Bubble markets to rebound?

Posted by: Dean Foust on January 8, 2008

falling_knife“Catch a falling knife.” That’s a term on Wall Street for those who try to time the market by buying heavily during a falling market on belief that there’s an imminent rebound. As the term suggests, misjudge your entry point and you could get sliced up pretty badly.

I have the feeling that we’re starting to see the same phenomenon in bubble markets that are overheated and have further to fall. Case in point: Two recent stories that caught my eye:

In Las Vegas, the construction of new casinos is giving rise to bulls who predict that a housing rebound is around the corner. To quote from this article by Associated Press reporter Ryan Nakashima:

One think tank already is predicting a housing shortage by late 2009, assuming workers flock to the state to fill jobs created by billions of dollars of new construction on the Las Vegas Strip.

"We're merely at the bottom of one cycle and heading back up on another one," said Jeremy Aguero, one of Applied Analysis' principals.

He points to the stream of Strip mega-resorts planned to go up over the next few years, from Las Vegas Sands Corp.'s $1.8 billion Palazzo, opening in January, to Boyd Gaming Corp.'s $4.8 billion Echelon in 2010.

In all, the surge is estimated to add more than 40,000 hotel rooms by 2012 and create around 100,000 direct and indirect jobs, according to Deutsche Bank.

The problem in my mind is that most of those 100,000 new jobs will pay minimum wage. The casinos are not exactly known to be enlightened, nor generous, employers. The other article was a column in The Washington Post by Steven Pearlstein, who was reacting to some fanciful predictions by a local economist Steven Fuller:

Next Friday in Tysons Corner, Steve Fuller and his colleagues from George Mason University will release their annual outlook for the Washington area economy. The title of this year's confab:

"Will Housing Recovery Drive Growth?"

That's right, folks, housing recovery. As Fuller sees it, with the local economy likely to add another 40,000 jobs this year -- just slightly below last year's 44,000 -- and unemployment at historic lows, the only way to fill those jobs will be to recruit people from somewhere else. Obviously, those workers and their families will need somewhere to live. And with new-home construction at recession levels, it will be only a matter of months before the existing inventory is sold off and builders start breaking ground on new houses and condos.

And there you have it: a rebound in residential construction, a big new spurt of public construction and a steady flow of federal procurement contracts, all conspiring to keep the Washington economy growing at the modest annual rate of 2.8 percent in 2008.

It's just what the local business community desperately wants to believe. And it's all part of the larger story of how Washington has the strongest regional economy in the nation and is basically recession-proof.

Too bad it's also a fantasy.

You can read the story for yourself, but Pearlstein's argument is basically this: Too much of Washington's growth was fueled by housing- and mortgage-related businesses (Fannie Mae, Freddie Mac, the local builders) so if those entities are in decline, that wipes out a big source of growth.

And that's one of the problems I have with optimists who are predicting a quick rebound in housing. I think we underestimate how much of the growth of this decade came from the housing boom itself. Depending on how you do the math, you can conclude that anywhere from 25% to 100% of the growth in the past five years was from housing. So where are the jobs going to come from that enable people to buy new homes?

Reader Comments

Jim D

January 8, 2008 3:12 PM

Whenever friends ask how bad it's going to get, I ask them to drive around. I live in South SF Bay, and it seems you can't pass a single strip mall or office park without seeing a mortgage broker, RE Agent, Title Company, or home improvement related business.

Most of those businesses (yes, most), will be gone in two years.

2008 is really going to be awful. But not as bad as 2009.

CS

January 9, 2008 7:49 AM

The housing boom was artificially created, and doomed to fail. This was predicted years in advance by consumer advocates and others, who "saw it coming" unlike Fed Reserve Chairman Greenspan. I don't believe for a minute that people in the industry and related govt agencies "didn't see it coming:" I believe they just figured the sham could go on forever...or at least until they personally made a fortune and got out. While I shake my head at the senseless house buying mania of some consumers, and investors, it's always been clear that the industry, in tandem with govt, created this mess. Home buyers alone could not have concocted or carried it out.

Max Schmidt

January 9, 2008 1:23 PM

Dean,
You may want to rethink your position on what is happening in the Las Vegas market. We currently have around 900,000 jobs in the Las Vegas Valley. Adding another 100,000 jobs will significantly impact our economy. The $30 billion dollars in construction on the strip is more dollars than all the construction added up for the entire history of the Las Vegas Strip.
This year this county hit the 2 million residents mark. The addition of 100,000 jobs will result in a population growth of approximately 200,000 more people. It would be nieve to think that the entire influx of new people would be ex-Burger stand workers trying on a new profession. Currently the median income in Las Vegas is $56,000 which is hardly burger stand wages. Yes a number of the new jobs will be low paying but a great deal of the jobs will be well above what is being paid now and many will pay very well. The new mega entertainment facilities being erected look nothing like the old $15 hotel room and 99 cent buffet that use to be the draw to Vegas.
Even those jobs that pay minimum wage very often end up with incomes of $50,000 to over $100,000 incomes. Tipping is still accepted in Vegas.
I suggest you take this tip and re-examine your position in this instance as we are definitely going to need a lot of additional housing in Las Vegas.
Max Schmidt

Jim D

January 12, 2008 2:12 PM

Max - how well is that tourism based economy going to do in a recession? Look back to '89, an let us know.

Las Vegas - "it's different here!"

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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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