“A miracle is needed to avoid recession”

Nouriel Roubini is fast earning himself a reputation as something of a savant when it comes to the US housing outlook, with predictions unloved, but close to the mark.

Roubini took a pasting for his gloomy predictions mid-Summer - but has since been proved largely right. Except, of course, for the fact that global equity markets don’t appear to care less about the noises from the Roubini camp.

His latest summation carries the starkest warnings yet though, predicting as it does, “the worst housing bust in US history.”

Prof Roubini prints a email from a “senior professional in one of the largest financial institutions in the world”, who - similarly to Roubini - predicted four phases in the current downwards cycle :

Phase 1: rising mortgage defaults, homes prices start falling, sale volumes falls, housing starts and permits decline.

Phase 2: home-builders’ bankruptcies, housing starts and permits crash, substantial layoffs in construction and real estate-related fields (mortgage brokers, mortgage lenders, etc.).

Phase 3: substantial price declines in major metro areas, large rise in defaults of prime but low-equity mortgages.

Phase 4: large-scale government intervention to help households going bankrupt. This is a political phenomenon, so the timing and nature of this cannot be reliably forecast.

It appears that we are now entering phase 2 on the timeline for the housing bust.

Roubini disagrees ever so slightly - he thinks we’re now in phase 3:

Most of the aspects of phase 2 have already occurred by now and some elements of 3 are already on their way (home prices are falling sharply in some major metro areas, we are seeing the rise in defaults in near prime and prime mortgages and some near prime and prime lenders are in trouble). And we are getting close to phase 4 as over a dozen proposals to rescue 2 million plus households on the way to default and foreclosure are now being debated in Washington.

But both agree it couldn’t be worse. Says Roubini’s “senior professional”:

We will experience at least a severe housing downturn — in price action unlike anything since the 1930’s, probably also in rates of foreclosure.

But consensus opinion remains unshaken that there will be only minor macro effects. This seems extraordinary to me. A 70 year record decline in what is perhaps the largest private asset class, the collateral for the majority of household debt, whose leverage is at an all-time record high. A downturn - perhaps crash - in the construction and real estate industries (18% of 2005 total metropolitan area GDP).

Perhaps the most astonishing aspect of this event is the refusal to recognize the possible dimensions, the impact, of what is coming.

Roubini’s analysis is similar. He slates the financial community having been “increasingly delusional” about the “soft landing consensus”. Only now, are they starting to realise, says Roubini, that “after the spurt in growth in Q3 the economy is now rapidly decelerating and Q4 will be weak.” Witness the fact that even super-bulls like JPMorgan are now forecasting Q4 growth of only 1 per cent. How this one will play itself out, then, remains to be seen. Equities continue to rally - but the bad news has to catch up at some point.

Back to that senior source:

We think a miracle is needed to avoid recession.

http://ftalphaville.ft.com/blog/dailyview/2007/10/29/

 

even if he is right his predictions are worthless he has been calling weak gdp quarters since 06q3

 

He didn't predict that the US consumer was stupid enough to dip into their 401K to keep la vida loca going. So there is the delay from 06Q3 to now.

 

A recession is normal and expected... not a mistake by the Fed or a disaster.

 

3.9% GDP with an easing Fed. ......... a recession is a long way off if it ever happens.

 

Seriously. It looks like a 3.9% miracle just occured.

 

roubini next blog post should be hilarious. he will breakdown the gdp numbers and explain why his predictions were wrong again

 

Three economists go hunting, and spot a large deer. The first economist fires, but his shot goes three feet wide to the left. The second economist fires, but also misses, by three feet to the right. The third economist starts jumping up and down, shouting "We got it! We got it!"


Aiming for the deer, this guy ended up shooting the bull.

 

So let's say Bernanke decides 3.9% is too good and says no to a rate cut. Buy the dip?

 

These vultures are always hovering over the economy predicting dead carcasses will appear next...

This housing cycle is little different than previous ones except for the subprime thing. Lots of that subprime stuff was sold to European banks so who gives a ratz azz about that issue, some of it was sold to pension funds but pensions don't move/shake the economy. We may get bailed out by the people we love to hate, illegal immigrants, those guys can find work anywhere and if they can't find some they will make some.... maybe they will buy the low end as prices fall. I know lots of them, they are keen to own property, they can't do that where they come from, the government will take it from them. The high end housing.... it's as volatile as the low end but not so susceptible to foreclosure as the owners might be well equipped to hang on to it until the next cycle... most housing is owner occupied and owners have strong incentive to stay in those dwellings, namely, if they don't they have to move to lousey apartments. Anybody that has compared apartment living to homeownership will be averse to living in an apartment... the people that own rentals are aware of the real estate cycle so they will sit it out, collect the rent and wait for the next price upswing if they are going to unload............