Tuesday, January 10, 2006

The Coming Late 2006 / Early 2007 Recession

As the housing market continues to weaken it will have serious ramifications for the overall US economy. "The collapse of the housing bubble will throw the economy into a recession, and quite likely a severe recession," warned a July report by the Center for Economic and Policy Research. Furthermore, Lehman Brothers report, "[A] turn in the housing market is central to our economic forecast. " As reported by the AP on Nov 11:

A downturn in housing could mean more than 1.3 million lost jobs, Goldman Sachs Group Inc. predicts, bumping up the national unemployment rate by 1 percent and the unemployment rate in house-mad California by 2 percent. Those numbers don't include likely job cuts in housing-dependent businesses, such as banking, furniture and building materials.

The Center for Economic and Policy Research predicts worse, saying a bubble burst would mean the loss of 5 million to 6.3 million jobs.

The housing run-up has financed consumer spending, creating more than $5 trillion in bubble wealth, the center estimates. Consumers have used "cash-out" mortgages to pay for everything from new kitchens to college tuition.

On August 12th and then September 29th, this blog warned about the coming recession. The current economic predicament is simply unsustainable. The double digit price appreciation of the housing boom years has come to an abrupt end. Once the housing bubble pops, a recession is almost inevitable. Here are other factors that will contribute to a future recession:

  • High Energy Costs
  • Federal Debt & Deficit
  • Continuing Housing Bust
  • High Consumer Debt
  • Large Trade Deficit
  • Continued Offshoring
  • Security Costs
  • Rising interest rates
Billionaire speculator George Soros said he did not expect the United States to fall into recession in 2006 - but he does the following year.

For the past 4 years the US economic 'recovery' has been too dependent on cheap credit and the housing boom. The boom is fast becoming a bust. The convergence of the housing bust with other significant economic factors will almost certainly put the US into a recession by late 2006 or early 2007.


  1. But... But...

    Surely the wise and ethical stewardship of George W. Bush will see us through!

  2. CEPR? yeah, they have a great record when it comes to forecasting...

  3. CEPR is only one among a chorus. I think that's the point. It will not be pretty.

  4. I'm a real estate agent and trust me, you guys are so completly lost!! You're missing out on a real opportunity to make some good money. Just keep banging your head against the wall, it'll make me money!

  5. Keeping drinking the Kool Aid!

  6. David Rosenberg has called it right-now Lehman Bros. has joined the chorus- I remember last fall Ian Shepherdson of High Frequency economics predicted a recession- and described the coming scenario as 'ugly' and a meltdown. Nope it will not be pretty- But we have the bold leadership of 'W' help us- indeed a thin reed to rely on.

  7. can you point to a good resource for investment advice in preparation for a recession? I'm hearing way too many things (gold? silver? treasuries? hen's teeth?) but having just escaped the bubble by the skin of my teeth I want to try to defend against the inevitable.

  8. David, you probably need to make a lot of those decisions on your own. Some people, deflation predictors, will say that in a recession, as demand dries up, the best place to be is in cash. Others, inflation predictors, will say that the government will (or already has) react(ed) by printing money, so you should buy commodities, foreign currencies, energy, and precious metals. (This can contradict a deflation predictor, who sees demand drying up and thus also lowering demand for energy and commodities). You probably need to decide for yourself who you believe. Not investment advice.

  9. David,

    A safe bet would be TIPS or I Bonds. It's about as safe an investment as you can make. I work in Hedge Funds and a lot of the traders (I don't trade) I talk to are putting the majority of thier investments into TIPS.

  10. Anon,

    I agree TIPS make much sense.

  11. thanks for the TIPS. haw haw haw! :)

  12. A substancial sell off in the stock market will be experienced in 2007. This would fall in line with the 25 yr market cycle. So my advice is either hold cash or buy puts.

  13. The Center for Economic and Policy Research predicts worse, saying a bubble burst would mean the loss of 5 million to 6.3 million jobs.

    This quote is such nonsense. Even 21.5% interest rates in the early 1980s didnt casue that much job loss. This would mean over a 10% unemployment rate.

  14. This quote is such nonsense. Even 21.5% interest rates in the early 1980s didnt casue that much job loss.

    1) The 80's didn't see nearly as much as a runup as now.

    2) The 80's didn't have the suicide loans we have today.

    3) The 80's didn't have a big runup in RE agents.

    Comparing the 80's to today is like comparing apples and oranges!

  15. If family budgets disallowed any
    savings, borrowed out of reality
    on the one asset most middle class
    U.S. families have, had declining income over the past two decades,
    we would have the formula for fin-
    ancial disaster. Well the truth is
    we are there and are about to pay
    the piper. Exact timing is not an
    issue, only that it is going to
    happen to this working generation.

    Most advanced nations have done
    a much better job at governing all
    all of the above and as was the case in the Great Depression will
    land much softer than will middle
    class Americans. To say the whole
    world is in it together and equaly
    is inaccurate and perhaps a lot of
    wishful thinking. One only had to
    look at the length of the bread
    lines and bank failure rates to
    know this is true.

    We will soon wish we had more
    social safety nets and far less


  16. Be Smart Buy Real EsateAugust 29, 2006 9:05 PM

    Heh crashmaster, where are your statistics that loans were different in the 80's? From what I understand there was more funky risky loans out there to combat with high rates. As far as RE agents are concerned, yes there was in fact a big run up of agents, but what is your point? There was a big one in the 80's as well.

    Pricing? no we do not have the run up as we did in the 80's, but that is because all the baby bommers were setteled in there family home. Now they are going to start to retire and buy second homes. Imaigration and baby boomers will keep markets alive. Sorry to all those that are awaiting th 40-60% correction. Not going to happen. Market will adjust a bit more, lay low and then take off like we have never seen before. Demographics my friends. Econ 101.

  17. Econ 101 is great, but what about Psych 101? Everyone knows housing prices are dropping and likely will continue to drop in at least the near future. Countless sources are pounding this into people's heads everyday. That the housing market is in decline is so widely accepted and commonplace a notion that even the most shameless cheerleader won't disagree. What do people generally tend to do when they own an asset that has appreciated dramatically in recent years but has no apparently reached a peak in value and is beginning a descent to an unknown and unpredictable level? They cash out. They'll play along with their buddies saying "given a long enough time horizon, real estate always goes up." But once they perceive their equity to be in serious danger, they're gonna sell. They can't help it: it's human nature. This reinforces itself: as the market declines, more people become convinced now is the time to sell, as more people are convinced now is the time to sell the market declines further, and so on. Econ 101 is meaningless without Psych 101.
    28% of houses in the U.S. are currently owned by investors/speculators. They are and will be selling their houses as fast as they can, and likely not purchasing replacements until the market levels out or shapes up. Homebuilders are already struggling to unload inventory. They are currently, and increasingly will be competing with the investors/speculators for relatively few buyers. What does Econ 101 tell us about this type of market?
    While a time of declining prices is an advantageous time to purchase, it is also a time when potential buyers are reluctant to purchase for fear of continued decline. Demographically and technically speaking, Baby-boomers won't officially start retiring until 2008, and my guess it will be several years later that enough of them will have retired for this phenomenon to start affecting markets in substantial ways.
    Declining housing sales and prices will have ripple effects: less jobs and less equity for people to convert and spend. Less spending = less profits for businesses = less value in stock, which not necessarily right away, but eventually = a decline in stock prices. Econ 201.
    Also speaking Demographics, that swollen segment of the population that is approaching retirement will be looking for a good time to convert their equity currently held in more risky investments (stocks) into more secure, less volatile assets (cash, CD's, bonds). Now seems like a pretty good time, with the DOW having reached a new record high and the NASDAQ having kind of sort of recovered from its 70% crash. But I'm not a Baby Boomer. I'm just getting started in this investment game.
    So for me, Econ 101 and Demographics don't suggest now is the time to buy real estate or that a correction in equity markets isn't just around the corner. Psych 101 and Econ 101 tell me that the seeds for declining equity markets have been sown, and Demographics won't be their to do anything about it until later.

  18. June 6th,2007 O.K. Here it comes, the beginning of the recession. You can't have energy cost double in two years and not have it cause major inflation. The goverment figures are a smoke screen. Every thing we touch and produce is influenced by energy/oil and it will eventually seep through into the economy. Interest rates are poised to raise and Joe consumer is tapped out on credit cards and morgages and can't continue to spend. Beware by Sept 2007 we will all know its for real as Goverment debt causes major falls in the bond market, foreclosures will rise interest rate will soar and the Fed will only be able to print $ to pay off the national debt. Foreighn goverments will sell off dollors and the fed will be stuck with no real out. Hold on its gona be a bumpy ride. Peter J. L. M.