Tuesday, November 1, 2005
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Dr. Doom vs. the soft landing
As long as this blog has been in existence, Morgan Stanley's Stephen Roach has been pessimistic about the U.S. economy. His latest missive is in today's Financial Times:
I'm a bit more sanguine than Roach. The U.S. has already absorbed several energy shocks in the last year, and the reaction by financial markets to Greenspan's successor has been pretty smooth. I'm just as worried as Roach about US protectionism, but it's not clear to me that the situation is going to worsen in the next twelve months, and the Doha round is still moving forward -- albeit very slowly.
[Yeah, but what about the housing market?--ed.] Mary Umberger writes in today's Chicago Tribune that the National Association of Realtors sees a soft landing rather than a hard one:
I'm not saying the chances of a hard landing are zero -- let's just say I'm twice as optimistic as Roach.
UPDATE: Kash at Angry Bear is more pessimistic -- and he has some persuasive reasons. The real question, to me, is not whether the economiposted by Dan on 11.01.05 at 11:45 AM
Growth, growth, growth, growth, growth, growth, growth.posted by: Mark Buehner on 11.01.05 at 11:45 AM [permalink]
The Realtors association predicts a soft landing rather than a hard one ? What a shocker !!
I predict a hard landing for the housing industry in many markets expecially in California.
The New York real estate market is definitely reaching a peak as it seems that there is far more inventory on the market now than in recent history and fewer people out there to snap up properties with all-cash offers.
That being said, Wall Street's bonus season is shaping up to be a good one and all the local real estate prognosticators are still talking up the market saying a bunch of new demand will be created.
For what it's worth, in my opinion, just because you may get a good bonus for one year doesn't mean you want to move your entire family into a new place.
Then again, it's not like Manhattan is getting any bigger...posted by: Jay Drezner on 11.01.05 at 11:45 AM [permalink]
1)What replaces housing to drive GNP growth?
*... let's just say I'm twice as optimistic as Roach.
Do the math: 0*2 = 0 Maybe Roach (and I) aren't quite at "0." But we are, or at least I am, pretty close to it. Where does that put you?
I really wish there might be at least one pony buried in the pile of manure that sits in front of us. But I'm very, very skeptical. We've been 'kiting' the system for far too long now, methinks.posted by: dave iverson on 11.01.05 at 11:45 AM [permalink]
Once again, massive overreacting. The economy is huming along at almost 4% growth despite a big drag from energy and rising interest rates. Housing is not driving all of that, its simply been leading the way. Its not like the economy cant survive without a booming housing market. The real estate crash in the late 80s occurred during a booming economy- and note there were double digit interest rates in that period. We would have to double interest rates to get back to that atmosphere.
With Krugman behind a firewall, the doomies need a more accessible financial guru to say the end is nigh.posted by: Tom Holsinger on 11.01.05 at 11:45 AM [permalink]
I am less concerned about Manhattan than about California. Manhattan at least has some of the income required to sustain these prices. Southern California is driven by the real estate industry and is obscenely overpriced relative to income. Northern California still hasn't recovered job wise from the dotcom crash. I think the possibility of a soft landing for California and a few other markets is getting dimmer and dimmer.
No recovery we've had in the past has been driven as much by real estate as this recovery. In the past, interest rates this low would have led to a huge investment in productive, profitable, innovative enterprises. Now it seems like all that money is going to build new houses. At least in the dot-com era, while a lot of money was wasted, a lot went to truly innovative companies like Google and Amazon (Google started before the dot-com crash).
As for real estate crashes hurting only speculators, anyone who uses an exotic mortgage (IO, for instance) is a speculator, since they are relying on appreciation to bail them out.
I personally think a real estate crash especially in California, would be good for the economy. It would mean that speculators would be shaken out of the market, it would mean that capital would go to truly productive endeavors. Finally, it would remove the moral hazard we have now where it pays to be as irresponsible as possible when buying a house.posted by: erg on 11.01.05 at 11:45 AM [permalink]
I don't understand why the NAR is constantly quoted in these types of articles - why would the author expect the fox to be the expert on chicken coop protection?
More importantly, though, why don't housing industry articles mention the fact that hard landings in the housing market and historically common. There is a persistent belief that the worst that can happen is 0% growth. Going back four centuries to Holland, or more recently to Hong Kong or Japan, there are countless examples of major (25-50%+) drops in real home prices.posted by: cure on 11.01.05 at 11:45 AM [permalink]
Anecdotal evidence to be sure.
Have any of you gone shopping at a Mall during
I'd have to say that things are booming here
Do the real estate market analyses take into account the impact of foreign investors, also immigrant investors who are recycling their profits from China, India, Brazil etc into residential real estate in Manhattan, Florida, California?
Just speculation (no pun intended) here, but I'd not be surprised if more than a third of the speculative real estate investment on the coasts is coming from Asian and Latin American flight capital, as well as profits from immigrants' US-based business ventures that are parked in expensive coastal apartments for young Sunil or Ming or Mauricio.
If so, then this is a powerful force at the margin for asset price appreciation in the more overheated markets such as Miami and Silicon Valley. Ironically, this capital is less skittish about US economic prospects than American capital, given the extremely high risk premium, not to mention tax (and in some cases legal) exposure presented by these investors' own home countries. Until we see a proper and detailed estimation of the size and nature of this source of real estate investment, it would be unwise to predict a crash in the coastal markets that attract flight capital.posted by: thibaud on 11.01.05 at 11:45 AM [permalink]
Dan -- last I checked, the Doha round said basically zero on the set of issues that will drive protection in the US -- namely, China, its booming exports, its move up the value chain into new areas (autoparts being one obvious one) and how the world trading system is silent on currency issues (And rato thinks the imf should be too), so concerns that china's intervention in the fx market constitutes a de facto export cannot be addressed in the trade context.
in other words, Doha is about opening up still relatively closed sectors; the real protectionist threat comes from closing up already (mostly) open sectors as Chinese/ Indian/ other exports in those areas heat up.
what's changed in the last 12 months. schumer-Graham, Cnooc, etc. What's likely in the next twelve months: Competitive elections in the upper midwest; lots of talk of serious dislocations in the auto sector and some potential slowdown in overall growth (b/c of less real estate stimulus), which makes jobs more scarce and makes those with jobs less willing to give them up.
on rising risks of a protectionist backlash, I am with Roach. I cannot see anyone up for election in Michigan or Ohio or many other places voting against schumer -graham in an election year ...posted by: brad setser on 11.01.05 at 11:45 AM [permalink]
Real estate crashes can be pretty severe. 20 to 30% is not uncommon. And unlike stock market crashes they tend to inflict themselves slowly.
50% of new jobs are connectd to real estate so there is a big potential problem there.
I really don't know were the myth that our fireign lenders are always true comes from. A Japanese pull out in the late seventies led to a stock market fall and a few years under Clinton rapidly knocked down the dollar by 20%.
The dolar will be trusted as long as it's trusted. It has lost much of that trust in the past.posted by: don on 11.01.05 at 11:45 AM [permalink]
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