A few good quotes:
"Since it was the bursting of the housing bubble in 2006 that inevitably touched off the financial and economic problems we are experiencing today in the US, it stands to reason that stability in home prices is a necessary and sufficient condition for a restoration of normality to the credit market and the economy. Residential real estate in the US, this $23,000bn asset class, after all, is the cornerstone of the collateral in the financial system and the backbone of the household balance sheet.
History is replete with examples of how real estate deflations end – much like today – in financial and economic chaos. Even though the builders have recently become more aggressive in cutting their production, the reality is that demand has been just as weak if not weaker and as a result the unsold new housing inventory still stands at uncomfortably high levels of over 11 months supply. By way of comparison, the highest this inventory/sales rate went in the early 1990s real estate meltdown in the US was 9.4 months. Not until this ratio dips convincingly below eight months’ supply do we believe residential real estate prices will begin to stabilise. The current mismatch between supply and demand portends a further 15 per cent downside to US home prices, on top of the record 23 per cent slide already incurred from the bubble peaks."
"The US is in the midst of a secular credit contraction and likely a prolonged period of sub-par economic activity. This is an environment conducive to a sustained period of ultra-low policy rates. This is no mere cyclical downturn in consumer spending. What we are seeing is the first phase of balance sheet repair – the deleveraging phase.
The buy-now/pay-later days are gone. Household debt is contracting at a record rate and the personal savings rate is now on a discernible uptrend. This transition from frivolity towards frugality, as painful as it is, is necessary in order for consumer balance sheets to become more manageable and blaze the trail for the next sustainable economic expansion."
"With the home ownership rate near 68 per cent in the US, compared with pre-mania normalised levels of 64 per cent, there is really not that much pent-up demand for housing, as the record low readings in the National Association of Home Builders index, mortgage applications and homebuying intentions attest. Therefore, attempts to try to solve the inventory crisis through demand-side government measures, such as trying to peg mortgage rates at 4.5 per cent by fiat, are a cushion, at best.
What we probably need is a supply-side resolution, either creating regional land banks to ring-fence the inventory or a moratorium on new housing starts to prevent further corrosion in residential real estate values. Supply-demand divergences are likely to persist through 2009, in our view, and will require even further contraction in construction activity before balance is restored in the real estate market."
Yet another confirmation of what people have been saying all along... this crisis is rooted in real estate, and only when real estate values normalize consumer confidence will return and the economy will start to grow at a normal rate.
