Tuesday, August 30, 2011

SPIN RECOVERY

Contributed by Dan Hobbs at the Affinity Homes blog

We’re not talking political spin today; we had enough of that from Washington lately. We’re talking about economic spin.

The analogy is a spin in flight. A plane enters a condition where one wing is ‘flying’ slower than the other, the slow wing loses its ability to generate lift and the plane begins to fall. Physics causes the plane to turn downward and inward, and this further slows the problem wing. It also accelerates the non-problem wing which speeds and tightens the spin. The spin tightens to the point where the plane may no longer have the aerodynamic control and the result is catastrophic. (For inquiring minds, the solution is immediate power back, nose down, full opposite rudder. Don’t forget it! Don’t let the spin go more than three revolutions even in practice! Change your diaper.)

Our housing economic situation has been spinning. The disabled wing -- housing values -- no longer provides support. In fact, values have weakened as the spin tightens. The other wing – mortgage financing -- still has lift but only if it can fly faster; i.e., stiffer credit requirements, greater collateral, tighter bank regulations, etc. Four annual cycles have come and gone, but the fundamentals hold:

Power back – if we think more stimulus will carry the day, think again. Data consistently show the poor multiplier effect of government expenditures, and more losses in Fannie and Freddie won’t put Humpty Dumpty back together. Pulling back the throttle on federal spending will let natural economic forces take over. All good.
Nose down – spins eat altitude; successful recovery occurs before all altitude is eaten. Housing values to date, excluding the disaster areas of Phoenix, Las Vegas, Detroit and Florida, have dropped 10-30%. This is scary but recoverable. Also, the rate of value diminution is declining; i.e., the worst appears to be over. Clear Capital, reported today in Bloomberg, said, “The moderation of the projected price changes generally reflects a flattening market.”
Full opposite rudder – lower housing starts, lower rates of home ownership, private capital nipping at the edges of the securitized mortgage market, investors bottom fishing for rental/ultimate sale (but flipping is not back), bank accommodation (capitulation?) on valuations of REO, etc. All are clawing to stabilize the ship.

The bottom line – hang on; we’re coming out of it.

1 comment:

Modular Home Place said...

Coach,

I love your analogy with a spin, however one element your forgot was spacial disorientation which when a pilot can't tell which way is up. For the longest time the housing industry was high in the clouds.

For many in the building industry they never even knew they were in a spin and continued to do business as usual.

By the way Buddy Holly, Richie Valance and the Big Bopper all were victims of spacial disorientation and a life losing spin.