Mild and qualified optimism from Calculated Risk on housing

Calculated Risk for years has provided better economic forecasts and data collection than the expensive paid services with their relentless bubble boosterism.

I also owe him personally for helping to expose the ticking time bomb of subprime and option-ARM mortgages way back in 2006. That was a very good year for my personal portfolio! Nonetheless I have to disagree with his mild optimism on housing expressed here:

He argues that residential investment may have reached bottom earlier this year, and their recovery in Q3 and Q4 will boost the rest of the economy, and also points to possible recoveries in autos and business inventories.

I think, more likely, these “green shoots” will soon be overwhelmed by the continuing collapse of much of the rest of the economy.

Even if autos and residential RE construction recover somewhat, what about the following:

Banks without cheap federal financing?

State and local government spending?

Commercial real estate?

Unemployment and income declines?

Decreasing velocity of money due to high marginal propensity to save?

Rolling waves of defaults as cheap bubble debt matures, from Option ARMs to leveraged loans to credit cards to commercial lines of credit?

The hundreds of thousands of small and medium-size businesses affected by the impending CIT Group bankruptcy and the massive closing of unsecured credit lines by Amex and Adventa earlier this year?

Each of these are contributing to deflationary headwinds that, in my opinion, will smother any spark of recovery in real estate or autos for at least the next three quarters.

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One response to “Mild and qualified optimism from Calculated Risk on housing

  1. Reading this in Feb 2010, you look pretty good as a predictor.

    Brent White’s 12/2009 paper on shame and the housing crisis has many good points, but one I would like to repeat here is the fact that negative equity has a huge impact on middle-class consumption and weakens aggregate demand.

    Until we get an equity reset, the economy will be in zombie status.

    On the sunny side, after we get that reset, maybe people from the rest of the USA may again be able to think about being able to buy a house in CA.

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