February 28, 2006

Countrywide's Mozilo and Yale's Shiller predicting 30%+ meltdowns

Sorry, no link - from BusinessWeek. However, here's the killer quotes from Mozilo and Shiller. And don't forget, Mozilo has already cashed in bigtime, dumping his Countrywide shares.

Run. When the insider fat cat who made the loans is telling you it's about to fall apart (and in the media - not drunk at a cocktail party), trust him, it's about to fall apart. Amazing.

How severe are the price declines you are expecting?

MOZILO: I would expect a general decline of 5% to 10% throughout the country, some areas 20%. And in areas where you have had heavy speculation, you could have 30%. We will see…sellers back off from the prices they have been demanding. A year or a year and half from now, you will have seen a slow deterioration of home values and a substantial deterioration in those areas where there has been speculative excess.”
“SHILLER: In Los Angeles in the last cycle, prices peaked in 1989 and bottomed out in 1997. In that interval, L.A. lost 40% of its real value. I can see that happening there again or in any of the cities that have had tremendous price increases, and there are quite a number of them in this country. I think a pullback of as much as 40% is plausible in many places.”

Where are the most vulnerable areas?

MOZILO: Miami and Fort Lauderdale. Las Vegas is another area where there is heavy speculation. That means people were buying three, four, five condos at a time and thinking they can flip them. Those are the spots we have identified where… we will only make loans when we know the person will live [in the housing].”

“SHILLER: The most spectacular cases are Phoenix and Las Vegas. They soared so suddenly. But others [are vulnerable, too,] such as San Francisco, San Diego, L.A., really much of California.”


Anonymous said...

Dr. Shiller is a brilliant man who has never been proven wrong yet...

I wouldn't bet against him.

Anonymous said...

Hey Keith, great stuff.

Shiller is indeed brilliant and I am a big fan - I loved his white paper on the wealth effect especially. However, I wish he wouldn't use the 40% decline example in LA - its very misleading. He has mentioned that on prior occasions. Its been thoroughly hashed out that the reason why home prices dropped during that period was from the massive layoffs in the aerospace industry, not because of speculative excess. When a major employer leaves a market suddenly, employment falls and therefore housing prices fall. This happened in the texas oil patch 20 years ago as well. We are not losing entire industries in these locations that I am aware of. Detroit anyone? Still there is reason to be concerned. As far as Mozilo goes, what can he be thinking? Hmmm.

Van Housing Blogger said...

"We are not losing entire industries in these locations that I am aware of."

Isn't most of the mortgage industry based in OC/LA?

ColumbusOH said...

Keith, great stuff. Would you mind posting the source of this article ? I would like to read the whole article or interview.


Anonymous said...

jonathon miller,

I agree that a jolt to employment played a major factor in the last So Cal crash. One thing you want to keep in mind though is that interest rates fell along with real estate values in the early 90's. What would the downturn have looked like in the face of higher interest rates and tightening lending standards? The current run up in CA real estate today is far greater than it was in the late 80's. It begs the question, whats worse a steep correction or a long drawn out slightly declining to stagnate real estate market lasting over 10 years. When you price in 10 to 15 years of appreciation in 2.5 years thats about the best case scenario.

Anonymous said...



Anonymous said...

When the 1980 bubble burst in LA, prices took 4-6 years to recover. When the 1989 bubble burst in LA, prices took 7-9 years to recover and most analysts did attribute the bursting to the loss of 700,000 aerospace industry jobs tied to the end of the cold war. However, the affordibility index had fallen to record lows in 1989 at 14% and mortgage rates were around 11%. Now the affordiblity index is about 9% and mortgage rates are 6.5% with no place to go but up. And, yes, the LA area is almost as dependent on mortgage/construction industry jobs now as it was on aerospace during the 1980s. It is the headquarters of countrywide, ameriquest, KB Homes, and others as well as having a lot of jobs at WAMU and there are many many real estate 'professionals' driving about in their leased luxury vehicles. Shiller has been crying bubble for years and his partner, Karl Case, has disagreed for years. I heard Case speak last year and give every argument for their being a bubble and then at the end say, "but wages will catch up and there won't be a significant correction." He wasn't convincing and I think Shiller is right. So California is about to blow and dump 40% just like it did in 1989, but this bubble is much bigger because of the absurd percentage of I/O, optin ARM, and 0-down loans given to speculators and regular homeowners who are now or soon will be upside down.

blogger said...

1) you want to see loss of industries add fire to the bubble's popping? drive down to phoenix, where az republic quoted that over 40% of all jobs (ALL JOBS) are tied to homebuilding in some way. so add horrific job loss to speculative bubble and that's why it's the mother of all bubbles in human history

2) for the article, gotta buy businessweek

brokersleaveyoubroke said...

I think 40% is optomistic. In the last 5 years trillions of dollars in refi money was pumped into the economy. Not only is that money no longer flowing into the economy but now consumers have to pay those trillions back at increasing interest rates. Never before has so much of our economy depended on rising house prices. I'm not a gloom and doomer, just a realist. I have kids ready to enter the job market I wish things looked brighter.

Anonymous said...

That's why he gets paid the big bucks while I keep my desk job...


First, take his advise: beware of who is paying his rent. But, his commentary has credance and very intriguing.

People give the Fed too much credit for taming inflation when in fact inflation has merely transferred to the home buyers in the form of overpriced homes. Worse, unlike traditional factors that contribute to inflation such as factories buying capital equipment (i.e. active investments that eventually produce an output and pay down the inflation it has caused), housing has no such thing (i.e. a consumable, that does not produce any sellable item).

Eventually the so called pay down will come when the loans reset and the owner of the debt instrument will have to make a decision to refinance (which is becoming more difficult due to all the comments in this blog), or liquidate, thereby causing a glut of homes for sale. This is happening now as we speak.

On the other hand though, the doomsday scenario might be unlikely. Like me - a home buyer waiting on the sidelines, the pent up demand will eventually materialize. Whether that happens after a 10% , 15%, or 30% drop is anybody's guess.

Anonymous said...

From 2001 to 2005 %43 of ALL new jobs were housing related. I believe the percentage is even higher in LA and OFF THE CHARTS in Orange County.

The aerospace job loses will PALE in comparison to the REAL ESTATE JOB LOSES that have already started occuring.

Much of these are low-skilled, inexperience sales people that went from 25K per year jobs to 150K per year jobs overnight!

I am betting big time on the crash, biggest investment bet I have made in my lifetime!

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