Housing Revisited (June 22, 2009)

Four years have past, four summers, with . . . the housing market continuing to deteriorate.  The cover of the June 18 – 24, 2005 edition of “The Economist” depicts a falling brick with the words “House Prices” on it and leads with an article entitled “After the fall.”  The article and earlier articles in the magazine were prescient in warning about the explosive rise and pending collapse of house prices.  In conclusion, the article notes:

“Of course, by the time American prices begin to fall, probably sometime next year [2006], they will not be Mr. Greenspan’s headache.  He will have retired and someone else will be in his job.  If weaker house prices push the economy towards recession, the awkward truth is that America’s policymakers will have much less room to manoeuvre than they did after the stock market bubble burst.  Short-term interest rates of only 3% leave less scope for cuts.  In 2000, America had a budget surplus.  Today, it has a large deficit, ruling out big tax cuts.

The whole world economy is at risk.  The IMF has warned that, just as the upswing in house prices has been a global phenomenon, so any downturn is likely to be synchronized, and thus the effects of it will be shared widely.  The housing boom was fun while it lasted, but the biggest increase in wealth in history was largely an illusion.”

In the last few weeks, when someone applied for a building permit to construct a 12 by 16 foot shed, too many commentators were ready to proclaim the housing crash ended.  Few seem to realize that the housing market is just starting to crash.  The infection is now impacting families with reasonable fixed-rate 30-year mortgages and long-term ties to their communities who are losing their jobs and will soon lose their homes.

Until housing prices drop to at least the extrapolated historical levels of a bench mark such as the S&P/Case-Shiller Home Price Indices, the decline in prices will continue.  The Federal Funds Rate is zero which eliminates the primary tool to shape economic events.  The Fed is creating other gimmicks to stimulate the economy that are unwise, unwarranted and unfounded in law.  More later.

Bumper stickers of the week:

Still pushing hard on a string

Everything that goes down does not necessarily go up

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