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The Economic Near Miss

Posted by: Chris Palmeri on September 13, 2007

edleamer.jpgBack when the housing market was inflating, one of the few institutions to try to stick a pin in the bubble was UCLA’s Anderson School of Management. Edward Leamer, director of the school’s Anderson Forecast, and Christopher Thornberg, another economist, were routinely quoted saying the housing market was overheated. They became the subject of scorn by Realtors and mortgage industry folks. That’s Leamer’s photo over there. Now, in what’s becoming an ongoing series on Those Who Got It Right, I figured I’d check in on the Anderson folks.

Thornberg left UCLA and is now a principal with Beacon Economics, a consulting firm in Los Angeles. He was quoted in a front page article in the Los Angeles Times today. The article noted that the number of homes sold in Southern California hit a 15-year low in August. “People just don’t have the income to support these prices except with crazy mortgages—and now the mortgage money is going away, and people are walking away from their homes,” he said.
Leamer is still at Anderson. His group’s third quarterly forecast, released yesterday, said the nation’s economic growth would slow to just 1% the fourth quarter of this year and the first of 2008. That’s actually good news. Those numbers represent “a near recession experience” or a near miss if you will. The report said the slump in new home construction and sales would slow the economy but not enough to send GDP into negative territory. Leamer, meanwhile, delivered an address last month to the same Jackson Hole, Wyoming conclave as Federal Reserve chairman Ben Bernanke. He could have gloated with all the bad housing news. Instead, he urged the Fed to cut interest rates and give homeowners a break.

Reader Comments

Brian R.

September 15, 2007 8:52 PM

Chris, with all due respect to the experts you quoted, there were many other individuals, experts and laypeople alike, who predicted today's mess. When fundamentals become out of whack, such as the key housing-prices-to-incomes example you gave, something has to give. In this case, what gave way was common sense. Option ARM's? Interest-only payments for the first 10 years? 1 to 2 percent teaser rates? 50-year mortgages? A house might be the average person's biggest financial purchase, but, given today's trends, that house will no longer be the biggest nest egg. Further, given that we as a nation remain in negative savings territory, there might not be an egg left, aside from the paltry social security benefits. Given the increased costs of education and housing relative to incomes, how are our young people supposed to build for retirement? One thing we can do, and that is to avoid taking any action which would slow the deflating of the housing bubble. "Experts" and reporters wail about the housing "slump," when in actuality housing prices remain greatly higher than they were just 3 short years ago. So what is the federal government (including Treasury Secretary Paulsen) proposing to do? (1) Introduce "new" mortgage products, as though we don't have enough already, and (2) increase both the portfolio and the loan limits which are in place to prevent Fannie Mae and Freddie Mac from further encumbering the already burdened taxpayer. That's right. The feds are urging Fannie and Freddie to buy that distressed mortgage debt,and thereby obligate you and me should those newly refinanced loans turn sour, as of course an appreciable percentage will do. Brilliant. More debt for the taxpayer, and more air for the bubble. What a blessing this higher priced housing has been.

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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.

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