Via the BusinessWeek blog:
Goldman economist Jan Hatzius argues that softness in housing will be such a drag on the economy that the Federal Reserve, which has been steadily cranking short-term interest rates higher, is going to have to turn around and start cutting them to keep the economy from tanking. He's looking for a full percentage-point cut in 2007.
Here are Hatzius' bullet points:
**Houses are about 15% overvalued nationwide, ranging from 50% overvalued in Los Angeles to not overvalued at all in Houston.
**Housing construction, which is the highest share of GDP in half a century, will slow. And people will pull less cash out of their homes (through cash-out refinancings, etc.).
**Together, these drags will subtract 1.5 percentage points from the economy's underlying growth rate. For the past two years, housing's strength has lifted economic growth about 1 percentage point above its underlying rate. All told, then, the downturn in housing from will subtract 2.5 percentage points from GDP growth.
**Ben Bernanke probably isn't going to react right away. He'll wait until there's concrete evidence that a housing downturn is hurting the economy. "If and when that slowdown arrives, however, the response is likely to be fairly aggressive
February 06, 2006
Goldman Sachs: Housing 15% overvalued nationwide, 50% overvalued in LA, and will drag economy down
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10 comments:
If it is true that the Fed and others want this housing bubble to retract to truly healthy levels, then the Fed won't try and save it by lowering interest rates (they do have to keep the dollar strong afterall) but might instead come up with bogus reasons to say that even as the housing bubble pulls back, all is well, the economy is strong, inflation is under control...
The conundrum with lowering interest rates is that it may cause a bubble to develop in another area (stocks again?). The current rate of 4.5 is still pretty low with regards to historical levels and short of nuclear war I don't expect it would drop below 3% regardless of housing values. I hope to never see it at 1% again.
At this point the housing bubble is so large cutting rates right now to 3% wouldn't be able to save us from this collapse. Bubbles collapse under their own weight and that is what we are seeing, and many of us have a front row view.
Kieth - Now you can brag about telling me to short the home builders.
Even on my blog, which promotes investing on home builders, a couple of weeks ago I recognized the power of the lynch mob though.
When mortgage rates hit a three month low, profits rosed to record levels, and growth though slower was still forcasted - YET they all dove. I did recognize the power of the mob. I will be back though when your torch burns out.
p.s. what did you think of the increase dividends made by Home Depot, Hughes Supply, Rylan Homes, and others? Next quarter. I swear ext quarter I will be back.
Here is where the nightmare begins for many in the bubble. If land prices drop 20%. The cost of construction of a new home drops 12%.
But for the overal health of the nation THIS IS GREAT NEWS AND IS NEEDED.
If the cost of producing gas where to drop 12% this would be great. If the cost producing cars were to drop 12% this would be great news.
Lower cost of production in the end is what the country needs.
Good news is coming to the housing industry.
Supply side economics at work is the duel effect of lower taxes for the rich and low interest rates. Produce more houses than there are people to live in them. Yep, that is true supply side "voodoo" economics which only works when digging out from a recession as we found out under Reagan. No trickle down is happening under the genius we now have as President.
I live in the thick of this bubble: RIVERISDE, CA. I have about 250k equity. It it drops 50%. I really dont care. i will be back at what I owe the bank. Plus I plan to stay here for a while.
I was in the same situation. My house doubled, and I 'made' $250K in equity. I rushed to sell months ago when I saw no way for demand to push prices further.
Now I'm a renter, but I'm renting a house. I don't have to share walls, and it's just as nice.
If you are willing to risk whatever it takes to stay put, more power to you.
peterbob said...
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Anonymous said... I have about 250k equity. It it drops 50%. I really dont care.
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It doesn't matter where you started from. It only matters that you'd have more by selling now.
You obviously aren't familiar with California property taxes. I fully expect a 500-$600,000 haircut in the next few years. The problem is you have to live somewhere and moving to even half the house is a bigger money loser than sitting still. My taxes would jump from $210/mo to $600/mo for half the house. Making money in the bank even $20,000 more than that difference doesn't come anywhere near close to restoring our current lifestyle.
This is typical cart-before-the-horse mentality.
Sorry, but the fed might not be able to lower rates much more.
If foreign state investors get a whiff of inflation or diluted dollars, there will be a huge sucking sound from the east, west, north and south.
Once the Euro Oil Bourse opens, we might see an accelerated flight from the dollar. Bernanke would only be able to prop up GDP, not cheap prices which would increase substantially for foreign-made objects; pretty much everything the consumer buys except for food. Which, incidentally, is not part of CPI (perhaps now is the time to put it back in so that the USGov doesn't have to increase CPI-based entitlements?)
No, this is a tightrope walk. I would highly doubt that the Fed would be able to hit 3% anytime soon. I may be old and grey before we have that kind of global pricing power again.
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