Don't Worry, All Recessions are Local

Does anyone remember the mantra "All Real Estate Is Local"? Somehow that plug has stopped. What stopped that plug is the fact that real estate is now down nationally for the first time since the Great Depression.

It's now time for a new mantra. I propose the following: "Don't Worry All Recessions Are Local". With that, let's take a look a few states.

Florida is in Recession

It's crystal clear that Florida real estate is in a recession. It should also be clear that Florida in general is in a recession. Those who disagree can give Mike Morgan a buzz at Morgan Florida. He can fill you in on some of the details.

Michigan is in Recession

The state of Michigan is also in a recession. As proof I offer 42,000 jobs lost in state since August 2006.

Statewide August seasonally adjusted unemployment rates rose four-tenths of a percent from this time last year, with three-quarters of the 56,000 payroll jobs lost in Michigan since August 2006 occurring in manufacturing and construction sectors, according to the Dept. of Labor and Economic Growth (DLEG).

While the national jobless rate remained unchanged at 4.6 percent, Michigan’s 7.4 percent unemployment rate in August increased over July’s 7.2 percent rate. The August rate was the highest monthly rate for the state since September 1993.

Total employment fell by 28,000 over the month as unemployment rose by 12,000 and the state’s labor force declined by 16,000 in August. “Michigan’s labor force in 2007 has declined in six out of eight months,” said Rick Waclawek, director of DLEG’s Bureau of Labor Market Information and Strategic Initiatives.

What About California?
Inquiring minds might be saying "Who cares about Florida or the Midwest rustbelt, what about California?" That's a good question.

Let's take a look starting with this headline: Californians not optimistic about economy.

A mood of gloom has settled on California in the past few months, with foreclosures and tightening credit causing more residents to see bad times ahead than at any time since 2003.

The sagging confidence in the economy also is influencing voters' opinions of their elected leaders, the Public Policy Institute of California reported Thursday, with distrust in state government "near an all-time high." Most of those polled said they think state government is run by big interests and wastes taxpayer money.

Economic pessimism jumped by 20 percentage points since the beginning of the year, the poll found, with 59 percent of residents saying they expected bad economic times in the coming year. Among "likely voters," 62 percent were pessimists.

Worriers outnumbered optimists in every region of the state, every income bracket and among homeowners and renters alike. That is unlike typical responses during this stage of an economic downturn, said Mark Baldassare, PPIC president and the survey's director.

Two Key Ideas

• Distrust in state government is "near an all-time high."
• Worriers outnumbered optimists in every region of the state, every income bracket and among homeowners and renters alike. That is unlike typical responses during this stage of an economic downturn.

Inquiring minds are asking "Why the change in sentiment?"

Could it be that California Foreclosures are up 200% from Last Year?

The 2nd Quarter National Delinquency Survey, released recently by the Mortgage Bankers Association (MBA), shows that California mortgage loans entering foreclosure have reached 25-year highs, with subprime borrowers bearing the brunt of the storm. The MBA linked market factors such as declining home prices and an increase in housing inventory to the grim foreclosure situation in California, but failed to acknowledge the risky products and deterioration of lending practices in their own industry. “Brokers and lenders pushed risky products that maximized their profits, but lost sight of the basic fundamentals of lending,” said Paul Leonard, director of the California office of the Center for Responsible Lending. “Subprime borrowers were set up for historic levels of failure.”

Is sentiment sinking because of rising foreclosures?

Believe it or not, the answer to the last question is no. Sentiment is not sour because foreclosures are up. Foreclosures are up because sentiment went sour! The pool of greater fools dried up (a sentiment change), then and only then (and it took a long time thereafter) did California sentiment change. And sentiment, like a fully loaded supertanker at warp speed, is very difficult to turn around.

The LBO Dance

The sudden reversal in willingness to fund LBOs regardless of value is also a change in sentiment. You may wish to take a look at Saturday's post Buyout Bingo Reversal Continues with that thought in mind. Here's the key idea "If Goldman and Citigroup don't want the deals or the debt, why should you?"

I did not explicitly say so but it was a sudden change in sentiment that is causing these deals to collapse.

Indeed, Chuck Prince, CEO of Citigroup marked the tip top in LBO mania when he proclaimed “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing". For more on this idea see Slope of Hope.

Chuck Prince is no longer dancing. In fact he is willing to pay significant money to get out of his last dance. And just as Chuck Prince suggested, things are now "complicated".

It's Just Local

Who cares if Michigan is in a slump? Ohio, same thing. After all both Michigan and Ohio are do nothing rust belt states. Florida? The demographics argument that everyone wants to move to Florida is now turned upside down as boomers exit Florida.

It's debatable whether or not California is a recession now or not. But it soon will be. And as each state slips into recession, simply click your heels together three times and repeat after me, "I'm not worried, all recessions are local."

Comments

[Tom B]

"And as each state slips into recession, simply click your heels together three times and repeat after me, "I'm not worried, all recessions are local.""

And go out and buy yourself a cup of Joe with your increasingly worthless greenbacks.

[Malkiel]

"Distrust in (California) state government is "near an all-time high."

Connecticut experienced a couple of percent increase in jobs recently, almost all in the public sector (i.e., local and state government).

As Keynes once observed, (paraphrased), "Governments that don't spend in good times had damn well better spend in bad times"...

[fodi MD.]

And while jobs and house prices shrink- taxes, assesments and insurance fees are rising.local government cannot seem to stop tax and spend budgets. One benefit the roads are less conjested!