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“A miracle is needed to avoid recession”

Nouriel Roubini is fast earning himself a reputation as something of a savant when it comes to the US housing outlook, with predictions unloved, but close to the mark.

Roubini took a pasting for his gloomy predictions mid-Summer - but has since been proved largely right. Except, of course, for the fact that global equity markets don’t appear to care less about the noises from the Roubini camp.

His latest summation carries the starkest warnings yet though, predicting as it does, “the worst housing bust in US history.”

Prof Roubini prints a email from a “senior professional in one of the largest financial institutions in the world”, who - similarly to Roubini - predicted four phases in the current downwards cycle :

Phase 1: rising mortgage defaults, homes prices start falling, sale volumes falls, housing starts and permits decline.

Phase 2: home-builders’ bankruptcies, housing starts and permits crash, substantial layoffs in construction and real estate-related fields (mortgage brokers, mortgage lenders, etc.).

Phase 3: substantial price declines in major metro areas, large rise in defaults of prime but low-equity mortgages.

Phase 4: large-scale government intervention to help households going bankrupt. This is a political phenomenon, so the timing and nature of this cannot be reliably forecast.

It appears that we are now entering phase 2 on the timeline for the housing bust.

Roubini disagrees ever so slightly - he thinks we’re now in phase 3:

Most of the aspects of phase 2 have already occurred by now and some elements of 3 are already on their way (home prices are falling sharply in some major metro areas, we are seeing the rise in defaults in near prime and prime mortgages and some near prime and prime lenders are in trouble). And we are getting close to phase 4 as over a dozen proposals to rescue 2 million plus households on the way to default and foreclosure are now being debated in Washington.

But both agree it couldn’t be worse. Says Roubini’s “senior professional”:

We will experience at least a severe housing downturn — in price action unlike anything since the 1930’s, probably also in rates of foreclosure.

But consensus opinion remains unshaken that there will be only minor macro effects. This seems extraordinary to me. A 70 year record decline in what is perhaps the largest private asset class, the collateral for the majority of household debt, whose leverage is at an all-time record high. A downturn - perhaps crash - in the construction and real estate industries (18% of 2005 total metropolitan area GDP).

Perhaps the most astonishing aspect of this event is the refusal to recognize the possible dimensions, the impact, of what is coming.

Roubini’s analysis is similar. He slates the financial community having been “increasingly delusional” about the “soft landing consensus”. Only now, are they starting to realise, says Roubini, that “after the spurt in growth in Q3 the economy is now rapidly decelerating and Q4 will be weak.” Witness the fact that even super-bulls like JPMorgan are now forecasting Q4 growth of only 1 per cent. How this one will play itself out, then, remains to be seen. Equities continue to rally - but the bad news has to catch up at some point.

Back to that senior source:

We think a miracle is needed to avoid recession.

This entry was posted by Sam Jones on Monday, October 29th, 2007 at 12:31 and is filed under Capital markets. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.

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Comments

  1. Nov 01   6:44 Posted by   Foreclosure News: Foreclosure washington - October 31 — Foreclosure Blog [report]

    […] Foreclosure News: Foreclosure washington - October 31 More information from CNBC: Now granted, several of these were the boom cities, Miami, Tampa, San Diego, Vegas, whose prices were fueled by investors who never intended to live in the properties they bought. stepping up to the plate, etc., but if prices continue to correct this deeply, the number of borrowers in distress is only going to rise, because they won’t be able to sell their homes for enough money to pay off the mortgage, and they won’t be able to refinance because their mortgage will be worth more than their house. You should check out FT Alphaville: Phase 1: rising mortgage defaults, homes prices start falling, sale volumes falls, housing starts and permits decline. Phase 2: home-builders’ bankruptcies, housing starts and permits crash, substantial layoffs in construction and real estate-related fields (mortgage brokers, mortgage lenders, etc.). Phase 3: substantial price declines in major metro areas, large rise in defaults of prime but low-equity mortgages. Most of the aspects of phase 2 have already occurred by now and some elements of 3 are already on their way (home prices are falling sharply in some major metro areas, we are seeing the rise in defaults in near prime and prime mortgages and some near prime and prime lenders are in trouble). July 28, 2006 (Bloomberg) - Nouriel Roubini, an economist at New York University and a former U.S. Treasury official, talks with Bloomberg’s Tom Keene from New York about the outlook for the U.S. economy, Federal Reserve monetary policy and the impact of the economy on Japan and China. […]

  2. Oct 31   15:07 Posted by Anonymous [report]

    “Even a stopped clock is right twice a day”

    Roubini of New York University Predicts a U.S. Recession

    July 28, 2006 (Bloomberg) — Nouriel Roubini, an economist at New York
    University and a former U.S. Treasury official, talks with Bloomberg’s Tom
    Keene from New York about the outlook for the U.S. economy, Federal Reserve
    monetary policy and the impact of the economy on Japan and China. Roubini said he sees a U.S. economic recession in the first quarter of 2007.

  3. Oct 30   14:27 Posted by Are we headed for a recession? -- Hoover’s Business Insight Zone [report]

    […] Since I’m not much of an economist, this is more a question for discussion than an expression of any clear verdict on my part. For now I’ll say that some very smart folks think we are headed for a recession; that list of folks includes economist Nouriel Roubini, zillionaire Warren Buffett, and the top executives of Caterpillar. As much as two-thirds of the general U.S. population agrees with them, but opinions vary. U.S. companies disagree on prospects for a recession […]

  4. Oct 29   19:01 Posted by The Capitalist Resistance [report]

    Articles of Interest. Markets, Economics and the Current State of the economy…

    This is just an aggregation of noteworthy articles relating to markets, economics and the current state of the economy. Link: Maybe Inflation Is More Than a Sideshow - New York Times. Fundamentally Maybe Inflation Is More Than a Sideshow By…

  5. Oct 29   16:03 Posted by Sam Jones [report]

    Could pretend it was a deliberate and pithy elision. But won’t. That one must have slipped through the net.

  6. Oct 29   14:15 Posted by L'Emmerdeur [report]

    “Nourini”? He’s going to want to trademark that!

This post is closed to further comments.