AEI’s March 28, 2007 Subprime Seminar – IX
This is an unofficial transcript of the few minutes that occurred during AEI’s March 28th seminar on the Subprime Mortgage Crisis [1] between the conclusion of the speakers’ presentations and the beginning of the Question & Answer session.
Desmond Lachman made a brief comment about Tom Zimmerman’s talk, which had just concluded. Then Nouriel Roubini returned to a theme of his earlier presentation, enumerating the channels by which housing inventory was coming onto the market, and the significance of rising inventory for the housing market and the broader economy.
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Previous partial transcripts of the March 28th event:
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As usual, the times are from the audio version of the seminar.
Peter Wallison [1:16:27]: … Let me give the members of the panel a minute, if you want, to make any further comments that occur to your mind, or responses to other speakers. Anybody? Desmond?
Desmond Lachman: Yeh, I was just a little bit surprised why Thomas [Zimmerman], after making a presentation like that, describes himself as being relatively optimistic. [laughter] I thought that what he’s telling us is that there is going to be a lot of defaults, that’s there’s going to be a lot of foreclosures, that more of these houses are going to be turning onto a saturated market, that prices are going to decline and that his HPA ratios are going to go into the wrong direction, and we’re just going to have more defaults. So I would have thought, if I’d looked that closely at those numbers, I would have been a lot more worried about a vicious cycle and that more downward pressure on house prices going forward. But then I’ve got an optimistic view of the world. [1:17:30]
Peter Wallison: Other comments? Nouriel.
Nouriel Roubini: My other comment that follows up the one by Desmond is that — if the [??] thing about the general equilibrium effects about these things. As we said, may not be just subprime, might be spreading to other parts of the economy. I think that crucially what’s going to happen to home prices is essential, because you can get into a vicious circle there. If prices are falling, home equity — values are falling the withdrawal is falling and then you have a vicious circle. And then from that point of view you have — that the crucial thing is that if you look at what’s going to happen to the excess supply or glut of inventory of new and existing homes, it’s going to just get worse. [1:18:13]
It’s true that housing starts have fallen, but in the last few months new home sales have fallen even more, so when you look at the measure about absolutes, share of current sales, debt ratio, unsold homes, is going up. Secondly, deadwood is going to get worse. There is a government study, that suggested actually that the effect just alone of subprime, the shrinkage of that market, might reduce new home sales by 200,000 this year alone. They are already down to 844 [1,000s] last month from a peak of something like 1.4 [1,000,000s] so if you get another 200,000, falling demand, that’s an excess supply of new homes on the market. And that’s only one channel — you’ve got three other ones on existing homes. You’re going to have all those guys who go into foreclosure — and then the bank owns the thing and six months down the line they’re going to dump it on the market. That’s an excess supply of existing homes. You’re going to have the people … the speculative stuff, and now you’re seeing their home equity is shrinking, and therefore they have to sell as fast as they can before they get a loss. So that’s an excess supply over there. [1:19:11]
And you’re going to have also lots of people that have these resetting ARMs, and they have to decide — What do I do? If I can afford it, I try to sell the home and try to have a distress sale or short or whatever not. So if you think about the channels through which you’re going to have an increase in the supply of homes, both existing and new ones on the market, I think that the situation is that the excess supply that we see today is going to get worse. If that’s going to happen, home prices fall even more, and you get all that vicious circle effects of that on values of home, home wealth, home equity withdrawal, on consumption, on demand, on supply, and so on. So that’s the things from a general equilibrium point of view you have to worry about. [1:19:50]
Alex Pollock: Any other comment before we open it up? OK, let’s — We’re going to open the floor to questions. If I could remind you all how this will work … Dan Geary, who is here with a microphone — first of all please wait for Dan to get to you with the microphone and — I’m sorry —
Dan Geary(?): We have another microphone on the other side.
Alex Pollock: Oh, there’s another microphone over here, OK, thank-you. First of all wait for the microphone to get to you. Secondly, if you would then tell us your name and your affiliation. And then your question. … And let’s open the floor. [laughs] I see a hand here. [1:20:30]
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Notes and References
[1]: "Mortgage Credit and Subprime Lending: Implications of a Deflating Bubble", Event, American Enterprise Institute & Professional Risk Managers’ International Association, March 28, 2007.
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John-
Roubini nails what I think is housing’s “Enemy #1″- Excess Inventory:
When you weigh that against any other “positive” factor, that is what is going to keep the market in the doldrums for a long time. It’s also one of the big factors that make pinning a date on “recovery” difficult- as long as builders keep production in excess of demand, at however diminished a rate, there is no telling how long this can go on.
One of the common theories on this situation is; Builders MUST build to stay alive. If they don’t there are too many factors against them to ride out a downturn. I imagine they had loads of cash after the run-up, what they did with that cash will play a significant part in their companies fate over the next few months. I.e. Did they buy a bunch of land or did they stockpile the cash?
On one hand they have excess inventory and in the other they have a fiduciary responsibility to perform for share holders. How they will create demand to buy the excess and then some is going to really tough. They could lower the price of the homes they haven’t sold low enough to get a few sideliner’s into the game, but that might spur a class action. Even with a lowered price… I still don’t think that would be enough to kick start this languishing market.
Supply and demand are fundamental market forces that must be followed. The problem is no one seems think either supply or demand matter. I don’t care what economic doctrine you subscribe to, this blatant disregard for supply and demand is laughable.