housing supply

More Chicago-Area Homes Underwater Last Quarter

Back when I was running “The Most Hated Blog On Wall Street” I used to talk with increasing regularity about the “underwater people”- Americans who owed more on their mortgages than their homes were worth. According to online home and real estate marketplace Zillow, their ranks are now thinning out. At least in certain parts of the country. Cory Hopkins reported on the Zillow Blog yesterday:

Almost 2 million American homeowners were freed from negative equity in 2012, and the overall percentage of all homeowners with a mortgage in negative equity fell to 27.5 percent at the end of the fourth quarter, according to Zillow’s fourth quarter Negative Equity Report.

The falling negative equity rate is good news for struggling homeowners and is largely attributable to a 5.9 percent bump in home values nationwide last year to a median Zillow Home Value Index of $157,400 (when home values rise, negative equity falls). At the end of 2011, 31.1 percent of homeowners with a mortgage were underwater, or more than 15.7 million people…

Still, despite more than 1.9 million homeowners nationwide finding their way back above water last year, 13.8 million American homeowners are still struggling with negative equity.

Here in the Chicagoland region, there’s still plenty of “underwater people” around. Francine Knowles reported on the Chicago Sun-Times website early this morning:

Nearly 37 percent of homeowners with mortgages in the Chicago area had negative equity in the fourth quarter of 2012, edging up from the third quarter, according to a new report that forecasts conditions will be worse by the end of the year… That was up from 36.6 percent in the third quarter, but down from 39.2 percent in the fourth quarter of 2011.

The Seattle, Washington-based company predicts falling home prices for the “Windy City.” Knowles added:

Zillow expects the percent of homes with negative equity will rise to 37.3 by the end of this year.

“Our forecast shows that Chicago’s negative equity rate is expected to rise because home values are expected to decrease by 0.6 percent” in the metropolitan area in December 2013, Zillow senior economist Svenja Gudell said in an email.

(Editor’s note: Italics added for emphasis)

I’ve been reading/hearing about a Chicago-area housing market recovery in the local media outlets with more frequency these days. Sure, sales are up. But prices have been going down. Plus there’s a whole bunch of foreclosures in the pipeline.

A recovery? I’ll believe it when I see it. And let you know when that happens.

UPDATE: This afternoon the Chicago media is running stories about a February 21 Illinois Association of REALTORS press release which might be interpreted as showing the Chicago-area housing market is experiencing a solid recovery. The problem is, January 2013 home sales and median prices are being compared to just one month (“year-over-year”)- January 2012. Instead, consider what the REALTORS wrote on January 22 about the nine-county Chicago Primary Metropolitan Statistical Area (PMSA) over 12 months (January through December 2012):

Year-end 2012 home sales totaled 90,365, up 26.7 percent from 71,315 homes sold in the region in 2011… The year-end 2012 median price reached $160,000, down -1.5 percent from $162,500 in 2011.

(Editor’s note: Italics added for emphasis)

Like I said before: Sales up. Prices down.

Analyze year-end totals for home sales and median prices, and a clearer picture emerges of how healthy the Chicago-area housing market really is.

Or isn’t.

By Christopher E. Hill, Editor
Survival And Prosperity (www.survivalandprosperity.com)


Hopkins, Cory. “2 Million Homeowners Freed From Negative Equity in 2012; 1 Million More to Come in 2013.” Zillow Blog. 20 Feb. 2013. (http://www.zillowblog.com/2013-02-20/2-million-homeowners-freed-from-negative-equity-in-2012-1-million-more-to-come-in-2013/). 21 Feb 2013.

Knowles, Francine. “More Chicago homes underwater in last 3 months of 2012.” Chicago Sun-Times. 21 Feb. 2013. (http://www.suntimes.com/business/18361768-420/more-chicago-homes-underwater-in-last-3-months-of-2012.html). 21 Feb. 2013.

“Home sales, median prices increase in January; housing gains extend into new year.” Illinois Association of REALTORS. 21 Feb. 2013. (http://www.illinoisrealtor.org/node/3203). 21 Feb. 2013.

“Illinois sees home sales increase in December; 2012 notches 22.9 percent sales gain over 2011.” Illinois Association of REALTORS. 22 Jan. 2013. (http://www.illinoisrealtor.org/node/3182). 21 Feb. 2013.

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Thursday, February 21st, 2013 Housing, Main Street, Mainstream Media, Recovery No Comments

Crain’s On Chicago-Area Housing Market

Last night I read a good opinion piece about the Chicago-area housing market on the Crain’s Chicago Business website. Three “experts” shared their outlooks on residential real estate for the year ahead:

• Geoff Smith, Executive Director, Institute for Housing Studies at DePaul University in Chicago.
• Jennifer Alter Warden, President, Baird & Warner Residential Sales in Chicago
• Joseph L. Pagliari, Clinical Professor of Real Estate at the University of Chicago’s Booth School of Business

I wonder if any of these “experts” spotted the recent U.S. housing crash? As an early observer of that event, it’s been my experience that most people didn’t.

So, what made this Crain’s piece so “good?”

Unlike other Chicagoland real estate articles I’ve read recently, this one actually discussed the “large foreclosure pipeline” (Smith) and the “declining financial health of the city, county, and state” (Pagliari) as it relates to the local housing market and home prices.

No mention of the impact of incompetent political leadership, but one could make the case that it’s related to that bit about “declining financial health.”

A worthy read, which is located on the Crain’s website here.

By Christopher E. Hill, Editor
Survival And Prosperity (www.survivalandprosperity.com)

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Wednesday, February 20th, 2013 Debt Crisis, Government, Housing No Comments

S&P/Case-Shiller: Chicago-Area Home Prices Fall For Third Straight Month

There’s good and bad news with the latest S&P/Case-Shiller home price data for the Chicago-area housing market.

The good news? In November 2012, Chicago-area home prices were up 0.8 percent year-over-year.

And the bad? Prices fell for the third straight month. From ChicagoRealEstateDaily.com (a Crain’s Chicago Business enterprise) this morning:

A closely watched index of Chicago-area home prices fell again in November, its third straight drop and the biggest decline among a 20-city index.

The S&P/Case-Shiller index of Chicago-area single-family home prices fell 1.3 percent from October to November after dropping 1.6 percent from September to October and 0.6 percent from August to September, according to a report released this morning.

For the second straight month, Chicago posted the biggest decline in a 20-city index where prices fell.

(Editor’s note: Italics added for emphasis)

A week ago, the Illinois Association of Realtors released housing data for all of 2012. Mary Ellen Podmolik reported in Sunday’s Chicago Tribune:

On Tuesday, the Illinois Association of Realtors reported that home sales in the nine-county Chicago area rose almost 27 percent in 2012 from 2011. The inventory of available area homes in December plunged 37 percent from its year-ago comparison, which has led to multiple-offer scenarios and quicker marketing times. Still, the annualized median price slipped 1.5 percent from 2011.

Those pesky home prices…

By Christopher E. Hill, Editor
Survival And Prosperity (www.survivalandprosperity.com)


“Chicago-area home prices fall for third straight month.” ChicagoRealEstateDaily.com. 29 Jan. 2013. (http://www.chicagorealestatedaily.com/article/20130129/CRED0701/130129771/chicago-area-home-prices-fall-for-third-straight-month). 29 Jan. 2013.

Podmolik, Mary Ellen. “Realtors’ dose of optimism tinged with reality.” Chicago Tribune. 25 Jan. 2013. (http://articles.chicagotribune.com/2013-01-25/classified/ct-mre-0127-podmolik-homefront-20130125_1_mabel-guzman-median-price-realtors). 29 Jan. 2013.

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Tuesday, January 29th, 2013 Housing, Main Street No Comments

S&P/Case-Shiller: Chicago-Area Home Prices Decline Again

Data through October 2012 from the Standard & Poor’s/Case-Shiller home price indices paints a not-too-pretty picture for Chicago-area residential real estate. Sandra Guy wrote on the Chicago Sun-Times website yesterday:

The Chicago-area housing market continued to lag national numbers, posting the largest non-seasonally adjusted single-home price decline — 1.5 percent from September to October and 1.3 percent year-over-year — of 20 major cities in the Standard & Poor’s/Case-Shiller national home price index released Wednesday.

Of the 20 cities, 12 saw housing prices drop.

(Editor’s note: Italics added for emphasis)

Recent rising prices have led to claims the U.S. housing market is in recovery-mode.

However, doubts remain. AnnaMaria Andriotis reported on the MarketWatch website on December 20:

But experts say that spike is largely due to the limited number of homes on the market. There were about two million existing homes available for sale at the end of November, which equates to the lowest housing supply since September 2005, according to the NAR. With fewer homes to choose from, buyers intent on purchasing a property are more inclined to offer a higher price or engage in bidding wars, housing analysts say, which ultimately drives prices up.

The problem is this limited inventory underscores a weakness in the housing market: Many sellers have resisted putting their home up for sale, out of concern that it will sell for far less than they paid for it, says Jack McCabe, an independent housing analyst in Deerfield Beach, Fla. That’s set off a domino effect. Because they’ve held off, supply has remained limited, in turn pushing prices up. “Prices have gone up in the last year because of this temporary, artificial market,” he says…

Separately, in some neighborhoods, median or average sales prices are rising because the mix of homes selling has been shifting toward higher-end, more expensive properties — not necessarily because the value of the typical home is rising, says Jed Kolko, chief economist at Trulia.com, a real-estate listing site. Sales of existing single-family homes priced at $1 million or more increased 52% in November from a year ago, a trend that’s been in play for most of the year, according to the NAR.

(Editor’s note: Italics added for emphasis)

More later on these doubts…

By Christopher E. Hill, Editor
Survival And Prosperity (http://www.survivalandprosperity.com)


Guy, Sandra. “Chicago-area home prices see steepest drop nationwide: report.” Chicago Sun-Times. 26 Dec. 2012. (http://www.suntimes.com/business/17230482-420/chicago-area-home-prices-see-steepest-drop-nationwide-report.html). 27 Dec. 2012.

Andriotis, AnnaMaria. “The real meaning of rising home prices.” MarketWatch. 20 Dec. 2012. (http://www.marketwatch.com/story/the-real-meaning-of-rising-home-prices-2012-12-20). 27 Dec. 2012.

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Thursday, December 27th, 2012 Housing, Recovery No Comments

Illinois Foreclosures Up 9 Percent Year-Over-Year

“Real estate is going UP!” That’s what one of my family members recently roared at me when I suggested that the Chicago-area housing market was still a mess.

Did I happen to mention this individual also serves as one of my “reverse indicators?”

Anyway, not only are Chicagoland home prices down year-over-year (which I talked about here), but foreclosures too- more so around the state than around the Windy City. From the November 2012 U.S. Foreclosure Market Report from real estate information company and Survival And Prosperity advertising partner RealtyTrac Tuesday:

Florida posted the nation’s highest state foreclosure rate for the third month in a row, with one in every 304 housing units with a foreclosure filing in November, followed by Nevada, Illinois, California and South Carolina…

One in every 392 Illinois housing units had a foreclosure filing in November, the nation’s third highest state foreclosure rate. A total of 13,520 Illinois properties had a foreclosure filing during the month, down 9 percent from the previous month to a seven-month low, but still up 9 percent from November 2011 — the 11th straight month where Illinois foreclosure activity has increased on a year-over-year basis.

(Editor’s note: Italics added for emphasis)


As for the Chicago metropolitan area, the Irvine, California-based company said on its website:

Florida and California metro areas accounted for 16 of the top 20 highest metro foreclosure rates. Other cities with foreclosure rates in the top 20 were Rockford, Ill., at No. 11 (one in 290 housing units with a foreclosure filing); Chicago at No. 13 (one in 306 housing units); Las Vegas at No. 16 (one in 336 housing units); and Dayton, Ohio, at No. 18 (one in 338 housing units).

(Editor’s note: Italics added for emphasis)

Chicago Tribune real estate reporter Mart Ellen Podmolik chimed in this morning on the Chicago newspaper’s website:

In the Chicago-area counties of Cook, DuPage, Kane, Kendall, Lake and Will, almost 11,000 homes received a foreclosure notice in November, a decrease of 10.5 percent from October’s level of activity but up 1.6 percent from November 2011.

Most of that activity was in Cook County, where about 2,299 homes received initial notices of default, another 2,651 homes were scheduled for court-ordered sales and 2,086 homes were repossessed by lenders.

(Editor’s note: Italics added for emphasis)

I’ll have to see if I can’t find data on the local housing supply. Lots of for sale signs up on front lawns around the area…

You can read the Realty Trac report on their website here.


Podmolik, Mary Ellen. “Illinois foreclosures rise for 11th month.” Chicago Tribune. 13 Dec. 2012. (http://www.chicagotribune.com/business/breaking/chi-illinois-foreclosures-rise-for-11th-month-20121213,0,6683119.story). 13 Dec. 2012.

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Thursday, December 13th, 2012 Housing No Comments

Report: Chicago-Area Foreclosures Jump 34 Percent From A Year Ago

The housing Pollyannas are out in full force these days in the Chicago metropolitan area. The thing is, there no shortage of bad news still out there for my local residential real estate market. From the home foreclosure tracking firm (and advertising partner of Survival And Prosperity) Realty Trac this morning:

RealtyTrac (www.realtytrac.com), the leading online marketplace for foreclosure properties, today released its Q3 2012 Metropolitan Foreclosure Market Report, which shows third quarter foreclosure activity decreased from a year ago in 131 out of the nation’s 212 (62 percent) metropolitan areas with a population of 200,000 or more. Third quarter foreclosure activity decreased from the previous quarter in 134 of the metro areas tracked in the report (63 percent).

Foreclosure activity decreased annually in 12 out of the nation’s 20 largest metro areas, led by San Francisco (36 percent), Detroit (31 percent), Los Angeles (29 percent), Phoenix (27 percent) and San Diego (26 percent).

The biggest annual increases in foreclosure activity among the nation’s 20 largest metro areas were in New York (69 percent), Tampa (43 percent), Philadelphia (34 percent), Chicago (34 percent), and Seattle (20 percent).

(Editor’s note: Italics added for emphasis)

Chicago-area foreclosures last quarter increased 34 percent when compared to the same time in 2011.

And according to the Irvine, California-based company, the Chicago metro-area foreclosure rate is 1 in 98 housing units.

Only the Riverside-San Bernardino metro area in Southern California registered a higher foreclosure rate (1 in 73 units) among the nation’s 20 largest metropolitan areas in the third quarter.

Considering the likely effect of all these foreclosures being added to the local housing supply, I think it’s safe to say it will be a while before the Chicagoland housing market really gets back on its feet.

You can read the entire report on the Realty Trac website here.

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Thursday, October 25th, 2012 Housing No Comments

Seen On The Streets, Part 1

Real Estate “For Sale” Signs Going Up. Lots Of Them.

There’s more talk recently of a housing recovery being “right around the corner” due to shrinking inventory. A number of media outlets have discussed the decreasing number of existing homes on the market lately. For example, Nick Timiraos wrote in the Wall Street Journal’s Developments blog back on January 19:

“Housing Inventory Ends Year Down 22%”

There were fewer homes listed for sale at the end of 2011 than in any of the previous four years, a positive sign for the housing sector…

The 1.89 million homes on the market at the end of December represented a 6% decline from November and a 22.3% decline from one year ago, according to data compiled by Realtor.com.

I can’t speak for the rest of the country, but based on what I’ve seen around the Chicagoland area the past several days, inventory levels might be rising shortly. Driving back and forth between Chicago and the western suburbs I’ve noticed an awful lot of “for sale” signs going up in front lawns- more so than what you’d typically expect for the spring selling season. Stately homes, shacks, condos, you name it, and quite a few signs are out. On the opposite end of the spectrum, I’ve seen only two “for rent” signs, both in my neighborhood, which has a lot of multi-family buildings. While Craigslist usually returns a good number of properties for rent around where I live, a quick search revealed only seven available going back to the oldest entry on February 24. Plenty of condominium units up and down my street for sale though. Hmm. I wonder if unwilling landlords aren’t thinking this is the year for finally unloading that ill-timed attempt at a “flip?”

Those who point to improving inventory data as evidence a housing recovery is near might be underestimating what I may be witnessing, which is, quite a few sellers who pulled their properties off the market some time ago to wait for better conditions could be charging back in, emboldened by each bit of good housing news they’ve heard lately. However, more properties placed on the market leads to increased supply, which could keep depressing home prices.


Timiraos, Nick. “Housing Inventory Ends Year Down 22%.” Wall Street Journal. 19 Jan. 2012. (http://blogs.wsj.com/developments/2012/01/19/housing-inventory-ends-year-down-22/). 2 Mar. 2012.

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Friday, March 2nd, 2012 Housing, Seen On The Streets No Comments

Housing Is Back!

Every few days, I see it snuck in somewhere on various mainstream media websites:

Housing is back

Doubtful. A number of housing experts point out that for residential real estate to achieve a sustained recovery in this country, substantial progress has to be made in reducing the glut of properties languishing on the market. The National Association of Realtors reported on August 18:

Total housing inventory at the end of July fell 1.7 percent to 3.65 million existing homes available for sale, which represents a 9.4-month supply at the current sales pace, up from a 9.2-month supply in June.

And don’t forget about the “shadow inventory,” or looming foreclosures that are expected to hit the market. Reuters’ Leah Schnurr wrote yesterday:

“There are probably about 3.5 million loans that should be in foreclosure but aren’t yet, and we’re going to have to work through that inventory before the housing market can come back,” said [RealtyTrac senior vice president Rick] Sharga. “This is a painful but necessary first step to get the housing market back on a more even keel.”

After foreclosure activity slowed down for a period of time, the banks appear to be back in the saddle again. The Chicago Tribune’s Mary Ellen Podmolik wrote yesterday:

Notices of mortgage default, the first step in the home foreclosure process, jumped 25 percent in Illinois last month, putting the threat of additional strain on local housing markets.

In August, 7,264 Illinois households received default notices in August, compared to 5,786 households that had foreclosure proceedings started against them by lenders in July, RealtyTrac reported Thursday. It was the most default notices filed against Illinois homeowners since March.

Illinois’ heightened activity mirrors a national trend. Across the country, 78,880 U.S. properties received a default notice in August, a nine-month high and a 33 percent increase from July…

States where default notices rose more than 40 percent from July included New Jersey, Indiana and California.

Based on inventory alone, it sounds like a sustained housing recovery in the United States is still a ways off.


“Existing-Home Sales Down in July but Up Strongly From a Year Ago.” National Association of Realtors. 18 Aug. 2011. (http://www.realtor.org/press_room/news_releases/2011/08/july_ehs). 16 Sep. 2011.

Schnurr, Leah. “Mortgage default notices jump in August: RealtyTrac.” Reuters. 15 Sep. 2011. (http://www.reuters.com/article/2011/09/15/us-usa-economy-realtytrac-idUSTRE78E0OM20110915). 16 Sep. 2011.

Podmolik, Mary Ellen. “Mortgage default notices in Illinois surge 25% in August.” Chicago Tribune. 15 Sep. 2011. (http://www.chicagotribune.com/classified/realestate/foreclosure/chi-mortgage-default-warnings-surged-in-august-20110915,0,421789.story). 16 Sep. 2011.

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Friday, September 16th, 2011 Defaults, Housing No Comments

U.S. Housing Prices To Fall Another 20 Percent?

The rate of new home construction in the United States exceeded analysts’ expectations and rose in June by 14.6 percent to an annualized rate of 629,000 units, the Commerce Department reported Tuesday…

The June rate was the highest monthly housing starts figure since January.

-FOX News website, July 19

Sales of previously owned homes fell in June, defying expectations for even a slight pickup after a lousy spring selling season.

The National Association of Realtors said sales fell 0.8 percent month over month to an annual rate of 4.77 million units, the lowest since November, as cancellations of pending contracts surged. May’s sales were unrevised at a 4.81 million-unit rate…

After six months, sales are on pace to finish behind last year’s 4.91 million homes sold — the weakest sales in 13 years. Sales have fallen in four of the past five years.

-MSNBC website, July 20

Now that the “flurry” of spring home sales has subsided (ha!), I’ve continued my hunt for a permanent residence in southeastern Wisconsin (I still intend to keep a residence in the Chicagoland area as well due to family obligations). A couple of days ago, I noticed some significant price reductions among a number of homes for sale in the town I’ve been frequenting since 1984 and would like to buy property in. Seeing that residential real estate is on my mind these days, I decided a post about the outlook for U.S. housing is called for.

Recently, I’ve noticed a couple of headlines in the financial media that mentioned “crash prophet” Gary Shilling and a recent housing call he made. Back on April 15, I talked about Shilling, who is the founder and president of A. Gary Shilling & Co., Inc., an economic consulting company he founded back in 1978. The publisher of the monthly newsletter INSIGHT is known for making numerous correct market calls. In fact, Shilling not only successfully predicted the 2008 financial crisis- but he identified a primary catalyst for it as well. Back on June 14, 2007, I wrote in one of my old blogs:

And what will trigger the meltdown? According to Farrell, Shilling still sees the subprime debacle as the catalyst.

Shilling wrote in The Christian Science Monitor on April 5 that a further fall in housing prices could drag the United States back into recession. These days, he fears this scenario could be playing out right before our eyes. The author of the recently-released The Age of Deleveraging appeared on Yahoo! Finance’s The Daily Ticker show on July 13 and responded to statements he made in the July issue of his newsletter. From the Ticker’s Peter Gorenstein that day:

“Economic growth here and abroad is slipping, making a 2012 recession a distinct possibility,” he writes in his July newsletter. And, “when you have slow growth it doesn’t take much of a shock to throw you in negative territory.”

Shilling says the shock to trigger the next recession is “another big leg-down in housing.”

(Editor’s note: Italics added for emphasis)

Here’s what Shilling had to say about residential real estate:

It’s probably going to be another big leg down in housing. The problem that is there’s just too many excess inventories there. We estimate that there are two to two-and-a-half million excess housing unit inventories over and above the normal working levels. And that’s a lot. We normally build about a million-and-a-half houses a year. Getting rid of those excess inventories, if you look at what’s happening in terms of household formation and new housing being built, it’ll probably take four or five years, and that’s plenty of time for this excess inventory to depress prices. Excess inventories are the mortal enemy of prices. We’re looking for another 20 percent decline in house prices

If we had the 20 percent decline- which would bring us back to the long-term trend, inflation-adjusted, on house prices- if we have that, and I think that’s likely, and markets often overshoot on the downside, by the way, so it may be a conservative estimate. But we have that the percentage of mortgages underwater, by our calculation, would jump from 23 percent now to 40 percent. And at that point, strategic defaulting- in other words, people walking away from houses even if they can afford them if they’re underwater- that would become a favorite cocktail party conversation. “Have you strategically-defaulted?” In other words, it’s a critical mass. I think it would be devastating to consumer spending. Home equity, of those with mortgages, now 19 percent would drop to 8 percent. It would be very difficult for anybody who’s in the mortgage business, the derivatives, the banks holding mortgages…

(Editor’s note: Italics added for emphasis)

Shilling warned Ticker viewers:

This is something I think is going to unfold in the next couple of years. But at what point it would be a shock enough to, in effect, cause a negative economic growth pattern, which is pretty much what you’re talking about with a recession, I think, I think next year looks pretty critical in this whole situation

(Editor’s note: Italics added for emphasis)

“20 percent decline in house prices.” “Mortgages underwater, by our calculation, would jump from 23 percent now to 40 percent.” Not good.

Earlier this month, CNN Money surveyed a number of economists concerning their outlook for U.S. housing prices. Their predictions weren’t too rosy either. From their website on July 7:

Housing prices are likely to keep falling the rest of this year, and probably won’t show much improvement next year either, according to a survey of economists.

A CNNMoney exclusive survey of 27 economists showed the battered housing market is facing myriad problems and won’t turn around anytime soon.

Of the 22 who had specific predictions for the closely watched Case-Shiller home price index, the median forecast was for a 3.9 percent decline in the second quarter compared to a year earlier, and a 2.9 percent drop in prices over the course of the full year.

Only three economists expect prices to rise this year.

The outlook for 2011 is only modestly better — a 2 percent increase in home values, with six of the economists forecasting another drop in prices next year.

[Editor’s notes: Italics added for emphasis. Also, I believe there was a typo in that final sentence. It seems to make more sense were it to read “The outlook for 2012…”]

Stay tuned…


Shilling, A. Gary. “A fragile recovery – and five shocks that threaten it.” The Christian Science Monitor. 5 Apr. 2011. (http://www.csmonitor.com/Business/2011/0405/A-fragile-recovery-and-five-shocks-that-threaten-it). 15 Apr. 2011.

Gorenstein, Peter. “20% Drop in Housing to Cause Recession in 2012, Says Gary Shilling.” Yahoo! Finance’s Daily Ticker. 13 July 2011. (http://finance.yahoo.com/blogs/daily-ticker/20-drop-housing-cause-recession-2012-says-gary-161445494.html). 20 July 2011.

“Economists: No rebound this year in housing prices.” CNN Money. 7 July 2011. (http://www.chicagotribune.com/business/breaking/chi-economists-no-rebound-this-year-in-housing-prices-20110707,0,5383577.story). 20 July 2011.

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The Crash Prophets Revisited, Part 1

Last week while I was off on my “spring break,” a series of posts, entitled “The Crash Prophets,” were re-published from my old blog. In the first installment of the three-part series, dated June 14, 2007, I discussed how financial market watchers Peter Bernstein, Richard Bookstaber, Jeremy Grantham, and Gary Shilling were warning of a fast-approaching crisis. Bookstaber, a risk manager and derivatives designer at the time, is now employed by the U.S. Securities and Exchange Commission, and Bernstein, a Wall Street legend, passed away back in June 2009. Grantham and Shilling still ply their trade- and continue to warn that the U.S. economy and markets could be in for a rough ride ahead.

Jeremy Grantham

Jeremy Grantham is a co-founder and former chairman of Grantham, Mayo, Van Otterloo & Co. (GMO), a privately-held global investment firm with $107 billion under management as of December 31, 2010. Currently GMO’s chief investment strategist, Grantham has a special talent for correctly-calling the direction of the markets. For example:

• In 1982, said the U.S. stock market was ripe for a “major rally.” That year was the beginning of the longest bull run ever.
• In 1989, called the top of the Japanese bubble economy
• In 1991, predicted the resurgence of U.S. large cap stocks
• In 2000, correctly called the rallies in U.S. small cap and value stocks
• In January 2000, warned of an impending crash in technology stocks, which took place two months later
• Saw the 2008 global financial crisis coming. In April 2007, said we are now seeing the first worldwide bubble in history covering all asset classes.

Grantham, whose individual clients have included former U.S. Vice President Dick Cheney and former U.S. presidential candidate John Kerry, pens a quarterly investment letter on GMO website. In his January 2011 installment, the British investor warned that U.S. stocks are due for a reversal. He wrote:

Looking Forward

• Be prepared for a strong market and continued outperformance of everything risky.
• But be aware that you are living on borrowed time as a bull; on our data, the market is worth about 910 on the S&P 500, substantially less than current levels, and most risky components are even more overpriced.
• The speed with which you should pull back from the market as it advances into dangerously overpriced territory this year is more of an art than a science, but by October 1 you should probably be thinking much more conservatively.

As I write this, the S&P 500 is at 1,320.

Grantham also talked about the problem of resource scarcity. He added:

For my money, resource problems exacerbated by weather instability will be our biggest and most complicated investment problem for years to come. How should we prepare for it? First, we should all transfer more of our intellectual resources to the problem. Yes, we have already recommended forestry, agricultural land, and “stuff in the ground.” It would be nice to back this up with more detail. To this end, we are starting to look more closely at commodity cycles, both historically and currently. We will report back from time to time.

Grantham wrapped up his quarterly letter with the following comments:

Things that Really Matter in 2011 and Beyond (in one person’s view) for Investments and Real Life

• Resources running out, putting strong but intermittent pressure on commodity prices
• Global warming causing destabilized weather patterns, adding to agricultural price pressures
• Declining American educational standards relative to competitors
• Extraordinary income disparities and a lack of progress of American hourly wages
• Everything else.

A. Gary Shilling

Gary Shilling is the founder and president of A. Gary Shilling & Co., Inc., an economic consulting company he formed in 1978. Shilling publishes the monthly newsletter INSIGHT, is a regular columnist for Forbes magazine, and his articles appear in the Wall Street Journal and the New York Times, among other publications. Shilling also makes frequent appearances on radio and TV business shows. Like Grantham, he is known for his correct calls on the financial markets. From his website:

Dr. Shilling is well known for his forecasting record. In the spring of 1969, he was among the few who correctly saw that a recession would start late in the year. In 1973, he stood almost alone in forecasting that the world was entering a massive inventory-building spree to be followed by the first major worldwide recession since the 1930s. In the late 1970s, when most thought that raging inflation would last forever, he was the first to predict that the changing political mood of the country would lead to an end of severe inflation, as well as to potentially serious financial and economic readjustment problems, and a shift in investment strategy from one favoring tangible assets to an emphasis on stocks and bonds.

The July 5, 1991 edition of The Wall Street Journal stated, “Mr. Shilling was one of the few analysts a year ago to forecast a recession. At that time, he said a recession ‘may already have started,’ a forecast that now looks prophetic.”

The January 22, 1993 edition reviewed the track records of interest rate forecasters polled semiannually by the Journal since 1981 and said, “The economist with by far…the best record in picking when to buy long-term bonds: A. Gary Shilling, who heads an economic consulting firm and manages money. During the 1980s, Mr. Shilling…saw sharply lower interest rates ahead. …investors who bet on his rate forecasts by putting their money in long-term bonds did very well.”

The July 7, 1997 edition stated that “Mr. Shilling…had the best overall forecast” of the economy, interest rates, exchange rates and inflation “among the…57 economists polled in the latest survey.”

The January 2, 2003 edition, in reviewing the forecasts of its poll taken six month earlier, stated, “In June, only one forecaster…Gary Shilling, expected the Fed to cut short-term interest rates in the second half, as it did in November….Only one forecaster, again Mr. Shilling, expected the Dow Jones Industrial Average to finish the year below 9000. Twenty-seven of the 55 saw it finishing the year above 10,000.” (It finished at 8342.)

Twice, a poll of financial institutions conducted by Institutional Investor magazine ranked Dr. Shilling as Wall Street’s top economist. Futures magazine also ranked him the country’s number one Commodity Trading Advisor. And in 2003, MoneySense ranked him as the 3rd best stock market forecaster, right behind Warren Buffett.

Chalk another one up for Shilling as he not only successfully predicted the 2008 financial crisis- but identified a primary catalyst for it. From my June 14, 2007, post:

And what will trigger the meltdown? According to Farrell, Shilling still sees the subprime debacle as the catalyst.

These days, the economist remains more concerned than ever about the U.S. economy. Shilling wrote in The Christian Science Monitor on April 5:

Despite the revival of stocks in the past two years and recent optimistic economic data, the US economy remains so fragile that it could easily be driven into another recession. All it would take would be an outside shock – even a moderate one – and there are several candidates lining up.

Normally, the United States is resilient in the face of such shocks, especially when its economy is recovering. But this is no ordinary recovery. It’s a two-tier phenomenon, with the fortunes of higher-income folks reviving swiftly while the rest of America is stuck in a slow deleveraging of household balance sheets that will take years to accomplish. This partial rebound makes the economy particularly vulnerable.

Shilling thinks that any of the following events could drag the United States back into recession:

• Global supply and demand disruption resulting from the disaster in Japan
• Pull-back in consumer spending due to higher gasoline prices related to Middle East turmoil
• Further fall in housing prices. Shilling wrote:

The third candidate is further decline in US house prices. Sales and prices remain weak, lending standards have tightened, and people are balking at buying big new assets that will be worth less in a year. Furthermore, the massive overhang of house inventories, the mortal enemy of prices, suggests another 20 percent fall in prices, resulting in a 43 percent peak-to-trough decline.

With that additional drop in prices, I estimate that about 40 percent of mortgages will be under water, up from 23 percent in the fourth quarter of 2010. The negative effects on consumer spending and the mortgage market are ominous.

• Decreased demand for commodities from hard landing in China
• “Fresh” sovereign debt crisis in Europe

Time will tell if Jeremy Grantham and Gary Shilling are correct- once again. Next week, the second installment of this three-part series of posts will visit with legendary investors Warren Buffett, Jim Rogers, and George Soros, and see what they think is in store for the United States down the road.

(Editor’s note: Part 2 located here; Part 3 located here)


Grantham, Jeremy. “Pavlov’s Bulls.” GMO.com. Jan. 2011. (http://www.gmo.com/websitecontent/JGLetter_PavlovsBulls_4Q10.pdf). 15 Apr. 2011.

Shilling, A. Gary. “A fragile recovery – and five shocks that threaten it.” The Christian Science Monitor. 5 Apr. 2011. (http://www.csmonitor.com/Business/2011/0405/A-fragile-recovery-and-five-shocks-that-threaten-it). 15 Apr. 2011.

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