Recession 2008

I'm at the AEA in New Orleans, where I just returned from a session on the subprime mortgage crisis with panelists Bob Schiller, Paul Krugman, Larry White and one other person who I didn't recognize. Three out of four were incredibly pessimistic, and since I have a house on the market (after 9 months, it still hasn't sold), I started to get incredibly discouraged and decided to leave during the Q&A. I looked at the futures on 2008 recession at intrade, and for the first time that I'd seen recently, looks like a 2008 recession is collectively believed to be more likely than not.

One interesting slide that Schiller showed was a 100-year series of real housing price index, which he and Chip Case had constructed using a bunch of different housing prices since 1890. The growth in housing prices was unreal. It's a somewhat volatile price series anyway, but since the late 1990s, housing prices were on an upward climb resembling the start of a roller coaster mountain, and then began to fall. How far they fall is anyone's guess. Priced to market, they appear to need to collectively fall 30% according to one or two of the panelists. But that's heterogenous across the country. Some cities, like Houston and Atlanta, appear to have escaped this bubble, in terms of their asset prices, but some places like San Diego may be over-valued by as much as 50%. I wonder if my house is not moving because it was a first-time home (950 sq feet), and the combinatin of consumer uncertainty and the drying up of credit for marginally higher risk consumers has dried up demand for houses on my block of predominantly African-American owned and rented homes.

On the recession front, Schiller showed another interesting time series that will be interesting to watch - the unemployment rate for the last 80-100 years. The most recent data showed unemployment rates grow from 4.7% to 5.0% in a single month. Five percent is not large, but a growth of three-tenths of a point in a single month is large by historical standards. Schiller claimed that we've never seen growth that much not be followed by a recession. Which may explain intrade future's pricing the event at more like 55% as opposed to last week's 40-45%.

Update: Jim Hamilton also offers some excellent analysis from this week's economic numbers. He shows the unemployment rate spike, plus some other indicators suggesting a slowdown is coming.