Interesting Note by Raymond James

http://www.raymondjames.com/inv_strat.htm

One of the reasons why I think the housing downturn will be worse than 1990-1992 downturn

So why is everyone so worried? Well, in addition to the recent seizing up of the ABCP market, which comprises 50% of the over $2 trillion commercial paper market, this housing cycle looks different than any we have seen. To this point, we have included two charts at the end of this report. We suggest studying them carefully. What you find is that the 1988 – 1992 housing cycle peaked in the first quarter of 1988 (1Q88) followed by a decline in “For Sale Inventories” until the cycle troughs in the 4Q91 (some 15 quarters later, which is typical). Scarily, the current cycle peaked in the 1Q04, yet inventories have continued to rise, hitting an all-time high in 2Q07. And they are still rising! Moreover, in the 1988 – 1992 cycle vacancy rates among single family homes for rent stayed relatively flat. In this cycle they have risen dramatically. How this plays out is anyone’s guess, but clearly somebody is pretty worried.

Which leads me to think they are wrong on this.

As with all bubbles, however, this one too has burst. Nevertheless, we have opined that historically real estate has never pulled the economy into recession since it is an “effect” and not a “cause.” For example, in the early 1970s we moved to Atlanta and considered buying a $200,000 condominium. By 1975 that same condo was selling at bankruptcy auction for under $30,000. What happened? Well the “cause” was a rise in the price of crude oil with a concurrent rise in interest rates. The “effect” was a crash in real estate prices accompanied by a severe recession. Therefore, to think that real estate is going to pull the country into a recession one has to believe real estate has become so entwined in the economic fabric of the country that it has morphed from an “effect” into a “cause.” While we are not there yet, we do believe the odds of a recession have risen.

No, the bubble was so big and the bursting will be as well (Newton's Third Law) that the effect from the bubble burst will be a turn down in the economy. I am risking saying "it is different this time" which are the 5 words put together that I hate the most but bubbles cause things that otherwise would not happen to happen.