December 20, 2007
Their Mascot Might Be A Bull, But Merrill Lynch Is Anything But
The title of yesterday’s Economic Commentary from Merrill Lynch: “Housing deflation could be a multi-year process.” And the executive summary:
Both the near-term and longer-run outlooks for the housing market remain clouded in what is a severe downturn in starts, sales and prices that has become national in scope. As we saw in the November housing starts data, the builders are now frantically cutting production.
But with the sales backdrop still softening, they may have to slice their construction plans by another 30% before we hit bottom on a cyclical basis. And, that bottom could be as long as a year away. Beyond that, weak demographic fundamentals point to years of sluggish real estate activity, particularly in terms of the “price”. The looming dominance of the “move down” buyer suggests that home values will continue to soften long after the building industry mops up the current excess supply. In fact, real estate pricing in general can be expected to be in the doldrums through 2012.
The need to save for retirement will have to increasingly come “organically” in the form of setting aside an extra nickel or dime from every dollar earned in after-tax wages and salaries as opposed to what we as a society have been doing for the better part of the past decade, in essence, blurring the distinction between real estate as a “consumption good” (place to live) and real estate as part of the “portfolio” (investment) that was going to experience sustained double-digit appreciation and emerge as a fountain of cash-flow in the future.
Expectations are already in the process of being deflated and we are at the early stages of a savings revival in the traditional sense of the word, and this will (i) be deflationary for the aggregate demand curve; (ii) be bullish for Treasury bonds; (iii) act as an underpinning for the dollar insofar as this process continues to foster an improvement in the current account deficit (which, excluding energy, is down to a six-year low).
See the chart [above] – at the height of the bubble, almost one in four households who were contemplating a move into real estate based their decisions on future price appreciation. This “investor class” that dominated the housing market for so long has now seen its share dwindle to a record low of 4%. This is a very big deal as it illustrates just how far the speculation has been expunged, and it also heralds a major (and healthy) shift in how the public now perceives real estate.
And while the report is national by nature, there are obviously themes that might resonate right here at home. And of course, there’s the punch line:
Here is what we really “do not get”. There are still economists out there talking about how the housing recession is still local and not regionally broad based. We have no idea who their data vendors are. In our view, this clearly goes down as the most national real estate downturn since the 1930s.
First Published: December 20, 2007 2:00 AM
Comments from "Plugged In" Readers
Don't get me wrong. I am very bearish about RE, particularly SF RE. And, I walk the walk. We left SF for Miami where prices are, too say the least, very negotiable. (For example, many class one high rises can be bought for $600 sq./ft.)
Nevertheless, I have great difficulty putting much stock in anything Merrill has to say about housing.
NOW they tell us?
Posted by: chubin at December 20, 2007 5:54 AM
Of course, I basically agree with the tone of this report. The critical point that may be lost, especially insofar as SF real estate is involved, is the macro picture of a US consumer who will now rebuild savings. This is a VERY big issue, as rampant consumer spending has been the source of the large current account deficit the US has run (reaching an almost unheard of 7% of GDP for a developed country like the US!).
The flip side - or mirror image - of this current account deficit is the huge domestic (mal)investment in China to service the US consumer, which constitutes 25% of world consumer demand, and accounts for the lion's share of Chinese growth (Europe is getting stronger as well, but this is likely to fade as a driver of Chinese demand).
As the US consumer retrenches, expect a dramatic slowdown in import demand (we're seeing this already). Europe will also slow import demand, as they are in current account surplus position as well.
Bottom line, this will literally CRASH the growth trajectory of the Chinese economy, as their economy will have to retool because of all the malinvestment there (the flip side of the malinvestment in housing-driven consumption and the "consumer" industry in the US.
Here's some investment advice. Get out of all Chinese stocks now!! Now! If you are aggressive, consider shorting them, but only if you are experienced with trading. The Chinese economy will likely recover fairly quickly, and the long term secular picture remains intact.
At some point Chinese stocks will be a buy again. But don't forget the NASDAQ bubble. The Chinese stock market is every bit the bubble that NASDAQ was circa early 2000 IMHO.
This will have implications for the SF real estate market, IMO.
Posted by: Satchel at December 20, 2007 6:37 AM
1. i agree with chubin.
2. "before we hit bottom on a cyclical basis. And, that bottom could be as long as a year away." 1 year? that doesn't seem very long to me in the whole scheme of things. a blink of an eye...
3. "In fact, real estate pricing in general can be expected to be in the doldrums through 2012." again, looking at past booms in other sectors, this doesn't seem all that long to me and further, is this new news? the housing market is a cyclical one, it's been going up for ages, it was due for an adjustment.
4."In our view, this clearly goes down as the most national real estate downturn since the 1930s." your view is fine and understandable, but does your view ever see real estate appreciating again? i'm a young man, i would anticipate seeing it come back up and back down a few more times in my life.
Posted by: garrett at December 20, 2007 8:35 AM
Posted by: Satchel at December 20, 2007 6:37 AM
Posted by: Michael L. at December 20, 2007 9:50 AM
You have some really good thoughts on this whole mess. You say get out of Chinese stocks. Okay, what then? Where are you putting your money?
Posted by: kel at December 20, 2007 10:18 AM
Sounds like a good time to buy!
Posted by: anonSF at December 20, 2007 10:29 AM
I don't see blood in the streets of SF yet.
Posted by: kel at December 20, 2007 11:09 AM
kel, once you see blood it's too late. The damage is already done.
(personally, I'm looking forward to a SF downturn but I don't think it's going to be a bloodbath like the Central Valley).
Posted by: sb at December 20, 2007 12:01 PM
You might not, and certainly don't yet. But I will tell you that in NYC in the early 1990s, co-ops in the most desirable buildings (e.g., 5th avenue in the 80s) fell 40% from their 1990 asking price. It took until 1994 (I know someone who bought that apartment, and lowered his offer price every year).
You buy when there is blood on the streets. You'll know it's time, when the guy who bought at the 2006 peak starts selling. Final capitulation of the peak bubble buyer often signals the bottom.
Posted by: Satchel at December 20, 2007 1:02 PM
I believe the bottom is when the toughest bull turns bear. So when Fluj turns bear, I say that's the time to buy.
Posted by: John at December 20, 2007 3:24 PM
hahahahhaha. I am in no way the toughest BBS bull. No way. Ever hear of a character named "Marina Prime" a k a "Squaw Creek Resort" a k a "whatever the heck else he's calling himself" ??
That aint me. I'm about 14 levels of Ye Loyal Order of Bear down from the Grand Poobah.
No. I've been saying we're due for some sort of correction, off and on, since I started posting here. What bugs me is when people come on here and start saying that it has already happend.
Posted by: fluj at December 20, 2007 6:30 PM
this is interesting...
august was the peak of foreclosures:
you guys may have missed the bottom already
Posted by: james at December 20, 2007 6:41 PM
Heehee, fluj, it is tough to find a real bull these days. So, maybe we really have missed the bottom.
There were a couple of them on CL before, but they all disappeared. Meanwhile, we had a lot of bears on SS - Satchel, Trip, etc....
I would still wait though. The RE market acts slowly. One doesn't need to time the exact bottom.
Posted by: John at December 20, 2007 9:48 PM