I love this joke, perhaps the only one ever told about economists:
Economists are great, they’ve accurately predicted nine of the past five recessions!
Eh, so I can’t tell a joke so well.
Karl Case, uber-economist (?), professor at Wellesley College, and co-creator of the much-respected and often-quoted S&P Case-Shiller Home Price Indices spoke at the conference (twice).
He’s very entertaining!
Briefly, here’s what I thought was the most interesting and important part of his presentation.
Basically, my interpretation is that he feels the Massachusetts real estate market has stabilized (my words not his), but that, on a national level, things are a bit more murky.
His main point seemed to be that it will take a little time for everyone to figure out what effect the slowdown in the national real estate market will have on our economy.
There are three things affecting the real estate market, right now.
1) Subprime lending crisis – Over the next six years, an estimated $360 billion in loans will enter the foreclosure process, according to Case. “Not a big deal,” he says. (Not sure if this is the number of homes going all the way through to repossession and resale by banks.)
2) The “Wealth Effect” – When people feel wealthy, they spend more money, according to Case. I think we can all agree with that concept. When people thought they had a lot of money, because their homes were suddenly worth a lot more (on paper, at least), they took out home equity loans to pay off their credit card debt (which they then ran up again), go on vacations, and buy fancy new sports cars. Now that they see their equity decrease by the day (on paper, at least), they are worried about their next paychecks. “Not a big deal,” says Case.
3) The biggest question mark, according to Case, is the effect the slowdown in new housing starts will have on the national economy.
Housing starts have varied greatly over the past couple of decades, between 1.5 million and 2.2 million, on an annual basis. Last year, 2006, there were 2.25 million new homes built. This year, it’s estimated that there will only be 1.5 million new homes built.
The “economic effect” of each new home is estimated to be $200,000. This means, how much money is poured into the economy (I guess).
So, in one year, we’ve had $1.5 trillion taken out of the economy. That’s a full drop of 1.5% in GDP. That’s gotta hurt!
My interpretation of Professor Case’s comments is that this is where the trouble lies over the coming months. Whether or not the other parts of our economy can pick up the slack, remains to be seen.
Oh, one other thing.
He told a funny story.
He was talking to a friend one day last year and asked her how things were going.
“Things are terrible! I can’t figure out why my house won’t sell!”
He responded, “You’re an ECONOMIST! What do you mean, you can’t figure out why you’re home won’t sell???!!”
Supply and demand is a mystery to so many of us.