Category: Market Outlook

You might be wondering just how bad can the housing crisis get? The short answer is: probably much worse than you now think.

The National Association of Homebuilders, as you might suspect, keeps a close eye on the nation’s economic trends. The following is from one of their recent reports.
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The Economy Skates Close to Recession

GDP revisions for the fourth quarter of 2007 left the overall economic growth rate at a meager 0.6%, but the estimated contraction in residential fixed investment deepened to a 25.2% annual rate and RFI subtracted a whopping 1.25 percentage points from the GDP growth rate.

The housing contraction weighed on GDP growth from other directions as well, including the reeling housing finance system and components of retail sales closely related to housing market activity.

Available data, including housing starts and building permits for January and February, point toward another sharp contraction in RFI and another very weak GDP growth rate in the first quarter of this year, a pattern that skates dangerously close to recessionary conditions.

We now view a mild recession as a nearly even bet, but we also believe that aggressive actions by the Fed and the recently enacted economic stimulus package virtually guarantee stronger growth by the second half of the year.

To see more go to NAHB
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Note that the NAHB forecasters still take the common view that things will pick up in the second half of the year. Most economists, government leaders, and the average consumer is, in my opinion, still in denial as to how deep and prolonged this downturn will be.

The NAHB (National Association of Home Builders) says that there will probably not be a recession next year but then goes on to forecast an economic close call.

Looking ahead, it seems to me that it will be almost impossible to avoid a recession during 2008. While Senator Clinton and others are calling for another bail out plan to save the housing market and over extended leaders and borrowers the extension of more credit to solve problems caused by an over extension of credit seems to be a dangerous way to try and correct imbalances in the allocation of capital.

A recession, as painful as it might be, especially to home builders, will be required to flush out the excesses of the past many years. Since the excesses were so excessive it is likely that a deep recession will take place no matter how hard the government tries to prevent it.

The article from the NAHB follows ===============

Economic Recession Will Most Likely Will Be Averted

The late-2007 downshift in economic growth reflects, to some degree, inevitable weakening of some GDP components, exports and business inventory investment, that displayed temporary growth spurts in the third quarter.

Furthermore, the housing downswing has continued to deepen and the fourth-quarter hit to GDP growth is likely to be even heavier than in the third quarter.

Finally, we’re now looking at a substantial unanticipated slowdown in growth of consumer spending, a sector that accounts for about 70% of total GDP.

Wachovia, the nation’s fourth-largest bank joins the subprime mortgage mess parade. Wachovia announced  that the complex debt instruments it has in its portfolio declined in value by an estimated $1.1 billion before taxes in October, leading to $600 million loan-loss charge for the current quarter.

Wachovia joins a growing list of banks, including Citigroup, the nations largest, in reporting massive losses stemming from their portfolio of complex debt instructions tied to the subprime mortgage market market.

The large number of non performing loans and foreclosures in this asset class has caused havoc in the mortgage industry and on Wall Street. The really surprising thing, however, is not that so many loans to people who have such a poor ability to repay are turning sour. This was entirely predictable.

The real surprise is that lenders that are supposed to be prudent evaluators of risk became so greedy to earn fees from making any kind of loan that they basically suspended their lending guidelines. For awhile it seemed that anyone who could put an “X” on a loan agreement was able to secure loans of such size that an eventual default was almost assured.

While the US government and lenders are hard at work trying to figure out how to contain the mortgage mess to the housing industry the combination of the subprime mortgage loan disaster, crude oil going to $100 a barrel and beyond, the cost of paying for wars without end, gasoline at $3.00 a gallon heading for $4.00 and beyond, run away inflation in food prices, and a collapsing Dollar, will very likely be too much for any government pronouncement that everything is OK or rescue program to overcome.