Wednesday, July 19, 2006

A Request to Christopher Thornberg

A UCLA economist said the combination of rapidly falling home sales and diminishing home-price appreciation is the behavior of "a classic bubble." He predicts home-price appreciation will flatten out, and there might not be true appreciation again until 2011.

"The soft-landing people are full of nonsense," said Christopher Thornberg, senior economist at UCLA. "This is a classic bubble. And unit sales are falling faster than in past bubbles."

"We are in the middle of this decline. If we are lucky, prices will go flat. But we are not going to have prices fall like the stock market. You won't see declines of 10 percent or 15 percent per year. What will happen is that prices will flatten out," he said, adding that there might not be housing appreciation until 2011.

Next year will be critical from the standpoint of how the consumer will react to not having "a house cash machine" that can be tapped for spending thanks to rapidly appreciating value.

"A major pullback in consumer spending could get ugly very quickly," he said.

Granted that it is often said that economists seem to have a knack for getting things arse-backwards wrong. I am, however, nevertheless confused by the above quotes by Christopher Thornberg.

On the one hand he implies a bust:
  • all signs point to "a classic bubble"
  • "the soft-landing people are full of nonsense"
  • "there might not be housing appreciation until 2011"
  • "if we are lucky, prices will go flat"
And on the other hand he implies everything will be peachy:
  • "we are not going to have prices fall like the stock market. You won't see declines of 10 percent or 15 percent per year"
  • "what will happen is that prices will flatten out"
So he is simultaneously implying that prices will decline and prices will go flat. Nowhere does he suggest prices will actually increase before 2011. Now maybe he is hiding his true bearish predictions behind inflation-based qualifications (i.e., prices can go nominally flat but in real terms they will decline) but I think this guy is too good for that. I think he is just talking out of both sides of his mouth.

Christopher Thornberg: People are desperately in need of the unfiltered, uncensored, unspun truth or at least a best-guess. This blogger formally asks you to stop CYA and say what you really mean. Stop taking your lead from Alan Greenspan.


Anonymous Anonymous said...

He's very young. I watched him speak in San Diego. Lot of ham in him. Likeable fellow, but I didn't think his ideas were worth a squirt from a stink beetle.

Jul 19, 2006, 12:22:00 PM  
Blogger sf jack said...

I hope I explain this well enough to show what I'm thinking about it...


"And on the other hand he implies everything will be peachy:

* 'we are not going to have prices fall like the stock market. You won't see declines of 10 percent or 15 percent per year'
* 'what will happen is that prices will flatten out'"


What is peachy about either of those scenarios? Just because prices might decline in the single digits percentage-wise for several years, or that prices will simply flatten, does not mean all is well.

In fact, either will be very damaging for a California economy that saw much of its recent growth come from real estate businesses and related activities. And a slowing in this sector will last for years.

Further, could this be what he means by this statement?

"what will happen is that prices will flatten out"

... is that prices will flatten out within a series of *negative* price changes.

In other words, over time after initial "damage" (the largest price change; this year? next year? 2008?), the negatives will still be negatives, but smaller.

NOT flattening like this:

+7% Year 1
+3% Year 2
+1% Year 3
0% Year 4
0% Year 5
0% Year 6
0% Year 7
+1% Year 8

But instead, something like this:

+9% Year 1
+3% Year 2
-3% Year 3
-2% Year 4
-1.5% Year 5
-0.5% Year 6
-0.25% Year 7
0% Year 8

Picturing the curve, the second series is a flattening *downward* from a top or peak (gentle ski slope finishing at the bottom); not necessarily a plateau maintaining or holding a top or peak (as the top series shows).

Think about looking strictly at the curve. When he says "if we are lucky, prices will go flat" I think he means the plateau scenario, because it signifies hope.

It's somewhere here on this blog - go look at the (I think it's nominal) house price curve for SF or Marin house prices from the late 1980's to 1996. If I recall, I think it could show this relationship.

And I quote what I wrote on Ben's blog.

"I never had a negative opinion of Thornburg. I think Neil is right and that many of you are trying to paint T-burg into a corner. If you pay attention over time, it’s rather obvious what he’s saying.

Thornburg is trying to be a housing bear - but at the same time not become a victim of a “kill the messenger” mentality as this whole thing unwinds.

I am sure that in private, he tells it like he did at that UCSD event during his presentation on the California economy (back in January or February of this year). He may regret that thing is all over the ‘Net now (if you haven’t seen it yet - you should find it and watch it).

Re: Orange County home prices and how residents believe their area “is different”.

“They are going to get creamed!”


[I'm sure he got a lot of unneeded "attention" from what he said about OC prices and attitudes.]

[Or “crushed” - or whatever he said]"

Jul 19, 2006, 8:25:00 PM  
Anonymous Anonymous said...

"A major pullback in consumer spending could get ugly very quickly,"

No shit Sherlock. How many degrees does it take to reach that conclusion? Our economy is a giant confidence game, one which fleeces the masses periodically. That is why there is so much money and effort put into shaping public opinion in these areas. Those who experienced the depression as adults learned this and that is why so many of theme remained exceedingly frugal and protective of their money even as they later became "wealthy". No loans, hummers, or McMansions for them!
I suspect that we are about to produce another generation like them.

Jul 20, 2006, 12:16:00 AM  
Blogger marine_explorer said...

"You won't see declines of 10 percent or 15 percent per year"

I suppose the real question is how far housing will need to drop to be supported by the economy: -10%, -20%, -40%? Or is everything "peachy", where a flattening will solve everything?

So, what would a plateau scenario do to nominal house prices? Taking a typical tract home price of $900K, and applying the scenario from above as follows:

+9% Year 1 $981K
+3% Year 2 $1.01M
-2% Year 4 $990K
-1.5% Year 5 $975K
-0.5% Year 6 $970K
-0.25% Year 7 $967K
0% Year 8 $967K

So given how prices have already doubled over 5 years, such a nominal correction is hardly enticing to the average homebuyer, IMO. Sellers can only hope to get lucky.

Jul 20, 2006, 12:50:00 AM  
Blogger cajun100 said...

Does anyonw here watch the state unemployment claims and related information filed by County? Back a few years when I was paid to do stuff like this, that was a measure we used that was fairly reliable and contemporary -- shouldn't we be seeing a measurable increase in claims due to construction industry contraction around here? I cannot tell from simple observation -- Mill Valley streets are still full of pickup trucks and haulers, every day. The "incoming" traffic stream from "up north" every morning is still heavily contractor personnel.

I would be very interested to get a handle on how much flippin' 'n fixin' is still taking place even as the buying spree night be coming to an end ...

Jul 20, 2006, 9:06:00 AM  
Blogger fredtobik said...

Does it really matter? Who would want to leave God's Country anyway?

Jul 20, 2006, 9:52:00 AM  
Blogger B. Durbin said...

Mr. Thornberg:

I'm a photgrapher. Whoever photographed you should have told you to sit up straight!

Slumped shoulders don't do you any favors.

Jul 20, 2006, 6:27:00 PM  
Blogger E. said...

Wow, you people are quite myopic - stick your heads in the ground so you won't see the sky is falling. I'd be curious as to how many of those leaving comments would consider buying in your area if you were a middle income first time home buyer who was planning to stay in the house for 20 years - any one? *(hear the silence)* Is your market going because of genuine buyers, or because it's fueled by incestuous house swapping in a local pyramid scheme supplemented by outside speculators?

Oh yes, it’s much better having a society of people who are slaves to their property rather than investing in the stock market and the business infrastructure. Hope that whole ‘feudalism’ thing works out for you guys, just too bad the rest of the US is going to have to clean up the mess you dorks have made.

Nov 18, 2006, 11:35:00 AM  

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