%33.7%ILLINOIS5.8%3.0% ARIZONA12.8%3.5%NEW YORK5.8%5.1% FLORIDA11.4%10.2%MICHIGAN5.7%1.9% UTAH9.8%0.8%MINNESOTA5.7%1.3% COLORADO9.7%2.2%TENNESSEE5.6%0.9% HAWAII9.0%0.8%NEW JERSEY5.5%2.9% GEORGIA8.5%2.4%CONNECTICUT5.3%1.1% MARYLAND8.1%2.8%NEW MEXICO5.2%0.3% IDAHO7.8%0.4%NORTH CAROLINA5.2%1.3% WASHINGTON7.7%2.5%NEW HAMPSHIRE5.1%0.3% DISTRICT OF COLUMBIA7.7%0.3%INDIANA4.9%0.8% TEXAS7.5%3.6%OHIO4.8%1.5% VIRGINIA7.5%3.0%MASSACHUSETTS4.8%2.0% OREGON7.3%1.2%MISSOURI4.8%0.8% RHODE ISLAND6.5%0.3%WYOMING4.5%0.1% SOUTH CAROLINA6.0%0.7%OKLAHOMA4.4%0.3% Subprime / Alt A by state as share of State Est. Value of Homes (1010 data only)
The inevitable meltdown…
Worst is to come…
The Price Correction has begun LA -9% SD -13% SF -7.5%
Yeah- so who cares?
Consumer Savings Beacon Economics
The Home ATM Beacon Economics
Some New Vocabulary… Intaxication!: Euphoria at getting a tax refund, which lasts until you realize it was your money to start with. Dopeler effect: The tendency of stupid ideas to seem smarter when they come at you rapidly. Cashtration: The act of buying a house, which renders the subject financially impotent for an indefinite period of time. Source: Washington Post's Mensa Invitational
Summer GDP Growth Surge: Illusion Beacon Economics
Can Exports / Business Spending Save the Day? Beacon Economics
The State? Already there Previous Dec 07Years TotalDec06Dec05 California 6.1%4.8%5.1% Southern California Los Angeles-Long Beach5.5%4.5%5.1% Santa Ana-Anaheim4.6%3.5% San Diego-Carlsbad5.3%4.1% Riverside-San Bernardino6.7%5.1%5.0% Oxnard-Thousand Oaks5.7%4.4% Bay Region East Bay5.4%4.4%4.7% San Francisco-San Mateo4.6%3.9%4.2% San Jose-Sunnyvale5.5%4.5%4.9% Santa Rosa-Petaluma5.1%4.0%4.2% Central Valley Sacramento-Arden-Arcade6.2%4.8%4.7% Stockton9.7%7.3% Vallejo-Fairfield6.1%4.7%5.0% Fresno9.7%7.5%7.9% Bakersfield9.4%7.2%7.5% Modesto10.2%7.8%7.9% Visalia-Porterville9.8%7.9%8.3%
Local Consumer Spending
Can we avoid it? NO Federal Reserve pushing on a string with consumers Important role to play in financial markets Fiscal stimulus $150 billion of tax rebates vs. $2 trillion in real estate losses
Economic Forecast Beacon Economics Recession starting now Q4 or Q1 academic- depends on NBER Negative growth through Q3 08 Doldrums in 2009 Recovery 2010 Medium downturn Worse if financial losses add up to more than expected Worse if inflation creeps in to the economy
SJ Commercial Market Demand? Weak Economy Business spending follows consumer spending Weak employment Slowing in finance, professional services, IT Office space takes a hit Weak local spending Housing and weak labor market Retail takes a hit San Jose on periphery, not epicenter Hit less hard than the state Not a lot of new supply The big problem: commercial investors Highly leveraged investments Falling cap rates Small weakness implies big problems
San Jose Cap Rates: Too low ResMBS first to go ComMBS is next…
Summary Beacon Economics Recession is here… Consumer weakness coming to light Business weakness to start on profit issues Exports will not be able to carry the day Labor market figures sending a clear signal Debt markets a mess What kind of recession? Not huge, 2% decline followed by period of doldrums Might get worse—depends on financial markets
DON’T PANIC!!! Expansions are for growth Recessions are about market share Heed our warnings and get into a position to exploit the recovery when it comes!
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