Bruin Turned Bear: Thornberg Sees “Crazy Credit” and “Sheer Stupidity”

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Free and clear of the UCLA Anderson Forecast (which sees ‘no recession imminent’), economist Christopher Thornberg is now predicting the hardest of hard landings for California real estate: a housing-induced recession. He laughs at the notion that the subprime mortgage meltdown is to blame for continued weakness in the housing market. ‘That’s ridiculous -- subprime credit CREATED this bubble,’ Thorberg told LA Land this afternoon. ‘How could prices get so high in relation to income? Prices can only get this high when people have available to them ‘crazy credit.’ It allows them to gamble. It’s crazy credit!’ The foreclosure crisis now surfacing in the Inland Empire and the Antelope Valley will make its way to the San Fernando Valley and South Central LA, he says. ‘Absolutely. There’s no doubt about it. It isn’t going to hit Beverly Hills, it isn’t going to hit Bel Air, it probably isn’t even going to hit the Westside. But any place where you have a lot of first-time buyers, this is going to come home to roost.’ Overall, he sees two more economic shocks coming on top of the subprime mortgage crisis. ‘There’s two other shoes to drop,’ predicted Thornberg, now with the consulting firm Beacon Economics. ‘First, this mortgage problem has not played out.’ He noted that investors continue to price mortgages as if the housing market will stablize, not deteriorate. ‘There is still an astonishing amount of either sheer stupidity or head-in-the-sand mentality when it comes to these mortgages. There’s a shockingly low amount of risk being placed on these assets.’ Shoe number two (number three, actually -- the subprime meltdown was the first): Consumers. ‘The money they’ve been spending is money they’ve yanked out of their homes. This is one of those weird little vicious cycles. Prices are going down, and the consumer is eventually going to say, ‘Holy crap, I’ve got to pull back on spending.’’ ‘You have an entire U.S. economy right now that’s completely driven by consumer spending,’ he told me. ‘And consumer spending is driven by the housing market.’ Cheerful, huh? Thoughts, analysis, rebuttals? Use the comment button.