Monday, July 9, 2007

Approaching Waves of Default

I have a confession to make. I was a surfer once. I lived on the Hawaiian island of Maui for nine years and engaged in all forms of surfing.

The current housing market reminds me a little of that surfing past.
In the winter we surfer types would cross our fingers hoping for a swell to appear out of the north. The ocean could often be calm with sometimes barely a ripple on it for days or even weeks at a time. Then we would get the news passed about quickly on the ‘coconut wireless’ that bouy-1, about five hundred miles north, was going off (showing a rising swell). You could go to the beach for the next 24 hours and see no sign of it. In fact it was easy to believe that nothing was coming at all. But as promised, we would awake the next morning to the distant sound of thunder and a low rolling mist drifting through the valley indicating that the large swell had arrived.

One only had to make the short trip to the north shore to see how menacing the ocean had become over night. Giant man-eating waves hitting the reefs would give even the bravest watermen pause. (Yes I rode some of those, but that’s a story for another day.)

How does this relate to the economy and the housing market?
Professor Robert Shiller, chief economist at Macro Markets and Yale University has warned that no region of the U.S. is immune from the approaching housing downturn. (Let’s call him ‘Bouy-1’).

The downturn is coming, we just can’t see it yet. Most official reports have consumer confidence looking good., unemployment numbers are down, housing markets in areas like Seattle are still doing well. The ocean looks fairly calm. But a sea change is coming. Professor Shiller has reported approaching waves of financial turmoil. Many of us look out and behold a calm economic sea and think ‘what’s all the stink about?’ But when the waves arrive, like a giant Maui swell, they may leave us all gawking with our jaws hanging slack in wonder at the shear magnitude of the swell.

Case-Shiller Index: "No Region is Immune" The mantra being pushed by those "in the know" in the real estate industry - by which we mean "those with real estate-related things for sale" - is that the overhang of excessive inventories, bloated prices, weakening demand and tightening credit standards is an isolated "regional" issue. So we were surprised to see the Case-Shiller Home Price Index show that 14 of the 20 cities tracked saw year-over-year declines in home prices.

-Home values declined 2.1% in April year-over-year, according
to the S&P/Case-Shiller report released this morning.

-That was the fourth straight decline in the group's nearly
six-year-old index.

-"No region is immune to the weakening price returns,'' Robert
chief economist at MacroMarkets and Yale University
professor, said.


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