Recession "Name Game"

"The Little Depression"? "The Great Recession"?

Think of [the U.S. economy today] as Alien in reverse: lurking inside a dysfunctional, steroid-stuffed "monster economy" is a healthy, sustainable, and yes, market-driven one struggling to get out -- albeit a smaller, slower-growing, and certainly simpler and more transparent economy.

--"Financial Crash Instructions"; City Lakes Blog (12/12/2008)

Up until the 1940's, World War I wasn't known as "World War I," it was simply "The Great War."

Similarly, we call what happened in the 1930's "The Great Depression" because there's never been a sequel. At least not yet.

The latest batch of economic numbers, for the fourth quarter of 2008, show economic activity falling off the proverbial cliff. Consumption, production, home sales, car sales, retail sales -- you name it -- all showed declines not witnessed since . . . yup . . The Great Depression.

What we're experiencing now may very well qualify as "The Little Depression." Or, as Barron's Alan Abelson proposes, "The Not-So-Great Depression."

If it persists, with economic activity continuing in free fall and unemployment rising well above 10%, it may qualify for another, more ominous name.

Alternative Scenario

Personally, I doubt that that will happen, if for no other reason than life today is so different than the 1930's.

Namely, it's much faster and interconnected, thanks to technology.

Even if the banking system is in worse shape than is now feared -- and the fears are pretty high -- it's hard to imagine modern day Americans raised on PC's, microwaves, ATM's, instant messaging, etc. tolerating that degree of economic dislocation that long.

Policymakers also have Japan's "Lost Decade" (in the '90's, following the Nikkei's crash) to serve as a case study in what not to do.

When a PC crashes, you "re-boot." Yes, you may lose a lot of data, and it's a big headache, but it's not life-altering (usually!).

Similarly, when an over-leveraged, unstable financial system crashes, the solution is to replace it with . . . one's that better-designed (and to minimize the fallout from the crash).

When President Obama says the country will ultimately emerge stronger from this period . . . I think he's absolutely right.

Waiting for Cheap Housing . . . Since 1997

Timing the Housing Market

As John Maynard Keynes famously observed, "the market can stay irrational longer than you can stay solvent."

Or, in the case of housing the last decade-plus: 'stay above trend line longer than you can stay in a rental.'

Citing the charts reproduced at right, commentators like Barron's Alan Abelson make the point that, despite housing's 25% fall nationally from the 2006 peak, it's still well above historical trend lines.

The obvious implication is, don't rush (back) into the housing market just yet.

The only problem with that advice is that anyone concerned about historical valuations would have been relegated to the sidelines years ago.

Housing prices as a percentage of rent have been above trend line since at least 1998; as a percentage of median family income, since 2001. Some economists might even argue that the latter ratio has been above the long-term trend line since the late '70's!

That's a long time to stay in your in-laws' basement (or a cramped house you bought before you had kids).

In fact, despite the widespread pain in housing since 2006, anyone who bought in 2000 would still be up 30%. That compares with a 50% drop in equities since then. To paraphrase Churchill's line about democracy, "housing is a terrible investment . . except for all the others."

Housing's Benefits

Of course, anyone who's owned their home for almost a decade would likely have amortized a nice chunk of principal by now, and also have benefited from the tax deductions associated with paying mortgage interest.

Meanwhile, anyone selling with a gain up to $500k ($250k for singles) would have escaped paying capital gains taxes, thanks to housing's favored tax treatment.

But most importantly, anyone who bought a home in 2000 . . . would have enjoyed living in their own home since 2000.

As a Realtor with an economics background, my biggest criticism of the much-cited housing price/rent ratio is the underlying assumption that the rental and purchase markets are, if not interchangeable, at least close substitutes.

That may be true in some markets, but not in the one I work in, the Twin Cities.

In general, rental homes here are located in less desirable neighborhoods, are in worse condition, and have fewer amenities, than homes listed for sale. That's especially true as a soft market swells the number of rentals: "involuntary" landlords who can't attract a buyer -- or can't afford to sell their homes because they're underwater -- frequently lack the time and money to keep up their rental properties.

Unlike, say, Manhattan, in the Midwest owning your own home is as much as lifestyle decision as it is an economic or financial one.

It's one thing to jump into (or out of) stocks based on historical valuations.

Doing that with your family, and disrupting your kids' friendships, schooling, etc. is a sacrifice most people aren't willing to make.

Housing: How Much Further to Fall?

Why People Hate Wall Street --
And Wall Street Analysts, too

When stocks are going up, the airwaves are full of Wall Street analysts and other pundits chock-full of stock picks sure to make you money.

So what can you expect to hear after stocks plummet 50% or more?

All the reasons why stocks "are still historically expensive and have further -- much, much further -- to fall," notwithstanding their sickening plunge to date (call this phenomenon "prediction by extrapolation").

Thanks a lot.

Analysts' housing predictions have been much the same.

To be fair, Barron's Alan Abelson, who cites the charts above, has been bearish on housing all along. In his most recent column, "Double Trouble," Abelson makes the scary point that, despite the housing market's chilling fall to date, it still is well above historical trend lines.

Playing Devil's Advocate

Setting aside the counter-arguments for another post (See, "Waiting for Cheap Housing . . . Since 1997"), what if Abelson's right?

Should every prospective Buyer simply wait it out in a rental, until prices are more appealing? Should every growing family squeezed into a too-small house or apartment make do for another 5,6,7 years -- or longer, according to some bears -- until housing prices return to their long-term trend line?

There are more variations on this theme, but you get the idea.

Unless you: a) believe the prognosticators (always a dubious proposition); and b) are very patient, you're better off making housing decisions based on your current life situation, finances, and job opportunities.

My investing background and Realtor experience tell me that no one -- not Robert Shiller, not Nouriel Roubini, not Warren Buffett -- has a crystal ball accurately telling them what housing prices will be next year -- let alone 5 or 10 years from now.

To quote another investing guru, Peter Lynch, "If you spend 13 minutes per year trying to predict the economy, you have wasted 10 minutes."

Substitute "the housing market" for "the economy," and you'll have it about right . . .