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The Atlanta Fed's macroblog provides commentary on economic topics including monetary policy, macroeconomic developments, financial issues and Southeast regional trends.

Authors for macroblog are Dave Altig and other Atlanta Fed economists.


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March 19, 2007


Are We Panicking Just A Bit Too Soon?

If there was any doubt about it before, that groaning sound from the residential housing market definitely has our attention now.  A woefully incomplete list of blogger commentary from the past several days would include items at Alpha.Sources blog (here, with some international perspective here), at Angry Bear, at Beat the Press, at The Big Picture, at Bizzy Blog, at Brad DeLong's, at Daniel Gross, at Economic Dreams - Economic Nightmares (here and here), at Economics Unbound, at Economist's View (here and here), at Euro Intelligence, at Felix Salmon, at The Housing Bubble Blog (here and here), at Mish's Global Economic Trends Analysis, at the Skeptical Speculator, and at The Street Light.  I won't even bother to list individual items from Calculated Risk or Nouriel Roubini.  Just head on over and start reading.

In the midst of this, let me make one brief plea for a little perspective:  It might be good to remember that this was not entirely unexpected.  Since at least summer I have been giving "economic outlook" speeches with the same basic message:  Weakness in the residential housing market will continue for some time -- the bottom in prices seems unlikely until at least mid-year.  Adjustments of this sort are never easy, there will be some pain, and probably a disruption in the pace of economic expansion as things sort themselves out.  The punch line is always something like, "but things do sort themselves out, and there is no reason to expect that the economy will fail to return to a normal pace of growth after a sluggish quarter or two."

Anything yet make that projection look wrong?  Not within my confidence intervals.  Forecasters, economic pundits, and other human beings are congenital slaves to the latest surprises in the data, so confidence has ebbed and flowed and ebbed again as the news has surprised to the downside, to the upside, and back again.  But would anyone really want to argue that we aren't in the neighborhood of where most informed observers thought we would be about now? 

Trouble, of course, often looks worse when it arrives than it did when we were merely contemplating its arrival.  It is understandable that we feel a little wobbly now that the shake-out among certain mortgage lenders is here at last.  And there are parts of the "soft-landing" scenario that look a bit tenuous at the moment -- I would put the worrisome signs of weakening business investment expenditures, emphasized by pgl at Angry Bear and Jim Hamilton at Econbrowser, at the top of my list.  But for the time being, I'm going to go easy on the panic button. 

March 19, 2007 in Housing, Saving, Capital, and Investment | Permalink

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"Oh, 37 inches to go. Huzzah! At the rate we've been melting, that's good for about one more week!" ~ Professor Fate "You'd better keep it to yourself." ~ The Great Leslie "Oh, of course I'll keep it to myself. Until the water reaches my lower lip, and then I'm gonna mention it to SOMEBODY!" ~ Professor Fate

Posted by: RP | March 20, 2007 at 01:11 AM

It's not too early to panic -- it's too late.

The great glut of condos and McMansions in Chicago and its suburbs is already in place. A large fraction is already vacant, and as the coming recession drops the home ownership rate among the under-30 set from its current record level back towards its early-90s level (as they're forced to move back with the folks, or double up with roommates), the fraction vacant will rise even higher, and prices will plunge.

The pricing structure in the single family home market is also going to crumble, starting from the high end where there's more than a year's worth of inventory.

The effect of this is going to be the same as in Japan -- total destruction of the myth that real estate can only go up, and that young people have to buy as quickly as they can, no matter what the price, or be "priced out forever".

Posted by: jm | March 20, 2007 at 01:39 AM

What's fascinating to me has been the parade of denial the entire time this was unfolding.

Its not that it was so obvious in hindsight, but rather, a handful of people made the timely observation, and were shouted down by the frat boys at the kegger.

Now the hangover has just started, and the recriminations have begun in earnest.

Its all terribly, terribly amusing.

Posted by: Barry Ritholtz | March 20, 2007 at 05:45 AM

Nicely said Barry, but I think we can be even more direct.

David's been coming down hard on bears predicting this for months /years.

And now he's trying to take CREDIT ?

Amusing is one way to put it. Frightening that people like him get to be in govt. service is another way.

Posted by: RN | March 20, 2007 at 08:56 AM

I'm with Dave A. on this one, it is too early to "panic". Let's wait until the regulatory actions enacted to correct the abuses are actually implemented, THEN let's panic.
Everyone knows CA's economic influence on our national economy, it's huge. Aside from the FED 10/14/06 Non-traditional Mtg. "Guidance" to its national banks and the recent desintigration of our most agressive subprime originators, credit in CA remains VERY easy & VERY cheap. 100% mtgs. & no doc loans are readily available to all but those with terrible credit. Why has CA yet to sign on to CSBS non-traditional guidelines FOUR MONTHS after they were issued? Anyone who's interested need only check the percentage of CA mtgs. regulated by other than FED. bank guidelines. CLEARLY, CA has caved to r.e. pressure to get in one more selling season. This wouldn't be possible if Freddie-Mac, a Gov't. sponsored Enterprise, hadn't delayed implementation of its new loan guidelines until Sept. (Its rationalization qualifies for a mastercard commercial - it's priceless!)
Meanwhile, last week I received THREE MORE credit card invites offering me 0% interest on balance transfers & purchases for the next 15 months.
Meanwhile, we listen to Republican leaders of industry grovel for FED intervention to insure recent policy changes don't hurt the poor folk.
Meanwhile, ....

Posted by: bailey | March 20, 2007 at 10:59 AM

I agree with Dave on this one. There are reasons to be concerned for sure, but we aren't at the "I told you so" point yet. Overall, the job market continues to create jobs, and interest rates have remained low. Sanguine, maybe, but hitting the panic button is a little premature.

That said, I believe that inflation is a concern, and will forestall any Fed action in the near future, and that liquidity issues in the residential mortgage market may impinge on the demand side, and reduce absorption of housing units.

Posted by: Nathan | March 20, 2007 at 01:11 PM

I think that Dave A's point might have a bit to do with this little interchange between Agent J and Agent K (from movie: "Men In Black"):
--------------------------------
"Agent K: We do not discharge our weapons in view of the public!

"Agent J: Man, we ain't got time for this cover-up bullshit! In case you've forgotten, there's an Arquillian battle cruiser--

"Agent K: There's always an Arquillian battle cruiser or a Correllian death ray or a plague intended to wipe out all life on this miserable little planet, and the only way these people can get on with their lives is that they do Not KNOW about it!"
---------------------------------
It seems to me that we have been living on the edge of catastrophe for quite some time, one way or another. Just ask my wife. She has had to live with my negativism since the last housing bust, the Japanese supremacy moment, and so on. Maybe that's just the way it is, AND the way it is going to be.

OR maybe Keynes/Minsky (and others) had (have) some insight into the workings of complex systems that have not YET been worked into our thinking/policy development re: central banking.

If so, then we have a lot to think about and talk about re: useful roles for government AND for markets, as the bubbles continue to froth, and particularly in the aftermath of any crashes close at hand or further away. None of us gets to but prognosticate as to "future".

Posted by: Dave Iverson | March 20, 2007 at 02:20 PM

Well, Dave, I am at the "I told you so" point. :)

Posted by: Oracle of Cleveland | March 20, 2007 at 03:27 PM

Something funny about this "Panic Button" and the advice not to use it without due care and attention...is it our quest for law and order at all times even and especially those chaotic moments where we think we can redirect people into submission by posting "Use restraint when pushing the Panic Button".

Dave points out that the blogs are pretty noisy, but the MSM is pretty quiet. Too quiet, yes? [Way too quiet for us bloggers who feel the MSM is concealing, not helping.] So there are 2 buttons apparently: the troublesome Panic Button which we might never have the presence of mind to use, at least not properly...and the Arise Button which we know did not work so well when it came to saving those pies from the rats.

Posted by: calmo | March 20, 2007 at 05:00 PM

RN -- What is that you think I am trying to take credit for? All I said is that (a) the consensus expectation for some time has been that housing-market woes would, in fact, leave a mark, but not send the economy into a full-blown tailspin; and (b) from everything we know, the hard-landing scenario still amounts to *speculation* about what will unfold. Maybe it will unfold soon, but the data just simply does not support the view that a broad-based crash has arrived.

As for being "hard on bears predicting this", what exactly, is "this"? Let's suppose real GDP growth comes in somewhere between 1 and 2 percent for the first quarter, which seems pretty reasonable at this point. Is that lower than I would have predicted, say 6 months ago? Yes. Is it within the range that I would have bet against? No. Is this what the "bears" mean by "hard landing"? If so, I concede.

Posted by: Dave Altig | March 20, 2007 at 05:15 PM

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