Maybe Next Year: Gregor Weekly Macro Note

• Gregor Macdonald
• February 27th, 2010

Neither Ted Williams nor Carl Yastrzemski won a World Series with the Red Sox. In fact, whole generations of Red Sox fans lived, and died, without seeing the Red Sox win a World Series. I thought of these long-cycle disappointments today as I read over the investor newsletter from Warren Buffet. Warren appears to be thinking he’ll see a recovery in the American consumer and in American housing. Maybe. But I don’t think so. I see US residential real estate as a dead asset class for the rest of the decade. The problem is that a US house is no longer a tactical asset that gives one access to a future of high wage growth. But let Buffet think what he will. Despite his company’s historical leverage to the consumer, he has added natural gas, chemicals, and a railroad in recent years in a sign he knows what’s coming.

Still, I’m left wondering more generally why anyone, including Mr. Buffet, thought a recovery in US housing was either already underway, or coming along in 12 months time. There is certainly nothing in the data to suggest any recovery is underway. (And that’s an understatement). But should it really come as a surprise? Fannie Mae continues to bleed. There is no wage growth either in nominal or real terms. And even the FHA, which admittedly goosed the low-end for about 9 months last year, may now turn out to have created little more than a new class of mortgage defaulters, as they were “helped” into low priced homes with 5% downpayments. Perhaps they call them The 2009 Vintage of defaulters.

Meanwhile, the big states like California, Illinois, Florida, and New York are all getting into position to do their part for the “housing recovery.” They are about to release government workers back into the private sector.Yes, in cities from Chicago to Los Angeles a run of 24 months of falling tax revenues has finally met head-on with a state’s inability to print money. For those of you who tune in to my Sunday night MacroTwits show, you will know that I’ve felt for some time that tensions would eventually arise between the growing ranks of the unemployed, and the protected, pensioned, high-salaried workers of cities, counties, and states. It can’t help that the unemployed are still paying a schedule of state and local taxes and fees, while they watch services deteriorate or disappear altogether. I was pleased therefore to see Joe Mysak at Bloomberg/Business Week latch on to this emerging story last week. | see: Banker Bonus Anger is Shifting to Government Workers.

Given the aforementioned, I think it’s not really necessary that I re-hash the recent data on new home sales, existing home sales, foreclosures, rising vacancy rates, falling rents, and the growth of shadow inventory. Nor, do I need to cite the FED’s intention to stop buying MBS towards the end of March, the coming wave of mortgage rate re-sets starting up again later this year, or that mortgage rates ticked back above 5.00% again. Instead, I want to show you a chart…(this article continues for subscribers through the membership gateway, on the right side of this page)

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