The economic recovery has definitely begun, but it has a long way to go. Housing prices might have a lot farther to fall. And new waves of foreclosures could keep the economy on shaky footing — for years.
Those were a few of the views offered today by leading economist Christopher Thornberg of Los Angeles-based Beacon Economics, who took the stage in Missoula to kick off NewWest.Net’s fourth annual Real Estate and Development in the Northern Rockies conference — and to predict the future. It’s something Thornberg has done with uncanny precision in past years, when he was one of the few economists to warn about a coming housing bust and its dire consequences.
At the MCT Performing Arts Center, Thornberg offered some more predictions, this time about the recovery in Montana and beyond.
“The only thing I’m certain of is that this will be a slow recovery,” Thornberg told the more than 130 developers, planners, policy-makers, real estate agents, and others in attendance.
Thornberg predicted a “near recession” by 2011, “because we haven’t actually fixed the problems” that created the financial crisis, he said. “Unemployment will come down, but at best come down very slowly, and could still be at 8 percent in 2012. There’s not a very good prognosis for where this economy is headed in the short-term.”
The forecast would improve if the value of the dollar continues to fall, feeding an export boom. “That would help the situation enormously,” he said.
But the core of the recovery, he stressed, has to come from healthy consumers: people who save more money, have less debt, and live in a country where financial realism — not denial or hysteria — rules.
“Extremely aggressive” government interventions in the last year have been “like a tourniquet on a wound — it stabilizes the patient, but it’s not the end of the healing process,” Thornberg explained. “It’s going to be a long time before the patient gets up off the table and starts dancing again.”
Thornberg had some good news, too. Montana has weathered the economic downturn better than most and is one of the most stable states in the Rocky Mountain region, with about 7 percent unemployment this year, compared to about 10 percent nationwide (and about 9 percent in Idaho), he said.
The state has lost up to 2 percent of its workforce and shed about 4,400 construction jobs. But those losses “are really mild compared to most places in the United States.”
In addition, Montana’s median home prices have stayed relatively stable at about $220,000 (although overall sales have remained relatively low).
In addition, the nation’s recession is over, Thornberg announced. Then he showed a slide of a beam of light in the darkness, and posed the afternoon’s main question. “Is that the light at the end of the tunnel, or is that a train coming ’round the bend?” he asked.
In Thornberg’s view, it’s a bit of both. Among the biggest problems:
— “We have at least a million foreclosures that have yet to hit the market,” Thornberg said. In the second quarter of 2009, 7 percent of all mortgages were seriously delinquent and 4 percent of homes were already owned by the banks. “That pent-up supply is going to start coming out in 2010.”
— Montana has done comparatively well: only about 3 percent of mortgages are seriously delinquent (the Idaho rate is 5.6 percent and in Colorado it’s 4.6 percent). But the number of foreclosures is still unprecedented, and could send housing prices to new lows.
— The foreclosures come against the backdrop of a “vast oversupply” of housing in the country. Before the crash, “We were building like nobody’s business.”
— People aren’t saving enough. “In the mid-1990s, Americans were saving 7 or 8 percent of income. In recent years that level has dropped to about 1 percent. That’s not sustainable,” he said.
— Americans need to reduce their massive debt load. Tight consumer credit markets aren’t the problem, he added. “That’s like saying that the problem for the alcoholic is that the bar isn’t open.”
What worries him “more than anything,” Thornberg added, is that in 2010 there won’t be any more tax rebates, unemployment will still be high, and Americans will cut back on spending again.
So what does he advise and predict?
— If you want to refinance your home mortgage, do it in the next 12 months. Mortgage rates today are at about 5 percent but could rise to 7.5 percent or 8 percent in coming years.
— Inflation could strike hard after the next 18 months. “It’s definitely something to keep an eye out for.”
— Unemployment levels nationwide will hover at about 8.5 percent until 2012.
And the housing crisis remains, he said, because of “Michael Jackson” syndrome — or what happens when you pay people to tell you what you want to hear. The syndrome in housing involves real estate agents who tell homeowners they can list their property at inflated prices, or mortgage brokers who tell people it’s okay to buy a house they can’t afford.
Delusion lives on Wall Street, too, of course. Fixing the system, among other things, would require reforming the corporate incentive system so that executives aren’t rewarded for disastrously risky behavior, Thornberg noted. (Lehman Brothers Chief Executive Richard Fuld Jr. made $200 million after taxes for running the company into the ground, he said.)
“The problem is these guys have every incentive in the world to take the most giant gambles possible. Until you change the incentives, the only question is, what’s going to be the next disaster?”
In the meantime, people need to be patient, he said.
“We’re re-balancing now into a more sustainable model.” The nation is finding a middle ground, he said. It’s called reality.
NewWest.Net’s Real Estate and Development in the Northern Rockies conference continues tomorrow at the Hilton Garden Inn, including three tracks of break-out sessions in the morning and a plenary session in the afternoon. The afternoon features Luther Propst of the Sonoran Institute and Roger Lang of Sun Ranch among many other speakers, and will conclude with Sam Byrne, the new owner of the Yellowstone Club. The Tuesday evening reception will feature music with Shane Clouse and Tom Catmull, sponsored by WGM Group. Tuesday-only ticket are available for $198, and include breakfast, lunch, breaks, the reception, and all the presentations. Sign up online or on-site at the Hilton. Call 406-829-1725 or visit the conference website at www.newwest.net/realestate.