An update on the housing market from someone who actually knows what they are talking about
Happy Friday everyone. I have been going into greater detail on a number of my "Fearless Forecasts" lately. This morning I want to talk about #6, "The U.S. economy will be a mess, with several quarters of low to negative GDP growth, but it will never completely fall off of a cliff."
Anyone who is more optimistic than this about the current state of the economy and where it is headed needs to take a look at the following amazing interview with Yale professor and MacroMarkets chief economist Robert Shiller. If his name sounds familiar, it is probably because he helped to create the "Case Schiller" housing price index...which has rapidly become one of the most watched statistics on housing.
Mr. Schiller has an unbelieevably impressive resume. In addition to developing the housing price index, he called the pop of the tech bubble in his book "Irrational Exuberance."
Here are a few highlights from the following interview on his new book "The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do about It"
- "Home price declines are already approaching those in the Great Depression, when they plunged 30% during the 1930s. With prices already down almost 20%, it's not a stretch to think we might exceed that drop this time around."
- "There are about 10 million homeowners whose debt is higher than their home value, which has broad implications for how Americans feel about their wealth and spending habits (read: more pressure on consumer spending)."
- "The current hopeful consensus -- that house prices will bottom soon and then begin to recover -- is most likely a dream. Housing markets don't usually have "V-shaped" recoveries. And even if house prices stabilize in nominal terms, after adjusting for inflation, most homeowners will continue to lose money."
The bottom line here is that house prices probably are not be finished declining and when they do eventually hit a bottom there will not be a quick recovery. This reverse wealth effect will have a significant negative impact on consumer spending, and in turn the U.S. economy.
I am still optimistic that the government will be able to add enough liquidity to the system in the form of low interest rates and printing money that the economy will be able to avoid falling off of a cliff, but I do not expect a quick recovery and I am still staying far away from consumer discretionary stocks.
Currency strength is probably most directly correlated to the state of countries' economies and their interest rates (with additional influence from current account surplus / deficit and national debt). When the dust settles, I think that we will see that investors have been overly bullish on the state of the economy in the U.S. and the dollar.
I am still optimistic that the U.S. economy will continue to slowly, but steadily decline rather than fall off of a cliff and that it is highly unlikely that the Federal Reserve will be able to raise interest rates in 2008. In fact, I am starting to think that it might not even be able to do so until late 2009, if at all next year. Time will tell.