Graziadio Business Report Blog

Can’t see the above video? Click this link to watch.

In this video interview, David M. Smith, PhD, Associate Dean of Academic Affairs and Associate Professor of Economics at the Graziadio School of Business and Management discusses the impact of the American Reinvestment and Recovery Act so far, the fate of female and older workers in this down economy, and which sectors of the California economy are likely to bounce back. Continue reading ‘The State of the New Economy’

This op-ed first appeared in the Los Angeles Business Journal and is reprinted with their permission.

Dave Smith, PhD

In recent weeks there hasn’t been much data supporting sustained economic stability, much less a recovery. However, it does appear the economy is no longer in a freefall, and we are likely experiencing the depths of this downturn.

Since the start of the recession in December 2007, 6.3 million people have lost their jobs in the United States. Hundreds of thousands more per month are likely to join the ranks of the unemployed for the next several months, and the national jobless rate is expected to reach as high as 10 percent. In California, unemployment hit 11.5 percent in May and will surely peak at more than 12 percent in the coming months. L.A. city’s unemployment rate was even worse at 12.5 percent.

There is little cheer for the currently unemployed, underemployed or those seeking better career prospects. However, looking ahead, there are some breaks forming in the gray cloud hanging over the economy, brightening the outlook for job seekers.

In reviewing a number of sources of information, I believe it is likely that several areas of the economy will lead the way for jobs and economic growth. It also is my opinion that near-term jobs created as an outgrowth of the 2009 American Recovery and Reinvestment Act will not be among them. Here’s how I see it: Continue reading ‘Learning on the Job’

Joseph Lee

First, there’s the obvious reason: It’s the sheer scale. The total value of the US residential market hovers around $20 trillion. There simply isn’t anything close to it (add up all the cars in the US—maybe 250 million—and give each an average value of $10,000 (8+ years median age), and you only get about $2.5 trillion). The home is the single largest purchase any American will make in his/her life time.

But the reason residential real estate (and real estate in general) drives people crazy is for the less obvious reasons.

Unlike other products in the market, real estate is impacted much more severely by supply (than demand). Why? Because it is immovable.

Once real estate—residential, commercial, hotel, or retail—is placed in service, it cannot be packed up and moved to a different location if the “market isn’t there.” It must sit, wait, and perhaps be repackaged, but it will never be relocated.

In the 1980s, when I ran hotel market studies, we measured demand by counting occupied room nights. But that was simply a measure of how filled the hotels were. Imagine if McDonalds measured its own performance based on how many hamburgers were sold out of the ones they made.

Every day, they make the same billion, and every day, a different number is sold. A lot of waste, isn’t it? That’s real estate.

Continue reading ‘Why Real Estate Matters’

Economic forecasting is never an easy task but admittedly this year is harder than usual. The deep financial and social dislocations we suffered in the last 12 months have set in motion dynamics we hardly understand in their full ramifications. Most forecasts seem to point to a difficult first half followed by a solid recovery in the second half of 2009.

Perhaps…

On January 3rd, Prof. Rogoff of Harvard University and Prof. Carmen Reinhart of the University of Maryland presented a new study at the American Economic Association Annual Meeting in San Francisco that illustrates the aftermath of the most significant financial crises in history in developed and emerging economies. The results of such study can help us shape our mind on what to expect in the next 12 months.

Examining the fallout from major financial crises in developed and emerging markets, Rogoff and Reinhart found strikingly similar post-crisis developments. For example, after a financial crisis, the cumulative decline in real estate prices from peak to trough averaged 35.5% and the duration of the decline averaged six years, the study showed.

But what does that tell us about the current situation in the U.S.?

As of December 2008, the real estate price decline in the U.S., as measured by the Case-Shiller index, is 28%–but only two years in duration.

Continue reading ‘U.S. Economic Recovery May Not Be So Soon in Coming’

Intelligent people, including my wife, have been asking me questions about the subprime mortgage crisis. The point that seems to stump them is why a relatively small percentage of subprime mortgage defaults has led to a spiraling national credit crisis, how it happened, and where do we go from here. They were good questions, and if you are wondering the same thing, read on…

So what’s the deal with the subprime mortgage meltdown?

Well, imagine that the markets involved are analogous to a house with three stories. Each of the floors represent an industry related to the housing market and each of the upper stories are dependent on the one right below it.

The first floor represents the primary mortgage market (homeowners and their banks or mortgage lenders)

The second level represents the secondary mortgage market (where government-enabled agencies and private lenders by bundled bank mortgages)

The third represents the credit derivatives market (where securities created in the secondary mortgage market are pooled again with other debts and with various risk preferences)

The primary mortgage market is huge, but the second and third levels are just as huge. It makes for a pretty big meltdown when it all starts to unravel.

Continue reading ‘Why Did Subprime Loans Become Such a Big Deal?’

This is a guest post by Peggy Crawford, PhD, Professor of Finance, and Terry Young, PhD, Professor of Economics

The housing saga continues. The hope of “owning a piece of the American dream” is becoming a nightmare for some home buyers. While optimists argue that the “worst” is over as they cling to any sign of positive news, such as the slight upturn in sales of existing homes in February, others call for the government to come to our rescue and save homeowners by declaring a moratorium on foreclosures or “encouraging” financial institutions to renegotiate loan terms. Meanwhile, the Federal Reserve continues to cut interest rates (sometimes dramatically) hoping to ease the pain for some as interest rates reset on their mortgages and to spur activity in the sagging economy.

Have housing prices stopped plummeting? The experts disagree, but Business Week states that home prices could decline by another 25 percent over the next 2 or 3 years, returning the values to their 2000 levels in inflation-adjusted terms.

What can we expect? Like any market, the housing market is based on economic fundamentals of demand and supply. In general, housing prices are inversely related to interest rates. Now, both interest rates and housing prices are falling at the same time.

So, why aren’t sales increasing? Things have changed.

First, lenders are scrutinizing borrowers more carefully. No/low down payments are disappearing and no documented income is a thing of the past—at least for the time being. And second, potential buyers hear the news and are waiting for prices to fall further. On the other hand, some potential sellers are still in denial that the value of their property is decreasing not increasing.

Continue reading ‘Dream to Nightmare: Who Should Pay for the Housing Disaster?’