Get ready for a runaway recovery?
Economist warns of new bubbles
By Matt Carter, Monday, April 26, 2010.SAN FRANCISCO -- The financial crisis is over and the economy is growing at a fast enough clip that the Federal Reserve and other policymakers have already fallen behind the curve in preventing the next asset bubble, economist Ken Rosen said today.
Rosen, the chairman of the University of California, Berkeley's Fisher Center for Real Estate, acknowledged that most economists are still more worried about deflation than inflation.
In an hour-long presentation as the keynote speaker at the Fisher Center's 15th annual real estate conference, Rosen clicked through a stack of statistics and forecasts to make his case that it's time for the Fed to raise short-term interest rates.
"The financial crisis is over," Rosen said, but the Fed appears to be committed to keeping short-term rates at or near zero for at least six months. "I think short-term rates should be 2 to 3 percent today -- we are encouraging asset bubbles in the stock market, bond markets and global real estate."
While emergency measures taken by the government to head off a collapse of the financial system were warranted, Rosen said, there's been "a very big bounce off the bottom," and the low cost of borrowing is encouraging risk-taking.
Rosen predicts inflation could quickly rise to 3 to 5 percent, forcing the Fed to play catch up and raise short-term interest rates to between 3 and 4 percent within two years. The delay in raising short-term rates is "a huge mistake in monetary policy -- the same mistake we made in the last cycle," he said.
Rosen sees only a 10 percent chance of an L-shaped recovery in which the economy slips back into a mild recession, but a 35 percent chance of a U-shaped rebound with 3.5 percent growth. The most likely scenario is a W-shaped recovery, with further ups and downs, he said.
Rosen is projecting 2.2 percent economic growth this year, with unemployment falling to 9.8 percent. By 2012, he expects "more sustainable" 3 percent growth and 8.1 percent unemployment -- along with higher interest rates, inflation, and taxes.
"Exploding" federal and state budget deficits and unfunded liabilities are "shocking," he said, and are likely to lead not only to spending cuts but tax increases.
While it typically takes up to two years for the economy to start adding jobs after a recession, employers cut so deeply they can't provide the minimum level of services and will bring 1 million workers back on their payrolls this year, Rosen predicted.
To the average person on the street, the recovery may seem weak, Rosen acknowledged. It will take three to four years to replace the 8.4 million jobs lost during the recession, he predicted.
But global demand is already putting pressure on commodities prices, and China is in the midst of a speculative real estate bubble of its own, he said.
The outlook for U.S. housing is promising -- falling prices and low mortgage rates have produced dramatic improvements in affordability in many markets, and household formation is likely to drive demand for homes.
But with the Federal Reserve winding up its ongoing purchases of $1.25 trillion in mortgage-backed securities last month, mortgage rates are expected to go up.
If mortgage rates stay in the 5 to 6 percent range, that will help keep housing affordable, "but if we go to 7 or 8 percent quickly, that won't be good," Rosen said.
While there's been no dramatic increase in the "spread" between mortgage-backed securities and Treasurys, "that's the big worry -- can we keep rates low?"
Demand for housing should pick up as employers hire more workers, with immigration and demographic trends also significant drivers, Rosen said.
Many unemployed workers who moved back in with their parents or are living in apartments with roommates will strike out on their own again once they find jobs.
There's a huge wave of "echo boomers" -- children of baby boomers -- coming into the workforce in coming years, he noted, and immigration in this decade is expected to outpace the last.
Re-regulation of mortgage securitizations will promote conservative, sensible underwriting, Rosen predicted, meaning homeownership is unlikely to rebound to its peak of 69 percent during the boom -- settling in at something closer to 66 percent, he said.
On the supply side of the equation, Rosen expects new housing production will remain below the historical norm of 1.1 million homes a year, and will take two to three years to bounce back. But he expects foreclosures to set new records in 2010 and for problems to drag into 2011.
"The shadow inventory is real," Rosen said, and the threat is not only from foreclosures (see Inman News article: "Fears of an REO glut persist").
There's also the issue of pent-up supply -- homeowners who are waiting for prices to stabilize before putting their homes on the market.
In the short term, the looming expiration of the homebuyer tax credit will also produce "some weakness in the second half of the year" by pushing demand forward, Rosen said.
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Submitted by Daniel Bretzke on April 26, 2010 - 1:00pm.
The financial crisis may be over, but the aftermath of it will stick around a lot longer until people pay down debt that was spent on things that have lost their value.
Vacations, bad remodels, and just poor choices were financed by low cost money. As interest rates head up, the ability for people to pay off those loans will hit the economy again.
The FED is doing the right thing, keep rates low, allow people to pay down some debts. With adequate policies in place by lenders to assure that qualified borrowers are using money for productive purposes, will assure a steady recovery.
We don't need more by a tv today on my imaginary gains.
danielbretke.com
Submitted by Anonymous on April 26, 2010 - 1:31pm.
Typical bullspit from a clueless academic who probably doesn't even own any property!
Submitted by John Durso on April 26, 2010 - 1:47pm.
Mr. Rosen may be correct in his overall prediction, however he failed to account for a number of items that are currently affecting the real estate market and need to be addressed before the recovery takes off: 1) Unemployment; 2)Job security; and 3) Tight lending standards. These three issues need to be dealt with in order to insure a robust recovery.
Submitted by Lenn Harley on April 26, 2010 - 2:03pm.
My gosh, what cave does this gentleman inhabit???
The government, the academics, the prognostigators have yet to realize that fully 15-20% of the American citizenry are out of the economy for years until they recover from unemployment, loss of credit, etc.
Unless the economy can recover without benefit of the consumer, it's not going to happen for many, many years.
Lenn Harley
Broker
Homefinders.com
http://www.homefinders.com
Submitted by Nick Chucales on April 26, 2010 - 2:58pm.
Why does the media continue to give the clueless analysts a medium to espouse their obvious ignorance? I think the previous responses sum up what most consumers now realize, these “experts” don’t have a clue at to what is really going on with our economy. Please be more responsible with your reporting and the stories you publish.
Nick Chucales
NMC Consultants
Submitted by John Rakoci on April 26, 2010 - 7:33pm.
Have a few a minor problems like the lack of jobs and the Chinese are less interested in buying US debt no longer important? If so this guy has been listening to the administration and has not participated in the real world for some time. This sounds below Inman standards..... it sounds more like 'happy news'provided by the federal govt.
Submitted by Torelli Realty on April 26, 2010 - 7:52pm.
It's definitly true that there's pent up supply - so many homebuyers are just waiting for the market to improve so they can make a move. A lot of homeowners feel trapped in their current homes because so many never intended to live in them fora long period of time.
Costa Mesa, CA
www.torellirealty.com
Submitted by Michael LittleBig on April 29, 2010 - 8:38am.
I am hesitant to agree or to disagree on any economist theories at this time.
The reasons that caused this meltdown have some unusual criteria that we have not seen before because of the of 10 million housing foreclosures that have been processed since year 2000.
The Congress addressed this situation by "saving the Banks" when they should have let them fail.
I am deeply concerned that the reason "for saving the Banks" was based on the financial relationship between the Congress and the Bankers.
As further proof of my concern for the economy to remain unstable is supported by the fact that
basically 6 banks hold 60% of the financial assets as I read. Wall Street has not missed a beat in their quest for financial domination.
My suggestion would be to move your money to Canada since they were labeled as the safest banking system in the world by the World Economic Forum for the last two years.
This financial crisis in the USA is not only housing but the lack of positive legislation by the Congress which has resulted in the demise of the middle class as evidenced by the rising public anger.
I really believe that the government got it wrong.
We are now in a "pit of financial quicksand" which will last for decades.
I do not see housing recovering in 10 years.
The loss in housing as I read was 1.2 trillion. I do not see the jobs coming back either for many reasons- we gave our manufacturing away to China etc.
The people that we elected to control the money of our country have failed. There now is a void in leadership.
These politicians are in way over their head. They compromised their legislative gifts for past financial favors and that has come home to roost. The party is over so to speak.
Everything the government does puts us deeper in debt.
The President counsels with former and present Wall Street bankers who now are in government or who have been in government.
That in it self is frightening to watch the influence of those that laid these financial railroad tracks to economic failure to serve only their interest now have the power to bury us all.
The American people need to be told the truth.
The American people have lost their faith and trust in the government system as they see the wealthy and the powerful use feel good words that have no meaning.
The worst I fear is yet to come.
God help us all-we really really need it…..
Michael LittleBig
Cleveland Ohio
One of the 10 million foreclosure victims
4-29-2010