Too Much (panic) too Soon?
Tuesday, March 20, 2007 at 11:12PM I have indeed been pretty preoccupied as of late with the US housing market and housing markets beyond the US borders. I guess I, as many others, have been caught up in the negative market sentiments but I still I want to make clear that I still do not believe in a recession in the US which would reasonably be seen as materializing if GDP growth drops considerably below the 1% mark. The US economy is slowing and has been slowing since the latter part of 2006; pretty much every respectable macroeconomist has been calling this although of course there has been considerable variations in the severity of the predictions of the broad consequences and remnifications for the US economy. So indeed has there been too much panic too soon on the US economy and the subprime mess in the housing sector?
Well, Dave Altig has one of his blog round-ups and seems to find the tone to be a bit too pessimistic for the fundamentals to merit. In all fairness I think Altig has some well made points and especially this one is important ...
In the midst of this, let me make one brief plea for a little perspective: It might be good to remember that this was not entirely unexpected. Since at least summer I have been giving "economic outlook" speeches with the same basic message: Weakness in the residential housing market will continue for some time -- the bottom in prices seems unlikely until at least mid-year.
Now, I have already covered this in the intro above but let me repeat it then. Every macroeconomic forecast I have seen since the summer 2006 (beginning of Q4) be it global or regional has been including a slowing US in the general analysis and that includes the analyses made here at Alpha.Sources too. So as Dave points out ... this is not quite unexpected. Of course there is still the looming risk of a serious systemic risk reaction to the subprime fallout. In fact, you could say that the recessionary call for the US economy pretty much hinges on the viablity of the forecast that the subprime housing correction will spread to the overall housing market thus hurting consumer spending and perhaps also to other sectors of financial markets causing general and widespread turmoil. Some take this scenario as pretty given and as such it is only amount of time before the crash occurs. Some are even beginning to utter the possibility of a crash in the Dollar, an argument I try to counter here.
In the end, I think we need to see some serious macroeconomic data until we really start running for the exits. I expect growth in Q1 and Q2 in the US to come out tarnished by the housing correction but what about Q3 and Q4? Can we really say anything decisive here, I think not. There also seems to be some search of a self fulfilling prophecy in some of the commentaries made on the current economic environment in the US where the imperative of a crash in the US economy seems to shine above assessing the data we actually have at this point. In the end, I see worrying signs too here and especially the potential hit to US consumer spending is something to watch out for but at this point we are still lacking the economic data releases to finally push the panic button.
Reader Comments (2)
The Census Department's release of data on building permits issued through February showed a 26% drop year on year. Bloomberg has the following quote: “‘The market is definitely tightening standards, and to the degree the market controls the flow of capital, the Fed does not have to,’ said Carl Tannenbaum, chief economist at ABN Amro Holding.
And from the LA Times, “The shakeout in the sub-prime lending industry continued Monday, with more people losing their jobs and a prominent lender losing its name on a baseball stadium.” “Fremont General Corp. of Santa Monica said it had told ’significant numbers’ of its 2,400 home-loan employees to expect pink slips in two months.”
“The Orange-based parent of Ameriquest Mortgage Co. and Argent Mortgage Co. announced large but unspecified layoffs last week. On Monday, Ameriquest said that its name was coming off the Texas Rangers’ baseball stadium in Arlington, Texas.”
“‘You almost can relate this to the aerospace industry, when they had those massive layoffs’ after the end of the Cold War, said Jack Williams, president of the California Mortgage Brokers Assn.”
If Williams is right, I would expect to see significant outmigration from California over the next few years.
The United States likely will see 1.1 million foreclosures during the next six to seven years on adjustable-rate mortgages issued when home prices were at or near the peak of the market, a study released today by First American Corp. of Santa Ana says. The study assumes that home prices remain unchanged over the next six to seven years. A hypothetical 10 percent price drop, for example, would result in 1.9 million foreclosures, vs. 1.1 million, or 22 percent of the adjustable loans issued in the 2004-06 period.
I think it is fair to say that the assumption regarding home price change is faulty.
From Fortune:
"Janet Tavakoli, who runs Tavakoli Structured Finance, points out that AA-rated tranches of CDOs backed by subprime mortgage paper now yield far more than AA-rated debt backed by other assets - a sign that the market doesn’t trust the ratings.” “‘No one believes the ratings have any value,’ she says. Opined Grant’s Interest Rate Observer: ‘We are willing to bet that the agencies assigned too little weight to greed, ignorance, and soft criminality.
I see significant drops in employment in sectors relating to housing over the next few months in addition to the examples mentioned above. Suppliers of home-building materials, home-building tools and machinery, the real estate broker industry, furniture, and landscaping services and supplies will all see employment drops in my view.
In addition, the fact that homeowners will no longer be able to do cash out refinancings to spend money on luxuries or just paying the bills will reduce demand in many consumer sectors. I've seen data showing that sit-down restaurants have been suffering sales declines as consumers have had to manage their budgets to avoid missing mortgage payments.
To sum up, I see the probability of recession in 2007 in the US as fairly high.
Cheers,
Scott
I see your point and others' for that matter that this could turn ugly. As I said I want to see some real data on consumption before I join the recession crowd.
Having said that, the genie is indeed out of the bottle as Roubini puts it. This is a mess and questions are mounting as to the sustainability of this madness of these in essence mickey mouse mortgages and more importantly who is to blame?
Meanwhile, the economic fundamentals remain solid I think but this might of course not be enough to prevent a serious fallout. What seems a bit unrealistic to me is for this to turn into a systemic financial shock. Of course, I am not aware of all the connecting lines and dots but if you look at the subprime tranche of the entire housing/finance market it does seem relatively contained or what?