Inquiring
minds have been asking for another housing update. My previous update was was
on February 15,2008 in Housing Bottom
Nowhere in Sight. I did not remember Bernanke's comments at the time but
looking back now they sure seem funny.
CNBC
is reporting Bernanke Expects Housing Recovery by Year End.
Federal Reserve Chairman Ben Bernanke told lawmakers Tuesday he expects the
downtrodden U.S. housing sector to improve by the end of the year, a senator
who participated in the closed-door meeting said.
"He let us believe that the housing situation should begin to ameliorate
by the end of the year," said Sen. Pete Domenici, a New Mexico
Republican, told reporters.
Using the Japan
Nationwide Land Prices model as my guide, here is how I have called things in
real time.
I just added the
Winter 2008 arrow. Housing prices are now one notch closer to their final destination.
The US Timeline scale is compressed. At the current pace, housing will bottom
in about 7 years vs. 14 years in Japan.
Flashback March 26 2005
The initial data point was established in the post It's a Totally New
Paradigm on March 26, 2005. Here are some excerpts from that post.
·
Ron
Shuffield, president of Esslinger-Wooten-Maxwell Realtors says that "South Florida is working off of a totally new economic model than any of us have ever
experienced in the past." He predicts that a limited supply of land
coupled with demand from baby boomers and foreigners will prolong the boom
indefinitely.
·
"I
just don't think we have what it takes to prick the bubble," said Diane
C. Swonk, chief economist at Mesirow Financial in Chicago, who was an
optimist during the 90's. "I don't think prices are going to fall, and I
don't think they're even going to be flat."
·
Gregory
J. Heym, the chief economist at Brown Harris Stevens, is not sold on the
inevitability of a downturn. He bases his confidence in the market on things
like continuing low mortgage rates, high Wall Street bonuses and the tax
benefits of home ownership. "It is a new paradigm"
he said.
Flashback October 27,
2005
Inquiring minds may wish to review Bernanke: There's
No Housing Bubble to Go Bust.
Ben S.
Bernanke does not think the national housing boom is a bubble that is about
to burst, he indicated to Congress last week, just a few days before
President Bush nominated him to become the next chairman of the Federal
Reserve.
U.S. house prices have risen by nearly 25 percent over the past two years,
noted Bernanke, currently chairman of the president's Council of Economic
Advisers, in testimony to Congress's Joint Economic Committee. But these
increases, he said, "largely reflect strong economic fundamentals,"
such as strong growth in jobs, incomes and the number of new households.
What The US Can Learn
From Japan
I recently came across an interesting report called The Age of Balance
Sheet Recessions: What Post-2008 U.S., Europe and China Can Learn from Japan
1990-2005 by Richard C. Koo
Chief Economist, Nomura Research Institute, Tokyo, October 2008. The report
contains some very interesting charts.
Click On Any Chart In The Set For Sharper Image
Exhibit 1. US Housing Price Futures Moving Closer to the Japanese
Experience
Note: the line in pink is Tokyo Condo Prices while I am using Japan Land
Prices as my model except with a US timeline that looks more like the above.
Thus I see a bottom in US housing in 4-5 years. If I can get a hold of the
data that created the above charts I can probably get my friend
"TC" to chart it going forward. My latest update from
"TC" was Case Shiller and
CAR Analysis November 2008 Release.
Exhibit 4. Cumulative Capital Losses on Shares and Land since 1990 Reached
$15 Trillion or 3 Years Worth of Japan’s GDP
Exhibit 5. Balance Sheet Problems Forced Japanese Businesses to Pay Down
Debt even with Zero Interest Rates
I have extensive comments on balance sheets and paying down debt below.
Exhibit 6. Japan’s GDP Grew even after Massive Loss of Wealth and
Private Sector Rushing to Pay Down Debt
The above chart shows in pink the Japan Land Price chart that I have been
using since Spring of 2005. It represents the Commercial Land Price Index in
six major cities.
Exhibit 23. US Interest Rates Took 30 Years to Return to Their 1920s Level
The above chart should give treasury bears something to think about.
Balance Sheets and Paying Down Debt
There is every reason to believe US banks will face the same experience of
paying down debts in a Zero Interest Rate world as opposed to going on a
lending spree. Some will challenge this notion because of Obama's pledge to
create jobs and rebuild infrastructure.
The counter is that Japan went on a wild spending spree as well, building
bridges to nowhere and it did not do Japan any good. Here is an article by
James Shaft quoting Richard Koo in A long, shaky
bridge to recovery that discusses this very issue.
The
lessons of Japan's stumbling path out of deflation and recession suggest that
government spending can help stave off an extended recession, but it may take
years not months and require an unlikely combination of political will and
consensus.
That'll be a lot of bridges to nowhere.
Government spending can break the cycle. Not tax cuts, which will only go to
pay down debt or are saved into a banking system that isn't working, but
actual bricks and mortar. Think the New Deal's Works Progress Administration
supersized or Japan building highways and bridges over seemingly every river,
stream and rivulet.
"It was the fiscal stimulus that actually helped end the Great
Depression, not the monetary policy," said Richard Koo, Tokyo-based
chief economist at Nomura Research Institute and author of The Holy Grail of
Macroeconomics: Lessons from Japan's Great Recession.
"I don't think it will be over quickly. I am recommending at least three
to five years seamless medium-term fiscal stimulus measures to give enough
time for the private sector to repair its balance sheet."
Three to five years is an eternity in political life. It is an absolute sure
thing that incoming President Barack Obama will design and implement a pretty
chunky fiscal stimulus package even if President Bush does not pass one in
his waning days in office. But think about how difficult it will be to
maintain both the will and power to maintain a huge borrow and spend
programme for several years.
Koo thinks that Japan, which was facing a far more serious destruction of
assets, derailed its recovery with premature fiscal reform. "If we had
known in advance that this kind of recession will never be over until private
balance sheets are repaired and fiscal stimulus is needed to keep the economy
growing, we could have done it in seven or eight years perhaps instead of
15," he said.
Near zero interest rates were ineffective in Japan because people and
business refused to borrow, continuing to pay down debt to repair balance
sheets that had been hurt badly by the fall in the value of assets like stock
holdings and real estate.
I disagree with the conclusions
of Koo and instead suggest that building bridges to nowhere wasted capital
and prolonged Japan's deflation. Simple logic dictates that one cannot spend
one's way to prosperity.
In the meantime I am sticking with my model that suggests there is another
3-5 years before housing bottoms in the US. I also expect the UK, Canada, and Australia to follow similar paths, offset only by the start of their respective
housing busts.
Mish
GlobalEconomicAnalysis.blogspot.com
Mish's Global Economic
Trend Analysis
Thoughts on the great inflation/deflation/stagflation
debate as well as discussions on gold, silver, currencies, interest rates,
and policy decisions that affect the global markets.
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