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Wednesday, 23 February 2011 20:53

In Case You Didn't Get The Memo, The US Is In a Real Estate Depression That Is About To Get Much Worse

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Yes, we are in a balance sheet based, real asset depression. If you take a look at it from an empirical perspective there should be no surprise in this statement, but since most derive their information from the mainstream media media and the sell side of Wall Street (both of whom have a preternatural proclivity for the positive spin) this may come as a bit of a shock to a few. Let's ponder the term "depression" as outlined in Wikipedia with some Reggie edits:

In economics, a depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn recession, which is seen by economists as part of the modern business cycle. than a

Well, we have had a severe downturn in real estate in much of the EU, the middle east, the UK, Japan, and definitely the US. See "The Inevitable Has Finally Been Admitted In Europe: The Macro Experiment Has Ignited Inflation Without Commensurate Growth & Rates Will Spike" for a series of graphs that compare real estate markets in several of these countries.

[Note: The chart below has a typo that was carried over from the Japanese CRE chart, which is down 72%.]

Depression: Considered, by some, a rare and extreme form of recession, a depression is characterized by:

its length (it's been almost 5 years to date)...

by abnormally large increases in unemployment...

Reference Are the Effects of Unemployment About To Shoot Through the Roof?:

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UNEMPLOYMENT INSURANCE DATA FOR REGULAR STATE PROGRAMS

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and falls in the availability of credit— often due to some kind of banking/financial crisis, shrinking output—as buyers dry up and suppliers cut back on production, and investment, large number of bankruptcies—including sovereign debt defaults, significantly reduced amounts of trade and commerce—especially international, as well as highly volatile relative currency value fluctuations—most often due to devaluations. Price deflation, financial crises and bank failures are also common elements of a depression that are not normally a part of a recession.

Referencing:

There is no agreed definition for a depression, though some have been proposed. In the United States the National Bureau of Economic Research^[1] Generally, periods labeled depressions are marked by a substantial and sustained shortfall of the ability to purchase goods relative to the amount that could be produced using current resources and technology (potential output).^[2] Another proposed definition of depression includes two general rules: 1) a decline in real GDP exceeding 10%, or 2) a recession lasting 2 or more years. determines contractions and expansions in the business cycle, but does not declare depressions.

You tell me if these diagrams fit the depiction of the situation described above...

Subscribers, reference the Shadow Inventory Analysis model for what I consider to be the elephant in the room. Go through the whole model, of course, but pay attention to the first chart, "Years to Clear Shadow Inventory Backlog'. That will be the gist of my next post on this topic. Between that, and the inevitable spike in interest rates, if we are in a depression now - what will you call it when we lose another 20% of economic value???