Nouriel Roubini is fast earning himself a reputation as something of a savant when it comes to the US housing outlook, with predictions unloved, but close to the mark.
Roubini took a pasting for his gloomy predictions mid-Summer - but has since been proved largely right. Except, of course, for the fact that global equity markets don’t appear to care less about the noises from the Roubini camp.
His latest summation carries the starkest warnings yet though, predicting as it does, “the worst housing bust in US history.”
Prof Roubini prints a email from a “senior professional in one of the largest financial institutions in the world”, who - similarly to Roubini - predicted four phases in the current downwards cycle :
Phase 1: rising mortgage defaults, homes prices start falling, sale volumes falls, housing starts and permits decline.
Phase 2: home-builders’ bankruptcies, housing starts and permits crash, substantial layoffs in construction and real estate-related fields (mortgage brokers, mortgage lenders, etc.).
Phase 3: substantial price declines in major metro areas, large rise in defaults of prime but low-equity mortgages.
Phase 4: large-scale government intervention to help households going bankrupt. This is a political phenomenon, so the timing and nature of this cannot be reliably forecast.
It appears that we are now entering phase 2 on the timeline for the housing bust.
Roubini disagrees ever so slightly - he thinks we’re now in phase 3:
Most of the aspects of phase 2 have already occurred by now and some elements of 3 are already on their way (home prices are falling sharply in some major metro areas, we are seeing the rise in defaults in near prime and prime mortgages and some near prime and prime lenders are in trouble). And we are getting close to phase 4 as over a dozen proposals to rescue 2 million plus households on the way to default and foreclosure are now being debated in Washington.
But both agree it couldn’t be worse. Says Roubini’s “senior professional”:
We will experience at least a severe housing downturn — in price action unlike anything since the 1930’s, probably also in rates of foreclosure.
But consensus opinion remains unshaken that there will be only minor macro effects. This seems extraordinary to me. A 70 year record decline in what is perhaps the largest private asset class, the collateral for the majority of household debt, whose leverage is at an all-time record high. A downturn - perhaps crash - in the construction and real estate industries (18% of 2005 total metropolitan area GDP).
Perhaps the most astonishing aspect of this event is the refusal to recognize the possible dimensions, the impact, of what is coming.
Roubini’s analysis is similar. He slates the financial community having been “increasingly delusional” about the “soft landing consensus”. Only now, are they starting to realise, says Roubini, that “after the spurt in growth in Q3 the economy is now rapidly decelerating and Q4 will be weak.” Witness the fact that even super-bulls like JPMorgan are now forecasting Q4 growth of only 1 per cent. How this one will play itself out, then, remains to be seen. Equities continue to rally - but the bad news has to catch up at some point.
Back to that senior source:
We think a miracle is needed to avoid recession.