Peter Hooper on the Economic Outlook

The speaker at our UCSD Economics Roundtable this week was Peter Hooper, chief economist for Deutsche Bank Securities. Here is a brief summary of his thoughts about the U.S. economic outlook.

Hooper thinks the U.S. has likely already entered a recession and is expecting U.S. real GDP growth to come in slightly negative for the first two quarters of 2008. His forecast calls for a sharp but brief kick out in the third quarter, thanks to the tax rebate stimulus. He calculates that $100 billion in rebates might translate into $33 billion more spending on final goods and services in the third quarter, or $132 billion at an annual rate, though Robin Moroney and Joseph Carson seem less confident. After any consumption burst, Hooper's expecting the continuing drag from housing to bring us back to sluggish but positive growth numbers.

(Click to enlarge)

Hooper's view, and I agree, is that the key uncertainty in such forecasts is how big the decline in house prices will prove to be. He guesses that for every 10% additional drop in home prices:

• household wealth falls by $2 trillion,
• consumer spending is reduced by 1% via wealth effects,
• financial sector losses on foreclosures increase by $50 to 100 billion,
• tightening of credit conditions associated with deleveraging could reduce GDP by an additional 1/4-1/2%.

Hooper presented this impressive graph of the impact of the deleveraging so far on the once booming practice of mortgage securitization:

(Click to enlarge)

How big will the house decline prove to be? Hooper rightly cautioned that it is difficult to answer that question with great confidence, but offered his reasons for thinking that we might see the overhang of unsold houses begin to drop significantly over the next few quarters, which would limit further price declines.

Let's hope he's right. If you're interested in more details, you can view his presentation here.

Comments

[Heritageinvesting]

What strikes me is the explosion of "securitized mortgage lending" in the first half of 2007. According to the chart the first half of the year saw far more of it than all of 2006. In fact, the jumbo area saw more just in Q1 2007 than in the entire year of 2006.

[Big BearLake Hostel]

I found page 12 in the presentation to be the most interesting point. I haven't heard anyone mention before that _some_ of the average price run up in the last 10 years incorporates higher building standards and more 'luxury' in average houses. At least its a nugget of positive information or at least 'less negative' to add to the mix.

[yolosetodo]

"we might see the overhang of unsold houses begin to drop significantly over the next few quarters"
How about the following scenario: A good credit borrower that is paying on a depreciated home (paid $950K with a 90% loan, now worth $650K) will buy a similar property in foreclosure at a greatly discounted price and default on the loan of the depreciated home.
Net gain in inventory = Zero
It's happening in Florida.

[galewhitaker]

I keep hearing the optimists talk about the rebate plan like it is going to be our salvation but as I recall past rebates had zero benifit for the economy. I wonder what makes people think its going to be different this time. I think the rebate idea is an act of desperation on the part of the administration to get John Mcain elected in November.

[e2800]

What a clown. So sick of this,"We may already be in a recession", most of us with our feet on the ground have seen recession since Nov.
As far as the tax credits increasing spending, mine is going to pay for a vacation I just took. I'll bet a high percentage of these checks will go towards paying for previous consumption and provide virtually no new stimulus. These economists need to stop plugging numbers into their precious models, and look at reality.

[FourBrane]

We'll have to see mortgage securitization recover rapidly if house prices are to stop falling. Hooper's chart does not suggest any hope for real estate, so I wonder how he came to expect that house prices would stabilize in the absence of mortgage funds. Lenders have to securitize their loan portfolios to restock the pot. This must be watched very carefully and I'm expecting much more downside than we've seen.