Remember 1989 – 1992? The housing market fell an average of 15%. 747 Savings and Loans went out of business. The unemployment rate in June 1992 was 7.8%. Inflation was over 6%. Does this sound familiar?
What is the saying, those who don’t study history a bound to repeat it?
So, let’s compare to today. The housing market on average is off 15%. It will probably deteriorate a little more. You could also argue that a handful of areas are skewing the results. In particular, CA, NV, FL,MI, OH, and AZ account for most of the foreclosures. But in any case, the current market is down 15% and will probably continue to drop.
I am looking at the prices to start bottoming over the next 6 months and linger. An L curve is what I would be expecting. The market has excess inventory that just need to work its way out and that will take time, just like the 90s.
Analysts are estimating 150 banks are in or going to be in distress. That seems like a large number until we compare it to the 747 S&Ls that went out of business.
Just like the early 1990’s, real estate loans were to blame. RTC noted this was the number one contributing factor to the S&L crisis. Other factors included the high short term interest rates in late 70s and early 90s. Some might also say the deregulation of the industry. I would argue the deregulation allowed more time for the S&Ls to try to get out of the mess by being allowed to take on higher margin products (or riskier investments).
So, what happened? Well, the deposits were insured but the fiduciary did not have enough to cover all of these deposits. So, the fed stepped in to cover the gap ($124 billion).
Now, it is a little different. Banks have to be more capitalized and the insurance premiums that banks pay for that FIDC insurance have gone up. So, your money in the bank is safe. Just make sure you stay within the insurable limits.
Unemployment might go up to 6% in the short term and inflation may hit 5% or a little more. But to add perspective that 1992 saw 7.8% and 6% respectively.
So to summarize, I see this as more of 1989 – 1992. And just proves that these things run in cycles.
Back to the Future
July 15th, 2008 at 02:24 pm
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I agree with the cyclical aspect, but I think it will be far more severe than 89-91. But I don't think it will be Great Depression part 2, like a few of my tinfoil hat friends do.