Things will get uglier

[Gohabsgo_IHB]

Let's say that the general financial industry underestimated the housing downturn since mid 2005. In 2005, they said everything would be fine, in 2006 they said things might level off then pick up again, in late 2006 they said things will pick back up in 2007, in 2007 they said the same about 2008. Now in 2008 they said things will still be bad in 2009 (at least for the most part).



So if they have been wrong for 3 years (always being overly optimistic), why wouldn't they be overly optimistic again?



Even IR's projections are not as bad as things have been since 2007. I didn't check his "How bad things good get" post, but his best guess seem a little high now.



With the US and global economy going south as quickly as it is now I do not see any reasons why things wouldn't be so much worse than most bears are currently thinking.



I have been a bear for 2 years now and I thought Graphix and others were too pessimistic. I think I changed my mind and I am not even sure if they are pessimistic enough. Roubini and Schiller, two of the most widely known bears, are projecting very very bad things for the coming months. I now think they must be right.



Here's my little idea of why people didn't see things as they currently are. Computer models run sensitivity testing and scenario testing. Sensitivity measures the impact of a single event (e.g. interest rate on housing prices) whereas scenario testing measures the impact of a scenario (e.g. interest rate drop, economy tanks, and credit crisis all at the same time). Both analysis provide good feedback on how things might behave under various circumstances. However, the main problem is that scenario testing can't be accurate in the unknown. Such conditions have never been experienced before, therefore there's no scenario testing that can predict what might happen. It is sometime too hard for a model to account for all the external events that might occur at the same time, therefore it might not be able to model the most extreme/outlier outcomes (read: today's enrvironment).



Finally, I would add that markets overshoot fundamentals (up and down). The bigger the bubble, the more it explodes. Therefore, I wouldn't be surprised if home prices overshoot the fundamentals by a very big margin.



Yeah, I really think things will get worse, much much worse. It will be ugly.

 

[politrix_IHB]

[quote author="Roo" date=1226552403]It will be <strong>fugly</strong>.</blockquote>

 

[IrvineRenter_IHB]

There is a video of Shiller floating around where he discusses the difficulty of economic forecasting in an environment like this. Basically, when the economy is under control, and FED policy can make a difference, economic forecasting does quite well; however when things get out of control, and FED policy is impotent, nobody knows what will happen next. Right now, events are totally out of control.

 

[Shevy_IHB]

It could get much uglier, especially if we keep going the direction we're going with the loan modifications that the banks and legislators are pushing. America is quickly becoming desensitized to its moral obligation and duty to repay debts. In fact, many American?s now feel that they are owed something regardless of their behavior and actions. This moral path could lead to an economic crisis far worse than anything we have seen.



In the movie Cinderella Man Russell Crowe plays James Braddock, a.k.a Cinderella man. This movie is a story about a poor ex-prizefighter during the great depression. Unable to pay his bills struggling to feed and clothe his family he is forced to go on public relief. Driven by love and honor James Braddock returns to the ring to become a legend and a symbol to many American?s during the time, proving that hard work and sacrifice and pay off when he defeats the heavyweight champion. In memorable scene, James Braddock returns to the public assistance office to return the money he was lent when he was down and out.



This brings us to today. A majority of Americans did not lose their homes trying to feed, clothe, and keep their children warm. In fact, of the entire country 6% of homeowners are behind on their mortgage, most of them are losing their homes as a result of irresponsible behavior that has caused many others that did not participate in the irresponsible behavior to lose their jobs, 401k's, and retirements. As Larry Roberts author of The Great Housing Bubble puts it, a majority of American?s are losing their homes because they ?were lured by the free money accumulating as appreciation and took out an additional $400,000 in home equity lines of credit and refinancing and lived the good life. This neighbor was driving around in new cars, taking vacations, buying expensive toys and pretending to be rich,? while others sacrificed, even spent less time with family and friends in order to pay down their mortgage and in hopes of a better future. Now, current legislation endorsed by John McCain, Arnold Schwarzenegger, and others seeks to use the tax dollars of the prudent to pay for the imprudent and worst of all the imprudent are beginning to feel entitled and even proud of the plunders. Furthermore, this legislation leads to others saying why not me and the potential for the number of bad loans to increase exponentially as the banks tell people that they need to quit paying their mortgage to qualify for the modification.





?When the thirteen colonies were still a part of England, Professor Alexander Tyler wrote about the fall of the Athenian republic over two thousand years previous to that time:A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves money from the public treasure. From that moment on the majority always votes for the candidates promising the most money from the public treasury, with the result that a democracy always collapses over loose fiscal policy followed by a dictatorship.The average age of the world's great civilizations has been two hundred years. These nations have progressed through the following sequence: from bondage to spiritual faith, from spiritual faith to great courage, from courage to liberty, from liberty to abundance, from abundance to selfishness, from selfishness to complacency from complacency to apathy, from apathy to dependency, from dependency back to bondage.?1



I write more about this on my blog at:http://orangecountycaliforniarealestate.blogspot.com/