Double Dip Fantasy

Unicorn
Creative Commons License photo credit: eliztesch

Great! Just great. One day after Kris posts her dissertation staking out her position as to why we are likely heading for a double dip in the housing market, China decides to issue the message of slower than anticipated growth. Then my old buddy Paul Krugman (formerly known as a brilliant economist) writes a nationally syndicated article telling the world that we are on the verge of the Third Depression. Negative economic news is bursting out all over.

Wonderful. Kris, how lucky can you get? All of this news sends a “sell” message to all of the global equities markets and down we go. In the same post Kris throws down the gauntlet, daring me to challenge her thesis. She’s probably feeling pretty cocky right now. Except for one thing – She’s wrong, at least partly.

First of all, for there to be a double dip, you must first have a sustained upswing in economy and/or housing market. That has not happened. We are in the 7th inning of an extremely stubborn recession brought on not by the traditional business cycle taking a breather but by, among other things, ten years of artificial demand stimulus (starting around 1998) to the housing market due to the grossly negligent and largely unregulated mortgage industry. Money was being pushed out the door faster than buyers could shove it into seller’s hands. Little or no qualifying, no money down, even 110% loans. Add to that the false premise that every business news media outlet is now blaring by comparing everything today to the “peak” year of housing sales, prices, employment, auto sales, GDP, etc. All of these were false positive peaks due to the millions of bogus mortgages that were issued and the home-based ATM machines.

Why are we now surprised by the result? Is it rocket science that Home Depot and Mor Furniture and UPS are doing less business now? But a double dip? No. We have yet to recover. Another step down? Likely. Semantics? I think not.

We are desperately seeking stabilization and on the trip to this Eden we are experiencing a case of micro management. Look at the stock market volatility. Only because homes are less liquid do we not see it there, too. What we do see are the classic signals of reaching stabilization. In Scripps Ranch (I had to get a keyword in somewhere) there is a statistical flat line market with monthly (or even multi-monthly) trips below and above that line.

Kris, your problem is that you and your similarly thinking minions are all in bed (figuratively only, I hope) with the likes of Case & Shiller. You’ve bought into their fancy, schmancy models that neither you, nor anyone else, really understands. Take this chart explaining their algorithms:

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OK — That’s not their chart. It’s a page from my wife’s electricity usage, the wife who refuses to turn off a light when she leaves the room.  But my point is that Case & Shiller have the best business model in the world. Barnum and Bailey would be envious. Hell, the Macau casino owners would be jealous. Case-Shiller has the brilliant idea to tell us what’s already happened and they actually get paid to do it! Now I don’t know about you, but once the ballgame is over, even I can understand the results and I don’t need a bunch of serious looking men in suits to tell me about it.  Be careful if you see these guys driving down the interstate; all they are paying attention to is the rear view mirror.

There is no double dip coming to San Diego since neither the housing market nor the economy in general has recovered enough to form a recent peak. Look at your own bar chart, Kris. It clearly shows a straight line decline. It’s so obvious that even Case & Shiller would feel guilty charging bucks to tell us that. Your problem, along with your buddies C&S, is that you aren’t looking forward. Let me enlighten you.

In San Diego population continues to grow. Increased population creates more demand for goods and services, albeit at a slow pace at the moment. Meeting this increasing demand requires people, materials, manufacturing, capital equipment, technology, and the like. The main reason the economy remains in the toilet is attitude. The psychology sucks right now. Consumers, 70% of the US economy, are not confident so they are hoarding money instead of spending it.

By the way, the monthly University of Michigan Consumer Sentiment Index is no better than Case-Shiller. Do they really think we need to know how people feel every month? Please!! They actually get paid to tell me what I already know. I swear, I’m in the wrong business. But I digress.

As the demand grows for goods and services, the longer people hoard their money, the greater the ultimate demand will be. Just like the artificially formed housing bubble, we are now experiencing the building of a latent demand bubble , a demand that is growing and will eventually burst and need to be satisfied. Just because people want to hang on to their bucks right now doesn’t mean that their washer and dryer isn’t getting older and wearing out or that their car now has over 150,000 miles and needs replacement or that they are having their third child and are desperate to get out of the 1-bedroom apartment.

At some point, things are going to break and the longer everyone waits the greater the ultimate demand will be. We are treading water now, but we are not going under. Add to that the fact that growing latent demand from productivity (efficiencies obtained through technology and best management practices for my Gringo friends) has shot through the roof over the past two years, meaning that management is squeezing the few remaining workers in this country about 20% beyond their capacity. In the very near future the reality will be that in order to make more money (which is what this is all about), more people will need to be hired. Many more. When that happens, all things will change for the better and the recovery in San Diego will be fortified.

Let us also not forget that, with few exceptions, developable land in San Diego is virtually gone. Our economy is as diverse as it gets for a major city and employment here is starting to grow again. Home prices have dropped dramatically and the affordability index is higher than in decades. So you can buy into the negative media and statistics-in-arrears all you want, but in a place with an average annual temperature of 72 degrees and  300+ days a year of sunshine, plus gorgeous beaches and mountains, we are fast approaching an era of moderate, but long term, prosperity. If Case and Shiller were smart, they would bet on it.

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