A Different Housing Crisis: Now and Then
You’re thinking what we’re thinking, right?
Nouriel Roubini’s gloominous look ahead on CNBC today sees good outmatched by bad.
Here’s an excerpt from “The Modern Economics of Housing,” by Randall Johnston Pozdena.
New construction of housing units during the depression was far below the levels recorded in the prosperous mid-1920s. Approximately 900,000 new housing units were built each year between 1923 and 1926. In 1930 only 330,000 new units were added and in 1933, at the nadir of homebuilding activity, a mere 93,000 new housing units were reported to have been started. As recovery from the depression proceeded (perhaps, the effects of government housing assistance began to have an effect), new construction activity gradually recovered. However, as late as 1940, the volume of new housing starts was still 30 percent below the levels recorded in the 1920s.
Here’s another way to look at the data, in housing starts per thousand households. First, though, consider what happened to household formations during The Depression. In the nine years from 1920 to 1929, about 600,000 new households per year formed. In the following nine-year stretch, household formation dropped by more than 100,000 homes a year.
Here went demand for a sustained amount of time, and the subsequent nine-year period, household formations averaged over 60% more than during the Depression years, at about 760,000 a year.
That’s why many parents remember living during the 1930s with their grandparents in three-generation harmony.
At any rate, housing’s 1920s peak came in 1925, when there were 34 housing starts per 1,000 households. Six years later, that number had fallen to single digits, 8.3 starts per 1,000 households, and the low point was 1933, when only 3 starts per 1,000 households got a start. It was 1937 before starts per thousand households broke double-digits again, and the start of World War II before the stat came close to 20 starts per thousand.
Here’s a quote from Jeff Booth’s BuildDirect blog:
But by looking at the Great Depression, we can draw parallels to when we can expect a bottom in housing in the current cycle.
As I said previously, housing starts fell by 90% to 93,000 units at the low of the Great Depression. If we were to assume that we were to reach the lows of 1933, housing starts per person would translate into a current day housing start number of 213,000.
I believe it is highly improbable that we see housing starts fall to that level. Why?
The main difference between the Great Depression and today is in terms of housing starts is the speed of the decline. Four years after the peak of the cycle in 1925 housing starts were still at .0041 starts per person or 509,000 units. That would be the equivalent of building 1,165,054 new units today. (or using the same 4 years - a higher number today and 1,165,054 units in 2010).
There are two issues here to draw insight from.
One is that the economy slowed down sustainably for long enough to seriously impact demand for either for-sale or for-rent product, and only a strong recovery in the 1940s set up a big, lasting housing bounce in the latter ’40s and 1950s.
The other is, we don’t know where homeownership will settle as a policy initiative. Real questions and no small amount of rancor have built up around the issue of trying to expand the ownership universe via imaginative financing options and economic growth.
Here’s what we’ve learned from the debate so far.
- people don’t like that idea in concept, especially in hindsight, even if they benefited hugely from the economic run up.
- punishment for those who financially miscalculate must be harsh and immediate–just the way some people treat a puppy who’s had an accident–in order to satisfy economic principles, one would think
- Bottom-calling is becoming the preferred full-contact sport of the blogosphere.
What else we know as we listen to econ icon Roubini is that policy needs to mind the business of the long haul and ensure that the artificial and unscrupulous inflators of growth that cropped up in the past 15 years get dealt with.
Willing to Settle for Yellow Weeds Over Scorched Earth? You Betcha!
The good news here is of the second-derivative nature. NYU econ icon Nouriel Roubini offers nine reasons for continued pessimism about the outlook for 2009, 2010, and well, just about every year after that.
Dr. Doom's Top 9
The crucial issue, however, is not when the global economy will bottom out, but whether the global recovery – whenever it comes – will be robust or weak over the medium term. One cannot rule out a couple of quarters of sharp GDP growth as the inventory cycle and the massive policy boost lead to a short-term revival. But those tentative green shoots that we hear so much about these days may well be overrun by yellow weeds even in the medium term, heralding a weak global recovery over the next two years.
For Roubini, the economy’s antonym for Houdini, continued doom has nine principal causes, which he happily enumerates here.
Still, that’s not as bad as it was a few months ago. Then, it would have been a Top 10 list.
Home Building’s Stress Test
Ask just about anybody in real estate, construction, and design how they feel their business is going to go in the next 12 months, and our bet is that almost every one of them would say something like, ”who knows?” Unpredictability looms much more importantly as part of every market and every business, and will probably need to be baked into every kind of plan for the forseeable future.
But business plans and unpredictability don’t go together somehow. So what do you do?
Bet as Pulte CEO Richard Dugas did, on entry level and first-time home buyers. The big question is, will Centex’s kind of entry level and first-time home buyer product fit the near-term urgency bill or not. The race now is for real cash generation. At the end of the day, when they’ve taken all the cost of people, competitive cost and systems redundancy out, will Pulte-Centex be able to meet the biggest challenge of the moment, which is to get people a new-home offering that they can’t resist.
We think the philosophy’s right. But, we’d question the ability to execute. As a matter of fact, just as the government is looking under the hood of the banks, and in some cases is not liking what it sees, we’d say that most home builders who’re planning to stick around had better figure out how to get first-time buyers into their stable soon.
First a few dots that may seem random. Then, how they connect.
Let us know if this litany makes any sense to you in the next 300 words or so. Stress Test. Under water homeowners. Recovery. Walkable urbanism. High volume home builder strategy.
This afternoon at 5 pm EDT, the Federal Reserve Board will release the results of its Stress Test of the nation’s 19 largest banks. The Stress Test is called the Supervisory Capital Assessment Program, and it’s the government’s attempt to learn whether banks–and, more broadly, the private sector financial system–have enough capital to cover their losses if things go as wrong as government theorists and their trusted advisors assume they can go.
The arguable issue is whether the Stress Test tests the real life stress that could occur or not. New York University economist Nouriel Roubini asserts the stress test is not a valid reflection of real risk and real exposure of bank capital to further dramatic dislocation.
Here’s a CNBC clip of Roubini on the topic.
Whether or not you agree with Roubini may reflect how confident you are about the one-in-five home mortgage borrowers who are now said to be under water on their loans. The facts of negative equity and the theories about negative equity’s direct impact on loan defaults are roiling beneath federal bank supervisors’ assumptions at work in the Stress Test.
We can guess that people who are far under water on their home loan and undergo new challenges to their ability to make monthly payments will be most likely to default. Those who can continue to pay, but who realize they’re paying into the vat of home value deflation, we can only guess.
What we do know is that home prices are still falling and that the job and income baselines that they may need to correct to are challenged. This means that home equity, in more cases than usual, won’t be able to serve as viable currency in near term future purchases of homes. Hard cash, 20% or more in most cases, will be what it takes to buy a home, period.
This observation on residential “demand” from Todd Sullivan’s Value Plays blog:
Here is the dilemma. Falling home prices are making homes more affordable, of that there is no argument. The problem is that falling home prices also sap equity from those sellers looking to use it to afford the next purchase. When you add tighter lending and higher down payment requirements you further restrict demand as you eliminate more marginal buyers from the pool.
Contingency sales are highly challenged. Stated income purchase loans, even for professionals, are also highly challenged. The mid-to high end for production homes, and the 55+ category of active adult communities will also be highly challenged.
Why? If you can’t roll your home’s equity into that dream home, an American economic juggernaut in cars, appliances, furnishings, service companies, landscaping, etc. makes a screeching sound.
That’s the kind of Stress Test Roubini’s talking about.
The Stress Test for home builders, we think, is can they leverage their current capital structure to make new homes available to people approved under FHA, and to some with 20% down who can make monthly payments of $850 to $1300? But here’s the twist.
This can not rely entirely on swapping out land they overpaid for for land they’ll get on the cheap out in the exurbs. They have to be able to crack the code of bringing their skills of construction, engineering, financial management, community relations, and marketing into the urban core.
Here’s Nobel prize-winning economist Paul Krugman in the New York Times:
He’s in “the kind of neighborhood in which people don’t have to drive a lot, but it’s also a kind of neighborhood that barely exists in America, even in big metropolitan areas. Greater Atlanta has roughly the same population as Greater Berlin — but Berlin is a city of trains, buses and bikes, while Atlanta is a city of cars, cars and cars.
And in the face of rising oil prices, which have left many Americans stranded in suburbia — utterly dependent on their cars, yet having a hard time affording gas — it’s starting to look as if Berlin had the better idea. “
Cheap energy is gone. The fossil fuel based economy is winding down. Communities that rely excessively on car travel are a limited opportunity, even for home builders that made a living building the surburbs.
Where there is excess capacity in home building is in the suburbs and exurbs. Where there is a need for what production home builders could do is downtown and near downtown. Right now, it’s more expensive, more risky, more time-consuming, more capital intensive, and more technically difficult to do it.
Brookings Institution’s Christopher Leinberger has written:
- Real estate and infrastructure, including government buildings, accounts for 35% of wealth in the US and is the largest asset class in the economy.
- There are only two options for real estate development and the built environment (drivable sub-urbanism and walkable urbanism).
- Drivable sub-urbanism has been the defacto domestic policy of the country since the 1950s.
- Growing demand for walkable urbanism has resulted in a large gap between the current limited supply and much larger pent-up demand, boosting per square foot premiums for walkable urban residential, office and retail space from 40 to 200 percent.
- More than 80 percent of recent residents in downtown Philadelphia and Detroit are college educated.
- Recent research in selected metropolitan areas shows that 30 to 40 percent of households want to live in walkable urban communities, but only 5 to 20 percent of the housing supply is in that category.
But over time, it’s more valuable and can sustain a more predictable future. Who wouldn’t want that right now?
Baby, [Let's Hope] It’s U
Nemo, who almost always comments first on every Caculated Risk post, wrote this about a certain NYU Econ Icon whose forecast for a U-shaped recession that’s leaning toward an L is what we all might rather not have heard today.
Nemo wrote:
I am working on a song called “Itsy Bitsy Teeny Weeny Yellow Polka Dot Roubini”.
Let’s go to the video.
Nouriel of the heavy heart would also be heavy of hand when it comes to policy. In a debt-be-gone flourish, he’d re-write every mortgage everywhere to a principal and interest rate that could fly with distressed homeowners everywhere.
A Free Marketeer Addresses Housing Crisis
The crisis has spawned its econ icons, like Paul Krugman, Robert Shiller, and Nouriel Roubini, who’ve become household names… literally.
Tom Lawler of Lawler Economic and Housing Consulting might well have been one such star, but he’s tended to have appended ”oclastic” to the word icon, choosing to move outside the Beltway to farm and get even smarter.
Lawler’s outlook can be respected, since his outlook about housing in 2004 was, “uh oh!” Here’s his interview today with CNBC’s Diana Olick.
Time Knights Nouriel Econ Icon
It wasn’t so long ago our funky culture conferred celebrity status on the likes of Bobby Flay, Mario Battali and Mr. Pick-it-up-a-Notch Emeril Lagasse.
Photo: Courtesy of CNBC
Now it seems, it’s out with the five-star chefs, and in with–of all people–academic and applied economists. And the most vaunted of the moment is New York University’s Nouriel Roubini, whose insomniac eyes, Chaplinesque shrug, machine-gun verbal style, and preternatural sense of gloom have made him a none-too-reluctant cover-boy for the End-of-the-Beginning-of-the-Global-Recession.
Time magazine–which we continue to believe should hand over all business and economic news coverage to its more capable sister media channel Fortune–affirms Roubini’s star status with a feature Q&A set in Hong Kong between the NYU prof and correspondent Michael Schuman.
Here’s the interview’s piece de resistance, with a fillip of Roubini dure.
What do you think of President Barack Obama’s progress so far?
I have to give [the Obama Administration] credit. In about six weeks, they have done three major things: the $800-billion stimulus package, a mortgage program that is much more than the previous administration did and a bank plan that, however flawed, at least has the benefit of not having another bailout of the banks. The glass is half full. But for each one there are some flaws … the bank plan wants to pretend that the government is half pregnant with the banks. The debate is between partial and full nationalization, not between nationalization or no nationalization. Go and do the job and do it right by taking over the banks and restructuring them and selling them back to the private sector.
What’s the best-case scenario?
If you do everything right, you avoid an “L,” and that’s really good news. But you still have a situation in which global growth this year is negative. GDP growth in advanced economies is going to be negative through the fourth quarter of this year, and next year growth will be anemic, probably 1% or lower. Job creation is going to be negative. Even in the best scenario, there will be job losses through the end of next year. In the best of circumstances, we have a two- to three-year recession in advanced economies.
Stop Making Sense: Nationalization a Question of When and How Much, Not If
CNBC snags minor celebrity NYU economist Nouriel Roubini for a conversation about the latest–a four-bagger–bailout for AIG and what it means.
It turns out that we–those who write checks to Uncle Sam on a regular basis–are on the hook for about $250 billion in counter party risk for AIG.
It’s almost unimaginable how many kegs you could get for all that counter party risk.
Roubini’s Crystal Ball
The New York Times asked economists it knows well to forecast when recovery will come in its “When Will the Recession Be Over” opinion piece today.
Importantly, though, New York University economist Nouriel Roubini got his own play in the Times. Here’s a bit of it.
Today, as we enter the 15th month, it’s obvious that we are already in a painful U-shaped recession that has become global and will last at least until the end of the year — 24 months, the longest since the Great Depression. Even if the gross domestic product grows in 2010, it is likely to be no higher than 1 percent. And at that rate, with the unemployment rate rising toward 10 percent, we will still be substantially in a recession.
Even if appropriate aggressive policy actions were undertaken — monetary and fiscal stimulus, bank clean-up and credit restoration, mortgage debt reduction for insolvent households — the growth rate would not rise closer to 2 percent until 2011. So this recession may last 36 months.
Remember, though, this is Roubini we’re quoting. His next line is:
And things could get worse.
In his unblinking way, he’ll tell you why that is.
We Ask Why Not?
RGE Monitor, an economics intelligence piece led by New York University econ guru Nouriel Roubini, maps out the math of mortgage stop-loss modification. The piece is entitled “The Housing Crisis and Bankruptcy Reform: The Prepackaged Chapter 13 Approach.”
Since about 10% of the $10 trillion mortgages are currently delinquent or in the foreclosure process, the expected deadweight loss for the delinquency started so far will be at least $300 billion or $1,000 per American. Avoiding this loss should be a top legislative priority. A major puzzle is why the market does not avoid these losses. Lenders can do better if they renegotiate loans rather than foreclose on them. To see why, suppose that the outstanding debt on a house is $200,000, the market value of the house is now $150,000, and the foreclosure value of the house is $100,000. If the lender forecloses, it obtains $100,000 at best. Alternatively, it could renegotiate the loan with the homeowner for, say, $140,000. The homeowner now owns a house worth $150,000, and the bank owns a loan worth $140,000. The homeowner could resell the house and obtain a profit for $10,000, or keep the house—in either case, the foreclosure inefficiency of $50,000 is avoided, as are the negative effects on neighboring houses. With millions of houses currently in foreclosure or close to it, the cost savings from loan renegotiations could be enormous. However, if loan renegotiation is desirable from an ex post perspective, it can nonetheless create problems for banks, which must take into account the effect of loan renegotiations for future credit transactions. If borrowers with outstanding mortgages observe that other borrowers benefit from loan renegotiations, then they will realize that they, too, may be able to renegotiate their mortgage if otherwise they would default. If homeowners anticipate the possibility of renegotiation, they might deliberately maintain thin equity margins so that they can credibly bargain for a loan renegotiation if the value of the house declines. As a result, many banks appear to have a policy of either not renegotiating loans or doing so only in unusual circumstances.
What would become of the Stress Test if a bank adopts this approach? It’s certainly worth exploring. Rescue policy fatigue is setting in big time.
Throw out The Bums!
In blogland, there seems to be an assumption about “the bums.” The bums are “Them” in the “Us-Them” war that is all aboil as economic turmoil intensifies and the downturn’s byproduct of personal pain engulfs more people each day.
A macroeconomic debate–whether or not to declare the largest U.S. banks insolvent, zero out equity shareholders’ investment, and put government in charge of their restructuring and future resale–instantly has become so pervasive that one almost wishes the NFL were still ruling Sunday afternoons so that we’d have something else to talk about. It’s become water-cooler fodder, as current as Oscar gossip.
Still, many of us are so bad about talking about bank nationalization. We don’t know enough about it–even when Nobel Prize winning New York Times columnist and Princeton economist Paul Krugman and others try to dumb it down for us–to know whether or not it’s a good thing for us, for the country, etc. For instance, nothing in the words Krugman uses below flies over our head; it’s the entirety and immensity of what he’s talking about that baffles us.
The case for nationalization rests on three observations.
First, some major banks are dangerously close to the edge — in fact, they would have failed already if investors didn’t expect the government to rescue them if necessary.
Second, banks must be rescued. The collapse of Lehman Brothers almost destroyed the world financial system, and we can’t risk letting much bigger institutions like Citigroup or Bank of America implode.
Third, while banks must be rescued, the U.S. government can’t afford, fiscally or politically, to bestow huge gifts on bank shareholders.
How are we really to get our minds around the concept of Roubini Reality, which appears to assert that the past 15 years of societal, cultural, corporate, and political behavior, trajectory, and design were but a hallucination from which the world is being shaken roughly awake?
For understanding, we turn to insight sherpas, which is where we hear about “the bums.” The bums are the scoundrels who are to blame. They are 24 individuals and the entire American population of consumers, according to a self-laudatory slide show Time Magazine has assembled. They are the chicanerous imbeciles who ran all the banks, according to many commentators. They are the three-faced prevaricators in the home building sector who overborrowed, overbuilt, and overcharged for houses, when in fact, apparently they should have been expected to sit patiently, not building and not finding new customers until the boom ran its merry course. They are the unscrubbed and the unscrupulous populace who opted–undeserving and now caught red-handed–for homeownership.
Now, above all, they are government officials–a hybridized mix of idiocy, incompetence, and criminality–who, according to the champions of economic Us-Them warfare, are bent on using malevolent powers, not only to help all “the bums,” but to stick “Us” with the enormous, multi-generational invoice for the help–which, by the way, won’t help.
“The bums,” in other words, are “Them.” “Us,” the good guys, are most often referred to in these polemics as “taxpayers,” or “the taxpayer.”
A question comes to mind when you hear a rant along the lines of this one from Mike “Mish” Shedlock, one of the very smartest economic critics out there in blogland:
Geithner is attempting to bail out his banking buddies, no more, no less, and he does not give a damn what it costs taxpayers to do so. And while everyone and their brother has hopped on the Nationalization Train (please see The Nationalization Train Has Left The Station), I think there are at a bare minimum a half dozen questions that need to be addressed first (please see Nationalization Revisited).
Citigroup is struggling to remain independent even as it knows full well, that without still more government intervention, it is worthless. In fact, Citigroup is less than worthless because without more taxpayer cash infusions it cannot survive.
To hell with Citigroup. Bust it up and sell it. It’s the best possible outcome for everyone involved.
The question to Mish is who is “everyone involved?” We wonder this partly because when you subtract equity holders and homeowners who both stand to lose a great deal when and if this eventuality takes place, how many tax payers are there left as beneficiaries of such a smart move?
You’d think from much of the cant out there among the bloggers that the “taxpayer,” or “Us” is a group entirely discrete from “Them,” the verminous, villainous, numbskulled, dimwitted perpetrators of the crash.
The point is, many, many of “Us” are “Them.” If you can’t understand and explain to someone who doesn’t understand why it’s best economics practice to nationalize the banks; why it would be the most effective housing strategy to write-down the face value of the principal of mortgage loans to going market value; why home prices must fall into their 80-year lockstep with cost-to-rent and household income to restore order to the universe … then maybe you are not “Us” after all.
Maybe, you’re “Them.”
Clearly, though, two insights are becoming ever more apparent through the hyperbolic din that is the blogosphere. One–an old one that comes from Jesuit teaching–is that telling the difference between scholarship and plagiarism comes down to one simple thing: footnotes. The other is that, when it comes to declaiming economic theory or criticism, passion minus discipline eerily resembles a dangerous streak of extremism.
We, the author, candidly believe that while we know we’re going to get stuck with the tax bill like the rest of “Us,” we must acknowledge there’s a dollop or two of “Them” in there as well.