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Recession Economics

Recession Economics. Why the housing meltdown is hurting the US economy. Jon Haveman Principal February 13, 2008. Colliers International. What’s going on?. Yet denial still runs strong. Survey of Professional Forecasters. What is a Recession?.

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Recession Economics

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  1. Recession Economics Why the housing meltdown is hurting the US economy Jon Haveman Principal February 13, 2008 Colliers International

  2. What’s going on? Yet denial still runs strong Survey of Professional Forecasters

  3. What is a Recession? • Economic Growth is all about trends and bends • Trends are long run growth trends driven by demographics productivity and policy • Bends are short run fluctuations driven by some imbalances • Imbalances have to be large, rapid and sustained • A recession is a bend • 2 quarters negative growth rule confuses the symptoms with the disease • Shock to economy causes rapid changes, factor markets can’t clear: Unemployment rises, capacity utilization falls • Recovery is a given, but the process is painful

  4. Trends and the 2001 ‘Bend’ Log Run Growth 3.1% US Business Investment US Corporate Profits

  5. 2001: An odd cycle No Housing Cycle No Consumer Cycle Just one big investment cycle

  6. How did California fare?

  7. A slow recovery in SJ?

  8. 2000 was unusual, not today

  9. Local Growth Local Output (GSP) Growth 03-05 Local Employment Growth 04-07

  10. So what’s happening today? What’s right? Current national numbers: we are NOT in a recession

  11. GDP / Employment

  12. Industry has been stable.

  13. Consumers: Weak, but not recession weak

  14. Financial Markets? Turbulent but Solid Fundamentals

  15. So what’s happening today? What’s wrong? Housing!

  16. Transactions: Drop started in late 05

  17. What does residential construction mean to the economy?Not Much

  18. The 3 parts of a housing bubble • The transaction cycle The collapse of the pyramid • The building cycle The loss of jobs • The price cycle The impact on financial markets and consumer spending

  19. Reason # 2 The Mortgage Markets Bernanke May 2007: “About 7-1/2 million first-lien subprime mortgages are now outstanding, accounting for about 14 percent of all first-lien mortgages.1 So-called near-prime loans--loans to borrowers who typically have higher credit scores than subprime borrowers but whose applications may have other higher-risk aspects--account for an additional 8 to 10 percent of mortgages.”

  20. The housing markets Subprime / Alt A by state as share of State Est. Value of Homes (1010 data only) Beacon Economics

  21. The inevitable meltdown…

  22. Worst is to come…

  23. The Price Correction has begun LA -9% SD -13% SF -7.5%

  24. Yeah- so who cares?

  25. Consumer Savings Beacon Economics

  26. The Home ATM Beacon Economics

  27. Some New Vocabulary… Source: Washington Post's Mensa Invitational • Intaxication!: Euphoria at getting a tax refund, which lasts until you realize it was your money to start with. • Dopeler effect: The tendency of stupid ideas to seem smarter when they come at you rapidly. • Cashtration: The act of buying a house, which renders the subject financially impotent for an indefinite period of time.

  28. Summer GDP Growth Surge: Illusion Beacon Economics

  29. Can Exports / Business Spending Save the Day? Beacon Economics

  30. The State? Already there

  31. Local Consumer Spending

  32. Can we avoid it? • NO • Federal Reserve • pushing on a string with consumers • Important role to play in financial markets • Fiscal stimulus • $150 billion of tax rebates vs. $2 trillion in real estate losses

  33. Economic Forecast Beacon Economics • Recession starting now • Q4 or Q1 academic- depends on NBER • Negative growth through Q3 08 • Doldrums in 2009 • Recovery 2010 • Medium downturn • Worse if financial losses add up to more than expected • Worse if inflation creeps in to the economy

  34. Forecasts

  35. SJ Commercial Market Demand? • Weak Economy • Business spending follows consumer spending • Weak employment • Slowing in finance, professional services, IT • Office space takes a hit • Weak local spending • Housing and weak labor market • Retail takes a hit • San Jose on periphery, not epicenter • Hit less hard than the state • Not a lot of new supply • The big problem: commercial investors • Highly leveraged investments • Falling cap rates • Small weakness implies big problems

  36. San Jose Cap Rates: Too low ResMBS first to go ComMBS is next…

  37. Summary Beacon Economics • Recession is here… • Consumer weakness coming to light • Business weakness to start on profit issues • Exports will not be able to carry the day • Labor market figures sending a clear signal • Debt markets a mess • What kind of recession? • Not huge, 2% decline followed by period of doldrums • Might get worse—depends on financial markets

  38. DON’T PANIC!!! • Expansions are for growth • Recessions are about market share • Heed our warnings and get into a position to exploit the recovery when it comes!

  39. Beacon Economics is an independent consulting firm providing a variety of economic support services to clients across the Western US. • Our Services Include • Custom Presentations for Public and Private Events • Litigation Support and Damage Estimation • Regional Economic Outlooks and Conferences • Market Analysis and Forecasts • Cost-Benefit Analyses • Public Policy and Development Studies For more information Go to: www.BeaconEcon.com E-mail: Jon@BeaconEcon.com Call: 415-336-5705 Jon Haveman and Chris Thornberg are

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