Chris Ripkey of the Bank of Tokyo-Mitsubishi says the Fed will be raising interest rates by June 2010.
I seriously doubt the FED funds rate will be raised anytime this year. The Deflation boogeyman is out to get us, and deleveraging is a bitch. I find it hard to believe, but I’m agreeing with Paul Krugman on many points… not the least of which in his landmark article That 1937 Feeling.
Which makes me wonder. Krugman is hardly even close to a contrary indicator, but has nevertheless been a strong supporter of even more fiscal stimulus as the problem increased in intensity. One cannot fault him for being a flip-flopper. When he takes a point, he sticks with it. Which is why it’s not surprising to see him write this:
As you read the economic news, it will be important to remember, first of all, that blips — occasional good numbers, signifying nothing — are common even when the economy is, in fact, mired in a prolonged slump. In early 2002, for example, initial reports showed the economy growing at a 5.8 percent annual rate. But the unemployment rate kept rising for another year.
And in early 1996 preliminary reports showed the Japanese economy growing at an annual rate of more than 12 percent, leading to triumphant proclamations that “the economy has finally entered a phase of self-propelled recovery.” In fact, Japan was only halfway through its lost decade.
Such blips are often, in part, statistical illusions. But even more important, they’re usually caused by an “inventory bounce.” When the economy slumps, companies typically find themselves with large stocks of unsold goods. To work off their excess inventories, they slash production; once the excess has been disposed of, they raise production again, which shows up as a burst of growth in G.D.P. Unfortunately, growth caused by an inventory bounce is a one-shot affair unless underlying sources of demand, such as consumer spending and long-term investment, pick up.
Which brings us to the still grim fundamentals of the economic situation.
The bigger question is… is this just part of the schtick, or is it a really likely to be that bad.
My gut reaction after absorbing current economic news is that it is. However, it is easy to make 2 types of mistakes in a deep recession:
The first one is that momentum has a lot to do with the physics of the downturn… it will go along until there is sufficient uplift from other economic factors which counteract the downward pressure caused by household deleveraging. At this time, I cannot forsee what that is, but it’s normal to not be able to see the next growth area until it is upon us. Personally, I wouldn’t be surprised to find it being related to energy, alternative or otherwise, since at current oil prices, many alternatives can still be profitable (just not ethanol or solar).
The second one is that growth does not normally come from the area of the last economic bubble… housing will not lead us out of the downturn, and this is where much of the economic commentary is now. Think 2003 when journalists were still covering the tech stock market, while housing was going gangbusters. It wasn’t until we were deeply entrenched in a bubble of absolutely massive proportions that the general focus changed.
At the same time, a grave risk has arisen with respect to another bubble, especially one in gold. Unlike the 2 previous bubbles in stocks, which provided useful (albeit squandered) capital to very useful web-based technology and increased productivity and bubble in housing, which substantially increased and improved our housing stock, gold does little to provide anything of use to our country. You can’t eat it, you can’t live in it, it doesn’t improve productivity, and it certainly doesn’t earn any income; which makes this the worst kind of bubble; an unproductive one. At the end of it, we will only have great piles of shiny yellow metal. Difficult to store, illiquid, and barely wanted. But, that is looking past the peak. In the meantime, we can all feel safe in saying that we will continue to delude ourselves that little blocks of shiny yellow metal makes us safer, or richer, or god forbid happier. Personally, I’d be more interested in ensuring that we have adequate stocks of food, water, and financial reserves, both in households, and in government to prepare us for further downturns. As sure as the famine of 7 years came after the 7 fat years, so too will recessions follow booms; it’s the natural order of things.
This natural order has not been able to take its natural course; the worst banks in lending are still wards of the state. Instead of our chance to build a smart, efficient, and secure banking system, instead, we are perpetuating a bloated, mismanaged, stupid, and short-sighted banking cartel. Eventually, nature will have to be satisfied. As sure as the invisible hand balances the supply and demand, so too will the banking system that never cleansed itself of debt through bankruptcy stagger on, zombified with bad housing bets that the population can never and will never pay for.
Housing, on the other hand is woefully oversupplied, with shadow inventory reaching monumental proportions, with only more stacking up behind it faster than it is depleted. We’ll drag this housing recovery out another 10 or 15 years at this rate.
The T2 Partners paper provided by More Mortgage Meltdown can be downloaded here:
I recommend looking over the entire presentation, as it provides a play by play of where we have come in the last 3 years, and what to expect for the coming 3 years. I agree with the general assessment that we are in the middle innings of the overall price declines (perhaps in Inning 5 of 9), but the real movement is yet to come in the middle and high-end price tiers. Of course, there is no way of accounting for significant outside involvement that might change that outcome, however any change must be structural and permanent (such as offering citizenship to anyone purchasing real estate, offering 20% of the purchase price, no questions asked by the government, or total global thermonuclear war. I doubt many can understand what those outcomes would look like, so we’ll focus on the most likely scenarios.
The key is really what is happening and will continue to happen California. Their assesment, given by Mark Hanson, is in my opinion spot on to how I expect the next 2 years to play out:
California housing — at the low end — is ‘bottoming’ mostly because: a) median prices are down 55% from their peak over the past two years, thereby making the low end affordable; b) foreclosures have temporarily been cut by 66% through moratoriums reducing supply; and c) demand is picking up going into the busy season.
But the moratoriums are ending and the number of foreclosures in the pipeline is massive — they will start showing themselves as REO over the near to mid-term. The Obama plan held the foreclosure wave back, creating a huge backlog and now the servicers are testing hundreds of thousands of defaults against the new loss mitigation initiatives. We presently see the Notice of Defaults at record highs and Notice of Trustee Sales back up to 9 month highs — there is no reason for a loan to go to the Notice of Trustee Sale stage if indeed it wasn’t a foreclosure. However, the new ‘batch’ are not only from the low end but a wide mix all the way up to several million dollars in present value.
Because the majority of buyers are in ultra low and low-mid prices ranges, the supply-demand imbalance from foreclosures and organic supply will crush the mid-to-upper priced properties in 2009. We already have early seasonal hard data proving this. As the mid-to-upper end go through their respective implosions this year and the volume of sales in these bands increase as prices tumble, the mix shift will raise median and average house prices creating the ultimate in false bottoms. We also have data proving this phenomenon.
You can find this narrative (and much more) on slide 62.
CNN Money today gives us our money shot for the day while interviewing Realty Trac for insight into the April foreclosure numbers:
Foreclosures in April exceeded even March’s blistering pace with a record 342,000 homes receiving notices of default, auction notices or undergoing bank repossessions, according to a regular industry report.
One of every 374 U.S. homes received a filing during the month, the highest monthly rate that RealtyTrac, an online marketer of foreclosed properties, has recorded in four-plus years of record keeping.
“April was a shocker,” said Rick Sharga, a spokesman for RealtyTrac. “I would have bet on a dip because March foreclosures were so high.
Instead, filings inched up 1% from March and rose 32% compared with April 2008.
Indeed, for those who do not keep up with the lingo, you may want to google what a shocker is.
For those wondering, I’ll give a visual:
If this is in bad taste, let me know, but the foreclosure numbers are definitely a surprise. Sometimes, I’m not sure if living in SoCal has warped my sense of humor.
And, for those seeing green shoots in the economy, I doubt you”ll be seeing a corresponding positive report out of housing. We may very well be in a strong dead cat bounce this year (much like California experienced in 1993) as housing prices realign themselves.
There were 63,900 bank repossessions, the last stop in the foreclosure process. More than 1.3 million homes have now been lost to foreclosure since the market meltdown began in August 2007.
The increasing foreclosures will force RealtyTrac to rethink its forecasts, according to Sharga. “We had been predicting 3.4 million filings for the year,” he said, “but we’ll blow those numbers out of the water.”
With so much uncertainty, I can only stand by my predictions for 2009. There will be some up and some down areas. Overall, the direction is down.
If you want to see something really interesting, check out Lawrence Yun talking about something that bloggers caught onto long before the NAR did, shadow inventory… when sales come back, so do sellers. whocoodanode?
In addition, the most startling revelation (which bypassed the host’s attention) was Larry the Liar’s admission that Realtors are bypassing entering direct sales into the MLS.
So, now that the MLS is no longer valid as a data collection tool, what is the next step? Maybe the NAR will offer an open MLS?
For anyone interested in why interest rates on property are still going up, here’s a great chart courtesy of Paul Krugman’s Opinion column today:
I’m predicting whatever lift we saw this summer from decent rates (muting the crash underway), will disappear and the next leg down of prices will continue. This dead cat bounce is dead!
I will be officially revising my 2008 Socal Real Estate estimates based on recent action.