Real Estate and the LA Economy: Why the “Aerospace Analogy” Doesn’t Matter

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Friday morning bloviation from your blogger: Those in LA who believe the current housing weakness is just a bump in the economic road often invoke the ‘aerospace analogy’: The last time we had a housing-induced recession, in the early 90s, the main cause was the loss of thousands of aerospace jobs, which forced people to sell their homes, which forced home prices to collapse. The theory continues that, in 2007, the LA economy is more balanced, and there is no big piece of the job market at risk of collapsing, so there will be no army of motivated sellers, and the regional real estate market will hold up.

In military intelligence, this kind of thinking is known as ‘fighting the last war.’ Who says this housing downturn will look anything like the last one? It is quite possible the housing and credit bubble is so big that its collapse alone is the entire story -- kind of like a wildfire so intense that it creates its own weather.

This is why John O’Dell’s piece in today’s Times is worth reading: it traces the weakness in auto sales back to the housing market.

Let us, with O’Dell’s help, count the auto industry’s exposure to the real estate bubble:
--When homeowners used their houses as ATMs and pulled out $1 trillion through refinancing in 2005, they blew a lot of that cash on cars. There is less cash to be pulled out of homes now, which means less money to blow on cars.
--Auto-makers are also in the loan business, and customers who can’t pay their mortgages are quite likely to become customers who can’t pay their car loans either. “I think that some of the weakness in the home mortgage market will bleed out into the auto loan market as people start running late on car payments as they juggle funds to keep their home mortgage payments current,” economist Mark Zandi told O’Dell.
--GM was also in the subprime mortgage business; It is getting out, but it will be hard to replace the quick money it made in recent years by floating subprime loans. And if you haven’t noticed, GM is not an earnings juggernaut.
--Lastly, the home-building and construction industry, in good times, bought a ton of high-margin pickup trucks and SUVs. These are no longer great times for home-building and construction.

Your thoughts? Comments? Insights?