Today I'm at the 2008 Luxury Summit in Beverly Hills, a large event where experts will talk about the good, the bad, and the really ugly trends at the high end of the market. I'll blog what I learn, especially as it relates to public companies like Tiffany and LVMH (which trades in Europe).
Meantime, I want to talk about a guy named Chris Thornberg. As Ben Bernanke suggests this morning that interest rate cuts don't help a homeowner who's underwater in a mortgage, that perhaps lenders should instead write down the PRINCIPAL--as much as 50 percent!--Thornberg jokes he's on a "victory tour."
"We got a major real estate bubble," Thornberg said. "We got consumers due for some major retrenchment, we have a falling dollar, making U.S. assets look that much less desirable, a massive trade deficit."
He said that in December 2004.
For years, Thornberg gave his outlook as part of the UCLA Anderson Forecast, predicting the housing boom was about to bust. He was early. If you'd sold when he first suggested getting out, you would have lost quite a bit of equity gains. On the other hand, your home is probably now back down to what it was worth when Thornberg suggested getting out...
Last week, at the annual forecast dinner for the CFA Society of San Diego, Thornberg gave his current forecast. Folks, keep the Tums handy.
Thornberg, now with Beacon Economics, says the worst is yet to come. With the peak of loan resets coming in the third quarter this year, this is "the year of the walk-away." When I asked him if a lot of lenders may end up not resetting, he said, "It doesn't matter."
Thornberg says we are entering a recession and it's "hard to believe" anyone would say otherwise. Unlike the recession of 2001, consumer spending is now slowing after a 16-year run. As consumer spending slows, business spending will follow. In housing, we should have seen this coming. He claims that between 2004-2006, .75 new homes were built per new adult, while .6 is the norm. He says for the past two years, four million new units were built, while there were only two million new families.
He predicts we will see a 35 percent decline in home values from the peak, and a third of that has already occurred. He predicts a 2 percent decline in GDP this year, with only minimal help from the tax rebate stimulus package. One of his favorite new made-up words is "Intaxication," which means "the euphoria of getting a tax refund which evaporates once you realize it was your money to begin with."
Thornberg also cautions investors from listening too closely to Wall Street. "They. Don't. Care." He says Wall Street works solely for December 31st and the bonus that comes with the end of the year. "Three good bonuses and they're out of there." OUCH!
As for being too early to call the housing bust, Thornberg quips, "Trying to predict when a bubble is going to burst is like trying to predict what a crazy person is going to say next. If I knew that, he wouldn't be crazy."
So, when do things get better. Ever? "The good news about the recession is they do eventually end," he says. He thinks the economy will start to improve at the beginning of 2009, and that housing will bottom by the end of 2009 into the beginning of 2010. Regionally, though, it will be tougher in some spots. When an audience member asked whether to sell a couple of condos in Florida or wait it out, Thornberg said, "Sell. Now." He says the Florida housing market won't improve for eight years. EIGHT YEARS! Where'd I put those Tums.
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