One of my favorite Wall Street economists, Jan Hatzius of Goldman Sachs, put out a report recently predicting that Florida — not California or New York or DC — would be the “epicenter of the U.S. Housing Bust.” To appreciate the context for Hatzius’ prediction, you first have to take a step back and realize that Hatzius isn’t a housing gloomster. He’s not predicting a dramatic 30% plunge in values that sends us into recession or depression the way some seers have it. He believes the direct and indirect housing drag on GDP will “only” be a cumulative 3-4 percentage points, with that spread out over 2-3 years. Not enough to cause a recession because he thinks that improvements in the trade imbalance — read: higher exports — will help pick up the slack from housing.
But he DOES predict a recession will hit one state: Florida. And the hit will be hard: Hatzius estimates that the direct and indirect drag from housing will be six to eight percentage points, or twice the impact on the country as a whole. Here’s his argument …
For starters, Hatzius notes that Florida has the largest amount of excess housing supply: In 2006, unsold homes for sale made up 4.3% of all homes for owner-occupation, twice the percentage of the nation as a whole. Inventories of unsold homes are as high as 30 months in some counties, vs. a national average of 7.3 months. Already, homebuilders have responded by cutting the pace of new construction by half. That will trim two percentage points from Florida's economic growth, and the residual cutbacks in related services -- commissions paid to real estate agents, cutbacks in production of building materaisl, etc. -- will trim another two points.
Another concern Hatzius raises is that the dramatic increase in housing values in Florida has left a sharp disconnect between home values and incomes. Nationally, Hatzius calculates that the average homeowner is paying 23% of their income on housing, vs. 20% in the 1990s (hence, he believes housing values nationally will have to fall 15% to get back to equilibrium, though a boost in incomes could also help close the gap).
In Florida, the disconnect is worse. The average mortgage there eats up 31% of incomes, vs. 18% in the 1990s. Hence, Hatzius calculates that house prices would have to fall by more than 40$ to get back to fair value. He expects a decline of 10-15% this year, and further declines thereafter. Comparing the historic links between drops in housing values and consumer spending, Hatzius figures falling home prices will trim consumption by another two percentage points, as consumers feel poorer (or simply can't tap home equity loans anymore. Hatzius nots that mortgage equity withdrawals in Florida were running at 13.8% of disposable income in the third quarter of 2006, vs. 8.9% nationally).
Hatzius makes one final point: Florida has a comparatively small manufacturing sector, so it won't enjoy any of the strength in manufacturing that Hatzius expects to occur elsewhere as a result of the falling dollar. On the other hand, he acknowledges that Florida's tourism economy could benefit from a weaker dollar as Europeans and Asian find it cheaper to visit Disney World. Good if you work for Walt Disney. Bad if you work in the Florida real estate industry, or simply used your home as an ATM during the boom years.
BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.