Nouriel Roubini Sep 07, 2007
The utterly ugly employment figures for August (a fall in jobs for the first time in four years, downward revisions to previous months’ data, a fall in the labor participation rate, and an even weaker employment picture based on the household survey compared to the establishments survey) confirm what few of us have been predicting since the beginning of 2007: the U.S. is headed towards a hard landing.
The probability of a US economic hard landing (either a likely outright recession and/or an almost certain “growth recession”) was already significant even before the severe turmoil and volatility in financial markets during this summer. But the likelihood of sucthe recent financial turmoil - that has manifested itself as a severe liquidity and credit crunch - now makes h a hard landing even greater. There is now a vicious circle where a weakening US economy is making the financial markets’ crunch more severe and where the worsening financial markets and tightening of credit conditions will further weaken the economy via further falls of residential investment and further slowdowns of private consumption and of capital spending by the corporate sector.
The US economic slowdown was already serious since early 2007 and will get worse in the next few quarters for a variety of reasons. A massive housing bubble - where home prices went to stratospheric levels because of a debt-driven asset bubble (a massive rise in mortgage debt of households) - has now turned into the most severe housing recession in the last 30 years and into a house price bust: for the first time since the Great Depression of the 1930s home prices are now falling on a year-over-year basis. Home prices will fall much more in the next two years – by at least 15% - because of five factors that will make the huge excess inventory of new and existing homes – already at historic highs – even larger: first production of new home is still excessive as demand for new homes has fallen more than the now lower supply; the credit crunch in mortgage markets will further reduce the demand for new homes; millions of households will default on their mortgages and go into foreclosure and once the creditor banks will repossess these homes they will dump them in the market adding to the excess supply; about $1 trillion of adjustable rate mortgages will be reset – at much higher interest rates – in the next 12 months: the households that cannot refinance them and/or afford the higher interest rates will sell their homes at distressed prices; and those who bought homes for speculative reasons with little equity will now try to sell their homes as prices are falling. So expect a much faster and deeper fall in home prices for the next two years.
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