Merrill's Rosenberg on Real Estate

David Rosenberg of Merrill Lynch* appeared on CNBC a few moments ago to discuss the relationship between deflation in residential real estate--which he called a "$20 trillion beast,...the backbone of the household balance sheet and the cornerstone of the collateral in the financial system"--and the slowdown of credit and economic activity in general.

Rosenberg is exactly right here, as he so often is. His conversation this morning drew on his Tuesday piece in the Financial Times. Here are a couple key excerpts (emphasis added in italics):

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, painful as may be, 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.

This story always has been and always will be about inventories.

From Calculated Risk, here's another problem on the demand side: Mortgage rates are ridiculously low, but fewer would-be borrowers are qualifying, and much of the reported mortgage activity is in the re-fi market. Refinancing at low rates should help the macro-economy, but it won't do anything for the basic supply-demand imbalance reflected in elevated inventories.

Rosenberg is right that a local government moratorium on building permits would help. After all, housing starts in most places should be exactly zero. But this is a classic collective action problem. Who'll be the first agency to say no mas--and thus forgo developer fees, jobs, &c.? Even if those fees don't fully pay for the necessary expansion of infrastructure, schools, &c., and even if those jobs are short-term, it's difficult to see enough local pols standing athwart this bit of our history yelling "Stop!"

~~~~~~~~~~~~~~~~

* Are we still calling it that?

Source

David Rosenberg, "All eyes on US house prices for indicators of confidence," Financial Times, January 6, 2009

Comments

[{5U}:]

Rosenberg is the man. I find it amusing when equity guys talk about stocks when they do not understand the credit market.

I was a bond trader before I ever traded stocks.

Jan 09 09:20 AM

[Guero:]

Force housing starts to zero...very interesting proposal. Probably needs to be seriously considered.

Home builders are already holding out their hands for their piece of the bailout pie, they will absolutely scream bloody murder if we try something like this. Donnie Ray Horton would not go down easily.

Jan 09 10:44 AM

[freemarketguy:]

You guys are communists. Let's just pick and choose some more industries to subsidize or close down. What happened to rule of law and private property rights?

Jan 09 10:53 AM

[thecondoguy1:]

Freemarketguy is correct, if these NYSE listed builders had any brains at all the would STOP building because there is no market for their products.
Until then if I were a lender they would not get another dime for spec, let them pee through their own capital on this stupid over capacity, if I were a city planner I would not issue another permit until the forclosures and empty homes were reasonably obsorbed by the market.
Good luck to all......................

Jan 09 12:43 PM