The Housing Bear Who Finally Got it Right

I've never heard of this chap before, but since he was stating things correctly in 2004 (a bit too early for my taste since there was a lot of money to be made chasing a bubble, but at least accurate) it's worthwhile to hear what he says now. Just like me, it appears, he is calling 2008 the year of the "walkaway". Again folks, you are not reading about this or hearing about this almost anywhere right now. By December 31, 2008 I believe you will be hearing about it all over the mainstream press.... as usual they will be late by 6 months to 12 months. This is why they are still distilling the "everything will be fine in 6 months" Kool Aid. People simply to not understand the basic economics of being upside down in a depreciating assets. No amount of rate freezing, or talk about a hit to the credit report is going to matter. And as we've been saying this is not a business recession aka 2001 or 1991. This is a consumer recession aka 1982; a very different animal than most market participants under the age of 50 are used to.

• I want to talk about a guy named Chris Thornberg. As Ben Bernanke suggests this morning that interest rate cuts don't help a homeowner who's underwater in a mortgage, that perhaps lenders should instead write down the PRINCIPAL--as much as 50 percent!--Thornberg jokes he's on a "victory tour."
• "We got a major real estate bubble," Thornberg said. "We got consumers due for some major retrenchment, we have a falling dollar, making U.S. assets look that much less desirable, a massive trade deficit." He said that in December 2004.
• For years, Thornberg gave his outlook as part of the UCLA Anderson Forecast, predicting the housing boom was about to bust. He was early. If you'd sold when he first suggested getting out, you would have lost quite a bit of equity gains. On the other hand, your home is probably now back down to what it was worth when Thornberg suggested getting out...
• Thornberg, now with Beacon Economics, says the worst is yet to come. With the peak of loan resets coming in the third quarter this year, this is "the year of the walk-away." When I asked him if a lot of lenders may end up not resetting, he said, "It doesn't matter."
• Thornberg says we are entering a recession and it's "hard to believe" anyone would say otherwise. Unlike the recession of 2001, consumer spending is now slowing after a 16-year run. As consumer spending slows, business spending will follow. In housing, we should have seen this coming. He claims that between 2004-2006, .75 new homes were built per new adult, while .6 is the norm. He says for the past two years, four million new units were built, while there were only two million new families.
• He predicts we will see a 35 percent decline in home values from the peak, and a third of that has already occurred. He predicts a 2 percent decline in GDP this year, with only minimal help from the tax rebate stimulus package. One of his favorite new made-up words is "Intaxication," which means "the euphoria of getting a tax refund which evaporates once you realize it was your money to begin with." (nice!)
• Thornberg also cautions investors from listening too closely to Wall Street. "They. Don't. Care." He says Wall Street works solely for December 31st and the bonus that comes with the end of the year. "Three good bonuses and they're out of there." (I like this guy more and more, someone telling the truth - nice change...)
• As for being too early to call the housing bust, Thornberg quips, "Trying to predict when a bubble is going to burst is like trying to predict what a crazy person is going to say next. If I knew that, he wouldn't be crazy."
• So, when do things get better. Ever? "The good news about the recession is they do eventually end," he says. He thinks the economy will start to improve at the beginning of 2009, and that housing will bottom by the end of 2009 into the beginning of 2010. Regionally, though, it will be tougher in some spots. When an audience member asked whether to sell a couple of condos in Florida or wait it out, Thornberg said, "Sell. Now." He says the Florida housing market won't improve for eight years.

I'd say very similar views to me, although I am not sure if we're going to need to wait 8 years in Florida. I do agree with the regional differences as I've tagged this recession the "regional recession" (the heartland wonders what all the fuss is about).

Anyhow, as investors, the always tricky part is to figure out when market participants go from denial to anger to acceptance of the facts. We've been in month upon month of denial. Which makes the market that much more difficult to forecast... if I only had a nickel for each time I've heard "It will be fine in 6 months" since last July, I'd be able to fund my mutual fund on my own! :)

Long Iowa, Short California