Sunday, July 16, 2006

Economic Thoughts

You have been predicting a recession in the near future. Given the 5.6% GDP growth for 1st Quarter 2006 in the US, do you think a recession will happen soon?

Despite the strong 5.6% 1st quarter GDP growth in the US, a recession is looming. The declining housing market coupled with a drop in consumer spending are the two main factors that will lead to a recession within the next 12 months. By the end of this fall, the economic news will be sour. Get ready, a significant recession is coming.

What will happen with short term interest rates as set by the Federal Reserve?

Interest rates will reach 5.5% this year. They may even reach 5.75%. It is unlikely that the Feds will raise further given the coming recession.

What will happen with the housing markets in the coming months?

By the end of fall 2006, bubble markets throughout the US will be in bad shape. Inventory will be at record highs, prices will be falling, and layoffs will be spreading in the housing related industry. By December, Joe Sixpack will be well aware of the significant declines occurring in the bubble markets.

How will the 2006 Christmas shopping season fare?

It will be bad. Consumers will be pulling back and spending significantly less in real dollars than in 2005. Retailers will be disappointed.

43 comments:

  1. We are renting a house on the Eastern shore next month. I was suprised at the number of houses with no rentals in August.

    Many of them were new buildings.

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  2. Correction. For 60-80% of the public, we are already in a recession. Over the past decade, our economy has effectively bifurcated, with a top 20% going gangbusters, the next 20% holding their own, and a bottom 60% losing ground.

    This is why you see the idiots in the Admin and at the Post editorial board scratching their heads at why the lowly peons don't say how wonderful they think the economy is. "Look at that 5.6% growth, you rubes!"

    However, almost all of the growth goes into the pockets of the top 20% (like folks in the Admin and at the Post editorial board).

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  3. "How will the 2006 Christmas shopping season fare?"

    Well, since fewer people can take out home equity lines of credit to purchase SUVs, plasma screens, and jewelry I would guess pretty bad.

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  4. Yes, what a horrible, terrible, no good very bad Arlington real estate market
    http://sungazette.net/articles/2006/07/16/arlington/news/nws906a.txt

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  5. David. I'm kinda slow so just want to ask where are the comments you posted from?

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  6. David, if you actually believe all this, I assume you have put your money where your mouth is and have shorted the various retain/cyclically sensitive stocks, as well as the CME residential real estate futures?

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  7. anon 5:29

    ... and you really think that a paper that touts itself as:

    "Reaching the most affluent audience in the Washington D.C. Metro Area"

    is going to tell those affluent people that they really aren't as rich as they thought they were?

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  8. If you could, tell me which facts in that article you dispute?

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  9. First off, this is an excellent, informative blog. Thanks for putting it together.

    I wanted to point out that it seems the MLS servers may be down. Two websites I use to access detailed MLS information without the hassle of a realtor are giving me an error message that has never appeared before(eyaurban.com and jobinrealty.com). There may be scheduled maintenance. I'm guessing the number of listings is overwhelming the network infrastructure.

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  10. The "5.6" quarterly growth wasn't that impressive considering it made up for the weak Q4 05. Guess what, I have a sneakly feeling Q2 06 growth stunk, with Q3 06 looking cooler. That is when the nasty will hit the fan.

    The 96-06 speculative boom is nearly over. Though the peek has long been over(1999).

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  11. waiting for godotJuly 16, 2006 11:53 PM

    We were just talking about this...I swear I did not put this on CL

    http://tinyurl.com/gow7m

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  12. Simple math: continued rising consumer spending + rising interest rates + rising rates of personal debt = trouble

    Some unsustainable economic activity in the U.S. that needs to be corrected somehow.

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  13. David,

    I agree with everything *but* Christmas 2006 being bad. Oh, it will be scalled back, but people are still in denial. Expect to see a bifucated market iwth some people splurging and spending that last home equity, completely in denial that the market is dropping and some people in pain.


    Yes, I know Wallmart sales are already dropping but Starbucks is still up... Hence, the Yuppies are still doing ok while the "working man" is hurting. And yes, fewer can pull out HELOCs... but when people are so used to living it up... they'll stretch the credit cards this Christmas.

    I hope I'm wrong. It would be better to have a bad Christmas than have *everyone* reach the end of their credit at the same time... But I swear we'll hit a wall next year.

    Yes, my prediction for housing is pain by the ides of October. But denial isn't just a river in Egypt. ;)

    2007 is going to be ugly... May on will be a notable recession.
    Neil

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  14. "kinda slow so just want to ask where are the comments you posted from? "

    These are my economic thoughts.

    "David, if you actually believe all this, I assume you have put your money where your mouth is and have shorted the various retain/cyclically sensitive stocks, as well as the CME residential real estate futures?"

    These CME markets are too new to be trusted in my humble opinion.

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  15. "Neil said...
    Yes, I know Wallmart sales are already dropping but Starbucks is still up... Hence, the Yuppies are still doing ok while the "working man" is hurting. And yes, fewer can pull out HELOCs... but when people are so used to living it up... they'll stretch the credit cards this Christmas......"

    I agree 100% with your comment. Ask about any "homeowner" if their property is going to decline in value in six months or so. I'm sure they will say, it just won't happen. Pure denial on their part.

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  16. typo-o
    within the six months or so.

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  17. David,

    Your recession prediction is based on two indicators ("declining housing market" and "drop in consumer spending") that are yet to manifest themselves. Aren't economic forecasts usually based on already established trends and not just on predicted trends? Aren't you really venturing into the area of complete unpredictability when you base your predictions on other predictions that have yet to prove themselves true?

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  18. I agree. David's economic forecasts are worth what we are paying for them.

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  19. "Aren't economic forecasts usually based on already established trends and not just on predicted trends?"

    These trends are already happening. The housing market has been declining from it previous pace in many bubble markets for almost 12 months. Consumer spending is also falling.

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  20. " I agree. David's economic forecasts are worth what we are paying for them."

    They are indeed free. I am not drinking any economic Kool Aid.

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  21. David..you been a good student of mine..i did correct your early enthusiasm of rate pause for almost 1 yr now..first 4 then 4.5 then 5. My god david, and yet now you act like some kinda (lerahish) expert.
    Anyhow, i do not see fed pause before 6. As a obedient student, i am sure you will revise your numbers too.

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  22. I think it's dangerous to get too far into economic forecasting, especially if you're not an expert. Even the best forecasters are wrong a lot. Economic forecasting is worthwhile, and works better than just guessing (on average), but not a whole lot better.

    And I agree with the poster that said David's forecast does imply some economic positions.

    One of my personal views is that there will be major housing corrections in many markets, including the DC market. The DC housing market, along with many other coastal markets, has terrible fundamentals right now. The Median Price is about 10 times median income, the price/rent premium is stratospheric, and inventories are skyrocketing.

    But these bubble corrections aren't going to have the horrible implications that people think. A housing correction would be good for DC over the long-term, and even the short-run pain isn't going to be what people believe.

    We can have a 30% real correction in DC over the next few years without having a recession.

    A 30% correction will only be bad for a select group of people, and good for most people, and even better for DC's long-term economic growth. As Lance and Investor have pointed out, many people bought a long time ago, so a 30% drop won't hurt them.

    No, I don't expect 1997 or even 2001 prices, but a retrenchment back to real 2003-early 2004 levels is certainly realistic. The correction would be bigger if interest rates rise substantially, of course.

    I may not live in DC forever, but it's a nice place (with drawbacks) and getting nicer. It's good that DC isn't a craphole anymore. And I think a housing correction will play a valuable role in keeping DC humming.

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  23. anon 5:47,

    When did I write "of rate pause for almost 1 yr now..first 4 then 4.5 then 5." I don't recall writing this. Please post a link.

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  24. David:
    These CME markets are too new to be trusted in my humble opinion.

    Well, how about shorting (or calling) retail/cyclically sensitive stocks? Put your money where your mouth is.

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  25. It's far easier to be a prophet when you don't have to put monetary bets on your prophecies.

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  26. I put money on my currency predictions.

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  27. So shorting housing cyclicals should be a snap!

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  28. Why Buying Today is a Bad Idea, OR What Could Happen Here if Real Estate Collapses, OR Just How Long This Thing Could Last, OR Why There Is a Case for Renting....

    From the Financial Times:

    Overall," concludes Mark Zandi, chief economist at Moody's Economy.com, the consultancy, "there is now a very compelling rationale to renting rather than buying in most of the global economy, particularly as interest rates rise. This was not the case a decade ago."

    The shift in the buying-versus-renting balance was highlighted in a recent report on the US housing market by HSBC, the bank. The research showed that even removing capital repayments from mortgages (which is possible through increasingly common interest-only loans) and taking into account government tax deductions designed to boost home-ownership, new buyers are paying a substantial premium over renters in many areas.

    In San Francisco or Honolulu, for example, annual ownership costs are 68 and 73 per cent greater than rental costs.

    Although the advantages of ownership eventually reassert themselves, as rents rise and inflation eats away at mortgage debt, today's buyers need to see higher-than-average price growth and to hold their properties for a significant amount of time to make it financially worthwhile.

    In Los Angeles, for example, an owner would need to stay in his or her house for 11 years, assuming prices remain steady, before the costs equalled those of renting.

    Yoji Otani, real estate analyst at Credit Suisse, says the same is true in Tokyo, where the average house price is down about 8 per cent since 2000. "An investment in a flat is worth practically nothing in Japan - it is the value of the land that is important and, although land prices are just starting to recover, it's too early to say that they will appreciate as a whole over the next ten years," he says. "The low interest rate environment [does] makes mortgages attractive . . . but renting is better because there is virtually no secondary housing market in Japan [due to] an oversupply of new condominiums."

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  29. Notice how Tokyo is still considered to be depressed despite "just" an 8% decline over the past 6 years.

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  30. Someone tell that shrill "Lance" to review the last employment report. Retailers are laying off. The economy is responding to high gas prices and higher interest rates.

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  31. Consumer spending is unlikely to decline if gas prices continue to rise. We all know it's impossible for Americans to drive less, so they'll keep paying whatever it takes. It's retail spending that may suffer, and as we saw that overall retail sales dropped 0.1% in June (from May). But despite many people saying that people are HELOCing and taking cash-out refis to pay for insurance and the like, retail sales dont' seem to be suffering too much...yet. I agree that the denial of many sellers continues to be astonishing. There are currently 7 houses for sale on my street, 6 for the past 5 weeks or so. The 7th just came on the market last week, and despite watching the neighbors houses sit and sit in a close price range, he priced it about 3K less than the others. I've walked thruogh all of the open houses, and they're all the same--overpriced and nothing special. This has gone from amusing hilarity at their stubbornness to just sad, really. I wonder if any are in financial toruble, because when the one who's not blinks and drops significantly, the rest are screwed.

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  32. No one is "screwed" unless they have to sell under duress.

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  33. "No one is "screwed" unless they have to sell under duress."

    There are those will be in true distress, for sure, but sometimes, duress is imagined. I wonder how many will give into the new psychology? After all, it's pretty easy to convince people of things.

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  34. There is something looming in some economists minds that may be much worse on the world economy than any short term recession. What if the government, a company, or an individual wanted to borrow money, but there was no more money left to borrow? Some economists think that we may be approaching this theoretical maximum sooner rather than later.

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  35. Anonymous said...
    "There is something looming in some economists minds that may be much worse on the world economy than any short term recession. What if the government, a company, or an individual wanted to borrow money, but there was no more money left to borrow? Some economists think that we may be approaching this theoretical maximum sooner rather than later."

    Economics 102: Money is put into the monetary system via various means from several sources including the Fed Reverve Requirement. When that requirement is raised banks must leave more on reserve leaving them less to lend out (i.e. reducing the "money out there.") Concurrently, the government (i.e, the executive branch directly) can do similar acts of magic by issuing or calling bonds. It literally prints money out of thin air backing it with an IOU. As such, have no feat that "there will be no money left to borrow" ... That is not possible under the way our non-gold standard backed monetary system works. The only concern is that the government not gauge the economic trends correctly and either print too little money (chocked off growth) or print too much money (devaluating its value via inflation) and causing problems for people on fixed incomes among others ... but benefiting those with mortgages that get paid back in yesterday's dollars.

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  36. The economy is slowing- and inflation is still a problem, despite that slowing. The FED will likely raise again next month- and many economists now realize that a recession next year is becoming more a possibility. The housing slowdown is being pooh poohed by many wags on Wall Street- however what they really believe on the housing 'debacle' is sending chills up and down their backs.

    Also from my point of view I like the right wing neo-cons and their rodent minions from the real estate industrial complex sweating- realizing this may be the end of their debt ridden smoking mirror 'bubble' and Facist 'owenership society'. Cheers.

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  37. Ah yes, more evidence of declining prices.

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  38. strekker,

    please explain what you mean by "Facist 'owenership society'".

    Thanks

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  39. Whoever is posting in my name must stop.

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  40. Lance,

    As a socialist sympathizer, I get what trekker means. This so-called "ownership society" touted by Wall Street firms, big media, and our wonderful President of the United States falls short of lifting boats out of poverty. An overwhelming dollar value of stocks are held by the wealthiest of Americans. Only the very wealthy make windfalls from their investments. Ordinary Americans can expect modest returns on 401-K investments.

    During the Dot-Com boom, it was the venture capitalists and CEOs that cashed out the stock options. The employees had few options or they weren't allowed to cash out at all.

    Property ownership was hyped the big media and the real estate industry as the way for "average" Americans to make a killer profit. The middle-class tapped into re-finances to spruce up their property, buy luxury cars or take exotic, expensive vacations. More debt was a simple result.

    Incomes for like 70-80 percent of American population have remained stagnant since the Internet/Telecom bust of 2000-01. Investments in stocks, bonds, and real estate haven't been that great for middle-class families either.

    Lance, there is nothing fascist about investing in stocks or property...you have the right to make a risk. The problem is that the risk isn't spread evenly in society.

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  41. Ihateyuppies is a right-wing troll. Go back to being a sheep for Bush... BAAAAA, BAAAAAHHHAAAHH.

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  42. "Whoever is posting in my name must stop."

    Hey, there are other Davids in this world besides you. Or are you just saying that you don't want anyone else named David posting on your blog? How childishly selfish of you.

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  43. You can use David, but is should be part of a larger named like David B. This will stop users from getting confused.

    Thanks.

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