I often ridicule garden-variety economists and government functionaries, as I did yesterday regarding the CBO's job and economic growth fantasies. I do so because knee-jerk optimism does not help us face the future. Motives vary in these cases, but all such talk has a common theme: the world has changed—not for the better—and these pollyannas have failed to recognize it, preferring to talk about "business cycles" and other nonsense. In these times, complacency is a recipe for disaster.
The Nymex front-month price rose above $101/barrel yesterday, and it may be a very long time before we see prices back in the $80s. Brent hit $115, and prices are comparable in the other international markets. If one looks on the surface, as most people do, it's easy to blame these high oil prices on unexpected geopolitical shocks—Nassim Taleb called such events black swans. Beneath the surface, the world oil market has been anything but stable for several years now, so there was always a considerable risk that random events could create the situation we see today. Taleb's point was that such risks have been grossly underestimated in today's complex, fragile financial and commodity markets.
If prices remain high for an extended period, and there is a good chance they will, we may see another "official" recession in the United States later this year. Lacking that—entitlements and government transfer payments inflate GDP numbers—we will have a large slowdown in an already anemic economy. I will talk about the oil markets at greater length in this coming Saturday's oil report.
Today I want to focus on the housing market. Unlike the oil market, where prices are going up, house prices are crashing, which is a devastating development for millions of American households. As with oil, this market has been anything but stable for a long time now, and a "double-dip" in housing was predictable because the fundamentals in the market are worse, not better, than they were before the financial meltdown.
Robert Shiller of the famous Case-Shiller Home Price Index (below) now believes another big swoon in house prices is possible—
At this dismal point, some economists and analysts say that the damage has been done, and there is nowhere to go but up. Many others argue that the market has still not finished falling.
And then there are those who maintain that, possibly, things are about to get a whole lot worse. Robert Shiller, the Yale economist who is the author of “Irrational Exuberance” and who helped develop the Standard & Poor's/Case-Shiller Home Price Index, put himself in this last group. Mr. Shiller said in a conference call on Tuesday that he saw “a substantial risk” of the market falling another 15, 20 or even 25 percent.
Graph from Tim Iacono
Even now, after five straight months of declines in the Case-Shiller, there are economists and analysts who think there is nowhere to go but up. It is a matter of paying attention to Reality, as opposed to cheerleading and wishful thinking. So many people simply can not bring themselves to acknowledge just how screwed up things are.
In so far as realists in the general case are few and far between, I always ascribe unwarranted, delusional optimism to Human Nature. Sometimes that light at the end of the tunnel is the headlight of an oncoming train hurtling right toward you. This is one of those times.
I found out that Hyperion Group's Lew Ranieri is not one of these delusional optimists. I recommend you watch the video below if you want to understand the problems the housing market faces, and where house prices are likely to go. Listening to Lew, it is easy to see why Robert Shiller thinks house prices may fall another 15, 20 or even 25 percent.
We've had some good news recently. Unemployment claims dropped for the third consecutive week. But even if we're having a tepid recovery in the part-time jobs market, how long can it last? The headwinds in energy and housing—just to name two ongoing diasters—make any such recovery very fragile indeed. These days, as I read the various reports pouring in every day, it feels like I'm watching the Empire decline in real-time.
Here's Lew Ranieri on the state of the housing market.
First of all, we're still in a recession, so the next leg down is a depression.
The housing market remains dreadful and isn't going up because there's at least a million more houses in foreclosure. And as more regular people can't pay their bills, more houses will be up for grabs. Then you need to throw in the tightening of credit and the demand for a 20% down payment. The housing market is dead for everyone except the rich.
The unemployment and inflation numbers lie. The price of everything is rising and higher oil prices not only translates into fewer people going anywhere, it means even higher prices for anything that needs to be shipped.
As long as Congress thinks the problem is our deficit, we are screwed.
Posted by: sharonsj | 02/24/2011 at 10:41 AM