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  • ianmud ianmud Mar 21, 2008 11:26 AM Flag

    Accumulation vs. Distribution

    I, of course, hope you are right. I guess what keeps me skeptical is that hardest hit states in terms of a bursting housing bubble, California ($1,727 billion), Arizona ($232 billion), Nevada ($117 Billion) and Florida ($713 billion), made up 21% of the US economy in 2006 (used the economy section of Wikipedia for each state to derive that number). It is hard for me to see how serious economic upheaval in those four states wont have some sort of spill-over effect on the remainder of the US economy.

    Add to that the fact that mortgages are harder to come by today as lenders return to 20 year old lending practices and it suggests that we may be further away from a bottoming of the real estate market than we would like (I was reading this morning that several major mortgage insurers have black balled entire regions of the country, making it hard to get mortgage insurance and thus freezing out buyers that do not have 20% to put down on a home).

    Again, I hope you are right but there are some huge macroeconomic factors to contend with right now.

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    • You're right in that these states account for a big portion of our economy. At one point California alone was the fifth largest economy in the world (not sure about current situation). However I don't see how the housing situation is correlated to their economy. E.g. California's economy has multiple footings, e.g. high tec, enterteinment, agriculture, etc...and eventually the cheap money situation (rate cuts) will result in proping up the economy, while we're working through the housing inventory. Take a closer look at the housing situation. The root problem was the speculation driving housing prices up, which then lead to further speculation. Even 'ordinary' folks started to buy second homes as investment vehicles. At one point prices couldn't go higher, and the bubble burst. Now we are at a point, where the housing inventory is being worked through the system, and at one time new demand will prevail. First sign of recovery starts to show up as demand on coastal properties, the very same which took us down. So I am cautiously optimistic.

      I need to run. The family is ready to head into the long weekend.

      I wish everybody a great, long weekend...so we're ready for a new week of trading.

      • 1 Reply to lookoutgrady
      • I'll take both of these:

        First,

        <<However I don't see how the housing situation is correlated to their economy. E.g. California's economy has multiple footings, e.g. high tec, entertainment, agriculture, etc...>>

        Agree that California has a broad economic base which provides a degree of safety when one sector turns down, but it may not be enough when:

        1. Homebuilding and home improvement grind to a halt, resulting in fewer construction jobs, less demand for hundreds of ancillary products including concrete, glass, lumber, kitchen cabinets, lighting, swimming pools. Less revenue for Lowe's, Home Depot and a host of other retail suppliers.

        2. Service jobs tied to the industry including mortgage brokers, building inspectors, realtors, interior designers, etc... get reduced by 20 to 50%, depending upon who you believe.

        3. The impact of these losses multiplies across a spectrum of goods and service industries, from restaurants that served the construction trade at lunch, to newspapers that sold classified ads to the woman down at the nail salon, etc...

        The following abstract, while a little dated, sums it up quite well:

        http://www.epi.org/content.cfm/webfeatures_snapshots_20060830

        <<Both figures reveal that the housing boom was a key contributor to the growth in both jobs and GDP over this recovery. It thus comes as little surprise that a slowing housing market creates a significant drag on the rest of the economy. Absent a considerable boost in demand from other sources (personal consumption, a lower trade deficit, or accelerated business investment), we can expect slower growth in coming quarters.>>

        As to the second issue:


        <<And eventually the cheap money situation (rate cuts) will result in propping up the economy, while we're working through the housing inventory.>>

        I particularly agree with the 'eventually' part. The irony of our present situation is that despite all of the liquidity that the fed is trying to inject into the economy, very little of that money is finding its way to businesses or individuals.

        Instead, banks and brokerages are using it to address their own near term liquidity crises and are lending very little to third parties.

    • <<<California ($1,727 billion), Arizona ($232 billion), Nevada ($117 Billion) and Florida ($713 billion), made up 21% of the US economy in 2006

      Job losses just starting in NYC
      - won't be as bad as CA/FL but these are VERY well compensated people and their multiplier effect is much more than a guy working at Home Depot.

      And you left out MI and OH
      Ohio $461M
      Michigan $381M

      Do you consider PA to be a strength? IL? $1.1B GDP between those 2 - I am not saying they are as bad as MI/OH or CA but not exactly pillars of strength.

      They already have dropped so it won't be a new drop, but it is a permanent moribound situation. CA alone is enough to make most worry - I believe if it were its own country its GDP would be like 7th biggest in the world (or 8th)

      I think people who look at the economy or housing prices think its stock prices. Things do not turn on a dime. As for the mid Atlantic strength if you are talking Washington DC yeah - they have unlimited spending so there are no job cuts. Federal govt can add jobs.

      Have you thought about the impact of lower state revenues in our major states? As housing stock price falls, revenue fall WITH a lag. Then what happens to jobs? And spending? That doesnt turn on a dime as stock prices do. Same with house prices. Reluctant sellers still stuck in 2006 pricing don't sell and they sit and sit and sit. It took 4+ years for MI residents to finally get to the point they realize they have to sell and things won't "rebound". So for those states seeing a correction you wont see it in home prices in 6 months or 12 months. I saw on Fox Business this week a bunch of homes in DC area/Maryland. They are foreclosed (some brand new) and they want on auction where true supply/demand prices can be achieved. From the price they "last sold" (to the foreclosed owner) they dropped from 20-33%. So thats "true market" value. So are national home builders who are now selling at 30%+ below 2006 levels.

      Stubborn sellers who refuse to sell because they believe their house is worth more is not true value.

      But I think you really underestimate the hit to state governments - so much of our economy is based on inflated home prices. People just don't realize it. Schools will cut back spending, road work, city service like police/fire, etc - all those are jobs that need to be cut because revenues will be faltering but that stage has not even begun for most states. It will start to appear by end of THIS year. Then 2009 it will really hit.

      Maybe a better way to look at things is where is strength? Then balance against the ledger of where is weakness?

      Strength?
      Texas $1B GDP
      NC $375M
      VA $370M
      WA $300M

      and then some agricultural states which are far smaller

      So I buy the "its regional" thesis, but the states of strength ex Texas are not the size of the states of weakness.

 
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