Real Estate Brings Real Pain

Thanks to Speculative Bubble for finding this great article in the Heraldtribune.com

"The housing industry has been held out in the past two years as the economic landing gear stabilizing the nation for a soft landing. But now with its fortunes so changed, many are asking whether the spongy real estate market will drag the economy into recession."

'"We've had an unprecedented run-up in home prices, on the order of 30 percent in recent years," said Economist, Dean Baker, who fully expects the real estate market to give that gain back. He says it's the result of the same kind of "irrational exuberance" that former Federal Reserve Chairman Alan Greenspan cited with the stock market during the heady days of the late 1990s."

"Robert Reich, a former Clinton administration Cabinet member and a professor at the University of California at Berkeley, has been warning all year about a general slowdown caused by the waning housing market. The two biggest sectors of the economy in terms of their impact on jobs and suppliers are the housing and automobile industry."

"Both these sectors are in deep trouble right now," Reich said. "Detroit is awash in unsold inventories. The housing bubble is bursting. If more job losses result, as I expect they will, the problems of these two sectors will spread throughout the economy because consumers won't have the dollars they need to buy everything the economy is producing."

As of the end of 2006 Real Estate accounted for 13% of the jobs in Sonoma County. 40% increase from 5 years ago. During the last 5 years tech and manufacturing were losing jobs. We are still below the number of jobs in 2001 and the non- real estate related jobs we have gained have been lower paying mostly service sector jobs.

With the Housing Market in the toilet and the housing industry accounting for the only measly blip on Sonoma County's job scene, how do you think we will fare when all the gains of the housing bubble are given back?

"Consumers have pulled out an enormous amount of equity from their homes and spent it. That has been a serious boost during the past few years because such a huge portion of the economy is driven by consumer spending, Baker said."

"About $800 billion in equity was taken out of the housing sector by consumers in 2005. This year I expect it'll be about $500 billion, and in 2007 it'll be between $200 (billion) and $300 billion," he predicted.

"As housing-related cash dries up, so does the overall economy. Baker terms it "a significant drop" in economic liquidity."If we go into recession, it'll be because of housing."'

* Employment peaked in Sonoma County in 2001 at the end of the tech boom when the county had 196,700 payroll jobs.

* By 2003, the economic downturn had wiped out 7,600 of those jobs. (we were already in a recession in 2003, yet the housing bubble continued to boil with greater fools still rushing in, and the surge in exotic financing due to the unaffordability of prices is proof in the pudding)

Percentage of Sonoma County homes financed with risky loans
(Interest Only, ARMs, Negative Amortizing Loans)
2003 - 36.8%
2004 - 59.4%
2005 - 69%

* Through 2005, only 2,400 jobs had returned.
"Real estate built up an outsized role in the region's economy during an eight-year housing boom. Housing-related jobs now account for 13 percent of employment in Sonoma County, and soaring prices boosted equity that bolstered consumer spending."

*By October 2006 the county lost 3,100 jobs
"Plunging sales led to construction layoffs and job losses in real estate, financing and other housing related areas. "What growth there was ended unexpectedly in May, the first of seven consecutive months the county had fewer jobs than a year earlier. More could follow, economists warn."

"A correction in the U.S. real estate market is under way, says a recent report from UBS, one of the world's largest financial firms.That observation was confirmed by the Office of Federal Housing Enterprise Oversight, which noted a "national deceleration in house prices."'

"Even the Federal Reserve's "Beige Book" report has a fairly grim assessment of the housing market, analysts say."

"Paul Kasriel, Northern Trust's chief economist, thinks that because housing played such an important role in keeping the economy chugging during the last two years, if it is responsible for a recession, that downturn could be particularly severe."

"Kasriel refers to a fairly simple formula: take the dollar value of new and existing single-family homes in 2005 and divide it by the nation's gross domestic product, the total of all goods and services produced in one year. That gives you a ratio of 16.3 percent."

'"That's off the scale," Kasriel said. "The ratio has never been that high. The median is 8.4 percent and the previous high, of less than 12 percent, was in the late 1970s."'

"Real estate prices have been dropping faster than ever before. The National Association of Realtors said last month that the median price in October for existing homes fell to $221,000 nationally, down a steep 3.5 percent from October 2005."

'"That's the largest decline on record since 1968, and the speed of the decline has been breathtaking," Kasriel said. "It's just like a straight line down."'

December 2006
Sonoma County median price fell almost -8 percent.

"OFHEO Director James B. Lockhart said that U.S. house prices are growing at less than 1 percent during the third quarter, providing "more evidence that the long-forecasted national deceleration in house prices is occurring."'

"We do not expect the U.S. economy to pick up again until the fourth quarter of 2007."

Although rates are now still low, "they could easily spike upward again," Reich said, adding that Federal Reserve chairman Ben Bernanke and his policymakers should be seriously considering a rate cut. "That Bernanke and company are still muttering about inflation is itself very worrying."

"Kasriel, the Northern Trust economist, notes that short-term interest rates are higher than long-term interest rates. That is known as an inverted yield curve in financial circles, and is a historically accurate indicator of economic downturns."