Best of the Week
Most Popular
1.SNP Offers Labour Deadly Death Embrace Alliance, Holding England to Ransom, Destroy UK From Within - Nadeem_Walayat
2.Gold And Silver – Most Widely Used Currency In Western World? Stupidity - Michael_Noonan
3.Election Forecast 2015 - Coalition Economic Recovery vs Labour Collapse - Nadeem_Walayat
4.Election Forecast 2015 - Debates Boost Labour Into Opinion Polls Seats Lead - Nadeem_Walayat
5.Why are Interest Rates So Low? Ben Bernanke, Confused as Ever, Starts His Own Blog to Prove It - Mike_Shedlock
6.Leaders Debate Election 2015 - Natalie Bennett Green Party Convincing Anti-Austerity More Debt Argument - Nadeem_Walayat
7.Labour Economic Collapse vs Coalition Recovery - UK Election Forecast 2015 - Video - Nadeem_Walayat
8.China’s Stock Market Mania; How High can Red-chips Fly? - Gary_Dorsch
9.Gold and Misery, Strange Bedfellows - 31st Mar 15 - Dan_Norcini
10.Ed Miliband Debate Election 2015 Analysis - Labour Spending, Debt and Economic Collapse - Nadeem_Walayat
Last 5 days
Stock Market Valuations - Maybe I am Crazy - 28th Apr 15
Gold Price Rises, Silver Surges – Physical Demand and Greece, Ukraine, Russia Risks - 28th Apr 15
The Insurance "Game" Has Changed – and Investors Can Profit - 28th Apr 15
Prelude to a Japanese Revival - 28th Apr 15
Why You Could Make ANOTHER 100% in China Stock Market Starting Now - 28th Apr 15
CIA Prefab State Terror for Human Bondage - 28th Apr 15
Greece: Down and Probably Out - 27th Apr 15
Biotech Stocks and the Power of Context - 27th Apr 15
Strawberry Picking Undervalued Gold Stocks - 27th Apr 15
Rock-Paper-Silver - 27th Apr 15
Gold Flows East - China, India Import Massive Quantities of Gold from Switzerland - 27th Apr 15
Conservatives Start to Pull Away from Labour in Opinion Polls, But is it too Late? Election Forecast 2015 - 27th Apr 15
Gold and Silver - It's ALL about The Big Picture After All - 27th Apr 15
Sheffield School Places Election Crisis - Affluent Schools Demand Increase in Funding - 27th Apr 15
Labour Bribes Voters With Housing Market Stamp Duty Cut and Rent Controls - 27th Apr 15
Stock Market SPX Index at Resistance - 27th Apr 15
Society's Leaders Have Been Digging a Bottomless Economic Pit - 27th Apr 15
Impending Stock Market Top - Trend Forecast Summer 2015 - 26th Apr 15
Desperate Stock Market Bubble Thinking Takes Hold on Wall Street - 26th Apr 15
Stock Market Back into The Bear Suits - 26th Apr 15
One Stock Market Where You Haven't Missed the Bull Market Boom Yet - 26th Apr 15
Migrant Crisis - Europe Has Completely Lost It - 26th Apr 15
What Obama's First-Ever Energy Review Missed - 26th Apr 15
Sheffield Hallam Election Battle 2015, School Places Crisis, Can Nick Clegg Win? - 26th Apr 15
Stocks Bull Market Looks to Resume - 25th Apr 15
Gold And Silver - The U.S. Is A Corporation. Precious Metals Stand In The Way - 25th Apr 15
When the Nuclear Money Option Fails - 25th Apr 15
The War on Cash Special Report - 25th Apr 15
China Economic Slowdown Story - Why “Didi Dache” Is a Phrase You Need to Know - 25th Apr 15
The Trans-Pacific Partnership and the Death of the Republic - 25th Apr 15
Stock Splitting Caused the Stock Market Crash - 25th Apr 15
China Stock Market Parabolic Mania’s Global Risk - 24th Apr 15
What Will Happen to You When the U.S. Dollar Collapses? - 24th Apr 15
Why 2 of U.S. Dollar's Recent Bottoms Have 1 Thing In Common - 24th Apr 15
UK Economy Debt Timebomb Will Explode After Election - 24th Apr 15
Are Gold Stocks the Cheapest Ever? - 24th Apr 15
God, the Stock Market and Pascal's Wager - 24th Apr 15
Greedy Insurers Are in for a Nasty Surprise – Positioning You for Big Profits - 24th Apr 15
Four Things Missing From Obama’s First-Ever Energy Review - 24th Apr 15
How to Grow a Regenerative Medicine Industry - 23rd Apr 15
Stocks and Bonds Seven Year of Negative Returns; Fraudulent Promises - 23rd Apr 15
The Existential Danger To The Euro Is Elections - 23rd Apr 15
Stock Market No Clear Direction As Investors React To Quarterly Earnings Releases - 23rd Apr 15
Is China The Next United States? - 23rd Apr 15
U.S. Oil Glut: How High Can It Go? - 23rd Apr 15
Distorted Financial System Expect Deflation, Inflation And Hyperinflation - 23rd Apr 15
What McDonald’s Corporate Earnings Report Is Really Telling You - 23rd Apr 15
Gold Price Forecast to Become Priceless - 23rd Apr 15
FDIC Plots a Bank Heist Involving YOUR Accounts - 23rd Apr 15
$GOLD Price Year 2007 Again - 23rd Apr 15
Stocks Bubble - The Spread between Stock Prices and GDP is Blowing Out - 23rd Apr 15
Ukraine War - When Did We All Become Murderers? - 23rd Apr 15
Libya Crisis - EU Leaders Are Indicted for Nazi-Style Crimes against Humanity - 22nd Apr 15
Why Alternative Energy Isn’t Taking It on the Chin Despite Low Oil Prices - 22nd Apr 15
Bill Gross - German 10-Year Bunds Short of a Life Time - 22nd Apr 15
How to Profit from the Drop in the Oil Price - 22nd Apr 15
The U.S. Dollar's Move Is More Dangerous than You Think - 22nd Apr 15
Apple Watch Means Apple Will Become Worlds First $1 Trillion Stock - 22nd Apr 15
Half a Stocks Bubble Off Dead Center - 22nd Apr 15
They Said Go to College - Learning to become Debt Slaves - 22nd Apr 15
Best Cash ISA 2015/16, Instant and Fixed Savings Interest Rates, New Flexible Withdrawal / Deposit Rule - 22nd Apr 15
Unsound Banking: Why Most of the World's Banks Are Headed for Collapse - 21st Apr 15
Bitcoin Recent Low Price Volatility Might Be Deceptive - 21st Apr 15
Currency Wars Back As Russia Buys Gold - One Million Ounces in March Alone - 21st Apr 15
The Greece 'Grexit' Issue and the Problem of Free Trade - 21st Apr 15
Why Europe Lets People Drown - 21st Apr 15
Wealth Destruction for the 99.9 Percent - 21st Apr 15
SNP Publish England's Suicide Note as Pollsters Still Forecast Labour-SNP Election Disaster - 21st Apr 15
Characteristics of Extremely Over-Indebted Economies - 21st Apr 15
Trader Education Week -- a Free Event to Help You Learn to Spot Trading Opportunities - 21st Apr 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The War on Cash!

Nouriel Roubini 2009 U.S. GDP Forecasting 40% Home Mortgage Failures?

Housing-Market / US Housing Jan 08, 2009 - 12:52 PM GMT

By: Andrew_Butter

Housing-Market Diamond Rated - Best Financial Markets Analysis ArticleIF Nouriel Roubini's 2009 GDP forecast for USA is right, THEN could 40% of home mortgages fail? It's been a long time since I saw two guys so eager to lose their jobs, Hank Paulson and George Bush could hardly be held back, they were positively skipping out of the door; I wonder why?


Last week Dr. Nouriel Roubini's newsletter (RGE Monitor) predicted a peak to trough in US housing of 38% to 44% with a bottom not before mid 2010.

That's the first time I saw Roubini put a number on house prices. My projection three months ago said (low-case) peak to trough 32% with a bottom mid 2010 ( Fixing the U.S. Housing Market and House Prices).

So "SNAP!" - more or less.

But my projection of 32% was based on 3% nominal GDP growth in 2009 (I don't do GDP I just do real estate prices, I look up the GDP projections), but things are looking worse now. Of course Roubini is the most pessimistic, that's why they call him "Dr. Doom".

If Roubini is right in that nominal GDP growth will be -5.4% in 2009 (-3.4% real and -2% inflation) then my model says that house-prices will fall 15% in 2009 (peak to end of 2009 = 35%).

What happens in 2010 will depend on the economy, and no one is talking about that. Roubini hints that the recession could be over by 2010; so for the sake of argument let's say 2% nominal GDP growth in 2010 (what's real and what's inflation doesn't matter for my model).

In that case my model says the bottom will be some time after mid 2010 with a total peak to trough of 40%. That's all assuming that long-term interest rates stay low.

So "SNAP!" and " SNAP!"... using Roubini's numbers for the economy my model delivers mid-range of his projection. Time for mutual admiration perhaps?

Methodology

RGE don't explain their methodology so it's hard to say if that's two independent views or the same model done twice.

Just for the record, the core of my model is a valuation and in any coherent valuation you are obliged to explain the methodology (I do).

That's unless you are using Zimbabwe Valuation Standards, or the "Bean Counter's Big Surprise Valuation Standards" mandated under US GAAP and IFRS. But then RGE's price forecast is an "economic" prediction, and for that, well apparently, anything goes.

I can't help wondering if the current mess might have something to do with economists (and bean counters) thinking they have the inside edge on doing valuations for assessing capital adequacy of banks with debt secured by real estate? Isn't that a bit like hiring an (expensive) dentist to clean your drains?

Nah...can't be that, Allan Greenspan is a genius and a GREAT ECONOMIST, I know that because he said so himself.

And if you can't understand that "froth" means the "biggest property bubble in history" you should be working minimum wage as a security guard, if you can get a job at all!

Anyway, back to the point, I suspect we are independent since RGE's logic appears to be based on inventory (housing starts and foreclosures) and uptake. My model ( Value of Housing Markets in USA and UK Past, Present, and Future) is based on International Valuation Standards and 100+ years of data and does not need to know anything about starts, foreclosures, or sales; rather these are predicted by the model.

It's an important distinction, if price is affected by starts, foreclosures, and sales then the logical strategy to "rescue" house prices (and the bonds that depend on them - i.e. fix the mess), is to cut starts and foreclosures and to encourage sales by getting Fannie and Freddie to lend irresponsibly.

Or in the words of that Great American Poet..."do it to me one more time...BABY". That appears, at least to the untrained observer, to be the current strategy.

But the valuation model says "NO, that won't do anything to prices".

For the valuation model, price is independent of starts, foreclosures or sales, in fact it's price that drives those variable, and that's driven by nominal GDP, long-term interest rates and the inevitability of Farrell's Rule with the only possible way out of the loop being to implement "Surprise-Free Valuation Standards" (as was argued in UK Housing Market Will Not Bottom Before 2012) .

Not that there is anything wrong with economic theories, just they often confuses cause with effect which has the tendency to send people in the wrong direction, like when Allan Greenspan pushed down interest rates so that we could all enjoy a "bit of froth". And very tasty froth it was too! Thanks Allan.

Here's why:

Logically price drives starts (I've done development, you don't start when prices are in a hole unless you have a theory and an inside track to a banker (preferably a bent one), that much I know).

So I think it's safe to assume that the logic in RGE's argument is that if starts are falling then the market knows something. Well no contest there; I say price drives starts too; just I get to starts via price rather than the other way around...cause and effect.

You can say what you like about foreclosures but my view is that they are driven by either price or GDP (which in turn drives my model - i.e. there could be cross correlation), and that if foreclosures are to some extent, driving price down (the conventional wisdom amongst economists), then the effect is part of a feedback loop ( The U.S. Housing Market Economic Double Negative Feedback Loop) .

Sure sales can be driven by irresponsible lending, but only if the trajectory of price is upwards ( Time for Selective Buying of Mortgaged Backed Securities?) .

Now the trajectory is down, that's a different ball game. Sure also, constraints on lending slow sales, but the valuation model seems to suggest this doesn't do anything to price when prices are falling (people just don't move).

It's a small point but what that says is that bailing out distressed mortgages and getting Fannie and Freddie to be irresponsible again won't affect prices, but it might affect GDP in the long term (negatively).

Predicting Foreclosures

In October I put up a chart based on combining some data that I found on the FT website on foreclosures by State, with some other data I trawled up on GDP growth by State.

I thought it might help resolve the point about foreclosures. This showed that there was a relationship between foreclosures (by State) and GDP growth per State (65% R-Squared or so). ( The U.S. Housing Market Economic Double Negative Feedback Loop) .

Basically foreclosures shoot up when GDP growth goes down below 1%. If average GDP growth goes down to -3.4% (real) it looks like we may be having the fun of accelerating foreclosures some time soon (which, now that GDP has started to tank, seems to be happening - ummm....could the two be related?)

So cause and effect, either (a) falling GDP drives foreclosures (b) foreclosures drive GDP down (c) there is a feedback loop or (d) foreclosures and GDP are independent and a 65% R-Squared is just a chance occurrence?

My view is (a) with a bit of (c).

So by how much?

Well I know that you are not "supposed" to project outside the data, but just for a bit of fun I tracked back the best fit regression line to minus 3.4% GDP Growth.


Umm...oh dear I hope either the regression line that predicts foreclosures from GDP or GDP from foreclosures (or a bit of both) doesn't mean that at minus 3.4% GDP foreclosures will pop up to 40%.

Or if that's the story I hope that Nouriel Roubini is wrong about his GDP projections!

He's been wrong before, he must have been; he's an economist after all! Didn't he say the crunch would happen before 2005, in which case perhaps his -3.4% GDP growth won't happen before 2012...whew!!!

But maybe not...oh dear oh dear, and just for a bit of froth! There again it's non-recourse debt so all those people pushed into negative equity can just jingle their way out of the hole. Thank God for that! Oh but oops…I almost forgot, what about the securities?

Don't worry we will get the Chinese and the SWF's to bail us out, no problem! And if that fails there is always the grandchildren.

Right now house prices in USA are under-valued (below the long-term equilibrium line), but unless there is REAL CHANGE they will keep going down as increasingly jingle-mail becomes the only option.

So HAPPY TIMES... 40% to 44% peak to trough and (perhaps) 40% foreclosure on home mortgages, here we come!

Yup I think that Cowboy George deserves a long rest, and although the new guy is possibly the first US President in a long time that anyone felt like dancing in the streets about, I must say, last time I saw him on TV he did seem to have a look like "darn...what have I let myself in for?"

It's one thing to run a brilliant election campaign; it's another to run the can of worms that the US Government has evolved into.

The numbers on inflation, the real size of the government's liabilities, and the "efficiency" with which money is funneled out of the back door to special interests; these are all manipulated by a shadowy tribe of vampires. And the hastily concocted "Stimulus Plan" just plays into their hands.

Right now there is only one number in USA that the manipulators of power can't (presently) get their hands on. That's how much people will pay for a house in a free and open market.

For years Fannie and Freddie distorted that number (they were set up so people could afford to own homes, their effect was to radically increase the price of housing – figure that one out), but eventually that proved to be an unsustainable scam. Ask the Master Scammer Mr. Madof, he knows, eventually every scam runs out of money.

Fannie and Freddie "temporarily" ran out of money, sure they were dressed up as instruments of the Free Market, maybe before 1987 when they changed the accounting rules for measuring inflation they were, but from that point they became instruments of crony capitalism that sucked all the blood out of America.

If CHANGE is really the objective then in Washington nothing changes, the words are the same, "FOLLOW THE MONEY". And make sure it's counted properly.

Forget about US GAAP and IFRS, there is only one tool that properly values assets and liabilities, a silver stake that can tear out the heart of the vampires.

It's called International Valuation Standards.

IF you really want "CHANGE", THEN use that tool.

By Andrew Butter

Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( hbutter@eim.ae ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

Copyright © 2009 Andrew Butter

Andrew Butter Archive

© 2005-2015 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Ward Dutton
23 Jan 09, 02:15
Real Estate Prices are driven by jobs

I found you insights very interesting, but I believe there is a third and arguably more significant indicator driving your model results. Having worked in the apartment investment business for 20 years, our most significant factor is job growth. Without jobs prices fall and GDP falls, at least in the absence of easy credit promoting increased housing bubble inflation and consumer leverage. Eventually the house of cards falls, but it's jobs that starts to decline in GDP and rise in foreclosures. I have watched this first hand in Las Vegas and Phoenix, two markets that I was an active buyer in 2004. Now I woudn't touch those market with a ten foot pole.


John_the_pessimist
28 Jan 09, 16:01
Jobs v. GDP

If job growth/loss is more important than GDP gain/loss, then that would support the Austrian theory that companies should be reducing the wage rates across the board, rather than laying off some of their workers. That would preserve jobs, at a level where they can at least have a chance to make the mortgage payments...


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014