Economic Forecasting with Dr. Christopher Thornberg of Beacon Economics Part 1

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Originally from upstate New York, Dr. Thornberg holds a Ph.D in Business Economics from The Anderson School at UCLA, and a B.S. degree in Business Administration from the State University  of New York at Buffalo.

Christopher Thornberg founded Beacon Economics LLC in 2006.  Dr. Thornberg also became  Director of the UC Riverside School of Business Center for Economic Forecasting and Development and an Adjunct Professor at the School.Prior to launching Beacon Economics, Dr. Thornberg was a senior economist with UCLA’s Anderson Forecast. He previously taught in the MBA program at UCLA’s Anderson School, in the Rady School of Business at UC San Diego, and at Thammasat University in Bangkok, Thailand

An expert in economic and revenue forecasting, regional economics, economic policy, and labor and real estate markets, Dr. Thornberg has consulted for private industry, cities, counties, and public agencies in Los Angeles, San Francisco and the Bay Area, San Diego, the Inland Empire, Seattle, Orange County, Sacramento, Nevada, and other geographies across the nation. Dr. Thornberg became nationally known for forecasting the subprime mortgage market crash that began in 2007, and was one of the few economists on record to predict the global economic recession that followed. Well known for his ability to capture and hold audiences, Dr. Thornberg has presented to hundreds of leading business, government, and nonprofit organizations across the globe including Chevron, The New Yorker, Colliers International, the California Chamber of Commerce, City National Bank, the California State Association of Counties, State Farm Insurance, the City of Los Angeles, the California and Nevada Credit Union League, and the  National Steel and Shipbuilding Company, among many others.



Episode Notes:


Narrator  This is The Norris Group’s real estate investor radio show, the award-winning show dedicated to thought leaders shaping the real estate industry and local experts revealing their insider tips to succeed in an ever-changing real estate market hosted by author, investor and hard money lender, Bruce Norris.

Bruce Norris  Hi, Thank you for joining us. My name is Bruce Norris and today our special guest is Christopher Thornberg. Christopher founded Beacon Economics LLC in 2006. Under his leadership, the firm has become one of the most respected research organizations in California serving public and private sector clients across the United States. In 2015, Dr. Thornberg also became director of the UC Riverside School of Business Center for Economic Forecasting and Development, an Adjunct Professor at the school, an expert in economic and revenue forecasting, regional economics, economic policy, and labor and real estate markets. Dr. Thornberg has consulted for private industry, cities, counties and public agencies become nationally known for forecasting the subprime mortgage crash that began in 2007. And was one of the few economists on record to predict the global economic recession that followed. Dr. Thornberg holds a PhD in Business Economics from Anderson school at UCLA and a BS degree in Business Administration, from the State University of New York, Buffalo. Christopher, it’s been a long time Welcome back.

Christopher Thornberg  It has been way too long, Bruce, and thank you very much for having me as always.

Bruce Norris  I’m excited. You know, it’s an interesting, interesting year, you chose to start forecasting economics 2006.

Christopher Thornberg  Well, I was doing it before then remember, I was at UCLA and departed for any number of reasons, not the least of which is a forecast used to forecast said that real estate was fine. And I always say different in opinion. Ergo, I left and presented my forecast, which, which, fortunately, for me, unfortunately, for the global economy came largely true.

Bruce Norris  You know, what’s interesting about predicting, if it’s really a value, it hasn’t happened yet. And so, you know, when you stepped up to the plate and said, what you did, there was the real estate market was very strong. And, you know, what you were looking at was what was likely or inevitable to occur, but had yet to occur? And well, what’s interesting, too, is, and I know you’ve had this comment.

Christopher Thornberg  Yeah.

Bruce Norris  So, two years after the fact somebody says, Yeah, we knew that was all going to crash. I always like to say, ‘well, could I see your document?’

Christopher Thornberg  Yeah. Well, yeah, like, historical revisionism is hardly new or hardly exclusive to my field. So, that I’ll get, I would also say that, you know, my predictions I make are largely based, you know, a lot of, a lot of folks want to sit around and talk about their fancy mathematical model. And I say that the art of forecasting these kinds of events, is really no more complicated than comparing trends to fundamentals. And asking yourself, do the trends, match fundamentals, or the fundamental saying one thing to trends or another, when they’re going in different directions means one of two things, either A. we’re going to a bad place, or B. there’s a hell of a buying opportunity out there. One or the other.

Bruce Norris  Okay.

Christopher Thornberg  Right? But if of course, they match, then the answer is, yeah, so what?

Bruce Norris  Okay.

Christopher Thornberg  So, so that’s, that’s really the quadrants, if you will, that we all have to take a look at. And, and, you know, what’s intriguing about, about your comment about that? Again, we haven’t talked a lot. But I will tell you a year and a half ago, you remember the world started getting very interesting very quickly.

Bruce Norris  Yeah.

Christopher Thornberg  With, of course, the onset of COVID and the beginning of the shutdowns that happened in March and February of last year, and yet again, the economics community and the forecasting community, missed the boat completely. We all heard about the hue, the 10-year scarring of the labor market, Mark Zandi predicted 15% of homeowners are going to default. My former employer was discussing this as a depression like crisis. And yet here we are in really in the beginning of the third quarter, and by my read of the numbers, not only is the recession long, long, long over that was driven by COVID. But the recovery is finished. We’re back on trend. So, we had said initially that this was going to be a rapid business cycle, as tragic as the pandemic has been. The economic consequences of pandemics is not is not what people are saying. And for the most part that has happened. Now I know we’re going to talk a lot about why and and I’m eager to do so. But it does, you know, I like to say that, you know, we’re two for two at this point in time. And we’ll see what happens next time.

Bruce Norris  Okay, um, let it take you to the end of 2019.

Christopher Thornberg  Sure.

Bruce Norris  Because that was an interesting year to me. Because, as you know, following California real estate as I do, we had a really great set of charts that usually set off inflation of real estate prices. We had good affordability, we had reasonably low interest rates, 50 year low unemployment, low foreclosures in the marketplace. usually given that scenario, prices in California can take off double digit and do it for years. And we had nothing like that in 2019.

Christopher Thornberg  Right.

Bruce Norris  Why do you think that didn’t happen with that great set of charts?

Christopher Thornberg  Two reasons. First of all, it wasn’t all that calm, as you suggest. Remember that 2019 was a year where two things were going on both which would pull the market off. But one was, of course, we had to change in tax policy under the Trump Administration that reduced your, your write-offs. And or at least limited them rather than reduce them for most people they reduce them. And that, of course, had a modest chilling effect on the market. And 2019 was also a year of rising interest rates, mortgage rates had come up. Now, both of those things will tend to flatten the market in short term, cool it off a bit. And remember, real estate, residential real estate, always overreact to drivers. There’s the whole feedback effect. when nobody’s buying, you’re not in a rush. When everybody’s buying, you’re in incredible rush. So, you have these modest drivers, that in turn, created the feedback effect and made us off market. And well, again, where we are now is the exact opposite of that, again, let’s come back to that in a second. But the other part of it has to do with where we were as a nation in 2019, I like to point out the, the irony of of what was going on back then, at the beginning of 2019, you know, the, the UCR Center, which I run, we contribute to the Wall Street Journal next recession survey.

Bruce Norris  Okay. Okay.

Christopher Thornberg  So, I kind of track that. And in January of 2019, 80% of economists, so we were about to have a recession 80% of them in the next two years. That’s what they said.  And mind you, ultimately, they were right, we did. Now, at the beginning of 2019. I think we could all acknowledge that while they were predicting a recession, they were talking about COVID. Because COVID didn’t even exist at that point in time, at least in the public mind. They were talking about rising interest rates in real estate yet again, if you remember, there were a lot of folks saying the real estate markets were all I mean, there was a famous article in The New York Times titled ‘Real Estate Is Already In a Recession.’ What does it mean for the rest of the economy? So, people heard that and an intensified that feedback cycle. So, fast forward to the beginning of 2020. And the number of economists to predict or predicting recession in the next two years, went from 80%. In the beginning of 2019, which we completely disagree with, to 8% at the beginning of 2020, which, for us was a victory tour moment, right? Hey, let’s go on the road and talk about how smart we were for the recession. That didn’t happen. And then of course, COVID hits, boom, we’re in a recession.

Bruce Norris  Yeah.

Christopher Thornberg  So, so, it was an interesting turn of events, how things actually shaped up. But again, all that serve to keep real estate very cool in 2019.

Bruce Norris  Let me just circle back about the comment about interest rates rising. So, why did interest rates double between 75 and 87 and a half to 15 and prices tripled during that journey?

Christopher Thornberg  Why do we have inflation to high-interest rates in the late 70s, early 80s?

Bruce Norris  Well, why did the interest rates not cool the real estate market? It did it exploded?

Christopher Thornberg  Um, because interest rates aren’t necessarily the death knell of real estate. Look, if interest rates are something that every real estate investor, just one that has to function into their model, right? You sit down and and you run numbers. And you’re looking at interest rates and you just are and the price you’re willing to pay is a function of that interest rate. In other words, it’s not high interest rates that are bad for the market. It’s the increase in interest rates is bad for the market. Once, once you’re there, once you’ve hit an equilibrium level, once that number has been built into your models, the market can proceed accordingly. So, the key here is, is what did hurt real estate was at the beginning of that trend, when inflation hit and interest rates did start to rise. That’s when real estate cooled off. And that was, of course, during those those big recessions in the early part of the 1980s. Now, we came out of that you’re absolutely right with high interest rates, but real estate had adapted to the new world and could grow accordingly.

Bruce Norris  Okay.

Christopher Thornberg  So, it’s it’s again, it’s not the level it’s the trend….

Bruce Norris  Okay, was that’s to kind of to reiterate, we didn’t have a high interest rate in 2019. We just had a higher interest rate than we were used to.

Christopher Thornberg  Exactly.

Bruce Norris  We got spoiled. You, you had you wrote a report that I read this morning, and you use the word that we had complacent buyers, no rush.

Christopher Thornberg  Yeah.

Bruce Norris  And then all of a sudden the Coronavirus hit and the group of complacent buyers changed their tune.

Christopher Thornberg  Well, two things because you’re, there’s a little in between there, which we all have to remember, right. And let’s, let’s, let’s, and Bruce, let me, let me let’s take a step back from real estate and talk about the business cycle.

Bruce Norris  Okay.

Christopher Thornberg  That was okay. Because it’s important to understand the business cycle, why forecasts were wrong, and why real estate came screaming out of that business cycle. Because remember, at the very beginning of this thing, when you think of, when you think about the COVID recession, let’s just talk Q2, okay?

Bruce Norris  Okay.

Christopher Thornberg  Last year, Q2 2020, that was the big quarter. That was the massive decline in economic activity. Now, if you go monthly, you’ll see it was really the beginning of the quarter by the end of the quarter. We’re already in recovery mode. But there’s no doubt that that quarter was ugly. It was the ugliest quarter, quarter in, inUS economic history going back to when we really calculated GDP with any degree of reasonableness ugliest ever. So, um, yeah, real estate was cold in that quarter. Absolutely it was. sales were down permits were way down. It just nothing was happening. Everybody was in a freakout. But by the third quarter to your point, real estate came roaring back like nobody’s business. Why? Well, let’s think about a traditional business cycle. Let’s think about what happened, say during the Great Recession, which was an extreme example of a traditional business cycle. And the great recession, we had the subprime lending bubble, massive amounts of money entered the US households system. Most of it going to people who were borrowing money, they should never should have been allowed to borrow not most of it, but a lot of it huge share of it going to people that should not have been allowed to borrow that money. And what that did was in turn, really overheated the economy. Now, when everything started to fall apart, the, the subprime cash stopped flowing, the bubble that was inflated by that collapsed in on itself. And there was a general decline in wealth in the United States, home values and home equity is enormous share of household wealth, just went deep into the red, stock market followed, other forms of debt followed. And households had a big problem on their hands, which is to say they had lots of debt and all that wealth they had that disappeared like a mirage in the desert. And the net result of that was a demand shock to the US economy. That is to say, how do you deal with the fact that you don’t have enough wealth as you save more. And when you save more, you consume less, and you consume a little less of everything, and every part of the economy suffers. Now, there’s no doubt that the great recession was led by hits to very specific parts of the economy, housing construction, housing, sales, consumer finance, these industries just got wasted, right. But there was a general hit to the entire economy that really caused the economy to struggle for years. Because if there’s very weak consumer demand is such an enormous part of aggregate demand. But that’s weak, it’s as hard for the economy to grow. And that’s what we were seeing for a long time. That’s why it was a nine-year business cycle, six quarters down seven and a half years back to trend.  It was nine years total, it was the longest business cycle we’ve ever seen. Now, what happened in that second quarter of last year? It was not a demand shock. It was the exact opposite. It was a supply shock. Now, now, what does that mean? Look, people stopped going to restaurants in 2010 because they couldn’t afford it.

Bruce Norris  Okay. Okay.

Christopher Thornberg  In 2020, they stopped going to restaurants because they weren’t allowed to go. That’s right. They wanted to go but they weren’t allowed. There was a big No, you’re not allowed to go here. Now, that’s critical. Because when you have an aggregate demand shock, that creates a general malaise across the economy, everybody’s suffering. But when you have a supply shock that closes down the 10% of the economy, we call services. That demand naturally flows to other parts of the economy. Because people want to spend people want to consume, they had the money coming into this pandemic, the US economy was fundamentally very healthy. So, what do they do? They started buying other stuff. And we know we are, we are we still see that right? Look at where the economy is today, the retail inventory to sales ratios are still incredibly low, the supply chains still haven’t been able to catch up, the ports are busy, used car prices are through the roof. Well, this is a representation of the parts of the economy that were overheated by the lack of demand and those service sectors that were closed because of COVID.

Bruce Norris  Okay.

Christopher Thornberg  Now, of course, a big part of that demand also went into housing. It just did. Why? Well, not only were you saving money, because you weren’t going out to restaurants, you won’t go into Disneyland, you were stuck at home, which made you realize just how small your home was, particularly with kids. Interest rates fall like a rock. And everybody said, well, ‘Hell, I got nothing else to do time to move.’

Bruce Norris  Yeah.

Christopher Thornberg  And so, it set off this frenetic rush to get into housing, which going back to the feedback effect created even more of a rush. And by the end of the year, that thing had just, you know, it was like a chain reaction feedback effect, like the beginning of a, it’s like the inside of a nuclear bomb, right? Where you get those feedback effects of the uranium atoms splitting apart and stuff happening all over the place. And boom, next thing you know, the market is going atomic. And that’s exactly what happened here.

Bruce Norris  You know, what’s interesting about you said, because, you know, I was looking at all this stuff March, April going, okay, well, you know, what, what is going to happen? Well, the first thing that happened was 50% of the listings were removed. So, there were a bunch of people that said, well, you’re not touring my house. Now, what was interesting when the, when the volume turn returned to normal, so you had to you had three months of really declined volume, then you had three months of really increased volume. But after say, August of 2020, yeah, you had normal, you had normal demand, if you will, in volume, but it landed on half of the inventory still.

Christopher Thornberg  Exactly. And, and to your point. And, and I’m glad you said that, Bruce, because you’re reminding me of one other little factor, which again, yes has to do with the specifics of COVID. One of the things about COVID is as a seller, particularly when inventories are tight, there’s no way you’re going to sell your home until you have something else in the hopper, right?

Bruce Norris  That’s right. I mean, where are you going to go? What are you gonna do?  Well, you owe interest rate, the cheapest ever, so maybe it just refi and say, You know what, let’s add a bedroom, put an office in and let’s stay.

Christopher Thornberg  Exactly. So, inventories went down, which yet again, feeds back. But it also costs goes back to the idea that inventories were pretty low in the first place. Again, going back to fundamentals versus trends. I mean, for all of the the incredible pessimism about real estate, the beginning of this thing, or the pessimism about real estate in 2019. The reality was, is real estate at the beginning of 2020, residential real estate in the United States fundamentally looked the best had had in 30 or 40 years. What do I mean by that? Well, the credit markets credit market standards were incredibly high the share of borrowers mortgage borrowers with FICO scores ever 720 was was close to an all time high level or at an all time high level. Interest rates were still very, very low, you had not had a lot of building, for while you had a huge amount of equity in the system. If you looked at mortgage payments, so you know, we get data for the American Community Survey, which I rely on. It’s wonderful stuff. And it discusses the the kind of median share of household income used to pay household expenses for those for those households that have mortgages. And that was at a, at a 10 year low. Coming into 2019. Now again, one of the reasons that this just isn’t everyone’s like what are you talking about? You know, I didn’t hear any of this. Well, no, you didn’t because all through the last decade, politicians state and federal have been creating a crisis on housing that didn’t actually exist. We kept hearing out terrible expensive housing was and and how things were, were dramatically and, and it was the center of the homeless crisis in Southern California and this and that, and what’s Funny is the whole time they were discussing that this statistics and numbers said the exact opposite. Housing wasn’t getting more expensive. We didin’t have a housing affordability crisis.

Bruce Norris  No.

Christopher Thornberg  And, and you know that, that sort of disconnect is, is, is, is the kind of thing that does have an impact on markets, it has a has an absolute impact on things.

Bruce Norris  What’s interesting now is we, you know, California is moved from the high fives to the low eights median price in a year. And so usually when we’re well over, say, 225% of the national price now, the median price.

Christopher Thornberg  Yeah.

Bruce Norris  That generally creates an exiting of people who finally decide, you know, what, I’m never gonna be able to afford a house.

Christopher Thornberg  And that’s happening right now, Bruce.

Bruce Norris  That’s right…continue?

Christopher Thornberg  A what?

Bruce Norris  To what extent do you think that will continue?

Christopher Thornberg  It will continue until somebody in Sacramento gets serious about expanding the housing supply? You know, you said, you said something, I think which is functionally correct. But the way you said it was incorrect.

Bruce Norris  Okay.

Christopher Thornberg  If I may. What I mean by that is you said, ‘Well, I’m never going to be able to afford a house in California, ergo, I have to move to Texas.’ Um, no, it’s not so much you’re not gonna be able to afford a house is that you’re not going to win a bidding war. Ergo, you’re going to move to Texas, because somebody bought that house, you wanted, and they bought it for a price higher than you could afford. And that’s the key, you have, you know, one house with 20 offers, the highest income of those 20 people is going to be the one that’s going to win that bidding war. And that’s the key, even as prices are going up in California. Again, even here, even in this state, the percent of income of households and can be used on mortgages has been falling, not rising.

Bruce Norris  Interesting, okay.

Christopher Thornberg  And it’s and it sounds perverse. But again, remember, the people who are winning these bidding wars are very well heeled. And there are, again, despite the claims of a lot of politicians who like to say that Americans are starving on their feet. The reality is, is there’s a lot of very wealthy households in the United States right now, there has been a diminishment of the middle class. What nobody tells you is the majority of those people who left the middle class are moving up, not down.

Bruce Norris  What was interesting, I saw one of the charts that you had, I’ve never seen the, the breakdown of the income of the people that leave.

Christopher Thornberg  Yeah.

Bruce Norris  I had never seen that source. So…

Christopher Thornberg  It’s the lower-income folks.

Bruce Norris  Yeah, the majority of the people are making less than 75 grand, which does put them out of the chance of buying something.

Christopher Thornberg  Oh absolutely. And who can blame them for leaving? And, and I don’t. But what I say is, is, is this going to crush the California economy? Of course not. Of course, not. California, in fact, I would argue is going to look better. I mean, if you get lower income people out, you look better. Let them go to Texas. So, our economy looks more equitable. It’s, look, if you go to, if you go to, if you go to Bel Air Country Club, things look pretty equitable. Everybody’s rich, right?

Bruce Norris  Okay.

Christopher Thornberg  Now, me personally, I don’t want to live in Country Club, California. But that’s exactly what we’re creating. And until we get serious about expanding housing supply, that isn’t going to change.

Bruce Norris  Okay. And what’s the likelihood of you seeing that happen?

Christopher Thornberg  Well, now you’re asking me to do political forecasting, Bruce, and that’s I’m not, I’m not a political forecaster. But I know there’s some guys in Sacramento, who NIMBY’s who do understand what the problem truly is. They are trying hard to get things through. I mean, I think Scott Wiener and all the very good efforts that guys made to improve density around transit to loosen up the permitting process. I mean, the guy knows what’s going on. He’s aggressive. He’s, he’s trying to do something about it, but he just keeps getting blocked. So, the question is, is, is will they ever be able to build a coalition large enough to overcome the NIMBYs in Sacramento, and, and i don’t know I don’t, I don’t i’m not enough of a Sacramento watcher to give you the, the odds of that, of that change.

Bruce Norris  Okay.

Joey Romero  That’s gonna do it for part one of our interview with Beacon Economics founder, Dr. Christopher Thornberg, be sure to catch Part Two next week. See you then.

Narrator  For more information on hard money, loans and upcoming events with The Norris Group, check out For information on passive investing with trust deeds, visit

Aaron Norris  The Norris Group originates and services loans in California and Florida under California DRE License 01219911, Florida Mortgage Lender License 1577, and NMLS License 1623669.  For more information on hard money lending, go and click the Hard Money tab.



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