Tuesday, January 22, 2008

Deep doo-doo

We are in deep doo-doo. Things won't be as they were the last couple of decades.

As I wrote this the Dow gyrated after the foreign markets' crash yesterday and the Fed's 3/4 point emergency rate cut, opening down 460 this morning, closing down 128.

But previous rate cuts had no lasting effect. Paul Krugman noted Bernanke's study of Japan in the 1990s and its limits to monetary policy. Herb Greenberg asked, "what if they do a big-bath cut and it doesn’t help?" Peter Viles concluded, "You can forget the parallels to the early '90s real estate slump - this is worse; the Fed just said so." And Housing Doom asked, "The Fed has apparently decided to play their 'trump card' in this round of what has become a high stakes poker game. I wonder what happens when they need to play another hand?"

Here and on other bubble blogs we've been watching the fundamentals, wondering when the markets would catch up to reality. A year ago the bulls still called for a "soft landing." Last summer was the "subprime crisis," but "contained." Now they concede a possible recession, but expect a 2Q 2008 upturn. I don't think so with their track record.

The old business cycle was business investment, especially in manufacturing. The new one has been housing construction and furnishing, prolonged by the housing bubble and mortgage equity withdrawal. Bush's one-time-payment stimulus package may only transfer private debt to public debt. We have a big debt hole to climb out of.

Longer term, be sure to see the David Walker (head of U.S. Government Accountability Office) video making the rounds (YouTube version and 60 Minutes version, July 8, 2007). It gives a bleak view of the unsustainable U.S. budget, especially Social Security and Medicare, also covered by Charles Hugh Smith, here, for example.

So, what does this do to Westside real estate prices? Hmmm ... recession, falling net worth, tightened lending standards, falling neighboring prices? It reinforces my expectation of a fall that won't end anytime soon.


california resident said...

What does it mean to Westside prices?!

I think that it is obvious what all of this means. Only a blind fool would suggest that the exorbitant prices that real estate climbed to on the Westside (and much of the United States) was the result of sustainable economic forces.

A huge amount of money just evaporated and now we must pay for the consequences.

And the crash has only started.

This is going to make the tech bubble "POP!" look like the good ole days.

We're screwed.

california resident said...

This is an omen of things to come:

"CHARLOTTE, N.C. - The credit crisis all but wiped out fourth-quarter earnings at Bank of America Corp. and Wachovia Corp., but the banks did make some money — something that can't be said for Citigroup and some other Wall Street financial firms.

Profits fell 95 percent at Bank of America and 98 percent at Wachovia. The numbers, worse than analysts expected, show that the global credit squeeze is still causing more customers to fall behind on their bills and banks to lose money on securities they own...."

So, what effect is this going to have on the Westside?

It's the economy, stupid.

Anonymous said...

I actually agree with all the bears on this blog, and things are indeed going to hit the fan, taking housing down with it. The only exception so far has been West LA housing, particularly the 90402. Those areas were affected in terms of slightly more inventory, but other than purely anecdotal evidence (see the Santa Monica Distress blog series on the 90402), and only including holding costs etc., those areas appear to have been spared.

Query whether the 90402 will continue to be spared, and if not, how well it will hold up . . .

Anonymous said...

I think the bearishness during a down market is every bit as amusing as the baseless optimism during a bubble. I remember with equal fondness friends buying houses in 2005 and 2006 insisting that it was reasonable to have a mortgage payment that was double the cost of renting... but I also remember people in 2001 saying that World War III was coming and global depression was inevitable.

I don't think this recession, if it hits, will be bad. There is still plenty of room for monetary easing and fiscal stimulus. I concede, the long-term effects of both are troubling, but I think we can and will push off the day of reckoning for at least another five to ten years. Housing prices in LA are truly obscene, as they are in a few other markets, but nationwide that's not the case. Stock values are below historical P/E ratios with the recent downturn... and even before it, the S&P was just getting back to it's 2000 levels when trouble hit.

There is much more to say (re stickyness of housing prices given their illiquidity; long-term fiscal nightmare of Medicare, etc.). But the doom and gloom is misplaced.

Anonymous said...

This proves that the situation is dire (this is from the Federal Reserve):

"Press Release
Release Date: January 22, 2008

For immediate release
The Federal Open Market Committee has decided to lower its target for the federal funds rate 75 basis points to 3-1/2 percent.

The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully...."

When is the last time the Fed lowered the rate 75 basis points? Cheap money got us into this mess and the Fed thinks that lowering the interest rates will save the day???

What is everyone smoking?

Mikey said...

Alan Greenspan is gonna need an unmarked grave.

allsouledout said...

Agree with Anon at 6:13pm ... there's always overreactions on both sides of a cycle.

That said, I still think LA home prices have another 20% downside in most areas. Maybe 19.5% in the 90402 .


dwr said...

"Agree with Anon at 6:13pm ... there's always overreactions on both sides of a cycle."

Exactly, people will overreact, which is why prices always go below the long-term trend line on the down cycle. And which is why you need to multiply your numbers by a factor of 2 (especially in the 90402).

Anonymous said...

Like the masonic law of the pendulum, the further it swings in one direction it will swing back as far. Westside prices over the past 6 years have not been based on reality (income, etc.) but rather in an artificial sense of prosperity fueled by cheap money, a White House looking to prop up the economy and dishonest, greedy lenders and real estate agents. Finally and hopefully the time has come to adjust back to normalcy. Affordable housing is needed everywhere, including the westside.

Anonymous said...

Did anyone see the L.A. Times business page today? Look at where the foreclosures are....in places no one wanted to live in the firt place, but felt they HAD to get into the market or be labeled as' missing out'....the Westside is not recession proof (I bought my SM home from the gov't in 1994 after the Chas. Keating S & L went under), but the world envies our climate and location....so SM is safe....for now.

Anonymous said...

SM is not 'safe for now'. there are plenty of props in foreclosure in SM as we speak. Peter Mullins (AP Real Estate magnate) has 3 props going to trustee sale this month.

notice, folks--the 'new listings' coming onto the MLS are the old expired listings. today 2613 5TH ST (a former 'Mullins Special' listed last summer at ca. $1.6 mil) came back at $1.079 mil with a new agent. the owners can't pay their prop taxes of ca 6.5K/yr.

why why why would anyone list a house today? one reason, folks--they're in trouble. if you check prop taxes as these listings come out, ca. 25% are in default. those that aren't paid no money down, have PMI insurance, so the banks are paying their taxes for them. like the man said 'deep doo-doo'.

Anonymous said...

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