'Where's the Fuel That's Going to Keep the Fire Going?

From Inman News:

The quarterly Anderson Forecast, produced by the Anderson School of Management at University of California, Los Angeles, reports, "Put bluntly, the credit crunch in the subprime mortgage market will likely trigger a second leg down in the housing market in terms of output and prices."

Edward Leamer, forecast director and a professor of economics and statistics at UCLA, said the severity of the subprime meltdown was a surprise since the last forecast was produced.

"This thing started in the Midwest, where jobs were weak and prices were weak," he said, and has since mushroomed to national scale. Foreclosures are on the rise, but the more critical issue for the economy is the ability for consumers to purchase homes.

"There are sad individual stories about people who got into homes they couldn't afford. I think the real story is not what's happening to the people who own homes -- it's what happens to prospective buyers who might be buying a home soon. The energy of the market, a lot of it is in the subprime, low-income homes. You need new money in the market in order to fuel the price appreciation. A lot of the new home buyers have been at the lower end -- start-up, entry homes. If you pull that out of the market, where's the fuel that's going to keep the fire going?"

He added, "The economy overall is going to be impacted by the inability to provide fuel to drive housing forward."
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Shulman's report states that the housing market may take many years to recover, and "will look like the protracted decline that took place in Southern California from 1989-96."
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"Although we continue to believe that our no-recession, soft-landing thesis for the economy remains intact, we are becoming increasingly nervous about the economic outlook as the period of below-trend growth grinds on," Shulman states.

A separate report that tracks the California economy predicts "a significant slowing of the California economy in 2007, as the double whammy from construction and mortgage finance creates a drag on the rest of the economy."

Foreclosure notices have been on the increase in California, with the biggest increases in the San Francisco East Bay area and in the Sacramento, Bakersfield, Ventura and Riverside areas. "This list ... may sound familiar from previous California reports: these are the counties where new homes account for a substantial share of total home sales and also the counties which have seen the most weakness in median sales prices," according to the report by Ryan Ratcliff, an economist for the forecast.

This may be due to "a combination of overextended first-time buyers and builders offering overly aggressive financing in order to close deals," according to Ratcliff's report.

From the AP:

"We suspect the problem in the subprime area is just the tip of the iceberg for the mortgage market as a whole," Shulman wrote. "For all practical purposes, the subprime market is in the process of shutting down."

From the Sacramento Bee:

"We still expect to see the pattern of deepening real estate losses combined with a slowdown in the rest of the economy -- now it's just the first half of 2007 instead of the second half of 2006."

The main culprit: the recent meltdown in subprime lending.

"The drying up of subprime credit suggests that home sales in California will be stagnant for some time to come," he [Ratcliff] wrote.

Construction employment will turn negative this year, he said in an interview, and the financial sector will become a drag on the economy as well. And while the rest of the economy is likely to remain fairly healthy, "there's no sector that's all of a sudden going to shift into overdrive" to compensate for construction losses, he said.