Think the Recession is Over? ... 'Keep on Dreaming'
"Anyone
who imagines that the crisis is behind us never understood its deep underlying
causes. Not only are the primary reasons for it still present, but some of
them will intensify in the coming years. Hence the warning that the crisis is
making a comeback is more than just a forecast."
It’s summer and you’re
probably in no mood for crisis. The Ifo Business
Climate Index is reaching record levels. German industry is in high
spirits. The stress tests for banks are over, will all German banking
institutions passing - with one exception - and the one that failed wasn’t
particularly surprising. It appears that the climax of this violent financial
crisis has passed.
Well
then, keep on dreaming.
Anyone who imagines that the crisis
is behind us never understood its deep underlying causes. Not only are the
primary reasons for it still present, but some of them will intensify in
the coming years. Hence the warning that the crisis is making a comeback is
more than just a forecast. It is a challenge to those in charge to straighten
out the mistakes in economic and financial policy made over recent years. But
since one really shouldn’t rely on international cooperation in this area - and
even less so on the competence of national governments, especially here in
Europe - I’m not at all optimistic that a return of the crisis can be
prevented.
Over the next four weeks, my
four-part summer series will be dedicated to outlining this argument in detail.
The opening piece discusses the real estate market, which triggered the first
wave of the financial crisis almost exactly three years ago.
First sales volume drops, then prices
follow
In the U.S., the most recent
data show that average home prices have fallen by almost 30 percent since their
peak in 2006. Commercial real estate saw a price decline of roughly 40 percent.
While the real estate bubble hasn't been completely neutralized, much of the
decline is now behind us. Since the end of last year, prices have stabilized.
The Case-Shiller
Index, which tracks changes in housing prices through April, even indicates
a slight increase toward the end.
But real estate statistics
should always be viewed with some caution. Transaction prices are the only
prices made public. What the statistics do not take into account are sales that
didn’t take place because potential sellers couldn’t find a buyer prepared to
pay the listed price. So the really shocking statistic is the number of
properties for sale on the American real estate market - a number that
continues to grow. In June, the number of successful deals cratered.
Robert
Steers, co-chairman and co-CEO of Cohen & Steers, talks
about
commercial real estate, violent cycles, and securitization, May 20.
At the moment, all sales
statistics for existing homes sales as well as new construction are falling
drastically. The first thing to change is sales volume - and then prices
follow. In other words, real estate prices are dependent variables. And the
first signs of a new decline are already there. The well-informed real estate
blog Calculated Risk reported
several weeks ago the results of a survey of real estate brokers, which showed
that prices had in fact already fallen in June.
What we’re witnessing now are
the harbingers of a double dip - a double recession in the housing market. And
at least in the United States, the real estate price cycle is an important
component of the economic cycle as a whole.
But why is this new setback
occurring now? The reason lies in monetary policy. Over the past year in order
to boost the economy, the U.S. Federal Reserve has purchased mortgage-backed
securities amounting to more than $1 trillion. This slowed the decline in
prices. But now the program has ended. During the crisis, I estimated that
housing prices in the United States would have to fall by 40 percent. If there
is an overcorrection - which is often the case - things can even get worse. My
prediction stands.
Posted by WORLDMEETS.US
In Europe, on the other hand,
housing prices in Great Britain and Spain have also declined, but not nearly as
dramatically as in the U.S. However, monetary policy has also played a roll In
both countries, where the majority of mortgages are tied to short-term interest
rates on financial markets - unlike in the U.S. and Germany. As a result of the
European Central Bank lowering interest rates, the decline in prices slowed. In
Spain, banks have often extended repayment periods - and with the help of cheap
credit, it was then possible for many property owners to keep themselves above
water - barely- in spite of being technically insolvent. Even the slightest
rise in interest rates would mean that the property market in Spain would be
threatened with collapse. And along with it, parts of the banking system.
Premature 'all-clear'
In Great Britain, after a
short period of weakness, prices have even risen. There, not only cheap credit
helped, but also a persistent physical shortage in the market brought on by
supply constraints and a growing population. But even such a market is not
immune to bubbles, especially in the case of falling interest rates.
The real-estate bubble wasn't
the root cause of this crisis. That was caused by global imbalances in
worldwide financial flows that came in contact with a highly innovative and
poorly-regulated market.
But the end of the real
estate crisis is still a necessary, if not sufficient condition, for ending the
current financial crisis. As long as prices are falling, toxic credit waste
will continue to weigh down bank balance sheets. From the history of housing
price bubbles, we can assume that the intensity of the downturn will be as
strong as the boom and last roughly the same amount of time. Curves
usually follow a very symmetrical path.
Which means, in turn, that
the supposed end of the drop in home prices, which has been interpreted as a sign
of the end of the crisis, was a premature all-clear.
