Now that is is pretty clear that we are in a recession, the natural question to ask is: how long will it last? Will it be as long as the Great Depression, or as short as the post-dot-com-crash recession?
According to a couple of economists who write for Forbes and work for an investment firm, “any velocity-driven economic slowdown will likely be very short lived.” They predict a “one-quarter slowdown” followed by “a relatively quick recovery in 2009.” Thus, they suggest you take advantage of today’s low stock prices and buy buy buy now now now!
But then, they also say the problem was caused by the Fed cutting interest rates last year, and their solution is for the Fed to cut interest rates now. Say what?
A more pessimistic view comes from a southern California blogger who calls himself Doctor Housing Bubble. “California is years away from a housing bottom,” he says. For one thing, he says, California’s economy entered a recession after the housing bubble began to deflate, which will only make the deflationary period last longer.
It is worth noting that the economy recovered relatively quickly after the dot-com and telecommunications crashes because of the housing bubble. As housing prices rose, people financed a consumer-spending boom by borrowing against their homes. I don’t see any boom on the horizon that will make up for the deflation of the current housing bubble.
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As a result, the Antiplanner is inclined to agree with the doctor. I also base this on the evidence of previous housing bubbles. Using data from the Office of Federal Housing Enterprise Oversight (OFHEO) — the agency that was supposed to monitor Fannie Mae and Freddie Mac — California had a housing bubble that peaked in 1990 and bottomed in 1995. Hawaii had a bubble that peaked in 1994 and didn’t bottom until 2000. Massachusetts and most other New England states had a bubble that peaked in about 1989 and bottomed in about 1994 (varies slightly by state).
For those who like to look at the data, I’ve posted a spreadsheet of the OFHEO state data in an easy-to-use format. Simply enter the two-letter abbreviations for up to six states in cells BC1 through BH1 and you will get a chart of the home price indices for those states (with the price in 1980 set equal to 100).
Scroll down to about row 138 and see the same chart adjusted for inflation (enter the state abbreviations in cells BC138 through BH138). Adjusting for inflation makes some of the earlier bubbles a bit more obvious, and also makes them appear to last a little longer. But I suspect home sellers don’t adjust for inflation; if they bought a house for $250,000 in 1990 and are ready to move again in 1996, they’ll be happy to sell it for $260,000 even though it they’ve lost money after adjusting for inflation.
In any case, the point is that it seems to take about five years for housing bubbles to deflate as far as they are going to go. This bubble might take longer; I doubt it is going to take any less. Other markets might recover a little sooner, but until people’s housing prices recover, few consumers are going to want to start spending lots of money on new cars or other big-ticket items. And few people are going to want to start buying homes until prices bottom out.
I suspect what happens is that, as prices decline, people initially hold off on buying homes. After four or five years, however, there is so much pent-up demand for housing that people start to buy, which leads prices to flatten out and, eventually, move upwards again. In most states that had bubbles, prices peaked around 2006, which means they will bottom out in about 2011. Housing isn’t everything, but anyone who tells you to expect a recovery much before then is probably trying to sell you something.
One thing that is different this time is that the banks will likely tighten up on lending standards. This should make less money available for:
* Refinancing and getting spending money out of our homes. This will generally depress spending for years.
* Commodities speculation. This is likely the reason that oil is not around $90/bbl. Kinda looks like the “peak oil” panic may be a delusion. Recent discoveries suggest that the USA has more oil than the Saudis. With Portland OR gas at $3.40/gal, can we dream of $2.50? $2.00? $1.50?
* Lehman Bros is now out of the promoting global warming business. They were associated with Generations mutual fund, chaired by Al Gore, so we may see a little less of Al since one of his partners in getting rich just self destructed. Maybe the green venture capital firm, in which Al is a partner, will have problems getting money.
* Cities may have trouble borrowing millions to feed to developers of new urbanism/smart growth utopias. Can we even hope that smart growth will crawl back under its rock for a few years until an easy source of wastable money again surfaces?
* Cities may have trouble coming up with the local match for toy trains and street cars. Hopefully the Feds would quit wasting money on this garbage transport and only finance low cost transport like cars and buses.
* Lower housing prices will finally allow the younger generation to afford a real home.
* High density, which never made economic sense in most places, will require even more subsidies if land prices fall. (High density require high land prices to “pencil outâ€Â.)
* Most important of all:
The world’s smart growth poster child (Portland OR) may hover near bankruptcy, finally exposing the lies underlying smart growth:
1. It does not make economic sense!
2. It does not reduce congestion
3. It does not save money.
4. It does not reduce pollution.
5. People do not want to live in high density.
6. It costs more than low density.
7. TODs actually increase congestion while reducing driving a little because they concentrate many people in a small area.
AND THE BIG ONE: Cities may actually realize that planners have been lying to them for years and fire the whole lot for pure incompetence. This will lead to a new golden age of cities for people instead of for planners!
Thanks
JK
One problem with the bailout and with recent Fed actions is the MASSIVE increase in the money supply which portends greater future rates of inflation. Past Fed money supply injections led to the internet bubble, flowed into, underwrote and enabled much of the current housing bubble and are now poised to create some other inflationary pressures in the market that haven’t been revealed, yet. The market is attempting to correct this situation by devaluing previously over-valued investments and to clean up the wasted capital in order to try to redirect it to better uses. That may be a relatively quick process in many sectors and a slower process in housing due to the length of mortgage contracts, the length of the legal process to repossess and resell homes, and the needed revaluations of inflated home prices by local taxing authorities.
As long as the Fed and the Treasury are injecting more and more money into the sytem, the market pricing signals will become more and more distorted and the clean up will be longer and more persistent. The needed adjustment process will then suffer from delay and misdirection.
Credit does need to “freeze up”; banks have behaved as if there aren’t any real lending standards – the government (taxpayers) will pick up the tab for any mistakes. The banks need to take a step back and redevelop some more realistic lending practices without the interference of money injections from the Fed.
I would like to say hat I agree with the Forbs writes, to a certain extent. I’m a novice e-trader. I also have an IRA. My IRA hasn’t been doing ever well but on the last to market drops took a friends advice and bought some stock online only to sell it the next day or so, when the recovery happens. I’ve done pretty well. Not bad or a wanna be socialist 😉
Well Randy it looks like your dreams might just be coming true!
As I see it. The Gov has taken over Freddie and Fanny (five trillion) which have loans on 90% of the homes. They can make everyone happy by changing the loan amounts and interest rates for votes. Why should there be any foreclosures???
Something like – from each according to his ability and to each according to his needs-.
It may be time to purchase some GOLD. (Can we Still?)
JK: Lehman Bros is now out of the promoting global warming business. They were associated with Generations mutual fund, chaired by Al Gore, so we may see a little less of Al since one of his partners in getting rich just self destructed. Maybe the green venture capital firm, in which Al is a partner, will have problems getting money.
OLS estimate of dependent variable, comments about Al Gore, and independent variable, being a right wing global warming skeptic… R Squared = .9999, t = 20
Shit happens.
“OLS estimate of dependent variable, comments about Al Gore, and independent variable, being a right wing global warming skeptic… R Squared = .9999, t = 20 ”
Naw, I’v just read a few climate papers that do not support the panic version of warming in obscure journals like Nature, Science and many others. Have you?
PS: I take it Al Gore is making millions off of this doesn’t bother you?
Does a skeptic having gotten $1000 a few years ago from an oil company bother you?
I notice from you blog’s title that you don’t like to see people having basic freedoms.
Thanks
JK
Then for that matter this blog also is against people having basic freedoms too.
Sustainibertarian has brought up some good points in that there are lot of things that never get acounted for that can’t really be put in a monetary sense.
Henry David Thoreau even realised this back in 1859, when he said:
“Each town should have a park, or rather a primitive forest, of five hundred or a thousand acres, where a stick should never be cut for fuel, a common possession forever, for instruction and recreation. All Walden Wood might have been preserved for our park forever, with Walden in its midst…”
A lot of people that call them selves “libertarians” today are interested in control than freedom and seem to have a mind set more in common with that of Hitler or Stalin, than with some one like H D Thoreau.
As for my self, I’m pro human rights, but I’m also pro human responsibilities too.
JK, If all energy subsidies were removed, including those that flow from designating energy as a “national security” matter instead of just regarding it the same as any other commodity then market forces would direct consumers towards the most economicly efficient means of satisfying energy needs.
Thus the first step towards preparing America for peak oil and climate change is to deregulate and desubsidise energy supplies, including ensuring that land needed for production facilities, pipelines and transmission lines is not subsidised by special eminent domain or special exemptions from existing environmental protections.
Once the subsidies are removed and the real cost of energy is revealed then consumers can decide whether it is cheaper to consume or conserve in an informed way.
The same thing should be done for water and the few foodstuffs that are not currently priced largely by the market.
From the various studies I’ve read America can profitably reduce it’s energy consumption by 25% with current commercially available products and systems. There is certainly potential for this process to continue with an additional 25% reduction (of the remaining energy demand)becoming profitable every decade or two. But the future depends on what happens in the future so whether the potential is realised is another matter.
Don’t be too quick to dismiss peak oil just because the price is currently falling. This is precisely what economic theory says will happen – both the mean and variation from the mean will increase. If the producer nations are not in debt then they will have no incentive to stimulate demand during a global credit-crisis induced recession. If some of the dominant consumer nations are not in debt either then demand may not fall as much as some analysts have been forecasting. I don’t think we have to worry about commodity speculators pushing the price back up to $120 bbl or $150 any time soon but equally I don’t think we should be holding our breaths for a return to $20 or $40 or even $80 by this time next year.
Only 2% of Americas oil reserves can be profitably extracted with current technology and current heavy crude prices. Without a revolutionary technological breakthrough the normal rate of evolutionary development in oil extraction and refining capabilities will only double that percentage every 15 years. The last revolutionary breakthough in the oil industry was the rock drill, a hundred years ago, give or take a bit.
The other big difference from 1929 is that back then America was the world’s biggest lender, and possibly the world’s biggest importer. When it stopped lending and importing it dragged the rest of the world down with it. Today America may be challenged by the EU for ther title of world’s biggest importer but it closer to being the world’s biggest borrower than being it’s biggest lender. That makes the Great Depression pretty useless as guide to what will happen globally with this recession. The rest of the world may bounce back like America did after the dot com crash, dragging America up with them. Or they could discover that America has peessed away all the money it borrowed. Or in the worst case scenario, They could discover that America gave all that borrowed money to China to pay for America’s import fetish. As long as China has passed most of that money on to other countries to pay for raw materials then everything should work out hunky-dory. But if the Chinese government has just been printing money left, right and center to make it’s growth look spectacular then we’re all in deep doo-doo.
Only time will tell. Though I’m gald you brought up peak oil & climate change.