More housing blues
The original source of the global economic crisis was the housing bust in the US. It is now over three years since this began, as most of the key parameters of the residential housing sector peaked between late 2005 and the second quarter of 2006. The effects of that reversal began to be felt in
the financial markets in early 2007 and with full force from July of that year. The rest, as they say, is history – although it is worth remembering that as late as early 2008, there were still many people who were convinced, and tried to convince others, that the ‘subprime crisis’ was a problem limited to some borrowers, in some areas, and only in the US.
I mention that because when Nuriel Roubini, at that time not yet carrying the ‘Dr Doom’ tag later affixed to him, suggested in February-March 2008 that the problem was not subprime mortgages, but rather the ‘subprime financial system’, he was dismissed as an extremist panic-monger. But the reason that Roubini and others – I would highlight Robert Shiller in this context – have been proved right all along, is because they insisted on crunching the numbers for the residential construction sector all the way through the boom, and were therefore able to see the inevitability of the bust. There was very little ‘prediction’ involved; the magnitude of the boom and the excesses it featured meant that a massive slump was certain, only its exact timing was unclear.
By extension, the view of these supposedly pessimistic – in fact, highly realistic – analysts, has been that no recovery is possible in the US, and hence in the global economy, until the housing bust hits bottom. Although it’s true that the economic crisis cannot be resolved until the financial sector has been stabilised, it is also true – although less widely admitted – that the stabilization of the financial sector depends, first and foremost, on the housing slump ending and, if not actually recovering, at least not deteriorating further. Any and all government plans to bail out the banks, however good or bad they may be, have no chance of working so long as the banking system is being bled to death by its exposure to ongoing losses from real-estate loans.
Thus it is essential to keep tabs on the state of the real-estate sector, both in the US and elsewhere. Unfortunately, despite the widespread cheer-leading about ‘green shoots’ and an imminent turnaround in the wider economy, the data from the real-estate front-line make clear that nothing of the sort can or will happen.
Space precludes any in-depth discussion of the ongoing trends in the US residential sector, or the rapidly-worsening situation in commercial real estate. I would repeat the recommendation that the best place to get ongoing objective analysis of the hard data is the Calculated Risk blog (www.calculatedriskblog.com). But by way of illustration, the number of foreclosure filings in April 2009 was over 342,000 – only a 1% increase over March, but 32% up on April 2008 and, at one foreclosure per 374 US housing units, another record-breaker. Foreclosures are very important, because they are closely correlated with many other economic and financial parameters, including unemployment, retail spending (via other consumer debt, such as credit cards) and, on the lending side, banking write-downs and losses. Banks foreclose and then try to sell of the property at a loss, thereby pushing down property prices generally and causing more borrowers to go ‘underwater’ (meaning their home is worth less than what they owe on it), which encourages them to walk away from the property and the debt. The flow of homes coming on to the market thus continues to swell – attracting increased buying interest from bargain-hunters, and thus a higher volume of transactions, but ensuring that the overall market remains very depressed and construction of new homes continues to decline.
None of this is new, of course. The problem is that instead of winding down, the pace of decline has picked up again. One main reason is that many states mandated a temporary ban on foreclosures last year; as objective analysts predicted at the time, when these periods of governmental intervention expired, the underlying problems of excess supply immediately re-emerged and the downward spiral recommenced. This is bad enough, but what’s worse – and newer — is that the commercial real estate slump is picking up speed and will destroy dozens, if not hundreds, of regional and local banks who were squeezed out of the residential mortgage market by the big banks and mortgage lenders (Countrywide, et al) but lent heavily to commercial projects. Worst of all is the possibility that the failed government intervention in the residential real-estate market may indicate the fate of the government’s attempt to end the slide in the wider economy.