Housing and the economy Christopher Thornberg Principal Beacon Economic

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

6-Dec7-Dec Resale houses Los Angeles 6,0132,853-53% Orange 1, % Riverside 2,2221,238-44% San Bernardino 2, % San Diego 1,8471,074-42% Ventura %

Median Prices Q1 89Q1 99Q1 07 Alameda$179$228$618 Contra Costa$163$209$584 Los Angeles$185$177$553 Orange$223$246$681 Riverside$106$117$409 San Bern.$93$98$368 San Diego$160$200$546 San Francisco$268$327$799 Santa Clara$231$334$738 Ventura$233$215$610 Owner Affordability %138%66% 100%153%72% 79%147%61% 77%125%59% 112%187%76% 131%223%81% 86%131%67% 55%100%50% 78%114%66% 71%139%64% Affordability based on FHA definition

LA -9% SD -13% SF -7.5%

The Fed? Only Indirectly The Paulson plan? Useless Fannie and Freddie? Probably not Congress? Yes, but at what cost

Can construction stop the economy? No- its not big enough Does the credit crunch matter? Not as long as the Fed does its job as lender of last resort What does matter? The consumer

Beacon Economics

Illinois1.2Virginia0.2North Carolina-0.2 Nevada1.1Utah0.2North Dakota-0.3 Florida1Vermont0.2Washington-0.3 California0.9Rhode Island0.1Wyoming-0.3 Connecticut0.8Ohio0.1District of Columbia-0.4 Hawaii0.8Oregon0.1South Dakota-0.4 Montana0.5Arizona0Idaho-0.5 Oklahoma0.4Colorado0New Mexico-0.5 Iowa0.4Delaware0Pennsylvania-0.5 New York0.4Indiana0Texas-0.5 Change November 06 to Nov 07

Beacon Economics Recession is starting now Q4 or Q1 academic- depends on NBER Negative growth through Q3 08 Doldrums in 2009 Recovery 2010 Mild downturn Worse if financial losses add up to more than expected Worse if inflation creeps in to the economy

Local Government Finance CAUS Support from State47.0%37.4% Property Taxes33.2%47.7% Surplus1.0%-0.8% The downside of Prop 13

Beacon Economics

Recession VERY likely Consumer weakness coming to light Business weakness to start on profit issues Exports will not be able to carry the day Housing to go into freefall in 08 Price declines, bottom found in 09 to 10 State Local Budgets are a mess Actual deficit larger than $14 billion No quick recovery in revenuesthis is structural / not cyclical Impact as large on local governments as state gov.

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