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Monday, December 31, 2007

Top economist says America could plunge into recession

Even if the economy just declines slightly early in the New Year this could exacerbate the credit crunch. As noted in my earlier post there could be a credit crunch in auto loans. If people's incomes do not keep pace with debt then there is bound to be increased defaulting on loans.

From The Times
December 31, 2007
Top economist says America could plunge into recession
Suzy Jagger in New York

Losses arising from America’s housing recession could triple over the

next few years and they represent the greatest threat to growth in the
United States, one of the world’s leading economists has told The
Times.

Robert Shiller, Professor of Economics at Yale University, predicted
that there was a very real possibility that the US would be plunged
into
a Japan-style slump, with house prices declining for years.

Professor Shiller, co-founder of the respected S&P Case/Shiller
house-price index, said: “American real estate values have already
lost
around $1 trillion [£503 billion]. That could easily increase
threefold
over the next few years. This is a much bigger issue than sub-prime. We

are talking trillions of dollars’ worth of losses.”

He said that US futures markets had priced in further declines in house

prices in the short term, with contracts on the S&P Shiller index
pointing to decreases of up to 14 per cent.

“Over the next five years, the futures contracts are pointing to
losses
of around 35 per cent in some areas, such as Florida, California and
Las
Vegas. There is a good chance that this housing recession will go on
for
years,” he said.

Professor Shiller, author of Irrational Exuberance, a phrase later used

by Alan Greenspan, the former Federal Reserve chairman, said: “This
is a
classic bubble scenario. A few years ago house prices got very high,
pushed up because of investor expectations. Americans have fuelled the
myth that prices would never fall, that values could only go up. People

believed the story. Now there is a very real chance of a big
recession.”

He pointed out that signs at the beginning of 2007 that had indicated
that some states were beginning to experience a recovery in house
prices
had proved to be false: “States such as Massachusetts had seen some
increases at the beginning of the year. Denver also looked like it had
a
different path. Now all states are falling.”

Until two years ago, each of America’s 50 states had experienced a
prolonged housing boom, with properties in some – such as Florida,
California, Arizona and Nevada – doubling in price, fuelled by cheap
credit and lax lending practices to borrowers who ordinarily would not
have been able to secure a mortgage. Two years ago, the northeastern
states of America became the first to slide into a recession after 17
successive interest-rate rises between June 2004 and August 2006 hit
the
property market.

Last week, new numbers from the S&P/Case Shiller index showed that
house
prices had declined in October at their fastest rate for more than six
years, with homes in Miami losing 12 per cent of their value.

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